Cactus, Inc. — Q2 2020 Form 10-Q Summary
Business context and reporting period
Quarter ended June 30, 2020. Cactus designs, manufactures, sells and rents wellhead and pressure-control equipment and provides related field services, primarily to onshore oil and gas customers. The filing reports one business segment. Results were sharply affected by COVID-19, weak oil demand and reduced customer capital spending.
Financial performance
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Revenue | $66.5 million | $168.5 million | $220.7 million | $327.4 million |
| Operating income | $8.9 million | $51.5 million | $49.1 million | $99.9 million |
| Net income | $9.1 million | $40.8 million | $42.2 million | $89.2 million |
| Net income attributable to Cactus, Inc. | $6.0 million | $21.4 million | $25.0 million | $48.2 million |
| Diluted EPS | $0.11 | $0.45 | $0.51 | $1.07 |
| Operating cash flow | Not stated separately | Not stated separately | $102.5 million | $98.3 million |
| Capital expenditures, net | Not stated separately | Not stated separately | $16.6 million | $28.7 million |
Q2 revenue fell 60.5% year over year; product, rental, and field service revenue declined 56.7%, 70.9%, and 59.0%, respectively. Six-month revenue decreased 32.6%. Approximate operating margin was 13.3% in Q2 2020 versus 30.5% in Q2 2019, and 22.2% versus 30.5% for the six-month periods. Approximate net margin was 13.7% versus 24.2% in Q2 and 19.1% versus 27.2% for the six-month periods.
At June 30, cash and cash equivalents were $270.7 million, current assets $416.7 million, and current liabilities $58.8 million. The company had no debt outstanding, $45.8 million of available borrowing capacity under its asset-based revolver, and was in compliance with its covenants. Total liabilities were $274.2 million, including a $215.5 million tax receivable agreement (TRA) liability. Operating cash flow benefited from lower working-capital requirements, including collections and inventory reductions.
Material changes and notable items
- Profitability contracted substantially as customer drilling and completion activity fell. Cost reductions partly offset the revenue decline; Q2 included $0.9 million of severance expense and $3.4 million of tariff-refund credits in product and rental costs.
- The company reduced its worldwide workforce by approximately 50% and implemented executive, employee and board compensation reductions, along with suspension of its 401(k) match. Management estimated annualized savings from workforce, wage and other payroll measures at approximately $85 million.
- Cash increased from $202.6 million at year-end 2019 to $270.7 million. Six-month financing outflows included $8.6 million of Class A dividends and $4.7 million of distributions to other Cactus LLC members.
- The company recognized approximately $7.7 million of tariff refunds, including interest; about $6.3 million of additional potential refunds remained unrecognized and subject to government review. The tariff exclusion was scheduled to expire August 7, 2020, with extension uncertain.
- After quarter-end, the company paid $14.2 million under the TRA following finalization of its 2019 federal tax return. The balance-sheet current TRA liability includes this payment and an estimated 2021 payment.
Outlook, risks and contingencies
Management expected weakened demand to continue through the second half of 2020 and potentially beyond, but said the duration and full impact were not estimable. The U.S. onshore rig count averaged 378 in Q2 2020, compared with 963 a year earlier, and was 239 as of July 24, 2020. Management estimated 2020 net capital expenditures of $20 million to $25 million and believed cash, operating cash flow and available borrowing capacity would cover at least the next 12 months of requirements, including expected TRA payments, taxes and dividends.
Key risks include the uncertain trajectory of COVID-19 and oil prices, further reductions in customer spending and activity, customer credit losses, and dependence on oilfield demand. The company noted ordinary-course legal disputes but did not expect them to materially affect its financial position or results. An early TRA termination could accelerate a substantial payment. Management reported no impairment of long-lived assets or goodwill at June 30, 2020; the assessment relied on forecasts and assumptions.
Important facts for investors to verify
- Whether customer activity and demand stabilized or deteriorated after quarter-end, and how that affected revenues, margins and cash generation.
- Whether management achieved the stated annualized cost savings and how further workforce or cost actions affected service capacity.
- Actual recovery and timing of the remaining tariff refunds, and whether the exclusions were extended beyond August 7, 2020.
- TRA payment timing and the company’s ability to meet the substantial long-term liability while sustaining dividends and other distributions.
- Whether 2020 capital expenditures remained within the $20 million to $25 million estimate and whether cash and revolver availability remained adequate.