Cactus(WHD) - 2019 Q3 - Quarterly Report

PART I - FINANCIAL INFORMATION Financial Statements 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 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] - As of September 30, 2019, Cactus Inc. owned 62.7% of Cactus LLC, an increase from 50.3% as of December 31, 2018[36] - 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][31][32] Revenue 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] Tax Receivable Agreement (TRA) 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] - In Q3 2019, the company made a $9.3 million TRA payment related to the 2018 tax benefit[103] - If the TRA were terminated as of September 30, 2019, the estimated early termination payment would be approximately $313 million[189] 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) 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][141] - 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][147] - The company declared a quarterly cash dividend of $0.09 per share of Class A common stock on October 29, 2019[149] Results of Operations 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][156] 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 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] - 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] - 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] 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 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] Controls and Procedures 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] - The material weakness relates to the accounting for the liability and deferred tax asset associated with the Tax Receivable Agreement (TRA)[195] - 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][196] PART II - OTHER INFORMATION Legal Proceedings 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][201] Risk Factors 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] Unregistered Sales of Equity Securities and Use of Proceeds 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] Exhibits 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]