ITEM 1. BUSINESS
RPC, Inc. ("RPC") is a Delaware corporation originally organized in 1984 as part of a spin-off from Rollins, Inc. (NYSE:ROL). Two of RPC's businesses, Cudd Pressure Control ("Cudd") and Patterson Services ("Patterson"), have been conducted for more than 20 years. Effective February 28, 2001, RPC completed the spin-off of its powerboat manufacturing business through a distribution of shares in Marine Products Corporation ("Marine Products"). See "Discontinued Operation" for additional information.
RPC provides a broad range of specialized oilfield services and equipment primarily to independent and major oilfield 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 other things, (1) snubbing services, (2) coiled tubing services, (3) pressure pumping services, (4) marine services, (5) firefighting and well control, and (6) the rental of drill pipe and other specialized oilfield equipment. RPC acts as a holding company for its operating subsidiaries, Cudd Pressure Control, Inc., Patterson Services, Inc. and Patterson Tubular Services, Inc. together with several smaller non-core businesses.
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 these service lines within each of the segments as well as the economic and business conditions impacting their business activity levels. The other business segment includes information concerning RPC's business units that do not qualify for separate segment reporting. These business units include an overhead crane fabricator, an enhanced facsimile service provider and other non-oilfield research and development operations. The research and development operations have been scaled back since approximately 1997.
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 are generally directed toward improving the flow of oil and natural gas from producing formations or to address well control issues. The Technical Services business segment consists primarily of snubbing, coiled tubing, pressure pumping, nitrogen, well control, down-hole tools, wire line, fluid pumping, hot-tapping, gate valve drilling and casing installation services. The principal markets for this business segment include the United States, including the Gulf of Mexico, mid-continent, southwest and Rocky Mountain regions, and international locations including primarily Algeria and Venezuela. 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, work platform marine vessels, 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, Gulf of Mexico and mid-continent regions. Customers include domestic operations of major multi-national and independent oil and gas producers.
TECHNICAL SERVICES The following is a description of the primary service lines conducted within the Technical Services business segment.
SNUBBING. Snubbing involves using a high-pressure workover rig that permits an operator to repair damaged casing, production tubing and down-hole production equipment in a high-pressure environment. Using a series of highly sophisticated blowout
prevention devices, a snubbing unit makes it possible to remove and replace down-hole equipment in a pressurized environment. Customers benefit because these operations can be performed without removing the pressure from or "killing" the well. "Killing" a well can result in formation damage and may cause difficulties on the subsequent repressurization. Typically, performing snubbing workover operations can be done quickly and is therefore more cost effective than alternative procedures. Since snubbing is a very hazardous process that entails high risk, the snubbing segment of the oil and gas services industry is limited to a few operators who have the experience and knowledge required to safely and efficiently perform such services.
COILED TUBING. Coiled tubing services 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 five inches manufactured in continuous lengths of thousands of feet and wound or coiled around a large reel on a truck or skid-mounted unit. Due to the small diameter of coiled tubing, 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 include: (i) not having to "shut-in" the well during such operations, thereby allowing production to continue and reducing the risk of formation damage to the well, (ii) the ability to reel continuous coiled tubing in and out of a well significantly faster than conventional pipe which must be jointed and unjointed, (iii) the ability to direct fluids into a wellbore with more precision, allowing for localized stimulation treatments and providing a source of energy to power a down-hole motor or manipulate down-hole tools and (iv) enhanced access to remote or offshore fields due to the smaller size and mobility of a coiled tubing unit. Recent technological improvements to coiled tubing have increased its dependability and durability, expanding coiled tubing's potential uses and markets.
PRESSURE PUMPING SERVICES. Cudd provides pumping services to customers throughout the Gulf Coast and mid-continent regions of the United States. Cudd utilizes complex, truck-or skid-mounted equipment designed and constructed for each specific pumping service offered. After such equipment is moved to a well location, it is configured with appropriate connections to perform the specific services required. The mobility of this equipment permits Cudd to provide pressure pumping services 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 Cudd utilizes more than one supplier for each item. Pressure Pumping Services offered include:
Fracturing - Fracturing services are performed to enhance the production of oil and natural gas from formations where the well's natural flow is restricted due to permeability issues. The fracturing process consists of pumping a fluid gel into a cased well at sufficient pressure to "fracture" the formation. Sand, bauxite or synthetic proppant, which is suspended in the gel, is pumped into the fracture to prop it open. The main pieces of equipment used in the fracturing process are the blender, which blends the proppant and chemicals into the fracturing fluid, the pumping unit, which is capable of pumping significant volumes at high pressures, and a monitoring van loaded with real time monitoring equipment and computers used to control the fracturing process. In some cases, fracturing is performed by an acid solution pumped under pressure without a proppant or with small amounts of proppant. An important element of fracturing services is the design of the fracturing treatment, which includes determining the proper fracturing fluid, proppants and injection program to maximize results. Cudd's field engineering staff provides technical evaluation and job design recommendations as an integral element of its fracturing services.
Acidizing - Acidizing services are performed to enhance the flow rate of oil and natural gas from wells with reduced flow caused by formation damage due to drilling or completion fluids, or the buildup over time 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. Cudd maintains a fleet of mobile acid transport and pumping units to provide acidizing services for the onshore market.
NITROGEN. There are a number of uses for nitrogen, an inert gas, in pressure pumping operations. Used alone, it is effective in displacing fluids in various oilfield applications, including underbalanced drilling and pipeline purging. Nitrogen services are used principally in applications which support Cudd's coiled tubing, snubbing and pressure pumping services.
WELL CONTROL. Cudd Pressure Control specializes in responding to and controlling oil and gas well emergencies, including blowouts and well fires domestically and internationally. In connection with these services, Cudd, along with Patterson Services, has the capacity to supply the equipment, expertise and personnel necessary to contain the oil and hazardous materials spills and discharges associated with such oil and gas well emergencies, to remediate affected sites and to restore affected oil and gas wells to production. In the last five years, Cudd has responded to well control situations in several international locations including Argentina, Australia, Bolivia, Colombia, Egypt, India, Peru, Taiwan and Venezuela.
Cudd Pressure Control's professional firefighting staff has more than 340 years of aggregate industry experience in responding to well fires and blowouts. This team of 17 experts responds to well control projects where hydrocarbons are escaping from a well bore, regardless of whether a fire has occurred. In the most critical situations, there are explosive fires, loss of life, the destruction of drilling and production facilities, substantial environmental damage and the loss of hundreds of thousands of
dollars per day in 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 into high-pressure reservoirs. In these situations, the blowout preventers and other safety systems on the drilling rig function according to design and Cudd is then called upon to supervise and assist in the well control effort so that drilling operations can resume as promptly as safety permits.
DOWN-HOLE TOOLS. Cudd Pressure Control's division ThruTubing Solutions (TTS) provides proprietary down-hole motors and fishing tools to operators and service companies throughout the oil and gas industry. TTS' experience for reliable tool services allows it to work with virtually any coiled tubing unit or snubbing unit that is equipped for the task. TTS' engineered solutions are backed by more than 70 years of "hands on" experience.
WIRELINE SERVICES. Cudd provides mechanical wireline services. A wireline unit is a spooled wire that can be unwound and lowered into a well carrying various types of tools. Wireline services are used for a variety of purposes, such as: accessing a well to assist in data acquisition or logging activities, fishing tool operations to retrieve lost or broken equipment, pipe recovery, and remedial activities. In addition, wireline services are an integral part of plug and abandonment services.
SPECIAL SERVICES. When a valve malfunctions, the only solution may be to drill out the gate or the plug. If pressure is trapped, hot-tapping, a technique of drilling into a medium that is under pressure, is one method of relieving that pressure. Cudd Pressure Control maintains hot-tapping and valve drilling equipment capable of drilling out valve seats in an environment with up to 15,000 psi working pressure and hydrogen sulfide. In order to isolate wellheads, valves and other circulating equipment from subsurface or upstream pressure, Cudd Pressure Control also performs freezing operations.
CASING AND TORQUE-TURN SERVICES. Casing and laydown principally consists of installing casing and production tubing into a wellbore. Casing is run to protect the structural integrity of the wellbore and to seal various zones in the well. These services are normally provided during the drilling and completion phases of a well. Production tubing is run inside the casing. Oil and natural gas are produced through the tubing. These services are provided during the completion and workover phases.
Torque-Turn is used on tubulars in the deeper, higher pressure gas wells where connection integrity and leak resistance are most critical. By monitoring the makeup of connections with both torque and turns simultaneously, we are able to achieve the optimum bearing pressure between the connection. The level of bearing pressure directly affects the leak resistance of the connection. The use of the Torque-Turn system allows us to obtain the maximum bearing pressure without permanently deforming the material.
SUPPORT SERVICES The following is a description of the primary service lines conducted within the Support Services business segment.
RENTAL TOOLS - RPC rents specialized equipment for use with onshore and offshore oil and gas well drilling, completion and workover activities. The drilling and operation of oil and gas wells generally requires a variety of equipment. The equipment needed is in large part determined by the geological features of the well area and the size of the well itself. As a result, operators and drilling contractors often find it more economical to supplement their inventories with rental tools instead of maintaining a complete inventory of tools. RPC is strategically located to serve the major staging points for oil and gas activities in the Gulf of Mexico and mid-continent regions.
RPC, through Patterson Rental Tools, offers a broad range of rental tools including:
Blowout Preventors High Pressure Manifolds Coflexip Hoses Hydraulic Torque Wrenches Drill Collars Power Tongs Drill Pipe Pressure Control Equipment Flow Iron Test Pumps Gravel Pack Equipment Tubing Handling Tools Tubulars Hevi-wate Tubular Handling Tools
MARINE SERVICES. A liftboat is a self-propelled, self-elevating work platform with legs, cranes and living accommodations. Our fleet consists of five liftboats, two of which have leg lengths of 200 feet or more. Upon arriving at a destination, a liftboat hydraulically lowers its legs until they are positioned on the ocean floor, and then jacks up until the work platform is sufficiently above the water level. Once positioned, the stability, open deck area, crane capacity, and relatively low cost of operation make liftboats ideal work platforms for a wide range of offshore activity from platform construction to plug and abandonment services. Our liftboats have either one or two cranes with lift capacities up to 75 tons. A liftboat's capability to reposition at a work site or to move to another location within a short time adds to its versatility. These boats are also subcontracted to customers in a bare
boat charter, whereby RPC provides only the crew to operate the boat. In addition, liftboat services are also highly complementary to RPC's service lines within the Technical Services business segment as it relates to providing services offshore.
PIPE INSPECTION AND HANDLING SERVICES. Pipe inspection services involve the inspection and testing of the integrity of pipe used in oil and gas wells. These services are provided primarily at RPC's inspection yards located on a water channel near Houston, Texas, and in Morgan City, Louisiana. Customers rely on tubular inspection services to avoid failure of in-service tubing, casing, flowlines, and drill pipe. Such tubular failures are expensive and in some cases catastrophic. All inspection equipment is maintained and calibrated in strict compliance with required specifications. In addition to electromagnetic inspections of tubulars from 2 3/8" to 13 5/8" and full length ultrasonic inspection of tubulars from 2 3/8" to 20," RPC offers ultrasonic weld line inspections and complete thread gauging. RPC's yard in Houston, Texas is equipped with bulkhead waterfronts, large capacity cranes, specially designed forklifts, and a computerized inventory system to serve a variety of other storage and handling issues.
WELL CONTROL SCHOOL. Well Control School provides industry and government accredited training for the oil and gas industry. Well Control School provides this training in various formats including conventional classroom training, interactive computer training and mobile simulator training. Well Control School, through its division, Interactive Training Solutions (ITS), also develops customized training solutions for clients.
ENERGY PERSONNEL INTERNATIONAL. Energy Personnel International provides consultants to the oil and gas industry to meet customers' needs for staff engineering and wellsite management.
INDUSTRY UNITED STATES. The United States represents the largest single oilfield services market in the world. RPC provides its services to its U.S. customers through a network of strategic locations including the Gulf of Mexico, the mid-continent, the southwest and the Rocky Mountains. Demand for RPC's services in the U.S. is driven by the current and projected prices of oil and natural gas and the resulting drilling activities. Our business tends to be extremely volatile and fluctuates with the price level of these commodities and customer production-enhancement activities.
Due to aging oilfields and lower-cost sources of oil internationally, drilling activity in the U.S. has declined more than 75% from its peak in 1981. Record low drilling activity levels were experienced in 1986, 1992 and again in 1999, with April 1999 recording the lowest U.S. drilling rig count in recorded history.
Currently, the industry is in the midst of a dramatic increase in drilling activity in North America. At the end of 2000, there were 1,114 working drilling rigs domestically compared to only 797 at the end of 1999, a one year increase of approximately 40 percent. Natural gas has been the key driver of the cyclical recovery thus far. Since 1991, gas drilling rigs have typically represented just over 50 percent of the total drilling rig count. However, gas-directed drilling rigs have averaged approximately 80 percent of the total domestic drilling rig count since the record low seen in the second quarter of 1999. Demand for natural gas is continuing to rise, primarily as a result of increased emphasis on gas-fired power generation. Based on the current demand for natural gas as well as the high depletion rates experienced over the past several years, it is anticipated that gas-directed drilling will represent at least 70 percent of the total drilling rig count in the foreseeable future.
Thus, in North America the demand for our services and products associated with natural gas development is currently more robust than demand related to oil drilling. We expect to see continued improvement in oil exploration and development in 2001 and we expect natural gas development activity will continue in North America at the current improved levels as our customers seek to meet increased demand and to replace depleting reserves and inventory levels.
INTERNATIONAL. RPC operates in several countries including the major international oil and natural gas producing areas of Algeria, Argentina, Bolivia, Colombia, Gabon, Indonesia, Mexico and Venezuela. RPC provides services to its international customers through wholly-owned foreign subsidiaries or branch locations. The international market is somewhat less volatile than the U.S. market although prone to risk of political uncertainties. Due to the significant investment and complexity in international projects, 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. 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 producer in the U.S. International activities have been increasingly important to RPC's results of operations since 1995, when RPC implemented a strategy to expand its international presence.
GROWTH STRATEGIES RPC's primary objective is to provide stockholders with excellent long-term returns on their investment through income growth and asset appreciation. This objective will 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 there exist opportunities for higher market growth or penetration or enhanced returns through consolidations or through the provision of proprietary value-added products and services. RPC does not seek to provide all products and services necessary for the exploration and development of oil and gas reserves. Rather it 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. The oil and gas services business is generally characterized by a small number of dominant global competitors and a significant number of locally oriented businesses, many of which tend to be viable acquisition targets. RPC believes that the owners of locally oriented companies may be willing to consider becoming part of a larger organization.
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 workover activity worldwide. RPC's principal customers consist of major and independent oil and natural gas producing companies. During 2000 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.
COMPETITION RPC operates in highly competitive areas of the oilfield services industry. The products and services of each of RPC's principal industry segments are sold in highly competitive markets, and its revenues and earnings are affected by changes in prices, fluctuations in the level of activity in major markets, general economic conditions and governmental regulation. RPC competes with the oil and gas industry's largest integrated oilfield services companies. RPC believes that the principal competitive factors in the market areas that it serves are product and service quality, availability, price and technical proficiency.
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 owned and unencumbered. 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. RPC believes that its facilities are adequate for its current operations. RPC owns and operates five offshore liftboats, including three in Venezuela and two in the Gulf of Mexico. 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 significantly affected by state and federal laws and other regulations relating to the oil and gas industry. 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.
INTELLECTUAL PROPERTY RPC uses several patented items in its operations, which management believes are important but are not indispensable to RPC's operations. 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.
EMPLOYEES As of December 31, 2000, RPC had approximately 2,300 employees, comprising 1,500 in the continuing operations and 800 in the discontinued operation. None of the employees is represented by a union or covered by a collective bargaining agreement. RPC believes that it has good relations with its employees.
DISCONTINUED OPERATION In January 2000, RPC announced plans to spin-off Chaparral Boats, Inc. ("Chaparral"), the recreational powerboat manufacturing business of RPC, to RPC's stockholders. RPC accomplished the spin-off by contributing 100% of the issued and outstanding stock of Chaparral to Marine Products, a newly formed wholly-owned subsidiary of RPC, and then distributing the common stock of Marine Products to RPC stockholders effective February 28, 2001. As part of the transaction, RPC's stockholders received 0.6 shares of Marine Products common stock for every one share of RPC common stock owned as of February 16, 2001, the record date for the spin-off. Marine Products is listed on the American Stock Exchange and traded under the ticker symbol MPX.
In connection with the spin-off, RPC and Marine Products entered into an Agreement Regarding Distribution and Plan of Reorganization (the "Distribution Agreement"), providing for the principal corporate transactions required to effect the spin-off.
In addition to the Distribution Agreement, RPC and Marine Products also entered into other agreements governing the spin-off and the subsequent relationship between the two companies, including a Tax Sharing Agreement, an Employee Benefits Agreement and a Transition Support Services Agreement.
No consideration was payable by RPC stockholders for the shares of Marine Products common stock received in the spin-off, nor were RPC stockholders required to surrender or exchange shares of RPC common stock or take any other action in order to receive the Marine Products shares pursuant to the spin-off.
RPC's powerboat manufacturing business segment has been classified for accounting purposes as a discontinued operation in light of the spin-off of that business to RPC stockholders. This business is conducted through Marine Products, a newly formed holding company, the primary asset of which consists of the stock of Chaparral.
RISK FACTORS DEMAND FOR OUR PRODUCTS AND SERVICES IS AFFECTED BY THE VOLATILITY OF OIL 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 expenditures of our customers related to the exploration and production of oil and natural gas. When these expenditures 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 reducing expenditures. This would adversely affect our business. A prolonged low level of 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.
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 of each of our principal industry segments are sold in highly competitive markets, and our revenues and earnings may be affected by the following factors: changes in competitive prices, fluctuations in the level of activity and major markets, general economic conditions, and governmental regulation. We compete with the oil and gas industry's 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 will 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 consolidate successfully the operations and assets of any acquired business with our own business. Any inability on our part to consolidate and manage the growth from acquired businesses could have a material adverse effect on our results of operations and financial condition.
OUR OPERATIONS ARE AFFECTED BY ADVERSE WEATHER CONDITIONS. Our operations are directly affected by the weather conditions in the Gulf of Mexico and Gulf Coast regions. Due to seasonal differences in weather patterns, our crews may operate more days in some periods than others. Rainy weather, hurricanes and other storms prevalent in the Gulf of Mexico and along the Gulf Coast throughout the year may also affect our operations. Accordingly, our operating results may vary from quarter to quarter, depending on factors outside of our control.
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 oil and gas services employees in the Gulf Coast region 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 INABILITY TO PERFORM SERVICES FOR A NUMBER OF OUR LARGE EXISTING CUSTOMERS COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR BUSINESS AND OPERATIONS. Our inability to continue to perform services for a number of our large existing customers could have a material adverse effect on our business and operations. Substantially all of our customers are engaged in the energy industry. This concentration of customers 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. While we maintain reserves for potential credit losses, our actual losses have historically been within expectations.
OUR BUSINESS HAS POTENTIAL LIABILITY FOR PERSONAL INJURY AND PROPERTY DAMAGE CLAIMS. 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, this 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 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. This 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 that may arise.
OUR OPERATIONS MAY BE AFFECTED IF WE ARE UNABLE TO COMPLY WITH REGULATORY AND ENVIRONMENTAL LAWS. Our business is significantly affected by 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 drilling for oil and gas 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. 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.
OUR INTERNATIONAL OPERATIONS COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR BUSINESS. Our operations in Venezuela, Algeria and other foreign countries, although presently limited, are subject to risks inherent in doing business in foreign countries. These risks include, but are not limited to, political changes, expropriation, currency restrictions and changes in currency exchange rates, taxes, and boycotts and other civil disturbances. Although it is impossible to predict the likelihood of such occurrences or their effect on our operations, our management believes that these risks are acceptable. However, the occurrence of any one of these events could have a material adverse effect on our operations.
OUR COMMON STOCK PRICE MAY BE ADVERSELY AFFECTED BY CHANGES IN OIL AND GAS PRICES AND THE SUPPLY AND DEMAND FOR OIL AND GAS. Historically, and in recent months in particular, 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. Changes in oil and natural gas prices, changes in the demand for oil and natural gas exploration, and changes in the supply and demand for oil and natural gas have all been factors affecting the price of our common stock.
ITEM 2.
ITEM 2. PROPERTIES
RPC owns or leases 58 offices and operating facilities, comprising 55 properties owned or leased by the continuing operations and 3 properties owned by the discontinued operation. RPC believes its current operating facilities are suitable and adequate to meet current and reasonably anticipated future needs. Descriptions of the major facilities of continuing operations are as follows:
OWNED LOCATIONS Houston, Texas - Pipe storage terminal, inspection shed, and pipe coating facility Irving, Texas - Crane fabrication plant Houma, Louisiana - Oil and gas administrative office
ITEM 3.
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.
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 2000.
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.
PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
RPC common stock is listed for trading on the New York Stock Exchange under the symbol RES. At the close of business on December 31, 2000, there were approximately 2,300 holders of record of common stock. The high and low prices of RPC's common stock for each quarter in the years ended December 31, 2000 and 1999 were as follows:
During 2000 and 1999, RPC declared and paid quarterly cash dividends of $0.035 per common share. Dividends were first paid in the third quarter of 1997.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA The following summary financial data of RPC highlights selected historical financial data and should be read in conjunction with the consolidated financial statements included elsewhere in this document.
(a) EBITDA represents income (loss) from continuing operations before income taxes and interest income, plus depreciation and amortization. EBITDA is not presented as a substitute for income from operations, net income or net cash provided by operating activities. RPC has presented EBITDA data (which is not a measure of financial performance under accounting principles generally accepted in the United States) because such data is used by certain investors to analyze and compare companies on the basis of operating performance, leverage and liquidity, and to determine a company's ability to service debt. (b) Depreciation and amortization was derived from the statement of cash flows. This amount differs from depreciation and amortization presented on the statement of income due to depreciation related to the manufacturing of goods which is included in cost of goods sold and services rendered. (c) Represents employees of continuing operations for all periods presented. (d) Includes assets and stockholders' equity associated with the discontinued operation.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with "Selected Financial Data," and the "Consolidated Financial Statements" included elsewhere in this document. See also "CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING INFORMATION" above.
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 2000 COMPARED TO YEAR ENDED DECEMBER 31, 1999
REVENUES. RPC generated revenues of $184,215,000 in 2000 compared to $107,585,000 in 1999, an increase of $76,630,000 or 71 percent. Revenues increased as a result of improvements in overall customer activity levels domestically and internationally, especially in Venezuela, the start-up of a pressure pumping service line, and several well control jobs in the United States and various international locations, including Egypt and Argentina.
Beginning in the fourth quarter of 1999, revenues began to improve as customer spending increased in response to higher oil and natural gas prices. As of the end of 2000, the number of active drilling rigs in the United States was approximately 40 percent higher than at the end of 1999. Our services that increase production from existing wells have been increasingly in demand as production companies seek to take advantage of the higher prices for oil and natural gas; there has been less customer emphasis on exploration activities until the last two quarters of 2000.
COST OF SERVICES RENDERED AND GOODS SOLD. Cost of services rendered and goods sold were $107,246,000 in 2000 compared to $71,439,000 in 1999. Cost of services rendered and goods sold, as a percent of revenue, decreased from 66 percent in 1999 to 58 percent in 2000. This improvement resulted from an improved operating environment allowing for better utilization of our equipment and personnel. In addition, the increasing industry demand for oil and gas services has allowed for slightly improved pricing.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and administrative expenses were $34,630,000 in 2000 compared to $23,364,000 in 1999. This increase of $11,266,000, or 48 percent, was due to additional overhead required to administer the significant growth in the company's oil and gas services business lines. Selling, general and administrative expenses as a percent of revenues fell from 22 percent in 1999 to 19 percent in 2000.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization were $17,805,000 in 2000, an increase of $1,968,000 or 12 percent compared to $15,837,000 in 1999. This increase in depreciation and amortization results primarily from capital expenditures relating to a new pressure pumping service line, and various maintenance and growth capital expenditures in other oil and gas service lines.
OPERATING PROFIT (LOSS). Operating profit was $24,534,000 in 2000, an increase of $27,589,000 compared to an operating loss of $3,055,000 in 1999. This significant improvement in operating profits resulted from improvements in industry conditions in 2000 compared to 1999.
INTEREST INCOME. Interest income was $1,443,000 in 2000 compared to $1,485,000 in 1999. RPC generates interest income from investment of its available cash primarily in marketable securities. The decrease in interest income results primarily from a decrease in average investable cash balances. See "Liquidity and Capital Resources" for additional explanations.
INCOME (LOSS) FROM CONTINUING OPERATIONS (NET OF INCOME TAXES). RPC's results of continuing operations improved $17,094,000 from a loss of $967,000 in 1999 to an income of $16,127,000 in 2000. This improvement is consistent with the increases in operating profits, as the income tax rate was the same in both periods.
INCOME FROM DISCONTINUED OPERATION (NET OF INCOME TAXES). RPC's powerboat manufacturing segment, classified as a discontinued operation, earned $13,961,000 in 2000 compared to $9,118,000 in 1999, an increase of $4,843,000 or 53 percent. This increase was primarily due to the after-tax gain of $4,227,000 from the settlement of a claim.
YEAR ENDED DECEMBER 31, 1999 COMPARED TO YEAR ENDED DECEMBER 31, 1998
REVENUES. RPC generated revenues of $107,585,000 in 1999 compared to $140,777,000 in 1998, a decrease of $33,192,000 or 24 percent. The decrease in revenues during 1999 was similar to that experienced by the overall oil and gas services industry and was the result of a perceived imbalance between the supply and demand for oil and natural gas. Despite a significant improvement in the price of oil and natural gas during 1999, exploration and production spending increased only modestly.
COST OF SERVICES RENDERED AND GOODS SOLD. Cost of services rendered and goods sold were $71,439,000 in 1999 compared to $83,691,000 in 1998, a decrease of $12,252,000 or 15 percent. Cost of services rendered and goods sold as a percent of revenues increased to 66 percent in 1999 compared to 59 percent in 1998. This increase was the result of significantly lower utilization of our equipment and personnel combined with softness in pricing experienced as a result of declines in overall oil and gas industry activity levels.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and administrative expenses were $23,364,000 in 1999 compared to $30,529,000 in 1998, a decrease of $7,165,000 or 24 percent. The decrease in selling, general and administrative expenses in 1999 compared to 1998 can be attributed to RPC's efforts to reduce overhead in its oil and gas services businesses because of the reduction in industry activity levels. Also contributing to the reduction was RPC's decision to discontinue some business development efforts unrelated to the oil and gas services industry. Selling, general and administrative expenses as a percent of revenues were 22 percent for 1999 and 1998.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization were $15,837,000 in 1999 compared to $14,877,000 in 1998, an increase of $960,000 or 6 percent. This increase can be attributed to the capital expenditures in 1998 and 1999 to both rebuild certain of RPC's existing oil and gas services equipment and expand our fleet of equipment.
OPERATING PROFIT (LOSS). RPC experienced an operating loss in 1999 of $3,055,000 compared to an operating profit of $11,680,000 in 1998, a decrease of $14,735,000. This decrease in operating profits resulted from the rapid decreases in revenues experienced during 1999 due to poor industry conditions. RPC was not able to decrease its costs as quickly as revenues declined.
INTEREST INCOME. Interest income was $1,485,000 in 1999 compared to $1,783,000 in 1998. Interest income decreased 17 percent as a result of lower average investable cash balances and moderately lower yields. RPC generates interest income from investment of its available cash primarily in marketable securities. The amount of cash available for investment varies. See "Liquidity and Capital Resources" for additional explanations.
INCOME (LOSS) FROM CONTINUING OPERATIONS (NET OF INCOME TAXES). RPC's results of continuing operations, net of income taxes, declined $9,318,000 to a loss of $967,000 in 1999 compared to an income of $8,351,000 in 1998. This decrease is consistent with the decrease in revenues partially offset by decreases in selling, general and administrative expenses. The income tax rates were the same in both periods.
INCOME FROM DISCONTINUED OPERATION (NET OF INCOME TAXES). RPC's powerboat manufacturing segment, classified as a discontinued operation, earned $9,118,000 in 1999 compared to $7,674,000 in 1998, a 19 percent increase. The increase was due to several factors including, selling 8 percent more boats and selling a larger quantity of higher priced and more profitable deckboats and cruisers.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by continuing operations was $11,272,000 in 2000 compared to $16,419,000 in 1999. The decrease is due primarily to higher working capital requirements necessary to support the increased level of oil and gas services business activity levels. The higher working capital, primarily accounts receivable, was partially offset by increases in net income from continuing operations.
Net cash used for investing activities increased from $16,352,000 in 1999 to $19,890,000 in 2000. Capital expenditures in 2000 were $35,526,000 related to the purchase of revenue producing equipment primarily in the oil and gas services businesses. Funding for capital requirements over the next twelve months is expected to be provided by available cash and marketable securities and cash flow generated from continuing operations.
Net cash used for financing activities was $4,392,000 in 2000 compared to $9,388,000 in 1999. This decrease is due primarily to less stock repurchased in 2000 compared to 1999.
In connection with the spin-off, RPC transferred approximately $13.8 million in cash to Marine Products.
Management has commenced preliminary discussions with a number of companies engaged in complementary businesses to explore the potential for mutually beneficial business arrangements. While none of these discussions has progressed to the point where RPC believes a particular transaction is probable, management believes that additional acquisitions, joint ventures and strategic alliances are likely. While RPC has historically completed acquisitions using a combination of cash and seller financing, RPC expects that it may use its stock as acquisition currency now that it is separated from its powerboat manufacturing business segment.
ITEM 7A.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
RPC maintains an investment portfolio, comprised of U.S. Government and corporate debt securities, which is subject to interest rate risk exposure. This risk is managed through conservative policies to invest in high-quality obligations. RPC has performed an interest rate sensitivity analysis using a duration model over the near term with a 10 percent change in interest rates. RPC's portfolio is not subject to material interest rate risk exposure based on this analysis, and no material changes in market risk exposures or how those risks are managed is expected.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
CONSOLIDATED BALANCE SHEETS RPC, INC. AND SUBSIDIARIES (IN THOUSANDS EXCEPT SHARE INFORMATION)
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
CONSOLIDATED STATEMENTS OF INCOME RPC, INC. AND SUBSIDIARIES (IN THOUSANDS EXCEPT PER SHARE DATA)
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY RPC, INC. AND SUBSIDIARIES (IN THOUSANDS)
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
CONSOLIDATED STATEMENTS OF CASH FLOWS RPC, INC. AND SUBSIDIARIES
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS RPC, INC. AND SUBSIDIARIES YEARS ENDED DECEMBER 31, 2000, 1999, AND 1998
NOTE 1: SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the accounts of RPC, Inc. and its wholly-owned subsidiaries ("RPC"or the "Company"). All material intercompany accounts and transactions have been eliminated. On February 28, 2001, the Company distributed the Powerboat Manufacturing Segment of the Company to RPC stockholders through a tax-free spin-off transaction. Accordingly, as discussed in Note 2, this segment has been accounted for as a discontinued operation and the accompanying consolidated financial statements for all periods presented have been restated to report separately the net assets and operating results of this discontinued operation.
NATURE OF OPERATIONS RPC provides a broad range of specialized oil and gas services and equipment primarily to independent and major oilfield companies engaged in the exploration, production and development of oil and gas properties in the United States, including the Gulf of Mexico, mid-continent, southwest and Rocky Mountain regions, and in selected international markets. These services and equipment include among other things, (1) snubbing services, (2) coiled tubing services, (3) firefighting and well control, and (4) the rental of drill pipe and other specialized oilfield equipment. RPC acts as a holding company for its operating subsidiaries, Cudd Pressure Control, Inc., Patterson Services, Inc. and Patterson Tubular Services, Inc. along with several smaller non-oilfield businesses.
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.
REVENUES The Company's revenue recognition policy is in accordance with the Securities and Exchange Commission's recently released Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements" which clarifies the basic criteria for recognizing revenue. RPC recognizes revenue when an agreement exists, prices are determinable, services and products are delivered and collectibility is reasonably assured.
CASH EQUIVALENTS Highly liquid investments with original maturities of 3 months or less are considered to be cash equivalents.
MARKETABLE SECURITIES RPC maintains cash equivalents and investments in several large, well-capitalized financial institutions, and RPC's policy disallows investment in any securities rated less than "investment grade" by national rating services.
Management determines the appropriate classification of debt securities at the time of purchase and re-evaluates such designations as of each balance sheet date. Debt securities are classified as available-for-sale because the Company does not have the intent to hold the securities to maturity. Available-for-sale securities are stated at their fair values, with the unrealized gains and losses, net of tax, reported in a separate component of stockholders' equity. As of December 31, 2000 and l999, the unrealized gains or losses were immaterial. The amortized cost of debt securities classified as available-for-sale is adjusted for amortization of premiums and accretion of discounts to maturity. Such amortization is included in investment income. Realized gains and losses and declines in value judged to be other than temporary on available-for-sale securities are included in investment income. The cost of securities sold is based on the specific identification method. Interest and dividends on securities classified as available-for-sale are included in interest income.
Investments with original maturities between 3 and 12 months are considered to be current marketable securities. Investments with original maturities greater than 12 months are considered to be noncurrent marketable securities.
INVENTORIES Inventories, which consist principally of (i) products which are consumed in RPC's services provided to customers, (ii) spare parts for equipment used in providing these services and (iii) manufacturing components and attachments for equipment used in providing services, are recorded at the lower of cost (first-in, first-out basis) or market value.
LONG-LIVED ASSETS 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 are other than temporary. Management believes that the long-lived assets in the accompanying balance sheets are appropriately valued.
PROPERTY, PLANT AND EQUIPMENT Depreciation is provided principally on a straight-line basis over the estimated useful lives of assets. Annual provisions for depreciation are computed using the following useful lives: operating equipment and property, 3 to 10 years; buildings and leasehold improvements, 15 to 30 years; furniture and fixtures, 5 to 7 years; and vehicles, 3 to 5 years. The cost of assets retired or otherwise disposed of and the related accumulated depreciation are eliminated from the accounts in the year of disposal with the resulting gain or loss credited or charged to income. Expenditures for additions, major renewals, and betterments are capitalized.
INTANGIBLES Intangibles represent the excess of the purchase price over the fair value of net assets of businesses acquired and noncompete agreements related to businesses acquired. Intangibles are presented net of accumulated amortization and are amortized using the straight-line method over a period not exceeding 20 years or the period of the noncompete agreement. Amortization of intangibles for the years ended December 31, 2000, 1999, and 1998 amounted to approximately $717,000, $594,000, and $464,000, respectively.
INSURANCE EXPENSES RPC self insures, up to specified limits, certain risks related to general liability, product liability, workers' compensation, and vehicle liability. The estimated cost of claims under the self-insurance program is 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 noncurrent portion of these estimated outstanding claims 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.
EARNINGS PER SHARE Statement of Financial Accounting Standards ("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 restricted shares included in diluted earnings per share, but excluded in basic earnings per share. A reconciliation of the weighted shares outstanding is as follows:
NEW ACCOUNTING STANDARDS SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," establishes accounting and reporting standards for derivative instruments including certain derivative instruments embedded in other contracts, and for hedging activities. It requires entities to recognize all instruments as either assets or liabilities in the balance sheet and measure those instruments at fair value. As amended, the adoption of SFAS No. 133, effective for the Company as of January 1, 2001, did not impact the results of operations or financial condition of the Company as the Company is not a party to any derivative transactions that fall under the provisions of this statement.
NOTE 2: DISCONTINUED OPERATION
In January 2000, the Board of Directors of RPC, Inc. announced that it planned to spin-off to stockholders the business conducted through Chaparral Boats, Inc. ("Chaparral"), RPC's Powerboat Manufacturing Segment (the "spin-off"). The spin-off transaction was approved by RPC's Board of Directors on February 12, 2001. RPC accomplished the spin-off by contributing 100% 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. RPC stockholders received 0.6 shares of Marine Products Common Stock for each share of RPC Common Stock owned as of the record date. Based on an Internal Revenue Service Private Letter ruling, the spin-off is tax-free to RPC and RPC stockholders, except for cash received for any fractional shares. The spin-off was consummated on February 28, 2001, with 17,012,277 shares of Marine Products Common Stock distributed to RPC stockholders.
The Powerboat Manufacturing Segment of RPC has been accounted for as a discontinued operation and, accordingly, the accompanying consolidated financial statements of RPC have been restated to report separately the net assets and operating results of this discontinued operation. A summary of the net assets of this segment is as follows:
A summary of the operating results of RPC's Powerboat Manufacturing Segment is as follows:
In conjunction with the spin-off, RPC and Marine Products have entered into various agreements that address the allocation of assets and liabilities between the two companies and that define the companies' relationship after the separation. These include the Distribution Agreement and Plan of Reorganization, the Transition Support Services Agreement, the Employee Benefits Agreement, and the Tax Sharing Agreement.
The Distribution Agreement and Plan of Reorganization provides for the principal corporate transactions required to effect the spin-off including the distribution ratio of Marine Products shares to RPC shares, the contribution of cash by RPC to Marine Products at the date of the spin-off, and the cancellation of any remaining intercompany balances.
The Transition Support Services Agreement provides for RPC to provide certain services, including financial reporting and income tax administration, acquisition assistance, etc. to Marine Products until the agreement is terminated by either party. During 2000, 1999, and 1998, RPC allocated expenses for these services to Marine Products totaling $2,372,000, $1,966,000, and $1,777,000, respectively. The allocation was based on Marine Products' revenues as a percent of RPC's total revenues. Management believes that such allocation methodology is reasonable. The costs allocated to Marine Products for these services are not necessarily indicative of the costs that would have been incurred if Marine Products had been a separate, independent entity and had otherwise independently managed these functions. Subsequent to the spin-off, Marine Products will reimburse RPC for its allocable share of costs incurred for services rendered on behalf of Marine Products.
The Employee Benefits Agreement provides for Marine Products to continue participating subsequent to the spin-off in two RPC sponsored benefit plans, specifically, the defined contribution 401(k) plan and the defined benefit retirement income plan. It also sets forth the method of handling the stock options and other stock incentive awards issued to RPC employees that will be employed by Marine Products subsequent to the spin-off.
The Tax Sharing Agreement provides for the treatment of income tax matters for periods through the date of the spin-off and responsibility for any adjustments as a result of audit by any taxing authority. The general terms provide for the indemnification for any tax detriment incurred by one party caused by the other party's action.
In the first quarter of 2000, RPC recorded an after-tax gain of $4,227,000 in its powerboat manufacturing business segment. The gain is a result of Chaparral's receipt of its share of a non-refundable $35 million settlement payment made by Brunswick Corporation (Brunswick), a major engine supplier, to the members of the American Boatbuilders Association (ABA), a buying group which includes Chaparral. Under the terms of this agreement between the ABA and Brunswick, additional payments were to be made to the ABA depending on the final judgment or settlement of a lawsuit brought by Independent Boatbuilders Association (IBBI), another buying group supplied engines by Brunswick. In March 2000, the U.S. Court of Appeals for the Eighth Circuit ordered the trial court to enter a judgment for Brunswick, thereby reversing the initial decision in favor of IBBI. No additional payments will be received by Marine Products in connection with this settlement.
NOTE 3: ACCOUNTS RECEIVABLE
Accounts receivable, net, at December 31, 2000, of $55,485,000 and at December 31, 1999, of $33,454,000 are net of allowances for doubtful accounts of $4,994,000 in 2000 and $4,590,000 in 1999.
NOTE 4: INVENTORIES
Inventories consist of the following:
NOTE 5: PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are presented at cost net of accumulated depreciation and consist of the following:
Depreciation expense amounted to $17,278,000, $15,368,000, and $14,473,000 for the years ended December 31, 2000, 1999, and 1998, respectively.
NOTE 6: INCOME TAXES
The following table lists the components of the provision (benefit) for income taxes from continuing operations:
A reconciliation between the federal statutory rate and RPC's effective tax rate is as follows:
The components of the net deferred tax assets (liabilities) of continuing operations are as follows:
Total income tax payments, net of refunds, were $13,825,000 in 2000, $1,616,000 in 1999, and $12,765,000 in 1998.
NOTE 7: PAYABLE TO MARINE PRODUCTS CORPORATION
At December 31, 2000 and 1999, the consolidated balance sheets reflect a Payable to Marine Products Corporation. This represents the amount of cash transferred from Marine Products to RPC since RPC's acquisition of Chaparral in 1986. Subsequent to year-end, effective with the spin-off, RPC established a cash balance at Marine Products of approximately $15 million by contributing approximately $13.8 million. The remaining Payable to Marine Products totalling approximately $53.6 million was cancelled and RPC's retained earnings was increased by an equal amount.
NOTE 8: LONG-TERM DEBT
At December 31, 2000, future minimum payments on long-term debt and capitalized lease obligations were as follows:
The long-term debt of RPC as of December 31, 2000, and December 31, 1999, is summarized as follows:
The net book value of equipment under capital leases was $712,100 at December 31, 2000.
NOTE 9: COMMITMENTS AND CONTINGENCIES
Minimum annual rentals, principally for noncancelable real estate leases with terms in excess of one year, in effect at December 31, 2000, are summarized in the following table:
Total rental expense charged to operations was $3,110,000 in 2000, $2,014,000 in 1999, and $2,514,000 in 1998.
RPC is a defendant in a number of lawsuits which allege that plaintiffs have been damaged as a result of the rendering of services by RPC personnel and equipment. RPC is vigorously contesting these actions. Management is of the opinion that the outcome of these lawsuits will not have a material adverse effect on the financial position, results of operations or liquidity of RPC.
NOTE 10: STOCK-BASED COMPENSATION
SFAS No. 123, "Accounting for Stock-Based Compensation" defines a fair value-based method of accounting for an employee stock option plan or similar equity instrument. However, it also allows an entity to continue to measure compensation cost for those plans using the method of accounting prescribed in Accounting Principles Board ("APB") Opinion No. 25. Entities electing to remain with the accounting in APB No. 25 must make pro forma disclosures of net income and earnings per share, as if the fair value-based method of accounting defined in the statement had been applied.
RPC has elected to account for its stock-based compensation plans under APB No. 25. The Company has computed for pro forma disclosure purposes the value of all options granted during 2000, 1999, and 1998 using the Black-Scholes option pricing model as prescribed by SFAS No. 123 using the following weighted average assumptions for grants:
The total fair value of options granted to RPC and Marine Products employees was computed as follows:
The total fair value of options granted would be amortized over the vesting period of the options. If RPC had accounted for these plans in accordance with SFAS No. 123, RPC's reported pro forma net income and pro forma diluted net income per share would have been as follows:
NOTE 11: EMPLOYEE BENEFIT PLANS
RETIREMENT PLAN RPC has a tax-qualified defined benefit, noncontributory, trusteed retirement income plan that covers substantially all RPC and Marine Products employees with at least one year of service. Benefits are based on an employee's years of service and compensation near retirement. RPC has the right to terminate or modify the plan at any time.
SFAS No. 132, "Employers' Disclosures About Pensions and Other Post Retirement Benefits," standardizes the disclosure requirements for pensions and other post retirement benefits to the extent possible.
The following table sets forth the funded status of the retirement income plan and the amounts recognized in RPC's consolidated balance sheets:
RPC's funding policy is to contribute to the retirement income plan the amount required, if any, under the Employee Retirement Income Security Act of 1974. RPC contributed $1,052,000 to the retirement income plan in 2000. No contributions were required in 1999 and 1998.
The net accrued benefit cost is included on the balance sheet in the line item Accrued payroll and related expenses.
The components of net periodic benefit cost are summarized as follows:
Total retirement plan cost attributable to Marine Products, which is included in net periodic benefit cost above, was $147,000 in 2000, $136,000 in 1999, and $127,000 in 1998.
The weighted average assumptions were as follows:
401(k) PLAN RPC sponsors a defined contribution 401(k) plan that is available to substantially all full-time employees with more than 6 months of service. This plan allows employees to make tax-deferred contributions of up to 15 percent of their annual compensation, not exceeding the permissible deduction imposed by the Internal Revenue Code. RPC matches 40 percent of each employee's contributions up to 3 percent of the employee's compensation. Employees vest in the RPC contributions after 5 years of service. Marine Products will continue participating subsequent to the spin-off in the RPC sponsored defined contribution 401(k) plan. The charges to expense for RPC's continuing operations were $295,000 in 2000, $282,000 in 1999, and $318,000 in 1998. The charges to expense for Marine Products were $76,000 in 2000, $74,000 in 1999, and $74,000 in 1998.
STOCK INCENTIVE PLANS RPC has an Employee Incentive Stock Option Plan (the "1984 Plan") under which 1,000,000 shares of common stock were reserved for issuance. The 1984 Plan expired in October 1994. On January 25, 1994, RPC adopted a new 10-year Employee Stock Incentive Plan (the "1994 Plan") under which 1,000,000 shares of common stock were reserved for issuance. During 1997, an additional 1,600,000 shares were reserved for issuance. These plans provide for the issuance of various forms of stock incentives, including, among others, incentive stock options and restricted stock. Historically, certain RPC employees, including employees of Marine Products, have participated in these RPC Stock Incentive Plans (the "RPC SIP").
In conjunction with the spin-off, Marine Products has adopted a 10-year Employee Stock Incentive Plan (the "Marine Products SIP") under which 2,000,000 shares of common stock have been reserved for issuance to Marine Products employees. The Marine Products SIP provides for the issuance of various forms of stock incentives, including, among others, incentive stock options and restricted stock.
Following the spin-off, outstanding stock option grants under the RPC SIP held by Marine Products employees who will not also be RPC employees will be replaced with the Marine Products SIP stock option grants. The Marine Products SIP grants will have the same relative ratio of the exercise price per option to the market value per share, the same aggregate difference between market value and exercise price and the same vesting provisions, option periods and other applicable terms and conditions as the
RPC SIP stock option grants being replaced. At December 31, 2000 there were 129,800 RPC SIP stock options held by Marine Products employees subject to replacement with Marine Products SIP stock option grants. RPC cannot currently determine the number of shares of Marine Products' common stock that will be subject to substitute grant. As of December 31, 2000, there were 1,351,200 shares available for the granting of options or other awards under the RPC SIP.
Employees of RPC with outstanding options that have not been earned and issued into escrow will be adjusted to account for the spin-off, based on the average trading price of RPC's common stock relative to that of the combined daily average trading prices of one share of RPC and 0.6 shares of Marine Products, in each case during the 10 consecutive trading days beginning on the trading day that is 10 trading days after the effective date of the spin-off.
INCENTIVE STOCK OPTIONS Transactions involving the RPC SIP were as follows:
The weighted average remaining contractual life of options outstanding at December 31, 2000 was 7 years.
RESTRICTED STOCK RPC has granted employees two forms of restricted stock: performance restricted and time lapse restricted. The performance restricted shares are granted, but not earned and issued, until certain 5-year tiered performance criteria are met. The performance criteria are predetermined market prices of RPC stock. On the date the stock appreciates to each level (determination date), 20 percent of performance shares are earned. Once earned, the performance shares vest 5 years from the determination date. Time lapse restricted shares vest 10 years from the grant date. Units granted under these restricted stock programs were 0 in 2000, 90,000 in 1999, and 52,000 in 1998. There were 3,800 performance shares earned under the plans in 2000. During 2000, 1999 and 1998, no shares were forfeited or canceled. Deferred compensation was $1,337,000 and $1,669,000 as of December 31, 2000 and December 31, 1999, respectively. Shares of performance restricted stock totalling 10,000 will be forfeited and replaced with grants of performance restricted stock under the Marine Products SIP pursuant to the spin-off.
Employees of RPC with outstanding performance restricted stock awards that have not been earned and issued into escrow will be adjusted to account for the spin-off, based on average trading price of RPC's common stock relative to that of the combined daily average trading prices of one share of RPC and 0.6 times one share of Marine Products, in each case during the 10 consecutive trading days beginning on the trading day that is 10 trading days after the effective date of the spin-off. In addition, RPC employees with time lapse restricted stock awards or performance restricted stock awards that have been issued and are being held in escrow on their behalf as of the close of business on the record date will receive 0.6 shares of Marine Products common stock for each share of RPC common stock held in escrow as of the close of business on the record date, pursuant to the
spin-off. Any shares of Marine Products common stock received by an RPC employee will also be held in escrow on the same terms as the time lapse or performance restricted stock awards with respect to which they were issued.
The agreements under which the restricted stock is issued provide that shares awarded may not be sold or otherwise transferred until restrictions as established under the RPC SIP have lapsed. Upon termination of employment from RPC or, in certain cases, termination of employment from Marine Products or Chaparral, shares with restrictions must be returned to RPC. As of December 31, 2000, no shares of restricted stock were vested.
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.
Technical services include RPC's oilfield 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 coiled tubing, fluid pumping, nitrogen pumping, fracturing and acidizing services, wireline, snubbing, well control consulting and firefighting, down-hole tools, and casing installation 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 Algeria and Venezuela. Customers include major multi-national and independent oil and gas producers, and selected nationally-owned oil companies.
Support services include RPC's oilfield 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, work platform marine vessels, 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. Customers include domestic operations of major multi-national and independent oil and gas producers.
The other business segment includes information concerning RPC's business units that do not qualify for separate segment reporting. These business units include an overhead crane fabricator, an enhanced facsimile service provider and other non-oilfield business development activities.
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 earnings before interest, taxes, depreciation and amortization and other non-cash charges (EBITDA). RPC's balance sheets are generally managed on a consolidated basis and therefore it is impractical to report assets by business segment.
Summarized financial information concerning RPC's reportable segments from continuing operations for the years ended December 31, 2000, 1999, and 1998 are shown in the following table.
The following summarizes selected information between the United States and all international locations combined for the years ended December 31, 2000, 1999, and 1998. 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.
PART III
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information concerning directors and executive officers is included in the RPC Proxy for its 2001 Annual Meeting of Stockholders, in the sections entitled "Election of Directors" and "Section 16(a) Beneficial Ownership Reporting Compliance." This information is incorporated herein by reference. Information about executive officers is contained on page 9.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION Information concerning executive compensation is included in the RPC Proxy for its 2001 Annual Meeting of Stockholders, in the section entitled "Executive Compensation." This information is incorporated herein by reference.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information concerning security ownership is included in the RPC Proxy for its 2001 Annual Meeting of Stockholders, in the sections entitled "Capital Stock" and "Election of Directors." This information is incorporated herein by reference.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information concerning certain relationships and related transactions is included in the RPC Proxy for its 2001 Annual Meeting of Stockholders, in the sections entitled "Certain Relationships and Related Transactions" and "Compensation Committee Interlocks and Insider Participation." This information is incorporated herein by reference.
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
The following documents are filed as part of this report.
EXHIBITS
REPORTS ON FORM 8-K
On December 8, 2000, the Company filed a report announcing its plans to spin-off, on a tax free basis, its powerboat manufacturing business, conducted through Chaparral Boats, to its shareholders.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS RPC, INC. AND SUBSIDIARIES (IN THOUSANDS)
SIGNATURES Pursuant to the requirements of Section 13 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. By:
/s/ R. RANDALL ROLLINS - ---------------------------------- R. Randall Rollins Chairman of the Board of Directors (Principal Executive Officer) March 26, 2001
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
The Directors of RPC, Inc. (listed below) executed a power of attorney appointing Richard A. Hubbell their attorney-in-fact, empowering him to sign this report on their behalf.
Wilton Looney, Director Gary W. Rollins, Director James A. Lane, Jr., Director Henry B. Tippie, Director James B. Williams, Director
/s/RICHARD A. HUBBELL - ---------------------------------- Richard A. Hubbell Director and as Attorney-in-fact March 26, 2001
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To RPC, Inc.:
We have audited the accompanying consolidated balance sheets of RPC, Inc. (a Delaware corporation) and subsidiaries as of December 31, 2000 and 1999, and the related consolidated statements of income, stockholders' equity, and cash flows for each of the three years in the period ended December 31, 2000. These financial statements and the schedule referred to below are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from 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 financial statements referred to above present fairly, in all material respects, the financial position of RPC, Inc. and subsidiaries as of December 31, 2000 and 1999, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2000, in conformity with accounting principles generally accepted in the United States.
Our audit was made for the purpose of forming an opinion on the basic financial statements taken as a whole. The schedule listed in Item 14 is presented for the purposes of complying with the Securities and Exchange Commission's rules and is not part of the basic financial statements. This schedule has been subjected to the auditing procedures applied in our audit of the basic financial statements and, in our opinion, fairly states in all material respects, the financial data required to be set forth therein in relation to the basic financial statements taken as a whole.
Atlanta, Georgia Arthur Andersen LLP March 2, 2001
SELECTED QUARTERLY FINANCIAL DATA
OFFICERS
R. RANDALL ROLLINS Chairman of the Board and Chief Executive Officer
RICHARD A. HUBBELL President and Chief Operating Officer
JONATHAN W. MOSS Executive Vice President
LINDA H. GRAHAM Vice President and Secretary
BEN M. PALMER Vice President, Chief Financial Officer and Treasurer
DIRECTORS
R. RANDALL ROLLINS Chairman of the Board and Chief Executive Officer, Rollins, Inc. (consumer services)
HENRY B. TIPPIE*+ Chairman of the Board and Chief Executive Officer, Tippie Services, Inc. (management services)
WILTON LOONEY* Honorary Chairman of the Board, Genuine Parts company (automotive parts distributor)
JAMES A. LANE, JR. President of Chaparral Boats, Inc.
JAMES B. WILLLAMS* Chairman of the Executive Committee, SunTrust Banks, Inc.(bank holding company)
GARY W. ROLLINS President and Chief Operating Officer, Rollins, Inc. (consumer services)
RICHARD A. HUBBELL President and Chief Operating Officer
LINDA H. GRAHAM Vice President and Secretary
*Member of the Audit Committee and Executive Compensation Committee +Chairman of the Audit Committee and Executive Compensation Committee
STOCKHOLDER INFORMATION
CORPORATE OFFICES RPC, Inc. 2170 Piedmont Road, NE Atlanta, Georgia 30324 Telephone: (404) 321-2140
STOCK LISTING The New York Stock Exchange
TICKER SYMBOL RES
NEWSPAPER TABLE STOCK RPC
INVESTOR RELATIONS WEB SITE WWW.RPC.NET
TRANSFER AGENT AND REGISTRAR For inquiries related to stock certificates, including changes of address, please contact: SunTrust Bank, Atlanta Stock Transfer Department PO Box 4625 Atlanta, Georgia 30302 Telephone: (404) 588-7817
ANNUAL MEETING The Annual Meeting of RPC will be held at 9:30 am, April 24, 2001, at the corporate offices in Atlanta, Georgia.