Cactus, Inc. — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023; unaudited. Comparative results are for Q1 2022 unless stated otherwise. Dollar amounts below are in millions.
Business context and reporting period
Cactus provides equipment and services primarily to onshore oil and gas markets. On February 28, 2023, it acquired FlexSteel, adding the Spoolable Technologies segment to its Pressure Control business. FlexSteel’s results are included only from the acquisition date through quarter-end. Cactus reported $33.8 million of FlexSteel revenue and $0.4 million of net income for that period.
Financial results and liquidity
| Metric | Q1 2023 | Q1 2022 | Change |
|---|---|---|---|
| Revenue | $228.4 | $145.9 | +56.6% |
| Operating income | $49.7 | $31.0 | +60.3% |
| Net income | $52.3 | $27.1 | +93.1% |
| Net income attributable to Cactus, Inc. | $42.9 | $20.6 | +108.1% |
| Diluted EPS | $0.63 | $0.34 | +$0.29 |
| Operating cash flow | $60.5 | $17.2 | +$43.3 |
Operating margin was approximately 21.8%, versus 21.2% in Q1 2022. Net margin was approximately 22.9%, versus 18.6%. Cost of revenue implies gross margin of approximately 34.8%, versus 30.9%. These percentages are calculated from reported figures.
Revenue comprised product sales of $159.5 million, rentals of $27.8 million, and field service and other revenue of $41.1 million. Pressure Control generated $194.7 million of revenue and $49.4 million of operating income. Spoolable Technologies contributed $33.8 million of revenue and $0.2 million of operating income, including acquisition-related inventory step-up, intangible amortization, and higher depreciation.
Investing cash outflow was $633.2 million, mainly reflecting the FlexSteel acquisition; financing cash inflow was $303.2 million, including stock and debt proceeds. Capital expenditures were $15.9 million. Cash fell to $75.4 million from $344.5 million at year-end 2022, principally due to the acquisition.
At March 31, 2023, debt was $155.0 million gross ($151.7 million net of financing costs), including a $125.0 million term loan and $30.0 million revolver balance. The company reported $193.3 million of available borrowing capacity and $1.7 million of letters of credit. After quarter-end, it made $60.0 million in discretionary term-loan payments. Current assets were $527.5 million and current liabilities $186.6 million. The tax receivable agreement liability totaled $289.2 million.
Material changes and unusual items
- Revenue growth reflected stronger Pressure Control activity and the addition of FlexSteel; the acquisition makes year-over-year comparisons less like-for-like.
- FlexSteel’s cash consideration was approximately $624.2 million. Estimated total purchase consideration was $630.1 million, including $6.0 million estimated fair value for a contingent earn-out of up to $75 million. Purchase accounting remains preliminary.
- Q1 SG&A included approximately $7.5 million of acquisition transaction costs and $1.1 million of related reporting and accounting costs. FlexSteel results also included $4.2 million of inventory step-up expense and $3.7 million of acquired-intangible amortization.
- Q1 income tax expense was $1.9 million and included a $12.1 million benefit from releasing a valuation allowance, offset in part by a $4.3 million expense from deferred-tax remeasurement. Other income included non-cash revaluation effects related primarily to the tax receivable agreement.
Outlook, risks and contingencies
No specific revenue or earnings guidance was provided. Management expects existing cash, operating cash flow, and borrowing availability to cover needs for at least the next 12 months. Estimated 2023 net capital expenditures are $45 million to $55 million. Management described industry activity as robust in Q1, but expects lower natural-gas prices to affect gas-focused basins in coming quarters; oil-driven activity was expected to remain relatively stable at then-current oil prices, subject to economic conditions.
Demand depends on drilling, completion, and production activity, oil and gas prices, customer financing, and broader economic conditions. The filing added risks related to 2023 bank failures and a possible recession. Variable-rate debt creates interest-rate exposure; a 100-basis-point rate change was estimated to affect annual interest expense by approximately $1.6 million. The company reported compliance with credit-facility covenants at quarter-end. Management did not expect ordinary-course legal matters to have a material adverse effect. FlexSteel’s controls were excluded from the assessment of disclosure controls while integration work proceeds; management concluded disclosure controls were effective at the reasonable-assurance level.
Important facts for investors to verify
- Progress integrating FlexSteel, its performance over a full quarter, and whether expected complementary-market growth materializes.
- Final purchase-price allocation and working-capital adjustments, including the valuation of acquired assets, goodwill, and the contingent earn-out.
- Post-quarter debt balance after the $60 million prepayment, remaining borrowing capacity, and compliance with debt covenants.
- Sustainability of earnings excluding acquisition costs, purchase-accounting charges, and the valuation-allowance release.
- Exposure to oil and gas activity, lower natural-gas prices, economic or banking-sector disruption, and the tax receivable agreement’s future cash requirements.