Cactus, Inc. — Q3 2018 Form 10-Q
Business context and period. Cactus designs, manufactures, sells and rents wellhead and pressure-control equipment and provides related field services. This unaudited quarterly report covers the three and nine months ended September 30, 2018. The company completed its IPO in February and a follow-on offering in July; 2017 comparisons reflect the predecessor LLC before the IPO, so tax expense, ownership attribution and per-share comparisons are not fully comparable.
Financial performance
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Revenue | $150.7m | $96.0m | $404.3m | $236.4m |
| Operating income | $52.1m | $28.1m | $133.8m | $60.1m |
| Net income | $43.6m | $22.3m | $111.6m | $43.7m |
| Net income attributable to Cactus, Inc. | $18.7m | Not applicable | $34.8m | Not applicable |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $122.4m | $19.5m |
Revenue mix and growth. Q3 product revenue was $79.4m, rental revenue $38.1m and field service and other revenue $33.1m. Compared with Q3 2017, these increased 48%, 80% and 57%, respectively; total revenue rose 57%. Nine-month revenue rose 71%, with product, rental and field-service revenue up 60%, 93% and 76%.
Margins and earnings. Calculated from reported revenue and direct costs, gross margin was approximately 41.9% in Q3 versus 36.6% a year earlier, and 40.5% for nine months versus 34.1%. Operating margin was approximately 34.6% in Q3 versus 29.2%, and 33.1% for nine months versus 25.4%. Q3 basic and diluted earnings per Class A share were $0.52; nine-month amounts were $1.15 and $1.14. Cactus, Inc. owned 50.3% of Cactus LLC at quarter-end, with the remainder reflected as non-controlling interest.
Cash flow and investment. Nine-month operating cash flow was $122.4m; investing cash outflow was $54.4m, including $55.7m of capital expenditures. Financing cash outflow was $32.9m, reflecting debt repayment, member distributions and unit redemptions, partly offset by IPO and follow-on proceeds. Cash increased to $42.0m from $7.6m at year-end 2017.
Liquidity and debt. Current assets were $242.6m and current liabilities $68.9m at September 30. The company reported no borrowings under its new $75m asset-based revolving credit facility, with the full $75m available; the facility allows up to $125m subject to conditions and borrowing base. The prior term loan was repaid in February. Capital lease obligations totaled $16.2m on the balance sheet; future operating lease commitments were $22.3m.
Material changes and unusual items
- Growth was attributed to higher U.S. onshore activity, a larger number of rigs followed by Cactus, stronger completion demand and investment that expanded rental-fleet capacity. Management also cited improved rental utilization and pricing and product-sourcing and operating-efficiency benefits.
- The IPO and follow-on offering generated reported net proceeds of $828.2m in total. Proceeds funded repayment of the term loan and redemptions of Cactus LLC units; the follow-on offering did not leave proceeds retained by Cactus.
- Interest expense fell substantially following repayment of the term loan. Nine-month results include a $4.3m debt-extinguishment loss. The Q3 effective tax rate was 15.8%; nine-month rate was 11.5%, affected by Cactus, Inc.’s post-IPO taxable share of LLC income and non-controlling ownership.
- A $161.8m tax receivable agreement (TRA) liability was recorded. Under the TRA, Cactus generally owes eligible holders 85% of specified realized or deemed tax savings. The filing estimates an approximately $383.4m payment if the agreement had been terminated at September 30, based on stated assumptions; this is not the recorded liability or a scheduled current payment.
Outlook, commentary and risks
- Management estimated 2018 net capital expenditures of $65m–$70m, excluding acquisitions, after accelerating investment in frac equipment and expanding facilities. It expected cash, operating cash flow and available revolver capacity to cover working capital, anticipated capex, member tax distributions and expected tax and TRA liabilities for at least 12 months.
- No formal revenue or earnings guidance is provided. Management noted typical fourth-quarter seasonality from holidays and customers’ year-end budget management.
- Tariffs applied to substantially all products imported through the Chinese supply chain from September 24; management estimated 50% of inventory received in Q3 came through that supply chain. The tariff rate was 10% through year-end and was scheduled to rise to 25% absent further action. Management expected mitigation but acknowledged material uncertainty.
- Demand depends on oil and gas activity, rig counts, completions, commodity markets, customer spending and takeaway capacity. Additional risks include raw-material availability and cost, competition and pricing, and reliance on a significant supplier (22% of third-party purchases in each nine-month comparison period).
- The filing highlighted Colorado Proposition 112, then pending a November 2018 vote, as a potential constraint on new development and demand in the state. Management reported no material change to previously disclosed risk factors beyond those discussed in the filing.
- The company reported ordinary-course legal disputes that management did not expect to have a material adverse effect, and stated disclosure controls were effective as of September 30, 2018.
Key facts for investors to verify
- Whether revenue growth and margin improvement persist if rig, drilling and completion activity weakens, or fourth-quarter seasonality intensifies.
- Actual cost and pricing effects of the China tariffs, including any rate changes, customer recovery and supply-chain adjustments.
- Capital spending versus the $65m–$70m estimate, rental-fleet utilization and returns on expanded equipment and facilities.
- Cash availability and obligations under the $161.8m recorded TRA liability, including payment timing, future redemptions and potential acceleration on termination or a change of control.
- Compliance with the ABL facility’s covenants and borrowing-base limits, and the company’s ability to fund member distributions, leases and other obligations.
- Changes in non-controlling ownership and the resulting difference between consolidated net income and income attributable to Cactus, Inc. shareholders.