Cactus, Inc. (NYSE:WHD) Q4 2019 Earnings Conference Call February 27, 2020 10:00 AM ET Company Participants John Fitzgerald - Director, Corporate Development & IR Scott Bender - President, Director & CEO Steve Tadlock - VP & CFO Joel Bender - SVP & COO Conference Call Participants George O'Leary - Tudor, Pickering, Holt & Co. Sean Meakim - JP Morgan Scott Gruber - Citigroup Tommy Moll - Stephens Inc. Operator Good morning. And welcome to the Cactus Q4 and Full Year 2019 Earnings Call. My name is May, and I ...

PART I [Item 1. Business](index=5&type=section&id=Item%201.%20Business) Cactus, Inc. designs, manufactures, and sells wellhead and pressure control equipment for onshore unconventional oil and gas wells, with revenues from products, rentals, and services [Overview and Operations](index=5&type=section&id=1.1%20Overview%20and%20Operations) The company specializes in wellhead and pressure control equipment, operating service centers in the U.S. and Australia and manufacturing facilities in Louisiana and China - The company designs, manufactures, and sells wellhead and pressure control equipment, including its proprietary **Cactus SafeDrill® wellhead systems**, frac stacks, and production trees[21](index=21&type=chunk)[28](index=28&type=chunk) - Cactus operates **14 service centers** in key U.S. oil and gas regions, three in Eastern Australia, and has manufacturing facilities in Bossier City, Louisiana, and Suzhou, China[20](index=20&type=chunk)[30](index=30&type=chunk) - Following its IPO in February 2018, Cactus Inc. became a holding company whose primary asset is its equity interest in Cactus LLC, owning approximately **62.8%** as of December 31, 2019[23](index=23&type=chunk)[26](index=26&type=chunk) [Revenue, Costs, and Market Factors](index=8&type=section&id=1.2%20Revenue%2C%20Costs%2C%20and%20Market%20Factors) Revenue is primarily from product sales, with costs significantly impacted by manufacturing inputs and U.S. tariffs on goods from its Chinese supply chain Revenue Breakdown by Source (FY 2019) | Revenue Source | Percentage of Total Revenue | | :--- | :--- | | Product Sales | 57% | | Rental | 22% | | Field Service and Other | 21% | - The principal costs for products are manufacturing-related, rental costs are primarily depreciation and repairs, and field service costs are mainly labor and equipment depreciation[34](index=34&type=chunk) - The company is affected by Section 232 and Section 301 tariffs, with approximately **50% of goods received in 2019** sourced through its Chinese supply chain[36](index=36&type=chunk)[37](index=37&type=chunk) [Supply Chain, Manufacturing, and Competition](index=9&type=section&id=1.3%20Supply%20Chain%2C%20Manufacturing%2C%20and%20Competition) The company utilizes a dual-facility manufacturing strategy in the U.S. and China and competes with major integrated service companies in a highly competitive market - A single vendor in China supplied machined components representing approximately **16% of total third-party vendor purchases** in 2019[39](index=39&type=chunk) - The Bossier City, LA facility is designed for rapid production, while the Suzhou, China facility is optimized for higher-volume orders; **both are API 6A certified**[40](index=40&type=chunk)[42](index=42&type=chunk) - The company competes with major integrated service companies like **Schlumberger, Baker Hughes, and TechnipFMC** in the wellhead market[49](index=49&type=chunk)[50](index=50&type=chunk)[52](index=52&type=chunk) [Regulation, Risk, and Other Information](index=13&type=section&id=1.4%20Regulation%2C%20Risk%2C%20and%20Other%20Information) The business is subject to stringent environmental regulations and manages operational risk through insurance, with over 1,100 employees and no collective bargaining agreements - The company is subject to stringent U.S. and international environmental, health, and safety laws, including the **Clean Water Act, Clean Air Act, and OSHA**[54](index=54&type=chunk)[57](index=57&type=chunk) - Increased regulation of **hydraulic fracturing or climate change policies** could reduce demand for oil and gas, negatively impacting the company's business[59](index=59&type=chunk)[60](index=60&type=chunk) - As of December 31, 2019, Cactus employed **over 1,100 people** and is not a party to any collective bargaining agreements[63](index=63&type=chunk) [Item 1A. Risk Factors](index=17&type=section&id=Item%201A.%20Risk%20Factors) The company faces significant risks from oil and gas industry cyclicality, supply chain disruptions, and financial obligations related to its corporate structure [Industry and Business Risks](index=17&type=section&id=1A.1%20Industry%20and%20Business%20Risks) Performance is highly dependent on volatile commodity prices, customer spending, and operational risks including the coronavirus impact on its Chinese supply chain - Demand for products and services is directly affected by **volatile crude oil and natural gas prices**, which influence customer capital spending and drilling activity[67](index=67&type=chunk)[68](index=68&type=chunk) - The coronavirus outbreak in China led to a **temporary 10-day closure** of the Suzhou facility in early 2020, which could materially impact results if prolonged[77](index=77&type=chunk)[78](index=78&type=chunk) - **Pioneer Natural Resources** was a major customer, representing **10% of total revenue** in 2019[79](index=79&type=chunk) - The company faces intense competition from large, well-resourced companies and is subject to risks from new technologies that could create a competitive disadvantage[83](index=83&type=chunk)[84](index=84&type=chunk) [Corporate and Financial Risks](index=29&type=section&id=1A.2%20Corporate%20and%20Financial%20Risks) Financial risks stem from its holding company structure, substantial payment obligations under the Tax Receivable Agreement, and significant shareholder influence - Cactus Inc. is a holding company **dependent on distributions from Cactus LLC** to pay taxes, dividends, and obligations under the Tax Receivable Agreement (TRA)[108](index=108&type=chunk)[109](index=109&type=chunk) - The TRA requires payments of 85% of certain tax savings to pre-IPO owners, with a potential early termination payment estimated at **$331.3 million** as of Dec 31, 2019[127](index=127&type=chunk)[132](index=132&type=chunk) - As of Dec 31, 2019, major shareholders Cadent and Cactus WH Enterprises control approximately **11% and 24% of the company's voting power**, respectively[112](index=112&type=chunk) - Future sales of the **28.0 million shares of Class A common stock** issuable upon redemption of CW Units could adversely affect the market price[123](index=123&type=chunk)[124](index=124&type=chunk) [Item 2. Properties](index=39&type=section&id=Item%202.%20Properties) The company owns and leases key properties including manufacturing facilities in Louisiana and China, service centers, and its administrative headquarters in Houston Principal Facilities as of December 31, 2019 | Location | Type | Own/Lease | | :--- | :--- | :--- | | **United States** | | | | Bossier City, LA | Manufacturing Facility and Service Center | Lease | | Bossier City, LA | Assembly Facility and Warehouse / Land | Own | | Houston, TX | Administrative Headquarters | Lease | | Hobbs, NM | Service Center / Land | Own | | New Waverly, TX | Service Center / Land | Own | | **China and Australia** | | | | Suzhou, China | Production Facility and Offices | Lease | | Queensland, Australia | Service Centers and Offices / Land | Lease | [Item 3. Legal Proceedings](index=39&type=section&id=Item%203.%20Legal%20Proceedings) The company is involved in routine litigation incidental to its business but does not expect any material adverse financial impact from pending matters - The company is subject to routine litigation related to its business activities but **does not expect any pending cases to have a material adverse effect** on its financial results[141](index=141&type=chunk) PART II [Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities](index=40&type=section&id=Item%205.%20Market%20for%20Registrant's%20Common%20Equity%2C%20Related%20Stockholder%20Matters%20and%20Issuer%20Purchases%20of%20Equity%20Securities) The company's stock trades on the NYSE under "WHD", a quarterly dividend was initiated in 2019, and shares were repurchased to cover employee tax obligations - The company's Class A common stock is traded on the New York Stock Exchange under the symbol **"WHD"**[145](index=145&type=chunk) - On October 29, 2019, the board authorized a regular quarterly cash dividend of **$0.09 per share** of Class A common stock[145](index=145&type=chunk) - In Q4 2019, the company repurchased **740 shares** from employees at an average price of **$28.16** to cover tax withholding on vested restricted stock units[148](index=148&type=chunk)[149](index=149&type=chunk) [Item 6. Selected Financial Data](index=42&type=section&id=Item%206.%20Selected%20Financial%20Data) Historical data shows significant revenue and net income growth since 2016, elimination of long-term debt in 2018, and the initiation of a dividend in 2019 Selected Financial Data (2017-2019) | Metric (in thousands) | 2019 | 2018 | 2017 | | :--- | :--- | :--- | :--- | | Total revenues | $628,414 | $544,135 | $341,191 | | Income from operations | $183,150 | $177,701 | $88,863 | | Net income | $156,303 | $150,281 | $66,547 | | Net income attributable to Cactus Inc. | $85,612 | $51,683 | $0 | | Earnings per Class A share - diluted | $1.88 | $1.58 | $0 | | Total assets | $834,964 | $584,744 | $266,456 | | Long-term debt, net | $0 | $0 | $241,437 | | Cash dividends declared per share | $0.09 | $0 | $0 | [Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations](index=44&type=section&id=Item%207.%20Management's%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) Revenue increased 15.5% in 2019 due to market share gains, but operating income growth was limited by rising costs, while liquidity remains strong with no debt [Market Factors and Recent Developments](index=44&type=section&id=7.1%20Market%20Factors%20and%20Recent%20Developments) Despite a lower U.S. rig count in 2019, performance was supported by drilling trends, though the recent coronavirus outbreak caused a temporary factory shutdown - The average U.S. onshore rig count **decreased by 9% in 2019** to 918 rigs, compared to 1,011 in 2018[158](index=158&type=chunk) - The company's factory in Suzhou, China, was temporarily closed for 10 days due to the coronavirus outbreak but is **not expected to have a material adverse impact on Q1 2020 results**[164](index=164&type=chunk) [Consolidated Results of Operations (2019 vs 2018)](index=47&type=section&id=7.2%20Consolidated%20Results%20of%20Operations%20(2019%20vs%202018)) Total revenues grew 15.5% in 2019, driven by product sales, but a 21.5% rise in costs and expenses constrained operating income growth to 3.1% Consolidated Results of Operations (2019 vs. 2018) | Metric (in thousands) | 2019 | 2018 | % Change | | :--- | :--- | :--- | :--- | | **Total Revenues** | **$628,414** | **$544,135** | **15.5%** | | Product revenue | $357,087 | $290,496 | 22.9% | | Rental revenue | $141,816 | $133,418 | 6.3% | | Field service and other revenue | $129,511 | $120,221 | 7.7% | | **Total costs and expenses** | **$445,264** | **$366,434** | **21.5%** | | **Income from operations** | **$183,150** | **$177,701** | **3.1%** | | **Net income** | **$156,303** | **$150,281** | **4.0%** | | **Net income attributable to Cactus Inc.** | **$85,612** | **$51,683** | **65.6%** | - The **26% increase in cost of product revenue** was driven by higher sales volume and tariff costs[170](index=170&type=chunk) - SG&A expense **increased 27%** due to higher compensation, stock-based compensation, and costs associated with losing Emerging Growth Company (EGC) status[173](index=173&type=chunk) [Liquidity and Capital Resources](index=48&type=section&id=7.3%20Liquidity%20and%20Capital%20Resources) The company maintains strong liquidity with $202.6 million in cash, no debt, and a $75.0 million credit facility, alongside a significant TRA liability - As of December 31, 2019, the company had **$202.6 million in cash**, no outstanding borrowings, and **$75.0 million** of available capacity under its ABL Credit Facility[177](index=177&type=chunk) Cash Flow Summary (2019 vs. 2018) | Cash Flow (in thousands) | 2019 | 2018 | | :--- | :--- | :--- | | Net cash provided by operating activities | $209,632 | $167,180 | | Net cash used in investing activities | ($55,948) | ($68,154) | | Net cash used in financing activities | ($21,669) | ($35,004) | - The company estimates net capital expenditures for 2020 to range from **$30 million to $40 million**[179](index=179&type=chunk) Contractual Obligations as of December 31, 2019 (in thousands) | Obligation | Total | Payments Due 2020 | | :--- | :--- | :--- | | Operating leases | $30,637 | $7,691 | | Finance leases | $11,644 | $7,434 | | Liability related to TRA | $216,532 | $14,630 | | **Total** | **$258,813** | **$29,755** | [Critical Accounting Policies and Estimates](index=52&type=section&id=7.4%20Critical%20Accounting%20Policies%20and%20Estimates) Critical accounting policies involve significant estimates for inventory valuation, asset impairment, income taxes, and the highly complex Tax Receivable Agreement liability - Critical accounting policies require significant management estimates regarding **inventory obsolescence, impairment of long-lived assets, income taxes, and the TRA liability**[192](index=192&type=chunk) - The TRA liability calculation is highly sensitive; a **100 basis point change** in the assumed blended tax rate would change the TRA liability by approximately **$12.0 million**[201](index=201&type=chunk) - The company evaluates long-lived assets for impairment if events indicate the carrying amount may not be recoverable[195](index=195&type=chunk) [Item 8. Financial Statements and Supplementary Data](index=57&type=section&id=Item%208.%20Financial%20Statements%20and%20Supplementary%20Data) This section contains the audited consolidated financial statements and notes, with the auditor's report highlighting the Tax Receivable Agreement as a critical audit matter [Auditor's Report and Management's Assessment](index=58&type=section&id=8.1%20Auditor's%20Report%20and%20Management's%20Assessment) Management and the independent auditor concluded that internal controls were effective, with the auditor issuing an unqualified opinion and flagging the TRA liability as a critical audit matter - Management assessed its internal control over financial reporting as **effective** as of December 31, 2019[212](index=212&type=chunk) - PricewaterhouseCoopers LLP issued an **unqualified audit opinion** on both the consolidated financial statements and the effectiveness of internal control over financial reporting[216](index=216&type=chunk) - The auditor identified the liability related to the **Tax Receivable Agreement (TRA) as a Critical Audit Matter** due to significant complexity and judgment in its calculation[224](index=224&type=chunk)[225](index=225&type=chunk) [Consolidated Financial Statements](index=63&type=section&id=8.2%20Consolidated%20Financial%20Statements) The financial statements show significant asset growth to $835.0 million in 2019, driven by cash and deferred tax assets, with a corresponding increase in liabilities from the TRA Consolidated Balance Sheet Data (as of Dec 31) | (in thousands) | 2019 | 2018 | | :--- | :--- | :--- | | Cash and cash equivalents | $202,603 | $70,841 | | Total current assets | $414,883 | $274,505 | | Total assets | $834,964 | $584,744 | | Total current liabilities | $91,126 | $74,624 | | Liability related to TRA (non-current) | $201,902 | $138,015 | | Total liabilities | $318,569 | $222,416 | | Total stockholders' equity | $516,395 | $362,328 | Consolidated Income Statement Data (Year Ended Dec 31) | (in thousands) | 2019 | 2018 | 2017 | | :--- | :--- | :--- | :--- | | Total revenues | $628,414 | $544,135 | $341,191 | | Income from operations | $183,150 | $177,701 | $88,863 | | Net income | $156,303 | $150,281 | $66,547 | | Net income attributable to Cactus Inc. | $85,612 | $51,683 | $0 | [Notes to Consolidated Financial Statements](index=68&type=section&id=8.3%20Notes%20to%20Consolidated%20Financial%20Statements) Key disclosures include the adoption of a new lease standard, details on the $216.5 million TRA liability, and the redemption of 9.3 million CW Units for stock - The company operates in a single segment and relied on a significant vendor in China for **16% of total third-party purchases** in 2019[248](index=248&type=chunk)[250](index=250&type=chunk) - The company adopted the new lease standard (ASC 842) on Jan 1, 2019, recognizing **$25.3 million in operating lease right-of-use assets** and liabilities[277](index=277&type=chunk) - As of Dec 31, 2019, the total liability related to the Tax Receivable Agreement (TRA) was **$216.5 million**[314](index=314&type=chunk) - During 2019, legacy holders redeemed **9.3 million CW Units**, which were exchanged for 9.3 million shares of Class A common stock[319](index=319&type=chunk)[320](index=320&type=chunk)[336](index=336&type=chunk) [Item 9A. Controls and Procedures](index=93&type=section&id=Item%209A.%20Controls%20and%20Procedures) Management concluded that disclosure controls were effective as of year-end 2019, having successfully remediated a previously reported material weakness related to the TRA - The principal executive and financial officers concluded that **disclosure controls and procedures were effective** as of December 31, 2019[339](index=339&type=chunk) - A material weakness in internal control related to the Tax Receivable Agreement (TRA), identified in the prior year, was **successfully remediated** as of December 31, 2019[340](index=340&type=chunk)[341](index=341&type=chunk) - Remediation steps included replacing the outside tax service provider, hiring an experienced Tax Director, and redesigning control activities for TRA accounting[340](index=340&type=chunk)[344](index=344&type=chunk) PART III [Item 10. Directors, Executive Officers and Corporate Governance](index=94&type=section&id=Item%2010.%20Directors%2C%20Executive%20Officers%20and%20Corporate%20Governance) The company is led by a separated Chairman and CEO, with an eight-member staggered board that includes four independent directors and has adopted comprehensive governance policies - The board consists of eight members, including Chairman Bruce Rothstein, CEO Scott Bender, and COO Joel Bender, and is divided into **three staggered classes**[346](index=346&type=chunk)[363](index=363&type=chunk) - The board has standing **Audit, Compensation, and Nominating and Governance committees**, and the Audit Committee has a designated financial expert[365](index=365&type=chunk)[366](index=366&type=chunk)[368](index=368&type=chunk)[371](index=371&type=chunk) - The company has adopted a Code of Business Conduct and Ethics and policies that **prohibit directors and executive officers from hedging or pledging company stock**[372](index=372&type=chunk)[374](index=374&type=chunk)[387](index=387&type=chunk) [Item 11. Executive Compensation](index=105&type=section&id=Item%2011.%20Executive%20Compensation) Executive compensation is pay-for-performance, with a high percentage of at-risk pay tied to EBITDA and safety metrics, resulting in a 111.3% STI payout in 2019 - The executive compensation program is heavily weighted towards at-risk pay, with **86% for the CEO** and an average of 80% for other NEOs in 2019[393](index=393&type=chunk) - The 2019 short-term incentive plan was based on EBITDA and safety metrics, resulting in a total payout of **111.3% of the target bonus**[416](index=416&type=chunk)[419](index=419&type=chunk)[422](index=422&type=chunk) 2019 NEO Summary Compensation | Name | Position | Total Compensation ($) | | :--- | :--- | :--- | | Scott Bender | President, CEO & Director | 2,163,931 | | Joel Bender | SVP, COO & Director | 2,164,949 | | Stephen Tadlock | VP, CFO & Treasurer | 2,030,614 | - The company has stock ownership guidelines requiring the CEO to hold **6x base salary** and non-employee directors to hold **3x their annual cash retainer**[434](index=434&type=chunk) [Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters](index=133&type=section&id=Item%2012.%20Security%20Ownership%20of%20Certain%20Beneficial%20Owners%20and%20Management%20and%20Related%20Stockholder%20Matters) Significant beneficial ownership is concentrated with Cactus WH Enterprises and Cadent Energy Partners, with management and directors as a group holding 24.2% of voting power Beneficial Ownership (as of Feb 11, 2020) | Owner | Combined Voting Power | | :--- | :--- | | Cactus WH Enterprises, LLC | 23.8% | | Cadent Energy Partners II, L.P. | 11.1% | | The Vanguard Group | 5.7% | | Scott Bender (CEO) | 23.9% | | Joel Bender (COO) | 23.9% | | All directors and executive officers as a group | 24.2% | - As of December 31, 2019, there were **2,036,788 securities remaining available** for future issuance under the company's equity compensation plans[495](index=495&type=chunk) [Item 13. Certain Relationships and Related Transactions, and Director Independence](index=136&type=section&id=Item%2013.%20Certain%20Relationships%20and%20Related%20Transactions%2C%20and%20Director%20Independence) The company engages in several related-party transactions, including TRA payments and an aircraft lease, governed by an Audit Committee approval policy - The company has a written policy requiring the **Audit Committee to review and approve** related party transactions exceeding $120,000[500](index=500&type=chunk)[501](index=501&type=chunk) - The Tax Receivable Agreement (TRA) obligates the company to pay 85% of realized tax savings to original owners; 2019 payments included **$6.3 million to Cadent** and **$2.1 million to a company controlled by the Benders**[512](index=512&type=chunk)[525](index=525&type=chunk)[526](index=526&type=chunk) - A Stockholders' Agreement provides Cadent and Cactus WH Enterprises the **right to designate directors** to the board as long as they maintain specified ownership levels[533](index=533&type=chunk)[536](index=536&type=chunk) - Cactus LLC leases an aircraft from an entity wholly owned by CEO Scott Bender, with **$0.3 million in lease expense** recognized in 2019[538](index=538&type=chunk) [Item 14. Principal Accounting Fees and Services](index=144&type=section&id=Item%2014.%20Principal%20Accounting%20Fees%20and%20Services) Total fees paid to the independent auditor, PricewaterhouseCoopers LLP, were $1.763 million in 2019, a decrease from 2018, with all services pre-approved by the Audit Committee Auditor Fees (in thousands) | Fee Type | 2019 | 2018 | | :--- | :--- | :--- | | Audit Fees | $1,760 | $1,645 | | Audit-Related Fees | $3 | $10 | | Tax Fees | $0 | $328 | | All Other Fees | $0 | $0 | | **Total** | **$1,763** | **$1,983** | - All audit and non-audit services provided by PricewaterhouseCoopers LLP in 2019 and 2018 were **pre-approved by the Audit Committee**[542](index=542&type=chunk) PART IV [Item 15. Exhibits, Financial Statement Schedules](index=146&type=section&id=Item%2015.%20Exhibits%2C%20Financial%20Statement%20Schedules) This section lists the financial statements and exhibits filed with the report, including key corporate governance and financial agreements - The consolidated financial statements of Cactus, Inc. are included in **Part II, Item 8** of the report[544](index=544&type=chunk) - All financial statement schedules have been omitted because they are not applicable or the required information is already present in the financial statements or notes[545](index=545&type=chunk) - Key exhibits filed with the report include the Certificate of Incorporation, the LLC Operating Agreement, the Tax Receivable Agreement, and various employment agreements[547](index=547&type=chunk)[548](index=548&type=chunk) [Item 16. Form 10-K Summary](index=149&type=section&id=Item%2016.%20Form%2010-K%20Summary) The company has indicated that a Form 10-K summary is not applicable or has not been provided in this filing - **No Form 10-K summary** is provided[552](index=552&type=chunk)

Financial Data and Key Metrics Changes - Revenues for Q3 2019 were $161 million, a 5% sequential decline but a 7% increase year-over-year [9] - Adjusted EBITDA was $59 million, with adjusted EBITDA margins at nearly 37% [8][14] - Cash balance increased by $36 million to $168 million, with operating cash flow of $50 million [8][17] - GAAP net income was $36 million, with adjusted earnings per share at $0.48, down 8% from Q2 2019 [15][16] Business Line Data and Key Metrics Changes - Product revenues were $93 million, up 17% year-over-year but down 2% sequentially [9][10] - Rental revenues were just under $36 million, down 10% from the previous quarter due to reduced industry completion activity [10] - Field service and other revenues were $33 million, down 5% from Q2 2019, representing nearly 26% of combined product and rental-related revenues [11] Market Data and Key Metrics Changes - The U.S. land rig count declined by 7% sequentially in Q3 2019 [7] - Product market share dipped to 28.6% as large E&Ps reduced spending [22] - U.S. onshore completion activity is expected to decline approximately 25% in Q4 2019 [26] Company Strategy and Development Direction - The company plans to focus on growth capital in its rental business, particularly in recent rental innovations [19] - International expansion is being pursued, with increased CapEx in Australia and a focus on obtaining approved vendor status in target markets [36][50] - New product development is ongoing, with several innovations aimed at enhancing efficiency and safety during drilling and completion phases [37] Management's Comments on Operating Environment and Future Outlook - Management expressed confidence in maintaining adjusted EBITDA margins similar to Q3 levels despite market challenges [28] - The company anticipates a meaningful decrease in capital spending for 2020 due to market visibility concerns [20] - Encouraging data points from customers suggest a potential rebound in activity in 2020 [39] Other Important Information - The company initiated a quarterly cash dividend of $0.09 per share, reflecting confidence in its business model [33] - The effective tax rate for Q4 is expected to be approximately 24% [16] Q&A Session Summary Question: Revenue per rig trend and its drivers - Management indicated that the increase in revenue per rig is primarily due to rig efficiencies and a favorable product mix [44][45] Question: International growth opportunities - Management highlighted increased CapEx in Australia and the potential for growth in similar markets, with modest increases in SG&A expected [49][50] Question: Decision to initiate a dividend - The company emphasized its strong cash flow generation and low fixed costs, which support the sustainability of the dividend [57][60] Question: Risks and opportunities from E&P M&A activity - Management noted that while there are risks when working with sellers, past experiences have shown positive outcomes when buyers take over [62] Question: New technology revenues and growth - Management expects innovation revenues to grow faster than legacy business, but noted current market conditions make customer adoption challenging [65][66] Question: Appetite for new technologies and development timelines - Management shared that new product rollouts are in progress, with timelines averaging around six months for development [79][80]

[PART I - FINANCIAL INFORMATION](index=7&type=section&id=PART%20I%20-%20FINANCIAL%20INFORMATION) [Financial Statements](index=7&type=section&id=Item%201.%20Financial%20Statements) Presents unaudited condensed consolidated financial statements for Cactus, Inc., including balance sheets, income statements, and cash flows, with detailed notes on accounting policies and key agreements Condensed Consolidated Balance Sheet Highlights (unaudited) | Account | Sep 30, 2019 (in thousands) | Dec 31, 2018 (in thousands) | | :--- | :--- | :--- | | **Assets** | | | | Cash and cash equivalents | $167,545 | $70,841 | | Total current assets | $386,950 | $274,505 | | Total assets | $811,137 | $584,744 | | **Liabilities and Equity** | | | | Total current liabilities | $89,580 | $74,624 | | Liability related to tax receivable agreement | $220,920 | $147,589 | | Total liabilities | $322,078 | $222,416 | | Total stockholders' equity | $489,059 | $362,328 | Condensed Consolidated Statements of Income Highlights (unaudited) | Metric | Q3 2019 (in thousands) | Q3 2018 (in thousands) | 9 Months 2019 (in thousands) | 9 Months 2018 (in thousands) | | :--- | :--- | :--- | :--- | :--- | | Total revenues | $160,808 | $150,658 | $488,176 | $404,311 | | Income from operations | $47,123 | $52,133 | $147,065 | $133,837 | | Net income | $35,833 | $43,648 | $125,029 | $111,598 | | Diluted EPS | $0.41 | $0.52 | $1.50 | $1.14 | Condensed Consolidated Statements of Cash Flows Highlights (unaudited, Nine Months Ended Sep 30) | Cash Flow Activity | 2019 (in thousands) | 2018 (in thousands) | | :--- | :--- | :--- | | Net cash provided by operating activities | $148,191 | $122,350 | | Net cash used in investing activities | ($37,715) | ($54,407) | | Net cash used in financing activities | ($13,042) | ($32,922) | | Net increase in cash and cash equivalents | $96,704 | $34,407 | [Organization and Nature of Operations](index=13&type=section&id=1.%20Organization%20and%20Nature%20of%20Operations) Cactus, Inc. designs and manufactures wellhead and pressure control equipment, increasing its ownership in Cactus LLC to **62.7%** by September 30, 2019 - The company is primarily engaged in the design, manufacture, and sale of wellhead and pressure control equipment, with operations in the U.S. and Australia, and manufacturing in Louisiana and China[26](index=26&type=chunk) - As of September 30, 2019, Cactus Inc. owned **62.7%** of Cactus LLC, an increase from **50.3%** as of December 31, 2018[36](index=36&type=chunk) - During the nine months ended September 30, 2019, legacy CW Unit Holders redeemed a total of **9.221 million** CW Units, primarily through the March 2019 Secondary Offering[29](index=29&type=chunk)[31](index=31&type=chunk)[32](index=32&type=chunk) [Revenue](index=22&type=section&id=6.%20Revenue) Revenue is disaggregated into product, rental, and field service categories, with product revenue comprising **56%** of total revenue for the nine months ended September 30, 2019 Disaggregation of Revenue (in thousands) | Revenue Category | Q3 2019 | Q3 2018 | 9 Months 2019 | 9 Months 2018 | | :--- | :--- | :--- | :--- | :--- | | Product revenue | $92,582 | $79,388 | $273,716 | $211,595 | | Rental revenue | $35,528 | $38,135 | $113,601 | $102,224 | | Field service and other revenue | $32,698 | $33,135 | $100,859 | $90,492 | | **Total revenue** | **$160,808** | **$150,658** | **$488,176** | **$404,311** | - For the nine months ended September 30, 2019, the revenue mix shifted slightly more towards product sales (**56%**) compared to the same period in 2018 (**52%**)[74](index=74&type=chunk) [Tax Receivable Agreement (TRA)](index=27&type=section&id=8.%20Tax%20Receivable%20Agreement) Cactus Inc. has a TRA obligating it to pay **85%** of net cash tax savings, with a total liability of **$220.9 million** as of September 30, 2019 - The total recorded liability from the TRA was **$220.9 million** as of September 30, 2019[91](index=91&type=chunk) - In Q3 2019, the company made a **$9.3 million** TRA payment related to the 2018 tax benefit[103](index=103&type=chunk) - If the TRA were terminated as of September 30, 2019, the estimated early termination payment would be approximately **$313 million**[189](index=189&type=chunk) Future TRA Liability Payments (as of Sep 30, 2019) | Period | Liability (in thousands) | | :--- | :--- | | Remainder of 2019 | $0 | | 2020 | $14,815 | | 2021 | $12,159 | | 2022 | $12,391 | | 2023 | $12,655 | | Thereafter | $168,900 | | **Total** | **$220,920** | [Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A)](index=41&type=section&id=Item%202.%20Management%27s%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) Management discusses performance, market trends, and financial condition, highlighting revenue growth, declining rig counts, tariff impacts, and strong liquidity with **$167.5 million** cash - Demand for products and services is heavily influenced by oil and gas prices, rig counts, and E&P capital spending. The U.S. onshore rig count trended down through October 2019[138](index=138&type=chunk)[141](index=141&type=chunk) - Tariffs on Chinese imports were increased from **10% to 25%** in May 2019. Approximately **50%** of inventory received in the first nine months of 2019 was sourced from the company's Chinese supply chain and is subject to these tariffs[146](index=146&type=chunk)[147](index=147&type=chunk) - The company declared a quarterly cash dividend of **$0.09 per share** of Class A common stock on October 29, 2019[149](index=149&type=chunk) [Results of Operations](index=45&type=section&id=Results%20of%20Operations) Compares operating results for Q3 and nine months ended September 30, 2019, showing Q3 revenue growth of **6.7%** but a **17.9%** decline in net income Q3 2019 vs. Q3 2018 Performance (in thousands) | Metric | Q3 2019 | Q3 2018 | $ Change | % Change | | :--- | :--- | :--- | :--- | :--- | | Total revenues | $160,808 | $150,658 | $10,150 | 6.7% | | Income from operations | $47,123 | $52,133 | ($5,010) | (9.6)% | | Net income | $35,833 | $43,648 | ($7,815) | (17.9)% | - Q3 2019 product revenue increased **17%** YoY due to increased market share, while rental revenue decreased **7%** YoY due to decreased completion activity from customers[155](index=155&type=chunk)[156](index=156&type=chunk) Nine Months 2019 vs. Nine Months 2018 Performance (in thousands) | Metric | 9M 2019 | 9M 2018 | $ Change | % Change | | :--- | :--- | :--- | :--- | :--- | | Total revenues | $488,176 | $404,311 | $83,865 | 20.7% | | Income from operations | $147,065 | $133,837 | $13,228 | 9.9% | | Net income | $125,029 | $111,598 | $13,431 | 12.0% | [Liquidity and Capital Resources](index=49&type=section&id=Liquidity%20and%20Capital%20Resources) Primary liquidity sources include **$167.5 million** cash and **$75.0 million** undrawn credit, with **$148.2 million** net cash from operations for the nine months ended September 30, 2019 - As of September 30, 2019, the company had **$167.5 million** in cash and cash equivalents and no borrowings outstanding under its **$75.0 million** ABL Credit Facility[179](index=179&type=chunk) - Estimated net capital expenditures for the full year 2019 are expected to range from **$50 million to $55 million**, primarily for rental fleet investments[182](index=182&type=chunk) - Net cash provided by operating activities for the nine months ended September 30, 2019, was **$148.2 million**, an increase from **$122.4 million** in the prior-year period[185](index=185&type=chunk) Contractual Obligations as of September 30, 2019 (in thousands) | Obligation Type | Total | Remainder of 2019 | 2020 | 2021-2023 | Thereafter | | :--- | :--- | :--- | :--- | :--- | :--- | | Operating lease liabilities | $26,971 | $1,747 | $6,389 | $10,290 | $8,545 | | Finance lease obligations | $12,700 | $2,096 | $6,731 | $3,873 | $0 | | Liability related to TRA | $220,920 | $0 | $14,815 | $37,205 | $168,900 | | **Total** | **$260,591** | **$3,843** | **$27,935** | **$51,368** | **$177,445** | [Quantitative and Qualitative Disclosures About Market Risk](index=53&type=section&id=Item%203.%20Quantitative%20and%20Qualitative%20Disclosures%20About%20Market%20Risk) The company reports no material change in its exposure to market risk since its 2018 Annual Report on Form 10-K - There has been no material change in the company's exposure to market risk since December 31, 2018[193](index=193&type=chunk) [Controls and Procedures](index=53&type=section&id=Item%204.%20Controls%20and%20Procedures) Disclosure controls and procedures were deemed ineffective as of September 30, 2019, due to a material weakness in TRA accounting, with remediation efforts underway - Disclosure controls and procedures were deemed not effective as of September 30, 2019, due to a previously disclosed and unremediated material weakness in internal control over financial reporting[194](index=194&type=chunk) - The material weakness relates to the accounting for the liability and deferred tax asset associated with the Tax Receivable Agreement (TRA)[195](index=195&type=chunk) - Remediation efforts include hiring a Tax Director and redesigning controls related to TRA accounting. The company believes the material weakness will be remediated as of December 31, 2019[198](index=198&type=chunk)[196](index=196&type=chunk) [PART II - OTHER INFORMATION](index=55&type=section&id=PART%20II%20-%20OTHER%20INFORMATION) [Legal Proceedings](index=55&type=section&id=Item%201.%20Legal%20Proceedings) The company is involved in routine legal matters, which management believes will not have a material adverse effect on its financial condition or operations - The company is party to lawsuits arising in the ordinary course of business, which management believes are unlikely to have a material adverse impact[200](index=200&type=chunk)[201](index=201&type=chunk) [Risk Factors](index=55&type=section&id=Item%201A.%20Risk%20Factors) No material changes to the company's risk factors have occurred since those disclosed in its 2018 Annual Report on Form 10-K - There have been no material changes in the company's risk factors from those described in its 2018 Annual Report[202](index=202&type=chunk) [Unregistered Sales of Equity Securities and Use of Proceeds](index=55&type=section&id=Item%202.%20Unregistered%20Sales%20of%20Equity%20Securities%20and%20Use%20of%20Proceeds) During Q3 2019, the company repurchased **443** shares of Class A common stock at **$29.97 per share** to satisfy tax withholding obligations Issuer Purchases of Equity Securities (Q3 2019) | Period | Total number of shares purchased | Average price paid per share | | :--- | :--- | :--- | | July 1-31, 2019 | - | $ - | | August 1-31, 2019 | - | $ - | | September 1-30, 2019 | 443 | $ 29.97 | | **Total** | **443** | **$ 29.97** | - The repurchased shares were from employees to satisfy tax withholding obligations related to vested restricted stock units[204](index=204&type=chunk) [Exhibits](index=56&type=section&id=Item%206.%20Exhibits) Lists exhibits filed with Form 10-Q, including CEO and CFO certifications under Sarbanes-Oxley and XBRL data files - The report includes required exhibits such as CEO and CFO certifications under Sarbanes-Oxley Sections 302 and 906, and XBRL data files[208](index=208&type=chunk)

Cactus, Inc. (NYSE:WHD) Q2 2019 Earnings Conference Call August 1, 2019 10:00 AM ET Company Participants John Fitzgerald - Director of Corporate Development and Investor Relations Scott Bender - President, Chief Executive Officer and Director Stephen Tadlock - Vice President and Chief Financial Officer Conference Call Participants Marshall Adkins - Raymond James & Associates, Inc. Chase Mulvehill - BofA Merrill Lynch Scott Gruber - Citigroup Inc. George O'Leary - Tudor, Pickering, Holt & Co. Connor Lynagh - ...

[Cautionary Note Regarding Forward-Looking Statements](index=4&type=section&id=Cautionary%20Note%20Regarding%20Forward-Looking%20Statements) This section cautions that forward-looking statements involve known and unknown risks that may cause actual results to differ materially - This Quarterly Report contains forward-looking statements based on current expectations and assumptions about future events, identified by words like "could," "believe," "anticipate," "intend," "estimate," "expect," and "project"[8](index=8&type=chunk) - Forward-looking statements cover various aspects including demand for products/services, rig growth, capital spending, fracturing activity, raw material availability, costs, potential liabilities, business strategy, financial performance, and regulatory impacts[9](index=9&type=chunk) - These statements involve known and unknown risks, uncertainties, and other factors, as described in Item 1A, "Risk Factors" of the Annual Report on Form 10-K, which may cause actual results to differ materially[11](index=11&type=chunk) [PART I - FINANCIAL INFORMATION](index=7&type=section&id=PART%20I%20-%20FINANCIAL%20INFORMATION) [Item 1. Financial Statements](index=7&type=section&id=Item%201.%20Financial%20Statements) This section presents unaudited condensed consolidated financial statements, including balance sheets, income, comprehensive income, equity, and cash flow statements, with detailed notes [Condensed Consolidated Balance Sheets](index=7&type=section&id=CONDENSED%20CONSOLIDATED%20BALANCE%20SHEETS) This section presents the company's financial position, detailing assets, liabilities, and equity as of June 30, 2019, and December 31, 2018 | Metric | June 30, 2019 (in thousands) | December 31, 2018 (in thousands) | Change ($) | Change (%) | | :-------------------------------- | :----------------------------- | :------------------------------- | :--------- | :--------- | | Total assets | $793,765 | $584,744 | $209,021 | 35.7% | | Total liabilities | $339,235 | $222,416 | $116,819 | 52.5% | | Total stockholders' equity | $454,530 | $362,328 | $92,202 | 25.4% | - Cash and cash equivalents increased significantly from **$70,841 thousand** at December 31, 2018, to **$131,149 thousand** at June 30, 2019[17](index=17&type=chunk) - Deferred tax asset, net, saw a substantial increase from **$159,053 thousand** to **$239,754 thousand**[17](index=17&type=chunk) [Condensed Consolidated Statements of Income](index=8&type=section&id=CONDENSED%20CONSOLIDATED%20STATEMENTS%20OF%20INCOME) This section presents the company's financial performance, detailing revenues, income from operations, and net income for the three and six months ended June 30, 2019 and 2018 | Metric (in thousands) | 3 Months Ended June 30, 2019 | 3 Months Ended June 30, 2018 | Change ($) | Change (%) | | :-------------------- | :--------------------------- | :--------------------------- | :--------- | :--------- | | Total revenues | $168,493 | $138,543 | $29,950 | 21.6% | | Income from operations| $51,450 | $46,487 | $4,963 | 10.7% | | Net income | $40,750 | $41,542 | $(792) | (1.9)% | | EPS - basic | $0.46 | $0.47 | $(0.01) | (2.1)% | | EPS - diluted | $0.45 | $0.46 | $(0.01) | (2.2)% | | Metric (in thousands) | 6 Months Ended June 30, 2019 | 6 Months Ended June 30, 2018 | Change ($) | Change (%) | | :-------------------- | :--------------------------- | :--------------------------- | :--------- | :--------- | | Total revenues | $327,368 | $253,653 | $73,715 | 29.1% | | Income from operations| $99,942 | $81,704 | $18,238 | 22.3% | | Net income | $89,196 | $67,950 | $21,246 | 31.3% | | EPS - basic | $1.13 | $0.61 | $0.52 | 85.2% | | EPS - diluted | $1.07 | $0.60 | $0.47 | 78.3% | - Income tax expense for the three months ended June 30, 2019, significantly increased by **129.8%** to **$10,793 thousand**, primarily due to a valuation allowance increase[18](index=18&type=chunk)[157](index=157&type=chunk) [Condensed Consolidated Statements of Comprehensive Income](index=9&type=section&id=CONDENSED%20CONSOLIDATED%20STATEMENTS%20OF%20COMPREHENSIVE%20INCOME) This section presents the company's comprehensive income, including net income and other comprehensive income components, for the three and six months ended June 30, 2019 and 2018 | Metric (in thousands) | 3 Months Ended June 30, 2019 | 3 Months Ended June 30, 2018 | Change ($) | Change (%) | | :-------------------- | :--------------------------- | :--------------------------- | :--------- | :--------- | | Comprehensive income | $40,379 | $40,952 | $(573) | (1.4)% | | Comprehensive income attributable to Cactus Inc. | $21,176 | $12,159 | $9,017 | 74.2% | | Metric (in thousands) | 6 Months Ended June 30, 2019 | 6 Months Ended June 30, 2018 | Change ($) | Change (%) | | :-------------------- | :--------------------------- | :--------------------------- | :--------- | :--------- | | Comprehensive income | $89,095 | $67,599 | $21,496 | 31.8% | | Comprehensive income attributable to Cactus Inc. | $48,106 | $15,897 | $32,209 | 202.6% | [Condensed Consolidated Statements of Stockholders' Equity](index=10&type=section&id=CONDENSED%20CONSOLIDATED%20STATEMENTS%20OF%20STOCKHOLDERS'%20EQUITY) This section details changes in stockholders' equity, including net income, additional paid-in capital, and non-controlling interest adjustments, for the periods presented - Total stockholders' equity increased from **$362,328 thousand** at December 31, 2018, to **$454,530 thousand** at June 30, 2019[22](index=22&type=chunk) - The increase in equity was driven by net income, additional paid-in capital related to the tax receivable agreement, and the effect of CW Unit redemptions, which increased Cactus Inc.'s ownership in Cactus LLC[22](index=22&type=chunk)[34](index=34&type=chunk) - A correction for misstatements of equity related to the July 2018 follow-on offering reduced non-controlling interest by **$14.5 million** and increased additional paid-in capital by **$14.0 million** and accumulated other comprehensive income by **$0.5 million**[35](index=35&type=chunk) [Condensed Consolidated Statements of Cash Flows](index=12&type=section&id=CONDENSED%20CONSOLIDATED%20STATEMENTS%20OF%20CASH%20FLOWS) This section presents the company's cash flows from operating, investing, and financing activities for the six months ended June 30, 2019 and 2018 | Cash Flow Activity (in thousands) | 6 Months Ended June 30, 2019 | 6 Months Ended June 30, 2018 | Change ($) | Change (%) | | :-------------------------------- | :--------------------------- | :--------------------------- | :--------- | :--------- | | Net cash provided by operating activities | $98,318 | $80,705 | $17,613 | 21.8% | | Net cash used in investing activities | $(28,749) | $(31,348) | $2,599 | (8.3)% | | Net cash used in financing activities | $(9,087) | $(28,396) | $19,309 | (68.0)% | - The net increase in cash and cash equivalents was **$60,308 thousand** for the six months ended June 30, 2019, compared to **$20,829 thousand** in the prior year period[25](index=25&type=chunk) - Financing activities in 2018 included significant proceeds from equity offerings (**$469.6 million**) and repayments of long-term debt (**$248.5 million**) related to the IPO, which were not present in 2019[25](index=25&type=chunk)[179](index=179&type=chunk) [Notes to Condensed Consolidated Financial Statements](index=13&type=section&id=NOTES%20TO%20CONDENSED%20CONSOLIDATED%20FINANCIAL%20STATEMENTS) [Note 1. Organization and Nature of Operations](index=13&type=section&id=1.%20Organization%20and%20Nature%20of%20Operations) This note describes Cactus, Inc.'s business, its structure as a holding company, the IPO, and the mechanics of CW Unit redemptions and the associated Tax Receivable Agreement - Cactus, Inc. designs, manufactures, and sells wellhead and pressure control equipment, and offers rental, repair, refurbishment, and service crews for onshore unconventional oil and gas wells[27](index=27&type=chunk) - Cactus Inc. is a holding company that became the sole managing member of Cactus LLC after its IPO on February 12, 2018, consolidating Cactus LLC's financial results and reporting non-controlling interest[28](index=28&type=chunk)[29](index=29&type=chunk) | CW Unit Holders | As of Feb 7, 2018 | IPO | July 2018 Offering | Other Redemptions | As of Dec 31, 2018 | March 2019 Offering | Other Redemptions | As of June 30, 2019 | | :---------------- | :---------------- | :-- | :----------------- | :---------------- | :----------------- | :------------------ | :---------------- | :------------------ | | No. of CW Units | 60,558 | (12,118) | (11,197) | (7) | 37,236 | (8,474) | (742) | 28,020 | - As of June 30, 2019, Cactus Inc. owned **62.7%** of Cactus LLC, an increase from **50.3%** at December 31, 2018, due to CW Unit redemptions[36](index=36&type=chunk) [Note 2. Preparation of Interim Financial Statements and Other Items](index=16&type=section&id=2.%20Preparation%20of%20Interim%20Financial%20Statements%20and%20Other%20Items) This note outlines the basis of presentation for interim financial statements, including GAAP compliance, consolidation principles, key accounting policies, and recent accounting pronouncement adoption - The financial statements are prepared in accordance with GAAP for interim financial information and include all adjustments of a normal recurring nature[38](index=38&type=chunk)[39](index=39&type=chunk) - The company operates as a **single reporting segment**[41](index=41&type=chunk) - One customer accounted for **10%** and **11%** of consolidated revenues for the six months ended June 30, 2019 and 2018, respectively[44](index=44&type=chunk) - The company adopted ASC Topic 842, Leases, on January 1, 2019, resulting in the recognition of operating lease ROU assets of **$25.3 million** and corresponding lease liabilities[47](index=47&type=chunk)[49](index=49&type=chunk) - The company is evaluating the impact of ASU 2016-13, Financial Instruments – Credit Losses (Topic 326), which is effective for fiscal years beginning after December 15, 2019[55](index=55&type=chunk) [Note 3. Inventories](index=20&type=section&id=3.%20Inventories) This note provides a breakdown of the company's inventory components, including raw materials, work-in-progress, and finished goods, as of June 30, 2019, and December 31, 2018 | Inventory Type (in thousands) | June 30, 2019 | December 31, 2018 | | :---------------------------- | :------------ | :---------------- | | Raw materials | $1,733 | $1,925 | | Work-in-progress | $3,767 | $3,582 | | Finished goods | $104,560 | $94,330 | | Total Inventories | $110,060 | $99,837 | [Note 4. Property and Equipment, net](index=20&type=section&id=4.%20Property%20and%20Equipment%2C%20net) This note details the composition of property and equipment, net, including land, buildings, machinery, finance lease assets, rental equipment, and construction in progress | Property & Equipment (in thousands) | June 30, 2019 | December 31, 2018 | | :---------------------------------- | :------------ | :---------------- | | Gross property and equipment | $249,960 | $225,907 | | Less: Accumulated depreciation | $(109,167) | $(96,412) | | Net property and equipment | $140,793 | $129,495 | | Construction in progress | $15,195 | $12,559 | | Total property and equipment, net | $155,988 | $142,054 | [Note 5. Long-term Debt](index=22&type=section&id=5.%20Long-term%20Debt) This note clarifies that Cactus, Inc. had no long-term debt outstanding and details its $75.0 million ABL Credit Facility, its terms, covenants, and compliance - Cactus LLC had **no long-term debt outstanding** as of June 30, 2019, and December 31, 2018[58](index=58&type=chunk) - The company has a **$75.0 million** senior secured asset-based revolving credit facility (ABL Credit Facility) maturing on August 21, 2023, with full access to its capacity at June 30, 2019[59](index=59&type=chunk)[60](index=60&type=chunk) - The ABL Credit Facility contains various covenants limiting additional indebtedness, investments, asset sales, restricted payments, and affiliate transactions, and requires a fixed charge coverage ratio under certain conditions[64](index=64&type=chunk) - The company was in **compliance with all covenants** under the ABL Credit Facility as of June 30, 2019, and December 31, 2018[66](index=66&type=chunk) [Note 6. Revenue](index=24&type=section&id=6.%20Revenue) This note describes the company's revenue recognition policies, performance obligations, and disaggregation of revenue by category, highlighting short-term contracts - Revenues are recognized when performance obligations are satisfied by transferring control of promised goods or services to customers, primarily from **short-term contracts**[68](index=68&type=chunk)[69](index=69&type=chunk) | Revenue Category (in thousands) | 3 Months Ended June 30, 2019 | 3 Months Ended June 30, 2018 | 6 Months Ended June 30, 2019 | 6 Months Ended June 30, 2018 | | :------------------------------ | :--------------------------- | :--------------------------- | :--------------------------- | :--------------------------- | | Product revenue | $94,494 | $73,281 | $181,134 | $132,207 | | Rental revenue | $39,576 | $34,944 | $78,073 | $64,089 | | Field service and other revenue | $34,423 | $30,318 | $68,161 | $57,357 | | Total revenue | $168,493 | $138,543 | $327,368 | $253,653 | - For the six months ended June 30, 2019, product revenue constituted **55%** of total revenues, rental revenue **24%**, and field service and other revenue **21%**, with approximately **99%** of revenues from U.S. operations[71](index=71&type=chunk)[134](index=134&type=chunk) [Note 7. Leases](index=26&type=section&id=7.%20Leases) This note details the company's adoption of ASC Topic 842, Leases, and its impact on financial statements, including recognition of ROU assets and liabilities - Adoption of ASC Topic 842 on January 1, 2019, resulted in the recognition of operating lease ROU assets of **$25.3 million** and corresponding operating short-term and long-term lease liabilities of **$6.2 million** and **$19.6 million**, respectively[49](index=49&type=chunk) | Lease Cost Component (in thousands) | 3 Months Ended June 30, 2019 | 6 Months Ended June 30, 2019 | | :---------------------------------- | :--------------------------- | :--------------------------- | | Finance lease cost | $2,120 | $4,204 | | Operating lease cost | $1,944 | $3,809 | | Short-term lease cost | $161 | $336 | | Variable lease cost | $136 | $263 | | Sublease income | $(119) | $(218) | | Total lease cost | $4,242 | $8,394 | | Future Lease Payments (in thousands) | Operating Leases | Finance Leases | | :----------------------------------- | :--------------- | :------------- | | Total undiscounted lease payments | $27,978 | $15,678 | | Less: imputed interest | $3,362 | $1,421 | | Present value of lease payments | $24,616 | $14,257 | | Lease Metric (as of June 30, 2019) | Value | | :--------------------------------- | :---------- | | Weighted average remaining lease term: Finance leases | 1.89 years | | Weighted average remaining lease term: Operating leases | 5.66 years | | Weighted average discount rate: Finance leases | 11.89 % | | Weighted average discount rate: Operating leases | 4.47 % | [Note 8. Tax Receivable Agreement](index=29&type=section&id=8.%20Tax%20Receivable%20Agreement) This note details the Tax Receivable Agreement (TRA), obligating Cactus Inc. to pay TRA Holders 85% of net cash savings from tax basis adjustments, and its financial implications - The TRA obligates Cactus Inc. to pay TRA Holders **85%** of net cash savings in U.S. federal, state, and local income/franchise tax resulting from tax basis adjustments due to CW Unit redemptions and IPO-related debt repayment[88](index=88&type=chunk) - The total TRA liability recorded as of June 30, 2019, was **$230.6 million**, with future payments expected to be substantial and continue for over **25 years** if not terminated early[89](index=89&type=chunk)[97](index=97&type=chunk) - Payments under the TRA are dependent on future taxable income, timing and number of CW Unit redemptions, stock price, and applicable tax rates[90](index=90&type=chunk)[91](index=91&type=chunk) | Period (in thousands) | Liability related to TRA | | :-------------------- | :----------------------- | | Remainder of 2019 | $9,574 | | 2020 | $14,424 | | 2021 | $12,186 | | 2022 | $12,423 | | 2023 | $12,690 | | Thereafter | $169,320 | | Total | $230,617 | [Note 9. Income Taxes](index=35&type=section&id=9.%20Income%20Taxes) This note explains Cactus Inc.'s income tax structure, effective tax rates, and the treatment of deferred tax assets and valuation allowances, highlighting ownership structure impacts - Cactus Inc. is subject to U.S. federal and state income taxes on its share of Cactus LLC's income, while non-controlling interest income is not subject to these taxes[105](index=105&type=chunk)[107](index=107&type=chunk) | Metric (in thousands) | 3 Months Ended June 30, 2019 | 3 Months Ended June 30, 2018 | 6 Months Ended June 30, 2019 | 6 Months Ended June 30, 2018 | | :-------------------- | :--------------------------- | :--------------------------- | :--------------------------- | :--------------------------- | | Income tax expense | $10,793 | $4,697 | $9,820 | $6,349 | | Effective tax rate | 20.9% | 10.2% | 9.9% | 8.5% | - The second quarter of 2019 included **$4.0 million** in tax expense for establishing additional valuation allowance against a deferred tax asset, while the six months ended June 30, 2019, saw a **$4.2 million** tax benefit from the release of valuation allowance due to CW Unit redemptions[107](index=107&type=chunk)[110](index=110&type=chunk) [Note 10. Related Party Transactions](index=37&type=section&id=10.%20Related%20Party%20Transactions) This note discloses related party transactions, including plane rentals, the Tax Receivable Agreement (TRA) with certain officers, and pro-rata distributions by Cactus LLC - The company rents a plane under dry-lease from a company owned by a Cactus LLC member, with expenses totaling less than **$0.1 million** for the three months ended June 30, 2019, and **$0.1 million** for the six months ended June 30, 2019[111](index=111&type=chunk) - The TRA involves certain officers, directors, and employees as TRA Holders, with a total liability of **$230.6 million** as of June 30, 2019[112](index=112&type=chunk) - Cactus LLC distributed **$5.8 million** to Cactus Inc. to fund TRA liability payments and **$3.8 million** to other members during the six months ended June 30, 2019[113](index=113&type=chunk) [Note 11. Commitments and Contingencies](index=37&type=section&id=11.%20Commitments%20and%20Contingencies) This note addresses legal contingencies, stating that management does not believe current disputes will have a material adverse effect on the company's financial position or results - Management believes that pending or threatened legal matters will not have a **material adverse impact** on the company's consolidated financial position or results of operations[114](index=114&type=chunk) [Note 12. Employee Benefit Plans](index=37&type=section&id=12.%20Employee%20Benefit%20Plans) This note describes the company's 401(k) plan for U.S. employees, including eligibility, contribution matching, and discretionary non-elective contributions, as well as similar foreign plans - The company matches **100%** of the first **3%** of gross pay contributed by employees and **50%** of the next **4%** contributed to the 401(k) plan[115](index=115&type=chunk) - Employer matching contributions totaled **$0.6 million** for the three months ended June 30, 2019, and **$1.7 million** for the six months ended June 30, 2019[117](index=117&type=chunk) [Note 13. Stock-based Compensation](index=39&type=section&id=13.%20Stock-based%20Compensation) This note outlines the Long-term Incentive Plan (LTIP) and the accounting for restricted stock units (RSUs), providing a summary of RSU activity and compensation expense - The LTIP allows for various equity awards to incentivize individuals providing services to the company or its affiliates[118](index=118&type=chunk) | RSU Activity (in thousands) | No. of RSU's | Weighted Average Grant Date Fair Value | | :-------------------------- | :----------- | :------------------------------------- | | Nonvested as of Dec 31, 2018| 782 | $19.84 | | Granted | 204 | $37.37 | | Vested | (269) | $19.23 | | Nonvested as of June 30, 2019| 717 | $25.07 | - Stock-based compensation expense was **$1.9 million** for the three months and **$3.6 million** for the six months ended June 30, 2019[122](index=122&type=chunk) - Approximately **$14.9 million** of unrecognized compensation expense related to unvested RSUs remains as of June 30, 2019, to be recognized over a weighted average remaining vesting period of **2.3 years**[122](index=122&type=chunk) [Note 14. Earnings per Share](index=39&type=section&id=14.%20Earnings%20per%20Share) This note details the calculation of basic and diluted earnings per share (EPS) for Class A common stock, including methods for potentially dilutive shares - Basic EPS is calculated by dividing net income attributable to Cactus Inc. by the weighted average Class A shares outstanding, while diluted EPS considers the potential dilutive effect of CW Units and unvested restricted stock units[123](index=123&type=chunk)[124](index=124&type=chunk) | EPS Metric | 3 Months Ended June 30, 2019 | 3 Months Ended June 30, 2018 | 6 Months Ended June 30, 2019 | 6 Months Ended June 30, 2018 | | :--------- | :--------------------------- | :--------------------------- | :--------------------------- | :--------------------------- | | Basic EPS | $0.46 | $0.47 | $1.13 | $0.61 | | Diluted EPS| $0.45 | $0.46 | $1.07 | $0.60 | - For the three months ended June 30, 2019, **28.2 million shares** of Class B common stock were excluded from diluted EPS calculation as their effect would be anti-dilutive[129](index=129&type=chunk) [Note 15. Supplemental Cash Flow Information](index=41&type=section&id=15.%20Supplemental%20Cash%20Flow%20Information) This note provides supplemental information on non-cash investing and financing activities, such as property and equipment acquired under capital lease and Class A common stock issuance | Non-Cash Activity (in thousands) | 6 Months Ended June 30, 2019 | 6 Months Ended June 30, 2018 | | :------------------------------- | :--------------------------- | :--------------------------- | | Property and equipment acquired under capital lease | $2,359 | $5,860 | | Property and equipment in payables | $3,943 | $3,500 | - During the six months ended June 30, 2019, the company issued **9.2 million shares** of Class A common stock for no proceeds due to redemptions of CW Units[129](index=129&type=chunk) [Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations](index=43&type=section&id=Item%202.%20Management's%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) This section provides management's perspective on the company's financial performance, condition, and operational results, including market factors, consolidated results, and liquidity [Executive Summary](index=43&type=section&id=Executive%20Summary) This section provides an overview of Cactus's business, including its core products, services, operational footprint, and revenue composition by category - Cactus designs, manufactures, sells, and rents highly engineered wellhead and pressure control equipment for onshore unconventional oil and gas wells, also providing field services[131](index=131&type=chunk) - The company operates through U.S. service centers in key oil and gas regions and in Eastern Australia, with manufacturing facilities in Louisiana and China[132](index=132&type=chunk) - Revenues are primarily derived from product sales (wellhead systems, production trees), equipment rentals (frac valves, drilling tools), and field services (installation, maintenance, repair)[133](index=133&type=chunk) - For the six months ended June 30, 2019, product sales accounted for **55%** of total revenues, rentals **24%**, and field services **21%**, with **99%** of sales from U.S. operations[134](index=134&type=chunk) [Market Factors and Trends](index=43&type=section&id=Market%20Factors%20and%20Trends) This section discusses market factors and trends influencing the company's demand, including oil and gas industry activity, rig count, drilling efficiencies, and trade tariffs - Demand for products and services is driven by oil and gas industry activity, including rig count, wells drilled, completion activity, and capital spending by E&P companies, which are influenced by volatile oil and gas prices[135](index=135&type=chunk) - The U.S. onshore rig count trended down through July 2019, with the weekly average at **992 rigs** for the six months ended June 30, 2019, down from **1,011 rigs** in 2018[138](index=138&type=chunk)[139](index=139&type=chunk) - Increased horizontal wells, pad drilling, and wells per rig are favorable trends enhancing demand for products relative to active rig count[140](index=140&type=chunk) - The U.S. Trade Representative increased tariffs on approximately **$200 billion** worth of Chinese imports from **10% to 25%** on May 10, 2019, affecting about **50%** of the company's inventory sourced from China[143](index=143&type=chunk)[144](index=144&type=chunk) - Cactus will become a **large accelerated filer** for the year ended December 31, 2019, and will no longer be considered an emerging growth company[146](index=146&type=chunk) [Consolidated Results of Operations](index=47&type=section&id=Consolidated%20Results%20of%20Operations) [Three Months Ended June 30, 2019 Compared to Three Months Ended June 30, 2018](index=47&type=section&id=Three%20Months%20Ended%20June%2030%2C%202019%20Compared%20to%20Three%20Months%20Ended%20June%2030%2C%202018) For the three months ended June 30, 2019, total revenues increased by 21.6%, driven by strong growth across all categories, though net income slightly decreased due to higher costs and increased income tax expense | Metric (in thousands) | June 30, 2019 | June 30, 2018 | Change ($) | Change (%) | | :-------------------- | :------------ | :------------ | :--------- | :--------- | | Product revenue | $94,494 | $73,281 | $21,213 | 28.9% | | Rental revenue | $39,576 | $34,944 | $4,632 | 13.3% | | Field service revenue | $34,423 | $30,318 | $4,105 | 13.5% | | Total revenues | $168,493 | $138,543 | $29,950 | 21.6% | - Product revenue increased primarily due to increased sales of wellhead and production-related equipment, driven by market share gains and greater customer drilling efficiencies[149](index=149&type=chunk) - Cost of rental revenue increased by **39.4%** to **$19.5 million**, largely due to higher depreciation on a larger rental fleet and increased repair costs associated with greater deployment and activity[153](index=153&type=chunk) - Selling, general and administrative expenses rose by **34.5%** to **$13.3 million**, attributed to higher payroll, incentive compensation, stock-based compensation, and public company costs[155](index=155&type=chunk) - Income tax expense surged by **129.8%** to **$10.8 million**, including a **$4.0 million** valuation allowance increase, reflecting Cactus Inc.'s increased ownership in Cactus LLC (**62.7%** vs. **35.3%** YoY)[157](index=157&type=chunk) [Six Months Ended June 30, 2019 Compared to Six Months Ended June 30, 2018](index=49&type=section&id=Six%20Months%20Ended%20June%2030%2C%202019%20Compared%20to%20Six%20Months%20Ended%20June%2030%2C%202018) For the six months ended June 30, 2019, total revenues grew by 29.1% and net income increased by 31.3%, despite higher operating costs, partially offset by a tax benefit | Metric (in thousands) | June 30, 2019 | June 30, 2018 | Change ($) | Change (%) | | :-------------------- | :------------ | :------------ | :--------- | :--------- | | Product revenue | $181,134 | $132,207 | $48,927 | 37.0% | | Rental revenue | $78,073 | $64,089 | $13,984 | 21.8% | | Field service revenue | $68,161 | $57,357 | $10,804 | 18.8% | | Total revenues | $327,368 | $253,653 | $73,715 | 29.1% | | Net income | $89,196 | $67,950 | $21,246 | 31.3% | - Product revenue increased by **37%** due to higher sales of wellhead and production equipment, driven by increased market share and customer efficiencies[159](index=159&type=chunk) - Cost of rental revenue increased by **43%** to **$37.2 million**, primarily due to higher depreciation on an expanded rental fleet and increased costs for asset deployment and repairs[164](index=164&type=chunk) - Interest income, net, improved significantly from an expense of **$3.1 million** in 2018 to income of **$0.1 million** in 2019, mainly due to the repayment of the previous term loan post-IPO[167](index=167&type=chunk) - Income tax expense for the six months ended June 30, 2019, was **$9.8 million** (**9.9%** effective tax rate), which included a **$4.2 million** tax benefit from the release of a valuation allowance due to CW Unit redemptions and the March 2019 Secondary Offering[169](index=169&type=chunk) [Liquidity and Capital Resources](index=53&type=section&id=Liquidity%20and%20Capital%20Resources) This section discusses the company's liquidity and capital resources, including cash flows, the ABL Credit Facility, and the financial impact of the Tax Receivable Agreement [Cash Flows](index=53&type=section&id=Cash%20Flows) The company's liquidity is primarily supported by cash flows from operating activities and its ABL Credit Facility, with changes in investing and financing activities detailed - As of June 30, 2019, cash and cash equivalents totaled **$131.1 million**, with **$75.0 million** available under the ABL Credit Facility and no outstanding borrowings[172](index=172&type=chunk) - Net cash provided by operating activities increased by **$17.6 million** to **$98.3 million** for the six months ended June 30, 2019, driven by higher net income[176](index=176&type=chunk) - Net cash used in investing activities decreased by **$2.6 million** to **$28.7 million**, primarily due to slightly lower capital expenditures and higher proceeds from asset sales[177](index=177&type=chunk) - Net cash used in financing activities decreased significantly by **$19.3 million** to **$9.1 million** for the six months ended June 30, 2019, compared to **$28.4 million** in 2018, which included large IPO-related transactions[178](index=178&type=chunk) - The company estimates net capital expenditures for 2019 to range from **$50 million to $60 million**, mostly for rental fleet investments[174](index=174&type=chunk) [Tax Receivable Agreement (Liquidity)](index=55&type=section&id=Tax%20Receivable%20Agreement%20%28Liquidity%29) This section discusses the potential financial impact of the Tax Receivable Agreement (TRA) on the company's liquidity, particularly in the event of an early termination - If the TRA were terminated as of June 30, 2019, estimated termination payments would be approximately **$347 million** (discounted), based on an undiscounted liability of **$471 million**[181](index=181&type=chunk) - A **10% increase** in Class A common stock price would increase the discounted TRA liability by **$16 million** to **$363 million**, while a **10% decrease** would reduce it by **$17 million** to **$330 million**[181](index=181&type=chunk) [Contractual Obligations](index=55&type=section&id=Contractual%20Obligations) This section provides a summary of the company's contractual obligations, including operating lease liabilities, finance lease obligations, and the Tax Receivable Agreement liability | Obligation (in thousands) | Remainder of 2019 | 2020 | 2021 | 2022 | 2023 | Thereafter | Total | | :------------------------ | :---------------- | :------ | :------ | :------ | :------ | :--------- | :-------- | | Operating lease liabilities | $3,410 | $6,068 | $3,855 | $2,878 | $2,024 | $6,381 | $24,616 | | Finance lease obligations | $4,038 | $6,655 | $3,014 | $550 | — | — | $14,257 | | Liability related to TRA | $9,574 | $14,424 | $12,186 | $12,423 | $12,690 | $169,320 | $230,617 | | Total | $17,022 | $27,147 | $19,055 | $15,851 | $14,714 | $175,701 | $269,490 | [Off-Balance Sheet Arrangements](index=55&type=section&id=Off-Balance%20Sheet%20Arrangements) This section states that the company currently does not have any off-balance sheet arrangements - The company currently does not have any **off-balance sheet arrangements**[183](index=183&type=chunk) [Item 3. Quantitative and Qualitative Disclosures About Market Risk](index=55&type=section&id=Item%203.%20Quantitative%20and%20Qualitative%20Disclosures%20About%20Market%20Risk) This section refers to the company's 2018 Annual Report for detailed market risk disclosures, noting no material changes since December 31, 2018 - The company's exposure to market risk has not changed materially since December 31, 2018[184](index=184&type=chunk) - For detailed disclosures on market risk, refer to Part II, Item 7A, "Quantitative and Qualitative Disclosures about Market Risk," in the 2018 Annual Report[184](index=184&type=chunk) [Item 4. Controls and Procedures](index=57&type=section&id=Item%204.%20Controls%20and%20Procedures) This section reports on the ineffectiveness of disclosure controls and procedures due to a material weakness, with no material changes in internal control over financial reporting - The company's disclosure controls and procedures were **not effective** as of June 30, 2019, due to a previously disclosed material weakness in internal control over financial reporting[185](index=185&type=chunk) - There has been no change in internal control over financial reporting during the second quarter of 2019 that has materially affected, or is reasonably likely to materially affect, internal control over financial reporting[186](index=186&type=chunk) [PART II - OTHER INFORMATION](index=58&type=section&id=PART%20II%20-%20OTHER%20INFORMATION) [Item 1. Legal Proceedings](index=58&type=section&id=Item%201.%20Legal%20Proceedings) This section addresses legal proceedings, stating that management believes current disputes will not have a material adverse impact on the company's financial condition or results - Management believes that pending or threatened legal matters will not have a **material adverse impact** on the company's financial condition or consolidated results of operations[189](index=189&type=chunk)[190](index=190&type=chunk) [Item 1A. Risk Factors](index=58&type=section&id=Item%201A.%20Risk%20Factors) This section directs readers to the risk factors detailed in the company's 2018 Annual Report and other SEC filings, noting no material changes - There have been **no material changes** in the company's risk factors from those described in its 2018 Annual Report or other SEC filings[191](index=191&type=chunk) [Item 2. Unregistered Sales of Equity Securities and Use of Proceeds](index=58&type=section&id=Item%202.%20Unregistered%20Sales%20of%20Equity%20Securities%20and%20Use%20of%20Proceeds) This section reports on issuer purchases of equity securities, specifically Class A common stock repurchased from employees to satisfy tax withholding obligations related to vested restricted stock units | Period | Total shares purchased | Average price paid per share | | :-------------- | :--------------------- | :--------------------------- | | April 1-30, 2019| 200 | $35.60 | | May 1-31, 2019 | - | - | | June 1-30, 2019 | 1,032 | $32.55 | | Total | 1,232 | $33.05 | - Shares of Class A common stock were repurchased from employees to satisfy tax withholding obligations related to vested restricted stock units[193](index=193&type=chunk) [Item 6. Exhibits](index=59&type=section&id=Item%206.%20Exhibits) This section lists the exhibits filed as part of the report, including corporate organizational documents, CEO and CFO certifications, and XBRL taxonomy documents - Exhibits include Amended and Restated Certificate of Incorporation, Amended and Restated Bylaws, CEO and CFO Certifications (Sarbanes-Oxley Act), and XBRL Instance and Taxonomy Documents[197](index=197&type=chunk) [Signatures](index=60&type=section&id=Signatures) This section confirms the report was signed on August 1, 2019, by the President, CEO, Director, and the Vice President, CFO, and Treasurer - The report was signed on August 1, 2019, by Scott Bender, President, Chief Executive Officer and Director, and Stephen Tadlock, Vice President, Chief Financial Officer and Treasurer[201](index=201&type=chunk)

[PART I - FINANCIAL INFORMATION](index=7&type=section&id=PART%20I%20-%20FINANCIAL%20INFORMATION) [Financial Statements](index=7&type=section&id=Item%201.%20Financial%20Statements) Cactus, Inc. reported **$158.9 million** in Q1 2019 revenues and **$48.4 million** net income, with total assets reaching **$742.6 million** and new lease accounting standard adoption Condensed Consolidated Statements of Income (Q1 2019 vs Q1 2018) | Metric | Three Months Ended March 31, 2019 (in thousands) | Three Months Ended March 31, 2018 (in thousands) | Change (%) | | :--- | :--- | :--- | :--- | | **Total Revenues** | **$158,875** | **$115,110** | **+38.0%** | | Product Revenue | $86,640 | $58,926 | +47.0% | | Rental Revenue | $38,497 | $29,145 | +32.1% | | Field Service & Other Revenue | $33,738 | $27,039 | +24.8% | | **Income from Operations** | **$48,492** | **$35,217** | **+37.7%** | | **Net Income** | **$48,446** | **$26,408** | **+83.5%** | | Net Income Attributable to Cactus Inc. | $26,807 | $3,753 | +614.3% | | **Earnings per Class A share - diluted** | **$0.59** | **$0.14** | **+321.4%** | Condensed Consolidated Balance Sheets Highlights | Metric | March 31, 2019 (in thousands) | December 31, 2018 (in thousands) | | :--- | :--- | :--- | | Cash and cash equivalents | $88,116 | $70,841 | | Total current assets | $315,199 | $274,505 | | Total assets | $742,633 | $584,744 | | Liability related to tax receivable agreement | $224,542 | $147,589 | | Total liabilities | $326,272 | $222,416 | | Total stockholders' equity | $416,361 | $362,328 | - The company adopted the new lease accounting standard ASC Topic 842 on January 1, 2019, resulting in the recognition of operating lease right-of-use assets of **$25.3 million** and corresponding lease liabilities[66](index=66&type=chunk)[68](index=68&type=chunk) [Management's Discussion and Analysis of Financial Condition and Results of Operations](index=42&type=section&id=Item%202.%20Management%27s%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) Q1 2019 revenue growth was driven by increased market share and drilling activity, supported by strong liquidity and projected capital expenditures for fleet investments - Product revenue increased **47% YoY**, primarily due to increased market share and customer activity, with active U.S. onshore drilling rigs followed increasing by **19%**[144](index=144&type=chunk) - Rental revenue increased **32% YoY**, driven by investments in the rental fleet to meet higher completion activity[145](index=145&type=chunk) - The company estimates net capital expenditures for 2019 to range from **$60 million to $65 million**, primarily for rental fleet investments[158](index=158&type=chunk) Cash Flow Summary (Q1 2019 vs Q1 2018) | Cash Flow Activity | Three Months Ended March 31, 2019 (in thousands) | Three Months Ended March 31, 2018 (in thousands) | | :--- | :--- | :--- | | Net cash provided by operating activities | $34,239 | $38,565 | | Net cash used in investing activities | ($13,847) | ($15,687) | | Net cash used in financing activities | ($3,555) | ($22,640) | [Quantitative and Qualitative Disclosures About Market Risk](index=51&type=section&id=Item%203.%20Quantitative%20and%20Qualitative%20Disclosures%20About%20Market%20Risk) The company reports no material changes in its market risk exposure since December 31, 2018, consistent with its prior annual report disclosures - There have been no material changes in the company's exposure to market risk since December 31, 2018[171](index=171&type=chunk) [Controls and Procedures](index=51&type=section&id=Item%204.%20Controls%20and%20Procedures) Management concluded that disclosure controls and procedures were ineffective as of March 31, 2019, due to a previously identified material weakness, with no new material changes in Q1 2019 - The principal executive officer and principal financial officer concluded that disclosure controls and procedures were not effective as of March 31, 2019[172](index=172&type=chunk) - The ineffectiveness is due to a previously disclosed material weakness in internal control over financial reporting, identified in the 2018 Annual Report[172](index=172&type=chunk) - There were no changes in internal control over financial reporting during Q1 2019 that materially affected or are likely to materially affect internal controls[173](index=173&type=chunk) [PART II - OTHER INFORMATION](index=53&type=section&id=PART%20II%20-%20OTHER%20INFORMATION) [Legal Proceedings](index=53&type=section&id=Item%201.%20Legal%20Proceedings) The company is involved in routine legal disputes, which management does not expect to materially impact its financial condition or operations - The company is party to lawsuits arising in the ordinary course of business, but management does not expect them to have a material adverse impact[175](index=175&type=chunk)[176](index=176&type=chunk) [Risk Factors](index=53&type=section&id=Item%20lA.%20Risk%20Factors) No material changes to the company's previously disclosed risk factors have occurred since the 2018 Annual Report - There have been no material changes in risk factors from those described in the 2018 Annual Report[177](index=177&type=chunk) [Unregistered Sales of Equity Securities and Use of Proceeds](index=53&type=section&id=Item%202.%20Unregistered%20Sales%20of%20Equity%20Securities%20and%20Use%20of%20Proceeds) In Q1 2019, the company repurchased **44,906** Class A shares at **$32.79** per share to cover employee tax withholding obligations from vested restricted stock units Share Repurchases in Q1 2019 | Period | Total number of shares purchased | Average price paid per share | | :--- | :--- | :--- | | January 1-31, 2019 | - | $ - | | February 1-28, 2019 | 44,906 | $32.79 | | March 1-31, 2019 | - | $ - | | **Total** | **44,906** | **$32.79** | - The repurchased shares were from employees to satisfy tax withholding obligations related to vested restricted stock units[179](index=179&type=chunk) [Exhibits](index=54&type=section&id=Item%206.%20Exhibits) This section lists required exhibits, including CEO and CFO certifications and XBRL data files, filed as part of the quarterly report - The report includes required exhibits such as CEO and CFO certifications under Sections 302 and 906 of the Sarbanes-Oxley Act, and XBRL data files[182](index=182&type=chunk)

Financial Data and Key Metrics Changes - Q1 revenues reached $159 million, a 38% increase compared to the same period last year and a 14% increase sequentially [10] - Adjusted EBITDA for Q1 was $59 million, up 38% year-over-year and 10% sequentially, representing 37% of revenues [16] - Net income increased to $48 million from $39 million in Q4 2018, including an income tax benefit of $8 million [15] - Cash position increased by $17 million to $88 million at the end of Q1, with operating cash flow of $34 million [19] Business Line Data and Key Metrics Changes - Product revenues were $87 million, a 47% increase year-over-year and 10% sequentially, with a gross margin of 39% [11] - Rental revenues reached $39 million, a 32% increase compared to Q1 2018 and 23% higher sequentially [12] - Field service and other revenues were $34 million, up 25% year-over-year and 14% sequentially, driven by increased billable hours [13] Market Data and Key Metrics Changes - Average U.S. market share in the products business increased from 27.8% to a record 29.1% [8] - The U.S. land rig count declined by 3% sequentially, contrasting with the company's growth trajectory [7] Company Strategy and Development Direction - The company is focused on maintaining capital discipline and generating free cash flow while exploring growth opportunities in completions and rental services [32] - There is a cautious optimism regarding modest increases in drilling activity in the latter part of the year, driven by stabilized crude prices above $60 per barrel [24] - The company plans to invest in new innovations and expand market penetration, particularly with private operators [27][26] Management's Comments on Operating Environment and Future Outlook - Management noted that while the rig count is expected to decline, product revenues may remain stable based on preliminary results [23] - There is an expectation of no meaningful changes in overall margins, with slight declines in product margins offset by gains in rental [31] - The impact of Section 301 tariffs was significant in Q1, but management anticipates minimal further effects post-Q2 [30] Other Important Information - SG&A expenses increased to $12.7 million, primarily due to higher stock-based compensation and professional fees [14] - The company expects capital expenditures for 2019 to remain in the low $60 million range, focusing on growth capital for the rental business [21] Q&A Session Summary Question: Capital discipline and customer value proposition - Management confirmed that the focus is on efficiency gains rather than cost reductions per well [35] Question: Visibility into customer planning and rig count - Management indicated it is early to gauge customer plans but noted increased inquiries from private operators [38] Question: Medium- to long-term business perspective - Management expressed confidence in growth opportunities in the completions side of the business due to low market share [43] Question: Competitive response from major oil companies - Management acknowledged that competitors are improving their products in response to the company's market share gains [86] Question: Timing for new frac innovation products - Management stated that new products are in the field but will not significantly impact until Q3 [95] Question: Impact of manufacturing capacity on rental margins - Management indicated that better utilization of assets will positively impact rental margins [104] Question: Potential for capital return - Management suggested that if no suitable opportunities arise, an announcement regarding capital return could be made by year-end [67]

Financial Performance - Total revenues for Cactus Inc. in 2018 were $544.1 million, a 59.5% increase from $341.2 million in 2017[164]. - Net income attributable to Cactus Inc. for 2018 was $51.7 million, compared to a net loss of $8.2 million in 2016[164]. - Net income for 2018 was $150.3 million, a rise of $83.7 million, or 125.8%, compared to $66.5 million in 2017[180]. - Comprehensive income attributable to Cactus Inc. was $51.2 million in 2018, compared to $0 in 2016[275]. - Earnings per Class A share - diluted was $1.58 for 2018, with a weighted average of 32,695 shares outstanding[273]. Revenue Breakdown - Product revenue increased to $290.5 million, up $101.4 million, or 53.6%, primarily due to increased U.S. onshore activity and a 29% rise in average monthly rigs to 272[181]. - Rental revenue reached $133.4 million, an increase of $55.9 million, or 72%, driven by investments in the rental fleet[182]. - Field service and other revenue grew to $120.2 million, up $45.6 million, or 61%, due to higher demand correlated with increased product and rental revenue[183]. Cash and Debt Management - Cactus Inc. had cash and cash equivalents of $70.8 million at the end of 2018, a substantial increase from $7.6 million at the end of 2017[164]. - Long-term debt was reduced to zero in 2018 from $241.4 million in 2017, reflecting the repayment of borrowings using IPO proceeds[166]. - Total debt, excluding capital leases, was $0.0 million at December 31, 2018, down from $248.5 million in 2017[207]. - Interest expense decreased significantly to $3.6 million, down $17.2 million, or 82.7%, due to the repayment of the term loan[189]. Tax and Compliance - Cactus Inc. is subject to a U.S. federal income tax rate of 21% on its share of income from Cactus LLC following its IPO[179]. - Income tax expense for 2018 was $19.5 million, reflecting an effective tax rate of 11.5%, compared to $1.5 million (2.3% effective tax rate) in 2017[191]. - The company intends to make pro rata distributions to unitholders to cover tax obligations and payments under the Tax Receivable Agreement[229]. - The company was in compliance with all covenants under the ABL Credit Facility as of December 31, 2018[228]. Operational Insights - The average U.S. onshore rig count for 2018 was 1,011 rigs, up 18.5% from 853 rigs in 2017 and significantly higher than 483 rigs in 2016[169]. - The rental revenues are primarily dependent on the number of wells completed, with a focus on the number of drilled but uncompleted wells (DUCs) providing additional opportunities[171]. - Cactus Inc. anticipates that market factors such as oil and gas prices will continue to influence demand for its products and services[168]. Capital Expenditures and Investments - The company expects capital expenditures for 2019 to range from $60 million to $65 million, primarily for rental fleet investments[209]. - The company reported capital expenditures of $70.1 million for the year, up from $32.1 million in 2017[279]. Inventory and Accounts Receivable - The allowance for doubtful accounts was $0.6 million as of December 31, 2018, representing approximately 1.0% of consolidated gross accounts receivable[237]. - The inventory obsolescence reserve was $7.3 million as of December 31, 2018, representing approximately 6.8% of consolidated gross inventories, an increase from $5.9 million (8.4%) in 2017[239]. - The company reported a significant increase in accounts receivable, net of allowance, which rose to $92.3 million from $84.2 million in 2017[271]. IPO and Follow-on Offering - Cactus Inc. completed an IPO on February 12, 2018, raising net proceeds of $408.0 million from the sale of 23 million shares at $19.00 per share[283]. - A follow-on offering on July 16, 2018, raised $359.3 million from the sale of 11.2 million shares at $33.25 per share[288]. Market Risks and Economic Factors - The company is exposed to market risks from changes in foreign currency rates and interest rates, particularly due to operations in China and Australia[256][257]. - Inflation has been relatively low in recent years and did not materially impact the company's operations for the years ended December 31, 2018, 2017, and 2016[254]. Tax Receivable Agreement (TRA) - The total liability from the Tax Receivable Agreement (TRA) recorded as of December 31, 2018, is $147.6 million, which includes both current and long-term portions[306]. - The TRA payments are expected to commence in 2019 and continue for 16 years after the last redemption of CW Units, potentially extending over 25 years[314]. - The TRA generally provides for the payment of 85% of net cash savings in taxes realized by the company, with the remaining 15% retained by the company[305].

Financial Data and Key Metrics Changes - In 2018, the company reported revenues of $544 million, an increase of nearly 60% from 2017, and adjusted EBITDA rose almost 90% year-over-year to $213 million [7] - For Q4 2018, revenues were $139.8 million, which was 33.4% higher than the same period last year but 7.2% lower than Q3 2018 [10] - Adjusted EBITDA for Q4 was $53.5 million, representing a 52.7% increase year-over-year but down 12.7% sequentially, with adjusted EBITDA margins at 38.3% compared to 40.7% in Q3 2018 [14][16] - Net income for Q4 was $38.7 million, down from $43.6 million in Q3 2018 [14] Business Line Data and Key Metrics Changes - Product revenues, including consumables used in drilling and production, were $78.9 million, up 38.1% from Q4 2017 but down 0.6% from Q3 2018 [10] - Rental revenues were $31.2 million, an increase of $6.7 million compared to Q4 2017 but a decrease of $6.9 million sequentially due to reduced completion activity [11] - Field service and other revenues were $29.7 million, up $6.6 million year-over-year but down $3.4 million from Q3 2018, attributed to decreased billable hours and typical Q4 seasonality [12] Market Data and Key Metrics Changes - The company's average US market share in its products business increased from 27.4% to 27.8% during the quarter [9] - The company anticipates a sequential increase in rental revenues of approximately 15% in Q1 2019, driven by improved completion activity [23] Company Strategy and Development Direction - The company aims to maintain a focus on free cash flow and returns while being well-positioned to gain market share in 2019 [30] - New completions innovations are expected to generate noticeable revenue in the second half of 2019, with a potential 20% increase in rental revenue run rate by year-end [25] - The company is cautious about overall drilling activity levels despite a modest decline in rig counts, expecting a more muted pullback in spending from E&Ps [21] Management's Comments on Operating Environment and Future Outlook - Management noted that customers were less willing to complete wells due to lower oil prices but expected a normalization of completion activity as budgets reset in the New Year [22] - The company is optimistic about the impact of new rental innovations and the potential for increased market share in the frac rental business [25][86] Other Important Information - The effective tax rate for Q4 was 11.4%, lower than the federal tax rate due to profits from non-controlling interests not being subject to US federal tax [15] - The company’s cash position increased by $28.9 million during Q4, reaching $70.8 million by year-end [17] Q&A Session Summary Question: Can you provide insights on the tariff impact and competitive positioning? - Management expressed a more relaxed stance regarding potential tariff increases, noting that they had accelerated inventory receipts in anticipation of higher tariffs but have not taken similar steps this year [34] - The company believes it is in a good position compared to competitors who rely heavily on China for manufacturing [36] Question: How do you expect margins to unfold in Q1 across each segment? - Margins for rental and product segments are expected to be slightly down, while service margins should see a considerable increase [43] Question: What is the outlook for the frac tree assets and their utilization? - The company reported that gross rental PP&E increased from about $85 million at the end of 2017 to about $124 million at the end of 2018, with plans for further growth [61] Question: How do you see the cadence of completions in 2019? - Management indicated a cautious outlook, expecting a gradual increase in completion activity, particularly in the third and fourth quarters [86]