Cactus(WHD) - 2020 Q3 - Quarterly Report

PART I - FINANCIAL INFORMATION Financial Statements This section presents unaudited condensed consolidated financial statements, reflecting a significant decline in revenue and net income due to industry downturns, offset by strong cash and cost management Condensed Consolidated Balance Sheet Highlights (unaudited) | (in thousands) | September 30, 2020 | December 31, 2019 | | :--- | :--- | :--- | | Total current assets | $411,894 | $414,883 | | Cash and cash equivalents | $273,941 | $202,603 | | Accounts receivable, net | $40,290 | $87,865 | | Inventories | $87,702 | $113,371 | | Total assets | $811,488 | $834,964 | | Total current liabilities | $47,997 | $91,126 | | Total liabilities | $264,928 | $318,569 | | Total stockholders' equity | $546,560 | $516,395 | Condensed Consolidated Statements of Income (unaudited) | (in thousands, except per share data) | Three Months Ended Sep 30, 2020 | Three Months Ended Sep 30, 2019 | Nine Months Ended Sep 30, 2020 | Nine Months Ended Sep 30, 2019 | | :--- | :--- | :--- | :--- | :--- | | Total revenues | $59,789 | $160,808 | $280,476 | $488,176 | | Income from operations | $12,556 | $47,123 | $61,616 | $147,065 | | Net income | $10,886 | $35,833 | $53,079 | $125,029 | | Net income attributable to Cactus Inc. | $6,233 | $19,339 | $31,244 | $67,554 | | Earnings per Class A share - diluted | $0.13 | $0.41 | $0.64 | $1.50 | Condensed Consolidated Statements of Cash Flows (unaudited) | (in thousands) | Nine Months Ended Sep 30, 2020 | Nine Months Ended Sep 30, 2019 | | :--- | :--- | :--- | | Net cash provided by operating activities | $121,485 | $148,191 | | Net cash used in investing activities | ($16,494) | ($37,715) | | Net cash used in financing activities | ($34,090) | ($13,042) | | Net increase in cash and cash equivalents | $71,338 | $96,704 | - In response to the weakened macroeconomic environment due to COVID-19, the company implemented significant cost reduction measures, including salary reductions for executives and workforce, headcount reductions of almost 50%, suspension of the 401(k) match, and reduced capital expenditures[42][43] - The company recognized approximately $14.0 million in tariff refunds (including $0.5 million in interest) as of September 30, 2020, related to exclusions on certain Chinese imports[65] Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses the severe impact of COVID-19 and the oil and gas downturn on financial performance, detailing cost-cutting, tariff refunds, and strong liquidity Executive Summary & Market Factors Cactus designs, manufactures, sells, and rents wellhead and pressure control equipment for U.S. onshore wells, with demand driven by oil and gas activity - The company operates in a single business segment, deriving revenue from three sources: products (wellhead systems), rentals (well control equipment), and field services[71][73] - Demand for products and services is primarily driven by the level of oil and gas activity, including the number of drilling rigs, well completions, and capital spending by customers[75] Recent Developments and Trends The COVID-19 pandemic severely impacted drilling activity, leading to significant cost reductions and temporary tariff exemptions - The weekly average U.S. onshore rig count declined to 240 for Q3 2020, compared to 894 for the same period in 2019, reflecting a significant drop in customer activity[81] - The company is well-positioned to navigate the market downturn with a strong balance sheet, having reduced its workforce by almost 50%, holding approximately $273.9 million in cash, and having no long-term debt as of September 30, 2020[83] - A tariff exemption on certain Chinese imports, which was in effect from September 2018 to August 2020, resulted in the recognition of $14.0 million in refunds[84][85] Consolidated Results of Operations The company experienced significant year-over-year declines in Q3 and nine-month 2020 financial performance, with revenues and income from operations falling sharply due to lower customer activity, partially offset by cost-cutting and tariff refunds Q3 2020 vs. Q3 2019 Performance (in thousands) | Metric | Q3 2020 | Q3 2019 | % Change | | :--- | :--- | :--- | :--- | | Total Revenues | $59,789 | $160,808 | (62.8)% | | Product Revenue | $35,857 | $92,582 | (61.3)% | | Rental Revenue | $9,881 | $35,528 | (72.2)% | | Income from Operations | $12,556 | $47,123 | (73.4)% | | Net Income | $10,886 | $35,833 | (69.6)% | Nine Months 2020 vs. Nine Months 2019 Performance (in thousands) | Metric | Nine Months 2020 | Nine Months 2019 | % Change | | :--- | :--- | :--- | :--- | | Total Revenues | $280,476 | $488,176 | (42.5)% | | Product Revenue | $163,781 | $273,716 | (40.2)% | | Rental Revenue | $57,579 | $113,601 | (49.3)% | | Income from Operations | $61,616 | $147,065 | (58.1)% | | Net Income | $53,079 | $125,029 | (57.5)% | - Cost of product revenue for Q3 2020 decreased by 66% and included approximately $5.4 million in credits from tariff refunds[90] - For the nine months ended September 30, 2020, the company recorded $1.9 million in severance expenses due to headcount reductions[107] Liquidity and Capital Resources As of September 30, 2020, Cactus maintained a strong liquidity position with substantial cash, no debt, and reduced capital expenditures, believing existing liquidity is sufficient for future obligations - As of September 30, 2020, the company had $273.9 million in cash and cash equivalents, no borrowings outstanding under its ABL Credit Facility, and $39.3 million of available borrowing capacity[110] - Net capital expenditures for the first nine months of 2020 totaled $16.5 million, a significant decrease from the prior year, primarily due to reduced investment in the rental fleet[113][117] - Net cash used in financing activities increased to $34.1 million for the nine months ended September 30, 2020, mainly due to $12.8 million in dividend payments and a $9.7 million increase in member distributions[118] Quantitative and Qualitative Disclosures About Market Risk The company's exposure to market risk has not materially changed since the 2019 fiscal year-end, referring stakeholders to prior disclosures - The company's exposure to market risk has not changed materially since December 31, 2019[120] Controls and Procedures Management concluded the company's disclosure controls and procedures were effective as of September 30, 2020, with no material changes to internal control over financial reporting identified during Q3 2020 - Based on an evaluation by management, the company's disclosure controls and procedures were concluded to be effective as of September 30, 2020[122] - There were no changes in internal control over financial reporting during Q3 2020 that have materially affected, or are reasonably likely to materially affect, these controls[123] PART II - OTHER INFORMATION Legal Proceedings The company is involved in routine lawsuits, but management believes these legal matters will not materially adversely affect its financial condition, results of operations, or cash flows - The company is party to lawsuits arising in the ordinary course of business, but management believes it is unlikely that these will have a material adverse impact on its financial condition[125][126] Risk Factors No material changes to the company's risk factors have occurred since the 2019 Annual Report, except as previously disclosed in the Q1 2020 Form 10-Q - There have been no material changes in the company's risk factors from those described in the 2019 Annual Report, other than what was disclosed in the Q1 2020 10-Q[127] Unregistered Sales of Equity Securities and Use of Proceeds During Q3 2020, the company repurchased Class A common stock shares to satisfy employee tax withholding obligations related to vested restricted stock units Issuer Purchases of Equity Securities (Q3 2020) | Period | Total number of shares purchased | Average price paid per share (USD) | | :--- | :--- | :--- | | July 1-31, 2020 | — | $ — | | August 1-31, 2020 | — | $ — | | September 1-30, 2020 | 426 | $19.66 | | Total | 426 | $19.66 | - The repurchased shares of Class A common stock were from employees to satisfy tax withholding obligations related to vested restricted stock units[129] Exhibits This section lists exhibits filed with the Form 10-Q, including corporate governance documents, credit agreement amendments, and CEO/CFO certifications - A list of exhibits filed with the report is provided, including corporate charters, an amendment to the credit agreement, and CEO/CFO certifications under Sarbanes-Oxley Sections 302 and 906[131]