Business context and reporting period
Cactus, Inc. filed this unaudited Form 10-Q for the quarter ended September 30, 2021. The company designs, manufactures, sells and rents wellhead and pressure-control equipment, and provides related field services. It operates in one segment and serves primarily U.S. oil and gas customers, with operations in Australia and, beginning in Q3, Saudi Arabia.
Financial performance and liquidity
Amounts below are in millions of dollars, except per-share data and percentages.
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Revenue | $115.4 | $59.8 | $308.7 | $280.5 |
| Operating income | $20.8 | $12.6 | $49.7 | $61.6 |
| Operating margin | 18.0% | 21.0% | 16.1% | 22.0% |
| Net income | $17.2 | $10.9 | $47.1 | $53.1 |
| Net income attributable to Cactus, Inc. | $12.6 | $6.2 | $34.6 | $31.2 |
| Diluted EPS | $0.21 | $0.13 | $0.58 | $0.64 |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $52.1 | $121.5 |
Q3 revenue grew 92.9% year over year, while nine-month revenue rose 10.1%. Nine-month operating income fell 19.3%, reflecting rising costs and the prior-year comparison. Gross margin was approximately 28.5% in Q3 versus 35.0% in Q3 2020, and 26.8% for the first nine months versus 33.6% a year earlier.
At September 30, cash and cash equivalents were $302.0 million, total current assets were $491.8 million and current liabilities were $88.0 million. The company had no debt outstanding, and reported $75.0 million of available borrowing capacity under its asset-based revolver. It was covenant-compliant. The company stated that cash, operating cash flow and available borrowing capacity should cover anticipated needs for at least 12 months.
Nine-month operating cash flow declined to $52.1 million from $121.5 million, primarily due to working-capital investment, including higher receivables and inventory. Investing cash outflow was $8.4 million; financing cash outflow was $30.4 million. Cash increased $13.3 million from year-end 2020. The company estimated 2021 net capital expenditures of $10–$15 million.
Material changes versus comparable periods
- Q3 revenue increased across products, rentals and field service compared with Q3 2020. Product revenue was $74.8 million, rental revenue $15.3 million and field service and other revenue $25.3 million.
- For the first nine months, product revenue increased 20.4% and field service and other revenue increased 16.9%; rental revenue decreased 26.4%, as recovery in rental activity lagged and competing rental equipment remained available.
- Nine-month product costs increased 31.7%, faster than product revenue, reflecting materials, freight and overhead costs. The 2020 comparison also included $8.5 million of tariff-refund credits in product costs.
- Cash and cash equivalents increased from $288.7 million at December 31, 2020 to $302.0 million. The tax receivable agreement (TRA) liability rose from $204.4 million to $283.0 million.
- Cactus Inc.’s ownership of Cactus Wellhead, LLC increased from 63.3% at year-end 2020 to 77.9% at September 30, 2021, largely due to CW Unit redemptions. These transactions increased Class A shares and reduced non-controlling interest; Cactus received no proceeds.
Outlook, commentary and risks
- Management reported stronger customer demand as oil and gas prices and activity recovered, and anticipated continued activity growth in Q4 2021, subject to seasonal trends and potential adverse effects from COVID-19.
- The company added more than 300 employees in the first nine months, restored wage and salary reductions and the 401(k) match, and invested in fleet vehicles and rental equipment.
- Supply-chain pressures raised material, labor and freight costs. International freight costs reportedly rose from about $2,800 to over $17,000 per container; management expected elevated pricing to persist until mid-to-late 2022 and cautioned that cost increases could pressure margins if not recovered from customers.
- Demand remains sensitive to oil and gas prices, customer capital spending, drilling and completion activity, supply-chain availability and costs, and pandemic-related disruptions. A single customer represented 13% of nine-month 2021 revenue.
- The $283.0 million TRA liability includes $11.0 million current. The agreement generally requires payment of 85% of specified realized or deemed tax savings; early termination or certain change-of-control events could accelerate substantial payments.
- Management said routine legal matters were not expected to materially affect the company. No material changes to previously disclosed risk factors were reported.
Most important facts for investors to verify
- Whether revenue growth and the anticipated Q4 activity improvement continue, particularly in product sales and the slower-recovering rental business.
- Whether price increases and other cost-recovery efforts offset higher raw-material, labor and freight costs, and how margins trend.
- Whether working-capital needs continue to constrain operating cash flow as receivables and inventory rise.
- The timing and amount of future TRA payments, and the effect of further CW Unit redemptions on ownership, share count, taxes and diluted EPS.
- Whether estimated 2021 capital expenditures remain within the $10–$15 million range and liquidity remains sufficient for operating needs, distributions, dividends and TRA obligations.