Cactus, Inc. — FY 2018 Form 10-K
Business context and reporting period. The filing covers the fiscal year ended December 31, 2018; quarterly figures below identify the fourth quarter where disclosed. Cactus designs, manufactures and sells wellhead and pressure-control equipment, rents completion equipment, and provides field services. Operations are predominantly U.S.-based, with 99% of revenue from U.S. operations. The company completed its IPO in February 2018 and a follow-on offering in July 2018.
Financial performance and liquidity
| Metric | FY 2018 | FY 2017 | Change |
|---|---|---|---|
| Revenue | $544.1 million | $341.2 million | +59.5% |
| Operating income | $177.7 million | $88.9 million | +100.0% |
| Net income | $150.3 million | $66.5 million | +125.8% |
| Net income attributable to Cactus, Inc. | $51.7 million | Not applicable | Company formed in connection with IPO |
| Basic / diluted Class A EPS | $1.60 / $1.58 | Not applicable | Public shares issued in 2018 |
| Operating cash flow | $167.2 million | $34.7 million | Increased |
| Cash and equivalents at year-end | $70.8 million | $7.6 million | Increased |
| Bank debt, excluding capital leases | $0 | $248.5 million | Repaid in February 2018 |
Revenue mix was products $290.5 million (53%), rentals $133.4 million (25%), and field service and other $120.2 million (22%). Approximate operating margin was 32.7% of revenue, versus 26.0% in 2017; total net margin was approximately 27.6%, versus 19.5%. Fourth-quarter revenue was $139.8 million, operating income $43.9 million, net income $38.7 million, and basic/diluted EPS $0.45/$0.44.
Capital expenditures and other investing cash outflows were $70.1 million; operating cash flow less this amount was approximately $97.1 million. This simple difference is not a company-reported free-cash-flow measure. Year-end current assets were $274.5 million and current liabilities $74.6 million. The company had $75 million of revolving commitments, with approximately $75 million of availability reported at year-end and no borrowings outstanding. Capital lease obligations totaled $16.1 million on the balance sheet.
Material changes versus the prior comparable period
- Revenue growth reflected stronger U.S. drilling and completion activity, increased product sales, and a larger, more utilized rental fleet. Average monthly rigs followed by Cactus rose 29%, to 272 from 211.
- Product revenue grew 53.6%, rental revenue 72.2%, and field service and other revenue 61.1%. Management reported improved product and rental margins from volume, mix, efficiencies, utilization and pricing; field-service margins were relatively flat.
- Operating expenses increased 45.2%, slower than revenue growth. SG&A rose 49.1%, including higher compensation, stock-based compensation and costs of being public.
- Interest expense fell to $3.6 million from $20.8 million after repayment of the term loan. A $4.3 million debt-extinguishment loss partly offset the benefit.
- IPO and follow-on proceeds were used principally to repay term debt and redeem CW Units. At year-end Cactus, Inc. owned approximately 50.3% of Cactus LLC, with the remaining 49.7% held by other unit holders.
Outlook, risks and unusual items
- Management estimated 2019 capital expenditures of $60–$65 million, mostly for rental-fleet investment. It stated cash, operating cash flow and available ABL borrowings should cover working capital, anticipated capex, distributions and tax liabilities for at least 12 months.
- No specific revenue or earnings guidance is provided. The company’s results depend substantially on oil and gas prices, drilling and completion activity, customer spending, equipment and labor availability, and regional takeaway capacity.
- Trade tariffs increased raw-material costs. Substantially all products imported through the Chinese supply chain were subject to Section 301 tariffs; management estimated 50% of inventory received in the fourth quarter was sourced through that supply chain. The tariff rate remained 10% as of the filing date after a planned increase to 25% was postponed; the ultimate impact remained uncertain.
- The company recorded a $147.6 million tax receivable agreement (TRA) liability. It generally owes TRA holders 85% of specified realized or deemed tax savings. An estimated early-termination payment as of year-end was approximately $280 million, based on assumptions; actual amounts could differ and may exceed realized tax savings.
- Management disclosed a material weakness in controls over TRA-related tax calculations; disclosure controls and internal control over financial reporting were considered ineffective at December 31, 2018. Immaterial balance-sheet errors were corrected in the fourth quarter, with no effect on reported results of operations or cash flows. Remediation was underway but had not operated long enough to establish effectiveness. The auditor did not attest to internal controls.
- Other risks include oilfield cyclicality, customer concentration (Pioneer Natural Resources was 11% of revenue), reliance on a Chinese vendor (21% of third-party vendor purchases in 2018), operational and product-liability exposure, and possible dilution from CW Unit redemptions or future share sales. Ordinary-course legal matters were not expected by management to have a material adverse impact.
Important facts for investors to verify
- Whether operating activity, pricing and rental-fleet utilization support continued growth and margins amid oil-price volatility and potential regional infrastructure constraints.
- Whether the TRA accounting-control remediation is effective, and the likely timing and cash demands of TRA payments relative to available distributions and taxable income.
- The realized cost and mitigation of steel and China-related tariffs, including the share of sourcing exposed to those tariffs.
- Whether planned 2019 rental-fleet and facility investment produces adequate returns and preserves liquidity.
- Potential effects of Class B/CW Unit redemptions, registration rights and concentrated voting control on dilution, governance and share supply.