Cactus Inc

Previous wording

During the six months ended June 30, 2024, we derived 76% of total revenues from the sale of our products, 9% of total revenues from rental and 15% of total revenues from field service and other. During the six months ended June 30, 2023, we derived 73% of total revenues from the sale of our products, 11% of total revenues from rental and 16% of total revenues from field service and other. We have predominantly domestic operations with more limited operations in Australia, Canada, and the Middle East, as well as sales in other international markets.

Current wording

During the nine months ended September 30, 2024, we derived 76% of total revenues from the sale of our products, 9% of total revenues from rental and 15% of total revenues from field service and other. During the nine months ended September 30, 2023, we derived 74% of total revenues from the sale of our products, 10% of total revenues from rental and 16% of total revenues from field service and other. We have predominantly domestic operations, with more limited operations in Australia, Canada, and the Middle East, as well as sales in other international markets.

Previous wording

In the second quarter of 2024, U.S. land drilling and completion activity levels were down approximately 3% from the first quarter of 2024 and down approximately 13% from the 2023 full year average. Average oil prices increased modestly in the second quarter of 2024 compared to the first quarter of 2024 as oil demand continued to grow and outpaced supply growth, keeping prices elevated. Prices were also influenced higher due to continued geopolitical risk concerns. Natural gas prices declined 4% in the second quarter of 2024 from the first quarter of 2024, as production curtailments and activity reductions have failed to sufficiently offset weaker demand from warmer weather and delayed export plans. U.S. gas storage levels remain well above five-year average levels. The ongoing conflicts in Ukraine and the Middle East have led to heightened commodity volatility and increased risk to the global supply chain.

Current wording

In the third quarter of 2024, U.S. land drilling and completion activity levels were down approximately 3% from the second quarter of 2024 and down approximately 15% from the 2023 full year average. Average oil prices decreased in the third quarter of 2024 compared to the second quarter of 2024 as global oil demand concerns grew in parallel with risks of increased supply from OPEC+ and non-OPEC+ countries. Accordingly, we anticipate activity in the Middle East may decline. Prices remain volatile due to ongoing geopolitical risk concerns. Natural gas prices increased 2% in the third quarter of 2024 from the second quarter of 2024, as higher power generation demand through the summer led to less supply surplus than the market anticipated. U.S. gas storage approached five-year average levels in the third quarter, after remaining above the 5-year maximum range for most of the first half of 2024. The ongoing conflicts in Ukraine and the Middle East have led to heightened commodity price uncertainty and increased risk to the global supply chain.

Previous wording

We have two operating segments consisting of the Pressure Control segment and the Spoolable Technologies segment. Our results of operations are evaluated by the Chief Executive Officer on a consolidated basis as well as at the segment level. The performance of our operating segments is primarily evaluated based on segment operating income (in addition to other measures), which is defined as income before taxes and before interest income (expense), net, other income (expense), net and corporate and other expenses not allocated to the operating segments. Prior to January 1, 2024, Corporate and other expenses were included in our Pressure Control segment. The Company has recast the information for the six months ended June 30, 2023 to align with the presentation for the six months ended June 30, 2024.

Current wording

We have two operating segments consisting of the Pressure Control segment and the Spoolable Technologies segment. Our results of operations are evaluated by the Chief Executive Officer on a consolidated basis as well as at the segment level. The performance of our operating segments is primarily evaluated based on segment operating income (in addition to other measures), which is defined as income before taxes and before interest income (expense), net, other income (expense), net and corporate and other expenses not allocated to the operating segments. Prior to January 1, 2024, Corporate and other expenses were included in our Pressure Control segment. The Company has recast the information for the nine months ended September 30, 2023 to align with the presentation for the nine months ended September 30, 2024.

Previous wording

Pressure Control. Pressure Control revenue for the second quarter of 2024 was $187.2 million, an increase of $12.2 million, or 6.9%, from the first quarter of 2024 primarily due to increased customer activity resulting in increased sales of wellhead and production related equipment, increased rental activity and higher field service activity. Pressure Control operating income of $55.7 million for the second quarter of 2024 increased $4.0 million, or 7.7% from the first quarter of 2024 primarily due to the overall increase in customer activity. Pressure Control selling, general and administrative expenses (“SG&A”) increased $2.0 million from the first quarter primarily due to an increase in personnel costs and other reserves.

Current wording

Pressure Control. Pressure Control revenue for the third quarter of 2024 was $185.1 million, a decrease of $2.1 million, or 1.1%, from the second quarter of 2024 primarily due to decreased sales of wellhead and production related equipment, offset by an increase in rental activity and field service activity. Pressure Control operating income of $52.5 million for the third quarter of 2024 decreased $3.1 million, or 5.6% from the second quarter of 2024 primarily due to miscellaneous charges incurred during the quarter, including reserves taken in connection with customer bankruptcies and other litigation claims.

Previous wording

Spoolable Technologies. Spoolable Technologies revenue for the second quarter of 2024 was $103.7 million, an increase of $4.6 million, or 4.7% from the first quarter of 2024. Total operating income for Spoolable Technologies for the second quarter of 2024 was $30.0 million, compared to operating income of $16.4 million for the first quarter of 2024. The increase in operating income was primarily due to a $2.9 million expense related to the change in fair value of the earn-out payment for the FlexSteel acquisition in the second quarter of 2024 compared to a larger expense of $13.3 million related to the change in fair value of the earn-out payment for the FlexSteel acquisition recognized in the first quarter of 2024.

Current wording

Spoolable Technologies. Spoolable Technologies revenue for the third quarter of 2024 was $108.2 million, an increase of $4.4 million, or 4.3% from the second quarter of 2024 primarily due to increased customer activity levels. Total operating income for Spoolable Technologies for the third quarter of 2024 was $32.9 million, compared to operating income of $30.0 million for the second quarter of 2024. The increase in operating income was primarily due to a decrease in expense related to the change in fair value of the earn-out payment for the FlexSteel acquisition, partly offset by higher manufacturing input costs.

Previous wording

Corporate and other. Corporate and other revenue represents the elimination of inter-segment sales from our Pressure Control segment to our Spoolable technologies segment. Corporate and other expenses for the second quarter of 2024 were $5.9 million, an increase of $0.4 million, or 6.8% from $5.5 million for the first quarter of 2024. The increase was primarily due to higher stock-based compensation and bonus expense.

Current wording

Corporate and other. Corporate and other revenue represents the elimination of inter-segment sales from our Pressure Control segment to our Spoolable technologies segment. Corporate and other expenses include costs associated with executive management and other administrative functions not directly attributable to our reporting segment. Corporate and other expenses for the third quarter of 2024 were $8.7 million, an increase of $2.8 million, or 46.9% from $5.9 million for the second quarter of 2024. The increase was primarily due to professional fees associated with the evaluation of an inorganic growth opportunity.

Previous wording

Interest income, net. Interest income, net was $1.4 million for the second quarter of 2024, an increase of $0.7 million from the first quarter of 2024. The increase in interest income, net was primarily due to higher interest income earned on a higher invested cash balance.

Current wording

Interest income, net. Interest income, net was $2.1 million for the third quarter of 2024, an increase of $0.7 million from the second quarter of 2024. The increase in interest income, net was primarily due to interest income earned on a higher invested cash balance.

Previous wording

Income tax expense. Income tax expense for the second quarter of 2024 was $18.2 million compared to $13.4 million for the first quarter of 2024. The increase in income tax expense from the first quarter was primarily due to an increase in operating income quarter over quarter. Cactus Inc. is only subject to federal and state income tax on its share of income from Cactus Companies. Income allocated to the non-controlling interest is only taxable to the non-controlling interest.

Current wording

Income tax expense. Income tax expense for the third quarter of 2024 was $16.4 million compared to $18.2 million for the second quarter of 2024. The decrease in income tax expense from the second quarter was due to a decrease in operating income quarter-over-quarter, in addition to an overall tax rate reduction due to decreases in permanent items. Cactus Inc. is only subject to federal and state income tax on its share of income from Cactus Companies. Income allocated to the non-controlling interest is only taxable to the non-controlling interest.

Previous wording

Pressure Control. Pressure Control revenue was $362.2 million for the first six months of 2024, a decrease of $31.6 million, or 8.0%, from the first six months of 2023. The lower revenue was primarily due to decreased sales of wellhead and production related equipment resulting from lower drilling and completion activity by our customers. In addition, rental of drilling and completion equipment and field service associated with product and rental revenues decreased as a result of the decline in activity. Operating income of $107.3 million in the first six months of 2024 decreased $18.7 million, or 14.8%, from the first six months of 2023. The decrease was primarily attributable to lower gross margins during the period due to the decreased customer activity levels and higher SG&A expenses. The increase in SG&A expenses primarily related to higher personnel costs, bad debt expense and stock-based compensation expense.

Current wording

Pressure Control. Pressure Control revenue was $547.3 million for the first nine months of 2024, a decrease of $29.0 million, or 5.0%, from the first nine months of 2023. The lower revenue was primarily due to decreased sales of wellhead and production related equipment resulting from lower drilling and completion activity by our customers. In addition, rental of drilling and completion equipment and field service associated with product and rental revenues decreased as a result of the decline in customer activity. Operating income of $159.9 million in the first nine months of 2024 decreased $21.0 million, or 11.6%, from the first nine months of 2023. The decrease was primarily attributable to lower gross margins during the period due to the decreased customer activity levels and higher selling, general and administrative ("SG&A") expenses. The increase in SG&A expenses primarily related to higher personnel costs, stock-based compensation expense and other reserves, partially offset by a decrease in bad debt expense.

Previous wording

Spoolable Technologies. Spoolable Technologies revenue for the first six months of 2024 was $202.8 million, an increase of $62.4 million, or 44.4%, from the first six months of 2023, as results for the first six months of 2023 only included four months of revenues from the FlexSteel acquisition, which closed on February 28, 2023. Total operating income was $46.4 million in the first six months of 2024, an increase of $52.2 million, compared to an operating loss of $5.8 million in the first six months of 2023, which included only four months of income. Operating income for the first six months of 2024 included $16.2 million of expense related to the change in fair value of the earn-out liability for the FlexSteel acquisition and $8.0 million of intangible amortization. Operating loss for the first six months of 2023 included approximately $18.0 million of expense related to the change in fair value of the estimated earn-out liability, $23.5 million of inventory step-up expense and $12.3 million of intangible amortization expense as well as depreciation expense of $5.5 million primarily associated with the step-up of fixed assets in connection with accounting for the purchased assets at fair value in conjunction with purchase accounting.

Current wording

Spoolable Technologies. Spoolable Technologies revenue for the first nine months of 2024 was $311.0 million, an increase of $65.1 million, or 26.5%, from the first nine months of 2023, as results for the first nine months of 2023 only included seven months of revenues from the FlexSteel acquisition, which closed on February 28, 2023. Total operating income was $79.3 million in the first nine months of 2024, an increase of $45.3 million, compared to operating income of $34.0 million in the first nine months of 2023, which included only seven months of income. Operating income for the first nine months of 2024 included $16.3 million of expense related to the change in fair value of the earn-out liability for the FlexSteel acquisition and $12.0 million of intangible amortization. Operating income for the first nine months of 2023 included approximately $13.1 million of expense related to the change in fair value of the estimated earn-out liability, $23.5 million of inventory step-up expense and $16.3 million of intangible amortization expense, as well as depreciation expense of $9.9 million primarily associated with the step-up of fixed assets in connection with accounting for the purchased assets at fair value in conjunction with purchase accounting.

Previous wording

Corporate and other. Corporate and other revenue represents the elimination of inter-segment sales from our Pressure Control segment to our Spoolable technologies segment.Corporate and other expenses for the first six months of 2024 was $11.4 million, a decrease of $10.7 million, or 48.3% from the first six months of 2023. The decrease was largely attributable to lower professional fees related to transaction costs associated with the closing of and accounting for the FlexSteel acquisition.

Current wording

Corporate and other. Corporate and other revenue represents the elimination of inter-segment sales from our Pressure Control segment to our Spoolable technologies segment. Corporate and other expenses include costs associated with executive management and other administrative functions not directly attributable to our reporting segment. Corporate and other expenses for the first nine months of 2024 was $20.1 million, a decrease of $9.0 million, or 31.0% from the first nine months of 2023. The decrease was largely attributable to professional fees related to transaction costs associated with the closing of and accounting for the FlexSteel acquisition.

Previous wording

Interest income (expense), net. Interest income, net for the first six months of 2024 was $2.1 million, compared to interest expense, net of $4.9 million for the first six months of 2023. The increase was primarily due to an increase in interest income earned on cash invested during the period. Interest expense for the first six months of 2023 related to outstanding borrowings under the Amended ABL Credit Facility in conjunction with the FlexSteel acquisition.

Current wording

Interest income (expense), net. Interest income, net for the first nine months of 2024 was $4.2 million, compared to interest expense, net of $6.3 million for the first nine months of 2023. The increase was due to an increase in interest income earned on cash invested during the 2024 period. Interest expense in 2023 was primarily related to borrowings outstanding through July 2023 under the Amended ABL Credit Facility.

Previous wording

Income tax expense. Income tax expense for the first six months of 2024 was $31.6 million compared to $12.1 million for the first six months of 2023. The increase in income tax expense from the first six months of 2023 was primarily due to an increase in operating income during the first six months of 2024, and fewer reductions in income tax expense for items specific to the first half of 2023. Income tax expense for the first half of 2023 included $21.1 million of expense associated with current income, offset by a $12.1 million benefit associated with the release of our valuation allowance previously provided for our investment in Cactus Companies based on the determination that the deferred tax asset was realizable due to our ability to generate sufficient taxable income of the appropriate type. Additionally, we recognized $4.3 million of expense associated with the revaluation of our deferred tax asset as a result of a change in our forecasted state tax rate, and a $1.2 million benefit associated with permanent differences related to equity compensation.

Current wording

Income tax expense. Income tax expense for the first nine months of 2024 was $48.0 million compared to $30.6 million for the first nine months of 2023. The increase in income tax expense from the first nine months of 2023 was primarily due to an increase in operating income during the first nine months of 2024, and fewer reductions in income tax expense for items specific to the comparable period of 2023. Income tax expense for the first nine months of 2023 included approximately $38.3 million of expense associated with 2023 income, offset by a $12.1 million benefit associated with the release of our valuation allowance previously provided for our investment in Cactus Companies. The valuation allowance was based on the determination that the deferred tax asset was realizable due to our ability to generate sufficient taxable income of the appropriate type. Additionally, we recognized $4.3 million of expense associated with the revaluation of our deferred tax asset as a result of a change in our forecasted state tax rate, $0.5 million of expense related to the finalization of our 2022 tax returns, and a $0.4 million benefit associated with permanent differences related to equity compensation.

Previous wording

At June 30, 2024, we had $246.5 million of cash and cash equivalents. Our primary sources of liquidity and capital resources are cash on hand, cash flows generated by operating activities, and borrowings under our Amended ABL Credit Facility (as defined in Note 7 in the notes to the unaudited condensed consolidated financial statements). Depending upon market conditions and other factors, we may also have the ability to issue additional equity and debt if needed. As of June 30, 2024, we had $220.1 million of available borrowing capacity under our Amended ABL Credit Facility with no outstanding borrowings, and $1.1 million in letters of credit outstanding. We were in compliance with the covenants of the Amended ABL Credit Facility as of June 30, 2024.

Current wording

At September 30, 2024, we had $303.4 million of cash and cash equivalents. Our primary sources of liquidity and capital resources are cash on hand, cash flows generated by operating activities, and borrowings under our Amended ABL Credit Facility (as defined in Note 7 in the notes to the unaudited condensed consolidated financial statements). Depending upon market conditions and other factors, we may also have the ability to issue additional equity and debt if needed. As of September 30, 2024, we had $220.7 million of available borrowing capacity under our Amended ABL Credit Facility with no outstanding borrowings, and $2.5 million in letters of credit outstanding. We were in compliance with the covenants of the Amended ABL Credit Facility as of September 30, 2024.

Previous wording

The contingent consideration earn-out period related to the FlexSteel acquisition ended on June 30, 2024 and resulted in a final earn-out liability of $37.0 million, which we expect to pay in August 2024.

Current wording

The contingent consideration earn-out period related to the FlexSteel acquisition ended on June 30, 2024 and resulted in an earn-out liability of $37.0 million, which was paid in September 2024.

Previous wording

We believe that our existing cash on hand, cash generated from operations and available borrowings under our Amended ABL Credit Facility will be sufficient for at least the next 12 months to meet working capital requirements, debt service obligations, anticipated capital expenditures, the earn-out payment related to the FlexSteel acquisition, repurchases of shares of our Class A common stock, expected TRA liability payments, anticipated tax liabilities and dividends to holders of our Class A common stock as well as pro rata cash distributions to holders of CC Units other than Cactus Inc.

Current wording

We believe that our existing cash on hand, cash generated from operations and available borrowings under our Amended ABL Credit Facility will be sufficient for at least the next 12 months to meet working capital requirements, debt service obligations, anticipated capital expenditures, repurchases of shares of our Class A common stock, expected TRA liability payments, anticipated tax liabilities, and dividends to holders of our Class A common stock as well as pro rata cash distributions to holders of CC Units other than Cactus Inc.

Previous wording

We currently estimate our net capital expenditures for the year ending December 31, 2024 will range from $35 million to $45 million. In the Pressure Control segment, capital expenditures are primarily related to rental fleet investments, international expansion and diversification of our low cost supply chain. In the Spoolable Technologies segment, capital expenditures are primarily related to manufacturing plant enhancements and additional deployment equipment used for product installation.

Current wording

We currently estimate our net capital expenditures for the year ending December 31, 2024 will range from $32 million to $37 million. In the Pressure Control segment, capital expenditures are primarily related to rental fleet investments, international expansion and diversification of our low cost supply chain. In the Spoolable Technologies segment, capital expenditures are primarily related to manufacturing plant enhancements and additional deployment equipment used for product installation.

Previous wording

Net cash provided by operating activities was $164.2 million and $168.5 million for the six months ended June 30, 2024 and 2023, respectively. Operating cash flows for 2024 decreased primarily due to an increase in cash outflows associated with working capital, partially offset by an increase in operating income.

Current wording

Net cash provided by operating activities was $249.5 million and $248.6 million for the nine months ended September 30, 2024 and 2023, respectively. Operating cash flows for 2024 increased primarily due to an increase in operating income and stronger customer collections, partially offset by an increase in cash outflows associated with increased purchases of inventory, in addition to the payment of the earn-out liability.

Previous wording

Net cash used in investing activities was $14.1 million and $639.5 million for the six months ended June 30, 2024 and 2023, respectively. The decrease was primarily due to cash paid to acquire FlexSteel for $621.5 million less $5.3 million in cash acquired during the first quarter of 2023. Additionally, our capital expenditures decreased approximately $6.3 million primarily due to the $7.0 million purchase of a previously leased facility during the first half of 2023.

Current wording

Net cash used in investing activities was $24.1 million and $645.2 million for the nine months ended September 30, 2024 and 2023, respectively. The current year decrease was primarily due to the non-recurrence of cash paid to acquire FlexSteel for $621.5 million, less $5.3 million in cash acquired during the first quarter of 2023. Additionally, our capital expenditures decreased approximately $6.4 million primarily due to the $7.0 million purchase of a previously leased facility during the first half of 2023.

Previous wording

Net cash used in financing activities was $37.2 million for the six months ended June 30, 2024 as compared to net cash provided by financing activities of $190.7 million for the six months ended June 30, 2023. The decrease in net cash provided by financing activities was primarily related to certain financing activities in 2023 associated with the FlexSteel acquisition. We received approximately $169.9 million of proceeds, net of issuance costs, from issuing shares of our Class A common stock during 2023. Additionally, we received $155.0 million from total borrowings under our Amended ABL Credit Facility of which all $155.0 million has been repaid. The first half of 2023 included payments of approximately $6.8 million of debt issuance costs. The first half of 2024 includes a $3.9 million increase in share repurchases primarily associated with the Company's share repurchase program, increased distributions to members of $3.9 million, higher dividend payments of approximately $1.7 million and $0.4 million of additional payments on finance leases.

Current wording

Net cash used in financing activities was $56.4 million for the nine months ended September 30, 2024 as compared to net cash provided by financing activities of $116.7 million for the nine months ended September 30, 2023. The decrease in net cash provided by financing activities was primarily related to certain financing activities in 2023 associated with the FlexSteel acquisition. We received approximately $169.9 million of proceeds, net of issuance costs, from issuing shares of our Class A common stock during 2023. The first nine months of 2023 also included payments of approximately $6.9 million of debt issuance costs. The first nine months of 2024 includes a $4.7 million increase in share repurchases, primarily associated with the Company's share repurchase program, higher dividend payments of approximately $2.6 million and $6.0 million payment related to the contingent consideration established as of the FlexSteel acquisition date. These increases are partially offset by a $3.5 million decrease in member distributions.