Cactus, Inc. — FY 2019 Form 10-K
Reporting period: Fiscal year ended December 31, 2019. The filing also reports fourth-quarter results; it is an annual filing, not a standalone Q4 report. Cactus designs, manufactures, sells and rents wellhead and pressure-control equipment and provides related field services, primarily to onshore oil and gas customers.
Financial performance and liquidity
| Metric | FY 2019 | FY 2018 | Change |
|---|---|---|---|
| Revenue | $628.4 million | $544.1 million | +15.5% |
| Operating income | $183.2 million | $177.7 million | +3.1% |
| Operating margin | 29.1% | 32.7% | Down 3.6 percentage points |
| Net income, consolidated | $156.3 million | $150.3 million | +4.0% |
| Net income attributable to Cactus, Inc. | $85.6 million | $51.7 million | +65.6% |
| EPS attributable to Class A, basic / diluted | $1.90 / $1.88 | $1.60 / $1.58 | |
| Operating cash flow | $209.6 million | $167.2 million | |
| Cash and cash equivalents at year-end | $202.6 million | $70.8 million | |
| Bank debt outstanding | None | None |
Revenue comprised products ($357.1 million; 57%), rentals ($141.8 million; 22%) and field service and other ($129.5 million; 21%). Product revenue grew 22.9%, rental revenue 6.3% and field service and other 7.7%. Costs and expenses increased 21.5%, faster than revenue; higher product costs included tariff costs, while rental costs rose with fleet depreciation, repairs and deployment activity. SG&A increased 27.5% with growth-related compensation, stock compensation and public-company costs.
Consolidated net income includes income attributable to non-controlling interest. Cactus, Inc.’s ownership of Cactus LLC increased to 62.8% from 50.3%, affecting the portion attributable to Class A shareholders. Interest income, net was $0.9 million versus $3.6 million of net interest expense in 2018, reflecting repayment of the prior term loan and higher cash balances. The 2019 tax rate was 17.0%, compared with 11.5%; the filing cites increased Cactus, Inc. ownership and a deferred-tax-asset write-down associated with forecast state tax rates.
Cash used in investing was $55.9 million and cash used in financing was $21.7 million. Financing uses included $8.4 million of member distributions, $7.5 million of finance-lease payments and $4.2 million of Class A dividends. Working capital was approximately $323.8 million at year-end, based on current assets of $414.9 million less current liabilities of $91.1 million. The $216.5 million TRA liability includes $14.6 million current and $201.9 million noncurrent; finance and operating lease liabilities are additional obligations.
Material changes and Q4 comparison
- FY revenue grew, led by product sales, but operating margin declined as costs grew faster than revenue.
- Quarterly revenue was $140.2 million in Q4 2019 versus $139.8 million in Q4 2018. Q4 operating income fell to $36.1 million from $43.9 million, and consolidated net income fell to $31.3 million from $38.7 million.
- Operating cash flow increased by $42.5 million year over year; management attributed the improvement mainly to higher non-cash items and lower working-capital use, including a $9.3 million TRA payment.
- The board introduced a regular quarterly dividend of $0.09 per Class A share in October 2019; $4.2 million was paid during the year. Continuation remains at the board’s discretion.
- Cactus adopted the lease accounting standard in 2019, recognizing operating lease right-of-use assets and liabilities. The filing says adoption did not materially affect results or cash flows.
Outlook, risks and unusual items
- Management estimated 2020 net capital expenditures of $30 million to $40 million, excluding acquisitions, mostly for rental-fleet investment. It said existing cash, operating cash flow and available ABL capacity should cover anticipated needs for at least 12 months.
- Management expected drilling activity to be down year over year in 2020, citing lower late-2019 rig counts, customer spending discipline and crude-price volatility. The 2019 average U.S. onshore rig count was 918, down 9% from 2018; it was 768 on February 21, 2020.
- The $75 million ABL facility had no borrowings and $75 million available at year-end; Cactus reported covenant compliance. Its five-year facility matures in August 2023.
- TRA payments equal 85% of specified realized or deemed tax savings. Cactus recorded a $5.3 million non-cash gain from TRA liability revaluation in 2019. Estimated TRA termination payments at year-end were $331.3 million discounted, based on assumptions; the estimate is not a scheduled payment.
- U.S. tariffs affected substantially all products imported through the Chinese supply chain. Management estimated about 50% of goods received in 2019 were sourced through that supply chain. A key Chinese vendor represented 16% of third-party purchases in 2019, down from 21% in 2018.
- The Suzhou facility temporarily closed for 10 days amid the coronavirus outbreak and reopened February 10, 2020 at reduced capacity. Management said near-term customer commitments were expected to be met, but the effect of a prolonged disruption could be material and could not then be estimated.
- Other principal risks include oilfield cyclicality and pricing competition, customer concentration (Pioneer Natural Resources was 10% of 2019 revenue), supply and labor constraints, environmental and hydraulic-fracturing regulation, product-liability and insurance exposure, and foreign-exchange and cyber risks.
- The auditor identified the TRA liability as a critical audit matter because of complexity in tax-basis and blended-tax-rate estimates. Management reported that a previously identified material weakness in TRA accounting controls was remediated by year-end; management and the auditor concluded internal control over financial reporting was effective as of December 31, 2019. Management reported no pending legal matter expected to have a material adverse effect.
Key facts for investors to verify
- Whether 2020 rig activity, completion demand and pricing supported the capital-spending assumptions and rental-fleet returns.
- How tariffs, Chinese sourcing and the reduced-capacity Suzhou operation affected costs, supply continuity and margins after year-end.
- The timing and cash funding of TRA payments, and the assumptions behind the $216.5 million recorded liability and estimated $331.3 million termination amount.
- Whether margin pressure and higher rental-fleet and personnel costs persisted, despite FY revenue and operating cash flow growth.
- How non-controlling ownership, future CW Unit redemptions, dividend decisions and lease obligations affect cash available to Class A shareholders.