Cactus, Inc. — Q1 2021 Form 10-Q
Business context and period: Unaudited results for the three months ended March 31, 2021. Cactus designs, manufactures, sells and rents wellhead and pressure-control equipment and provides related field services, primarily to onshore oil and gas customers. It operates as one business segment.
Financial performance and position
- Revenue: $84.4 million, down 45.2% from $154.1 million a year earlier, but up 24.0% from Q4 2020. Year-over-year declines were in products ($52.0 million, down 40.3%), rentals ($12.5 million, down 65.5%) and field service and other ($20.0 million, down 35.5%).
- Profitability: Operating income was $11.6 million, down 71.0% year over year; operating margin was approximately 13.8%, versus 26.1%. Net income was $15.1 million, down 54.3%; net income attributable to Cactus, Inc. was $11.6 million, down 39.1%. Basic and diluted EPS were $0.24 and $0.19, respectively, versus $0.40 for each in Q1 2020.
- Margins and costs: Gross profit on product, rental and field-service revenue was approximately $21.3 million, or 25.2% of revenue, compared with $54.9 million, or 35.6%, a year earlier. Management cited higher materials, tariff, freight and wage costs in the sequential comparison.
- Cash flow: Operating cash flow was $15.7 million, versus $45.2 million a year earlier. Investing cash outflow was $2.0 million and financing cash outflow was $10.5 million. Cash increased $3.3 million to $292.0 million.
- Liquidity and debt: Current assets were $439.4 million and current liabilities $55.1 million. The company reported no debt outstanding, $63.7 million of available borrowing capacity under its asset-based revolving facility, and compliance with its covenants.
- Other balance-sheet items: Total liabilities were $318.8 million. The Tax Receivable Agreement (TRA) liability totaled $251.1 million, including $9.3 million current. Finance and operating lease obligations are also reported.
Changes versus comparable periods
Revenue and earnings remained substantially below Q1 2020, reflecting lower customer drilling and completion activity amid the industry downturn and COVID-19 impacts. However, all three revenue categories grew sequentially from Q4 2020 as activity recovered. The U.S. onshore rig count averaged 377 in Q1 2021, compared with 763 in Q1 2020 and 295 in Q4 2020.
Operating cash flow was lower year over year, principally reflecting lower net income. Capital expenditures were lower than in Q1 2020. Cactus added more than 100 associates during Q1 and began restoring wage reductions imposed in 2020; the remaining reductions were restored effective April 2021.
Outlook, commentary and risks
- Management reported signs of recovery and was cautiously optimistic, while noting that customer activity remained below 2019 and early-2020 levels. The filing does not provide revenue or earnings guidance.
- Management estimated 2021 net capital expenditures of $10 million to $15 million; actual spending depends on demand, market conditions and other factors.
- Rising steel and ocean-freight costs could pressure margins if the company cannot recover them from customers. Management viewed some increases as potentially temporary but said normalization timing and extent were uncertain.
- Demand is sensitive to oil and gas prices, customer capital spending, rig and completion activity, and takeaway and storage constraints. COVID-19 and related disruptions, customer credit, supply availability and costs, tariffs, and industry consolidation are among the cited risks.
- A $5.1 million tax benefit from a partial valuation-allowance release and a $1.1 million benefit from permanent equity-compensation differences contributed to the Q1 income tax benefit of $4.1 million. The tax benefit and the resulting net income make reported earnings less directly comparable to operating performance.
- The company incurred $0.4 million of offering-related expense. A March secondary offering involved redemption of 6.27 million Cactus Wellhead units and issuance of Class A shares; Cactus received no proceeds. The transaction also increased Cactus, Inc.’s ownership of Cactus Wellhead to 71.8% from 63.3%.
- Management said ordinary-course disputes and litigation were not expected to have a material adverse effect. No material changes to previously disclosed risk factors were reported. Disclosure controls were deemed effective, with no material change in internal control over financial reporting during the quarter.
Most important facts for investors to verify
- Whether the sequential revenue recovery continues, particularly in rental and field-service activity, and how it compares with the still-low year-over-year base.
- Whether steel, freight, tariff and labor cost increases are passed through to customers or reduce margins.
- Operating cash generation and capital spending against the $10 million–$15 million full-year capex estimate.
- Cash requirements and assumptions underlying the $251.1 million TRA liability, including potential acceleration upon specified events.
- The effect of the tax valuation-allowance release and ownership/unit redemptions on future attributable earnings and EPS.
- Changes in oilfield activity, COVID-19 impacts, customer concentration and credit exposure, and access to the revolving facility.