Cactus, Inc. — Q2 2023 Form 10-Q
Reporting period: Three and six months ended June 30, 2023. Unaudited consolidated results include FlexSteel from its February 28, 2023 acquisition; comparisons with 2022 are therefore not fully like-for-like.
Business context and results
Cactus provides equipment, rentals and field services for onshore oil and gas markets. Following the FlexSteel acquisition, it reports Pressure Control and Spoolable Technologies segments.
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Revenue | $305.8 million | $170.2 million | $534.2 million | $316.1 million |
| Operating income | $48.5 million | $44.2 million | $98.2 million | $75.2 million |
| Net income | $32.5 million | $35.8 million | $84.7 million | $62.9 million |
| Net income attributable to Cactus | $24.8 million | $27.1 million | $67.6 million | $47.8 million |
| Diluted EPS | $0.38 | $0.44 | $1.02 | $0.78 |
| Operating margin | 15.9% | 26.0% | 18.4% | 23.8% |
Q2 revenue rose about 80% year over year; first-half revenue increased 69%. The acquisition contributed $140.4 million of revenue from closing through June 30. Pressure Control generated Q2 revenue of $199.1 million and operating income of $54.5 million. Spoolable Technologies generated $106.7 million of revenue and an operating loss of $6.0 million. Its loss included acquisition-related valuation and purchase-accounting costs.
Cash flow, liquidity and capital
- First-half operating cash flow was $168.5 million, versus $48.2 million a year earlier. Investing cash outflow was $639.5 million, principally reflecting $618.9 million paid for FlexSteel net of cash acquired, plus capital spending.
- Cash was $63.9 million at June 30, down from $344.5 million at December 31, 2022. Current assets were $499.1 million and current liabilities $180.7 million.
- Quarter-end debt, net of financing costs, was $54.6 million: $25.0 million term debt and $30.0 million revolving borrowings. The company repaid both balances in July 2023 and reported no bank debt outstanding as of the filing date. June 30 available borrowing capacity was $193.3 million; letters of credit were $1.7 million.
- Net capital expenditure guidance for 2023 was $35–$45 million. Management said cash, operating cash flow and credit availability should cover needs for at least 12 months, including working capital, capital spending, dividends and tax-related payments.
- The board authorized up to $150 million of Class A share repurchases in June. $0.2 million was repurchased under the program through June 30; $149.8 million remained authorized.
Material changes, outlook and risks
- FlexSteel was acquired for approximately $624.2 million cash, funded with equity proceeds, debt and cash. Estimated total consideration was $630.1 million, including an acquisition-date earn-out estimate. The purchase price allocation remains preliminary.
- The potential earn-out is up to $75 million, dependent on FlexSteel revenue-growth targets and payable no later than Q3 2024. Its fair value was $24.0 million at June 30, with approximately $18.0 million of remeasurement expense recognized in the first half. Q2 operating income also reflects the separate $18.1 million Q2 fair-value charge.
- FlexSteel results included $23.5 million of inventory step-up expense and $12.3 million of intangible amortization in the first half. Acquisition-related professional and other costs also increased SG&A.
- Management reported weaker oil and gas activity through the first half and expected drilling and completion activity to decline further in Q3, with gas-weighted basins particularly exposed. It cited lower realized prices for natural gas and natural gas liquids; it also viewed oil supply-and-demand fundamentals as supportive, subject to stable economic activity. No revenue or earnings guidance was provided.
- The tax receivable agreement liability was $290.4 million, including $27.5 million current. Early termination could accelerate a substantial payment. Management said ordinary-course legal matters were not expected to have a material adverse effect; no material risk-factor changes were reported from prior filings.
- Disclosure controls were judged effective at June 30, but FlexSteel’s controls were excluded from the assessment under the permitted acquisition transition period; integration of its financial reporting controls was ongoing.
Most important facts to verify
- Whether FlexSteel achieves the revenue targets underlying the earn-out and how its operating performance develops after acquisition-related costs.
- Final purchase-price allocation and valuation assumptions for acquired assets, goodwill and the earn-out liability.
- Oil and gas activity trends, especially the expected second-half decline in gas-driven basins, and their effect on segment demand and margins.
- Cash requirements and timing for the $290.4 million tax receivable agreement liability, dividends, capital spending and any share repurchases.
- Post-acquisition debt repayment, borrowing availability and completion of FlexSteel financial-control integration.