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 Companies, LLC (“Cactus Companies”). Cactus Inc. is a holding company whose only material asset is an equity interest consisting of units representing limited liability company interests in Cactus Companies (“CC Units”). Cactus Inc. is the sole managing member of Cactus Companies and operates and controls all of the business and affairs of Cactus Companies and conducts its business through Cactus Companies and its subsidiaries. As a result, Cactus Inc. consolidates the financial results of Cactus Companies and its subsidiaries and reports a non-controlling interest related to the portion of CC 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.
On February 28, 2023, Cactus Inc. through one of its subsidiaries, completed its previously announced merger of the FlexSteel business (the “Merger”) through a merger with HighRidge Resources, Inc. and its subsidiaries (“HighRidge”). On February 27, 2023, in order to facilitate the Merger with HighRidge, an internal reorganization was completed in which Cactus Companies acquired all of the outstanding units representing ownership interests in Cactus Wellhead, LLC (“Cactus LLC”), the operating subsidiary of Cactus Inc. (the “CC Reorganization”). The purpose of the Merger was to effect the acquisition of the operations of FlexSteel Holdings, Inc. and its subsidiaries. FlexSteel Holdings, Inc. was a wholly-owned subsidiary of HighRidge prior to the Merger and was converted into a limited liability company, contributed from HighRidge to Cactus Companies as part of the CC Reorganization and is now named FlexSteel Holdings, LLC (“FlexSteel”). The results of operations of FlexSteel have been reflected in our accompanying condensed consolidated financial statements from the closing date of the acquisition through March 31, 2023. See Note 2 for additional information related to the acquisition.
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, 2022.
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.
2.FlexSteel Acquisition
On February 28, 2023, we completed the acquisition of FlexSteel in accordance with the terms and conditions of the merger agreement dated December 30, 2022. We paid cash consideration of $624.2 million upon closing, with that amount subject to finalization based upon closing working capital, cash on hand and indebtedness adjustments as set forth in the merger agreement. In addition to the upfront consideration, there is a potential future earn-out payment of up to $75.0 million to be paid no later than the third quarter of 2024, if certain revenue growth targets are met by FlexSteel. We funded the upfront purchase price using a combination of $165.6 million of net proceeds received from the public offering of shares of our Class A common stock completed in January 2023, borrowings under the Amended ABL Credit Facility (as defined in Note 7) totaling $155.0 million and available cash on hand at the time of closing.
We believe this acquisition enhances Cactus’ position as a premier manufacturer and provider of highly engineered
equipment to the exploration and production (“E&P”) industry and provides meaningful growth potential for Cactus. We also believe FlexSteel’s products are highly complementary to Cactus’ equipment at the wellsite as it expands our exposure to our customers’ operations from production trees to transportation of oil, gas and other liquids as well as to additional customers operating in the midstream area. The acquisition is being accounted for using the acquisition method of accounting, with Cactus being treated as the accounting acquirer. Under the acquisition method of accounting, the assets and liabilities were recorded at their respective fair values as of the date of the completion of the acquisition. The transaction was treated as a purchase of stock for United States federal income tax purposes. In connection with the acquisition, we incurred approximately $7.5 million of transaction costs for the three months ended March 31, 2023 required to effect the transaction and incurred an additional $1.1 million in costs related to the reporting of and accounting for the transaction. These fees primarily related to legal, accounting and consulting fees and are included in selling, general and administrative (“SG&A”) expenses in the statements of income.
Purchase Price Consideration
The estimated purchase price consideration for the acquisition is $630.1 million and is summarized as follows:
| | | | | | | | |
| | Purchase Price Consideration |
Cash consideration | | $ | 624,173 | |
Add: Estimated contingent consideration (1) | | 5,960 | |
Fair value of consideration transferred or estimated to be transferred | | $ | 630,133 | |
(1) Represents the estimated fair value of the earn-out payment of up to $75 million of additional cash consideration if certain revenue growth targets are met by FlexSteel. The estimated fair value of the earn-out payment was determined using a Monte Carlo simulation valuation methodology based on probability-weighted performance projections and other inputs, including a discount rate. The liability associated with the earn-out payment is recorded in other noncurrent liabilities. Changes to the fair value of the liability subsequent to the acquisition date are recognized in the statements of income as a component of other income (expense), net.
Preliminary Purchase Price Allocation
The following table provides the preliminary allocation of the purchase price as of the acquisition date:
| | | | | | | | |
Cash and cash equivalents | | $ | 5,316 | |
Receivables | | 57,747 | |
Inventories | | 92,421 | |
Prepaid expenses and other current assets | | 1,283 | |
Property and equipment | | 210,929 | |
Operating lease right-of-use assets | | 1,021 | |
Identifiable intangible assets | | 200,300 | |
Other noncurrent assets | | 5,666 | |
Total assets acquired | | 574,683 | |
Accounts payable | | (14,789) | |
Accrued expenses and other current liabilities | | (26,827) | |
Finance lease obligations | | (974) | |
Operating lease liabilities | | (906) | |
Deferred tax liabilities | | (94,532) | |
Total liabilities assumed | | (138,028) | |
| | |
Net assets acquired | | 436,655 | |
| | |
Goodwill | | $ | 193,478 | |
Assets acquired and liabilities assumed in connection with the acquisition were recorded at their estimated fair values. Estimated fair values were determined by management, based in part on an independent valuation performed by third-party
valuation specialists. The valuation methods used to determine the estimated fair value of intangible assets included the excess earnings approach for customer relationships and backlog using customer inputs and contributory charges and the relief from royalty method for tradename and developed technology. Several significant assumptions and estimates were involved in the application of these valuation methods, including forecasted sales volumes and prices, royalty rates, costs to produce, tax rates, capital spending, discount rates, attrition rates and working capital changes. Cash flow forecasts were generally based on FlexSteel’s pre-acquisition forecasts. Identifiable intangible assets with finite lives are subject to amortization over their estimated useful lives.
The fair values determined for accounts receivable, accounts payable and most other current assets and liabilities, other than inventory, were equivalent to the carrying value due to their short-term nature. Acquired inventories are comprised of raw materials, work-in-progress and finished goods. The preliminary fair value of finished goods was calculated as the estimated selling price, less costs of the selling effort and a reasonable profit allowance relating to the selling effort. The preliminary fair value of work-in-progress was calculated as the estimated selling price, less costs to complete, less costs of the selling effort and a reasonable profit allowance on completion and selling costs. The preliminary fair value of raw materials was determined based on replacement cost which approximates historical carrying value. The preliminary fair value of identifiable fixed assets was calculated using a combination of valuation approaches, but primarily consisted of the cost approach which adjusts estimates of replacement cost for the age, condition and utility of the associated assets.
Goodwill is calculated as the excess of the purchase price over the estimated fair value of net assets acquired and represents the future economic benefits arising from other assets acquired that could not be individually identified and separately recognized. Among the factors that contributed to a purchase price in excess of the estimated fair value of the net tangible and intangible assets acquired were the acquisition of an assembled workforce, expansion opportunities and other benefits that we believe will result from combining the operations of FlexSteel with ours. Goodwill was further increased by the deferred tax liability associated with the fair market value in excess of the tax basis acquired. The goodwill associated with this transaction has been allocated to our Spoolable Technologies segment.
Due to the timing of the completion of the acquisition, the purchase price and related allocation are preliminary and could be revised as a result of adjustments made to the purchase price, additional information obtained regarding assets acquired and liabilities assumed and revisions of preliminary estimates of fair values including, but not limited to, certain tangible assets acquired and liabilities assumed, contractual relationships, intangible assets, certain working capital items, deferred income taxes and residual goodwill. These changes to the purchase price allocation could be significant. The purchase price allocation will be finalized within the measurement period of up to one year from the acquisition date.
Tax-related impacts
As a result of the transaction, we acquired certain carryforward tax attributes. The Company’s current assessment is that some of these attributes should be accounted for as unrecognized tax benefits in the acquisition accounting. The unrecognized tax benefits have been offset by an indemnification asset from the seller of $5.7 million. The Company continues to evaluate the technical merits of the tax attributes, and the unrecognized tax benefit assessment is subject to change within the measurement period. Subsequent to completion of the acquisition, we determined that we expect to generate sufficient taxable income of the appropriate type to allow for the realization of the deferred tax asset associated with our investment in Cactus Companies and recognized a $12.1 million tax benefit in the first quarter of 2023 associated with the release of our valuation allowance previously provided. Additionally, we recognized $4.3 million of tax expense in the first quarter of 2023 associated with the revaluation of our deferred tax asset as a result of a change in our forecasted state rate primarily due to state impacts of the FlexSteel acquisition.
Pro forma financial information
From acquisition date through March 31, 2023, FlexSteel had revenue of $33.8 million and net income of $0.4 million. The pro forma financial information below represents the combined results of operations for the three months ended March 31, 2023 and 2022, as if the acquisition had occurred as of January 1, 2022. The unaudited pro forma combined financial information includes, where applicable, adjustments for additional amortization expense related to the fair value step-up of intangible assets, additional inventory fair value step-up expense, additional depreciation expense associated with adjusting property and equipment to fair value, changes to align accounting policies, decreases in interest expense due to modification of borrowings in conjunction with the acquisition and associated tax-related impacts of adjustments. These pro forma adjustments are based on available information as of the date hereof and upon assumptions that we believe are reasonable to reflect the impact of the FlexSteel acquisition on our historical financial information on a supplemental pro forma basis. Adjustments do not include the elimination of transaction-related costs incurred or any costs related to integration activities, cost savings or synergies that have been or may
be achieved by the combined business. The unaudited pro forma financial information is presented for informational purposes only and is neither indicative of the results of operations that would have occurred if the acquisition had taken place at the beginning of the period presented nor indicative of future operating results.
| | | | | | | | | | | | | | |
| | Three Months Ended March 31, |
| | 2023 | | 2022 |
Revenues | | $ | 281,784 | | | $ | 228,711 | |
Net Income attributable to Cactus, Inc. | | 40,803 | | | 18,771 | |
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 E&P companies located in the U.S. Our receivables are short-term in nature and typically due in 30 to 60 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 March 31, 2023 and December 31, 2022 was $27.9 million and $34.9 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.
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| Balance at Beginning of Period | | Credit to Expense | | Write off | | Translation Adjustments | | Balance at End of Period |
Three Months Ended March 31, 2023 | $ | 1,060 | | | $ | (376) | | | $ | (19) | | | $ | 2 | | | $ | 667 | |
Three Months Ended March 31, 2022 | 741 | | | (110) | | | (15) | | | — | | | 616 | |
4.Inventories
Inventories are stated at the lower of cost or net realizable value. Cost is determined using standard cost (which approximates average cost). Costs include an application of related material, direct labor, duties, tariffs, freight and overhead costs. 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:
| | | | | | | | | | | |
| March 31, 2023 | | December 31, 2022 |
Raw materials | $ | 22,106 | | | $ | 3,150 | |
Work-in-progress | 13,052 | | | 5,444 | |
Finished goods | 197,440 | | | 152,689 | |
| $ | 232,598 | | | $ | 161,283 | |
5.Property and Equipment, net
Property and equipment are stated at cost. We manufacture or construct most of our rental equipment assets. During the manufacture of these assets, they are reflected as construction in progress until complete. Property and equipment consists of the following:
| | | | | | | | | | | |
| March 31, 2023 | | December 31, 2022 |
Land | $ | 16,442 | | | $ | 5,302 | |
Buildings and improvements | 131,155 | | | 25,480 | |
Machinery and equipment | 114,293 | | | 57,883 | |
Reels and skids | 18,036 | | | — | |
Vehicles | 32,839 | | | 29,045 | |
Rental equipment | 216,136 | | | 194,088 | |
Furniture and fixtures | 1,906 | | | 1,759 | |
Computers and software | 3,707 | | | 3,068 | |
Gross property and equipment | 534,514 | | | 316,625 | |
Less: Accumulated depreciation | (204,366) | | | (200,573) | |
Net property and equipment | 330,148 | | | 116,052 | |
Construction in progress | 21,154 | | | 13,946 | |
Total property and equipment, net | $ | 351,302 | | | $ | 129,998 | |
6.Goodwill and Other Intangible Assets
Goodwill represents the excess of purchase price paid over the fair value of the net assets of acquired businesses. Goodwill is not amortized, but we perform an annual goodwill impairment test on December 31 and more frequently if events and circumstances indicate that the asset might be impaired. The change in carrying value of goodwill allocated to our reportable segments during the three months ended March 31, 2023 was as follows:
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| | Pressure Control | | Spoolable Technologies | | Total |
Balance at December 31, 2022 | | $ | 7,824 | | | $ | — | | | $ | 7,824 | |
FlexSteel acquisition | | — | | | 193,478 | | | 193,478 | |
| | | | | | |
Balance at March 31, 2023 | | $ | 7,824 | | | $ | 193,478 | | | $ | 201,302 | |
The following table presents the detail of acquired intangible assets other than goodwill as of March 31, 2023:
| | | | | | | | | | | | | | | | | | | | |
| | Gross Cost | | Accumulated Amortization | | Net Cost |
Customer relationships | | $ | 100,300 | | | $ | (557) | | | $ | 99,743 | |
Developed technology | | 77,000 | | | (642) | | | 76,358 | |
Tradename | | 16,000 | | | (134) | | | 15,866 | |
Backlog | | 7,000 | | | (2,333) | | | 4,667 | |
Total | | $ | 200,300 | | | $ | (3,666) | | | $ | 196,634 | |
All intangible assets are amortized over their estimated useful lives. The weighted average amortization period for identifiable intangible assets acquired is 12 years. Amortization expense recognized during the three months ended March 31, 2023 was $3.7 million and was recorded in SG&A expenses in the statements of income. Estimated future amortization expense is as follows:
| | | | | | | | |
Remainder of 2023 | | $ | 16,657 | |
2024 | | 15,987 | |
2025 | | 15,987 | |
2026 | | 15,987 | |
2027 | | 15,987 | |
2028 | | 15,987 | |
Thereafter | | 100,042 | |
Total | | $ | 196,634 | |
7.Debt
The following is a summary of our debt as of March 31, 2023. We had no debt outstanding as of December 31, 2022.
| | | | | | | | |
Revolving loan | | $ | 30,000 | |
Term loan | | 125,000 | |
Less: Unamortized debt issuance costs | | (3,283) | |
Total debt, net of deferred financing costs | | 151,717 | |
Less: Current portion of long-term debt (1) | | (39,750) | |
Long-term debt | | $ | 111,967 | |
(1) Represents the mandatory amortization payments due within twelve months of March 31, 2023. This amount does not reflect $60.0 million in discretionary prepayments made on the term loan in April and May 2023.
In addition to the borrowings reflected above, we had $1.7 million in letters of credit outstanding.
In August 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 was first amended in September 2020 and provided for up to $75.0 million in revolving commitments. On July 25, 2022, the ABL Credit Facility was amended again for up to $80.0 million in revolving commitments, up to $15.0 million of which was available for the issuance of letters of credit.
On February 28, 2023, in connection with the Merger, Cactus Companies assumed the rights and obligations of Cactus LLC as Borrower under the ABL Credit Facility, and the ABL Credit Facility was amended and restated in its entirety (the “Amended ABL Credit Facility”). The Amended ABL Credit Facility provides for a term loan of $125.0 million, the full amount of which was borrowed at closing of the Amended ABL Credit Facility to fund a portion of the Merger, and up to $225.0 million in revolving commitments, up to $20.0 million of which is available for the issuance of letters of credit. Subject to certain terms and conditions set forth in the Amended ABL Credit Facility, Cactus Companies may request additional revolving commitments in an amount not to exceed $50.0 million, for a total of up to $275.0 million in revolving commitments. The term loan under the Amended ABL Credit Facility matures on February 27, 2026 and any revolving loans under the Amended ABL Credit Facility mature on July 26, 2027. The maximum amount that Cactus Companies may borrow under the Amended 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.
Borrowings under the Amended ABL Credit Facility bear interest at Cactus Companies’ option at either (i) the Alternate Base Rate (as defined therein) (“ABR”), or (ii) the Adjusted Term SOFR Rate (as defined therein) (“Term Benchmark”), plus, in each case, an applicable margin. Letters of credit issued under the Amended ABL Credit Facility accrue fees at a rate equal to the applicable margin for Term Benchmark borrowings. The applicable margin is 2.50% per annum for term loan ABR borrowings and 3.50% per annum for term loan Term Benchmark borrowings. The applicable margin for revolving loan borrowings ranges from 0.0% to 0.5% per annum for revolving loan ABR borrowings and 1.25% to 1.75% per annum for revolving loan Term Benchmark borrowings and, in each case, is based on the average quarterly availability of the revolving loan commitment under the Amended ABL Credit Facility for the immediately preceding fiscal quarter. The unused portion of revolving commitment under the Amended ABL Credit Facility is subject to a commitment fee of 0.25% per annum. The term loan is required to be repaid in regular set amounts starting July 1, 2023 as set forth in the amortization schedule in the Amended ABL Credit Facility.
The term loan can be prepaid without the payment of any prepayment premium (other than customary breakage costs for Term Benchmark borrowings).
The Amended ABL Credit Facility contains various covenants and restrictive provisions that limit Cactus Companies’ and each of its subsidiaries’ ability to, among other things, incur additional indebtedness and create liens, make investments or loans, merge or consolidate with other companies, sell assets, make certain restricted payments and distributions, and engage in transactions with affiliates. The obligations under the Amended ABL Credit Facility are guaranteed by certain subsidiaries of Cactus Companies and secured by a security interest in accounts receivable, inventory, equipment and certain other real and personal property assets of Cactus Companies and the guarantors. Until the term loan is paid in full, the Amended ABL Credit Facility requires Cactus Companies to maintain a leverage ratio no greater than 2.50 to 1.00 based on the ratio of Total Indebtedness (as defined therein) to EBITDA (as defined therein). The Amended ABL Credit Facility also requires Cactus Companies to maintain a minimum fixed charge coverage ratio of 1.00 to 1.00 based on the ratio of EBITDA (as defined therein) minus Unfinanced Capital Expenditures (as defined therein) to Fixed Charges (as defined therein) during certain periods, including when availability under the Amended ABL Credit Facility is under certain levels. If Cactus Companies fails to perform its obligations under the Amended ABL Credit Facility, (i) the revolving commitments under the Amended ABL Credit Facility could be terminated, (ii) any outstanding borrowings under the Amended ABL Credit Facility may be declared immediately due and payable, and (iii) the lenders may commence foreclosure or other actions against the collateral. We were in compliance with all covenants under the Amended ABL Credit Facility as of March 31, 2023.
8.Revenue
The majority of our revenues are derived from short-term contracts for fixed consideration or in the case of rentals, for a fixed charge per day while the equipment is in use by the customer. 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 60 days of invoicing. 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 in Australia, Canada, the Middle East and other international markets. The following table presents our revenues disaggregated by category:
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| Three Months Ended March 31, | |
| 2023 | | 2022 | | | |
Product revenue | $ | 159,510 | | | 70 | % | | $ | 94,040 | | | 65 | % | | | | | | | | |
Rental revenue | 27,817 | | | 12 | % | | 22,343 | | | 15 | % | | | | | | | | |
Field service and other revenue | 41,078 | | | 18 | % | | 29,516 | | | 20 | % | | | | | | | | |
Total revenues | $ | 228,405 | | | 100 | % | | $ | 145,899 | | | 100 | % | | | | | | | | |
At March 31, 2023, we had a deferred revenue balance of $8.9 million compared to the December 31, 2022 balance of $1.5 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 March 31, 2023, 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.
9.Tax Receivable Agreement (“TRA”)
In connection with our initial public offering (“IPO”) in February 2018, we entered into the TRA which generally provides for payment by Cactus Inc. to certain direct and indirect owners of Cactus LLC (after the CC Reorganization, Cactus Companies) of 85% of the net cash savings, if any, in U.S. federal, state and local income tax and 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 the TRA (“tax basis”) and applying a blended tax rate to the basis differences and calculating the resulting 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 expense, net. As of March 31, 2023, the total liability from the TRA was $289.2 million with $27.5 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 Companies 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 CC 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.
10.Equity
As of March 31, 2023, Cactus Inc. owned 81.1% of Cactus Companies as compared to 80.3% of Cactus LLC (prior to the CC Reorganization) as of December 31, 2022. As of March 31, 2023, Cactus Inc. had outstanding 64.4 million shares of Class A common stock (representing 81.1% of the total voting power) and 15.0 million shares of Class B common stock (representing 18.9% of the total voting power).
Equity Offering
In January 2023, Cactus Inc. completed an underwritten offering of 3,224,300 shares of Class A common stock at a price to the underwriters of $51.36 per share for net proceeds of $165.6 million (net of $6.9 million of underwriting discounts and commissions). In addition to the underwriting discounts and commissions, approximately $2.2 million of costs directly associated with the stock issuance were recorded as a reduction to additional paid-in capital.
FlexSteel Acquisition
In conjunction with the FlexSteel acquisition, a restricted stock award of 128,150 shares of Class A common stock was issued under the Company’s long-term incentive plan to a key employee in exchange for cash consideration of $6.5 million. The shares are restricted from sale or trading and are subject to vesting requirements for one year from grant date. If the fair market value of the restricted shares is below the purchase price upon vesting, Cactus will compensate the key employee for the difference in price plus a gross-up for taxes. We are accounting for this guaranteed payment as stock compensation with liability classification and remeasure the liability to fair value at each reporting period. Compensation cost is being recognized ratably over the one year vesting period. The liability was valued at $0.6 million as of March 31, 2023 and is included in accrued expenses and other
current liabilities. We recognized $0.1 million of compensation expense during the three months ended March 31, 2023 in selling, general and administrative expenses.
CC Reorganization
As part of the CC Reorganization in connection with the acquisition of FlexSteel, Cactus Companies acquired all of the outstanding units representing limited liability company interests of Cactus LLC ( “CW Units”) in exchange for an equal number of CC Units issued to each of the previous owners of CW Units other than Cactus Inc. (the “CW Unit Holders”). Upon the completion of the CC Reorganization, CW Unit Holders ceased to be holders of CW Units and, instead, became holders of a number of CC Units equal to the number of CW Units such CW Unit Holders held immediately prior to the completion of the CC Reorganization. After the CC Reorganization, we refer to the owners of CC Units, other than Cactus Inc. (along with their permitted transferees), as “CC Unit Holders.” Following the completion of the CC Reorganization, CC Unit Holders own one share of our Class B Common Stock for each CC Unit such CC Unit Holder owns. Cactus Inc. is a holding company whose only material asset is an equity interest consisting of CC Units, following the completion of the CC Reorganization, and was CW Units from the IPO until the CC Reorganization.
In connection with the CC Reorganization, Cactus Inc. and the owners of CC Units entered into the Amended and Restated Limited Liability Company Operating Agreement of Cactus Companies (the “Cactus Companies LLC Agreement”), which contains substantially the same terms and conditions as the Second Amended and Restated Limited Liability Company Operating Agreement of Cactus LLC (the “Cactus Wellhead LLC Agreement”), which was the limited liability company operating agreement of Cactus LLC prior to the CC Reorganization. Cactus Inc. was responsible for all operational, management and administrative decisions relating to Cactus LLC’s business for the period from completion of our IPO until the CC Reorganization and relating to Cactus Companies’ business for periods after the CC Reorganization. Pursuant to the Cactus Companies LLC Agreement, each holder of CC Units has, subject to certain limitations, the right to cause Cactus Companies to acquire all or at least a minimum portion of its CC Units for, at Cactus Companies’ election, (x) shares of our Class A common stock at a redemption ratio of one share of Class A common stock for each CC Unit redeemed, subject to conversion rate adjustments for stock splits, stock dividends and reclassification and other similar transactions, or (y) an equivalent amount of cash. Alternatively, upon the exercise of such redemption right, Cactus Inc. (instead of Cactus Companies) has the right to acquire each tendered CC Unit directly from the exchanging CC Unit Holder for, at its election, (x) one share of Class A common stock, subject to conversion rate adjustments for stock splits, stock dividends and reclassifications and other similar transactions, or (y) an equivalent amount of cash. In connection with any redemption of CC Units pursuant to such redemption right or our alternative right to acquire each tendered CC Unit, the corresponding number of shares of Class B common stock would be canceled.
Redemptions of CC Units
Pursuant to the Cactus Companies LLC Agreement, holders of CC Units are entitled to redeem their CC Units, which results in additional Class A common stock outstanding. Since our IPO in February 2018, an aggregate of 45.6 million CC Units (including CW Units prior to the CC Reorganization) 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 three months ended March 31, 2023, there were no redemptions of CW Units (or CC Units, after the CC Reorganization). During the three months ended March 31, 2022, one million CW Units, together with a corresponding number of shares of Class B common stock, were redeemed in exchange for Class A common stock in accordance with the Cactus Wellhead LLC Agreement. There was no change in the combined number of Cactus Inc. voting shares outstanding as a result of the redemptions.
Dividends
Aggregate cash dividends of $0.11 per share of Class A common stock were declared during the three months ended March 31, 2023 and 2022 totaling $7.1 million and $6.6 million, respectively. Cash dividends paid during the three months ended March 31, 2023 and 2022 totaled $7.4 million and $6.7 million, respectively. Dividends accrue on unvested equity-based awards on the date of record and are paid upon vesting. Dividends are not paid to our Class B common stockholders; however, a corresponding distribution up to the same amount per share as our Class A common stockholders is paid to the owners of CC Units other than Cactus Inc. for any dividends declared on our Class A common stock. See further discussion of the distributions below under “Member Distributions.”
Member Distributions
Distributions made by Cactus Companies are generally required to be made pro rata among all its members. For the three months ended March 31, 2023, Cactus Companies distributed $7.1 million to Cactus Inc. to fund its dividend payments and made pro rata distributions to the other members totaling $1.6 million over the same period. During the three months ended March 31, 2022, Cactus Companies distributed $6.3 million to Cactus Inc. to fund its dividend payments and made pro rata distributions to the other members totaling $1.7 million.
Limitation of Members’ Liability
Under the terms of the Cactus Companies LLC Agreement, the members of Cactus Companies are not obligated for debt, liabilities, contracts or other obligations of Cactus Companies. Profits and losses are allocated to members as defined in the Cactus Companies LLC Agreement.
11.Commitments and 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.
12.Segment Reporting
Prior to the acquisition of FlexSteel, we operated in a single segment which reflected how our business was managed and the nature of our products and services. Upon completion of the acquisition, we re-evaluated our reportable segments and now report two business segments. Our business segments offer different products and services and correspond to the manner in which our chief operating decision maker reviews and evaluates operating performance to make decisions about resources to be allocated to each segment.
Our reporting segments are:
•Pressure Control – engaged in the design, manufacture, sale, installation and service of wellhead and pressure control equipment utilized during the drilling, completion and production phases of oil and gas wells.
•Spoolable Technologies – engaged in the design, manufacture, sale, installation, service and associated rental of onshore spoolable pipe technologies utilized for production, gathering and takeaway transportation of oil, gas or other liquids.
Financial information by business segment for the three months ended March 31, 2023 and 2022 is summarized below.
| | | | | | | | | | | | | | |
| | Three Months Ended March 31, |
| | 2023 | | 2022 |
Revenue: | | | | |
Pressure Control | | $ | 194,655 | | | $ | 145,899 | |
Spoolable Technologies | | 33,750 | | | — | |
Total revenues | | 228,405 | | | 145,899 | |
Operating income: | | | | |
Pressure Control | | 49,439 | | | 30,990 | |
Spoolable Technologies | | 249 | | | — | |
Total operating income | | 49,688 | | | 30,990 | |
Interest income (expense), net | | 1,002 | | | (100) | |
Other income (expense), net | | 3,538 | | | (1,115) | |
Income before income taxes | | $ | 54,228 | | | $ | 29,775 | |
13.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 CC Units (and corresponding shares of outstanding Class B common stock), 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 and the contingently issuable share method to determine the potential dilutive effect of unvested performance stock units.
The following table summarizes the basic and diluted earnings per share calculations:
| | | | | | | | | | | | | | | |
| Three Months Ended March 31, | | |
| 2023 | | 2022 | | | | |
Numerator: | | | | | | | |
Net income attributable to Cactus Inc.—basic | $ | 42,894 | | | $ | 20,616 | | | | | |
Net income attributable to non-controlling interest (1) | 7,312 | | | 4,953 | | | | | |
Net income attributable to Cactus Inc.—diluted (1) | $ | 50,206 | | | $ | 25,569 | | | | | |
Denominator: | | | | | | | |
Weighted average Class A shares outstanding—basic | 63,740 | | | 59,288 | | | | | |
Effect of dilutive shares | 15,415 | | | 16,874 | | | | | |
Weighted average Class A shares outstanding—diluted | 79,155 | | | 76,162 | | | | | |
| | | | | | | |
Earnings per Class A share—basic | $ | 0.67 | | | $ | 0.35 | | | | | |
Earnings per Class A share—diluted (1) | $ | 0.63 | | | $ | 0.34 | | | | | |
(1)The numerator is adjusted in the calculation of diluted earnings per share under the if-converted method to include net income attributable to the non-controlling interest calculated as its pre-tax income adjusted for a corporate effective tax rate of 24.5% for the three months ended March 31, 2023 and 26.0% for the three months ended March 31, 2022.