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 33 Report of Independent Registered Public Accounting Firm (PCAOB ID 238 ) 34 Consolidated Balance Sheets as of December 31, 2022 and 2021 36 Consolidated Statements of Income for the Years Ended December 31, 2022, 2021 and 2020 37 Consolidated Statements of Comprehensive Income for the Years Ended December 31, 2022, 2021 and 2020 38 Consolidated Statements of Stockholders’ Equity for the Years Ended December 31, 2022, 2021 and 2020 39 Consolidated Statements of Cash Flows for the Years Ended December 31, 2022, 2021 and 2020 40 Notes to the Consolidated Financial Statements 41 32 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, 2022, 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, 2022, which appears herein. /s/ Scott Bender /s/ Stephen Tadlock President, Chief Executive Officer and Director Vice President, Chief Financial Officer and Treasurer Houston, Texas March 1, 2023 33 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, 2022 and 2021, and the related consolidated statements of income, of comprehensive income, of stockholders’ equity and of cash flows for each of the three years in the period ended December 31, 2022, 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, 2022, 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, 2022 and 2021, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2022 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, 2022, 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. 34 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 $292.6 million as of December 31, 2022. 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 March 1, 2023 We have served as the Company’s auditor since 2015, which includes periods before the Company became subject to SEC reporting requirements. 35 Table of Contents CACTUS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS December 31, 2022 2021 (in thousands, except per share data) Assets Current assets Cash and cash equivalents $ 344,527 $ 301,669 Accounts receivable, net of allowance of $ 1,060 and $ 741 , respectively 138,268 89,205 Inventories 161,283 119,817 Prepaid expenses and other current assets 10,564 7,794 Total current assets 654,642 518,485 Property and equipment, net 129,998 129,117 Operating lease right-of-use assets, net 23,183 22,538 Goodwill 7,824 7,824 Deferred tax asset, net 301,644 303,074 Other noncurrent assets 1,605 1,040 Total assets $ 1,118,896 $ 982,078 Liabilities and Equity Current liabilities Accounts payable $ 47,776 $ 42,818 Accrued expenses and other current liabilities 30,619 28,240 Current portion of liability related to tax receivable agreement 27,544 11,769 Finance lease obligations, current portion 5,933 4,867 Operating lease liabilities, current portion 4,777 4,880 Total current liabilities 116,649 92,574 Deferred tax liability, net 1,966 1,172 Liability related to tax receivable agreement, net of current portion 265,025 269,838 Finance lease obligations, net of current portion 6,436 5,811 Operating lease liabilities, net of current portion 18,375 17,650 Total liabilities 408,451 387,045 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, 60,903 and 59,035 shares issued and outstanding 609 590 Class B common stock, $ 0.01 par value, 215,000 shares authorized, 14,978 and 16,674 shares issued and outstanding — — Additional paid-in capital 310,528 289,600 Retained earnings 261,764 178,446 Accumulated other comprehensive income (loss) ( 984 ) 8 Total stockholders’ equity attributable to Cactus Inc. 571,917 468,644 Non-controlling interest 138,528 126,389 Total stockholders’ equity 710,445 595,033 Total liabilities and equity $ 1,118,896 $ 982,078 The accompanying notes are an integral part of these consolidated financial statements. 36 Table of Contents CACTUS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME Year Ended December 31, 2022 2021 2020 (in thousands, except per share data) Revenues Product revenue $ 452,615 $ 280,907 $ 206,801 Rental revenue 100,453 61,629 66,169 Field service and other revenue 135,301 96,053 75,596 Total revenues 688,369 438,589 348,566 Costs and expenses Cost of product revenue 277,871 189,083 131,728 Cost of rental revenue 62,037 54,377 49,077 Cost of field service and other revenue 106,013 73,681 56,143 Selling, general and administrative expenses 67,700 46,021 39,715 Severance expenses — — 1,864 Total costs and expenses 513,621 363,162 278,527 Income from operations 174,748 75,427 70,039 Interest income (expense), net 3,714 ( 774 ) 701 Other income (expense), net ( 1,910 ) 492 ( 555 ) Income before income taxes 176,552 75,145 70,185 Income tax expense 31,430 7,675 10,970 Net income $ 145,122 $ 67,470 $ 59,215 Less: net income attributable to non-controlling interest 34,948 17,877 24,769 Net income attributable to Cactus Inc. $ 110,174 $ 49,593 $ 34,446 Earnings per Class A share - basic $ 1.83 $ 0.90 $ 0.73 Earnings per Class A share - diluted $ 1.80 $ 0.83 $ 0.72 Weighted average Class A shares outstanding - basic 60,323 55,398 47,457 Weighted average Class A shares outstanding - diluted 76,337 76,107 75,495 The accompanying notes are an integral part of these consolidated financial statements. 37 Table of Contents CACTUS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME Year Ended December 31, 2022 2021 2020 (in thousands) Net income $ 145,122 $ 67,470 $ 59,215 Foreign currency translation adjustments ( 1,308 ) ( 567 ) 1,375 Comprehensive income 143,814 66,903 60,590 Less: comprehensive income attributable to non-controlling interest 34,632 17,632 25,362 Comprehensive income attributable to Cactus Inc. $ 109,182 $ 49,271 $ 35,228 The accompanying notes are an integral part of these consolidated financial statements. 38 Table of Contents CACTUS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY Class A Common Stock Class B Common Stock Additional Paid-In Capital Retained Earnings Accumulated Other Comprehensive Income (Loss) Non-controlling Interest Total Equity (in thousands) Shares Amount Shares Amount 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 Member distributions — — — — — — — ( 9,742 ) ( 9,742 ) Effect of CW Unit redemptions 10,981 110 ( 10,981 ) — 79,276 — — ( 79,386 ) — Tax impact of equity transactions — — — — 2,998 — — — 2,998 Equity award vestings 341 3 — — ( 1,141 ) — — ( 2,145 ) ( 3,283 ) Other comprehensive loss — — — — — — ( 322 ) ( 245 ) ( 567 ) Stock-based compensation — — — — 6,390 — — 2,230 8,620 Cash dividends declared ($ 0.38 per share) — — — ( 21,233 ) — — ( 21,233 ) Net income — — — — — 49,593 — 17,877 67,470 Balance at December 31, 2021 59,035 $ 590 16,674 $ — $ 289,600 $ 178,446 $ 8 $ 126,389 $ 595,033 Member distributions — — — — — — — ( 9,692 ) ( 9,692 ) Effect of CW Unit redemptions 1,696 17 ( 1,696 ) — 13,690 — — ( 13,707 ) — Tax impact of equity transactions — — — — 2,076 — — — 2,076 Equity award vestings 172 2 — — ( 3,306 ) — — ( 1,257 ) ( 4,561 ) Other comprehensive loss — — — — — — ( 992 ) ( 316 ) ( 1,308 ) Stock-based compensation — — — — 8,468 — — 2,163 10,631 Cash dividends declared ($ 0.44 per share) — — — ( 26,856 ) — — ( 26,856 ) Net income — — — — — 110,174 — 34,948 145,122 Balance at December 31, 2022 60,903 $ 609 14,978 $ — $ 310,528 $ 261,764 $ ( 984 ) $ 138,528 $ 710,445 The accompanying notes are an integral part of these consolidated financial statements. 39 Table of Contents CACTUS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS Year Ended December 31, 2022 2021 2020 (in thousands) Cash flows from operating activities Net income $ 145,122 $ 67,470 $ 59,215 Reconciliation of net income to net cash provided by operating activities: Depreciation and amortization 34,124 36,308 40,520 Deferred financing cost amortization 165 168 168 Stock-based compensation 10,631 8,620 8,599 Provision for expected credit losses 406 310 342 Inventory obsolescence 2,739 3,490 4,840 Gain on disposal of assets ( 1,391 ) ( 1,386 ) ( 2,480 ) Deferred income taxes 25,299 4,829 6,948 (Gain) loss from revaluation of liability related to tax receivable agreement 1,910 ( 898 ) 555 Changes in operating assets and liabilities: Accounts receivable ( 49,349 ) ( 45,492 ) 44,829 Inventories ( 44,891 ) ( 36,083 ) 18,201 Prepaid expenses and other assets ( 3,108 ) ( 2,789 ) 6,177 Accounts payable 5,803 22,281 ( 19,434 ) Accrued expenses and other liabilities 2,090 16,628 ( 10,893 ) Payments pursuant to tax receivable agreement ( 11,666 ) ( 9,697 ) ( 14,207 ) Net cash provided by operating activities 117,884 63,759 143,380 Cash flows from investing activities Capital expenditures and other ( 28,291 ) ( 13,939 ) ( 24,493 ) Proceeds from sale of assets 2,755 2,306 6,346 Net cash used in investing activities ( 25,536 ) ( 11,633 ) ( 18,147 ) Cash flows from financing activities Payment of deferred financing costs ( 353 ) — — Payments on finance leases ( 6,055 ) ( 5,205 ) ( 5,317 ) Dividends paid to Class A common stock shareholders ( 26,719 ) ( 21,158 ) ( 17,140 ) Distributions to members ( 9,692 ) ( 9,742 ) ( 16,304 ) Repurchases of shares ( 4,563 ) ( 3,283 ) ( 1,445 ) Net cash used in financing activities ( 47,382 ) ( 39,388 ) ( 40,206 ) Effect of exchange rate changes on cash and cash equivalents ( 2,108 ) 272 1,029 Net increase in cash and cash equivalents 42,858 13,010 86,056 Cash and cash equivalents Beginning of period 301,669 288,659 202,603 End of period $ 344,527 $ 301,669 $ 288,659 The accompanying notes are an integral part of these consolidated financial statements. 40 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, offer repair and refurbishment services and provide field 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, Wyoming and Utah as well as in Eastern Australia. We also provide rental and service operations in the Kingdom of Saudi Arabia. Our manufacturing and production facilities are located in Bossier City, Louisiana and Suzhou, China and our corporate headquarters are located in Houston, Texas. 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 and is responsible for all operational, management and administrative decisions relating to Cactus LLC’s business. Pursuant to the Second Amended and Restated Limited Liability Company Operating Agreement of Cactus LLC (the “Cactus Wellhead LLC Agreement”), owners of CW Units are entitled to redeem their CW Units for shares of Cactus Inc.’s Class A common stock, par value $ 0.01 per share (“Class A common stock”) on a one-for-one basis, which results in a corresponding increase in Cactus Inc.’s membership interest in Cactus LLC and an increase in the number of shares of Class A common stock outstanding. We refer to the owners of CW Units, other than Cactus Inc. (along with their permitted transferees), as “CW Unit Holders.” CW Unit Holders own one share of our Class B common stock, par value $ 0.01 per share (“Class B common stock”) for each CW Unit such CW Unit Holder owns. 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). On February 28, 2023, we completed the acquisition of FlexSteel Holdings, LLC (“FlexSteel”), a leading manufacturer and provider of differentiated onshore spoolable pipe technologies and associated installation services. The historical consolidated financial statements and related notes included herein do not reflect the acquisition as it was completed subsequent to December 31, 2022. The post-acquisition results of operations of FlexSteel will first be included in our consolidated results for the period ending March 31, 2023. See further discussion of the acquisition in Note 15. “Subsequent Events”. 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. 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. 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. 41 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, China and the Kingdom of Saudi Arabia. Our operations outside of the United States represented less than 10% of our consolidated operations for all periods presented in these consolidated financial statements. 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 oil and natural gas exploration and production (“E&P”) companies representing private operators, publicly-traded independents, majors and other companies with operations in the key U.S. oil and gas producing basins as well as Australia and the Kingdom of Saudi Arabia. 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, 2022, we had no customers representing more than 10% of total revenues. For the year ended December 31, 2021, one customer represented approximately 12 % of total revenues. No customer represented 10% or more of total revenues for the year ended December 31, 2020. Significant Vendors The principal raw materials used in the manufacture of our products and rental equipment include forgings, castings, tube and bar stock. In addition, we require accessory items (such as elastomers, ring gaskets, studs and nuts) and machined components and assemblies. We purchase a majority of these items from vendors primarily located in the United States, China, India and Australia. For each of the three years ended December 31, 2022, no vendor represented more than 10% of our total third-party vendor purchases of raw materials, finished products, equipment, machining and other services. 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, 2022, 2021 and 2020, we recognized a $ 1.9 million loss, a $ 0.9 million gain and a $ 0.6 million loss 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 or in the case of frac equipment rentals, for a fixed charge per day while the equipment is in use by the customer. Product sales generally do not include right of return or other significant post-delivery obligations. A contract’s transaction price is allocated to each distinct performance obligation and recognized as revenue when, or as, the performance obligation is satisfied. Revenues are recognized when we satisfy a performance obligation by transferring control of the promised goods or providing services to our customers at a point in time, in an amount specified in the contract with our customer and that reflects the consideration to which we expect to be entitled in exchange for those goods or services. The majority of our contracts with customers contain a single performance obligation to provide agreed upon products or services. For contracts with multiple performance obligations, we allocate revenue to each performance obligation based on its relative standalone selling price. We do not assess whether promised goods or services are performance obligations if they are immaterial in the context of the contract with the customer. We do not incur any material costs of obtaining contracts. We do not adjust the amount of consideration per the contract for the effects of a significant financing component when we expect, at contract inception, that the period between the transfer of a promised good or service to a customer and when the customer pays for that good or service will be one year or less, which is in substantially all cases. Payment terms and conditions vary, although terms generally include a requirement of payment within 30 to 45 days. Revenues are recognized net of any taxes collected from customers, which are subsequently remitted to governmental authorities. We treat shipping and 42 Table of Contents 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, typically through an agreed upon rate for each rental job. 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 We utilize 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, 2022 and 2021, the fair value of our forward contracts were immaterial. 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. Beginning with our 2021 grants, the grant date fair value is determined by the closing price of our Class A common stock on the grant date. Prior to 2021, the grant date fair value was 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 43 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 China, Australia and Saudi Arabia 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 E&P 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 have not yet been submitted to the customers. Total unbilled revenue included in accounts receivable as of December 31, 2022 and 2021 was $ 34.9 million and $ 24.1 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 Translation Adjustments Balance at End of Period Year Ended December 31, 2022 $ 741 $ 406 $ ( 86 ) $ ( 1 ) $ 1,060 Year Ended December 31, 2021 598 310 ( 167 ) — 741 Year Ended December 31, 2020 837 342 ( 581 ) — 598 Inventories Inventories are stated at the lower of cost or net realizable value. Cost is determined using standard cost (which approximates average cost). Costs include an application of related material, direct labor, duties, tariffs, freight and overhead costs. Net realizable value is the estimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal and transportation. Reserves are made for excess and obsolete items based on a range of factors, including age, usage and technological or market changes that may impact demand for those products. The inventory obsolescence reserve was $ 20.5 million and $ 18.0 million as of December 31, 2022 and 2021, respectively. The following is a rollforward of our inventory obsolescence reserve: Balance at Beginning of Period Expense Write off Translation Adjustments Balance at End of Period Year Ended December 31, 2022 $ 18,012 $ 2,739 $ ( 202 ) $ ( 61 ) $ 20,488 Year Ended December 31, 2021 14,637 3,490 ( 62 ) ( 53 ) 18,012 Year Ended December 31, 2020 9,772 4,840 ( 53 ) 78 14,637 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 44 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 and improvements 5 - 30 years Machinery and equipment 2 - 12 years Vehicles under finance lease 3 years Rental equipment 2 - 11 years Furniture and fixtures 5 years Computers and software 2 - 4 years Property and equipment as of December 31, 2022 and 2021 consists of the following: December 31, 2022 2021 Land $ 5,302 $ 3,203 Buildings and improvements 25,480 22,532 Machinery and equipment 57,883 56,937 Vehicles under finance lease 29,045 23,450 Rental equipment 194,088 180,704 Furniture and fixtures 1,759 1,755 Computers and software 3,068 3,495 Gross property and equipment 316,625 292,076 Less: Accumulated depreciation ( 200,573 ) ( 175,992 ) Net property and equipment 116,052 116,084 Construction in progress 13,946 13,033 Total property and equipment, net $ 129,998 $ 129,117 Depreciation and amortization was $ 34.1 million, $ 36.3 million and $ 40.5 million for 2022, 2021 and 2020, respectively. Depreciation and amortization expense is included in the consolidated statements of income as follows: Year Ended December 31, 2022 2021 2020 Cost of product revenue $ 3,022 $ 3,176 $ 3,506 Cost of rental revenue 23,663 25,812 28,063 Cost of field service and other revenue 6,986 6,863 8,075 Selling, general and administrative expenses 453 457 876 Total depreciation and amortization $ 34,124 $ 36,308 $ 40,520 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. We concluded there were no indicators evident or other circumstances present that these assets were not recoverable and accordingly, no impairment charges of long‑lived assets were recognized for 2022 and 2021. 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. 45 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. Based on our annual impairment analysis using qualitative assessments, we concluded that there was no impairment of goodwill in 2022 and 2021. 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 had not materially changed; therefore, we concluded that our goodwill was no t impaired at each subsequent interim period of 2020 and as of December 31, 2020. Accrued Expenses and Other Current Liabilities Accrued expenses and other current liabilities as of December 31, 2022 and 2021 are as follows: December 31, 2022 2021 Payroll, incentive compensation, payroll taxes and benefits $ 9,484 $ 7,030 Accrued professional fees and other 7,347 1,078 Accrued international freight and tariffs 5,887 14,794 Taxes other than income 2,728 1,641 Income based tax payable 2,537 1,182 Deferred revenue 1,450 1,764 Accrued workers’ compensation insurance 576 269 Accrued dividends 484 346 Product warranties 126 136 Total accrued expenses and other current liabilities $ 30,619 $ 28,240 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 through 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 $ 1.4 million and $ 1.1 million as of December 31, 2022 and 2021, respectively. 46 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, 2022 or 2021. 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. We match 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 and we may also make additional non‑elective employer contributions at our discretion under the plan. Due to the difficult economic environment at that time, the 401(k) match was temporarily suspended in the U.S. in June 2020 and reinstated in August 2021. During 2022, 2021 and 2020, employer matching contributions totaled $ 4.2 million, $ 1.2 million and $ 1.6 million, respectively. 3. Inventories Inventories consist of the following: December 31, 2022 2021 Raw materials $ 3,150 $ 1,870 Work-in-progress 5,444 4,288 Finished goods 152,689 113,659 Total inventories $ 161,283 $ 119,817 4. Debt We had no debt outstanding as of December 31, 2022 and 2021. We had $ 0.1 million in letters of credit outstanding and were in compliance with all covenants under the ABL Credit Facility (as defined below) as of December 31, 2022. In August 2018, Cactus LLC entered into a five-year senior secured asset-based revolving credit facility with a syndicate of lenders and JPMorgan Chase Bank, N.A., as administrative agent for such lenders and as an issuing bank and swingline lender (the “ABL Credit Facility”). The ABL Credit Facility was first amended in September 2020 and provided for $ 75.0 million in revolving commitments. On July 25, 2022, the ABL Credit Facility was amended again for up to $ 80.0 million in revolving commitments, up to $ 15.0 million of which is available for the issuance of letters of credit. Subject to certain terms and conditions set forth in the ABL Credit Facility, Cactus LLC may request additional revolving commitments in an amount not to exceed $ 50.0 million, for a total of up to $ 130.0 million in revolving commitments. The ABL Credit Facility matures on July 25, 2027, or such earlier date that is 91 days prior to the maturity date of any indebtedness that has a principal balance exceeding $ 30.0 million. 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. 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 Term SOFR Rate (as defined therein) (“Term Benchmark”), 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 47 Table of Contents for Term Benchmark borrowings. The applicable margin ranges from 0.0 % to 0.5 % per annum for ABR borrowings and 1.25 % to 1.75 % per annum for Term Benchmark 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 of 0.25 % per annum. 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 obligations under the ABL Credit Facility are guaranteed by certain subsidiaries of Cactus LLC and secured by a security interest in the accounts receivable, inventory and certain other personal property assets of Cactus LLC and the guarantors. 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, 2022, although there were no borrowings outstanding, the applicable margin on our Term Benchmark borrowings was 1.25 %, plus the base rate of one, three or six month SOFR plus 0.10 %, subject to a floor rate. At December 31, 2021, the applicable margin was 1.50 % plus an adjusted base rate of one or three month LIBOR. On February 28, 2023, in connection with the acquisition of FlexSteel, the ABL Credit Facility was amended and restated in its entirety (the “Amended ABL Credit Facility”). The Amended ABL Credit Facility provides for a term loan of $ 125.0 million and up to $ 225.0 million in revolving commitments. The term loan under the Amended ABL Credit Facility matures on February 27, 2026 and any revolving loans under the Amended ABL Credit Facility mature on July 26, 2027. See further discussion of the Amended ABL Credit Facility in Note 15. Interest (Income) Expense, net Interest (income) expense, net, including deferred financing cost amortization, was comprised of the following: Year Ended December 31, 2022 2021 2020 Interest under bank facilities $ 268 $ 313 $ 317 Deferred financing cost amortization 165 168 168 Finance lease interest 628 520 639 Other 167 126 3 Interest income ( 4,942 ) ( 353 ) ( 1,828 ) Interest (income) expense, net $ ( 3,714 ) $ 774 $ ( 701 ) 5. Income Taxes Domestic and foreign components of income before income taxes were as follows: Year Ended December 31, 2022 2021 2020 Domestic $ 155,380 $ 64,139 $ 61,028 Foreign 21,172 11,006 9,157 Income before income taxes $ 176,552 $ 75,145 $ 70,185 48 Table of Contents The provision for income taxes consisted of: Year Ended December 31, 2022 2021 2020 Current: Federal $ — $ — $ ( 786 ) State 1,231 348 597 Foreign 4,900 2,497 4,211 Total current income taxes 6,131 2,845 4,022 Deferred: Federal 23,945 2,658 8,040 State 514 1,516 ( 253 ) Foreign 840 656 ( 839 ) Total deferred income taxes 25,299 4,830 6,948 Total provision for income taxes $ 31,430 $ 7,675 $ 10,970 The effective income tax rate was different from the statutory U.S. federal income tax rate due to the following: Year Ended December 31, 2022 2021 2020 Income taxes at 21% statutory tax rate $ 37,076 $ 15,780 $ 14,739 Net difference resulting from: Profit of non-controlling interest not subject to U.S. federal tax ( 7,339 ) ( 3,754 ) ( 5,508 ) Foreign income taxes (net of foreign tax credit) 2,104 2,423 269 State income taxes (excluding rate change) 2,910 1,348 883 Impact of change in forecasted state income tax rate ( 1,739 ) 1,347 ( 1,216 ) Foreign withholding taxes 1,225 730 462 Change in valuation allowance ( 1,381 ) ( 8,977 ) 2,840 Adjustments of prior year taxes ( 120 ) 79 ( 1,663 ) Stock compensation ( 1,743 ) ( 1,096 ) ( 34 ) Other 437 ( 205 ) 198 Total provision for income taxes $ 31,430 $ 7,675 $ 10,970 Our effective tax rate was 17.8 %, 10.2 % and 15.6 % for the years ended December 31, 2022, 2021 and 2020, respectively. Our effective tax rate is typically lower than the federal statutory rate of 21% 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. 49 Table of Contents The components of deferred tax assets and liabilities are as follows: December 31, 2022 2021 Investment in Cactus LLC $ 299,253 $ 292,956 Imputed interest 12,982 12,297 Tax credits 6,158 3,713 Net operating loss carryforwards 855 11,198 Other — 152 Deferred tax assets 319,248 320,316 Valuation allowance ( 17,604 ) ( 17,242 ) Deferred tax asset, net 301,644 303,074 Foreign withholding taxes 1,323 854 Other 643 318 Deferred tax liability, net $ 1,966 $ 1,172 As of December 31, 2022, our liability related to the TRA was $ 292.6 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 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, 2022, as a result of redemptions of CW Units, we released $ 1.4 million of our valuation allowance and recorded a tax benefit of $ 1.4 million related to the realizable portion of the deferred tax asset. As of December 31, 2022, we have a valuation allowance of $ 12.2 million against the $ 299.3 million deferred tax asset. During the year ended December 31, 2021, as a result of redemptions of CW Units, we released $ 9.0 million of our valuation allowance and recorded a tax benefit of $ 9.0 million related to the realizable portion of the deferred tax asset. As of December 31, 2021, we had a valuation allowance of $ 13.5 million against the $ 293.0 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, 2022, we have a valuation allowance of $ 5.4 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, 2022, we have deferred tax assets on U.S. federal and state net operating loss (“NOL”) carryforwards of approximately $ 0.8 million and $ 0.1 million, respectively, which can be used to offset U.S. federal and state taxes payable in future years. The U.S. federal NOL carryforwards have no expiration date whereas the U.S. state NOL carryforwards generally will expire in periods beginning in 2040. As of December 31, 2022 and 2021, 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 50 Table of Contents 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. We recorded $ 10.6 million of stock-based compensation expense during the year ended December 31, 2022 and $ 8.6 million during each of the years ended December 31, 2021 and 2020. Stock-based compensation expense is primarily recorded in selling, general and administrative expenses. We recognized $ 1.7 million, $ 1.1 million and $ 34 thousand in tax benefits for tax deductions from the vesting of stock-based awards benefits during the years ended December 31, 2022, 2021 and 2020, respectively. As of December 31, 2022, 1.1 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, 2022 (RSUs in thousands): No. of RSUs Weighted Average Grant Date Fair Value ($) Nonvested as of December 31, 2021 476 $ 24.29 Granted 151 55.06 Vested ( 253 ) 25.37 Forfeited ( 24 ) 31.75 Nonvested as of December 31, 2022 350 $ 36.27 There was approximately $ 7.9 million of unrecognized compensation expense relating to the unvested RSUs as of December 31, 2022. The unrecognized compensation expense will be recognized over the weighted average remaining vesting period of 1.9 years. Performance Stock Units Performance stock units (“PSUs”) are granted to our executive officers. Under these awards, the number of shares vested and earned is currently determined at the end of a three-year performance period based on our Return on Capital Employed (“ROCE”). 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 the performance period conditioned upon continued service and on our achievement of certain predefined targets as defined in the underlying performance stock unit agreements. PSUs cliff vest upon conclusion of the three-year performance period. As the ROCE target represents a performance condition, we recognize compensation expense for the performance share units on a straight-line basis over three years based on the probable outcome of the ROCE performance. In 2020, we granted PSU awards that contained a two-year and a three-year performance period. Our ROCE performance over the two-year period did not meet the minimum requirements for vesting; therefore, the portions of the awards related to the two-year performance period were forfeited as of December 31, 2021. As of December 31, 2020, we had not recognized compensation expense related to any of 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. In 2021, we recorded a cumulative catch-up of compensation expense for the portions of the awards related to the three-year performance period as it was probable that the minimum ROCE performance level would be achieved. Based on actual ROCE performance from 2020 through 2022, these PSUs vested at 80 % of target; therefore, a portion of the awards related to the three-year performance period were forfeited as of December 31, 2022. 51 Table of Contents The following table summarizes our PSU activity during the year ended December 31, 2022 (PSUs in thousands at their target number of shares which assumes achievement of 100 % of target): No. of PSUs Weighted Average Grant Date Fair Value ($) Nonvested as of December 31, 2021 198 $ 20.80 Granted 68 55.02 Vested ( 96 ) 13.66 Forfeited ( 42 ) 23.26 Nonvested as of December 31, 2022 128 $ 43.63 As of December 31, 2022, there was approximately $ 3.0 million of unrecognized compensation expense relating to the unvested PSUs (based on the grant date fair value of the awards at 100 % of target) which is expected to be recognized over a weighted average period of 1.8 years. 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, the Kingdom of Saudi Arabia and other international markets. For the year ended December 31, 2022, we derived 66 % of our total revenues from the sale of our products, 14 % of our total revenues from rental and 20 % of our total revenues from field service and other. This compares to 64 % of our total revenues from the sale of our products, 14 % of our total revenues from rental and 22 % of our total revenues from field service and other for the year ended December 31, 2021. In 2020, we derived 59 % of our total revenues from the sale of our products, 19 % from rental and 22 % from field service and other. The following table presents our revenues disaggregated by category: Year Ended December 31, 2022 2021 2020 Product revenue $ 452,615 $ 280,907 $ 206,801 Rental revenue 100,453 61,629 66,169 Field service and other revenue 135,301 96,053 75,596 Total revenue $ 688,369 $ 438,589 $ 348,566 At December 31, 2022, we had a deferred revenue balance of $ 1.5 million compared to the December 31, 2021 balance of $ 1.8 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, 2022, 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. 52 Table of Contents The following are the components of operating and finance lease costs: Year Ended December 31, 2022 2021 Finance lease cost: Amortization of right-of-use assets $ 5,516 $ 4,906 Interest expense 628 520 Operating lease cost 6,564 6,638 Short-term lease cost 1,515 1,894 Sublease income ( 353 ) ( 265 ) Total lease cost $ 13,870 $ 13,693 The following is supplemental cash flow information for our operating and finance leases: Year Ended December 31, 2022 2021 Cash paid for amounts included in the measurement of lease liabilities: Operating cash flows from finance leases $ 628 $ 520 Operating cash flows from operating leases 6,524 5,398 Financing cash flows from finance leases 6,055 5,205 Total $ 13,207 $ 11,123 Right-of-use assets obtained in exchange for new lease obligations: Operating leases $ 6,565 $ 5,342 Finance leases 7,941 9,941 Total $ 14,506 $ 15,283 The following is the aggregate future lease payments for operating and finance leases as of December 31, 2022: Operating Finance 2023 $ 5,431 $ 6,442 2024 4,420 4,963 2025 3,458 2,117 2026 2,711 111 2027 2,640 — Thereafter 7,410 — Total undiscounted lease payments 26,070 13,633 Less: effects of discounting ( 2,918 ) ( 1,264 ) Present value of lease payments $ 23,152 $ 12,369 The following represents the average lease terms and discount rates for our operating and finance leases: Year Ended December 31, 2022 2021 Weighted average remaining lease term: Finance leases 2.0 years 2.1 years Operating leases 6.5 years 5.8 years Weighted average discount rate Finance leases 11.97 % 8.58 % Operating leases 2.96 % 3.01 % 53 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 (each as defined below), (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 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 resulting iterative impact. The blended tax rate consists of the U.S. federal income tax rate and an assumed combined state and local income tax rate driven by the apportionment factors applicable to each state. As of December 31, 2022, the total liability from the TRA was $ 292.6 million with $ 27.5 million reflected in current liabilities based on the expected timing of our next payment. The payments under the TRA will not be conditional on a holder of rights under the TRA having a continued ownership interest in either Cactus 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 relating to Cactus LLC, 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 As of December 31, 2022, Cactus Inc. owned 80.3 % of Cactus LLC, as compared to 78.0 % as of December 31, 2021. As of December 31, 2022, Cactus Inc. had outstanding 60.9 million shares of Class A common stock (representing 80.3 % of the total voting power) and 15.0 million shares of Class B common stock (representing 19.7 % of the total voting power). Redemptions of CW Units Pursuant to the Cactus Wellhead LLC Agreement, each holder of CW Units had, 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. 54 Table of Contents 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 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, 45.6 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 CW Unit Holders for the three years ended December 31, 2022: CW Units (in thousands) CW Units held by legacy CW Unit Holders as of December 31, 2019 27,958 CW Unit redemptions ( 303 ) CW Units held by legacy CW Unit Holders as of December 31, 2020 27,655 March 2021 Secondary Offering ( 6,273 ) Cadent redemption in June 2021 ( 3,292 ) Cadent redemption in September 2021 ( 715 ) Other CW Unit redemptions ( 701 ) CW Units held by legacy CW Unit Holders as of December 31, 2021 16,674 CW Unit redemptions ( 1,696 ) CW Units held by legacy CW Unit Holders as of December 31, 2022 14,978 Outside of the redemptions associated with the 2021 Secondary Offering (as defined below) and the 2021 redemptions by Cadent (as defined below) and its affiliates, certain legacy CW Unit Holders redeemed 1.7 million, 0.7 million and 0.3 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, 2022, 2021 and 2020, respectively. 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 1.7 million, 0.7 million and 0.3 million shares of Class A common stock to the redeeming CW Unit Holders during the same respective time periods. Pursuant to the TRA, as described in Note 9, CW Unit redemptions create additional TRA liability. As a result of all of the CW Unit redemptions during the years ended December 31, 2022, 2021 and 2020, Cactus Inc. increased its ownership in Cactus LLC and accordingly, increased its equity by approximately $ 13.7 million, $ 79.4 million and $ 2.2 million, respectively, resulting from a reduction in the non-controlling interest. On March 9, 2021, Cactus Inc. entered into an underwriting agreement with Cactus LLC, certain selling stockholders of Cactus (the “Selling Stockholders”) and the underwriters named therein, providing for the offer and sale by the Selling Stockholders (the “2021 Secondary Offering”) of up to 6,325,000 shares of Class A common stock at a price to the underwriters of $ 30.555 per share. On March 12, 2021, in connection with the 2021 Secondary Offering, certain of the Selling Stockholders exercised their right to redeem 6,272,500 CW Units, together with a corresponding number of shares of Class B common stock, as provided in the Cactus Wellhead LLC Agreement. Upon the closing of the 2021 Secondary Offering, 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 6,272,500 new shares of Class A common stock to the underwriters at the direction of the redeeming Selling Stockholders, as provided in the Cactus Wellhead LLC Agreement. In addition, certain other Selling Stockholders sold 52,500 shares of Class A common stock in the 2021 Secondary Offering, which shares were owned by them directly as of the time of the 2021 Secondary Offering. Cactus did not receive any of the proceeds from the sale of common stock in the 2021 Secondary Offering and incurred $ 0.4 million in expenses which were recorded in other expense, net, in the consolidated statements of income. There was no change in the combined number of Cactus Inc. voting shares outstanding as a result of the 2021 Secondary Offering. On June 17, 2021, Cadent Energy Partners II, L.P. (“Cadent”) transferred ownership of 944,093 CW Units, together with a corresponding number of shares of Class B common stock, to its general partner, Cadent Energy Partners II - GP, L.P., (“Cadent GP”), and its manager, Cadent Management Services, LLC (“Cadent Management”). Cadent then redeemed its remaining 3.3 million CW Units, together with a corresponding number of shares of Class B common stock, as provided in the Cactus Wellhead LLC Agreement. The redeemed CW Units (and the corresponding shares of Class B common stock) were 55 Table of Contents canceled and Cactus Inc. issued 3.3 million new shares of Class A common stock to Cadent, which then distributed such shares to its limited partners. Cactus received no proceeds from these events, and there was no change in the combined number of Cactus Inc. voting shares outstanding. On September 13, 2021, Cadent GP and Cadent Management transferred their aggregate ownership of 228,878 CW Units, together with a corresponding number of shares of Class B common stock, to their respective owners, which included certain Cactus Inc. board members and executive management. The transfers were made at the discretion of Cadent GP and Cadent Management without the consent of the transferees. Additionally, Cadent GP and Cadent Management redeemed their remaining 715,215 CW Units held, together with a corresponding number of shares of Class B common stock, thus liquidating its ownership in Cactus Wellhead, LLC. These transactions were in accordance with the Cactus Wellhead LLC Agreement. The redeemed CW Units (and the corresponding shares of Class B common stock) were canceled and Cactus Inc. issued 715,215 new shares of Class A common stock. Cactus received no proceeds from these events, and there was no change in the combined number of Cactus Inc. voting shares outstanding. Dividends Aggregate cash dividends of $ 0.44 , $ 0.38 and $ 0.36 per share of Class A common stock declared during the years ended December 31, 2022, 2021 and 2020 totaled $ 26.9 million, $ 21.2 million and $ 17.4 million, respectively. Cash dividends paid during the years ended December 31, 2022, 2021 and 2020 totaled $ 26.7 million, $ 21.2 million and $ 17.1 million, respectively. Dividends accrue on unvested stock-based awards on the date of record and are paid upon vesting. 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 Unit Holders 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. Effective January 1, 2022, we pay a base hourly rent of $ 2,500 per flight hour of use (increased from $ 1,750 per flight hour) of the aircraft, payable monthly, for the hours of aircraft operation. During each of the years ended December 31, 2022 and 2021, expense recognized in connection with these rentals totaled $ 0.2 million as compared to $ 0.1 million during the year ended December 31, 2020. As of December 31, 2022 and 2021, 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. Our Chief Executive Officer and Chief Operating Officer reimburse the Company up to $ 2,350 per day for their personal use of the pilots employed by the Company, depending on how many company pilots are utilized for the day. 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, 2022 was $ 292.6 million. We pay professional fees to assist with maintenance of the TRA and composite tax payments in advance of the state tax return filings which are reimbursable from the TRA Holders. As of December 31, 2022 and 2021, amounts due from the TRA Holders for fees and estimated state tax payments made on their behalf totaled $ 0.1 million and $ 0.2 million, respectively. 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. During the years ended December 31, 2022, 2021 and 2020, Cactus LLC distributed $ 38.6 million, $ 30.6 million and $ 27.8 million, respectively, to Cactus Inc. to fund its dividend, TRA liability and estimated tax payments. During the years ended December 31, 2022 and 2021, Cactus LLC made pro rata distributions to the other members totaling $ 9.7 million, respectively as compared to $ 16.3 million during the year ended December 31, 2020. 56 Table of Contents 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. 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), the treasury stock method to determine the potential dilutive effect of unvested restricted stock units assuming that the proceeds will be used to purchase shares of Class A common stock and the contingently issuable share method to determine the potential dilutive effect of unvested performance stock units. The following table summarizes the basic and diluted earnings per share calculations: Year Ended December 31, 2022 2021 2020 Numerator: Net income attributable to Cactus Inc.—basic $ 110,174 $ 49,593 $ 34,446 Net income attributable to non-controlling interest (1) 27,235 13,744 19,934 Net income attributable to Cactus Inc.—diluted (1) $ 137,409 $ 63,337 $ 54,380 Denominator: Weighted average Class A shares outstanding—basic 60,323 55,398 47,457 Effect of dilutive shares 16,014 20,709 28,038 Weighted average Class A shares outstanding—diluted 76,337 76,107 75,495 Earnings per Class A share—basic $ 1.83 $ 0.90 $ 0.73 Earnings per Class A share—diluted (1) $ 1.80 $ 0.83 $ 0.72 (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 25.0 %, 27.0 % and 24.0 % for the years ended December 31, 2022, 2021 and 2020, respectively. 14. Supplemental Cash Flow Information Non-cash investing and financing activities were as follows: Year Ended December 31, 2022 2021 2020 Right-of-use assets obtained in exchange for new lease obligations $ 14,506 $ 15,283 $ 4,302 Property and equipment in accounts payable 1,369 405 197 Cash paid for interest and income taxes was as follows: Year Ended December 31, 2022 2021 2020 Cash paid for interest $ 1,063 $ 959 $ 959 Cash paid for income taxes, net 5,502 4,542 1,600 During the years ended December 31, 2022, 2021 and 2020, we issued 1.7 million, 11.0 million and 0.3 million shares of Class A common stock, respectively, pursuant to redemptions of CW Units by holders thereof. 57 Table of Contents 15. Subsequent Events On December 30, 2022, Cactus Inc. and its newly-formed subsidiary, Atlas Merger Sub, LLC, entered into a definitive agreement (the “Merger Agreement”) to acquire HighRidge Resources, Inc. and its subsidiaries (“HighRidge”) on the terms and subject to the conditions set forth in the Merger Agreement (the “Merger”). The Merger Agreement provided Cactus with the opportunity to acquire FlexSteel, a wholly-owned subsidiary of HighRidge and a leading manufacturer and provider of differentiated onshore spoolable pipe technologies and associated installation services. On January 13, 2023, Cactus Inc. completed an underwritten offering of 3,224,300 shares of Class A common stock at a price to the underwriters of $ 51.36 per share for net proceeds of $ 165.6 million (net of $ 6.9 million of underwriting discounts and commissions). Following the offering, Cactus Inc. owned 81.1 % and CW Unit Holders owned 18.9 % of Cactus LLC, which was based on 64.1 million shares of Class A common stock issued and outstanding and 15.0 million shares of Class B common stock issued and outstanding. The Merger closed on February 28, 2023 whereby Atlas Merger Sub, LLC merged into HighRidge, with HighRidge being the surviving entity. HighRidge’s primary purpose was to own 100% of the equity in FlexSteel Holdings, Inc. Subsequent to the Merger, FlexSteel Holdings, Inc. was converted into a limited liability company, now named FlexSteel Holdings, LLC (previously defined as “FlexSteel”). Also subsequent to the Merger, Cactus Inc. contributed HighRidge to Cactus Acquisitions LLC, a newly created entity, whereby HighRidge was converted into a limited liability company. Finally, Cactus Acquisitions LLC contributed FlexSteel to Cactus Companies, LLC who acquired all of the outstanding units of Cactus LLC in exchange for an equal number CC Units (as defined below) prior to the Merger closing. We acquired FlexSteel on a cash-free, debt-free basis, for a purchase price of approximately $ 621.2 million, subject to certain working capital, debt and other customary adjustments set forth in the Merger Agreement. In addition to the upfront consideration, there is a potential future earn-out payment of up to $ 75 million to be paid no later than the third quarter of 2024, if certain revenue growth targets are met by FlexSteel. We funded the upfront purchase price using a combination of $ 165.6 million of net proceeds received from the public offering of shares of our Class A common stock completed on January 13, 2023, borrowings under the Amended ABL Credit Facility and available cash on hand at the time of closing. We believe this acquisition enhances Cactus’ position as a premier manufacturer and provider of highly engineered equipment to the E&P industry and expands our reach further downstream. We also believe FlexSteel’s products are highly complementary to Cactus’ equipment at the wellsite and provides meaningful growth potential for Cactus. The acquisition is being accounted for using the acquisition method of accounting, with Cactus being treated as the accounting acquirer. Under the acquisition method of accounting, the assets and liabilities will be recorded at their respective fair values as of the date of the completion of the Merger. The preliminary purchase price allocation is not complete as of the date of this report and will be an ongoing process for up to one year subsequent to the closing date of the transaction. Determining the fair value of the assets and liabilities of FlexSteel requires judgment and certain assumptions to be made. The Merger was structured as a tax-free reorganization for United States federal income tax purposes. In connection with the Merger, Cactus recognized approximately $ 8.4 million of transaction costs for the year ended December 31, 2022. These fees primarily related to legal, accounting and consulting fees and are included in selling, general and administrative expenses in the statements of income. As part of an internal reorganization (the “CC Reorganization”) in connection with the Merger, Cactus Companies, LLC (“Cactus Companies”) was formed and on February 27, 2023, Cactus Companies acquired all of the outstanding units of Cactus LLC in exchange for an equal number of units representing limited liability company interests in Cactus Companies (“CC Units”) issued to each of the previous owners of CW Units. Upon the completion of the CC Reorganization, CW Unit Holders ceased to be holders of CW Units and, instead, became holders of a number of CC Units equal to the number of CW Units such CW Unit Holders held immediately prior to the completion of the CC Reorganization. Following the completion of the CC Reorganization, CC Unit Holders own one share of our Class B Common Stock for each CC Unit such CC Unit Holder owns. Cactus Inc. is a holding company whose only material asset is an equity interest consisting of CC Units, following the completion of the CC Reorganization, and was CW Units from the IPO until the CC Reorganization. Cactus Inc. was the sole managing member of Cactus LLC upon completion of our IPO until the CC Reorganization and became the sole managing member of Cactus Companies upon completion of the CC Reorganization. In connection with the CC Reorganization, Cactus Inc. and the owners of CC Units entered into the Limited Liability Company Operating Agreement of Cactus Companies (the “Cactus Companies LLC Agreement”), which contains substantially the same terms and conditions as the Second Amended and Restated Limited Liability Company Operating Agreement of Cactus LLC (the “Cactus Wellhead LLC Agreement”), which was the limited liability company operating agreement of Cactus LLC prior to the CC Reorganization. Cactus Inc. was responsible for all operational, management and administrative decisions relating to Cactus LLC’s business for the period from completion of our IPO until the CC Reorganization and relating to Cactus Companies’ business for periods after the CC Reorganization. Pursuant to the Cactus Companies LLC Agreement, each holder 58 Table of Contents of CC Units has, subject to certain limitations, the right to cause Cactus Companies to acquire all or at least a minimum portion of its CC Units for, at Cactus Companies’ election, (x) shares of our Class A common stock at a redemption ratio of one share of Class A common stock for each CC Unit redeemed, subject to conversion rate adjustments for stock splits, stock dividends and reclassification and other similar transactions, or (y) an equivalent amount of cash. Alternatively, upon the exercise of such redemption right, Cactus Inc. (instead of Cactus Companies) has the right to acquire each tendered CC Unit directly from the exchanging CC Unit Holder for, at its election, (x) one share of Class A common stock, subject to conversion rate adjustments for stock splits, stock dividends and reclassifications and other similar transactions, or (y) an equivalent amount of cash. In connection with any redemption of CC Units pursuant to such redemption right or our alternative right to acquire each tendered CC Unit, the corresponding number of shares of Class B common stock would be canceled. On February 28, 2023, in connection with the Merger, Cactus Companies assumed the rights and obligations of Cactus LLC as Borrower under the ABL Credit Facility and the ABL Credit Facility was amended and restated in its entirety (the “Amended ABL Credit Facility”). The Amended ABL Credit Facility provides for a term loan of $ 125.0 million, the full amount of which was borrowed at closing of the Amended ABL Credit Facility to fund a portion of the Merger, and up to $ 225.0 million in revolving commitments, up to $ 20.0 million of which is available for the issuance of letters of credit. Subject to certain terms and conditions set forth in the Amended ABL Credit Facility, Cactus Companies LLC may request additional revolving commitments in an amount not to exceed $ 50.0 million, for a total of up to $ 275.0 million in revolving commitments. The term loan under the Amended ABL Credit Facility matures on February 27, 2026 and any revolving loans under the Amended ABL Credit Facility mature on July 26, 2027. The maximum amount that Cactus Companies may borrow under the Amended ABL Credit Facility is subject to a borrowing base, which is based on a percentage of eligible accounts receivable and eligible inventory, subject to reserves and other adjustments. Borrowings under the Amended ABL Credit Facility bear interest at Cactus Companies’ option at either the ABR rate or the Term Benchmark rate, plus, in each case, an applicable margin. Letters of credit issued under the Amended ABL Credit Facility accrue fees at a rate equal to the applicable margin for Term Benchmark borrowings. The applicable margin for term loan borrowings is 2.50 % per annum for term loan ABR borrowings and 3.50 % per annum for term loan Term Benchmark borrowings. The applicable margin for revolving loan borrowings ranges from 0.0 % to 0.5 % per annum for revolving loan ABR borrowings and 1.25 % to 1.75 % per annum for revolving loan Term Benchmark borrowings and, in each case, is based on the average quarterly availability of the revolving loan commitment under the Amended ABL Credit Facility for the immediately preceding fiscal quarter. The unused portion of revolving commitment under the Amended ABL Credit Facility is subject to a commitment fee of 0.25 % per annum. The term loan is required to be repaid in regular set amounts starting March 31, 2023 as set forth in the amortization schedule in the Amended ABL Credit Facility. The term loan can be prepaid without the payment of any prepayment premium (other than customary breakage costs for Term Benchmark borrowings). The Amended ABL Credit Facility contains various covenants and restrictive provisions that limit Cactus Companies’ and each of its subsidiaries’ ability to, among other things, incur additional indebtedness and create liens, make investments or loans, merge or consolidate with other companies, sell assets, make certain restricted payments and distributions, and engage in transactions with affiliates. The obligations under the Amended ABL Credit Facility are guaranteed by certain subsidiaries of Cactus Companies and secured by a security interest in accounts receivable, inventory, equipment and certain other real and personal property assets of Cactus Companies and the guarantors. Until the term loan is paid in full, the Amended ABL Credit Facility requires Cactus Companies to maintain a leverage ratio no greater than 2.50 to 1.00 based on the ratio of Total Indebtedness (as defined therein) to EBITDA (as defined therein). The Amended ABL Credit Facility also requires Cactus Companies to maintain a minimum fixed charge coverage ratio of 1.00 to 1.00 based on the ratio of EBITDA (as defined therein) minus Unfinanced Capital Expenditures (as defined therein) to Fixed Charges (as defined therein) during certain periods, including when availability under the Amended ABL Credit Facility is under certain levels. If Cactus Companies fails to perform its obligations under the Amended ABL Credit Facility, (i) the revolving commitments under the Amended ABL Credit Facility could be terminated, (ii) any outstanding borrowings under the Amended ABL Credit Facility may be declared immediately due and payable and (iii) the lenders may commence foreclosure or other actions against the collateral. Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None.