Cactus, Inc. — Q1 2018 Form 10-Q
Business context and reporting period
Quarter ended March 31, 2018. Cactus designs, manufactures, sells and rents wellhead and pressure-control equipment, and provides related field services. The company completed its IPO and reorganization in February 2018; accordingly, the quarter includes pre- and post-IPO results, while Q1 2017 reflects the predecessor LLC and is not fully comparable. Unless noted, financial amounts below are in millions.
Financial results and liquidity
| Metric | Q1 2018 | Q1 2017 / comparison |
|---|---|---|
| Product revenue | $58.9 | $33.0; up 78.4% |
| Rental revenue | $29.1 | $13.0; up 124.6% |
| Field service and other revenue | $27.0 | $12.5; up 116.5% |
| Total revenue | $115.1 | $58.5; up 96.8% |
| Gross profit before SG&A | $44.3; 38.5% margin | $16.1; 27.5% margin |
| Operating income | $35.2; 30.6% margin | $10.0; 17.1% margin |
| Net income, consolidated | $26.4 | $4.9 |
| Net income attributable to Cactus, Inc. | $3.8; $0.14 per Class A share, basic and diluted | No Class A shares or comparable EPS before IPO |
| Cash from operating activities | $38.6 | $5.9 |
| Capital expenditures | $16.1 | $8.6 |
At March 31, cash was $7.9, current assets were $167.8 and current liabilities were $58.7. The company had no term-loan or revolving-credit borrowings outstanding and reported the full $50.0 revolving facility available. It repaid approximately $251.0 of term-loan principal and accrued interest using IPO proceeds. Capital lease obligations were $14.4, including current and long-term portions. A $63.0 tax receivable agreement (TRA) liability was recorded. The current ratio was approximately 2.9.
Material changes versus the prior comparable period
- Revenue growth reflected increased U.S. onshore drilling and completion activity, higher utilization of the rental fleet, and higher demand for related services. The average U.S. onshore rig count rose 32% year over year, and rigs followed by Cactus rose 53% to 250.
- Operating income grew faster than revenue, with operating margin increasing to 30.6% from 17.1%. Costs rose with volumes, fleet depreciation and repairs, and additional field staffing; SG&A also increased 49%, partly due to public-company costs and IPO-related stock compensation.
- Net interest expense declined 43% to $2.9 following repayment of the term loan. A $4.3 noncash loss on debt extinguishment, from writing off unamortized debt discount and loan costs, reduced pretax income.
- Cash from operations increased substantially, while investing cash use rose with rental-equipment purchases. Financing cash flows reflected IPO proceeds, debt repayment, unit redemptions and a $26.0 pre-IPO distribution to owners.
- IPO accounting materially changed the balance sheet: it recognized a $73.2 net deferred tax asset, a $63.0 TRA liability, and non-controlling interest. Cactus, Inc. owned 35.3% of Cactus LLC at quarter-end; the other 64.7% is reflected as non-controlling interest.
Outlook, risks and unusual items
- Management cited rising oilfield activity and expects demand to benefit from higher drilling and completion activity, but revenue remains sensitive to commodity prices, rig and well counts, customer spending, rental pricing and equipment availability. No specific revenue or earnings guidance was provided.
- Estimated 2018 capital expenditures are $50–$60 million, excluding acquisitions, including expanded investment in frac equipment and certain facilities. Management expects cash, operating cash flow and revolver availability to meet working capital, capex, tax distributions and anticipated tax needs for at least 12 months.
- The TRA generally requires payment to eligible holders of 85% of specified realized or deemed tax savings. The filing estimates that an early termination as of March 31 could require approximately $304.6 million, based on stated assumptions; actual timing and amounts depend on future taxable income, redemptions and other factors. Payments could exceed actual tax savings and pressure liquidity.
- Market risks include oil and gas volatility, competitive and price-sensitive rental markets, raw-material supply and costs, skilled-labor availability, and possible trade tariffs on Chinese imports. The filing specifically notes uncertainty around proposed U.S. and Chinese Section 301 tariffs.
- One customer represented 11% of Q1 revenue. One vendor supplied approximately 21% of third-party vendor purchases, indicating customer and supplier concentration. Management stated ordinary-course legal matters were not expected to have a material adverse effect.
Important facts for investors to verify
- Whether rig, well-completion and customer activity—and resulting rental utilization and pricing—sustain the reported revenue and margin gains.
- How the $50–$60 million capex plan affects free cash flow and whether fleet investment earns adequate returns.
- The timing, cash funding and sensitivity of TRA payments, including the assumptions underlying the $63.0 million recorded liability and estimated $304.6 million early-termination amount.
- Effects of the post-IPO ownership structure, non-controlling interest and future unit redemptions on income attributable to Class A shareholders and per-share results.
- Exposure to tariffs, the concentrated supplier relationship, and the revolving facility’s July 2019 maturity and covenant restrictions.