Cactus, Inc. — Q1 2020 Form 10-Q Summary
Reporting period: Three months ended March 31, 2020. Cactus designs, manufactures, sells and rents wellhead and pressure-control equipment and provides related field services, primarily to onshore oil and gas customers. Results are consolidated with Cactus Wellhead, LLC and include a non-controlling interest.
Financial results and liquidity
| Metric | Q1 2020 | Q1 2019 | Change |
|---|---|---|---|
| Revenue | $154.1 million | $158.9 million | Down 3.0% |
| Operating income | $40.2 million | $48.5 million | Down 17.1% |
| Operating margin | 26.1% | 30.5% | Down 4.4 percentage points |
| Net income | $33.1 million | $48.4 million | Down 31.7% |
| Net income attributable to Cactus, Inc. | $19.0 million | $26.8 million | Down 29.2% |
| Basic / diluted EPS | $0.40 / $0.40 | $0.69 / $0.59 | Lower year over year |
| Operating cash flow | $45.2 million | $34.2 million | Up $10.9 million |
| Capital expenditures and other, net | $8.3 million used | $13.8 million used | Lower spend |
Product revenue was $87.0 million, rental revenue $36.2 million, and field service and other revenue $30.9 million. Cash and cash equivalents were $230.2 million at quarter-end, up from $202.6 million at December 31, 2019. The company had no borrowings under its $75 million revolving credit facility and reported full availability and covenant compliance. It also had finance lease obligations of $10.5 million and an aggregate tax receivable agreement (TRA) liability of $216.5 million. Current assets were $435.3 million and current liabilities $81.4 million.
Changes versus the prior comparable period
- Product revenue edged up 0.5%, but rental revenue fell 6.1% and field service and other revenue fell 8.3%.
- Operating income declined as product and rental costs rose, while total costs and expenses increased 3.2% despite lower revenue. Product costs reflected higher sales volume, tariffs and inventory obsolescence reserves; rental costs included higher depreciation and scrap and rework.
- Net income was also affected by income tax expense of $7.5 million, compared with a $1.0 million tax benefit in Q1 2019. The company reported an 18.5% effective tax rate for Q1 2020.
- Operating cash flow increased primarily because of lower net working-capital use. Investing outflows decreased, while financing outflows rose, including $4.3 million of Class A dividends paid.
Outlook, commentary and risks
- Management expected demand to be severely affected for the remainder of 2020 and potentially beyond, but said the duration and full impact of the downturn could not be estimated. COVID-19-driven demand declines, oil-price instability, oversupply and limited storage capacity led customers to announce significant 2020 capital-spending cuts.
- The U.S. onshore rig count averaged 763 in Q1 2020 versus 1,021 a year earlier and was 448 on April 24, 2020. Management anticipated further declines and reduced demand.
- Cost actions included wage and compensation reductions, a reduction of 277 U.S. positions announced by quarter-end, and additional reductions affecting 212 employees in April. March measures were estimated to generate about $35 million in annualized savings; April workforce reductions were estimated to add about $23 million in annualized savings.
- Management reduced planned capital spending and estimated 2020 net capital expenditures of $20 million to $30 million, primarily for rental fleet investments. It said cash, operating cash flow and available credit were expected to cover requirements for at least 12 months, including capital spending, TRA payments, taxes and dividends.
- Impairment assessments found no impairment of long-lived assets or goodwill as of March 31, 2020; management cautioned that future impairment charges remained possible if conditions worsened.
- U.S. tariff exclusions announced March 26 applied retroactively to certain covered Chinese imports through August 7, 2020; not all affected products were covered. The company said substantially all products imported through its Chinese supply chain had been subject to Section 301 tariffs.
- The TRA generally requires payment to holders of 85% of specified realized or deemed tax savings. Early termination could trigger a substantial accelerated payment. Ordinary-course disputes and litigation were not expected by management to have a material adverse effect.
- The Suzhou, China facility closed for 10 days in late January, reopened February 10 and returned to full capacity by quarter-end; the company reported no ongoing China workforce or supply-chain disruption at the filing date.
Important facts for investors to verify
- How quickly customer spending, rig counts and completion activity respond to oil prices, storage constraints and the pandemic.
- Whether announced workforce and compensation actions deliver the estimated savings, and whether further restructuring or severance costs arise.
- Cash conversion and working-capital trends, including receivables collection, expected credit losses and inventory obsolescence.
- The timing and cash impact of TRA payments, including the risk of accelerated payment under a qualifying termination event.
- Capital spending against the $20 million to $30 million estimate and the status of tariff exclusions after August 7, 2020.