Cactus, Inc. — Q3 2020 Form 10-Q
Reporting period: Three and nine months ended September 30, 2020. Cactus designs, manufactures, sells and rents wellhead and pressure-control equipment and provides related field services, primarily to U.S. oil and gas customers.
Financial performance
Q3 revenue was $59.8 million, down 62.8% from $160.8 million a year earlier. Product revenue fell 61.3% to $35.9 million; rental revenue fell 72.2% to $9.9 million; and field service and other revenue fell 57.0% to $14.1 million. Lower customer drilling and completion activity drove the declines.
Q3 earnings: Operating income was $12.6 million versus $47.1 million; net income was $10.9 million versus $35.8 million; and net income attributable to Cactus, Inc. was $6.2 million versus $19.3 million. Diluted EPS was $0.13 versus $0.41. Operating margin was approximately 21.0% versus 29.3%; net margin was approximately 18.2% versus 22.3%.
First nine months: Revenue was $280.5 million, down 42.5%; operating income was $61.6 million, down 58.1%; net income was $53.1 million, down 57.5%; and diluted EPS was $0.64 versus $1.50. Operating margin was approximately 22.0% versus 30.1%.
Q3 cost of sales included approximately $6.0 million in tariff-refund credits. Nine-month cost of sales included approximately $9.4 million in such credits. The credits benefited reported costs and margins; the filing does not provide margins excluding them. Nine-month results also included $1.9 million of severance expense.
Cash, liquidity and balance sheet
- At September 30, cash and cash equivalents were $273.9 million, versus $202.6 million at year-end 2019. The company had no debt outstanding and $39.3 million of available ABL borrowing capacity; it reported compliance with facility covenants.
- Nine-month operating cash flow was $121.5 million, compared with $148.2 million in 2019. Investing cash outflow was $16.5 million, compared with $37.7 million; financing cash outflow was $34.1 million, compared with $13.0 million.
- Current assets were $411.9 million and current liabilities were $48.0 million. The tax receivable agreement (TRA) liability totaled $203.5 million, including $8.9 million current. Finance and operating lease obligations were also recorded.
- Nine-month dividends paid to Class A shareholders were $12.8 million. Net capital expenditures were $16.5 million for the period.
Business conditions, outlook and risks
Management attributed the downturn to COVID-19-related weakness in oil demand, oil-price instability, customer spending cuts and lower drilling and completion activity. Average U.S. onshore rig count was 240 in Q3 2020 versus 894 a year earlier; it was 282 on October 30. Management expected subdued demand to continue through year-end and potentially beyond, with the recovery’s pace and extent uncertain.
Cost actions included workforce reductions of almost 50% worldwide, salary and wage cuts, suspension of the 401(k) match and reduced planned capital spending. Management estimated 2020 net capital expenditures of $17.5 million to $22.5 million and believed cash, operating cash flow and available borrowings would meet needs for at least 12 months, including capital spending, taxes, TRA payments and dividends.
Tariff exclusions expired August 7, 2020, and the company resumed paying 25% tariffs on previously excluded Chinese imports. Approximately 40% of items received in the first nine months were sourced through its Chinese supply chain. Cactus had recognized about $14.0 million in tariff refunds, including interest; approximately $0.1 million remained unrecognized at quarter-end.
Management reported no long-lived-asset or goodwill impairment at September 30. It considered ordinary-course disputes unlikely to have a material adverse effect. The filing identifies oil and gas activity, COVID-19, customer capital discipline, tariffs, supply availability and customer credit risk as important uncertainties. Early termination of the TRA could accelerate a substantial payment.
Important facts for investors to verify
- Whether drilling and completion activity and customer spending recover, and how that affects each revenue stream.
- How sustainable margins and cash generation are after the tariff-refund credits and other cost reductions.
- Whether the $273.9 million cash position and $39.3 million borrowing availability remain sufficient as downturn-related cash flows evolve.
- The timing and amount of future TRA payments and the implications of the $203.5 million recorded liability.
- Whether resumed 25% tariffs, workforce reductions and lower capital spending affect operating capacity, costs or customer service.