Cactus, Inc. 10-K

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations Except as otherwise indicated or required by the context, all references in this Annual Report to the “Company,” “Cactus,” “we,” “us” and “our” refer to 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 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 in “Cautionary Statement Regarding Forward-Looking Statements” and “Item 1A. Risk Factors” included elsewhere in this Annual 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. This section includes comparisons of certain 2020 financial information to the same information for 2019. Year-to-year comparisons of the 2019 financial information to the same information for 2018 are contained in “Item 7. Management’s Discussion and Analysis of Financial Condition and Result of Operations” of our Annual Report on Form 10-K for the year ended December 31, 2019 filed with the Securities and Exchange Commission on February 28, 2020, which comparative information and the information therein under the caption “Factors Affecting the Comparability of our Financial Condition and Results of Operations” are incorporated by reference herein. Market Factors See “Item 1. Business” for information on our products and business. 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, 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 our customer is operating. While these factors may lead to differing revenues per rig, we are able to broadly forecast our product needs and anticipated revenue levels based on general trends in a given region and with a specific customer. Increases in horizontal wells drilled as a percentage of total wells drilled, the shift towards pad drilling, and 21 Table of Contents 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. Our rental revenues are primarily dependent on the number of wells completed (i.e., hydraulically fractured), the number of wells on a well pad and the number of fracture stages per well. Well completion activity generally follows the level of drilling activity but can be delayed due to such factors as takeaway capacity, storage capacity and budget constraints. Changes to the number of drilled but uncompleted wells (“DUCs”) could provide additional opportunities or headwinds for our rental business relative to general drilling activity. 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 service and other revenues generated. Our business experiences some seasonality during the fourth quarter due to holidays and customers managing their budgets as the year closes out. This can lead to lower activity in our three revenue categories as well as lower margins, particularly in field services due to lower labor utilization. Recent Developments and Trends The ongoing COVID-19 pandemic negatively impacted our business and revenues beginning as early as March 2020. Throughout 2020, the inability to control the spread of the virus and the recent resurgence in cases globally has resulted in continued travel restrictions, school and business closures and stay-at-home orders worldwide. Although vaccines have begun to be administered all over the world, until vehicle and airline travel returns to activity levels closer to those prior to the pandemic, demand for oil will continue to be depressed. Oil prices have recovered from the lows experienced in April 2020, trading above $50 per barrel in January 2021 partially due to Saudi Arabia announcing that it will cut one million barrels a day of crude production starting in February 2021. As oil began trading above $60 per barrel in mid-February 2021 primarily due to harsh winter weather conditions resulting in production disruptions, there has been increasing speculation that Saudi Arabia will restore production of an incremental one million barrels per day starting in April 2021. Even with these recent increases in commodity prices, our customers’ activity continues to be significantly lower than 2019 and early 2020 levels, which translates into reduced demand for our products and services. The resurgence of COVID-19 cases in the United States and other countries as well as delays in vaccinations may limit improvements in the demand for oil and natural gas products and could lead to additional government-mandated lockdowns and other restrictions, which would likely continue to have a negative impact on global energy demand. During 2020, we saw a significant decline in the level of onshore drilling activity in the U.S. primarily caused by commodity price weakness compounded by the impacts from the COVID-19 pandemic. At the end of 2019, the U.S. onshore rig count as reported by Baker Hughes was 781 rigs. The weekly average U.S. onshore rig count for the three months ended December 31, 2020 was 295 rigs, a 63% decline when compared to 796 rigs for the comparable period in 2019. The increase in commodity prices beginning late in 2020 and into 2021 has led to rebounds in the level of U.S. onshore drilling activity since bottoming in August of 2020 at 230 rigs. As of February 19, 2021, the U.S. onshore rig count was 380. Recently, there has been an increase in large-scale merger and acquisition activity among E&P companies that operate in the United States. These transactions may be driven in part by an effort to reduce the cost of hydrocarbon production per barrel equivalent and increase overall company efficiencies. These transactions generally increase the size and scale of the counterparties involved, which may provide better access to capital and lead to a healthier overall industry. We have historically focused on providing our products and services to large and well capitalized customers. Consolidation of E&P companies presents both risks and opportunities depending on a number of factors, but namely whether the companies involved are existing customers. We believe our company is well positioned to continue successfully navigating the challenges posed by the current market environment. At December 31, 2020, we had no long term debt and a strong balance sheet. In response to the drop in demand and customer activity in 2020, we had implemented certain workforce, wage and capital expenditure reductions beginning as early as March 2020. Given the significant service component of our business, we adjust our headcount to reflect current activity levels. By mid-year 2020, we had reduced our global workforce by approximately 50%. As demand and activity started showing signs of recovery, we began bringing our associates back and reinstated 145 associates before the end of the year. We have continued adding personnel in 2021 in line with market activity and implemented a partial roll-back of the wage reductions effective late January 2021. The magnitude of the partial roll-back is less than half of the wage and salary reductions that were implemented in 2020. We are cautiously optimistic regarding signs of recovery. However, we continue to actively review all opportunities to manage costs and efficiently deploy capital relative to market conditions. Our required capital 22 Table of Contents expenditures have historically tended to be lower than most other oilfield service providers due to the asset-lite nature of our business model. Tariffs Substantially all of the products and frac rental equipment that we import through our Chinese supply chain are subject to tariffs under Section 301 of the Trade Act of 1974 (“Section 301”). For the year ended December 31, 2020, we estimate that approximately 40% of the items received were sourced through our Chinese supply chain. In May 2019, the U.S. Trade Representative announced that it was increasing the level of tariffs on approximately $200 billion worth of Chinese imports pursuant to Section 301. The tariff rate on covered products that were exported on or after May 10, 2019 was raised from 10% to 25%. In 2020, we received a temporary exclusion and tariff suspension on certain covered products exported from China to the United States under Section 301 and received refunds totaling $14.2 million, inclusive of $0.5 million in interest, for tariffs paid on excluded products exported after September 24, 2018. Approximately $4.0 million of the tariff recoveries related to balances included in inventory and were recorded as a reduction to inventory and $9.7 million was recorded as credits to cost of goods sold to offset the accounts where the tariff expenses were originally recorded. The tariff exemption ended August 7, 2020; therefore, we have resumed paying tariffs at 25% on the previously excluded parts imported from China. We believe further increases in the tariff rate above 25% may adversely affect our business, but a combination of factors may mitigate some of the impact of any future increases in tariff rates on our results of operations. These include, among other things, use of product received prior to the introduction of tariffs, our negotiations with suppliers, use of alternative supply chains and favorable currency exchange movements. 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. 23 Table of Contents Year Ended December 31, 2020 Compared to Year Ended December 31, 2019 The following table presents summary consolidated operating results for the periods indicated: Year Ended December 31, 2020 2019 $ Change % Change (in thousands) Revenues Product revenue $ 206,801 $ 357,087 $ (150,286) (42.1) % Rental revenue 66,169 141,816 (75,647) (53.3) Field service and other revenue 75,596 129,511 (53,915) (41.6) Total revenues 348,566 628,414 (279,848) (44.5) Costs and expenses Cost of product revenue 131,728 220,615 (88,887) (40.3) Cost of rental revenue 49,077 69,829 (20,752) (29.7) Cost of field service and other revenue 56,143 103,163 (47,020) (45.6) Selling, general and administrative expenses 39,715 51,657 (11,942) (23.1) Severance expenses 1,864 — 1,864 nm Total costs and expenses 278,527 445,264 (166,737) (37.4) Income from operations 70,039 183,150 (113,111) (61.8) Interest income, net 701 879 (178) (20.3) Other income (expense), net (555) 4,294 (4,849) nm Income before income taxes 70,185 188,323 (118,138) (62.7) Income tax expense 10,970 32,020 (21,050) (65.7) Net income 59,215 156,303 (97,088) (62.1) Less: net income attributable to non-controlling interest 24,769 70,691 (45,922) (65.0) Net income attributable to Cactus Inc. $ 34,446 $ 85,612 $ (51,166) (59.8) % nm = not meaningful Revenues Product revenue for the year ended December 31, 2020 was $206.8 million, a decrease of $150.3 million, or 42%, from $357.1 million for the year ended December 31, 2019. The decrease was primarily due to lower sales of wellhead and production related equipment as our customers reduced their drilling and completion activity for most of 2020 in direct response to the overall industry downturn resulting from depressed commodity prices exacerbated by the COVID-19 pandemic. Rental revenue for the year ended December 31, 2020 was $66.2 million, a decrease of $75.6 million, or 53%, from $141.8 million for the year ended December 31, 2019. The decrease was primarily attributable to reduced completion activity by our customers as part of the industry downturn in 2020. Field service and other revenue for the year ended December 31, 2020 was $75.6 million, a decrease of $53.9 million, or 42%, from $129.5 million for the year ended December 31, 2019. The decrease was primarily attributable to lower customer activity in 2020 related to the industry downturn, resulting in lower billable hours and ancillary services. Costs and expenses Cost of product revenue for the year ended December 31, 2020 was $131.7 million, a decrease of $88.9 million, or 40%, from $220.6 million for the year ended December 31, 2019. The decrease was largely attributable to the reduction in product sales and approximately $8.7 million in credits related to tariff refunds. 24 Table of Contents Cost of rental revenue for the year ended December 31, 2020 was $49.1 million, a decrease of $20.8 million, or 30%, from $69.8 million for the year ended December 31, 2019. The decrease was primarily attributable to lower repair costs and lower branch expenses. Rental cost of sales in 2020 also included approximately $1.0 million in credits related to tariff refunds. These decreases were partially offset by an increase in depreciation expense on a larger rental fleet during 2020 and higher scrap and rework expenses. Cost of field service and other revenue for the year ended December 31, 2020 was $56.1 million, a decrease of $47.0 million, or 46%, from $103.2 million for the year ended December 31, 2019. The decrease was mainly related to lower payroll costs associated with fewer field and branch personnel, an increase in gains from sales of field service vehicles of $3.2 million, lower depreciation, fuel and repair expenses on a smaller fleet of vehicles and various other savings resulting from lower overall activity. Selling, general and administrative expense for the year ended December 31, 2020 was $39.7 million, a decrease of $11.9 million, or 23%, from $51.7 million for the year ended December 31, 2019. The decrease was primarily due to lower personnel costs, including annual incentive bonuses, related to headcount and salary reductions during 2020, a reduction in professional fees, travel and entertainment costs and other decreases associated with certain targeted cost savings measures. These reductions were partially offset by increases in stock-based compensation expense and foreign currency losses. Severance expense for the year ended December 31, 2020 of $1.9 million was related to severance benefits associated with headcount reductions in the second and third quarters of 2020 resulting from the economic downturn and decline in demand for our products and services. Interest income, net. Interest income, net was $0.7 million in 2020 compared to $0.9 million in 2019, a decrease of $0.2 million. The decrease was primarily due to lower interest income on cash invested in interest-bearing accounts and money market funds as a result of lower interest rates in 2020, partially offset by $0.5 million of interest income in 2020 associated with the tariff refunds. Other income (expense), net. Other expense, net for the year ended December 31, 2020 consisted of non-cash adjustments for the revaluation of the liability related to the TRA. Other income, net for the year ended December 31, 2019 of $4.3 million consisted of a $5.3 million non-cash gain on the revaluation of the liability related to the TRA, partially offset by $1.0 million in offering expenses associated with the secondary offering of our Class A common stock in March 2019 by certain selling stockholders. Income tax expense. Income tax expense for the year ended December 31, 2020 was $11.0 million (15.6% effective tax rate) compared to $32.0 million (17.0% effective tax rate) for 2019. Income tax expense for the year ended December 31, 2020 included a $2.2 million benefit primarily comprised of tax credit adjustments and the revaluation of our deferred tax asset resulting from a change in our forecasted state tax rate. Our effective tax rate is lower than the federal statutory rate of 21% primarily due to the fact that Cactus Inc. is only subject to federal and state income tax on its share of income from Cactus LLC. Income allocated to the non-controlling interest is not subject to U.S. federal or state tax. Liquidity and Capital Resources At December 31, 2020 we had $288.7 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 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 of December 31, 2020, we had no borrowings outstanding under our ABL Credit Facility and had $45.2 million of available borrowing capacity. Additionally, we were in compliance with the covenants of the ABL Credit Facility as of December 31, 2020. We expect that our existing cash on hand, cash generated from operations and available borrowings under our ABL Credit Facility will be sufficient for the next 12 months to meet working capital requirements, anticipated capital expenditures, expected TRA liability payments, anticipated tax liabilities and dividends to holders of our Class A common stock as well as pro rata cash distributions to holders of CW units (other than Cactus Inc.). We currently estimate our net capital expenditures for the year ending December 31, 2021 will range from $10 million to $15 million, excluding acquisitions, mostly related to rental fleet investments. 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. 25 Table of Contents 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 of Cactus 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. Tax Receivable Agreement (TRA) The TRA generally provides for the 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 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. To the extent Cactus LLC has available cash, we intend to cause Cactus LLC to make pro rata distributions to its unitholders, including Cactus Inc., in an amount at least sufficient to allow us to pay our taxes and to make payments under the TRA. Except in cases where we elect to terminate the TRA early, the TRA is terminated early due to certain mergers, asset sales, or other forms of business combinations or changes of control or if we have available cash but fail to make payments when due under circumstances where we do not have the right to elect to defer the payment. We may generally 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. In certain cases, payments under the TRA may be accelerated and/or significantly exceed the actual benefits, if any, we realize in respect of the tax attributes subject to the TRA. In these situations, our obligations under the TRA could have a substantial negative impact on our liquidity. Assuming no material changes in the relevant tax law, we expect that if the TRA were terminated as of December 31, 2020, the estimated termination payments, based on the assumptions discussed in Note 9 of the Notes to the Consolidated Financial Statements, would be approximately $315.1 million, calculated using a discount rate equal to one-year LIBOR plus 150 basis points, applied against an undiscounted liability of $362.5 million. A 10% increase in the price of our Class A common stock at December 31, 2020 would have increased the discounted liability by $15.1 million to $330.2 million (an undiscounted increase of $17.5 million to $380.0 million), and likewise, a 10% decrease in the price of our Class A common stock at December 31, 2020 would have decreased the discounted liability by $15.1 million to $300.0 million (an undiscounted decrease of $17.5 million to $345.0 million). Cash Flows Year Ended December 31, 2020 Compared to Year Ended December 31, 2019 The following table summarizes our cash flows for the periods indicated: Year Ended December 31, 2020 2019 (in thousands) Net cash provided by operating activities $ 143,380 $ 209,632 Net cash used in investing activities (18,147) (55,948) Net cash used in financing activities (40,206) (21,669) Net cash provided by operating activities was $143.4 million and $209.6 million for the years ended December 31, 2020 and 2019, respectively. Operating cash flows for 2020 decreased from 2019 primarily due to the overall reduction in revenue due to the economic downturn evidenced by a decrease in net income adjusted for certain noncash items offset by an increase in cash generated from changes in net working capital and $14.2 million in tariff refunds. Net cash used in investing activities was $18.1 million and $55.9 million for the years ended December 31, 2020 and 2019, respectively. The decrease was primarily due to lower capital expenditures associated with our rental fleet in 2020 due to reductions in purchases as a result of the current industry environment as well as an increase in proceeds from asset sales. Net cash used in financing activities was $40.2 million and $21.7 million for the years ended December 31, 2020 and 2019, respectively. The increase was attributable to an increase of $12.9 million in dividend payments to holders of Class A 26 Table of Contents common stock and an increase of $7.9 million in Cactus LLC member distributions, partially offset by a $2.2 million reduction in payments on finance leases. Critical Accounting Policies and Estimates In preparing our financial statements in accordance 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 generally 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 financial statements. We identify certain accounting policies as critical based on, among other things, their impact on the portrayal of our financial condition and results of operations and the degree of difficulty, subjectivity and complexity in their deployment. Note 2 of the Notes to the Consolidated Financial Statements includes a summary of the significant accounting policies used in the preparation of the accompanying consolidated financial statements. The following is a brief discussion of our most critical accounting policies and related estimates and assumptions. 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. We evaluate the components of inventory on a regular basis for excess and obsolescence. Reserves are made based on a range of factors, including age, usage and technological or market changes that may impact demand for those products. The amount of reserve recorded is subjective and is susceptible to change from period to period. Long‑Lived Assets Key estimates related to long‑lived assets include useful lives and recoverability of carrying values. Such estimates could be modified, as impairment could arise as a result of changes in supply and demand fundamentals, technological developments, new competitors with cost advantages and the cyclical nature of the oil and gas industry. We evaluate long‑lived assets for potential impairment indicators whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Long‑lived assets assessed for impairment are grouped at the lowest level for which identifiable cash flows are available, and a provision made where the cash flow is less than the carrying value of the asset. The estimation of future cash flows and fair value is highly subjective and inherently imprecise. Estimates can change materially from period to period based on many factors. Accordingly, if conditions change in the future, we may record impairment losses, which could be material to any particular reporting period. Income Taxes Deferred taxes are recorded using the asset and liability method, whereby tax assets and liabilities are determined based on the differences between the financial statement and tax basis of assets and liabilities using enacted tax laws and rates expected to apply to taxable income in the year in which the differences are expected to reverse. We assess the likelihood that our deferred tax assets will be recovered through adjustments to future taxable income. To the extent we believe recovery is not likely, we establish a valuation allowance to reduce the asset to a value we believe will be recoverable based on our expectation of future taxable income. In evaluating our ability to recover our deferred tax assets, we consider all available positive and negative evidence, including scheduled reversals of deferred tax liabilities, projected future taxable income, tax planning strategies and results of recent operations. The assumptions about future taxable income require significant judgment and are consistent with the plans and estimates management is using to manage the underlying business. If the projected future taxable income changes materially, we may be required to reassess the amount of valuation allowance recorded against our deferred tax assets. Tax Receivable Agreement The TRA generally provides for the 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 and franchise tax that Cactus Inc. actually realizes or is deemed to realize in certain circumstances as a result of (i) certain increases in tax basis that occur as a result of Cactus Inc.’s acquisition (or deemed acquisition for U.S. federal income tax purposes) of all or a portion of such TRA Holder’s CW Units in connection with our 27 Table of Contents IPO or any subsequent offering, or pursuant to any other exercise of the Redemption Right or the Call Right, (ii) certain increases in tax basis resulting from the repayment of borrowings outstanding under Cactus LLC’s term loan facility in connection with our IPO and (iii) imputed interest deemed to be paid by Cactus Inc. as a result of, and additional tax basis arising from, any payments Cactus Inc. makes under the TRA. We will retain the remaining 15% of the 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. Redemptions of CW Units result in adjustments to the tax basis of the tangible and intangible assets of Cactus LLC. These adjustments are allocated to Cactus Inc. Such adjustments to the tax basis of the tangible and intangible assets of Cactus LLC would not have been available to Cactus Inc. absent its acquisition or deemed acquisition of CW Units. In addition, the repayment of borrowings outstanding under the Cactus LLC term loan facility resulted in adjustments to the tax basis of the tangible and intangible assets of Cactus LLC, a portion of which was allocated to Cactus Inc. These basis adjustments are expected to increase (for tax purposes) Cactus Inc.’s depreciation and amortization deductions and may also decrease Cactus Inc.’s gains (or increase its losses) on future dispositions of certain assets to the extent tax basis is allocated to those assets. Such increased deductions and losses and reduced gains may reduce the amount of tax that Cactus Inc. would otherwise be required to pay in the future. Estimating the amount and timing of the tax benefit is by its nature imprecise and the assumptions used in the estimates can change. The tax benefit is dependent upon future events and assumptions, the amount of the redeeming unit holders' tax basis in its CW Units at the time of the relevant redemption, the depreciation and amortization periods that apply to the increase in tax basis, the amount and timing of taxable income we generate in the future and the U.S. federal, state and local income tax rate then applicable, and the portion of Cactus Inc.’s payments under the TRA that constitute imputed interest or give rise to depreciable or amortizable tax basis. The most critical estimate included in calculating the TRA liability to record is the combined U.S. federal income tax rate and an assumed combined state and local income tax rate, to determine the future benefit we will realize. A 100 basis point decrease/increase in the blended tax rate used would decrease/increase the TRA liability recorded at December 31, 2020 by approximately $10.5 million. Recent Accounting Pronouncements See Note 2 in the Notes to the Consolidated Financial Statements for discussion of recent accounting pronouncements. Inflation While inflationary cost increases can affect our income from operations’ margin, we believe that inflation generally has not had, and in the near future is not expected to have, a material adverse effect on our results of operations. Although the impact of inflation has been insignificant in recent years, it is still a factor in the United States economy, and we tend to experience inflationary pressure on wages and raw materials.