Cactus, Inc. — Q2 2018 Form 10-Q
Reporting period: Three and six months ended June 30, 2018. Cactus designs, manufactures, sells and rents wellhead and pressure-control equipment and provides related field services. Results reflect a major structural change: the company completed its IPO in February 2018 and, as of June 30, owned 35.3% of Cactus LLC; the remaining income was attributable to non-controlling owners. Unless stated otherwise, financial amounts below are USD millions.
Financial results
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Revenue | $138.5 | $81.9 | $253.7 | $140.4 |
| Operating income | $46.5 | $22.1 | $81.7 | $32.1 |
| Operating margin | 33.6% | 27.0% | 32.2% | 22.8% |
| Net income, consolidated | $41.5 | $16.6 | $68.0 | $21.4 |
| Net income attributable to Cactus, Inc. | $12.3 | — | $16.1 | — |
| Class A diluted EPS | $0.46 | — | $0.60 | — |
Revenue increased 69% in Q2 and 81% in the first half. Q2 product revenue rose 62% to $73.3 million, rental revenue 86% to $34.9 million, and field service and other revenue 70% to $30.3 million. First-half revenue mix was 52% products, 25% rentals and 23% field service and other. Derived gross margin was approximately 40.7% in Q2 versus 35.9% a year earlier, and 39.7% for the first half versus 32.4%.
Q2 consolidated net income is not equivalent to earnings available to Class A shareholders: $29.2 million was attributable to non-controlling interest. Prior-year EPS is not presented because Cactus, Inc. had no publicly traded shares before the IPO. The filing also notes different entity-level tax treatment before and after the IPO.
Cash flow, debt and liquidity
- First-half operating cash flow was $80.7 million, versus $6.4 million in 2017; investing cash outflow was $31.3 million, including $32.1 million of capital expenditures.
- Cash was $28.4 million at June 30, up from $7.6 million at year-end. Current assets were $209.3 million and current liabilities $67.8 million, for working capital of $141.5 million.
- IPO proceeds were used to repay the $248.5 million term loan and redeem $216.4 million of CW Units. No debt was outstanding at June 30; the company had access to its full $50 million revolving facility and was covenant-compliant. The facility matures July 31, 2019.
- Management said cash, operating cash flow and revolver availability should cover working capital, anticipated capital spending, member distributions and tax obligations for at least 12 months.
Changes, outlook and key risks
- Growth reflected increased U.S. onshore activity and higher utilization of a larger rental fleet. The company reported a Q2 average U.S. onshore rig count of 1,017, up 17% year over year, and 264 rigs followed by Cactus, up 25%.
- Management expected 2018 net capital expenditures of $50–$60 million, excluding acquisitions, citing expanded frac-equipment investment and facility expansion. No revenue or earnings guidance was provided.
- IPO-related changes include a $4.3 million first-quarter debt-extinguishment loss, new public-company and stock-compensation costs, and a $63.0 million recorded tax receivable agreement (TRA) liability. The company generally owes TRA holders 85% of qualifying tax savings. A hypothetical early termination as of June 30 was estimated at approximately $363 million; the filing says the July follow-on offering will increase the TRA liability, but does not provide the resulting amount.
- On July 16, 2018, after quarter-end, Cactus completed a follow-on offering generating $359.3 million net proceeds, used to redeem CW Units. Cactus, Inc.’s ownership of Cactus LLC increased to 50.3%.
- Risks include oil-and-gas activity and pricing volatility, completion-market competition and pricing, raw-material availability and costs, and uncertainty from U.S.–China tariffs. One customer accounted for 11% of first-half revenue; one supplier represented approximately 21% of third-party purchases. Management did not expect ordinary-course legal matters to have a material adverse effect.
Important facts for investors to verify
- Whether rig, well-completion and rental-fleet utilization trends sustain revenue growth and margins, given the industry’s sensitivity to activity and pricing.
- The realized cost and return on the $50–$60 million 2018 capital-spending plan.
- The post-follow-on TRA liability, expected payment timing, and the company’s capacity to fund TRA payments and distributions.
- Exposure to the concentrated customer and supplier, including any effects from tariffs on China-sourced products or materials.
- How the increased Cactus LLC ownership affects future income attributable to Cactus, Inc., taxes and per-share results.