RPC INC - Annual Report: 2008 (Form 10-K)
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
FORM
10-K
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(Mark
One)
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x
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Annual
report pursuant to Section 13 or 15(d) of the Securities Exchange Act of
1934
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o
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Transition
report pursuant to Section 13 or 15(d) of the Securities Exchange Act of
1934
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For
the fiscal year ended December 31, 2008
Commission
File No. 1-8726
RPC,
INC.
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Delaware
(State
of Incorporation)
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58-1550825
(I.R.S.
Employer Identification No.)
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2801
BUFORD HIGHWAY
SUITE 520
ATLANTA,
GEORGIA 30329
(404)
321-2140
Securities
registered pursuant to Section 12(b) of the Act:
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Title
of each class
COMMON
STOCK, $0.10 PAR VALUE
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Name
of each exchange on which registered
NEW
YORK STOCK EXCHANGE
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Securities
registered pursuant to Section 12(g) of the Act: NONE
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act.
o Yes x No
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act. o Yes x No
Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes x No o
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. x
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer or a smaller reporting
company. See definitions of “large accelerated filer,” “accelerated
filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check
one):
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Large
accelerated filer o
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Accelerated
filer x
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Non-accelerated
filer o
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Smaller
reporting company o
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Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes o No x
The
aggregate market value of RPC, Inc. Common Stock held by non-affiliates on June
30, 2008, the last business day of the registrant’s most recently completed
second fiscal quarter, was $472,396,172 based on the closing price on the New
York Stock Exchange on June 30, 2008 of $16.80 per share.
RPC, Inc.
had 98,419,782 shares of Common Stock outstanding as of February 13,
2009.
Documents
Incorporated by Reference
Portions
of the Proxy Statement for the 2009 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 products and services
and other events and conditions that may influence the oilfield services market
and our performance in the future. Forward-looking statements made
elsewhere in this report include without limitation statements regarding our
belief that the long term prospects for our business are favorable due to
growing demand for oil and natural gas and declining production of these
commodities; our belief that the gas-directed drilling will
represent at least 75 percent of the total drilling rig count in the foreseeable
future; our belief that drilling activity and demand for our services appears to
be weakening in the first quarter of 2009; our expectation to continue to focus
on the development of international business opportunities in current and other
international markets; our belief that the high returns on our purchases of
revenue-producing equipment will continue, thus justifying the funding of these
expenditures with debt; our ability to obtain other customers in the event of a
loss of our largest customers; the adequacy of our insurance coverage; the
impact of lawsuits, legal proceedings and claims on our business and financial
condition; our expectation to continue to pay cash dividends to the common
stockholders, subject to the earnings and financial condition of the Company and
other relevant factors; our expectation that our consolidated revenues for 2009
will decrease compared to 2008; our expectations regarding capital expenditures
in 2009; our ability to maintain sufficient liquidity and a conservative capital
structure; our belief that the Company will not make any additional
contributions to the defined benefit pension plan in 2009; our ability to reduce
the amount drawn on our credit facility over the course of 2009; our ability to
fund capital requirements in the future; the adequacy of our liquidity in the
future; the estimated amount of our capital expenditures and contractual
obligations for future periods; estimates made with respect to our critical
accounting policies; and the effect of new accounting standards.
The words
“may,” “will,” “expect,” “believe,” “anticipate,” “project,” “estimate,” and
similar expressions generally identify forward-looking statements. Such
statements are based on certain assumptions and analyses made by our management
in light of its experience and its perception of historical trends, current
conditions, expected future developments and other factors it believes to be
appropriate. We caution you that such statements are only predictions and not
guarantees of future performance and that actual results, developments and
business decisions may differ from those envisioned by the forward-looking
statements. See “Risk Factors” contained in Item 1A. for a discussion
of factors that may cause actual results to differ from our
projections.
Item
1. Business
Organization
and Overview
RPC is a
Delaware corporation originally organized in 1984 as a holding company for
several oilfield services companies and is headquartered in Atlanta,
Georgia.
RPC
provides a broad range of specialized oilfield services and equipment primarily
to independent and major oil and gas companies engaged in the exploration,
production and development of oil and gas properties throughout the United
States, including the Gulf of Mexico, mid-continent, southwest and Rocky
Mountain regions, and in selected international markets. The services and
equipment provided include, among others, (1) pressure pumping services, (2)
coiled tubing services, (3) snubbing services (also referred to as
hydraulic workover services), (4) nitrogen services, (5) the rental of drill
pipe and other specialized oilfield equipment, (6) downhole tool rental services
and (7) firefighting and well control. RPC acts as a holding company for its
operating units, Cudd Energy Services, Patterson Rental and Fishing Tools,
Bronco Oilfield Services, Thru Tubing Solutions, Well Control School, and
others. As of December 31, 2008, RPC had approximately 2,500
employees.
Business
Segments
RPC’s
service lines have been aggregated into two reportable oil and gas services
business segments, Technical Services and Support Services, because of the
similarities between the financial performance and approach to managing the
service lines within each of the segments, as well as the economic and business
conditions impacting their business activity levels.
2
Technical
Services include RPC’s oil and gas service lines that utilize people and
equipment to perform value-added completion, production and maintenance services
directly to a customer’s well. The demand for these services is generally
influenced by customers’ decisions to invest capital toward initiating
production in a new oil or natural gas well, improving production flows in an
existing formation, or to address well control issues. This business segment
consists primarily of pressure pumping, coiled tubing, snubbing, nitrogen, well
control, downhole tools, wireline, and fishing. The principal markets for this
business segment include the United States, including the Gulf of Mexico,
mid-continent, southwest and Rocky Mountain regions, and contract or project
work in selected international locations in the last three years including
primarily Africa, Canada, China, Eastern Europe, Latin America and the Middle
East. Customers include major multi-national and independent oil and gas
producers, and selected nationally owned oil companies.
Support
Services include RPC’s oil and gas service lines that primarily provide
equipment for customer use or services to assist customer operations. The
equipment and services include drill pipe and related tools, pipe handling, pipe
inspection and storage services, and oilfield training services. The demand for
these services tends to be influenced primarily by customer drilling-related
activity levels. The principal markets for this segment include the United
States, including the Gulf of Mexico, mid-continent and Rocky Mountain regions
and project work in selected international locations in the last three years
including primarily Canada, Latin America and the Middle East. Customers
primarily include domestic operations of major multi-national and independent
oil and gas producers, and selected nationally owned oil companies.
Technical
Services
The
following is a description of the primary service lines conducted within the
Technical Services business segment:
Pressure Pumping. Pressure
pumping services, which accounted for approximately 41 percent of 2008 revenues,
40 percent of 2007 revenues and 38 percent of 2006 revenues, are provided to
customers throughout the Gulf Coast, mid-continent and Rocky Mountain regions of
the United States and are generally utilized to initiate production in new or
enhance production in existing customer wells. Pressure pumping services involve
using complex, truck or skid-mounted equipment designed and constructed for each
specific pumping service offered. The mobility of this equipment permits
pressure pumping services to be performed in varying geographic areas. Principal
materials utilized in the pressure pumping business include fracturing
proppants, acid and bulk chemical additives. Generally, these items are
available from several suppliers, and the Company utilizes more than one
supplier for each item. Pressure pumping services offered include:
Fracturing
— Fracturing services are performed to stimulate production of oil and natural
gas by increasing the permeability of a formation. The fracturing process
consists of pumping nitrogen or a fluid gel into a cased well at sufficient
pressure to fracture the formation at desired depths. Sand, bauxite or synthetic
proppant, which is suspended in the gel, is pumped into the fracture. When the
pressure is released at the surface, the fluid gel returns to the well, but the
proppant remain in the fracture, thus keeping it open so that oil and natural
gas can flow through the fracture into the well. In some cases, fracturing is
performed in formations with a high amount of carbonate rock by an acid solution
pumped under pressure without a proppant or with small amounts of
proppant.
Acidizing
— Acidizing services are also performed to stimulate production of oil and
natural gas, but they are used in wells that have undergone formation damage due
to the buildup of various materials that block the formation. Acidizing entails
pumping large volumes of specially formulated acids into reservoirs to dissolve
barriers and enlarge crevices in the formation, thereby eliminating obstacles to
the flow of oil and natural gas. Acidizing services can also enhance production
in limestone formations.
Coiled Tubing. Coiled tubing
services, which accounted for approximately nine percent of 2008 and 2007
revenues, and 10 percent of 2006 revenues, involve the injection of
coiled tubing into wells to perform various applications and functions for use
principally in well-servicing operations. Coiled tubing is a flexible steel pipe
with a diameter of less than four inches manufactured in continuous lengths of
thousands of feet and wound or coiled around a large reel. It can be inserted
through existing production tubing and used to perform workovers without using a
larger, more costly workover rig. Principal advantages of employing coiled
tubing in a workover operation include: (i) not having to “shut-in” the well
during such operations, (ii) the ability to reel continuous coiled tubing in and
out of a well significantly faster than conventional pipe, (iii) the ability to
direct fluids into a wellbore with more precision, and (iv) enhanced access to
remote or offshore fields due to the smaller size and mobility of a coiled
tubing unit compared to a workover rig. There are several
manufacturers of flexible steel pipe used in coiled tubing services, and the
Company believes that its sources of supply are adequate.
Snubbing. Snubbing (also
referred to as hydraulic workover services), which accounted for approximately
seven percent of 2008 revenues, 10 percent of 2007 revenues, and 11 percent of
2006 revenues, involves using a hydraulic workover rig that permits an operator
to repair damaged casing, production tubing and downhole production equipment in
a high-pressure environment. A snubbing unit makes it possible to remove and
replace downhole equipment while maintaining pressure in the well. Customers
benefit because these operations can be performed without removing the pressure
from the well, which stops production and can damage the formation, and because
a snubbing rig can perform many applications at a lower cost than other
alternatives. Because this service involves a very hazardous process that
entails high risk, the snubbing segment of the oil and gas services industry is
limited to a relatively few operators who have the experience and knowledge
required to perform such services safely and efficiently.
3
Nitrogen. Nitrogen accounted
for approximately eight percent of 2008 revenues, seven percent of 2007
revenues, and eight percent of 2006 revenues. There are a number of
uses for nitrogen, an inert, non-combustible element, in providing services to
oilfield customers and industrial users outside of the oilfield. For our
oilfield customers, nitrogen can be used to clean drilling and production pipe
and displace fluids in various drilling applications. It also can be used to
create a fire-retardant environment in hazardous blowout situations and as a
fracturing medium for our fracturing service line. In addition, nitrogen can be
complementary to our snubbing and coiled tubing service lines, because it is a
non-corrosive medium and is frequently injected into a well using coiled tubing.
Nitrogen is complementary to our pressure pumping service line as well, because
foam-based nitrogen stimulation is appropriate in certain sensitive formations
in which the fluids used in fracturing or acidizing would damage a customer's
well.
For
non-oilfield industrial users, nitrogen can be used to purge pipelines and
create a non-combustible environment. RPC stores and transports nitrogen and has
a number of pumping unit configurations that inject nitrogen in its various
applications. Some of these pumping units are set up for use on offshore
platforms or inland waters. RPC purchases its nitrogen in liquid form from
several suppliers and believes that these sources of supply are
adequate.
Downhole Tools. Thru Tubing
Solutions (“TTS”) accounted for approximately nine percent of 2008 revenues,
seven percent of 2007 revenues, and six percent of 2006 revenues. TTS
provides services and proprietary downhole motors, fishing tools and other
specialized downhole tools and processes to operators and service companies in
drilling and production operations, including casing perforation at the
completion stage of an oil or gas well. The services that TTS
provides are especially suited for unconventional drilling and completion
activities. TTS’ experience providing reliable tool services allows
it to work in a pressurized environment with virtually any coiled tubing unit or
snubbing unit.
Well Control. Cudd Energy
Services specializes in responding to and controlling oil and gas well
emergencies, including blowouts and well fires, domestically and
internationally. In connection with these services, Cudd Energy Services, along
with Patterson Services, has the capacity to supply the equipment, expertise and
personnel necessary to restore affected oil and gas wells to production. In the
last nine years, the Company has responded to well control situations in several
international locations including Algeria, Argentina, Australia, Bolivia,
Canada, Colombia, Egypt, India, Kuwait, Peru, Qatar, Taiwan, Trinidad and
Venezuela.
The
Company’s professional firefighting staff has many years of aggregate industry
experience in responding to well fires and blowouts. This team of 11 experts
responds to well control situations where hydrocarbons are escaping from a well
bore, regardless of whether a fire has occurred. In the most critical
situations, there are explosive fires, the destruction of drilling and
production facilities, substantial environmental damage and the loss of hundreds
of thousands of dollars per day in well operators’ production revenue. Since
these events ordinarily arise from equipment failures or human error, it is
impossible to predict accurately the timing or scope of this work. Additionally,
less critical events frequently occur in connection with the drilling of new
wells in high-pressure reservoirs. In these situations, the Company is called
upon to supervise and assist in the well control effort so that drilling
operations can resume as promptly as safety permits.
Wireline Services. Wireline
is classified into two types of services: slick or braided line and electric
line. In both, a spooled wire is unwound and lowered into a well,
conveying various types of tools or equipment. Slick or braided line
services use a non-conductive line primarily for jarring objects into or out of
a well, as in fishing or plug-setting operations. Electric line
services lower an electrical conductor line into a well allowing the use of
electrically-operated tools such as perforators, bridge plugs and logging
tools. Wireline services can be an integral part of the plug and
abandonment process, near the end of the life cycle of a well.
Fishing. Fishing involves the
use of specialized tools and procedures to retrieve lost equipment from a well
drilling operation and producing wells. It is a service required by oil and gas
operators who have lost equipment in a well. Oil and natural gas production from
an affected well typically declines until the lost equipment can be retrieved.
In some cases, the Company creates customized tools to perform a fishing
operation. The customized tools are maintained by the Company after the
particular fishing job for future use if a similar need arises.
Support
Services
The
following is a description of the primary service lines conducted within the
Support Services business segment:
Rental Tools. Rental tools
accounted for approximately 11 percent of 2008 revenues, and 13 percent of 2007
and 2006 revenues. The Company rents specialized equipment for use
with onshore and offshore oil and gas well drilling, completion and workover
activities. The drilling and subsequent operation of oil and gas wells generally
require a variety of equipment. The equipment needed is in large part determined
by the geological features of the production zone and the size of the well
itself. As a result, operators and drilling contractors often find it more
economical to supplement their tool and tubular inventories with rental items
instead of owning a complete inventory. The Company’s facilities are
strategically located to serve the major staging points for oil and gas
activities in the Gulf of Mexico, mid-continent region and Rocky
Mountains.
4
Patterson
Rental Tools offers a broad range of rental tools including:
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Blowout
Preventors
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Diverters
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High
Pressure Manifolds and Valves
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Drill
Pipe
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Hevi-wate
Drill Pipe
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Drill
Collars
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Tubing
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Handling
Tools
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Production
Related Rental Tools
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Coflexip
Hoses
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Pumps
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Oilfield Pipe Inspection Services,
Pipe Management and Pipe Storage. Pipe inspection services
include Full Body Electromagnetic and Phased Array Ultrasonic inspection of pipe
used in oil and gas wells. These services are provided at both the Company’s
inspection facilities and at pipe mills in accordance with negotiated sales
and/or service contracts. Our customers are major oil companies and steel mills,
for which we provide in-house inspection services, inventory management and
process control of tubing, casing, and drill pipe. Our locations in
Channelview, Texas and Morgan City, Louisiana are equipped with large capacity
cranes, specially designed forklifts and a computerized inventory system to
serve a variety of storage and handling services for both the oilfield and
non-oilfield customers.
Well Control School. Well
Control School provides industry and government accredited training for the oil
and gas industry both in the United States and in several international
locations. Well Control School provides this training in various formats
including conventional classroom training, interactive computer training
including training delivered over the internet, and mobile simulator
training.
Energy Personnel
International. Energy Personnel International provides drilling and
production engineers, well site supervisors, project management specialists, and
workover and completion specialists on a consulting basis to the oil and gas
industry to meet customers’ needs for staff engineering and wellsite
management.
Refer to
Note 12 in the Notes to the Consolidated Financial Statements for additional
financial information on our business segments.
Industry
United States. RPC provides
its services to its domestic customers through a network of facilities
strategically located to serve the Gulf of Mexico, the mid-continent, the
southwest and the Rocky Mountains production fields. Demand for RPC’s services
in the U.S. tends to be extremely volatile and fluctuates with current and
projected price levels of oil and natural gas and activity levels in the oil and
gas industry. Customer activity levels are influenced by their decisions about
capital investment toward the development and production of oil and gas
reserves.
Due to
aging oilfields and lower-cost sources of oil internationally, the drilling rig
count in the U.S. has declined by approximately 62 percent from its peak in
1981. Due to enhanced technology, however, more wells are being drilled and the
domestic production of oil and natural gas remains roughly equivalent to prior
years. Record low drilling activity levels were experienced in 1986,
1992, 1999 (with April 1999 recording the lowest U.S. drilling rig count in the
industry’s history) and again in 2002. At the beginning of 2008,
there were 1,774 domestic working drilling rigs, up 37 percent from the third
quarter 2001 peak during that industry cycle. U.S. domestic drilling
activity rose during the first three quarters of 2008 and peaked in the third
quarter at a rig count of 2,031, which was 57 percent higher than the third
quarter 2001 peak. In 2008 the average rig count of 1,879 increased
seven percent compared to the prior year. During 2008 the average
price of natural gas increased by approximately 27 percent, and the average
price of oil increased by over 37 percent. However, the price
of oil fell almost 37 percent during the fourth quarter of 2008 compared to the
prior year and the price of natural gas fell almost 10 percent during the period
compared to the prior year. The average domestic rig count was more
than six percent higher in the fourth quarter of 2008 than the prior
year. However, it began to fall during the fourth quarter of 2008 as
declining commodity prices and the global economic slowdown, coupled with
declining availability of capital for drilling projects, caused industry
activity levels to decline. The change in domestic drilling activity
was consistent with the change in the prices of oil and natural
gas. We are concerned that the current prices of oil and natural gas
are not high enough to sustain recent exploration and production activity
levels. However, we also believe, along with our customers, that the
long term prospects for our business are favorable due to growing demand for oil
and natural gas and declining production of these commodities.
5
Gas
drilling rigs have represented an increasing percentage of the total drilling
rig count, and have represented at least 75 percent of the drilling rig count
each year since 2001. In 2008, gas drilling rigs represented 79
percent of total drilling activity. This percentage, which is lower than in
previous years, is partly due to the tremendous increase in the price of oil
that occurred in 2008. Demand for natural gas is continuing to rise,
primarily as a result of increased emphasis on gas-fired power generation,
although demand fluctuates in the short term due to factors such as economic
activity and the weather. Also, unlike oil, foreign imports of natural gas do
not compete with domestic production. This lack of foreign competition tends to
keep prices high. Based on current demand levels for natural gas as well as the
high oil and gas well depletion rates experienced over the past several years,
it is anticipated that gas-directed drilling will represent at least 75 percent
of the total drilling rig count in the foreseeable future. The demand for RPC’s
services is driven more by gas-directed drilling than oil-directed drilling,
because our services are particularly useful for deeper, higher pressure wells,
which tend to be the wells that produce natural gas. In addition,
there are certain types of wells, predominately natural gas, being drilled
in the U.S. domestic market for which there is a higher demand for RPC’s
services. Known as either directional or horizontal wells, these
natural gas wells are more difficult and costly to complete. Because
they are drilled through a narrow formation, they require additional stimulation
when they are completed, and since they are not drilled in a straight vertical
direction from the Earth’s surface, they require tools and drilling mechanisms
that are flexible, rather than rigid, and can be steered once they are
downhole. Specifically, these types of wells require RPC’s pressure
pumping and coiled tubing services, as well as our downhole tools and
services.
Thus, in
North America the demand for our services and products depends more on natural
gas than oil development. Drilling activity and demand for our
services was very strong during the first three quarters of 2008 but decreased
during the fourth quarter of 2008 and appears to be weakening early in the first
quarter of 2009.
International. RPC has
historically operated in several countries outside of the United States,
although international revenues have never accounted for more than 10 percent of
total revenues. Over the past several years, RPC has continued its
focus on developing international opportunities, although our equipment
investments over the last couple of years has emphasized domestic rather than
international expansion. International revenues for 2008 decreased
due to lower customer activity levels in Turkmenistan and
Hungary. During 2008, RPC provided snubbing and oilfield training
services in Australia, Bolivia, Canada, Egypt, Gabon, Mexico, Oman, Saudi Arabia
and the United Arab Emirates, among other countries. We also provided rental
tools, well control services, downhole motors, fishing tool services and
oilfield training to customers located in Australia, Bolivia and
Mexico. We continue to focus on the development of international
opportunities in these and other markets, although we believe that it will
continue to be less than 10 percent of total revenues.
RPC
provides services to its international customers through branch locations or
wholly-owned foreign subsidiaries. The international market is prone to
political uncertainties, including the risk of civil unrest and conflicts.
However, due to the significant investment requirement and complexity of
international projects, customers’ drilling decisions relating to such projects
tend to be evaluated and monitored with a longer-term perspective with regard to
oil and natural gas pricing, and therefore have the potential to be more stable
than most U.S. domestic operations. Additionally, the international
market is dominated by major oil companies and national oil companies which tend
to have different objectives and more operating stability than the typical
independent oil and gas producer in the U.S. Predicting the timing
and duration of contract work is not possible. Pursuing selective
international opportunities for revenue growth continues to be a strong emphasis
for RPC. Refer to Note 12 in the Notes to Consolidated Financial Statements for
further information on our international operations.
Growth
Strategies
RPC’s
primary objective is to generate excellent long-term returns on investment
through the effective and conservative management of its invested capital, thus
yielding strong cash flow and asset appreciation. This objective continues to be
pursued through strategic investments and opportunities designed to enhance the
long-term value of RPC while improving market share, product offerings and the
profitability of existing businesses. Growth strategies are focused on selected
areas and markets in which we believe there exist opportunities for higher
growth, market penetration, or enhanced returns achieved through consolidations
or through providing proprietary value-added products and services. RPC intends
to focus on specific market segments in which it believes that it has a
competitive advantage or there exists significant growth potential.
RPC seeks
to expand its service capabilities through a combination of internal growth,
acquisitions, joint ventures and strategic alliances. Because of the fragmented
nature of the oil and gas services industry, RPC believes a number of attractive
acquisition opportunities exist. However, near-term business
conditions do not justify sellers’ price expectations, so we believe we generate
better returns growing organically in service lines and geographic locations in
which we have experience and presence.
6
RPC has
traditionally had a conservative capital structure with minimal
debt. During 2006, however, we established a new revolving credit
facility to fund the purchase of revenue-producing equipment and other working
capital requirements to pursue our growth plan. We pursued this capital source
because of the high returns on investment that had been generated by many of our
service lines during the previous several years, and because of the low cost and
ready availability of debt capital. By 2008, purchases of revenue-producing
equipment under our growth plan were substantially complete, and we believe that
the high returns on investment generated by many of our service lines will
continue, thus justifying the funding of these expenditures with
debt. At the end of 2008, RPC easily complied with the debt covenants
in our revolving credit agreement and our level of debt was conservative
compared to a number of our peers.
Customers
Demand
for RPC’s services and products depends primarily upon the number of oil and
natural gas wells being drilled, the depth and drilling conditions of such
wells, the number of well completions and the level of production enhancement
activity worldwide. RPC’s principal customers consist of major and independent
oil and natural gas producing companies. During 2008, RPC provided oilfield
services to several hundred customers, none of which accounted for more than 10
percent of consolidated revenues. While the loss of certain of RPC’s largest
customers could have a material adverse effect on Company revenues and operating
results in the near term, management believes RPC would be able to obtain other
customers for its services in the event of a loss of any of its largest
customers. Sales are generated by RPC’s sales force and through referrals from
existing customers. There are long-term written contracts for services and
equipment with certain international and domestic customers, although revenues
earned under such contracts are a small percentage of total revenues. Due to the
short lead time between ordering services or equipment and providing services or
delivering equipment, there is no significant sales backlog in most of our
service lines.
Competition
RPC
operates in highly competitive areas of the oilfield services industry. RPC’s
products and services are sold in highly competitive markets, and its revenues
and earnings are affected by changes in prices for our services, fluctuations in
the level of customer activity in major markets, general economic conditions and
governmental regulation. RPC competes with many large and small oilfield
industry competitors, including the largest integrated oilfield services
companies. RPC believes that the principal competitive factors in the market
areas that it serves are product and service quality and availability,
reputation for safety and technical proficiency, and price.
The oil
and gas services industry includes a small number of dominant global competitors
including, among others, Halliburton Energy Services Group, a division of
Halliburton Company, BJ Services Company and Schlumberger Ltd., and a
significant number of locally oriented businesses.
Facilities/Equipment
RPC’s
equipment consists primarily of oil and gas services equipment used either in
servicing customer wells or provided on a rental basis for customer use.
Substantially all of this equipment is Company owned. RPC purchases
oilfield service equipment from a limited number of
manufacturers. These manufacturers of our oilfield service equipment
may not be able to meet our requests for timely delivery during periods of high
demand which may result in delayed deliveries of equipment and higher prices for
equipment.
RPC both
owns and leases regional and district facilities from which its oilfield
services are provided to land-based and offshore customers. RPC’s principal
executive offices in Atlanta, Georgia are leased. The Company has two primary
administrative buildings, one in Houston, Texas that includes the Company’s
operations, engineering, sales and marketing headquarters, and one in Houma,
Louisiana that includes certain administrative functions. RPC believes that its
facilities are adequate for its current operations. For additional
information with respect to RPC’s lease commitments, see Note 9 of the Notes to
Consolidated Financial Statements.
Governmental
Regulation
RPC’s
business is affected by state, federal and foreign laws and other regulations
relating to the oil and gas industry, as well as laws and regulations relating
to worker safety and environmental protection. RPC cannot predict the level of
enforcement of existing laws and regulations or how such laws and regulations
may be interpreted by enforcement agencies or court rulings, whether additional
laws and regulations will be adopted, or the effect such changes may have on it,
its businesses or financial condition.
In
addition, our customers are affected by laws and regulations relating to the
exploration for and production of natural resources such as oil and natural gas.
These regulations are subject to change, and new regulations may curtail or
eliminate our customers’ activities in certain areas where we currently operate.
We cannot determine the extent to which new legislation may impact our
customers’ activity levels, and ultimately, the demand for our
services.
7
Intellectual
Property
RPC uses
several patented items in its operations, which management believes are
important but are not indispensable to RPC’s success. Although RPC anticipates
seeking patent protection when possible, it relies to a greater extent on the
technical expertise and know-how of its personnel to maintain its competitive
position.
Availability
of Filings
RPC makes
available, free of charge, on its website, www.rpc.net, its annual report on
Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and all
amendments to those reports on the same day as they are filed with the
Securities and Exchange Commission.
1A.
Risk Factors
Demand
for our products and services is affected by the volatility of oil and natural
gas prices.
Oil
prices affect demand throughout the oil and natural gas industry, including the
demand for our products and services. Our business depends in large part on the
conditions of the oil and gas industry, and specifically on the capital
investments of our customers related to the exploration and production of oil
and natural gas. When these capital investments decline, our customers’ demand
for our services declines.
Although
the production sector of the oil and gas industry is less immediately affected
by changing prices, and, as a result, less volatile than the exploration sector,
producers react to declining oil and gas prices by curtailing capital spending,
which would adversely affect our business. A prolonged low level of customer
activity in the oil and gas industry will adversely affect the demand for our
products and services and our financial condition and results of
operations.
The
relationship between the prices of oil and natural gas and our customers’
drilling and production activities may not be highly correlated in the
future.
Historically,
fluctuations in the prices of oil and natural gas have led to immediate
corresponding changes in our customers’ drilling and production activities as
measured by the domestic rig count. This relationship was very strong in 2008
and recent years, although it was not as strong several years ago. If this
correlation is weak in the future, then it is possible that increases in the
prices of oil and natural gas will not lead to an increase in our customers’
activities, and our future operating results could be negatively
impacted.
We
may be unable to compete in the highly competitive oil and gas industry in the
future.
We
operate in highly competitive areas of the oilfield services industry. The
products and services in our industry segments are sold in highly competitive
markets, and our revenues and earnings have in the past been affected by changes
in competitive prices, fluctuations in the level of activity in major markets
and general economic conditions. We compete with the oil and gas industry’s many
large and small industry competitors, including the largest integrated oilfield
service providers. We believe that the principal competitive factors in the
market areas that we serve are product and service quality and availability,
reputation for safety, technical proficiency and price. Although we believe that
our reputation for safety and quality service is good, we cannot assure you that
we will be able to maintain our competitive position.
We
may be unable to identify or complete acquisitions.
Acquisitions
have been and may continue to be a key element of our business strategy. We
cannot assure you that we will be able to identify and acquire acceptable
acquisition candidates on terms favorable to us in the future. We may be
required to incur substantial indebtedness to finance future acquisitions and
also may issue equity securities in connection with such acquisitions. The
issuance of additional equity securities could result in significant dilution to
our stockholders. We cannot assure you that we will be able to integrate
successfully the operations and assets of any acquired business with our own
business. Any inability on our part to integrate and manage the growth from
acquired businesses could have a material adverse effect on our results of
operations and financial condition.
8
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 and the
Rocky Mountains. 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
inability to attract and retain skilled workers may impair growth potential and
profitability.
Our
ability to remain 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. The
demand for skilled oilfield employees is high, and the supply is very limited. 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.
Our
concentration of customers in one industry may impact our overall exposure to
credit risk.
Substantially
all of our customers operate in the energy industry. This concentration of
customers in one industry may impact our overall exposure to credit risk, either
positively or negatively, in that customers may be similarly affected by changes
in economic and industry conditions. We perform ongoing credit evaluations of
our customers and do not generally require collateral in support of our trade
receivables.
Our
business has potential liability for litigation, personal injury and property
damage claims assessments.
Our
operations involve the use of heavy equipment and exposure to inherent risks,
including blowouts, explosions and fires. If any of these events were to occur,
it could result in liability for personal injury and property damage, pollution
or other environmental hazards or loss of production. Litigation may arise from
a catastrophic occurrence at a location where our equipment and services are
used. This litigation could result in large claims for damages. The frequency
and severity of such incidents will affect our operating costs, insurability and
relationships with customers, employees and regulators. These occurrences could
have a material adverse effect on us. We maintain what we believe is prudent
insurance protection. We cannot assure you that we will be able to maintain
adequate insurance in the future at rates we consider reasonable or that our
insurance coverage will be adequate to cover future claims and assessments that
may arise.
Our
operations may be adversely affected if we are unable to comply with regulatory
and environmental laws.
Our
business is significantly affected by stringent environmental laws and other
regulations relating to the oil and gas industry and by changes in such laws and
the level of enforcement of such laws. We are unable to predict the level of
enforcement of existing laws and regulations, how such laws and regulations may
be interpreted by enforcement agencies or court rulings, or whether additional
laws and regulations will be adopted. The adoption of laws and regulations
curtailing exploration and development of oil and gas fields in our areas of
operations for economic, environmental or other policy reasons would adversely
affect our operations by limiting demand for our services. We also have
potential environmental liabilities with respect to our offshore and onshore
operations, and could be liable for cleanup costs, or environmental and natural
resource damage due to conduct that was lawful at the time it occurred, but is
later ruled to be unlawful. We also may be subject to claims for personal injury
and property damage due to the generation of hazardous substances in connection
with our operations. We believe that our present operations substantially comply
with applicable federal and state pollution control and environmental protection
laws and regulations. We also believe that compliance with such laws has had no
material adverse effect on our operations to date. However, such environmental
laws are changed frequently. We are unable to predict whether environmental laws
will, in the future, materially adversely affect our operations and financial
condition. Penalties for noncompliance with these laws may include cancellation
of permits, fines, and other corrective actions, which would negatively affect
our future financial results.
Our
international operations could have a material adverse effect on our
business.
Our
operations in various countries including, but not limited to, Africa, Canada,
China, Eastern Europe, Latin America 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.
9
Our
common stock price has been volatile.
Historically,
the market price of common stock of companies engaged in the oil and gas
services industry has been highly volatile. Likewise, the market price of our
common stock has varied significantly in the past.
Our
management has a substantial ownership interest, and public shareholders may
have no effective voice in the management of the Company.
The
Company has elected the “Controlled Corporation” exemption under Rule 303A of
the New York Stock Exchange (“NYSE”) Company Guide. The Company is a “Controlled
Corporation” because a group that includes the Company’s Chairman of the Board,
R. Randall Rollins and his brother, Gary W. Rollins, who is also a director of
the Company, and certain companies under their control, controls in excess of
fifty percent of the Company’s voting power. As a “Controlled Corporation,” the
Company need not comply with certain NYSE rules including those requiring a
majority of independent directors.
RPC’s
executive officers, directors and their affiliates hold directly or through
indirect beneficial ownership, in the aggregate, approximately 71 percent of
RPC’s outstanding shares of common stock. As a result, these stockholders
effectively control the operations of RPC, including the election of directors
and approval of significant corporate transactions such as acquisitions and
other matters requiring stockholder approval. This concentration of ownership
could also have the effect of delaying or preventing a third party from
acquiring control over the Company at a premium.
Our
management has a substantial ownership interest, and the availability of the
Company’s common stock to the investing public may be limited.
The
availability of RPC’s common stock to the investing public may be limited to
those shares not held by the executive officers, directors and their affiliates,
which could negatively impact RPC’s stock trading prices and affect the ability
of minority stockholders to sell their shares. Future sales by executive
officers, directors and their affiliates of all or a portion of their shares
could also negatively affect the trading price of our common stock.
Provisions
in RPC's Certificate of Incorporation and Bylaws may inhibit a takeover of
RPC.
RPC’s
certificate of incorporation, bylaws and other documents contain provisions
including advance notice requirements for shareholder proposals and staggered
terms of office for the Board of Directors. These provisions may make
a tender offer, change in control or takeover attempt that is opposed by RPC’s
Board of Directors more difficult or expensive.
Some
of our equipment and several types of materials used in providing our services
are available from a limited number of suppliers.
We
purchase equipment provided by a limited number of manufacturers who specialize
in oilfield service equipment. During periods of high demand, these
manufacturers may not be able to meet our requests for timely delivery,
resulting in delayed deliveries of equipment and higher prices for
equipment. There are a limited number of suppliers for certain
materials used in pressure pumping services, our largest service
line. While these materials are generally available, supply
disruptions can occur due to factors beyond our control. Such
disruptions, delayed deliveries, and higher prices can limit our ability to
provide services, or increase the costs of providing services, thus reducing our
revenues and profits.
We
have used outside financing to accomplish our growth strategy, and outside
financing may become unavailable or may be unfavorable to us.
Our
business requires a great deal of capital in order to maintain our equipment and
increase our fleet of equipment to expand our operations, and we have access to
our $296.5 million credit facility to fund our capital requirements. Most of our
existing credit facility bears interest at a floating rate, which exposes us to
market risks as interest rates rise. If our existing capital
resources become unavailable, inadequate or unfavorable for purposes of funding
our capital requirements, we would need to raise additional funds through
alternative debt or equity financings to maintain our equipment and continue our
growth. Such additional financing sources may not be available when
we need them, or may not be available on favorable terms. If we fund
our growth through the issuance of public equity, the holdings of shareholders
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.
10
Item
1B. Unresolved Staff Comments
None.
Item
2. Properties
RPC owns
or leases approximately 100 offices and operating facilities. The Company leases
approximately 13,400 square feet of office space in Atlanta, Georgia that serves
as its headquarters, a portion of which is allocated and charged to Marine
Products Corporation. See “Related Party Transactions” contained in
Item 7. The lease agreement on the headquarters is effective through
October 2013. RPC believes its current operating facilities are
suitable and adequate to meet current and reasonably anticipated future needs
although as our business continues to grow we are evaluating the need for
additional facilities. Descriptions of the major facilities used in
our operations are as follows:
Owned
Locations
Houma,
Louisiana — Administrative office
Houston,
Texas — Pipe storage terminal and inspection sheds
Houston,
Texas — Operations, sales and administrative office
Elk City,
Oklahoma — Operations, sales and equipment storage yards
Rock
Springs, Wyoming — Operations, sales and equipment storage yards
Lafayette,
Louisiana — Operations, sales and equipment storage yards
Conway,
Arkansas — Operations, sales and equipment storage yards
Fruita,
Colorado — Operations, sales and equipment storage yards
Kilgore,
Texas — Pumping services facility
Leased
Locations
Seminole,
Oklahoma — Pumping services facility
Oklahoma
City, Oklahoma — Operations, sales and administrative office
Houston,
Texas — Operations, sales and administrative office
Odessa,
Texas — Operations, sales and equipment storage yards
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. Submission of Matters to a Vote of Security Holders
There
were no matters submitted to a vote of security holders during the fourth
quarter of 2008.
11
Item
4A. Executive Officers of the Registrant
Each of
the executive officers of RPC was elected by the Board of Directors to serve
until the Board of Directors’ meeting immediately following the next annual
meeting of stockholders or until his or her earlier removal by the Board of
Directors or his or her resignation. The following table lists the executive
officers of RPC and their ages, offices, and terms of office with
RPC.
|
Name
and Office with Registrant
|
Age
|
Date
First Elected to Present Office
|
|
R.
Randall Rollins (1)
|
77
|
1/24/84
|
|
Chairman
of the Board
|
||
|
Richard
A. Hubbell (2)
|
64
|
4/22/03
|
|
President
and
Chief
Executive Officer
|
||
|
Linda
H. Graham (3)
|
72
|
1/27/87
|
|
Vice
President and
Secretary
|
||
|
Ben
M. Palmer (4)
|
48
|
7/8/96
|
|
Vice
President,
Chief
Financial Officer and
Treasurer
|
|
(1)
|
R.
Randall Rollins began working for Rollins, Inc. (consumer services) in
1949. At the time of the spin-off of RPC from Rollins, Inc., in 1984, Mr.
Rollins was elected Chairman of the Board and Chief Executive Officer of
RPC. He remains Chairman of RPC and stepped down as the Chief Executive
Officer effective April 22, 2003. He has served as Chairman of the Board
of Marine Products Corporation (boat manufacturing) since it was spun off
from RPC in February 2001 and Chairman of the Board of Rollins, Inc. since
October 1991. He is also a director of Dover Downs Gaming and
Entertainment, Inc. and Dover Motorsports, Inc.
|
|
(2)
|
Richard
A. Hubbell has been the President of RPC since 1987 and Chief Executive
Officer since April 22, 2003. He has also been the President and Chief
Executive Officer of Marine Products Corporation since it was spun off
from RPC in February 2001. Mr. Hubbell serves on the Board of Directors
for both of these companies.
|
|
(3)
|
Linda
H. Graham has been the Vice President and Secretary of RPC since
1987. She has also been the Vice President and Secretary of
Marine Products Corporation since it was spun off from RPC in February
2001. Ms. Graham serves on the Board of Directors for both of these
companies.
|
|
(4)
|
Ben
M. Palmer has been the Vice President, Chief Financial Officer and
Treasurer of RPC since 1996. He has also been the Vice
President, Chief Financial Officer and Treasurer of Marine Products
Corporation since it was spun off from RPC in February
2001.
|
12
PART
II
Item
5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities
RPC’s
common stock is listed for trading on the New York Stock Exchange under the
symbol RES. At February 13, 2009, there were 98,419,782 shares of
common stock outstanding and approximately 4,300 holders of record of common
stock. The following table sets forth the high and low prices of
RPC’s common stock and dividends paid for each quarter in the years ended
December 31, 2008 and 2007:
|
2008
|
2007
|
|||||||||||||||||||||||
|
Quarter
|
High
|
Low
|
Dividends
|
High
|
Low
|
Dividends
|
||||||||||||||||||
|
First
|
$ | 15.32 | $ | 8.52 | $ | 0.06 | $ | 18.35 | $ | 14.20 | $ | 0.05 | ||||||||||||
|
Second
|
17.80 | 12.50 | 0.06 | 18.94 | 15.77 | 0.05 | ||||||||||||||||||
|
Third
|
18.91 | 13.15 | 0.06 | 17.25 | 11.34 | 0.05 | ||||||||||||||||||
|
Fourth
|
14.10 | 6.02 | 0.06 | 14.40 | 10.65 | 0.05 | ||||||||||||||||||
On
January 27, 2009, the Board of Directors approved an increase in the quarterly
cash dividend per common share from $0.06 to $0.07, payable March 10, 2009 to
stockholders of record at the close of business February 10,
2009. The Company expects to continue to pay cash dividends to the
common stockholders, subject to the earnings and financial condition of the
Company and other relevant factors.
Issuer
Purchases of Equity Securities
Shares
repurchased in the fourth quarter of 2008 are outlined below.
|
Period
|
Total
Number
of
Shares (or
Units)
Purchased
|
Average
Price
Paid
Per Share
(or
Unit)
|
Total
Number of
Shares
(or Units)
Purchased
as Part of
Publicly
Announced
Plans
or Programs
|
Maximum
Number (or
Approximate
Dollar
Value)
of Shares (or Units)
that
May Yet Be
Purchased
Under the Plans
or
Programs
|
||||||||||||
|
October
1, 2008 to October 31, 2008
|
- | $ | - | - | 3,207,265 | |||||||||||
|
November
1, 2008 to November 30, 2008
|
556,250 | (1) | 8.53 | 400,000 | 2,807,265 | |||||||||||
|
December
1, 2008 to December 31, 2008
|
- | - | - | 2,807,265 | ||||||||||||
|
Totals
|
556,250 | $ | 8.53 | 400,000 | 2,807,265 | |||||||||||
|
(1)
|
Includes
shares purchased by an “affiliated purchaser” under Rule 10b - 18 of the
Securities Exchange Act in open market transactions. These
affiliated purchases were made by Henry B. Tippie who is a Director of the
Company.
|
The
Company’s Board of Directors announced a stock buyback program in March 1998
authorizing the repurchase of 11,812,500 shares in the open
market. Currently the program does not have a predetermined
expiration date.
Performance
Graph
The
following graph shows a five year comparison of the cumulative total stockholder
return based on the performance of the stock of the Company, assuming dividend
reinvestment, as compared with both a broad equity market index and an industry
or peer group index. The indices included in the following graph are
the Russell 2000 Index (“Russell 2000”), the Philadelphia Stock Exchange’s Oil
Service Index (“OSX”), and a peer group which includes companies that are
considered peers of the Company, as discussed below (the “Peer
Group”). The Company has voluntarily chosen to provide both an
industry and a peer group index.
13
The
Russell 2000 is a stock index representing small capitalization U.S.
stocks. The components of the index had an average market
capitalization in 2008 of $881 million, and the Company was a component of the
Russell 2000 during 2008. The Russell 2000 was chosen because it
represents companies with comparable market capitalizations to the
Company. The OSX is a stock index of 15 U.S. companies that provide
oil drilling and production services, oilfield equipment, support services and
geophysical/reservoir services. The Company is not a component of the
OSX, but it was chosen because it represents a large group of companies that
provide the same or similar products and services as the Company. The
companies included in the Peer Group are Weatherford International, Inc., BJ
Services Company, Superior Energy Services, Inc., and Halliburton Company. The
companies included in the peer group have been weighted according to each
respective issuer's stock market capitalization at the beginning of each
year.
Item
6. Selected Financial Data
The
following table summarizes certain selected financial data of the
Company. The historical information may not be indicative of the
Company’s future results of operations. The information set forth
below should be read in conjunction with “Management’s Discussion and Analysis
of Financial Condition and Results of Operations” and the Consolidated Financial
Statements and the notes thereto included elsewhere in this
document.
14
STATEMENT
OF OPERATIONS DATA:
|
Years
Ended December 31,
|
2008
|
2007
|
2006
|
2005
|
2004
|
|||||||||||||||
|
(in
thousands, except employee and per share amounts)
|
||||||||||||||||||||
|
Revenues
|
$ | 876,977 | $ | 690,226 | $ | 596,630 | $ | 427,643 | $ | 339,792 | ||||||||||
|
Cost
of revenues
|
503,631 | 368,175 | 287,037 | 227,492 | 193,659 | |||||||||||||||
|
Selling,
general and administrative expenses
|
117,140 | 107,800 | 91,051 | 75,478 | 65,871 | |||||||||||||||
|
Depreciation
and amortization
|
118,403 | 78,506 | 46,711 | 39,129 | 34,473 | |||||||||||||||
|
Gain
on disposition of assets, net (a)
|
(6,367 | ) | (6,293 | ) | (5,969 | ) | (12,169 | ) | (5,551 | ) | ||||||||||
|
Operating
profit
|
144,170 | 142,038 | 177,800 | 97,713 | 51,340 | |||||||||||||||
|
Interest
expense
|
(5,282 | ) | (4,179 | ) | (356 | ) | (127 | ) | (311 | ) | ||||||||||
|
Interest
income
|
73 | 70 | 319 | 1,077 | 243 | |||||||||||||||
|
Other
(expense) income, net
|
(1,176 | ) | 1,905 | 1,085 | 2,077 | 1,931 | ||||||||||||||
|
Income
before income taxes
|
137,785 | 139,834 | 178,848 | 100,740 | 53,203 | |||||||||||||||
|
Income
tax provision (b)
|
54,382 | 52,785 | 68,054 | 34,256 | 18,430 | |||||||||||||||
|
Net
income (b)
|
$ | 83,403 | $ | 87,049 | $ | 110,794 | $ | 66,484 | $ | 34,773 | ||||||||||
|
Earnings
per share:
|
||||||||||||||||||||
|
Basic
|
$ | 0.86 | $ | 0.90 | $ | 1.16 | $ | 0.70 | $ | 0.36 | ||||||||||
|
Diluted
|
$ | 0.85 | $ | 0.89 | $ | 1.13 | $ | 0.67 | $ | 0.36 | ||||||||||
|
Dividends
paid per share
|
$ | 0.240 | $ | 0.200 | $ | 0.133 | $ | 0.071 | $ | 0.036 | ||||||||||
|
OTHER
DATA:
|
||||||||||||||||||||
|
Operating
margin percent
|
16.4 | % | 20.6 | % | 29.8 | % | 22.8 | % | 15.1 | % | ||||||||||
|
Net
cash provided by operations
|
$ | 177,320 | $ | 141,872 | $ | 118,228 | $ | 66,362 | $ | 50,374 | ||||||||||
|
Net
cash used for investing activities
|
(158,953 | ) | (239,624 | ) | (151,085 | ) | (62,415 | ) | (37,215 | ) | ||||||||||
|
Net
cash (used for) provided by financing activities
|
(21,668 | ) | 101,361 | 22,777 | (20,774 | ) | (5,825 | ) | ||||||||||||
|
Depreciation
and amortization
|
118,403 | 78,506 | 46,711 | 39,129 | 34,500 | |||||||||||||||
|
Capital
expenditures
|
$ | 170,318 | $ | 248,758 | $ | 159,831 | $ | 72,808 | $ | 49,869 | ||||||||||
|
Employees
at end of period
|
2,532 | 2,370 | 2,000 | 1,649 | 1,596 | |||||||||||||||
|
BALANCE
SHEET DATA AT END OF YEAR:
|
||||||||||||||||||||
|
Accounts
receivable, net
|
$ | 210,375 | $ | 176,154 | $ | 148,469 | $ | 107,428 | $ | 75,793 | ||||||||||
|
Working
capital
|
200,494 | 144,338 | 111,302 | 95,215 | 77,509 | |||||||||||||||
|
Property,
plant and equipment, net
|
470,115 | 433,126 | 262,797 | 141,218 | 114,222 | |||||||||||||||
|
Total
assets
|
793,461 | 701,015 | 478,007 | 311,785 | 262,942 | |||||||||||||||
|
Current
portion of long-term debt
|
— | — | — | — | 2,700 | |||||||||||||||
|
Long-term
debt (c)
|
174,450 | 156,400 | 35,600 | — | 2,100 | |||||||||||||||
|
Total
stockholders’ equity
|
$ | 449,084 | $ | 409,272 | $ | 335,287 | $ | 232,501 | $ | 181,423 | ||||||||||
|
(a)
|
Gain
on disposition of assets, net in 2005 includes a $10.7 million pre-tax
gain ($0.07 after tax per diluted share) on the sale of certain operating
assets during the third quarter of 2005. In 2004 the gain on
disposition, net includes a $3.3 million pre-tax gain ($0.02 after tax per
diluted share) on the sale of certain operating assets during the fourth
quarter of 2004.
|
|
(b)
|
During
the fourth quarter of 2005, the income tax provision and net income
reflect the receipt of tax refunds of $3.5 million related to the
successful resolution of certain tax matters, which had a positive impact
of $0.04 after tax per diluted share.
|
|
(c)
|
Effective
September 2006, the Company closed on a new revolving credit facility that
was expanded to $296.5 million in the second quarter of
2008. In February 2005, the Company prepaid a $2.8 million
promissory note and the remaining balance of long-term debt was paid in
full upon maturity of a promissory note in July
2005.
|
15
Item
7. Management’s Discussion and Analysis of Financial Condition and Results of
Operations
Overview
The
following discussion should be read in conjunction with “Selected Financial
Data,” and the Consolidated Financial Statements included elsewhere in this
document. See also “Forward-Looking Statements” on page 2.
RPC, Inc.
(“RPC”) provides a broad range of specialized oilfield services primarily to
independent and major oilfield companies engaged in exploration, production and
development of oil and gas properties throughout the United States, including
the Gulf of Mexico, mid-continent, southwest and Rocky Mountain regions, and
selected international locations. The Company’s revenues and profits
are generated by providing equipment and services to customers who operate oil
and gas properties and invest capital to drill new wells and enhance production
or perform maintenance on existing wells.
Our key
business and financial strategies are:
|
-
|
To
focus our management resources on and invest our capital in equipment and
geographic markets that we believe will earn high returns on capital, and
maintain an appropriate capital structure.
|
|
|
-
|
To
maintain a flexible cost structure that can respond quickly to volatile
industry conditions and business activity levels.
|
|
|
-
|
To
deliver equipment and services to our customers safely.
|
|
|
-
|
To
maintain and increase market share.
|
|
|
-
|
To
maximize shareholder return by optimizing the balance between cash
invested in the Company's productive assets, the payment of dividends to
shareholders, and the repurchase of our common stock on the open
market.
|
|
|
-
|
To
align the interests of our management and shareholders.
|
|
|
-
|
To
maintain an efficient, low-cost capital structure, which includes an
appropriate use of debt.
|
In
assessing the outcomes of these strategies and RPC’s financial condition and
operating performance, management generally reviews periodic forecast data,
monthly actual results, and other similar information. We also
consider trends related to certain key financial data, including revenues,
utilization of our equipment and personnel, pricing for our services and
equipment, profit margins, selling, general and administrative expenses, cash
flows and the return on our invested capital. We continuously monitor
factors that impact the level of current and expected customer activity levels,
such as the price of oil and natural gas, changes in pricing for our services
and equipment and utilization of our equipment and personnel. Our
financial results are affected by geopolitical factors such as political
instability in the petroleum-producing regions of the world, overall economic
conditions and weather in the United States, the prices of oil and natural gas,
and our customers’ drilling and production activities.
Current
industry conditions include natural gas prices that have been very volatile, and
while high by historical levels, declined tremendously during
2008. Oil prices are also extremely volatile, having reached record
highs at the beginning of the third quarter of 2008, prior to declining to a low
of slightly more than $32 per barrel by the end of the year, which is the lowest
level for oil prices since the first quarter of 2005. In the
beginning of 2009, natural gas prices are falling dramatically compared to 2008,
and during the first quarter are approximately 38 percent lower than the same
period last year. The price of oil has fallen as well, and is
approximately 56 percent lower than the same period last year. The
average rig count in 2008 increased by 6.3 percent compared to the prior year,
but fell during the fourth quarter of 2008 and into early
2009. During the first quarter the average rig count is approximately
16 percent lower than the same period last year. In addition to the
overall rig count, the Company also monitors the number of horizontal and
directional wells drilled in the U.S. domestic market, because this type of well
is more service-intensive than a vertical oil or gas well, thus requiring more
of the Company’s services provided for a longer period of time. The
number of horizontal and directional wells drilled in the United States
increased in 2008, and was 49 percent of total wells drilled during the
year. During the first part of 2009, the percentage of horizontal and
directional wells drilled as a percentage of total wells increased to
approximately 56 percent. Over the past several years, the supply of
oilfield service equipment in the U.S. domestic market has increased
tremendously, both from existing service companies and new entrants to the
oilfield services business. Although the supply of oilfield equipment
did not increase as much in 2008 as in prior years, the large supply of
equipment and service providers has caused pricing for the Company’s services to
decrease, which has had a negative impact on the Company’s financial results and
returns. The Company responded by reducing its capital expenditures
during 2008, closely monitoring its competitors’ activities, and scrutinizing
planned capital expenditures more closely for acceptable financial
returns. In spite of increased competition and declining financial
results, the Company’s returns are still high by historical standards, and cash
flow from operations as well as proceeds from our revolving credit facility have
allowed us to make significant capital expenditures during 2008.
16
Income
before income taxes was $137.8 million in 2008 compared to $139.8 million in the
prior year. The effective tax rate for 2008 was 39.5 percent compared
to 37.7 percent in the prior year. Diluted earnings per share
decreased to $0.85 in 2008 compared to $0.89 for the prior year. Cash
flows from operating activities were $177.3 million in 2008 compared to $141.9
million in the prior year, and cash and cash equivalents were $3.0 million at
December 31, 2008, a decrease of $3.3 million compared to December 31,
2007. During the second quarter of 2008, we expanded our revolving
credit facility to $296.5 million. As of December 31, 2008,
there was $174.5 million in outstanding borrowings on our revolving credit
facility.
Cost of
revenues as a percentage of revenues increased approximately 4.1 percentage
points in 2008 compared to 2007, because of lower pricing for our services due
to competition and higher cost for materials and supplies, personnel and
fuel.
Selling,
general and administrative expenses as a percentage of revenues decreased
approximately 2.2 percentage points in 2008 compared to 2007, which was
primarily due to positive leverage of these costs realized from the higher
revenues.
Consistent
with our strategy to selectively grow our capacity and maintain our existing
fleet of high demand equipment, capital expenditures were $170.3 million in
2008.
Outlook
Drilling
activity in the U.S. domestic oilfields, as measured by the rotary drilling rig
count, has been stable or gradually increasing for several years, and the
overall domestic rig count during the fourth quarter of 2008 was approximately
6.3 percent higher than in the comparable period in 2007. The average price of
oil during the fourth quarter fell by approximately 37 percent as compared to
the prior year while the average price of natural gas fell by approximately 10
percent. Horizontal and directional wells drilled during 2008 were 49
percent of total domestic activity, an increase from 44 percent in the prior
year, and the highest percentage of total drilling activity during the time that
this data has been reported. This trend has continued in early
2009. The price of oil has fallen dramatically due in part to low
global demand, especially among newly-industrializing countries such as China
and India, in spite of political instability and conflict in the oil-producing
regions of the Middle East. While the overall drilling rig count has
increased, it began to fall in the fourth quarter of 2008 as declining commodity
prices and the global economic slowdown, coupled with declining availability of
capital for drilling projects, caused industry activity levels to
decline. These declines continued during the early part of 2009, and
do not show signs of improvement in the near term.
The
Company continues to monitor the competitive environment in 2009, and is
concerned about the rapidly-declining rig count and commodity prices, especially
in light of the higher level of competition which has arisen from the large
amount of additional equipment that has been placed in service in the domestic
market during the past several years. The Company’s response to these
deteriorating industry conditions is to reduce our planned capital expenditures,
implement cost-reduction plans and enhance our sales and marketing
efforts. The Company understands that factors influencing the
industry are unpredictable, and our response to the industry's potential
uncertainty is to maintain sufficient liquidity and a conservative capital
structure and monitor our discretionary spending. Although we used
our bank credit facility to finance our expansion, we will still maintain a
conservative financial structure, and intend to reduce the amount drawn on this
facility over the course of 2009. Based on current industry
conditions and the deep global recession, we expect consolidated revenues for
2009 to decrease compared to 2008.
17
Results
of Operations
|
Years
Ended December 31,
|
2008
|
2007
|
2006
|
|||||||||
|
Consolidated
revenues
|
$ | 876,977 | $ | 690,226 | $ | 596,630 | ||||||
|
Revenues
by business segment:
|
||||||||||||
|
Technical
|
$ | 745,991 | $ | 574,723 | $ | 495,090 | ||||||
|
Support
|
130,986 | 115,503 | 101,540 | |||||||||
|
Consolidated
operating profit
|
$ | 144,170 | $ | 142,038 | $ | 177,800 | ||||||
|
Operating
profit by business segment:
|
||||||||||||
|
Technical
|
$ | 110,648 | $ | 116,493 | $ | 153,126 | ||||||
|
Support
|
36,515 | 29,955 | 30,953 | |||||||||
|
Corporate
expenses
|
(9,360 | ) | (10,703 | ) | (12,248 | ) | ||||||
|
Gain
on disposition of assets, net
|
6,367 | 6,293 | 5,969 | |||||||||
|
Net
income
|
$ | 83,403 | $ | 87,049 | $ | 110,794 | ||||||
|
Earnings
per share — diluted
|
$ | 0.85 | $ | 0.89 | $ | 1.13 | ||||||
|
Percentage
of cost of revenues to revenues
|
57 | % | 53 | % | 48 | % | ||||||
|
Percentage
of selling, general and administrative expenses to
revenues
|
13 | % | 16 | % | 15 | % | ||||||
|
Percentage
of depreciation and amortization expense to revenues
|
14 | % | 11 | % | 8 | % | ||||||
|
Effective
income tax rate
|
39.5 | % | 37.7 | % | 38.1 | % | ||||||
|
Average
U.S. domestic rig count
|
1,879 | 1,768 | 1,649 | |||||||||
|
Average
natural gas price (per thousand cubic feet (mcf))
|
$ | 8.81 | $ | 6.93 | $ | 6.65 | ||||||
|
Average
oil price (per barrel)
|
$ | 99.96 | $ | 72.78 | $ | 66.36 | ||||||
Year
Ended December 31, 2008 Compared To Year Ended December 31, 2007
Revenues. Revenues for 2008
increased $186.8 million or 27.1 percent compared to 2007. The
Technical Services segment revenues for 2008 increased 29.8 percent from the
prior year due primarily to a higher drilling rig count and increased capacity
driven by higher capital expenditures partially offset by lower pricing for
services. The Support Services segment revenues for 2008 increased
13.4 percent from the prior year due to increased capacity driven by higher
capital expenditures as well as a more profitable job mix in the rental tool
service line, the largest within this segment.
Domestic
revenues increased 30 percent to $846.2 million during 2008 compared to 2007 due
to increased capacity in our largest service lines, such as pressure pumping and
rental tools. The average price of natural gas increased by 27
percent and the average price of oil increased by approximately 37 percent
during 2008 compared to the prior year. In conjunction with the
increase in natural gas prices, the average domestic rig count during 2008 was
seven percent higher than in 2007. This increase in drilling activity
had a positive impact on our financial results. We believe that our
activity levels are affected more by the price of natural gas than by the price
of oil, because the majority of U.S. domestic drilling activity relates to
natural gas, and many of our services are more appropriate for gas wells than
oil wells. Foreign revenues, which decreased from $41.1 million in
2007 to $30.8 million in 2008, were four percent of consolidated
revenues. These revenue decreases were due mainly to lower customer
activity levels in Turkmenistan and Hungary compared to the prior
year. Our international revenues are impacted by the timing of
project initiation and their ultimate duration.
Cost of
revenues. Costs of revenues in 2008 was $503.6 million
compared to $368.2 million in 2007, an increase of $135.4 million or 36.8
percent. The increase in these costs was due to the variable nature
of many of these expenses, including materials and supplies, compensation, and
maintenance and repairs. Cost of revenues, as a percent of revenues,
increased in 2008 from 2007 due to more competitive pricing, higher costs of
proppant used in our pressure pumping service line and increased maintenance and
repairs expenses.
Selling, general and administrative
expenses. Selling, general and administrative expenses increased 8.7 percent
to $117.1 million in 2008 compared to $107.8 million in 2007. This
increase was primarily due to higher employment costs consistent with higher
activity levels and geographic expansion under RPC’s long-term growth
plan. As a percentage of revenues, selling, general and
administrative expenses decreased to 13.4 percent in 2008 compared to 15.6
percent in 2007.
18
Depreciation and
amortization. Depreciation and amortization were $118.4
million in 2008, an increase of $39.9 million or 50.8 percent compared to $78.5
million in 2007. This increase resulted from a higher level of capital
expenditures during recent quarters within both Support Services and Technical
Services to increase capacity and to maintain our existing
equipment.
Gain on disposition of assets, net.
Gain on the disposition of assets, net increased due primarily to gains
related to various property and equipment dispositions or sales to customers of
lost or damaged rental equipment.
Other(expense) income, net. Other
(expense), net in 2008 was $(1.2) million, a decrease of $3.1 million compared
to other income of $1.9 million in 2007. The decrease is mainly due
to the current year decline in the fair value of trading securities
held in the non-qualified Supplemental Retirement Plan. In
addition to changes in the fair value of trading securities, other (expense)
income includes gains from settlements of various legal and insurance claims and
royalty payments.
Interest
expense. Interest expense was $5.3 million in 2008
compared to $4.2 million in 2007. The increase is due to higher
interest expense in 2008 incurred on larger outstanding interest bearing
advances on our revolving line of credit.
Interest income.
Interest income increased to $73 thousand in 2008 compared to $70 thousand in
2007 as a result of a higher average investable cash balance in 2008 compared to
2007.
Income tax
provision. The income tax provision increased to $54.4 million
in 2008 from $52.8 million in 2007. The increase is due to an
increase in the effective tax rate to 39.5 percent in 2008 from 37.7 percent in
2007.
Net income and diluted earnings per
share. Net income decreased 4.2 percent to $83.4
million, or $0.85 earnings per diluted share, compared to $87.0 million, or
$0.89 earnings per diluted share in 2007. This decrease is due to
higher costs of revenues, selling, general and administrative expenses,
depreciation expense, other expense, and interest expense partially offset by
increased revenues.
Year
Ended December 31, 2007 Compared To Year Ended December 31, 2006
Revenues. Revenues for 2007
increased $93.6 million or 15.7 percent compared to 2006. The
Technical Services segment revenues for 2007 increased 16.1 percent from the
prior year due primarily to increased capacity driven by higher capital
expenditures partially offset by lower pricing for services and increased
drilling rig count. The Support Services segment revenues for 2007
increased 13.8 percent from the prior year due to increased capacity driven by
higher capital expenditures as well as a more profitable job mix in the rental
tool service line, the largest within this segment.
Domestic
revenues increased 15 percent to $649.1 million during 2007 compared to 2006 due
to increased capacity in our largest service lines, such as pressure pumping and
rental tools. The average price of natural gas increased by four
percent and the average price of oil increased by approximately ten percent
during 2007 compared to 2006. In conjunction with the increase in
natural gas prices, the average domestic rig count during 2007 was seven percent
higher than in 2006. This increase in drilling activity had a
positive impact on our financial results. Foreign revenues, which
increased from $30.0 million in 2006 to $41.1 million in 2007, were six percent
of consolidated revenues. These revenue increases were realized due
mainly to higher customer activity levels in Bolivia, Canada, Egypt and
Turkmenistan compared to the prior year. Our international revenues
are impacted by the timing of project initiation and their ultimate
duration.
Cost of
revenues. Costs of revenues in 2007 was $368.2 million
compared to $287.0 million in 2006, an increase of $81.2 million or 28.3
percent. The increase in these costs was due to the variable nature
of many of these expenses, including compensation, materials and supplies, fuel
and maintenance and repair costs. Cost of revenues, as a percent of
revenues, increased in 2007 from 2006 due to upward cost pressures for materials
and supplies, personnel, fuel, delays in the delivery of revenue producing
equipment and resulting inefficiencies, as well as lower pricing for our
services, due to increased competition.
Selling, general and administrative
expenses. Selling, general and administrative expenses increased 18.4 percent
to $107.8 million in 2007 compared to $91.1 million in 2006. This
increase was primarily due to higher employment costs consistent with higher
activity levels and geographic expansion under RPC’s long-term growth
plan. As a percentage of revenues, selling, general and
administrative expenses increased to 15.6 percent in 2007 compared to 15.3
percent in 2006.
Depreciation and
amortization. Depreciation and amortization were $78.5 million
in 2007, an increase of $31.8 million or 68.1 percent compared to $46.7 million
in 2006. This increase resulted from a higher level of capital expenditures
during 2006 and 2007 within both Support Services and Technical Services to
increase capacity and to maintain our existing equipment.
Gain on disposition of assets, net.
Gain on the disposition of assets, net increased due primarily to gains
related to various property and equipment dispositions or sales to customers of
lost or damaged rental equipment.
Other income, net. Other income,
net in 2007 was $1.9 million, an increase of $0.8 million compared to $1.1
million in 2006. Other income includes gains from settlements of
various legal and insurance claims and royalty payments.
19
Interest
expense. Interest expense was $4.2 million in 2007
compared to $356 thousand in 2006. The increase is due to higher
interest expense in 2007 incurred on larger outstanding interest bearing
advances on our revolving line of credit.
Interest Income.
Interest income declined to $70 thousand in 2007 compared to $319 thousand in
2006 as a result of a lower average investable cash balance in 2007 compared to
2006.
Income tax
provision. The income tax provision decreased to $52.8 million
in 2007 from $68.1 million in 2006. The decrease is due to the
decline in income before taxes coupled with a decrease in the effective tax rate
to 37.7 percent in 2007 from 38.1 percent in 2006.
Net income and diluted earnings per
share. Net income decreased 21.4 percent to $87.0
million, or $0.89 earnings per diluted share, compared to $110.8 million, or
$1.13 earnings per diluted share in 2006.
20
Liquidity
and Capital Resources
Cash
and Cash Flows
The
Company’s cash and cash equivalents were $3.0 million as of December 31, 2008,
$6.3 million as of December 31, 2007 and $2.7 million as of December 31,
2006.
The following table sets forth the
historical cash flows for the years ended December 31:
|
(in
thousands)
|
||||||||||||
|
2008
|
2007
|
2006
|
||||||||||
|
Net
cash provided by operating activities
|
$ | 177,320 | $ | 141,872 | $ | 118,228 | ||||||
|
Net
cash used for investing activities
|
(158,953 | ) | (239,624 | ) | (151,085 | ) | ||||||
|
Net
cash (used for) provided by financing activities
|
(21,668 | ) | 101,361 | 22,777 | ||||||||
2008
Cash
provided by operating activities increased by $35.4 million in 2008 compared to
the prior year. Although net income decreased $3.6 million in 2008
compared to 2007, cash provided by operating activities increased due primarily
to an increase in depreciation due to higher capital expenditures and a higher
deferred tax provision due to accelerated tax depreciation. Increased
business activity levels and revenues in 2008 resulted in higher accounts
receivable, inventories and prepaid expenses partially offset by increased
accounts payable and accrued payroll including bonuses.
Cash used
for investing activities in 2008 decreased by $80.7 million compared to 2007,
primarily as a result of lower capital expenditures.
Cash
(used for) provided by financing activities in 2008 increased by $123.0 million
compared to 2007, primarily due to lower net borrowings from notes payable to
banks during 2008, an increase in common stock purchased and retired, and a 20
percent increase in dividends paid per share to common
shareholders.
2007
Cash
provided by operating activities increased by $23.6 million in 2007 compared to
the prior year. Although net income decreased $23.7 million in 2007
compared to 2006, cash provided by operating activities increased due primarily
to an increase in depreciation due to higher capital expenditures, a higher
deferred tax provision due to accelerated tax depreciation and lower growth in
working capital requirements. Increased business activity levels and
revenues in 2007 resulted in higher accounts receivable, inventories and prepaid
expenses partially offset by increased accounts payable and accrued payroll
including bonuses.
Cash used
for investing activities in 2007 increased by $88.5 million compared to 2006,
primarily as a result of higher capital expenditures to increase capacity and
maintain our existing equipment.
Cash
provided by financing activities in 2007 increased by $78.6 million compared to
2006, primarily due to net borrowings from notes payable to banks during 2007,
partially offset by a 50 percent increase in dividends paid per share to common
shareholders.
Financial
Condition and Liquidity
The
Company’s financial condition as of December 31, 2008, remains
strong. We believe the liquidity provided by our existing cash and
cash equivalents, our overall strong capitalization which includes a revolving
credit facility and cash expected to be generated from operations will provide
sufficient capital to meet our requirements for at least the next twelve
months. During the third quarter of 2006, the Company replaced its
$50 million line of credit with a $250 million revolving credit facility (the
"Revolving Credit Agreement"), with a term of five years. During the second
quarter of 2008, the Company entered into a certain Commitment Increase
Amendment to the Revolving Credit Agreement to increase the amount of the credit
facility by $46.5 million to its current amount of $296.5
million. The Revolving Credit Agreement contains customary terms and
conditions, including certain financial covenants including covenants
restricting RPC's ability to incur liens, merge or consolidate with another
entity. A total of $99.9 million was available under our facility as
of December 31, 2008; approximately $22.2 million of the credit facility
supports outstanding letters of credit relating to self-insurance programs or
contract bids. For additional information with respect to RPC’s
credit facility, see Note 6 of the Notes to Consolidated Financial
Statements.
21
The
Company’s decisions about the amount of cash to be used for investing and
financing purposes are influenced by its capital position, including access to
borrowings under our credit facility, and the expected amount of cash to be
provided by operations. We believe our liquidity will continue to
provide the opportunity to grow our asset base and revenues during periods with
positive business conditions and strong customer activity levels. The
Company's decisions about the amount of cash to be used for investing and
financing activities could be influenced by the financial covenants in our
credit facility but we do not expect the covenants to restrict our planned
activities.
Cash
Requirements
Capital
expenditures were $170.3 million in 2008, and we currently expect capital
expenditures to be approximately $90.0 million in 2009. We expect
these expenditures to be primarily directed towards revenue-producing equipment
in our larger, core service lines including pressure pumping, snubbing,
nitrogen, and rental tools. The actual amount of 2009 expenditures
will depend primarily on equipment maintenance requirements, expansion
opportunities, and equipment delivery schedules.
The Company’s Retirement Income Plan, a
multiple employer trusteed defined benefit pension plan, provides monthly
benefits upon retirement at age 65 to eligible employees. The Company
does not currently expect to make any contributions to the defined benefit
pension plan in 2009 to meet its funding objectives.
The Company’s Board of Directors
announced a stock buyback program on March 9, 1998 authorizing the repurchase of
up to 11,812,500 shares of which 2,807,265 additional shares were available to
be repurchased as of December 31, 2008. The program does not have a
predetermined expiration date.
On
January 27, 2009, the Board of Directors approved an increase in the quarterly
cash dividend per common share, from $0.06 to $0.07, payable March 10, 2009 to
stockholders of record at the close of business February 10,
2009. The Company expects to continue to pay cash dividends to common
stockholders, subject to the earnings and financial condition of the Company and
other relevant factors.
Contractual
Obligations
The
Company’s obligations and commitments that require future payments include a
bank demand note, 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, 2008:
|
Contractual
obligations
|
Payments
due by period
|
|||||||||||||||||||
|
(in
thousands)
|
Total
|
Less
than
1
year
|
1-3
years
|
3-5
years
|
More
than
5
years
|
|||||||||||||||
|
Long-term
debt obligations
|
$ | 174,450 | $ | - | $ | 174,450 | $ | - | $ | - | ||||||||||
|
Interest
on long-term debt obligations
|
9,705 | 3,611 | 6,094 | - | - | |||||||||||||||
|
Capital
lease obligations
|
- | - | - | - | - | |||||||||||||||
|
Operating
leases (1)
|
12,784 | 344 | 8,838 | 2,461 | 1,141 | |||||||||||||||
|
Purchase
obligations (2)
|
6,435 | 6,435 | - | - | - | |||||||||||||||
|
Other
long-term liabilities (3)
|
2,718 | - | 2,718 | - | - | |||||||||||||||
|
Total
contractual obligations
|
$ | 206,092 | $ | 10,390 | $ | 192,100 | $ | 2,461 | $ | 1,141 | ||||||||||
|
(1)
|
Operating
leases include agreements for various office locations, office equipment,
and certain operating equipment.
|
|
(2)
|
Includes
agreements to purchase goods or services that have been approved and that
specify all significant terms (pricing, quantity, and
timing). As part of the normal course of business the Company
enters into purchase commitments to manage its various operating
needs.
|
|
(3)
|
Includes
expected cash payments for long-term liabilities reflected on the balance
sheet where the timing of the payments are known. These amounts include
incentive compensation. These amounts exclude pension obligations with
uncertain funding requirements and deferred compensation
liabilities.
|
22
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. Due
to the increases in activity in the domestic oilfield over the past several
years, as well as a shortage of a skilled work force due to historically high
activity in the oilfield, the Company has experienced some upward wage pressures
in the labor markets from which it hires employees. Also over the
past several years, the price of steel, for both the commodity and for products
manufactured with steel, has increased dramatically. Recently, steel
prices have moderated, although they remain high by historical
standards. This factor has affected the Company's operations by
extending time for deliveries of new equipment and receipt of price quotations
that may only be valid for a limited period of time. If this factor
continues, it is possible that the cost of the Company's new equipment will
increase which would result in higher capital expenditures and depreciation
expense. RPC attempts to recover such increased costs through price increases to
its customers, although competitive pressures have recently adversely affected
the Company’s ability to do so.
Off
Balance Sheet Arrangements
The
Company does not have any material off balance sheet arrangements.
Related
Party Transactions
Marine
Products Corporation
Effective
February 28, 2001, the Company spun off the business conducted through Chaparral
Boats, Inc. (“Chaparral”), RPC’s former powerboat manufacturing
segment. RPC accomplished the spin-off by contributing 100 percent of
the issued and outstanding stock of Chaparral to Marine Products Corporation (a
Delaware corporation) (“Marine Products”), a newly formed wholly-owned
subsidiary of RPC, and then distributing the common stock of Marine Products to
RPC stockholders. In conjunction with the spin-off, RPC and Marine
Products entered into various agreements that define the companies’
relationship.
In
accordance with a Transition Support Services agreement, which may be terminated
by either party, RPC provides certain administrative services, including
financial reporting and income tax administration, acquisition assistance, etc.,
to Marine Products. Charges from the Company (or from corporations
that are subsidiaries of the Company) for such services aggregated approximately
$842,000 in 2008, $957,000 in 2007 and $739,000 in 2006. The Company’s
receivable due from Marine Products for these services as of December 31, 2008
and 2007 was approximately $70,000 and $223,000. The Company’s
directors are also directors of Marine Products and all of the executive
officers are employees of both the Company and Marine Products.
Other
The
Company periodically purchases in the ordinary course of business products or
services from suppliers, who are owned by significant officers or shareholders,
or affiliated with the directors of RPC. The total amounts paid to these
affiliated parties were approximately $393,000 in 2008, $1,035,000 in 2007 and
$1,248,000 in 2006.
RPC
receives certain administrative services and rents office space from Rollins,
Inc. (a company of which Mr. R. Randall Rollins is also Chairman and which is
otherwise affiliated with RPC). The service agreements between
Rollins, Inc. and the Company provide for the provision of services on a cost
reimbursement basis and are terminable on six months notice. The
services covered by these agreements include office space, administration of
certain employee benefit programs, and other administrative services. Charges to
the Company (or to corporations which are subsidiaries of the Company) for such
services and rent totaled $90,000 in 2008, $72,000 in 2007 and $70,000 in
2006.
Critical
Accounting Policies
The
consolidated financial statements are prepared in accordance with accounting
principles generally accepted in the United States, which require significant
judgment by management in selecting the appropriate assumptions for calculating
accounting estimates. These judgments are based on our historical experience,
terms of existing contracts, trends in the industry, and information available
from other outside sources, as appropriate. Senior management has
discussed the development, selection and disclosure of its critical accounting
estimates with the Audit Committee of our Board of Directors. The
Company believes the following critical accounting policies involve estimates
that require a higher degree of judgment and complexity:
23
Allowance for doubtful
accounts — Substantially all of the Company’s receivables are due from
oil and gas exploration and production companies in the United States, selected
international locations and foreign, nationally owned oil
companies. Our allowance for doubtful accounts is determined using a
combination of factors to ensure that our receivables are not overstated due to
uncollectibility. Our established credit evaluation procedures seek
to minimize the amount of business we conduct with higher risk customers. Our
customers’ ability to pay is directly related to their ability to generate cash
flow on their projects and is significantly affected by the volatility in the
price of oil and natural gas. Provisions for doubtful accounts are recorded in
selling, general and administrative expenses. Accounts are
written-off against the allowance for doubtful accounts when the Company
determines that amounts are uncollectible and recoveries of amounts previously
written off are recorded when collected. Significant recoveries will
generally reduce the required provision in the period of
recovery. Therefore, the provision for doubtful accounts can
fluctuate significantly from period to period. Recoveries in 2008
totaled $1.5 million, causing a reduction in bad debt
expense. Recoveries in 2007 and 2006 were
insignificant. We record specific provisions when we become aware of
a customer's inability to meet its financial obligations to us, such as in the
case of bankruptcy filings or deterioration in the customer's operating results
or financial position. If circumstances related to customers change, our
estimates of the realizability of receivables would be further adjusted, either
upward or downward.
The
estimated allowance for doubtful accounts is based on our evaluation of the
overall trends in the oil and gas industry, financial condition of our
customers, our historical write-off experience, current economic conditions, and
in the case of international customers, our judgments about the economic and
political environment of the related country and region. In addition
to reserves established for specific customers, we establish general reserves by
using different percentages depending on the age of the
receivables. Excluding the effect of the recoveries referred to
above, the annual provisions for doubtful accounts have ranged from 0.10 percent
to 0.45 percent of revenues over the last three years. Increasing or
decreasing the estimated general reserve percentages by 0.50 percentage points
as of December 31, 2008 would have resulted in a change of approximately $1.1
million to the allowance for doubtful accounts and a corresponding change to
selling, general and administrative expenses.
Income taxes — The effective
income tax rates were 39.5 percent in 2008, 37.7 percent in 2007, and 38.1
percent in 2006. Our effective tax rates vary due to changes in
estimates of our future taxable income, fluctuations in the tax jurisdictions in
which our earnings and deductions are realized, and favorable or unfavorable
adjustments to our estimated tax liabilities related to proposed or probable
assessments. As a result, our effective tax rate may fluctuate
significantly on a quarterly or annual basis.
We
establish a valuation allowance against the carrying value of deferred tax
assets when we determine that it is more likely than not that the asset will not
be realized through future taxable income. Such amounts are charged
to earnings in the period in which we make such determination. Likewise, if we
later determine that it is more likely than not that the net deferred tax assets
would be realized, we would reverse the applicable portion of the previously
provided valuation allowance. We have considered future market growth,
forecasted earnings, future taxable income, the mix of earnings in the
jurisdictions in which we operate, and prudent and feasible tax planning
strategies in determining the need for a valuation allowance.
We
calculate our current and deferred tax provision based on estimates and
assumptions that could differ from the actual results reflected in income tax
returns filed during the subsequent year. Adjustments based on filed returns are
recorded when identified, which is generally in the third quarter of the
subsequent year for U.S. federal and state provisions. Deferred tax
liabilities and assets are determined based on the differences between the
financial and tax bases of assets and liabilities using enacted tax rates in
effect in the year the differences are expected to reverse.
The
amount of income taxes we pay is subject to ongoing audits by federal, state and
foreign tax authorities, which often result in proposed assessments. Our
estimate for the potential outcome for any uncertain tax issue is highly
judgmental. We believe we have adequately provided for any reasonably
foreseeable outcome related to these matters. However, our future results may
include favorable or unfavorable adjustments to our estimated tax liabilities in
the period the assessments are made or resolved or when statutes of limitation
on potential assessments expire. Additionally, the jurisdictions in which our
earnings or deductions are realized may differ from our current
estimates.
Insurance expenses – The
Company self insures, up to certain policy-specified limits, certain risks
related to general liability, workers’ compensation, vehicle and equipment
liability. The cost of claims under these self-insurance programs is
estimated and accrued using individual case-based valuations and statistical
analysis and is based upon judgment and historical experience; however, the
ultimate cost of many of these claims may not be known for several years. These
claims are monitored and the cost estimates are revised as developments occur
relating to such claims. The Company has retained an independent
third party actuary to assist in the calculation of a range of exposure for
these claims. As of December 31, 2008, the Company estimates the
range of exposure to be from $11.3 million to $14.9 million. The
Company has recorded liabilities at December 31, 2008 of approximately $13.0
million which represents management’s best estimate of probable
loss.
Depreciable life of assets —
RPC’s net property, plant and equipment at December 31, 2008 was $470.1 million
representing 59.2 percent of the Company’s consolidated
assets. Depreciation and amortization expenses for the year ended
December 31, 2008 were $118.4 million, or 16.0 percent of total operating
costs. Management judgment is required in the determination of the
estimated useful lives used to calculate the annual and accumulated depreciation
and amortization expense.
24
Property,
plant and equipment are reported at cost less accumulated depreciation and
amortization, which is generally provided on a straight-line basis over the
estimated useful lives of the assets. The estimated useful life represents the
projected period of time that the asset will be productively employed by the
Company and is determined by management based on many factors including
historical experience with similar assets. Assets are monitored to
ensure changes in asset lives are identified and prospective depreciation and
amortization expense is adjusted accordingly. We have not made any
changes to the estimated lives of assets resulting in a material impact in the
last three years.
Defined benefit pension
plan – In
2002, the Company ceased all future benefit accruals under the defined benefit
plan, although the Company remains obligated to provide employees benefits
earned through March 2002. The Company accounts for the defined
benefit plan in accordance with the provisions of Statement of Financial
Accounting Standards (“SFAS”) No. 158, “Employers’ Accounting for Defined
Benefit Pension and Other Postretirement Plans – An Amendment of FASB Statements
No. 87, 88, 106, and 132(R)” and engages an outside actuary to calculate its
obligations and costs. With the assistance of the actuary, the
Company evaluates the significant assumptions used on a periodic basis including
the estimated future return on plan assets, the discount rate, and other
factors, and makes adjustments to these liabilities as necessary.
The
Company chooses an expected rate of return on plan assets based on historical
results for similar allocations among asset classes, the investments strategy,
and the views of our investment adviser. Differences between
the expected long-term return on plan assets and the actual return are amortized
over future years. Therefore, the net deferral of past asset gains
(losses) ultimately affects future pension expense. The Company’s
assumption for the expected return on plan assets is eight percent which is
unchanged from the prior year.
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 is forecasted and then compared to a portfolio of investment grade
corporate bonds that will mature at the same time that the benefit payments are
due in any given year. The economic model then calculates the one
discount rate to apply to all benefit payments over the life of the plan which
will result in the same total lump sum as the payments from the corporate
bonds. A lower discount rate increases the present value of
benefit obligations. The discount rate was 6.84 percent as of
December 31, 2008 compared to 6.25 percent in 2007 and 5.50 percent in
2006.
As of
December 31, 2008, the defined benefit plan was under-funded and the recorded
change within accumulated other comprehensive loss decreased stockholders’
equity by $6.1 million after tax. Holding all other factors
constant, a decrease in the discount rate used to measure plan liabilities by
0.25 percentage points would result in a pre-tax increase of $0.5 million to the
net loss related to pension in accumulated other comprehensive loss and an
increase in the discount rate used to measure plan liabilities by 0.25
percentage points would result in a pre-tax decrease of $0.5 million to the net
loss related to pension in accumulated other comprehensive loss.
The
Company recognized pre-tax pension (income) expense of $(0.4) million in 2008,
$0.3 million in 2007, and $0.8 million in 2006. Based on the
under-funded status of the defined benefit plan as of December 31, 2008 due
primarily to declines in pension assets, the Company expects to recognize
pension expense of $2.0 million in 2009. Holding all other factors
constant, a change in the expected long-term rate of return on plan assets by
0.50 percentage points would result in an increase or decrease in pension
expense/income of approximately $0.1 million in 2009. Holding
all other factors constant, a change in the discount rate used to measure plan
liabilities by 0.25 percentage points would result in an increase or decrease in
pension expense/income of approximately $0.1 million in 2009.
New
Accounting Standards
In
December 2008, the FASB issued FASB Staff Position (FSP) FAS 132R-1, “Employers’
Disclosures about Postretirement Benefit Plan Assets.” The FASB issued the FSP,
which amends FASB Statement 132R, Employers’ Disclosures about
Pensions and Other Postretirement Benefits, in order to provide adequate
transparency about the types of assets and associated risks in employers’
postretirement plans. Disclosures are designed to provide an
understanding of how investment decisions are made: the major categories of plan
assets; the inputs and valuation techniques used to measure the fair value of
plan assets; the effect of fair value measurements using significant
unobservable inputs (Level 3 measurements in FASB Statement 157, Fair Value
Measurements) on changes in plan assets for the period; and significant
concentrations of risk within plan assets. The disclosures about plan
assets required by this FSP are required to be provided for fiscal years ending
after December 15, 2009, with the provisions of this FSP not required for
earlier periods that are presented for comparative purposes, upon initial
application. Earlier application of the provisions of this FSP is permitted. The
Company is currently in the process of determining the additional disclosures
required upon the adoption of this FSP.
25
In
October 2008, the FASB issued FASB Staff Position (FSP) No. FAS 157-3,
“Determining the Fair Value of a Financial Asset When the Market for That Asset
Is Not Active.” FSP 157-3 clarifies the application of SFAS No.
157, “Fair Value
Measurements,” in a market that is not active and provides an example to
illustrate key considerations in determining the fair value of a financial asset
when the market for that financial asset is not active. The FSP
stipulates that determining fair value in a dislocated market depends on the
facts and circumstances and may require the use of significant judgment when
evaluating individual transactions or broker quotes which are some of the
sources of the fair value measurement. In addition, FSP FAS 157-3
states that if an entity uses its own assumptions to determine fair value, it
must include appropriate risk adjustments that market participants would make
for nonperformance and liquidity risks. FSP FAS 157-3 is effective
upon issuance, including prior periods for which financial statements have not
been issued. The Company adopted FSP FAS 157-3 in the third quarter
of 2008 and has concluded that it does not have a material effect on its
consolidated financial statements.
In
September 2008, the FASB issued FSP No. FAS 133-1 and FIN 45-4, “Disclosures
about Credit Derivatives and Certain Guarantees – An Amendment of FASB Statement
No. 133 and FASB Interpretation No. 45; and Clarification of the Effective Date
of FASB Statement No. 161.” This FSP amends SFAS No. 133,
“Accounting for Derivative Instruments and Hedging Activities,” to require
disclosures by sellers of credit derivatives, including credit derivatives
embedded in a hybrid instrument. This FSP also amends FASB
Interpretation No. (FIN) 45, “Guarantor’s Accounting and Disclosure Requirements
for Guarantees, Including Indirect Guarantees of Indebtedness of Others,” to
require an additional disclosure about the current status of the
payment/performance risk of a guarantee. Further this FSP
clarifies the FASB’s intent about the effective date of SFAS No. 161,
“Disclosures about Derivative Instruments and Hedging
Activities.” The provisions of this FSP that amend SFAS No. 161 and
FIN 45 are effective for reporting periods ending after November 15, 2008 and
the clarification of the effective date of SFAS No. 161 is effective upon
issuance of this FSP. The Company adopted FSP FAS 133-1 and FIN 45-4
in the fourth quarter of 2008 and has concluded that it does not have a material
effect on its consolidated financial statements.
In June
2008, the FASB issued FSP EITF 03-6-1, “Determining Whether Instruments Granted
in Share-Based Payment Transactions Are Participating Securities,” to clarify
that all outstanding unvested share-based payment awards that contain
nonforfeitable rights to dividends or dividend equivalents, whether paid or
unpaid, are participating securities. An entity must include participating
securities in its calculation of basic and diluted earnings per share (EPS)
pursuant to the two-class method, as described in FASB Statement 128, Earnings
per Share. FSP EITF 03-6-1 is effective for fiscal years beginning after
December 15, 2008 and interim periods within those fiscal years. The Company
intends to adopt FSP EITF 03-6-1 effective January 1, 2009 and apply its
provisions retrospectively to all prior-period EPS data presented in its
financial statements. The Company has periodically issued share-based payment
awards that contain non-forfeitable rights to dividends and does not expect the
adoption of this accounting guidance to have a material effect on its
consolidated financial statements or EPS.
In May
2008, the FASB issued SFAS 162, “The Hierarchy of Generally Accepted Accounting
Principles.” SFAS 162 is intended to improve financial
reporting by identifying a consistent framework, or hierarchy, for selecting
accounting principles to be used in financial statements that are presented in
conformity with U.S. generally accepted accounting principles for
nongovernmental entities. This Statement became effective
on November 15, 2008. The Company adopted SFAS 162 in the fourth quarter of
2008 and has concluded that it does not have a material effect on its
consolidated financial statements.
In April
2008, the FASB issued FSP FAS No. 142-3, which amends the factors that must be
considered in developing renewal or extension assumptions used to determine the
useful life over which to amortize the cost of a recognized intangible asset
under SFAS No. 142, “Goodwill and Other Intangible Assets.” The FSP requires an
entity that is estimating the useful life of a recognized intangible asset to
consider its historical experience in renewing or extending similar arrangements
or, in the absence of historical experience, must consider assumptions that
market participants would use about renewal or extension that are both
consistent with the asset’s highest and best use and adjusted for
entity-specific factors under SFAS No. 142. The FSP is effective for
fiscal years beginning after December 15, 2008, and the guidance for determining
the useful life of a recognized intangible asset must be applied prospectively
to intangible assets acquired after the effective date. The Company does not
expect the adoption of FSP FAS No. 142-3 to have a material effect on its
consolidated financial statements.
26
In March
2008, the FASB issued SFAS 161, “Disclosures about Derivative Instruments and
Hedging Activities - an Amendment of FASB Statement No. 133.” SFAS 161 requires
enhanced disclosures regarding how: (a) an entity uses derivative instruments;
(b) derivative instruments and related hedged items are accounted for under FASB
Statement No. 133, “Accounting for Derivative Instruments and Hedging
Activities;” and (c) derivative instruments and related hedged items affect an
entity's financial position, financial performance, and cash
flows. SFAS 161 is effective for fiscal years and interim periods
beginning after November 15, 2008 with early application being
encouraged. The Company does not expect the adoption of SFAS 161 to
have a significant impact on the Company’s consolidated financial
statements.
In
February 2008, the FASB issued FASB Staff Position (FSP) FAS 157-1, “Application
of FASB Statement No. 157 to FASB Statement No. 13 and Other Accounting
Pronouncements that Address Fair Value Measurements for Purposes of Lease
Classification or Measurement under Statement 13,” and FSP FAS 157-2, “Effective
Date of FASB Statement No. 157.” These FSPs:
• Exclude
certain leasing transactions accounted for under FASB Statement No. 13,
Accounting for Leases, from the scope of FASB Statement No. 157, “Fair Value
Measurements” (Statement 157). The exclusion does not apply to fair value
measurements of assets and liabilities recorded as a result of a lease
transaction but measured pursuant to other pronouncements within the scope of
Statement 157.
• Defer
the effective date in Statement 157 for one year for certain nonfinancial assets
and nonfinancial liabilities, except those that are recognized or disclosed at
fair value in the financial statements on a recurring basis (at least
annually).
FSP FAS
157-1 is effective upon the initial adoption of Statement 157. FSP
FAS 157-2 is effective February 12, 2008. The Company adopted the
provisions of FSP 157-1 and 157-2 in the first quarter of 2008. See
Note 8 for details regarding impact of adoption.
Item
7A. Quantitative and Qualitative Disclosures about Market Risk
The
Company is subject to interest rate risk exposure through borrowings on its
credit facility. As of December 31, 2008, there are outstanding
interest-bearing advances of $174.5 million on our credit facility which bear
interest at a floating rate. Effective December 2008 we entered into a
$50,000,000 interest rate swap agreement that effectively converted this portion
of the outstanding variable-rate borrowings under the revolving credit agreement
to a fixed-rate basis, thereby hedging against the impact of potential interest
rate changes. Under this agreement we pay a fixed interest rate of
2.07%. In return, the issuing lender refunds us the variable-rate interest paid
to the syndicate of lenders under our revolving credit agreement on the same
notional amount, excluding the margin. The agreement terminates on
September 8, 2011. As of December 31, 2008 the interest rate swap had
a negative fair value of $830,000. An increase in interest rates of
one percent would result in the interest rate swap having a positive fair value
of approximately $407,000 at December 31, 2008. A decrease in
interest rates of one percent would result in the interest rate swap having a
negative fair value of approximately $2,176,000 at December 31,
2008. A change in interest rates will have no impact on the
interest expense associated with the $50,000,000 of borrowings under the
revolving credit agreement that are subject to the interest rate
swap. A change in interest rates of one percent on the balance
outstanding on the revolving credit agreement at December 31, 2008 not subject
to the interest rate swap would cause a change of $1.2 million in total annual
interest costs.
Additionally,
the Company is exposed to market risk resulting from changes in foreign exchange
rates. However, since the majority of the Company’s transactions
occur in U.S. currency, this risk is not expected to have a material effect on
its consolidated results of operations and financial condition.
27
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, 2008 based on criteria
established in Internal Control—Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission. Based on this evaluation,
management’s assessment is that RPC, Inc. maintained effective internal control
over financial reporting as of December 31, 2008.
The
independent registered public accounting firm, Grant Thornton LLP, has audited
the consolidated financial statements as of and for the year ended December 31,
2008, and has also issued their report on the effectiveness of the Company’s
internal control over financial reporting, included in this report on page
29.
| /s/ Richard A. Hubbell | /s/ Ben M. Palmer | |
|
Richard
A. Hubbell
President
and Chief Executive Officer
|
Ben
M. Palmer
Chief
Financial Officer and Treasurer
|
Atlanta,
Georgia
March 3,
2009
28
Report
of Independent Registered Public Accounting Firm on Internal Control Over
Financial Reporting
Board of
Directors and Stockholders
RPC,
Inc.
We have
audited RPC, Inc.’s (a Delaware Corporation) and subsidiaries (the “Company”)
internal control over financial reporting as of December 31, 2008 based on
criteria established in Internal Control—Integrated
Framework issued by the Committee
of Sponsoring Organizations of the Treadway Commission (COSO). The
Company’s management is responsible for maintaining effective internal control
over financial reporting and for its assessment of the effectiveness of internal
control over financial reporting, included in the accompanying Management’s
Report on Internal Control Over Financial Reporting. Our responsibility is
to express an opinion on the Company’s internal control over financial reporting
based on our audit.
We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal
control over financial reporting, assessing the risk that a material weakness
exists, testing and evaluating the design and operating effectiveness of
internal control based on the assessed risk, and performing such other
procedures as we considered necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinion.
A
company’s internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company’s internal
control over financial reporting includes those policies and procedures that (1)
pertain to the maintenance of records that, in reasonable detail, accurately and
fairly reflect the transactions and dispositions of the assets of the company;
(2) provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company’s
assets that could have a material effect on the financial
statements.
Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
In our
opinion, the Company maintained, in all material respects, effective internal
control over financial reporting as of December 31, 2008, based on criteria
established in Internal
Control—Integrated Framework issued by COSO.
We also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the consolidated balance sheets of the Company
as of December 31, 2008 and 2007, and the related consolidated statements of
income, stockholders’ equity, and cash flows for each of the three years in the
period ended December 31, 2008 and our report dated March 3, 2009 expressed an
unqualified opinion on those consolidated financial statements.
/s/
Grant Thornton LLP
Atlanta,
Georgia
March 3,
2009
29
Report
of Independent Registered Public Accounting Firm on Consolidated Financial
Statements
Board of
Directors and Stockholders
RPC,
Inc.
We have
audited the accompanying consolidated balance sheets of RPC, Inc. (a Delaware
corporation) and subsidiaries (the “Company”) as of December 31, 2008 and 2007,
and the related consolidated statements of operations, stockholders’ equity, and
cash flows for each of the three years in the period ended December 31,
2008. Our audits of the basic consolidated financial statements
included the financial statement schedule listed in the index appearing under
Item 15. These financial statements and financial statement schedule
are the responsibility of the Company’s management. Our responsibility is to
express an opinion on these financial statements and financial statement
schedule based on our audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audits to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of the Company as of December
31, 2008 and 2007, and the results of its operations and its cash flows for each
of the three years in the period ended December 31, 2008 in conformity with
accounting principles generally accepted in the United States of
America. Also in our opinion, the related financial statement
schedule, when considered in relation to the basic consolidated financial
statements taken as a whole, presents fairly, in all material respects, the
information set forth therein.
As
described in Note 5
to the consolidated financial statements, the Company adopted the provisions of
Financial Interpretation No. 48, “Accounting for Uncertainty in Income Taxes –
an interpretation of FASB Statement 109” during 2007. As described in
Note 1
to the consolidated financial statements, the Company adopted the provisions of
Statement of Financial Accounting Standards No. 123 (revised 2004),
“Share-Based Payment” during 2006.
We also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the Company’s internal control over financial
reporting as of December 31, 2008, based on criteria established in Internal Control—Integrated
Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO) and our report dated March 3, 2009 expressed an
unqualified opinion thereon.
/s/ Grant
Thornton LLP
Atlanta,
Georgia
March 3,
2009
30
CONSOLIDATED
BALANCE SHEETS
RPC,
INC. AND SUBSIDIARIES
(in
thousands except share information)
|
December
31,
|
2008
|
2007
|
||||||
|
ASSETS
|
||||||||
|
Cash
and cash equivalents
|
$ | 3,037 | $ | 6,338 | ||||
|
Accounts
receivable, net
|
210,375 | 176,154 | ||||||
|
Inventories
|
49,779 | 29,602 | ||||||
|
Deferred
income taxes
|
6,187 | 3,974 | ||||||
|
Income
taxes receivable
|
15,604 | 12,296 | ||||||
|
Prepaid
expenses and other current assets
|
7,841 | 6,696 | ||||||
|
Current
assets
|
292,823 | 235,060 | ||||||
|
Property,
plant and equipment, net
|
470,115 | 433,126 | ||||||
|
Goodwill
|
24,093 | 24,093 | ||||||
|
Other
assets
|
6,430 | 8,736 | ||||||
|
Total
assets
|
$ | 793,461 | $ | 701,015 | ||||
|
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
||||||||
|
LIABILITIES
|
||||||||
|
Accounts
payable
|
$ | 61,217 | $ | 61,371 | ||||
|
Accrued
payroll and related expenses
|
20,398 | 17,972 | ||||||
|
Accrued
insurance expenses
|
4,640 | 4,753 | ||||||
|
Accrued
state, local and other taxes
|
2,395 | 1,719 | ||||||
|
Income
taxes payable
|
3,359 | 4,340 | ||||||
|
Other
accrued expenses
|
320 | 567 | ||||||
|
Current
liabilities
|
92,329 | 90,722 | ||||||
|
Long-term
accrued insurance expenses
|
8,398 | 8,166 | ||||||
|
Notes
payable to banks
|
174,450 | 156,400 | ||||||
|
Long-term
pension liabilities
|
11,177 | 4,527 | ||||||
|
Other
long-term liabilities
|
3,628 | 2,692 | ||||||
|
Deferred
income taxes
|
54,395 | 29,236 | ||||||
|
Total
liabilities
|
344,377 | 291,743 | ||||||
|
Commitments
and contingencies
|
||||||||
|
STOCKHOLDERS’
EQUITY
|
||||||||
|
Preferred
stock, $0.10 par value, 1,000,000 shares authorized, none
issued
|
- | - | ||||||
|
Common
stock, $0.10 par value, 159,000,000 shares authorized, 97,705,142 and
98,039,336 shares issued and outstanding in 2008 and 2007,
respectively
|
9,770 | 9,804 | ||||||
|
Capital
in excess of par value
|
3,990 | 16,728 | ||||||
|
Retained
earnings
|
445,356 | 385,281 | ||||||
|
Accumulated
other comprehensive loss
|
(10,032 | ) | (2,541 | ) | ||||
|
Total
stockholders’ equity
|
449,084 | 409,272 | ||||||
|
Total
liabilities and stockholders’ equity
|
$ | 793,461 | $ | 701,015 | ||||
The
accompanying notes are an integral part of these statements.
31
CONSOLIDATED
STATEMENTS OF OPERATIONS
RPC,
INC. AND SUBSIDIARIES
(in
thousands except per share data)
|
Years
ended December 31,
|
2008
|
2007
|
2006
|
|||||||||
|
REVENUES
|
$ | 876,977 | $ | 690,226 | $ | 596,630 | ||||||
|
COSTS
AND EXPENSES:
|
||||||||||||
|
Cost
of revenues
|
503,631 | 368,175 | 287,037 | |||||||||
|
Selling,
general and administrative expenses
|
117,140 | 107,800 | 91,051 | |||||||||
|
Depreciation
and amortization
|
118,403 | 78,506 | 46,711 | |||||||||
|
Gain
on disposition of assets, net
|
(6,367 | ) | (6,293 | ) | (5,969 | ) | ||||||
|
Operating
profit
|
144,170 | 142,038 | 177,800 | |||||||||
|
Interest
expense
|
(5,282 | ) | (4,179 | ) | (356 | ) | ||||||
|
Interest
income
|
73 | 70 | 319 | |||||||||
|
Other
(expense) income, net
|
(1,176 | ) | 1,905 | 1,085 | ||||||||
|
Income
before income taxes
|
137,785 | 139,834 | 178,848 | |||||||||
|
Income
tax provision
|
54,382 | 52,785 | 68,054 | |||||||||
|
Net
income
|
$ | 83,403 | $ | 87,049 | $ | 110,794 | ||||||
|
EARNINGS
PER SHARE
|
||||||||||||
|
Basic
|
$ | 0.86 | $ | 0.90 | $ | 1.16 | ||||||
|
Diluted
|
$ | 0.85 | $ | 0.89 | $ | 1.13 | ||||||
|
Dividends
paid per share
|
$ | 0.240 | $ | 0.200 | $ | 0.133 | ||||||
The
accompanying notes are an integral part of these statements.
32
CONSOLIDATED
STATEMENTS OF STOCKHOLDERS’ EQUITY
RPC,
INC. AND SUBSIDIARIES
(in
thousands)
|
Capital
in
|
Accumulated
|
|||||||||||||||||||||||||||||||
|
Excess
of
|
Other
|
|||||||||||||||||||||||||||||||
| Three Years Ended |
Comprehensive
|
Common
Stock
|
Par
|
Deferred
|
Retained
|
Comprehensive
|
||||||||||||||||||||||||||
|
December 31,
2008
|
Income
(Loss)
|
Shares
|
Amount
|
Value
|
Compensation
|
Earnings
|
Loss
|
Total
|
||||||||||||||||||||||||
|
Balance,
December 31, 2005
|
96,678 | $ | 9,668 | $ | 16,012 | $ | (5,391 | ) | $ | 219,907 | $ | (7,695 | ) | $ | 232,501 | |||||||||||||||||
|
Stock
issued for stock incentive plans, net
|
491 | 49 | 2,533 | — | — | — | 2,582 | |||||||||||||||||||||||||
|
Stock
purchased and retired
|
(119 | ) | (12 | ) | (3,252 | ) | — | — | — | (3,264 | ) | |||||||||||||||||||||
|
Net
income
|
$ | 110,794 | — | — | — | — | 110,794 | — | 110,794 | |||||||||||||||||||||||
|
Minimum
pension liability, net of taxes
|
2,108 | — | — | — | — | — | 2,108 | 2,108 | ||||||||||||||||||||||||
|
Unrealized
loss on securities, net of taxes
|
(147 | ) | — | — | — | — | — | (147 | ) | (147 | ) | |||||||||||||||||||||
|
Comprehensive
income
|
$ | 112,755 | ||||||||||||||||||||||||||||||
|
Dividends
declared
|
— | — | — | — | (12,996 | ) | — | (12,996 | ) | |||||||||||||||||||||||
|
Stock-based
compensation
|
— | — | 2,384 | — | — | — | 2,384 | |||||||||||||||||||||||||
|
Excess
tax benefits for share- based payments
|
— | — | 1,325 | — | — | — | 1,325 | |||||||||||||||||||||||||
|
Adoption
of SFAS 123(R)
|
— | — | (5,391 | ) | 5,391 | — | — | — | ||||||||||||||||||||||||
|
Three-for-two
stock split
|
164 | 16 | (16 | ) | — | — | — | — | ||||||||||||||||||||||||
|
Balance,
December 31, 2006
|
97,214 | 9,721 | 13,595 | — | 317,705 | (5,734 | ) | 335,287 | ||||||||||||||||||||||||
|
Stock
issued for stock incentive plans, net
|
989 | 99 | 1,654 | — | — | — | 1,753 | |||||||||||||||||||||||||
|
Stock
purchased and retired
|
(163 | ) | (16 | ) | (2,838 | ) | — | — | — | (2,854 | ) | |||||||||||||||||||||
|
Net
income
|
$ | 87,049 | — | — | — | — | 87,049 | — | 87,049 | |||||||||||||||||||||||
|
Pension
adjustment, net of taxes
|
2,535 | — | — | — | — | — | 2,535 | 2,535 | ||||||||||||||||||||||||
|
Unrealized
gain on securities, net of taxes
|
486 | — | — | — | — | — | 486 | 486 | ||||||||||||||||||||||||
|
Foreign
currency translation, net of taxes
|
172 | — | — | — | — | — | 172 | 172 | ||||||||||||||||||||||||
|
Comprehensive
income
|
$ | 90,242 | ||||||||||||||||||||||||||||||
|
Dividends
declared
|
— | — | — | — | (19,473 | ) | — | (19,473 | ) | |||||||||||||||||||||||
|
Stock-based
compensation
|
— | — | 3,189 | — | — | — | 3,189 | |||||||||||||||||||||||||
|
Excess
tax benefits for share- based payments
|
— | — | 1,128 | — | — | — | 1,128 | |||||||||||||||||||||||||
|
Balance,
December 31, 2007
|
98,040 | 9,804 | 16,728 | — | 385,281 | (2,541 | ) | 409,272 | ||||||||||||||||||||||||
|
Stock
issued for stock incentive plans, net
|
1,288 | 128 | 1,922 | — | — | — | 2,050 | |||||||||||||||||||||||||
|
Stock
purchased and retired
|
(1,623 | ) | (162 | ) | (19,238 | ) | — | — | — | (19,400 | ) | |||||||||||||||||||||
|
Net
income
|
$ | 83,403 | — | — | — | — | 83,403 | — | 83,403 | |||||||||||||||||||||||
|
Pension
adjustment, net of taxes
|
(6,053 | ) | — | — | — | — | — | (6,053 | ) | (6,053 | ) | |||||||||||||||||||||
|
Loss
on cash flow hedge, net of taxes
|
(527 | ) | — | — | — | — | — | (527 | ) | (527 | ) | |||||||||||||||||||||
|
Unrealized
loss on securities, net of taxes
|
(585 | ) | — | — | — | — | — | (585 | ) | (585 | ) | |||||||||||||||||||||
|
Foreign
currency translation, net of taxes
|
(326 | ) | — | — | — | — | — | (326 | ) | (326 | ) | |||||||||||||||||||||
|
Comprehensive
income
|
$ | 75,912 | ||||||||||||||||||||||||||||||
|
Dividends
declared
|
— | — | — | — | (23,328 | ) | — | (23,328 | ) | |||||||||||||||||||||||
|
Stock-based
compensation
|
— | — | 3,732 | — | — | — | 3,732 | |||||||||||||||||||||||||
|
Excess
tax benefits for share- based payments
|
— | — | 846 | — | — | — | 846 | |||||||||||||||||||||||||
|
Balance,
December 31, 2008
|
97,705 | $ | 9,770 | $ | 3,990 | $ | — | $ | 445,356 | $ | (10,032 | ) | $ | 449,084 | ||||||||||||||||||
The
accompanying notes are an integral part of these statements.
33
CONSOLIDATED
STATEMENTS OF CASH FLOWS
RPC,
Inc. and Subsidiaries
(in
thousands)
|
Years
ended December 31,
|
2008
|
2007
|
2006
|
|||||||||
|
OPERATING
ACTIVITIES
|
||||||||||||
|
Net
income
|
$ | 83,403 | $ | 87,049 | $ | 110,794 | ||||||
|
Adjustments
to reconcile net income to net cash provided by operating
activities:
|
||||||||||||
|
Depreciation,
amortization and other non-cash charges
|
118,444 | 78,493 | 46,726 | |||||||||
|
Stock-based
compensation expense
|
3,732 | 3,189 | 2,384 | |||||||||
|
Gain
on disposition of assets, net
|
(6,367 | ) | (6,293 | ) | (5,969 | ) | ||||||
|
Deferred
income tax provision
|
27,199 | 15,738 | 2,817 | |||||||||
|
Excess
tax benefits for share-based payments
|
(846 | ) | (1,128 | ) | (1,325 | ) | ||||||
|
Changes
in current assets and liabilities:
|
||||||||||||
|
Accounts
receivable
|
(34,508 | ) | (27,497 | ) | (41,093 | ) | ||||||
|
Income
taxes receivable
|
(2,462 | ) | (7,229 | ) | (1,347 | ) | ||||||
|
Inventories
|
(20,377 | ) | (8,316 | ) | (7,886 | ) | ||||||
|
Prepaid
expenses and other current assets
|
(2,231 | ) | (568 | ) | (1,463 | ) | ||||||
|
Accounts
payable
|
9,691 | 7,826 | 8,958 | |||||||||
|
Income
taxes payable
|
(981 | ) | 123 | 774 | ||||||||
|
Accrued
payroll and related expenses
|
2,426 | 4,683 | 3,713 | |||||||||
|
Accrued
insurance expenses
|
(113 | ) | 1,426 | (368 | ) | |||||||
|
Accrued
state, local and other taxes
|
676 | (1,078 | ) | 1,597 | ||||||||
|
Other
accrued expenses
|
(203 | ) | 46 | (90 | ) | |||||||
|
Changes
in working capital
|
(48,082 | ) | (30,584 | ) | (37,205 | ) | ||||||
|
Changes
in other assets and liabilities:
|
||||||||||||
|
Accrued
pension
|
(481 | ) | (3,067 | ) | (802 | ) | ||||||
|
Accrued
insurance expenses
|
232 | 1,274 | 724 | |||||||||
|
Other
non-current assets
|
(20 | ) | (1,173 | ) | (1,118 | ) | ||||||
|
Other
non-current liabilities
|
106 | (1,626 | ) | 1,202 | ||||||||
|
Net
cash provided by operating activities
|
177,320 | 141,872 | 118,228 | |||||||||
|
INVESTING
ACTIVITIES
|
||||||||||||
|
Capital
expenditures
|
(170,318 | ) | (248,758 | ) | (159,831 | ) | ||||||
|
Proceeds
from sale of assets
|
11,365 | 9,134 | 8,746 | |||||||||
|
Net
cash used for investing activities
|
(158,953 | ) | (239,624 | ) | (151,085 | ) | ||||||
|
FINANCING
ACTIVITIES
|
||||||||||||
|
Payment
of dividends
|
(23,328 | ) | (19,473 | ) | (12,996 | ) | ||||||
|
Borrowings
from notes payable to banks
|
392,300 | 478,600 | 115,171 | |||||||||
|
Repayments
of notes payable to banks
|
(374,250 | ) | (357,800 | ) | (79,571 | ) | ||||||
|
Debt
issue costs for notes payable to banks
|
(94 | ) | — | (469 | ) | |||||||
|
Excess
tax benefits for share-based payments
|
846 | 1,128 | 1,325 | |||||||||
|
Cash
paid for common stock purchased and retired
|
(17,489 | ) | (1,730 | ) | (2,024 | ) | ||||||
|
Proceeds
received upon exercise of stock options
|
347 | 636 | 1,341 | |||||||||
|
Net
cash (used for) provided by financing activities
|
(21,668 | ) | 101,361 | 22,777 | ||||||||
|
Net
(decrease) increase in cash and cash equivalents
|
(3,301 | ) | 3,609 | (10,080 | ) | |||||||
|
Cash
and cash equivalents at beginning of year
|
6,338 | 2,729 | 12,809 | |||||||||
|
Cash
and cash equivalents at end of year
|
$ | 3,037 | $ | 6,338 | $ | 2,729 | ||||||
The
accompanying notes are an integral part of these statements.
34
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
RPC,
Inc. and Subsidiaries
Years
ended December 31, 2008, 2007 and 2006
Note
1: Significant Accounting Policies
Principles
of Consolidation and Basis of Presentation
The
consolidated financial statements include the accounts of RPC, Inc. and its
wholly-owned subsidiaries (“RPC” or the “Company”). All significant intercompany
accounts and transactions have been eliminated.
Nature
of Operations
RPC
provides a broad range of specialized oilfield services and equipment primarily
to independent and major oil and gas companies engaged in the exploration,
production and development of oil and gas properties throughout the United
States, including the Gulf of Mexico, mid-continent, southwest and Rocky
Mountain regions, and in selected international markets. The services and
equipment provided include Technical Services such as pressure pumping services,
coiled tubing services, snubbing services (also referred to as hydraulic
workover services), nitrogen services, and firefighting and well control, and
Support Services such as the rental of drill pipe and other specialized oilfield
equipment and oilfield training.
Dividends
On
January 27, 2009, the Board of Directors approved an increase in the quarterly
cash dividend per common share from $0.06 to $0.07, payable March 10, 2009 to
stockholders of record at the close of business February 10, 2009.
Use
of Estimates in the Preparation of Financial Statements
The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Significant
estimates are used in the determination of the allowance for doubtful accounts,
income taxes, accrued insurance expenses, depreciable lives of assets, and
pension liabilities.
Revenues
RPC’s
revenues are generated principally from providing services and the related
equipment. Revenues are recognized when the services are rendered and
collectibility is reasonably assured. Revenues from services and
equipment are based on fixed or determinable priced purchase orders or contracts
with the customer and do not include the right of return. Rates for
services and equipment are priced on a per day, per unit of measure, per man
hour or similar basis. Sales tax charged to customers is presented on
a net basis within the consolidated statement of operations and excluded from
revenues.
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, none of which accounted for more than 10
percent of consolidated revenues.
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 deposit 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.
35
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
RPC,
Inc. and Subsidiaries
Years
ended December 31, 2008, 2007 and 2006
Investments
Investments
classified as available-for-sale are stated at their fair values, with the
unrealized gains and losses, net of tax, reported as a separate component of
stockholders’ equity. The cost of securities sold is based on the specific
identification method. Realized gains and losses, declines in value judged to be
other than temporary, interest, and dividends with respect to available-for-sale
securities are included in interest income. The Company did not realize any
gains or losses on securities during 2008, 2007 and 2006 on its
available-for-sale securities. Securities that are held in the
non-qualified Supplemental Retirement Plan (“SERP”) are classified as
trading. See Note 10 for further information regarding the
SERP. The change in fair value of trading securities is presented in
other (expense) income on the consolidated statements of
operations.
Management
determines the appropriate classification of investments at the time of purchase
and re-evaluates such designations as of each balance sheet date.
Accounts
Receivable
The
majority of the Company’s accounts receivable are due principally from major and
independent oil and natural gas exploration and production
companies. Credit is extended based on evaluation of a customer’s
financial condition and, generally, collateral is not
required. Accounts receivable are considered past due after 60 days
and are stated at amounts due from customers, net of an allowance for doubtful
accounts.
Allowance
for Doubtful Accounts
Accounts
receivable are carried at the amount owed by customers, reduced by an allowance
for estimated amounts that may not be collectible in the future. The estimated
allowance for doubtful accounts is based on our evaluation of industry trends,
financial condition of our customers, our historical write-off experience,
current economic conditions, and in the case of our international customers, our
judgments about the economic and political environment of the related country
and region. Accounts are written off against the allowance for doubtful accounts
when the Company determines that amounts are uncollectible and recoveries of
previously written-off accounts are recorded when collected.
Inventories
Inventories,
which consist principally of (i) raw materials and supplies that are consumed in
RPC’s services provided to customers, (ii) spare parts for equipment used in
providing these services and (iii) manufactured components and attachments for
equipment used in providing services, are recorded at the lower of weighted
average cost or market value. Market value is determined based on replacement
cost for material and supplies. The Company regularly reviews inventory
quantities on hand and records provisions for excess or obsolete inventory based
primarily on its estimated forecast of product demand, market conditions,
production requirements and technological developments.
Derivative
Instruments and Hedging Activities
The
Company is subject to interest rate risk on the variable component of the
interest rate under our revolving credit agreement. Effective
December 2008, the Company entered into a $50,000,000 interest rate swap
agreement. The agreement terminates on September 8,
2011. The Company has designated the interest rate swap as a cash
flow hedge. Changes in the fair value of the effective portion of the
interest rate swap are recognized in other comprehensive loss until the hedge
item is recognized in earnings.
36
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
RPC,
Inc. and Subsidiaries
Years
ended December 31, 2008, 2007 and 2006
Property,
Plant and Equipment
Property,
plant and equipment, including software costs, are reported at cost less
accumulated depreciation and amortization, which is generally provided on a
straight-line basis over the estimated useful lives of the
assets. Annual depreciation and amortization expense is computed
using the following useful lives: operating equipment, 3 to 10 years; buildings
and leasehold improvements, 15 to 30 years; furniture and fixtures, 5 to 7
years; software, 5 years; and vehicles, 3 to 5 years. The cost of assets retired
or otherwise disposed of and the related accumulated depreciation and
amortization are eliminated from the accounts in the year of disposal with the
resulting gain or loss credited or charged to income from operations.
Expenditures for additions, major renewals, and betterments are capitalized.
Expenditures for restoring an identifiable asset to working condition or for
maintaining the asset in good working order constitute repairs and maintenance
and are expensed as incurred.
RPC
records impairment losses on long-lived assets used in operations when events
and circumstances indicate that the assets might be impaired and the
undiscounted cash flows estimated to be generated by those assets are less than
the carrying
amount of those assets. The Company periodically reviews the values assigned to
long-lived assets, such as property, plant and equipment and other assets, to
determine if any impairments should be recognized. Management believes that the
long-lived assets in the accompanying balance sheets have not been
impaired.
Goodwill
and Other Intangibles
Goodwill
represents the excess of the purchase price over the fair value of net assets of
businesses acquired. The carrying amount of goodwill was $24,093,000
at December 31, 2008 and 2007. Goodwill is reviewed annually for
impairment in accordance with the provisions of Statement of Financial
Accounting Standard (“SFAS”) No. 142, “Goodwill and Other Intangible
Assets.” In reviewing goodwill for impairment, potential impairment
is measured by comparing the estimated fair value of a reporting unit with its
carrying value. Based upon the results of these analyses, the Company
has concluded that no impairment of its goodwill has occurred for the years
ended December 31, 2008, 2007 and 2006.
Other
intangibles primarily represent non-compete agreements related to businesses
acquired. Non-compete agreements are amortized on a straight-line
basis over the period of the agreement, as this method best estimates the ratio
that current revenues bear to the total of current and anticipated
revenues. These non-compete agreements are fully amortized as of
December 31, 2008 and 2007.
Advertising
Advertising
expenses are charged to expense during the period in which they are
incurred. Advertising expenses totaled $1,957,000 in 2008, $1,594,000
in 2007 and $1,180,000 in 2006.
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.
37
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
RPC,
Inc. and Subsidiaries
Years
ended December 31, 2008, 2007 and 2006
Defined
Benefit Pension Plan
The
Company has a defined benefit pension plan that provides monthly benefits upon
retirement at age 65 to eligible employees. In September 2006, the FASB issued
SFAS No. 158, “Employers’ Accounting for Defined Benefit Pension and Other
Postretirement Plans - An Amendment of FASB Statements No. 87, 88, 106, and
132(R).” SFAS 158 requires the Company to recognize the funded status of its
defined benefit pension plan in the Company’s consolidated balance
sheets. Effective for fiscal years ending after December 15, 2008, SFAS 158
also removes the existing option to use a plan measurement date that is up to 90
days prior to the date of the balance sheet. The recognition and disclosure
provisions of SFAS 158 are effective for fiscal years ending after December 15,
2006, for entities with publicly traded equity securities that have defined
benefit plans and is to be applied as of the year of adoption. Accordingly, the
Company has adopted the recognition and disclosure provisions of SFAS 158 as of
December 31, 2006 which did not result in a material impact to its consolidated
financial statements. The Company uses a December 31 measurement date for its
pension plan and thus the measurement date provisions did not affect the
Company. See Note 10 for a full description of this plan and the related
accounting and funding policies.
Share
Repurchases
The
Company records the cost of share repurchases in stockholders’ equity as a
reduction to common stock to the extent of par value of the shares acquired and
the remainder is allocated to capital in excess of par value.
Earnings
per Share
SFAS No.
128, “Earnings Per Share,” requires a basic earnings per share and diluted
earnings per share presentation. The two calculations differ as a result of the
dilutive effect of stock options and time lapse restricted and performance
restricted shares included in diluted earnings per share, but excluded from
basic earnings per share. A reconciliation of the weighted shares outstanding is
as follows:
|
2008
|
2007
|
2006
|
||||||||||
|
Basic
|
96,565,148 | 96,267,732 | 95,242,593 | |||||||||
|
Dilutive
effect of stock options and restricted shares
|
1,299,890 | 2,094,333 | 2,953,428 | |||||||||
|
Diluted
|
97,865,038 | 98,362,065 | 98,196,021 | |||||||||
Fair
Value of Financial Instruments
The
Company’s financial instruments consist primarily of cash and cash equivalents,
accounts receivable, marketable securities, accounts payable, an interest rate
swap, and debt. The carrying value of cash and cash equivalents, accounts
receivable and accounts payable approximate their fair value due to the
short-term nature of such instruments. The marketable securities
classified as available-for-sale and the securities held in the SERP classified
as trading are carried at fair value in the accompanying consolidated balance
sheets. The interest rate swap is carried at fair value, which is
based on quotes from the issuer of the swap and represents the estimated amounts
that we would expect to pay to terminate the swap. The carrying value
of debt approximates fair value since the interest rates are market based and
are adjusted periodically.
Stock-Based
Compensation
Effective
January 1, 2006, the Company adopted the provisions of SFAS No. 123 (revised
2004), “Share-Based Payments” (“SFAS 123(R)”), which revises SFAS 123,
“Accounting for Stock-Based Compensation,” and supersedes APB Opinion No. 25,
“Accounting for Stock Issued to Employees.” SFAS 123(R) requires all share-based
payments to employees, including grants of employee stock options, to be
measured based on their fair values and recognized in the financial statements
over the requisite service period. See Note 10 regarding the Company’s adoption
of SFAS 123(R).
38
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
RPC,
Inc. and Subsidiaries
Years
ended December 31, 2008, 2007 and 2006
Prior to
January 1, 2006, the Company provided the disclosures required by SFAS 123, as
amended by SFAS 148, “Accounting for Stock-Based Compensation - Transition and
Disclosures,” and accounted for all of its stock-based compensation under the
provisions of Accounting Principles Board (“APB”) Opinion No. 25, “Accounting
for Stock Issued to Employees” using the intrinsic value method prescribed
therein. Accordingly, the Company did not recognize compensation expense for the
options granted since the exercise price was the same as the market price of the
shares on the date of grant. Compensation cost on the restricted stock was
recorded as deferred compensation in stockholders’ equity based on the fair
market value of the shares on the date of issuance and amortized ratably over
the respective vesting period. Forfeitures related to restricted stock were
previously accounted for as they occurred. See Note 10 for additional
information.
New
Accounting Standards
In
December 2008, the FASB issued FASB Staff Position (FSP) FAS 132R-1, “Employers’
Disclosures about Postretirement Benefit Plan Assets.” The FASB issued the FSP,
which amends FASB Statement 132R, Employers’ Disclosures about
Pensions and Other Postretirement Benefits, in order to provide adequate
transparency about the types of assets and associated risks in employers’
postretirement plans. Disclosures are designed to provide an
understanding of how investment decisions are made: the major categories of plan
assets; the inputs and valuation techniques used to measure the fair value of
plan assets; the effect of fair value measurements using significant
unobservable inputs (Level 3 measurements in FASB Statement 157, Fair Value
Measurements) on changes in plan assets for the period; and significant
concentrations of risk within plan assets. The disclosures about plan
assets required by this FSP are required to be provided for fiscal years ending
after December 15, 2009, with the provisions of this FSP not required for
earlier periods that are presented for comparative purposes, upon initial
application. Earlier application of the provisions of this FSP is permitted. The
Company is currently in the process of determining the additional disclosures
required upon the adoption of this FSP.
In
October 2008, the FASB issued FASB Staff Position (FSP) No. FAS 157-3,
“Determining the Fair Value of a Financial Asset When the Market for That Asset
Is Not Active.” FSP 157-3 clarifies the application of SFAS No.
157, “Fair Value
Measurements,” in a market that is not active and provides an example to
illustrate key considerations in determining the fair value of a financial asset
when the market for that financial asset is not active. The FSP
stipulates that determining fair value in a dislocated market depends on the
facts and circumstances and may require the use of significant judgment when
evaluating individual transactions or broker quotes which are some of the
sources of the fair value measurement. In addition, FSP FAS 157-3
states that if an entity uses its own assumptions to determine fair value, it
must include appropriate risk adjustments that market participants would make
for nonperformance and liquidity risks. FSP FAS 157-3 is effective
upon issuance, including prior periods for which financial statements have not
been issued. The Company adopted FSP FAS 157-3 in the third quarter
of 2008 and has concluded that it does not have a material effect on its
consolidated financial statements.
In
September 2008, the FASB issued FSP No. FAS 133-1 and FIN 45-4, “Disclosures
about Credit Derivatives and Certain Guarantees – An Amendment of FASB Statement
No. 133 and FASB Interpretation No. 45; and Clarification of the Effective Date
of FASB Statement No. 161.” This FSP amends SFAS No. 133,
“Accounting for Derivative Instruments and Hedging Activities,” to require
disclosures by sellers of credit derivatives, including credit derivatives
embedded in a hybrid instrument. This FSP also amends FASB
Interpretation No. (FIN) 45, “Guarantor’s Accounting and Disclosure Requirements
for Guarantees, Including Indirect Guarantees of Indebtedness of Others,” to
require an additional disclosure about the current status of the
payment/performance risk of a guarantee. Further this FSP
clarifies the FASB’s intent about the effective date of SFAS No. 161,
“Disclosures about Derivative Instruments and Hedging
Activities.” The provisions of this FSP that amend SFAS No. 161 and
FIN 45 are effective for reporting periods ending after November 15, 2008 and
the clarification of the effective date of SFAS No. 161 is effective upon
issuance of this FSP. The Company adopted FSP FAS 133-1 and FIN 45-4
in the fourth quarter of 2008 and has concluded that it does not have a material
effect on its consolidated financial statements.
39
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
RPC,
Inc. and Subsidiaries
Years
ended December 31, 2008, 2007 and 2006
In June
2008, the FASB issued FSP EITF 03-6-1, “Determining Whether Instruments Granted
in Share-Based Payment Transactions Are Participating Securities,” to clarify
that all outstanding unvested share-based payment awards that contain
nonforfeitable rights to dividends or dividend equivalents, whether paid or
unpaid, are participating securities. An entity must include participating
securities in its calculation of basic and diluted earnings per share (EPS)
pursuant to the two-class method, as described in FASB Statement 128, Earnings
per Share. FSP EITF 03-6-1 is effective for fiscal years beginning after
December 15, 2008 and interim periods within those fiscal years. The Company
intends to adopt FSP EITF 03-6-1 effective January 1, 2009 and apply its
provisions retrospectively to all prior-period EPS data presented in its
financial statements. The Company has periodically issued share-based payment
awards that contain non-forfeitable rights to dividends and does not expect the
adoption of this accounting guidance to have a material effect on its
consolidated financial statements or EPS.
In May
2008, the FASB issued SFAS 162, “The Hierarchy of Generally Accepted Accounting
Principles.” SFAS 162 is intended to improve financial reporting by
identifying a consistent framework, or hierarchy, for selecting accounting
principles to be used in financial statements that are presented in conformity
with U.S. generally accepted accounting principles for nongovernmental
entities. SFAS 162 is effective 60 days following the SEC’s approval
of the Public Company Accounting Oversight Board amendments to AU Section 411,
“The Meaning of Present Fairly in Conformity With Generally Accepted Accounting
Principles.” This Statement became effective on November 15,
2008. The Company adopted SFAS 162 in the fourth quarter of 2008 and has
concluded that it does not have a material effect on its consolidated financial
statements.
In April
2008, the FASB issued FSP FAS No. 142-3, which amends the factors that must be
considered in developing renewal or extension assumptions used to determine the
useful life over which to amortize the cost of a recognized intangible asset
under SFAS No. 142, “Goodwill and Other Intangible Assets.” The FSP requires an
entity that is estimating the useful life of a recognized intangible asset to
consider its historical experience in renewing or extending similar arrangements
or, in the absence of historical experience, must consider assumptions that
market participants would use about renewal or extension that are both
consistent with the asset’s highest and best use and adjusted for
entity-specific factors under SFAS No. 142. The FSP is effective for
fiscal years beginning after December 15, 2008, and the guidance for determining
the useful life of a recognized intangible asset must be applied prospectively
to intangible assets acquired after the effective date. The Company does not
expect the adoption of FSP FAS No. 142-3 to have a material effect on its
consolidated financial statements.
In March
2008, the FASB issued SFAS 161, “Disclosures about Derivative Instruments and
Hedging Activities - an Amendment of FASB Statement No. 133.” SFAS 161 requires
enhanced disclosures regarding how: (a) an entity uses derivative instruments;
(b) derivative instruments and related hedged items are accounted for under FASB
Statement No. 133, “Accounting for Derivative Instruments and Hedging
Activities;” and (c) derivative instruments and related hedged items affect an
entity's financial position, financial performance, and cash
flows. SFAS 161 is effective for fiscal years and interim periods
beginning after November 15, 2008 with early application being
encouraged. The Company does not expect the adoption of SFAS 161 to
have a significant impact on the Company’s consolidated financial
statements.
In
February 2008, the FASB issued FASB Staff Position (FSP) FAS 157-1, “Application
of FASB Statement No. 157 to FASB Statement No. 13 and Other Accounting
Pronouncements that Address Fair Value Measurements for Purposes of Lease
Classification or Measurement under Statement 13,” and FSP FAS 157-2, “Effective
Date of FASB Statement No. 157.” These FSPs:
• Exclude
certain leasing transactions accounted for under FASB Statement No. 13,
Accounting for Leases, from the scope of FASB Statement No. 157, “Fair Value
Measurements” (Statement 157). The exclusion does not apply to fair value
measurements of assets and liabilities recorded as a result of a lease
transaction but measured pursuant to other pronouncements within the scope of
Statement 157.
• Defer
the effective date in Statement 157 for one year for certain nonfinancial assets
and nonfinancial liabilities, except those that are recognized or disclosed at
fair value in the financial statements on a recurring basis (at least
annually).
FSP FAS
157-1 is effective upon the initial adoption of Statement 157. FSP
FAS 157-2 is effective February 12, 2008. The Company adopted the
provisions of FSP 157-1 and 157-2 in the first quarter of 2008. See
Note 8 for details regarding impact of adoption.
40
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
RPC,
Inc. and Subsidiaries
Years
ended December 31, 2008, 2007 and 2006
Note
2: Accounts Receivable
Accounts
receivable, net consists of the following:
|
December
31,
|
2008
|
2007
|
||||||
|
(in
thousands)
|
||||||||
|
Trade
receivables:
|
||||||||
|
Billed
|
$ | 168,989 | $ | 134,522 | ||||
|
Unbilled
|
47,034 | 43,513 | ||||||
|
Other
receivables
|
551 | 3,336 | ||||||
|
Total
|
216,574 | 181,371 | ||||||
|
Less:
Allowance for doubtful accounts
|
(6,199 | ) | (5,217 | ) | ||||
|
Accounts
receivable, net
|
$ | 210,375 | $ | 176,154 | ||||
Trade
receivables relate to sale of our services and products, for which credit is
extended based on the customer’s credit history. Unbilled receivables
represent revenues earned but not billed to the customer until future dates,
usually within one month. Other receivables consist primarily of
amounts due from purchasers of company property and rebates from
suppliers.
Changes
in the Company’s allowance for doubtful accounts are as follows:
|
Years
Ended December 31,
|
2008
|
2007
|
||||||
|
(in
thousands)
|
||||||||
|
Beginning
balance
|
$ | 5,217 | $ | 4,904 | ||||
|
Bad
debt (credit) expense
|
(84 | ) | 3,119 | |||||
|
Accounts
written-off
|
(392 | ) | (2,940 | ) | ||||
|
Recoveries
|
1,458 | 134 | ||||||
|
Ending
balance
|
$ | 6,199 | $ | 5,217 | ||||
Note
3: Inventories
Inventories
are $49,779,000 at December 31, 2008 and $29,602,000 at December 31, 2007 and
consist of raw materials, parts and supplies.
41
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
RPC,
Inc. and Subsidiaries
Years
ended December 31, 2008, 2007 and 2006
Note
4: Property, Plant and Equipment
Property,
plant and equipment are presented at cost net of accumulated depreciation and
consist of the following:
|
December
31,
|
2008
|
2007
|
||||||
|
(in
thousands)
|
||||||||
|
Land
|
$ | 14,927 | $ | 14,817 | ||||
|
Buildings
and leasehold improvements
|
77,867 | 43,959 | ||||||
|
Operating
equipment
|
595,217 | 496,216 | ||||||
|
Capitalized
software
|
15,700 | 14,300 | ||||||
|
Furniture
and fixtures
|
4,398 | 3,764 | ||||||
|
Vehicles
|
181,102 | 170,647 | ||||||
|
Construction
in progress
|
231 | 9,926 | ||||||
|
Gross
property, plant and equipment
|
889,442 | 753,629 | ||||||
|
Less:
accumulated depreciation
|
(419,327 | ) | (320,503 | ) | ||||
|
Net
property, plant and equipment
|
$ | 470,115 | $ | 433,126 | ||||
Depreciation
expense was $118.4 million in 2008, $78.5 million in 2007 and $46.7 million in
2006. There are no capital leases outstanding as of December 31, 2008
and December 31, 2007. The Company had accounts payable for purchases
of property and equipment of approximately $9.4 million, $19.1 million and $16.4
million at December 31, 2008, 2007 and 2006.
Note
5: Income Taxes
The
following table lists the components of the provision for income
taxes:
|
Years
ended December 31,
|
2008
|
2007
|
2006
|
|||||||||
|
(in
thousands)
|
||||||||||||
|
Current
provision:
|
||||||||||||
|
Federal
|
$ | 20,793 | $ | 29,589 | $ | 56,104 | ||||||
|
State
|
5,453 | 4,857 | 8,155 | |||||||||
|
Foreign
|
937 | 2,601 | 978 | |||||||||
|
Deferred
provision:
|
||||||||||||
|
Federal
|
25,486 | 14,531 | 2,429 | |||||||||
|
State
|
1,713 | 1,207 | 388 | |||||||||
|
Total
income tax provision
|
$ | 54,382 | $ | 52,785 | $ | 68,054 | ||||||
Reconciliation
between the federal statutory rate and RPC’s effective tax rate is as
follows:
|
Years
ended December 31,
|
2008
|
2007
|
2006
|
|||||||||
|
Federal
statutory rate
|
35.0 | % | 35.0 | % | 35.0 | % | ||||||
|
State
income taxes, net of federal benefit
|
3.2 | 2.8 | 3.2 | |||||||||
|
Tax
credits
|
(0.8 | ) | (1.6 | ) | (0.6 | ) | ||||||
|
Federal
and state refunds
|
— | 0.1 | — | |||||||||
|
Adjustments
to foreign tax liabilities
|
— | — | (1.1 | ) | ||||||||
|
Other
|
2.1 | 1.4 | 1.6 | |||||||||
|
Effective
tax rate
|
39.5 | % | 37.7 | % | 38.1 | % | ||||||
42
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
RPC,
Inc. and Subsidiaries
Years
ended December 31, 2008, 2007 and 2006
Significant
components of the Company’s deferred tax assets and liabilities are as
follows:
|
December
31,
|
2008
|
2007
|
||||||
|
(in
thousands)
|
||||||||
|
Deferred
tax assets:
|
||||||||
|
Self-insurance
|
$ | 5,404 | $ | 5,220 | ||||
|
Pension
|
4,054 | — | ||||||
|
State
net operating loss carryforwards
|
1,649 | 1,704 | ||||||
|
Bad
debts
|
2,418 | 2,099 | ||||||
|
Accrued
payroll
|
1,579 | 857 | ||||||
|
Stock-based
compensation
|
2,294 | 1,785 | ||||||
|
All
others
|
501 | 52 | ||||||
|
Valuation
allowance
|
(1,454 | ) | (1,503 | ) | ||||
|
Gross
deferred tax assets
|
16,445 | 10,214 | ||||||
|
Deferred
tax liabilities:
|
||||||||
|
Depreciation
|
(60,946 | ) | (30,909 | ) | ||||
|
Goodwill
amortization
|
(3,707 | ) | (2,954 | ) | ||||
|
Pension
|
— | (962 | ) | |||||
|
All
others
|
— | (651 | ) | |||||
|
Gross
deferred tax liabilities
|
(64,653 | ) | (35,476 | ) | ||||
|
Net
deferred tax liabilities
|
$ | (48,208 | ) | $ | (25,262 | ) | ||
Historically,
undistributed earnings of the Company's forgein subsidiaries were considered
indefinitely reinvested and, accordingly, no provision for U.S. federal income
taxes was recorded. Deferred taxes are provided for earnings outside the
United States when those earnings are not considered indefinitely
reinvested.
As of
December 31, 2008, the Company has net operating loss carryforwards related to
state income taxes of approximately $39.1 million that will expire between 2009
and 2028. As of December 31, 2008 the Company has a valuation
allowance of approximately $1.5 million, representing the tax affected amount of
loss carryforwards that the Company does not expect to utilize, against the
corresponding deferred tax asset.
Total
income tax payments, net of refunds were $29,714,000 in 2008, $46,328,000 in
2007, and $65,208,000 in 2006.
In July
2006, the FASB issued FASB Interpretation No. 48, “Accounting for Uncertainty in
Income Taxes - an interpretation of FASB Statement No. 109” (“FIN 48”), which
provides criteria for the recognition, measurement, presentation and disclosure
of uncertain tax positions. The Company was subject to the provisions
of FIN 48 as of January 1, 2007, and has analyzed filing positions in federal,
state and foreign filing jurisdictions where it is required to file income tax
returns, as well as all open years in those jurisdictions. As a
result of the implementation of FIN 48, the Company did not recognize a material
adjustment in the liability for unrecognized income tax benefits. As
of the adoption date the Company had gross tax affected unrecognized tax
benefits of $922,000, of which $850,000, if recognized, would affect the
Company’s effective tax rate. As of December 31, 2008 the Company had
remaining gross tax affected unrecognized benefits of $11,000. A
reconciliation of the beginning and ending amount of unrecognized tax benefits
is as follows:
43
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
RPC,
Inc. and Subsidiaries
Years
ended December 31, 2008, 2007 and 2006
|
Years
Ended December 31,
|
2008
|
2007
|
||||||
|
(in
thousands
|
||||||||
|
Beginning
balance
|
$ | 10 | $ | 922 | ||||
|
Additions
based on tax positions related to current year
|
- | - | ||||||
|
Additions
for tax positions of prior years
|
1 | 3 | ||||||
|
Reductions
for tax positions of prior years
|
- | (915 | ) | |||||
|
Ending
balance
|
$ | 11 | $ | 10 | ||||
The
Company and its subsidiaries are subject to U.S. federal and state income tax in
multiple jurisdictions. In many cases our uncertain tax positions are
related to tax years that remain open and subject to examination by the relevant
taxing authorities. The Company’s 2005 through 2008 tax years remain
open to examination.
It is
reasonably possible that the amount of the unrecognized tax benefits with
respect to our unrecognized tax positions will increase or decrease in the next
12 months. These changes may be the result of, among other things,
state tax settlements under Voluntary Disclosure Agreements. However,
quantification of an estimated range cannot be made at this time.
The
Company’s policy is to record interest and penalties related to income tax
matters as income tax expense. Accrued interest and penalties were
immaterial as of December 31, 2008 and December 31, 2007.
Note
6: Long-Term Debt
The
Company currently has a revolving credit agreement (the "Revolving Credit
Agreement") with SunTrust Capital Markets, Inc, as Joint Lead Arranger and Sole
Book Manager, Banc of America Securities LLC as Joint Lead Arranger, and a
syndicate of six other lenders. The Revolving Credit Agreement
includes a full and unconditional guarantee by RPC's 100% owned domestic
subsidiaries whose assets equal substantially all of the consolidated assets of
RPC and its subsidiaries. The subsidiaries of the Company that are
not guarantors are considered minor.
The
Revolving Credit Agreement has a general term of five years and provides for an
unsecured line of credit of up to $250 million, which includes a $50 million
letter of credit subfacility, and a $20 million swingline
subfacility. The maturity date of all revolving loans under the
Credit Agreement is September 8, 2011. During the second quarter of
2008, the Company entered into a certain Commitment Increase Amendment to the
Revolving Credit Agreement to increase the amount of the credit facility by
$46.5 million to its current amount of $296.5 million. The Company
incurred loan origination fees and other debt related costs associated with the
line of credit and Commitment Increase Amendment in the aggregate of
approximately $514,000. These costs are being amortized to interest
expense over the remaining term of the five year loan, and the net amount is
classified as non-current other assets on the consolidated balance
sheet.
Revolving
loans under the Revolving Credit Agreement bear interest at one of the following
two rates, at RPC's election:
The
Revolving Credit Agreement contains customary terms and conditions, including
certain financial covenants and restrictions on indebtedness, dividend payments,
business combinations and other related items. Further, the Revolving
Credit Agreement contains financial covenants restricting RPC's ability to
permit the ratio of RPC's consolidated
debt to EBITDA to exceed 2.5 to 1, and to permit the ratio of RPC's consolidated
EBIT to interest expense to exceed 2 to 1.
44
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
RPC,
Inc. and Subsidiaries
Years
ended December 31, 2008, 2007 and 2006
As of
December 31, 2008, RPC has outstanding borrowings of $174.45 million under the
Revolving Credit Agreement. Interest incurred and
recorded as expense on the line of credit was $5,188,000 in 2008, $4,083,000 in
2007 and $356,000 in 2006. The weighted average interest rate was 3.6% in 2008,
6.1% for 2007 and 5.8% for 2006. The Company capitalized interest
incurred of $1,064,000 in 2008 and $2,300,000 in 2007 related to facilities and
equipment under construction. Additionally there were letters of
credit relating to self-insurance programs and contract bids outstanding for
$22.2 million as of December 31, 2008.
Cash
interest paid (net of capitalized interest) was approximately $5,232,000 in
2008, $3,849,000 in 2007, and $232,000 in 2006.
Effective
December 2008 the Company entered into an interest rate swap agreement that
effectively converted $50 million of our variable-rate debt to a fixed rate
basis, thereby hedging against the impact of potential interest rate changes on
future interest expense. The agreement terminates on September 8,
2011. Under this agreement we pay a fixed interest rate of
2.07%. In return, the issuing lender refunds us the variable-rate
interest paid to the syndicate of lenders under our revolving credit agreement
on the same notional amount, excluding the margin that varies from 0.40% to
0.80%, depending upon RPC's then-current consolidated debt-to-EBITDA
ratio.
Note
7: Accumulated Other Comprehensive (Loss) Income
Accumulated
other comprehensive (loss) income consists of the following (in
thousands):
|
Pension
Adjustment
|
Unrealized
Gain
(Loss) On
Securities
|
Foreign
Currency Translation
|
Net
Loss
On
Cash Flow Hedge
|
Total
|
||||||||||||||||
|
Balance
at December 31, 2006
|
$ | (5,962 | ) | $ | 228 | $ | — | $ | — | $ | (5,734 | ) | ||||||||
|
Change
during 2007:
|
||||||||||||||||||||
|
Before-tax
amount
|
3,992 | 757 | 271 | — | 5,027 | |||||||||||||||
|
Tax
expense
|
(1,457 | ) | (271 | ) | (99 | ) | — | (1,834 | ) | |||||||||||
|
Total
activity in 2007
|
2,535 | 486 | 172 | — | 3,193 | |||||||||||||||
|
Balance
at December 31, 2007
|
$ | (3,427 | ) | $ | 714 | $ | 172 | $ | — | $ | (2,541 | ) | ||||||||
|
Change
during 2008:
|
||||||||||||||||||||
|
Before-tax
amount
|
(9,532 | ) | (921 | ) | (513 | ) | (830 | ) | (11,796 | ) | ||||||||||
|
Tax
benefit
|
3,479 | 336 | 187 | 303 | 4,305 | |||||||||||||||
|
Total
activity in 2008
|
(6,053 | ) | (585 | ) | (326 | ) | (527 | ) | (7,491 | ) | ||||||||||
|
Balance
at December 31, 2008
|
$ | (9,480 | ) | $ | 129 | $ | (154 | ) | $ | (527 | ) | $ | (10,032 | ) | ||||||
45
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
RPC,
Inc. and Subsidiaries
Years
ended December 31, 2008, 2007 and 2006
Note
8: Fair Value Disclosures
The
Company adopted SFAS 157, “Fair Value Measurements,” and FSP 157-2, “Effective
Date of FASB Statement No. 157,” in the first quarter of 2008 for financial
assets and liabilities. There was no impact from the adoption of SFAS
157 to the consolidated financial statements. SFAS 157 defines fair
value, establishes a framework for measuring fair value and expands disclosure
requirements about items measured at fair value. SFAS 157 does not
require any new fair value measurements. It applies to accounting
pronouncements that already require or permit fair value measures. As
a result, the Company will not be required to recognize any new assets or
liabilities at fair value. FSP 157-2 delays the effective date of SFAS 157 for
nonfinancial assets and nonfinancial liabilities, except for items that are
recognized or disclosed at fair value in the financial statements on a recurring
basis.
SFAS 157
establishes a fair value 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 – Inputs other than level 1 that are either directly or indirectly
observable.
|
|
|
3.
|
Level
3 – Unobservable inputs developed using the Company’s estimates and
assumptions, which reflect those that market participants would
use.
|
The
following table summarizes the valuation of financial instruments measured at
fair value on a recurring basis in the balance sheet as of December 31,
2008:
|
Fair
Value Measurements at December 31, 2008 with:
|
||||||||||||
|
(in
thousands)
|
Quoted
prices in
active
markets for identical assets
|
Significant
other
observable
inputs
|
Significant
unobservable
inputs
|
|||||||||
|
(Level 1)
|
(Level 2)
|
(Level 3)
|
||||||||||
|
Assets:
|
||||||||||||
|
Trading
securities
|
$ | 4,074 | $ | - | $ | - | ||||||
|
Available-for-sale
securities
|
511 | - | - | |||||||||
|
Liabilities:
|
||||||||||||
|
Interest
rate swap
|
$ | - | $ | 830 | $ | - | ||||||
The
Company determines the fair value of the marketable securities that are trading
and available-for-sale through quoted market prices.
At
December 31, 2008 and 2007, there was $174,450,000 and $156,400,000 outstanding
under our revolving credit agreement. The borrowings under our
revolving credit agreement bear interest at the variable rate described in Note
6 and therefore approximate fair value at December 31, 2008 and
2007. We are subject to interest rate risk on the variable component
of the interest rate. Our risk management objective is to lock in the
interest cash outflows on a portion of our debt. As a result, as
described in Note 6, we entered into an interest rate swap agreement effectively
converting a portion of the outstanding borrowings under the revolving credit
agreement to a fixed-rate, thereby hedging against the impact of potential
interest rate changes on future interest expense. At December 31,
2008 the interest rate swap had a negative fair value of $830,000, which is
recorded in other long-term liabilities. The fair value of the
interest rate swap was based on quotes from the issuer of the swap and
represents the estimated amounts that we would expect to pay to terminate the
swap.
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.
In
February 2007, the FASB issued SFAS No. 159, “The Fair Value Option
for Financial Assets and Financial Liabilities — including an amendment of FASB
Statement No. 115.” This statement permits entities to choose to measure
many financial instruments and certain other items at fair value. This statement
is effective for financial statements issued for fiscal years beginning after
November 15, 2007, including interim periods within that fiscal year. The
Company did not elect the fair value option for any of its existing financial
instruments as of December 31, 2008 and the Company has not determined whether
or not it will elect this option for financial instruments it may acquire in the
future.
46
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
RPC,
Inc. and Subsidiaries
Years
ended December 31, 2008, 2007 and 2006
Note
9: Commitments and Contingencies
Lease Commitments - Minimum
annual rentals, principally for noncancelable real estate leases with terms in
excess of one year, in effect at December 31, 2008, are summarized in the
following table:
|
(in
thousands)
|
||||
|
2009
|
$ | 3,396 | ||
|
2010
|
3,155 | |||
|
2011
|
2,287 | |||
|
2012
|
1,469 | |||
|
2013
|
993 | |||
|
Thereafter
|
1,141 | |||
|
Total
rental commitments
|
$ | 12,441 | ||
Total
rental expense charged to operations was approximately $9,109,000 in 2008,
$7,116,000 in 2007, and $6,276,000 in 2006.
Income Taxes - The amount of
income taxes the Company pays is subject to ongoing audits by federal and state
tax authorities, which often result in proposed assessments. Other
long-term liabilities include $11,000 as of December 31, 2008 and $10,000 as of
December 31, 2007, that represents the Company’s estimated liabilities for the
probable assessments payable.
Sales and Use Taxes - The
Company has ongoing sales and use tax audits in various jurisdictions and may be
subjected to varying interpretations of statue that could result in unfavorable
outcomes that cannot be currently estimated.
Litigation - RPC is a party
to various routine legal proceedings primarily involving commercial claims,
workers’ compensation claims and claims for personal injury. RPC insures against
these risks to the extent deemed prudent by its management, but no assurance can
be given that the nature and amount of such insurance will, in every case, fully
indemnify RPC against liabilities arising out of pending and future legal
proceedings related to its business activities. While the outcome of these
lawsuits, legal proceedings and claims cannot be predicted with certainty,
management, after consultation with legal counsel, believes that the outcome of
all such proceedings, even if determined adversely, would not have a material
adverse effect on the Company’s business or financial condition.
47
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
RPC,
Inc. and Subsidiaries
Years
ended December 31, 2008, 2007 and 2006
Note
10: Employee Benefit Plans
Defined
Benefit Pension Plan
The
Company’s Retirement Income Plan, a trusteed defined benefit pension plan,
provides monthly benefits upon retirement at age 65 to substantially all
employees with at least one year of service prior to 2002. As of
February 28, 2001, the plan became a multiple employer plan, with Marine
Products Corporation as an adopting employer.
In
2002, the Company’s Board of Directors approved a resolution to cease all future
retirement benefit accruals under the defined benefit pension plan. In lieu
thereof, the Company began providing enhanced benefits in the form of cash
contributions for certain longer serviced employees that had not reached the
normal retirement age of 65 as of March 31, 2002. The contributions are
discretionary and made annually based on continued employment over a seven year
period beginning in 2002. These discretionary contributions are made to either
the SERP established by the Company or to the 401(k) plan for each employee that
is entitled to the enhanced benefit. The expense related to the enhanced
benefits was $295,000 for 2008, $315,000 for 2007 and $320,000 for
2006.
The
Company permits selected highly compensated employees to defer a portion of
their compensation into the SERP. The SERP assets are marked to market and
totaled $4,073,000 as of December 31, 2008 and $4,270,000 as of December 31,
2007. The SERP assets are reported in other assets on the balance
sheet and changes related to the fair value of assets are recorded in the
consolidated statement of operations as part of other (expense) income, net.
Trading (losses) gains related to the SERP assets totaled $(1,661,000) for 2008,
$73,000 for 2007 and $143,000 for 2006. The SERP deferrals and the
contributions are recorded on the balance sheet in pension liabilities with any
change in the fair value of the liabilities recorded as compensation cost in the
statement of operations.
As
previously mentioned, the Company has adopted the provisions of SFAS 158. In
accordance with the provisions of SFAS 158, the Company’s projected
benefit obligation exceeds the fair value of the plan assets under its pension
plan by $6,715,000 and thus the plan was under-funded as of December 31,
2008. Prior to the adoption of SFAS 158, the Company’s disclosure of
the funded status in the notes to the consolidated financial statements did not
differ from the amount recognized in the consolidated balance sheet; therefore,
the adoption of SFAS 158 did not have an affect on the consolidated balance
sheet.
48
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
RPC,
Inc. and Subsidiaries
Years
ended December 31, 2008, 2007 and 2006
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,
|
2008
|
2007
|
||||||
|
(in
thousands)
|
||||||||
|
Accumulated
Benefit Obligation at end of year
|
$ | 29,203 | $ | 30,149 | ||||
|
CHANGE
IN PROJECTED BENEFIT OBLIGATION:
|
||||||||
|
Benefit
obligation at beginning of year
|
$ | 30,149 | $ | 32,172 | ||||
|
Service
cost
|
— | — | ||||||
|
Interest
cost
|
1,841 | 1,759 | ||||||
|
Amendments
|
— | — | ||||||
|
Actuarial
(gain) loss
|
(1,239 | ) | (2,415 | ) | ||||
|
Benefits
paid
|
(1,548 | ) | (1,367 | ) | ||||
|
Projected
benefit obligation at end of year
|
$ | 29,203 | $ | 30,149 | ||||
|
CHANGE
IN PLAN ASSETS:
|
||||||||
|
Fair
value of plan assets at beginning of year
|
$ | 32,548 | $ | 26,127 | ||||
|
Actual
return on plan assets
|
(8,512 | ) | 3,038 | |||||
|
Employer
contribution
|
— | 4,750 | ||||||
|
Benefits
paid
|
(1,548 | ) | (1,367 | ) | ||||
|
Fair
value of plan assets at end of year
|
22,488 | 32,548 | ||||||
|
Funded
status at end of year
|
$ | (6,715 | ) | $ | 2,399 | |||
|
December
31,
|
2008
|
2007
|
||||||
|
(in
thousands)
|
||||||||
|
AMOUNTS
RECOGNIZED IN THE CONSOLIDATED BALANCE SHEETS CONSIST OF:
|
||||||||
|
Noncurrent
assets
|
$ | — | $ | 2,399 | ||||
|
Current
liabilities
|
— | — | ||||||
|
Noncurrent
liabilities
|
(6,715 | ) | — | |||||
| $ | (6,715 | ) | $ | 2,399 | ||||
|
December
31,
|
2008
|
2007
|
||||||
|
(in
thousands)
|
||||||||
|
AMOUNTS
(PRE-TAX) RECOGNIZED IN ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
CONSIST OF:
|
||||||||
|
Net
loss
|
$ | 14,928 | $ | 5,398 | ||||
|
Prior
service cost
|
— | — | ||||||
|
Net
transition obligation
|
— | — | ||||||
| $ | 14,928 | $ | 5,398 | |||||
The
accumulated benefit obligation for the defined benefit pension plan at December
31, 2008 and 2007 has been disclosed above. The Company uses a
December 31 measurement date for this qualified plan.
49
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
RPC,
Inc. and Subsidiaries
Years
ended December 31, 2008, 2007 and 2006
Amounts
recognized in the consolidated balance sheets consist of:
|
December
31,
|
2008
|
2007
|
||||||
|
(in
thousands)
|
||||||||
|
Funded
status
|
$ | (6,715 | ) | $ | 2,399 | (1) | ||
|
SERP
employer contributions/deferrals
|
(4,462 | ) | (4,527 | ) | ||||
|
Long-term
pension liabilities
|
$ | (11,177 | ) | $ | (4,527 | ) | ||
(1)The
defined benefit pension plan over-funded position at December 31, 2007 has been
included as part of other assets in the balance sheet.
RPC’s
funding policy is to contribute to the defined benefit pension plan the amount
required, if any, under the Employee Retirement Income Security Act of 1974. RPC
made no contributions in 2008 and $4,750,000 in 2007.
The
components of net periodic benefit cost are summarized as follows:
|
Years
ended December 31,
|
2008
|
2007
|
2006
|
|||||||||
|
(in
thousands)
|
||||||||||||
|
Service
cost for benefits earned during the period
|
$ | — | $ | — | $ | — | ||||||
|
Interest
cost on projected benefit obligation
|
1,841 | 1,759 | 1,705 | |||||||||
|
Expected
return on plan assets
|
(2,543 | ) | (2,321 | ) | (1,888 | ) | ||||||
|
Amortization
of net loss (gain)
|
285 | 860 | 998 | |||||||||
|
Net
periodic benefit plan (credit) cost
|
$ | (417 | ) | $ | 298 | $ | 815 | |||||
The
Company recognized pre-tax (increases) decreases to the funded status in
comprehensive loss of $9,532,000 in 2008, $(3,992,000) in 2007, and $(3,627,000)
in 2006. There were no previously unrecognized prior service costs as
of December 31, 2008 and 2007. The pre-tax amounts recognized in
comprehensive loss for the years ended December 31, 2008, 2007 and 2006 are
summarized as follows:
|
(in
thousands)
|
2008
|
2007
|
2006
|
|||||||||
|
Net
loss (gain)
|
$ | 9,817 | $ | (3,132 | ) | $ | (2,629 | ) | ||||
|
Amortization
of net (loss) gain
|
(285 | ) | (860 | ) | (998 | ) | ||||||
|
Net
transition obligation (asset)
|
— | — | — | |||||||||
|
Amount
recognized in other comprehensive loss
|
$ | 9,532 | $ | (3,992 | ) | $ | (3,627 | ) | ||||
The
amounts in accumulated other comprehensive loss expected to be recognized as
components of net periodic benefit cost in 2009 are as follows:
|
(in
thousands)
|
2009
|
||||
|
Amortization
of net loss (gain)
|
$ | 1,540 | |||
|
Prior
service cost (credit)
|
— | ||||
|
Net
transition obligation (asset)
|
— | ||||
|
Estimated
net periodic benefit plan cost
|
$ | 1,540 | |||
50
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
RPC,
Inc. and Subsidiaries
Years
ended December 31, 2008, 2007 and 2006
The
weighted average assumptions as of December 31 used to determine the projected
benefit obligation and net benefit cost were as follows:
|
December
31,
|
2008
|
2007
|
2006
|
|||||||||
|
Projected Benefit
Obligation:
|
||||||||||||
|
Discount
rate
|
6.84 | % | 6.25 | % | 5.50 | % | ||||||
|
Rate
of compensation increase
|
N/A | N/A | N/A | |||||||||
|
Net
Benefit Cost:
|
||||||||||||
|
Discount
rate
|
6.25 | % | 5.50 | % | 5.50 | % | ||||||
|
Expected
return on plan assets
|
8.00 | % | 8.00 | % | 8.00 | % | ||||||
|
Rate
of compensation increase
|
N/A | N/A | N/A | |||||||||
The
Company’s expected return on assets assumption is derived from a detailed
periodic assessment conducted by its management and its investment adviser. It
includes a review of anticipated future long-term performance of individual
asset classes and consideration of the appropriate asset allocation strategy
given the anticipated requirements of the plan to determine the average rate of
earnings expected on the funds invested to provide for the pension plan
benefits. While the study gives appropriate consideration to recent fund
performance and historical returns, the rate of return assumption is derived
primarily from a long-term, prospective view. Based on its recent assessment,
the Company has concluded that its expected long-term return assumption of eight
percent is reasonable.
The
Plan’s weighted average asset allocation at December 31, 2008 and 2007 by asset
category along with the target allocation for 2009 are as follows:
|
Asset
Category
|
Target
Allocation
for
2009
|
Percentage
of
Plan
Assets
as
of
December
31,
2008
|
Percentage
of
Plan
Assets
as
of
December
31,
2007
|
|||||||||
|
Equity
Securities
|
43.0 | % | 37.5 | % | 48.1 | % | ||||||
|
Debt
Securities — Core Fixed Income
|
27.0 | % | 14.0 | % | 27.1 | % | ||||||
|
Tactical
— Fund of Equity and Debt Securities
|
5.0 | % | 4.3 | % | 5.2 | % | ||||||
|
Real
Estate
|
5.0 | % | 7.7 | % | 5.7 | % | ||||||
|
Other
|
20.0 | % | 36.5 | % | 13.9 | % | ||||||
|
Total
|
100.0 | % | 100.0 | % | 100.0 | % | ||||||
The
Company’s investment strategy for its defined benefit pension plan is to
maximize the long-term rate of return on plan assets within 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 Company utilizes a number of investment approaches,
including individual marketable securities, equity and fixed income funds in
which the underlying securities are marketable, and debt funds to achieve this
target allocation. The Company does not currently expect to make a contribution
to the defined benefit pension plan in 2009 and does not expect to receive a
refund in 2009.
The
Company estimates that the future benefits payable for the defined benefit
pension plan over the next ten years are as follows:
|
(in
thousands)
|
||||
|
2009
|
$ | 1,581 | ||
|
2010
|
1,682 | |||
|
2011
|
1,706 | |||
|
2012
|
1,795 | |||
|
2013
|
1,884 | |||
|
2014-2018
|
10,748 | |||
51
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
RPC,
Inc. and Subsidiaries
Years
ended December 31, 2008, 2007 and 2006
401(k)
Plan
RPC
sponsors a defined contribution 401(k) plan that is available to substantially
all full-time employees with more than three months of service. This plan allows
employees to make tax-deferred contributions from one to 25 percent of their
annual compensation, not exceeding the permissible contribution imposed by the
Internal Revenue Code. RPC matches 50 percent of each employee’s contributions
that do not exceed six percent of the employee’s compensation, as defined by the
plan. Employees vest in the RPC contributions after three years of service. The
charges to expense for the Company’s contributions to the 401(k) plan were
approximately $2,814,000 in 2008, $2,300,000 in 2007 and $1,500,000 in
2006.
Stock
Incentive Plans
The
Company has issued stock options and restricted stock to employees under two 10
year stock incentive plans that were approved by shareholders in 1994 and
2004. The 1994 plan expired in 2004. The Company reserved
5,062,500 shares of common stock under the 2004 Plan which expires ten years
from the date of approval. This plan provides for the issuance of
various forms of stock incentives, including, among others, incentive and
non-qualified stock options and restricted stock which are discussed in detail
below. As of December 31, 2008, there were approximately 2,900,000
shares available for grants. The Company issues new shares from its
authorized but unissued share pool.
As
previously noted, the Company adopted the provisions of SFAS 123(R),
“Share-Based Payments,” effective January 1, 2006. As permitted by SFAS 123(R),
the Company has elected to use the modified prospective transition method and
therefore financial results for prior periods have not been restated. Under this
transition method, the Company applies the provisions of SFAS 123(R) to new
awards and the awards modified, repurchased, or cancelled after January 1, 2006.
Additionally, the Company recognizes compensation expense for the unvested
portion of awards outstanding over the remainder of the service period. The
compensation cost recorded for these awards is based on their fair value at
grant date as calculated for the pro forma disclosures required by SFAS 123 less
the cost of estimated forfeitures. SFAS 123(R) requires forfeitures to be
estimated at the time of grant and revised, if necessary, in subsequent periods
to reflect actual forfeitures. SFAS 123(R) also requires that 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) be classified
as financing cash flows.
Pre-tax
stock-based employee compensation expense was $3,732,000 in 2008 ($2,382,000
after tax), $3,189,000 in 2007 ($2,167,000 after tax) and $2,384,000 ($1,722,000
after tax) for 2006.
52
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
RPC,
Inc. and Subsidiaries
Years
ended December 31, 2008, 2007 and 2006
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.
As
prescribed by SFAS 123(R), 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.
Transactions
involving RPC’s stock options for the year ended December 31, 2008 were as
follows:
|
Shares
|
Weighted
Average
Exercise
Price
|
Weighted
Average
Remaining
Contractual
Life
|
Aggregate
Intrinsic Value
|
||||||||||||
|
Outstanding
at January 1, 2008
|
1,878,252 | $ | 3.11 |
3.32
years
|
|||||||||||
|
Granted
|
- | - |
N/A
|
||||||||||||
|
Exercised
|
(750,601 | ) | 3.06 |
N/A
|
|||||||||||
|
Forfeited
|
(19,629 | ) | 3.92 |
N/A
|
|||||||||||
|
Expired
|
- | - |
N/A
|
||||||||||||
|
Outstanding
at December 31, 2008
|
1,108,022 | $ | 3.12 |
2.68
years
|
$ | 7,357,000 | |||||||||
|
Exercisable
at December 31, 2008
|
1,108,022 | $ | 3.12 |
2.68
years
|
$ | 7,357,000 | |||||||||
The total
intrinsic value of stock options exercised was approximately $6,214,000 during
2008, $7,758,000 during 2007 and $12,468,000 during 2006. Recognized
excess tax benefits associated with the exercise of stock options were
approximately $344,000 during 2008. There were no recognized excess
tax benefits associated with the exercise of stock options during 2007 and 2006,
since all of the stock options exercised in 2007 and 2006 were incentive stock
options which do not generate tax deductions for the Company.
Restricted
Stock
The
Company has granted employees two forms of restricted stock: time lapse
restricted and performance restricted.
Time
Lapse restricted shares
Time
lapse restricted shares vest after a stipulated number of years from the grant
date, depending on the terms of the issue. Time lapse restricted shares issued
in years 2003 and prior vest after ten years. Time lapse restricted
shares issued subsequent to fiscal year 2003 vest in 20 percent increments
annually starting with the second anniversary of the grant, over six years from
the date of grant. Grantees receive dividends declared and retain
voting rights for the granted shares.
Performance
restricted shares
The
performance restricted shares are granted, but not earned and issued until
certain five-year tiered performance criteria are met. The performance criteria
are predetermined market prices of RPC’s common stock. On the date the common
stock appreciates to each level (determination date), 20 percent of performance
shares are earned. Once earned, the performance shares vest five years from the
determination date. After the determination date, the grantee will receive
dividends declared and voting rights to the shares. The Company has
not granted performance restricted shares since 1999.
The
agreements under which the restricted stock is issued provide that shares
awarded may not be sold or otherwise transferred until restrictions established
under the stock plans have lapsed. Upon termination of employment from RPC or,
in certain cases, termination of employment from Marine Products Corporation or
Chaparral Boats, Inc., shares with restrictions must be returned to
RPC.
53
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
RPC,
Inc. and Subsidiaries
Years
ended December 31, 2008, 2007 and 2006
The
following is a summary of the changes in non-vested restricted shares for the
year ended December 31, 2008:
|
Shares
|
Weighted
Average
Grant-Date
Fair Value
|
|||||||
|
Non-vested
shares at January 1, 2008
|
1,570,232 | $ | 11.01 | |||||
|
Granted
|
608,500 | 9.81 | ||||||
|
Vested
|
(345,758 | ) | 8.86 | |||||
|
Forfeited
|
(70,496 | ) | 11.60 | |||||
|
Non-vested
shares at December 31, 2008
|
1,762,478 | $ | 11.34 | |||||
The fair
value of restricted awards is based on the market price of the Company’s stock
on the date of the grant and is amortized to compensation expense on a
straight-line basis over the requisite service period. The weighted
average grant date fair value of these restricted stock awards was $9.81, $17.61
and $22.32 for the years ended December 31, 2008, 2007, and 2006,
respectively. The total fair value of shares vested was approximately
$3,675,000 during 2008, $4,903,000 during 2007 and $5,380,000 during
2006. The tax benefit for compensation tax deductions in excess of
compensation expense was credited to capital in excess of par value aggregating
$502,000 for 2008, $1,128,000 for 2007 and $1,325,000 for 2006. The
excess tax deductions are classified as financing cash flows in accordance with
SFAS 123(R).
Other
Information
As of
December 31, 2008, total unrecognized compensation cost related to non-vested
restricted shares was approximately $17,002,000 which is expected to be
recognized over a weighted-average period of 3.3 years. Unearned
compensation cost associated with non-vested restricted shares of $5,391,000
previously reflected as deferred compensation in stockholders’ equity at January
1, 2006 was reclassified to capital in excess of par value as required by SFAS
123(R). As of December 31, 2008, there was no unrecognized
compensation cost related to non-vested stock options.
The
Company received cash from options exercised of $347,000 during 2008, $636,000
during 2007 and $1,341,000 during 2006. These cash receipts are classified as
financing cash flows in the accompanying consolidated statements of cash flows.
The fair value of shares tendered to exercise employee stock options totaled
approximately $1,911,000 during 2008, $1,123,000 during 2007 and $1,240,000
during 2006 and have been excluded from the consolidated statements of cash
flows.
Note
11: Related Party Transactions
Related
Party Transactions
Marine
Products Corporation
Effective
February 28, 2001, the Company spun-off the business conducted through Chaparral
Boats, Inc. (“Chaparral”), RPC’s former powerboat manufacturing
segment. RPC accomplished the spin-off by contributing 100 percent of
the issued and outstanding stock of Chaparral to Marine Products Corporation (a
Delaware corporation) (“Marine Products”), a newly formed wholly-owned
subsidiary of RPC, and then distributing the common stock of Marine Products to
RPC stockholders. In conjunction with the spin-off, RPC and Marine
Products entered into various agreements that define the companies’
relationship.
In
accordance with a Transition Support Services agreement, which may be terminated
by either party, RPC provides certain administrative services, including
financial reporting and income tax administration, acquisition assistance, etc.,
to Marine Products. Charges from the Company (or from corporations
that are subsidiaries of the Company) for such services aggregated approximately
$842,000 in 2008, $957,000 in 2007 and $739,000 in 2006. The Company’s
receivable due from Marine Products for these services as of December 31, 2008
and 2007 was approximately $70,000 and $223,000. The Company’s
directors are also directors of Marine Products and all of the executive
officers are employees of both the Company and Marine Products.
54
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
RPC,
Inc. and Subsidiaries
Years
ended December 31, 2008, 2007 and 2006
Other
The
Company periodically purchases in the ordinary course of business products or
services from suppliers, who are owned by significant officers or shareholders,
or affiliated with the directors of RPC. The total amounts paid to these
affiliated parties were approximately $393,000 in 2008, $1,035,000 in 2007 and
$1,248,000 in 2006.
RPC
receives certain administrative services and rents office space from Rollins,
Inc. (a company of which Mr. R. Randall Rollins is also Chairman and which is
otherwise affiliated with RPC). The service agreements between
Rollins, Inc. and the Company provide for the provision of services on a cost
reimbursement basis and are terminable on six months notice. The
services covered by these agreements include office space, administration of
certain employee benefit programs, and other administrative services. Charges to
the Company (or to corporations which are subsidiaries of the Company) for such
services and rent totaled $90,000 in 2008, $72,000 in 2007 and $70,000 in
2006.
A group
that includes the Company’s Chairman of the Board, R. Randall Rollins and his
brother Gary W. Rollins, who is also a director of the Company, and certain
companies under their control, controls in excess of fifty percent of the
Company’s voting power.
Note
12: Business Segment Information
RPC’s
service lines have been aggregated into two reportable oil and gas services
segments — Technical Services and Support Services — because of the similarities
between the financial performance and approach to managing the service lines
within each of the segments, as well as the economic and business conditions
impacting their business activity levels. Corporate includes selected
administrative costs incurred by the Company.
Technical
Services include RPC’s oil and gas service lines that utilize people and
equipment to perform value-added completion, production and maintenance services
directly to a customer’s well. These services include pressure pumping services,
coiled tubing, snubbing, nitrogen pumping, well control consulting and
firefighting, downhole tools, wireline, and fluid pumping services. These
Technical Services are primarily used in the completion, production and
maintenance of oil and gas wells. The principal markets for this segment include
the United States, including the Gulf of Mexico, the mid-continent, southwest
and Rocky Mountain regions, and international locations including primarily
Africa, Canada, China, Latin America and the Middle East. Customers include
major multi-national and independent oil and gas producers, and selected
nationally-owned oil companies.
Support
Services include RPC’s oil and gas service lines that primarily provide
equipment for customer use or services to assist customer operations. The
equipment and services include drill pipe and related tools, pipe handling,
inspection and storage services, and oilfield training services. The demand for
these services tends to be influenced primarily by customer drilling-related
activity levels. The principal markets for this segment include the United
States, including the Gulf of Mexico and the mid-continent regions, and
international locations, including primarily Canada, Latin America, and the
Middle East. Customers include domestic operations of major multi-national and
independent oil and gas producers, and selected nationally-owned oil
companies.
The
accounting policies of the reportable segments are the same as those described
in Note 1 to these consolidated financial statements. RPC evaluates the
performance of its segments based on revenues, operating profits and return on
invested capital. Gains or losses on disposition of assets are
reviewed by the Company’s chief decision maker on a consolidated basis, and
accordingly the Company does not report gains or losses at the segment
level. Inter-segment revenues are generally recorded in segment
operating results at prices that management believes approximate prices for
arm’s length transactions and are not material to operating
results.
55
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
RPC,
Inc. and Subsidiaries
Years
ended December 31, 2008, 2007 and 2006
Summarized
financial information concerning RPC’s reportable segments for the years ended
December 31, 2008, 2007 and 2006 are shown in the following
table.
|
Technical
Services
|
Support
Services
|
Corporate
|
Gain
on disposition of assets, net
|
Total
|
||||||||||||||||
|
(in
thousands)
|
||||||||||||||||||||
|
2008
|
||||||||||||||||||||
|
Revenues
|
$ | 745,991 | $ | 130,986 | $ | — | $ | — | $ | 876,977 | ||||||||||
|
Operating
profit (loss)
|
110,648 | 36,515 | (9,360 | ) | 6,367 | 144,170 | ||||||||||||||
|
Capital
expenditures
|
127,054 | 42,238 | 1,026 | — | 170,318 | |||||||||||||||
|
Depreciation
and amortization
|
92,738 | 24,798 | 867 | — | 118,403 | |||||||||||||||
|
Identifiable
assets
|
564,708 | 181,991 | 46,762 | — | 793,461 | |||||||||||||||
|
2007
|
||||||||||||||||||||
|
Revenues
|
$ | 574,723 | $ | 115,503 | $ | — | $ | — | $ | 690,226 | ||||||||||
|
Operating
profit (loss)
|
116,493 | 29,955 | (10,703 | ) | 6,293 | 142,038 | ||||||||||||||
|
Capital
expenditures
|
211,389 | 35,138 | 2,231 | — | 248,758 | |||||||||||||||
|
Depreciation
and amortization
|
59,436 | 18,106 | 964 | — | 78,506 | |||||||||||||||
|
Identifiable
assets
|
480,840 | 168,027 | 52,148 | — | 701,015 | |||||||||||||||
|
2006
|
||||||||||||||||||||
|
Revenues
|
$ | 495,090 | $ | 101,540 | $ | — | $ | — | $ | 596,630 | ||||||||||
|
Operating
profit (loss)
|
153,126 | 30,953 | (12,248 | ) | 5,969 | 177,800 | ||||||||||||||
|
Capital
expenditures
|
125,138 | 28,902 | 5,791 | — | 159,831 | |||||||||||||||
|
Depreciation
and amortization
|
31,805 | 13,974 | 932 | — | 46,711 | |||||||||||||||
|
Identifiable
assets
|
320,637 | 125,627 | 31,743 | — | 478,007 | |||||||||||||||
The
following summarizes selected information between the United States and all
international locations combined for the years ended December 31, 2008, 2007 and
2006. The revenues are presented based on the location of the use of the product
or service. Assets related to international operations are less than 10 percent
of RPC’s consolidated assets, and therefore are not presented.
|
Years
ended December 31,
|
2008
|
2007
|
2006
|
|||||||||
|
(in
thousands)
|
||||||||||||
|
United
States Revenues
|
$ | 846,202 | $ | 649,116 | $ | 566,636 | ||||||
|
International
Revenues
|
30,775 | 41,110 | 29,994 | |||||||||
| $ | 876,977 | $ | 690,226 | $ | 596,630 | |||||||
56
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, 2008 (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 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 28 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, 2008 and
issued a report thereon which is included on page 29 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.
57
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 2009 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 12 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 2009 Annual
Meeting of Stockholders, in the section titled “Corporate Governance and Board
of Directors, Committees and Meetings – Audit Committee.” This information is
incorporated herein by reference.
Code
of Ethics
RPC, Inc.
has a Code of Business Conduct that applies to all employees. In addition, the
Company has a Code of Business Conduct and Ethics for Directors and Executive
Officers and Related Party Transaction Policy. Both of these documents are
available on the Company’s website at www.rpc.net. Copies are
available at no charge by writing to Attention: Human Resources, RPC Inc., 2801
Buford Highway, Suite 520, N.E., Atlanta, GA 30329.
RPC, Inc.
intends to satisfy the disclosure requirement under Item 10 of Form 8-K
regarding an amendment to, or waiver from, a provision of its code that relates
to any elements of the code of ethics definition enumerated in SEC rules by
posting such information on its internet website, the address of which is
provided above.
Section
16(a) Beneficial Ownership Reporting Compliance
Information
regarding compliance with Section 16(a) of the Exchange Act will be included
under “Section 16(a) Beneficial Ownership Reporting Compliance” in the Company’s
Proxy Statement for its 2009 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 2009 Annual Meeting of Stockholders, in the sections titled
“Compensation Committee Interlocks and Insider Participation,” “Director
Compensation,” “Compensation Discussion and Analysis,” “Compensation Committee
Report” and “Executive Compensation.” This information is incorporated herein by
reference.
Item
12. Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters
Information
concerning security ownership will be included in the RPC Proxy Statement for
its 2009 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, 2008.
58
|
Plan
Category
|
(A)
Number
of Securities
To
Be Issued Upon
Exercise
of
Outstanding
Options,
Warrants
and Rights
|
(B)
Weighted
Average Exercise
Price
of Outstanding
Options,
Warrants and
Rights
|
(C)
Number
of Securities
Remaining
Available for
Future
Issuance Under
Equity
Compensation
Plans
(Excluding
Securities
Reflected in
Column
(A))
|
|||||||||
|
Equity
compensation plans approved by securityholders
|
1,108,322 | $ | 3.12 | 2,899,664 | (1) | |||||||
|
Equity
compensation plans not approved by securityholders
|
- | - | - | |||||||||
|
Total
|
1,108,322 | $ | 3.12 | 2,899,664 | ||||||||
|
(1)
|
All
of the securities can be issued in the form of restricted stock or other
stock awards.
|
See Note
10 to the Consolidated Financial Statements for information regarding the
material terms of the equity compensation plans.
Item
13. Certain Relationships and Related Party Transactions and Director
Independence
Information
concerning certain relationships and related party transactions will be included
in the RPC Proxy Statement for its 2009 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 2009 Annual Meeting of Stockholders
in the section titled “Director Independence and NYSE
Requirements.” This information is incorporated herein by
reference.
Item
14. Principal Accounting Fees and Services
Information
regarding principal accountant fees and services will be included in the section
titled “Independent Registered Public Accountants” in the RPC Proxy Statement
for its 2009 Annual Meeting of Stockholders. This information is incorporated
herein by reference.
59
PART
IV
Item
15. Exhibits and Financial Statement Schedules
Consolidated Financial Statements,
Financial Statement Schedule and Exhibits.
|
1.
|
Consolidated
financial statements listed in the accompanying Index to Consolidated
Financial Statements and Schedule are filed as part of this
report.
|
||
|
2.
|
The
financial statement schedule listed in the accompanying Index to
Consolidated Financial Statements and Schedule is filed as part of this
report.
|
||
|
3.
|
Exhibits
listed in the accompanying Index to Exhibits are filed as part of this
report. The following such exhibits are management contracts or
compensatory plans or arrangements:
|
||
|
10.1
|
2004
Stock Incentive Plan (incorporated herein by reference to Appendix B to
the Registrant’s definitive Proxy Statement filed on March 24,
2004).
|
||
|
10.6
|
Form
of stock option grant agreement (incorporated herein by reference to
Exhibit 10.1 to Form 10-Q filed on November 2, 2004).
|
||
|
10.7
|
Form
of time lapse restricted stock grant agreement (incorporated herein by
reference to Exhibit 10.2 to Form 10-Q filed on November 2,
2004).
|
||
|
10.8
|
Form
of performance restricted stock grant agreement (incorporated herein by
reference to Exhibit 10.3 to Form 10-Q filed on November 2,
2004).
|
||
|
10.9
|
Supplemental
Retirement Plan (incorporated herein by reference to Exhibit 10.11 to the
Form 10-K filed on March 16, 2005).
|
||
|
10.10
|
Summary
of ‘At-Will’ compensation arrangements with the Executive Officers as of
February 28, 2007 (incorporated herein by reference to Exhibit 10.12 to
the Form 10-K filed on March 2, 2007).
|
||
|
10.11
|
Summary
of Compensation Arrangements with Non-Employee Directors as of February
28, 2007 (incorporated herein by reference to Exhibit 10.13 to the Form
10-K filed on March 2, 2007).
|
||
|
10.12
|
First
Amendment to 1994 Employee Stock Incentive Plan and 2004 Stock Incentive
Plan (incorporated herein by reference to Exhibit 10.14 to the Form 10-K
filed on March 2, 2007).
|
||
|
10.13
|
Performance-Based
Incentive Cash Compensation Plan (incorporated by reference to Exhibit
10.1 to the Form 8-K filed April 28, 2006).
|
||
|
10.14
|
Summary
of “At-Will” of Compensation Arrangements with Executive Officers as of
February 28, 2008 (incorporated by reference to Exhibit 10.16 to the Form
10-K filed on March 4, 2008).
|
||
|
10.15
|
Summary
of Compensation Arrangements with Non-Employee Directors as of February
28, 2008 (incorporated by reference to Exhibit 10.17 to the Form 10-K
filed on March 4, 2008).
|
||
|
10.18
|
Summary
of “At-Will” of Compensation Arrangements with Executive Officers as of
February 28, 2009.
|
||
60
Exhibits
(inclusive of item 3 above):
|
Exhibit
Number
|
Description
|
|
|
3.1A
|
Restated
certificate of incorporation of RPC, Inc. (incorporated herein by
reference to exhibit 3.1 to the Annual Report on Form 10-K for the fiscal
year ended December 31, 1999).
|
|
|
3.1B
|
Certificate
of Amendment of Certificate of Incorporation of RPC, Inc. (incorporated by
reference to Exhibit 3.1(B) to the Quarterly Report on Form 10-Q filed May
8, 2006).
|
|
|
3.2
|
Bylaws
of RPC, Inc. (incorporated herein by reference to Exhibit 3.1 to the Form
8-K filed on October 25, 2007).
|
|
|
4
|
Form
of Stock Certificate (incorporated herein by reference to the Annual
Report on Form 10-K for the fiscal year ended December 31,
1998).
|
|
|
10.1
|
2004
Stock Incentive Plan (incorporated herein by reference to Appendix B to
the Registrant’s definitive Proxy Statement filed on March 24,
2004).
|
|
|
10.2
|
Agreement
Regarding Distribution and Plan of Reorganization, dated February 12,
2001, by and between RPC, Inc. and Marine Products Corporation
(incorporated herein by reference to Exhibit 10.2 to the Form 10-K filed
on February 13, 2001).
|
|
|
10.3
|
Employee
Benefits Agreement dated February 12, 2001, by and between RPC, Inc.,
Chaparral Boats, Inc. and Marine Products Corporation (incorporated herein
by reference to Exhibit 10.3 to the Form 10-K filed on February 13,
2001).
|
|
|
10.4
|
Transition
Support Services Agreement dated February 12, 2001 by and between RPC,
Inc. and Marine Products Corporation (incorporated herein by reference to
Exhibit 10.4 to the Form 10-K filed on February 13,
2001).
|
|
|
10.5
|
Tax
Sharing Agreement dated February 12, 2001, by and between RPC, Inc. and
Marine Products Corporation (incorporated herein by reference to Exhibit
10.5 to the Form 10-K filed on February 13, 2001).
|
|
|
10.6
|
Form
of stock option grant agreement (incorporated herein by reference to
Exhibit 10.1 to the Form 10-Q filed on November 2,
2004).
|
|
|
10.7
|
Form
of time lapse restricted stock grant agreement (incorporated herein by
reference to Exhibit 10.2 to the Form 10-Q filed on November 2,
2004).
|
|
|
10.8
|
Form
of performance restricted stock grant agreement (incorporated herein by
reference to Exhibit 10.3 to the Form 10-Q filed on November 2,
2004).
|
|
|
10.9
|
Supplemental
Retirement Plan (incorporated herein by reference to Exhibit 10.11 to the
Form 10-K filed on March 16, 2005).
|
|
|
10.10
|
Summary
of ‘At-Will’ compensation arrangements with the Executive Officers as of
February 28, 2007 (incorporated herein by reference to Exhibit 10.12 to
the Form 10-K filed on March 2, 2007).
|
|
|
10.11
|
Summary
of Compensation Arrangements with Non-Employee Directors as of February
28, 2007 (incorporated herein by reference to Exhibit 10.13 to the Form
10-K filed on March 2, 2007).
|
|
|
10.12
|
First
Amendment to 1994 Employee Stock Incentive Plan and 2004 Stock Incentive
Plan (incorporated herein by reference to Exhibit 10.14 to the Form 10-K
filed on March 2, 2007).
|
|
|
10.13
|
Performance-Based
Incentive Cash Compensation Plan (incorporated by reference to Exhibit
10.1 to the Form 8-K filed April 28, 2006).
|
|
|
10.14
|
Summary
of “At-Will” of Compensation Arrangements with Executive Officers as of
February 28, 2008 (incorporated by reference to Exhibit 10.16 to the Form
10-K filed on March 4, 2008).
|
|
|
10.15
|
Summary
of Compensation Arrangements with Non-Employee Directors as of February
28, 2008 (incorporated by reference to Exhibit 10.17 to the Form 10-K
filed on March 4, 2008).
|
|
|
10.16
|
Revolving
Credit Agreement dated September 8, 2006 between RPC, Banc of America,
N.A., SunTrust Bank and certain other Lenders party thereto (incorporated
by reference to Exhibit 99.1 to the Form 8-K dated September 8,
2006).
|
|
|
10.17
|
Commitment
Increase Amendment to Revolving Credit Agreement dated as of June 9, 2008,
by and among the Company, the several banks and other financial
institutions from time to time party thereto and SunTrust Bank, in its
capacity as Administrative Agent (incorporated herein by reference to
Exhibit 99.1 to the Company’s Current Report on Form 8-K dated June 9,
2008).
|
|
|
10.18
|
Summary
of “At-Will” of Compensation Arrangements with Executive Officers as of
February 28, 2009.
|
|
|
21
|
Subsidiaries
of RPC (incorporated herein by reference to Exhibit 21 to the Form 10-K
filed on March 4, 2008)
|
|
|
23
|
Consent
of Grant Thornton LLP
|
|
|
24
|
Powers
of Attorney for Directors
|
|
|
31.1
|
Section
302 certification for Chief Executive Officer
|
|
|
31.2
|
Section
302 certification for Chief Financial Officer
|
|
|
32.1
|
Section
906 certifications for Chief Executive Officer and Chief Financial
Officer
|
|
61
SIGNATURES
Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
|
RPC,
Inc.
|
||
| /s/ Richard A. Hubbell | ||
|
Richard
A. Hubbell
|
||
|
President
and Chief Executive Officer
|
||
|
(Principal
Executive Officer)
|
||
|
March
4, 2009
|
Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the Registrant and in the
capacities and on the dates indicated.
|
Name
|
Title
|
Date
|
|
|
|
|||
| /s/ Richard A. Hubbell | |||
|
Richard
A. Hubbell
|
President
and Chief Executive Officer
(Principal
Executive Officer)
|
March
4, 2009
|
|
|
|
|||
| /s/ Ben M. Palmer | |||
|
Ben
M. Palmer
|
Chief
Financial Officer
(Principal
Financial and Accounting Officer)
|
March
4, 2009
|
|
The
Directors of RPC (listed below) executed a power of attorney, appointing Richard
A. Hubbell their attorney-in-fact, empowering him to sign this report on their
behalf.
|
R.
Randall Rollins, Director
|
James
B. Williams, Director
|
|
|
Wilton
Looney, Director
|
James
A. Lane, Jr., Director
|
|
|
Gary
W. Rollins, Director
|
Linda
H. Graham, Director
|
|
|
Henry
B. Tippie, Director
|
Bill
J. Dismuke, Director
|
| /s/ Richard A. Hubbell | |
|
Richard
A. Hubbell
|
|
|
Director
and as Attorney-in-fact
|
|
|
March
4, 2009
|
62
INDEX
TO CONSOLIDATED FINANCIAL STATEMENTS, REPORTS AND SCHEDULE
The
following documents are filed as part of this report.
|
FINANCIAL
STATEMENTS AND REPORTS
|
PAGE
|
|
Management’s
Report on Internal Control Over Financial Reporting
|
28
|
|
Report
of Independent Registered Public Accounting Firm on Internal Control Over
Financial Reporting
|
29
|
|
Report
of Independent Registered Public Accounting Firm on Consolidated Financial
Statements
|
30
|
|
Consolidated
Balance Sheets as of December 31, 2008 and 2007
|
31
|
|
Consolidated
Statements of Operations for the three years ended December 31,
2008
|
32
|
|
Consolidated
Statements of Stockholders’ Equity for the three years ended December 31,
2008
|
33
|
|
Consolidated
Statements of Cash Flows for the three years ended December 31,
2008
|
34
|
|
Notes
to Consolidated Financial Statements
|
35
- 56
|
|
SCHEDULE
|
|
|
Schedule
II — Valuation and Qualifying Accounts
|
63
|
Schedules
not listed above have been omitted because they are not applicable or the
required information is included in the consolidated financial statements or
notes thereto.
SCHEDULE
II — VALUATION AND QUALIFYING ACCOUNTS
|
For
the years ended
December
31, 2008, 2007 and 2006
|
||||||||||||||||
|
(in
thousands)
|
Balance
at
Beginning
of
Period
|
Charged
to
Costs
and
Expenses
|
Net
(Deductions)
Recoveries
|
Balance
at
End of
Period
|
||||||||||||
|
Year
ended December 31, 2008
|
||||||||||||||||
|
Allowance
for doubtful accounts
|
$ | 5,217 | $ | (84 | ) | $ | 1,066 | (1) | $ | 6,199 | ||||||
|
Deferred
tax asset valuation allowance
|
$ | 1,503 | $ | — | $ | (49 | )(2) | $ | 1,454 | |||||||
|
Year
ended December 31, 2007
|
||||||||||||||||
|
Allowance
for doubtful accounts
|
$ | 4,904 | $ | 3,119 | $ | (2,806 | )(1) | $ | 5,217 | |||||||
|
Deferred
tax asset valuation allowance
|
$ | 1,342 | $ | 161 | $ | 0 | (2) | $ | 1,503 | |||||||
|
Year
ended December 31, 2006
|
||||||||||||||||
|
Allowance
for doubtful accounts
|
$ | 4,080 | $ | 1,492 | $ | (668 | )(1) | $ | 4,904 | |||||||
|
Deferred
tax asset valuation allowance
|
$ | 1,945 | $ | 54 | $ | (657 | )(2) | $ | 1,342 | |||||||
|
(1)
|
Deductions
in the allowance for doubtful accounts principally reflect the write-off
of previously reserved accounts net of recoveries.
|
|
(2)
|
The
valuation allowance for deferred tax assets was decreased by $49,000
during 2008 to reflect state net operating losses that management believes
will be utilized before they expire, The valuation allowance for deferred
tax assets was increased by $161,000 and $54,000 during 2007
and 2006 to reflect state net operating losses that management does not
believe will be utilized before they expire. During 2006 the allowance for
deferred tax assets was reduced by $657,000 to reflect previously reserved
foreign tax credit carry forwards expected to be
realized.
|
63
SELECTED
QUARTERLY FINANCIAL DATA (UNAUDITED)
|
Quarters
ended
|
March
31
|
June
30
|
September
30
|
December
31
|
||||||||||||
|
(in
thousands except per share data)
|
||||||||||||||||
|
2008
|
||||||||||||||||
|
Revenues
|
$ | 197,227 | $ | 214,689 | $ | 237,217 | $ | 227,844 | ||||||||
|
Net
income
|
$ | 14,757 | $ | 22,458 | $ | 25,780 | $ | 20,408 | ||||||||
|
Net
income per share — basic:
|
$ | 0.15 | $ | 0.23 | $ | 0.27 | $ | 0.21 | ||||||||
|
Net
income per share — diluted:
|
$ | 0.15 | $ | 0.23 | $ | 0.26 | $ | 0.21 | ||||||||
|
2007
|
||||||||||||||||
|
Revenues
|
$ | 171,045 | $ | 171,031 | $ | 161,961 | $ | 186,189 | ||||||||
|
Net
income
|
$ | 28,045 | $ | 23,815 | $ | 14,893 | $ | 20,296 | ||||||||
|
Net
income per share — basic:
|
$ | 0.29 | $ | 0.25 | $ | 0.15 | $ | 0.21 | ||||||||
|
Net
income per share — diluted:
|
$ | 0.29 | $ | 0.24 | $ | 0.15 | $ | 0.21 | ||||||||
64