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 our Quarterly Report on Form 10-Q for the quarter ended March 31, 2025 and 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 six months ended June 30, 2025, we derived 75% of total revenues from the sale of our products, 9% of total revenues from rental and 16% of total revenues from field service and other. During the six months ended June 30, 2024, we derived 76% of total revenues from the sale of our products, 9% of total revenues from rental and 15% 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. 20 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 Six Months Ended June 30, 2025 March 31, 2025 June 30, 2025 June 30, 2024 WTI Oil Price ($/bbl) (1) $ 64.57 $ 71.78 $ 68.12 $ 79.69 Natural Gas Price ($/MMBtu) (2) $ 3.19 $ 4.14 $ 3.66 $ 2.02 U.S. Land Drilling Rigs (3) 556 572 564 593 (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) Based on data made publicly available by Baker Hughes Company. In the second quarter of 2025, average U.S. land drilling activity levels declined approximately 3% compared to the first quarter of 2025 as weaker commodity prices and an uncertain global economic outlook impacted activity levels. Average natural gas prices were down approximately 23% from the first quarter of 2025. First quarter 2025 prices were elevated as a cold winter led to higher draws than anticipated in early 2025, but stocks have since recovered to above the five-year average which reduced pricing in the second quarter. The outlook for natural gas demand remains strong. Average oil prices declined 10% in the second quarter of 2025, largely due to OPEC+ announcing their intention to substantially unwind production cuts of 2.2 million barrels per day that have been in place since 2023, which has increased market fears of a potential supply surplus. U.S. Trade Policies Over the course of 2025, the Trump administration has implemented and announced a number of new tariffs, including new Section 232 tariffs of 50% on imports of steel and certain products made from steel from most countries outside of the U.S., 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-July, most Reciprocal tariffs have been temporarily paused until August 1, 2025, except for those applied to certain countries, including China. After these tariff announcements, global equity, bond and currency markets have experienced heightened levels of volatility due to the potential disruption to global trade, the increasingly uncertain global economic and inflation outlook, and the negative implications of reduced consumer demand for potentially more expensive imported products and energy. 21 We are incurring, and expect to continue to incur, elevated tariff expenses on our goods imported from Vietnam and China, and experience generally higher steel input costs at our Bossier City manufacturing facility as a result of the broad Section 232 tariffs, which should both impact profitability to the extent we cannot offset such increases with cost reduction efforts and increased pricing. The weaker oil demand and increased supply outlook and associated decline in commodity pricing has led and is likely to continue to lead to lower U.S. land drilling and completion activity levels as 2025 progresses, and correspondingly reduced demand for our products and services. Pillar Two Framework Certain members of 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. On June 28, 2025, the Group of Seven announced an update to the Pillar Two regime with a proposed ‘side by side’ solution. The ‘side by side’ proposal would fully exclude the Company and other U.S. parented groups from the impacts of Pillar Two in respect of both foreign and domestic profits, other than a foreign minimum tax. The Company continues to evaluate the impact of both currently enacted and proposed provisions and estimates the impacts to income tax expense to be immaterial. 2025 Tax Legislation On July 4, 2025, tax legislation colloquially known as the One Big Beautiful Bill Act (“OBBBA”) was enacted. The OBBBA includes tax provisions such as the reinstatement of bonus depreciation and expensing of domestic research and development expenditures. As a result of this legislation, we anticipate the OBBBA will lead to accelerated tax deductions that will reduce current tax expense with an offset to deferred tax expense. The Company continues to evaluate the impacts of this legislation but anticipates the impact to total income tax expense will be immaterial. Baker Hughes Transaction In June 2025, Cactus Companies entered into a Framework Agreement (the “Framework Agreement”) with Baker Hughes Holdings LLC (“Baker Hughes Holdings”) and Baker Hughes Pressure Control LP (“Baker Hughes Pressure Control”), each of which is an indirect subsidiary of Baker Hughes Company, pursuant to which the Company will acquire a controlling interest in Baker Hughes Company’s surface pressure control business. Prior to the closing of the transactions contemplated by the Framework Agreement (“(the “Closing”), Baker Hughes Holdings will effect certain restructuring transactions on the terms and subject to the conditions set forth in the Framework Agreement, as a result of which Baker Hughes Pressure Control or certain of its subsidiaries will own the Business Assets and the Business Liabilities (each as defined in the Framework Agreement) (collectively, the “Acquired Business”). At Closing and pursuant to the Framework Agreement, Baker Hughes Holdings or one or more affiliates thereof will sell 65% of the limited liability company membership interests in Baker Hughes Pressure Control to Cactus Companies or an affiliate thereof for a cash purchase price of $344.5 million, subject to certain working capital, cash, debt, capital expenditure and other customary adjustments after Closing (such transaction, the “Baker Hughes Transaction” and the strategic relationship created thereby, the “Joint Venture”). Subject to satisfaction of the closing conditions, the Baker Hughes Transaction is expected to close in either late 2025 or early 2026. 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. 22 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 June 30, 2025 Compared to Three Months Ended March 31, 2025 The following table presents a summary of the segment consolidated operating results for the periods indicated: Three Months Ended June 30, 2025 March 31, 2025 $ Change % Change (in thousands) Revenues Pressure Control $ 179,772 $ 190,277 $ (10,505) (5.5) % Spoolable Technologies 96,225 92,578 3,647 3.9 Corporate and other (2,422) (2,536) 114 4.5 Total revenues 273,575 280,319 (6,744) (2.4) Operating income Pressure Control 42,333 54,333 (12,000) (22.1) Spoolable Technologies 28,053 23,876 4,177 17.5 Total segment operating income 70,386 78,209 (7,823) (10.0) Corporate and other expenses (9,581) (9,597) 16 0.2 Total operating income 60,805 68,612 (7,807) (11.4) Interest income, net 2,518 2,325 193 8.3 Income before income taxes 63,323 70,937 (7,614) (10.7) Income tax expense 14,276 16,832 (2,556) (15.2) Net income 49,047 54,105 (5,058) (9.3) Less: net income attributable to non-controlling interest 8,718 9,882 (1,164) (11.8) Net income attributable to Cactus Inc. $ 40,329 $ 44,223 $ (3,894) (8.8) % Pressure Control. Pressure Control revenue for the second quarter of 2025 was $179.8 million, a decrease of $10.5 million, or 5.5%, from the first quarter of 2025 primarily due to lower rental revenue and lower sales of wellhead and production from reduced customer activity levels in the second quarter. Pressure Control operating income of $42.3 million for the second quarter of 2025 decreased $12.0 million, or 22.1% from the first quarter of 2025 primarily due to lower operating leverage resulting from the reduced volume, increased tariff impacts to product margins and increased legal expenses and reserves recognized in connection with litigation claims. Spoolable Technologies. Spoolable Technologies revenue for the second quarter of 2025 was $96.2 million, an increase of $3.6 million, or 3.9% from the first quarter of 2025 primarily due to higher customer activity levels in the seasonally strong second quarter. Total operating income for Spoolable Technologies for the second quarter of 2025 was $28.1 million, compared to operating income of $23.9 million for the first quarter of 2025, an increase of $4.2 million, or 17.5%, from the first quarter of 2025. The increase in operating income was primarily due to higher volume and higher 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 23 management and other administrative functions not directly attributable to our reporting segment. Corporate and other expenses for the second quarter of 2025 were flat sequentially. The expenses in both quarters include similar levels of expenses for professional fees associated with the Baker Hughes Transaction. Interest income, net. Interest income, net was $2.5 million for the second quarter of 2025 and $2.3 million for the first quarter of 2025. The interest income, net is primarily comprised of interest income earned on the invested cash balance. Income tax expense. Income tax expense for the second quarter of 2025 was $14.3 million compared to $16.8 million for the first quarter of 2025. The decrease in income tax expense from the second quarter was due to a decrease in operating income quarter-over-quarter. 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. Six Months Ended June 30, 2025 Compared to Six Months Ended June 30, 2024 The following table presents a summary of the segment consolidated operating results for the periods indicated: Six Months Ended June 30, 2025 2024 $ Change % Change (in thousands) Revenues Pressure Control $ 370,049 $ 362,220 $ 7,829 2.2 % Spoolable Technologies 188,803 202,811 (14,008) (6.9) Corporate and other (4,958) (519) (4,439) nm Total revenues 553,894 564,512 (10,618) (1.9) Operating income Pressure Control 96,666 107,344 (10,678) (9.9) Spoolable Technologies 51,929 46,434 5,495 11.8 Total segment operating income 148,595 153,778 (5,183) (3.4) Corporate and other expenses (19,178) (11,409) (7,769) (68.1) Total operating income 129,417 142,369 (12,952) (9.1) Interest income, net 4,843 2,094 2,749 nm Income before income taxes 134,260 144,463 (10,203) (7.1) Income tax expense 31,108 31,589 (481) (1.5) Net income 103,152 112,874 (9,722) (8.6) Less: net income attributable to non-controlling interest 18,600 24,081 (5,481) (22.8) Net income attributable to Cactus Inc. $ 84,552 $ 88,793 $ (4,241) (4.8) % nm = not meaningful Pressure Control. Pressure Control revenue was $370.0 million for the first six months of 2025, an increase of $7.8 million, or 2.2%, from the first six months of 2024, primarily due to increased intersegment sales with Spoolable Technologies. Further, enhanced customer drilling efficiencies contributed to higher product volume sold, notwithstanding a decline in rig counts. Operating income of $96.7 million in the first six months of 2025 decreased $10.7 million, or 9.9%, from the first six months of 2024. The decrease was primarily attributable to escalated tariff cost impacts on product margins in the second quarter of 2025, as well as increased legal expenses and reserves recognized in connection with litigation claims. Spoolable Technologies. Spoolable Technologies revenue for the first six months of 2025 was $188.8 million, a decrease of $14.0 million, or 6.9%, from the first six months of 2024, primarily due to reduced customer activity levels. Total operating income was $51.9 million in the first six months of 2025, an increase of $5.5 million, or 11.8%, compared to operating income of $46.4 million in the first six months of 2024. Operating income for the first six months of 2025 reflected improved operating 24 efficiencies, which were partly offset by the impact of the lower volume. Operating income for the first six months of 2024 included approximately $16.2 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 six months of 2025 was $19.2 million, an increase of $7.8 million, or 68.1% from the first six months of 2024. The increase was largely attributable to professional fees associated with the Baker Hughes Transaction. Interest income, net. Interest income, net for the first six months of 2025 was $4.8 million, compared to $2.1 million for the first six 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 six months of 2025 was $31.1 million compared to $31.6 million for the first six months of 2024. The decrease in income tax expense from the first six months of 2024 was primarily due to a decrease in operating income during the first six months of 2025, partially offset by 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 income tax rate. Liquidity and Capital Resources At June 30, 2025, we had $405.2 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 June 30, 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 June 30, 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 June 30, 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 our short-term anticipated cash requirements, including working capital requirements, the cash purchase price related to the Baker Hughes Transaction, debt service obligations, anticipated capital expenditures, repurchases of shares of our Class A common stock, expected Tax Receivable Agreement ("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 expect to utilize cash on hand and funds from the undrawn Amended ABL Credit Facility to fund the cash purchase price related to the Baker Hughes Transaction. However, we may elect to pursue one or more debt financing transactions prior to the Closing to enhance liquidity. We currently estimate our net capital expenditures for the year ending December 31, 2025 will range from $40 to $45 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. 25 Cash Flows Six Months Ended June 30, 2025 Compared to Six Months Ended June 30, 2024 The following table summarizes our cash flows for the periods indicated: Six Months Ended June 30, 2025 2024 (in thousands) Net cash provided by operating activities $ 124,380 $ 164,218 Net cash used in investing activities (26,507) (14,054) Net cash used in financing activities (36,546) (37,195) Net cash provided by operating activities was $124.4 million and $164.2 million for the six months ended June 30, 2025 and 2024, respectively. Operating cash flows for the six months ended June 30, 2025 decreased primarily due to lower earnings and an increase in working capital. Net cash used in investing activities was $26.5 million and $14.1 million for the six months ended June 30, 2025 and 2024, respectively. The increase for the six months ended June 30, 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 as well as an increase in capital expenditures. Net cash used in financing activities was $36.5 million for the six months ended June 30, 2025 compared to $37.2 million for the six months ended June 30, 2024. The decrease in net cash used in financing activities for the six months ended June 30, 2025 was primarily related to a decrease in share repurchases of $2.8 million. partially offset by an increase in the payment of Class A share dividends of $2.0 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.