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Item 7. Management’s Discussion and Analysis

2024-02-29 compared with 2023-03-01 · 186 added, 111 removed, 125 unchanged (70% of the section changed)

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The following discussion contains “forward-looking statements” that reflect our plans, estimates, beliefs and expected performance.

Our actual results may differ materially from those anticipated as discussed in these forward-looking statements as a result of a variety of risks and uncertainties, including those described in “Cautionary Statement Regarding Forward-Looking Statements” and “Item 1A.

Our actual results may differ materially from those anticipated as discussed in these forward-looking statements as a result of a variety of risks and

uncertainties, including those described in “Cautionary Statement Regarding Forward-Looking Statements” and “Item 1A.

Risk Factors” included elsewhere in this Annual Report, all of which are difficult to predict.

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We assume no obligation to update any of these forward-looking statements except as otherwise required by law.

This section includes comparisons of certain 2022 financial information to the same information for 2021.

Year-to-year comparisons of the 2021 financial information to the same information for 2020 are contained in “Item 7.

Management’s Discussion and Analysis of Financial Condition and Result of Operations” of our Annual Report on Form 10-K for the year ended December 31, 2021 filed with the Securities and Exchange Commission on February 28, 2022.

Unless specifically noted herein, the historical financial information included herein does not reflect the Merger or the CC Reorganization as they were completed subsequent to December 31, 2022.

The post-acquisition results of operations of FlexSteel will first be included in our consolidated financial information for the period ending March 31, 2023.

Market Factors

Business” for information on our products and business.

Demand for our products and services depends primarily upon the general level of activity in the oil and gas industry, including the number of active drilling rigs, the number of wells drilled, the depth and working pressure of these wells, the number of well completions, the level of well remediation activity, the volume of production and the corresponding capital spending by oil and natural gas companies.

Demand for our products and services depends primarily upon oil and gas industry activity levels, including the number of active drilling rigs, the number of wells being drilled, the number of wells being completed and the volume of newly producing wells, among other factors.

Oil and gas activity is in turn heavily influenced by, among other factors, investor sentiment, availability of capital and oil and gas prices locally and worldwide, which have historically been volatile.

The key market factors impacting our product sales are the number of wells drilled and placed on production, as each well requires an individual wellhead assembly and, at some time after completion, the installation of an associated production tree.

We measure our product sales activity levels against our competitors by the number of rigs that we are supporting on a monthly basis as it is correlated to wells drilled.

Each active drilling rig produces different levels of revenue based on the customer’s drilling program and efficiencies, which includes factors such as the number of wells drilled per pad, the timing of rig moves, the time taken to drill each well, the number and size of casing strings, the working pressure, material selection and the complexity of the wellhead system chosen by the customer and the rate at which production trees are eventually deployed.

All of these factors may be influenced by the oil and gas region in which our customers are operating.

While these factors may lead to differing revenues per rig, we have generally been able to forecast our product needs and anticipated revenue levels based on historic trends in a given region and with a specific customer.

Our rental revenues are primarily dependent on the number of wells completed (i.e., hydraulically fractured), the number of wells on a well pad, the number of fracture stages per well and the number of fracture stages completed per day.

Well completion activity generally follows the level of drilling activity over time but can be delayed or accelerated due to such factors as availability of drilling rigs, pressure pumping fleets and OCTG, takeaway capacity, storage capacity, oil and gas prices, overall service cost inflation and budget considerations.

Field service and other revenues are closely correlated to revenues from product sales and rentals, as items sold or rented almost always have an associated service component.

Therefore, the market factors and trends of product sales and rental revenues similarly impact the associated levels of field service and other revenues generated.

Revenues generated by our Pressure Control and Spoolable Technologies operating segments are derived from three sources:

products, rentals, and field service and other.

Product revenues are derived from the sale of wellhead systems, production trees and spoolable pipe and fittings.

Rental revenues are primarily derived from the rental of equipment used during the completion process, the repair of such equipment and the rental of equipment or tools used to install wellhead equipment or spoolable pipe.

Field service and other revenues are primarily earned when we provide installation and other field services for both product sales and equipment rental.

Pressure Control

The Pressure Control segment designs, manufactures, sells and rents a range of wellhead and pressure control equipment under the Cactus Wellhead brand.

Products are sold and rented principally for onshore unconventional oil and gas wells and are utilized during the drilling, completion and production phases of our customers’ wells.

In addition, we provide field services for all of our products and rental items to assist with the installation, maintenance and handling of the equipment.

We operate through service centers in the United States, which are strategically located in the key oil and gas producing regions, and in Eastern Australia.

These service centers support our field services and provide equipment assembly and repair services.

We also provide rental and service operations in the Middle East.

Pressure Control manufacturing and production facilities are located in Bossier City, Louisiana and Suzhou, China.

Demand for our product sales in the Pressure Control segment are driven primarily by the number of new wells drilled, as each new well requires a wellhead and, after the completion phase, a production tree.

Demand for our rental items is driven primarily by the number of well completions as we rent frac trees to oil and gas operators to assist in hydraulic fracturing.

Rental demand is also driven to a lesser extent by drilling activity as we rent tools used in the installation of wellheads.

Field service and other revenues are closely correlated with revenues from product sales and rentals, as items sold or rented almost always have an associated service component.

Spoolable Technologies

The Spoolable Technologies segment designs, manufactures and sells spoolable pipe and associated end fittings under the FlexSteel brand.

Our customers use these products primarily as production, gathering and takeaway pipelines to transport oil, gas or other liquids.

In addition, we also provide field services and rental items to assist our customers with the installation of these products.

We support our field service operations through service centers and pipe yards located in oil and gas regions throughout the United States and Western Canada.

Our manufacturing facility is located in Baytown, Texas.

Demand for our product sales in the Spoolable Technologies segment are driven primarily by the number of wells being placed into production after the completions phase as customers use our spoolable pipe and associated fittings to bring wells more rapidly onto production.

Rental and field service and other revenues are closely correlated with revenues from product sales, as items sold usually have an associated rental and service component.

Our business experiences some seasonality during the fourth quarter due to holidays and customers managing their budgets as the year closes out.

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Acquisition of FlexSteel

On February 28, 2023, we completed the acquisition of FlexSteel, which designs, manufactures, sells and installs highly engineered spoolable pipe technologies.

FlexSteel’s steel reinforced pipeline solutions are sold principally for onshore oil and gas wells and are utilized during the production phases of its customers’ wells.

FlexSteel operates through service centers and pipe yards located throughout the United States and Canada, while also providing equipment and services in select international markets.

FlexSteel’s manufacturing facility is located in Baytown, Texas.

Commodity Prices and Geopolitical Conflict

Oil prices were volatile throughout 2022 primarily due to global import restrictions enacted on Russian oil, including a price cap set by the International Group of Seven (G7) members in response to the conflict in Ukraine, releases of oil from the Strategic Petroleum Reserve and subsequent plans to replenish it, enacted and planned production cuts by OPEC+, fears of a global recession and easing COVID-19 restrictions in China.

Oil prices reached their peak in March 2022 with West Texas Intermediate (“WTI”) prices increasing to over $123 per barrel.

Prices dropped below $80 per barrel in late November 2022 and remained under $80 per barrel for the majority of December 2022 before ending the year at slightly above $80 per barrel.

Oil prices dropped below $80 several days in early 2023, but remained above $73 per barrel and averaged approximately $78 per barrel through February 24, 2023.

In mid-February 2023, the International Energy Agency raised its forecast for global crude oil demand for 2023, raising the projection for 2023 to two million barrels per day above 2022.

Prices for natural gas were elevated, but also volatile, throughout 2022 in the United States due to several factors including higher demand for heating due to a colder winter early in the year, a nationwide heat wave during the summer and record-high liquified natural gas (“LNG”) exports due to a rise in global LNG demand.

Henry Hub natural gas spot prices increased from an average of $3.76 per one million British Thermal Units (“MMBtu”) in December 2021 to an average high of $8.14 per MMBtu in May 2022 to an average of $5.53 per MMBtu in December 2022.

Natural gas prices began to moderate toward the end of 2022 primarily due to increased levels of domestic production, the shutdown of a large LNG export facility and relatively mild winter weather in Europe, which have driven inventories in underground storage to levels in-line with the five-year average from levels below the five-year average.

These impacts continued into early 2023, with natural gas prices declining to an average of $3.27 per MMBtu for January 2023 down even further to $2.07 per MMBtu on February 24, 2023.

Although weakening natural gas prices could negatively impact the oil and gas industry, our customers are primarily oil-focused, thus slightly moderating the adverse impacts to demand for our products and services.

The ongoing conflict in Ukraine has had repercussions globally and in the United States by continuing to cause uncertainty, not only in the oil and natural gas markets, but also in the financial markets and global supply chain.

As previously discussed, we completed the acquisition of FlexSteel on February 28, 2023.

The results of operations of the FlexSteel business have been reflected in our accompanying condensed consolidated financial statements from the closing date of the acquisition.

See Note 3 in the notes to the Consolidated Financial Statements for additional information related to the acquisition.

Oil and Natural Gas Prices

The following table summarizes average oil and natural gas prices in North America over the indicated periods as well as industry activity levels as reflected by the average number of active onshore drilling rigs during the same periods.

2023 2022 2021

WTI Oil Price ($/bbl) (1)

$ 77.58 $ 94.90 $ 68.14

Natural Gas Price ($/MMBtu) (2)

$ 2.53 $ 6.45 $ 3.89

Land Drilling Rigs (3)

Energy Information Administration (“EIA”) Cushing, OK WTI (“West Texas Intermediate”) spot price per barrel of crude oil.

(2) EIA Henry Hub Natural Gas spot price per million British Thermal Unit (“MMBtu”).

(3) Baker Hughes.

After seeing a recovery in industry activity in 2022, onshore drilling and completion activity levels steadily declined throughout 2023.

The average number of U.S.

land drilling rigs for 2023 decreased by 5% from 2022, with the number of rigs as of the end of 2023 at 602 rigs compared to 762 as of the end of 2022 and 570 as of the end of 2021.

Oil prices declined throughout 2023 and continued to be relatively volatile, with WTI remaining above $66 per barrel all year.

Natural gas prices declined approximately 60% in 2023 from 2022 primarily due to persistently high inventory levels with prices averaging $2.53 per MMBtu in 2023 compared to $6.45 per MMBtu in 2022.

Although lower natural gas prices could negatively impact the oil and gas industry, most of our customers are primarily oil-focused, thus moderating the impact to demand for our products and services.

The ongoing conflicts in the Middle East and Ukraine have had repercussions globally and in the United States by continuing to cause uncertainty, not only in the oil and natural gas markets, but also in the financial markets and global supply chain.

Such uncertainty could continue to result in stock price volatility and supply chain disruptions as well as higher oil and natural gas prices which could cause higher inflation worldwide, impact consumer spending and negatively impact demand for our goods and services.

Moreover, additional interest rate increases by the U.S.

Federal Reserve to combat inflation could further increase the probability of a recession.

Notwithstanding the significant commodity price volatility in 2022, U.S.

onshore drilling activity increased meaningfully during the year.

At the end of 2022, the U.S.

onshore rig count as reported by Baker Hughes was 762 rigs as compared to 570 at the end of 2021.

The weekly average U.S.

onshore rig count for the three months ended December 31, 2022 was 757 rigs, a 39% increase as compared to 543 rigs for the comparable period in 2021.

onshore drilling activity has been

relatively stable during the first part of 2023.

As of February 24, 2023, the U.S.

onshore rig count was 734, reflecting weakening natural gas prices in early 2023.

Inflation and Increased Costs

Supply chain disruptions, geopolitical issues, increased money supply and significantly increased demand for goods and services worldwide resulted in substantial increases in the cost of fuel, raw materials, component parts, ocean freight charges and labor in 2022.

Inflation, measured by the U.S.

Consumer Price Index (“CPI”) as reported by the U.S.

Bureau of Labor Statistics, increased substantially during 2022, rising to an average of 8.0% on a year-over-year basis in 2022 from an average of 4.7% on a year-over-year basis in 2021.

While year-over-year inflation rates remained elevated relative to historical levels, the rate of increases began to moderate late in 2022 and were reported at 6.5% in December 2022, the lowest that figure has been in more than a year.

Salaries and wages remain elevated as a result of competitive labor markets, especially in certain key oil and gas producing areas, but also due to broader inflation trends and labor shortages.

We expect we will continue to experience inflationary pressures on portions of our cost structure;

however, tightness in overseas freight and transit times from China have eased.

Additionally, raw material and component costs are moderating due in part to improvements in the global supply and demand dynamics for steel.

Nonetheless, we cannot be confident that transit times or input prices will return or stabilize at the lower levels experienced in prior years.

Additionally, militant attacks on ships in the Red Sea or elsewhere could negatively impact our ocean freight costs.

Consolidated Results of Operations

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Where appropriate, we have identified specific events and changes that affect comparability or trends and, where reasonably practicable, have quantified the impact of such items.

Following the acquisition of FlexSteel, we have two operating segments consisting of the Pressure Control segment (legacy Cactus) and the Spoolable Technologies segment (FlexSteel).

Our results of operations are evaluated by the Chief Executive Officer on a consolidated basis as well as at the segment level.

The performance of our operating segments is primarily evaluated based on segment operating income (in addition to other measures), which is defined as income before taxes and before interest income (expense), net, other income (expense), net and corporate and other expenses not allocated to the operating segments.

Corporate and other expenses were previously included in our Pressure Control segment.

The Company has recast the information for fiscal year 2022 and 2021 to align with the presentation for the year ended December 31, 2023.

Year Ended December 31, 2023 Compared to Year Ended December 31, 2022

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(in thousands)

Product revenue $ 452,615 $ 280,907 $ 171,708 61.1 %

Rental revenue 100,453 61,629 38,824 63.0

Field service and other revenue 135,301 96,053 39,248 40.9

Pressure Control $ 756,727 $ 688,369 $ 68,358 9.9 %

Spoolable Technologies 340,233 — 340,233 nm

Total revenues 1,096,960 688,369 408,591 59.4

Costs and expenses

Cost of product revenue 277,871 189,083 88,788 47.0

Cost of rental revenue 62,037 54,377 7,660 14.1

Cost of field service and other revenue 106,013 73,681 32,332 43.9

Selling, general and administrative expenses 67,700 46,021 21,679 47.1

Total costs and expenses 513,621 363,162 150,459 41.4

Income from operations 174,748 75,427 99,321 nm

Operating income

Pressure Control 236,934 202,650 34,284 16.9

Spoolable Technologies 62,172 — 62,172 nm

Total segment operating income 299,106 202,650 96,456 47.6

Corporate and other expenses (34,740) (27,902) (6,838) 24.5

Total operating income 264,366 174,748 89,618 51.3

Interest income (expense), net (6,480) 3,714 (10,194) nm

Other income (expense), net 4,490 (1,910) 6,400 nm

Income before income taxes 262,376 176,552 85,824 48.6

Income tax expense 47,536 31,430 16,106 51.2

Net income $ 214,840 $ 145,122 $ 69,718 48.0 %

net income attributable to non-controlling interest 45,669 34,948 10,721 30.7

Net income attributable to Cactus Inc.

$ 169,171 $ 110,174 $ 58,997 53.5 %

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Pressure Control.

Pressure Control revenue was $756.7 million for 2023, an increase of $68.4 million, or 10%, from $688.4 million for 2022.

The increase in revenues was primarily due to higher sales of wellhead and production related equipment resulting from higher drilling and completion activity by our customers.

In addition, increased rental of drilling and completion equipment and field service associated with product and rental revenues also increased as a result of higher customer activity.

Operating income of $236.9 million in 2023 increased $34.3 million, or 17%, from $202.7 million in 2022.

The increase was primarily attributable to higher gross margins during the period and increased volume partially offset by higher segment selling, general and administrative (“SG&A”) expenses.

The increase in SG&A expenses primarily related to higher bad debt expense, travel and entertainment expenses, professional fees and hardware and software expenses.

Spoolable Technologies.

Spoolable Technologies revenue of $340.2 million and operating income of $62.2 million represents FlexSteel results generated from February 28, 2023, the date of acquisition, through December 31, 2023.

The results for Spoolable Technologies include the following items resulting from purchase accounting:

approximately $14.9 million of expense related to the change in fair value of the estimated earn-out payment for the FlexSteel acquisition, $23.5 million of inventory step-up expense, $20.3 million of intangible amortization expense and depreciation expense of $13.8 million primarily associated with the step-up of fixed assets.

Corporate and other expenses.

Corporate and other expenses for 2023 were $34.7 million, an increase of $6.8 million from $27.9 million for 2022.

The increase was largely attributable to higher professional fees of $3.8 million related to transaction costs associated with the closing of and accounting for the FlexSteel acquisition.

Additional increases were attributable to higher personnel costs of which the largest increase was related to stock-based compensation.

Interest income (expense), net.

Interest expense, net was $6.5 million in 2023 compared to interest income, net of $3.7 million in 2022.

The increase in interest expense, net of $10.2 million was primarily related to borrowings under the Amended ABL Credit Facility related to the FlexSteel acquisition.

Other income (expense), net.

Other income (expense), net represents non-cash adjustments for the revaluation of the liability related to the tax receivable agreement as a result of changes to the forecasted state tax rate.

Income tax expense.

Income tax expense for 2023 was $47.5 million (18.1% effective tax rate) compared to $31.4 million (17.8% effective tax rate) for 2022.

Income tax expense for 2023 includes approximately $56.6 million of expense associated with current income offset by a $12.1 million benefit associated with the release of our valuation allowance previously provided for our investment in Cactus Companies based on the determination that the deferred tax asset was realizable due to our ability to generate sufficient taxable income of the appropriate type.

Additionally, we recognized $4.9 million of expense associated with the revaluation of our deferred tax asset as a result of a change in our forecasted state tax rate, $0.5 million of expense related to the finalization of our 2022 tax returns, a $1.2 million benefit associated with permanent differences related to equity compensation and a $1.2 million benefit associated with other adjustments.

Income tax expense for 2022 primarily included approximately $36.4 million of expense associated with current income offset by a $1.7 million benefit associated with permanent differences related to equity compensation, a $1.7 million benefit resulting from a change in our forecasted state rate and a $1.4 million tax benefit associated with the partial valuation allowance release in conjunction with CW Unit redemptions during 2022.

Partial valuation releases occur in conjunction with redemptions of CW Units (or CC Units, in the case of redemptions after the CC Reorganization) as a portion of Cactus Inc.’s deferred tax assets from its investment in Cactus LLC (or, after the CC Reorganization, its investment in Cactus Companies) becomes realizable.

is only subject to federal and state income tax on its share of income from Cactus Companies.

Income allocated to the non-controlling interest is only taxable to the non-controlling interest.

Year Ended December 31, 2022 Compared to Year Ended December 31, 2021

The following table presents summary consolidated operating results for the periods indicated:

2022 2021 $ Change % Change

(in thousands)

Pressure Control $ 688,369 $ 438,589 $ 249,780 57.0 %

Spoolable Technologies — — — —

Total revenues 688,369 438,589 249,780 57.0

Operating income

Pressure Control 202,650 91,579 111,071 nm

Spoolable Technologies — — — —

Total segment operating income 202,650 91,579 111,071 nm

Corporate and other expenses (27,902) (16,152) (11,750) 72.7

Total operating income 174,748 75,427 99,321 nm

Interest income (expense), net 3,714 (774) 4,488 nm

Other income (expense), net (1,910) 492 (2,402) nm

Income before income taxes 176,552 75,145 101,407 nm

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Product revenue for 2022 was $452.6 million compared to $280.9 million for 2021.

The increase of $171.7 million, representing a 61% increase from 2021, was primarily due to higher sales of wellhead and production related equipment resulting from increased activity by our customers as well as the impact of cost recovery efforts.

Rental revenue of $100.5 million in 2022 increased $38.8 million, or 63%, from $61.6 million in 2021.

The increase was primarily attributable to higher drilling and completion activity by our customers and associated repairs.

Field service and other revenue for 2022 was $135.3 million, an increase of $39.2 million, or 41%, from $96.1 million for 2021.

The increase was attributable to increased customer activity, resulting in higher billable hours and ancillary services as well as cost recovery measures.

Costs and expenses

Cost of product revenue of $277.9 million in 2022 increased $88.8 million, or 47%, from $189.1 million in 2021.

The increase was largely attributable to an increase in product sales and increased costs associated with materials, freight and overhead.

Cost of rental revenue for 2022 was $62.0 million, an increase of $7.7 million, or 14%, from $54.4 million for 2021.

The increase was primarily due to higher repair and equipment reactivation costs, scrap expense, freight costs and increased personnel, ancillary and branch expenses, partially offset by lower depreciation expense on our rental fleet.

Cost of field service and other revenue for 2022 was $106.0 million, an increase of $32.3 million, or 44%, from $73.7 million for 2021.

The increase was mainly related to higher personnel costs resulting from an increase in the number of field and branch personnel and higher wages as well as higher fuel and third-party service costs associated with increased field service activity levels.

Selling, general and administrative expense (“SG&A”) for 2022 was $67.7 million, an increase of $21.7 million, or 47%, from $46.0 million for 2021.

The increase was largely attributable to increased personnel costs primarily related to higher salaries and wages and their associated payroll taxes, increased benefits including health insurance and retirement funding, higher stock-based compensation and annual incentive bonus expense.

Additionally, professional fees increased from 2021 primarily due to approximately $8.4 million of transaction costs associated with the Merger.

Additional increases in SG&A from 2021 were attributable to higher information technology expenses and increased travel costs.

Pressure Control.

Pressure Control revenue for 2022 was $688.4 million compared to $438.6 million for 2021.

The increase of $249.8 million, representing a 57% increase from 2021 was primarily due to a $171.7 million increase in product revenues, a $38.8 million increase in rental revenues and a $39.2 million increase in field service and other revenue.

These increases were the result of increased drilling and completion activity by our customers which translated into higher sales of pressure control equipment, tool and equipment rentals and related field and other ancillary services as well as certain cost recovery measures.

Operating income of $202.7 million in 2022 increased $111.1 million from $91.6 million in 2021.

increase was primarily attributable to higher gross margins during the period due to increased activity partially offset by higher SG&A expenses.

The increase in SG&A expenses was largely attributable to increased personnel costs primarily related to higher salaries and wages and associated taxes and benefits, higher annual incentive bonus expense and increased stock-based compensation.

Additional increases in SG&A expenses from 2021 were attributable to higher information technology expenses.

Corporate and other expenses.

Corporate and other expenses for 2022 were $27.9 million, an increase of $11.8 million from $16.2 million for 2021.

The increase was primarily due to approximately $8.4 million of transaction costs associated with the FlexSteel acquisition.

Additional increases were largely attributable to increased personnel costs as well as increased travel and entertainment expenses.

Interest income (expense), net.

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Income tax expense for 2022 was $31.4 million (17.8% effective tax rate) compared to $7.7 million (10.2% effective tax rate) for 2021.

Partial valuation releases occur in conjunction with redemptions of CW Units as a portion of Cactus Inc.’s deferred tax assets from its investment in Cactus LLC becomes realizable.

Income tax expense for 2021 was primarily related to approximately $16.3 million expense associated with our 2021 operations and $1.3 million expense resulting from a change in our forecasted state tax rate.

This tax expense was partially offset by a $1.1 million benefit associated with permanent differences related to equity compensation and a $9.0 million tax benefit associated with the partial valuation allowance release in conjunction with 2021 redemptions of CW Units.

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.

Liquidity and Capital Resources

At December 31, 2023, we had $133.8 million of cash and cash equivalents.

Our primary sources of liquidity and capital resources are cash on hand, cash flows generated by operating activities and, if necessary, borrowings under our ABL Credit Facility (as defined in Note 4 in the notes to the Consolidated Financial Statements).

Our primary sources of liquidity and capital resources are cash on hand, cash flows generated by operating activities and, if necessary, borrowings under our Amended ABL Credit Facility (as defined in Note 6 in the notes to the Consolidated Financial Statements).

Depending upon market conditions and other factors, we may also have the ability to issue additional equity and debt if needed.

As of December 31, 2022, we had no borrowings outstanding under our ABL Credit Facility and $79.9 million of available borrowing capacity.

As of December 31, 2023, we had no borrowings outstanding under our Amended ABL Credit Facility and $216.0 million of available borrowing capacity.

We had $1.1 million in letters of credit outstanding at December 31, 2023 which reduced our available borrowing capacity.

We were in compliance with the covenants of the ABL Credit Facility as of December 31, 2022.

We expect that our existing cash on hand, cash generated from operations and available borrowings under our ABL Credit Facility will be sufficient for the next 12 months to meet working capital requirements, anticipated capital expenditures, expected TRA liability payments, anticipated tax liabilities and dividends to holders of our Class A common stock as well as pro rata cash distributions to holders of CW Units (or, in the case of dividends declared after the completion of the CC Reorganization, to the holders of CC Units), other than Cactus Inc.

In connection with the signing of the Merger Agreement in December 2022, we obtained fully committed bridge financing that could be used to fund a portion of the upfront purchase price of $621.2 million for the Merger (excluding working capital adjustments).

On January 13, 2023, we completed an underwritten offering of 3,224,300 shares of Class A common stock for net proceeds of $165.6 million and used the net proceeds to finance a portion of the Merger in lieu of utilizing the bridge facility.

On February 28, 2023, in connection with the Merger, we replaced the remainder of the bridge facility commitment with the Amended ABL Credit Facility, which includes a term loan facility and a revolving facility, with a syndicate of lenders and JPMorgan Chase Bank, N.A., as administrative agent for such lenders and as an issuing bank.

For a description of the ABL Credit Facility and the Amended ABL Credit Facility, please see Note 4 and Note 15, respectively, in the Notes to the Consolidated Financial Statements.

Not including the impact of the acquisition of FlexSteel, we currently estimate our net capital expenditures for the year ending December 31, 2023 will range from $35 million to $45 million, mostly related to rental fleet investments including drilling tools but also related to the potential purchase of a currently leased facility, international expansion and development of a newly-leased research and development facility in Houston, Texas.

We continuously evaluate our capital expenditures, and the amount we ultimately spend will depend on a number of factors, including, among other things, demand for rental assets, available capacity in existing locations, prevailing economic conditions, market conditions in the E&P industry, customers’ forecasts, volatility and company initiatives.

We were in compliance with the covenants of the Amended ABL Credit Facility as of December 31, 2023.

In June 2023, our board of directors authorized the Company to repurchase shares of its Class A common stock for an aggregate purchase price of up to $150 million.

Under our share repurchase program, shares may be repurchased from time to time in open market transactions or block trades, in privately negotiated transactions or any other method permitted under U.S.

securities laws, rules and regulations.

The repurchase program does not obligate the Company to purchase any particular amount of shares, and the repurchase program may be suspended or discontinued at any time at the Company’s discretion.

At December 31, 2023, $149.7 million of Class A common stock could be repurchased under our share repurchase program.

We expect that our existing cash on hand, cash generated from operations and available borrowings under our Amended ABL Credit Facility will be sufficient for the next 12 months to meet our material cash requirements, including working capital requirements, debt service obligations, anticipated capital expenditures, lease obligations, repurchases of shares of our Class A common stock, expected TRA liability payments, possible earn-out payment associated with the FlexSteel acquisition, anticipated tax liabilities and dividends to holders of our Class A common stock as well as pro rata cash distributions to holders of CC Units other than Cactus Inc.

We currently estimate our net capital expenditures for the year ending December 31, 2024 will range from $45 million to $55 million, mostly related to rental fleet investments including drilling tools, international expansion, diversification of our low cost supply chain, enhancements for our Baytown, TX manufacturing plant and additional deployment equipment to facilitate installation of recent product introductions.

We continuously evaluate our capital expenditures, and the amount we ultimately spend will depend on a number of factors, including, among other things, demand for rental assets, available capacity

in existing locations, prevailing economic conditions, market conditions in the E&P industry, customers’ forecasts, volatility and company initiatives.

For information concerning our future lease payments as of December 31, 2023, see Note 10 to our consolidated financial statements.

Our ability to satisfy our long-term liquidity requirements, including cash distributions to CC Unit Holders to fund their respective income tax liabilities relating to their share of the income of Cactus Companies and to fund liabilities related to the TRA, depends on our future operating performance, which is affected by, and subject to, prevailing economic conditions, market conditions in the E&P industry, availability and cost of raw materials, and financial, business and other factors, many of which are beyond our control.

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Any such deferred payments under the TRA generally will accrue interest.

In certain cases, payments under the TRA

may be accelerated and/or significantly exceed the actual benefits, if any, we realize in respect of the tax attributes subject to the TRA.

In certain cases, payments under the TRA may be accelerated and/or significantly exceed the actual benefits, if any, we realize in respect of the tax attributes subject to the TRA.

In these situations, our obligations under the TRA could have a substantial negative impact on our liquidity.

Assuming no material changes in the relevant tax law, we expect that if the TRA were terminated as of December 31, 2022, the estimated termination payments, based on the assumptions discussed in Note 9 of the Notes to the Consolidated Financial Statements, would be approximately $291.2 million, calculated using a discount rate equal to one-year LIBOR plus 150 basis points, applied against an undiscounted liability of $456.6 million.

Assuming no material changes in the relevant tax law, we expect that if the TRA were terminated as of December 31, 2023, the estimated termination payments, based on the assumptions discussed in Note 11 of the notes to the Consolidated Financial Statements, would be approximately $256.8 million, calculated using a discount rate equivalent to the former one-year LIBOR, applied against an undiscounted liability of $397.0 million.

A 10% increase in the price of our Class A common stock at December 31, 2023 would have increased the discounted liability by $9.0 million to $265.8 million (an undiscounted increase of $15.2 million to $412.2 million), and likewise, a 10% decrease in the price of our Class A common stock at December 31, 2023 would have decreased the discounted liability by $9.0 million to $247.8 million (an undiscounted decrease of $15.2 million to $381.8 million).

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Net cash used in investing activities (654,793) (25,536)

Net cash provided by (used in) financing activities 103,275 (47,382)

Net cash provided by operating activities was $340.3 million in 2023 compared to $117.9 million in 2022.

Operating cash flows increased primarily due to higher income and a decrease in cash outflows associated with working capital, largely related to decreased purchases of inventory as well as higher collections on receivable balances.

These increases in operating cash flows were slightly offset by $20.5 million of additional income tax payments, higher TRA payments of $15.2 million and $4.6 million of additional interest paid in 2023 compared to 2022.

Net cash used in investing activities was $654.8 million and $25.5 million for 2023 and 2022, respectively.

The increase was primarily due to cash paid to acquire FlexSteel for $621.5 million less $5.3 million in cash acquired.

Additionally, our capital expenditures increased approximately $15.7 million primarily due to the $7.0 million purchase of a previously leased facility, Pressure Control rental fleet additions and enhancements and $3.0 million of capital expenditures for the Spoolable Technologies segment.

Other movements in our investing activities were related to the increase in proceeds from sales of assets of approximately $2.6 million from 2022.

Net cash provided by financing activities was $103.3 million for 2023 compared to net cash used in financing activities of $47.4 million for 2022.

The increase in net cash provided by financing activities was primarily related to certain financing activities in 2023 associated with the FlexSteel acquisition.

We received approximately $169.9 million of proceeds, net of issuance costs, from issuing shares of our Class A common stock during 2023.

Additionally, we received $155.0 million from total borrowings under our Amended ABL Credit Facility of which all $155.0 million has been repaid.

Increased payments of $6.6 million in deferred financing costs, increased distributions to members of $7.0 million, higher dividend payments of $3.4 million, $1.6 million of additional payments on finance leases and a $0.7 million increase in share repurchases partially offset the aforementioned cash inflows associated with the equity financing activities during 2023.

Year Ended December 31, 2022 Compared to Year Ended December 31, 2021

The following table summarizes our cash flows for the periods indicated:

Year Ended December 31,

(in thousands)

Net cash provided by operating activities $ 117,884 $ 63,759

Net cash used in investing activities (25,536) (11,633)

Net cash used in financing activities (47,382) (39,388)

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Critical Accounting Policies and Estimates

In preparing our financial statements in accordance with generally accepted in the United States of America (“GAAP”), we make numerous estimates and assumptions that affect the accounting for and recognition and disclosure of assets, liabilities, equity, revenues and expenses.

In preparing our financial statements in accordance with accounting principles generally accepted in the United States of America (“GAAP”), we make numerous estimates and assumptions that affect the accounting for and recognition and disclosure of assets, liabilities, equity, revenues and expenses.

We must make these estimates and assumptions because certain information that we use is dependent on future events, cannot be calculated with a high degree of precision from available data or is not otherwise capable of being readily calculated based on generally accepted methodologies.

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The following is a brief discussion of our most critical accounting policies and related estimates and assumptions.

Determination of Fair Value in Business Combinations

Accounting for the acquisition of a business requires the allocation of the purchase price to the various assets acquired and liabilities assumed at their respective fair values.

The determination of fair value requires the use of significant estimates and assumptions, and in making these determinations, management uses all available information.

For tangible and identifiable intangible assets acquired in a business combination, the determination of fair value utilizes several valuation methodologies including discounted cash flows which has assumptions with respect to the timing and amount of future revenue and expenses associated with an asset.

The assumptions made in performing these valuations include, but are not limited to, discount rates, future revenues and operating costs, projections of capital costs, and other assumptions believed to be consistent with those used by principal market participants.

Due to the specialized nature of these calculations, we engage third-party specialists to assist management in evaluating our assumptions as well as appropriately measuring the fair value of assets acquired and liabilities assumed.

Inventories are stated at the lower of cost or net realizable value.

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Accordingly, if conditions change in the future, we may record impairment losses, which could be material to any particular reporting period.

Goodwill represents the excess of purchase price paid over the fair value of the net assets of acquired businesses.

Goodwill is not amortized, but we 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 will 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.

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.

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To the extent we believe recovery is not likely, we establish a valuation allowance to reduce the asset to a value we believe will be recoverable based on our expectation of future taxable income.

In evaluating our ability to recover our deferred tax assets, we consider all available positive and negative evidence, including scheduled reversals of deferred tax liabilities, projected future taxable income, tax planning strategies and results of recent operations.

strategies and results of recent operations.

The assumptions about future taxable income require significant judgment and are consistent with the plans and estimates management is using to manage the underlying business.

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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 iterative impact.

The TRA liability is calculated by determining the tax basis subject to the TRA (“tax basis”) and applying a blended tax rate to the basis differences and calculating the iterative impact.

The blended tax rate consists of the U.S.

federal income tax rate and an assumed combined state and local income tax rate driven by the apportionment factors applicable to each state.

Redemptions of CW Units resulted in adjustments to the tax basis of the tangible and intangible assets of Cactus LLC.

These adjustments were allocated to Cactus Inc.

Such adjustments to the tax basis of the tangible and intangible assets of Cactus LLC would not have been available to Cactus Inc.

absent its acquisition or deemed acquisition of CW Units.

Redemptions of CC Units (CW Units prior to the CC Reorganization) result in adjustments to the tax basis of the tangible and intangible assets of Cactus Companies (Cactus LLC prior to the CC Reorganization).

These adjustments are allocated to Cactus Inc.

Such adjustments to the tax basis of the tangible and intangible assets of Cactus Companies would not be available to Cactus Inc.

absent its acquisition or deemed acquisition of CC Units or CW Units prior to the CC Reorganization.

In addition, the repayment of borrowings outstanding under the Cactus LLC term loan facility resulted in adjustments to the tax basis of the tangible and intangible assets of Cactus LLC, a portion of which was allocated to Cactus Inc.

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Recent Accounting Pronouncements

There were no new accounting standards adopted in 2022 and there are no new accounting pronouncements issued but not yet effective that are expected to have a material impact on our consolidated financial statements.

See Note 2 of the notes to the Consolidated Financial Statements for discussion of recent accounting pronouncements.

While inflationary cost increases can affect our income from operations’ margin, we believe that inflation generally has not had, and is not expected to have, a material adverse effect on our results of operations.

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The most noticeable adverse impact to our business was increased costs associated with freight, materials, vehicle-related costs and personnel expenses.

While we have seen some of these costs begin to moderate, we are unsure how long an elevated rate will continue.

Additionally, we cannot be confident that costs will return to the lower levels experienced in prior years.

Most of our costs moderated in 2023 except for wages.

It is highly unlikely that salaries and wages will decrease to the levels experienced in prior years.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis