Cactus, Inc. 10-K

Item 8. Financial Statements and Supplementary Data The following Consolidated Financial Statements are filed as part of this Annual Report: Cactus, Inc. and Subsidiaries Management’s Report on Internal Control Over Financial Reporting 30 Report of Independent Registered Public Accounting Firm 31 Consolidated Balance Sheets as of December 31, 20 20 and 201 9 33 Consolidated Statements of Income for the Years Ended December 31, 20 20 , 201 9 and 201 8 34 Consolidated Statements of Comprehensive Income for the Years Ended December 31, 20 20 , 201 9 and 201 8 35 Consolidated Statements of Stockholders’ Equity for the Years Ended December 31, 20 20 , 201 9 and 201 8 36 Consolidated Statements of Cash Flows for the Years Ended December 31, 20 20 , 201 9 and 201 8 37 Notes to the Consolidated Financial Statements 38 29 Table of Contents Management’s Report on Internal Control Over Financial Reporting Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934, as amended. Our internal control over financial reporting was designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. In making its assessment, management has utilized the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (or “COSO”) in Internal Control-Integrated Framework (2013 framework). Based on this assessment, management has concluded that, as of December 31, 2020, our internal control over financial reporting was effective. Our independent registered public accounting firm, PricewaterhouseCoopers, LLP, has issued an audit report on the effectiveness of our internal control over financial reporting as of December 31, 2020, which appears herein. /s/ Scott Bender /s/ Stephen Tadlock President, Chief Executive Officer and Director Vice President, Chief Financial Officer and Treasurer Houston, Texas February 26, 2021 30 Table of Contents Report of Independent Registered Public Accounting Firm To the Board of Directors and Stockholders of Cactus, Inc. Opinions on the Financial Statements and Internal Control over Financial Reporting We have audited the accompanying consolidated balance sheets of Cactus, Inc. and its subsidiaries (the “Company”) as of December 31, 2020 and 2019, and the related consolidated statements of income, comprehensive income, stockholders’ equity and cash flows for each of the three years in the period ended December 31, 2020, including the related notes (collectively referred to as the “consolidated financial statements”). We also have audited the Company's internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2020 and 2019, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2020 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control - Integrated Framework (2013) issued by the COSO. Basis for Opinions The Company’s management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management's Report on Internal Control over Financial Reporting. Our responsibility is to express opinions on the Company’s consolidated financial statements and on the Company's internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions. Definition and Limitations of Internal Control over Financial Reporting A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. 31 Table of Contents Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Critical Audit Matters The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that (i) relates to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates. Liability related to the Tax Receivable Agreement As described in Notes 2 and 9 to the consolidated financial statements, the Company has a liability under the Tax Receivable Agreement (“TRA”) of $ 204.4 million as of December 31, 2020. In connection with its initial public offering, the Company entered into the TRA with certain direct and indirect owners of Cactus Wellhead, LLC (the “TRA Holders”). The TRA generally provides for the payment by the Company to the TRA Holders of 85% of the net cash tax savings, if any, in United States federal, state and local income tax and franchise tax that the Company 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 the Company’s acquisition (or deemed acquisition for U.S. federal income tax purposes) of all or a portion of such TRA Holder’s ownership interest in Cactus Wellhead, LLC, (ii) certain increases in tax basis resulting from the repayment of borrowings outstanding under Cactus Wellhead, LLC’s term loan facility, and (iii) imputed interest deemed to be paid by the Company as a result of, and additional tax basis arising from, any payments the Company makes under the TRA. Management calculates the TRA liability by determining the tax basis subject to the 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. The principal considerations for our determination that performing procedures relating to the liability related to the TRA is a critical audit matter are the significant complexity in i) management’s calculation of the tax basis, and (ii) developing the applicable state apportionment factors utilized in determining the appropriate blended tax rate. This in turn led to a high degree of auditor subjectivity and effort in performing procedures and evaluating the appropriateness of the calculation of the tax basis and the blended tax rate. In addition, the audit effort involved the use of professionals with specialized skill and knowledge to assist in performing these procedures and evaluating the audit evidence obtained from these procedures. Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included testing the effectiveness of controls relating to the calculation and recognition of the TRA liability, including controls over the completeness and accuracy of the underlying data used in the tax basis and blended tax rate calculations. These procedures also included, among others, testing the information used in the calculation of the TRA liability, and the involvement of professionals with specialized skills and knowledge to assist in (i) developing an independent calculation of the tax basis, (ii) comparing the independent calculation to management’s calculations to evaluate the reasonableness of the tax basis, (iii) evaluating the apportionment factors and the resulting blended tax rate, and (iv) assessing management’s application of the tax laws. Evaluating management’s determination of the apportionment factors involved considering the current and expected activity levels of the Company and whether the apportionment factors were consistent with evidence obtained in other areas of the audit. /s/ PricewaterhouseCoopers LLP Houston, Texas February 26, 2021 We have served as the Company’s auditor since 2015, which includes periods before the Company became subject to SEC reporting requirements. 32 Table of Contents CACTUS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS December 31, 2020 2019 (in thousands, except per share data) Assets Current assets Cash and cash equivalents $ 288,659 $ 202,603 Accounts receivable, net of allowance of $ 598 and $ 837 , respectively 44,068 87,865 Inventories 87,480 113,371 Prepaid expenses and other current assets 4,935 11,044 Total current assets 425,142 414,883 Property and equipment, net 142,825 161,748 Operating lease right-of-use assets, net 21,994 26,561 Goodwill 7,824 7,824 Deferred tax asset, net 216,603 222,545 Other noncurrent assets 1,206 1,403 Total assets $ 815,594 $ 834,964 Liabilities and Equity Current liabilities Accounts payable $ 20,163 $ 40,957 Accrued expenses and other current liabilities 11,392 22,067 Current portion of liability related to tax receivable agreement 9,290 14,630 Finance lease obligations, current portion 3,823 6,735 Operating lease liabilities, current portion 4,247 6,737 Total current liabilities 48,915 91,126 Deferred tax liability, net 786 1,348 Liability related to tax receivable agreement, net of current portion 195,061 201,902 Finance lease obligations, net of current portion 2,240 3,910 Operating lease liabilities, net of current portion 17,822 20,283 Total liabilities 264,824 318,569 Commitments and contingencies Stockholders’ equity Preferred stock, $ 0.01 par value, 10,000 shares authorized, none issued and outstanding — — Class A common stock, $ 0.01 par value, 300,000 shares authorized, 47,713 and 47,159 shares issued and outstanding 477 472 Class B common stock, $ 0.01 par value, 215,000 shares authorized, 27,655 and 27,958 shares issued and outstanding — — Additional paid-in capital 202,077 194,456 Retained earnings 150,086 132,990 Accumulated other comprehensive loss 330 ( 452 ) Total stockholders’ equity attributable to Cactus Inc. 352,970 327,466 Non-controlling interest 197,800 188,929 Total stockholders’ equity 550,770 516,395 Total liabilities and equity $ 815,594 $ 834,964 The accompanying notes are an integral part of these consolidated financial statements. 33 Table of Contents CACTUS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME Year Ended December 31, 2020 2019 2018 (in thousands, except per share data) Revenues Product revenue $ 206,801 $ 357,087 $ 290,496 Rental revenue 66,169 141,816 133,418 Field service and other revenue 75,596 129,511 120,221 Total revenues 348,566 628,414 544,135 Costs and expenses Cost of product revenue 131,728 220,615 174,675 Cost of rental revenue 49,077 69,829 55,015 Cost of field service and other revenue 56,143 103,163 96,215 Selling, general and administrative expenses 39,715 51,657 40,529 Severance expenses 1,864 — — Total costs and expenses 278,527 445,264 366,434 Income from operations 70,039 183,150 177,701 Interest income (expense), net 701 879 ( 3,595 ) Other income (expense), net ( 555 ) 4,294 ( 4,305 ) Income before income taxes 70,185 188,323 169,801 Income tax expense 10,970 32,020 19,520 Net income $ 59,215 $ 156,303 $ 150,281 Less: pre-IPO net income attributable to Cactus LLC — — 13,648 Less: net income attributable to non-controlling interest 24,769 70,691 84,950 Net income attributable to Cactus Inc. $ 34,446 $ 85,612 $ 51,683 Earnings per Class A share - basic $ 0.73 $ 1.90 $ 1.60 Earnings per Class A share - diluted $ 0.72 $ 1.88 $ 1.58 Weighted average Class A shares outstanding - basic 47,457 44,983 32,329 Weighted average Class A shares outstanding - diluted 75,495 75,353 32,695 The accompanying notes are an integral part of these consolidated financial statements. 34 Table of Contents CACTUS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME Year Ended December 31, 2020 2019 2018 (in thousands) Net income $ 59,215 $ 156,303 $ 150,281 Foreign currency translation adjustments 1,375 368 ( 902 ) Comprehensive income 60,590 156,671 149,379 Less: pre-IPO comprehensive income attributable to Cactus LLC — — 13,928 Less: comprehensive income attributable to non-controlling interest 25,362 70,581 84,212 Comprehensive income attributable to Cactus Inc. $ 35,228 $ 86,090 $ 51,239 The accompanying notes are an integral part of these consolidated financial statements. 35 Table of Contents CACTUS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY Members’ Equity Deficit Class A Common Stock Class B Common Stock Additional Paid-In Capital Retained Earnings Accumulated Other Comprehensive Income (Loss) Non-controlling Interest Total Equity (Deficit) (in thousands) Shares Amount Shares Amount Balance at December 31, 2017 $ ( 36,299 ) — $ — — $ — $ — $ — $ 82 $ — $ ( 36,217 ) Member distributions prior to IPO ( 26,000 ) — — — — — — — — ( 26,000 ) Net income prior to IPO 13,648 — — — — — — — — 13,648 Effect of IPO 48,651 26,450 265 48,440 — 71,196 — — 130,861 250,973 Member distributions after IPO — — — — — — — — ( 5,848 ) ( 5,848 ) Effect of Follow-on Offering and CW Unit redemptions — 11,204 112 ( 11,204 ) — 24,472 — — ( 25,293 ) ( 709 ) Tax impact of equity transactions — — — — — 26,046 — — — 26,046 Other comprehensive (loss) — — — — — — — ( 902 ) — ( 902 ) Stock-based compensation — — — — — 4,704 — — — 4,704 Net income after IPO — — — — — — 51,683 — 84,950 136,633 Balance at December 31, 2018 $ — 37,654 $ 377 37,236 $ — $ 126,418 $ 51,683 $ ( 820 ) $ 184,670 $ 362,328 Adjustment to prior periods — — — — — 10,424 — 409 ( 11,339 ) ( 506 ) Member distributions — — — — — — — — ( 8,392 ) ( 8,392 ) Effect of CW Unit redemptions — 9,278 93 ( 9,278 ) — 48,635 — ( 59 ) ( 48,669 ) — Tax impact of equity transactions — — — — — 5,499 — — — 5,499 Equity award vestings — 227 2 — — ( 791 ) — — ( 760 ) ( 1,549 ) Other comprehensive income — — — — — — — 18 4 22 Stock-based compensation — — — — — 4,271 — — 2,724 6,995 Cash dividends declared ($ 0.09 per share) — — — — ( 4,305 ) — — ( 4,305 ) Net income — — — — — — 85,612 — 70,691 156,303 Balance at December 31, 2019 $ — 47,159 $ 472 27,958 $ — $ 194,456 $ 132,990 $ ( 452 ) $ 188,929 $ 516,395 Member distributions — — — — — — — — ( 16,304 ) ( 16,304 ) Effect of CW Unit redemptions — 303 3 ( 303 ) — 2,155 — — ( 2,158 ) — Tax impact of equity transactions — — — — — 284 — — — 284 Equity award vestings — 251 2 — — ( 238 ) — — ( 1,208 ) ( 1,444 ) Other comprehensive income — — — — — — — 782 593 1,375 Stock-based compensation — — — — — 5,420 — — 3,179 8,599 Cash dividends declared ($ 0.36 per share) — — — — ( 17,350 ) — — ( 17,350 ) Net income — — — — — — 34,446 — 24,769 59,215 Balance at December 31, 2020 $ — 47,713 $ 477 27,655 $ — $ 202,077 $ 150,086 $ 330 $ 197,800 $ 550,770 The accompanying notes are an integral part of these consolidated financial statements. 36 Table of Contents CACTUS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS Year Ended December 31, 2020 2019 2018 (in thousands) Cash flows from operating activities Net income $ 59,215 $ 156,303 $ 150,281 Reconciliation of net income to net cash provided by operating activities: Depreciation and amortization 40,520 38,854 30,153 Debt discount and deferred financing cost amortization 168 168 275 Stock-based compensation 8,599 6,995 4,704 Provision for expected credit losses 342 355 — Inventory obsolescence 4,840 2,552 1,451 (Gain) loss on disposal of assets ( 2,480 ) 236 886 Deferred income taxes 6,948 25,403 15,201 Loss on debt extinguishment — — 4,305 (Gain) loss from revaluation of liability related to tax receivable agreement 555 ( 5,336 ) — Changes in operating assets and liabilities: Accounts receivable 44,829 4,204 ( 8,105 ) Inventories 18,201 ( 17,592 ) ( 38,227 ) Prepaid expenses and other assets 6,177 438 ( 6,509 ) Accounts payable ( 19,434 ) ( 607 ) 7,651 Accrued expenses and other liabilities ( 10,893 ) 6,994 5,114 Payments pursuant to tax receivable agreement ( 14,207 ) ( 9,335 ) — Net cash provided by operating activities 143,380 209,632 167,180 Cash flows from investing activities Capital expenditures and other ( 24,493 ) ( 59,703 ) ( 70,053 ) Proceeds from sale of assets 6,346 3,755 1,899 Net cash used in investing activities ( 18,147 ) ( 55,948 ) ( 68,154 ) Cash flows from financing activities Principal payments on long-term debt — — ( 248,529 ) Payment of deferred financing costs — — ( 840 ) Payments on finance leases ( 5,317 ) ( 7,484 ) ( 6,274 ) Net proceeds from equity offerings — — 828,168 Dividends paid to Class A common stock shareholders ( 17,140 ) ( 4,244 ) — Distributions to members ( 16,304 ) ( 8,392 ) ( 31,848 ) Redemptions of CW Units — — ( 575,681 ) Repurchases of shares ( 1,445 ) ( 1,549 ) — Net cash used in financing activities ( 40,206 ) ( 21,669 ) ( 35,004 ) Effect of exchange rate changes on cash and cash equivalents 1,029 ( 253 ) ( 755 ) Net increase in cash and cash equivalents 86,056 131,762 63,267 Cash and cash equivalents Beginning of period 202,603 70,841 7,574 End of period $ 288,659 $ 202,603 $ 70,841 The accompanying notes are an integral part of these consolidated financial statements. 37 Table of Contents CACTUS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands, except share and per share data, or as otherwise indicated) 1. Organization and Nature of Operations Cactus, Inc. (“Cactus Inc.”) and its consolidated subsidiaries (“the Company”), including Cactus Wellhead, LLC (“Cactus LLC”), are primarily engaged in the design, manufacture and sale of wellhead and pressure control equipment. In addition, we maintain a fleet of frac valves and ancillary equipment for short-term rental, as well as offer repair and refurbishment services and the provision of service crews to assist in the installation and operations of pressure control systems. We operate through U.S. service centers located in Texas, New Mexico, Pennsylvania, North Dakota, Louisiana, Oklahoma, Colorado and Wyoming as well as in Eastern Australia, with our corporate headquarters located in Houston, Texas. We also have manufacturing and production facilities in Bossier City, Louisiana and Suzhou, China. Cactus Inc. was incorporated on February 17, 2017 as a Delaware corporation for the purpose of completing an initial public offering of equity and related transactions, which was completed on February 12, 2018 (our “IPO”). Cactus Inc. is a holding company whose only material asset is an equity interest consisting of units representing limited liability company interests in Cactus LLC (“CW Units”). Cactus Inc. became the sole managing member of Cactus LLC upon completion of our IPO. Cactus LLC is a Delaware limited liability company and was formed on July 11, 2011. 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 (including Cactus LLC) following the completion of our IPO and Cactus LLC and its consolidated subsidiaries prior to the completion of our IPO. For detailed information regarding our IPO, see our Annual Report on Form 10-K for the year ended December 31, 2018. As the sole managing member of Cactus LLC, Cactus Inc. operates and controls all of the business and affairs of Cactus LLC and conducts its business through Cactus LLC and its subsidiaries. As a result, Cactus Inc. consolidates the financial results of Cactus LLC and its subsidiaries and reports a non-controlling interest related to the portion of CW Units not owned by Cactus Inc., which reduces net income attributable to holders of Cactus Inc.’s Class A common stock, par value $ 0.01 per share (“Class A common stock”). As of December 31, 2020, Cactus Inc. owned 63.3 % of Cactus LLC, as compared to 62.8 % as of December 31, 2019. As of December 31, 2020, Cactus Inc. had outstanding 47.7 million shares of Class A common stock (representing 63.3 % of the total voting power) and 27.7 million shares of Class B common stock (representing 36.7 % of the total voting power). 2. Summary of Significant Accounting Policies and Other Items Basis of Presentation The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). These consolidated financial statements include the accounts of Cactus Inc. and its wholly owned subsidiaries. All intercompany transactions and balances have been eliminated upon consolidation. Cactus Inc. consolidates the financial results of Cactus LLC and its subsidiaries and reports a non-controlling interest related to the portion of CW Units not owned by Cactus Inc., which reduces net income attributable to holders of Cactus Inc.’s Class A common stock. 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. 38 Table of Contents Segment Information We operate in a single operating segment, which reflects how we manage our business and the fact that all of our products and services are dependent upon the oil and natural gas industry. Substantially all of our products and services are sold in the U.S. to oil and natural gas exploration and production companies. We operate in the United States, Australia and China. Our operations in Australia and China represented less than 10% of our consolidated operations for all periods presented in these consolidated financial statements. Reclassifications Certain prior period amounts have been reclassified to conform to the current period presentation. Concentrations of Credit Risk Our assets that are potentially subject to concentrations of credit risk are cash and cash equivalents and accounts receivable. We manage the credit risk associated with these financial instruments by transacting only with what management believes are financially secure counterparties, requiring credit approvals and credit limits and monitoring counterparties’ financial condition. Our receivables are spread over a number of customers, a majority of which are operators and suppliers to the oil and natural gas industry. Our maximum exposure to credit loss in the event of non‑performance by the customer is limited to the receivable balance. We perform ongoing credit evaluations and monitoring as to the financial condition of our customers with respect to trade receivables. Generally, no collateral is required as a condition of sale. We also control our exposure associated with trade receivables by discontinuing sales and service to non-paying customers. For the year ended December 31, 2020, no customer represented 10% or more of total revenues. We had one customer representing 10 % of total revenues for the year ended December 2019 and one customer representing 11 % of total revenues in the year ended December 31, 2018. Significant Vendors We purchase a significant portion of supplies, equipment and machined components from a single vendor. During 2020, 2019 and 2018, purchases from this vendor totaled $ 6.7 million, $ 36.5 million and $ 46.7 million respectively. These figures represent approximately 7 %, 16 % and 21 % for the respective periods, of total third party vendor purchases of raw materials, finished products, equipment, machining and other services. Amounts due to the vendor included in accounts payable, in the consolidated balance sheets, as of December 31, 2020 and 2019 totaled $ 1.1 million and $ 4.3 million, respectively. Tax Receivable Agreement (TRA) We account for amounts payable under the TRA in accordance with Accounting Standards Codification (“ASC”) Topic 450, Contingencies. As such, subsequent changes to the measurement of the TRA liability are recognized in the statements of income as a component of other income (expense), net. During the years ended December 31, 2020 and 2019, we recognized a $ 0.6 million loss and a $ 5.3 million gain on the change in the TRA liability, respectively. See Note 9 for further details on the TRA liability. Revenue Recognition The majority of our revenues are derived from short-term contracts for fixed consideration. Product sales generally do not include right of return or other significant post-delivery obligations. A contract’s transaction price is allocated to each distinct performance obligation and recognized as revenue when, or as, the performance obligation is satisfied. Revenues are recognized when we satisfy a performance obligation by transferring control of the promised goods or providing services to our customers at a point in time, in an amount specified in the contract with our customer and that reflects the consideration we expect to be entitled to 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 39 Table of Contents conditions vary, although terms generally include a requirement of payment within 30 to 45 days. Revenues are recognized net of any taxes collected from customers, which are subsequently remitted to governmental authorities. We treat shipping and handling associated with outbound freight as a fulfillment cost instead of as a separate performance obligation. We recognize the cost for the associated shipping and handling when incurred as an expense in cost of sales. Our revenues are derived from three sources: products, rentals, and field service and other: Product revenue. Product revenues are primarily derived from the sale of wellhead systems and production trees. Revenue is recognized when the products have shipped and the customer obtains control of the products. Rental revenue. Rental revenues are primarily derived from the rental of equipment, tools and products used for well control during the drilling and completion phases to customers. Our rental agreements are directly with our customers and provide for a rate based on the period of time the equipment is used or made available to the customer. In addition, customers are charged for repair costs either through an agreed upon rate or as incurred. Revenue is recognized ratably over the rental period, which tends to be short-term in nature with most equipment on site for less than 90 days. Field service and other revenue. We provide field services to our customers based on contractually agreed rates. Other revenues are derived from providing repair and reconditioning services to customers who have installed wellheads and production trees on their wellsite. Revenues are recognized as the services are performed or rendered. Foreign Currency Translation The financial position and results of operations of our foreign subsidiaries are measured using the local currency as the functional currency. Revenues and expenses of the subsidiaries have been translated into U.S. dollars at average exchange rates prevailing during the period. Assets and liabilities have been translated at the rates of exchange on the balance sheet dates. The resulting translation gain and loss adjustments have been recorded directly as a separate component of other comprehensive income in the consolidated statements of comprehensive income and stockholders’ equity. Transaction gains and losses that arise from exchange rate fluctuations on transactions denominated in a currency other than the functional currency are included in our consolidated statements of income as incurred. Derivative Financial Instruments Beginning in 2020, we implemented a hedging program to reduce the risks associated with changes in the value of monetary assets and liabilities denominated in currencies other than the functional currency of our subsidiaries. Under this program, we utilize foreign currency forward contracts to offset gains or losses recorded upon remeasurement of assets and liabilities stated in the non-functional currencies of our subsidiaries. These forward contracts are not designated as hedges for accounting purposes. As such, we record changes in fair value of the forward contracts in our consolidated statements of income along with the gain or loss resulting from remeasurement of the U.S. dollar denominated financial assets and liabilities held by our foreign subsidiaries. The forward contracts are typically only 30 days in duration and are settled and renewed each month. As of December 31, 2020, the fair value of our forward contracts was a liability of approximately $ 56 thousand. Stock-based Compensation We measure the cost of equity‑based awards based on the grant date fair value and allocate the compensation expense over the requisite service period, which is usually the vesting period. The grant date fair value is determined by the average price of the trading high and trading low of our Class A common stock on the grant date. 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 regularly evaluate the valuation allowances established for deferred tax assets for which future realization is uncertain. In assessing the realizability of deferred tax assets, we consider both positive and negative evidence, including scheduled reversals of deferred tax assets and liabilities, projected future taxable income, tax planning strategies and results of recent operations. If, based on the weight of available evidence, it is more likely than not that the deferred tax assets will not be realized, a valuation allowance is recorded. Cactus Inc. is a corporation and is subject to U.S. federal as well as state income tax related to its ownership percentage in Cactus LLC. Cactus LLC is a limited liability company treated as a partnership for U.S. federal income tax purposes and files a U.S. Return of Partnership Income, which includes both our U.S. and foreign operations. Consequently, the 40 Table of Contents members of Cactus LLC are taxed individually on their share of earnings for U.S. federal and state income tax purposes. However, Cactus LLC is subject to the Texas Margins Tax. Additionally, our operations in both Australia and China are subject to local country income taxes. See Note 5 “Income Taxes” for additional information regarding income taxes. Cash and Cash Equivalents Cash in excess of current operating requirements is invested in short-term interest-bearing investments with maturities of three months or less at the date of purchase and is stated at cost, which approximates fair value. Throughout the year we maintained cash balances that were not covered by federal deposit insurance. We have not experienced any losses in such accounts. Accounts Receivable and Allowance for Credit Losses We extend credit to customers in the normal course of business. Our customers are predominantly oil and gas companies in the United States. Our receivables are short-term in nature and typically due in 30 to 45 days. We do not accrue interest on delinquent receivables. Accounts receivable includes amounts billed and currently due from customers and unbilled amounts for products delivered and services performed for which billings had not yet been submitted to the customers. Total unbilled revenue included in accounts receivable as of December 31, 2020 and 2019 was $ 8.7 million and $ 23.8 million, respectively. We maintain an allowance for credit losses to provide for the amount of billed receivables we believe to be at risk of loss. In our determination of the allowance for credit losses, we pool receivables with similar risk characteristics based on customer size, credit ratings, payment history, bankruptcy status and other factors known to us and apply an expected credit loss percentage. The expected credit loss percentage is determined using historical loss data adjusted for current conditions and forecasts of future economic conditions. Accounts deemed uncollectible are applied against the allowance for credit losses. The following is a rollforward of our allowance for credit losses: Balance at Beginning of Period Expense Write off Balance at End of Period Year Ended December 31, 2020 $ 837 $ 342 $ ( 581 ) $ 598 Year Ended December 31, 2019 576 355 ( 94 ) 837 Year Ended December 31, 2018 740 — ( 164 ) 576 Inventories Inventories are stated at the lower of cost or net realizable value. Cost is determined using standard cost (which approximates average cost) and weighted average methods. Costs include an application of related direct labor and overhead cost. Net realizable value is the estimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal and transportation. Reserves are made for excess and obsolete items based on a range of factors, including age, usage and technological or market changes that may impact demand for those products. The inventory obsolescence reserve was $ 14.6 million and $ 9.8 million as of December 31, 2020 and 2019, respectively. The following is a rollforward of our inventory obsolescence reserve: Balance at Beginning of Period Expense Write off Other Balance at End of Period Year Ended December 31, 2020 $ 9,772 $ 4,840 $ ( 53 ) $ 78 $ 14,637 Year Ended December 31, 2019 7,310 2,552 ( 90 ) — 9,772 Year Ended December 31, 2018 5,885 1,451 — ( 26 ) 7,310 Property and Equipment Property and equipment are stated at cost. We manufacture or construct most of our own rental assets and during the manufacture of these assets, they are reflected as construction in progress until complete. We depreciate the cost of property and equipment using the straight‑line method over the estimated useful lives and depreciate our rental assets to their salvage value. Leasehold improvements are amortized over the shorter of the remaining lease term or economic life of the related assets. When assets are retired or otherwise disposed of, the cost and related accumulated depreciation are removed from the accounts and 41 Table of Contents any resulting gain or loss are reflected in income for the period. The cost of maintenance and repairs is charged to income as incurred; significant renewals and improvements are capitalized. Estimated useful lives are as follows: Land N/A Buildings 10 - 30 years Machinery and equipment 2 - 12 years Vehicles under finance lease 3 years Rental equipment 2 - 8 years Furniture and fixtures 5 years Computers and software 4 years Property and equipment as of December 31, 2020 and 2019 consists of the following: December 31, 2020 2019 Land $ 3,203 $ 3,203 Buildings and improvements 21,935 21,655 Machinery and equipment 57,726 55,494 Vehicles under finance lease 14,371 24,275 Rental equipment 172,012 161,156 Furniture and fixtures 1,780 1,684 Computers and software 3,530 3,317 Gross property and equipment 274,557 270,784 Less: Accumulated depreciation ( 147,221 ) ( 123,397 ) Net property and equipment 127,336 147,387 Construction in progress 15,489 14,361 Total property and equipment, net $ 142,825 $ 161,748 Depreciation and amortization was $ 40.5 million, $ 38.9 million and $ 30.2 million for 2020, 2019 and 2018, respectively. Depreciation and amortization expense is included in the consolidated statements of income as follows: Year Ended December 31, 2020 2019 2018 Cost of product revenue $ 3,506 $ 3,304 $ 3,262 Cost of rental revenue 28,063 24,881 17,997 Cost of field service and other revenue 8,075 9,986 8,456 Selling, general and administrative expenses 876 683 438 Total depreciation and amortization $ 40,520 $ 38,854 $ 30,153 Impairment of Long‑Lived Assets We review the recoverability of long‑lived assets, such as property and equipment, when events or changes in circumstances occur that indicate the carrying value of the asset or asset group may not be recoverable. The assessment of possible impairment is based on our ability to recover the carrying value of the asset or asset group from the expected future pre‑tax cash flows (undiscounted) of the related operations. If these cash flows are less than the carrying value of such asset, an impairment loss is recognized for the difference between estimated fair value and carrying value. Due to reduced sales and cash flows in 2020, we assessed the recoverability of our long-lived assets at each interim period of 2020 and as of December 31, 2020. No impairments were recognized in 2020 as a result of these assessments. Additionally, no impairment charges of long‑lived assets were recognized in 2019 and 2018. 42 Table of Contents Goodwill Goodwill represents the excess of purchase price paid over the fair value of the net assets of acquired businesses. Our goodwill resulted from the acquisition of a manufacturing facility in Bossier City, Louisiana in 2011. The facility supports our full range of products, rentals and services. Goodwill is not amortized, but we evaluate at least annually whether it is impaired. Goodwill is considered impaired if the carrying amount of the reporting unit exceeds its estimated fair value. We conduct our annual assessment of the recoverability of goodwill as of December 31 of each year. We first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the goodwill impairment test. If the qualitative assessment indicates that it is more likely than not that the fair value of the reporting unit is less than its carrying amount or we elect not to perform a qualitative assessment, the quantitative assessment of goodwill test is performed. The goodwill impairment test is also performed whenever events or changes in circumstances indicate that the carrying value may not be recoverable. If it is necessary to perform the quantitative assessment to determine if our goodwill is impaired, we typically utilize a discounted cash flow analysis using management’s projections that are subject to various risks and uncertainties of revenues, expenses and cash flows as well as assumptions regarding discount rates, terminal value and control premiums. Estimates of future cash flows and fair value are highly subjective and inherently imprecise. These 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. Due to the depressed oil price environment, reduced sales and cash flow projections and a significant decline in our market capitalization as of March 31, 2020, we assessed whether our goodwill may have been impaired as of March 31, 2020. Our quantitative impairment test using management’s current projections of revenues, expenses and cash flows as of March 31, 2020 calculated significant cushion and no impairment was recognized as a result of this assessment. Actual results during the remainder of the year were consistent with expectations and our forecasts have not materially changed; therefore, we concluded that our goodwill was no t impaired at each interim period of 2020 and as of December 31, 2020. Additionally, no goodwill impairment losses were deemed necessary in 2019 or 2018. Accrued Expenses and Other Current Liabilities Accrued expenses and other current liabilities as of December 31, 2020 and 2019 are as follows: December 31, 2020 2019 Payroll, incentive compensation, payroll taxes and benefits $ 4,210 $ 10,708 Income based tax payable 2,336 2,481 Accrued international freight and tariffs 2,087 3,794 Deferred revenue 1,068 1,371 Accrued professional fees and other 687 1,729 Taxes other than income 450 767 Product warranties 283 556 Accrued dividends 271 61 Accrued workers’ compensation insurance — 600 Total accrued expenses and other current liabilities $ 11,392 $ 22,067 Self-Insurance Accrued Expenses We maintain a partially self-insured health benefit plan which provides medical and prescription drug benefits to certain of our employees electing coverage under the plan. Our exposure is limited by individual and aggregate stop loss limits via third-party insurance carriers. Our self-insurance expense is accrued based upon the aggregate of the expected liability for reported claims and the estimated liability for claims incurred but not reported, based on historical claims experience provided by our third-party insurance advisors, adjusted as necessary based upon management’s reasoned judgment. Actual employee medical claims expense may differ from estimated loss provisions based on historical experience. The liabilities for these claims are included as a component of payroll, incentive compensation, payroll taxes and benefits in the table above and were $ 1.3 million and $ 1.6 million as of December 31, 2020 and 2019, respectively. 43 Table of Contents Product Warranties We generally warrant our manufactured products for 12 months from the date placed in service. The estimated liability for product warranties is based on historical and current claims experience. Fair Value Measurements Authoritative guidance on fair value measurements provides a framework for measuring fair value and establishes a fair value hierarchy that prioritizes the inputs used to measure fair value, giving the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 inputs) and the lowest priority to unobservable inputs (Level 3 inputs). The carrying value of cash and cash equivalents, receivables, accounts payable and accrued expenses approximates fair value based on the short-term nature of these accounts. The fair value of our foreign currency forwards is determined using market observable inputs including forward and spot prices (Level 2 inputs). We had no long-term debt outstanding as of December 31, 2020 or 2019. Employee Benefit Plans Our employees within the United States are eligible to participate in a 401(k) plan sponsored by us. These employees are eligible to participate on the first day of the month following 30 days of employment and if they are at least eighteen years of age. Eligible employees may contribute a percentage of their compensation subject to a maximum imposed by the Internal Revenue Code. Similar benefit plans exist for employees of our foreign subsidiaries. During 2020, 2019 and 2018, we matched 100 % of the first 3 % of gross pay contributed by each employee and 50 % of the next 4 % of gross pay contributed by each employee. Due to the difficult economic environment in 2020, the 401(k) match was indefinitely suspended in the U.S. effective June 1, 2020. We may also make additional non‑elective employer contributions at our discretion under the plan. During 2020, 2019 and 2018, employer matching contributions totaled $ 1.6 million, $ 3.1 million and $ 3.7 million, respectively. During the year ended December 31, 2019, a $ 0.1 million non-elective contribution was made under the 401(k) plan, whereas no such contributions were made in 2020 or 2018. Recent Accounting Pronouncements Standards Adopted Effective January 1, 2020, we adopted Financial Accounting Standards Board (“FASB”) Accounting Standards Update (“ASU”) 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The new guidance changed the measurement of credit losses on financial assets measured at amortized cost, including but not limited to trade receivables. The new guidance replaced the prior methodology for recognizing credit losses when it is probable that a loss has been incurred with an expected loss model that requires consideration of a broader range of information to estimate expected credit losses over the lifetime of an asset. The allowance for credit losses under the new guidance represents the portion of the asset’s amortized cost basis that we do not expect to collect over the asset’s contractual life, considering past events, current conditions and reasonable and supportable forecasts of future economic conditions. Adoption of the standard did not impact our consolidated financial statements other than certain expanded disclosures. We also adopted FASB ASU 2017-04, Intangibles – Goodwill and Other (Topic 350), effective January 1, 2020. The new standard simplified the accounting for goodwill impairment by eliminating Step 2 of the current goodwill impairment test. Under the new standard, an entity performs its goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount and recognizes an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value. The loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. Adoption of this standard did not impact our consolidated financial statements. Standards Not Yet Adopted No new pronouncements issued but not yet effective are expected to have a material impact on our consolidated financial statements. 44 Table of Contents 3. Inventories Inventories consist of the following: December 31, 2020 2019 Raw materials $ 2,003 $ 1,538 Work-in-progress 3,598 4,619 Finished goods 81,879 107,214 Total inventories $ 87,480 $ 113,371 4. Debt We had no debt outstanding as of December 31, 2020 and 2019. On August 21, 2018, Cactus LLC entered into a five-year senior secured asset-based revolving credit facility with a syndicate of lenders and JPMorgan Chase Bank, N.A., as administrative agent for such lenders and as an issuing bank and swingline lender (the “ABL Credit Facility”). The ABL Credit Facility provides for $ 75.0 million in revolving commitments, up to $ 15.0 million of which is available for the issuance of letters of credit. The ABL Credit Facility matures on August 21, 2023. The maximum amount that Cactus LLC may borrow under the ABL Credit Facility is subject to a borrowing base, which is based on a percentage of eligible accounts receivable and eligible inventory, subject to reserves and other adjustments. The ABL Credit Facility was amended in September 2020 to incorporate certain changes related to revised and new definitions associated with alternative interest rates to LIBOR and satisfaction of payment conditions for restricted payments, investments, permitted acquisitions and asset dispositions. The amendment did not change covenants, the Alternate Base Rate, applicable margin rates, commitment fees, the maturity date or borrowing availability under the ABL Credit Facility. Borrowings under the ABL Credit Facility bear interest at Cactus LLC’s option at either (i) the Alternate Base Rate (as defined therein) (“ABR”), or (ii) the Adjusted LIBO Rate (as defined therein) (“Eurodollar”), plus, in each case, an applicable margin. Letters of credit issued under the ABL Credit Facility accrue fees at a rate equal to the applicable margin for Eurodollar borrowings. The applicable margin ranges from 0.50 % to 1.00 % per annum for ABR borrowings and 1.50 % to 2.00 % per annum for Eurodollar borrowings and, in each case, is based on the average quarterly availability under the ABL Credit Facility for the immediately preceding fiscal quarter. The unused portion of the ABL Credit Facility is subject to a commitment fee that varies from 0.250 % to 0.375 % per annum, according to the average quarterly availability under the ABL Credit Facility for the immediately preceding fiscal quarter. The ABL Credit Facility contains various covenants and restrictive provisions that limit Cactus LLC’s 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 ABL Credit Facility also requires Cactus LLC to maintain a fixed charge coverage ratio of 1.0 to 1.0 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 ABL Credit Facility is under certain levels. If Cactus LLC fails to perform its obligations under the ABL Credit Facility, (i) the commitments under the ABL Credit Facility could be terminated, (ii) any outstanding borrowings under the ABL Credit Facility may be declared immediately due and payable and (iii) the lenders may commence foreclosure or other actions against the collateral. At December 31, 2020 and 2019, although there were no borrowings outstanding, the applicable margins on our Eurodollar borrowings were 1.75 % and 1.50 %, respectively, plus an adjusted base rate of one or three month LIBOR. We were in compliance with all covenants under the ABL Credit Facility as of December 31, 2020. Loss on Debt Extinguishment The ABL Credit Facility replaced Cactus LLC’s prior credit agreement, dated as of July 31, 2014, with Credit Suisse AG, as administrative agent, collateral agent and issuing bank, and the other lenders party thereto (the “Prior Credit Agreement”). The Prior Credit Agreement provided for a term loan tranche in an aggregate principal amount of $ 275.0 million, the outstanding balance of which was repaid in full in February 2018 from the net proceeds of our IPO. We recorded a $ 4.3 million loss on early extinguishment of debt in conjunction with the repayment of the term loan portion of the Prior Credit Agreement with a portion of the net proceeds from our IPO. The loss consisted of the write-off of the unamortized balance of 45 Table of Contents debt discount and deferred loan costs of $ 2.1 million and $ 2.2 million, respectively and is included under other income (expense), net, in the consolidated statement of income for the year ended December 31, 2018. The Prior Credit Agreement was terminated concurrently with the effectiveness of, and as a condition of entering into, the ABL Credit Facility. Interest (Income) Expense, net Interest (income) expense, net, including debt discount and deferred financing costs amortization, was comprised of the following: Year Ended December 31, 2020 2019 2018 Interest under bank facilities $ 317 $ 315 $ 2,669 Debt discount and deferred financing costs amortization 168 168 275 Finance lease interest 639 877 734 Other 3 164 45 Interest income ( 1,828 ) ( 2,403 ) ( 128 ) Interest (income) expense, net $ ( 701 ) $ ( 879 ) $ 3,595 5. Income Taxes Domestic and foreign components of income before income taxes were as follows: Year Ended December 31, 2020 2019 2018 Domestic (1) 61,028 173,039 159,990 Foreign (2) 9,157 15,284 9,811 Income before income taxes $ 70,185 $ 188,323 $ 169,801 (1) $ 13.4 million related to the pre-IPO period in 2018. (2) $ 0.5 million related to the pre-IPO period in 2018. The provision for income taxes consisted of: Year Ended December 31, 2020 2019 2018 Current: Federal $ ( 786 ) $ 1,088 $ — State 597 1,408 1,172 Foreign 4,211 4,121 3,147 Total current income taxes 4,022 6,617 4,319 Deferred: Federal 8,040 14,853 12,589 State ( 253 ) 10,681 1,992 Foreign ( 839 ) ( 131 ) 620 Total deferred income taxes 6,948 25,403 15,201 Total provision for income taxes $ 10,970 $ 32,020 $ 19,520 46 Table of Contents The effective income tax rate was different from the statutory U.S. federal income tax rate due to the following: Year Ended December 31, 2020 2019 2018 Income taxes at 21% statutory tax rate $ 14,739 $ 39,548 $ 35,658 Net difference resulting from: Profit of Cactus LLC pre-IPO not subject to U.S. federal tax — — ( 2,808 ) Profit of non-controlling interest not subject to U.S. federal tax ( 5,508 ) ( 15,477 ) ( 18,570 ) Foreign income taxes (net of foreign tax credit) 269 364 828 State income taxes (excluding rate change) 883 4,887 2,746 Impact of change in forecasted state income tax rate ( 1,216 ) 5,774 — Foreign withholding taxes 462 988 1,056 Change in valuation allowance 2,840 ( 3,888 ) 733 Adjustments of prior year taxes ( 1,663 ) 1,336 ( 125 ) Other 164 ( 1,512 ) 2 Total provision for income taxes $ 10,970 $ 32,020 $ 19,520 Our effective tax rate was 15.6 %, 17.0 % and 11.5 % for the years ended December 31, 2020, 2019 and 2018, respectively. 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. The components of deferred tax assets and liabilities are as follows: December 31, 2020 2019 Investment in Cactus LLC $ 224,485 $ 234,629 Imputed interest 10,333 10,323 Tax credits 5,719 1,479 Net operating loss carryforwards 2,333 — Other 546 155 Deferred tax assets 243,416 246,586 Valuation allowance ( 26,813 ) ( 24,041 ) Deferred tax asset, net 216,603 222,545 Foreign withholding taxes 562 1,054 Other 224 294 Deferred tax liability, net $ 786 $ 1,348 As of December 31, 2020, our liability related to the TRA was $ 204.4 million, representing 85 % of the calculated net cash savings in the United States federal, state and local and franchise tax that we anticipate realizing in future years from certain increases in tax basis and certain tax benefits attributed to imputed interest as a result of our acquisition of CW Units. We have determined it is more-likely-than-not that we will be able to utilize all of our tax basis subject to the TRA; therefore, we have recorded a liability related to the TRA for the tax savings we may realize from certain increases in tax basis and certain tax benefits attributable to imputed interest as a result of our acquisition (or deemed acquisition for United States federal income tax purposes) of CW Units. If we determine the utilization of this tax basis is not more-likely-than-not in the future, our estimate of amounts to be paid under the TRA would be reduced. In this scenario, the reduction of the liability under the TRA would result in a benefit to our pre-tax consolidated results of operations in conjunction with an increase to the valuation allowance and an offsetting adjustment to tax expense. We record a deferred tax asset for the differences between our tax and book basis in the investment in Cactus LLC and imputed interest on the TRA. Based upon our cumulative earnings history and forecasted future sources of taxable income, we believe that we will be able to realize the majority of our U.S. deferred tax assets in the future. We do not expect to realize the 47 Table of Contents portion of our deferred tax asset for our investment in Cactus LLC that may only be realizable through the sale or liquidation of the investment and our ability to generate sufficient capital gains. For the year ended December 31, 2020, as a result of redemptions of CW Units, we released $ 0.1 million of our valuation allowance and recorded a tax benefit of $ 0.1 million related to the realizable portion of the deferred tax asset. As of December 31, 2020, we have a valuation allowance of $ 22.5 million against the $ 224.5 million deferred tax asset. During the year ended December 31, 2019, as a result of redemptions of CW Units, we released $ 5.4 million of our valuation allowance and recorded a tax benefit of $ 5.4 million related to the realizable portion of the deferred tax asset. As of December 31, 2019, we had a valuation allowance of $ 22.7 million against the $ 234.6 million deferred tax asset. We also record deferred tax assets for imputed interest, certain tax credits and net operating loss carryforwards. As of December 31, 2020, we have a valuation allowance of $ 4.3 million against these deferred tax assets, primarily associated with our portion of Cactus LLC’s accrued foreign taxes and state tax credits, due to uncertainty of realization. As of December 31, 2020 and 2019, we had no uncertain tax positions. None of our federal or state income tax returns are currently under examination by state taxing authorities. 6. Stock-Based Compensation We have a long-term incentive plan (“LTIP”) that provides for the grant of various stock-based compensation awards at the discretion of our compensation committee of our board of directors. Employees and non-employee directors are eligible to receive awards under the LTIP. Stock based awards granted pursuant to the LTIP are expected to be settled in shares of our Class A common stock if they vest. Our stock based awards do not have voting rights prior to vesting. Dividends declared are accumulated and paid upon vesting. We account for forfeitures when they occur and recognize the impact to stock-based compensation expense at that time. During the years ended December 31, 2020, 2019 and 2018, we recorded $ 8.6 million, $ 7.0 million and $ 4.7 million, respectively, of stock-based compensation expense. Stock-based compensation expense is primarily recorded in selling, general and administrative expenses. We recognized $ 34 thousand and $ 0.8 million in tax benefits for tax deductions from the vesting of stock-based awards during the years ended December 31, 2020 and 2019, respectively. No benefits were recognized in 2018 as there were no vestings of stock-based awards. As of December 31, 2020, 1.5 million stock awards were available for grant. Restricted Stock Units Restricted stock units (“RSUs”) granted to our key employees generally vest over a three-year period (vesting ratably in equal tranches over a three-year period); however, RSUs granted to our non-employee directors generally vest on the first anniversary of the grant date. We recognize compensation expense over the requisite service period using straight-line amortization. The following table summarizes our RSU activity during the year ended December 31, 2020 (RSUs in thousands): No. of RSUs Weighted Average Grant Date Fair Value ($) Nonvested as of December 31, 2019 690 $ 25.34 Granted 390 13.80 Vested ( 311 ) 24.00 Forfeited ( 12 ) 23.16 Nonvested as of December 31, 2020 757 $ 19.97 There was approximately $ 7.6 million of unrecognized compensation expense relating to the unvested RSUs as of December 31, 2020. The unrecognized compensation expense will be recognized over the weighted average remaining vesting period of 1.9 years. Performance Stock Units In 2020, we granted approximately 152 thousand performance stock units (“PSUs”) to our executive officers that will vest based on our Return on Capital Employed (“ROCE”) performance over two or three years , depending on the award agreement. The number of shares earned may range from 0 % to 200 % of the target units set forth in the applicable award agreement and is determined at the end of each performance period conditioned upon continued service and on our achievement 48 Table of Contents of certain predefined targets as defined in the underlying performance stock unit agreements. Depending on the award agreement issued, vesting terms provided are either (i) two-thirds of the PSUs granted thereunder upon conclusion of the two-year performance period with the remaining one-third vesting upon the conclusion of the three-year performance period (“Two- and Three-Year Agreement”) or (ii) three-year cliff vesting upon conclusion of the three-year performance period (“Three-Year Agreement”). As the ROCE target represents a performance condition, we recognize compensation expense for the performance share units on a straight-line basis for the two-thirds portion and one-thirds portion of the Two- and Three-Year Agreement awards as if they were individual awards (graded vesting) and on a straight-line basis for the Three-Year Agreement awards based on the probable outcome of the ROCE performance. As of December 31, 2020, we had not recognized compensation expense related to the 2020 awards as it was not probable that the minimum performance level would be achieved for each award as determined by the actual and forecasted ROCE performance over the applicable performance periods. If at a later date it becomes probable that the minimum ROCE performance level will be achieved, we will record a cumulative catch-up of compensation expense for the probable amount of stock award achievement in that period. As of December 31, 2020, there was approximately $ 2.1 million of unrecognized compensation expense relating to the unvested PSUs (based on the grant date fair value of the awards at 100 % of target). As of December 31, 2020, approximately 152 thousand PSUs (assuming the achievement of 100 % of target) were outstanding and had not vested. 7. Revenue We disaggregate revenue from contracts with customers into three revenue categories: (i) product revenues, (ii) rental revenues and (iii) field service and other revenues. We have predominately domestic operations, with a small amount of sales in Australia. For the year ended December 31, 2020, we derived 59 % of our total revenues from the sale of our products, 19 % of our total revenues from rental and 22 % of our total revenues from field service and other. This compares to 57 % of our total revenues from the sale of our products, 22 % of our total revenues from rental and 21 % of our total revenues from field service and other for the year ended December 31, 2019. In 2018, we derived 53 % of our total revenues from the sale of our products, 25 % from rental and 22 % from field service and other. The following table presents our revenues disaggregated by category: Year Ended December 31, 2020 2019 2018 Product revenue $ 206,801 $ 357,087 $ 290,496 Rental revenue 66,169 141,816 133,418 Field service and other revenue 75,596 129,511 120,221 Total revenue $ 348,566 $ 628,414 $ 544,135 At December 31, 2020, we had a deferred revenue balance of $ 1.1 million compared to the December 31, 2019 balance of $ 1.4 million included in accrued expenses and other current liabilities in the consolidated balance sheets. Deferred revenue represents our obligation to transfer products 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 December 31, 2020, we did not have any contracts with an original length of greater than a year from which revenue is expected to be recognized in the future related to performance obligations that are unsatisfied. 8. Leases We lease real estate, apartments, forklifts, vehicles and other equipment under non-cancellable agreements. Certain of our leases include one or more options to renew, with renewal terms that can extend the lease term from one to 10 years or greater. The exercise of lease renewal options is typically at our discretion. The measurement of the lease term includes options to extend or renew the lease when it is reasonably certain that we will exercise those options. Lease assets and liabilities are recognized at the commencement date based on the present value of minimum lease payments over the lease term. To determine the present value of future minimum lease payments, we use the implicit rate when readily determinable; however, many of our leases do not provide an implicit rate. Therefore, to determine the present value of minimum lease payments, we use our incremental borrowing rate based on the information available at the commencement date of the lease. Our finance lease agreements typically include an interest rate that is used to determine the present value of future lease payments. Short-term operating leases with an initial term of twelve months or less are not recorded on our balance sheet. Minimum lease payments are expensed on a straight-line basis over the lease term, including reasonably certain renewal options. 49 Table of Contents The following are the components of operating and finance lease costs: Year Ended December 31, 2020 2019 Finance lease cost: Amortization of right-of-use assets $ 5,739 $ 7,601 Interest expense 639 877 Operating lease cost 7,747 8,857 Short-term lease cost 329 847 Sublease income ( 475 ) ( 455 ) Total lease cost $ 13,979 $ 17,727 The following is supplemental cash flow information for our operating and finance leases: Year Ended December 31, 2020 2019 Cash paid for amounts included in the measurement of lease liabilities: Operating cash flows from finance leases $ 639 $ 877 Operating cash flows from operating leases 6,875 6,828 Financing cash flows from finance leases 5,317 7,484 Total $ 12,831 $ 15,189 Right-of-use assets obtained in exchange for new lease obligations: Operating leases $ 1,329 $ 8,054 Finance leases 2,973 3,008 Total $ 4,302 $ 11,062 The following is the aggregate future lease payments for operating and finance leases as of December 31, 2020: Operating Finance 2021 $ 4,946 $ 4,122 2022 4,184 1,710 2023 3,371 631 2024 2,837 57 2025 2,243 — Thereafter 7,101 — Total undiscounted lease payments 24,682 6,520 Less: effects of discounting ( 2,613 ) ( 457 ) Present value of lease payments $ 22,069 $ 6,063 The following represents the average lease terms and discount rates for our operating and finance lease portfolio as of December 31, 2020: Year ended December 31, 2020 2019 Weighted average remaining lease term: Finance leases 1.6 years 1.5 years years Operating leases 6.6 years 5.8 years Weighted average discount rate Finance leases 10.78 % 12.18 % Operating leases 3.52 % 3.76 % 50 Table of Contents As a lessor, we rent a fleet of frac valves and ancillary equipment for short-term rental periods, typically one to two months . Our lessor portfolio consists mainly of operating leases for equipment utilized during the drilling, completion and production phases of our customers’ wells. At this time, most lessor agreements contain less than three-month terms with no renewal options that are reasonably certain to exercise, or early termination options based on established terms specific to the individual agreement. See Note 7 for disaggregation of revenue. 9. Tax Receivable Agreement In connection with our IPO, we entered into the TRA with certain direct and indirect owners of Cactus LLC (the “TRA Holders”). The TRA generally provides for payment by Cactus Inc. to the TRA Holders of 85 % of the net cash savings, if any, in U.S. federal, state and local income tax 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 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 and franchise tax rate driven by the apportionment factors applicable to each state. As of December 31, 2020, the total liability from the TRA was $ 204.4 million with $ 9.3 million reflected in current liabilities based on the expected timing of our next payment. The payments under the TRA will not be conditional on a holder of rights under the TRA having a continued ownership interest in either Cactus LLC or Cactus Inc. The term of the TRA commenced upon completion of our IPO and will continue until all tax benefits that are subject to the TRA have been utilized or expired, unless we exercise our right to terminate the TRA. If we elect to terminate the TRA early (or it is terminated early due to certain mergers, asset sales, other forms of business combinations or other changes of control), our obligations under the TRA would accelerate and we would be required to make an immediate payment equal to the present value of the anticipated future payments to be made by us under the TRA and such payment is expected to be substantial. The calculation of anticipated future payments will be based upon certain assumptions and deemed events set forth in the TRA, including the assumptions that (i) we have sufficient taxable income to fully utilize the tax benefits covered by the TRA and (ii) any CW Units (other than those held by Cactus Inc.) outstanding on the termination date are deemed to be redeemed on the termination date. Any early termination payment may be made significantly in advance of the actual realization, if any, of the future tax benefits to which the termination payment relates. We may elect to defer payments due under the TRA if we do not have available cash to satisfy our payment obligations under the TRA. Any such deferred payments under the TRA generally will accrue interest from the due date for such payment until the payment date. 10. Equity Redemptions of CW Units Pursuant to the First Amended and Restated Limited Liability Company Operating Agreement of Cactus LLC (the “Cactus LLC Agreement”), each holder of CW Units (“CW Unit Holder”) has, subject to certain limitations, the right (the “Redemption Right”) to cause Cactus LLC to acquire all or at least a minimum portion of its CW Units for, at Cactus LLC’s election, (x) shares of our Class A common stock at a redemption ratio of one share of Class A common stock for each CW 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 the Redemption Right, Cactus Inc. (instead of Cactus LLC) will have the right (the “Call Right”) to acquire each tendered CW Unit directly from the exchanging CW 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 CW Units pursuant to the Redemption Right or our Call Right, the corresponding number of shares of Class B common stock, par value $ 0.01 per share (“Class B common stock”), will be canceled. Any exercise by Cactus LLC or Cactus Inc. of the right to acquire redeemed CW Units for cash must be approved by the board of directors of Cactus Inc. To date, neither Cactus Inc. nor Cactus LLC have elected to acquire CW Units for cash in connection with exchanges by CW Unit Holders. It is the policy of Cactus Inc. that any exercise by Cactus Inc. or Cactus LLC 51 Table of Contents of the right to acquire redeemed CW Units for cash must be approved by a majority of those members of the board of directors of Cactus Inc. who have no interest in such transaction. Since our IPO in February 2018, 32.9 million CW Units and a corresponding number of shares of Class B common stock have been redeemed in exchange for shares of Class A common stock. For more information regarding our IPO, see our Annual Report on Form 10-K for the year ended December 31, 2018. The following is a rollforward of ownership of legacy CW Units by legacy CW Unit Holders: CW Units (in thousands) CW Units held by legacy CW Unit Holders as of February 7, 2018 60,558 IPO ( 12,118 ) July 2018 Follow-on Offering ( 11,197 ) Other CW Unit redemptions ( 7 ) CW Units held by legacy CW Unit Holders as of December 31, 2018 37,236 March 2019 Secondary Offering ( 8,474 ) Other CW Unit redemptions ( 804 ) CW Units held by legacy CW Unit Holders as of December 31, 2019 27,958 Other CW Unit redemptions ( 303 ) CW Units held by legacy CW Unit Holders as of December 31, 2020 27,655 On July 16, 2018, we completed a public offering of 11.2 million shares of Class A common stock (the “July 2018 Follow-on Offering”) at $ 33.25 per share and received $ 359.3 million of net proceeds after deducting underwriting discounts and commissions. Cactus Inc. contributed these net proceeds to Cactus LLC in exchange for 11.2 million CW Units. Cactus LLC then used the net proceeds to redeem and retire 11.2 million CW Units from certain of the other owners of Cactus LLC, and Cactus Inc. canceled a corresponding number of shares of Class B common stock. In conjunction with the redemption of these CW Units, we recorded a deferred tax asset related to the step-up in basis, a liability from the TRA representing 85 % of the expected net cash savings from the step-up in basis that will be paid to TRA Holders and recorded the remaining 15 % as additional paid-in capital. Offering expenses related to the July 2018 Follow-on Offering were $ 0.7 million, which were recorded within equity and were borne by Cactus Inc. In conjunction with the July 2018 Follow-on Offering and the additional ownership Cactus Inc. acquired in Cactus LLC, $ 25.2 million of equity was reclassified to Cactus Inc. from non-controlling interest representing the additional CW Units acquired by Cactus and $ 0.1 million related to the cancellation of Class B common stock. On March 19, 2019, Cactus Inc. entered into an underwriting agreement by and among Cactus Inc., Cactus LLC, certain selling stockholders of Cactus (the “Selling Stockholders”) and the underwriters named therein, providing for the offer and sale of Class A common stock by the Selling Stockholders (the “March 2019 Secondary Offering”). As described in the prospectus supplement dated March 19, 2019 and filed with the Securities and Exchange Commission on March 20, 2019, in connection with the March 2019 Secondary Offering, certain Selling Stockholders owning CW Units exercised their Redemption Right with respect to 8.5 million CW Units, together with a corresponding number of shares of Class B common stock, as provided in the Cactus LLC Agreement. The March 2019 Secondary Offering closed on March 21, 2019, at which time, in exercise of its Call Right, Cactus Inc. acquired the redeemed CW Units and a corresponding number of shares of Class B common stock (which shares of Class B common stock were then canceled) and issued 8.5 million shares of Class A common stock to the underwriters at the direction of the redeeming Selling Stockholders, as provided in the Cactus LLC Agreement. In addition, certain other Selling Stockholders sold 26 thousand shares of Class A common stock in the March 2019 Secondary Offering, which shares were owned by them directly prior to the closing of this offering. Cactus did not receive any of the proceeds from the sale of common stock in the March 2019 Secondary Offering. Cactus incurred $ 1.0 million in offering expenses which were recorded in other income (expense), net, in the consolidated statement of income during the first quarter of 2019. In addition to the redemptions associated with the July 2018 Follow-on Offering and the March 2019 Secondary Offering, certain legacy CW Unit Holders redeemed 0.3 million and 0.8 million CW Units (together with a corresponding number of shares of Class B common stock) pursuant to the Redemption Right for the years ended December 31, 2020 and 2019, respectively. Cactus acquired the redeemed CW Units and a corresponding number of shares of Class B common stock (which shares of Class B common stock were then canceled) and issued 0.3 million and 0.8 million shares of Class A common stock to the redeeming CW Unit Holders during the same respective time periods. Pursuant to the TRA described in Note 9, 52 Table of Contents CW Unit redemptions create additional TRA liability. As a result of the CW Unit redemptions described above, Cactus Inc. increased its ownership in Cactus LLC and accordingly, increased its equity by $ 2.2 million and $ 48.7 million from the non-controlling interest during the years ended December 31, 2020 and 2019, respectively. Dividends Cash dividends of $ 0.36 per share of Class A common stock declared and paid during the year ended December 31, 2020 totaled $ 17.4 million and $ 17.1 million, respectively. In the fourth quarter of 2019, we declared and paid our first cash dividend of $ 0.09 per share of Class A common stock equal to $ 4.3 million and $ 4.2 million, respectively. Dividends accrue on unvested restricted stock on the date of record and are paid upon vesting. A de minimis amount of accrued dividends was paid during 2020 to holders of restricted stock units that vested during 2020. Dividends are not paid to our Class B common stock holders; however, a corresponding distribution up to the same amount per share as our Class A common stockholders is paid to our CW Unitholders for any dividends declared on our Class A common stock. See Note 11 “Related Party Transactions” for further discussion of distributions made by Cactus LLC. Limitation of Members’ Liability Under the terms of the Cactus Wellhead LLC Agreement, the members of Cactus LLC are not obligated for debt, liabilities, contracts or other obligations of Cactus LLC. Profits and losses are allocated to members as defined in the Cactus Wellhead LLC Agreement. 11. Related Party Transactions When needed, we rent a plane under dry-lease from a company owned by a member of Cactus LLC. These transactions are under short-term rental arrangements and the agreement governing these transactions does not qualify as a lease. We pay a base hourly rent of $ 1,750 per flight hour of use of the aircraft, payable monthly, for the hours of aircraft operation during the prior calendar month. During 2020, 2019 and 2018, expense recognized in connection with these rentals totaled $ 0.1 million, $ 0.3 million and $ 0.4 million, respectively. As of December 31, 2020 and 2019, we owed less than $ 0.1 million to the related party which are included in accounts payable in the consolidated balance sheets. We are also responsible for employing pilots and fuel expenses. Mr. Scott Bender and Mr. Joel Bender pay the Company $1,800/day for their personal use of the pilots employed by the Company. The TRA agreement is with certain direct and indirect holders of CW Units, including certain of our officers, directors and employees. These TRA Holders have the right in the future to receive 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. The total liability from the TRA as of December 31, 2020 was $ 204.4 million. We pay professional fees to assist with maintenance of the TRA which are reimbursable from the TRA Holders. As of December 31, 2020 and 2019, we had $ 0.2 million and $ 0.3 million, respectively due from the TRA Holders for fees paid on their behalf. The balances are included in accounts receivable, net in the consolidated balance sheets. Distributions made by Cactus LLC are generally required to be made pro rata among all its members. For the year ended December 31, 2020, Cactus LLC distributed $ 27.8 million to Cactus Inc. to fund its dividend, TRA liability and estimated tax payments and made pro rata distributions to the other members totaling $ 16.3 million. For the year ended December 31, 2019, Cactus LLC made $ 14.2 million in distributions to Cactus Inc. to fund its TRA liability payments and to cover its estimated tax payments and also made an aggregate $ 8.4 million in pro rata distributions to the other members. For the year ended December 31, 2018, Cactus LLC made $ 3.8 million in distributions to Cactus Inc. to cover its estimated tax payments and also made an aggregate $ 5.8 million in pro-rata distributions to the other members. Prior to our IPO, on January 25, 2018, Cactus LLC paid a cash distribution of $ 26.0 million to holders of CW Units at that time. This distribution was funded by borrowing under a revolving credit facility. The purpose of the distribution was to provide funds to these owners to pay their federal and state tax liabilities associated with taxable income recognized by them for periods prior to the completion of our IPO as a result of their ownership interests in Cactus LLC. The borrowings under this revolving credit facility were repaid during the first quarter of 2018. 12. 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. 53 Table of Contents 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 CW Units (and corresponding shares of outstanding Class B common stock), and the treasury stock method to determine the potential dilutive effect of unvested restricted stock units assuming that the proceeds will be used to purchase shares of Class A common stock. The following table summarizes the basic and diluted earnings per share calculations: Year Ended December 31, 2020 2019 2018 Numerator: Net income attributable to Cactus Inc.—basic $ 34,446 $ 85,612 $ 51,683 Net income attributable to non-controlling interest (1) 19,934 56,012 — Net income attributable to Cactus Inc.—diluted (1) $ 54,380 $ 141,624 $ 51,683 Denominator: Weighted average Class A shares outstanding—basic 47,457 44,983 32,329 Effect of dilutive shares (2) 28,038 30,370 366 Weighted average Class A shares outstanding—diluted (2) 75,495 75,353 32,695 Earnings per Class A share—basic $ 0.73 $ 1.90 $ 1.60 Earnings per Class A share—diluted (1) (2) $ 0.72 $ 1.88 $ 1.58 (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 24.0 % for the twelve months ended December 31, 2020 and 2019. (2) Diluted earnings per share for the year ended December 31, 2018 excludes 37.2 million shares of Class B common stock as the effect would be anti-dilutive. 14. Supplemental Cash Flow Information Non-cash investing and financing activities were as follows: Year Ended December 31, 2020 2019 2018 Property and equipment acquired under finance leases $ 2,973 $ 3,008 $ 9,966 Property and equipment in payables 197 1,052 1,312 Cash paid for interest and income taxes was as follows: Year Ended December 31, 2020 2019 2018 Cash paid for interest $ 959 $ 1,187 $ 3,583 Cash paid for income taxes, net 1,600 5,301 7,613 In conjunction with our IPO, we issued and contributed shares of Class B common stock to owners of CW Units equal to the number of outstanding CW Units held by the owners thereof. The Class B common stock has no economic interest and does not share in cash dividends or liquidation rights. During the years ended December 31, 2020 and 2019, we issued 0.3 million and 9.3 million shares of Class A common stock, respectively, pursuant to redemptions of CW Units by holders thereof. 54 Table of Contents Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None.