Cactus, Inc. — Q3 2023 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2023. Dollar amounts below are in millions unless stated otherwise.
Business context
Cactus supplies equipment and services for onshore oil and gas markets. Since acquiring FlexSteel on February 28, 2023, it reports two segments: Pressure Control and Spoolable Technologies. The 2023 results include FlexSteel from the acquisition date; therefore, year-over-year consolidated comparisons include acquisition-related effects and are not fully like-for-like.
Financial highlights
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Revenue | $287.9 | $184.5 | $822.1 | $500.6 |
| Operating income | $87.6 | $51.3 | $185.8 | $126.5 |
| Operating margin | 30.4% | 27.8% | 22.6% | 25.3% |
| Net income | $68.0 | $41.5 | $152.8 | $104.4 |
| Net income attributable to Cactus, Inc. | $52.6 | $31.4 | $120.2 | $79.2 |
| Diluted EPS | $0.80 | $0.51 | $1.82 | $1.30 |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $248.6 | $78.6 |
- Q3 revenue increased 56.0% year over year, primarily reflecting FlexSteel, while Pressure Control revenue was $182.5 million versus $184.5 million. Spoolable Technologies contributed $105.4 million.
- Nine-month revenue rose 64.2%; Pressure Control revenue increased 15.1% and Spoolable Technologies contributed $245.8 million from the acquisition date.
- Q3 revenue was down 5.9% from Q2. Pressure Control revenue fell 8.4%, mainly due to lower equipment sales and related field services amid reduced activity; Spoolable Technologies revenue declined 1.2%.
- Nine-month investing cash outflow was $645.2 million, primarily the $621.5 million FlexSteel cash purchase price, net of cash acquired, plus capital spending. Capital expenditures and other were $33.4 million.
- Cash declined to $63.7 million from $344.5 million at year-end 2022. At September 30, current assets were $492.9 million and current liabilities were $177.4 million.
- No debt was outstanding at quarter-end; $222.9 million of ABL borrowing capacity was available, with $1.5 million in letters of credit. The company reported compliance with credit-facility covenants.
Material changes and unusual items
- FlexSteel acquisition consideration was $621.5 million cash plus estimated contingent consideration of $6.0 million at acquisition. The earn-out can reach $75 million and is payable by Q3 2024 if revenue targets are met; its fair value was $18.9 million at September 30.
- Q3 operating income included a $5.1 million gain from the earn-out fair-value remeasurement. Nine-month results included $13.1 million of earn-out remeasurement expense, $23.5 million of acquired-inventory step-up expense, and $16.3 million of acquired-intangible amortization.
- Q3 Spoolable Technologies operating income was $39.8 million versus a $6.0 million loss in Q2, reflecting the earn-out fair-value gain and lower inventory step-up and amortization expenses.
- Nine-month operating cash flow improved year over year with higher earnings and more favorable working-capital movements, partly offset by higher tax, tax receivable agreement (TRA), and interest payments.
- The company paid $26.9 million under the TRA during the nine months. The TRA liability was $271.1 million at September 30, including $20.9 million current.
- Net income tax expense for nine months was $30.6 million and included a $12.1 million benefit from releasing a valuation allowance, partly offset by other tax adjustments.
Outlook, risks and contingencies
- Management expected a modest recovery in oil and gas activity in Q4 2023 versus Q3, barring significant developments in the Middle East. The filing does not provide revenue or earnings guidance.
- Estimated 2023 net capital expenditures were $35–$40 million. Management stated cash, operating cash flow, and available borrowing capacity should cover anticipated needs for at least the next 12 months, including capital spending, taxes, TRA payments, dividends, and repurchases.
- Management noted lower drilling and completion activity in Q3. Oil and gas prices, rig and completion activity, raw-material availability and cost, competition, and broader economic conditions may affect results. The Middle East conflict was identified as a risk to commodity prices, activity, and global conditions.
- The $150 million share repurchase authorization was largely unused at September 30; $149.8 million remained available. The program is discretionary and may be suspended or discontinued.
- Management did not expect ordinary-course legal matters to have a material adverse effect. Disclosure controls were deemed effective; FlexSteel was excluded from the assessment scope while reporting controls are being implemented.
Investor verification points
- Separate underlying Pressure Control trends from acquisition-driven consolidated growth, and assess the comparability of reported margins given purchase-accounting and acquisition costs.
- Track FlexSteel performance against the earn-out revenue targets and the effect of fair-value remeasurements on reported earnings.
- Review cash conversion, working-capital requirements, capital spending, and liquidity after the acquisition-related cash outflow.
- Assess the future timing and amount of TRA payments and the potential cash cost of any early termination.
- Monitor oil and gas activity, Middle East developments, and completion of FlexSteel’s financial-reporting control integration.