Cactus(WHD) - 2021 Q4 - Annual Report

Part I Business Cactus, Inc. designs, manufactures, and sells wellhead and pressure control equipment for onshore unconventional oil and gas wells globally - Cactus, Inc. is a holding company whose primary asset is a 78.0% ownership interest in Cactus Wellhead, LLC as of December 31, 2021. The company designs, manufactures, and sells wellhead and pressure control equipment for oil and gas wells[18][19][20] Revenue Breakdown by Source (2019-2021) | Revenue Source | 2021 | 2020 | 2019 | | :--- | :--- | :--- | :--- | | Product Sales | 64% | 59% | 57% | | Rental | 14% | 19% | 22% | | Field Service & Other | 22% | 22% | 21% | - The company's principal products include Cactus SafeDrill® wellhead systems, frac stacks, zipper manifolds, and production trees. It also provides critical field services, including 24-hour crews for installation, maintenance, and repair[25] - Manufacturing facilities are located in Bossier City, LA (for rapid, made-to-order equipment) and Suzhou, China (for longer lead-time orders). Both facilities are licensed to API 6A specifications[33] - As of December 31, 2021, the company employed over 1,000 people worldwide. In 2021, the workforce increased by approximately 57% to rebuild from 2020 reductions and meet recovering industry demand[50][51] - The company's Total Recordable Incident Rate (TRIR) was 1.29 in 2021, compared to 0.55 in 2020. Management states this is in line with the industry average[54] Risk Factors The company faces significant risks from oil and gas industry cyclicality, volatile commodity prices, rising operational costs, and substantial Tax Receivable Agreement liabilities - Demand for products is highly dependent on oil and gas industry activity, which is affected by volatile crude oil and natural gas prices. The COVID-19 pandemic has negatively impacted revenues and operations through facility slowdowns and supply chain disruptions[59][60] - The company faces increased costs and potential shortages of raw materials like steel, as well as significantly higher freight costs. The highest inflation in decades is adversely impacting freight, materials, and labor costs[73][75] - As a holding company, Cactus Inc.'s only material asset is its equity in Cactus LLC. It depends on distributions from Cactus LLC to pay taxes, dividends, and make substantial payments under the Tax Receivable Agreement (TRA)[93][94] - The company is required to make significant payments under the TRA, representing 85% of net cash tax savings realized. Early termination of the TRA could result in an accelerated payment, estimated at approximately $361.9 million as of December 31, 2021[101][106] - Cactus WH Enterprises, LLC holds significant voting power (approximately 20% as of year-end 2021) and has the right to designate nominees to the board, which may create conflicts of interest with other shareholders[96] Unresolved Staff Comments The company reports that it has no unresolved staff comments from the SEC - None[115] Properties Cactus, Inc. operates from various owned and leased facilities, including manufacturing and service centers across the U.S., China, and Australia - The company's principal facilities include owned and leased manufacturing, assembly, and service centers in Bossier City, LA. It also owns facilities in Hobbs, NM, and New Waverly, TX, and leases its Houston headquarters and a production facility in Suzhou, China[116][117] Legal Proceedings The company is involved in routine litigation, but management believes no pending matters will materially affect its financial condition - The company is subject to routine litigation in the ordinary course of business, but management does not expect any pending cases to have a material adverse effect[118] Mine Safety Disclosures This item is not applicable to the company - Not applicable[119] Part II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Cactus, Inc.'s Class A common stock trades on the NYSE, with quarterly dividends increasing and minor share repurchases for tax obligations - The company's Class A common stock is traded on the New York Stock Exchange (NYSE) under the "WHD"[121] - The quarterly cash dividend was increased to $0.10 per share in July 2021 and again to $0.11 per share in January 2022. The annual dividend rate was $0.38 per share in 2021, up from $0.36 in 2020[122][123] - During Q4 2021, the company repurchased 2,171 shares of Class A common stock from employees at an average price of $41.87 per share to satisfy tax withholding obligations on vested restricted stock units[126][127] Management's Discussion and Analysis of Financial Condition and Results of Operations In 2021, Cactus experienced a 25.8% increase in total revenues to $438.6 million, driven by higher drilling activity, while maintaining strong liquidity despite rising costs Consolidated Results of Operations (2021 vs. 2020) | Metric | 2021 (in thousands) | 2020 (in thousands) | % Change | | :--- | :--- | :--- | :--- | | Total Revenues | $438,589 | $348,566 | 25.8% | | Product Revenue | $280,907 | $206,801 | 35.8% | | Rental Revenue | $61,629 | $66,169 | (6.9)% | | Field Service & Other Revenue | $96,053 | $75,596 | 27.1% | | Income from Operations | $75,427 | $70,039 | 7.7% | | Net Income | $67,470 | $59,215 | 13.9% | | Net Income Attributable to Cactus Inc. | $49,593 | $34,446 | 44.0% | - The increase in product revenue was due to higher sales of wellhead and production equipment from increased customer drilling and completion activity. The decrease in rental revenue was due to reduced completion activity and extraordinary market pressure[144][145] - The company experienced substantial cost increases in 2021 for salaries, raw materials (steel), and ocean freight due to supply chain pressures and increased global demand[141] - As of December 31, 2021, the company had $301.7 million in cash and cash equivalents and no borrowings outstanding under its $75.0 million ABL Credit Facility[156] - Net capital expenditures for 2022 are estimated to be between $20 million and $30 million, primarily for rental fleet investments and manufacturing facility expansion[158] - The estimated termination payment for the Tax Receivable Agreement (TRA) as of December 31, 2021, would be approximately $361.9 million[162] Quantitative and Qualitative Disclosures about Market Risk The company is exposed to market risks from foreign currency exchange rates and interest rates, partially managed through hedging and no current debt - The company is subject to foreign currency exchange rate risk due to operations in China and Australia. It uses monthly foreign currency forward contracts to hedge against fluctuations on U.S. dollar-denominated assets and liabilities held by its foreign subsidiaries[177][178] - Interest rate risk arises from the variable rate ABL Credit Facility. As of December 31, 2021, there were no borrowings outstanding under this facility[179] Financial Statements and Supplementary Data This section presents the consolidated financial statements for 2021, showing increased assets and liabilities, with the TRA liability identified as a critical audit matter - Management concluded that as of December 31, 2021, the company's internal control over financial reporting was effective, based on the COSO framework[185] - The independent auditor, PricewaterhouseCoopers LLP, issued an unqualified opinion on the consolidated financial statements and the effectiveness of internal control over financial reporting. The liability related to the Tax Receivable Agreement (TRA) was identified as a Critical Audit Matter due to the complexity of calculating the tax basis and blended tax rate[190][197][198] Consolidated Balance Sheet Highlights (as of Dec 31) | Account | 2021 (in thousands) | 2020 (in thousands) | | :--- | :--- | :--- | | Cash and cash equivalents | $301,669 | $288,659 | | Total Current Assets | $518,485 | $425,142 | | Total Assets | $982,078 | $815,594 | | Total Current Liabilities | $92,574 | $48,915 | | Liability related to TRA | $281,607 | $204,351 | | Total Liabilities | $387,045 | $264,824 | | Total Stockholders' Equity | $595,033 | $550,770 | Consolidated Income Statement Summary (Year Ended Dec 31) | Account | 2021 (in thousands) | 2020 (in thousands) | 2019 (in thousands) | | :--- | :--- | :--- | :--- | | Total Revenues | $438,589 | $348,566 | $628,414 | | Income from Operations | $75,427 | $70,039 | $183,150 | | Net Income | $67,470 | $59,215 | $156,303 | | Net Income Attributable to Cactus Inc. | $49,593 | $34,446 | $85,612 | | Diluted EPS | $0.83 | $0.72 | $1.88 | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure The company reports no changes in or disagreements with its accountants on accounting principles or financial disclosure - None[301] Controls and Procedures Management concluded that the company's disclosure controls and procedures were effective as of December 31, 2021, with no material changes to internal controls - Management, including the CEO and CFO, concluded that the company's disclosure controls and procedures were effective as of December 31, 2021[302] - There were no changes in internal control over financial reporting during the quarter ended December 31, 2021, that materially affected, or are reasonably likely to materially affect, internal controls[303] Other Information This item is not applicable - Not applicable[304] Disclosure Regarding Foreign Jurisdictions that Prevent Inspections This item is not applicable - Not applicable[305] Part III Directors, Executive Officers and Corporate Governance The company's board comprises nine directors, with six independent members, and operates through independent committees, adhering to strong corporate governance policies - The board of directors consists of nine members, with Scott Bender serving as President & CEO and Bruce Rothstein as Chairman. The board is divided into three staggered classes[307][322] - The board has determined that six of its nine directors are independent under NYSE listing standards: Messrs. McGovern, O'Donnell, Rosenthal, Rothstein, Semple, and Tombar, and Ms. Law[323] - The company has standing Audit, Compensation, and Nominating and Governance Committees, each composed entirely of independent directors[324] - The company has adopted a Code of Business Conduct and Ethics, and policies that prohibit directors and executive officers from hedging or pledging their ownership of company stock[330][342] Executive Compensation Executive compensation is performance-based, with a significant portion at-risk, tied to key financial and operational metrics, and includes long-term incentives and stock ownership guidelines - The executive compensation program is designed to pay for performance, with 86% of the CEO's and an average of 77% of other NEOs' 2021 target total direct compensation being "at-risk" (variable cash and equity incentives)[344][346] - The 2021 Management Incentive Plan (MIP) for NEOs was based on three metrics: Adjusted EBITDA (80% weight), Operating Capital Employed/Revenue (10% weight), and Total Recordable Incident Rate (TRIR) (10% weight)[364][367] - For 2021, the company exceeded its Adjusted EBITDA target and its OCE/Revenue target, but missed its TRIR target. This resulted in a total bonus payout of 104.3% of the target bonus for NEOs[369] - Long-term incentive awards in 2021 consisted of a mix of time-based Restricted Stock Units (RSUs) and Performance Stock Units (PSUs). The PSUs vest after a three-year period based on the company's Return on Capital Employed (ROCE) performance[371][373] - The company has stock ownership guidelines requiring the CEO to hold 6x base salary and other NEOs to hold 2x base salary in company stock[374] - The CEO's 2021 total annual compensation was $2,031,846, which is approximately 22 times the median employee's annual total compensation of $92,211[408][409] Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Key beneficial owners include Cactus WH Enterprises (19.8%), with directors and executive officers collectively owning 20.9% of combined voting power as of February 14, 2022 Security Ownership of 5% Stockholders (as of Feb 14, 2022) | Owner | Combined Voting Power % | | :--- | :--- | | Cactus WH Enterprises, LLC | 19.8% | | The Vanguard Group | 7.4% | | T. Rowe Price Associates | 7.2% | | AllianceBernstein L.P. | 6.4% | | BlackRock, Inc. | 5.1% | - Directors and executive officers as a group beneficially owned approximately 20.9% of the combined voting power as of February 14, 2022[420] - Scott Bender and Joel Bender control Cactus WH Enterprises and are deemed beneficial owners of the 15,014,963 shares it holds, giving them each approximately 20.0% of the combined voting power[420][422] - As of December 31, 2021, there were 1,295,150 securities remaining available for future issuance under the company's equity compensation plans[425] Certain Relationships and Related Transactions, and Director Independence The company has significant related party agreements, including the Cactus Wellhead LLC Agreement, Tax Receivable Agreement, and a Stockholders' Agreement, all reviewed by the Audit Committee - The company has a written policy requiring the Audit Committee to review and approve all Related Party Transactions exceeding $120,000[426][427] - The Cactus Wellhead LLC Agreement provides CW Unit Holders with the right to redeem their units for Class A common stock or cash. In 2021, Cactus LLC distributed $9.7 million to non-controlling members[429][431] - The Tax Receivable Agreement (TRA) obligates the company to pay 85% of realized tax savings to TRA Holders. In 2021, a company controlled by Scott and Joel Bender received approximately $2.8 million under the TRA[439][450] - The Amended and Restated Stockholders' Agreement provides Cactus WH Enterprises the right to designate a certain number of directors to the board as long as it maintains at least 5% ownership[457] - The company leases an aircraft from SusieAir, LLC, an entity wholly owned by CEO Scott Bender. In 2021, the company recognized $0.2 million in expense related to this lease[461][462] Principal Accountant Fees and Services For 2021, Cactus, Inc. incurred $1.723 million in fees from PricewaterhouseCoopers LLP, primarily for audit services, all pre-approved by the Audit Committee Accountant Fees (2021 vs. 2020) | Fee Type | 2021 (in thousands) | 2020 (in thousands) | | :--- | :--- | :--- | | Audit Fees | $1,722 | $1,422 | | Audit-Related Fees | $1 | $1 | | Tax Fees | $— | $— | | All Other Fees | $— | $— | | Total | $1,723 | $1,423 | - All audit and non-audit services provided by PricewaterhouseCoopers LLP in 2021 and 2020 were pre-approved by the Audit Committee[465] Part IV Exhibits, Financial Statement Schedules This section provides an index of all exhibits filed with the Form 10-K, including governing documents and material contracts, with financial schedules omitted - This section contains the index of exhibits filed with the Form 10-K, including governing documents, material contracts, and certifications[470][471][472] - All financial statement schedules have been omitted because they are not applicable or the required information is already presented in the financial statements or notes[469] Form 10-K Summary No Form 10-K summary was provided - None[475]