Business Context and Reporting Period
Company: Cactus, Inc. (and its predecessor, Cactus Wellhead, LLC)
Reporting Period: Fiscal year ended December 31, 2017
Business Overview: Cactus designs, manufactures, sells, and rents highly-engineered wellheads and pressure control equipment for onshore unconventional oil and gas wells. Operations include manufacturing facilities in Bossier City, Louisiana, and Suzhou, China, with 14 service centers in the U.S. and one in Australia.
Corporate Status: The company completed its Initial Public Offering (IPO) on February 12, 2018, shortly after the reporting period. Prior to the IPO, the operating entity was Cactus Wellhead, LLC (a partnership). Post-IPO, Cactus, Inc. became a holding company owning units in Cactus LLC.
Key Financial Metrics (Year Ended Dec 31, 2017)
| Metric | 2017 | 2016 | 2015 |
|---|---|---|---|
| Total Revenues | $341.2 million | $155.0 million | $221.4 million |
| Income from Operations | $88.9 million | $10.6 million | $42.2 million |
| Net Income (Loss) | $66.5 million | $(8.2) million | $21.2 million |
| Operating Margin | 26.0% | 6.8% | 19.1% |
| Net Cash from Operating Activities | $34.7 million | $24.0 million | $45.9 million |
| Long-Term Debt (Net) | $241.4 million | $242.3 million | $250.6 million |
| Cash and Cash Equivalents | $7.6 million | $8.7 million | $12.5 million |
Note: Historical financial data reflects the results of Cactus Wellhead, LLC (the predecessor). Cactus LLC is a pass-through entity and not subject to U.S. federal income tax at the entity level; however, it is subject to state and foreign taxes.
Material Changes vs. Prior Period
- Revenue Growth: Total revenues increased 120% to $341.2 million in 2017 compared to $155.0 million in 2016. This was driven by a 143% increase in product revenue and a 75% increase in rental revenue, attributed to accelerated U.S. land activity and higher onshore rig counts.
- Profitability: Income from operations surged 737% to $88.9 million, reversing a net loss in 2016. Operating margins expanded significantly due to volume increases, pricing improvements, and a shift toward higher-value advanced wellheads.
- Cost Structure: Total costs and expenses rose 75% to $252.3 million, primarily due to increased cost of sales associated with higher volume. Selling, general, and administrative (SG&A) expenses increased 42%, partly due to $1.0 million in costs related to IPO preparation.
- Debt Repayment: While the 2017 balance sheet shows $241.4 million in long-term debt, the company utilized $251.0 million of IPO proceeds in February 2018 to repay the entire term loan facility outstanding at year-end.
Guidance, Outlook, and Risks
- Capital Expenditures: Management estimates capital expenditures for 2018 will range from $40 million to $50 million, excluding acquisitions, to expand frac equipment and facilities.
- Liquidity: The company expects cash flows from operations and its $50 million revolving credit facility to be sufficient for working capital and distributions for at least the next 12 months. A $26.0 million distribution was declared in January 2018 to fund member tax liabilities.
- Tax Receivable Agreement (TRA): In connection with the IPO, Cactus, Inc. entered into a TRA requiring it to pay 85% of net cash tax savings to pre-IPO owners. Payments are expected to commence in 2019 and continue for up to 16 years.
- Key Risks:
- Commodity Prices: Demand is highly correlated with oil and natural gas prices and drilling activity levels.
- Customer Concentration: Pioneer Natural Resources represented 11% of 2017 revenue; no other customer exceeded 10%.
- Supply Chain: Approximately 22% of raw material purchases in 2017 came from a single vendor in China.
- Regulatory: Exposure to environmental regulations, hydraulic fracturing restrictions, and potential tariffs on steel and aluminum imports.
Investor Verification Checklist
- Debt Status: Verify the full repayment of the $248.5 million term loan using IPO proceeds in February 2018 and the current status of the $50 million revolving credit facility.
- Tax Implications: Review the specific terms of the Tax Receivable Agreement (TRA) and the potential impact of future tax basis adjustments on cash flow.
- Customer Concentration: Monitor the stability of relationships with top customers, specifically Pioneer Natural Resources (11% of 2017 revenue).
- Internal Controls: Note the remediation of a material weakness in internal controls identified in 2016 regarding the review of consolidated financial statements.
- Ownership Structure: Understand the dual-class structure where Cactus, Inc. owns ~35.3% of Cactus LLC, while pre-IPO owners (via CW Units/Class B stock) own ~64.7%.