Cactus, Inc. — 2022 Form 10-K Summary
Business and reporting period. This filing covers the fiscal year ended December 31, 2022. Cactus designs, manufactures and sells wellhead and pressure-control equipment, rents completion equipment, and provides related field and repair services, primarily to onshore oil and gas operators. The results below exclude FlexSteel: Cactus acquired the business on February 28, 2023, and expected to include its results beginning in the quarter ended March 31, 2023.
Financial performance
| Metric | 2022 | 2021 | Change |
|---|---|---|---|
| Revenue | $688.4 million | $438.6 million | +57.0% |
| Operating income | $174.7 million | $75.4 million | +131.7% |
| Operating margin | 25.4% | 17.2% | +8.2 percentage points |
| Net income | $145.1 million | $67.5 million | +115.1% |
| Net income attributable to Cactus, Inc. | $110.2 million | $49.6 million | +122.2% |
| Diluted earnings per Class A share | $1.80 | $0.83 | +$0.97 |
| Operating cash flow | $117.9 million | $63.8 million | +$54.1 million |
- Product revenue rose 61% to $452.6 million; rental revenue rose 63% to $100.5 million; field service and other revenue rose 41% to $135.3 million. Higher customer activity and cost-recovery efforts supported growth.
- Gross costs and SG&A also increased. Product costs rose 47%, rental costs 14%, field-service costs 44%, and SG&A 47%. SG&A included approximately $8.4 million of FlexSteel transaction costs.
- Cash used in investing was $25.5 million, mainly for rental-fleet investments and expansion of the Bossier City facility. Cash used in financing was $47.4 million, including $26.7 million of dividends and $9.7 million of distributions to non-controlling members.
Financial position and liquidity
- At December 31, 2022, cash and cash equivalents were $344.5 million; current assets were $654.6 million and current liabilities were $116.6 million.
- Cactus had no borrowings outstanding under its ABL facility at year-end and reported $79.9 million of available borrowing capacity. The company reported compliance with facility covenants.
- Total liabilities included a $292.6 million tax receivable agreement (TRA) liability, of which $27.5 million was current. The filing estimated a discounted TRA termination payment of approximately $291.2 million as of year-end, subject to assumptions and potentially materially different actual amounts.
- The company declared dividends of $0.44 per Class A share for 2022, compared with $0.38 in 2021. It said it intended to continue the quarterly dividend at current levels, subject to board discretion and financial conditions.
Material changes, outlook and significant items
- Revenue and profit growth reflected increased drilling and completion activity. The U.S. onshore rig count was 762 at year-end 2022, versus 570 at year-end 2021. Management noted early-2023 rig activity was relatively stable, while weaker natural-gas prices were a potential headwind; customers were primarily oil-focused.
- Management estimated 2023 net capital expenditures of $35 million to $45 million, excluding the FlexSteel acquisition. Planned uses included rental assets, a possible facility purchase, international expansion and a Houston research-and-development facility. This is an estimate, not earnings guidance.
- On February 28, 2023, Cactus completed the FlexSteel acquisition for approximately $621.2 million, subject to customary adjustments, and may owe up to $75 million in additional earn-out payments if revenue-growth targets are met. Funding included $165.6 million of net proceeds from a January 2023 equity offering, cash on hand and new borrowing.
- At closing, Cactus borrowed the full $125 million term loan under its amended credit facility, which also provides up to $225 million in revolving commitments. The term loan matures in February 2026; revolving loans mature in July 2027. The facility includes repayment requirements, financial covenants, collateral and restrictions on certain actions.
- Inflation raised materials, freight, vehicle and personnel costs. Management said some input costs and shipping pressures were moderating, but expected continued inflationary pressure on parts of its cost structure and could not assure costs would return to prior levels.
Risks, contingencies and unusual items
- Results depend on volatile oil and gas prices, drilling and completion activity, customer spending, competition, labor availability, supply-chain conditions and customers’ financial health. Inflation, recession risk and geopolitical disruption could further affect demand and costs.
- Environmental, climate, methane-emissions and hydraulic-fracturing or wastewater-disposal regulation could increase costs or reduce customer activity. Product or field-service failures, workplace incidents, litigation and insufficient insurance or customer indemnification also present risks.
- FlexSteel integration, unanticipated liabilities, capital needs and failure to achieve expected benefits are material post-acquisition risks. Acquisition financing increases interest expense and introduces debt covenants and collateral claims.
- The TRA is a significant liquidity exposure: Cactus generally owes TRA holders 85% of specified realized or deemed tax savings. Early termination or a change of control could accelerate payments and could require amounts exceeding actual cash tax savings.
- No pending litigation was identified that management believed would have a material adverse effect. The independent auditor gave unqualified opinions on the financial statements and internal control; management and the auditor reported effective internal control over financial reporting as of December 31, 2022. The auditor identified the TRA liability calculation as a critical audit matter.
Most important facts for investors to verify
- How FlexSteel’s results, purchase-price allocation, integration costs and any earn-out develop after the acquisition.
- Actual borrowing, repayment, interest expense, covenant headroom and available revolver capacity under the amended credit facility.
- Cash generation and working-capital needs, particularly inventory and receivables, as activity and revenue change.
- The assumptions, timing and cash demands associated with the $292.6 million TRA liability.
- Whether management’s $35 million–$45 million 2023 capital-spending estimate and current dividend intention remain appropriate, noting the estimate excludes FlexSteel.
- Exposure to commodity-price changes, inflation, customer concentration, regulation and supply or labor constraints.