Cactus, Inc. — Q2 2019 Form 10-Q
Reporting period: Three and six months ended June 30, 2019; comparisons are with the corresponding 2018 periods. Cactus designs, manufactures, sells and rents wellhead and pressure-control equipment and provides related field services, primarily to U.S. onshore oil and gas customers. Figures below are in millions of dollars unless otherwise noted.
Financial performance
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Revenue | $168.5 | $138.5 | $327.4 | $253.7 |
| Operating income | $51.5 | $46.5 | $99.9 | $81.7 |
| Operating margin | 30.5% | 33.6% | 30.5% | 32.2% |
| Net income, consolidated | $40.8 | $41.5 | $89.2 | $68.0 |
| Net income attributable to Cactus, Inc. | $21.4 | $12.3 | $48.2 | $16.1 |
| Class A diluted EPS | $0.45 | $0.46 | $1.07 | $0.60 |
Q2 revenue grew 21.6% year over year; product revenue rose 28.9%, rental revenue 13.3%, and field service and other revenue 13.5%. For the first half, revenue increased 29.1%, with product, rental and field service revenue up 37.0%, 21.8% and 18.8%, respectively. Management attributed growth mainly to increased market share and customer drilling efficiencies, and to rental-fleet investment supporting completion activity.
Operating costs grew faster than revenue in both comparisons, compressing operating margins. Rental costs rose 39% in Q2 and 42.5% in the first half, reflecting higher depreciation and repair/deployment costs for a larger, more active fleet. SG&A increased 34.5% and 36.7%, respectively, reflecting growth-related payroll and incentives, stock compensation and public-company costs. Consolidated Q2 net income declined 1.9%, despite higher operating income, in part because income tax expense increased to $10.8 million from $4.7 million. Cactus-attributable earnings and EPS also reflect changes in Cactus Inc.’s ownership of Cactus LLC and share counts; the six-month diluted EPS calculation includes assumed conversion of non-controlling units.
Cash flow, liquidity and obligations
- First-half operating cash flow was $98.3 million, compared with $80.7 million in 2018. Investing cash outflow was $28.7 million, primarily reflecting capital expenditures; financing cash outflow was $9.1 million.
- Cash and equivalents were $131.1 million at June 30, 2019, up from $70.8 million at year-end. Current assets were $364.5 million and current liabilities $93.0 million, or approximately $271.6 million of working capital.
- No long-term debt was outstanding and the $75 million asset-based revolver was undrawn, with its full capacity available. The company reported compliance with facility covenants.
- Recorded tax receivable agreement (TRA) liability was $230.6 million. The company estimated that termination at June 30 would require approximately $347 million on a discounted basis ($471 million undiscounted), subject to assumptions. Operating and finance lease liabilities totaled approximately $38.9 million.
- Net capital expenditures for 2019 were estimated at $50–$60 million, excluding acquisitions, mostly for rental-fleet investment. Management said available cash, operating cash flow and revolver capacity should meet working capital, capital expenditure, distribution, tax and TRA needs for at least 12 months.
Outlook, risks and notable items
- Market outlook: Management noted that the U.S. onshore rig count averaged 992 in the first half, versus 1,011 for 2018, and was 938 at June 30. It cited expectations for lower drilling activity and possible customer spending reductions in the second half of 2019; sustained lower activity could reduce demand.
- Tariffs: The tariff rate on covered Chinese imports increased from 10% to 25% for products exported on or after May 10, 2019. About 50% of first-half inventory receipts were sourced through the Chinese supply chain. Management said tariffs may adversely affect results, with potential mitigation from pre-tariff inventory, supplier negotiations and currency effects.
- Taxes and TRA: Q2 included $4.0 million of tax expense from an increased valuation allowance; first-half tax expense was net of a $4.2 million valuation-allowance release related to unit redemptions and the March secondary offering. TRA payments depend on future tax savings and other assumptions; early termination or a change of control could accelerate substantial payments and pressure liquidity.
- Ownership transactions: In the March 2019 secondary offering, selling stockholders sold shares and redeemed CW Units; Cactus received no sale proceeds. Cactus Inc.’s ownership of Cactus LLC increased from 50.3% at December 31, 2018 to 62.7% at June 30, 2019. The filing also corrected an immaterial prior-period equity allocation error, with no impact on total equity or results.
- Controls and contingencies: Management concluded disclosure controls were not effective at June 30 because of a previously disclosed material weakness in internal control over financial reporting. The filing reports no material change in risk factors and says ordinary-course litigation is not expected to have a material adverse effect.
Most important facts for investors to verify
- Whether second-half rig counts, customer capital budgets and completion activity weakened as management anticipated, and the resulting impact on orders, rentals and margins.
- Actual tariff exposure and the extent to which inventory timing, supplier negotiations or other measures offset higher costs.
- Progress in remediating the material weakness and whether disclosure controls become effective.
- TRA payment timing and sensitivity to future redemptions, share price, taxable income and potential change-of-control or termination events.
- Whether rental-fleet investment generates returns sufficient to offset higher depreciation, repair and deployment costs; compare actual 2019 capital spending with the $50–$60 million estimate.