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 of equipment used during the completion process, the repair of such equipment and the rental of tools used during drilling operations. 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. 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, 2022 , we derived 65% of total revenues from the sale of our products, 15% of total revenues from rental and 20% of total revenues from field service and other. 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. We have predominantly domestic revenues with a small amount of sales in select international markets.
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 active drilling rigs, the number of wells drilled, the depth and working pressure 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, investor sentiment, 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 program and efficiencies, which includes factors such as the number of wells drilled per pad, the timing of rig moves, the time taken to drill each well, the number and size of casing strings, the working pressure, material selection, 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 our customers are operating. While these factors may lead to differing revenues 14 --------------------------------------------------------------------------------
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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.
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 availability of drilling rigs, pressure pumping fleets and OCTG, 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
Oil prices have been extremely volatile throughout 2022 primarily due to global import restrictions already enacted and anticipated to be enacted on Russian oil in response to the conflict inUkraine , efforts by the President ofthe United States to combat rising gasoline prices by releasing oil from the Strategic Petroleum Reserve, fears of a recession inthe United States ,China andEurope caused by increasing inflation and rising interest rates and planned production cuts by theOrganization of Petroleum Exporting Countries (OPEC+). Oil prices reached their peak inMarch 2022 with West Texas Intermediate ("WTI") prices increasing to over$123 per barrel. Prices remained elevated, yet volatile for several months until briefly dropping to under$77 per barrel in lateSeptember 2022 , approaching lower pricing not seen since the beginning of 2022, only to increase to over$90 in earlyNovember 2022 . Prices for natural gas have been elevated, but also volatile, throughout 2022 inthe United States due to several factors including higher demand for heating due to a colder winter at the beginning of the year, a nationwide heat wave during the summer and record-high LNG exports due to a rise in global LNG demand.Henry Hub natural gas spot prices have increased from an average of$3.76 per one million British Thermal Units ("MMBtu") forDecember 2021 to an average high of$8.14 per MMBtu forMay 2022 and most recently to an average of$5.66 per MMBtu forOctober 2022 . Delivery bottlenecks, lack of storage capacity and mild weather inEurope have contributed to the aforementioned price decline. The ongoing conflict inUkraine has had repercussions globally and inthe United States by continuing to cause uncertainty, not only in the oil and natural gas markets, but also in the financial markets. Such uncertainty already has and could continue to result in stock price volatility and supply chain disruptions as well as higher oil and natural gas prices which could result in higher inflation worldwide, impact consumer spending and negatively impact demand for our goods and services. Moreover, additional interest rate increases by theU.S. Federal Reserve to combat inflation could further increase the probability of a recession. Notwithstanding the significant commodity price volatility this year, we have seen increases inUnited States onshore drilling activity, particularly among private operators. During the three months endedSeptember 30, 2022 , the weekly averageU.S. onshore rig count as reported byBaker Hughes was 741 rigs compared to 697 rigs for the three months endedJune 30, 2022 and 483 rigs for the three months endedSeptember 30, 2021 . Current rig activity remains significantly reduced from 2019 levels when the weekly average rig count for the three months endedMarch 31, 2019 was 1,021. However, notwithstanding the impact of longer laterals, improved rig efficiencies have partially offset the impact of this reduction. As ofNovember 4, 2022 , theU.S. onshore rig count was 754. Private E&P companies have been responsible for the majority of the rig additions in theU.S. onshore market over the last year. We have significantly increased our revenues and rigs followed since the low in activity in 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 and their relative efficiency in drilling wells. Increasing volatility in oil and natural gas prices could also impact activity among private operators.
Inflation and Increased Costs
Supply chain disruptions, geopolitical issues and significantly increased demand for goods and services worldwide resulted in substantial increases in fuel, raw materials, component parts, ocean freight charges and increased labor costs this year. Inflation as reported by theU.S. Bureau of Labor Statistics has increased in 2022, rising from an average of 4.7% in 2021 to 8.2% in 15 --------------------------------------------------------------------------------
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September 2022 . September's reported increase was down slightly from the high of 9.1% inJune 2022 but was higher than economists expected, continuing to fuel fears of a recession. Salaries and wages remain elevated as a result of competitive labor markets, especially in certain key oil and gas producing areas, but also due to broader inflation trends and labor shortages. We expect we will continue to experience inflationary pressures on our cost structure for the foreseeable future; however, tightness in overseas freight and transit times fromChina have eased. Additionally, raw material and component costs are moderating due in part to a strengtheningUnited States dollar and weakening steel demand. Nonetheless, we cannot be confident that transit times or input prices will return to the lower levels experienced in prior years. Continued inflation and looming concerns regarding a possible recession weigh on the outlook for oil demand which could in turn negatively impact demand for our goods and services.
Critical Accounting Policies and Estimates
A discussion of our critical accounting policies and estimates is contained in
our 2021 Annual Report on Form 10-K. There have not been any changes in our
critical accounting policies since
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 Ended
The following table presents summary consolidated operating results for the periods indicated: Three Months Ended September 30, 2022 June 30, 2022 $ Change % Change (in thousands) Revenues Product revenue$ 121,782 $ 112,232 $ 9,550 8.5 % Rental revenue 27,105 23,695 3,410 14.4 Field service and other revenue 35,594 34,288 1,306 3.8 Total revenues 184,481 170,215 14,266 8.4 Costs and expenses Cost of product revenue 73,747 69,172 4,575 6.6 Cost of rental revenue 16,323 15,328 995 6.5 Cost of field service and other revenue 27,145 26,734 411 1.5 Selling, general and administrative expenses 15,970 14,740 1,230 8.3 Total costs and expenses 133,185 125,974 7,211 5.7 Income from operations 51,296 44,241 7,055 15.9 Interest income, net 1,140 304 836 nm Other income, net 1,125 - 1,125 nm Income before income taxes 53,561 44,545 9,016 20.2 Income tax expense 12,041 8,765 3,276 37.4 Net income 41,520 35,780 5,740 16.0 Less: net income attributable to non-controlling interest 10,095 8,636 1,459 16.9 Net income attributable to Cactus Inc.$ 31,425 $ 27,144 $ 4,281 15.8 % nm = not meaningful 16
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Revenues
Product revenue was$121.8 million for the third quarter of 2022 compared to$112.2 million for the second quarter of 2022. The increase of$9.6 million , representing a 9% increase, was primarily due to increased sales of wellhead and production related equipment resulting from higher drilling activity by our customers as well as continued cost recovery efforts. Rental revenue for the third quarter of 2022 was$27.1 million , an increase of$3.4 million , or 14%, from$23.7 million for the second quarter of 2022. The increase was mainly attributable to higher customer drilling and completion activity and associated repairs. Field service and other revenue of$35.6 million for the third quarter of 2022 increased$1.3 million , or 4%, from$34.3 million for the second quarter of 2022. The increase was primarily due to higher billable hours from increased customer activity. Costs and expenses Cost of product revenue for the third quarter of 2022 of$73.7 million increased$4.6 million , or 7%, from$69.2 million for the second quarter of 2022. The increase was primarily attributable to the increase in product sales as well as increased costs associated with freight and overhead. Cost of rental revenue for the third quarter of 2022 was$16.3 million , an increase of$1.0 million , or 6%, from$15.3 million for the second quarter of 2022 mainly due to increased equipment repair costs partially offset by lower depreciation expense on our rental fleet. Cost of field service and other revenue was$27.1 million for the third quarter of 2022, an increase of$0.4 million , or 2%, from$26.7 million for the second quarter of 2022. The increase was primarily related to increased personnel costs associated with an increase in the number of field personnel and higher wages partially offset by lower third-party service costs. Selling, general and administrative expenses for the third quarter of 2022 were$16.0 million , an increase of$1.2 million , or 8%, from$14.7 million for the second quarter of 2022. The increase was primarily due to increased personnel costs associated with higher salaries and wages, benefits and stock-based compensation expense as well as increased professional fees, offset slightly by lower bad debt expense. Interest income, net. Interest income, net for the third quarter of 2022 was$1.1 million compared to$0.3 million for the second quarter of 2022. The increase of$0.8 million was primarily due to higher interest income as a result of increased interest rates. Other income, net. Other income, net for the third quarter of 2022 of$1.1 million represented a non-cash adjustment for the revaluation of the liability related to the tax receivable agreement as a result of changes to the state tax rate. Income tax expense. Income tax expense for the third quarter of 2022 was$12.0 million compared to$8.8 million for the second quarter of 2022. Income tax expense for the third quarter of 2022 included approximately$11.0 million of expense associated with current income and$1.1 million of expense associated with the revaluation of our deferred tax asset as a result of a change in our forecasted state tax rate offset by a$0.1 million tax benefit associated with the partial valuation allowance release in conjunction with third quarter 2022 redemptions of CW Units. Partial valuation releases occur in conjunction with redemptions of CW Units as a portion ofCactus Inc.'s deferred tax assets from its investment inCactus LLC becomes realizable. Income tax expense for the second quarter of 2022 included approximately$9.1 million of expense associated with current income offset by a$0.3 million tax benefit associated with the partial valuation allowance release in conjunction with second quarter 2022 redemptions of CW Units.
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Nine Months Ended
The following table presents summary consolidated operating results for the periods indicated: Nine Months Ended September 30, 2022 2021 $ Change % Change (in thousands) Revenues Product revenue$ 328,054 $ 197,136 $ 130,918 66.4 % Rental revenue 73,143 42,404 30,739 72.5 Field service and other revenue 99,398 69,133 30,265 43.8 Total revenues 500,595 308,673 191,922 62.2 Costs and expenses Cost of product revenue 203,839 134,329 69,510 51.7 Cost of rental revenue 46,740 39,824 6,916 17.4 Cost of field service and other revenue 78,685 51,645 27,040 52.4 Selling, general and administrative expenses 44,804 33,160 11,644 35.1 Total costs and expenses 374,068 258,958 115,110 44.5 Income from operations 126,527 49,715 76,812 nm Interest income (expense), net 1,344 (632) 1,976 nm Other income (expense), net 10 (1,410) 1,420 nm Income before income taxes 127,881 47,673 80,208 nm Income tax expense 23,498 586 22,912 nm Net income 104,383 47,087 57,296 nm Less: net income attributable to non-controlling interest 25,198 12,518 12,680 nm Net income attributable to Cactus Inc.$ 79,185 $ 34,569 $ 44,616 nm nm = not meaningful Revenues Product revenue was$328.1 million for the nine months endedSeptember 30, 2022 compared to$197.1 million for the nine months endedSeptember 30, 2021 . The increase of$130.9 million , representing a 66% increase from 2021, was primarily due to higher sales of wellhead and production related equipment resulting from higher activity by our customers as well as continued cost recovery efforts. Rental revenue of$73.1 million for the first nine months of 2022 increased$30.7 million , or 72%, from$42.4 million for the first nine months of 2021. The increase was primarily attributable to higher drilling and completion activity by our customers and associated repairs. Field service and other revenue for the nine months endedSeptember 30, 2022 was$99.4 million , an increase of$30.3 million , or 44%, from$69.1 million for the nine months endedSeptember 30, 2021 . The increase was attributable to increased customer activity, resulting in higher billable hours and ancillary services as well as cost recovery measures.
Costs and expenses
Cost of product revenue for the nine months endedSeptember 30, 2022 was$203.8 million , an increase of$69.5 million , or 52%, from$134.3 million for the nine months endedSeptember 30, 2021 . The increase was largely attributable to an increase in product sales and increased costs associated with materials, freight and overhead. Cost of rental revenue of$46.7 million for the first nine months of 2022 increased$6.9 million , or 17%, from$39.8 million for the first nine months of 2021. The increase was primarily due to higher scrap expense, repair and equipment reactivation costs and increased personnel, ancillary costs and branch expenses, partially offset by lower depreciation expense on our rental fleet. 18 --------------------------------------------------------------------------------
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Cost of field service and other revenue was$78.7 million for the nine months endedSeptember 30, 2022 , an increase of$27.0 million , or 52%, from$51.6 million for the nine months endedSeptember 30, 2021 . The increase was mainly related to higher personnel costs resulting from an increase in the number of field and branch personnel and higher wages as well as higher fuel and third-party service costs associated with increased field service activity levels. Selling, general and administrative expenses for the nine months endedSeptember 30, 2022 were$44.8 million compared to$33.2 million for the nine months endedSeptember 30, 2021 . The$11.6 million increase was largely attributable to increased personnel costs primarily related to higher salaries and wages, benefits and accruals for annual incentive bonuses. Additional increases related to higher stock-based compensation expense, professional fees, information technology expenses and travel costs. Interest income (expense), net. Interest income, net for the first nine months of 2022 was$1.3 million compared to interest expense, net of$0.6 million for the first nine months of 2021. The increase in interest income, net of$2.0 million was primarily due to higher interest income earned on cash invested resulting from increased interest rates in 2022. Other expense, net. Other expense, net for the nine months endedSeptember 30, 2021 of$1.4 million related to a$1.0 million non-cash adjustment for the revaluation of the liability related to the tax receivable agreement and$0.4 million for professional fees and other expenses associated with the 2021 Secondary Offering. Income tax expense. Income tax expense for the nine months endedSeptember 30, 2022 was$23.5 million compared to$0.6 million for the nine months endedSeptember 30, 2021 . Income tax expense for the first nine months of 2022 included approximately$26.3 million of expense associated with current income offset by a$1.7 million benefit associated with permanent differences related to equity compensation and a$1.2 million tax benefit associated with the partial valuation allowance release in conjunction with CW Unit redemptions during the year. The income tax expense for the first nine months of 2021 included an$8.9 million benefit associated with a partial valuation allowance release associated with CW Unit redemptions during the year and a$1.1 million benefit associated with permanent differences related to equity compensation.
Liquidity and Capital Resources
AtSeptember 30, 2022 , we had$320.6 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, if necessary, borrowings under our Amended ABL Credit Facility. Depending upon market conditions and other factors, we may also have the ability to issue additional equity and debt if needed. As ofSeptember 30, 2022 , we had no borrowings outstanding under our Amended ABL Credit Facility and$80.0 million of available borrowing capacity. Additionally, we were in compliance with the covenants of the Amended ABL Credit Facility as ofSeptember 30, 2022 . 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, anticipated capital expenditures, expected payments related to the TRA, anticipated tax liabilities and dividends to holders of our Class A common stock as well as pro rata cash distributions to the holders of CW Units other thanCactus Inc. For the nine months endedSeptember 30, 2022 , net capital expenditures totaled$19.5 million , which were primarily related to additions to the Company's fleet of rental equipment, including drilling-related tools, and additional investment in and expansion of ourBossier City location. We currently estimate our net capital expenditures for the year endingDecember 31, 2022 will be approximately$25 million . We continuously evaluate our capital expenditures and the amount we ultimately spend will depend on a number of factors, including, among other things, demand for rental assets, available capacity in existing locations, prevailing economic conditions, market conditions in the E&P industry, customers' forecasts, volatility and company initiatives. Our ability to satisfy our long-term liquidity requirements, including cash distributions to CW Unit Holders to fund their respective income tax liabilities relating to their share of the income ofCactus LLC and to fund liabilities related to the TRA, depends on our future operating performance, which is affected by, and subject to, prevailing economic conditions, market conditions in the E&P industry, availability and cost of raw materials, and financial, business and other factors, many of which are beyond our control. We will not be able to predict or control many of these factors, such as economic conditions in the markets where we operate and competitive pressures. If necessary, we could choose to further reduce our spending on capital projects and operating expenses to ensure we operate within the cash flow generated from our operations. 19 --------------------------------------------------------------------------------
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Cash Flows
Nine Months Ended
The following table summarizes our cash flows for the periods indicated:
Nine Months EndedSeptember 30, 2022 2021 (in thousands)
Net cash provided by operating activities
Net cash provided by operating activities was$78.6 million and$52.1 million for the nine months endedSeptember 30, 2022 and 2021, respectively. Operating cash flows for 2022 increased primarily due to an increase in income offset by a$2.0 million increase in TRA payments and an increase in working capital, largely related to the increase in inventory and increased accounts receivable associated with higher revenues. Net cash used in investing activities was$19.5 million and$8.4 million for the nine months endedSeptember 30, 2022 and 2021, respectively. The increase was primarily due to increased investments associated with our rental fleet and additional investment in and expansion of ourBossier City location. Net cash used in financing activities was$37.2 million and$30.4 million for the nine months endedSeptember 30, 2022 and 2021, respectively. The increase was primarily comprised of a$4.8 million increase in dividend payments, a$1.3 million increase in share repurchases from employees to satisfy tax withholding obligations related to restricted stock units that vested during the period, a$0.7 million increase in payments on finance leases and$0.2 million in deferred financing costs.
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