Cactus Earnings 2020-09-30

Balance Sheet	Income Statement	Cash Flow
Assets, Equity	Rev, G Profit, Net Income	Ops, Inv, Fin

whd-20200930

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

______________________________________________________________________________

FORM 10-Q

______________________________________________________________________________

(MARK ONE)


☑			QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2020


☐			TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _____ to _____

Commission File Number: 001-38390

______________________________________________________________________________

Cactus, Inc.

(Exact name of registrant as specified in its charter)

______________________________________________________________________________


Delaware		35-2586106
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

920 Memorial City Way, Suite 300		77024
Houston,	Texas	(Zip Code)
(Address of principal executive offices)

(713) 626-8800

(Registrant’s telephone number, including area code)

______________________________________________________________________________

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Class A Common Stock, par value $0.01

WHD

New York Stock Exchange

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☑ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☑ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.


Large accelerated filer	☑	Accelerated filer	☐
Non-accelerated filer	☐	Smaller reporting company	☐
		Emerging growth company	☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☑

As of November 3, 2020, the registrant had 47,549,381 shares of Class A common stock, $0.01 par value per share, and 27,815,584 shares of Class B common stock, $0.01 par value per share, outstanding.

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CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q (the “Quarterly Report”) contains “forward-looking statements” within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). When used in this Quarterly Report, the words “could,” “believe,” “anticipate,” “intend,” “estimate,” “expect,” “project” and similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain such identifying words. These forward-looking statements are based on our current expectations and assumptions about future events and are based on currently available information as to the outcome and timing of future events.

Forward-looking statements may include statements about:

•demand for our products and services, which is affected by, among other things, changes in the price of crude oil and natural gas in domestic and international markets;

•the level of growth or decline in number of rigs, pad sizes, well spacings and associated well count, availability of takeaway capacity and availability of storage capacity;

•availability of capital and the associated capital spending discipline exercised by customers;

•the financial health of our customers and our credit risk of customer non-payment;

•changes in the number of drilled but uncompleted wells and the level of completion activity;

•the size and timing of orders;

•availability of raw materials and imported items;

•transportation differentials associated with reduced capacity in and out of the storage hub in Cushing, Oklahoma;

•expectations regarding raw materials, overhead and operating costs and margins;

•availability of skilled and qualified workers;

•potential liabilities such as warranty and product liability claims arising out of the installation, use or misuse of our products;

•our business strategy;

•our financial strategy, operating cash flows, liquidity and capital required for our business;

•our future revenue, income and operating performance;

•our ability to pay dividends and the amounts of any such dividends;

•corporate consolidation activity involving our customers;

•the addition or termination of relationships with major customers or suppliers;

•laws and regulations, including environmental regulations, that may increase our costs, limit the demand for our products and services or restrict our operations;

•disruptions in the political, regulatory, economic and social conditions domestically or internationally;

•the ultimate severity and duration of the ongoing outbreak of coronavirus (“COVID-19”) and the extent of its impact on our business;

•outbreaks of other pandemic or contagious diseases that may disrupt our operations, suppliers or customers or impact demand for oil and gas;

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•the impact of actions taken by the Organization of Petroleum Exporting Countries (“OPEC”) and other oil and gas producing countries affecting the supply of oil and natural gas;

•increases in import tariffs assessed on products from China and imported raw materials used in the manufacture of our goods in the United States which could negatively impact margins and our working capital;

•the significance of future liabilities under the Tax Receivable Agreement (the “TRA”) we entered into with certain current or past direct and indirect owners of Cactus LLC (the “TRA Holders”) in connection with our initial public offering;

•a failure of our information technology infrastructure or any significant breach of security;

•potential uninsured claims and litigation against us;

•competition within the oilfield services industry;

•our dependence on the continuing services of certain of our key managers and employees;

•currency exchange rate fluctuations associated with our international operations; and

•plans, objectives, expectations and intentions contained in this Quarterly Report that are not historical.

Although forward-looking statements reflect our good faith beliefs at the time they are made, forward-looking statements involve known and unknown risks, uncertainties and other factors, including the factors described under Item 1A, “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2019 (our “2019 Annual Report”), this Quarterly Report and in our other filings with the SEC, which may cause our actual results, performance or achievements to differ materially from anticipated future results, performance or achievements expressed or implied by such forward-looking statements.

Should one or more of the risks or uncertainties described in this Quarterly Report occur, or should underlying assumptions prove incorrect, our actual results and plans could differ materially from those expressed in any forward-looking statements.

All forward-looking statements, expressed or implied, included in this Quarterly Report are expressly qualified in their entirety by this cautionary statement. This cautionary statement should also be considered in connection with any subsequent written or oral forward-looking statements that we or persons acting on our behalf may issue.

Except as otherwise required by applicable law, we disclaim any duty to update any forward-looking statements, all of which are expressly qualified by the statements in this section, to reflect events or circumstances after the date of this Quarterly Report.

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PART I - FINANCIAL INFORMATION

Item 1. Financial Statements.

CACTUS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(unaudited)


	September 30, 2020		December 31, 2019
	(in thousands, except per share data)
Assets
Current assets
Cash and cash equivalents	$	273,941	$	202,603
Accounts receivable, net of allowance of $904 and $837, respectively	40,290		87,865
Inventories	87,702		113,371
Prepaid expenses and other current assets	9,961		11,044
Total current assets	411,894		414,883
Property and equipment, net	148,696		161,748
Operating lease right-of-use assets, net	24,167		26,561
Goodwill	7,824		7,824
Deferred tax asset, net	217,659		222,545
Other noncurrent assets	1,248		1,403
Total assets	$	811,488	$	834,964
Liabilities and Equity
Current liabilities
Accounts payable	$	15,573	$	40,957
Accrued expenses and other current liabilities	14,565		22,067
Current portion of liability related to tax receivable agreement	8,902		14,630
Finance lease obligations, current portion	4,009		6,735
Operating lease liabilities, current portion	4,948		6,737
Total current liabilities	47,997		91,126
Deferred tax liability, net	792		1,348
Liability related to tax receivable agreement, net of current portion	194,616		201,902
Finance lease obligations, net of current portion	2,286		3,910
Operating lease liabilities, net of current portion	19,237		20,283
Total liabilities	264,928		318,569
Commitments and contingencies
Stockholders’ equity
Preferred stock, $0.01 par value, 10,000 shares authorized, none issued and outstanding	—		—
Class A common stock, $0.01 par value, 300,000 shares authorized, 47,547 and 47,159 shares issued and outstanding	475		472
Class B common stock, $0.01 par value, 215,000 shares authorized, 27,816 and 27,958 shares issued and outstanding	—		—
Additional paid-in capital	199,570		194,456
Retained earnings	151,240		132,990
Accumulated other comprehensive loss	(266)		(452)
Total stockholders’ equity attributable to Cactus Inc.	351,019		327,466
Non-controlling interest	195,541		188,929
Total stockholders’ equity	546,560		516,395
Total liabilities and equity	$	811,488	$	834,964

The accompanying notes are an integral part of these condensed consolidated financial statements.

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CACTUS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(unaudited)


	Three Months Ended September 30,				Nine Months Ended September 30,
	2020		2019		2020		2019
	(in thousands, except per share data)
Revenues
Product revenue	$	35,857	$	92,582	$	163,781	$	273,716
Rental revenue	9,881		35,528		57,579		113,601
Field service and other revenue	14,051		32,698		59,116		100,859
Total revenues	59,789		160,808		280,476		488,176
Costs and expenses
Cost of product revenue	19,879		57,768		101,976		168,303
Cost of rental revenue	9,647		17,194		39,661		54,435
Cost of field service and other revenue	9,323		25,375		44,620		79,105
Selling, general and administrative expenses	8,384		13,348		30,739		39,268
Severance expenses	—		—		1,864		—
Total costs and expenses	47,233		113,685		218,860		341,111
Income from operations	12,556		47,123		61,616		147,065

Interest income, net	218		373		851		489
Other income (expense), net	(1,865)		558		(555)		(484)
Income before income taxes	10,909		48,054		61,912		147,070
Income tax expense	23		12,221		8,833		22,041
Net income	$	10,886	$	35,833	$	53,079	$	125,029
Less: net income attributable to non-controlling interest	4,653		16,494		21,835		57,475
Net income attributable to Cactus Inc.	$	6,233	$	19,339	$	31,244	$	67,554

Earnings per Class A share - basic	$	0.13	$	0.41	$	0.66	$	1.53
Earnings per Class A share - diluted	$	0.13	$	0.41	$	0.64	$	1.50

Weighted average Class A shares outstanding - basic	47,510		47,095		47,406		44,260
Weighted average Class A shares outstanding - diluted	75,622		47,322		75,427		75,337

The accompanying notes are an integral part of these condensed consolidated financial statements.

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CACTUS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(unaudited)


	Three Months Ended September 30,				Nine Months Ended September 30,
	2020		2019		2020		2019
	(in thousands)
Net income	$	10,886	$	35,833	$	53,079	$	125,029
Foreign currency translation adjustments	533		(469)		329		(570)
Comprehensive income	$	11,419	$	35,364	$	53,408	$	124,459
Less: comprehensive income attributable to non-controlling interest	4,883		16,494		21,978		57,475
Comprehensive income attributable to Cactus Inc.	$	6,536	$	18,870	$	31,430	$	66,984

The accompanying notes are an integral part of these condensed consolidated financial statements.

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CACTUS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(unaudited)


	Class A			Class B			Additional Paid-In Capital		Retained Earnings		Accumulated Other Comprehensive Loss		Non-controlling Interest		Total Equity
	Common Stock			Common Stock
(in thousands)	Shares	Amount		Shares	Amount
Balance at June 30, 2020	47,478	$	475	27,884	$	—	$	197,484	$	149,356	$	(569)	$	201,161	$	547,907
Member distributions	—	—		—	—		—		—		—		(10,848)		(10,848)
Effect of CW Unit redemptions	68	—		(68)	—		476		—		—		(476)		—
Tax impact of equity transactions	—	—		—	—		199		—		—		—		199
Equity award vestings	1	—		—	—		4		—		—		(4)		—
Other comprehensive income	—	—		—	—		—		—		303		230		533
Stock-based compensation	—	—		—	—		1,407		—		—		825		2,232
Cash dividends declared on Class A common stock ($0.09 per share)	—	—		—	—		—		(4,349)		—		—		(4,349)
Net income	—	—		—	—		—		6,233		—		4,653		10,886
Balance at September 30, 2020	47,547	$	475	27,816	$	—	$	199,570	$	151,240	$	(266)	$	195,541	$	546,560

Balance at June 30, 2019	47,093	$	471	28,020	$	—	$	193,160	$	99,898	$	(498)	$	161,499	$	454,530
Adjustments to prior periods	—	—		—	—		(1,466)		—		—		960		(506)
Member distributions	—	—		—	—		—		—		—		(2,005)		(2,005)
Effect of CW Unit redemptions	5	—		(5)	—		39		—		—		(39)		—
Equity award vestings	2	—		—	—		(13)		—		—		—		(13)
Other comprehensive loss	—	—		—	—		—		—		(294)		(175)		(469)
Stock-based compensation	—	—		—	—		1,689		—		—		—		1,689
Net income	—	—		—	—		—		19,339		—		16,494		35,833
Balance at September 30, 2019	47,100	$	471	28,015	$	—	$	193,409	$	119,237	$	(792)	$	176,734	$	489,059

The accompanying notes are an integral part of these condensed consolidated financial statements.

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CACTUS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (Continued)

(unaudited)


	Class A			Class B			Additional Paid-In Capital		Retained Earnings		Accumulated Other Comprehensive Loss		Non-controlling Interest		Total Equity
	Common Stock			Common Stock
(in thousands)	Shares	Amount		Shares	Amount
Balance at December 31, 2019	47,159	$	472	27,958	$	—	$	194,456	$	132,990	$	(452)	$	188,929	$	516,395
Member distributions	—	—		—	—		—		—		—		(15,560)		(15,560)
Effect of CW Unit redemptions	142	1		(142)	—		1,015		—		—		(1,016)		—
Tax impact of equity transactions	—	—		—	—		261		—		—		—		261
Equity award vestings	246	2		—	—		(214)		—		—		(1,174)		(1,386)
Other comprehensive income	—	—		—	—		—		—		186		143		329
Stock-based compensation	—	—		—	—		4,052		—		—		2,384		6,436
Cash dividends declared on Class A common stock ($0.27 per share)	—	—		—	—		—		(12,994)		—		—		(12,994)
Net income	—	—		—	—		—		31,244		—		21,835		53,079
Balance at September 30, 2020	47,547	$	475	27,816	$	—	$	199,570	$	151,240	$	(266)	$	195,541	$	546,560

Balance at December 31, 2018	37,654	$	377	37,236	$	—	$	126,418	$	51,683	$	(820)	$	184,670	$	362,328
Adjustment to prior periods	—	—		—	—		12,569		—		488		(13,563)		(506)
Member distributions	—	—		—	—		—		—		—		(5,853)		(5,853)
Effect of CW Unit redemptions	9,221	92		(9,221)	—		48,344		—		(57)		(48,379)		—
Adjustment to deferred tax asset from CW Unit redemptions	—	—		—	—		(9,751)		—		—		—		(9,751)
Tax impact of equity transactions	—	—		—	—		14,652		—		—		—		14,652
Equity award vestings	225	2		—	—		(4,080)		—		—		2,551		(1,527)
Other comprehensive loss	—	—		—	—		—		—		(403)		(167)		(570)
Stock-based compensation	—	—		—	—		5,257		—		—		—		5,257
Net income	—	—		—	—		—		67,554		—		57,475		125,029
Balance at September 30, 2019	47,100	$	471	28,015	$	—	$	193,409	$	119,237	$	(792)	$	176,734	$	489,059

The accompanying notes are an integral part of these condensed consolidated financial statements.

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CACTUS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)


	Nine Months Ended September 30,
	2020		2019
	(in thousands)
Cash flows from operating activities
Net income	$	53,079	$	125,029
Reconciliation of net income to net cash provided by operating activities:
Depreciation and amortization	31,262		28,264
Deferred financing cost amortization	126		126
Stock-based compensation	6,436		5,257
Provision for expected credit losses	341		255
Inventory obsolescence	3,376		1,708
(Gain) loss on disposal of assets	(1,810)		820
Deferred income taxes	5,182		15,072
(Gain) loss from revaluation of liability related to tax receivable agreement	555		(558)
Changes in operating assets and liabilities:
Accounts receivable	48,190		(8,326)
Inventories	19,188		(14,513)
Prepaid expenses and other assets	1,127		4,032
Accounts payable	(23,753)		(4,334)
Accrued expenses and other liabilities	(7,607)		4,694
Payments pursuant to tax receivable agreement	(14,207)		(9,335)
Net cash provided by operating activities	121,485		148,191

Cash flows from investing activities
Capital expenditures and other	(21,908)		(40,526)
Proceeds from sale of assets	5,414		2,811
Net cash used in investing activities	(16,494)		(37,715)

Cash flows from financing activities
Payments on finance leases	(4,298)		(5,660)
Dividends paid to Class A common stock shareholders	(12,847)		—
Distributions to members	(15,560)		(5,853)
Repurchases of shares	(1,385)		(1,529)
Net cash used in financing activities	(34,090)		(13,042)

Effect of exchange rate changes on cash and cash equivalents	437		(730)

Net increase in cash and cash equivalents	71,338		96,704

Cash and cash equivalents
Beginning of period	202,603		70,841
End of period	$	273,941	$	167,545

Supplemental disclosure of cash flow information
Non-cash investing and financing activities:
Property and equipment acquired under finance leases	$	2,018	$	2,921
Property and equipment in payables	$	621	$	4,968

The accompanying notes are an integral part of these condensed consolidated financial statements.

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CACTUS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

(in thousands, except per share data, or as otherwise indicated)

1.Preparation of Interim Financial Statements and Other Items

Basis of Presentation

The financial statements presented in this report represent the consolidation of Cactus, Inc. (“Cactus Inc.”) and its subsidiaries (“the Company”), including Cactus Wellhead, LLC (“Cactus LLC”). Cactus Inc. is a holding company whose only material asset is an equity interest consisting of units representing limited liability company interests in Cactus LLC (“CW Units”). Cactus Inc. is the sole managing member of Cactus LLC and operates and controls all of the business and affairs of Cactus LLC and conducts its business through Cactus LLC and its subsidiaries. As a result, Cactus Inc. consolidates the financial results of Cactus LLC and its subsidiaries and reports a non-controlling interest related to the portion of CW Units not owned by Cactus Inc., which reduces net income attributable to holders of Cactus Inc.’s Class A common stock, par value $0.01 per share (“Class A common stock”). Except as otherwise indicated or required by the context, all references to “Cactus,” “we,” “us” and “our” refer to Cactus Inc. and its consolidated subsidiaries.

The unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information. Accordingly, these consolidated financial statements do not include all information or notes required by generally accepted accounting principles for annual financial statements and should be read together with our Annual Report on Form 10-K for the year ended December 31, 2019.

The consolidated financial statements include all adjustments, which are of a normal recurring nature, unless otherwise disclosed, necessary for a fair statement of the consolidated financial statements for the interim periods. The results of operations for any interim period are not necessarily indicative of the results to be expected for the full year.

Use of Estimates

In preparing our consolidated financial statements in conformity with GAAP, we make numerous estimates and assumptions that affect the accounting for and recognition and disclosure of assets, liabilities, equity, revenues and expenses. We must make these estimates and assumptions because certain information that we use is dependent on future events, cannot be calculated with a high degree of precision from available data or is not otherwise capable of being readily calculated based on accepted methodologies. In some cases, these estimates are particularly difficult to determine, and we must exercise significant judgment. Actual results could differ materially from the estimates and assumptions that we use in the preparation of our consolidated financial statements.

Reclassifications

Certain prior period amounts have been reclassified to conform to the current period presentation.

Recent Accounting Pronouncements

Standards Adopted

Effective January 1, 2020, we adopted Financial Accounting Standards Board (“FASB”) Accounting Standards Update (“ASU”) 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The new guidance changed the measurement of credit losses on financial assets measured at amortized cost, including but not limited to trade receivables. The new guidance replaced the prior methodology for recognizing credit losses when it is probable that a loss has been incurred with an expected loss model that requires consideration of a broader range of information to estimate expected credit losses over the lifetime of an asset. The allowance for credit losses under the new guidance represents the portion of the asset’s amortized cost basis that we do not expect to collect over the asset’s contractual life, considering past events, current conditions and reasonable and supportable forecasts of future economic conditions. Adoption of the standard did not impact our consolidated financial statements other than certain expanded disclosures. See further discussion and expanded disclosures in Note 3.

We also adopted FASB ASU 2017-04, Intangibles – Goodwill and Other (Topic 350) effective January 1, 2020. The new standard simplified the accounting for goodwill impairment by eliminating Step 2 of the current goodwill impairment test. Under

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the new standard, an entity performs its goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount and recognizes an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value. The loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. Adoption of this standard did not impact our consolidated financial statements.

2.Concentrations, Risks and Uncertainties

Significant Customers

Our customers are engaged in the oil and natural gas exploration and production business primarily in the U.S. as well as Australia. Our receivables are spread over a number of customers, a majority of which are operators and suppliers to the oil and natural gas industry. For the nine months ended September 30, 2020, no customer represented 10% or more of our consolidated revenues. For the nine months ended September 30, 2019, one customer represented 10% of our consolidated revenue.

Significant Vendors

We have historically purchased a significant portion of supplies, equipment and machined components from a single vendor located in China. For the nine months ended September 30, 2020 and 2019, purchases from this vendor totaled $5.6 million and $30.3 million, respectively. These figures represent approximately 7% and 17% for the respective periods of our total third-party vendor purchases of raw materials, finished products, equipment, machining and other services. Amounts due to the vendor included in accounts payable in the consolidated balance sheets as of September 30, 2020 and December 31, 2019 totaled $0.9 million and $4.3 million, respectively.

COVID-19

The significant decline in oil demand due to COVID-19 coupled with the instability of oil prices caused by geopolitical issues and production levels, as well as limited availability of storage capacity have resulted in our customers significantly reducing their capital expenditure budgets for 2020. As a result, demand for our products and services was severely impacted beginning in late March and continued through the third quarter of 2020. Our expectation is that this will continue through the end of 2020 and potentially beyond.

In an effort to offset the reduction in revenues resulting from the weakened macroeconomic environment, we implemented certain cost reduction measures throughout 2020. These measures included, but were not limited to, the following:

•More than 80% reduction to our Chief Executive Officer’s base salary;

•Salary reductions ranging from 32.5% to 55% for our other named executive officers;

•Salary and wage reductions for the remaining U.S. workforce ranging from 2% to 15% depending on salary and position beginning in March 2020 with an additional 10% reduction in May 2020;

•Reduction in board member compensation by 25%;

•Suspension of our 401(k) match program;

•Headcount reductions during 2020 representing an almost 50% reduction in our worldwide workforce;

•Sales of fleet vehicles in line with the reduction in headcount; and

•Reduction in our 2020 planned capital expenditures.

Due to our reduced cash flows and projections resulting from reduced sales, we assessed whether our long-lived assets and goodwill may have been impaired as of September 30, 2020. We previously performed quantitative impairment tests using management’s current projections of revenues, expenses and cash flows as of March 31, 2020. At that time, we calculated significant cushion in our quantitative tests. Actual results during the second and third quarters of 2020 were broadly consistent with expectations and our forecasts have not materially changed; therefore, we concluded that our long-lived assets and goodwill were not impaired as of September 30, 2020.

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3.Accounts Receivable and Allowance for Credit Losses

We extend credit to customers in the normal course of business. Our customers are predominantly oil and gas companies in the U.S. Our receivables are short-term in nature and typically due in 30 to 45 days. We do not accrue interest on delinquent receivables. Accounts receivable includes amounts billed and currently due from customers and unbilled amounts for products delivered and services performed for which billings have not yet been submitted to the customers. Total unbilled revenue included in accounts receivable as of September 30, 2020 and December 31, 2019 was $8.4 million and $23.8 million, respectively.

We maintain an allowance for credit losses to provide for the amount of billed receivables we believe to be at risk of loss. In our determination of the allowance for credit losses, we pool receivables with similar risk characteristics based on customer size, credit ratings, payment history, bankruptcy status and other factors known to us and apply an expected credit loss percentage. The expected credit loss percentage is determined using historical loss data adjusted for current conditions and forecasts of future economic conditions. Accounts deemed uncollectible are applied against the allowance for credit losses. The following is a rollforward of our allowance for credit losses.


	Balance at Beginning of Period		Expense		Write off		Other		Balance at End of Period
Nine Months Ended September 30, 2020	$	837	$	341	$	(274)	$	—	$	904
Nine Months Ended September 30, 2019	576		255		(59)		2		774

4.Inventories

Inventories are stated at the lower of cost or net realizable value. Cost is determined using standard cost (which approximates average cost) and weighted average methods. Costs include an application of related direct labor and overhead cost. Net realizable value is the estimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal and transportation. Reserves are made for excess and obsolete items based on a range of factors, including age, usage and technological or market changes that may impact demand for those products. Inventories consist of the following:


	September 30, 2020		December 31, 2019
Raw materials	$	1,999	$	1,538
Work-in-progress	3,573		4,619
Finished goods	82,130		107,214
	$	87,702	$	113,371

5.Property and Equipment, net

Property and equipment are stated at cost. We manufacture or construct most of our own rental assets. During the manufacture of these assets, they are reflected as construction in progress until complete. Property and equipment consists of the following:


	September 30, 2020		December 31, 2019
Land	$	3,203	$	3,203
Buildings and improvements	21,903		21,655
Machinery and equipment	56,994		55,494
Vehicles under finance lease	14,007		24,275
Rental equipment	171,580		161,156
Furniture and fixtures	1,770		1,684
Computers and software	3,498		3,317
Gross property and equipment	272,955		270,784
Less: Accumulated depreciation	(139,627)		(123,397)
Net property and equipment	133,328		147,387
Construction in progress	15,368		14,361
Total property and equipment, net	$	148,696	$	161,748

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6.Debt

We had no debt outstanding as of September 30, 2020 and December 31, 2019.

On August 21, 2018, Cactus LLC entered into a five-year senior secured asset-based revolving credit facility with a syndicate of lenders and JPMorgan Chase Bank, N.A., as administrative agent for such lenders and as an issuing bank and swingline lender (the “ABL Credit Facility”). The ABL Credit Facility provides for up to $75.0 million in revolving commitments, up to $15.0 million of which is available for the issuance of letters of credit. The maximum amount that Cactus LLC may borrow under the ABL Credit Facility is subject to a borrowing base, which is based on a percentage of eligible accounts receivable and eligible inventory, subject to reserves and other adjustments. We were in compliance with all covenants under the ABL Credit Facility as of September 30, 2020.

The ABL Credit Facility was amended in September 2020 to incorporate certain changes related to revised and new definitions associated with alternative interest rates to LIBOR and satisfaction of payment conditions for restricted payments, investments, permitted acquisitions and asset dispositions. The amendment did not change covenants, the Alternate Base Rate, applicable margin rates, commitment fees, the maturity date or borrowing availability under the ABL Credit Facility.

7.Revenue

The majority of our revenues are derived from short-term contracts for fixed consideration. Product sales generally do not include right of return or other significant post-delivery obligations. A contract’s transaction price is allocated to each distinct performance obligation and recognized as revenue when, or as, the performance obligation is satisfied. Revenues are recognized when we satisfy a performance obligation by transferring control of the promised goods or providing services to our customers at a point in time, in an amount specified in the contract with our customer and that reflects the consideration to which we expect to be entitled in exchange for those goods or services. The majority of our contracts with customers contain a single performance obligation to provide agreed upon products or services. For contracts with multiple performance obligations, we allocate revenue to each performance obligation based on its relative standalone selling price. We do not assess whether promised goods or services are performance obligations if they are immaterial in the context of the contract with the customer. We do not incur any material costs of obtaining contracts.

We do not adjust the amount of consideration per the contract for the effects of a significant financing component when we expect, at contract inception, that the period between the transfer of a promised good or service to a customer and when the customer pays for that good or service will be one year or less, which is in substantially all cases. Payment terms and conditions vary, although terms generally include a requirement of payment within 30 to 45 days. Revenues are recognized net of any taxes collected from customers, which are subsequently remitted to governmental authorities. We treat shipping and handling associated with outbound freight as a fulfillment cost instead of as a separate performance obligation. We recognize the cost for the associated shipping and handling when incurred as an expense in cost of sales.

We disaggregate revenue into three categories: product revenues, rental revenues and field service and other revenues. We have predominately domestic operations, with a small amount of sales being generated in Australia. The following table presents our revenues disaggregated by category:


	Three Months Ended September 30,								Nine Months Ended September 30,
	2020				2019				2020				2019
Product revenue	$	35,857	60	%	$	92,582	58	%	$	163,781	58	%	$	273,716	56	%
Rental revenue	9,881		17	%	35,528		22	%	57,579		21	%	113,601		23	%
Field service and other revenue	14,051		23	%	32,698		20	%	59,116		21	%	100,859		21	%
Total revenue	$	59,789	100	%	$	160,808	100	%	$	280,476	100	%	$	488,176	100	%

At September 30, 2020, we had a deferred revenue balance of $1.1 million compared to the December 31, 2019 balance of $1.4 million. Deferred revenue represents our obligation to transfer products to or perform services for a customer for which we have received cash or billed in advance. The revenue that has been deferred will be recognized upon product delivery or as services are performed. As of September 30, 2020, we did not have any contracts with an original length of greater than a year from which revenue is expected to be recognized in the future related to performance obligations that are unsatisfied.

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8.Tax Receivable Agreement (TRA)

In connection with our initial public offering (“IPO”) in February 2018, we entered into the TRA with certain direct and indirect owners of Cactus LLC (the “TRA Holders”). The TRA generally provides for payment by Cactus Inc. to the TRA Holders of 85% of the net cash savings, if any, in U.S. federal, state and local income tax or franchise tax that Cactus Inc. actually realizes or is deemed to realize in certain circumstances. Cactus Inc. will retain the benefit of the remaining 15% of these net cash savings.

The TRA liability is calculated by determining the tax basis subject to TRA (“tax basis”) and applying a blended tax rate to the basis differences and calculating the iterative impact. The blended tax rate consists of the U.S. federal income tax rate and an assumed combined state and local income tax rate driven by the apportionment factors applicable to each state. Subsequent changes to the measurement of the TRA liability are recognized in the statements of income as a component of other income (expense), net. After finalizing its 2019 federal tax return in July 2020, Cactus, Inc. made a $14.2 million TRA payment, which is equal to 85% of the $16.7 million 2019 tax benefit resulting from the exchange of CW Units for shares of Class A common stock. As of September 30, 2020, the total liability from the TRA was $203.5 million with $8.9 million reflected in current liabilities based on the expected timing of our next payment. The payments under the TRA will not be conditional on a holder of rights under the TRA having a continued ownership interest in either Cactus LLC or Cactus Inc.

The term of the TRA commenced upon completion of our IPO and will continue until all tax benefits that are subject to the TRA have been utilized or expired, unless we exercise our right to terminate the TRA. If we elect to terminate the TRA early (or it is terminated early due to certain mergers, asset sales, other forms of business combinations or other changes of control), our obligations under the TRA would accelerate and we would be required to make an immediate payment equal to the present value of the anticipated future payments to be made by us under the TRA and such payment is expected to be substantial. The calculation of anticipated future payments will be based upon certain assumptions and deemed events set forth in the TRA, including the assumptions that (i) we have sufficient taxable income to fully utilize the tax benefits covered by the TRA and (ii) any CW Units (other than those held by Cactus Inc.) outstanding on the termination date are deemed to be redeemed on the termination date. Any early termination payment may be made significantly in advance of the actual realization, if any, of the future tax benefits to which the termination payment relates.

We may elect to defer payments due under the TRA if we do not have available cash to satisfy our payment obligations under the TRA. Any such deferred payments under the TRA generally will accrue interest from the due date for such payment until the payment date.

9.Equity

As of September 30, 2020, Cactus Inc. owned 63.1% of Cactus LLC as compared to 62.8% as of December 31, 2019. As of September 30, 2020, Cactus Inc. had outstanding 47.5 million shares of Class A common stock (representing 63.1% of the total voting power) and 27.8 million shares of Class B common stock (representing 36.9% of the total voting power).

Redemptions of CW Units

Pursuant to the First Amended and Restated Limited Liability Company Operating Agreement of Cactus Wellhead, LLC (the “Cactus Wellhead LLC Agreement”), holders of CW Units are entitled to redeem their CW Units, which results in additional Class A common stock outstanding. Since our IPO in February 2018, 32.7 million CW Units and a corresponding number of shares of Class B common stock have been redeemed in exchange for shares of Class A common stock. During the nine months ended September 30, 2020, 142 thousand CW Units were redeemed in exchange for Class A common stock as compared to 9.2 million CW Units redeemed as part of a secondary offering and other CW Unit redemptions during the nine months ended September 30, 2019. We did not receive any of the proceeds from the 2019 offering and incurred $1.0 million in offering expenses which were recorded in other income (expense), net, in the consolidated statement of income.

Dividends

Cash dividends of $0.27 per share of Class A common stock declared and paid during the nine months ended September 30, 2020 totaled $13.0 million and $12.8 million, respectively. Dividends accrue on unvested restricted stock on the date of record and are paid upon vesting. A de minimis amount of accrued dividends was paid during 2020 to holders of restricted stock units that vested during the period.

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Member Distributions

Distributions made by Cactus LLC are generally required to be made pro rata among all its members. For the nine months ended September 30, 2020, Cactus LLC distributed $26.5 million to Cactus Inc. to fund dividend and TRA liability payments and made pro rata distributions to its other members totaling $15.6 million over the same period. During the nine months ended September 30, 2019, Cactus LLC distributed $9.9 million to Cactus Inc. to fund the 2019 TRA liability payments and made pro rata distributions to its other members totaling $5.9 million.

Limitation of Members’ Liability

Under the terms of the Cactus Wellhead LLC Agreement, the members of Cactus LLC are not obligated for debt, liabilities, contracts or other obligations of Cactus LLC. Profits and losses are allocated to members as defined in the Cactus LLC Agreement.

10.Commitments and Contingencies

Loss Contingencies

We are involved in various disputes arising in the ordinary course of business. Management does not believe the outcome of these disputes will have a material adverse effect on our consolidated financial position or consolidated results of operations.

Gain Contingencies

On March 26, 2020, the U.S. Trade Representative (“USTR”) announced certain exclusion requests related to tariffs on our Chinese imports under Section 301 of the Trade Act of 1974 (“Section 301”). The tariff exemption applied to covered products exported from China to the United States from September 24, 2018 until August 7, 2020. Accordingly, we filed protests and post summary corrections with U.S. Customs and Border Protection in order to recover tariffs paid on the excluded products. The filing requests for refunds were subject to review and approval; therefore, we did not recognize these potential gains until the amounts were realized or considered realizable based on information available to us prior to issuance of the financial statements. As of September 30, 2020, we recognized approximately $14.0 million in refunds, inclusive of $0.5 million in interest. Approximately $4.0 million of the tariff recoveries related to balances included in inventory and were recorded as a reduction to inventory in the second quarter of 2020. Approximately $6.0 million and $9.5 million were recorded as credits to cost of goods sold during the three and nine months ended September 30, 2020, respectively, to offset the accounts where the tariff expenses were originally recorded. Remaining refunds applied for and not recorded as of September 30, 2020 totaled approximately $0.1 million (excluding interest) and will be recognized as a reduction to cost of goods sold when received. The tariff exemption ended August 7, 2020; therefore, we have resumed paying tariffs at 25% on the aforementioned previously excluded parts imported from China.

11.Earnings per Share

Basic earnings per share of Class A common stock is calculated by dividing the net income attributable to Cactus Inc. during the period by the weighted average number of shares of Class A common stock outstanding during the same period. Diluted earnings per share of Class A common stock is calculated by dividing the net income attributable to Cactus Inc. during that period by the weighted average number of common shares outstanding assuming all potentially dilutive shares were issued.

We use the “if-converted” method to determine the potential dilutive effect of outstanding CW Units (and corresponding shares of outstanding Class B common stock), and the treasury stock method to determine the potential dilutive effect of unvested restricted stock units assuming that the proceeds will be used to purchase shares of Class A common stock.

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The following table summarizes the basic and diluted earnings per share calculations:


	Three Months Ended September 30,				Nine Months Ended September 30,
	2020		2019		2020		2019
Numerator:
Net income attributable to Cactus Inc.—basic	$	6,233	$	19,339	$	31,244	$	67,554
Net income attributable to non-controlling interest (1)

Price	1.00	EPS	-141,953,000
Shares	-0	P/E	-0
MCap	-0	P/FCF	-0
Net Debt	-168	EBIT	164
TEV	-168	TEV/EBIT	-1
TTM 2019-09-30, in MM, except price, ratios

10-Q	2020-09-30	Filed 2020-11-05
10-Q	2020-06-30	Filed 2020-07-31
10-Q	2020-03-31	Filed 2020-05-01
10-K	2019-12-31	Filed 2020-02-28
10-Q	2019-09-30	Filed 2019-10-31
10-Q	2019-06-30	Filed 2019-08-02
10-Q	2019-03-31	Filed 2019-05-09
10-K	2018-12-31	Filed 2019-03-15
10-Q	2018-09-30	Filed 2018-11-02
S-1	2018-07-09	Public Filing
10-Q	2018-06-30	Filed 2018-08-02
10-Q	2018-03-31	Filed 2018-05-11
S-1	2018-01-12	Public Filing
10-K	2017-12-31	Filed 2018-03-19

8-K	2020-11-17
8-K	2020-11-04
8-K	2020-09-08
8-K	2020-07-29
8-K	2020-05-20
8-K	2020-05-11
8-K	2020-04-29
8-K	2020-04-22
8-K	2020-03-30
8-K	2020-03-11
8-K	2020-02-26
8-K	2020-01-28
8-K	2019-12-09
8-K	2019-11-25
8-K	2019-11-12
8-K	2019-10-30
8-K	2019-09-11
8-K	2019-08-12
8-K	2019-07-31
8-K	2019-06-17
8-K	2019-05-22
8-K	2019-05-07
8-K	2019-05-01
8-K	2019-03-19
8-K	2019-03-19
8-K	2019-03-18
8-K	2019-03-06
8-K	2019-02-15
8-K	2019-02-11
8-K	2018-12-10
8-K	2018-11-14
8-K	2018-10-31
8-K	2018-09-04
8-K	2018-08-21
8-K	2018-08-01
8-K	2018-07-11
8-K	2018-07-09
8-K	2018-06-21
8-K	2018-06-18
8-K	2018-05-09
8-K	2018-03-27
8-K	2018-03-08
8-K	2018-02-12

EX-10.1	whd-20200930xex101.htm
EX-31.1	whd-20200930xex311.htm
EX-31.2	whd-20200930xex312.htm
EX-32.1	whd-20200930xex321.htm
EX-32.2	whd-20200930xex322.htm


Cautionary Note Regarding Forward-Looking Statements		i

PART I - FINANCIAL INFORMATION

Item 1.	Financial Statements	1
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	14
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	20
Item 4.	Controls and Procedures	20

PART II - OTHER INFORMATION

Item 1.	Legal Proceedings	21
Item 1A.	Risk Factors	21
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	21
Item 6.	Exhibits	22
	Signatures	23

WHD 10Q Quarterly Report

Cactus Earnings 2020-09-30