Cactus, Inc. 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations. Except as otherwise indicated or required by the context, all references in this Quarterly Report to the “Company,” “Cactus,” “we,” “us” and “our” refer to Cactus, Inc. (“Cactus Inc.”) and its consolidated subsidiaries, unless we state otherwise or the context otherwise requires. The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the accompanying unaudited condensed consolidated financial statements and related notes. The following discussion contains “forward-looking statements” that reflect our plans, estimates, beliefs and expected performance. Our actual results may differ materially from those anticipated as discussed in these forward-looking statements as a result of a variety of risks and uncertainties, which are difficult to predict, including those described above in “Cautionary Note Regarding Forward-Looking Statements,” and in the risk factors included in “Part I, Item 1A. Risk Factors” in our 2024 Annual Report and "Part II, Item 1A. Risk Factors" in this Quarterly Report. In light of these risks, uncertainties and assumptions, the forward-looking events discussed may not occur. We assume no obligation to update any of these forward-looking statements except as otherwise required by law. Executive Summary Cactus is an equipment solutions provider primarily for onshore oil and gas markets. Founded in 2011 by a management group that previously operated two of the largest wellhead providers at the time, Cactus has rapidly grown to be a leading provider of wellhead solutions to the U.S. onshore market. On February 28, 2023, Cactus acquired FlexSteel, which similarly grew from its founding in 2003 to its current status as a leading provider of spoolable pipe technologies, primarily to the U.S. onshore market. We believe this acquisition enhances our position as a premier manufacturer and provider of highly engineered equipment to the exploration and production ("E&P") industry and should provide meaningful growth. We further believe FlexSteel’s products are highly complementary to Cactus’ equipment as it expands our exposure to our customers’ operations from production trees to transportation of oil, gas and other liquids, as well as to additional customers operating in the midstream area. 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. Revenues Our revenues 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 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 earned when we provide installation and other field services for both product sales and equipment rental. During the three months ended March 31, 2025, we derived 74% of total revenues from the sale of our products, 10% of total revenues from rental and 16% of total revenues from field service and other. During the three months ended March 31, 2024, we derived 76% of total revenues from the sale of our products, 8% of total revenues from rental and 16% of total revenues from field service and other. We have predominantly domestic operations, with more limited operations in Australia, Canada, and the Middle East, as well as sales in other international markets. We operate in two business segments consisting of the Pressure Control segment and the Spoolable Technologies segment. 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 Australia. These service centers support our field services and provide equipment assembly and repair services. We also provide rental and service operations in the Kingdom of Saudi Arabia. Pressure Control manufacturing and production facilities are located in Bossier City, Louisiana, Suzhou, China, and Vietnam. 16 Demand for our product sales in the Pressure Control segment is 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 is 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. Recent Developments and Trends 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. Three Months Ended March 31, 2025 December 31, 2024 March 31, 2024 WTI Oil Price ($/bbl) (1) $ 71.78 $ 70.73 $ 77.50 Natural Gas Price ($/MMBtu) (2) $ 4.14 $ 2.44 $ 2.15 U.S. Land Drilling Rigs (3) 572 569 602 (1) EIA Cushing, OK West Texas Intermediate ("WTI") spot price. (2) EIA Henry Hub Natural Gas spot price per million British Thermal Unit (“MMBtu”). (3) Baker Hughes. In the first quarter of 2025, average U.S. land drilling and completion activity levels and oil prices were relatively flat compared to the fourth quarter of 2024. Average natural gas prices were up approximately 70% from the fourth quarter of 2024, as a cold January led to high inventory draws resulting in storage levels approaching the lowest levels observed in the previous five years. U.S. gas demand forecasts remained strong through the first quarter considering increasing liquid natural gas export capacity in 2025 and positive power demand trends. In early April 2025, several members of OPEC+ announced an increase to output plans beginning in April 2025, which has had a negative impact on recent commodity prices. U.S. Trade Policies Over the past several months, the Trump administration has implemented and announced a number of new tariffs, including new Section 232 tariffs of 25% on imports of steel and certain products made from steel from all locations, Synthetic Opioid tariffs of 20% on all imports from China, and broad “Reciprocal” tariffs with varying rates applied to U.S. trading partners across the globe. As of mid-April, most Reciprocal tariffs have been temporarily paused, except for those applied to certain countries, including China. After these tariff announcements, global equity, bond and currency markets reacted negatively and have continued to experience high levels of volatility due to the potential disruption to global trade, the increasingly uncertain global economic outlook, and the negative implications of reduced consumer demand for imported products and energy. 17 We anticipate incurring elevated tariff expenses on our goods imported from China, and experiencing generally higher steel input costs at our Bossier City manufacturing facility as a result of the broad Section 232 tariffs, which will both impact profitability, to the extent we cannot offset such increases with cost reduction efforts and increased pricing. The weaker oil demand outlook and associated decline in commodity pricing will potentially lead to lower U.S. land drilling and completion activity levels as 2025 progresses, and correspondingly reduced demand for our products and services. The Company also continues its efforts to diversify its supply chain by acquiring a 40% ownership percentage in a forging manufacturing facility in Vietnam in exchange for $6 million. This interest is in addition to the wholly owned production facility in Vietnam. Pillar Two Framework The Organization for Economic Cooperation and Development (“OECD”) enacted rules (“Pillar Two”) for a new, global minimum tax of at least 15% on income arising in low-tax jurisdictions. Based on current enacted legislation, management anticipates the impact of Pillar Two to be immaterial to the Company for 2025. Critical Accounting Policies and Estimates A discussion of our critical accounting policies and estimates is contained in our 2024 Annual Report on Form 10-K. There have not been any changes in our critical accounting policies since December 31, 2024. 18 Consolidated Results of Operations The following discussions relating to significant line items from our condensed consolidated statements of income are based on available information and represent our analysis of significant changes or events that impact the comparability of reported amounts. Where appropriate, we have identified specific events and changes that affect comparability or trends and, where reasonably practicable, have quantified the impact of such items. We have two operating segments consisting of the Pressure Control segment and the Spoolable Technologies segment. 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. Three Months Ended March 31, 2025 Compared to Three Months Ended December 31, 2024 The following table presents a summary of the segment consolidated operating results for the periods indicated: Three Months Ended March 31, 2025 December 31, 2024 $ Change % Change (in thousands) Revenues Pressure Control $ 190,277 $ 176,719 $ 13,558 7.7 % Spoolable Technologies 92,578 96,072 (3,494) (3.6) Corporate and other (2,536) (670) (1,866) nm Total revenues 280,319 272,121 8,198 3.0 Operating income Pressure Control 54,333 50,829 3,504 6.9 Spoolable Technologies 23,876 25,523 (1,647) (6.5) Total segment operating income 78,209 76,352 1,857 2.4 Corporate and other expenses (9,597) (5,900) (3,697) 62.7 Total operating income 68,612 70,452 (1,840) (2.6) Interest income, net 2,325 2,303 22 1.0 Other income, net — 3,204 (3,204) nm Income before income taxes 70,937 75,959 (5,022) (6.6) Income tax expense 16,832 18,512 (1,680) (9.1) Net income 54,105 57,447 (3,342) (5.8) Less: net income attributable to non-controlling interest 9,882 10,760 (878) (8.2) Net income attributable to Cactus Inc. $ 44,223 $ 46,687 $ (2,464) (5.3) % nm = not meaningful Pressure Control. Pressure Control revenue for the first quarter of 2025 was $190.3 million, an increase of $13.6 million, or 7.7%, from the fourth quarter of 2024 primarily due to increased sales of wellhead and production related equipment resulting from increased customer drilling efficiencies. Pressure Control operating income of $54.3 million for the first quarter of 2025 increased $3.5 million, or 6.9% from the fourth quarter of 2024 primarily due to the higher volume, with margins decreasing 20 basis points due to reserves taken in connection with litigation claims. Spoolable Technologies. Spoolable Technologies revenue for the first quarter of 2025 was $92.6 million, a decrease of $3.5 million, or 3.6% from the fourth quarter of 2024 primarily due to reduced customer activity levels in the seasonally slow first quarter. Total operating income for Spoolable Technologies for the first quarter of 2025 was $23.9 million, compared to operating income of $25.5 million for the fourth quarter of 2024. The decrease in operating income was primarily due to lower revenue realized and the corresponding reduced operating leverage. Corporate and other. Corporate and other revenue represents the elimination of inter-segment sales from our Pressure Control segment to our Spoolable Technologies segment. Corporate and other expenses include costs associated with executive 19 management and other administrative functions not directly attributable to our reporting segment. Corporate and other expenses for the first quarter of 2025 were $9.6 million, an increase of $3.7 million, or 62.7% from $5.9 million for the fourth quarter of 2024. The increase was primarily due to professional fees associated with growth initiatives. Interest income, net. Interest income, net was $2.3 million for the first quarter of 2025 and the fourth quarter of 2024. The interest income, net is primarily comprised of interest income earned on the invested cash balance. Other income, net. Other income, net represents non-cash adjustments for the revaluation of the liability related to the tax receivable agreement as a result of changes to the state tax rate. Income tax expense. Income tax expense for the first quarter of 2025 was $16.8 million compared to $18.5 million for the fourth quarter of 2024. The decrease in income tax expense from the first quarter was due to a decrease in operating income quarter-over-quarter, in addition to an overall tax rate reduction due to decreases in permanent items. Cactus Inc. 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. Three Months Ended March 31, 2025 Compared to Three Months Ended March 31, 2024 The following table presents a summary of the segment consolidated operating results for the periods indicated: Three Months Ended March 31, 2025 2024 $ Change % Change (in thousands) Revenues Pressure Control $ 190,277 $ 175,028 $ 15,249 8.7 % Spoolable Technologies 92,578 99,095 (6,517) (6.6) Corporate and other (2,536) — (2,536) nm Total revenues 280,319 274,123 6,196 2.3 Operating income Pressure Control 54,333 51,675 2,658 5.1 Spoolable Technologies 23,876 16,393 7,483 45.6 Total segment operating income 78,209 68,068 10,141 14.9 Corporate and other expenses (9,597) (5,518) (4,079) 73.9 Total operating income 68,612 62,550 6,062 9.7 Interest income, net 2,325 689 1,636 nm Income before income taxes 70,937 63,239 7,698 12.2 Income tax expense 16,832 13,424 3,408 25.4 Net income 54,105 49,815 4,290 8.6 Less: net income attributable to non-controlling interest 9,882 10,850 (968) (8.9) Net income attributable to Cactus Inc. $ 44,223 $ 38,965 $ 5,258 13.5 % nm = not meaningful Pressure Control. Pressure Control revenue was $190.3 million for the first three months of 2025, an increase of $15.2 million, or 8.7%, from the first three months of 2024. The increased revenue was primarily due to increased sales of wellhead and production related equipment resulting from increased customer drilling efficiencies. Operating income of $54.3 million in the first three months of 2025 increased $2.7 million, or 5.1%, from the first three months of 2024. The increase was primarily attributable to higher gross margins during the period due to the higher customer activity levels, partially offset by an increase in selling, general and administrative ("SG&A") expenses related to higher personnel costs, stock-based compensation expense and other reserves. Spoolable Technologies. Spoolable Technologies revenue for the first three months of 2025 was $92.6 million, a decrease of $6.5 million, or 6.6%, from the first three months of 2024, primarily due to reduced customer activity levels. Total operating income was $23.9 million in the first three months of 2025, an increase of $7.5 million, compared to operating income of $16.4 20 million in the first three months of 2024. Operating income for the first three months of 2025 included higher manufacturing and field service related costs and reduced operating leverage. Operating income for the first three months of 2024 included approximately $13.3 million of expense related to the change in fair value of the estimated earn-out liability. Corporate and other. Corporate and other revenue represents the elimination of inter-segment sales from our Pressure Control segment to our Spoolable Technologies segment. Corporate and other expenses include costs associated with executive management and other administrative functions not directly attributable to our reporting segment. Corporate and other expenses for the first three months of 2025 was $9.6 million, an increase of $4.1 million, or 73.9% from the first three months of 2024. The increase was largely attributable to professional fees associated with growth initiatives. Interest income, net. Interest income, net for the first three months of 2025 was $2.3 million, compared to $0.7 million for the first three months of 2024. The increase was due to an increase in interest income earned on cash invested during period. Income tax expense. Income tax expense for the first three months of 2025 was $16.8 million compared to $13.4 million for the first three months of 2024. The increase in income tax expense from the first three months of 2024 was primarily due to an increase in operating income during the first three months of 2025, in conjunction with an additional $1.2 million of expense related to the revaluation of our deferred tax asset as a result of a change in our forecasted state rate. Liquidity and Capital Resources At March 31, 2025, we had $347.7 million of cash and cash equivalents. Our primary sources of liquidity and capital resources are cash on hand, cash flows generated by operating activities, and borrowings under our Amended ABL Credit Facility (as defined in Note 6 in the notes to the unaudited condensed 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 March 31, 2025, we had $222.6 million of available borrowing capacity under our Amended ABL Credit Facility with no outstanding borrowings, and $2.4 million in letters of credit outstanding. We were in compliance with the covenants of the Amended ABL Credit Facility as of March 31, 2025. 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. As of March 31, 2025, $146.3 million remained authorized for future repurchases of Class A common stock under the program. We believe that our existing cash on hand, cash generated from operations and available borrowings under our Amended ABL Credit Facility will be sufficient for at least the next 12 months to meet working capital requirements, debt service obligations, anticipated capital expenditures, repurchases of shares of our Class A common stock, 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 CC Units other than Cactus Inc. We currently estimate our net capital expenditures for the year ending December 31, 2025 will range from $40 to $50 million. In the Pressure Control segment, capital expenditures are primarily related to rental fleet investments, international expansion and diversification of our low cost supply chain. In the Spoolable Technologies segment, capital expenditures are primarily related to manufacturing plant enhancements and additional deployment equipment used for product installation. Our ability to satisfy our long-term liquidity requirements, including cash requirements to fund income tax liabilities and the TRA liability at Cactus Inc., along with associated distributions to holders of CC Units relating to their ownership of Cactus Companies, depends on our future operating performance, which is affected by, and subject to, prevailing economic conditions, market conditions in the E&P industry, availability and cost of raw materials, and financial, business and other factors, many of which are beyond our control. We will not be able to predict or control many of these factors, such as economic conditions in the markets where we operate, and competitive pressures. If necessary, we would likely choose to further reduce our spending on capital expenditures and operating expenses to ensure we operate within the cash flow generated from our operations. 21 Cash Flows Three Months Ended March 31, 2025 Compared to Three Months Ended March 31, 2024 The following table summarizes our cash flows for the periods indicated: Three Months Ended March 31, 2025 2024 (in thousands) Net cash provided by operating activities $ 41,545 $ 86,263 Net cash used in investing activities (15,451) (6,808) Net cash used in financing activities (21,791) (20,127) Net cash provided by operating activities was $41.5 million and $86.3 million for the three months ended March 31, 2025 and 2024, respectively. Operating cash flows for the three months ended March 31, 2025 decreased due to an increase in working capital, primarily related to strong revenue recognition in the month of March in both reporting segments to close the reporting period, combined with increased inventory levels in anticipation of seasonally stronger revenue in our Spoolable Technologies segment during the second and third quarters. Net cash used in investing activities was $15.5 million and $6.8 million for the three months ended March 31, 2025 and 2024, respectively. The increase for the three months ended March 31, 2025 was primarily due to the initial investment of $6.0 million related to our joint venture in Vietnam intended to diversify our manufacturing capabilities. Net cash used in financing activities was $21.8 million for the three months ended March 31, 2025 compared to $20.1 million for the three months ended March 31, 2024. The increase in net cash provided by financing activities for the three months ended March 31, 2025 was primarily related to an increase in member distributions of $3.4 million and an increase in payment of Class A dividends of $1.1 million. These increases were partially offset by a decrease in share repurchases of $2.8 million. Item 3. Quantitative and Qualitative Disclosures About Market Risk. For quantitative and qualitative disclosures about market risk, see Part II, Item 7A., “Quantitative and Qualitative Disclosures about Market Risk,” in our 2024 Annual Report. Our exposure to market risk has not changed materially since December 31, 2024.