Except as otherwise indicated or required by the context, all references in this Quarterly Report to the "Company," "Cactus," "we," "us" and "our" refer toCactus, Inc. ("Cactus Inc. ") and its consolidated subsidiaries, unless we state otherwise or the context otherwise requires. The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the accompanying unaudited condensed consolidated financial statements and related notes. The following discussion contains "forward-looking statements" that reflect our plans, estimates, beliefs and expected performance. Our actual results may differ materially from those anticipated as discussed in these forward-looking statements as a result of a variety of risks and uncertainties, including those described above in "Cautionary Note Regarding Forward-Looking Statements" and included elsewhere in this Quarterly Report, all of which are difficult to predict. In light of these risks, uncertainties and assumptions, the forward-looking events discussed may not occur. We assume no obligation to update any of these forward-looking statements except as otherwise required by law. Executive Summary We design, manufacture, sell and rent a range of highly engineered wellhead and pressure control equipment. Our products are sold and rented principally for onshore unconventional oil and gas wells and are utilized during the drilling, completion and production phases of our customers' wells. In addition, we provide field services for all of our products and rental items to assist with the installation, maintenance and handling of the wellhead and pressure control equipment. We operate through service centers inthe United States , which are strategically located in the key oil and gas producing regions, including the Permian, Marcellus, Utica,Haynesville ,Eagle Ford , Bakken and SCOOP/STACK, among other active oil and gas regions inthe United States , and inEastern Australia . These service centers support our field services and provide equipment assembly and repair services. We also provide rental and service operations in theKingdom of Saudi Arabia . Our manufacturing and production facilities are located inBossier City, Louisiana andSuzhou, China . We operate in one business segment. Our revenues are derived from three sources: products, rentals, and field service and other. Product revenues are primarily derived from the sale of wellhead systems and production trees. Rental revenues are primarily derived from the rental and associated repair of equipment used for well control during the completion process as well as the rental of drilling tools. Field service and other revenues are primarily earned when we provide installation and other field services for both product sales and equipment rental. Additionally, other revenues are derived from providing repair and reconditioning services to customers that have previously installed wellheads or production trees on their wellsite. Items sold or rented generally have an associated service component. As a result, there is a close correlation between field service and other revenues and revenues from product sales and rentals. During the nine months endedSeptember 30, 2021 , we derived 64% of total revenues from the sale of our products, 14% of total revenues from rental and 22% of total revenues from field service and other. During the nine months endedSeptember 30, 2020 , we derived 58% of total revenues from the sale of our products, 21% of total revenues from rental and 21% of total revenues from field service and other. We have predominantly domestic operations with a small amount of sales inAustralia , and beginning in the third quarter of 2021, in theKingdom of Saudi Arabia . Market Factors Demand for our products and services depends primarily upon the general level of activity in the oil and gas industry, including the number of drilling rigs in operation, the number of oil and gas wells being drilled, the depth and drilling conditions of these wells, the number of well completions, the level of well remediation activity, the volume of production and the corresponding capital spending by oil and natural gas companies. Oil and gas activity is in turn heavily influenced by, among other factors, availability of capital and oil and gas prices locally and worldwide, which have historically been volatile. The key market factors impacting our product sales are the number of wells drilled and placed on production, as each well requires an individual wellhead assembly and, at some time after completion, the installation of an associated production tree. We measure our product sales activity levels against our competitors by the number of rigs that we are supporting on a monthly basis, as it is correlated to wells drilled. Each active drilling rig produces different levels of revenue based on the customer's drilling plan, which includes factors such as the number of wells drilled per pad, the time taken to drill each well, the number and size of casing strings, the working pressure, material selection and the complexity of the wellhead system chosen by the customer and the rate at which production trees are eventually deployed. All of these factors may be influenced by the oil and gas region in which the customer is operating. While these factors may lead to differing revenues per rig, we have generally been able to forecast our product needs and anticipated revenue levels based on historic trends in a given region and with a specific customer. Increases in 14 -------------------------------------------------------------------------------- Table of Contents horizontal wells drilled as a percentage of total wells drilled, the shift towards pad drilling, and an increase in the number of wells drilled per rig are all favorable trends that we believe enhance the demand for our products relative to the active rig count. However, such favorable trends might be adversely affected by overall supply chain-related disruptions. Our rental revenues are primarily dependent on the number of wells completed (i.e., hydraulically fractured), the number of wells on a well pad, the number of fracture stages per well and the number of fracture stages completed per day. Well completion activity generally follows the level of drilling activity over time, but can be delayed or accelerated due to such factors as takeaway capacity, storage capacity, spot prices, overall service cost inflation and budget considerations. Field service and other revenues are closely correlated to revenues from product sales and rentals, as items sold or rented almost always have an associated service component. Therefore, the market factors and trends of product sales and rental revenues similarly impact the associated levels of field service and other revenues generated. Recent Developments and Trends As economies have reopened in 2021, there has been a resurgence in demand for fossil fuels and oil prices have increased, with West Texas Intermediate prices exceeding$80 per barrel inOctober 2021 . Natural gas prices have also increased significantly this year and have more than doubled sinceSeptember 2020 and are expected to remain elevated this winter. The higher commodity prices have resulted in increased drilling and completion activity by customers and improved demand for our products and services. This has translated into higher activity and revenues for our business. In response to the increased activity levels, we have added over 300 associates during the first nine months of 2021, reinstated wages and salaries to their full amounts and restored the 401(k) match, among other programs that were suspended or reduced in response to the industry downturn last year. We have also added fleet vehicles in line with additions to our headcount and invested capital in our rental fleet primarily to use a more environmentally friendly method of powering certain equipment. Barring significant adverse impacts to fossil fuel demand, including that caused by theCOVID-19 Delta variant, other variants, or the perception thereof, we anticipate continued activity growth in the fourth quarter of 2021 taking into account typical seasonal trends. As overall revenues and activity have grown this year, we have also seen a substantial increase in ocean freight, salaries and wages and raw material prices resulting from COVID-related pressures on the supply chain and significantly increased demand for goods and services worldwide. In addition to dealing with unprecedented cost increases, we are also impacted by the global supply chain issues which have, in some cases, resulted in increased costs when we are required to use other more expensive methods of transportation or substitute more costly products in order to meet customer demand. These cost increases have already had, and could continue to have, a negative impact on our margins and results of operations absent further cost recovery efforts. The significant increase in commodity prices in 2021 has led to meaningful increases in the level ofU.S. onshore drilling activity, particularly among private operators. During the three months endedSeptember 30, 2021 , the weekly averageU.S. onshore rig count as reported byBaker Hughes was 483 rigs compared to 436 rigs for the three months endedJune 30, 2021 and 240 rigs for the three months endedSeptember 30, 2020 . Although these gains are encouraging, current rig activity is still significantly reduced from the levels in 2019 when the weekly average rig count for the three months endedSeptember 30, 2019 was 894. During this period, however, improved rig efficiencies have partially offset the impact of this reduction. As ofOctober 29, 2021 , theU.S. onshore rig count was 529. Private exploration and production ("E&P") companies have been responsible for the majority of the rig additions in theU.S. onshore market in 2021. We have significantly increased our revenues and rigs followed since the third quarter of 2020 despite a greater portion of Cactus' revenues having historically resulted from publicly traded E&P companies. During this time, Cactus has meaningfully increased its business with private E&P companies. Disproportionate changes in activity from private or publicly traded E&P companies present both risks and opportunities for Cactus, depending on a number of factors, such as which customers add or drop rigs. Increased Raw Material and Freight Costs Our ability to source low cost raw materials and components, such as steel plate, tube and bar stock, forgings and machined components is critical to our ability to successfully compete. Due to a shortage of steel caused primarily by production disruptions during the pandemic, steel and assembled component prices are elevated. Additionally, freight costs, specifically ocean freight costs, have risen significantly due to a number of factors including, but not limited to, a scarcity of shipping containers, congested seaports, a shortage of commercial drivers, capacity constraints on vessels and lockdowns in certain markets. We have seen our international freight costs increase from approximately$2,800 per container before the pandemic to over$17,000 per container and expect prices to continue to increase through the end of the year. Although we believe that these cost increases are temporary and as supply equalizes with demand, prices should normalize, we do not believe this will occur until mid-to-late 2022. 15 -------------------------------------------------------------------------------- Table of Contents Additionally, we cannot be confident that prices will return to the lower levels experienced in prior years. As such, our results of operations may be adversely affected by these rising costs to the extent we are unable to recoup them from our customers. Critical Accounting Policies and Estimates A discussion of our critical accounting policies and estimates is contained in our 2020 Annual Report on Form 10-K. There have not been any changes in our critical accounting policies sinceDecember 31, 2020 . Consolidated Results of Operations The following discussions relating to significant line items from our condensed consolidated statements of income are based on available information and represent our analysis of significant changes or events that impact the comparability of reported amounts. Where appropriate, we have identified specific events and changes that affect comparability or trends and, where reasonably practicable, have quantified the impact of such items. Three Months EndedSeptember 30, 2021 Compared to Three Months EndedJune 30, 2021
The following table presents summary consolidated operating results for the periods indicated:
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