Cactus, Inc. — Q1 2019 Form 10-Q
Business context and period. For the three months ended March 31, 2019, Cactus designed, manufactured, sold and rented wellhead and pressure-control equipment and provided related field services, primarily to U.S. onshore oil and gas customers. Approximately 99% of revenue came from the United States.
Financial performance
Amounts in millions, except per-share data. Comparisons are with Q1 2018.
| Metric | Q1 2019 | Q1 2018 | Change |
|---|---|---|---|
| Revenue | $158.9 | $115.1 | +38.0% |
| Operating income | $48.5 | $35.2 | +37.7% |
| Net income | $48.4 | $26.4 | +83.5% |
| Net income attributable to Cactus, Inc. | $26.8 | $3.8 | — |
| Basic / diluted EPS | $0.69 / $0.59 | $0.14 / $0.14 | — |
| Cash provided by operations | $34.2 | $38.6 | Down $4.3 |
| Capital expenditures and other investing outflows | $14.7 | $16.1 | — |
- Revenue mix: product $86.6 million (+47.0%); rental $38.5 million (+32.1%); field service and other $33.7 million (+24.8%).
- Gross profit was approximately $61.2 million versus $44.3 million; gross margin was approximately 38.5% in both periods. Operating margin was approximately 30.5%, compared with 30.6%.
- Cash and cash equivalents were $88.1 million at March 31, 2019, up from $70.8 million at year-end. Current assets were $315.2 million and current liabilities $84.1 million.
- No long-term debt or ABL borrowings were outstanding. The company had access to the full $75 million revolving facility and was in compliance with its covenants.
Changes, outlook and risks
- Growth reflected higher customer demand and market share: the average U.S. onshore rig count rose 8%, while Cactus rigs followed increased 19% to 297. A larger rental fleet also supported rental growth.
- Operating cash flow declined despite higher earnings, primarily due to greater working-capital use as activity increased, including higher accounts receivable and inventory.
- Management estimated 2019 net capital expenditures of $60–$65 million, mostly for rental fleet investment. It said cash, operating cash flow and available credit should cover expected needs for at least 12 months.
- Management noted that customer capital-budget reductions and lower rig counts could weaken demand; the March 31 rig count was below the year-to-date average. Drilled-but-uncompleted wells may offer completion opportunities, but not all are expected to be completed. Seasonality can reduce fourth-quarter activity and margins.
- The filing reported a proposed increase in U.S. tariffs on certain Chinese imports from 10% to 25%, effective May 10, 2019 absent a trade agreement, creating potential cost pressure.
- The tax receivable agreement (TRA) liability was $224.5 million. Cactus generally owes TRA holders 85% of qualifying realized or deemed tax savings. Management estimated a $342 million discounted termination payment as of March 31, versus an undiscounted amount of $471 million; early termination or a change of control could materially affect liquidity.
- An $8.2 million valuation-allowance release related to the March secondary offering contributed to the Q1 tax benefit of $1.0 million. The secondary offering was by selling stockholders; Cactus received no proceeds and recorded $1.0 million of offering expenses.
- Disclosure controls were concluded to be ineffective because of a previously disclosed material weakness in internal control over financial reporting; no material change in internal control was reported during the quarter.
- Management said ordinary-course legal matters were not expected to have a material adverse effect. The filing reported no material changes to previously disclosed risk factors.
Most important facts to verify
- Whether revenue growth and rig-following gains continued after Q1, given oilfield activity and customer budget sensitivity.
- Whether working-capital investment, rental-fleet spending and the $60–$65 million 2019 capital plan convert into sustainable cash generation.
- The timing and actual cash impact of TRA payments, including the effects of future unit redemptions, taxable income and any termination or change-of-control event.
- Progress remediating the material weakness and restoring effective disclosure controls.
- The actual impact of proposed tariffs and other raw-material or supply-chain pressures on costs and margins.
- Comparability of attributable earnings and EPS: Cactus’s ownership of Cactus LLC rose to 61.8% from 50.3% at year-end, and Q1 2018 included different IPO-related ownership and financing effects.