UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10‑K10-K
(Mark One)
☑ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 20172019
or
☐TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number: 001‑38390
Cactus, Inc.
(Exact name of registrant as specified in its charter)
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Delaware | 35‑2586106 |
(State or other jurisdiction
of incorporation or organization) | (I.R.S. Employer
Identification No.) |
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Cobalt Center
920 Memorial City Way, Suite 300 Houston, Texas | 77024 |
(Address of principal executive offices) | (Zip code) |
(713) 626‑8800
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:Act
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Common Stock, par value $0.01 per share
| New York Stock Exchange
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(Title of each class)class
| (
| Trading Symbol(s) | | Name of each exchange on which registered)registered |
Class A Common Stock, par value $0.01 | | WHD | | New York Stock Exchange |
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the Registrantregistrant is a well‑known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐☑ No ☑☐
Indicate by check mark if the Registrantregistrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No ☑
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☐☑ No ☑☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☑No ☐
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10‑K or any amendment to this Form 10‑K. ☑
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b‑2 of the Exchange Act.
Large accelerated filer | ☐☑
| Accelerated filer | ☐ |
Non-accelerated filer | ☑☐
| Smaller reporting company | ☐ |
(Do not check if a smaller reporting company)
| Emerging growth company | ☑☐ |
If an emerging growth company indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☑☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b‑2 of the Exchange Act). Yes ☐ No ☑
As of June 30, 2017,2019, the last business dayaggregate market value of the registrant’s most recently completed second quarter, there was no public market for the registrant’s common stock. The registrant’s common stock began trading onof the New York Stock Exchange on February 8, 2018.registrant held by non-affiliates of the registrant was $1.6 billion.
As of March 13, 2018,February 24, 2020, the registrant had 26,450,00047,339,551 shares of Class A Common Stock,common stock, $0.01 par value per share, and 48,439,77227,957,699 shares of Class B Common Stock,common stock, $0.01 par value per share, outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
The Company’s definitive proxy statement relating to the annual meeting of shareholders (to be held June 20, 2018) will be filed with the Securities and Exchange Commission within 120 days after the close of the Company’s fiscal year ended December 31, 2017 and is incorporated by reference in Part III to the extent described herein.None.
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10‑K (this “Annual Report”) contains “forward-looking statements” within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). When used in this Annual Report, the words “could,” “believe,” “anticipate,” “intend,” “estimate,” “expect,” “project” and similar expressions are intended to identify forward‑looking statements, although not all forward‑looking statements contain such identifying words. These forward‑looking statements are based on our current expectations and assumptions about future events and are based on currently available information as to the outcome and timing of future events. When considering forward‑looking statements, you should keep in mind the risk factors and other cautionary statements described under the heading “Item 1A. Risk Factors” included in this Annual Report. These forward‑looking statements are based on management’s current belief, based on currently available information, as to the outcome and timing of future events.
Forward‑looking statements may include statements about:
| · | | demand for our products and services, which is affected by, among other things, changes in the price of and demand for, crude oil and natural gas in domestic and international markets; |
| · | | the level of growth in number of rigs, pad sizes, well spacings and associated well count;count and availability of takeaway capacity; |
| · | | capital spending discipline exercised by customers; |
| · | | changes in the number of drilled but uncompleted wells (“DUC’s”) and the level of fracturing activity and the availability of fracturing equipment and pressure pumping services;completion activity; |
| · | | the size and timing of orders; |
| · | | availability of raw materials;materials and imported items; |
| · | | transportation differentials associated with reduced capacity in and out of the storage hub in Cushing, Oklahoma; |
| · | | expectations regarding raw materials, overhead and operating costs and margins; |
| · | | availability of skilled and qualified workers; |
| · | | potential liabilities such as warranty and product liability claims arising out of the installation, use or misuse of our products; |
| · | | the possibility of cancellation of orders; |
| · | | our financial strategy, operating cash flows, liquidity and capital required for our business; |
| · | | our future revenue, income and operating performance; |
| · | | the terminationability to pay dividends and the amount of relationships with major customers or suppliers;any such dividends; |
| · | | warranty and product liability claims;the termination of relationships with major customers or suppliers;
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| · | | laws and regulations, including environmental regulations, that may increase our costs, limit the demand for our products and services or restrict our operations; |
| · | | disruptions in the political, regulatory, economic and social conditions domestically or internationally; |
| · | | increasedoutbreaks of pandemic or contagious diseases that may disrupt our suppliers or facilities or impact demand for oil and gas;
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| · | | increases in import tariffs assessed on products from China orand imported raw materials used in the manufacture of our goods in the United States;States which could negatively impact margins and our working capital; |
| · | | the significance of future liabilities under the Tax Receivable Agreement (the “TRA”) we entered into with certain current or past direct and indirect owners of Cactus LLC (the “TRA Holders”) in connection with our initial public offering; |
| · | | a failure of our information technology infrastructure or any significant breach of security; |
| · | | potential uninsured claims and litigation against us; |
| · | | competition within the oilfield services industry; |
| · | | our dependence on the continuing services of certain of our key managers and employees; |
| · | | the lack of a public market forcurrency exchange rate fluctuations associated with our securities;international operations; and
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| · | | plans, objectives, expectations and intentions contained in this Annual Report that are not historical. |
We caution you that these forward‑looking statements are subject to all of the risks and uncertainties, most of which are difficult to predict and many of which are beyond our control, incident to the operation of our business. These risks include, but are not limited to the risks described in this Annual Report under “Item 1A. Risk Factors.”
Should one or more of the risks or uncertainties described in this Annual Report occur, or should underlying assumptions prove incorrect, our actual results and plans could differ materially from those expressed in any forward‑looking statements.
All forward‑looking statements, expressed or implied, included in this Annual Report are expressly qualified in their entirety by this cautionary statement. This cautionary statement should also be considered in connection with any subsequent written or oral forward‑looking statements that we or persons acting on our behalf may issue.
Except as otherwise required by applicable law, we disclaim any duty to update any forward‑looking statements, all of which are expressly qualified by the statements in this section, to reflect events or circumstances after the date of this Annual Report.
EMERGING GROWTH COMPANY STATUS
We are an “emerging growth company” as defined in the Jumpstart Our Business Startups Act (the “JOBS Act”). For as long as we are an emerging growth company, unlike public companies that are not emerging growth companies under the JOBS Act, we will not be required to:
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| | provide an auditor’s attestation report on management’s assessment of the effectiveness of our system of internal control over financial reporting pursuant to Section 404(b) of the Sarbanes‑Oxley Act of 2002;
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| | comply with any new requirements adopted by the Public Company Accounting Oversight Board (the “PCAOB”) requiring mandatory audit firm rotation or a supplement to the auditor’s report in which the auditor would be required to provide additional information about the audit and the financial statements of the issuer;
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| | provide certain disclosure regarding executive compensation required of larger public companies or hold shareholder advisory votes on the executive compensation required by the Dodd‑Frank Wall Street Reform and Consumer Protection Act (the “Dodd‑Frank Act”); or
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| | obtain shareholder approval of any golden parachute payments not previously approved.
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We will cease to be an emerging growth company upon the earliest of the:
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| | last day of the fiscal year in which we have $1.07 billion or more in annual revenues;
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| | date (after being subject to Section 13(a) or Section 15(d) of the Exchange Act for a period of at least twelve calendar months) on which we become a “large accelerated filer” (the fiscal year‑end on which the total market value of our common equity securities held by non‑affiliates is $700 million or more as of June 30);
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| | date on which we issue more than $1.0 billion of non‑convertible debt over a three‑year period; or
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| | last day of the fiscal year following the fifth anniversary of our initial public offering.
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In addition, Section 107 of the JOBS Act provides that an emerging growth company can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act of 1933, as amended (the “Securities Act”), for complying with new or revised accounting standards, but we have irrevocably opted out of the extended transition period and, as a result, we will adopt new or revised accounting standards on the relevant dates in which adoption of such standards is required for other public companies.
For a description of the qualifications and other requirements applicable to emerging growth companies and certain elections that we have made due to our status as an emerging growth company, see “Risk Factors—Risks Related to Our Class A Common Stock—For as long as we are an emerging growth company, we will not be required to comply with certain reporting requirements, including those relating to disclosure about our executive compensation, that apply to other public companies.”
PART I
You should read this entire report carefully, including the risks described under Part 1, Item 1A. Risk Factors and our consolidated financial statements and the notes to those consolidated financial statements included elsewhere in this Annual Report on Form 10‑K. Except as otherwise indicated or required by the context, all references in this Annual Report to the “Company,“the Company,” “Cactus,” “we,” “us” and “our” refer to (i) Cactus Wellhead, LLC (“Cactus LLC”) and its consolidated subsidiaries prior to the completion of our initial public offering and (ii) Cactus, Inc. (“Cactus Inc.”) and its consolidated subsidiaries (including Cactus LLC) following the completion of our initial public offering on February 12, 2018, unless we state otherwise or the context otherwise requires. References in this Annual Report to “Cadent” are to Cadent Energy Partners II, L.P., an affiliate of Cadent Energy Partners. References in this Annual Report to “Cactus WH Enterprises” are to Cactus WH Enterprises, LLC. Cadent, Cactus WH Enterprises and Mr. Lee Boquet are collectively referred to herein as the “Pre-IPO Owners.”2018.
Item 1. Business
Overview
Cactus Inc. was incorporated as a Delaware corporation on February 17, 2017 for the purpose of completing an initial public offering of equity (our “IPO”) and related transactions. On February 12, 2018, in connection with our IPO, Cactus Inc. became a holding company whose sole material assets are units in Cactus LLC (“CW Units”). Cactus Inc. became the managing member of Cactus LLC and is responsible for all operational, management and administrative decisions relating to Cactus LLC’s business.
On February 12, 2018, we completed our initial public offering of 23,000,000 shares of Class A common stock, par value $0.01 per share (“Class A Common Stock”), at a price to the public of $19.00 per share. We received net proceeds of $405.8 million after deducting underwriting discounts and commissions and estimated offering expenses of our IPO. On February 14, 2018 we completed the sale of an additional 3,450,000 shares of Class A Common Stock pursuant to the exercise in full by the underwriters of their option to purchase additional shares of Class A Common Stock (the “Option”), resulting in $61.6 million of additional net proceeds. We contributed all of the net proceeds of the IPO to Cactus LLC in exchange for CW Units. Cactus LLC used (i) $251.0 million of the net proceeds to repay all of the borrowings outstanding under its term loan facility, including accrued interest and (ii) $216.4 million to redeem CW Units from certain direct and indirect owners of Cactus LLC.
We design, manufacture, sell and rent a range of highly‑engineered wellheads and pressure control equipment. Our products are sold and rented principally for onshore unconventional oil and gas wells and are utilized during the drilling, completion (including fracturing) 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 wellhead and pressure control equipment.
Organizational Structure
In connection with the completion of the IPO, Cactus Inc. became the sole managing member of Cactus LLC and is responsible for all operational, management and administrative decisions relating to Cactus LLC’s business and consolidates the financial results of Cactus LLC and its subsidiaries. The Limited Liability Company Operating Agreement of Cactus LLC was amended and restated as the First Amended and Restated Limited Liability Company Operating Agreement of Cactus LLC (the “Cactus Wellhead LLC Agreement”) to, among other things, admit Cactus Inc. as the sole managing member of Cactus LLC.
In connection with our IPO, we completed a series of reorganization transactions, including the following:
| (a)
| | all of the membership interests in Cactus LLC were converted into a single class of CW Units;
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| (b)
| | Cactus Inc. contributed the net proceeds of the IPO to Cactus LLC in exchange for 23,000,000 CW Units;
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| (c)
| | Cactus LLC used the net proceeds of the IPO that it received from Cactus Inc. to repay the borrowings outstanding, plus accrued interest, under its term loan facility and to redeem 8,667,841 CW Units from the owners thereof;
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| (d)
| | Cactus Inc. issued and contributed 51,747,768 shares of its Class B common stock, par value $0.01 per share (“Class B Common Stock”) equal to the number of outstanding CW Units held by the Pre-IPO Owners following the redemption described in (c) above to Cactus LLC;
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| (e)
| | Cactus LLC distributed to each of the Pre-IPO Owners that continued to own CW Units following the IPO one share of Class B Common Stock for each CW Unit such Pre-IPO Owner held following the redemption described in (c) above;
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| (f)
| | Cactus Inc. contributed the net proceeds from the exercise of the Option to Cactus LLC in return for 3,450,000 additional CW Units; and
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| (g)
| | Cactus LLC used the net proceeds from the Option to redeem 3,450,000 CW Units from the owners thereof, and Cactus Inc. canceled a corresponding number of shares of Class B Common Stock.
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In connection with the IPO, Cactus Inc. granted 0.7 million restricted stock unit awards, which will vest over one to three years, to certain directors, officers and employees of Cactus.
In this Annual Report, we refer to the owners of CW Units (along with their permitted transferees) as “CW Unit Holders.” CW Unit Holders also own one share of our Class B Common Stock for each CW Unit such CW Unit Holders own. After giving effect to our IPO and the related transactions, Cactus Inc. owns an approximate 35.3% interest in Cactus LLC, and the CW Unit Holders own an approximate 64.7% interest in Cactus LLC. These ownership percentages are based on 26,450,000 shares of Class A Common Stock and 48,439,772 shares of Class B Common Stock issued and outstanding as of March 13, 2018.
The following diagram indicates our simplified ownership structure.
Our Company
We design, manufacture, sell and rent a range of highly‑engineered wellheads and pressure control equipment. Our products are sold and rented principally for onshore unconventional oil and gas wells and are utilized during the drilling, completions (including fracturing) 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 wellhead and pressure control equipment.
Our principal products include our Cactus SafeDrill™ wellhead systems, frac stacks, zipper manifolds and production trees that we design and manufacture. Every oil and gas well requires a wellhead, which is installed at the onset of the drilling process and which remains with the well through its entire productive life. The Cactus SafeDrill™ wellhead systems employ technology which allows technicians to land and secure casing strings more safely from the rig floor reducing the need to descend into the cellar. We believe we are a market leader in the application of such technology, with thousands of our products sold and installed across the United States since 2011. During the completion phase of a well, we rent frac stacks, zipper manifolds and other high‑pressure equipment that are used for well control and for managing the transmission of frac fluids and proppants during the hydraulic fracturing process. These severe service applications require robust and reliable equipment. For the subsequent production phase of a well, we sell production trees that regulate hydrocarbon production, which are installed on the wellhead after the frac tree has been removed. In addition, we provide mission‑critical field services for all of our products and rental items, including 24‑hour service crews to assist with the installation, maintenance and safe handling of the wellhead and pressure control equipment. Finally, we provide repair services for all of the equipment that we sell or rent.
Our innovative wellhead products and pressure control equipment are developed internally. We believe our close relationship with our customers provides us with insight into the specific issues encountered in the drilling and completions processes, allowing us to provide them with highly tailored product and service solutions. We have achieved significant market share, as measured by the percentage of total active U.S. onshore rigs that we follow (which we define as the number of active U.S. onshore drilling rigs to which we are the primary provider of wellhead products and corresponding services during drilling), and brand name recognition with respect to our engineered products, which we believe is due to our focus on safety, reliability, cost effectiveness and time saving features. We optimize our products for pad drilling (i.e., the process of drilling multiple wellbores from a single surface location) to reduce rig time and provide operators with significant efficiencies that translate to cost savings at the wellsite.
Our manufacturing and production facilities are located in Bossier City, Louisiana and Suzhou, China. While both facilities can produce our full range of products, our Bossier City facility has advanced capabilities and is designed to support time‑sensitive and rapid turnaround orders, while our facility in China is optimized for longer lead time orders and outsources its machining requirements. Both our United States and China facilities are licensed to the latest API 6A specification for both wellheads and valves and API Q1 and ISO9001:2015 quality management systems.
We operate 14 service centers in the United States, which are strategically located in the key oil and gas producing regions, including the Permian, SCOOP/STACK, Marcellus, Utica, Eagle Ford, Bakken and other active oil and gas regions in the United States. We also have one service center in Eastern Australia. These service centers support our field services and provide equipment assembly and repair services.
Our History
Cactus Inc. was incorporated on February 17, 2017 as a Delaware corporation for the purpose of completing an initial public offering of equity and related transactions (our “IPO”). Cactus LLC is a Delaware limited liability company and was formed on July 11, 2011. We began operating in August 2011, following the formation of Cactus LLC by Scott Bender and Joel Bender, who have owned or operated wellhead manufacturing businesses since the late 1970s, and by Cadent Energy Partners II, L.P. (“Cadent”), an affiliate of Cadent Energy Partners LLC, as its equity sponsor. We acquired our primary manufacturing facility in Bossier City, Louisiana from one of our Pre-IPO Owners in September 2011 and established our other production facility, located in Suzhou, China in December 2013.2013 through our subsidiary there. Since we began operating, we have grown to 14 U.S. service centers located in Texas, Pennsylvania, Oklahoma, North Dakota, New Mexico, Louisiana, Colorado and Wyoming New Mexico, Oklahoma, Pennsylvaniaas well as three service centers in Eastern Australia. Our corporate headquarters are located in Houston, Texas.
Cactus Inc. and North Dakota.its consolidated subsidiaries, including Cactus LLC, are primarily engaged in the design, manufacture and sale of wellhead and pressure control equipment. In July 2014,addition, we formedmaintain a fleet of frac valves and ancillary equipment for short-term rental. Our 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. We also provide field services for all of our products and rental items to assist with the installation, maintenance and handling of the wellhead and pressure control equipment as well as offer repair and refurbishment services.
Organization Structure
On February 12, 2018, we completed our initial public offering of 23.0 million shares of Class A common stock, par value $0.01 per share (“Class A common stock”), at a price to the public of $19.00 per share. We received net proceeds of $408.0 million after deducting underwriting discounts and commissions and payment of $2.8 million in offering expenses for the IPO. We also paid $2.2 million in offering expenses during 2017. On February 14, 2018 we completed the sale of an additional 3.5 million shares of Class A common stock pursuant to the exercise in full by the underwriters of their option to purchase additional shares of Class A common stock (the “Option”), from which we received an additional $61.6 million net proceeds after deducting underwriting discounts and commissions. We contributed all of the net proceeds of our IPO (including from the Option) to Cactus LLC in exchange for CW Units. Cactus LLC used the $469.6 million of the net proceeds from our IPO to (i) repay all of the borrowings outstanding under its term loan facility, including accrued interest, of $251.0 million and (ii) redeem $216.4 million of CW Units from certain direct and indirect owners of Cactus LLC. The remaining $2.2 million was retained by Cactus LLC to cover offering expenses previously paid in 2017.
Cactus Inc. is a holding company whose only material asset is an equity interest consisting of units representing limited liability company interests in Cactus LLC (“CW Units”). Cactus Inc. became the sole managing member of Cactus LLC upon completion of our IPO and is responsible for all operational, management and administrative decisions relating to Cactus LLC’s business. The Limited Liability Company Operating Agreement of Cactus LLC was amended and restated as the First Amended and Restated Limited Liability Company Operating Agreement of Cactus LLC (the “Cactus Wellhead LLC Agreement”) to, among other things, admit Cactus Inc. as the sole managing member of Cactus LLC. Pursuant to the Cactus Wellhead Australia Pty, LtdLLC Agreement, holders of CW Units are entitled to redeem their CW Units, which results in a corresponding increase in Cactus Inc.’s membership interest in Cactus LLC and establishedan increase in the number of shares of
Class A common stock outstanding. The following is a rollforward of ownership of legacy CW Units by legacy CW Unit Holders:
| | | |
| | CW Units |
| | (in thousands) |
CW Units held by legacy CW Unit Holders as of February 7, 2018 | | | 60,558 |
IPO | | | (12,118) |
July 2018 Follow-on Offering | | | (11,197) |
Other CW Unit redemptions | | | (7) |
CW Units held by legacy CW Unit Holders as of December 31, 2018 | | | 37,236 |
March 2019 Secondary Offering | | | (8,474) |
Other CW Unit redemptions | | | (804) |
CW Units held by legacy CW Unit Holders as of December 31, 2019 | | | 27,958 |
On July 16, 2018, we completed a public offering of 11.2 million shares (consisting of 10.0 million base shares and 1.2 million shares sold pursuant to the underwriters’ option to purchase additional shares) of Class A common stock (the “Follow-on Offering”) at a price to the public of $33.25 per share and received $359.3 million of net proceeds after deducting underwriting discounts and commissions. Cactus Inc. contributed these net proceeds to Cactus LLC in exchange for CW Units. Cactus LLC then used the net proceeds to redeem 11.2 million CW Units from certain of the owners of Cactus LLC, and Cactus Inc. canceled a corresponding number of shares of Class B common stock, par value $0.01 per share (“Class B common stock”).
On March 19, 2019, Cactus Inc. entered into an underwriting agreement by and among Cactus Inc., Cactus LLC, certain selling stockholders of Cactus (the “Selling Stockholders”) and the underwriters named therein, providing for the offer and sale of Class A common stock by the Selling Stockholders (the “March 2019 Secondary Offering”). As described in the prospectus supplement dated March 19, 2019 and filed with the Securities and Exchange Commission on March 20, 2019, in connection with the March 2019 Secondary Offering, certain Selling Stockholders owning CW Units exercised their Redemption Right with respect to 8.5 million CW Units, together with a corresponding number of shares of Class B common stock, as provided in the Cactus LLC Agreement. The March 2019 Secondary Offering closed on March 21, 2019, at which time, in exercise of its Call Right, Cactus Inc. acquired the redeemed CW Units and a corresponding number of shares of Class B common stock (which shares of Class B common stock were then canceled) and issued 8.5 million shares of Class A common stock to the underwriters at the direction of the redeeming Selling Stockholders, as provided in the Cactus LLC Agreement. In addition, certain other Selling Stockholders sold 26 thousand shares of Class A common stock in the March 2019 Secondary Offering, which shares were owned by them directly prior to the closing of this offering. Cactus did not receive any of the proceeds from the sale of common stock in the March 2019 Secondary Offering. Cactus incurred $1.0 million in offering expenses which were recorded in other income (expense), net, in the consolidated statement of income.
In this Annual Report, we refer to the owners of CW Units, other than Cactus Inc., (along with their permitted transferees) as “CW Unit Holders.” CW Unit Holders also own one share of our Class B common stock for each CW Unit such CW Unit Holder owns. As of December 31, 2019, after giving effect to our IPO, Follow-on Offering, the March 2019 Secondary Offering and additional redemptions pursuant to the Cactus Wellhead LLC Agreement, Cactus Inc. owns an approximate 62.8% interest in Cactus LLC, and the CW Unit Holders own an approximate 37.2% interest in Cactus LLC as of December 31, 2019, which is based on 47.2 million shares of Class A common stock and 28.0 million shares of Class B common stock issued and outstanding.
The following diagram indicates our simplified ownership structure as of December 31, 2019:
Overview
Our principal products include our Cactus SafeDrill® wellhead systems as well as frac stacks, our Cactus SafeLinkTM system, zipper manifolds and production trees that we design and manufacture. Every oil and gas well requires a wellhead, which is installed at the onset of the drilling process and remains with the well through its entire productive life. The Cactus SafeDrill® wellhead systems employ technology which allows technicians to land and secure casing strings more safely from the rig floor, reducing the need to descend into the cellar. We believe we are a market leader in the application of such technology, with thousands of our products sold and installed across the United States since 2011. During the completion phase of a well, we rent frac stacks, zipper manifolds and other high-pressure equipment that are used for well control and for managing the transmission of frac fluids and proppants during the hydraulic fracturing process. These severe service centerapplications require robust and reliable equipment. For the subsequent production phase of a well, we sell production trees and the equipment to developinterface with various forms of artificial lift that regulate hydrocarbon production, which are installed on the wellhead after the frac stack has been removed. In addition, we provide mission-critical field services for all of our products and rental items, including 24-hour service crews to assist with the installation, maintenance, repair and safe handling of the wellhead and pressure control equipment.
Our innovative wellhead products and pressure control equipment are developed internally. We believe our close relationship with our customers provides us with insight into the specific issues encountered in the drilling and completion processes, allowing us to provide them appropriate product and service solutions. We have achieved significant market share, as measured by the percentage of total active U.S. onshore rigs that we follow (which we define as the number of active U.S. onshore drilling rigs to which we are the primary provider of wellhead products and corresponding services during drilling), and brand name recognition with respect to our engineered products, which we believe is due to our focus on safety, reliability, cost effectiveness and time saving features. We optimize our products for pad drilling (i.e., the process of drilling multiple wellbores from a single surface location) to reduce rig time and provide operators with significant efficiencies that translate to cost savings at the wellsite.
We operate through service centers in the United States, which are strategically located in the key oil and gas producing regions, including the Permian, SCOOP/STACK, Marcellus, Utica, Eagle Ford, and Bakken, among other active oil and gas regions in the United States, and in Eastern Australia. These service centers support our field services and provide equipment assembly and repair services. Our manufacturing and production facilities are located in Bossier City, Louisiana and Suzhou, China.
How We Generate Our Revenues
We operate in one business segment. Our revenues are derived from three sources: products, rentals, and field service and other. Product revenues are primarily derived from the sale of wellhead systems and production trees. Rental revenues are primarily derived from the rental and associated repair of equipment used for well control during the completion process as well as the rental of drilling tools. Field service and other revenues are primarily earned when we provide installation and other field services for both product sales and equipment rental. Additionally, other revenues are derived from providing repair and reconditioning services to customers that have previously installed wellheads or production trees on their wellsite. Items sold or rented generally have an associated service component. As a result, there is some level of correlation between field service and other revenues and revenues from product sales and rentals.
For the year ended December 31, 2019, we derived 57% of our total revenues from the sale of our products, 22% from rental and 21% from field service and other. In 2018, we derived 53% of our total revenues from the sale of our products, 25% from rental and 22% from field service and other. In 2017, we derived 55% of our total revenues from the sale of our products, 23% from rental and 22% from field service and other. We have predominantly domestic operations, with a small amount of sales being generated in Australia.
Most of our sales are made on a call out basis pursuant to agreements, wherein our clients provide delivery instructions for goods and/or services as their operations require. Such goods and/or services are most often priced in accordance with a preapproved price list. The actual pricing of our products and services is impacted by a number of factors including competitive pricing pressure, the level of utilized capacity in the oil service sector, maintenance of market share, cost of producing the product and general market conditions.
Costs of Conducting Our Business
The principal elements of cost of sales for our products are the direct and indirect costs to manufacture and supply the product, including labor, materials, machine time, tariffs and duties, freight and lease expense related to our facilities. The principal elements of cost of sales for rentals are the direct and indirect costs of supplying rental equipment, including depreciation, repairs specifically performed on such rental equipment and freight. The principal elements of cost of sales for field service and other are labor, equipment depreciation and repair, equipment lease expense, fuel and supplies.
Selling, general and administrative expense is comprised of costs such as sales and marketing, engineering, general corporate overhead, business development, compensation, employment benefits, information technology, safety and environmental, legal and professional.
Interest income (expense), net includes interest expense associated with our credit facility, finance leases and accrued interest on deferred payments under the TRA.
Impact of Section 232 of the Trade Expansion Act of 1962 (“Section 232”)
On March 8, 2018, the President of the United States issued two proclamations imposing tariffs on imports of certain steel and aluminum products, effective March 23, 2018. The decision was made in Eastern Australia.response to the Department of Commerce's findings and recommendations in its reports of its investigations into the impact of imported steel and aluminum on the national security of the United States pursuant to Section 232. Specifically, the President imposed a 25% global tariff on certain imported steel mill products and a 10% global tariff on certain imported aluminum products. The President subsequently has issued proclamations permanently excluding Argentina, Australia, Brazil, Canada, Mexico and South Korea from the steel tariff and Argentina, Australia, Canada and Mexico from the aluminum tariff, though imports of steel from Argentina, Brazil and South Korea, and imports of aluminum from Argentina, are subject to absolute quotas. The tariffs and quotas have caused the cost of raw materials to increase.
Impact of Section 301 of the Trade Act of 1974 (“Section 301”)
On May 10, 2019, the U.S. Trade Representative announced that it was increasing the level of tariffs on approximately $200 billion worth of Chinese imports pursuant to Section 301. The tariff rate on covered products that were exported on or after May 10, 2019 was raised from 10% to 25%. Covered products that were exported from China to the United States prior to May 10, 2019 remained subject to an additional 10% tariff if they entered the U.S. before June 15, 2019. Substantially all of the products and frac rental equipment that we import through our Chinese supply chain are subject to the tariffs. For the year ended December 31, 2019, we estimate that approximately 50% of our goods received were sourced through our Chinese supply chain.
We believe further increases in the tariff rate above 25% may adversely affect our business, but a combination of factors may mitigate some of the impact of any future increases in tariff rates on our results of operations. These include, among other things, use of product received prior to the introduction of tariffs, our negotiations with suppliers, use of alternative supply chains and favorable currency exchange movements.
Suppliers and Raw Materials
Forgings, castings and bar stock represent the principal raw materials used in the manufacture of our products and rental equipment. In addition, we require accessory items (such as elastomers, ring gaskets, studs and nuts) and machining services.machined components. We purchase these items and services from over 250 vendors both in the United States, China and China.
Australia. For the years ended December 31, 2019, 2018 and 2017, 2016 and 2015, approximately $33.4$36.5 million, $10.8$46.7 million and $18.1$33.4 million, respectively, of machined component purchases were made from a vendor located in China, representing approximately 22%16%, 20%21% and 27%22%, respectively, of our total third partythird-party vendor purchases of raw materials, finished products, equipment, machining and other services. Although we have historically made purchases from this vendor pursuant to a long term contract, such contract expired at the end of 2016.purchases. We are currently purchasing from this vendor on terms substantially similar to those contained in the expired agreement. We expect to negotiate a new agreement with such vendor on terms similar to those in the expired agreement. Although our relationships with our existing vendors, including the Chinese vendor referred to above, are important to us, we do not believe that we are substantiallyoverly dependent on any individual vendor to supply our required materials or services. The materials and services essential to our business are normally readily available and, where we use one or a few vendors as a source of any particular materials or services, we believe that we can, within a reasonable period of time, make satisfactory alternative arrangements in the event of an interruption of supply from any vendor.
We believe that our materials and services vendors have the capacity to meet additional demand should we require it.
Impact of Section 232 of the Trade Expansion Act of 1962 (“Section 232”)
On March 8, 2018, the President of the United States issued two proclamations imposing tariffs on imports of certain steelit, although likely at higher costs and aluminum products, effective March 23, 2018. The decision was made in response to the Department of Commerce’s findings and recommendations in its reports of its investigations into the impact of imported steel and aluminum on the national security of the United States pursuant to Section 232. Specifically, the President has imposed a 25% global tariff on certain imported steel mill products and a 10% global tariff on certain imported aluminum products from all countries except Canada and Mexico. The tariffs could cause the cost of raw materials to increase, although the impact to us of Section 232 remains uncertain.
Customers
We serve over 200 customers representing major independent and other oil and gas companies with operations in the key U.S. oil and gas producing basins including the Permian, Marcellus Shale/Utica, the SCOOP/STACK, the Eagle Ford, the Bakken and other active oil and gas basins, as well as in Australia. For the year ended December 31, 2017, Pioneer Natural Resources represented 11% of our total revenue and no other customer represented 10% or more of our total revenue. For each of the years ended December 31, 2016 and 2015, Devon Energy Corporation represented 12% of our total revenue, and no other customer represented 10% or more of our total revenue.delayed deliveries.
Manufacturing
Our manufacturing and production facilities are located in Bossier City, Louisiana and Suzhou, China. WhileAlthough both facilities can produce our full range of products, our Bossier City facility has advanced capabilities and is designed to support time‑sensitivetime-sensitive and rapid turnaround orders, while our facility in China is optimized for longer lead time orders and outsources its machining requirements. Both our U.S.Bossier City and China facilities are API certifiedlicensed to the APIlatest American Petroleum Institute (“API”) 6A specification for both wellheads and valves and API Q1 and ISO9001:ISO 9001:2015 quality management systems.
Our Bossier City facility is configured to provide rapid‑responserapid-response production of made‑to‑ordermade-to-order equipment. Where typicaltraditional manufacturing facilities are designed to run in batches with different machining processes occurring in stages, this facility uses highly‑capableadvanced computer numeric control (“CNC”) machines to perform substantially allmultiple machining of the productoperations in a single step. We believe eliminating the setup and queue times between machining processes allows us to offer significantly shorter order‑to‑deliveryorder-to-delivery time for equipment than our competitors, albeit at higher costs than China. Responsiveness to urgent needs strengthens our relationship with key customers.
Our Bossier City manufacturing facility also functions as a repair and testing facility with its API 6A PSL3 certification and full QA/QCQuality Assurance and Quality Control department. The facility also has the ability to perform hydrostatic testing, phosphate and oiling, copper coating and frac valve remanufacturing.
Our production facility in China is configured to efficiently produce our range of pressure control products and components for less time‑sensitive, higher‑volumetime-sensitive, higher-volume orders. All employees in our Suzhou facility are Cactus employees, which we believe is a key factor in ensuring high quality. Our Suzhou facility currently assembles and tests some machined components before shipment to Cactus facilities in the United States orand Australia.
Trademarks and Other Intellectual Property
Trademarks are important to the marketing of our products. We consider the Cactus Wellhead trademark to be important to our business as a whole. Additionally,The Company has numerous trademarks registered with the SafeDrillTM trademark is complementary to our marketing effortsU.S. Patent and brand recognition. TheseTrademark Office and has also applied for registration status of numerous trademarks which are registered in the United States.pending.
We also rely on trade secret protection for our confidential and proprietary information. To protect our information, we customarily enter into confidentiality agreements with our employees and suppliers. There can be no assurance, however, that others will not independently obtain similar information or otherwise gain access to our trade secrets.
We have been awarded several U.S. patents and currently have patent applications pending. We seek to protect our technology through use of patent protections, although we do not deem patents to be critical to our success.
Cyclicality
We are substantially dependent on conditions in the oil and gas industry, including the level of exploration, development and production activity of, and the corresponding capital spending by, oil and natural gas companies. The level of exploration, development and production activity is directly affected by trends in oil and natural gas prices, which hashave historically been volatile, and by the availability of capital and the associated capital spending discipline imposedexercised by customers.
Declines, as well as anticipated declines, in oil and gas prices could negatively affect the level of these activities and capital spending, which could adversely affect demand for our products and services and, in certain instances, result in the cancellation, modification or rescheduling of existing and expected orders and the ability of our customers to pay us for our products and services. These factors could have an adverse effect on our revenue and profitability.
Seasonality
Our business is not significantly impacted by seasonality, although our fourth quarter has historically been impacted by holidays and our clients’ budget cycles.
Environmental, Health and Safety RegulationCustomers
Our operations are subject to domestic (including U.S. federal, state and local) and international regulations with regard to air, land and water qualityWe serve over 200 customers representing majors, independents and other environmental matters. We believe we areoil and gas companies with operations in substantial compliance with these regulations. Lawsthe key U.S. oil and regulations to minimizegas producing basins including the Permian, SCOOP/STACK, Marcellus, Utica, Eagle Ford, Bakken and mitigate risks to the environmentother active oil and to workplace safety continue to be enacted. Changes in standards of enforcement of existing regulations,gas basins, as well as in Australia. Pioneer Natural Resources represented approximately 10% of total revenues for the enactmentyear ended December 31, 2019 and enforcement11% during each of new legislation, may require usthe years ended December 31, 2018 and our customers2017.
Competition
The markets in which we operate are highly competitive. We believe that we are one of the largest suppliers of wellheads in the United States. We compete with divisions of Schlumberger, Baker Hughes and TechnipFMC, as well as with a number of other companies. Similar to modify, supplement or replace equipment or facilities or to change or discontinue present methodsCactus, each of operation. Our environmental compliance expenditures, our capital costsSchlumberger, Baker Hughes and TechnipFMC manufacture their own engineered products.
We believe that the rental market for environmentalfrac stacks and related flow control equipment andis more fragmented than the market for our products may change accordingly.
Hazardous Substances and Waste. The Resource Conservation and Recovery Act (“RCRA”) and comparable state statutes, regulate the generation, transportation, treatment, storage, disposal and cleanup of hazardous and non‑hazardous wastes. Under the auspiceswellhead product market. Cactus does not believe that any individual company represents more than 20% of the Environmental Protection Agency (“EPA”), the individual statesU.S. market.
administer someAs is the case in the wellhead market, Cactus, Schlumberger, Baker Hughes and TechnipFMC rent internally engineered and manufactured products. Other competitors generally rent foreign manufactured generic products.
We believe that the principal competitive factors in the markets we serve are technical features, equipment availability, work force competency, efficiency, safety record, reputation, experience and price. Additionally, projects are often awarded on a bid basis, which tends to create a highly competitive environment. While we seek to be competitive in our pricing, we believe many of our customers elect to work with us based on product features, safety, performance and quality of our crews, equipment and services. We seek to differentiate ourselves from our competitors by delivering the highest‑quality services and equipment possible, coupled with superior execution and operating efficiency in a safe working environment.
Environmental, Health and Safety Regulation
We are subject to stringent governmental laws and regulations, both in the United States and other countries, pertaining to protection of the environment and occupational safety and health. Compliance with environmental legal requirements in the United States at the federal, state or local levels may require acquiring permits to conduct regulated activities, incurring capital expenditures to limit or prevent emissions, discharges and any unauthorized releases, and complying with stringent practices to handle, recycle and dispose of certain wastes. These laws and regulations include, among others:
| · | | the Federal Water Pollution Control Act (the “Clean Water Act”); |
| · | | the Comprehensive Environmental Response, Compensation and Liability Act; |
| · | | the Resource Conservation and Recovery Act; |
| · | | the Occupational Safety and Health Act; and |
| · | | national and local environmental protection laws in the People’s Republic of China. |
New, modified or stricter enforcement of environmental laws and regulations could be adopted or implemented that significantly increase our compliance costs, pollution mitigation costs, or the cost of any remediation of environmental contamination that may become necessary, and these costs could be material. Our clients are also subject to most, if not all, of the provisions of RCRA, sometimessame laws and regulations relating to environmental protection and occupational safety and health in conjunction with their own, more stringent requirements. Wethe United States and in foreign countries where we operate. Consequently, to the extent these environmental compliance costs, pollution mitigation costs or remediation costs are required to manage the transportation, storage and disposal of hazardous and non‑hazardous wastes generatedincurred by our operations in compliance with applicable laws, including RCRA.
The Comprehensive Environmental Response, Compensation,clients, those clients could elect to delay, restrict or cancel drilling, exploration or production programs, which could reduce demand for our products and Liability Act (“CERCLA”), also known as the Superfund law, imposes joint and several liability, without regard to fault or legality of conduct, on classes of persons who are considered to be responsible for the release of a hazardous substance into the environment. These persons include the current and former owner or operator of the site where the release occurred, and anyone who disposed of or arranged for the disposal of a hazardous substance released at the site. We currently own, lease, or operate numerous properties used for manufacturing and other operations. We also contract with waste removal services and, landfills. In the event ofas a release from these properties, under CERCLA, RCRA and analogous state laws, we could be required to remove substances and wastes, remediate contaminated property, or perform remedial operations to prevent future contamination even if the releases are not from our operations. In addition, neighboring landowners and other third parties may also file claims for personal injury and property damage allegedly caused by releases into the environment. Any obligations to undertake remedial operations in the future may increase our cost of doing business and mayresult, have a material adverse effect on our business, financial condition, results of operations, and financial condition.or cash flows.
Water Discharges. The Federal Water Pollution Control Act (the “Clean Water Act”) and analogous state laws restrictConsistent with our quality assurance and control the discharge of pollutants into waters ofprinciples, we have established proactive environmental and worker safety policies in the United States. Discharges to water associated with our operations require appropriate permits from state agenciesStates and may add material costs to our operations. The adoption of more stringent criteria in the future may also increase our costs of operation. The Clean Water Act and analogous state laws provide for administrative, civil and criminal penalties for unauthorized discharges and, together with the Oil Pollution Act of 1990, impose rigorous requirements for spill prevention and response planning, as well as substantial potential liabilityforeign countries for the costsmanagement, handling, recycling or disposal of removal, remediation,chemicals and damages in connection with any unauthorized discharges. In addition, in 2015 the EPAgases and U.S. Army Corps of Engineers (“Corps”) finalized a rule that expanded the scope of waters subject to Clean Water Act jurisdiction. If implemented, this rule may have a material adverse effect on the operation costs of customers, thereby potentially reducing demand forother materials and wastes resulting from our products. The rule was stayed nationwide in late 2015, however, and the EPA and the Corps have proposed to repeal the rule and reinstate the pre‑2015 rule. In a separate rulemaking, the EPA and the Corps have also proposed to delay the implementation of the 2015 rule until 2019. Neither of these proposals has been finalized and the rule remains stayed by the Sixth Circuit.
Employee Health and Safety. We are subject to a number of federal and state laws and regulations, including OSHA and comparable state statutes, establishing requirements to protect the health and safety of workers. In addition, the OSHA hazard communication standard, the EPA community right‑to‑know regulations under Title III of the federal Superfund Amendment and Reauthorization Act and comparable state statutes require that information be maintained concerning hazardous materials used or produced in our operations and that this information be provided to employees, state and local government authorities and the public.operations. Substantial fines and penalties can be imposed and orders or injunctions limiting or prohibiting certain operations may be issued in connection with any failure to comply with laws and regulations relating to worker health and safety.
API Certifications. Our manufacturing facility and our production facility are currently certified by the API as being in compliance with API 6A, 21st Edition product specification for both wellheads and valves and API Q1, 9th Edition, Addendum 2, and ISO9001:ISO 9001:2015 quality management systems. These standards have also been incorporated into regulations adopted by the Bureau of Safety and Environmental Enforcement (“BSEE”) that apply to the oil and gas industries that operate on the outer continental shelf. API’s standards are subject to revision, however, and there is no guarantee that future amendments or substantive changes to the standards would not require us to modify our operations or manufacturing processes to meet the new standards. Doing so may materially affect our operationoperational costs. We also cannot guarantee that changes to the standards would not lead to the rescission of our licenses should we be unable to make the changes necessary to meet the new standards. Furthermore, these facilities are subjected to annual audits by the API. Loss of our API licenses could materially affect demand for these products.
Climate Change. International, national and state governments and agencies are currently evaluating and/or promulgating legislation and regulations that are focused on restricting emissions commonly referred to as greenhouse gas (“GHG”) emissions. These regulatory measures include, among others, adoption of cap and trade regimes, carbon taxes, increased efficiency standards and incentives or mandates for renewable energy. Consideration of further legislation or regulation may be impacted by the Paris Agreement, which was announced by the Parties to the United Nations Framework Convention on Climate Change in December 2015 and which calls on signatories to set progressive GHG emission reduction goals. Although the United States became a party to the Paris Agreement in April 2016, the Trump administration announced in June 2017 its intention to either withdraw from the Agreement or renegotiate more favorable terms. However, the Paris Agreement stipulates that participating countries must wait four years before withdrawing from the agreement. Despite the planned withdrawal, certain U.S. city and state governments have announced their intention to satisfy their proportionate obligations under the Paris Agreement. These commitments could further reduce demand and prices for fossil fuels produced by our customers. In the United States, the EPA has made findings under the Clean Air Act that GHG emissions endanger public health and the environment, resulting in the EPA’s adoption of regulations requiring construction and operating permit reviews of both existing and new stationary sources with major emissions of GHGs, which reviews require the installation of new GHG emission control technologies. However, in October 2017, the EPA announced a proposal to repeal its regulation of GHG emissions from existing stationary sources. The EPA has also promulgated rules requiring the monitoring and annual reporting of GHG emissions from certain sources, including onshore and offshore oil and natural gas production facilities and onshore oil and natural gas processing, transmission, storage and distribution facilities. In addition, in May 2016, the EPA finalized a rule that set additional emissions limits for volatile organic compounds and established new methane emission standards for certain new, modified or reconstructed equipment and processes in the oil and natural gas source category, including production, processing, transmission and storage activities. In June 2017, the EPA issued an administrative stay of key provisions of the rule, but was promptly ordered by the D.C. Circuit to implement the rule. The EPA also published proposed 60‑day and two‑year stays of certain provisions in June 2017 and published a Notice of Data Availability in November 2017 seeking comment and providing clarification regarding the agency’s legal authority to stay the rule.
It is too early to determine whether, or in what form, further regulatory action regarding greenhouse gas emissions will be adopted or what specific impact a new regulatory action might have on us or our customers. Generally, the anticipated regulatory actions do not appear to affect us in any material respect that is different, or to any materially greater or lesser extent, than other companies that are our competitors. However, to the extent our customers are subject to these or other similar proposed or newly enacted laws and regulations, the additional costs incurred by our customers to comply with such laws and regulations could impact their ability or desire to continue to operate at current or anticipated levels, which would negatively impact their demand for our products and services. In addition, any new laws or regulations establishing cap‑and‑trade or that favor the increased use of non‑fossil fuels may dampen demand for oil and gas production and lead to lower spending by our customers for our products and services. Similarly, to the extent we are or become subject to any of these or other similar proposed or newly enacted laws and regulations, we expect that our efforts to monitor, report and comply with such laws and regulations, and any related taxes imposed on companies by such programs, will increase our cost of doing business and may have a material adverse effect on our financial condition and results of operations. Moreover, any such regulations could ultimately restrict the exploration and production of fossil fuels, which could adversely affect demand for our products.
Hydraulic Fracturing. Many of our customers utilize hydraulic fracturing in their operations. Environmental concerns have been raised regarding the potential impact of hydraulic fracturing on underground water supplies.supplies and seismic activity. These concerns have led to several regulatory and governmental initiatives in the United States to restrict the hydraulic fracturing process, which could have an adverse impact on our customers’ completions or production activities. For example, in December 2016, the EPA released its final report on the potential impacts of hydraulic fracturing on drinking water resources, concluding that “water cycle” activities associated with hydraulic fracturing may impact drinking water resources “under some circumstances,” including water withdrawals for fracturing in times or areas of low water availability; surface spills during the management of fracturing fluids, chemicals or produced water; injection of fracturing fluids into wells with inadequate mechanical integrity; injection of fracturing fluids directly into
groundwater resources; discharge of inadequately treated fracturing wastewater to surface waters; and disposal or storage of fracturing wastewater in unlined pits. In other examples, the EPA has issued final regulations under the U.S. Clean Air Act governing performance standards, including standards for the capture of air emissions released during hydraulic fracturing, though the EPA is currently reconsidering these standards, and published in June 2016 a final rule prohibiting the discharge of wastewater from hydraulic fracturing operations to publicly owned wastewater treatment plants. Also, the U.S. Bureau of Land Management finalized rules in March 2015 that imposed new or more stringent standards for performing hydraulic fracturing on federal and American Indian lands. While the agency subsequently published a final rule rescinding the 2015 rule in December 2017, this decision could be subject to legal challenge. In addition, in some instances, states and local governments have enacted more stringent hydraulic fracturing restrictions or bans on hydraulic fracturing activities. These and other similar state and foreign regulatory initiatives, if adopted, would establish additional levels of regulation for our customers that could make it more difficult for our customers to complete natural gas and oil wells and could adversely affect the demand for our equipment and services, which, in turn, could adversely affect our results of operations, financial condition and cash flows.
State and federal regulatory agencies have also recently focused on a possible connection between the operation of injection wells used for oil and gas waste disposal and seismic activity. Similar concerns have been raised that hydraulic fracturing may also contribute to seismic activity. When caused by human activity, such events are called induced seismicity. Developing research suggests that the link between seismic activity and wastewater disposal may vary by region, and that only a very small fraction of the tens of thousands of injection wells have been suspected to be, or have been, the likely cause of induced seismicity. In March 2016, the United States Geological Survey identified six states with the most significant hazards from induced seismicity, including Oklahoma, Kansas, Texas, Colorado, New Mexico, and Arkansas. In light of these concerns, some state regulatory agencies have modified their regulations or issued orders to address induced seismicity. Increased regulation and attention given to induced seismicity could lead to greater opposition to, and litigation concerning, oil and gas activities utilizing hydraulic fracturing or injection wells for waste disposal, which could indirectly impact our business, financial condition and results of operations. In addition, these concerns may give rise to private tort suits from individuals who claim they are adversely impacted by seismic activity they allege was induced. Such claims or actions could result in liability for property damage, exposure to waste and other hazardous materials, nuisance or personal injuries, and require our customers to expend additional resources or incur substantial costs or losses. This could in turn adversely affect the demand for our products.
Although we do not conduct hydraulic fracturing, increased regulation and attention given to the hydraulic fracturing process could lead to greater opposition to oil and gas production activities using hydraulic fracturing techniques. In addition, the adoption of new laws or regulations at the federal, state, local or foreign level imposing reporting obligations on, or otherwise limiting, delaying or banning, the hydraulic fracturing process or other processes on which hydraulic fracturing and subsequent hydrocarbon production relies, such as water disposal, could make it more difficult to complete oil and natural gas wells,wells. Further, it could increase our customers’ costs of compliance and doing business, and otherwise adversely affect the hydraulic fracturing services they perform, which could negatively impact demand for our products.
Offshore Drilling. Climate Change.Various new regulations intended State, national and international governments and agencies continue to improve offshore safety systemsevaluate, and in some instances adopt, climate-related legislation and other regulatory initiatives that would restrict emissions of greenhouse gases. Changes in environmental protection have been issued since 2010 that have increasedrequirements related to greenhouse gases, climate change and alternative energy sources may negatively impact demand for our services. For example, oil and natural gas exploration and production may decline as a result of environmental requirements, including land use policies responsive to environmental concerns. Because our business depends on the complexitylevel of the drilling permit process and may limit the opportunity for some operators to continue deepwater drillingactivity in the U.S. Gulf of Mexico, whichoil and natural gas industry, existing or future laws, regulations, treaties or international agreements related to greenhouse gases and climate change, including incentives to conserve energy or use alternative energy sources, may reduce demand for oil and natural gas and could have an adversea negative impact on our customers’ activities. For example,business. Likewise, such restrictions may result in April 2016, BSEE publishedadditional compliance obligations that could have a final blowout preventer systems and well control rule that focusesmaterial adverse effect on blowout preventer requirements and includes reforms in well design, well control, casing, cementing, real‑time well monitoring and subsea containment. Additionally, in July 2016, the Bureau of Ocean Energy Management issued a notice to lessees (“NTL”), effective September 30, 2016, setting out new financial assurance requirements for offshore leases intended to ensure that leaseholders will be able to cover the costs of decommissioning. In January 2017, the Bureau extended the NTL implementation timeline for certain leases by an additional six months. In May 2017, the Bureau began a review of the NTL to determine whether it should be implemented. If these new financial assurance requirements remain in place, they may increase our customers’ operating costs and impact our customers’ ability to obtain leases, thereby reducing demand for our products. Additional regulation includes a third‑party certification requirement promulgated by the Bureau of Safety and Environmental
Enforcement (“BSEE”) in September 2016 under which offshore operators must certify through an independent third party that their critical safety and pollution prevention equipment is operational and will function as designed in the most extreme conditions. However, the BSEE published a proposed rule in December 2017 to rescind this requirement, allowing equipment to demonstrate its adequacy through various industry standards, such as those established by the API. Third‑party challenges to industry operations in the U.S. Gulf of Mexico may also serve to further delay or restrict activities. Although our operations are predominately onshore, if the new regulations, policies, operating procedures and possibility of increased legal liability are viewed by our current or future customers as a significant impairment to expected profitability on projects or an unjustifiable increase in risk, they could discontinue or curtail their offshore operations, thereby adversely affecting the demand for our equipment and services, which, in turn could adversely affect ourbusiness, consolidated results of operations and consolidated financial condition and cash flows.
Chinese Environmental Law. As we have manufacturing operations in the People’s Republic of China (“PRC”), we are regulated by various PRC national and local environmental protection laws, regulations and policies. Chinese PRC environmental laws and regulations include national and local standards governing activities that may impact human health and the environment. These laws and regulations set standards for emissions control, discharges to surface and subsurface water, and the generation, handling, storage, transportation, treatment and disposal of waste materials. Although we believe that our operations are in substantial compliance with current environmental laws and regulations, we may not be able to comply with these regulations at all times as the PRC environmental legal regime is evolving and becoming more stringent. Therefore, if the PRC government imposes more stringent regulations in the future, we will have to incur additional and potentially substantial costs and expenses to comply with new regulations, which may negatively affect our results of operations. If we fail to comply with any of the present or future environmental regulations in any material aspects, we may suffer from negative publicity and may be required to pay substantial fines, suspend or even cease operations.condition.
Companies must register or file an environmental impact report with the appropriate environmental bureau before starting construction or any major expansion or renovation of a new production facility. Before commencing operations, the agency must inspect the new or renovated facility and determine that all necessary equipment has been installed as required by applicable environmental protection requirements.
Chinese PRC authorities have the power to issue fines and penalties for non‑compliance and can also require violators to cease operations until compliance has been restored. We cannot currently predict the extent of future capital expenditures, if any, required for compliance with environmental laws and regulations, which may include expenditures for environmental control facilities.
Insurance and Risk Management
We provide products and systems to customers involved in oil and gas exploration, development and production. We also provide parts, repair services and field services associated with installation at all of our facilities and service centers in the United States and at our facility in Australia, as well as at customer sites. Our operations are subject to hazards inherent in the oil and natural gas industry, including accidents, blowouts, explosions, cratering, fires, oil spills and hazardous materials spills. These conditions can cause personal injury or loss of life, damage to or destruction of property, equipment, the environment and wildlife, and interruption or suspension of operations, among other adverse effects. In addition, claims for loss of oil and natural gas production and damage to formations can occur. If a serious accident were to occur at a location where our equipment and services are being used, it could result in our being named as a defendant to lawsuits asserting significant claims.
We have suffered accidents in the past, and we anticipate that we could experience accidents in the future. In addition to the property and personal losses from these accidents, the frequency and severity of these incidents affect our operating costs and insurability, as well as our relationships with customers, employees and regulatory agencies. Any significant increase in the frequency or severity of these incidents, or the general level of compensation awards, could
adversely affect the cost of, or our ability to obtain, workers’ compensation and other forms of insurance and could have other adverse effects on our results of operations and financial condition.
We rely on customer indemnifications and third‑party insurance as part of our risk mitigation strategy. However, our customers may be unable to satisfy indemnification claims against them. In addition, we indemnify our customers against certain claims and liabilities resulting or arising from our provision of goods or services to them. Our insurance may not be sufficient to cover any particular loss or may not cover all losses. We carry a variety of insurance coverages for our operations, and we are partially self‑insured for certain claims, in amounts that we believe to be customary and reasonable. Historically, insurance rates have been subject to various market fluctuations that may result in less coverage, increased premium costs, or higher deductibles or self‑insured retentions.
Our insurance includes coverage for commercial general liability, damage to our real and personal property, damage to our mobile equipment, sudden and accidental pollution liability, workers’ compensation and employer’s liability, auto liability, foreign package policy, commercial crime, fiduciary liability employment practices, cargo, excess liability, and directors and officersofficers’ insurance. We also maintain a partially self-insured medical plan that utilizes specific and aggregate stop loss limits. Our insurance includes various limits and deductibles or self‑insured retentions, which must be met prior to, or in conjunction with, recovery. To cover potential pollution risks, our commercial general liability policy is endorsed with sudden and accidental coverage and our excess liability policies provide additional limits of liability for covered sudden and accidental pollution losses.
Employees
As of December 31, 2017,2019, we employed over 8801,100 people. Our future success will depend partially on our ability to attract, retain and motivate qualified personnel. We are not a party to any collective bargaining agreements and have not experienced any strikes or work stoppages. We consider our relations with our employees to be satisfactory.
Facilities
Our corporate headquarters is located in Houston, Texas. Please see “Item 2. Properties” for information with respect to our other facilities. We believe that our facilities are adequate for our current operations.
Competition
The markets in which we operate are highly competitive. We believe that we are one of the largest suppliers of wellheads in the United States. We compete with divisions of Schlumberger, Baker Hughes a GE company, Weir and TechnipFMC as well as with a number of smaller companies. We believe that the wellhead market is relatively concentrated, with Cactus, Schlumberger and Baker Hughes representing over 50% of the market. Similar to Cactus, each of Schlumberger, Baker Hughes and TechnipFMC manufacture their own engineered products.
We believe that the rental market for frac stacks and related flow control equipment is more fragmented than the wellhead product market. Cactus does not believe that any individual company represents more than 10% of the market. As is the case in the wellhead market, Cactus, Schlumberger, Baker Hughes and TechnipFMC rent internally engineered and manufactured products. Other competitors generally rent foreign designed and manufactured generic products.
We believe that the principal competitive factors in the markets we serve are technical features, equipment availability, work force competency, efficiency, safety record, reputation, experience and price. Additionally, projects are often awarded on a bid basis, which tends to create a highly competitive environment. While we seek to be competitive in our pricing, we believe many of our customers elect to work with us based on product features, safety, performance and quality of our crews, equipment and services. We seek to differentiate ourselves from our competitors
by delivering the highest‑quality services and equipment possible, coupled with superior execution and operating efficiency in a safe working environment.good.
Available Information
We are required to file annual, quarterly and current reports, proxy statements and certain other information with the SEC. Any documents filed by us with the SEC may be inspected without charge at the SEC’s Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549. Copies of these materials may be obtained from such office upon payment of a duplicating fee. Please call the SEC at 1‑800‑SEC‑0330 for further information on the operation of the Public Reference Room.
The SEC maintains a website at www.sec.gov that contains reports, proxy and information statements and other information regarding registrants that file electronically with the SEC. Any documents filed by us with the SEC, including this Annual Report, can be downloaded from the SEC’s website.
Our principal executive offices are located at Cobalt Center, 920 Memorial City Way, Suite 300, Houston, TX 77024, and our telephone number at that address is (713) 626‑8800. Our website address is www.CactusWHD.com. Our periodic reports and other information filed with or furnished to the SECSecurities and Exchange Commission (“SEC”) are available, free of charge, through our website, as soon as reasonably practicable after those reports and other information are electronically filed with or furnished to the SEC. Information on our website or any other website is not incorporated by reference into this Annual Report and does not constitute a part of this Annual Report.
Item 1A. Risk Factors
Investing in our Class A Common Stockcommon stock involves risks. You should carefully consider the information in this Annual Report, including the matters addressed under “Cautionary NoteStatement Regarding Forward‑Looking Statements,” and the following risks before making an investment decision. Our business, financial condition, prospects and results of operations and financial condition could be materially and adversely affected by any of these risks. Additional risks or uncertainties not currently known to us, or that we deem immaterial, may also have an effect on our business, financial condition, prospects or results of operations.operations and financial condition. The trading price of our Class A Common Stockcommon stock could decline due to any of these risks, and you may lose all or part of your investment.
Risks Related to the Oilfield Services Industry and Our Business
Demand for our products and services depends on oil and gas industry activity and customer expenditure levels, which are directly affected by trends in the demand for and price of crude oil and natural gas.gas and availability of capital.
Demand for our products and services depends primarily upon the general level of activity in the oil and gas industry, including the number of drilling rigs in operation, the number of oil and gas wells being drilled, the depth and drilling conditions of these wells, the volume of production, the number of well completions and the level of well remediation activity, and the corresponding capital spending by oil and natural gas companies. Oil and gas activity is in turn heavily influenced by, among other factors, current and anticipated oil and natural gas prices locally and worldwide, which have historically been volatile.
Declines, as well as anticipated declines, in oil and gas prices could negatively affect the level of these activities and capital spending, which could adversely affect demand for our products and services and, in certain instances, result in the cancellation, modification or rescheduling of existing and expected orders and the ability of our customers to pay us for our products and services. These factors could have an adverse effect on our revenueresults of operations, financial condition and profitability.
cash flows.
Factors affecting the prices of oil and natural gas include, but are not limited to, the following:
| · | | demand for hydrocarbons, which is affected by worldwide population growth, economic growth rates and general economic and business conditions; |
| · | | changesavailable excess production capacity within the Organization of Petroleum Exporting Countries (“OPEC”) and the level of oil and gas production by non‑OPEC countries;
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| · | | the continued development of shale plays which may influence worldwide supply; |
| · | | transportation differentials associated with reduced capacity in sentiment on environmental matters;and out of the storage hub in Cushing, Oklahoma; |
| · | | costs of exploring for, producing and delivering oil and natural gas; |
| · | | political and economic uncertainty and sociopolitical unrest; |
| · | | available excess production capacity within the Organization of Petroleum Exporting Countries (“OPEC”) and the level of oil and gas production by non‑OPEC countries;
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| | oil refining capacity and shifts in end‑customer preferences toward fuel efficiency and the use of natural gas; |
| · | | conservation measures and technological advances affecting energy consumption; |
| · | | potential acceleration of the commercial development of alternative fuels;energy sources (such as wind, solar, geothermal, tidal, fuel cells and biofuels); |
| · | | access to capital and credit markets, which may affect our customers’ activity levels and spending for our products and services; |
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| | the relative strength of the U.S. dollar;
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| · | | changes in laws and regulations related to hydraulic fracturing activities; |
| · | | changes in environmental laws and regulations (including relating to the use of coal in power plants); and |
The oil and gas industry is cyclical and has historically experienced periodic downturns, which have been characterized by diminished demand for oilfieldour products and services and downward pressure on the prices we charge. The last downturn in the oilThese downturns cause many exploration and gas industry that began in mid‑2014 resulted in a reduction in demand for oilfield servicesproduction (“E&P”) companies to reduce their capital budgets and adversely affected our financial condition, results of operations and cash flows.drilling activity. Any future downturn or expected downturn could againresult in a significant decline in demand for oilfield services and adversely affect our results of operations, financial condition and cash flows.
The cyclicality of the oil and natural gas industry may cause our operating results to fluctuate.
We derive our revenues from companies in the oil and natural gas exploration and production industry, a historically cyclical industry with levels of activity that are significantly affected by the levels and volatility of oil and natural gas prices. We have experienced and may in the future experience significant fluctuations in operating results as a result of the reactions of our customers to changes in oil and natural gas prices. For example, prolonged low commodity prices during 2015 and 2016, combined with adverse changes in the capital and credit markets, caused many exploration and production companies to reduce their capital budgets and drilling activity. This resulted in a significant decline in demand for oilfield services and adversely impacted the prices we could charge, particularly for rentals of frac equipment.
If oil prices or natural gas prices decline, the demand for our products and services could be adversely affected.
The demand for our products and services is primarily determined by current and anticipated oil and natural gas prices and the level of drilling activity and related general production spending in the areas in which we have operations. Volatility or weakness in oil prices or natural gas prices (or the perception that oil prices or natural gas prices will decrease) affects the spending patterns of our customers and may result in the drilling of fewer new wells or lower production spending on existing wells. When this occurs, exploration and production (“E&P”) companies move to significantly cut costs, both by decreasing drilling and completions activity and by demanding price concessions from their service providers. This results in lower demand for our products and services and may cause lower rates and lower utilization of our equipment. If oil prices decline or natural gas prices continue to remain low or decline further, or if there is a reduction in drilling activities, the demand for our products and services and our results of operations could be materially and adversely affected.
Additionally, the commercial development of economically viable alternative energy sources (such as wind, solar, geothermal, tidal, fuel cells and biofuels) could reduce demand for our products and services and create downward pressure on the revenue we are able to derive from such products and services, as they are dependent on oil and natural gas prices.
Anticipated growthGrowth in U.S. drilling and completionscompletion activity, and our ability to benefit from such anticipated growth, could be adversely affected by any significant constraints in pressure pumpingequipment, labor or takeaway capacity in the industry.regions in which we operate.
Growth in U.S. drilling and completionscompletion activity may be impacted by, among other things, pressure pumping capacity, pipeline capacity, and pricing, which,material and labor shortages. While there is no perceived shortage in turn, is impacted by, among other things, thecapacity, should significant growth in activity occur there could be concerns over availability of fracturingthe equipment, demand for fracturing equipmentmaterials and fracturing intensity per active rig. Also, longer lateralslabor required to drill and higher intensity fracturing result in greater wear and tear to the industry’s fracturing equipment, which has caused and will continue to cause attrition in the supply of fracturing equipment and shortages in the availability of pressure pumping services. In addition, rising fracturing intensity per rig and an overall increase in completions activity has increased the demand for fracturing equipment. During the completion phase ofcomplete a well, we rent frac stacks, zipper manifolds and other high‑pressure equipment used during the hydraulic fracturing process. For the subsequent production phase of a well, we sell production trees, which are installed on the wellhead after the frac tree has been removed. Any significant additional constraints in the availability of pressure pumping services, fracturing equipment ortogether with the ability to move the produced oil and natural gas to market. Should significant constraints develop that materially impact the economics of fracturing service providers to deliver fracturing servicesoil and gas producers, growth in U.S. drilling and completion activity could be adversely affected. This would have an adverse impact on the demand for the products we sell and rent, which could have a material adverse effect on our business, results of operations, financial condition and cash flows.
We design, manufacture, sell, rent and install equipment that is used in oil and gas exploration and production activities, which may subject us to liability, including claims for personal injury, property damage and environmental contamination should such equipment fail to perform to specifications.
We provide products and systems to customers involved in oil and gas exploration, development and production. Some of our equipment is designed to operate in high‑temperature and/or high‑pressure environments, and some equipment is designed for use in hydraulic fracturing operations. We also provide parts, repair services and field services associated with installation at all of our facilities and service centers in the United States and at our facility in Australia, as well as at customer sites. Because of applications to which our products and services are exposed, particularly those involving high pressure environments, a failure of such equipment, or a failure of our customer to maintain or operate the equipment properly, could cause damage to the equipment, damage to the property of customers and others, personal injury and environmental contamination and could lead to a variety of claims against us that could have an adverse effect on our business and results of operations.
We indemnify our customers against certain claims and liabilities resulting or arising from our provision of goods or services to them. In addition, we rely on customer indemnifications, generally, and third‑party insurance as part
of our risk mitigation strategy. However, our insurance may not be adequate to cover our liabilities. In addition, our customers may be unable to satisfy indemnification claims against them. Further, insurance companies may refuse to honor their policies, or insurance may not generally be available in the future, or if available, premiums may not be commercially justifiable. We could incur substantial liabilities and damages that are either not covered by insurance or that are in excess of policy limits, or incur liability at a time when we are not able to obtain liability insurance. Such potential liabilities could have a material adverse effect on our business, results of operations, financial condition and cash flows.
We may be unable to employ a sufficient number of skilled and qualified workers to sustain or expand our current operations.
The delivery of our products and services requires personnel with specialized skills and experience. Our ability to be productive and profitable will depend upon our ability to attract and retain skilled workers. In addition, our ability to expand our operations depends in part on our ability to increase the size of our skilled labor force. The demand for skilled workers is high, the supply is limited, and the cost to attract and retain qualified personnel has increased. During industry downturns, skilled workers may leave the industry, reducing the availability of qualified workers when conditions improve. In addition, a significant increase in the wages paid by competing employers could result in increases in the wage rates that we must pay. If we are not able to employ and retain skilled workers, our ability to respond quickly to customer demands or strong market conditions may inhibit our growth, which could have a material adverse effect on our business, results of operations and financial condition.
Our business is dependent on the continuing services of certain of our key managers and employees.
We depend on key personnel. The loss of key personnel could adversely impact our business if we are unable to implement certain strategies or transactions in their absence. The loss of qualified employees or an inability to retain and motivate additional highly‑skilled employees required for the operation and expansion of our business could hinder our ability to successfully maintain and expand our market share.
Equity interests in us are a substantial portion of the net worth of our executive officers and several of our other senior managers. Following the completion of our IPO, those executive officers and other senior managers have increased liquidity with respect to their equity interests in us. As a result, those executive officers and senior managers may have less incentive to remain employed by us. After terminating their employment with us, some of them may become employed by our competitors.
Political, regulatory, economic and social disruptions in the countries in which we conduct business could adversely affect our business or results of operations.
In addition to our facilities in the United States, we operate one production facility in China and have a facilityfacilities in Australia that sellssell and rentsrent equipment as well as providesprovide parts, repair services and field services associated with installation. Instability and unforeseen changes in any of the markets in which we conduct business could have an adverse effect on the
demand for, or supply of, our products and services, our results of operations and our financial condition. These factors include, but are not limited to, the following:
| · | | nationalization and expropriation; |
| · | | potentially burdensome taxation; |
| · | | inflationary and recessionary markets, including capital and equity markets; |
| · | | civil unrest, labor issues, political instability, natural disasters, terrorist attacks, cyber‑terrorism, military activity and wars; |
| · | | outbreaks of pandemic or contagious diseases; |
| · | | supply disruptions in key oil producing countries; |
| · | | tariffs, trade restrictions, trade protection measures, including those associated with Section 232 and Section 301, or price controls; |
| · | | foreign ownership restrictions; |
| · | | import or export licensing requirements; |
| · | | restrictions on operations, trade practices, trade partners and investment decisions resulting from domestic and foreign laws and regulations; |
| · | | changes in, and the administration of, laws and regulations; |
| · | | inability to repatriate income or capital; |
| · | | reductions in the availability of qualified personnel; |
| · | | development and implementation of new technologies; |
| · | | foreign currency fluctuations or currency restrictions; and |
| · | | fluctuations in the interest rate component of forward foreign currency rates. |
Our operations and results may be negatively impacted by the coronavirus outbreak.
During January 2020, a novel strain of coronavirus surfaced in the Hubei province in China. We operate one facility in China in Suzhou, located in the Jiangsu province. While the Jiangsu province does not share any borders with the Hubei province, it is approximately 500 miles from Hubei. On January 27, 2020, in an effort to halt the outbreak, China’s State Council announced an extension of the Lunar New Year celebration and thus extended the mandatory closure of all non-essential enterprises until February 10, 2020 in the Jiangsu province. As a result of these measures, we temporarily closed our facility in Suzhou for 10 days. Although the Suzhou facility reopened on February 10, 2020, it is currently operating at a reduced capacity due to, among other reasons, employee shortages resulting in part from government-imposed travel restrictions and local statutory quarantines. We cannot be sure the Suzhou facility will not face additional closures or assess how long it will continue operating at a reduced capacity. Additionally, even once our operations at the Suzhou facility are fully restored, continued government-imposed transportation restrictions or subsequent bottlenecks in the shipment of our products may result in additional negative effects to our supply chain or our ability to transport our products to our customers. There are still too many variables and uncertainties regarding the coronavirus outbreak to fully assess the potential impact on our business, including the ultimate geographic spread of the virus, the duration and severity of the outbreak and the extent of travel restrictions and business closures imposed in China or other affected countries. We believe that our
existing inventory levels and other operations will be able to meet customer commitments and demand for the near future, and we do not believe that the coronavirus is likely to have a material adverse impact on our results of operations for the first quarter of 2020. However, a prolonged shutdown or reduction in capacity of our Chinese operations or other facilities in China that are engaged in our supply chain will likely have a negative effect on our results of operations, which could be material. Broader global effects of potentially reduced consumer confidence, reduced demand for oil and gas and other macro issues could also have a negative effect on our overall business.
We are dependent on a relatively small number of customers in a single industry. The loss of an important customer could adversely affect our results of operations and financial condition.
Our customers are engaged in the oil and natural gas E&P business primarily in the United States and Australia. Historically, we have been dependent on a relatively small number of customers for our revenues. For the yearyears ended December 31, 2017,2019 and 2018, Pioneer Natural Resources represented 11% of our total revenue,10% and no other customer represented more than 10% of our total revenue. For each of the years ended December 31, 2016 and 2015, Devon Energy Corporation represented 12%11%, respectively, of our total revenue and no other customer represented more than 10% of our total revenue.
Our business, financial condition, prospects and results of operations and financial condition could be materially adversely affected if an important customer ceases to engage us for our services on favorable terms or at all or fails to pay or delays in paying us significant amounts of our outstanding receivables.
Additionally, the E&P industry is characterized by frequent consolidation activity. Changes in ownership of our customers may result in the loss of, or reduction in, business from those customers, which could materially and adversely affect our business, results of operations and financial condition.
Customer credit risks could result in losses.
The concentration of our customers in the energy industry may impact our overall exposure to credit risk as customers may be similarly affected by changes in economic and industry conditions. In addition, laws in some jurisdictions outside of the U.S. in which we operate could make collection difficult or time consuming. We perform ongoing credit evaluations of our customers and do not generally require collateral in support of our trade receivables. While we maintain reserves for potential credit losses, we cannot assure such reserves will be sufficient to meet write‑offs of uncollectible receivables or that our losses from such receivables will be consistent with our expectations.
To the extent one or more of our key customers commences bankruptcy proceedings, our contracts with these customers may be subject to rejection under applicable provisions of the United States Bankruptcy Code, or may be renegotiated. Further, during any such bankruptcy proceeding, prior to assumption, rejection or renegotiation of such contracts, the bankruptcy court may temporarily authorize the payment of value for our services less than contractually required, which could also have a material adverse effect on our business, results of operations, financial condition and cash flows.
Delays in obtaining, or inability to obtain or renew, permits or authorizations by our customers for their operations could impair our business.
In most states,both the United States and Australia, our customers are required to obtain permits or authorizations from one or more governmental agencies or other third parties to perform drilling and completionscompletion activities, including hydraulic fracturing. Such permits or approvals are typically required by state agencies but can also be required by federal and local governmental agencies
or other third parties. The requirements for such permits or authorizations vary depending on the location where such drilling and completionscompletion activities will be conducted. As with most permitting and authorization processes, there is a degree of uncertainty as to whether a permit will be granted, the time it will take for a permit or approval to be issued and the conditions which may be imposed in connection with the granting of the permit. In some jurisdictions, such as New York State and within the jurisdiction of the Delaware River Basin Commission, certain regulatory authorities have delayed or suspended the issuance of permits or authorizations while the potential environmental impacts associated with issuing such permits can be studied and appropriate mitigation measures evaluated. In Texas, rural water districts have begun to impose restrictions on water use and may require permits for water used in drilling and completionscompletion activities. Permitting, authorization or renewal delays, the inability to obtain new permits or the revocation of current permits could cause a loss of revenue and potentially have a materially adverse effect on our business, results of operations and financial condition.
WeCompetition within the oilfield services industry may adversely affect our ability to market our services.
The oilfield services industry is highly competitive and fragmented and includes numerous small companies capable of competing effectively in our markets on a local basis, as well as several large companies that possess substantially greater financial and other resources than we do. The amount of equipment available may exceed demand, which could result in active price competition. Many contracts are awarded on a bid basis, which may further increase competition based primarily on price. In addition, adverse market conditions lower demand for well servicing equipment, which results in excess equipment and lower utilization rates. If market conditions in our oil‑oriented operating areas were to deteriorate or if adverse market conditions in our natural gas‑oriented operating areas persist, the prices we are able to charge and utilization rates may decline. The competitive environment intensified in late 2014 and again in late 2019 as a result of the industry downturn and oversupply of oilfield equipment and services. Any significant future increase in overall market capacity for the products, rental equipment or services that we offer could adversely affect our business and results of operations.
New technology may cause us to become less competitive.
The oilfield services industry is subject to the introduction of new drilling and completions techniques and services using new technologies, some of which may be subject to patent or other intellectual property protections. Although we believe our equipment and processes currently give us a competitive advantage, as competitors and others use or develop new or comparable technologies in the future, we may lose money on fixed‑price contracts.
From timemarket share or be placed at a competitive disadvantage. Further, we may face competitive pressure to time, we agreedevelop, implement or acquire certain new technologies at a substantial cost. Some of our competitors have greater financial, technical and personnel resources that may allow them to provide products and services under relatively short term fixed‑price contracts. Under these contracts, we are typically responsible for cost overruns. Our actual costs and any gross profit realized on these fixed‑price contracts may vary from the estimated amounts on which these contracts were originally based. There is inherent riskenjoy various competitive advantages in the estimation process, including significant unforeseen technicaldevelopment and logistical challengesimplementation of new technologies. We cannot be certain that we will be able to continue to develop and implement new technologies or longer than expected deployment times in the case of rentals. Dependingproducts. Limits on the size ofour ability to develop, bring to market, effectively use and implement new and emerging technologies may have a project, variations from estimated contract performance could have anmaterial adverse impacteffect on our business, results of operations and financial condition, and cash flows.including a reduction in the value of assets replaced by new technologies.
Increased costs, or lack of availability, of raw materials and other components may result in increased operating expenses and adversely affect our results of operations and cash flows.
Our ability to source low cost raw materials and components, such as steel castings and forgings, is critical to our ability to manufacture and sell our products and provide our services competitively. Our results of operations may be adversely affected by our inability to manage the rising costs and availability of raw materials and components used in our wide variety of products and systems. We cannot assure that we will be able to continue to purchase these raw materials on a timely basis or at commercially viable prices, nor can we be certain of the impact of changes to Section 232.232 or Section 301 and future legislation that may impact trade with China. Further, unexpected changes in the size of regional and/or product markets, particularly for short lead‑time products, could affect our results of operations and cash flows. Should our current suppliers be unable to provide the necessary raw materials or components or otherwise fail to deliver such materials and components timely and in the quantities required, resulting delays in the provision of products or services to our customers could have a material adverse effect on our business.
In accordance with Section 1502 of the Dodd‑Frank Act, the SEC’s rules regarding mandatory disclosure and reporting requirements by public companies of their use of “conflict minerals” (tantalum, tin, tungsten and gold) originating in the Democratic Republic of Congo and adjoining countries became effective in 2014. While the conflict minerals rule continues in effect as adopted, there remains uncertainty regarding how the conflict minerals rule, and our compliance obligations, will be affected in the future. Additional requirements under the rule could affect sourcing at competitive prices and availability in sufficient quantities of certain of the conflict mineralstungsten, which is used in the manufacture of our products or in the provision of our services, whichservices. This could have a material adverse effect on our ability to purchase these products in the future. The costs of compliance, including those related to supply chain research, the limited number of suppliers and possible changes in the sourcing of these minerals, could have a material adverse effect on our results of operations and cash flows.
Competition within the oilfield services industry may adversely affect our ability to market our services.
The oilfield services industry is highly competitive and fragmented and includes numerous small companies capable of competing effectively in our markets on a local basis, as well as several large companies that possess substantially greater financial and other resources than we do. The amount of equipment available may exceed demand,
which could result in active price competition. Many contracts are awarded on a bid basis, which may further increase competition based primarily on price. In addition, adverse market conditions lower demand for well servicing equipment, which results in excess equipment and lower utilization rates. If market conditions in our oil‑oriented operating areas were to deteriorate or if adverse market conditions in our natural gas‑oriented operating areas persist, utilization rates may decline. The competitive environment has intensified since late 2014 as a result of the industry downturn and oversupply of oilfield equipment and services. Any significant future increase in overall market capacity for the products, rental equipment or services that we offer could adversely affect our business and results of operations.
Our relationship with one of our vendors is important to us.
We obtain certain important materials and machining services from one of our vendors located in China. For the years ended December 31, 2019, 2018 and 2017, 2016approximately $36.5 million, $46.7 million and 2015, approximately $33.4 million, $10.8 million and $18.1 millionrespectively, of purchases of machined components were made from this vendor, representing approximately 22%16%, 20%21% and 27%22%, respectively, of our total third party vendor purchases of raw materials, finished products, equipment, machining and other services. If we are not able to maintain our relationship or we experience supply-related issues with such vendor, our results of operations could be adversely impacted until we are able to find an alternative vendor.
Conservation measuresWe design, manufacture, sell, rent and technological advances could reduce demand forinstall equipment that is used in oil and natural gas E&P activities, which may subject us to liability, including claims for personal injury, property damage and our services.environmental contamination should such equipment fail to perform to specifications.
Fuel conservation measures, alternative fuel requirements, increasing consumer demand for alternativesWe provide products and systems to customers involved in oil and natural gas technological advancesexploration, development and production. Some of our equipment is designed to operate in fuel economyhigh‑temperature and/or high‑pressure environments, and energy generation devices could reduce demandsome equipment is designed for oil and natural gas, resultinguse in reduced demand for oilfield services. The impact of the changing demand for oil and natural gashydraulic fracturing operations. We also provide parts, repair services and field services associated with installation at all of our facilities and service centers in the United States and Australia, as well as at customer sites. Because of applications to which our products and services are exposed, particularly those involving high pressure environments, a
failure of such equipment, or a failure of our customers to maintain or operate the equipment properly, could cause damage to the equipment, damage to the property of customers and others, personal injury and environmental contamination and could lead to a variety of claims against us that could have an adverse effect on our business and results of operations.
We indemnify our customers against certain claims and liabilities resulting or arising from our provision of goods or services to them. In addition, we rely on customer indemnifications, generally, and third‑party insurance as part of our risk mitigation strategy. However, our insurance may not be adequate to cover our liabilities. In addition, our customers may be unable to satisfy indemnification claims against them. Further, insurance companies may refuse to honor their policies, or insurance may not generally be available in the future, or if available, premiums may not be commercially justifiable. We could incur substantial liabilities and damages that are either not covered by insurance or that are in excess of policy limits, or incur liability at a time when we are not able to obtain liability insurance. Such potential liabilities could have a material adverse effect on our business, results of operations, financial condition and cash flows.
Indebtedness and liquidity needs could restrict our operations and make us more vulnerable to adverse economic conditions.
Indebtedness we may incur in the future, whether incurred in connection with acquisitions, operations or otherwise, may adversely affect our operations and limit our growth, and we may have difficulty making debt service payments on such indebtedness as payments become due. Our level of indebtedness may affect our operations in several ways, including the following:
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| | increasing our vulnerability to general adverse economic and industry conditions should our business fail to generate sufficient cash flow to meet our debt obligations;
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| | limiting our ability to borrow funds, dispose of assets, pay dividends and make certain investments due to the covenants that are contained in the agreements governing our indebtedness;
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| | affecting our flexibility in planning for, and reacting to, changes in the economy and in our industry;
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| | causing an event of default resulting from any failure to comply with the financial or other covenants of our debt, including covenants that impose requirements to maintain certain financial ratios; and
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| | impairing our ability to obtain additional financing in the future for working capital, capital expenditures, acquisitions or other general corporate purposes.
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We are subject to foreign currency fluctuation risk.
We outsource certain of our wellhead equipment to suppliers in China, and our production facility in China assembles and tests these outsourced components, as we do not engage in machining operations in this facility. In addition, we have a service center in Australia that sells products, rents frac equipment and provides field services. To the extent either facility has net U.S. dollar denominated assets, our profitability is eroded when the U.S. dollar weakens against the Chinese Yuan and the Australian dollar. Our production facility in China generally has net U.S. dollar denominated assets, while our service center in Australia generally has net U.S. dollar denominated liabilities. The U.S. dollar translated profits and net assets of our facilities in China and Australia are eroded if the respective local currency value weakens against the U.S. dollar. We have not entered into any derivative arrangements to protect against fluctuations in currency exchange rates.
New technology may cause us to become less competitive.
The oilfield services industry is subject to the introduction of new drilling and completions techniques and services using new technologies, some of which may be subject to patent or other intellectual property protections. Although we believe our equipment and processes currently give us a competitive advantage, as competitors and others use or develop new or comparable technologies in the future, we may lose market share or be placed at a competitive disadvantage. Further, we may face competitive pressure to develop, implement or acquire certain new technologies at a substantial cost. Some of our competitors have greater financial, technical and personnel resources that may allow them to enjoy various competitive advantages in the development and implementation of new technologies. We cannot be certain that we will be able to continue to develop and implement new technologies or products. Limits on our ability to develop, effectively use and implement new and emerging technologies may have a material adverse effect on our business, results of operations and financial condition, including the reduction in the value of assets replaced by new technologies.
A failure of our information technology infrastructure could adversely impact us.
We depend on our information technology (“IT”) systems for the efficient operation of our business. Accordingly, we rely upon the capacity, reliability and security of our IT hardware and software infrastructure and our ability to expand and update this infrastructure in response to our changing needs. Despite our implementation of security measures, our systems are vulnerable to damages from computer viruses, natural disasters, incursions by intruders or hackers, failures in hardware or software, power fluctuations, cyber terrorists and other similar disruptions. Additionally, we rely on third parties to support the operation of our IT hardware and software infrastructure, and in certain instances, utilize web‑based applications. Although no such material incidents have occurred to date, the failure of our IT systems or those of our vendors to perform as anticipated for any reason or any significant breach of security could disrupt our business and result in numerous adverse consequences, including reduced effectiveness and efficiency of operations, inappropriate disclosure of confidential and proprietary information, reputational harm, increased overhead costs and loss of important information, which could have a material adverse effect on our business and results of operations. In addition, we may be required to incur significant costs to protect against damage caused by these disruptions or security breaches in the future.
Our business is dependent on the continuing services of certain of our key managers and employees.
We depend on key personnel. The loss of key personnel could adversely impact our business if we are unable to implement certain strategies or transactions in their absence. The loss of qualified employees or an inability to retain and motivate additional highly‑skilled employees required for the operation and expansion of our business could hinder our ability to successfully maintain and expand our market share.
Equity interests in us are a substantial portion of the net worth of our executive officers and several of our other senior managers. Following the completion of the IPO, those executive officers and other senior managers have increased liquidity with respect to their equity interests in us. As a result, those executive officers and senior managers may have less incentive to remain employed by us. After terminating their employment with us, some of them may become employed by our competitors.
Adverse weather conditions could impact demand for our services or materially impact our costs.
Our business could be materially adversely affected by adverse weather conditions. For example, unusually warm winters could adversely affect the demand for our products and services by decreasing the demand for natural gas or unusually cold winters could adversely affect our ability to perform our services due to delays in the delivery of products that we need to provide our services. Our operations in arid regions can be affected by droughts and limited access to water used in hydraulic fracturing operations. Adverse weather can also directly impede our own operations. Repercussions of adverse weather conditions may include:
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| | curtailment of services;
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| | weather‑related damage to infrastructure, transportation, facilities and equipment, resulting in delays in operations;
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| | inability to deliver equipment, personnel and products to job sites in accordance with contract schedules; and
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Competition among oilfield service and equipment providers is affected by each provider’s reputation for safety and quality.
Our activities are subject to a wide range of national, state and local occupational health and safety laws and regulations. In addition, customers maintain their own compliance and reporting requirements. Failure to comply with these health and safety laws and regulations, or failure to comply with our customers’ compliance or reporting requirements, could tarnish our reputation for safety and quality and have a material adverse effect on our competitive position.
Our operations require us to comply with various domestic and international regulations, violations of which could have a material adverse effect on our results of operations, financial condition and cash flows.
We are exposed to a variety of federal, state, local and international laws and regulations relating to matters such as environmental, workplace, health and safety, labor and employment, customs and tariffs, export and reexport controls, economic sanctions, currency exchange, bribery and corruption and taxation. These laws and regulations are complex, frequently change and have tended to become more stringent over time. They may be adopted, enacted, amended, enforced or interpreted in such a manner that the incremental cost of compliance could adversely impact our results of operations, financial condition and cash flows.
Our operations outside of the United States require us to comply with numerous anti‑bribery and anti‑corruption regulations. The U.S. Foreign Corrupt Practices Act (“FCPA”), among others, applies to us and our operations. Our policies, procedures and programs may not always protect us from reckless or criminal acts committed by our employees or agents, and severe criminal or civil sanctions may be imposed as a result of violations of these laws. We are also subject to the risks that our employees and agents outside of the United States may fail to comply with applicable laws.
In addition, we import raw materials, semi‑finished goods, and finished products into the United States, China and Australia for use in such countries or for manufacturing and/or finishing for re‑export and import into another country for use or further integration into equipment or systems. Most movement of raw materials, semi‑finished or finished products involves imports and exports. As a result, compliance with multiple trade sanctions, embargoes and import/export laws and regulations pose a constant challenge and risk to us since a portion of our business is conducted outside of the United States through our subsidiaries. Our failure to comply with these laws and regulations could materially affect our reputation, results of operations and financial condition.
Compliance with environmental laws and regulations may adversely affect our business and results of operations.
Environmental laws and regulations in the United States and foreign countries affect the equipment, systems and services we design, market and sell, as well as the facilities where we manufacture and produce our equipment and systems in the United States and China, and opportunities our customers pursue that create demand for our products. For example, we may be affected by such laws as the Resource Conservation and Recovery Act (“RCRA”), the Comprehensive Environmental Response, Compensation, and Liability Act (“CERCLA”), the Clean Water Act, and the Occupational Safety and Health Act (“OSHA”) of 1970. Further, our customers may be subject to a range of laws and regulations governing hydraulic fracturing, offshore drilling, and greenhouse gas emissions.
We are required to invest financial and managerial resources to comply with environmental laws and regulations and believe that we will continue to be required to do so in the future. Failure to comply with these laws and regulations may result in the assessment of administrative, civil and criminal penalties, the imposition of remedial obligations, or the issuance of orders enjoining operations. These laws and regulations, as well as the adoption of other new laws and regulations affecting exploration and production of crude oil and natural gas by our customers, could adversely affect our business and operating results by increasing our costs, limiting the demand for our products and services or restricting our operations. Increased regulation or a move away from the use of fossil fuels caused by additional regulation could also reduce demand for our products and services. For additional information, please see “Item 1. Business—Environmental, Health and Safety Regulation.” The operations of the energy industry, including those undertaking hydraulic fracturing, are also subject to wildlife‑protection laws and regulations, such as the Migratory Bird Treaty Act (“MBTA”) or the Endangered Species Act, which may impact exploration, development, and production activities through regulations intended to protect certain species. For example, regulations under the MBTA sometimes require companies to cover reserve pits that are open for more than 90 days to prevent the taking of birds.
Concerns over general economic, business or industry conditions may have a material adverse effect on our results of operations, financial condition and liquidity.
Concerns over global economic conditions, energy costs, geopolitical issues, inflation, the availability and cost of credit and the European, Asian and the United States financial markets have contributed to increased economic uncertainty and diminished expectations for the global economy. These factors, combined with volatility in commodity prices, business and consumer confidence and unemployment rates, have precipitated an economic slowdown. Concerns about global economic growth have had a significant adverse impact on global financial markets and commodity prices. If the economic climate in the United States or abroad deteriorates, worldwide demand for petroleum products could diminish further, which could impact the price at which oil, natural gas and natural gas liquids can be sold, which could affect the ability of our customers to continue operations and ultimately adversely impact our results of operations, financial condition and liquidity.
Our operations are subject to hazards inherent in the oil and natural gas industry, which could expose us to substantial liability and cause us to lose customers and substantial revenue.
Risks inherent in our industry include the risks of equipment defects, installation errors, the presence of multiple contractors at the wellsite over which we have no control, vehicle accidents, fires, explosions, blowouts, surface cratering, uncontrollable flows of gas or well fluids, pipe or pipeline failures, abnormally pressured formations and various environmental hazards such as oil spills and releases of, and exposure to, hazardous substances. For example, our operations are subject to risks associated with hydraulic fracturing, including any mishandling, surface spillage or potential underground migration of fracturing fluids, including chemical additives. The occurrence of any of these events could result in substantial losses to us due to injury or loss of life, severe damage to or destruction of property, natural resources and equipment, pollution or other environmental damage, clean‑up responsibilities, regulatory investigations and penalties, suspension of operations and repairs required to resume operations. The cost of managing such risks may be significant. The frequency and severity of such incidents will affect operating costs, insurability and relationships with customers, employees and regulators. In particular, our customers may elect not to purchase our products or services if they view our environmental or safety record as unacceptable, which could cause us to lose customers and substantial revenues.
Our insurance may not be adequate to cover all losses or liabilities we may suffer. Also, insurance may no longer be available to us or its availability may be at premium levels that do not justify its purchase. The occurrence of a significant uninsured claim, a claim in excess of the insurance coverage limits maintained by us or a claim at a time when we are not able to obtain liability insurance could have a material adverse effect on our ability to conduct normal business operations and on our results of operations, financial condition and cash flows. In addition, we may not be able to secure additional insurance or bonding that might be required by new governmental regulations. This may cause us to restrict our operations, which might severely impact our financial condition.
Oilfield anti-indemnity provisions enacted by many states may restrict or prohibit a party’s indemnification of us.
We typically enter into agreements with our customers governing the provision of our services, which usually include certain indemnification provisions for losses resulting from operations. Such agreements may require each party to indemnify the other against certain claims regardless of the negligence or other fault of the indemnified party; however, many states place limitations on contractual indemnity agreements, particularly agreements that indemnify a party against the consequences of its own negligence. Furthermore, certain states, including Louisiana, New Mexico, Texas, and Wyoming, have enacted statutes generally referred to as “oilfield anti-indemnity acts” expressly prohibiting certain indemnity agreements contained in or related to oilfield services agreements. Such oilfield anti-indemnity acts may restrict or void a party’s indemnification of us, which could have a material adverse effect on our business, financial condition, prospects, and results of operations.
Our operations require us to comply with various domestic and international regulations, violations of which could have a material adverse effect on our results of operations, financial condition and cash flows.
We are exposed to a variety of federal, state, local and international laws and regulations relating to matters such as environmental, workplace, health and safety, labor and employment, customs and tariffs, export and re-export controls, economic sanctions, currency exchange, bribery and corruption and taxation. These laws and regulations are complex,
frequently change and have tended to become more stringent over time. They may be adopted, enacted, amended, enforced or interpreted in such a manner that the incremental cost of compliance could adversely impact our results of operations, financial condition and cash flows.
Our operations outside of the United States require us to comply with numerous anti‑bribery and anti‑corruption regulations. The U.S. Foreign Corrupt Practices Act, among others, applies to us and our operations. Our policies, procedures and programs may not always protect us from reckless or criminal acts committed by our employees or agents, and severe criminal or civil sanctions may be imposed as a result of violations of these laws. We are also subject to the risks that our employees and agents outside of the United States may fail to comply with applicable laws.
In addition, we import raw materials, semi‑finished goods, and finished products into the United States, China and Australia for use in such countries or for manufacturing and/or finishing for re‑export and import into another country for use or further integration into equipment or systems. Most movement of raw materials, semi‑finished or finished products involves imports and exports. As a result, compliance with multiple trade sanctions, embargoes and import/export laws and regulations pose a constant challenge and risk to us since a portion of our business is conducted outside of the United States through our subsidiaries. Our failure to comply with these laws and regulations could materially affect our business, results of operations and financial condition.
Compliance with environmental laws and regulations may adversely affect our business and results of operations.
Environmental laws and regulations in the United States and foreign countries affect the equipment, systems and services we design, market and sell, as well as the facilities where we manufacture and produce our equipment and systems in the United States and China, and opportunities our customers pursue that create demand for our products. For example, we may be affected by such laws as the Resource Conservation and Recovery Act, the Comprehensive Environmental Response, Compensation, and Liability Act, the Clean Water Act, the Clean Air Act and the Occupational Safety and Health Act of 1970. Further, our customers may be subject to a range of laws and regulations governing hydraulic fracturing, offshore drilling, and greenhouse gas emissions.
We are required to invest financial and managerial resources to comply with environmental laws and regulations and believe that we will continue to be required to do so in the future. Failure to comply with these laws and regulations may result in the assessment of administrative, civil and criminal penalties, the imposition of remedial obligations, or the issuance of orders enjoining operations. These laws and regulations, as well as the adoption of other new laws and regulations affecting exploration and production of crude oil and natural gas by our customers, could adversely affect our business and operating results by increasing our costs, limiting the demand for our products and services or restricting our operations. Increased regulation or a move away from the use of fossil fuels caused by additional regulation could also reduce demand for our products and services.
Existing or future laws and regulations related to greenhouse gases and climate change could have a negative impact on our business and may result in additional compliance obligations with respect to the release, capture, and use of greenhouse gases that could have a material adverse effect on our business, results of operations, prospects, and financial condition.
Changes in environmental requirements related to greenhouse gas emissions and climate change may negatively impact demand for our products and services. For example, oil and natural gas E&P may decline as a result of environmental requirements, including land use policies responsive to environmental concerns. Federal, state, and local agencies have been evaluating climate-related legislation and other regulatory initiatives that would restrict emissions of greenhouse gases in areas in which we conduct business. Because our business depends on the level of activity in the oil and natural gas industry, existing or future laws and regulations related to greenhouse gases and climate change, including incentives to conserve energy or use alternative energy sources, could have a negative impact on our business if such laws or regulations reduce demand for oil and natural gas. Likewise, such restrictions may result in additional compliance obligations with respect to the release, capture, sequestration, and use of greenhouse gases that could have a material adverse effect on our business, results of operations, prospects, and financial condition. Finally, increasing concentrations of greenhouse gases in the Earth’s atmosphere may produce climate changes that could have significant physical effects, such as increased frequency and severity of storms, droughts, floods and other climatic events; if such effects were to occur, they could have an adverse impact on our operations.
The outcome of final actions under Section 301 of the Trade Act of 1974 may adversely affect our business.
On March 22, 2018 the President of the United States announced his decisions on the actions that the U.S. government will take based on the findings of an investigation under Section 301, which included a proposed 25% tariff on approximately $50 billion worth of imports from China. The United States has since taken subsequent actions to impose additional tariffs on imports from China, which currently include a 25% tariff on approximately $250 billion worth of Chinese imports and a 15% tariff on approximately $120 billion worth of Chinese imports. In December 2019, the Office of the United States Trade Representative announced that the United States has reached a Phase One trade deal with China, under which the U.S. suspended indefinitely the imposition of an additional 15% tariff on certain Chinese products not covered in an earlier Section 301 action, and cut the 15% tariff on $120 billion worth of Chinese goods to 7.5%. The United States will be maintaining the 25% tariff on approximately $250 billion of Chinese imports. Substantially all of the products that we import through our Chinese supply chain are subject to the 25% tariff. In the three months ended December 31, 2019, we estimate that approximately 50% of our inventory value received was sourced through our Chinese supply chain. To the extent these actions result in a decrease in demand for our products, our business may be adversely impacted. Given the uncertainty regarding the scope and duration of these trade actions by the U.S. or other countries, the impact of these trade actions on our operations or results remains uncertain.
If we are unable to fully protect our intellectual property rights or trade secrets, we may suffer a loss in revenue or any competitive advantage or market share we hold, or we may incur costs in litigation defending intellectual property rights.
While we have some patents and others pending, we do not have patents relating to many of our key processes and technology. If we are not able to maintain the confidentiality of our trade secrets, or if our competitors are able to replicate our technology or services, our competitive advantage would be diminished. We also cannot provide any assurance that any patents we may obtain in the future would provide us with any significant commercial benefit or would allow us to prevent our competitors from employing comparable technologies or processes.
We may initiate litigation from time to time to protect and enforce our intellectual property rights. In any such litigation, a defendant may assert that our intellectual property rights are invalid or unenforceable. Third parties from time to time may also initiate litigation against us by asserting that our businesses infringe, impair, misappropriate, dilute or otherwise violate another party’s intellectual property rights. We may not prevail in any such litigation, and our intellectual property rights may be found invalid or unenforceable or our products and services may be found to infringe, impair, misappropriate, dilute or otherwise violate the intellectual property rights of others. The results or costs of any such litigation may have an adverse effect on our business, results of operations and financial condition. Any litigation concerning intellectual property could be protracted and costly, is inherently unpredictable and could have an adverse effect on our business, regardless of its outcome.
A failure of our information technology infrastructure and cyberattacks could adversely impact us.
We depend on our information technology (“IT”) systems for the efficient operation of our business. Accordingly, we rely upon the capacity, reliability and security of our IT hardware and software infrastructure and our ability to expand and update this infrastructure in response to our changing needs. Despite our implementation of security measures, our systems are vulnerable to damage from computer viruses, natural disasters, incursions by intruders or hackers, failures in hardware or software, power fluctuations, cyber terrorists and other similar disruptions. Additionally, we rely on third parties to support the operation of our IT hardware and software infrastructure, and in certain instances, utilize web‑based applications. The failure of our IT systems or those of our vendors to perform as anticipated for any reason or any significant breach of security could disrupt our business and result in numerous adverse consequences, including reduced effectiveness and efficiency of operations, inappropriate disclosure of confidential and proprietary information, reputational harm, increased overhead costs and loss of important information, which could have a material adverse effect on our business and results of operations. In addition, we may be required to incur significant costs to protect against damage caused by these disruptions or security breaches in the future.
Adverse weather conditions could impact demand for our services or materially impact our costs.
Our business could be harmed by adverse weather conditions. For example, unusually warm winters could negatively affect the demand for our products and services by decreasing the demand for natural gas or unusually cold winters could adversely affect our ability to perform our services due to delays in the delivery of products that we need to provide our services. Our operations in arid regions can be affected by droughts and limited access to water used in hydraulic fracturing operations. Severe weather can also directly impede our own operations. Repercussions of adverse weather conditions may include:
| · | | curtailment of services; |
| · | | weather‑related damage to infrastructure, transportation, facilities and equipment, resulting in delays in operations; |
| · | | inability to deliver equipment, personnel and products to job sites in accordance with contract schedules; and |
A terrorist attack or armed conflict could harm our business.
The occurrence or threat of terrorist attacks in the United States or other countries, anti‑terrorist efforts, domestic unrest or civil disturbance and other armed conflicts involving the United States or other countries, including continued hostilities in the Middle East, may adversely affect the United States and global economies and could prevent us from meeting our financial and other obligations. If any of these events occur, the resulting political instability and societal disruption could reduce overall demand for oil and natural gas, potentially putting downward pressure on demand for our services and causing a reduction in our revenues. Oil and natural gas related facilities could be direct targets of terrorist attacks, and our operations could be adversely impacted if infrastructure integral to our customers’ operations is destroyed or damaged. Costs for insurance and other security may increase as a result of these threats, and some insurance coverage may become more difficult to obtain, if available at all.
If we are unable to fully protect our intellectual property rights or trade secrets, we may suffer a loss in our competitive advantage or market share.
We do not have patents relating to many of our key processes and technology. If we are not able to maintain the confidentiality of our trade secrets, or if our customers or competitors are able to replicate our technology or services, our competitive advantage would be diminished. We also cannot assure you that any patents we may obtain in the future would provide us with any significant commercial benefit or would allow us to prevent our competitors from employing comparable technologies or processes.
Risks Related to Our Class A Common Stock
We are a holding company. Ourcompany whose only material asset is our equity interest in Cactus LLC, and accordingly, we are dependent upon distributions from Cactus LLC to pay taxes, make payments under the Tax Receivable AgreementTRA and cover our corporate and other overhead expenses.expenses and pay dividends to holders of our class A common stock.
We are a holding company and have no material assets other than our equity interest in Cactus LLC. We have no independent means of generating revenue. To the extent Cactus LLC has available cash and subject to the terms of any current or future credit agreements or debt instruments, we intend to cause Cactus LLC to make (i) generally pro rata distributions to its unitholders, including us, in an amount at least sufficient to allow us to pay our taxes and to make payments under the Tax Receivable AgreementTRA and (ii) non‑pro rata payments to us to reimburse us for our corporate and other overhead expenses. To the extent that we need funds and Cactus LLC or its subsidiaries are restricted from making such distributions or payments under applicable law or regulation or under the terms of any future financing arrangements, or are otherwise unable to provide such funds, our financial condition and liquidity could be materially adversely affected. In addition, our ability to pay dividends to holders of our Class A common stock depends on receipt of distributions from Cactus LLC.
Moreover, because we have no independent means of generating revenue, our ability to make payments under the Tax Receivable AgreementTRA is dependent on the ability of Cactus LLC to make distributions to us in an amount sufficient to cover our obligations under the Tax Receivable Agreement.TRA. This ability, in turn, may depend on the ability of Cactus LLC’s subsidiaries to make distributions to it. The ability of Cactus LLC, its subsidiaries and other entities in which it directly or indirectly holds an equity interest to make such distributions will be subject to, among other things, (i) the applicable provisions of Delaware law (or other applicable U.S. and foreign jurisdictions) that may limit the amount of funds available for distribution and (ii) restrictions in relevant debt instruments issued by Cactus LLC or its subsidiaries and other entities in which it directly or indirectly holds an equity interest. To the extent that we are unable to make payments under the Tax Receivable AgreementTRA for any reason, such payments will be deferred and will accrue interest until paid.
The requirements of being a public company, including compliance with the reporting requirements of the Exchange Act, and the requirements of the Sarbanes‑Oxley Act, may strain our resources, increase our costs and distract management, and we may be unable to comply with these requirements in a timely or cost‑effective manner.
As a public company, we need to comply with new laws, regulations and requirements, certain corporate governance provisions of the Sarbanes‑Oxley Act of 2002, related regulations of the SEC, including filing quarterly and annual financial statements, and the requirements of the NYSE, with which we were not required to comply as a private company. Complying with these statutes, regulations and requirements will occupy a significant amount of time of our board of directors and management and will significantly increase our costs and expenses. We need to:
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The changes necessitated by becomingWe are subject to the requirements of Section 404 of the Sarbanes-Oxley Act. If we fail to comply with the requirements of Section 404 or if we or our auditors identify and report material weaknesses in internal control over financial reporting, our investors may lose confidence in our reported information and our stock price may be negatively affected.
Section 404 requires that we document and test our internal control over financial reporting and issue our management’s assessment of our internal control over financial reporting. This section also requires that our independent registered public accounting firm issue an attestation report on such internal control. If we fail to comply with the requirements of Section 404 of the Sarbanes-Oxley Act or if we or our auditors identify and report material weaknesses in our internal control over financial reporting, the accuracy and timeliness of the filing of our annual and quarterly reports may be materially adversely affected and could cause investors to lose confidence in our reported financial information, which could have a public companynegative effect on the trading price of our Class A common stock. In addition, a material weakness in the effectiveness of our internal control over financial reporting could result in an increased chance of fraud and the loss of customers, reduce our ability to obtain financing and require a significant commitmentadditional expenditures to comply with these requirements, each of resources and management oversight that has increased, and may continue to increase, our costs and might place a strain on our systems and resources. Such costswhich could have a material adverse effect on our business, results of operations and financial condition.
Furthermore, while we generally must comply with Section 404 of the Sarbanes‑Oxley Act of 2002 for our fiscal year ending December 31, 2018, we are not required to have our independent registered public accounting firm attest to the effectiveness of our internal controls until our first annual report subsequent to our ceasing to be an “emerging growth company” within the meaning of Section 2(a)(19) of the Securities Act. Accordingly, we may not be required to have our independent registered public accounting firm attest to the effectiveness of our internal controls until as late as our annual report for the fiscal year ending December 31, 2023, although this could be required earlier. Once it is required to do so, our independent registered public accounting firm may issue a report that is adverse in the event it is not satisfied with the level at which our controls are documented, designed, operated or reviewed. Compliance with these requirements may strain our resources, increase our costs and distract management, and we may be unable to comply with these requirements in a timely or cost‑effective manner.
In addition, we expect that being a public company subject to these rules and regulations may make it more difficult and more expensive for us to obtain director and officer liability insurance, and we may be required to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage. As a result, it may be more difficult for us to attract and retain qualified individuals to serve on our board of directors or as executive officers. We are currently evaluating these rules, and we cannot predict or estimate the amount of additional costs we may incur or the timing of such costs.
In the past, we identified a material weakness in our internal control over financial reporting and may identify additional material weaknesses in the future. Material weaknesses could affect the reliability of our financial statements and may cause to us to fail to meet our reporting obligations or fail to prevent fraud, which would harm our business and could negatively impact the price of our Class A Common Stock.
Effective internal control over financial reporting is necessary for us to provide reliable financial reports and prevent or detect fraud. If we cannot provide reliable financial reports or prevent fraud, our reputation and operating results would be harmed. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis.
In connection with the audit of the consolidated financial statements of Cactus LLC, our predecessor for accounting purposes, for the year ended December 31, 2016, we identified a material weakness in our internal control over financial reporting. We did not effectively operate controls in place over the review of the consolidated financial statements and related disclosures. This resulted in the identification of certain errors in the consolidated statement of cash flows that have been corrected as a revision of that statement. Please read “Item 9A. Remediation of Material Weakness in Internal Control Over Financial Reporting.” The material weakness described above or any newly identified material weakness could result in a material misstatement of our annual or interim consolidated financial statements that would not be prevented or detected.
In addition, neither our management nor an independent registered public accounting firm has performed an evaluation of our internal control over financial reporting in accordance with the provisions of the Sarbanes‑Oxley Act because no such evaluation has been required. Had we or our independent registered public accounting firm performed an evaluation of our internal control over financial reporting in accordance with the provisions of the Sarbanes‑Oxley Act, additional material weaknesses may have been identified.
Material weaknesses could affect the reliability of our financial statements and may cause to us to fail to meet our reporting obligations or fail to prevent fraud, which would harm our business, and could negatively impact investor perceptions. This could negatively impact the price of our Class A Common Stock.
Additionally, our reporting obligations as a public company will place a significant strain on our management, operational and financial resources and systems for the foreseeable future and may cause us to fail to timely achieve and maintain the adequacy of our internal control over financial reporting. Please see “—The requirements of being a public company, including compliance with the reporting requirements of the Exchange Act and the requirements of the Sarbanes‑Oxley Act, may strain our resources, increase our costs and distract management, and we may be unable to comply with these requirements in a timely or cost‑effective manner.”
Our stock price may be volatile.
The market price of our Class A Common Stock could fluctuate significantly as a result of a number of factors, some of which are beyond our control. In the event of a drop in the market price of our Class A Common Stock, you could lose a substantial part or all of your investment in our Class A Common Stock. The following factors could affect our stock price:
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| | our operating and financial performance;
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| | quarterly variations in the rate of growth of our financial indicators, such as net income per share, net income and revenues;
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| | the public reaction to our press releases, our other public announcements and our filings with the SEC;
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The stock markets in general have experienced extreme volatility that has often been unrelated to the operating performance of particular companies. These broad market fluctuations may adversely affect the trading price of our Class A Common Stock. Securities class action litigation has often been instituted against companies following periods of volatility in the overall market and in the market price of a company’s securities. Such litigation, if instituted against us, could result in very substantial costs, divert our management’s attention and resources and harm our business, results of operations and financial condition.
Cadent and Cactus WH Enterprises willLLC have the ability to direct the voting of a majoritysignificant percentage of the voting power of our common stock, and their interests may conflict with those of our other shareholders.
Holders of Class A Common Stockcommon stock and Class B Common Stockcommon stock vote together as a single class on all matters presented to our shareholdersstockholders for their vote or approval, except as otherwise required by applicable law or our amended and restated certificate of incorporation. Cadent owns approximately 49.2% of our Class B common stock (representing 31.8% of our voting power) and Cactus WH Enterprises owns approximately 46.6%LLC (“Cactus WH Enterprises”), a Delaware limited liability company owned by Scott Bender, Joel Bender, Steven Bender and certain of our Class B common stock (representing 30.2%other officers and employees, own approximately 11% and 24% of our voting power).power, respectively, as of December 31, 2019.
As a result, Cadent and Cactus WH Enterprises will be able toeffectively control matters requiring shareholderstockholder approval, including the election of directors, changes to our organizational documents and significant corporate transactions. This concentration of ownership makes it unlikely that any holder or group of holders of our Class A Common Stock will be ablelimit your ability to affect the way we are managed or the direction of our business. The interests of Cadent and Cactus WH Enterprises with respect to matters potentially or actually involving or affecting us, such as future acquisitions, financings and other corporate opportunities and attempts to acquire us, may conflict with the interests of our other shareholders. Cadent and Cactus WH Enterprises would have to approve any potential acquisition of us.stockholders. In addition, onethe Chairman of our board of directors is currently a partnermember of Cadent Energy Partners.Partners LLC. This director’s duties as a partner of Cadent Energy Partners LLC may conflict with his duties as our director, and the resolution of these conflicts may not always be in our or your best interest. Furthermore, in connection with our IPO, we entered into a stockholders’ agreement with Cadent and Cactus WH Enterprises. Among other things, the stockholders’ agreement provides each of Cadent and Cactus WH Enterprises with the right to designate a certain number of nominees to our board of directors so long as they and their respective affiliates collectively beneficially own at least 5% of the outstanding shares of our common stock. The existence of significant shareholdersstockholders and the stockholders’ agreement may have the effect of deterring hostile takeovers, delaying or preventing changes in control or changes in management or limiting the ability of our other shareholdersstockholders to approve transactions that they may deem to be in our best interests. Cadent and Cactus WH Enterprises’ concentration of stock ownership may also adversely affect the trading price of our Class A Common Stockcommon stock to the extent investors perceive a disadvantage in owning stock of a company with significant shareholders.stockholders. See “Item 13. Certain Relationships and Related Party Transactions, and Director Independence—Stockholders’ Agreement.”
Certain of our directors have significant duties with, and spend significant time serving, entities that may compete with us in seeking acquisitions and business opportunities and, accordingly, may have conflicts of interest in allocating time or pursuing business opportunities.
Certain of our directors, who are responsible for managing the direction of our operations and acquisition activities, hold positions of responsibility with other entities (including Cadent and its affiliated entities) whose businesses are similar to our business. The existing positions held by these directors may give rise to fiduciary or other duties that are in conflict with the duties they owe to us. These directors may become aware of business opportunities that may be appropriate for presentation to us as well as to the other entities with which they are or may become affiliated. Due to these existing and potential future affiliations, they may present potential business opportunities to other entities prior to presenting them to us, which could cause additional conflicts of interest. They may also decide that certain opportunities are more appropriate for
other entities with which they are affiliated, and as a result, they may elect not to present those opportunities to us. These conflicts may not be resolved in our favor.
Cadent Energy Partners and its affiliates are not limited in their ability to compete with us, and the corporate opportunity provisions in our amended and restated certificate of incorporation could enable Cadent Energy Partners to benefit from corporate opportunities that might otherwise be available to us.
Our governing documents provide that Cadent Energy Partners and its affiliates (including portfolio investments of Cadent Energy Partners and its affiliates) are not restricted from owning assets or engaging in businesses that compete directly or indirectly with us. In particular, subject to the limitations of applicable law, our amended and restated certificate of incorporation, among other things:
| · | | permits Cadent Energy Partners and its affiliates, including any of our directors affiliated with Cadent Energy Partners, to conduct business that competes with us and to make investments in any kind of business, asset or property in which we may make investments; and |
| · | | provides that if Cadent Energy Partners or its affiliates, including any of our directors affiliated with Cadent Energy Partners, becomes aware of a potential business opportunity, transaction or other matter, they will have no duty to communicate or offer that opportunity to us (unless such opportunity is expressly offered to such director in his capacity as one of our directors). |
Cadent Energy Partners and its affiliates, or our non‑employee directors, may become aware, from time to time, of certain business opportunities (such as, among other things, acquisition opportunities) and may direct such opportunities to other businesses in which they have invested, in which case we may not become aware of or otherwise have the ability to pursue such opportunity. Further, such businesses may choose to compete with us for these opportunities, possibly causing these opportunities to not be available to us or causing them to be more expensive for us to pursue. In addition, Cadent Energy Partners and its affiliates, or our non‑employee directors, may dispose of assets owned by them in the future, without any obligation to offer us the opportunity to purchase any of those assets. As a result, our renouncing our interest and expectancy in any business opportunity that may be from time to time presented to Cadent Energy Partners and its affiliates, or our non‑employee directors, could adversely impact our business or prospects if attractive business opportunities are procured by such parties for their own benefit rather than for ours.
Cadent and its affiliates potentially have access to resources greater than ours, which may make it more difficult for us to compete with Cadent and its affiliates with respect to commercial activities as well as for potential acquisitions. We cannot assure you that any conflicts that may arise between us and our shareholders, on the one hand, and Cadent, on the other hand, will be resolved in our favor. As a result, competition from Cadent and its affiliates could adversely impact our results of operations.
Our amended and restated certificate of incorporation and amended and restated bylaws, as well as Delaware law, contain provisions that could discourage acquisition bids or merger proposals, which may adversely affect the market price of our Class A Common Stock.common stock.
Our amended and restated certificate of incorporation authorizes our board of directors to issue preferred stock without shareholder approval. If our board of directors elects to issue preferred stock, it could be more difficult for a third party to acquire us. In addition, some provisions of our amended and restated certificate of incorporation and amended and restated bylaws could make it more difficult for a third party to acquire control of us, even if the change of control would be beneficial to our shareholders, including:
| · | | limitations on the removal of directors; |
| · | | limitations on the ability of our shareholders to call special meetings; |
| · | | establishing advance notice provisions for shareholder proposals and nominations for elections to the board of directors to be acted upon at meetings of shareholders; |
| · | | providing that the board of directors is expressly authorized to adopt, or to alter or repeal our bylaws; and |
| · | | establishing advance notice and certain information requirements for nominations for election to our board of directors or for proposing matters that can be acted upon by shareholders at shareholder meetings. |
In addition, certain change of control events have the effect of accelerating the payment due under the Tax Receivable Agreement,TRA, which could be substantial and accordingly serve as a disincentive to a potential acquirer of our company. Please see “—In certain cases, payments under
We may issue preferred stock whose terms could adversely affect the Tax Receivable Agreement may be accelerated and/voting power or significantly exceed the actual benefits, if any, we realize in respectvalue of the tax attributes subject to the Tax Receivable Agreement.”our Class A common stock.
Our amended and restated certificate of incorporation designatesauthorizes us to issue, without the Courtapproval of Chancery of the State of Delaware as the sole and exclusive forum for certain types of actions and proceedings that may be initiated by our shareholders, which could limitone or more classes or series of preferred stock having such designations, preferences, limitations and relative rights, including preferences over our shareholders’ ability to obtain a favorable judicial forum for disputes with us orClass A common stock respecting dividends and distributions, as our board of directors officers, employees or agents.
Our amended and restated certificate of incorporation provides that, unless we consent in writing to the selection of an alternative forum, the Court of Chancery of the State of Delaware will, to the fullest extent permitted by applicable law, be the sole and exclusive forum for (i) any derivative action or proceeding brought on our behalf, (ii) any action asserting a claim of breach of a fiduciary duty owed by any of our directors, officers, employees or agents to us or our shareholders, (iii) any action asserting a claim arising pursuant to any provision of the Delaware General Corporation Law (the “DGCL”), our amended and restated certificate of incorporation or our bylaws, or (iv) any action asserting a claim against us that is governed by the internal affairs doctrine, in each such case subject to such Court of Chancery having personal jurisdiction over the indispensable parties named as defendants therein. Any person or entity purchasing or otherwise acquiring any interest in shares of our capital stock will be deemed to have notice of, and consented to, the provisions of our amended and restated certificate of incorporation described in the preceding sentence. This choice of forum provision may limit a shareholder’s ability to bring a claim in a judicial forum that it finds favorable for disputes with us or our directors, officers, employees or agents, which may discourage such lawsuits against us and such persons. Alternatively, if a court were to find these provisions of our amended and restated certificate of incorporation inapplicable to, or unenforceable in respectdetermine. The terms of one or more classes or series of preferred stock could adversely impact the voting power or value of our Class A common stock. For example, we might grant holders of preferred stock the right to elect some number of our directors in all events or on the happening of specified events or the right to veto specified transactions. Similarly, the repurchase or redemption rights or liquidation preferences we might assign to holders of preferred stock could affect the residual value of the specified types of actions or proceedings, we may incur additional costs associated with resolving such matters in other jurisdictions, which could adversely affect our business, results of operations and financial condition.Class A common stock.
Future sales of our Class A Common Stockcommon stock in the public market, or the perception that such sales may occur, could reduce our stock price, and any additional capital raised by us through the sale of equity or convertible securities may dilute your ownership in us.
Subject to certain limitations and exceptions, the CW Unit Holders may cause Cactus LLC to redeem their CW Units for shares of Class A Common Stockcommon stock (on a one‑for‑one basis, subject to conversion rate adjustments for stock splits, stock dividends and reclassification and other similar transactions) and then sell those shares of Class A Common Stock.common stock. Additionally, we may issue additional shares of Class A Common Stockcommon stock or convertible securities in subsequent public offerings. We have 26,450,00047,159,099 outstanding shares of Class A Common Stockcommon stock and 48,439,77227,957,699 outstanding shares of Class B Common Stock.common stock as of December 31, 2019. The CW Unit Holders own 48,439,772all 27,957,699 shares of Class B Common Stock,common stock, representing approximately 64.7%37.2% of our total outstanding common stock. All suchAs required pursuant to the terms of the registration rights agreement that we entered into at the time of our IPO, we have filed a registration statement on Form S-3 under the Securities Act of 1933, as amended, to permit the public resale of shares of Class B Common Stock are restricted from immediate resale under the federal securities laws and are subject to the lock‑up agreements between such parties and the underwriters but may be sold into the market in the future.A common stock owned by Cadent, and Cactus WH Enterprises are party to a registration rights agreement between us and the Pre-IPO Owners, which will require us to effect the registration of their
shares in certain circumstances no earlier than the expiration of the lock‑up period contained in the underwriting agreement entered into in connection with our IPO.Lee Boquet. See “Item 13. Certain Relationships and Related Party Transactions, and Director Independence—Stockholders’ Agreement” for more information.
We cannot predict the size of future issuances of our Class A Common Stockcommon stock or securities convertible into Class A Common Stockcommon stock or the effect, if any, that future issuances and sales of shares of our Class A Common Stockcommon stock will have on the market price of our Class A Common Stock.common stock. Sales of substantial amounts of our Class A Common Stockcommon stock (including shares issued in connection with an acquisition), or the perception that such sales could occur, may adversely affect prevailing market prices of our Class A Common Stock.common stock.
Holders of our Class A common stock may not receive dividends on their Class A common stock.
We declared our first dividend to Class A stockholders in the fourth quarter of 2019. Holders of our Class A common stock are entitled to receive only such dividends as our board of directors may declare out of funds legally available for such payments. We are incorporated in Delaware and are governed by the Delaware General Corporation Law (“DGCL”). The DGCL allows a corporation to pay dividends only out of a surplus, as determined under Delaware law or, if there is no surplus, out of net profits for the fiscal year in which the dividend was declared and for the preceding fiscal year. Under the DGCL, however, we cannot pay dividends out of net profits if, after we pay the dividend, our capital would be less than the capital represented by the outstanding stock of all classes having a preference upon the distribution of assets. We are not required to pay a dividend, and any determination to pay dividends and other distributions in cash, stock or property by us in the future (including determinations as to the amount of any such dividend or distribution) will be at the discretion of our board of directors and will be dependent on then-existing conditions, including business conditions, our financial condition, results of operations, liquidity, capital requirements, contractual restrictions, including restrictive covenants contained in debt agreements, and other factors.
Under certain circumstances, redemptions of CW Units by CW Unit Holders will result in dilution to the holders of our Class A Common Stock.common stock.
Redemptions of CW Units by CW Unit Holders in accordance with the terms of the Cactus Wellhead LLC Agreement will result in a corresponding increase in our membership interest in Cactus LLC, increase in the number of shares of Class A Common Stockcommon stock outstanding and decrease in the number of shares of Class B Common Stockcommon stock outstanding. In the event that CW Units are exchanged at a time when Cactus LLC has made cash distributions to CW Unit Holders, including Cactus Inc., and Cactus Inc. has accumulated such distributions and neither reinvests them in Cactus LLC in exchange for additional CW Units nor distributes them as dividends to the holders of Cactus Inc.’s Class A Common Stock,common stock, the holders of our Class A Common Stockcommon stock would experience dilution with respect to such accumulated distributions.
Cactus Inc. will be required to make payments under the Tax Receivable AgreementTRA for certain tax benefits that we may claim, and the amounts of such payments could be significant.
In connection with our IPO, we entered into a Tax Receivable Agreementthe TRA with the TRA Holders. This agreement will generally provideprovides for the payment by Cactus Inc. to theeach TRA HoldersHolder of 85% of the net cash savings, if any, in U.S. federal, state and local income tax and franchise tax that Cactus Inc. actually realizes or is deemed to realize in certain circumstances as a result of certain increases in tax basis and certain benefits attributable to imputed interest. Cactus Inc. will retain the benefit of the remaining 15% of these net cash savings.
The term of the Tax Receivable AgreementTRA will continue until all tax benefits that are subject to the Tax Receivable AgreementTRA have been utilized or expired, unless we exercise our right to terminate the Tax Receivable AgreementTRA (or the Tax Receivable AgreementTRA is terminated due to other circumstances, including our breach of a material obligation thereunder or certain mergers or other changes of control), and we make the termination payment specified in the Tax Receivable Agreement.TRA. In addition, payments we make under the Tax Receivable AgreementTRA will be increased by any interest accrued from the due date (without extensions) of the corresponding tax return. InPayments under the TRA commenced in 2019, and in the event that the Tax Receivable AgreementTRA is not terminated, the payments under the Tax Receivable AgreementTRA are anticipated to commence in 2019 and to continue for 16approximately 20 years after the date of the last redemption of CW Units.
The payment obligations under the Tax Receivable AgreementTRA are our obligations and not obligations of Cactus LLC, and we expect that the payments we will be required to make under the Tax Receivable AgreementTRA will be substantial. Estimating the amount and timing of payments that may become due under the Tax ReceivableTRA Agreement is by its nature imprecise. For purposes of the Tax Receivable Agreement,TRA, cash savings in tax generally are calculated by comparing our actual tax liability (determined by using the actual applicable U.S. federal income tax rate and an assumed combined state and local income tax rate) to the amount we would have been required to pay had we not been able to utilize any of the tax benefits subject to the Tax Receivable Agreement.TRA. The amounts payable, as well as the timing of any payments under the Tax Receivable Agreement,TRA, are dependent upon significant future events and assumptions, including the timing of the redemption of CW Units, the price of our Class A Common Stockcommon stock at the time of each redemption, the extent to which such redemptions are taxable transactions, the amount of the redeeming unit holder’s tax basis in its CW Units at the time of the relevant redemption, the depreciation and amortization periods that
apply to the increase in tax basis, the amount and timing of taxable income we generate in the future and the U.S. federal income tax rates then applicable, and the portion of our payments under the Tax Receivable AgreementTRA that constitute imputed interest or give rise to depreciable or amortizable tax basis. The payments under the Tax Receivable Agreement willTRA are not be conditioned upon a holder of rights under the Tax Receivable AgreementTRA having a continued ownership interest in us. For additional information regarding the TRA, see “Item 13. Certain Relationships and Related Party Transactions, and Director Independence—Tax Receivable Agreement.”
In certain cases, payments under the Tax Receivable AgreementTRA may be accelerated and/or significantly exceed the actual benefits, if any, we realize in respect of the tax attributes subject to the Tax Receivable Agreement.TRA.
If we elect to terminate the Tax Receivable AgreementTRA early or it is terminated early due to Cactus Inc.’s failure to honor a material obligation thereunder or due to certain mergers or other changes of control, our obligations under the Tax Receivable AgreementTRA would accelerate and we would be required to make an immediate payment equal to the present value of the anticipated future payments to be made by us under the Tax Receivable AgreementTRA (determined by applying a discount rate of one‑year LIBOR plus 150 basis points) and such payment is expected to be substantial. The calculation of anticipated future payments will be based upon certain assumptions and deemed events set forth in the Tax Receivable Agreement,TRA, including (i) the assumption that we have sufficient taxable income to fully utilize the tax benefits covered by the Tax Receivable AgreementTRA and (ii) the assumption that any CW Units (other than those held by Cactus Inc.) outstanding on the termination date are deemed to be redeemed on the termination date. Any early termination payment may
be made significantly in advance of the actual realization, if any, of the future tax benefits to which the termination payment relates.
As a result of either an early termination or a change of control, we could be required to make payments under the Tax Receivable AgreementTRA that exceed our actual cash tax savings under the Tax Receivable Agreement.TRA. In these situations, our obligations under the Tax Receivable AgreementTRA could have a substantial negative impact on our liquidity and could have the effect of delaying, deferring or preventing certain mergers, asset sales, or other forms of business combinations or changes of control. If the TRA were terminated as of December 31, 2019, the estimated termination payments, based on the assumptions discussed above, would have been approximately $331.3 million (calculated using a discount rate equal to one-year LIBOR plus 150 basis points, applied against an undiscounted liability of approximately $434.7 million). The foregoing number is merely an estimate and the actual payment could differ materially. There can be no assurance that we will be able to finance our obligations under the Tax Receivable Agreement.TRA.
Payments under the Tax Receivable Agreement will beTRA are based on the tax reporting positions that we will determine. The TRA Holders will not reimburse us for any payments previously made under the Tax Receivable AgreementTRA if any tax benefits that have given rise to payments under the Tax Receivable AgreementTRA are subsequently disallowed, except that excess payments made to any TRA Holder will be netted against payments that would otherwise be made to such TRA Holder, if any, after our determination of such excess. As a result, in some circumstances, we could make payments that are greater than our actual cash tax savings, if any, and may not be able to recoup those payments, which could adversely affect our liquidity.
If Cactus LLC were to become a publicly traded partnership taxable as a corporation for U.S. federal income tax purposes, we and Cactus LLC might be subject to potentially significant tax inefficiencies, and we would not be able to recover payments previously made by us under the Tax Receivable AgreementTRA even if the corresponding tax benefits were subsequently determined to have been unavailable due to such status.
We intend to operate such that Cactus LLC does not become a publicly traded partnership taxable as a corporation for U.S. federal income tax purposes. A “publicly traded partnership” is a partnership the interests of which are traded on an established securities market or are readily tradable on a secondary market or the substantial equivalent thereof. Under certain circumstances, redemptions of CW Units pursuant to the Redemption Right (or our Call Right) or other transfers of CW Units could cause Cactus LLC to be treated as a publicly traded partnership. Applicable U.S. Treasury regulations provide for certain safe harbors from treatment as a publicly traded partnership, and we intend to operate such that one or more such safe harbors shall apply. For example, we intend to limit the number of unitholders of Cactus LLC, and the Cactus Wellhead LLC Agreement, which was entered into in connection with the closing of our IPO, provides for limitations on the ability of CW Unit Holders to transfer their CW Units and provides us, as managing
member of Cactus LLC, with the right to impose restrictions (in addition to those already in place) on the ability of unitholders of Cactus LLC to redeem their CW Units pursuant to the Redemption Right to the extent we believe it is necessary to ensure that Cactus LLC will continue to be treated as a partnership for U.S. federal income tax purposes.
If Cactus LLC were to become a publicly traded partnership, significant tax inefficiencies might result for us and for Cactus LLC, including as a result of our inability to file a consolidated U.S. federal income tax return with Cactus LLC. In addition, we would no longer have the benefit of certain increases in tax basis covered under the Tax Receivable Agreement,TRA, and we would not be able to recover any payments previously made by us under the Tax Receivable Agreement,TRA, even if the corresponding tax benefits (including any claimed increase in the tax basis of Cactus LLC’s assets) were subsequently determined to have been unavailable.
If Cactus Inc. were deemedDiscontinuation, reform or replacement of LIBOR and other benchmark rates, or uncertainty related to bethe potential for any of the foregoing, may adversely affect our business.
The U.K. Financial Conduct Authority announced in 2017 that it intends to phase out LIBOR by the end of 2021. In addition, other regulators have suggested reforming or replacing other benchmark rates. The discontinuation, reform or replacement of LIBOR or any other benchmark rates may have an investment companyunpredictable impact on contractual mechanics in the credit markets or cause disruption to the broader financial markets. Uncertainty as to the nature of such potential discontinuation, reform or replacement may negatively impact interest expense related to borrowings under our credit facility and interest on deferred payments due under the Investment Company Act of 1940, as amended (the “1940 Act”), as a result of its ownership of Cactus LLC, applicable restrictions could make it impractical for Cactus Inc. to continue its business as contemplated and could have a material adverse effect on its business.
Under Sections 3(a)(1)(A) and (C) of the 1940 Act, a company generally will be deemed to be an “investment company” for purposes of the 1940 Act if (i) it is, or holds itself out as being, engaged primarily, or proposes to engage primarily,TRA. We may in the businessfuture pursue amendments to our credit facility and the TRA to provide for a transition mechanism or other reference rate in anticipation of investing, reinvesting or trading in securities or (ii) it engages, or proposes to engage, in the business of investing, reinvesting, owning, holding or trading in securities and it owns or proposes to acquire investment securities having a value exceeding 40% of the value of its total assets (exclusive of U.S. government securities and cash items) on an unconsolidated basis. We do not believe that Cactus Inc. is an “investment company,” as such term is defined in either of those sections of the 1940 Act. As the sole managing member of Cactus LLC, Cactus Inc. will control and operate Cactus LLC. On that basis,LIBOR’s discontinuation, but we believe that Cactus Inc.’s interest in Cactus LLC is not an “investment security” as that term is used in the 1940 Act. However, if Cactus Inc. were to cease participation in the management of Cactus LLC, its interest in Cactus LLC could be deemed an “investment security” for purposes of the 1940 Act. Cactus Inc. and Cactus LLC intend to conduct their operations so that Cactus Inc. willmay not be deemed an investment company. However, if Cactus Inc. wereable to be deemed an investment company, restrictions imposed byreach agreement on any such amendments. Further, our credit facility limits the 1940 Act, including limitations on Cactus Inc.’s capital structureamount of indebtedness we and its ability to transact with affiliates, could make it impractical for Cactus Inc. to continue its business as contemplated and could have a material adverse effect on its business.
We may issue preferred stock whose terms could adversely affect the voting power or value of our Class A Common Stock.
Our amended and restated certificate of incorporation authorizes us to issue, without the approval of our shareholders, one or more classes or series of preferred stock having such designations, preferences, limitations and relative rights, including preferences over our Class A Common Stock respecting dividends and distributions, as our board of directors may determine. The terms of one or more classes or series of preferred stock could adversely impact the voting power or value of our Class A Common Stock. For example, we might grant holders of preferred stock the right to elect some number of our directors in all events or on the happening of specified events or the right to veto specified transactions. Similarly, the repurchase or redemption rights or liquidation preferences we might assign to holders of preferred stock could affect the residual value of the Class A Common Stock.
We are a “controlled company” within the meaning of the NYSE rules and, as a result, will qualify for and intend to rely on exemptions from certain corporate governance requirements.
Cadent and Cactus WH Enterprises beneficially own a majority of our outstanding voting interests. As a result, we are a “controlled company” within the meaning of the NYSE corporate governance standards. Under the NYSE rules, a company of which more than 50% of the voting power is held by another person or group of persons acting together is
our subsidiaries may incur. As a “controlled company” and may elect notresult, additional financing to comply with certain NYSE corporate governance requirements, including the requirements that:
| ·
| | a majority of the board of directors consist of independent directors;
|
| ·
| | we have a nominating and governance committee that is composed entirely of independent directors with a written charter addressing the committee’s purpose and responsibilities;
|
| ·
| | we have a compensation committee that is composed entirely of independent directors with a written charter addressing the committee’s purpose and responsibilities; and
|
| ·
| | there be an annual performance evaluation of the nominating and governance and compensation committees.
|
These requirements will not apply to us as long as we remain a controlled company. For at least some period, we intend to utilize these exemptions. Accordingly, you may not have the same protections afforded to shareholders of companies that are subject to all of the corporate governance requirements of the NYSE.
For as long as we are an emerging growth company, we will not be required to comply with certain reporting requirements, including those relating to accounting standards and disclosure aboutreplace our executive compensation, that apply to other public companies.
We are classified as an “emerging growth company” under the JOBS Act. For as long as we are an emerging growth company, whichLIBOR-based debt may be up to five full fiscal years, unlike other public companies, we will not be required to, among other things: (i) provide an auditor’s attestation report on management’s assessment ofunavailable, more expensive or restricted by the effectivenessterms of our system of internal control over financial reporting pursuant to Section 404(b) of the Sarbanes‑Oxley Act; (ii) comply with any new requirements adopted by the PCAOB requiring mandatory audit firm rotation or a supplement to the auditor’s report in which the auditor would be required to provide additional information about the audit and the financial statements of the issuer; (iii) provide certain disclosure regarding executive compensation required of larger public companies; or (iv) hold nonbinding advisory votes on executive compensation. We will remain an emerging growth company for up to five years, although we will lose that status sooner if we have more than $1.07 billion of revenues in a fiscal year, have more than $700.0 million in market value of our Class A Common Stock held by non‑affiliates, or issue more than $1.0 billion of non‑convertible debt over a three‑year period.outstanding indebtedness.
To the extent that we rely on any of the exemptions available to emerging growth companies, you will receive less information about our executive compensation and internal control over financial reporting than issuers that are not emerging growth companies. If some investors find our Class A Common Stock to be less attractive as a result, there may be a less active trading market for our Class A common stock and our stock price may be more volatile.
Item 1B. Unresolved Staff Comments
None.
Item 2. Properties
The following tables settable sets forth information with respect to our facilities.principal facilities as of December 31, 2019. We do not believe any of the omitted properties, consisting primarily of sales offices and service centers, are individually or collectively material to our operations or business. We believe that our facilities are adequate for our current operations.
| | | | | | | | |
| | | | Own/ | | Approximate
| | |
Location | | Type | | Lease | | Size
| | Status
|
United States: | | | | States | | | | |
Athens, PA
| | Service Center
| | Lease
| | 6,500 sq. ft.
| | Active
|
Bossier City, LA(1)LA(1) | | Manufacturing Facility and Service Center | | Lease |
| 38,000 sq. ft.Bossier City, LA(1)
| | Active
|
Bossier City, LA(1)
| | ManufacturingAssembly Facility and Service CenterWarehouse / Land
| | Own | | 74,000 sq. ft./5.7 acres
| | Active
|
Bossier City, LA(2)
| | Land Adjacent to Manufacturing Facility
| | Own
| | 10.0 acres
| | Undeveloped
|
Broussard, LA
| | Service Center
| | Lease
| | 17,500 sq. ft.
| | Active
|
Carlsbad, NM
| | Service Center
| | Lease
| | 5,000 sq. ft.
| | Active
|
Casper, WY
| | Service Center
| | Lease
| | 5,000 sq. ft.
| | Active
|
Center, TX(3)
| | —
| | Lease
| | 18,125 sq. ft.
| | Idle / Storage
|
Decatur, TX
| | Service Center
| | Lease
| | 9,000 sq. ft.
| | Active
|
Donora, PA | | Service Center | | Lease | | 37,000 sq. ft.
| | Active
|
DuBois, PA | | Service Center | | Lease | | 20,580 sq. ft.
| | Active
|
DuBois, PA
| | Land Adjacent to Service Center
| | Own
| | 5.1 acres
| | Undeveloped
|
Grand Junction, COHobbs, NM
| | Service Center / Land | | Lease
| | 7,200 sq. ft.
| | Active
|
Houston, TX(4)
| | —
| | Lease
| | 20,000 sq. ft.
| | Idle / Sub-leased to third partyOwn
|
Houston, TX | | Administrative Headquarters | | Lease | | 23,125 sq. ft.
| | Active
|
Kilgore, TX(4)
| | —
| | Lease
| | 24,000 sq. ft.
| | Portions sub-leased to third party / Storage
|
LaSalle, CO
| | Service Center
| | Lease
| | 6,800 sq. ft.
| | Active
|
Midland, TX(3)
| | —
| | Lease
| | 11,500 sq. ft.
| | Sub-leased to third party
|
New Waverly, TX | | Service Center / Land | | Own | | 21,000 sq. ft./8.7 acres
| | Active
|
Odessa, TX | | Service Center | | Lease | | 63,750 sq. ft.
| | Active
|
Odessa, TX | | Land | | Own | | 9.1 acres
| | Undeveloped
|
Oklahoma City, OK | | Service Center | | Lease | | 51,547 sq. ft.
| | Active
|
Oklahoma City, OK
| | Service Center
| | Lease
| | 20,200 sq. ft.
| | Idle / Vacant
|
Pleasanton, TX | | Service Center | | Lease | | 18,125 sq. ft.
| | Active
|
Pleasanton, TX
| | Land Adjacent to Service Center
| | Own
| | 5.4 acres
| | Storage
|
Williston, ND | | Service Center | | Lease | | 22,825 sq. ft.
| | Active
|
Williston, ND
| | Land Adjacent to Service Center
| | Own
| | 3.1 acres
| | Undeveloped
|
China and Australia: | | | | | | | | |
Queensland, Australia | | Service CenterCenters and Offices / Land | | Lease | | 15,000 sq. ft.
| | Active
|
Suzhou, China | | Production Facility and Offices | | Lease | | 89,535 sq. ft.
| | Active
|
| (1) | | Consists of various facilities adjacent to each other constituting our manufacturing facility, assembly facility, warehouse and service center. |
| (2)
| | Consists of various parcels of contiguous land adjacent to our manufacturing facility.
|
| (3)
| | Previously operated as a service center.
|
| (4)
| | Previously operated as a manufacturing facility.
|
Additional information about our properties is set forth in “Item 1. Business.”
Item 3. Legal Proceedings
We are party to lawsuits arising in the ordinary course of our business. We cannot predict the outcome of any such lawsuits with certainty, but management believes it is remote that pending or threatened legal matters will have a material adverse impact on our financial condition.
Due to the nature of our business, we are, from time to time, involved in other routine litigation or subject to disputes or claims related to our business activities, including workers’ compensation claims and employment related disputes. In the opinion of our management, none of these otherthere is no pending litigation, disputesdispute or claimsclaim against us that, if decided adversely, will have a material adverse effect on our results of operations, financial condition or cash flows or results of operations.
flows.
Item 4. Mine Safety Disclosures
Not applicable.
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Common Stock
Our Class A Common Stock began trading on the NYSE under the symbol “WHD” on February 8, 2018. Prior to that, there was no publicThe principal market for our Class A Common Stock. As a result, we have not set forth quarterly information with respect to the high and low prices for our common stock foris the two most recent fiscal years or provided a performance graph.
On March 13, 2018,New York Stock Exchange (“NYSE”), where it is traded under the closing pricesymbol “WHD.” As of December 31, 2019, there was one holder of record of our Class A Common Stock as reported by the NYSE was $26.68 per share, and we had approximately one holder of record.common stock. This number excludes owners for whom Class A Common Stockcommon stock may be held in “street”“street name.”
Dividend PolicyDividends
We do not anticipate declaring or paying anyOn October 29, 2019, our board of directors authorized the introduction of a regular quarterly cash dividends to holdersdividend of our$0.09 per share of Class A Common Stock in the foreseeable future.common stock. We currently intend to retaincontinue paying the quarterly dividend while retaining the balance of future earnings, if any, to finance the growth of our business. OurHowever, our future dividend policy is within the discretion of our board of directors and will depend upon then-existing conditions, including our results of operations, financial condition, capital requirements, investment opportunities, statutory and contractual restrictions on our ability to pay dividends and other factors our board of directors may deem relevant. In addition, our Credit Agreement restricts our ability to pay cash dividends to holders of our Class A Common Stock.
Securities Authorized for Issuance under Equity Compensation PlansPerformance Graph
The graph below compares the cumulative total shareholder return on our common stock to the S&P 500 Index, the S&P Oil & Gas Equipment & Services Index and the PHLX Oil Service Index from the date our common stock began trading through December 31, 2019. The total shareholder return assumes $100 invested on February 7, 2018 in Cactus Inc., the S&P 500 Index, the S&P Oil & Gas Equipment & Services Index and the PHLX Oil Service Index. It also assumes reinvestment of all dividends. The following graph and related information relatingshall not be deemed “soliciting material” or to our equity compensation plans required by Item 5 isbe “filed” with the SEC, nor shall such information be incorporated by reference into any future filing under the Securities Act of 1933 or the Securities Exchange Act of 1934, except to the extent that Cactus Inc. specifically incorporates it by reference into such information as set forth in Item 12. “Security Ownershipfiling.
Issuer Purchases of Equity Securities
We did not purchase anyThe following sets forth information with respect to our repurchase of our equity securitiesClass A common stock during the quarterthree months ended December 31, 2017.2019 (in whole shares).
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Period | | Total number of shares purchased (1) | | | Average price paid per share (2) |
October 1-31, 2019 | | 740 | | $ | 28.16 |
November 1-30, 2019 | | — | | | — |
December 1-31, 2019 | | — | | | — |
Total | | 740 | | $ | 28.16 |
Sales of Unregistered Equity Securities
We did not have any sales of unregistered equity securities during the fiscal year ended December 31, 2017.
| (1) | | Consists of shares of Class A common stock repurchased from employees to satisfy tax withholding obligations related to restricted stock units that vested during the period. |
| (2) | | Average price paid for Class A common stock purchased from employees to satisfy tax withholding obligations related to restricted stock units that vested during the period. |
Item 6. Selected Financial Data
The following tables show selected historical consolidated financial data, for the periods and as of the dates indicated, of Cactus LLC, our accounting predecessor.Inc. and its consolidated subsidiaries. Our historical results are not necessarily indicative of future results. The following selected financial and operating data should be read in conjunction with “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the consolidated financial statements and related notes, each of which is included in this report.Annual Report.
| | | | | | | | | | |
| | Year Ended December 31, | |
| | 2017 | | 2016 | | 2015 | |
| | (in thousands, except per unit data) | |
Consolidated Statements of Income Data: | | | | | | | | | | |
Total revenues | | $ | 341,191 | | $ | 155,048 | | $ | 221,395 | |
Total costs and expenses | | | 252,328 | | | 144,433 | | | 179,190 | |
Income from operations | | | 88,863 | | | 10,615 | | | 42,205 | |
Interest expense, net | | | (20,767) | | | (20,233) | | | (21,837) | |
Other income (expense), net | | | — | | | 2,251 | | | 1,640 | |
Income (loss) before income taxes | | | 68,096 | | | (7,367) | | | 22,008 | |
Income tax expense(1) | | | 1,549 | | | 809 | | | 784 | |
Net income (loss) | | $ | 66,547 | | $ | (8,176) | | $ | 21,224 | |
Earnings (loss) per Class A unit: | | | | | | | | | | |
Basic and diluted | | $ | 1,258.36 | | $ | (224.00) | | $ | 306.88 | |
Weighted average Class A units outstanding: | | | | | | | | | | |
Basic and diluted | | | 36.5 | | | 36.5 | | | 36.5 | |
| | | | | | | | | | |
Consolidated Balance Sheets Data (at period end): | | | | | | | | | | |
Cash and cash equivalents | | $ | 7,574 | | $ | 8,688 | | $ | 12,526 | |
Total assets | | | 266,456 | | | 165,328 | | | 177,559 | |
Long-term debt, net | | | 241,437 | | | 242,254 | | | 250,555 | |
Members’ equity (deficit)(2) | | | (36,217) | | | (103,321) | | | (93,167) | |
| | | | | | | | | | |
Consolidated Statements of Cash Flows Data: | | | | | | | | | | |
Net cash provided by (used in): | | | | | | | | | | |
Operating activities | | $ | 34,707 | | $ | 23,975 | | $ | 45,927 | |
Investing activities | | | (30,678) | | | (17,358) | | | (23,422) | |
Financing activities | | | (5,313) | | | (10,171) | | | (22,776) | |
| | | | | | | | | | | | | | | | |
| | Year Ended December 31, | |
| | 2019 | | 2018 | | 2017 | | 2016 | | 2015 | |
| | (in thousands, except per share data) | |
Consolidated Statements of Income Data: | | | | | | | | | | | | | | | | |
Total revenues | | $ | 628,414 | | $ | 544,135 | | $ | 341,191 | | $ | 155,048 | | $ | 221,395 | |
Total costs and expenses | | | 445,264 | | | 366,434 | | | 252,328 | | | 144,433 | | | 179,190 | |
Income from operations | | | 183,150 | | | 177,701 | | | 88,863 | | | 10,615 | | | 42,205 | |
| | | | | | | | | | | | | | | | |
Interest income (expense), net | | | 879 | | | (3,595) | | | (20,767) | | | (20,233) | | | (21,837) | |
Other income (expense), net | | | 4,294 | | | (4,305) | | | — | | | 2,251 | | | 1,640 | |
Income (loss) before income taxes | | | 188,323 | | | 169,801 | | | 68,096 | | | (7,367) | | | 22,008 | |
Income tax expense(1) | | | 32,020 | | | 19,520 | | | 1,549 | | | 809 | | | 784 | |
Net income (loss) | | $ | 156,303 | | $ | 150,281 | | $ | 66,547 | | $ | (8,176) | | $ | 21,224 | |
Less: pre-IPO net income attributable to Cactus LLC | | | — | | | 13,648 | | | 66,547 | | | (8,176) | | | 21,224 | |
Less: net income attributable to non-controlling interest | | | 70,691 | | | 84,950 | | | — | | | — | | | — | |
Net income attributable to Cactus Inc. | | $ | 85,612 | | $ | 51,683 | | $ | — | | $ | — | | $ | — | |
| | | | | | | | | | | | | | | | |
Earnings per Class A share - basic (2) | | $ | 1.90 | | $ | 1.60 | | $ | — | | $ | — | | $ | — | |
Earnings per Class A share - diluted (2) | | $ | 1.88 | | $ | 1.58 | | $ | — | | $ | — | | $ | — | |
| | | | | | | | | | | | | | | | |
Weighted average Class A shares outstanding - basic (2) | | | 44,983 | | | 32,329 | | | — | | | — | | | — | |
Weighted average Class A shares outstanding - diluted (2) | | | 75,353 | | | 32,695 | | | — | | | — | | | — | |
| | | | | | | | | | | | | | | | |
Consolidated Balance Sheets Data (at period end): | | | | | | | | | | | | | | | | |
Cash and cash equivalents | | $ | 202,603 | | $ | 70,841 | | $ | 7,574 | | $ | 8,688 | | $ | 12,526 | |
Total assets (3) | | | 834,964 | | | 584,744 | | | 266,456 | | | 165,328 | | | 177,559 | |
Long-term debt, net (4) | | | — | | | — | | | 241,437 | | | 242,254 | | | 250,555 | |
Liability related to tax receivable agreement, net of current portion | | | 201,902 | | | 138,015 | | | — | | | — | | | — | |
Finance lease obligations, net of current portion | | | 3,910 | | | 8,741 | | | 7,946 | | | 2,065 | | | — | |
Operating lease liabilities, net of current portion (3) | | | 20,283 | | | — | | | — | | | — | | | — | |
Stockholders'/Members’ equity (deficit) (2) | | | 516,395 | | | 362,328 | | | (36,217) | | | (103,321) | | | (93,167) | |
Cash dividends declared per common share (5) | | $ | 0.09 | | $ | — | | $ | — | | $ | — | | $ | — | |
| (1) | | Cactus Inc. is a corporation and is subject to U.S. federal as well as state income tax for its share of ownership in Cactus LLC. Our predecessor and operating subsidiary, Cactus LLC, is not subject to U.S. federal income tax at an entity level. As a result, the consolidated net income (loss) in our historical financial statements does not reflect the tax expense we would have incurred if we were subject to U.S. federal income tax at an entity level during such periods. Cactus LLC is subject to entity‑level taxes for certain states within the United States. Additionally, our operations in both Australia and China are subject to local country income taxes. |
| (2) | | In March 2014 and July 2014, Cactus LLC entered intoInc. completed an amendment and restatementinitial public offering of its then existing credit facility and a discount loan agreement, respectively, a portionClass A common stock on February 12, 2018. See “Item 1. Business—Organization Structure” above.
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| (3) | | Effective January 1, 2019, we adopted Accounting Standards Update (“ASU”) 2016-02, Leases, using the modified retrospective method of adoption. Prior year amounts reflected in the proceeds from which were used to make a cash distribution to the Pre-IPO Owners. These transactions had the effect of creating a deficit in our total members’ equity.table above have not been restated. |
| (4) | | In conjunction with our IPO, we used a portion of the net proceeds to repay all of the borrowings outstanding under Cactus LLC’s term loan facility. |
| (5) | | On October 29, 2019, Cactus Inc.’s board of directors authorized the introduction of a regular quarterly cash dividend of $0.09 per share of Class A common stock. |
Item 7. 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 Annual Report to the “Company,” “Cactus,” “we,” “us” and “our” refer to (i) Cactus Wellhead, LLC (“Cactus LLC”) and its consolidated subsidiaries prior to the completion of our initial public offering on February 12, 2018 and (ii) Cactus Inc. (“Cactus Inc.”) and its consolidated subsidiaries (including Cactus LLC) following the completion of our initial public offering, unless we state otherwise or the context otherwise requires.offering. The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the accompanying 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, including those described above 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. 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
We design, manufacture, sellThis section includes comparisons of certain 2019 financial information to the same information for 2018. Year-to-year comparisons of the 2018 financial information to the same information for 2017 are contained in “Item 7. Management’s Discussion and rent a rangeAnalysis of highly‑engineered wellheadsFinancial Condition and pressure control equipment. Our products are sold and rented principally for onshore unconventional oil and gas wells and are utilized during the drilling, completions (including fracturing) and production phasesResult of Operations” of our customers’ wells. In addition, we provide field servicesAnnual Report on Form 10-K for allthe year ended December 31, 2018 filed with the Securities and Exchange Commission on March 15, 2019, which comparative information and the information therein under the caption “Factors Affecting the Comparability of our productsFinancial Condition and rental items to assist with the installation, maintenance and handlingResults of the wellhead and pressure control equipment.
Our principal products include our Cactus SafeDrill™ wellhead systems, as well as frac stacks, zipper manifolds and production trees that we design and manufacture. Every oil and gas well requires a wellhead, which is installed at the onset of the drilling process and which remains with the well through its entire productive life. The Cactus SafeDrill™ wellhead systems employ technology which allows technicians to land and secure casing strings safely from the rig floor without the need to descend into the cellar. We believe weOperations” are a market leader in the application of such technology, with thousands of our products sold and installed across the United States since 2011. During the completion phase of a well, we rent frac stacks, zipper manifolds and other high‑pressure equipment that are used for well control and for managing the transmission of frac fluids and proppants during the hydraulic fracturing process. These severe service applications require robust and reliable equipment. For the subsequent production phase of a well, we sell production trees that regulate hydrocarbon production, which are installed on the wellhead after the frac tree has been removed. In addition, we provide mission‑critical field services for all of our products and rental items, including 24‑hour service crews to assist with the installation, maintenance and safe handling of the wellhead and pressure control equipment. Finally, we provide repair services for all of the equipment that we sell or rent.
Our primary wellhead products and pressure control equipment are developed internally. We believe our close relationship with our customers provides us with insight into the specific issues encountered in the drilling and completions processes, allowing us to provide them with highly tailored product and service solutions. We have achieved significant market share, as measuredincorporated by the percentage of total active U.S. onshore rigs that we follow (which we define as the number of active U.S. onshore drilling rigs to which we are the primary provider of wellhead products and corresponding services during drilling), and brand name recognition with respect to our engineered products, which we believe is due to our focus on safety, reliability, cost effectiveness and time saving features. We optimize our products for pad drilling (i.e., the process of drilling multiple wellbores from a single surface location) to reduce rig time and provide operators with significant efficiencies that translate to cost savings at the wellsite.reference herein.
Our manufacturing and production facilities are located in Bossier City, Louisiana and Suzhou, China. While both facilities can produce our full range of products, our Bossier City facility has advanced capabilities and is designed
to support time‑sensitive and rapid turnaround orders, while our facility in China is optimized for longer lead time orders and outsources its machining requirements. Both our United States and China facilities are licensed to the latest API 6A specification for both wellheads and valves and API Q1 and ISO9001:2015 quality management systems.
We operate 14 service centers in the United States, which are strategically located in the key oil and gas producing regions, including the Permian, SCOOP/STACK, Marcellus, Utica, Eagle Ford, Bakken and other active oil and gas regions in the United States. We also have one service center in Eastern Australia. These service centers support our field services and provide equipment assembly and repair services.
Market Factors and Trends
See “Item 1. 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 drilling rigs in operation, the number of oil and gas wells being drilled, the depth and drilling conditions of these wells, the volume of production, the number of well completions, and the level of well remediation activity, the volume of production and the corresponding capital spending by oil and natural gas companies. Oil and gas activity is in turn heavily influenced by, among other factors, oil and gas prices locally and worldwide, which have historically been volatile.
The totalOil supply markets tightened in 2017 and through the third quarter of 2018, driving 2018 average West Texas Intermediate (“WTI”) crude oil prices higher. However, during the fourth quarter of 2018, crude oil prices declined following concerns over slowing worldwide demand and the granting of waivers to several purchasers of Iranian oil. In response, many of the larger publicly traded E&P companies announced plans to reduce their capital budgets year-over-year for 2019. During 2019, the U.S. onshore rig count for 2017trended down as a significant number of E&P operators reduced spending levels during the latter part of 2019.
The 2019 weekly average U.S. onshore rig count as reported by Baker Hughes based onwas 918 rigs compared to 2018’s average of 1,011 rigs. The 2019 average rig count was a monthly average was 852 rigs, a material increase9% decrease relative to 2018, while up from the 2016 monthly2017 weekly average of 485853 rigs. The December 2017, January 2018 and February 2018 monthlyIf the rig count remains at levels below the 2019 average, was 909, 920 and 959 rigs, respectively.
Oil and natural gas prices have historically been volatile. Ongoing compliance among OPEC producers on production cuts implemented in early 2017 and the extension of these production cuts through the end of 2018, combined with current geopolitical tension, have supported upward momentum for energy prices. We believe that recent increases in oil and natural gas prices, as well as moderate relief from the global oversupply of oil and domestic oversupply of natural gas, should increasethere may be reduced demand for our products and services. Given the recent volatility in crude oil prices and pressure on our customers from the investment community to limit capital spending, it is generally expected that drilling activity will be down year-over-year in 2020. As of February 21, 2020, the U.S. onshore rig count was 768.
The key market factor offactors impacting our product sales isare 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 versusagainst our competitors’competitors by the number of rigs that we are supporting on a monthly basis as a proxy forit is correlated to wells drilled. Each active drilling rig produces different levels of revenue
based on the customer’s drilling plan, which includes factors such as the number of wells drilled per pad, 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.customer and the rate at which production trees are eventually deployed. All of these factors aremay be influenced by the oil and gas region in which our customer is operating. While these factors may lead to differing revenues per rig, they allow uswe are able to broadly forecast our product needs and anticipated revenue levels based on general trends in a given region and with a specific customer. Increases in horizontal wells drilled as a percentage of total wells drilled, the shift towards pad drilling, and an increase in the number of wells drilled per rig are all favorable trends that we believe enhance the demand for our products relative to the active rig count.
Our rental revenues are primarily dependent on the number of wells completed (i.e.(i.e., hydraulically fractured), the number of wells on a well pad and the number of fracture stages per well. Rental revenues and prices are more dependent on overall industryWell completion activity levelsgenerally follows the level of drilling activity. In 2019, a reduction in the short‑term than product sales. This is due to the more competitive and price‑sensitive nature of the rental market with more participants having access to completions‑focused rental equipment. Pricing had also been impacted with the move from dayrate pricing to stage‑based pricing in the hydraulic fracturing market. This had a follow‑on effect to the rental pricing of completions‑focused pressure control equipment, as problems experienced with rental equipment do not have as significant a cost impact as they did previously to the E&P operator under dayrate pricing. We believe that as the market increases in activity levels and as capacity becomes more constrained due to cannibalization of both rental and hydraulic fracturing service equipment, the pricing of completions‑focused pressure control rental equipment will improve due to a renewed focus on reliability and quality. Furthermore, we believe that the current number of Drilled But Uncompleteddrilled but uncompleted wells (“DUCs”) and any increases theretohas led to stronger completion activity relative to drilling activity from U.S. E&P companies. Changes to the number of DUCs could ultimately provide additional opportunities.
opportunities or headwinds for our rental business relative to general drilling activity.
Service and other revenues are closely correlated to revenues from product sales and rentals, as items sold or rented oftenalmost always have an associated service component. Almost all service sales are offered in connection with a product sale or rental. Therefore, the market factors and trends of product sales and rental revenues similarly impact the associated levels of service and other revenues generated.
How We Generate Our Revenues
Our revenues are derived from three sources: products, rentals, and field service and other. Product revenues are primarily derived from the sale of wellhead systems and production trees. Rental revenues are primarily derived from the rental of equipment used for well controlbusiness experiences some seasonality during the completions processfourth quarter due to holidays and customers managing their budgets as the year closes out. This can lead to lower activity in our three revenue categories as well as the rentallower margins, particularly in field services due to lower labor utilization.
Recent Developments
Our factory in Suzhou, China was closed for 10 days in January and February of drilling tools. Field service2020 as a result of travel restrictions and other revenuesmeasures taken by the Chinese government in response to the outbreak of the coronavirus. Our Suzhou facility reopened on February 10, 2020, however it is operating at a reduced capacity. This is expected to be temporary. Given the dynamic nature of these circumstances, the extent of the business disruption resulting from the coronavirus outbreak and the financial impact thereof cannot be reasonably estimated at this time. There are primarily earned when we provide installationstill too many variables and uncertainties regarding the coronavirus outbreak to fully assess the potential impact on our business, including the ultimate geographic spread of the virus, the duration and severity of the outbreak and the extent of travel restrictions and business closures imposed in China or other affected countries. We believe that our existing inventory levels and other field servicesoperations will be able to meet customer commitments and demand for both product salesthe near future, and equipment rental. Additionally, other revenues are derived from providing repair and reconditioning serviceswe do not believe that the coronavirus is likely to customers that have previously installeda material adverse impact on our products on their wellsite. Items soldresults of operations for the first quarter of 2020. However, a prolonged shutdown or rented generally have an associated service component. Therefore, field service and other revenues closely correlate to revenues from product sales and rentals.
In 2017, we derived 55%reduction in capacity of our total revenues fromChinese operations or other facilities in China that are engaged in our supply chain would likely have a negative effect on our results of operations, and that negative effect may be material. We do not believe that the salemeasures taken by the Chinese government in response to the outbreak of our products, 23% of our total revenues from rental and 22% of our total revenues from field service and other. In 2016, we derived 50% of our total revenues from the sale of our products, 29% of our total revenues from rental and 21% of our total revenues from field service and other. In 2015, we derived 50% of our total revenues from the sale of our products, 30% of our total revenues from rental and 20% of our total revenues from field service and other. Wecoronavirus will have predominantly domestic operations, with 99% of our total sales in 2017, 98% of our total sales in 2016 and 99% of our total sales in 2015 earned from U.S. operations.
Substantially all of our sales are madea disproportionately adverse impact on a call‑out basis, wherein our clients issue requests for goods and/or services as their operations require. Such goods and/or services are most often priced in accordance with a preapproved price list.
Generally, we attempt to raise prices as our costs increase or additional features are provided. However, the actual pricing of our products and services is impacted by a number of factors, including competitive pricing pressure, the level of utilized capacity in the oil service sector, maintenance of market share, and general market conditions.
Costs of Conducting Our Business
The principal elements of cost of sales for products are the direct and indirect costs to manufacture and supply the product, including labor, materials, machine time, lease expense relatedus relative to our facilities and freight. The principal elements of cost of sales for rentals are the direct and indirect costs of supplying rental equipment, including depreciation, repairs specifically performed on such rental equipment, lease expense and freight. The principal elements of cost of sales for field service and other are labor, equipment depreciation and repair, equipment lease expense, fuel and supplies.competitors.
Selling, general and administrative expense is comprised of costs such as sales and marketing, engineering expenses, general corporate overhead, business development expenses, compensation expense, IT expenses, safety and environmental expenses, legal and professional expenses and other related administrative functions.
Interest expense, net is comprised primarily of interest expense associated with our term loan facility. A portion of the net proceeds of the IPO was used to repay the borrowings outstanding under our term loan facility.
Factors Affecting the Comparability of Our Financial Condition and Results of Operations
Our historical financial condition and results of operations for the periods presented may not be comparable, either from period to period or going forward, for the following reasons:
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| | Selling, General and Administrative Expenses. We expect to incur additional selling, general and administrative expenses as a result of becoming a publicly traded company. These costs include expenses associated with our annual and quarterly reporting, tax return preparation expenses, Sarbanes‑Oxley compliance expenses, audit fees, legal fees, directors and officers insurance, investor relations expenses, Tax Receivable Agreement administration expenses and registrar and transfer agent fees. These increases in selling, general and administrative expenses are not reflected in our historical financial statements, other than a portion of these costs incurred in 2017 in preparation of becoming a public company.
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| | Corporate Reorganization. The historical consolidated financial statements are based on the financial statements of our accounting predecessor, Cactus LLC and its subsidiaries, prior to our reorganization in connection with our IPO. As a result, the historical consolidated financial data may not provide an accurate indication of what our actual results would have been if such transactions had been completed at the beginning of the periods presented or of what our future results of operations are likely to be. In addition, we entered into a Tax Receivable Agreement with the TRA Holders. This agreement generally provides for the payment by us to the TRA Holders of 85% of the net cash savings, if any, in U.S. federal, state and local income tax or franchise tax that we actually realize or are deemed to realize in certain circumstances as a result of certain increases in tax basis and imputed interest, as described below. We will retain the benefit of the remaining 15% of such net cash savings. For additional information regarding the Tax Receivable Agreement, see “Item 1A. Risk Factors—Risks Related to our Class A Common Stock.”
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We intend to account for any amounts payable under the Tax Receivable Agreement in accordance with Accounting Standard Codification (“ASC”) Topic 450, Contingencies (“ASC 450”). We believe accounting for the Tax Receivable Agreement under the provisions of ASC 450 is appropriate, given the significant uncertainties regarding the amount and timing of payments, if any, to be made under the Tax Receivable Agreement.
The tax benefits covered by the Tax Receivable Agreement include tax benefits expected to arise in connection with the reorganization and the IPO, including (i) certain increases in tax basis that occur as a result of Cactus Inc.’s acquisition (or deemed acquisition for U.S. federal income tax purposes) of CW Units from the Pre-IPO Owners in connection with the IPO, (ii) certain increases in tax basis resulting from the repayment, in connection with the IPO, of borrowings outstanding under Cactus LLC’s term loan facility and (iii) imputed interest deemed to be paid by Cactus Inc. as a result of, and additional tax basis arising from, any payments Cactus Inc. makes under the Tax Receivable Agreement. Payments will generally be made under the Tax Receivable Agreement as we realize actual cash tax savings from such tax benefits (provided that if we experience a change of control or the Tax Receivable Agreement terminates early at our election or as a result of a breach, we could be required to make an immediate lump‑sum payment in advance of any actual cash tax savings).
We will evaluate whether it is more likely than not that actual cash tax savings will be realized by Cactus Inc. from the tax benefits expected to arise in connection with the reorganization and the IPO. If it is determined that it is more likely than not that the tax benefits will be realized through actual cash tax savings, then the Tax Receivable Agreement would be expected to be probable of resulting in future payments and a liability would be recorded. On the other hand, if it is determined that it is more likely than not that the tax benefits will not be realized through actual cash tax savings, then no Tax Receivable
Agreement liability would be recorded, as future payments under the Tax Receivable Agreement would not be probable of occurring.
The accounting for any exchanges of CW Units subsequent to the reorganization transaction will follow the same accounting described above.
We will recognize subsequent changes to the measurement of the Tax Receivable Agreement liability in the income statement. In the case of any changes resulting from changes to any valuation allowance associated with the underlying tax asset, given the inextricable link between the tax savings generated and the recognition of the Tax Receivable Agreement liability (i.e., one is recorded based on 85% of the other), and the explicit guidance in ASC 740‑20‑45‑11(g) which requires that subsequent changes in a valuation allowance established against deferred tax assets that arose due to change in tax basis as a result of a transaction among or with shareholders to be recorded in the income statement as opposed to equity, we believe recording of the corollary adjustment to the Tax Receivable Agreement liability in the income statement would also be appropriate.
To the extent Cactus LLC has available cash and subject to the terms of any current or future credit agreements or debt instruments, we intend to cause Cactus LLC to generally make pro rata distributions to its unitholders, including us, in an amount at least sufficient to allow us to pay our taxes and to make payments under the Tax Receivable Agreement. Except in cases where we elect to terminate the Tax Receivable Agreement early or it is otherwise terminated, we may generally elect to defer payments due under the Tax Receivable Agreement if we do not have available cash to satisfy our payment obligations under the Tax Receivable Agreement. Any such deferred payments under the Tax Receivable Agreement generally will accrue interest from the due date for such payment until the payment date.
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| | Income Taxes. Our accounting predecessor is a limited liability company that constitutes a partnership for U.S. federal income tax purposes, and therefore is not subject to U.S. federal income taxes. Accordingly, no provision for U.S. federal income taxes has been provided for in our historical results of operations because taxable income was passed through to Cactus LLC’s members. We do not expect to report any income tax benefit or expense attributable to U.S. federal income taxes until after the IPO. After the IPO, we will be taxed as a corporation under the Code and subject to U.S. federal income taxes (currently at a statutory rate of 21% of pretax earnings, as adjusted by the Code), as well as state income taxes, for Cactus Inc.’s share of ownership in Cactus LLC.
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| | Long‑Term Incentive Plan. To incentivize individuals providing services to us or our affiliates, our board adopted a long‑term incentive plan prior to the completion of our IPO. The LTIP provides for the grant, from time to time, at the discretion of our board of directors or a committee thereof, of stock options, stock appreciation rights, restricted stock, restricted stock units, stock awards, dividend equivalents, other stock‑based awards, cash awards, substitute awards and performance awards. Any individual who is our officer or employee or an officer or employee of any of our affiliates, and any other person who provides services to us or our affiliates, including members of our board of directors, will be eligible to receive awards under the LTIP at the discretion of our board of directors. In connection with the IPO, we issued 737,493 restricted stock unit awards, which will vest over one to three years, to certain of our officers and directors. We will recognize equity compensation expenses aggregating up to $5.0 million per year, starting in 2018, over the one to three year vesting term related to this issuance.
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Predecessor Consolidated Results of Operations
Year Ended December 31, 20172019 Compared to Year Ended December 31, 20162018
The following table presents summary consolidated operating results for the periods indicated:
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| | Year Ended | | | | | | | | Year Ended | | | | | | |
| | December 31, | | | | | | | | December 31, | | | | | | |
| | 2017 | | 2016 | | $ Change | | % Change | | | 2019 | | 2018 | | $ Change | | % Change | |
| | (in thousands) | | | (in thousands) | | | |
Revenues | | | | | | | | | | | | | | | | | | | | | | | | |
Product revenue | | $ | 189,091 | | $ | 77,739 | | $ | 111,352 | | 143.2 | % | | $ | 357,087 | | $ | 290,496 | | $ | 66,591 | | 22.9 | % |
Rental revenue | | | 77,469 | | | 44,372 | | | 33,097 | | 74.6 | | | | 141,816 | | | 133,418 | | | 8,398 | | 6.3 | |
Field service and other revenue | | | 74,631 | | | 32,937 | | | 41,694 | | 126.6 | | | | 129,511 | | | 120,221 | | | 9,290 | | 7.7 | |
Total revenues | | | 341,191 | | | 155,048 | | | 186,143 | | 120.1 | | | | 628,414 | | | 544,135 | | | 84,279 | | 15.5 | |
Costs and expenses | | | | | | | | | | | | | | | | | | | | | | | | |
Cost of product revenue | | | 124,030 | | | 62,766 | | | 61,264 | | 97.6 | | | | 220,615 | | | 174,675 | | | 45,940 | | 26.3 | |
Cost of rental revenue | | | 40,519 | | | 33,990 | | | 6,529 | | 19.2 | | | | 69,829 | | | 55,015 | | | 14,814 | | 26.9 | |
Cost of field service and other revenue | | | 60,602 | | | 28,470 | | | 32,132 | | 112.9 | | | | 103,163 | | | 96,215 | | | 6,948 | | 7.2 | |
Selling, general and administrative expenses | | | 27,177 | | | 19,207 | | | 7,970 | | 41.5 | | | | 51,657 | | | 40,529 | | | 11,128 | | 27.5 | |
Total costs and expenses | | | 252,328 | | | 144,433 | | | 107,895 | | 74.7 | | | | 445,264 | | | 366,434 | | | 78,830 | | 21.5 | |
Income from operations | | | 88,863 | | | 10,615 | | | 78,248 | | 737.1 | | | | 183,150 | | | 177,701 | | | 5,449 | | 3.1 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Interest expense, net | | | (20,767) | | | (20,233) | | | 534 | | 2.6 | | |
Interest income (expense), net | | | | 879 | | | (3,595) | | | 4,474 | | nm | |
Other income (expense), net | | | — | | | 2,251 | | | (2,251) | | (100.0) | | | | 4,294 | | | (4,305) | | | 8,599 | | nm | |
Income (loss) before income taxes | | | 68,096 | | | (7,367) | | | 75,463 | | nm | | |
Income before income taxes | | | | 188,323 | | | 169,801 | | | 18,522 | | 10.9 | |
Income tax expense(1) | | | 1,549 | | | 809 | | | 740 | | 91.5 | | | | 32,020 | | | 19,520 | | | 12,500 | | 64.0 | |
Net income (loss) | | $ | 66,547 | | $ | (8,176) | | $ | 74,723 | | nm | | |
Net income | | | $ | 156,303 | | $ | 150,281 | | $ | 6,022 | | 4.0 | |
Less: Pre-IPO net income attributable to Cactus LLC | | | | — | | | 13,648 | | | (13,648) | | (100.0) | |
Less: net income attributable to non-controlling interest | | | | 70,691 | | | 84,950 | | | (14,259) | | (16.8) | |
Net income attributable to Cactus Inc. | | | $ | 85,612 | | $ | 51,683 | | $ | 33,929 | | 65.6 | % |
nm = not meaningful | | | | | | | | | | | | | |
nm = not meaningful
| (1)
| | Cactus Inc. is a corporation and is subject to U.S. federal as well as state income tax related to its ownership percentage in Cactus LLC. Our predecessor, Cactus LLC, is not subject to U.S. federal income tax at an entity level. As a result, the consolidated net (loss) income in our historical financial statements does not reflect the tax expense we would have incurred if we were subject to U.S. federal income tax at an entity level during such periods. Cactus LLC is subject to entity‑level taxes for certain states within the United States. Additionally, our operations in both Australia and China are subject to local country income taxes.
|
Revenues
Product revenue for the year ended December 31, 20172019 was $189.1$357.1 million, an increase of $111.4$66.6 million, or 143%23%, from $77.7$290.5 million for the year ended December 31, 2016.2018. The increase was primarily attributable to accelerated U.S. land activity in 2017 associated with increased E&P drilling, completionssales of wellhead and production which ledrelated equipment due to a higher onshore rig count in the United States, resulting inour increased demand for our productsmarket share and greater volume of product sales. Additionally, a change in mix toward higher value advanced wellheads has also contributed to the increase in revenues.efficiencies from customers.
Rental revenue for the year ended December 31, 20172019 was $77.5$141.8 million, an increase of $33.1$8.4 million, or 75%6%, from $44.4$133.4 million for the year ended December 31, 2016.2018. The increase was primarily attributable to increased drilling and completions activities, which led to increased demand for the rental of our equipment in 2017, as well as pricing improvementinvestment in our rental fleet, comparedincluding new rental offerings, that enabled us to 2016.
completion activity from customers.
Field service and other revenue for the year ended December 31, 20172019 was $74.6$129.5 million, an increase of $41.7$9.3 million, or 127%8%, from $32.9$120.2 million for the year ended December 31, 2016.2018. The increase was primarily attributable to the higher demand for these services following the increase in our product and rental revenue, as field service is closely correlated with these activities.
Costs and expenses
Cost of product revenue for the year ended December 31, 20172019 was $124.0$220.6 million, an increase of $61.3$45.9 million, or 98%26%, from $62.8$174.7 million for the year ended December 31, 2016.2018. The increase was largely attributable to increasedan increase in product sales volume as a result ofdriven by higher demand for our products. Product margins benefited from price increases together with a change in mix toward higher value advanced wellheads.products and tariff costs.
Cost of rental revenue for the year ended December 31, 20172019 was $40.5$69.8 million, an increase of $6.5$14.8 million, or 19%27%, from $34.0$55.0 million for the year ended December 31, 2016.2018. The increase was primarily duelargely attributable to higher depreciation expense from capital additionson a larger rental fleet and higher operating costs due to an increase in activity. Increased utilizationcosts associated with the deployment of assets into the field including increased repair costs associated with a larger and better pricing contributed to higher margins.more active rental fleet.
Cost of field service and other revenue for the year ended December 31, 20172019 was $60.6$103.2 million, an increase of $32.1$6.9 million, or 113%7%, from $28.5$96.2 million for the year ended December 31, 2016.2018. The increase was primarily duelargely attributable to higher payroll costs attributabledue to additional field personnel and higher volume driven operating costs due to activity increases.
Selling, generalsuch as vehicle and administrative expense for the year ended December 31, 2017 was $27.2 million, an increase of $8.0 million, or 42%, from $19.2 million for the year ended December 31, 2016. The increase was primarily due to higher payroll and incentive compensation costs associated with the overall growth of Cactus. Also, we expensed $1.0 million of costs during 2017 related to preparing for being a public company.
Interest expense, net. Interest expense, net for the year ended December 31, 2017 was $20.8 million, an increase of $0.5 million, or 3%, from $20.2 million for the year ended December 31, 2016. The increase was primarily due to higher average interest rates on borrowings under our credit facility and increased interest related to amounts on capital lease obligations.
Other income (expense), net. Other income, net for 2016 relates to a gain on debt extinguishment of $2.3 million associated with our redemption of $7.5 million of debt outstanding under our term loan during the second quarter of 2016.
Income tax expense. Although our operations have not been subject to U.S. federal income tax at an entity level, our operations are subject to state taxes within the United States. In addition, Cactus LLC’s operations located in China and Australia are subject to local country income taxes. Income tax expense for the years ended December 31, 2017 and 2016 were $1.5 million and $0.8 million, respectively.
Year Ended December 31, 2016 Compared to Year Ended December 31, 2015
The following table presents summary consolidated operating results for the periods presented:
| | | | | | | | | | | | |
| | Year Ended | | | | | | |
| | December 31, | | | | | | |
| | 2016 | | 2015 | | $ Change | | % Change | |
| | (in thousands) | |
Revenues | | | | | | | | | | | | |
Product revenue | | $ | 77,739 | | $ | 110,917 | | $ | (33,178) | | (29.9) | % |
Rental revenue | | | 44,372 | | | 65,431 | | | (21,059) | | (32.2) | |
Field service and other revenue | | | 32,937 | | | 45,047 | | | (12,110) | | (26.9) | |
Total revenues | | | 155,048 | | | 221,395 | | | (66,347) | | (30.0) | |
Costs and expenses | | | | | | | | | | | | |
Cost of product revenue | | | 62,766 | | | 84,604 | | | (21,838) | | (25.8) | |
Cost of rental revenue | | | 33,990 | | | 39,251 | | | (5,261) | | (13.4) | |
Cost of field service and other revenue | | | 28,470 | | | 33,200 | | | (4,730) | | (14.2) | |
Selling, general and administrative expenses | | | 19,207 | | | 22,135 | | | (2,928) | | (13.2) | |
Total costs and expenses | | | 144,433 | | | 179,190 | | | (34,757) | | (19.4) | |
Income from operations | | | 10,615 | | | 42,205 | | | (31,590) | | (74.8) | |
| | | | | | | | | | | | |
Interest expense, net | | | (20,233) | | | (21,837) | | | (1,604) | | (7.3) | |
Other income (expense), net | | | 2,251 | | | 1,640 | | | 611 | | 37.3 | |
Income (loss) before income taxes | | | (7,367) | | | 22,008 | | | (29,375) | | nm | |
Income tax expense(1) | | | 809 | | | 784 | | | 25 | | 3.2 | |
Net income (loss) | | $ | (8,176) | | $ | 21,224 | | $ | (29,400) | | nm | |
nm = not meaningful
| (1)
| | Cactus Inc. is a corporation and is subject to U.S. federal as well as state income tax related to its ownership percentage in Cactus LLC. Our predecessor, Cactus LLC, is not subject to U.S. federal income tax at an entity level. As a result, the consolidated net (loss) income in our historical financial statements does not reflect the tax expense we would have incurred if we were subject to U.S. federal income tax at an entity level during such periods. Cactus LLC is subject to entity‑level taxes for certain states within the United States. Additionally, our operations in both Australia and China are subject to local country income taxes.
|
Revenues
Product revenue for the year ended December 31, 2016 was $77.7 million, a decrease of $33.2 million, or 30%, from $110.9 million for the year ended December 31, 2015. The decrease was primarily attributable to the decline in crude oil prices, which led to a lower onshore rig count in the United States, resulting in a lower demand for our products.
Rental revenue for the year ended December 31, 2016 was $44.4 million, a decrease of $21.1 million, or 32%, from $65.4 million for the year ended December 31, 2015. The decrease was primarily attributable to the decline in oil prices, which reduced drilling and completions activities. These factors reduced demand for the rental of our equipment and put downward pressure on rental pricing.
Field service and other revenue for the year ended December 31, 2016 was $32.9 million, a decrease of $12.1 million, or 27%, from $45.0 million for the year ended December 31, 2015. The decrease was primarily attributable to a reduction in demand for our services following the decline in crude oil prices, resulting in lower rig count.
Costs and expenses
Cost of product revenue for the year ended December 31, 2016 was $62.8 million, a decrease of $21.8 million, or 26%, from $84.6 million for the year ended December 31, 2015. The decrease was primarily attributable to reduced product sales volume as a result of lower demand for our products.
Cost of rental revenue for the year ended December 31, 2016 was $34.0 million, a decrease of $5.3 million, or 13%, from $39.3 million for the year ended December 31, 2015. The decrease was primarily due to lower repair costs.
Cost of field service and other revenue for the year ended December 31, 2016 was $28.5 million, a decrease of $4.7 million, or 14%, from $33.2 million for the year ended December 31, 2015. The decrease was primarily due to reduction in payroll costs and branch overhead costs.
Selling, general and administrative expense for the year ended December 31, 20162019 was $19.2$51.7 million, a decreasean increase of $2.9$11.1 million, or 13%27%, from $22.1$40.5 million for the year ended December 31, 2015.2018. The decreaseincrease was largely dueattributable to lower headcounthigher payroll and incentive compensation costs associated with our overall growth as well as higher stock-based compensation expense related to equity awards and professional fees and other costs associated with being a reduction inpublic company including the provision for doubtful accounts.loss of emerging growth company (“EGC”) status.
Interest expense,income (expense), net. Interest expense,income, net for the year ended December 31, 20162019 was $20.2$0.9 million, a decreasecompared to interest expense, net of $1.6 million, or 7%, from $21.8$3.6 million for the year ended December 31, 2015.2018. The decrease waschange is primarily related to reduced interest expense due to less average debt outstanding underthe repayment of our credit agreement during 2016 fromprevious term loan in mid-February 2018 in conjunction with our IPO in addition to higher interest income due to a significant increase in the early redemptions of this debtCompany’s cash balance in 2016 and 2015.2019.
Other income (expense), net. The increase was dueOther income, net for the year ended December 31, 2019 of $4.3 million consists of $1.0 million in offering expenses associated with the secondary offering of our Class A common stock in March 2019 by certain selling stockholders, offset by a $5.3 million non-cash gain on the revaluation of the liability related to the TRA. This compares to a higher gain arising from$4.3 million loss on early extinguishment of debt for the redemptionyear ended December 31, 2018, recorded in conjunction with the repayment of $7.5 millionour previous term loan with a portion of the debt outstanding undernet proceeds from our credit agreement during 2016 compared to the gain recognized during 2015 from the redemption of $10.0 million of the debt outstanding under our credit agreement.IPO.
Income tax expense. Although our operations have not been subject to U.S. federal income tax at an entity level, our operations are subject to state taxes within the United States. In addition, Cactus LLC’s operations located in China and Australia are subject to local country income taxes. Income tax expense for the year ended December 31, 20162019 was $32.0 million (17.0% effective tax rate) compared to $19.5 million (11.5% effective tax rate) for 2018. The change was primarily attributable to an increase in Cactus Inc.’s ownership of Cactus LLC and 2015 remained consistent at $0.8 million.a write down of our deferred tax asset due to a change in our forecasted state tax rate.
Liquidity and Capital Resources
In February 2018,At December 31, 2019 we completed our IPO. We received net proceeds of $467.4 million from the sale of 26,450,000 shares of Class A Common Stock in the IPO. We contributed all of the net proceeds of the IPO to Cactus LLC in exchange for CW Units. Cactus LLC used (i) $251.0had $202.6 million of the net proceeds to repay all of the borrowings outstanding, plus accrued interest, under its term loan facilitycash and (ii) $216.4 million to redeem CW Units from certain direct and indirect owners of Cactus LLC.
We expect that ourcash equivalents. Our primary sources of liquidity and capital resources will beare cash on hand, cash flows generated by operating activities and, if necessary, borrowings under our revolving credit facility.ABL Credit Facility. Depending upon market conditions and other factors, we may also have the ability to issue additional equity and debt if needed.
Historically, our predecessor’s primary sources of liquidity were cash flows from operations, borrowings under Cactus LLC’s credit agreement and equity provided by the Pre-IPO Owners. Our predecessor’s primary use of capital has been for working capital purposes, to make cash distributions to the Pre-IPO Owners and repay indebtedness. Prior to the repayment of the term loan facility in conjunction with the IPO, our predecessor’s We had no borrowings outstanding under Cactus LLC’s credit agreementour ABL Credit Facility and had $75.0 million of available borrowing capacity. We were $248.5 million and $251.1 million atin compliance with the covenants of the ABL Credit Facility as of December 31, 2017 and 2016, respectively. Borrowings were used primarily for working capital purposes, to make cash distributions to the Pre-IPO Owners and repay indebtedness.
2019.
Our ability to satisfy our liquidity requirements, including cash distributions to the CW Unit Holders to fund their respective income tax liabilities relating to their share of taxesthe income of Cactus LLC and to fund liabilities related to the partnership,TRA, that we entered into with TRA Holders, depends on our future operating performance, which is affected by 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 currently estimate that our net capital expenditures for the year ending December 31, 20182020 will range from $30 million to $40 million, excluding acquisitions, mostly related to $50 million, excluding acquisitions. We have begun expanding our investments in frac equipment in response to increasing opportunities and client demands, and we expect to expand our facilities.rental fleet investments. 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, demand volatility and company initiatives.
We believe that our existing cash on hand, cash generated from operations and available borrowings under our revolving credit facilityABL Credit Facility will be sufficient for at least 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. In addition, we believe we will be able to fund pro rata cash distributions to holders of CW units (other than Cactus Inc.) resulting from the CW Unit Holders and anticipatedrequirement to make TRA liability payments, tax liabilities for at least the next 12 months.and dividends from Cactus Inc.
AtCash Flows
Year Ended December 31, 2017 and2019 Compared to Year Ended December 31, 2016, we had approximately $7.62018
The following table summarizes our cash flows for the periods indicated:
| | | | | | |
| | Year Ended December 31, |
| | 2019 | | 2018 |
| | (in thousands) |
Net cash provided by operating activities | | $ | 209,632 | | $ | 167,180 |
Net cash used in investing activities | | | (55,948) | | | (68,154) |
Net cash used in financing activities | | | (21,669) | | | (35,004) |
Net cash provided by operating activities was $209.6 million and $8.7$167.2 million respectively,for the years ended December 31, 2019 and 2018, respectively. The primary reasons for the change were a $6.0 million increase in net income, a $12.3 million increase in non-cash items and a $24.2 million decrease in net working capital use, inclusive of a $9.3 million TRA payment.
Net cash and cash equivalents and approximately $50used in investing activities was $55.9 million and $15$68.2 million respectively, of available borrowing capacity under our revolving credit facility. As offor the years ended December 31, 2017, there were no borrowings outstanding under2019 and 2018, respectively. The decrease was primarily due to lower capital expenditures associated with the revolving credit facilityinvestment in our rental fleet during the year ended December 31, 2019, in addition to higher proceeds from certain asset sales.
Net cash used in financing activities was $21.7 million and $50$35.0 million for the years ended December 31, 2019 and 2018, respectively. Net cash used in financing for the year ended December 31, 2019 includes $8.4 million in available borrowing capacity thereunder. On January 21, 2018, the board of directors ofpro rata distributions to Cactus LLC declared amembers, finance lease payments of $7.5 million, dividend payments to holders of Class A common stock of $4.2 million and $1.5 million related to the repurchase of shares to satisfy tax withholding obligations of restricted stock units that vested during the period. We did not receive any of the proceeds from our March 2019 Secondary Offering. Net cash distributionused in financing activities for 2018 includes $31.8 million in Cactus LLC member distributions, of which $26.0 million which was paidof these distributions were made prior to the Pre-IPO Owners on January 25, 2018. Such distribution was funded by borrowing under the revolving credit facility. The purpose of the distribution wasIPO, to provide funds to the Pre-IPO Owners to pay theirmembers’ federal and state tax liabilities associated with taxable income recognized by them as a result of their ownership interests in Cactus LLC prior to the completion of our IPO. As of March 13,LLC. Also during 2018, we had $8.0 million outstanding under the revolving credit facility and approximately $11.0received $828.2 million of cashnet proceeds from our IPO, the Option and cash equivalents.
Cash Flows
Year Ended December 31, 2017 Compared to Year Ended December 31, 2016
The following table summarizes our cash flows for the periods indicated:
| | | | | | |
| | Year Ended December 31, |
| | 2017 | | 2016 |
| | (in thousands) |
Net cash provided by operating activities | | $ | 34,707 | | $ | 23,975 |
Net cash used in investing activities | | | (30,678) | | | (17,358) |
Net cash used in financing activities | | | (5,313) | | | (10,171) |
Net cash provided by operating activities was $34.7 million and $24.0 million for the years ended December 31, 2017 and 2016, respectively. The primary reason for the change was the $74.7 million increase in net income and $3.2 million increase in non-cash items,Follow-on Offering offset by (i) a $67.2$248.5 million increase in net working capital items due to the significant increase in business activity during the second half of 2017.
Net cash used in investing activities was $30.7 million and $17.4 million for the years ended December 31, 2017 and 2016, respectively. The primary reason for the change was higher capital expenditures during 2017 related to the additional investments in our rental fleet as market activity improved significantly during 2017.
Net cash used in financing activities was $5.3 million and $10.2 million for the years ended December 31, 2017 and 2016, respectively. The primary reason for the change was due to less debt service in 2017 as 2016 included a partial
redemption of principal under our term loan. Also, there were no distributions to members in 2017 compared to $2.1 million in 2016.
Year Ended December 31, 2016 Compared to Year Ended December 31, 2015
The following table summarizes our cash flows for the periods indicated:
| | | | | | |
| | Year Ended December 31, |
| | 2016 | | 2015 |
| | (in thousands) |
Net cash provided by operating activities | | $ | 23,975 | | $ | 45,927 |
Net cash used in investing activities | | | (17,358) | | | (23,422) |
Net cash used in financing activities | | | (10,171) | | | (22,776) |
Net cash provided by operating activities was $24.0 million and $45.9 million for the years ended December 31, 2016 and 2015, respectively. The primary causerepayment of the reduction was the $29.4 million reduction in net income, partially offset by an $8.9 million reduction in net working capital items.
Net cash used in investing activities was $17.4 million and $23.4 million for the years ended December 31, 2016 and 2015, respectively. The primary reason for the change was a $3.6 million reduction in capital expenditures from 2015 to 2016 following a facility expansion and additional purchases of property and equipment in 2015.
Net cash used in financing activities was $10.2 million and $22.8 million for the years ended December 31, 2016 and 2015, respectively. The primary reason for the change was lower distributions to members of $10.2 million in 2016 compared to 2015.
Credit Agreement
On July 31, 2014, we entered into a credit agreement with Credit Suisse AG as administrative agent, collateral agent and issuing bank, and the other lenders party thereto (the “Credit Agreement”). The Credit Agreement provides for a term loan tranche in an aggregate principal amount of $275.0 million, the outstanding balance of which was repaid in full with the net proceeds of the IPO, and a revolving credit facility of up to $50.0 million with a $10.0 million sublimit for letters of credit. The revolving credit facility matures on July 31, 2019.
As of December 31, 2017 and 2016, we had $248.5 million and $251.1 million, respectively, of borrowings outstanding under the term loan no borrowings outstanding under the revolvingportion of our prior credit facilityagreement and no outstanding letters(ii) $575.7 million in redemptions of credit. In conjunctionCW Units from certain direct and indirect owners of Cactus LLC in connection with our IPO, we repaid the $248.5Option and the Follow-on Offering. We also made finance lease payments of $6.3 million outstanding under the term loan, plus accrued interest.
On January 21, 2018, the board of directors of Cactus LLC declared a cash distribution of $26.0 million, which was paid to the Pre-IPO Owners on January 25,during 2018. Such distribution was funded by a $26.0 million borrowing under the revolving credit facility. As of March 13, 2018, we had $8.0 million outstanding on the revolving credit facility.
The Credit Agreement is secured by liens on substantially all of our properties and guarantees from Cactus LLC and any future subsidiaries of Cactus LLC that may become guarantors under the Credit Agreement. The Credit Agreement contains restrictive covenants that may limit our ability to, among other things:
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| | incur additional indebtedness;
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| | enter into sale and lease‑back transactions;
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| | make investments or dispositions;
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| | enter into mergers or consolidations;
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| | enter into transactions with affiliates;
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| | issue additional equity interests at the subsidiary level or issue disqualified equity interests; and
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| | make or declare dividends.
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The Credit Agreement also requires us to maintain a total leverage ratio, as defined in the Credit Agreement, of not more than 5:00 to 1:00 as of the last day of any fiscal quarter, if the total aggregate principal amount of borrowings and letters of credit outstanding under the revolving credit facility (but excluding (x) undrawn letters of credit which have been cash collateralized by at least 103% of the undrawn amount of such letters of credit and (y) any other undrawn letters of credit up to $2.5 million in the aggregate as of the last day of such fiscal quarter) exceeds an amount equal to 30% of the aggregate revolving credit commitments as of such day.
If an event of default occurs under the Credit Agreement, subject to certain cure rights with respect to certain of the events of default, the lenders will be able to accelerate the maturity of the Credit Agreement and all outstanding amounts thereunder, foreclose on the collateral and/or terminate their revolving loan commitments. The Credit Agreement contains customary events of default, such as, among other things:
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| | inaccuracy of any representation and warranty;
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| | failure to repay principal and interest when due and payable;
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| | failure to comply with the financial covenant or other covenants;
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| | cross‑default to certain other material indebtedness;
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| | bankruptcy and other insolvency events;
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| | the occurrence of certain litigation judgments; or
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As of December 31, 2017 and 2016, we were in compliance with all covenants under the Credit Agreement.
Interest is payable quarterly for alternate base rate loans and at the end of the applicable interest period for Eurodollar loans (or quarterly if the applicable interest period is longer than three months). We have a choice of borrowing at an adjusted Eurodollar rate (subject to a 1.0% floor) plus an applicable margin or at the alternate base rate plus an applicable margin. The alternate base rate per annum is equal to the greatest of (i) the agent bank’s reference prime rate, (ii) the federal funds effective rate plus 0.5% and (iii) the adjusted LIBO rate for a one month interest period plus 1.0%. The applicable margin with respect to any Eurodollar revolving loan ranges from 2.75% to 3.75% and alternate base rate revolving loan ranges from 1.75% to 2.75% based on our total leverage ratio. During the continuance
of an event of default due to failure to pay interest or other amounts under the Credit Agreement, all overdue amounts under the Credit Agreement will bear interest at 2.0% plus the otherwise applicable interest rate.
As of December 31, 2017 and 2016, borrowings under the Credit Agreement had a weighted average interest rate of 7.3% and 7.0%, respectively.
Tax Receivable Agreement
The Tax Receivable AgreementTRA that Cactus Inc. entered into with the TRA Holders in connection with our IPO generally provides for the payment by Cactus Inc. to the TRA Holders of 85% of the net cash savings, if any, in U.S. federal, state and local income tax or franchise tax that Cactus Inc. actually realizes or is deemed to realize in certain circumstances. Cactus Inc. will retain the benefit of the remaining 15% of these net cash savings. To the extent Cactus LLC has available cash, we intend to cause Cactus LLC to make generally pro rata distributions to its unitholders, including us, in an amount at least sufficient to allow us to pay our taxes and to make payments under the Tax Receivable Agreement.TRA.
Except in cases where we elect to terminate the Tax Receivable AgreementTRA early, the Tax Receivable AgreementTRA is terminated early due to certain mergers, asset sales, or other forms of business combinations or changes of control or we have available cash but fail to make payments when due under circumstances where we do not have the right to elect to defer the payment, we may generally elect to defer payments due under the Tax Receivable AgreementTRA if we do not have available cash to satisfy our payment obligations under the Tax Receivable Agreement.TRA. Any such deferred payments under the Tax Receivable AgreementTRA generally will accrue interest. In certain cases, payments under the Tax Receivable AgreementTRA may be accelerated and/or significantly exceed the actual benefits, if any, we realize in respect of the tax attributes subject to the Tax Receivable Agreement.TRA. In these situations, our obligations under the Tax Receivable AgreementTRA could have a substantial negative impact on our liquidity. For further discussion regarding
Assuming no material changes in the potential accelerationrelevant tax law, we expect that if the TRA were terminated as of December 31, 2019, the estimated termination payments, underbased on the Tax Receivable Agreement and its potential impact, please read “Item 1A. Risk Factors—Risks Relatedassumptions discussed in Note 9 of the Notes to Ourthe Consolidated Financial Statements, would be approximately $331.3 million, calculated using a discount rate equal to one-year LIBOR plus 150 basis points, applied against an undiscounted liability of $434.7 million. A 10% increase in the price of our Class A Common Stock.”common stock at December 31, 2019 would have increased the discounted liability by $17.2 million to $348.5 million (an undiscounted increase of $23.2 million to $457.9 million), and likewise, a 10% decrease in the price of our Class A common stock at December 31, 2019 would have decreased the discounted liability by $17.3 million to $314.0 million (an undiscounted decrease of $23.3 million to $411.4 million).
Dividend Policy
On October 29, 2019, our board of directors authorized the introduction of a regular quarterly cash dividend of $0.09 per share of Class A common stock. We currently intend to continue paying the quarterly dividend while retaining the balance of future earnings, if any, to finance the growth of our business. However, our future dividend policy is within the discretion of our board of directors and will depend upon then-existing conditions, including our results of operations, financial condition, capital requirements, investment opportunities, statutory and contractual restrictions on our ability to pay dividends and other factors our board of directors may deem relevant.
Contractual Obligations
A summary of our predecessor’s contractual obligations as of December 31, 20172019 is provided in the following table.
We had no bank debt outstanding as of December 31, 2019.
| | | | | | | | | | | | | | | | | | | | | |
| | Predecessor |
| | Payments Due by Period For the Year Ending December 31, |
| | 2018 | | 2019 | | 2020 | | 2021 | | 2022 | | Thereafter | | Total |
| | (in thousands) |
Long-term debt, including current portion(1) | | $ | 2,568 | | $ | 2,568 | | $ | 243,393 | | $ | — | | $ | — | | $ | — | | $ | 248,529 |
Interest on long-term debt(2) | | | 18,322 | | | 18,135 | | | 10,474 | | | — | | | — | | | — | | | 46,931 |
Operating lease obligations(3) | | | 5,506 | | | 4,083 | | | 3,752 | | | 3,077 | | | 2,031 | | | 4,713 | | | 23,162 |
Capital lease obligations(4) | | | 5,296 | | | 5,394 | | | 3,475 | | | — | | | — | | | — | | | 14,165 |
Total | | $ | 31,692 | | $ | 30,180 | | $ | 261,094 | | $ | 3,077 | | $ | 2,031 | | $ | 4,713 | | $ | 332,787 |
| | | | | | | | | | | | | | | | | | | | | |
| | |
| | Payments Due by Period For the Year Ending December 31, |
| | 2020 | | 2021 | | 2022 | | 2023 | | 2024 | | Thereafter | | Total |
| | (in thousands) |
Operating leases | | $ | 7,691 | | $ | 6,291 | | $ | 3,967 | | $ | 3,072 | | $ | 2,453 | | $ | 7,163 | | $ | 30,637 |
Finance leases | | | 7,434 | | | 3,438 | | | 768 | | | 4 | | | — | | | — | | | 11,644 |
Liability related to TRA (1) | | | 14,630 | | | 11,959 | | | 12,183 | | | 12,439 | | | 12,700 | | | 152,621 | | | 216,532 |
Total | | $ | 29,755 | | $ | 21,688 | | $ | 16,918 | | $ | 15,515 | | $ | 15,153 | | $ | 159,784 | | $ | 258,813 |
| (1) | | Long‑term debt excludes interestRepresents obligations by Cactus Inc. to make payments on each obligation.under the TRA. The term loan was repaid in full in February 2018 in connection with our IPO.amounts and timing of payments are subject to change.
|
Critical Accounting Policies and Estimates In preparing our financial statements in accordance with GAAP, we make numerous estimates and assumptions that affect the accounting for and recognition and disclosure of assets, liabilities, equity, revenues and expenses. We must make these estimates and assumptions because certain information that we use is dependent on future events, cannot be calculated with a high degree of precision from available data or is not otherwise capable of being readily calculated based on generally accepted methodologies. In some cases, these estimates are particularly difficult to determine, and we must exercise significant judgment. Actual results could differ materially from the estimates and assumptions that we use in the preparation of our financial statements. We identify certain accounting policies as critical based on, among other things, their impact on the portrayal of our financial condition and results of operations and the degree of difficulty, subjectivity and complexity in their deployment. Note 2 of the Notes to the Consolidated Financial Statements includes a summary of the significant accounting policies used in the preparation of the accompanying consolidated financial statements. The following is a brief discussion of our most critical accounting policies. Inventories Inventories are stated at the lower of cost or net realizable value. Cost is determined using standard cost (which approximates average cost) and weighted average methods. Costs include an application of related direct labor and overhead cost. Net realizable value is the estimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal and transportation. We evaluate the components of inventory on a regular basis for excess and | (2)
| | Relates to our term loan. Interest on long‑term debt assumes no excess cash flow payments. Interest rate used for the calculation was 7.3%. The term loan, plus accrued interest, was repaid in full in February 2018 using the net proceeds from our IPO. As such, the entire interest expense reflected in the table will not be incurred.
|
| (3)
| | Operating lease obligations relate to real estate, vehicles and equipment.
|
obsolescence. Reserves are made based on a range of factors, including age, usage and technological or market changes that may impact demand for those products. The amount of reserve recorded is subjective and is susceptible to change from period to period. Long‑Lived Assets Key estimates related to long‑lived assets include useful lives and recoverability of carrying values. Such estimates could be modified, as impairment could arise as a result of changes in supply and demand fundamentals, technological developments, new competitors with cost advantages and the cyclical nature of the oil and gas industry. We evaluate long‑lived assets for potential impairment indicators whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Long‑lived assets assessed for impairment are grouped at the lowest level for which identifiable cash flows are available, and a provision made where the cash flow is less than the carrying value of the asset. The estimation of future cash flows and fair value is highly subjective and inherently imprecise. Estimates can change materially from period to period based on many factors. Accordingly, if conditions change in the future, we may record impairment losses, which could be material to any particular reporting period. Income Taxes Deferred taxes are recorded using the 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 rates in effect for the year in which the differences are expected to reverse. We assess the likelihood that our deferred tax assets will be recovered through adjustments to future taxable income. 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. 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. If the projected future taxable income changes materially, we may be required to reassess the amount of valuation allowance recorded against our deferred tax assets. Tax Receivable Agreement The TRA generally provides for payment by Cactus Inc. to the TRA Holders of 85% of the net cash savings, if any, in U.S. federal, state and local income tax or franchise tax that Cactus Inc. actually realizes or is deemed to realize in certain circumstances. Cactus Inc. will retain the benefit of the remaining 15% of these net cash savings. Redemptions of CW Units result in adjustments to the tax basis of the tangible and intangible assets of Cactus LLC. These adjustments will be 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. 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. These basis adjustments are expected to increase (for tax purposes) Cactus Inc.’s depreciation and amortization deductions and may also decrease Cactus Inc.’s gains (or increase its losses) on future dispositions of certain assets to the extent tax basis is allocated to those assets. Such increased deductions and losses and reduced gains may reduce the amount of tax that Cactus Inc. would otherwise be required to pay in the future. Estimating the amount and timing of the tax benefit is by its nature imprecise and the assumptions used in the estimates can change. The tax benefit is dependent upon future events and assumptions, the amount of the redeeming unit holders' tax basis in its CW Units at the time of the relevant redemption, the depreciation and amortization periods that apply to the increase in tax basis, the amount and timing of taxable income we generate in the future and the U.S. federal, state and local income tax rate then applicable, and the portion of Cactus Inc.’s payments under the TRA that constitute imputed interest or give rise to depreciable or amortizable tax basis. The most critical estimate included in calculating the TRA liability to record is the combined U.S. federal income tax rate and an assumed combined state and local income tax rate, to determine the future benefit we will realize. A 100 basis point decrease/increase in the blended tax rate used would decrease/increase the TRA liability recorded at December 31, 2019 by approximately $12.0 million. Recent Accounting Pronouncements See Note 2 in the Notes to the Consolidated Financial Statements for discussion of recent accounting pronouncements. Inflation While inflationary cost increases can affect our income from operations’ margin, we believe that inflation generally has not had, and in the near future is not expected to have, a material adverse effect on our results of operations. Although the impact of inflation has been insignificant in recent years, it is still a factor in the United States economy and we tend to experience inflationary pressure on wages and raw materials. Off‑Balance Sheet Arrangements We do not have off‑balance sheet arrangements. Item 7A. Quantitative and Qualitative Disclosures about Market Risk In the normal course of business, we are exposed to market risk from changes in foreign currency exchange rates and changes in interest rates. Foreign Currency Exchange Rate Risk We have subsidiaries with operations in China and Australia who conduct business in their local currencies (functional currencies) and are therefore subject to foreign currency exchange rate risk on cash flows related to sales, expenses, financing and investing transactions in currencies other than the U.S. dollar. Additionally, certain intercompany balances between our U.S. and foreign subsidiaries are denominated in U.S. dollars. Since this is not the functional currency of our subsidiaries in China and Australia, the changes in these balances are translated in our Consolidated Statements of Income. As a result, we are exposed to foreign exchange risk as it relates to these balances. Interest Rate Risk Our ABL Credit Facility is variable rate debt. At December 31, 2019, although there were no borrowings outstanding, the applicable margin on Eurodollar borrowings was 1.5% plus an adjusted base rate of one or three month LIBOR. | (4)
| | Capital lease obligations relate to vehicles used in our business.
|
Item 8. Financial Statements and Supplementary Data
The contractual obligations tablefollowing Consolidated Financial Statements are filed as part of this Annual Report:
Cactus, Inc. and Subsidiaries
Management’s Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934, as amended. Our internal control over financial reporting was designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In making its assessment, management has utilized the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (or “COSO”) in Internal Control-Integrated Framework (2013 framework). Based on this assessment, management has concluded that, as of December 31, 2019, our internal control over financial reporting was effective.
Our independent registered public accounting firm, PricewaterhouseCoopers, LLP, has issued an audit report on the effectiveness of our internal control over financial reporting as of December 31, 2019, which appears herein.
| | |
/s/ Scott Bender | | /s/ Stephen Tadlock |
President, Chief Executive Officer and Director | | Vice President, Chief Financial Officer and Treasurer |
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders of Cactus, Inc.
Opinions on the Financial Statements and Internal Control over Financial Reporting
We have audited the accompanying consolidated balance sheets of Cactus, Inc. and its subsidiaries (the “Company”) as of December 31, 2019 and 2018, and the related consolidated statements of income, comprehensive income, stockholders’ equity and cash flows for each of the three years in the period ended December 31, 2019, including the related notes (collectively referred to as the “consolidated financial statements”). We also have audited the Company's internal control over financial reporting as of December 31, 2019, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2019 and 2018, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2019 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2019, based on criteria established in Internal Control - Integrated Framework (2013) issued by the COSO.
Basis for Opinions
The Company's management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management's Report on Internal Control over Financial Reporting. Our responsibility is to express opinions on the Company’s consolidated financial statements and on the Company's internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.
Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the
company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Critical Audit Matters
The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that (i) relates to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not includealter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Liability related to the Tax Receivable Agreement
As described in Notes 2 and 9 to the consolidated financial statements, the Company has a liability under the Tax Receivable Agreement (“TRA”) of $216.5 million as of December 31, 2019. In connection with its initial public offering, the Company entered into the TRA with certain direct and indirect owners of Cactus Wellhead, LLC (the “TRA Holders”). The TRA generally provides for payment by the Company to the TRA Holders 85% of the net cash tax savings, if any, in United States federal, state and local income tax and franchise tax that the Company actually realizes or is deemed to realize in certain circumstances as a result of (i) certain increases in tax basis that occur as a result of the Company’s acquisition (or deemed acquisition for U.S. federal income tax purposes) of all or a portion of such TRA Holder’s ownership interest in Cactus Wellhead, LLC, (ii) certain increases in tax basis resulting from the repayment of borrowings outstanding under Cactus Wellhead, LLC’s term loan facility, and (iii) imputed interest deemed to be paid by the Company as a result of, and additional tax basis arising from, any payments the Company makes under the TRA. Management calculates the TRA liability associatedby determining the tax basis subject to the TRA (“tax basis”) and applying a blended tax rate to the basis differences and calculating the iterative impact. The blended tax rate consists of the U.S. federal income tax rate and an assumed combined state and local income tax rate driven by the apportionment factors applicable to each state.
The principal considerations for our determination that performing procedures relating to the liability related to the TRA is a critical audit matter are there was significant complexity in i) management’s calculation of the tax basis, and (ii) developing the applicable state apportionment factors utilized in determining the appropriate blended tax rate. This in turn led to a high degree of auditor subjectivity and effort in performing procedures and evaluating the appropriateness of the calculation of the tax basis and the blended tax rate. In addition, the audit effort involved the use of professionals with specialized skill and knowledge to assist in performing these procedures and evaluating the redemptionsaudit evidence obtained from these procedures. As disclosed by management, a material weakness existed during the year related to this matter.
Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included testing the effectiveness of controls relating to the calculation and recognition of the TRA liability, including controls over the completeness and accuracy of the underlying data used in the tax basis and blended tax rate calculations. These procedures also included, among others, testing the information used in the calculation of the TRA liability, and the involvement of professionals with specialized skills and knowledge to assist in (i) developing an independent calculation of the tax basis, (ii) comparing the independent calculation to management’s calculations to evaluate the reasonableness of the tax basis, (iii) evaluating the apportionment factors and the resulting blended tax rate, and (iv) assessing management’s application of the tax laws. Evaluating management’s determination of the apportionment factors involved considering the current and expected activity levels of the Company and whether the apportionment factors were consistent with evidence obtained in other areas of the audit.
/s/ PricewaterhouseCoopers LLP
Houston, Texas
February 28, 2020
We have served as the Company’s auditor since 2015.
CACTUS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
| | | | | | |
| | December 31, | | December 31, |
| | 2019 | | 2018 |
| | (in thousands, except per share data) |
Assets | | | | | | |
Current assets | | | | | | |
Cash and cash equivalents | | $ | 202,603 | | $ | 70,841 |
Accounts receivable, net of allowance of $837 and $576, respectively | | | 87,865 | | | 92,269 |
Inventories | | | 113,371 | | | 99,837 |
Prepaid expenses and other current assets | | | 11,044 | | | 11,558 |
Total current assets | | | 414,883 | | | 274,505 |
| | | | | | |
Property and equipment, net | | | 161,748 | | | 142,054 |
Operating lease right-of-use assets, net | | | 26,561 | | | — |
Goodwill | | | 7,824 | | | 7,824 |
Deferred tax asset, net | | | 222,545 | | | 159,053 |
Other noncurrent assets | | | 1,403 | | | 1,308 |
Total assets | | $ | 834,964 | | $ | 584,744 |
Liabilities and Equity | | | | | | |
Current liabilities | | | | | | |
Accounts payable | | $ | 40,957 | | $ | 42,047 |
Accrued expenses and other current liabilities | | | 22,067 | | | 15,650 |
Current portion of liability related to tax receivable agreement | | | 14,630 | | | 9,574 |
Finance lease obligations, current portion | | | 6,735 | | | 7,353 |
Operating lease liabilities, current portion | | | 6,737 | | | — |
Total current liabilities | | | 91,126 | | | 74,624 |
| | | | | | |
Deferred tax liability, net | | | 1,348 | | | 1,036 |
Liability related to tax receivable agreement, net of current portion | | | 201,902 | | | 138,015 |
Finance lease obligations, net of current portion | | | 3,910 | | | 8,741 |
Operating lease liabilities, net of current portion | | | 20,283 | | | — |
Total liabilities | | | 318,569 | | | 222,416 |
Commitments and contingencies | | | | | | |
Stockholders' equity | | | | | | |
Preferred stock, $0.01 par value, 10,000 shares authorized, none issued and outstanding | | | — | | | — |
Class A common stock, $0.01 par value, 300,000 shares authorized, 47,159 and 37,654 shares issued and outstanding | | | 472 | | | 377 |
Class B common stock, $0.01 par value, 215,000 shares authorized, 27,958 and 37,236 shares issued and outstanding | | | — | | | — |
Additional paid-in capital | | | 194,456 | | | 126,418 |
Retained earnings | | | 132,990 | | | 51,683 |
Accumulated other comprehensive loss | | | (452) | | | (820) |
Total stockholders' equity attributable to Cactus Inc. | | | 327,466 | | | 177,658 |
Non-controlling interest | | | 188,929 | | | 184,670 |
Total stockholders' equity | | | 516,395 | | | 362,328 |
Total liabilities and equity | | $ | 834,964 | | $ | 584,744 |
The accompanying notes are an integral part of these consolidated financial statements.
CACTUS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
| | | | | | | | | |
| | Year Ended December 31, |
| | 2019 | | 2018 | | 2017 |
| | (in thousands, except per share data) |
Revenues | | | | | | | | | |
Product revenue | | $ | 357,087 | | $ | 290,496 | | $ | 189,091 |
Rental revenue | | | 141,816 | | | 133,418 | | | 77,469 |
Field service and other revenue | | | 129,511 | | | 120,221 | | | 74,631 |
Total revenues | | | 628,414 | | | 544,135 | | | 341,191 |
Costs and expenses | | | | | | | | | |
Cost of product revenue | | | 220,615 | | | 174,675 | | | 124,030 |
Cost of rental revenue | | | 69,829 | | | 55,015 | | | 40,519 |
Cost of field service and other revenue | | | 103,163 | | | 96,215 | | | 60,602 |
Selling, general and administrative expenses | | | 51,657 | | | 40,529 | | | 27,177 |
Total costs and expenses | | | 445,264 | | | 366,434 | | | 252,328 |
Income from operations | | | 183,150 | | | 177,701 | | | 88,863 |
| | | | | | | | | |
Interest income (expense), net | | | 879 | | | (3,595) | | | (20,767) |
Other income (expense), net | | | 4,294 | | | (4,305) | | | — |
Income before income taxes | | | 188,323 | | | 169,801 | | | 68,096 |
Income tax expense | | | 32,020 | | | 19,520 | | | 1,549 |
Net income | | $ | 156,303 | | $ | 150,281 | | $ | 66,547 |
Less: pre-IPO net income attributable to Cactus LLC | | | — | | | 13,648 | | | 66,547 |
Less: net income attributable to non-controlling interest | | | 70,691 | | | 84,950 | | | — |
Net income attributable to Cactus Inc. | | $ | 85,612 | | $ | 51,683 | | $ | — |
| | | | | | | | | |
Earnings per Class A share - basic | | $ | 1.90 | | $ | 1.60 | | $ | — |
Earnings per Class A share - diluted | | $ | 1.88 | | $ | 1.58 | | $ | — |
| | | | | | | | | |
Weighted average Class A shares outstanding - basic | | | 44,983 | | | 32,329 | | | — |
Weighted average Class A shares outstanding - diluted | | | 75,353 | | | 32,695 | | | — |
The accompanying notes are an integral part of these consolidated financial statements.
CACTUS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
| | | | | | | | | |
| | Year Ended December 31, |
| | 2019 | | 2018 | | 2017 |
| | (in thousands) |
Net income | | $ | 156,303 | | $ | 150,281 | | $ | 66,547 |
Foreign currency translation adjustments | | | 368 | | | (902) | | | 557 |
Comprehensive income | | | 156,671 | | | 149,379 | | | 67,104 |
Less: pre-IPO comprehensive income attributable to Cactus LLC | | | — | | | 13,928 | | | 67,104 |
Less: comprehensive income attributable to non-controlling interest | | | 70,581 | | | 84,212 | | | — |
Comprehensive income attributable to Cactus Inc. | | $ | 86,090 | | $ | 51,239 | | $ | — |
The accompanying notes are an integral part of these consolidated financial statements.
CACTUS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | Accumulated | | | | | |
| | Members' | | Class A | | Class B | | Additional | | | | Other | | Non- | | Total |
| | Equity | | Common Stock | | Common Stock | | Paid-In | | Retained | | Comprehensive | | controlling | | Equity |
(in thousands) | | (Deficit) | | Shares | | Amount | | Shares | | Amount | | Capital | | Earnings | | Income (Loss) | | Interest | | (Deficit) |
Balance at December 31, 2016 | | $ | (102,846) | | — | | $ | — | | — | | $ | — | | $ | — | | $ | — | | $ | (475) | | $ | — | | $ | (103,321) |
Other comprehensive income | | | — | | — | | | — | | — | | | — | | | — | | | — | | | 557 | | | — | | | 557 |
Net income | | | 66,547 | | — | | | — | | — | | | — | | | — | | | — | | | — | | | — | | | 66,547 |
Balance at December 31, 2017 | | $ | (36,299) | | — | | $ | — | | — | | $ | — | | $ | — | | $ | — | | $ | 82 | | $ | — | | $ | (36,217) |
Member distributions prior to IPO | | | (26,000) | | — | | | — | | — | | | — | | | — | | | — | | | — | | | — | | | (26,000) |
Net income prior to IPO | | | 13,648 | | — | | | — | | — | | | — | | | — | | | — | | | — | | | — | | | 13,648 |
Effect of IPO | | | 48,651 | | 26,450 | | | 265 | | 48,440 | | | — | | | 71,196 | | | — | | | — | | | 130,861 | | | 250,973 |
Member distributions after IPO | | | — | | — | | | — | | — | | | — | | | — | | | — | | | — | | | (5,848) | | | (5,848) |
Effect of Follow-on Offering and CW Unit redemptions | | | — | | 11,204 | | | 112 | | (11,204) | | | — | | | 24,472 | | | — | | | — | | | (25,293) | | | (709) |
Additional paid-in capital related to tax receivable agreement | | | — | | — | | | — | | — | | | — | | | 26,046 | | | — | | | — | | | — | | | 26,046 |
Other comprehensive (loss) | | | — | | — | | | — | | — | | | — | | | — | | | — | | | (902) | | | — | | | (902) |
Stock-based compensation | | | — | | — | | | — | | — | | | — | | | 4,704 | | | — | | | — | | | — | | | 4,704 |
Net income after IPO | | | — | | — | | | — | | — | | | — | | | — | | | 51,683 | | | — | | | 84,950 | | | 136,633 |
Balance at December 31, 2018 | | $ | — | | 37,654 | | $ | 377 | | 37,236 | | $ | — | | $ | 126,418 | | $ | 51,683 | | $ | (820) | | $ | 184,670 | | $ | 362,328 |
Adjustment to prior periods | | | — | | — | | | — | | — | | | — | | | 10,424 | | | — | | | 409 | | | (11,339) | | | (506) |
Member distributions | | | — | | — | | | — | | — | | | — | | | — | | | — | | | — | | | (8,392) | | | (8,392) |
Effect of CW Unit redemptions | | | — | | 9,278 | | | 93 | | (9,278) | | | — | | | 48,635 | | | — | | | (59) | | | (48,669) | | | — |
Adjustment to deferred tax asset from CW Unit redemptions | | | — | | — | | | — | | — | | | — | | | (9,751) | | | — | | | — | | | — | | | (9,751) |
Additional paid-in capital related to tax receivable agreement | | | — | | — | | | — | | — | | | — | | | 15,250 | | | — | | | — | | | — | | | 15,250 |
Equity award vestings | | | — | | 227 | | | 2 | | — | | | — | | | (791) | | | — | | | — | | | (760) | | | (1,549) |
Other comprehensive income | | | — | | — | | | — | | — | | | — | | | — | | | — | | | 18 | | | 4 | | | 22 |
Stock-based compensation | | | — | | — | | | — | | — | | | — | | | 4,271 | | | — | | | — | | | 2,724 | | | 6,995 |
Cash dividends declared ($0.09 per share) | | | — | | — | | | — | | | | | | | | — | | | (4,305) | | | — | | | — | | | (4,305) |
Net income | | | — | | — | | | — | | — | | | — | | | — | | | 85,612 | | | — | | | 70,691 | | | 156,303 |
Balance at December 31, 2019 | | $ | — | | 47,159 | | $ | 472 | | 27,958 | | $ | — | | $ | 194,456 | | $ | 132,990 | | $ | (452) | | $ | 188,929 | | $ | 516,395 |
The accompanying notes are an integral part of these consolidated financial statements.
CACTUS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
| | | | | | | | | |
| | Year Ended December 31, |
| | 2019 | | 2018 | | 2017 |
| | (in thousands) |
Cash flows from operating activities | | | | | | | | | |
Net income | | $ | 156,303 | | $ | 150,281 | | $ | 66,547 |
Reconciliation of net income to net cash provided by operating activities: | | | | | | | | | |
Depreciation and amortization | | | 38,854 | | | 30,153 | | | 23,271 |
Debt discount and deferred financing cost amortization | | | 168 | | | 275 | | | 1,752 |
Stock-based compensation | | | 6,995 | | | 4,704 | | | — |
Provision for bad debts | | | 355 | | | — | | | (100) |
Inventory obsolescence | | | 2,552 | | | 1,451 | | | 1,259 |
Loss on disposal of assets | | | 236 | | | 886 | | | 534 |
Deferred income taxes | | | 25,403 | | | 15,201 | | | 220 |
Loss on debt extinguishment | | | — | | | 4,305 | | | — |
Gain from revaluation of liability related to tax receivable agreement | | | (5,336) | | | — | | | — |
Changes in operating assets and liabilities: | | | | | | | | | |
Accounts receivable | | | 4,204 | | | (8,105) | | | (50,094) |
Inventories | | | (17,592) | | | (38,227) | | | (28,279) |
Prepaid expenses and other assets | | | 438 | | | (6,509) | | | (4,012) |
Accounts payable | | | (607) | | | 7,651 | | | 19,505 |
Accrued expenses and other liabilities | | | 6,994 | | | 5,114 | | | 4,104 |
Payments pursuant to tax receivable agreement | | | (9,335) | | | — | | | — |
Net cash provided by operating activities | | | 209,632 | | | 167,180 | | | 34,707 |
| | | | | | | | | |
Cash flows from investing activities | | | | | | | | | |
Capital expenditures and other | | | (59,703) | | | (70,053) | | | (32,082) |
Proceeds from sale of assets | | | 3,755 | | | 1,899 | | | 1,404 |
Net cash used in investing activities | | | (55,948) | | | (68,154) | | | (30,678) |
| | | | | | | | | |
Cash flows from financing activities | | | | | | | | | |
Principal payments on long-term debt | | | — | | | (248,529) | | | (2,569) |
Payment of deferred financing costs | | | — | | | (840) | | | — |
Payments on finance leases | | | (7,484) | | | (6,274) | | | (2,744) |
Net proceeds from equity offerings | | | — | | | 828,168 | | | — |
Dividends paid to Class A common stock shareholders | | | (4,244) | | | — | | | — |
Distributions to members | | | (8,392) | | | (31,848) | | | — |
Redemptions of CW Units | | | — | | | (575,681) | | | — |
Repurchases of shares | | | (1,549) | | | — | | | — |
Net cash used in financing activities | | | (21,669) | | | (35,004) | | | (5,313) |
| | | | | | | | | |
Effect of exchange rate changes on cash and cash equivalents | | | (253) | | | (755) | | | 170 |
| | | | | | | | | |
Net increase (decrease) in cash and cash equivalents | | | 131,762 | | | 63,267 | | | (1,114) |
| | | | | | | | | |
Cash and cash equivalents | | | | | | | | | |
Beginning of period | | | 70,841 | | | 7,574 | | | 8,688 |
End of period | | $ | 202,603 | | $ | 70,841 | | $ | 7,574 |
The accompanying notes are an integral part of these consolidated financial statements.
CACTUS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share data, or as otherwise indicated)
1. Organization and Nature of Operations
Cactus, Inc. (“Cactus Inc.”) and its consolidated subsidiaries (“the Company”), including Cactus Wellhead, LLC (“Cactus LLC”), are primarily engaged in the design, manufacture and sale of wellhead and pressure control equipment. In addition, we maintain a fleet of frac valves and ancillary equipment for short-term rental, as well as offer repair and refurbishment services and the provision of service crews to assist in the installation and operations of pressure control systems. We operate through U.S. service centers located in Texas, Pennsylvania, Oklahoma, North Dakota, New Mexico, Louisiana, Colorado and Wyoming, and in Eastern Australia, with our corporate headquarters located in Houston, Texas. We also have manufacturing and production facilities in Bossier City, Louisiana and Suzhou, China.
Cactus Inc. was incorporated on February 17, 2017 as a Delaware corporation for the purpose of completing an initial public offering of equity and related transactions, which was completed on February 12, 2018 (our “IPO”). Cactus Inc. is a holding company whose only material asset is an equity interest consisting of units representing limited liability company interests in Cactus LLC (“CW Units”). Cactus Inc. became the sole managing member of Cactus LLC upon completion of our IPO. Cactus LLC is a Delaware limited liability company and was formed on July 11, 2011. Except as otherwise indicated or required by the context, all references to “Cactus,” “we,” “us” and “our” refer to Cactus Inc. and its consolidated subsidiaries (including Cactus LLC) following the completion of our IPO and Cactus LLC and its consolidated subsidiaries prior to the completion of our IPO.
As the sole managing member of Cactus LLC, Cactus Inc. operates and controls all of the business and affairs of Cactus LLC and conducts its business through Cactus LLC and its subsidiaries. As a result, Cactus Inc. consolidates the financial results of Cactus LLC and its subsidiaries and reports non-controlling interest related to the portion of CW Units made in connection withnot owned by Cactus Inc., which reduces net income attributable to holders of Cactus Inc.’s Class A common stock, par value $0.01 per share (“Class A common stock”). For information regarding our reorganizationIPO, see our Annual Report on Form 10-K for the year ended December 31, 2018.
As of December 31, 2019, Cactus Inc. owned 62.8% of Cactus LLC as compared to 50.3% as of December 31, 2018. As of December 31, 2019, Cactus Inc. had outstanding 47.2 million shares of Class A common stock (representing 62.8% of the total voting power) and IPO in February 2018.28.0 million shares of Class B common stock (representing 37.2% of the total voting power).
Critical2. Summary of Significant Accounting Policies and EstimatesOther Items
Basis of Presentation
The discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements which have been prepared in accordance with GAAP. The preparationaccounting principles generally accepted in the United States of ourAmerica (“GAAP”). These consolidated financial statements requires usinclude the accounts of Cactus Inc. and its wholly owned subsidiaries. All intercompany transactions and balances have been eliminated upon consolidation.
Cactus Inc. is the sole managing member of Cactus LLC and consolidates the financial results of Cactus LLC and its subsidiaries and reports a non-controlling interest related to the portion of CW Units not owned by Cactus Inc., which reduces net income attributable to holders of Cactus Inc.’s Class A common stock.
Use of Estimates
In preparing our consolidated financial statements in conformity with GAAP, we make numerous estimates and assumptions that affect the reported amountsaccounting for and recognition and disclosure of assets, liabilities, equity, revenues and expenses and related disclosure of contingent assets and liabilities. Certain accounting policies involve judgments and uncertainties to such an extent that there is reasonable likelihood that materially different amounts could have been reported under different conditions, or if different assumptions had been used.expenses. We evaluate our estimates and assumptions on a regular basis. We base our estimates on historical experience and various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ frommust make these estimates and assumptions usedbecause certain information that we use is dependent on future events, cannot be calculated with a high degree of precision from available data or is not otherwise capable of being readily calculated based on accepted methodologies. In some cases, these estimates are particularly difficult to determine, and we
must exercise significant judgment. Actual results could differ materially from the estimates and assumptions that we use in the preparation of our consolidated financial statements. See Note 2
Segment Information
We operate in a single operating segment, which reflects how we manage our business and the fact that all of our products and services are dependent upon the oil and natural gas industry. Substantially all of our products and services are sold in the notesU.S., which consists largely of oil and natural gas exploration and production companies. We operate in the United States, Australia and China. Our operations in Australia and China represented less than 10% of our consolidated operations for all periods presented in these consolidated financial statements.
Concentrations of Credit Risk
Our assets that are potentially subject to concentrations of credit risk are cash and cash equivalents and accounts receivable. We manage the credit risk associated with these financial instruments by transacting only with what management believes are financially secure counterparties, requiring credit approvals and credit limits and monitoring counterparties’ financial condition. Our receivables are spread over a number of customers, a majority of which are operators and suppliers to the auditedoil and natural gas industry. Our maximum exposure to credit loss in the event of non‑performance by the customer is limited to the receivable balance. We perform ongoing credit evaluations and monitoring as to the financial condition of our customers with respect to trade receivables. Generally, no collateral is required as a condition of sale. We also control our exposure associated with trade receivables by discontinuing sales and service to non-paying customers. We had one customer representing 10% of total revenues for the year ended December 31, 2019 and one customer representing 11% of total revenues in each of the years ended December 31, 2018 and 2017.
Significant Vendors
We purchase a significant portion of supplies, equipment and machined components from a single vendor. During 2019, 2018 and 2017, purchases from this vendor totaled $36.5 million, $46.7 million and $33.4 million, respectively. These figures represent approximately 16%, 21% and 22% for the respective periods, of total third party vendor purchases of raw materials, finished products, equipment, machining and other services. Amounts due to the vendor included in accounts payable, in the consolidated financial statementsbalance sheets, as of December 31, 2019 and 2018 totaled $4.3 million and $5.0 million, respectively.
Tax Receivable Agreement (TRA)
In connection with our IPO, we entered into the TRA with certain direct and indirect owners of Cactus LLC (the “TRA Holders”). The TRA generally provides for an expanded discussionpayment by Cactus Inc. to the TRA Holders of 85% of the net cash savings, if any, in U.S. federal, state and local income tax or franchise tax that Cactus Inc. actually realizes or is deemed to realize in certain circumstances. Cactus Inc. will retain the benefit of the remaining 15% of these net cash savings.
We account for amounts payable under the TRA in accordance with Accounting Standards Codification (“ASC”) Topic 450, Contingencies. As such, subsequent changes to the measurement of the TRA liability are recognized in the statements of income as a component of other income (expense), net. For the year ended December 31, 2019, we recognized a $5.3 million gain on the change in the TRA liability. See Note 9 for further details on the TRA liability.
Revenue Recognition
The majority of our revenues are derived from short-term contracts for fixed consideration. Product sales generally do not include right of return or other significant accounting policiespost-delivery obligations. A contract’s transaction price is allocated to each distinct performance obligation and estimatesrecognized as revenue when, or as, the performance obligation is satisfied. Revenues are recognized when we satisfy a performance obligation by transferring control of the promised goods or providing services to our customers at a point in time, in an amount specified in the contract with our customer and that reflects the consideration we expect to be entitled to in exchange for those goods or services. The majority of our contracts with customers contain a single performance obligation to provide agreed upon products or services. For contracts with multiple performance obligations, we allocate revenue to each performance obligation based on its relative standalone selling price. We do not
assess whether promised goods or services are performance obligations if they are immaterial in the context of the contract with the customer. We do not incur any material costs of obtaining contracts.
We do not adjust the amount of consideration per the contract for the effects of a significant financing component when we expect, at contract inception, that the period between the transfer of a promised good or service to a customer and when the customer pays for that good or service will be one year or less, which is in substantially all cases. Payment terms and conditions vary, although terms generally include a requirement of payment within 30 to 45 days. Revenues are recognized net of any taxes collected from customers, which are subsequently remitted to governmental authorities. We treat shipping and handling associated with outbound freight as a fulfillment cost instead of as a separate performance obligation. We recognize the cost for the associated shipping and handling when incurred as an expense in cost of sales.
Our revenues are derived from three sources: products, rentals, and field service and other:
Product revenue. Product revenues are primarily derived from the sale of wellhead systems and production trees. Revenue is recognized when the products have shipped and the customer obtains control of the products.
Rental revenue. Rental revenues areprimarily derived from the rental of equipment, tools and products used for well control during the drilling and completion phases to customers. Our rental agreements are directly with our customers and provide for a rate based on the period of time the equipment is used or made available to the customer. In addition, customers are charged for repair costs either through an agreed upon rate or as incurred. Revenue is recognized ratably over the rental period, which tends to be short-term in nature with most equipment on site for less than 90 days.
Field service and other revenue. We provide field services to our customers based on contractually agreed rates. Other revenues are derived from providing repair and reconditioning services to customers who have installed wellheads and production trees on their wellsite. Revenues are recognized as the services are performed or rendered.
Foreign Currency Translation
The financial position and results of operations of our foreign subsidiaries are measured using the local currency as the functional currency. Revenues and expenses of the subsidiaries have been translated into U.S. dollars at average exchange rates prevailing during the period. Assets and liabilities have been translated at the rates of exchange on the balance sheet dates. The resulting translation gain and loss adjustments have been recorded directly as a separate component of other comprehensive income in the consolidated statements of comprehensive income and stockholders’ equity.
Transaction gains and losses that arise from exchange rate fluctuations on transactions denominated in a currency other than the functional currency are included in our consolidated statements of income as incurred.
Stock‑based Compensation
We measure the cost of equity‑based awards based on the grant date fair value and we allocate the compensation expense over the corresponding service period, which is usually the vesting period, using the straight‑line method. The grant date fair value is determined by management.the average price of the trading high and trading low of our Class A common stock on the effective date of the grant.
Income Taxes
Deferred taxes are recorded using the asset and liability method, whereby tax assets and liabilities are determined based on the differences between the financial statement and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. We regularly evaluate the valuation allowances established for deferred tax assets for which future realization is uncertain. In assessing the realizability of deferred tax assets, we consider both positive and negative evidence, including scheduled reversals of deferred tax assets and liabilities, projected future taxable income, tax planning strategies and results of recent operations. If, based on the weight of available evidence, it is more likely than not that the deferred tax assets will not be realized, a valuation allowance is recorded.
Cactus Inc. is a corporation and is subject to U.S. federal as well as state income tax related to its ownership percentage in Cactus LLC. Cactus LLC is a limited liability company treated as a partnership for U.S. federal income tax purposes and files a U.S. Return of Partnership Income, which includes both our U.S. and foreign operations. Consequently, the members of Cactus LLC are taxed individually on their share of earnings for U.S. federal and state income tax purposes. However, Cactus LLC is subject to the Texas Margins Tax. Additionally, our operations in both Australia and China are subject to local country income taxes. See Note 5 “Income Taxes” for additional information regarding income taxes.
Cash and Cash Equivalents
Cash in excess of current operating requirements is invested in short-term interest-bearing investments with maturities of three months or less at the date of purchase and is stated at cost, which approximates fair value. Throughout the year we maintained cash balances that were not covered by federal deposit insurance. We have not experienced any losses in such accounts.
Accounts ReceivableBasis of Presentation
We extend credit to customersThe consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the normal courseUnited States of business. In our determinationAmerica (“GAAP”). These consolidated financial statements include the accounts of Cactus Inc. and its wholly owned subsidiaries. All intercompany transactions and balances have been eliminated upon consolidation.
Cactus Inc. is the allowance for doubtful accounts, we assess those amounts where there are concerns over collectionsole managing member of Cactus LLC and record an allowance for that amount. Estimating this amount requires us to analyzeconsolidates the financial conditionresults of Cactus LLC and its subsidiaries and reports a non-controlling interest related to the portion of CW Units not owned by Cactus Inc., which reduces net income attributable to holders of Cactus Inc.’s Class A common stock.
Use of Estimates
In preparing our customers, our historical experienceconsolidated financial statements in conformity with GAAP, we make numerous estimates and any specific concerns. By its nature, such an estimate is highly subjectiveassumptions that affect the accounting for and it is possible that the amountrecognition and disclosure of accounts receivableassets, liabilities, equity, revenues and expenses. We must make these estimates and assumptions because certain information that we are unable to collect mayuse is dependent on future events, cannot be differentcalculated with a high degree of precision from the amount initially estimated.
The allowance for doubtful accounts asavailable data or is not otherwise capable of December 31, 2017 was $0.7 million, compared to $0.9 million as of December 31, 2016, representing approximately 1.0% and 2.6%, respectively, of our consolidated gross accounts receivable. A 10% increase in our allowance for doubtful accounts at December 31, 2017 would result in a change in reserves of approximately $0.1 million and a change in income before income taxes by the same amount. Currently, management does not believe that there is a reasonable likelihood that there will be a material change in the future estimates or assumptions that were used to calculate our allowance for doubtful accounts.
Inventories
Inventories are stated at the lower of cost or net realizable value. Cost is determined using standard cost (which approximates average cost) and weighted average methods. Costs include an application of related direct labor and overhead cost. Net realizable value is the estimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal and transportation. Reserves are made for obsolete and slow‑moving itemsbeing readily calculated based on a range of factors, including age, usageaccepted methodologies. In some cases, these estimates are particularly difficult to determine, and technological or market changes that may impact demand for those products. The amount of allowance recorded is subjective and it may be that the level of provision required may be different from that initially recorded.
The inventory obsolescence reserve as of December 31, 2017 was $5.9 million, compared to $4.8 million as of December 31, 2016, representing approximately 8.4% and 11.2%, respectively, of our consolidated gross inventories. A 10% increase in our inventory obsolescence reserve at December 31, 2017 would result in a change in reserves of approximately $0.6 million and a change in income before income taxes by the same amount. Currently, management does not believe that there is a reasonable likelihood that there will be a material change in the future estimates or assumptions that were used to calculate our inventory obsolescence reserve.
we
must exercise significant judgment. Actual results could differ materially from the estimates and assumptions that we use in the preparation of our consolidated financial statements.
Long‑Lived Assets
Key estimates related to long‑lived assets include useful lives and recoverability of carrying values. Such estimates could be modified, as impairment could arise asSegment Information
We operate in a result of changes in supply and demand fundamentals, technological developments, new competitors with cost advantagessingle operating segment, which reflects how we manage our business and the cyclical naturefact that all of our products and services are dependent upon the oil and natural gas industry. Substantially all of our products and services are sold in the U.S., which consists largely of oil and natural gas exploration and production companies. We evaluate long‑lived assets for potential impairment indicators whenever events or changesoperate in circumstances indicate that the carrying amount of an asset may not be recoverable. Long‑lived assets assessed for impairment are grouped at the lowest level for which identifiable cash flows are available,United States, Australia and a provision made where the cash flow isChina. Our operations in Australia and China represented less than the carrying value of the asset. Actual impairment losses could vary from amounts estimated.
Goodwill
Goodwill represents the excess of acquisition consideration paid over the fair value of identifiable net tangible and identifiable intangible assets acquired. Goodwill is not amortized, but is reviewed for impairment on an annual basis (or more frequently if impairment indicators exist). We have established December 31st as the date10% of our annual testconsolidated operations for impairmentall periods presented in these consolidated financial statements.
Concentrations of goodwill.Credit Risk
Our assets that are potentially subject to concentrations of credit risk are cash and cash equivalents and accounts receivable. We manage the credit risk associated with these financial instruments by transacting only with what management believes are financially secure counterparties, requiring credit approvals and credit limits and monitoring counterparties’ financial condition. Our receivables are spread over a number of customers, a majority of which are operators and suppliers to the oil and natural gas industry. Our maximum exposure to credit loss in the event of non‑performance by the customer is limited to the receivable balance. We perform a qualitative assessment ofongoing credit evaluations and monitoring as to the fair valuefinancial condition of our reporting unit before calculating the fair valuecustomers with respect to trade receivables. Generally, no collateral is required as a condition of the reporting unit in stepsale. We also control our exposure associated with trade receivables by discontinuing sales and service to non-paying customers. We had one customer representing 10% of the two‑step goodwill impairment model. If, through the qualitative assessment, we determine that it is more likely than not that the reporting unit’s fair value is greater than its carrying value, the remaining impairment steps would be unnecessary.
If there are indicators that goodwill has been impaired and thus the two‑step goodwill impairment model is necessary, step one is to determine the fair value of the reporting unit and compare it to the reporting unit’s carrying value. Fair value is determined based on the present value of estimated cash flows using available information regarding expected cash flows of each reporting unit, discount rates and the expected long‑term cash flow growth rates. If the fair value of the reporting unit exceeds the carrying value, goodwill is not impaired and no further testing is performed. The second step is performed if the carrying value exceeds the fair value. The implied fair value of the reporting unit’s goodwill must be determined and compared to the carrying value of the goodwill. If the carrying value of a reporting unit’s goodwill exceeds its implied fair value, an impairment loss equal to the difference will be recorded.
Goodwill as of December 31, 2017 was $7.8 million, which is the same value astotal revenues for the year ended December 31, 2016. 2019 and one customer representing 11% of total revenues in each of the years ended December 31, 2018 and 2017.
Significant Vendors
We performed our annual impairment analysispurchase a significant portion of supplies, equipment and concluded there was no impairment. A 10% decreasemachined components from a single vendor. During 2019, 2018 and 2017, purchases from this vendor totaled $36.5 million, $46.7 million and $33.4 million, respectively. These figures represent approximately 16%, 21% and 22% for the respective periods, of total third party vendor purchases of raw materials, finished products, equipment, machining and other services. Amounts due to the vendor included in accounts payable, in the fair value of our reporting unit at December 31, 2017 would not result in an impairment. Currently, management does not believe that there is a reasonable likelihood that there will be a material change in the carrying value of goodwill.
Product Warranties
We generally warrant our manufactured products 12 months from the date placed in service, although where product failures arise, they typically manifest themselves at the time of installation at the well site. Most failures are the result of installation errors rather than product defects and are addressed by not charging service time required to remedy such errors. In rare instances, our customers request compensation for non‑productive time at the well site. Any compensation provided is voluntarily granted to promote strong customer relationships, as our master service agreements include waivers of consequential damages.
The accruals for product warrantiesconsolidated balance sheets, as of December 31, 2017 were $0.32019 and 2018 totaled $4.3 million comparedand $5.0 million, respectively.
Tax Receivable Agreement (TRA)
In connection with our IPO, we entered into the TRA with certain direct and indirect owners of Cactus LLC (the “TRA Holders”). The TRA generally provides for payment by Cactus Inc. to $0.1 millionthe TRA Holders of 85% of the net cash savings, if any, in U.S. federal, state and local income tax or franchise tax that Cactus Inc. actually realizes or is deemed to realize in certain circumstances. Cactus Inc. will retain the benefit of the remaining 15% of these net cash savings.
We account for amounts payable under the TRA in accordance with Accounting Standards Codification (“ASC”) Topic 450, Contingencies. As such, subsequent changes to the measurement of the TRA liability are recognized in the statements of income as a component of other income (expense), net. For the year ended December 31, 2016, representing approximately 0.2% and 0.1% of our annualized product revenues for2019, we recognized a $5.3 million gain on the respective periods. A 10% increase in our accruals for product warranties at December 31, 2017 would result in a change in accruals of less than $0.1 million and a change in income before income taxes by the same amount. Currently, management does not believe that there is a reasonable likelihood that there will be a material change in the future estimatesTRA liability. See Note 9 for further details on the TRA liability.
Revenue Recognition
The majority of our revenues are derived from short-term contracts for fixed consideration. Product sales generally do not include right of return or assumptionsother significant post-delivery obligations. A contract’s transaction price is allocated to each distinct performance obligation and recognized as revenue when, or as, the performance obligation is satisfied. Revenues are recognized when we satisfy a performance obligation by transferring control of the promised goods or providing services to our customers at a point in time, in an amount specified in the contract with our customer and that were usedreflects the consideration we expect to calculatebe entitled to in exchange for those goods or services. The majority of our accruals for product warranties.
contracts with customers contain a single performance obligation to provide agreed upon products or services. For contracts with multiple performance obligations, we allocate revenue to each performance obligation based on its relative standalone selling price. We do not
assess whether promised goods or services are performance obligations if they are immaterial in the context of the contract with the customer. We do not incur any material costs of obtaining contracts.
We do not adjust the amount of consideration per the contract for the effects of a significant financing component when we expect, at contract inception, that the period between the transfer of a promised good or service to a customer and when the customer pays for that good or service will be one year or less, which is in substantially all cases. Payment terms and conditions vary, although terms generally include a requirement of payment within 30 to 45 days. Revenues are recognized net of any taxes collected from customers, which are subsequently remitted to governmental authorities. We treat shipping and handling associated with outbound freight as a fulfillment cost instead of as a separate performance obligation. We recognize the cost for the associated shipping and handling when incurred as an expense in cost of sales.
Our revenues are derived from three sources: products, rentals, and field service and other:
Product revenue. Product revenues are primarily derived from the sale of wellhead systems and production trees. Revenue is recognized when the products have shipped and the customer obtains control of the products.
Rental revenue. Rental revenues areprimarily derived from the rental of equipment, tools and products used for well control during the drilling and completion phases to customers. Our rental agreements are directly with our customers and provide for a rate based on the period of time the equipment is used or made available to the customer. In addition, customers are charged for repair costs either through an agreed upon rate or as incurred. Revenue is recognized ratably over the rental period, which tends to be short-term in nature with most equipment on site for less than 90 days.
Field service and other revenue. We provide field services to our customers based on contractually agreed rates. Other revenues are derived from providing repair and reconditioning services to customers who have installed wellheads and production trees on their wellsite. Revenues are recognized as the services are performed or rendered.
Foreign Currency Translation
The financial position and results of operations of our foreign subsidiaries are measured using the local currency as the functional currency. Revenues and expenses of the subsidiaries have been translated into U.S. dollars at average exchange rates prevailing during the period. Assets and liabilities have been translated at the rates of exchange on the balance sheet dates. The resulting translation gain and loss adjustments have been recorded directly as a separate component of other comprehensive income in the consolidated statements of comprehensive income and stockholders’ equity.
Transaction gains and losses that arise from exchange rate fluctuations on transactions denominated in a currency other than the functional currency are included in our consolidated statements of income as incurred.
Stock‑based Compensation
We measure the cost of equity‑based awards based on the grant date fair value and we allocate the compensation expense over the corresponding service period, which is usually the vesting period, using the straight‑line method. The grant date fair value is determined by the average price of the trading high and trading low of our Class A common stock on the effective date of the grant.
Income Taxes
Cactus LLC is a limited liability company and files a U.S. Return of Partnership Income, which includes both U.S. and foreign operations. As a limited liability company, Cactus LLC is treated as a partnership, and the members of Cactus LLC are taxed individually on their share of our earnings for U.S. federal income tax purposes. Accordingly, no provision for U.S. federal income taxes has been made in the accompanying consolidated financial statements.
We are subject to state taxes within the United States. However, the income generated by Cactus LLC flows through to the members’ individual state tax returns. Additionally, our operations in both Australia and China are subject to local country income taxes.
We follow guidance issued by the Financial Accounting Standards Board (“FASB”), which clarifies accounting for uncertainty in income taxes by prescribing the minimum recognition threshold an income tax position is required to meet before being recognized in the consolidated financial statements and applies to all income tax positions. Each income tax position is assessed using a two‑step process. A determination is first made as to whether it is more likely than not that the income tax position will be sustained, based upon technical merits, upon examination by the taxing authorities. If the income tax position is expected to meet the more likely than not criteria, the benefit recorded in the consolidated financial statements equals the largest amount that is greater than 50% likely to be realized upon its ultimate settlement.
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 rates in effect for the year in which the differences are expected to reverse. TheWe regularly evaluate the valuation allowances established for deferred tax assets for which future realization is uncertain. In assessing the realizability of deferred tax assets, are evaluated annuallywe consider both positive and a valuation allowance is provided ifnegative evidence, including scheduled reversals of deferred tax assets and liabilities, projected future taxable income, tax planning strategies and results of recent operations. If, based on the weight of available evidence, it is more likely than not that the deferred tax assets will not give rise to future benefits in our tax returns.
We intend to account for any amounts payable under the Tax Receivable Agreement in accordance with ASC 450. We believe accounting for the Tax Receivable Agreement under the provisions of ASC 450 is appropriate, given the significant uncertainties regarding the amount and timing of payments, if any, to be made under the Tax Receivable Agreement.
U.S. Federal Income Tax Reform
On December 22, 2017, the President of the United States signed into law legislation informally known as the Tax Cuts and Jobs Act (the “Act”). The Act represents major tax reform legislation that, among other provisions, reduces the U.S. corporate tax rate. As of December 31, 2017, since Cactus LLC is a pass-through entity, management considers that the abovementioned Act will have an immaterial impact. However, going forward, the Company will analyze the impact based on revised circumstances.
Fair Value Measures
Fair value measurements—We record our financial assets and financial liabilities at fair value. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (an exit price) in an orderly transaction between market participants at the reporting date. The fair value framework requires the categorization of assets and liabilities into three levels based upon the assumptions (inputs) used to price the assets or liabilities, with the exception of certain assets and liabilities measured using the net asset value practical expedient, which are not required to be leveled. Level 1 provides the most reliable measure of fair value, whereas Level 3 generally requires significant management judgment. The three levels are defined as follows:
| ·
| | Level 1: Unadjusted quoted prices in active markets for identical assets and liabilities.
|
| ·
| | Level 2: Observable inputs other than quoted prices included in Level 1. For example, quoted prices for similar assets or liabilities in active markets or quoted prices for identical assets or liabilities in inactive markets.
|
| ·
| | Level 3: Unobservable inputs reflecting management’s own assumptions about the assumptions market participants would use in pricing the asset or liability.
|
Fair value of long‑lived, non‑financial assets—Long‑lived, non‑financial assets are measured at fair value on a non‑recurring basis for the purposes of calculating potential impairment. The fair value measurements of our long‑lived, non‑financial assets measured on a non‑recurring basis are determined by estimating the amount and timing of net future cash flows, which are Level 3 unobservable inputs, and discounting them using a risk‑adjusted rate of interest. Significant increases or decreases in actual cash flows may result in valuation changes.
Other fair value disclosures—The carrying amounts of cash and cash equivalents, receivables, accounts payable, short‑term debt, commercial paper, debt associated with our Credit Agreement as well as amounts included in other current assets and other current liabilities that meet the definition of financial instruments, approximate fair value.
Stock‑based Compensation
We recognize stock-based compensation expense using a fair value method. Fair value methods userealized, a valuation model to theoretically value stock option grants even though they are not available for trading and are of longer duration. The Black‑Scholes‑Merton option‑pricing model that we use includes the input of certain variables that are dependent on future expectations, including the expected lives of the options from grant date to maturity date, the level of volatility of peer companies in our industry, risk‑free interest rate and an assumption that there will be no forfeitures or future distributions. Our estimates of these variables are made for the purpose of using the valuation model to determine an expense for each reporting period and are not subsequently adjusted. These estimates are not considered highly complex or subjective. These estimates will not be necessary to determine the fair value of new stock awards once the underlying shares begin trading.
Recent Accounting Pronouncements
See Note 2 in the notes to the audited consolidated financial statements of Cactus LLC for discussion of recent accounting pronouncements.
Inflation
Inflation in the United States has been relatively low in recent years and did not have a material impact on our results of operations for the years ended December 31, 2017, 2016 and 2015. Although the impact of inflation has been insignificant in recent years, itallowance is still a factor in the United States economy, and we tend to experience inflationary pressure on wages and raw materials.
Off‑Balance Sheet Arrangements
Currently, neither we nor our predecessor have off‑balance sheet arrangements.
Item 7A. Quantitative and Qualitative Disclosures about Market Riskrecorded.
We are exposed to market risk from changes in foreign currency rates and changes in interest rates.
We outsource certainCactus Inc. is a corporation and is subject to U.S. federal as well as state income tax related to its ownership percentage in Cactus LLC. Cactus LLC is a limited liability company treated as a partnership for U.S. federal income tax purposes and files a U.S. Return of Partnership Income, which includes both our wellhead equipmentU.S. and foreign operations. Consequently, the members of Cactus LLC are taxed individually on their share of earnings for U.S. federal and state income tax purposes. However, Cactus LLC is subject to suppliers in China, andthe Texas Margins Tax. Additionally, our production facility in China assembles and tests these outsourced components, as we do not engage in machining operations in this facility. In addition,both Australia and China are subject to local country income taxes. See Note 5 “Income Taxes” for additional information regarding income taxes.
Cash and Cash Equivalents
Cash in excess of current operating requirements is invested in short-term interest-bearing investments with maturities of three months or less at the date of purchase and is stated at cost, which approximates fair value. Throughout the year we have a service center in Australiamaintained cash balances that sells products, rents frac equipment and provides field services. To the extent either facility has net U.S. dollar denominated assets, our profitability is eroded when the U.S. dollar weakens against the Chinese Yuan and the Australian dollar. Our production facility in China generally has net U.S. dollar denominated assets, while our service center in Australia generally has net U.S. dollar denominated liabilities. The U.S. dollar translated profits and net assets of our facilities in China and Australia are eroded if the respective local currency value weakens against the U.S. dollar.were not covered by federal deposit insurance. We have not entered intoexperienced any derivative arrangements to protect against fluctuationslosses in foreign currency exchange rates.such accounts.
During 2015, we entered into an interest rate hedge with a duration of five years, expiring in July 2020, to manage our exposure under the term loan tranche of our Credit Agreement. Pursuant to the terms of the hedge contract, we are not liable for any interest arising from LIBOR exceeding 6% with respect to up to $200 million of our borrowings outstanding under our term loan. As of December 31, 2017, 2016 and 2015, the fair value of the hedge was $1,000, $68,000 and $88,000, respectively. In conjunction with the completion of our IPO and the repayment in full of our outstanding term loan using the net proceeds from our IPO, we terminated the hedge contract for no value.
Item 8. Financial Statements and Supplementary Data
The following Consolidated Financial Statements are filed as part of this Annual Report:
Cactus, Inc.
Cactus Wellhead, LLC (Predecessor)
Report of Independent Registered Public Accounting Firm
To the Board of Directors of Cactus, Inc.
Opinion on the Financial Statements
We have audited the accompanying balance sheets of Cactus, Inc. (the “Company”) as of December 31, 2017 and February 17, 2017, including the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2017 and February 17, 2017 in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
The financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits of these financial statements in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ PricewaterhouseCoopers LLP
Houston, Texas
March 19, 2018
We have served as the Company’s auditor since 2015.
CACTUS, INC.
BALANCE SHEETS
| | | | | | |
| | December 31, | | February 17, |
| | 2017 | | 2017 |
| | (in thousands, except share data) |
Assets | | | | | | |
Cash and cash equivalents | | $ | — | | $ | — |
Total assets | | $ | — | | $ | — |
| | | | | | |
Liabilities and Stockholder's Equity | | | | | | |
Total liabilities | | $ | — | | $ | — |
| | | | | | |
Commitments and contingencies | | | | | | |
Stockholder's Equity | | | | | | |
Common stock, par value $0.01 per share, 1,000,000 shares authorized, none issued and outstanding | | | — | | | — |
Total stockholder's equity | | | — | | | — |
Total liabilities and stockholder's equity | | $ | — | | $ | — |
The accompanying notes are an integral part of this balance sheet.
CACTUS, INC.
NOTES TO BALANCE SHEETS
(in thousands, unless otherwise indicated)
1. Organization and Operations
Cactus, Inc. (the “Company”) is a Delaware corporation, incorporated on February 17, 2017. Pursuant to a reorganization and completion of the Company’s initial public offering on February 12, 2018 (the “IPO”), the Company became a holding corporation for Cactus Wellhead, LLC (“Cactus LLC”) and its subsidiaries. Following completion of the IPO, the Company’s sole material assets are units in Cactus LLC (“CW Units”). See note 4.
2. Summary of Significant Accounting Policies
Basis of Presentation
The Company’s balance sheet has been prepared in accordance with U.S. generally accepted accounting principles. Separate statements of income and comprehensive income, cash flows and changes in stockholder’s equity have not been presented because the Company has had no operations to date.
3. Stockholder’s Equity
As of December 31, 2017, the Company was authorized to issue 1 million shares of common stock with a par value of $0.01 per share. The Board of Directors has the authority to issue one or more series of preferred stock without stockholder approval. In conjunction with the IPO, the Company amended its articles of incorporation to increase the number of authorized shares.
4. Subsequent Events
On February 12, 2018, in connection with the completion of the Company’s IPO, Cactus Inc. became the managing member of Cactus LLC and is responsible for all operational, management and administrative decisions relating to Cactus LLC’s business.
Pursuant to the IPO, the Company issued 23,000,000 shares of Class A common stock, par value $0.01 per share (“Class A Common Stock”), at a price to the public of $19.00 per share. The Company received net proceeds of $405.8 million after deducting underwriting discounts and commissions and estimated offering expenses of the IPO. On February 14, 2018 the Company sold an additional 3,450,000 shares of Class A Common Stock pursuant to the exercise by the underwriters in full of their option to purchase additional shares of Class A Common Stock (the “Option”), resulting in $61.6 million of additional net proceeds after deducting underwriting discounts and commissions. The Company contributed all of the net proceeds of the IPO to Cactus LLC in exchange for CW Units. Cactus LLC used (i) $251.0 million of the net proceeds to repay all of the borrowings outstanding under its term loan facility, including accrued interest and (ii) $216.4 million to redeem CW Units from certain direct and indirect owners of Cactus LLC.
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Unitholders of Cactus Wellhead, LLC
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Cactus Wellhead, LLC and its subsidiaries (the “Company”) as of December 31, 2017 and 2016, and the related consolidated statements of income, comprehensive income, members’ equity (deficit) and cash flows for each of the three years in the period ended December 31, 2017, including the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2017 and 2016, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2017 in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits of these consolidated financial statements in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud.
Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ PricewaterhouseCoopers LLP
Houston, Texas
March 19, 2018
We have served as the Company’s auditor since 2015.
CACTUS WELLHEAD, LLC AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
| | | | | | |
| | December 31, | | December 31, |
| | 2017 | | 2016 |
| | (in thousands, except unit data) |
Assets | | | | | | |
Current assets | | | | | | |
Cash and cash equivalents | | $ | 7,574 | | $ | 8,688 |
Accounts receivable-trade, net | | | 84,173 | | | 32,289 |
Inventories | | | 64,450 | | | 37,900 |
Prepaid expenses and other current assets | | | 7,732 | | | 3,713 |
Total current assets | | | 163,929 | | | 82,590 |
Property and equipment, net | | | 94,654 | | | 74,870 |
Goodwill | | | 7,824 | | | 7,824 |
Other noncurrent assets | | | 49 | | | 44 |
Total assets | | $ | 266,456 | | $ | 165,328 |
Liabilities and Members' Equity | | | | | | |
Current liabilities | | | | | | |
Accounts payable-trade | | $ | 35,080 | | $ | 14,002 |
Accrued expenses and other | | | 10,559 | | | 6,430 |
Capital lease obligations, current portion | | | 4,667 | | | 1,134 |
Current maturities of long-term debt | | | 2,568 | | | 2,568 |
Total current liabilities | | | 52,874 | | | 24,134 |
Capital lease obligations, net of current portion | | | 7,946 | | | 2,065 |
Deferred tax liability, net | | | 416 | | | 196 |
Long-term debt, net | | | 241,437 | | | 242,254 |
Total liabilities | | | 302,673 | | | 268,649 |
Commitments and contingencies | | | | | | |
Members' equity (deficit) | | | | | | |
Class A, 36,500 units and 36,500 units issued and outstanding | | | (35,055) | | | (80,985) |
Class A-1, 520 units and 520 units issued and outstanding | | | 802 | | | 148 |
Class B, 8,608 units and 8,608 units issued and outstanding | | | (2,046) | | | (22,009) |
Accumulated other comprehensive income (loss) | | | 82 | | | (475) |
Total members' equity (deficit) | | | (36,217) | | | (103,321) |
Total liabilities and members’ equity (deficit) | | $ | 266,456 | | $ | 165,328 |
The accompanying notes are an integral part of these consolidated financial statements.
CACTUS WELLHEAD, LLC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
| | | | | | | | | |
| | Year Ended December 31, |
| | 2017 | | 2016 | | 2015 |
| | (in thousands, except unit and per unit data) |
Revenues | | | | | | | | | |
Product revenue | | $ | 189,091 | | $ | 77,739 | | $ | 110,917 |
Rental revenue | | | 77,469 | | | 44,372 | | | 65,431 |
Field service and other revenue | | | 74,631 | | | 32,937 | | | 45,047 |
Total revenues | | | 341,191 | | | 155,048 | | | 221,395 |
| | | | | | | | | |
Costs and expenses | | | | | | | | | |
Cost of product revenue | | | 124,030 | | | 62,766 | | | 84,604 |
Cost of rental revenue | | | 40,519 | | | 33,990 | | | 39,251 |
Cost of field service and other revenue | | | 60,602 | | | 28,470 | | | 33,200 |
Selling, general and administrative expenses | | | 27,177 | | | 19,207 | | | 22,135 |
Total costs and expenses | | | 252,328 | | | 144,433 | | | 179,190 |
Income from operations | | | 88,863 | | | 10,615 | | | 42,205 |
| | | | | | | | | |
Interest expense, net | | | (20,767) | | | (20,233) | | | (21,837) |
Other income (expense), net | | | — | | | 2,251 | | | 1,640 |
Income (loss) before income taxes | | | 68,096 | | | (7,367) | | | 22,008 |
Income tax expense | | | 1,549 | | | 809 | | | 784 |
Net income (loss) | | $ | 66,547 | | $ | (8,176) | | $ | 21,224 |
Earnings (loss) per Class A Unit—basic and diluted | | $ | 1,258.36 | | $ | (224.00) | | $ | 306.88 |
Weighted average Class A Units outstanding—basic and diluted | | | 36,500 | | | 36,500 | | | 36,500 |
The accompanying notes are an integral part of these consolidated financial statements.
CACTUS WELLHEAD, LLC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
| | | | | | | | | |
| | Year Ended December 31, |
| | 2017 | | 2016 | | 2015 |
| | (in thousands) |
Net income (loss) | | $ | 66,547 | | $ | (8,176) | | $ | 21,224 |
Foreign currency translation | | | 557 | | | (284) | | | (215) |
Total comprehensive income (loss) | | $ | 67,104 | | $ | (8,460) | | $ | 21,009 |
The accompanying notes are an integral part of these consolidated financial statements.
CACTUS WELLHEAD, LLC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF MEMBERS’ EQUITY (DEFICIT)
| | | | | | | | | |
| | | | | Accumulated | | Total |
| | Members' | | Other | | Members' |
| | Equity | | Comprehensive | | Equity |
| | (Deficit) | | Income (Loss) | | (Deficit) |
| | | (in thousands) |
Balances at December 31, 2014 | | $ | (102,327) | | $ | 24 | | $ | (102,303) |
Member distributions | | | (12,232) | | | — | | | (12,232) |
Other comprehensive income (loss) | | | — | | | (215) | | | (215) |
Equity based compensation | | | 359 | | | — | | | 359 |
Net income | | | 21,224 | | | — | | | 21,224 |
Balances at December 31, 2015 | | | (92,976) | | | (191) | | | (93,167) |
Member distributions | | | (2,055) | | | — | | | (2,055) |
Other comprehensive income (loss) | | | — | | | (284) | | | (284) |
Equity based compensation | | | 361 | | | — | | | 361 |
Net loss | | | (8,176) | | | — | | | (8,176) |
Balances at December 31, 2016 | | | (102,846) | | | (475) | | | (103,321) |
Other comprehensive income (loss) | | | — | | | 557 | | | 557 |
Net income | | | 66,547 | | | — | | | 66,547 |
Balances at December 31, 2017 | | $ | (36,299) | | $ | 82 | | $ | (36,217) |
The accompanying notes are an integral part of these consolidated financial statements.
CACTUS WELLHEAD, LLC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
| | | | | | | | | |
| | Year Ended December 31, |
| | 2017 | | 2016 | | 2015 |
| | (in thousands) |
Cash flows from operating activities | | | | | | | | | |
Net income (loss) | | $ | 66,547 | | $ | (8,176) | | $ | 21,224 |
Reconciliation of net income (loss) to net cash provided by operating activities | | | | | | | | | |
Depreciation and amortization | | | 23,271 | | | 21,241 | | | 20,580 |
Debt discount and deferred loan cost amortization | | | 1,752 | | | 1,777 | | | 1,913 |
Stock-based compensation | | | — | | | 361 | | | 359 |
Provision for (recovery of) bad debts | | | (100) | | | (357) | | | 250 |
Inventory obsolescence | | | 1,259 | | | 1,851 | | | 2,343 |
Loss on disposal of assets | | | 534 | | | 950 | | | 402 |
Deferred income taxes | | | 220 | | | 132 | | | 64 |
Gain on debt extinguishment | | | — | | | (2,251) | | | (1,640) |
Changes in operating assets and liabilities | | | | | | | | | |
Accounts receivable-trade | | | (50,094) | | | 509 | | | 12,829 |
Inventories | | | (28,279) | | | 4,126 | | | 10,563 |
Prepaid expenses and other assets | | | (4,012) | | | 1,080 | | | 127 |
Accounts payable-trade | | | 19,505 | | | 5,014 | | | (18,703) |
Accrued expenses and other liabilities | | | 4,104 | | | (2,282) | | | (4,384) |
Net cash provided by operating activities | | | 34,707 | | | 23,975 | | | 45,927 |
| | | | | | | | | |
Cash flows from investing activities | | | | | | | | | |
Capital expenditures | | | (32,074) | | | (21,677) | | | (25,281) |
Patent expenditures | | | (8) | | | (44) | | | — |
Proceeds from sale of assets | | | 1,404 | | | 4,363 | | | 1,859 |
Net cash used in investing activities | | | (30,678) | | | (17,358) | | | (23,422) |
| | | | | | | | | |
Cash flows from financing activities | | | | | | | | | |
Principal payments on long-term debt | | | (2,569) | | | (7,908) | | | (10,525) |
Payments on capital leases | | | (2,744) | | | (208) | | | — |
Payments for deferred loan costs | | | — | | | — | | | (19) |
Distributions to members | | | — | | | (2,055) | | | (12,232) |
Net cash used in financing activities | | | (5,313) | | | (10,171) | | | (22,776) |
| | | | | | | | | |
Effect of exchange rate changes on cash and cash equivalents | | | 170 | | | (284) | | | (128) |
| | | | | | | | | |
Net increase (decrease) in cash and cash equivalents | | | (1,114) | | | (3,838) | | | (399) |
| | | | | | | | | |
Cash and cash equivalents | | | | | | | | | |
Beginning of period | | | 8,688 | | | 12,526 | | | 12,925 |
End of period | | $ | 7,574 | | $ | 8,688 | | $ | 12,526 |
The accompanying notes are an integral part of these consolidated financial statements.
CACTUS WELLHEAD, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except unit and per unit data, or as otherwise indicated)
1. Organization and Nature of Operations
Cactus Wellhead, LLC (“Cactus LLC”) is a Delaware limited liability company and was formed on July 11, 2011. Cactus LLC has a U.S. manufacturing facility in Bossier City, Louisiana, that it acquired in September 2011. Effective August 14, 2013, Cactus LLC formed Cactus Wellhead (Suzhou) Pressure Control Co., Ltd. (“Suzhou”), a Chinese limited company, as a production facility that provides products to Cactus LLC and affiliates in the United States and Australia. Effective July 1, 2014, Cactus LLC formed Cactus Wellhead Australia Pty, Ltd (“CWA”), an Australian limited company, to service the Australian market.
Cactus LLC, Suzhou and CWA (collectively, “Cactus”, “we”, “us” and “our”) are primarily engaged in the design, manufacture and sale of wellheads and pressure control equipment. In addition, we maintain a fleet of frac trees and ancillary equipment for short‑term rental, we offer repair and refurbishment services and we provide service crews to assist in the installation and operations of pressure control systems at the wellhead. We operate through 14 U.S. service centers principally located in Texas, Oklahoma, New Mexico, Louisiana, Pennsylvania, North Dakota, Wyoming, Colorado, and one service center in Australia, with our corporate headquarters located in Houston, Texas.
On February 12, 2018, Cactus, Inc. (“Cactus Inc.”) completed the initial public offering of Class A common stock (the “IPO”). Pursuant to a reorganization and the IPO, Cactus Inc. became a holding corporation for Cactus LLC. See note 13.
2. Summary of Significant Accounting Policies and Other Items
Basis of Presentation
The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). These consolidated financial statements include the accounts of Cactus LLCInc. and its wholly owned subsidiaries, Suzhou and CWA.subsidiaries. All significant intercompany transactions and balances have been eliminated upon consolidation.
Reclassifications
Certain prior period amounts have been reclassified to conform toCactus Inc. is the current period presentation.
Limitation of Members’ Liability
Under the terms of the Amended and Restated Limited Liability Company Operating Agreement, dated as of May 31, 2016,sole managing member of Cactus LLC (the “Agreement”),and consolidates the members are not obligated for debt, liabilities, contracts or other obligationsfinancial results of Cactus LLC. ProfitsLLC and lossesits subsidiaries and reports a non-controlling interest related to the portion of CW Units not owned by Cactus Inc., which reduces net income attributable to holders of Cactus Inc.’s Class A common stock.
Use of Estimates
In preparing our consolidated financial statements in conformity with GAAP, we make numerous estimates and assumptions that affect the accounting for and recognition and disclosure of assets, liabilities, equity, revenues and expenses. We must make these estimates and assumptions because certain information that we use is dependent on future events, cannot be calculated with a high degree of precision from available data or is not otherwise capable of being readily calculated based on accepted methodologies. In some cases, these estimates are allocatedparticularly difficult to members as defineddetermine, and we
must exercise significant judgment. Actual results could differ materially from the estimates and assumptions that we use in the Agreement.preparation of our consolidated financial statements.
Segment and Related Information
We operate asin a single operating segment, which reflects how we manage our business and the fact that all of our products and services are dependent upon the oil and natural gas industry. Substantially all of our products and services are sold in the U.S., which consists largely of oil and natural gas exploration and production companies. We operate in the United States, Australia and China. Our operations in Australia and China represented less than 10% of our consolidated operations for all periods presented in these consolidated financial statements.
Significant Customers and ConcentrationConcentrations of Credit Risk
We had one customer representing 11% of total revenues in 2017 and one customer representing 12% of total revenues in both 2016 and 2015. There were no other customers representing 10% or more of total revenues in 2017, 2016 or 2015. Our assets that are potentially subject to concentrations of credit risk are cash and cash equivalents and accounts receivable. Our receivables are spread over a number of customers, a majority of which are operators and suppliers to the oil and natural gas industry. We manage the credit risk onassociated with these financial instruments by transacting only with what management believes are financially secure counterparties, requiring credit approvals and credit limits and monitoring counterparties’ financial condition. Our receivables are spread over a number of customers, a majority of which are operators and suppliers to the oil and natural gas industry. Our maximum exposure to credit loss in the event of non‑performance by the counterpartycustomer is limited to the receivable balance. We perform ongoing credit evaluations and monitoring as to the financial condition of our customers with respect to trade receivables. Generally, no collateral is required as a condition of sale. We also control our exposure associated with trade receivables by discontinuing sales and service to non-paying customers. We had one customer representing 10% of total revenues for the year ended December 31, 2019 and one customer representing 11% of total revenues in each of the years ended December 31, 2018 and 2017.
Significant Vendors
We purchase a significant portion of supplies, equipment and machined components from a single vendor. During 2017, 20162019, 2018 and 2015,2017, purchases from this vendor totaled $33.4$36.5 million, $10.8$46.7 million and $18.1$33.4 million, respectively. These figures represent approximately 22%16%, 20%21% and 27%22% for the respective periods, of total third party vendor purchases of raw materials, finished products, equipment, machining and other services. Amounts due to the vendor included in accounts payable, in the consolidated balance sheets, as of December 31, 20172019 and 20162018 totaled $7.4$4.3 million and $1.3$5.0 million, respectively.
UseTax Receivable Agreement (TRA)
In connection with our IPO, we entered into the TRA with certain direct and indirect owners of Estimates
Cactus LLC (the “TRA Holders”). The preparationTRA generally provides for payment by Cactus Inc. to the TRA Holders of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date85% of the consolidated financialnet cash savings, if any, in U.S. federal, state and local income tax or franchise tax that Cactus Inc. actually realizes or is deemed to realize in certain circumstances. Cactus Inc. will retain the benefit of the remaining 15% of these net cash savings.
We account for amounts payable under the TRA in accordance with Accounting Standards Codification (“ASC”) Topic 450, Contingencies. As such, subsequent changes to the measurement of the TRA liability are recognized in the statements andof income as a component of other income (expense), net. For the reported amounts of revenues and expenses duringyear ended December 31, 2019, we recognized a $5.3 million gain on the reporting period. Such estimates include but are not limited to estimated losseschange in the TRA liability. See Note 9 for further details on accounts receivables, estimated realizable value on excess and obsolete inventory, useful lives of equipment and estimates related to fair value of reporting units for purposes of assessing goodwill for impairment. Actual results could differ from those estimates.the TRA liability.
Revenue Recognition
RevenueThe majority of our revenues are derived from short-term contracts for fixed consideration. Product sales generally do not include right of return or other significant post-delivery obligations. A contract’s transaction price is allocated to each distinct performance obligation and recognized as revenue when, or as, the performance obligation is satisfied. Revenues are recognized when allwe satisfy a performance obligation by transferring control of the following criteria have been met: (i) evidencepromised goods or providing services to our customers at a point in time, in an amount specified in the contract with our customer and that reflects the consideration we expect to be entitled to in exchange for those goods or services. The majority of an arrangement exists; (ii) deliveryour contracts with customers contain a single performance obligation to provide agreed upon products or services. For contracts with multiple performance obligations, we allocate revenue to each performance obligation based on its relative standalone selling price. We do not
assess whether promised goods or services are performance obligations if they are immaterial in the context of the contract with the customer. We do not incur any material costs of obtaining contracts.
We do not adjust the amount of consideration per the contract for the effects of a significant financing component when we expect, at contract inception, that the period between the transfer of a promised good or service to a customer and acceptance bywhen the customer has occurred; (iii)pays for that good or service will be one year or less, which is in substantially all cases. Payment terms and conditions vary, although terms generally include a requirement of payment within 30 to 45 days. Revenues are recognized net of any taxes collected from customers, which are subsequently remitted to governmental authorities. We treat shipping and handling associated with outbound freight as a fulfillment cost instead of as a separate performance obligation. We recognize the price tocost for the customer is fixed or determinable;associated shipping and (iv) collectability is reasonably assured,handling when incurred as follows:an expense in cost of sales.
Our revenues are derived from three sources: products, rentals, and field service and other:
Product revenue. Revenue is recognizedProduct revenues are primarily derived from the sale of wellhead systems and production trees andtrees. Revenue is recognized when the products have shipped and significant riskthe customer obtains control of ownership has passed under our contract terms. The arrangements typically do not include the right of return.products.
Rental revenue. We design and manufacture a suiteRental revenues areprimarily derived from the rental of highly technical equipment, tools and products used for well control during the drilling and completion phases that are rented to customers on a short-term basis.customers. Our rental agreements are directly with our customers and provide for a rate based on the period of time the equipment is used or made available to the customer. In addition, customers are charged for repair costs either through an agreed upon rate or as incurred. Revenue is recognized as earnedratably over the rental period.period, which tends to be short-term in nature with most equipment on site for less than 90 days.
Field service and other revenue. We provide field services to our customers based on contractually agreed rates. Other revenue isrevenues are derived from providing repair and reconditioning services to customers generally to customers who have installed our productswellheads and production trees on their wellsite. Revenues are recognized as the services are performed or rendered.
From time to time certain of our contracts include multiple deliverables. The pricing of each of our products and services is individually negotiated and agreed with our customers. The hierarchy for determining the selling price of a deliverable includes (a) vendor‑specific objective evidence, if available, (b) third‑party evidence, if vendor‑specific evidence is not available, and (c) our best estimate of selling price, if neither vendor‑specific nor third‑party evidence is available. Our revenues for multi‑element arrangements are based on vendor‑specific evidence as most of our products, rentals and field services are sold on an individual basis.
Foreign Currency Translation
The financial position and results of operations of our foreign subsidiaries are measured using the local currency as the functional currency. Revenues and expenses of the subsidiaries have been translated into U.S. Dollarsdollars at average exchange rates prevailing during the period. Assets and liabilities have been translated at the rates of exchange on the balance sheet dates. The resulting translation gain and loss adjustments have been recorded directly as a separate component of other comprehensive income (loss) in the consolidated statements of income and comprehensive income and members’stockholders’ equity.
Transaction gains and losses that arise from exchange rate fluctuations on transactions denominated in a currency other than the functional currency are included in theour consolidated resultsstatements of operationsincome as incurred.
Stock‑based Compensation
We measure the cost of equity‑based awards based on the grant‑grant date fair value and we allocate the compensation expense over the corresponding service period, which is usually the vesting period, using the straight‑line method. AllThe grant date fair value is expensed immediately for awards that are fully vested asdetermined by the average price of the grant date.trading high and trading low of our Class A common stock on the effective date of the grant.
Income Taxes
Cactus LLC is a limited liability company and files a U.S. Return of Partnership Income, which includes both our U.S. and foreign operations. As a limited liability company, Cactus LLC is treated as a partnership, and the members of Cactus LLC are taxed individually on their share of our earnings for U.S. federal income tax purposes. Accordingly, no provision for U.S. federal income taxes has been made in the consolidated financial statements.
Cactus LLC is subject to state taxes within the United States. However, the income generated by Cactus LLC flows through to the members’ individual state tax returns. Additionally, our operations in both Australia and China are subject to local country income taxes.
Deferred taxes are recorded using the asset and liability method, whereby tax assets and liabilities are determined based on the differences between the financial statement and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. TheWe regularly evaluate the valuation allowances established for deferred tax assets for which future realization is uncertain. In assessing the realizability of deferred tax assets, are evaluated annuallywe consider both positive and a valuation allowance is provided ifnegative evidence, including scheduled reversals of deferred tax assets and liabilities, projected future taxable income, tax planning strategies and results of recent operations. If, based on the weight of available evidence, it is more likely than not that the deferred tax assets will not give rise to future benefits in our tax returns.
We account for uncertainty in income taxes by prescribing the minimum recognition threshold an income tax position is required to meet before being recognized in the consolidated financial statements. Each income tax position is assessed using a two‑step process. A determination is first made as to whether it is more likely than not that the income tax position will be sustained, based upon technical merits, upon examination by the taxing authorities. If the income tax position is expected to meet the more likely than not criteria, the benefit recorded in the consolidated financial statements equals the largest amount that is greater than 50% likely to be realized, upon its ultimate settlement.a valuation allowance is recorded.
We recordCactus Inc. is a corporation and is subject to U.S. federal as well as state income tax related interest and penalties, if any, as a componentto its ownership percentage in the provision for income tax expense.
U.S. Federal Income Tax Reform
On December 22, 2017, the President of the United States signed into law legislation informally known as the Tax Cuts and Jobs Act (the “Act”). The Act represents major tax reform legislation that, among other provisions, reduces the U.S. corporate tax rate. As of December 31, 2017, sinceCactus LLC. Cactus LLC is a pass-through entity, management considers thatlimited liability company treated as a partnership for U.S. federal income tax purposes and files a U.S. Return of Partnership Income, which includes both our U.S. and foreign operations. Consequently, the abovementioned Act will have an immaterial impact.members of Cactus LLC are taxed individually on their share of earnings for U.S. federal and state income tax purposes. However, going forward,Cactus LLC is subject to the Company will analyze the impact based on revised circumstances.Texas Margins Tax. Additionally, our operations in both Australia and China are subject to local country income taxes. See Note 5 “Income Taxes” for additional information regarding income taxes.
Cash and Cash Equivalents
We consider all highly liquid instruments purchasedCash in excess of current operating requirements is invested in short-term interest-bearing investments with a maturitymaturities of three months or less to be cash equivalents.at the date of purchase and is stated at cost, which approximates fair value. Throughout the year we maintained cash balances that were not covered by federal deposit insurance. We have not experienced any losses in such accounts.
Accounts Receivable
We extend credit to customers in the normal course of business. We do not accrue interest on delinquent accounts receivable. Accounts receivable as of December 31, 2017includes amounts billed and 2016 includescurrently due from customers and unbilled revenue of $24.9 million and $8.8 million, respectively,amounts for products delivered and for services performed for which billings had not yet been submitted to the customers. Total unbilled revenue included in accounts receivable as of December 31, 2019 and 2018 was $23.8 million and $26.8 million, respectively. We maintain an allowance for doubtful accounts to provide for the estimated amount of receivables that will not be collected. In our determination of the allowance for doubtful accounts, we assess those amounts where there are concerns over collection and record an allowance for that amount. Estimating this amount requires us to analyze the financial condition of our customers, our historical experience and any specific concerns. Earnings are charged with a provision for doubtful accounts based on a currentthis review of the collectability of accounts. Accounts deemed uncollectible are applied against the allowance for doubtful accounts. Accounts receivable is net of allowance for doubtful accounts of $0.7$0.8 million and $0.9$0.6 million as of December 31, 20172019 and 2016,2018, respectively.
The following is a rollforward of our allowance for doubtful accounts:
| | | | | | | | | | | | | | | |
| | Balance at | | | | | | | | | | | Balance at |
| | Beginning of | | Expense | | | | | | | | End of |
| | Period | | (recovery) | | Write off | | Other | | Period |
Year Ended December 31, 2017 | | $ | 851 | | $ | (100) | | $ | (3) | | $ | (8) | | $ | 740 |
Year Ended December 31, 2016 | | | 1,208 | | | (357) | | | — | | | — | | | 851 |
Year Ended December 31, 2015 | | | 1,024 | | | 250 | | | (66) | | | — | | | 1,208 |
| | | | | | | | | | | | | | | |
| | Balance at | | | | | | | | | | | Balance at |
| | Beginning of | | Expense | | | | | | | | End of |
| | Period | | (recovery) | | Write off | | Other | | Period |
Year Ended December 31, 2019 | | $ | 576 | | $ | 355 | | $ | (94) | | $ | — | | $ | 837 |
Year Ended December 31, 2018 | | | 740 | | | — | | | (164) | | | — | | | 576 |
Year Ended December 31, 2017 | | | 851 | | | (100) | | | (3) | | | (8) | | | 740 |
Inventories
Inventories are stated at the lower of cost or net realizable value. Cost is determined using standard cost (which approximates average cost) and weighted average methods. Costs include an application of related direct labor and overhead cost. Net realizable value is the estimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal and transportation. Reserves are made for obsoleteexcess and slow‑movingobsolete items based on a range of factors, including age, usage and technological or market changes that may impact demand for those products. The inventory obsolescence reserve was $5.9$9.8 million and $4.8$7.3 million as of December 31, 20172019 and 2016,2018, respectively.
The following is a rollforward of our inventory obsolescence reserve:
| | | | | | | | | | | | | | | |
| | Balance at | | | | | | | | | | | Balance at |
| | Beginning of | | Expense | | | | | | | | End of |
| | Period | | (recovery) | | Write off | | Other | | Period |
Year Ended December 31, 2017 | | $ | 4,770 | | $ | 1,259 | | $ | (103) | | $ | (41) | | $ | 5,885 |
Year Ended December 31, 2016 | | | 3,184 | | | 1,851 | | | (265) | | | — | | | 4,770 |
Year Ended December 31, 2015 | | | 841 | | | 2,343 | | | — | | | — | | | 3,184 |
| | | | | | | | | | | | | | | |
| | Balance at | | | | | | | | | | | Balance at |
| | Beginning of | | | | | | | | | | End of |
| | Period | | Expense | | Write off | | Other | | Period |
Year Ended December 31, 2019 | | $ | 7,310 | | $ | 2,552 | | $ | (90) | | $ | — | | $ | 9,772 |
Year Ended December 31, 2018 | | | 5,885 | | | 1,451 | | | — | | | (26) | | | 7,310 |
Year Ended December 31, 2017 | | | 4,770 | | | 1,259 | | | (103) | | | (41) | | | 5,885 |
Property and Equipment
Property and equipment are stated at cost. We manufacture someor construct most of our own rental assets and during the manufacture of these assets, they are reflected as construction in progress until complete. We depreciate the cost of property and equipment using the straight‑line method over the estimated useful lives and depreciate our rental assets to their salvage value. Leasehold improvements are amortized over the shorter of the remaining lease term or economic life of the related assets. When assets are retired or otherwise disposed of, the cost and related accumulated depreciation are removed from the accounts and any resulting gain or loss are reflected in income for the period. The cost of maintenance and repairs is charged to income as incurred; significant renewals and improvements are capitalized. Estimated useful lives are as follows:
| | | |
Land
| | N/A
| |
Buildings and improvement
| | 5-39
| years
|
Machinery and equipment
| | 7 | years
|
Vehicles under capital lease
| | 3 | years
|
Rental equipment
| | 2-5
| years
|
Furniture and fixtures
| | 5 | years
|
Computers and software
| | 3-5
| years
|
| | | | | |
Land | | | N/A | | |
Buildings | | 10 | - | 30 | years |
Machinery and equipment | | 2 | - | 12 | years |
Vehicles under finance lease | | | | 3 | years |
Rental equipment | | 2 | - | 8 | years |
Furniture and fixtures | | | | 5 | years |
Computers and software | | | | 4 | years |
Property and equipment as of December 31, 20172019 and 20162018 consists of the following:
| | | | | | | | | | | | |
| | December 31, | | December 31, |
| | 2017 | | 2016 | | 2019 | | 2018 |
Land | | $ | 2,241 | | $ | 2,241 | | $ | 3,203 | | $ | 3,614 |
Buildings and improvements | | | 11,657 | | | 11,169 | | | 21,655 | | | 20,803 |
Machinery and equipment | | | 43,528 | | | 38,429 | | | 55,494 | | | 47,606 |
Vehicles under capital lease | | | 15,557 | | | 2,616 | |
Vehicles under finance lease | | | | 24,275 | | | 25,165 |
Rental equipment | | | 85,292 | | | 75,437 | | | 161,156 | | | 124,002 |
Furniture and fixtures | | | 1,110 | | | 984 | | | 1,684 | | | 1,623 |
Computers and software | | | 2,636 | | | 2,429 | | | 3,317 | | | 3,094 |
| | | 162,021 | | | 133,305 | |
Less: Accumulated depreciation and amortization | | | 72,917 | | | 62,381 | |
| | | 89,104 | | | 70,924 | |
Gross property and equipment | | | | 270,784 | | | 225,907 |
Less: Accumulated depreciation | | | | (123,397) | | | (96,412) |
Net property and equipment | | | | 147,387 | | | 129,495 |
Construction in progress | | | 5,550 | | | 3,946 | | | 14,361 | | | 12,559 |
Total property and equipment, net | | | 94,654 | | | 74,870 | | $ | 161,748 | | $ | 142,054 |
Depreciation of property and equipmentamortization was $38.9 million, $30.2 million and $23.3 million $21.2 millionfor 2019, 2018 and $20.6 million for 2017, 2016 and 2015, respectively. Depreciation and amortization expense is included in “total costs and expenses” in the consolidated statements of income.
income as follows:
68
| | | | | | | | | |
| | Year Ended December 31, |
| | 2019 | | 2018 | | 2017 |
Cost of product revenue | | $ | 3,304 | | $ | 3,262 | | $ | 3,169 |
Cost of rental revenue | | | 24,881 | | | 17,997 | | | 14,912 |
Cost of field service and other revenue | | | 9,986 | | | 8,456 | | | 4,786 |
Selling, general and administrative expenses | | | 683 | | | 438 | | | 404 |
Total depreciation and amortization | | $ | 38,854 | | $ | 30,153 | | $ | 23,271 |
Impairment of Long‑Lived Assets
We review the recoverability of long‑lived assets, such as property and equipment, when events or changes in circumstances occur that indicate the carrying value of the asset or asset group may not be recoverable. The assessment of possible impairment is based on our ability to recover the carrying value of the asset or asset group from the expected future pre‑tax cash flows (undiscounted) of the related operations. If these cash flows are less than the carrying value of such asset, an impairment loss is recognized for the difference between estimated fair value and carrying value. We concluded there were no indicators evident or other circumstances present that these assets were not recoverable and accordingly, no impairment charges of long‑lived assets were recognized for 2017, 20162019, 2018 and 2015.2017.
Goodwill
Goodwill represents the excess of acquisition consideration paid over the fair value of identifiable net tangible and identifiable intangible assets acquired. All of the goodwill recorded on our consolidated balance sheets resulted from the acquisition of a manufacturing facility in Bossier City, Louisiana in 2011. The facility supports our full range of products, rentals and services. Goodwill is attributable to the reduced reliance on vendors and synergies associated with the ability of the Bossier City plant to manufacture our full range of products as well as to deliver time sensitive and rapid turnaround orders. Goodwill is not amortized, but is reviewed for impairment on an annual basis (or more frequently if impairment indicators exist). We have established December 31 as the date of our annual test for impairment of goodwill. We perform a qualitative assessment of the fair value of our reporting unit before calculating the fair value of the reporting unit in step one of the two‑step goodwill impairment model. If, through the qualitative assessment, we determine that it is more likely than not that the reporting unit’s fair value is greater than its carrying value, the remaining impairment steps would be unnecessary.
If there are indicators that goodwill has been impaired and thus the two‑step goodwill impairment model is necessary, step one is to determine the fair value of the reporting unit and compare it to the reporting unit’s carrying value. Fair value is determined based on the present value of estimated cash flows using available information regarding expected cash flows of each reporting unit, discount rates and the expected long‑term cash flow growth rates. If the fair value of the reporting unit exceeds the carrying value, goodwill is not impaired and no further testing is performed. The second step is performed if the carrying value exceeds the fair value. The implied fair value of the reporting unit’s goodwill must be determined and compared to the carrying value of the goodwill. If the carrying value of a reporting unit’s goodwill exceeds its implied fair value, an impairment loss equal to the difference will be recorded. We concluded that there was no impairment of goodwill in 2017, 20162019, 2018 or 2015,2017 based on our annual impairment analysis.
Debt Discount and Deferred Loan Costs
Long‑term debt is presented in the consolidated balance sheets net of an original issue discount as well as deferred loan costs, which are both amortized to interest expense over the life of the debt. The original issue discount was $5.5 million. The amortization of the discount totaled $0.8 million, $0.8 million and $0.9 million for 2017, 2016 and 2015, respectively, and is included in interest expense in the consolidated statements of income.
Deferred loan costs are amortized to interest expense over the term of the related debt agreement using methods which approximate the effective interest method. We capitalized $6.0 million in connection with our long-term debt. The amortization of the deferred loan costs for 2017, 2016 and 2015 totaled $0.9 million, $0.9 million and $1.0 million, respectively.
When the related debt instrument is retired, any remaining unamortized costs of the original issue discount and deferred loan costs are included in the determination of the gain or loss on the extinguishment of the debt.
As of December 31, 2017 and 2016, the unamortized balance of debt discount and deferred loan costs was $4.5 million and $6.3 million, respectively. In conjunction with the IPO and repayment in full of our term loan, the unamortized balance of debt discount and deferred loan costs will be written off to loss on debt extinguishment.
Accrued Expenses and Other Current Liabilities
Accrued expenses and other current liabilities as of December 31, 20172019 and 20162018 are as follows:
| | | | | | | | | | | | |
| | December 31, | | December 31, |
| | 2017 | | 2016 | | 2019 | | 2018 |
Payroll, payroll taxes and benefits | | $ | 4,033 | | $ | 2,722 | |
Payroll, incentive compensation, payroll taxes and benefits | | | $ | 10,708 | | $ | 7,842 |
Accrued international freight and tariffs | | | | 3,794 | | | 1,418 |
Income based tax payable | | | 526 | | | 641 | | | 2,481 | | | 2,061 |
Accrued professional fees and other | | | | 1,790 | | | 1,512 |
Deferred revenue | | | | 1,371 | | | 1,110 |
Taxes other than income | | | 1,375 | | | 1,271 | | | 767 | | | 1,414 |
Deferred revenue | | | 765 | | | 565 | |
Accrued workers' compensation insurance | | | | 600 | | | — |
Product warranties | | | 343 | | | 95 | | | 556 | | | 293 |
Accrued insurance | | | 1,059 | | | — | |
Accrued interest | | | 161 | | | 50 | |
Other | | | 2,297 | | | 1,086 | |
Total | | $ | 10,559 | | $ | 6,430 | | $ | 22,067 | | $ | 15,650 |
Self-Insurance Accrued Expenses
Deferred Revenue
Deferred revenue represents cash receivedWe maintain a partially self-insured health benefit plan which provides medical and prescription drug benefits to certain of our employees electing coverage under the plan. Our exposure is limited by individual and aggregate stop loss limits via third-party insurance carriers. Our self-insurance expense is accrued based upon the aggregate of the expected liability for reported claims and the estimated liability for claims incurred but not reported, based on historical claims experience provided by our third-party insurance advisors, adjusted as necessary based upon management’s reasoned judgment. Actual employee medical claims expense may differ from customersestimated loss provisions based on historical experience. The liabilities for rental equipment services not yet renderedthese claims are included as a component of payroll, incentive compensation, payroll taxes and products not yet delivered.benefits in the table above and were $1.6 million and $0.5 million as of December 31, 2019 and 2018, respectively.
Product Warranties
We generally warrant our manufactured products 12 months from the date placed in service.
Fair Value Measures
Fair value measurements—We record financial assets and financial liabilities at fair value. Fair value is defined as the price that would be received to sell an asset or paid to transfer a The estimated liability (an exit price) in an orderly transaction between market participants at the reporting date. The fair value framework requires the categorization of assets and liabilities into three levels based upon the assumptions (inputs) used to price the assets or liabilities, with the exception of certain assets and liabilities measured using the net asset value practical expedient, which are not required to be leveled. Level 1 provides the most reliable measure of fair value, whereas Level 3 generally requires significant management judgment. The three levels are defined as follows:
| ·
| | Level 1: Unadjusted quoted prices in active markets for identical assets and liabilities.
|
| ·
| | Level 2: Observable inputs other than quoted prices included in Level 1. For example, quoted prices for similar assets or liabilities in active markets or quoted prices for identical assets or liabilities in inactive markets.
|
| ·
| | Level 3: Unobservable inputs reflecting management’s own assumptions about the assumptions market participants would use in pricing the asset or liability.
|
Fair value of long‑lived, non‑financial assets—Long‑lived, non‑financial assets are measured at fair value on a non‑recurring basis for the purposes of calculating impairment. The fair value measurements of our long‑lived,
non‑financial assets measured on a non‑recurring basis are determined by estimating the amount and timing of net future cash flows, which are Level 3 unobservable inputs, and discounting them using a risk‑adjusted rate of interest. Significant increases or decreases in actual cash flows may result in valuation changes.
Fair value of debt—The fair value, based on Level 2, of our term loan facility due 2020 approximated the face value of the debt of $248.5 million as of December 31, 2017. The fair value was approximately $231 million as of December 31, 2016 compared to the $251.1 million face value of the debt as of December 31, 2016.
Other fair value disclosures—The carrying amounts of cash and cash equivalents, receivables, accounts payable, as well as amounts included in other current assets and other current liabilities that meet the definition of financial instruments, approximate fair value.
Recent Accounting Pronouncements
Standards Adopted
In July 2015, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2015‑11, Simplifying the Measurement of Inventory, which requires companies to measure inventory at the lower of cost or net realizable value rather than at the lower of cost or market. Net realizable value is the estimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal and transportation. We adopted this ASU on January 1, 2017. The adoption of this pronouncement did not have any material impact on the consolidated financial statements.
In March 2016, the FASB issued ASU No. 2016‑09, Improvements to Employee Share‑Based Payment Accounting. This new guidance includes provisions intended to simplify how share based payments are accounted for and presented in the financial statements, including: a) all excess tax benefits and tax deficiencies should be recognized as income tax expense or benefit in the income statement; b) excess tax benefits should be classified along with other income tax cash flows as an operating activity; c) an entity can make an entity wide accounting policy election to either estimate the number of awards that are expected to vest or account for forfeitures when they occur; d) the threshold to qualify for equity classification permits withholding up to the maximum statutory tax rates in the applicable jurisdictions; e) cash paid by an employer should be classified as a financing activity when shares are directly withheld for tax withholding purposes. We adopted this ASU on January 1, 2017. The adoption of this pronouncement did not have any material impact on the consolidated financial statements.
Standards Not Yet Adopted
In May 2014, the FASB issued ASU No. 2014‑09, Revenue from Contracts with Customers, which supersedes the current revenue recognition guidance. The ASUproduct warranties is based on the principle that revenue is recognized to depict the transfer of goodshistorical and services to customers in the amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The ASU also requires additional disclosure about the nature, amount, timing, and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract. The new standard will be effective for public companies for the fiscal years beginning after December 31, 2017 using one of two retrospective application methods. We adopted this pronouncement on January 1, 2018 using the modified retrospective method. Based on the assessment performed, the adoption of this pronouncement will not have a material impact on the consolidated financial statements. We are continuing our assessment of potential changes to our disclosures under the new standard. We will provide additional disclosures, if any, regarding material differences in reported financial statement line items in 2018 when compared to the amounts that would have been reported under legacy accounting guidance.current claims experience.
In February 2016,Fair Value Measurements
The carrying value of cash and cash equivalents, receivables, accounts payable and accrued expenses approximates fair value based on the FASB issuedshort-term nature of these accounts. We had no long-term debt outstanding as of December 31, 2019 or 2018.
Employee Benefit Plan
Our employees within the United States are eligible to participate in a 401(k) plan sponsored by us. These employees are eligible to participate on the first day of the month following 30 days of employment and if they are at least eighteen years of age. All eligible employees may contribute a percentage of their compensation subject to a maximum imposed by the Internal Revenue Code. During 2019, 2018 and 2017, we matched 100% of the first 3% of gross pay contributed by each employee and 50% of the next 4% of gross pay contributed by each employee. We may also make additional non‑elective employer contributions at our discretion under the plan. Similar benefit plans exist for employees of our foreign subsidiaries. During 2019, 2018 and 2017, employer matching contributions totaled $3.1 million, $3.7 million and $2.2 million, respectively. For the year ended December 31, 2019, we made a non-elective contribution of $0.1 million under the Plan. No such contributions were made in 2018 or 2017.
Recent Accounting Pronouncements
Standards Adopted
Effective January 1, 2019, we adopted Financial Accounting Standards Board (“FASB”) ASU No. 2016‑02, 2016-02, Leases (Topic 842), to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities onutilizing the balance sheet and disclosing key information about leasing arrangements. Upon adoption of the new guidance, lessees are required to recognize and measure leases at the beginning of the earliest period presented using a modified retrospective approach. There was no cumulative effect adjustment required to the opening balance of retained earnings as we utilized the package of practical expedients permitted under the transition guidance within the standard. The new guidance will be effectiveexpedient package allowed us to not reassess whether existing contracts contained a lease, to not reassess the lease classification of existing leases, and to not consider the initial direct cost for fiscal years beginning after December 15, 2018. We are currently evaluatingexisting leases. In addition to the impactpackage of practical expedients, we also utilized expedients and elections allowing for the exclusion of leases with terms of less than twelve months across all asset classes, use of the portfolio approach and the election to not separate non-lease components from lease components. Adoption of this pronouncement will havestandard resulted in the recognition of operating lease right-of-use (“ROU”) assets of $25.3 million, reversal of previously recorded deferred rent of $0.5 million and corresponding operating short-term and long-term lease liabilities of $6.2 million and $19.6 million, respectively, on the consolidated financial statements.balance sheet. Our accounting for finance leases remained substantially unchanged under the new guidance. Additionally, as a lessor, recognition of lease revenue associated with short-term equipment rentals remained consistent with previous guidance. Adoption of the standard did not have a material impact on our consolidated statements of income and consolidated statements of comprehensive income or consolidated statements of cash flows. See Note 8 for further details regarding leases.
Standards Not Yet Adopted
In January 2017, the FASB issued ASU No. 2017‑01, Business Combinations (Topic 805): Clarifying the Definition of a Business, in an effort to clarify the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The amendments in this standard provide a screen to determine when an integrated set of assets and activities is not a business. The screen requires that when substantially all of the fair value of the gross assets acquired (or disposed of) is concentrated in a single identifiable asset or a group of similar identifiable assets, the integrated set of assets and activities is not a business. The new guidance is effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption is allowed for transactions for which the acquisition date occurs before the issuance date or effective date of the amendments, only when the transaction has not been reported in financial statements that have been issued or made available for issuance and for transactions in which a subsidiary is deconsolidated or a group of assets is derecognized before the issuance date or effective date of the amendments, only when the transaction has not been reported in financial statements that have been issued or made available for issuance. Entities will be required to apply the guidance prospectively when adopted. We do not expect the adoption of this pronouncement to have a material impact on the consolidated financial statements.
In January 2017, the FASB issued ASU 2017‑04, Intangibles‑2017-04, Intangibles – Goodwill and Other (Topic 350), which simplifies the accounting for goodwill impairment by eliminating Step 2 of the current goodwill impairment test. In computing the implied fair value of goodwill under Step 2, an entity had to perform procedures to determine the fair value at the impairment testing date of its assets and liabilities (including unrecognized assets and liabilities) following the procedure that would be required in determining the fair value of assets acquired and liabilities assumed in a business combination. Instead, under the new standard, an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. An entity still has the option to perform the qualitative assessment for a reporting unit to determine if the quantitative impairment test is necessary. The new guidance should be adopted for annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2019. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. We do not expect the adoption of this pronouncement to have a material impact on the consolidated financial statements.
In August 2016, the FASB issued ASU No. 2016‑15, Cash Flow Statement (Topic 250). This new guidance addresses eight specific cash flow issues with the objective of reducing the existing diversity in practice, including: debt prepayment or debt extinguishment costs, settlement of zero coupon debt instruments or other debt instruments, contingent consideration payments made after a business combination, proceeds from the settlement of insurance claims, proceeds from the settlement of corporate owned life insurance policies, distributions received from equity method investees, beneficial interests in securitization transactions, and separately identifiable cash flows and application of the predominance principle. ASU 2016‑15 is effective for public business entities for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption is permitted, including adoption in an interim period. We do not expect that the adoption of this pronouncement will have a material impact on theour consolidated financial statements.
In June 2016, the FASB issued ASU 2016-13, Financial Instruments – Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”). ASU 2016-13 changes the measurement of credit losses on financial assets measured at amortized cost, including but not limited to trade receivables. The new guidance replaces the
current methodology for recognizing credit losses when it is probable that a loss has been incurred with an expected loss model that requires consideration of a broader range of information to estimate expected credit losses over the lifetime of an asset. Application of this new guidance may result in an earlier recognition of credit losses as the allowance for credit losses is measured and recorded upon the initial recognition of the financial asset. The allowance for credit losses under the new guidance represents the portion of the asset’s amortized cost basis that we do not expect to collect over the asset’s contractual life, considering past events, current conditions and reasonable and supportable forecasts of future economic conditions. We finalized our methodology for estimating expected credit losses, including the assumptions used in order to pool receivables with similar risk characteristics and adopted the new standard effective January 1, 2020. Adoption of the standard did not impact our consolidated financial statements.
3. Inventories
Inventories consist of the following:
| | | | | | | | | | | | |
| | December 31, | | December 31, |
| | 2017 | | 2016 | | 2019 | | 2018 |
Raw materials | | $ | 1,532 | | $ | 1,543 | | $ | 1,538 | | $ | 1,925 |
Work-in-progress | | | 3,590 | | | 4,585 | | | 4,619 | | | 3,582 |
Finished goods | | | 59,328 | | | 31,772 | | | 107,214 | | | 94,330 |
| | $ | 64,450 | | $ | 37,900 | | $ | 113,371 | | $ | 99,837 |
4. Long‑Term Debt
Long‑termWe had no debt consistsoutstanding as of the following:
| | | | | | |
| | December 31, |
| | 2017 | | 2016 |
Term Loan | | $ | 248,529 | | $ | 251,098 |
Less: | | | | | | |
Current portion | | | (2,568) | | | (2,568) |
Unamortized debt discount and deferred loan costs | | | (4,524) | | | (6,276) |
Long-term debt, net | | $ | 241,437 | | $ | 242,254 |
December 31, 2019 and 2018.
On July 31, 2014, weAugust 21, 2018, Cactus LLC entered into a credit agreement collateralized by substantially all of our assets (the “Credit Agreement”), consisting of a $275.0 million Tranche B term loan (the “Term Loan”) and a $50.0 millionfive-year senior secured asset-based revolving credit facility with a $10.0syndicate of lenders and JPMorgan Chase Bank, N.A., as administrative agent for such lenders and as an issuing bank and swingline lender (the “ABL Credit Facility”). The ABL Credit Facility provides for $75.0 million sublimitin revolving commitments, up to $15.0 million of which is available for the issuance of letters of credit. The ABL Credit Facility matures on August 21, 2023. The maximum amount that Cactus LLC may borrow under the ABL Credit Facility is subject to a borrowing base, which is based on a percentage of eligible accounts receivable and eligible inventory, subject to reserves and other adjustments.
Borrowings under the ABL Credit Facility bear interest at Cactus LLC’s option at either (i) the Alternate Base Rate (as defined therein) (“ABR”), or (ii) the Adjusted LIBO Rate (as defined therein) (“Eurodollar”), plus, in each case, an applicable margin. Letters of credit (the “Revolving Loans”). We make quarterly principal paymentsissued under the ABL Credit Facility accrue fees at a rate equal to the applicable margin for Eurodollar borrowings. The applicable margin ranges from 0.50% to 1.00% per annum for ABR borrowings and 1.50% to 2.00% per annum for Eurodollar borrowings and, in each case, is based on the Term Loan and may make loan prepayments as outlined inaverage quarterly availability under the ABL Credit Agreement. We may borrow and repayFacility for the Revolving Loans in accordance with the terms of the Credit Agreement. A commitment fee is payable quarterly on theimmediately preceding fiscal quarter. The unused portion of the revolving credit facility. There was $248.5 million and $251.1 million outstanding onABL Credit Facility is subject to a commitment fee that varies from 0.250% to 0.375% per annum, according to the Term Loan as of December 31, 2017 and 2016, respectively. As of December 31, 2017 and 2016, no amounts were outstanding on the Revolving Loans and no letters of credit were outstanding. Interest on outstanding amountsaverage quarterly availability under the ABL Credit Agreement are payable in arrearsFacility for each draw fixed at an adjusted based rate plus an applicable margin, as defined in the Credit Agreement. At December 31, 2017 and 2016, there was $0.2 million and $0.1 million accrued interest included within accrued expenses, respectively, in the consolidated balance sheets. The Term Loan portion of the Credit Agreement matures on July 31, 2020. The Revolving Loans portion of the Credit Agreement matures on July 31, 2019. Amounts outstanding under the Credit Agreement may be voluntarily prepaid, in whole or in part, without premium or penalty, in accordance with the terms of the Credit Agreement and subject to breakage and similar costs.
In conjunction with the IPO, we repaid the Term Loan in full. As of December 31, 2017, prior to the repayment resulting from the IPO, the future maturities of long‑term debt were as follows:
| | | |
Years Ending December 31, | | | |
2018 | | $ | 2,568 |
2019 | | | 2,568 |
2020 | | | 243,393 |
| | $ | 248,529 |
immediately preceding fiscal quarter.
The ABL Credit AgreementFacility contains various covenants and restrictive covenantsprovisions that may limit ourCactus LLC’s and each of its subsidiaries’ ability to, among other things, incur additional indebtedness and create liens, make investments or declare dividends, orloans, enter into asset sales, make certain restricted payments and distributions, and engage in transactions and containswith affiliates.
The ABL Credit Facility also requires Cactus LLC to maintain a total leverage
financial covenant related only1.0 to the Revolving Loans once a total of $15.0 million or more has been drawn1.0 based on the Revolving Loans. Based on this total leverage financial covenant,ratio of EBITDA (as defined therein) minus Unfinanced Capital Expenditures (as defined therein) to Fixed Charges (as defined therein) during certain periods, including when availability under the revolving credit facility canABL Credit Facility is under certain levels. If Cactus LLC fails to perform its obligations under the ABL Credit Facility, (i) the commitments under the ABL Credit Facility could be limited to $15.0 million. At December 31, 2017, we had access to the full $50.0 million revolving credit facility capacity. At December 31, 2017 and 2016, we were in compliance with the covenants in the Credit Agreement.
At December 31, 2017 and 2016, the weighted average interest rate forterminated, (ii) any outstanding borrowings under the ABL Credit Agreement was 7.3%Facility may be declared immediately due and 7.0%, respectively.
Gain on debt extinguishment
In accordance withpayable and (iii) the provisions oflenders may commence foreclosure or other actions against the Credit Agreement, we redeemed $7.5 million and $10.0 million of the Term Loan at a price of 65% and 79% of the principal amount in 2016 and 2015, respectively. We paid $4.9 million and $7.9 million for such redemptions, including fees, in 2016 and 2015, respectively. We recorded a gain on debt extinguishment of $2.3 million and $1.6 million in 2016 and 2015, respectively, on the redemptions. The gain consists of the tender discount on the Term Loan amount redeemed, partially offset by transaction fees and the write‑off of $0.3 million and $0.2 million of the unamortized debt discount and deferred loan costs in 2016 and 2015, respectively. The gain on debt extinguishment is included under other income, net, in the consolidated statements of income.
Interest Expense, net
Interest expense, net, including debt discount and deferred loan costs amortization, is comprised of the following:
| | | | | | | | | |
| | Year Ended December 31, |
| | 2017 | | 2016 | | 2015 |
Interest under Credit Agreement | | $ | 18,627 | | $ | 18,414 | | $ | 19,682 |
Debt discount and deferred loan costs amortization | | | 1,752 | | | 1,777 | | | 1,913 |
Capital lease interest | | | 311 | | | 24 | | | — |
Other | | | 82 | | | 20 | | | 253 |
Interest (income) | | | (5) | | | (2) | | | (11) |
Interest expense, net | | $ | 20,767 | | $ | 20,233 | | $ | 21,837 |
5. Income Taxes
Components of income (loss) before income taxes—Domestic and foreign components of income (loss) before income taxes were as follows:
| | | | | | | | | |
| | Year Ended December 31, |
| | 2017 | | 2016 | | 2015 |
Domestic | | $ | 65,023 | | $ | (8,558) | | $ | 21,791 |
Foreign | | | 3,073 | | | 1,191 | | | 217 |
Income (loss) before income taxes | | $ | 68,096 | | $ | (7,367) | | $ | 22,008 |
collateral.
ProvisionAt December 31, 2019 and 2018, although there were no borrowings outstanding, the applicable margin on our Eurodollar borrowings was 1.5% plus an adjusted base rate of one or three month LIBOR. We were in compliance with all covenants under the ABL Credit Facility as of December 31, 2019.
The ABL Credit Facility replaced Cactus LLC’s prior credit agreement, dated as of July 31, 2014, with Credit Suisse AG, as administrative agent, collateral agent and issuing bank, and the other lenders party thereto (the “Prior Credit Agreement”). The Prior Credit Agreement provided for a term loan tranche in an aggregate principal amount of $275.0 million, the outstanding balance of which was repaid in full in February 2018 from the net proceeds of our IPO, and a revolving credit facility (the “Prior Revolving Credit Facility”) of up to $50.0 million with a $10.0 million sublimit for letters of credit. The Prior Credit Agreement was terminated concurrently with the effectiveness of, and as a condition of entering into, the ABL Credit Facility. No loans or letters of credit under the Prior Credit Agreement were outstanding at the time of, or were repaid in connection with, such termination.
Loss on Debt Extinguishment
We recorded a $4.3 million loss on early extinguishment of debt in conjunction with the repayment of the term loan portion of the Prior Credit Agreement with a portion of the net proceeds from our IPO. The loss consisted of the write-off of the unamortized balance of debt discount and deferred loan costs of $2.1 million and $2.2 million, respectively. The loss on debt extinguishment is included under other income tax—(expense), net, in the consolidated statement of income for the year ended December 31, 2018.
Interest (Income) Expense, net
Interest (income) expense, net, including debt discount and deferred financing costs amortization, was comprised of the following:
| | | | | | | | | |
| | Year Ended December 31, |
| | 2019 | | 2018 | | 2017 |
Interest under bank facilities | | $ | 315 | | $ | 2,669 | | $ | 18,627 |
Debt discount and deferred financing costs amortization | | | 168 | | | 275 | | | 1,752 |
Finance lease interest | | | 877 | | | 734 | | | 311 |
Other | | | 164 | | | 45 | | | 82 |
Interest income | | | (2,403) | | | (128) | | | (5) |
Interest (income) expense, net | | $ | (879) | | $ | 3,595 | | $ | 20,767 |
5. Income Taxes
Domestic and foreign components of income before income taxes were as follows:
| | | | | | | | | |
| | Year Ended December 31, |
| | 2019 | | 2018 | | 2017 |
Pre-IPO Domestic | | $ | — | | $ | 13,370 | | $ | 65,023 |
Post-IPO Domestic | | | 173,039 | | | 146,620 | | | — |
Pre-IPO Foreign | | | — | | | 512 | | | 3,073 |
Post-IPO Foreign | | | 15,284 | | | 9,299 | | | — |
Income before income taxes | | $ | 188,323 | | $ | 169,801 | | $ | 68,096 |
The provision for income taxes consisted of:
| | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, | | Year Ended December 31, |
| | 2017 | | 2016 | | 2015 | | 2019 | | 2018 | | 2017 |
Current: | | | | | | | | | | | | | | | | | | |
Federal | | $ | — | | $ | — | | $ | — | | $ | 1,088 | | $ | — | | $ | — |
State | | | 594 | | | 229 | | | 474 | | | 1,408 | | | 1,172 | | | 594 |
Foreign | | | 735 | | | 448 | | | 246 | | | 4,121 | | | 3,147 | | | 735 |
Total current income taxes | | | 1,329 | | | 677 | | | 720 | | | 6,617 | | | 4,319 | | | 1,329 |
Deferred—foreign | | | 220 | | | 132 | | | 64 | |
Deferred: | | | | | | | | | | |
Federal | | | | 14,853 | | | 12,589 | | | — |
State | | | | 10,681 | | | 1,992 | | | — |
Foreign | | | | (131) | | | 620 | | | 220 |
Total deferred income taxes | | | | 25,403 | | | 15,201 | | | 220 |
Total provision for income taxes | | $ | 1,549 | | $ | 809 | | $ | 784 | | $ | 32,020 | | $ | 19,520 | | $ | 1,549 |
Effective income tax rate reconciliation—The effective income tax rate was different from the statutory U.S. federal income tax rate due to the following:
| | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, | | Year Ended December 31, |
| | 2017 | | 2016 | | 2015 | | 2019 | | 2018 | | 2017 |
Income taxes at 35% statutory tax rate | | $ | 23,834 | | $ | (2,578) | | $ | 7,703 | |
Income taxes at 21% (35% for 2017) statutory tax rate | | | $ | 39,548 | | $ | 35,658 | | $ | 23,834 |
Net difference resulting from: | | | | | | | | | | | | | | | | | | |
Profit and loss of Cactus LLC not subject to U.S. federal tax | | | (22,758) | | | 2,990 | | | (7,627) | |
Foreign earnings subject to different tax rates | | | (302) | | | (122) | | | (50) | |
State income taxes | | | 594 | | | 229 | | | 474 | |
Profit of Cactus LLC pre-IPO not subject to U.S. federal tax | | | | — | | | (2,808) | | | (22,758) |
Profit of non-controlling interest not subject to U.S. federal tax | | | | (15,477) | | | (18,570) | | | — |
Foreign income taxes (net of foreign tax credit) | | | | 364 | | | 828 | | | (302) |
State income taxes (excluding rate change) | | | | 4,887 | | | 2,746 | | | 594 |
Impact of change in forecasted state income tax rate | | | | 5,774 | | | — | | | — |
Foreign withholding taxes | | | 220 | | | 132 | | | 64 | | | 988 | | | 1,056 | | | 220 |
Change in valuation allowance | | | (39) | | | 158 | | | 220 | | | (3,888) | | | 733 | | | (39) |
Other | | | | (176) | | | (123) | | | — |
Total provision for income taxes | | $ | 1,549 | | $ | 809 | | $ | 784 | | $ | 32,020 | | $ | 19,520 | | $ | 1,549 |
DeferredOur effective tax components—rate was 17.0%, 11.5% and 2.3% for the years ended December 31, 2019, 2018 and 2017, respectively. For the year ended December 31, 2019, the primary reason for the change to our effective tax rate relates to an increase in Cactus Inc.’s ownership of Cactus LLC and a write down of our deferred tax asset due to a change in our forecasted state tax rate. Prior to our IPO, our accounting predecessor was a limited liability company treated as a partnership for U.S. federal income tax purposes, and therefore not subject to U.S. federal income taxes. Our operations are subject to state taxes within the United States and our operations in China and Australia are subject to local country income taxes.
The components of deferred tax assets and liabilities are as follows:
| | | | | | | | | | | | |
| | December 31, | | December 31, |
| | 2017 | | 2016 | | 2019 | | 2018 |
Investment in Cactus LLC | | | $ | 234,629 | | $ | 181,390 |
Net operating loss carryforwards | | | | — | | | 619 |
Imputed interest | | | | 10,323 | | | 7,445 |
Tax credits | | | | 1,479 | | | 1,988 |
Other | | | | 155 | | | 144 |
Deferred tax assets | | | | 246,586 | | | 191,586 |
Valuation allowance | | | | (24,041) | | | (32,533) |
Deferred tax asset, net | | | $ | 222,545 | | $ | 159,053 |
| | | | | | | |
Foreign withholding taxes | | $ | 416 | | $ | 196 | | $ | 1,054 | | $ | 1,036 |
Foreign loss carryforwards | | | (489) | | | (528) | |
Valuation allowance | | | 489 | | | 528 | |
Total deferred tax liability, net | | $ | 416 | | $ | 196 | |
Other | | | | 294 | | | — |
Deferred tax liability, net | | | $ | 1,348 | | $ | 1,036 |
We recorded a deferred tax asset for the differences between our tax and book basis in the investment in Cactus LLC and imputed interest on the TRA. We also recorded deferred tax assets for foreign tax credits associated with our portion of Cactus LLC’s accrued foreign taxes.
We did not have any foreign net operating losses of $1.8 million, $1.9 million and $1.3 million for 2017, 2016 and 2015, respectively. The foreign2019. Foreign net operating losses were $1.4 million and $1.6 million for 2018 and 2017, respectively.
Based upon our cumulative earnings history and forecasted future sources of taxable income, we believe that we will be able to realize the majority of our U.S. deferred tax assets in the future. We do not expect to realize the portion of our deferred tax asset for our investment in Cactus LLC that may only be realizable through the sale or liquidation of the investment and our ability to generate sufficient capital gains. As of December 31, 2019, we have an indefinite carryforward period.a valuation allowance of $22.7 million against this deferred tax asset. For the year ended December 31, 2019, as a result of the March 2019 Secondary Offering and redemptions of CW Units, we released $5.4 million of our valuation allowance and recorded a tax benefit of $5.4 million related to the realizable portion of the deferred tax asset.
As of December 31, 2019, our liability related to the TRA was $216.5 million, representing 85% of the calculated net cash savings in the United States federal, state and local or franchise tax that we anticipate realizing in future years from certain increases in tax basis and certain tax benefits attributed to imputed interest as a result of our acquisition of CW Units. We have determined it is more-likely-than-not that we will be able to utilize all of our tax basis subject to the TRA; therefore, we have recorded a full valuation allowance against the deferred tax assets associated with the foreign net operating loss carryforwards dueliability related to the uncertainty of realization.
Taxing Authority Examinations—The Texas Franchise state tax returnsTRA for the years endedtax savings we may realize from certain increases in tax basis and certain tax benefits attributable to imputed interest as a result of our acquisition (or deemed acquisition for United States federal income tax purposes) of CW Units. If we determine the utilization of this tax basis is not more-likely-than-not in the future, our estimate of amounts to be paid under the TRA would be reduced. In this scenario, the reduction of the liability under the TRA would result in a benefit to our pre-tax consolidated results of operations.
As of December 31, 20142019 and 2015 are currently under examination by the taxing authorities. Management believes that the result of the examination will not have a material impact on the financial statements. 2018, we had no uncertain tax positions.
None of our otherfederal or state income tax returns are currently under examination by state taxing authorities.
6. Stock-Based Compensation
We have a long-term incentive plan (“LTIP”) to incentivize individuals providing services to us or our affiliates. The LTIP provides for the grant, from time to time, at the discretion of our compensation committee of our board of directors, of stock options, stock appreciation rights, restricted stock, restricted stock units, stock awards, dividend equivalents, other stock-based awards, cash awards, substitute awards and performance awards. Any individual who is an officer or employee or an officer or employee of any of our affiliates, and any other person who provides services to us or our affiliates, including members of our board of directors, will be eligible to receive awards under the LTIP at the discretion of our board of directors. As of December 31, 2019, 2.0 million stock awards were available for grant.
Restricted Stock Units
Restricted stock units (“RSUs”) granted pursuant to the LTIP are expected to be settled in shares of our Class A common stock if they vest. RSU’s generally vest over a three-year period; however, RSUs granted to our non-employee directors generally vest on the first anniversary of the grant.
6. Members’ Equity
Member units outstanding wereA summary of restricted stock unit awards for the year ended December 31, 2019 is as follows:
follows (units in thousands):
| | | | |
| | December 31, |
| | 2017 | | 2016 |
Units | | | | |
Class A | | 36,500 | | 36,500 |
Class A-1 | | 520 | | 520 |
Class B | | 8,608 | | 8,608 |
| | | | | | |
| | |
| | No. of RSUs | | Weighted Average Grant Date Fair Value |
Nonvested as of December 31, 2018 | | | 782 | | $ | 19.84 |
Granted | | | 221 | | $ | 37.04 |
Vested | | | (274) | | $ | 19.50 |
Forfeited | | | (39) | | $ | 22.48 |
Nonvested as of December 31, 2019 | | | 690 | | $ | 25.34 |
There were no distributions for 2017. Distributions by Unit class are as follows for 2016During the year ended December 31, 2019 and 2015:
| | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2016 | | 2015 |
| | Amount | | Per Unit | | Amount | | Per Unit |
Distributions | | | | | | | | | | | | |
Class A | | $ | 2,055 | | $ | 56 | | $ | 8,928 | | $ | 245 |
Class A-1 | | | — | | | — | | | 3 | | | 7 |
Class B | | | — | | | — | | | 3,301 | | | 528 |
Total distributions | | $ | 2,055 | | | | | $ | 12,232 | | | |
Distributions2018, we recorded $7.0 million and income are defined in accordance with a waterfall calculation which allocates distributions and income to the Class A‑1 and Class B Unit holders based upon the Class A Unit holders’ return on investment thresholds. Under the terms$4.7 million, respectively, of its operating agreement, Cactus LLC is obligated to make distributions to its members to enable them to settle tax liabilities that arise from their investment in Cactus LLC. These distributions are recorded in the period during which payment is made. Cactus LLC wasstock-based compensation expense. We did not required to makerecognize any distributions related to member tax liabilities that arose in 2017 from their investment in Cactus LLC until 2018. In January 2018, Cactus LLC made a distribution of $26.0 million to its members related to tax liabilities incurred prior to the IPO. Voting rights are limited to Class A Unit holders.
There were no Class A or Class B Units issued during 2017, 2016 or 2015. From time to time, Cactus LLC issues Class A‑1 Units to Directors and key employees. There were no new Class A‑1 Units issuedstock-based compensation expense during 2017. During 2016 and 2015, Cactus LLC issued 120 and 125 Class A‑1 Units, respectively, and recordedStock-based compensation expense of $0.4 million and $0.4 million, respectively. The Class A‑1 Units were fully vested as of grant date and as such all equity compensation was expensed immediately. The equity compensation is includedprimarily recorded in selling, general and administrative expenses. There was approximately $11.1 million of unrecognized compensation expense relating to the unvested RSUs as of December 31, 2019. The unrecognized compensation expense will be recognized over the weighted average remaining vesting period of 2.0 years.
7. Revenue
We disaggregate revenue from contracts with customers into three revenue categories: (i) product revenues, (ii) rental revenues and (iii) field service and other revenues. We have predominately domestic operations, with a small amount of sales being generated in Australia. For the year ended December 31, 2019, we derived 57% of our total revenues from the sale of our products, 22% of our total revenues from rental and 21% of our total revenues from field service and other. This compares to 53% of our total revenues from the sale of our products, 25% of our total revenues from rental and 22% of our total revenues from field service and other for the year ended December 31, 2018. In 2017, we derived 55% of our total revenues from the sale of our products, 23% from rental and 22% from field service and other. The following table presents our revenues disaggregated by category:
| | | | | | | | | |
| | Year Ended December 31, |
| | 2019 | | 2018 | | 2017 |
Product revenue | | $ | 357,087 | | $ | 290,496 | | $ | 189,091 |
Rental revenue | | | 141,816 | | | 133,418 | | | 77,469 |
Field service and other revenue | | | 129,511 | | | 120,221 | | | 74,631 |
Total revenue | | $ | 628,414 | | $ | 544,135 | | $ | 341,191 |
At December 31, 2019, we had a deferred revenue balance of $1.4 million compared to the December 31, 2018 balance of $1.1 million included in accrued expenses and other current liabilities in the consolidated statementsbalance sheets. Deferred revenue represents our obligation to transfer products or perform services to a customer for which we have received cash or billed in advance. The revenue that has been deferred will be recognized upon product delivery or as services are performed. As of income. Class A‑1 Unit holdersDecember 31, 2019, we did not have any contracts with an original length of greater than a year from which revenue is expected to be recognized in the future related to performance obligations that are allocated unsatisfied.
8pari passu. Leases
As a lessee, we lease real estate, apartments, forklifts, vehicles and trucks, and other equipment under non-cancellable agreements. We determine if these contracts are or contain a lease at inception and review the facts and circumstances of the arrangement to classify the leased asset as operating or finance. To assess whether a contract is or contains a lease, we consider whether (i) explicitly or implicitly identified assets have been deployed in the contract and (ii) whether we obtain substantially all the economic benefits from the use of that underlying asset and direct how and for what purpose the asset is used during the term of the contract.
The portion of active leases within our portfolio classified as operating leases are included in operating lease right-of-use assets and current and long-term operating lease liabilities on our consolidated balance sheet. The finance lease right-of-use assets portion of the active lease agreements are included in property and equipment and current and long-term finance lease obligations on our consolidated balance sheets. The ROU assets represent our right to use the underlying asset for the
lease term and lease liabilities represent our obligation to make minimum lease payments arising from the lease for the duration of the lease term.
Certain of our leases include one or more options to renew, with all Class Arenewal terms that can extend the lease term from one to 10 years or greater. The exercise of lease renewal options is typically at our discretion. The measurement of the lease term includes options to extend or renew the lease when it is reasonably certain that we will exercise that option. We do not have leases that include options to purchase leased property or that provide for the automatic transfer of ownership of leased property to us, residual value guarantees, or the incurrence by us of other restrictions or covenants.
To determine the present value of future minimum lease payments, we use the implicit rate when readily determinable; however, many of our leases do not provide an implicit rate, therefore to determine the present value of minimum lease payments we use our incremental borrowing rate based on the information available at commencement date of the lease. Our finance lease agreements typically include an interest rate that is used to determine the present value of future lease payments.
Minimum lease payments are expensed on a straight-line basis over the term of the lease, including reasonably certain renewal options. In addition, some leases may require additional contingent or variable lease payments based on factors specific to the individual agreement. Variable lease payments for which we are typically responsible include payment of real estate taxes and Class A‑1 Unit holders provided Cactus LLC’s Enterprise Value exceedsmaintenance expenses. These payments are expensed as incurred and recorded as variable lease costs.
The following are the amount detailed in their individual Subscriptioncomponents of operating and Investment Agreement.finance lease costs:
| | | |
| | | Year Ended December 31, 2019 |
Finance lease cost: | | | |
Amortization of right-of-use assets | | $ | 7,601 |
Interest expense | | | 877 |
Operating lease cost | | | 8,329 |
Short-term lease cost | | | 847 |
Variable lease cost | | | 528 |
Sublease income | | | (455) |
Total lease cost | | $ | 17,727 |
The following is a rollforward of Class A‑1 Units:
supplemental cash flow information for our operating and finance leases:
| | |
Units at December 31, 2014
| | 275
|
Units issued in 2015
| | 125
|
Units at December 31, 2015
| | 400
|
Units issued in 2016
| | 120
|
Units at December 31, 2016
| | 520
|
Units issued in 2017
| | —
|
Units at December 31, 2017
| | 520
|
| | | |
| | | Year Ended December 31, 2019 |
Cash paid for amounts included in the measurement of lease liabilities: | | | |
Operating cash flows from finance leases | | $ | 877 |
Operating cash flows from operating leases | | | 6,828 |
Financing cash flows from finance leases | | | 7,484 |
Total | | $ | 15,189 |
| | | |
Right-of-use assets obtained in exchange for new lease obligations: | | | |
Operating leases | | $ | 8,054 |
Finance leases | | | 3,008 |
Total | | $ | 11,062 |
The Class A‑1following is the aggregate future lease payments for operating and finance leases as of December 31, 2019:
| | | | | | |
| | | Operating | | | Finance |
2020 | | $ | 7,691 | | $ | 7,434 |
2021 | | | 6,291 | | | 3,438 |
2022 | | | 3,967 | | | 768 |
2023 | | | 3,072 | | | 4 |
2024 | | | 2,453 | | | — |
Thereafter | | | 7,163 | | | — |
Total undiscounted lease payments | | | 30,637 | | | 11,644 |
Less: effects of discounting | | | (3,617) | | | (999) |
Present value of lease payments | | $ | 27,020 | | $ | 10,645 |
The following represents the average lease terms and discount rates for our operating and finance lease portfolio as of December 31, 2019:
| | | |
| | December 31, 2019 |
Weighted average remaining lease term: | | | |
Finance leases | | 1.51 | years |
Operating leases | | 5.82 | years |
| | | |
Weighted average discount rate | | | |
Finance leases | | 12.18 | % |
Operating leases | | 3.76 | % |
As a lessor, we rent a fleet of frac valves and ancillary equipment for short-term rental periods, typically one to two months. Our lessor portfolio consists mainly of operating leases for equipment utilized during the drilling, completion and production phases of our customers’ wells. At this time, most lessor agreements contain less than three-month terms with no renewal options that are reasonably certain to exercise, or early termination options based on established terms specific to the individual agreement. See Note 7 for disaggregation of revenue.
Disclosures related to periods prior to adoption of new lease standard
Operating and Capital Leases:
We lease certain facilities, vehicles, equipment, office and manufacturing space under noncancelable operating leases which expire at various dates. We are also party to a significant number of month‑to‑month leases that can be canceled at any time. Total rent expense under operating leases was $7.7 million in 2018 and $7.1 million in 2017. Accumulated depreciation for capital leases totaled $8.6 million at December 31, 2018.
Minimum lease payments, including executory costs and interest, under capital and operating leases with non-cancelable terms as of December 31, 2018 were as follows:
| | | | | | |
| | | Operating | | | Capital |
2019 | | $ | 6,638 | | $ | 8,740 |
2020 | | | 4,618 | | | 6,790 |
2021 | | | 3,487 | | | 2,533 |
2022 | | | 2,195 | | | 41 |
2023 | | | 1,426 | | | — |
Thereafter | | | 3,339 | | | — |
| | $ | 21,703 | | $ | 18,104 |
9. Tax Receivable Agreement
The TRA generally provides for the payment by Cactus Inc. to the TRA Holders of 85% of the net cash savings, if any, in U.S. federal, state and local income tax and franchise tax that Cactus Inc. actually realizes or is deemed to realize in certain circumstances as a result of (i) certain increases in tax basis that occur as a result of Cactus Inc.’s acquisition (or deemed acquisition for U.S. federal income tax purposes) of all or a portion of such TRA Holder’s CW Units were valued usingin connection with our IPO or any subsequent offering, or pursuant to any other exercise of the Black Scholes valuation model. VolatilityRedemption Right or the Call Right, (ii) certain increases in tax basis resulting from the repayment of borrowings outstanding under Cactus LLC’s term loan facility in connection with our IPO and (iii) imputed interest deemed to be paid by Cactus Inc. as a result of, and additional tax basis arising from, any payments Cactus Inc. makes under the TRA. We will retain the remaining 15% of the cash savings.
The TRA liability is calculated by determining the tax basis subject to TRA (“tax basis”) and applying a blended tax rate to the basis differences and calculating the iterative impact. The blended tax rate consists of the U.S. federal income tax rate and an assumed combined state and local income tax rate driven by the apportionment factors applicable to each state. As of December 31, 2019, the total liability from the TRA was estimated$216.5 million with $14.6 million reflected in current liabilities based on the averageexpected timing of our next payment. The payments under the TRA will not be conditional on a holder of rights under the TRA having a continued ownership interest in either Cactus LLC or Cactus Inc.
The term of the volatilityTRA commenced upon completion of peer group companiesour IPO and will continue until all tax benefits that are subject to the TRA have been utilized or expired, unless we exercise our right to terminate the TRA. If we elect to terminate the TRA early (or it is terminated early due to certain mergers, asset sales, other forms of business combinations or other changes of control), our obligations under the TRA would accelerate and we would be required to make an immediate payment equal to the present value of the anticipated future payments to be made by us under the TRA and such payment is expected to be substantial. The calculation of anticipated future payments will be based upon certain assumptions and deemed events set forth in the TRA, including the assumptions that (i) we have sufficient taxable income to fully utilize the tax benefits covered by the TRA and (ii) any CW Units (other than those held by Cactus Inc.) outstanding on the termination date are deemed to be redeemed on the termination date. Any early termination payment may be made significantly in advance of the actual realization, if any, of the future tax benefits to which the termination payment relates.
We may elect to defer payments due under the TRA if we do not have available cash to satisfy our payment obligations under the TRA. Any such deferred payments under the TRA generally will accrue interest from the due date for such payment until the payment date.
10. Equity
Redemptions of CW Units
Pursuant to the First Amended and Restated Limited Liability Company Operating Agreement of Cactus LLC (the “Cactus LLC Agreement”), each holder of CW Units (“CW Unit Holder”) has, subject to certain limitations, the right (the “Redemption Right”) to cause Cactus LLC to acquire all or at least a minimum portion of its CW Units for, at Cactus LLC’s election, (x) shares of our Class A common stock at a redemption ratio of one share of Class A common stock for each CW Unit redeemed, subject to conversion rate adjustments for stock splits, stock dividends and reclassification and other similar transactions, or (y) an equivalent amount of cash. Alternatively, upon the exercise of the Redemption Right, Cactus Inc. (instead of Cactus LLC) will have the right (the “Call Right”) to acquire each tendered CW Unit directly from the exchanging CW Unit Holder for, at its election, (x) one share of Class A common stock, subject to conversion rate adjustments for stock splits, stock dividends and reclassifications and other similar transactions, or (y) an equivalent amount of cash. In connection with any redemption of CW Units pursuant to the Redemption Right or our Call Right, the corresponding number of shares
of Class B common stock, par value $0.01 per share (“Class B common stock”), will be canceled. The following is a rollforward of ownership of legacy CW Units by legacy CW Unit Holders.
| | | |
| | CW Units |
| | (in thousands) |
CW Units held by legacy CW Unit Holders as of February 7, 2018 | | | 60,558 |
IPO | | | (12,118) |
July 2018 Follow-on Offering | | | (11,197) |
Other CW Unit redemptions | | | (7) |
CW Units held by legacy CW Unit Holders as of December 31, 2018 | | | 37,236 |
March 2019 Secondary Offering | | | (8,474) |
Other CW Unit redemptions | | | (804) |
CW Units held by legacy CW Unit Holders as of December 31, 2019 | | | 27,958 |
On March 19, 2019, Cactus Inc. entered into an underwriting agreement by and among Cactus Inc., Cactus LLC, certain selling stockholders of Cactus (the “Selling Stockholders”) and the underwriters named therein, providing for the offer and sale of Class A common stock by the Selling Stockholders (the “March 2019 Secondary Offering”). As described in the prospectus supplement dated March 19, 2019 and filed with the Securities and Exchange Commission on March 20, 2019, in connection with the March 2019 Secondary Offering, certain Selling Stockholders owning CW Units exercised their Redemption Right with respect to 8.5 million CW Units, together with a corresponding number of shares of Class B common stock, as provided in the Cactus LLC Agreement. The March 2019 Secondary Offering closed on March 21, 2019, at which time, in exercise of its Call Right, Cactus Inc. acquired the redeemed CW Units and a corresponding number of shares of Class B common stock (which shares of Class B common stock were then canceled) and issued 8.5 million shares of Class A common stock to the underwriters at the direction of the redeeming Selling Stockholders, as provided in the Cactus LLC Agreement. In addition, certain other Selling Stockholders sold 26 thousand shares of Class A common stock in the March 2019 Secondary Offering, which shares were owned by them directly prior to the closing of this offering. Cactus did not receive any of the proceeds from the sale of common stock in the March 2019 Secondary Offering. Cactus incurred $1.0 million in offering expenses which were recorded in other income (expense), net, in the consolidated statement of income during the first quarter of 2019.
In addition to the redemptions associated with the March 2019 Secondary Offering, certain legacy CW Unit Holders redeemed 0.8 million CW Units (together with a corresponding number of shares of Class B common stock) pursuant to the Redemption Right, for the year ended December 31, 2019. Cactus acquired the redeemed CW Units and a corresponding number of shares of Class B common stock (which shares of Class B common stock were then canceled) and issued 0.8 million shares of Class A common stock to the redeeming CW Unit Holders. Any exercise by Cactus LLC or Cactus Inc. of the right to acquire redeemed CW Units for cash must be approved by the board of directors of Cactus Inc. To date, neither Cactus Inc. nor Cactus LLC have elected to acquire CW Units for cash in connection with exchanges by CW Unit Holders. It is the policy of Cactus Inc. that any exercise by Cactus Inc. or Cactus LLC of the right to acquire redeemed CW Units for cash must be approved by a majority of those members of the board of directors of Cactus Inc. who have no interest in such transaction.
Pursuant to the tax receivable agreement (the “TRA”) described in Note 9, the CW Units redeemed in the March 2019 Secondary Offering and other CW Unit redemptions for the year ended December 31, 2019, created additional TRA liability. Also, as a result, Cactus Inc. increased its ownership in Cactus LLC’s industry. No forfeitures or expected future distributions were assumed. No Class A‑1 Units were issuedLLC and accordingly, increased its equity by $48.7 million from the non-controlling interest.
During 2019, we corrected for misstatements of equity between Cactus Inc. and non-controlling interest related to our July 2018 Follow-on Offering by reducing non-controlling interest and increasing additional paid-in capital and accumulated other comprehensive income. This related to immaterial errors associated with the ownership percentage change used in 2017. The key assumptions for 2016the underlying calculation giving effect to the offering. Additionally, we finalized the majority of the Company’s tax returns and 2015 are as follows:identified immaterial adjustments.
Dividends
| | | | | |
| | December 31, | |
| | 2016 | | 2015 | |
Expected term in years | | 3.5 | years | 3.5 | years |
Expected volatility | | 33 | % | 33 | % |
Risk‑free interest rate | | 0.98 | % | 0.98 | % |
On October 29, 2019, our board of directors authorized the introduction of a regular quarterly cash dividend of $0.09 per share of Class A common stock of which $4.2 million was paid on December 19, 2019. We currently intend to continue paying the quarterly dividend while retaining the balance of future earnings, if any, to finance the growth of our business. However, our future dividend policy is within the discretion of our board of directors and will depend upon then-existing conditions, including our results of operations, financial condition, capital requirements, investment opportunities, statutory and contractual restrictions on our ability to pay dividends and other factors our board of directors may deem relevant.
The key assumptions were unchanged between 2016Limitation of Members’ Liability
Under the terms of the Cactus Wellhead LLC Agreement, the members of Cactus LLC are not obligated for debt, liabilities, contracts or other obligations of Cactus LLC. Profits and 2015losses are allocated to members as defined in the Class A‑1 Units were issued within a two month period of time (January 1, 2016 and November 1, 2015) and management believes that there were no factors during the two months to change the assumptions.Cactus Wellhead LLC Agreement.
7.11. Related Party Transactions
When needed, we rent a plane under dry-lease from a company owned by a member of Cactus LLC. These transactions are under short-term rental arrangements and the agreement governing these transactions does not qualify as a lease under ASC 842. We entered intopay a base hourly rent of $1,750 per flight hour of use of the aircraft, payable monthly, for the hours of aircraft operation during the prior calendar month. We are also responsible for employing pilots and certain fuel true up fees. During 2019, 2018 and 2017, expense recognized in connection with these rentals totaled $0.3 million, $0.4 million and $0.3 million, respectively. As of December 31, 2019 and 2018, we owed less than $0.1 million to the related party which are included in accounts payable in the consolidated balance sheets.
The TRA agreement is with certain direct and indirect holders of CW Units, including certain of our officers, directors and employees. These TRA Holders have the right in the future to receive 85% of the net cash savings, if any, in U.S. federal, state and local income tax and franchise tax that Cactus Inc. actually realizes or is deemed to realize in certain circumstances. The total liability from the TRA as of December 31, 2019 was $216.5 million. We pay professional fees to assist with maintenance of the TRA which are reimbursable from the TRA Holders. As of December 31, 2019, we had a $0.3 million balance due from the TRA Holders for fees paid in 2019. The balance is included in accounts receivable, net in the consolidated balance sheet. No such balance existed as of December 31, 2018.
Distributions made by Cactus LLC are generally required to be made pro rata among all its members. For the year ended December 31, 2019, Cactus LLC distributed $14.2 million to Cactus Inc. to fund the 2019 TRA liability payments and estimated tax payments and made pro rata distributions to its other members totaling $8.4 million over the same period. For the year ended December 31, 2018, Cactus LLC made $3.8 million in distributions to Cactus Inc. to cover its estimated tax payments and also made an aggregate $5.8 million in pro-rata distributions to its other members over the same period.
Prior to our IPO, we were party to a management services agreement with two of ourCactus LLC members, whereby we must payCactus paid an annual management fee totaling approximately $0.3 million, payable in four installments, each to be paid quarterly in advance, prorated for any partial year. TheIn conjunction with our IPO, the management services agreement shall terminate upon the consummation of a change of control sale, as defined in our operating agreement.terminated pursuant to its terms. Management fee expense totaled $0.1 million and $0.3 million for each of2018 and 2017, 2016 and 2015.respectively. There were no outstanding balances due as of December 31, 20172019 and 20162018 under the management services agreement. In conjunction with
Prior to our IPO, on January 25, 2018, Cactus LLC paid a cash distribution of $26.0 million to holders of CW Units at that time. This distribution was funded by borrowing under a revolving credit facility. The purpose of the management services agreements terminated.
During 2016distribution was to provide funds to these owners to pay their federal and 2015, we rented certain equipment fromstate tax liabilities associated with taxable income recognized by them for periods prior to the completion of our IPO as a company owned by a memberresult of their ownership interests in Cactus LLC. These transactionsThe borrowings under this revolving credit facility were under short‑term rental arrangements. During 2017, 2016 and 2015, expense recognized in connection with these rentals totaled $0.3 million, $0.2 million and $0.3 million, respectively. Asrepaid during the first quarter of December 31, 2017 and 2016, we owed less than $0.1 million, respectively, to this related party which are included in accounts payable in the consolidated balance sheets.
8. Commitments and Contingencies
Operating Leases and Capital Leases
We lease certain facilities, vehicles, equipment, office and manufacturing space under noncancelable operating leases which expire at various dates through 2029. We are also party to a significant number of month‑to‑month leases that can be canceled at any time. Total rent expense related to operating leases for 2017, 2016 and 2015 amounted to $7.1 million, $7.3 million and $7.9 million, respectively.
We also lease vehicles under capital leases. These leases are typically three years in duration and have no guaranteed residual values. Amounts included within property and equipment under capital leases are as follows:
| | | | | | |
| | December 31, |
| | 2017 | | 2016 |
Cost | | $ | 15,557 | | $ | 2,616 |
Accumulated depreciation | | | (2,672) | | | (171) |
Net | | $ | 12,885 | | $ | 2,445 |
2018.
Future minimum annual lease payments, including executory costs12. Commitments and interest, for years subsequent to December 31, 2017 are approximately as follows:
| | | | | | | | | |
| | Operating Leases | | Capital Leases | | Total |
2018 | | $ | 5,506 | | $ | 5,296 | | $ | 10,802 |
2019 | | | 4,083 | | | 5,394 | | | 9,477 |
2020 | | | 3,752 | | | 3,475 | | | 7,227 |
2021 | | | 3,077 | | | — | | | 3,077 |
2022 | | | 2,031 | | | — | | | 2,031 |
Thereafter | | | 4,713 | | | — | | | 4,713 |
| | $ | 23,162 | | $ | 14,165 | | $ | 37,327 |
Legal Contingencies
We are involved in various disputes arising in the ordinary course of business. Management does not believe the outcome of these disputes will have a material adverse effect on our consolidated financial position or consolidated results of operations.
9. Employee Benefit Plans13. Earnings Per Share
401K Plan
Our employees withinBasic earnings per share of Class A common stock is calculated by dividing the United States are eligiblenet income attributable to participate in a 401(k) plan sponsored by us. These employees are eligible to participate upon employment hire date and obtainingCactus Inc. during the age of eighteen. All eligible employees may contribute a percentage of their compensation subject to a maximum imposedperiod by the Internal Revenue Code. During 2017, we matched 100% of the first 3% of gross pay contributed by each employee and 50% of the next 4% of gross pay contributed by each employee. We may also make additional non‑elective employer contributions at its discretion under the plan. Similar benefit plans exist for employees of our foreign subsidiaries. During 2017, 2016 and 2015, employer matching contributions totaled $2.2 million, $1.2 million and $1.5 million, respectively. We have not made non‑elective employer contributions under the plan.
10. Earnings (loss) Per Unit
Class A‑1 Units and Class B Units are entitled to allocations of distributions and income based upon the Class A Unit holder’s return on investment thresholds. The Class A‑1 Units and the Class B Units are considered participating securities and are required to be included in the calculation of basic earnings (loss) per Unit using the two‑class method. The two‑class method of computing earnings per Unit is an earnings allocation formula that determines earnings per Unit for each class of Unit according to dividends declared and participation rights in
undistributed earnings. Basic earnings (loss) per Unit is calculated based on the weighted‑weighted average number of theshares of Class A Unitscommon stock outstanding during the periods presented. same period. Diluted earnings per share of Class A common stock is calculated by dividing the net income attributable to Cactus Inc. during that period by the weighted average number of common shares outstanding assuming all potentially dilutive shares were issued.
We use the “if-converted” method to determine the potential dilutive effect of outstanding CW Units (and corresponding shares of outstanding Class B common stock), and the treasury stock method to determine the potential dilutive effect of unvested restricted stock units assuming that the proceeds will be used to purchase shares of Class A common stock.
The following is a summary oftable summarizes the basic and diluted earnings per Unit:share calculations:
| | | | | | |
| | Year Ended December 31, |
| | 2019 | | 2018 |
Numerator: | | | | | | |
Net income attributable to Cactus Inc.—basic | | $ | 85,612 | | $ | 51,683 |
Net income attributable to non-controlling interest (1) | | | 56,012 | | | — |
Net income attributable to Cactus Inc.—diluted (1) | | $ | 141,624 | | $ | 51,683 |
Denominator: | | | | | | |
Weighted average Class A shares outstanding—basic | | | 44,983 | | | 32,329 |
Effect of dilutive shares (2) | | | 30,370 | | | 366 |
Weighted average Class A shares outstanding—diluted (2) | | | 75,353 | | | 32,695 |
| | | | | | |
Earnings per Class A share—basic | | $ | 1.90 | | $ | 1.60 |
Earnings per Class A share—diluted (1) (2) | | $ | 1.88 | | $ | 1.58 |
| | | | | | | | | |
| | Year Ended December 31, |
| | 2017 | | 2016 | | 2015 |
Numerator: | | | | | | | | | |
Net income (loss) | | $ | 66,547 | | $ | (8,176) | | $ | 21,224 |
Participating securities: | | | | | | | | | |
Dividends | | | — | | | — | | | (3,303) |
Income allocation | | | (20,617) | | | — | | | (6,720) |
Net income (loss) available to Class A Units | | $ | 45,930 | | $ | (8,176) | | $ | 11,201 |
Denominator: | | | | | | | | | |
Weighted average Class A Units—basic and diluted | | | 36,500 | | | 36,500 | | | 36,500 |
Earnings (loss) per Class A Unit—basic and diluted | | $ | 1,258.36 | | $ | (224.00) | | $ | 306.88 |
| (1) | | Under the if-converted method for the twelve months ended December 31, 2019, the numerator is adjusted in the calculation of diluted earnings per share to include $73.7 million of additional pre-tax income attributable to non-controlling interest adjusted for a corporate effective tax rate of 24%. |
| (2) | | Diluted earnings per share for the year ended December 31, 2018 excludes 37.2 million shares of Class B common stock as the effect would be anti-dilutive. |
Losses were not allocated to the participating Units in 2016 as the participating securities are not contractually obligated to fund losses.
11.14. Supplemental Cash Flow Information
Non-cash investing and financing activities were as follows:
| | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, | | Year Ended December 31, |
| | 2017 | | 2016 | | 2015 | | 2019 | | 2018 | | 2017 |
Property and equipment acquired under capital lease | | $ | 12,941 | | $ | 2,616 | | $ | — | |
Property and equipment acquired under finance leases | | | $ | 3,008 | | $ | 9,966 | | $ | 12,941 |
Property and equipment in payables | | | 1,553 | | | 243 | | | 276 | | | 1,052 | | | 1,312 | | | 1,553 |
Cash paid for interest and income taxes was as follows:
| | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, | | Year Ended December 31, |
| | 2017 | | 2016 | | 2015 | | 2019 | | 2018 | | 2017 |
Cash paid for interest | | $ | 18,826 | | $ | 19,946 | | $ | 21,391 | | $ | 1,187 | | $ | 3,583 | | $ | 18,826 |
Cash paid for income taxes, net | | | 1,535 | | | 583 | | | 370 | | | 5,301 | | | 7,613 | | | 1,535 |
In conjunction with our IPO, we issued and contributed shares of Class B common stock to owners of CW Units equal to the number of outstanding CW Units held by the owners thereof. The Class B common stock has no economic interest and does not share in cash dividends or liquidation rights.
12.During the year ended December 31, 2019, we issued 9.3 million shares of Class A common stock pursuant to redemptions of CW Units by holders thereof.
15. Quarterly Financial Information (Unaudited)
Summarized quarterly financial data for the years ended December 31, 20172019 and 20162018 are presented in the following tables. In the following tables, the sum of basic and diluted earnings per unitshare for the four quarters may differ from the annual amounts due to the required method of computing weighted average number of shares in the respective
periods. Additionally, due to the effect of rounding, the sum of the individual quarterly earnings per share amounts may not equal the calculated yearyear-to-date earnings per share amount.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 2017 Quarters | | 2019 Quarters |
| | Total | | Fourth | | Third | | Second | | First | | First | | Second | | Third | | Fourth | | Total |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total revenues | | $ | 341,191 | | $ | 104,784 | | $ | 96,027 | | $ | 81,877 | | $ | 58,503 | | $ | 158,875 | | $ | 168,493 | | $ | 160,808 | | $ | 140,238 | | $ | 628,414 |
| | | | | | | | | | | | | | | | |
Income from operations | | | 88,863 | | | 28,737 | | | 28,059 | | | 22,073 | | | 9,994 | | | 48,492 | | | 51,450 | | | 47,123 | | | 36,085 | | | 183,150 |
| | | | | | | | | | | | | | | | |
Net income | | | 66,547 | | | 22,814 | | | 22,301 | | | 16,578 | | | 4,854 | | | 48,446 | | | 40,750 | | | 35,833 | | | 31,274 | | | 156,303 |
| | | | | | | | | | | | | | | | |
Earnings per Class A Unit—basic and diluted | | | 1,258.36 | | | 431.40 | | | 421.70 | | | 312.79 | | | 92.47 | |
Less: net income attributable to non-controlling interest | | | | 21,639 | | | 19,342 | | | 16,494 | | | 13,216 | | | 70,691 |
Net income attributable to Cactus Inc. | | | | 26,807 | | | 21,408 | | | 19,339 | | | 18,058 | | | 85,612 |
Earnings per Class A share—basic | | | $ | 0.69 | | $ | 0.46 | | $ | 0.41 | | $ | 0.38 | | $ | 1.90 |
Earnings per Class A share—diluted | | | $ | 0.59 | | $ | 0.45 | | $ | 0.41 | | $ | 0.38 | | $ | 1.88 |
Dividends declared per common share | | | $ | — | | $ | — | | $ | — | | $ | 0.09 | | $ | 0.09 |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | 2016 Quarters | | | 2018 Quarters |
| | Total | | Fourth | | Third | | Second | | First | | First | | Second | | Third | | Fourth | | Total |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total revenues | | $ | 155,048 | | $ | 49,547 | | $ | 36,755 | | $ | 32,863 | | $ | 35,883 | | $ | 115,110 | | $ | 138,543 | | $ | 150,658 | | $ | 139,824 | | $ | 544,135 |
| | | | | | | | | | | | | | | | |
Income from operations | | | 10,615 | | | 6,162 | | | 2,112 | | | 1,218 | | | 1,123 | | | 35,217 | | | 46,487 | | | 52,133 | | | 43,864 | | | 177,701 |
| | | | | | | | | | | | | | | | |
Net income (loss) | | | (8,176) | | | 1,346 | | | (3,167) | | | (1,833) | | | (4,522) | |
| | | | | | | | | | | | | | | | |
Earnings (loss) per Class A Unit—basic and diluted | | | (224.00) | | | 36.88 | | | (86.77) | | | (50.22) | | | (123.89) | |
Net income | | | | 26,408 | | | 41,542 | | | 43,648 | | | 38,683 | | | 150,281 |
Less: pre-IPO net income attributable to Cactus LLC | | | | 13,648 | | | — | | | — | | | — | | | 13,648 |
Less: net income attributable to non-controlling interest | | | | 9,007 | | | 29,208 | | | 24,976 | | | 21,759 | | | 84,950 |
Net income attributable to Cactus Inc. | | | | 3,753 | | | 12,334 | | | 18,672 | | | 16,924 | | | 51,683 |
Earnings per Class A share—basic | | | $ | 0.14 | | $ | 0.47 | | $ | 0.52 | | $ | 0.45 | | $ | 1.60 |
Earnings per Class A share—diluted | | | $ | 0.14 | | $ | 0.46 | | $ | 0.52 | | $ | 0.44 | | $ | 1.58 |
13. Subsequent Events
On February 12, 2018, Cactus Inc. completed its IPO. Pursuant to the IPO, Cactus Inc. issued 23,000,000 shares of Class A common stock, par value $0.01 per share (“Class A Common Stock”), at a price to the public of $19.00 per share. Cactus Inc. received net proceeds of $405.8 million after deducting underwriting discounts and commissions and estimated offering expenses of the IPO. On February 14, 2018 Cactus Inc. completed the sale of an additional 3,450,000 shares of Class A Common Stock pursuant to the exercise in full by the underwriters of their option (the “Option”) to purchase additional shares of Class A Common Stock, resulting in $61.6 million of additional net proceeds. Cactus Inc. contributed all of the net proceeds of the IPO to Cactus LLC in exchange for CW Units. Cactus LLC used (i) $251.0 million of the net proceeds to repay all of the borrowings outstanding under its term loan facility, including accrued interest and (ii) $216.4 million to redeem CW Units from certain direct and indirect owners of Cactus LLC. After the IPO, the amount of debt outstanding for Cactus LLC significantly decreased. With the closing of the IPO, we will write off $2.2 million of deferred IPO costs as a charge to additional paid in capital that are included in prepaid expenses in the consolidated balance sheet as of December 31, 2017.
In connection with the completion of the IPO, Cactus Inc. became the sole managing member of Cactus LLC and is responsible for all operational, management and administrative decisions relating to Cactus LLC’s business and will consolidate the financial results of Cactus LLC and its subsidiaries. The Limited Liability Company Operating Agreement of Cactus LLC was amended and restated as the First Amended and Restated Limited Liability Company Operating Agreement of Cactus LLC (the “Cactus Wellhead LLC Agreement”) to, among other things, admit Cactus Inc. as the sole managing member of Cactus LLC.
In connection with the IPO, Cactus completed a series of reorganization transactions, including the following:
| (a)
| | all of the membership interests in Cactus LLC were converted into a single class of CW Units;
|
| (b)
| | Cactus Inc. contributed the net proceeds of the IPO to Cactus LLC in exchange for 23,000,000 CW Units;
|
| (c)
| | Cactus LLC used the net proceeds of the IPO that it received from Cactus Inc. to repay the borrowings outstanding, plus accrued interest, under its term loan facility and to redeem 8,667,841 CW Units from the owners thereof;
|
| (d)
| | Cactus Inc. issued and contributed 51,747,768 shares of its Class B common stock, par value $0.01 per share (“Class B Common Stock”) equal to the number of outstanding CW Units held by the Pre-IPO Owners following the redemption described in (c) above to Cactus LLC;
|
| (e)
| | Cactus LLC distributed to each of the Pre-IPO Owners that continued to own CW Units following the IPO one share of Class B Common Stock for each CW Unit such Pre-IPO Owner held following the redemption described in (c) above;
|
| (f)
| | Cactus Inc. contributed the net proceeds from the exercise of the Option to Cactus LLC in return for 3,450,000 additional CW Units; and
|
| (g)
| | Cactus LLC used the net proceeds from the Option to redeem 3,450,000 CW Units from the owners thereof, and Cactus Inc. canceled a corresponding number of shares of Class B Common Stock.
|
Additionally, in connection with the IPO, Cactus Inc. granted 0.7 million restricted stock unit awards, which will vest over one to three years, to certain directors, officers and employees of Cactus. Stock-based compensation expense associated with these awards will be recognized over the vesting term.
The owners of CW Units (along with their permitted transferees) are referred to as “CW Unit Holders.” CW Unit Holders also own one share of our Class B Common Stock for each CW Unit such CW Unit Holders own. After giving effect to the IPO and the related transactions, Cactus Inc. owns an approximate 35.3% interest in Cactus LLC, and the CW Unit Holders own an approximate 64.7% interest in Cactus LLC. These ownership percentages are based on 26,450,000 shares of Class A Common Stock and 48,439,772 shares of Class B Common Stock issued and outstanding as of March 13, 2018.
The shares of Class B common stock are not considered participating securities because they do not participate in the earnings of Cactus Inc. The noncontrolling interest owners own shares of Class B common stock. The noncontrolling interest owners have redemption rights which enable the noncontrolling interest owners to redeem CW Units (and corresponding shares of Class B common stock) for shares of Class A common stock on a one for one basis or, at Cactus Inc.’s or Cactus LLC’s election, an equivalent amount of cash.
Cactus Inc.’s sole material assets are CW Units in Cactus LLC. On February 12, 2018, in connection with the IPO, Cactus Inc. became the managing member of Cactus LLC and is responsible for all operational, management and administrative decisions relating to Cactus LLC’s business.
Cactus Inc. will be subject to federal income taxes related to its share of income in Cactus LLC. In connection with the IPO, Cactus Inc. entered into the Tax Receivable Agreement (“TRA”) with certain direct and indirect owners of Cactus LLC (each such person, a “TRA Holder”) pursuant to which Cactus Inc. will pay to the TRA Holders 85% of the amount of net cash savings, if any, in U.S. federal, state and local income tax or franchise tax that Cactus Inc. actually realizes (or is deemed to realize in certain circumstances) in periods after the IPO as a result of (i) certain increases in tax
basis that occur as a result of Cactus Inc.’s acquisition (or deemed acquisition for U.S. federal income tax purposes) of all or a portion of such TRA Holders’ CW Units in connection with the IPO or pursuant to the exercise of the redemption right or the call right set forth in the TRA, (ii) certain increases in tax basis resulting from the repayment, in connection with the IPO, of borrowings outstanding under Cactus LLC’s term loan facility, and (iii) imputed interest deemed to be paid by Cactus Inc. as a result of, and additional tax basis arising from, any payments Cactus Inc. makes under the TRA. Cactus Inc. will retain the benefit of the remaining 15% of these net cash savings.
On January 21, 2018, the board of directors of Cactus LLC declared a cash distribution of $26.0 million, which was paid to the Pre-IPO Owners on January 25, 2018. Such distribution was funded by borrowing under the revolving credit facility. The purpose of the distribution was to provide funds to the Pre-IPO Owners to pay their federal and state tax liabilities associated with taxable income recognized by them as a result of their ownership interests in Cactus LLC prior to the completion of our IPO.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
In accordance with Exchange Act Rules 13a‑15 and 15d‑15, weWe have evaluated, under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a‑15(e) and 15d‑15(e) under the Exchange Act)Act as amended) as of December 31, 2017.2019. Based upon that evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures were effective at the reasonable assurance level as of such date. Our disclosure controls and procedures are designed to provide reasonable assurance that the information required to be disclosed by us in reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure and is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC. Based upon that evaluation,
Remediation of Previously Reported Material Weakness
As discussed in “Part II – Item 9A, Controls and Procedures” of our principal executive officer and principal financial officer concluded that our disclosure controls and procedures were effective as of December 31, 2017 at the reasonable assurance level.
Management’s Annual Report on Internal Control over Financial Reporting and Attestation Report of the Registered Public Accounting Firm
This annual report does not include a report of management’s assessment regarding internal control over financial reporting or an attestation report of our registered public accounting firm due to a transition period established by the rules of the SEC for newly public companies. However, a report of management’s assessment regarding internal control over financial reporting will be required for the 2018 annual report.
Remediation of Material Weakness in Internal Control Over Financial Reporting
In connection with the audit of the consolidated financial statements of Cactus Wellhead, LLC, our predecessor for accounting purposes,Form 10-K for the year ended December 31, 2016,2018, we identified a material weakness in our internal control over financial reporting. Areporting related to accounting of the liability and deferred tax asset associated with the tax receivable agreement (“TRA”). In response to the identified material weakness, is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis.
We did not effectively operate controls in place over the review of the consolidated financial statements and related disclosures for 2016. This resulted in the identification ofwe implemented certain errors in the 2016 consolidated statement of cash flows that have been corrected as a revision of that statement.
Changes were made to our controlsprocesses and procedures duringto address and remediate this material weakness. We added the quarter ended June 30, 2017, in an effort to remediatefollowing processes and procedures:
| · | | Replaced our outside service provider for tax compliance, support of tax accounting and reporting functions, and TRA accounting processes beginning in the first quarter of 2019 and hired a Tax Director in May 2019 who has extensive knowledge and experience in accounting for TRA liabilities; |
| · | | Redesigned, enhanced and implemented control activities related to the quarterly processes around accounting for the TRA beginning in the second quarter of 2019; and |
| · | | Redesigned, enhanced and implemented control activities related to reviews of the completeness and accuracy of inputs (including estimates) and assumptions used in calculations beginning in the third quarter of 2019 |
The control activities discussed above have operated for a sufficient period of time, and management has concluded, through testing, that these deficiencies. Activities to remediatecontrols are effective. Therefore, management has concluded that the previously identified material weakness include hiring additional experienced resources to manage the preparation of the consolidated financial statements and disclosures to allow more timely review of these consolidated financial statements and disclosures by management. With this change, we also added new controls and procedures related to the preparation of the consolidated financial statements and disclosures. In connection with these efforts, we documented the internal controls with respect to the preparation of the consolidated financial statements and disclosures and performed those controls in the preparation of the consolidated financial statements and disclosures.
Neither our management nor an independent registered public accounting firm has performed an evaluation of our internal control over financial reporting in accordance with the provisions of the Sarbanes‑Oxley Act because no
such evaluation has been required. However, based on the actions described above, we have concluded that the previously identified and disclosed material weakness no longer existsremediated as of December 31, 2017.2019.
Changes in Internal Control over Financial Reporting
There hashave been no changeother changes in our internal control over financial reporting during the quarter ended December 31, 20172019 that hashave materially affected, or isare reasonably likely to materially affect, our internal control over financial reporting.
Item 9B. Other Information
Not applicable.
PART III
Item 10. Directors, Executive Officers and Corporate Governance
InformationDirectors and Executive Officers
The directors and executive officers of the Company are:
| | |
Name | Age | Title |
Bruce Rothstein | 67 | Chairman of the Board of Directors |
Scott Bender | 66 | President, Chief Executive Officer and Director |
Joel Bender | 60 | Senior Vice President, Chief Operating Officer and Director |
Michael McGovern | 68 | Director, Compensation Committee Chairman and Audit Committee member |
John (Andy) O'Donnell | 71 | Director, Audit Committee member, Compensation Committee member and Nominating and Governance Committee member |
Gary Rosenthal | 70 | Director, Nominating and Governance Committee Chairman and Compensation Committee member |
Alan Semple | 60 | Director, Audit Committee Chairman and Nominating and Governance Committee member |
Melissa Law | 46 | Director, Audit Committee member and Compensation Committee member |
Steven Bender | 37 | Vice President of Operations |
Stephen Tadlock | 41 | Vice President, Chief Financial Officer and Treasurer |
David Isaac | 59 | General Counsel, Vice President of Administration and Secretary |
Set forth below is biographical information about each of our directors and executive officers.
Directors
Bruce Rothstein—Chairman of the Board of Directors. Bruce Rothstein has been our Chairman of the Board since 2011. Mr. Rothstein has been a Member of Cadent Energy Partners LLC (“Cadent Energy Partners”), a natural resources private equity firm that invests in companies in the North American energy industry, since co‑founding Cadent Energy Partners in 2003. From November 2005 until November 2017, Mr. Rothstein served on the board of directors of Array Holdings, Inc., formerly a portfolio company of Cadent Energy Partners. From May 2006 to August 2016, he served on the board of directors of Vedco Holdings, Inc., formerly a Cadent Energy Partners portfolio company. From December 2007 to April 2016, Mr. Rothstein served on the board of directors of Torqued‑Up Energy Services, Inc., formerly a Cadent Energy Partners portfolio company. From December 2008 until February 2012, Mr. Rothstein served as a director of Ardent Holdings, LLC, a portfolio company of Cadent Energy Partners. Mr. Rothstein graduated from Cornell University in 1974 with a Bachelor of Arts in Mathematics and New York University’s Stern School of Business in 1985 with a Master of Business Administration. We believe that Mr. Rothstein’s extensive financial and energy investment experience brings valuable skills to Item 10our board of directors and qualifies him to serve on our board of directors.
Scott Bender—President, Chief Executive Officer and Director. Scott Bender has been our President and Chief Executive Officer and one of our directors since 2011, when he and Mr. Joel Bender founded Cactus LLC. Prior to founding Cactus LLC, Mr. Bender was President of Wood Group Pressure Control from 2000 to 2011. He began his career in 1977 as President of Cactus Wellhead Equipment, a subsidiary of Cactus Pipe that was eventually sold to Cooper Cameron Corporation in 1996. Mr. Bender graduated from Princeton University in 1975 with a Bachelor of Science in Engineering and the University of Texas at Austin in 1977 with a Master of Business Administration. We believe that Mr. Bender’s significant experience in the oil field services industry and his founding and leading of Cactus LLC bring important skills to our board of directors and qualifies him to serve on our board. Mr. Bender is the father of Steven Bender, our Vice President of Operations, and the brother of Joel Bender, our Senior Vice President and Chief Operating Officer and one of our directors.
Joel Bender—Senior Vice President, Chief Operating Officer and Director. Joel Bender has been our Senior Vice President and Chief Operating Officer and one of our directors since 2011, when he and Mr. Scott Bender founded Cactus LLC. Prior to founding Cactus LLC, Mr. Bender was Senior Vice President of Wood Group Pressure Control from 2000 to 2011. He began his career in 1984 as Vice President of Cactus Wellhead Equipment, a subsidiary of Cactus Pipe that
was eventually sold to Cooper Cameron Corporation in 1996. Mr. Bender graduated from Washington University in 1981 with a Bachelor of Science in Engineering and the University of Houston in 1985 with a Master of Business Administration. We believe that Mr. Bender’s significant experience in the oil field services industry and his founding and leading of Cactus LLC bring important skills to our board of directors and qualifies him to serve on our board. Mr. Bender is the brother of Scott Bender, our President and Chief Executive Officer and one of our directors.
Michael McGovern—Director. Mr. McGovern has served as one of our directors since 2011. He currently serves as our Compensation Committee chairman. He served as Executive Advisor to Cadent Energy Partners from January 2008 to December 2014 and has served as Chairman and Chief Executive Officer of Sherwood Energy, LLC, a Cadent Energy Partners portfolio company, since March 2009. Mr. McGovern has also served as a director of GeoMet, Inc., an independent energy company, from September 2010 until December 2018. He also currently serves on the board of directors of Nuverra Environmental Solutions, Inc. since August 2017 and Ion Geophysical (NYSE: IO) since June 2019. Mr. McGovern served on the board of directors of Quicksilver Resources Inc. from March 2013 until August 2016 and of Probe Holdings, Inc. from February 2014 until July 2017. He has also served on the board of directors of Fibrant (f/k/a DSM Caprolactam) from May 2016 to June 2019. Mr. McGovern also served on the board of directors of Sonneborn, Inc. from 2012 to December 2016. Mr. McGovern graduated from the Centenary College of Louisiana in 1973 with a Bachelor of Science in Business. We believe Mr. McGovern’s qualifications to serve on our board of directors include his 40 years of experience in the energy industry and his extensive executive leadership and management experience, including as Chief Executive Officer of several public companies.
John (Andy) O’Donnell—Director. Mr. O’Donnell has served as one of our directors since January 2015. Mr. O’Donnell served as an officer of Baker Hughes Incorporated from 1998 until his retirement in January 2014. In his most recent role he served as Vice President, Office of the CEO of Baker Hughes Incorporated. Prior to that he held multiple leadership positions within Baker Hughes Incorporated, including President of Western Hemisphere, President of BJ Services, President of Baker Petrolite and President of Baker Hughes Drilling Fluids. He was responsible for the process segment, which was divested in early 2004. Mr. O’Donnell also managed Project Renaissance, an enterprise‑wide cost savings effort, completed in 2001. Prior to that he served as Vice President Manufacturing for Baker Oil Tools and Plant Manager for Hughes Tool Company. He joined Hughes Tool Company in 1975 starting his career as a systems analyst. Mr. O’Donnell served as an officer and aviator in the U.S. Marine Corps and holds a B.S. degree from the University of California, Davis. He is a member of the board of directors of CIRCOR International, Inc., where he serves on the Compensation Committee and the Nominating and Governance Committee. We believe Mr. O’Donnell’s qualifications to serve on our board of directors include his years of experience in the energy industry and his extensive executive leadership and management experience, including as an officer of Baker Hughes Incorporated from 1998 until 2014.
Gary Rosenthal—Director. Mr. Rosenthal has served as one of our directors since January 2018. He currently serves as our Nominating and Governance Committee chairman. Mr. Rosenthal has been a partner in The Sterling Group, L.P., a private equity firm based in Houston, Texas, since January 2005. Since September 2019, Mr. Rosenthal has served as Chairman of the Board of Highline Aftermarket LLC with whom he has served as a director since April 2016. Additionally, he has served as Chairman of the Board of Polychem Investments LLC since March 2019 and from October 2013 until February 2018, he was Chairman of the Board of Safe Fleet Investments LLC. All three of these companies are Sterling Group portfolio companies. Mr. Rosenthal served, from 2001 until 2018, as a director and chairman of the Compensation Committee of Oil States International, Inc. Mr. Rosenthal served as Chairman of the Board of Hydrochem Holdings, Inc. from May 2003 until December 2004. From August 1998 to April 2001, he served as Chief Executive Officer of AXIA Incorporated, a diversified manufacturing company. From 1991 to 1994, Mr. Rosenthal served as Executive Chairman and then after its initial public offering, as Chairman and Chief Executive Officer of Wheatley—TXT Corp., a manufacturer of pumps and valves for the oil field. Mr. Rosenthal holds J.D. and A.B. degrees from Harvard University. We believe that Mr. Rosenthal’s qualifications to serve on our board of directors include his extensive executive leadership experience and his experience in the energy sector.
Alan Semple—Director. Mr. Semple has served as one of our directors since April 2017. He currently serves as our Audit Committee chairman. Since December 2015, Mr. Semple has served as a member of the board of directors and the Audit Committee of Teekay Corporation, a leading provider of international crude oil and gas marine transportation services, and as the Audit Committee Chairman since March 2018. Since May 2019, Mr. Semple has served as a member of the Board of Directors and Chairman of the Audit Committee of Teekay GP, LLC, the general partner of Teekay LNG Partners, LP. He was formerly Director and Chief Financial Officer at John Wood Group PLC (Wood Group), a provider of engineering,
production support and maintenance management services to the oil and gas and power generation industries, a role he held from 2000 until his retirement in May 2015. Prior to this, he held a number of senior finance roles in Wood Group since 1996. Mr. Semple graduated from the University of Strathclyde (Glasgow, Scotland) in 1979 with a Bachelor of Arts degree in Business Administration and is a member of the Institute of Chartered Accountants of Scotland. We believe that Mr. Semple’s 30 years of finance experience, primarily in the energy industry, makes him qualified to serve on our board of directors.
Melissa Law—Director. Ms. Law was appointed by the Board to fill the newly created Board seat in January 2020. Ms. Law is an accomplished executive leader with significant experience in the oilfield services industry and more recent experience in the food & beverage ingredient industry. Ms. Law currently serves as the President of Global Operations for Tate & Lyle since September 2017. As a member of the Executive Leadership team, Ms. Law is responsible for leading the EHS, Quality, and Sustainability Programs, the end to end supply chain and logistics function as well as the global manufacturing and engineering organizations. Prior to joining Tate and Lyle, Ms. Law held various roles of increasing responsibility at Baker Hughes Incorporated from 1997 to 2017. At Baker Hughes, Ms. Law had full profit and loss responsibility for Baker Hughes' Global Specialty Chemical Business from 2014-2017 as well as Baker Hughes’ Australasia geo-market from 2013-2104. Prior to those roles, Ms. Law held various other senior leadership roles in technology, manufacturing and operations at Baker Hughes. Ms. Law is a graduate of the University of Houston from where she holds a Master of Science in Environmental Chemistry. We believe Ms. Law’s qualifications to serve on the board include her 20 years of experience in the energy industry and her multi-industry executive leadership and management experiences.
Our Executive Officers
Steven Bender—Vice President of Operations. Steven Bender has been our Vice President of Operations since 2011. From 2005 to 2011, Mr. Bender served as Rental Business Manager of Wood Group Pressure Control. Mr. Bender graduated from Rice University in 2005 with a Bachelor of Arts in English and Hispanic Studies and the University of Texas at Austin in 2010 with a Master of Business Administration. Mr. Bender is the son of Scott Bender, our President and Chief Executive Officer and one of our directors.
Stephen Tadlock—Vice President, Chief Financial Officer and Treasurer. Mr. Tadlock has been our Vice President, Chief Financial Officer and Treasurer since March 2019. He was our Vice President and Chief Administrative Officer from March 2018 until March 2019 and joined our company in June 2017 as our Vice President of Corporate Services. Mr. Tadlock previously worked at Cadent Energy Partners LLC from 2007 to 2017, where he most recently served as a Partner from 2014 to 2017. While at Cadent Energy Partners LLC, Mr. Tadlock managed investments across all energy sectors and worked with Cactus LLC since its founding in 2011 as a board observer. Prior to joining Cadent Energy Partners LLC, Mr. Tadlock was a consultant to Cairn Capital, a London based asset management firm. Previously he was associate to the CEO of SoundView, a publicly traded investment bank in Old Greenwich, Connecticut. Mr. Tadlock began his career as an analyst at UBS Investment Bank in New York, New York. Mr. Tadlock served as a director and chairman of Polyflow Holdings, LLC until his resignation in 2018. Mr. Tadlock also served as a director of Composite Energy Services, LLC and Energy Services Holdings, LLC until his respective resignations in 2017. Mr. Tadlock graduated from Princeton University in 2001 with a Bachelor of Science in Engineering in Operations Research and from the Wharton School at the University of Pennsylvania in 2007 with a Master of Business in Administration.
David Isaac—General Counsel, Vice President of Administration and Secretary. David Isaac has been our General Counsel, Vice President of Administration and Secretary since 2018. Mr. Isaac previously worked at Rockwater Energy Solutions, Inc. from 2011 to 2017 where he most recently served as Senior Vice President of Human Resources and General Counsel. While at Rockwater, Mr. Isaac led the Human Resources, HSE, and Legal functions of the organization. Prior to joining Rockwater, Mr. Isaac was the Vice President of Human Resources and General Counsel of Inmar, Inc. a private business-process outsourcing and reverse logistics firm in Winston-Salem, North Carolina. Previously he served as Senior Vice President of Human Resources at Wachovia Bank, also in Winston-Salem, North Carolina. Before Wachovia, Mr. Isaac performed legal and human resources functions for Baker Hughes, Inc. and its subsidiaries in Houston, Texas. Mr. Isaac graduated from The College of William & Mary in 1983 with a Bachelor of Arts in Economics and from The Ohio State University in 1986 with a Juris Doctor.
Composition of Our Board of Directors
Our business and affairs are managed under the direction of our board of directors. Our board of directors consists of eight members, including our Chief Executive Officer. In connection with our IPO, we entered into a Stockholders’ Agreement with Cadent and Cactus WH Enterprises, a Delaware limited liability company owned by Messrs. Scott Bender, Joel Bender and Steven Bender and certain of our other officers and employees. The Stockholders’ Agreement provides each of Cadent and Cactus WH Enterprises with the right to designate a certain number of nominees to our board of directors so long as they and their respective affiliates collectively beneficially own at least 5%, respectively, of the outstanding shares of our common stock. See “Item 13. Certain Relationships and Related Transactions, and Director Independence—Stockholders’ Agreement.”
In evaluating director candidates, our board of directors will assess whether a candidate possesses the integrity, judgment, knowledge, experience, skills and expertise that are likely to enhance the board’s ability to manage and direct our affairs and business, including, when applicable, to enhance the ability of committees of our board of directors to fulfill their duties.
Our directors are divided into three classes serving staggered three‑year terms. Class I, Class II and Class III directors will serve until our annual meetings of stockholders in 2021, 2022 and 2020, respectively. Messrs. McGovern and O’Donnell have been assigned to Class I, Messrs. Semple and Joel Bender and Ms. Law have been assigned to Class II, and Mr. Rothstein, Scott Bender and Mr. Rosenthal have been assigned to Class III. At each of the Company’s annual meeting of stockholders, directors will be set forthelected to succeed the class of directors whose terms have expired.
Our board of directors has reviewed the independence of our directors using the independence standards of the New York Stock Exchange (“NYSE”) and, based on this review, determined that Messrs. Semple, McGovern, O’Donnell and Rosenthal are independent within the meaning of the NYSE listing standards currently in effect and within the meaning of Section 10A‑3 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”).
Committees of the Board of Directors
We have a standing Audit Committee, Compensation Committee and a Nominating and Governance Committee.
Audit Committee
Rules implemented by the NYSE and the SEC require us to have an Audit Committee comprised of at least three directors who meet the independence and experience standards established by the NYSE and the Exchange Act. Our Audit Committee is currently comprised of Messrs. Semple, McGovern and O’Donnell and Ms. Law, each of whom are independent under the rules of the SEC. SEC rules also require that a public company disclose whether or not its audit committee has an “audit committee financial expert” as a member. An “audit committee financial expert” is defined as a person who, based on his or her experience, possesses the attributes outlined in such rules. The board has determined that Mr. Semple satisfies the definition of an “audit committee financial expert.” Mr. Semple serves as the chairman of the Audit Committee.
The Audit Committee oversees, reviews, acts on and reports on various auditing and accounting matters to the board, including: the selection of our independent accountants, the scope of our annual audits, fees to be paid to the independent accountants, the performance of our internal audit function and our independent accountants and our accounting practices. In addition, the Audit Committee assists our board of directors in fulfilling its oversight responsibilities regarding our compliance programs relating to legal and regulatory requirements. In connection with our IPO, we adopted an Audit Committee charter defining the committee’s primary duties in a manner consistent with the rules of the SEC and applicable stock exchange or market standards. Our Audit Committee charter is available on our website at www.CactusWHD.com.
Compensation Committee
Our Compensation Committee is currently comprised of Messrs. McGovern, Rosenthal and O’Donnell and Ms. Law, all of whom meet the independence standards established by the NYSE. Mr. McGovern serves as the chairman of the Compensation Committee. The Compensation Committee establishes salaries, incentives and other forms of compensation
for officers and other employees. The Compensation Committee also administers our incentive compensation and benefit plans. We have adopted a Compensation Committee charter defining the committee’s primary duties in a manner consistent with the rules of the SEC and applicable stock exchange or market standards. Our Compensation Committee charter is available on our website at www.CactusWHD.com.
Nominating and Governance Committee
Our Nominating and Governance Committee is currently comprised of Messrs. Rosenthal, Semple and O’Donnell, all of whom meet the independence standards established by the NYSE. Mr. Rosenthal serves as the chairman of the Nominating and Governance Committee. The Nominating and Governance Committee identifies, evaluates and recommends qualified nominees to serve on our board of directors, develops and oversees our internal corporate governance processes and maintains a management succession plan. We have adopted a Nominating and Governance Committee charter defining the committee’s primary duties in a manner consistent with the rules of the SEC and applicable stock exchange or market standards. Our Nominating and Governance Committee charter is available on our website at www.CactusWHD.com.
Corporate Governance
Corporate Governance Guidelines
Our board of directors believes that sound governance practices and policies provide an important framework to assist it in fulfilling its duty to stockholders. The Company’s “Corporate Governance Guidelines” cover the following principal subjects:
•the size of the board;
•qualifications and independence standards for the board;
•director responsibilities;
•board of director leadership;
•meetings of the board and of non‑employee directors;
•committee functions and independence of committee members;
•compensation of the board;
•self‑evaluation and succession planning;
•ethics and conflicts of interest (a copy of the current “Code of Business Conduct and Ethics” is posted on the Company’s website at www.CactusWHD.com);
•stockholder communications with directors; and
•access to senior management and to independent advisors.
The Corporate Governance Guidelines are posted on the Company’s website at www.CactusWHD.com. The Corporate Governance Guidelines will be reviewed periodically and as necessary by the board for its approval.
The NYSE has adopted rules that require listed companies to adopt governance guidelines covering certain matters. The Company believes that the Corporate Governance Guidelines comply with the NYSE rules.
Anti-Hedging and Pledging Policies
Our directors and executive officers are prohibited from hedging their ownership of Company stock. Furthermore, our directors and executive officers are prohibited from pledging their Company stock.
Board Leadership
Our board of directors directs and oversees the management of the business and affairs of the Company in a manner consistent with the best interests of the Company. Our board’s responsibility is one of oversight, and in performing its oversight role, our board serves as the ultimate decision‑making body of the Company, except for those matters reserved to or shared with our stockholders.
In accordance with the Company’s Corporate Governance Guidelines, our board of directors selects the Company’s Chairman and the Company’s CEO in any way it considers in the Proxy Statementbest interests of the Company and, accordingly, does not have a policy on whether the roles of Chairman and CEO should be separate or combined and, if separate, whether the Chairman should be selected from the independent directors. At the present time, the roles of Chairman and CEO are separate. Mr. Rothstein currently serves as the Chairman of the Board, and is not considered independent under NYSE rules.
Executive Sessions of Non‑Employee Directors
Our board of directors holds regular executive sessions in which the non‑employee directors meet without any members of management present. The purpose of these executive sessions is to promote open and candid discussion among the non‑employee directors. The Chairman of the Board will serve as the lead director at executive sessions of the non‑employee directors, unless the Chairman of the Board is a member of management, in which case the lead director at such meetings will be the chairman of the Audit Committee.
If the non‑employee directors includes members who are not independent within the listing requirements of the NYSE, the independent members of the board will meet in executive session at least once per year. Our Corporate Governance Guidelines provide that the Chairman of the Board will serve as the lead director at executive sessions of the independent directors, unless the Chairman of the Board is not independent, in which case the lead director at such meetings will be an independent director selected by our board of directors. At present, the Chairman of the Board is not independent, and the board has selected Mr. O’Donnell to serve as the lead director at executive sessions of the independent directors.
Communications with the Board of Directors
Stockholders and any other interested parties may send communications to the board, any committee of the board, the Chairman of the Board or any other director in particular to: Cactus, Inc., 920 Memorial City Way, Suite 300 Houston, Texas 77024. Stockholders and any other interested parties should mark the envelope containing each communication as “Stockholder Communication with Directors” and clearly identify the intended recipient(s) of the communication. Our General Counsel will review each communication received from stockholders and other interested parties and will forward the communication, as expeditiously as reasonably practicable, to the addressees if: (1) the communication complies with the requirements of any applicable policy adopted by the board relating to the subject matter of the communication; and (2) the communication falls within the scope of matters generally considered by the board. To the extent the subject matter of a communication relates to matters that have been delegated by the board to a committee or to an executive officer of the Company, then our General Counsel may forward the communication to the executive officer or chairman of the committee to which the matter has been delegated. The acceptance and forwarding of communications to the members of the board or an executive officer does not imply or create any fiduciary duty of the board members or executive officer to the person submitting the communications.
Oversight of Risk Management
Risk assessment, management and oversight are an integral part of our governance and management processes. Our board of directors encourages management to promote a culture that incorporates risk management into our corporate strategy and day‑to‑day business operations. Management discusses strategic and operational risks at regular management meetings and conducts specific strategic planning and review sessions during the year that include a focused discussion and
analysis of the risks facing us. Throughout the year, senior management reviews these risks with the board at regular board meetings as part of management presentations that focus on particular business functions, operations or strategies, and presents the steps taken by management to mitigate such risks.
Our board of directors does not have a standing risk management committee, but rather administers this oversight function directly through the board as a whole. Our board of directors is responsible for monitoring and assessing strategic risk exposure, and the Audit Committee assists the board in fulfilling its oversight responsibilities by overseeing our major financial risk exposures and the steps our management has taken to monitor and control these exposures.
Attendance at Annual Meetings
While we have no formal policy regarding director attendance at its annual meetings of stockholders, directors are encouraged to attend our annual meetings, if practicable. All of the directors attended our annual meeting held in 2019.
Board and Committee Meeting Attendance
During 2019, the entire Board held twelve meetings, the Audit Committee held six meetings, the Compensation Committee held four meetings and the Nominating and Governance Committee also held four meetings. Each of the directors attended 100% of the meetings of the board. Committee members also attended 100% of the meetings for the Annual Meetingcommittees on which they serve except Mr. O’Donnell who attended 67% of Shareholders to be heldthe meetings of the Audit Committee having missed two special meetings that were convened within the same week of his absence.
Compensation Committee Interlocks and Insider Participation
During 2019, the Company’s Compensation Committee consisted of Messrs. McGovern, Rosenthal and O’Donnell. There were no compensation committee interlock relationships for the year ended December 31, 2019. No member of our Compensation Committee during 2019 has engaged in any related party transaction in which our company was a participant.
Delinquent Section 16(a) Reports
Based solely on June 20, 2018 (the “Annual Meeting”)the review of Forms 3 and is incorporated herein4 received by reference.the Company during the 2019 fiscal year, as required under Section 16(a)(2) of the Exchange Act, all of our directors and officers reported all their transactions as required on a Form 4, on a timely basis.
Code of Business Conduct and Ethics
Our board of directors has adopted a Code of Business Conduct and Ethics applicable to all of our officers, directors and employees, including our principal executive officer, principal financial officer, principal accounting officer and controller, or persons performing similar functions and is available on our website at www.CactusWHD.com under “Corporate Governance” within the “Investors” section. We will provide a copy of this document to any person, without charge, upon request, by writing to us at Cactus, Inc., Investor Relations, Cobalt Center, 920 Memorial City Way, Suite 300, Houston, Texas 77024. We intend to satisfy the disclosure requirement under Item 406(b) of Regulation S-K regarding amendments to, or waivers from, provisions of our Code of Business Conduct and Ethics by posting such information on our website at the address and the location specified above.
Item 11. Executive Compensation
InformationIntroduction
This Compensation Discussion and Analysis (“CD&A”) provides information about the compensation objectives and policies for our principal executive officer, our principal financial officer and our three other most highly compensated executive officers (collectively our named executive officers or “NEOs”) during the last completed fiscal year and is intended to place in perspective the information contained in the executive compensation tables that follow this discussion. Throughout this discussion, the following individuals are referred to as our NEOs and are included in the Summary Compensation Table which follows:
| | |
Name | | Position |
Scott Bender | | President, Chief Executive Officer and Director |
Joel Bender | | Senior Vice President, Chief Operating Officer and Director |
Stephen Tadlock | | Vice President, Chief Financial Officer and Treasurer(1) |
Brian Small | | Senior Finance Director and Former Chief Financial Officer(2) |
Steven Bender | | Vice President of Operations |
David Isaac | | General Counsel, Vice President of Administration and Secretary |
| (1) | | On March 15, 2019, Mr. Tadlock became our Vice President, Chief Financial Officer and Treasurer, completing the management transition announced in November 2018. Prior to that time, Mr. Tadlock served as our Vice President and Chief Administrative Officer. |
| (2) | | Mr. Small stepped down from the position of Chief Financial Officer on March 15, 2019 and transitioned to the role of Senior Finance Director. |
Executive Compensation Philosophy and Objectives
The core principle of our executive compensation philosophy is to Item 11pay for performance that is aligned with our business strategy and drives growth in shareholder value over the short and long term. Accordingly, a significant portion of the compensation that we pay to our NEOs is in the form of variable, “at-risk” cash and equity incentives. The following compensation objectives are considered in setting the compensation components for our executive officers:
| · | | Attraction and retention: providing compensation opportunities that reflect competitive market practices so that we can attract and retain key executives responsible not only for our continued growth and profitability, but also for ensuring proper corporate governance while carrying out the goals and plans of the Company; |
| · | | Paying for performance: linking a significant portion of compensation to variable, “at-risk” incentive compensation with realized values dependent upon financial, operational, and stock price performance to ensure that compensation earned by our NEOs reflects our performance; and |
| · | | Shareholder alignment: providing a balance of short-term and long-term incentive opportunities with a majority of NEO compensation in the form of equity in order to ensure alignment of interests between our NEOs and our shareholder, and to promote an ownership culture among our executive officers. |
Our compensation philosophy is supported by the following principal pay elements:
| | | | |
| | Grounding Principles |
Element | Key Characteristic | Attraction & Retention | Pay for Performance | Shareholder Alignment |
Base Salary | • Annual fixed cash compensation
•Critical factor in attracting and retaining qualified talent | | | |
Short-term Incentives (STI) | •Annual variable cash award
•Awards are tied to achievement of key financial and safety objectives | | | |
Long-term Incentives (LTI) | •Provided in the form of time-vested equity
•Promotes alignment with shareholders by tying a majority of NEO compensation to creation of long-term value and by encouraging NEOs to build meaningful equity ownership | | | |
Target Pay Mix
As evidence of our emphasis on at-risk, incentive-based pay, the charts below show the mix of total direct compensation of our Chief Executive Officer and our other NEOs for 2019. These charts illustrate that a majority of NEO total direct compensation is at-risk (86% for our Chief Executive Officer and an average of 80% for our other NEOs).
Compensation Program Governance
We have worked extensively and deliberately to develop a thoughtful, fair, and effective compensation program for our NEOs that helps us to deliver long-term sustainable growth to our stockholders. The following chart highlights several features of our compensation practices that are intended to meet our objectives:
| | | | |
| What We Do | | | What We Don't Do |
| Significant majority of pay at risk | | X | No excessive prerequisites |
| Balance of short- and long-term incentives | | X | No guaranteed bonuses |
| Clawback policy for all executive officers that applies to cash and equity incentives | | X | No excise tax gross-ups |
| Share ownership guidelines for NEOs and directors | | X | Prohibition on hedging, pledging, and short sales by insiders |
| Regularly evaluate risks of our compensation policy | | X | Prohibition on option repricing |
| Independent compensation consultant | | | |
| One-year minimum vesting requirement for LTIP grants | | | |
2019 Say on Pay and Say on Frequency
At our 2019 Annual Meeting, a plurality of our stockholders expressed their preference for an advisory vote on executive compensation occurring every three years, and we have implemented their recommendation.
At our 2019 Annual Meeting, we also held our first advisory vote on compensation for our NEOs (“Say on Pay”). In that vote our stockholders expressed their support, with 94% of the shares of our Class A common stock and Class B common stock present or represented by proxy at the 2019 Annual Meeting voting in support our executive compensation policies and practices for our NEOs during 2018.
Our Compensation Committee values the opinions of our shareholders regarding NEO compensation. In reviewing our program, our Compensation Committee considered the results of last year’s advisory vote on executive compensation and the support expressed by stockholders in their overall assessment of our programs. Our Compensation Committee elected to apply similar principles in determining the types and amounts of compensation to be paid to our NEOs for 2019.
How We Make Compensation Decisions
Role of the Compensation Committee
The Compensation Committee has the responsibility for reviewing and approving the compensation policies, programs, and plans for our senior officers (including our NEOs) and our non-employee directors. The Compensation Committee’s responsibilities include administering our Management Incentive Plan (“MIP”), which provides for annual cash incentive opportunities, and our long-term incentive plan (the “LTIP”), which provides for the grant of equity-based awards. The Compensation Committee reviews the CD&A section of our annual proxy statement and produces the Compensation Committee Report with respect to our executive compensation disclosures for inclusion in the annual proxy statement. In addition, the Compensation Committee regularly reviews current best compensation and governance practices to ensure that our executive compensation program is consistent with recent developments and market practice. In overseeing the compensation of our directors and officers, our Compensation Committee considers various analyses and perspectives provided by its independent compensation consultant and by Company management. Subject in certain circumstances to Board approval, the Compensation Committee has the sole authority to make final decisions with respect to our executive compensation program, and the Compensation Committee is under no obligation to use the input of other parties. For more detailed information regarding the Compensation Committee, please refer to the Compensation Committee Charter, which may be accessed via our website at www.CactusWHD.com by selecting “Investors,” “Corporate Governance” and then “Governance Documents.”
Role of Independent Compensation Consultant
Pearl Meyer & Partners, LLC (“Pearl Meyer”) serves as independent compensation consultant for, and reports directly to, the Compensation Committee. Representatives of Pearl Meyer attend Compensation Committee meetings as requested and communicate with the Compensation Committee informally between meetings as necessary. Pearl Meyer assists and advises the Compensation Committee on all aspects of our executive compensation program. Services provided by the independent compensation consultant include:
| · | | reviewing the compensation and stock performance peer groups and recommending changes, as necessary; |
| · | | reviewing executive compensation based on an analysis of market-based compensation data; |
| · | | analyzing the effectiveness of our executive compensation program and recommending changes, as necessary; and |
| · | | evaluating how well our executive compensation adheres to program objectives. |
To facilitate the delivery of these services to the Compensation Committee, Pearl Meyer interfaces with our management, primarily with our General Counsel and VP of Administration. In 2019, Pearl Meyer did not provide any services to the Company other than those requested by the Compensation Committee in Pearl Meyer’s role as the Committee’s independent advisor.
Other than those services requested by the Compensation Committee, Pearl Meyer did not have any business or personal relationships with members of the Compensation Committee or executives of the Company, did not own any of the Company’s common stock and maintained policies and procedures designed to avoid such conflicts of interest. As such, the Compensation Committee determined the engagement of Pearl Meyer in 2019 did not create any conflicts of interest.
Role of Executive Officers in Compensation Decisions
With respect to the compensation of the NEOs other than our Chief Executive Officer, the Compensation Committee considers the recommendations of our Chief Executive Officer and each NEO’s individual performance. In light of our NEOs’ integral role in establishing and executing the Company’s overall operational and financial objectives, the Compensation Committee requests that our NEOs provide the initial recommendations on the appropriate goals for the qualitative and quantitative performance metrics used in our short-term cash incentive program. However, the Committee is under no obligation to follow those recommendations, and only Compensation Committee members are allowed to vote on decisions regarding NEO compensation.
The Compensation Committee may invite any NEO to attend Compensation Committee meetings to report on the Company’s progress with respect to the annual quantitative and qualitative performance metrics, but any such officer is excluded from any decisions or discussions regarding his individual compensation. In addition, the Board has granted limited authority to Scott Bender, our Chief Executive Officer, to make awards under the LTIP to certain individuals who are not executive officers.
Role of Competitive Benchmarking
In the exercise of its duties, the Compensation Committee periodically evaluates the Company’s executive compensation against that of comparable companies. The Compensation Committee does not set specific percentile goals against competitive data for purposes of determining executive compensation levels. In establishing individual compensation opportunities, the Committee considers this competitive data as well as a variety of other factors including individual performance, competencies, scope of responsibility, and internal equity.
The Compensation Committee considers the competitive market to consist of the oilfield services industry broadly as well as other similarly sized companies in related industries who could potentially compete with us for executive talent. The Committee periodically reviews data for a selected peer group approved by the Compensation Committee (the “peer group”) as well as for broader general industry companies of comparable size and business complexity (compensation survey
data), as provided to the Committee by their independent advisor. For the 2019 compensation analysis, the Company used the following peer group companies:
| |
2019 Compensation Peer Group |
Archrock, Inc. | NCS Multistage Holdings, Inc. |
Core Laboratories, NV | Newpark Resources, Inc. |
Dril-Quip, Inc. | Oil States International, Inc. |
Forum Energy Technologies | Pioneer Energy Services Corp. |
Frank’s International, NV | RPC, Inc. |
Helix Energy Solutions Group, Inc. | USA Compression Partners, LP |
In selecting comparison companies, the Compensation Committee considered various factors including each company’s participation in the energy services sector as well as market capitalization, annual revenues, business complexity, profitability, returns on equity and assets, the number of divisions/segments, countries in which they operate and total number of employees. The selected peer companies are reviewed from time to time to ensure their continued appropriateness for comparative purposes.
Elements of Compensation
Base Salary
Base salary is the guaranteed element of an executive’s direct compensation and is intended to provide a foundation for a competitive overall compensation opportunity for the executive. The Compensation Committee reviews each executive’s base salary annually. Executive officer base salaries are determined after an evaluation that considers the executive’s prior experience and breadth of knowledge and which also considers compensation data from peer group companies and other similarly sized companies in businesses comparable to the Company’s, the Company’s and the executive’s performance, and any significant changes in the executive’s responsibilities. The Compensation Committee considers all these factors together plus overall industry conditions.
Salaries for our Chief Executive Officer and our Chief Operating Officer have remained unchanged since 2017. Effective February 17, 2019, after discussions regarding competitive market data with Pearl Meyer, the Board approved a salary of $335,000 for Stephen Tadlock, who completed his transition to Chief Financial Officer on March 15, 2019.
| | | | | | |
NEO | | 2018
Base Salary | | 2019
Base Salary | | Percent Increase
During 2019 |
Scott Bender | | $ 300,000 | | $ 300,000 | | 0% |
Joel Bender | | 300,000 | | 300,000 | | 0% |
Stephen Tadlock | | 250,000 | | 335,000 | | 34% |
Brian Small | | (1) | | 250,000 | | — |
Steven Bender | | (1) | | 300,000 | | — |
David Isaac | | (1) | | 300,000 | | — |
| (1) | | Cactus was an EGC from our IPO until the end of 2019, and as such, in our 2019 proxy statement, we only reported information regarding the compensation of our Chief Executive Officer and our two next most highly compensated executive officers. Accordingly, Brian Small, Steven Bender and David Isaac were not NEOs for any years prior to 2019. |
Short Term Incentives
Our NEOs are eligible for an annual incentive bonus which is designed to focus executives on execution of our annual plan, which is linked to our long-term strategy. Execution against our annual corporate plan is important to drive long-term shareholder value by improving financial strength, managing costs and investing in projects that will deliver future value. We employ financial and safety performance metrics to further specific objectives of our strategy, such as EBITDA and total recordable incident rate.
On February 15, 2019, after discussions with Pearl Meyer, the Board approved a performance‑based bonus plan for 2019, the 2019 Management Incentive Plan (the “2019 MIP”), pursuant to which all eligible Company employees, including NEOs, would be eligible to receive a cash bonus upon the achievement of certain financial performance and safety metrics.
Under the 2019 MIP, executive officers, including NEOs, were eligible to receive base cash bonus payments equal to a certain specified percentage of their annual base salaries (“Target Bonus”) in the event that the Company met the specified performance targets. The approved 2019 Target Bonus for each of the Company’s NEOs is set forth in the table below as a percentage of such executive’s 2019 base salary:
| | |
NEO | | 2019 Target Bonus Opportunity
(percent of Salary) |
Scott Bender | | 100% |
Joel Bender | | 100% |
Stephen Tadlock | | 50% |
Brian Small | | 40% |
Steven Bender | | 75% |
David Isaac | | 50% |
Target Bonus Opportunity
For NEOs, the MIP has two performance parameters on which the bonus is calculated. The first parameter is Earnings Before Interest, Taxes, Depreciation and Amortization, excluding exceptional items, as defined by the Board (EBITDA), which is weighted as 90% of the bonus opportunity. Participants begin to earn a bonus payout when EBITDA performance reaches Threshold EBITDA which is set at 80% of Target EBITDA. Participants are eligible for a Stretch bonus opportunity if actual EBITDA exceeds Target EBITDA. The maximum Stretch bonus payment is achieved when EBITDA performance reaches 120% of Target EBITDA. The maximum Stretch payment is 40% of the full, non-stretch bonus payment. The calculation of the EBITDA portion of the bonus payout is linear between Threshold and Target and between Target and Stretch. The second parameter is Total Recordable Incident Rate (“TRIR”) which is defined as the number of employees per 100 full-time employees that have been involved in a recordable injury or illness in the pertinent period. TRIR is weighted as 10% of the bonus opportunity. Participants begin to earn a bonus payout when TRIR performance reaches Threshold TRIR of 1.85. A full bonus payout on the TRIR parameter is achieved when safety performance reaches Target TRIR of 1.50 or lower. The calculation of the TRIR portion of the bonus payout is linear between Threshold and Target. Depending upon Company performance, actual payouts under the 2019 MIP may be between 0% and 140% of the Target Bonus opportunity for each NEO.
| | | | |
| | EBITDA | | Payout |
| | ($ in millions) | | |
Threshold | | $ 169.60 | | 0% |
Target | | 212.00 | | 100% |
Stretch | | 254.40 | | 140% |
| | TRIR | | Payout |
Threshold | | 1.85 | | 0% |
Target | | 1.50 | | 100% |
2019 Award Determination
Performance under the MIP is assessed relative to pre-established goals approved by the Committee near the beginning of the fiscal year. For 2019, the Compensation Committee approved performance objectives under the 2019 MIP after considering a combination of factors including alignment with the Company’s business strategy, 2019 budget, investor expectations, recommendations from management, and the Committee’s assessment of management’s ability to impact outcomes.
In 2019, the actual EBITDA performance was $229.0 million. which exceeded Target EBITDA. Based on this result, in addition to earning a full target bonus on the EBITDA component, executives also earned 40.1% of their 40% stretch opportunity an additional 16.2% of the full, non-stretch bonus calculation. The 2019 TRIR performance was 1.64 which is between Threshold and Target performance. Based on this performance NEOs were eligible for 59.2% payout on the TRIR parameter. In total, NEOs will receive a payout for the 2019 MIP of approximately 111.3% of Target. The table below summarizes the metrics and performance standards approved for the 2019 MIP, and management’s level of achievement under the plan:
| | | | | | | | | | | | | | | |
| | Threshold | | Target | | Stretch | | Actual | | % of Target |
| | (in millions) | | | |
EBITDA(1) | | $ | 169.6 | | $ | 212.0 | | $ | 254.4 | | $ | 229.0 | | 108 | % |
(1)Earnings before interest, taxes, depreciation and amortization excluding any exceptional items as defined by the board. The EBITDA performance represented in the table above demonstrates full target achievement with respect to EBITDA. Furthermore, because EBITDA achievement was in excess of target, this results in the achievement of 40.1% of the 40% stretch component. This equates to a stretch payment of 16.2% of the full, non-stretch bonus calculation.
| | | | | | | | | | | | | |
| | | Threshold | | | Target | | | Actual | | | % of Target | |
TRIR(1) | | | 1.85 | | | 1.50 | | | 1.64 | | | 108 | % |
(1)Total Recordable Incident Rate (TRIR) is the number of employees per 100 full-time employees that have been involved in a recordable injury or illness in the pertinent period.
The following table shows the calculation of the non-stretch bonus payment:
| | | | | | | |
Parameter | | Percent of Target | Weighting | Percent Earned |
EBITDA | | 100 | % | 90 | % | 90.0 | % |
TRIR | | 59.2 | % | 10 | % | 5.9 | % |
Total | | | | | | 95.9 | % |
The table below shows the aggregate bonus calculation including both the non-stretch bonus payment and the stretch bonus:
| | | |
Non-Stretch Bonus Percent | | 95.9 | % |
Stretch Bonus Component (16.2% of Non-Stretch Bonus) | | 15.4 | % |
Total Bonus Percentage | | 111.3 | % |
Long-Term Incentives
In order to incentivize individuals providing services to us or our affiliates, in 2018 the Board adopted a long‑term incentive plan (the “LTIP”). The LTIP provides for the grant, from time to time, at the discretion of the Board or a committee thereof, of stock options, stock appreciation rights, restricted stock, restricted stock units, stock awards, dividend equivalents, other stock‑based awards, cash awards, substitute awards and performance awards. The Board has delegated to the Compensation Committee the authority to administer the LTIP, including the power to determine the eligible individuals to whom awards will be granted, the number and type of awards to be granted and the terms and conditions of awards. In addition, the Board has granted limited authority to Scott Bender, our Chief Executive Officer, to make awards under the LTIP to certain individuals who are not executive officers.
The primary purpose of awards under our LTIP is to enforce direct alignment between the long-term interests of our NEOs and those of our shareholders through the use of multi-year vesting and realized value of equity incentives that is contingent upon our stock price performance. Awards of equity under the LTIP also promote long-term share ownership by our NEOs, a goal which is further supported by the adoption of share ownership guidelines in 2019.
2019 LTIP Awards.
On March 11, 2019, our NEOs received grants of restricted stock units (“RSUs”) under our LTIP in the following amounts:
| | | | |
NEO | | Total RSUs Granted | | Total Grant Date Value |
Scott Bender | | 40,139 | | $ 1,499,994 |
Joel Bender | | 40,139 | | 1,499,994 |
Stephen Tadlock | | 40,218 | | 1,502,947 |
Steven Bender | | 16,055 | | 599,975 |
David Isaac | | 12,041 | | 449,972 |
The restricted stock unit awards will vest in three equal annual installments beginning on the first anniversary of the grant date.
Retirement, Health and Welfare Benefits
The Company offers retirement, health and welfare benefits to substantially all of its U.S. employees including executive officers. Executive officers are eligible for these benefits on the same basis as other employees. Health and welfare benefits we offer to our employees include: medical, vision and dental coverage, life insurance, accidental death and dismemberment, short and long-term disability insurance, flexible spending accounts and employee assistance.
The Company offers a defined contribution 401(k) retirement plan to substantially all of its U.S. employees, including the NEOs. Participants may contribute from 1% to 85% of their base pay and cash incentive compensation (subject to U.S. Internal Revenue Service (“IRS”) limitations), and the Company makes matching contributions under this plan on the first 7% of the participant’s compensation (100% match of the first 3% employee contribution and 50% match on the next 4% employee contribution). Company matching contributions vest 20% per year on the first five anniversaries of the respective employee’s hire date.
Perquisites
We provide Scott Bender, Joel Bender, Stephen Tadlock, Steven Bender and Brian Small with bi-weekly vehicle allowances. Additionally, Scott Bender receives a gasoline reimbursement.
Other Compensation Practices and Policies
Compensation Risk
Our compensation policies and practices are designed to provide rewards for short-term and long-term performance, both on an individual basis and at the entity level. In general, optimal financial and operational performance, particularly in a competitive business, requires some degree of risk-taking. Our compensation strategies are designed to encourage company growth and appropriate risk taking but not to encourage excessive risk taking. We also attempt to design the compensation program for our larger general employee population so that it does not inappropriately incentivize our employees to take unnecessary risks in their day to day activities. We recognize, however, that there are trade-offs and that it can be difficult in specific situations to maintain the appropriate balance. As such, we continue to evaluate our programs with a goal of preventing them from becoming materially imbalanced one way or the other.
Our compensation arrangements contain certain design elements that are intended to minimize the incentive for taking unwarranted risk to achieve short-term, unsustainable results. Those elements include a maximum amount that can be earned under our annual incentive cash compensation program.
We also provide compensation to our NEOs in the form of a reasonable base salary. We want our executives to be motivated to achieve Cactus’s short-term and long-term goals, without sacrificing our financial and corporate integrity in trying to achieve those goals. While an executive’s overall compensation should be strongly influenced by the achievement
of specific financial and operational targets, we also believe that a portion of an executive’s compensation should be awarded in components that provide a degree of financial certainty.
In combination with our risk management practices, we do not believe that risks arising from our compensation policies and practices for our employees, including our NEOs, are reasonably likely to have a material adverse effect on us.
Clawback Policy
In June 2019, our Board adopted the Executive Compensation Clawback Policy (the “Clawback Policy”). In the event of a restatement of our financial statements (other than a restatement caused by a change in applicable accounting rules or interpretations), the result of which is that any performance-based compensation paid under an incentive compensation plan would have been a lower amount had it been calculated based on such restated results, the Compensation Committee may seek to recover for the benefit of the Company the after tax portion of the difference between the compensation actually paid to the executive and the corrected amount based on the restated financial results.
Stock Ownership Guidelines
As of December 13, 2019, the Committee has established stock ownership guidelines for our NEOs and non-employee directors. The approved guidelines are as follows:
| | |
Position | | Required Level of Ownership |
Chief Executive Officer | | 6 times base salary |
Other NEOs | | 2 times base salary |
Non-Employee Directors | | 3 times annual cash retainer for Board service |
Stock ownership levels must be achieved by each NEO or non-employee director within five years of becoming subject to the guidelines, or within five years of any material change to the guideline level of ownership. As of February 28, 2020, all of our NEOs and non-employee directors have met or exceeded the ownership expectations under the guidelines other than Mr. Isaac and Ms. Law.
Employment, Severance, and Change-in-Control Agreements
Employment Agreements
In February 2018, in connection with our IPO, we amended and restated our employment agreements with Messrs. Scott and Joel Bender (as amended and restated, each, an “Employment Agreement”). Each Employment Agreement reflects the executive’s base salary of $300,000 and has an initial three‑year term that will extend automatically for one‑year periods thereafter unless advance written notice by either party is provided. Under the Employment Agreements, each of Messrs. Scott and Joel Bender are entitled to receive severance compensation if his employment is terminated under certain conditions, such as a termination by the executive officer for “good reason” or by us without “cause,” each as defined in the agreements and further described below under “—Potential Payments upon Termination or Change of Control.” In addition, the agreements provide for:
| · | | specified minimum base salaries; |
| · | | participation in all of our employee benefit plans to the extent the executive is eligible thereunder; |
| · | | termination benefits, including, in specified circumstances, severance payments; and |
| · | | an annual bonus of up to 100% of annual base salary in the good faith discretion of the Board if the executive satisfies budgetary and performance goals, as determined annually by the Board. |
On February 21, 2019, we amended the Employment Agreements to provide that Scott Bender and Joel Bender shall be eligible to receive an additional annual bonus of up to 40% of the regular annual bonus actually paid, determined in the good faith discretion of the Board if the executive satisfies additional budgetary and performance goals, as determined annually by the Board.
We have not entered into separate severance agreements with Messrs. Scott and Joel Bender and instead rely on the terms of each executive’s Employment Agreement to dictate the terms of any severance arrangements. The Employment Agreements do not provide for accelerated or enhanced cash payments or health and welfare benefits upon a change in control but do provide for salary continuation payments and subsidized health and welfare benefits upon the termination of the executive’s employment for “good reason” or without “cause.” Mr. Tadlock will be eligible to receive severance payments should a merger or sale transaction result in Mr. Tadlock being terminated by the new entity. In addition, Mr. Isaac will be eligible to receive severance payments should he be subject to a Qualifying Termination prior to the third anniversary of his commencement date. Severance payments that could become payable to Messrs. Scott and Joel Bender, Mr. Tadlock and Mr. Isaac pursuant to these arrangements have been described in more detail below under “—Potential Payments upon Termination or Change of Control—Employment Agreements.”
Non‑Compete Agreements
In connection with our IPO, on February 12, 2018, Cactus LLC entered into amended and restated noncompetition agreements (each, a “Noncompetition Agreement”) with each of Scott Bender and Joel Bender. Each of the Noncompetition Agreements provide that, for a period of one year following termination of his employment, Scott Bender and Joel Bender will not (i) compete against us in connection with our business, (ii) solicit or induce any of our employees to leave his or her employment with us or hire any of our employees or (iii) solicit or entice customers who were our customers within the one‑year period immediately prior to his date of termination to cease doing business with us or to begin doing business with our competitors. Pursuant to his employment arrangement with the Company, Mr. Isaac is subject to the same restrictions.
Summary Compensation Table
The following table sets forth information regarding the compensation awarded to, earned by or paid to our NEOs during the year ended December 31, 2019.
| | | | | | | | | | | | | | |
Name and Principal Position | | Year | | Salary
($) | | Bonus
($) | | Non Equity
Incentive Plan
Compensation
($)(1) | | Stock
Awards
($)(2) | | All Other
Compensation ($)(3) | | Total
($) |
Scott Bender, President, Chief Executive Officer and Director (4) | | 2019 | | 300,000 | | — | | 334,835 | | 1,499,994 | | 29,102 | | 2,163,931 |
| | 2018 | | 300,000 | | — | | 300,000 | | 1,000,008 | | 31,135 | | 1,631,143 |
| | 2017 | | 260,096 | | — | | 300,000 | | — | | 24,726 | | 584,822 |
Joel Bender, Senior Vice President, Chief Operating Officer and Director (4) | | 2019 | | 300,000 | | — | | 334,835 | | 1,499,994 | | 30,120 | | 2,164,949 |
| | 2018 | | 300,000 | | — | | 300,000 | | 1,000,008 | | 30,070 | | 1,630,078 |
| | 2017 | | 260,096 | | — | | 300,000 | | — | | 14,386 | | 574,482 |
Stephen Tadlock, Vice President, Chief Financial Officer and Treasurer (5) | | 2019 | | 321,923 | | — | | 180,971 | | 1,502,947 | | 24,773 | | 2,030,614 |
| | 2018 | | 250,000 | | — | | 120,298 | | 1,875,015 | | 23,780 | | 2,269,093 |
Brian Small, Senior Finance Director and Former Chief Financial Officer (5) | | 2019 | | 250,000 | | — | | 111,611 | | — | | 27,620 | | 389,231 |
Steven Bender, Vice President of Operations (5) | | 2019 | | 296,154 | | — | | 248,489 | | 599,975 | | 25,789 | | 1,170,407 |
David Isaac, General Counsel, Vice President of Administration and Secretary (5) | | 2019 | | 296,154 | | — | | 165,659 | | 449,972 | | 14,260 | | 926,045 |
| | | | | | | | | | | | | | |
(1)Amounts of “Non-Equity Incentive Plan Compensation” paid to each applicable NEO were made pursuant to the Company’s short-term incentive program. For a description of this plan please see “Compensation Discussion and Analysis—Elements of Compensation—Short-Term Incentives.”
(2)The amounts reported in this column represent the aggregate grant date fair value of restricted stock unit awards granted to each NEO and computed in accordance with FASB ASC Topic 718. For a discussion of the valuation assumptions with respect to these awards, see Note 6 in the notes to the consolidated financial statements in our Annual Report on Form 10‑K for the fiscal year ended December 31, 2019 (our “2019 Annual Report”). For additional information about restricted stock unit awards granted during 2018, see “Outstanding Equity Awards at 2019 Fiscal Year‑End” below. For more information about our LTIP, see “Compensation Discussion and Analysis—Elements of Compensation—Long-Term Incentives.”
(3)Amounts reflected within the “All Other Compensation” column are comprised of the following amounts:
| | | | | | | | | | |
Name | | Year | | Employer
Contributions to
401(k)
Plan
($) | | Vehicle
Allowance
($) | | Gas
Reimbursement
($) | | Total
($) |
Scott Bender | | 2019 | | 14,375 | | 14,400 | | 327 | | 29,102 |
| | 2018 | | 15,670 | | 14,400 | | 1,065 | | 31,135 |
| | 2017 | | 13,545 | | 10,800 | | 381 | | 24,726 |
Joel Bender | | 2019 | | 15,720 | | 14,400 | | — | | 30,120 |
| | 2018 | | 15,670 | | 14,400 | | — | | 30,070 |
| | 2017 | | 3,586 | | 10,800 | | — | | 14,386 |
Stephen Tadlock | | 2019 | | 10,373 | | 14,400 | | — | | 24,773 |
| | 2018 | | 9,380 | | 14,400 | | — | | 23,780 |
Brian Small | | 2019 | | 13,220 | | 14,400 | | — | | 27,620 |
Steven Bender | | 2019 | | 11,389 | | 14,400 | | — | | 25,789 |
David Isaac | | 2019 | | 14,260 | | — | | — | | 14,260 |
(4)Although Messrs. Scott and Joel Bender each serve on the Board, they are not compensated for their services as directors.
(5)Mr. Tadlock was not a NEO for any years prior to 2018. Brian Small, Steven Bender and David Isaac were not NEOs for any years prior to 2019.
Grants of Plan Based Awards
The following table provides information about equity and non-equity awards granted to our NEOs in 2019, including the following: (1) the grant date; (2) the estimated possible payouts under the non-equity incentive plan, which is discussed in “Compensation Discussion and Analysis—Elements of Compensation—Short-term Incentives and -Long-term Incentives”, included herein; (3) the number of restricted stock awards pursuant to the Company’s LTIP; and (4) the fair value of each equity award.
| | | | | | | | | | | | |
| | | | Estimated Future Payouts Under
Non-Equity Incentive Plan Awards(1) | | | | |
Name | | Grant
Date | | Threshold
($) | | Target
($) | | Maximum
($) | | All Other Stock Awards: Number of Shares of Stock or Units
(#)(2) | | Grant Date Fair Value of Stock Awards
($)(3) |
Scott Bender | | | | 0 | | 300,000 | | 420,000 | | | | |
| | 3/11/2019 | | — | | — | | — | | 40,139 | | 1,499,994 |
Joel Bender | | | | 0 | | 300,000 | | 420,000 | | | | |
| | 3/11/2019 | | — | | — | | — | | 40,139 | | 1,499,994 |
Stephen Tadlock | | | | 0 | | 167,500 | | 234,500 | | | | |
| | 3/11/2019 | | — | | — | | — | | 40,218 | | 1,502,947 |
Brian Small | | | | 0 | | 100,000 | | 140,000 | | | | |
Steven Bender | | | | 0 | | 225,000 | | 315,000 | | | | |
| | 3/11/2019 | | — | | — | | — | | 16,055 | | 599,975 |
David Isaac | | | | 0 | | 150,000 | | 210,000 | | | | |
| | 3/11/2019 | | — | | — | | — | | 12,041 | | 449,972 |
| (1) | | Amounts in these columns represent the threshold, target, and maximum estimated payouts for 2019 MIP bonus awards. The actual value of bonuses paid to our NEOs for 2019 under this program can be found in the “Non-Equity Incentive Plan Compensation” column of the Summary Compensation Table above. |
| (2) | | This column includes the number of restricted stock units granted to our NEOs during 2019. See “Compensation Discussion and Analysis—Elements of Compensation—Long-Term Incentives—2019 LTIP Awards” for more information regarding these restricted stock units. |
| (3) | | The amounts shown in this column represent the grant date fair value of each equity award computed in accordance with FASB ASC Topic 718. Please see Note 6 to our consolidated financial statements for the fiscal year ended December 31, 2019 for additional detail regarding assumptions underlying the value of these equity awards. |
Outstanding Equity Awards at 2019 Fiscal Year‑End
The following table reflects information regarding outstanding restricted stock units held by our NEOs as of December 31, 2019.
| | | | | | |
Name | | Grant Date | | Number of Shares or Units of Stock That Have Not Vested (#) | | Market Value of Shares or Units That Have Not Vested ($)(1) |
Scott Bender | | 2/7/2018 | | 35,088(2) | | 1,204,220 |
| | 3/11/2019 | | 40,139(3) | | 1,377,571 |
| | | | 75,227 | | 2,581,791 |
Joel Bender | | 2/7/2018 | | 35,088(2) | | 1,204,220 |
| | 3/11/2019 | | 40,139(3) | | 1,377,571 |
| | | | 75,227 | | 2,581,791 |
Stephen Tadlock | | 2/7/2018 | | 65,790(2) | | 2,257,913 |
| | 3/11/2019 | | 40,218(3) | | 1,380,282 |
| | | | 106,008 | | 3,638,195 |
Brian Small | | 2/7/2018 | | 2,632(2) | | 90,330 |
| | | | 2,632 | | 90,330 |
Steven Bender | | 2/7/2018 | | 21,052(2) | | 722,505 |
| | 3/11/2019 | | 16,055(3) | | 551,007 |
| | | | 37,107 | | 1,273,512 |
David Isaac | | 10/24/2018 | | 6,077(4) | | 208,563 |
| | 3/11/2019 | | 12,041(3) | | 413,247 |
| | | | 18,118 | | 621,810 |
| (1) | | The market value of these units is based on the closing price of the Company’s Class A common stock on December 31, 2019 ($34.32), the last trading day of the fiscal year. |
| (2) | | Reflects RSUs which vest over two years in equal annual installments on February 7, 2020 and February 7, 2021. |
| (3) | | Reflects RSUs which vest over three years in equal annual installments on March 11, 2020, March 11, 2021 and March 11, 2022. |
| (4) | | Reflects RSUs which vest over two years in equal annual installments on October 24, 2020 and October 24, 2021. |
Stock Vested
The following table provides information for our NEOs on the number of shares of Class A common stock acquired upon the vesting of RSU awards and the value realized, in each case before payment of any applicable withholding tax or exercise prices.
| | | | |
| | Stock Awards (1) |
Name | | Number of Shares Acquired on Vesting (#) | | Pre-tax Value Realized on Vesting
($) |
Scott Bender | | 17,544 | | 575,268 |
Joel Bender | | 17,544 | | 575,268 |
Stephen Tadlock | | 32,895 | | 1,078,627 |
Brian Small | | 1,316 | | 43,152 |
Steven Bender | | 10,527 | | 345,180 |
David Isaac | | 3,039 | | 85,578 |
| (1) | | Reflects shares received pursuant to RSU awards granted under the LTIP vesting in 2019. The value realized upon vesting of these awards represents the aggregate dollar amount realized by the NEO upon vesting computed by multiplying the number of shares of stock by the closing price of the underlying shares on the applicable vesting |
date. For Scott Bender, Joel Bender, Stephen Tadlock, Brian Small and Steven Bender, the applicable vesting date was February 7, 2019, and the closing price of the Class A common stock on that date was $32.79. For David Isaac, the applicable vesting date was October 24, 2019, and the closing price of the Class A common stock on that date was $28.16. |
Pension Benefits and Nonqualified Deferred Compensation
We have not maintained, and do not currently maintain, a defined benefit pension plan or a nonqualified deferred compensation plan providing for retirement benefits.
Potential Payments Upon Termination or Change of Control
Each of our NEOs may be entitled to certain severance and other benefits upon a termination of employment under their respective award agreements and employment agreements, as described in further detail below. The description of the relevant terms of such award agreements and employment agreements set forth below does not purport to be a complete description of all of the provisions of any such agreements and is qualified in its entirety by reference to the forms of award agreements and severance agreements previously filed.
Employment Agreements
Scott Bender and Joel Bender Employment Agreements
We have entered into employment agreements with Messrs. Scott and Joel Bender. The Employment Agreements do not provide for accelerated or enhanced cash payments or health and welfare benefits upon a change in control but do provide for salary continuation payments and subsidized health and welfare benefits upon the termination of the executive’s employment for “good reason” or without “cause.”
To receive benefits under the Employment Agreements, the executive officer will be required to execute a release of all claims against the Company.
Termination for Good Reason or Without Cause. If either Scott or Joel Bender terminates his employment for “good reason” or is terminated by us without “cause,” he will be entitled to receive as severance, in addition to any amounts earned and unpaid through the date of termination, his then‑current base salary and benefits (except car and expense reimbursement benefits) for the remaining term of the Employment Agreement if such term is greater than one year, or if such term is not greater than one year, one year from the date of termination, paid in lump sum within 60 days after the executive’s separation from service.
Termination Due to Disability. If either Scott or Joel Bender’s employment is terminated by either us or the executive due to disability, he will be entitled to receive as severance his then‑current base salary and benefits through the remainder of the calendar month during which such termination is effective and for the lesser of (a) six consecutive months thereafter or (b) the date on which disability insurance benefits commence under any disability insurance coverage which may be provided by us, paid in lump sum within 30 days after the executive’s termination due to disability.
Termination Due to Death. If either Scott or Joel Bender’s employment is terminated due to death, his estate will be entitled to receive his then‑current base salary and accrued benefits through the end of the calendar month in which his death occurs, paid in lump sum within 30 days after the executive’s termination due to disability.
In each case, if the executive is entitled to severance payments, during such severance period we will pay such executive’s portion of Consolidated Omnibus Budget Reconciliation Act (“COBRA”) premium payments, and if COBRA is no longer available during such period, we will provide similar health insurance coverage for such executive during the severance period.
For purposes of Scott and Joel Bender’s Employment Agreements:
•The term “cause” means the executive (i) is convicted of, or enters a nolo contendre or guilty plea with respect to, a crime involving fraud, theft, embezzlement or other act of material dishonesty or the Board’s loss of
confidence in the executive because he is convicted of, or enters a nolo contendre or guilty plea with respect to, any felony or crime involving moral turpitude; (ii) commits any other material breach of any of the provisions of his employment agreement other than a breach which (being capable of being remedied) is remedied by him within 14 days of being called upon to do so in writing by us; or (iii) fails to perform his duties and responsibilities (other than a failure from disability) for a period of 30 consecutive days.
•The term “good reason” means any of the following: (i) we commit any material breach of the provisions of the executive’s Employment Agreement; (ii) we assign the executive to a position, responsibilities or duties of a materially lesser status or degree of responsibility than his position, responsibilities or duties as of the effective date of the Employment Agreement; (iii) the requirement by us that the executive be based anywhere other than Houston, Texas, provided that such a change in geographic location be deemed material; or (iv) any decrease of more than 10% in the executive’s base salary as of the effective date of the Employment Agreement. In any case, the executive must provide written notice of termination for good reason within 90 days of the initial existence of the condition at issue, and we will have the opportunity to cure such circumstances within a 30‑day period of receipt of such notice.
Stephen Tadlock Offer Letter
Pursuant to the terms of his offer letter, Mr. Tadlock will be eligible to receive six months of severance should a merger or sale transaction result in Mr. Tadlock being terminated by the new entity.
David Isaac Severance Agreement
Pursuant to the terms of a severance agreement, Mr. Isaac is entitled to a severance payment in the event of a Qualifying Termination prior to September 24, 2021. If Mr. Isaac has a Qualifying Termination before September 24, 2020, he will be eligible for a severance payment equal to 2/3 of his then current annual base salary. If Mr. Isaac has a Qualifying Termination during the period from September 25, 2020 until September 24, 2021, he will be eligible to receive a severance payment equal to 1/3 of his then current annual base salary.
Restricted Stock Unit Awards
The Company’s restricted stock unit award agreements provide that restricted stock awards will become fully vested on (i) the date a Change of Control occurs, (ii) the termination of an employee’s employment due to his death or a Disability or (iii) upon the employee’s Normal Retirement. As used in the restricted stock unit award agreements, “Disability” means that the employee is unable to perform the essential functions of their duties for three consecutive months, or three months during any six-month period, as determined after an examination by a medical doctor selected by written agreement of the employee and the Company. As used in the restricted stock unit award agreements, “Normal Retirement” means an employee’s separation from service without Cause on or following the age of 65. For purposes of the restricted stock unit award agreements, “Cause” means the employee (i) is convicted of, or enters a nolo contendere or guilty plea with respect to a crime involving fraud, theft, embezzlement or other act of material dishonesty, the Board’s loss of confidence in the employee because he is convicted of or enters a nolo contendere or guilty plea with respect to any felony or crime involving moral turpitude; (ii) commits any other material breach of any of the provisions of their employment agreement with the Company (if applicable) or any material employment contract, policy or agreement the employee has entered into with the Company, other than a breach which (being capable of being remedied) is remedied by the employee within fourteen days of being called upon to do so in writing by the Company; or (iii) fails to perform their duties and responsibilities (other than a failure resulting from Disability).
Management Incentive Plan Awards
The Company’s Management Incentive Plan provides that participants whose employment ends before the bonus payments are made forfeit all rights to participate in the Management Incentive Plan and to receive any bonus relating to prior service, except for the following:
| · | | Injury, disability or ill-health (as determined by the Compensation Committee); |
Quantification of Payments
Shown in the table below are potential payments upon the assumed (i) involuntary not for Cause termination of our NEOs other than during the 24-month period following a Change of Control, or (ii) involuntary not for Cause termination or termination by the NEO for “Good Reason,” in either case, during the 24-month period following a Change of Control of the Company, occurring as of December 31, 2019. In addition, the tables that follow show the potential payments upon the hypothetical (i) disability, retirement or death of our NEOs, and (ii) Change of Control of the Company, in each case, occurring as of December 31, 2019. The table includes estimate amounts because actual amounts to be paid can only be determined at the time of such executive’s separation from the Company or upon a Change of Control.
| | | | | | | | | | | | | | | | | | | |
| | Potential Payments Upon Termination and Change of Control |
Executive Benefits and Payments Upon Separation | | Termination for Cause | | Involuntary Not for Cause Termination without a Change of Control | | Termination with a Change of Control | | Disability or Normal Retirement | | Death | | Change of Control (No Termination) |
Scott Bender | Compensation: | | | | | | | | | | | | | | | | | | |
| Cash Severance | | $ | — | | $ | 300,000 | | $ | 300,000 | | $ | 150,000 | | $ | 25,000 | | $ | — |
| Stock Awards (1) | | | — | | | 2,581,791 | | | 2,581,791 | | | 2,581,791 | | | 2,581,791 | | | 2,581,791 |
| Performance Cash Awards (2) | | | — | | | — | | | 300,000 | | | 300,000 | | | 300,000 | | | 300,000 |
| Benefits & Perquisites: | | | | | | | | | | | | | | | | | | |
| Health and Welfare Benefits (3) | | | — | | | 11,229 | | | 11,229 | | | 5,615 | | | 11,229 | | | — |
Total | | | $ | — | | $ | 2,893,020 | | $ | 3,193,020 | | $ | 3,037,406 | | $ | 2,918,020 | | $ | 2,881,791 |
Joel Bender | Compensation: | | | | | | | | | | | | | | | | | | |
| Cash Severance | | $ | — | | $ | 300,000 | | $ | 300,000 | | $ | 150,000 | | $ | 25,000 | | $ | — |
| Stock Awards (1) | | | — | | | — | | | 2,581,791 | | | 2,581,791 | | | 2,581,791 | | | 2,581,791 |
| Performance Cash Awards (2) | | | — | | | — | | | 300,000 | | | 300,000 | | | 300,000 | | | 300,000 |
| Benefits & Perquisites: | | | | | | | | | | | | | | | | | | |
| Health and Welfare Benefits (3) | | | — | | | 11,104 | | | 11,104 | | | 5,552 | | | 11,104 | | | — |
Total | | | $ | — | | $ | 311,104 | | $ | 3,192,895 | | $ | 3,037,343 | | $ | 2,917,895 | | $ | 2,881,791 |
Stephen Tadlock | Compensation: | | | | | | | | | | | | | | | | | | |
| Cash Severance | | $ | — | | $ | — | | $ | 167,500 | | $ | — | | $ | — | | $ | — |
| Stock Awards (1) | | | — | | | — | | | 3,638,195 | | | 3,638,195 | | | 3,638,195 | | | 3,638,195 |
| Performance Cash Awards (2) | | | — | | | — | | | 167,500 | | | 167,500 | | | 167,500 | | | 167,500 |
| Benefits & Perquisites: | | | | | | | | | | | | | | | | | | |
| Health and Welfare Benefits (3) | | | — | | | — | | | — | | | — | | | — | | | — |
Total | | | $ | — | | $ | — | | $ | 3,973,195 | | $ | 3,805,695 | | $ | 3,805,695 | | $ | 3,805,695 |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| | Potential Payments Upon Termination and Change of Control |
Executive Benefits and Payments Upon Separation | | Termination for Cause | | Involuntary Not for Cause Termination without a Change of Control | | Termination with a Change of Control | | Disability or Normal Retirement | | Death | | Change of Control (No Termination) |
Brian Small | Compensation: | | | | | | | | | | | | | | | | | | |
| Cash Severance | | $ | — | | $ | — | | $ | — | | $ | — | | $ | — | | $ | — |
| Stock Awards (1) | | | — | | | — | | | 90,330 | | | 90,330 | | | 90,330 | | | 90,330 |
| Performance Cash Awards (2) | | | — | | | — | | | 100,000 | | | 100,000 | | | 100,000 | | | 100,000 |
| Benefits & Perquisites: | | | | | | | | | | | | | | | | | | |
| Health and Welfare Benefits (3) | | | — | | | — | | | — | | | — | | | — | | | — |
Total | | | $ | — | | $ | — | | $ | 190,330 | | $ | 190,330 | | $ | 190,330 | | $ | 190,330 |
Steven Bender | Compensation: | | | | | | | | | | | | | | | | | | |
| Cash Severance | | $ | — | | $ | — | | $ | - | | $ | — | | $ | — | | $ | — |
| Stock Awards (1) | | | — | | | — | | | 1,273,512 | | | 1,273,512 | | | 1,273,512 | | | 1,273,512 |
| Performance Cash Awards (2) | | | — | | | — | | | 225,000 | | | 225,000 | | | 225,000 | | | 225,000 |
| Benefits & Perquisites: | | | | | | | | | | | | | | | | | | |
| Health and Welfare Benefits (3) | | | — | | | — | | | — | | | — | | | — | | | — |
Total | | | $ | — | | $ | — | | $ | 1,498,512 | | $ | 1,498,512 | | $ | 1,498,512 | | $ | 1,498,512 |
David Isaac | Compensation: | | | | | | | | | | | | | | | | | | |
| Cash Severance | | $ | — | | $ | 200,000 | | $ | 200,000 | | $ | — | | $ | — | | $ | — |
| Stock Awards (1) | | | — | | | — | | | 621,810 | | | 621,810 | | | 621,810 | | | 621,810 |
| Performance Cash Awards (2) | | | — | | | — | | | 150,000 | | | 150,000 | | | 150,000 | | | 150,000 |
| Benefits & Perquisites: | | | | | | | | | | | | | | | | | | |
| Health and Welfare Benefits (3) | | | — | | | — | | | — | | | — | | | — | | | — |
Total | | | $ | — | | $ | 200,000 | | $ | 971,810 | | $ | 771,810 | | $ | 771,810 | | $ | 771,810 |
| (1) | | Reflects the value of unvested restricted stock unit awards as of December 31, 2019 that would be accelerated as a result of the separation event based on the Company’s stock price of $34.32, which was the closing market price of the Company’s Class A common stock as of December 31, 2019. |
| (2) | | Reflects the value of unvested performance-based cash awards as of December 31, 2019. Performance-based cash awards have been reported assuming that the performance period ended on December 31, 2019 and that the performance level achievement was at target for the 2019 awards. |
| (3) | | Reflects the estimated lump-sum present value of all future premiums which will be paid on behalf of the NEO under the Company’s health and welfare benefit plans for the applicable continuation period specified in the Executive Agreements. |
| (4) | | Due to Mr. Bender’s eligibility for “Normal Retirement” treatment in the event of a separation from service without cause, this reflects the value of unvested restricted stock unit awards held by Mr. Bender as of December 31, 2019, that would be accelerated upon his “Normal Retirement.” |
2019 Chief Executive Officer Pay Ratio
As required by Section 953(b) of the Dodd-Frank Wall Street Reform and Consumer Protection Act, and Item 402(u) of Regulation S-K, we are providing the following information about the relationship of the median annual total compensation of our employees (other than the Chief Executive Officer) and the annual total compensation of Scott Bender, our Chief Executive Officer.
For 2019, our last completed fiscal year:
Scott Bender had total annual compensation of $2,163,931 as reflected in the Summary Compensation Table included in this Proxy Statement.
oOur median employee’s annual total compensation was $90,436.
oAs a result, we estimate that Scott Bender’s 2019 annual total compensation was approximately 23.9 times that of our median employee.
To identify the median employee, we took the following steps:
oWe determined that, as of December 1, 2019, our employee population consisted of 1,137 individuals. This population consisted of our full-time and part-time employees (including both active employees and employees on leave as of December 31, 2019);
oWe selected December 1, 2019 as our identification date for determining our median employee because it enabled us to make such identification in a reasonably efficient and economic manner.
oWe used a consistently applied compensation measure to identify our median employee by comparing the actual amount of salary or wages as reflected in our payroll records. Compensation was annualized for employees that were not employed by us for all of 2019.
oFor our employees located outside of the United States, we obtained similar payroll records and converted such information into U.S. dollars using the year-end currency exchange rate.
oTo determine the annual total compensation of our median employee and our Chief Executive Officer, we took the following steps:
After we identified our median employee, we combined all of the elements of such employee’s compensation for the 2019 year in accordance with the requirements of Item 402(c)(2)(x) of Regulation S-K, resulting in annual total compensation of $90,436.17.
With respect to the annual total compensation of our Chief Executive Officer, we used the amount reported in the “Total” column of our 2019 Summary Compensation Table included in this Proxy Statement.
Director Compensation
Pursuant to our non‑employee director compensation program, each non‑employee director receives the following compensation for his or her service on the Board:
| · | | a cash retainer of $80,000 per year, payable quarterly in arrears; |
| · | | an additional cash retainer of $20,000 per year, payable quarterly in arrears if such non‑employee director serves as the chairperson of our Audit Committee and an additional cash retainer of $10,000 per year for each other member of our Audit Committee; |
| · | | an additional cash retainer of $10,000 per year, payable quarterly in arrears if such non‑employee director serves as the chairperson of our Compensation Committee and an additional cash retainer of $5,000 per year for each other member of our Compensation Committee; |
| · | | an additional cash retainer of $10,000 per year, payable quarterly in arrears if such non‑employee director serves as the chairperson of our Nominating and Governance Committee and an additional $5,000 per year for each other member of our Nominating and Governance Committee; and |
| · | | annual equity‑based compensation with an aggregate grant date value of $100,000, described below. |
In addition, a cash retainer of $20,000 per year will be payable to a non‑employee Chairman of the Board quarterly in arrears. Each director will be reimbursed for out‑of‑pocket expenses incurred in connection with attending board and committee meetings.
The non‑employee directors received a restricted stock unit grant value of $100,000 in connection with our IPO. All director restricted stock unit awards will generally be subject to a one‑year vesting schedule. In connection with our IPO, Messrs. Rosenthal and Semple also each received restricted stock unit awards with grant date values of $1,250,000 that will vest over three years.
Messrs. Scott and Joel Bender, as employees of the Company, do not receive compensation for their services as directors in addition to their employee compensation described above. The table below reflects the compensation provided during 2019 to each member of the Board who was not employed by the Company.
| | | |
Name | Fees Earned or Paid in Cash ($)(1) | Stock Awards ($)(2) | Total ($)(3) |
Bruce Rothstein(3) | $ 100,000 | $ 99,965 | $ 199,965 |
John (Andy) O'Donnell | 100,000 | 99,965 | 199,965 |
Michael McGovern | 100,000 | 99,965 | 199,965 |
Alan Semple | 105,000 | 99,965 | 204,965 |
Gary L. Rosenthal | 95,000 | 99,965 | 194,965 |
Melissa Law(4) | — | — | — |
(1)The amounts shown in this column reflect cash fees earned by each director during 2019. We will also reimburse all directors for reasonable expenses incurred in attending all board or committee meetings.
(2)Amounts reported in this column represent the grant date fair market value determined in accordance with FASB ASC Topic 718 of restricted stock units granted during 2019.
(3)Mr. Rothstein did not directly receive any compensation for his services as a director during 2019. Mr. Rothstein is a Managing Partner of Cadent Energy Partners LLC. Due to Mr. Rothstein’s services as a managing partner at Cadent, all compensation and equity awards that he receives will be payable or transferred to Cadent.
(4)Melissa Law was appointed to the board of directors on January 30, 2020 and therefore was not a director in 2019.
Consistent with the director compensation program described above, on March 11, 2019, the Compensation Committee made grants of 2,675 restricted stock units to each of our non-employee directors. These awards of restricted stock will vest in full on the first anniversary of the date of grant and are subject to forfeiture pursuant to the terms of the notice of grant and award agreement under which they were granted as well as the terms of the LTIP on that date.
As of December 31, 2019, the aggregate number of unvested restricted stock unit awards held by non-employee directors were as follows:
| | |
Name | | Stock Awards
(#) |
Bruce Rothstein(3) | | 2,675 |
John (Andy) O'Donnell | | 2,675 |
Michael McGovern | | 2,675 |
Alan Semple | | 46,535 |
Gary L. Rosenthal | | 46,535 |
Compensation Committee Interlocks and Insider Participation
During 2019, the Company’s Compensation Committee consisted of Messrs. McGovern, O’Donnell and Rosenthal. There were no compensation committee interlock relationships for the year ended December 31, 2019. No member of our Compensation Committee during 2019 has engaged in any related party transaction in which our company was a participant.
Compensation Committee Report
The Compensation Committee reviewed and discussed the Compensation Discussion and Analysis required by Item 402 of Regulation S-K promulgated by the SEC with management of the Company, and, based on such review and discussions, the Compensation Committee recommended to the Board of Directors that such Compensation Discussion and Analysis be included in the Company’s Proxy Statement for the 2020 annual meeting and the Company’s Annual Meeting and is incorporated herein by reference.Report on Form 10-K for the fiscal year ended December 31, 2019.
| |
| Compensation Committee of the Board of Directors |
| Michael McGovern, Chairman John (Andy) O’Donnell, Member Gary Rosenthal, Member Melissa Law, Member |
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
InformationSecurity Ownership of Certain Beneficial Owners and Management
The following table sets forth certain information regarding the beneficial ownership of common stock as of February 11, 2020, by (i) each person who is known by the Company to own beneficially more than five percent of the outstanding shares of common stock, (ii) each NEO of the Company, (iii) each director and director nominee of the Company and (iv) all directors and executive officers as a group. All of such information is based on publicly available filings, unless otherwise known to us from other sources. Unless otherwise noted, the mailing address of each person or entity named below is 920 Memorial City Way, Suite 300 Houston, Texas 77024.
As of February 11, 2020, 47,339,329 shares of our Class A common stock and 27,957,699 shares of our Class B common stock were outstanding.
| | | | | | | | | | | | | | | | | | |
| | Shares Beneficially Owned by
Certain Beneficial Owners and Management (2) |
| | Class A
Common Stock | | Class B
Common Stock | | Combined Voting Power |
| | Number | | | % of
class | | Number | | | % of
class | | Number | | | % of
class |
5% Stockholders | | | | | | | | | | | | | | | | | | |
Cadent Energy Partners II, L.P.(3) | | 5,264 | | | * | % | | 8,347,466 | | | 29.9 | % | | 8,352,730 | | | 11.1 | % |
Cactus WH Enterprises, LLC(4) | | — | | | — | % | | 17,934,356 | | | 64.1 | % | | 17,934,356 | | | 23.8 | % |
BlackRock, Inc.(5) | | 3,311,308 | | | 7.0 | % | | — | | | — | % | | 3,311,308 | | | 4.4 | % |
The Vanguard Group(6) | | 4,303,181 | | | 9.1 | % | | — | | | — | % | | 4,303,181 | | | 5.7 | % |
Directors and NEOs: | | | | | | | | | | | | | | | | | | |
Bruce Rothstein(3) | | — | | | — | % | | — | | | — | % | | — | | | — | % |
Scott Bender(4) | | 26,816 | | | * | % | | 17,934,356 | | | 64.1 | % | | 17,961,172 | | | 23.9 | % |
Joel Bender(4) | | 26,234 | | | * | % | | 17,934,356 | | | 64.1 | % | | 17,960,590 | | | 23.9 | % |
Stephen Tadlock | | 49,452 | | | * | % | | — | | | — | % | | 49,452 | | | * | % |
David Isaac | | 2,299 | | | * | % | | — | | | — | % | | 2,299 | | | * | % |
Steven Bender | | 15,614 | | | * | % | | — | | | — | % | | 15,614 | | | * | % |
Brian Small | | 1,850 | | | * | % | | — | | | — | % | | 1,850 | | | * | % |
John (Andy) O’Donnell | | 5,264 | | | * | % | | 52,508 | | | * | % | | 57,772 | | | * | % |
Michael McGovern | | 5,264 | | | * | % | | 56,018 | | | * | % | | 61,282 | | | * | % |
Alan Semple | | 39,994 | | | * | % | | — | | | — | % | | 39,994 | | | * | % |
Gary Rosenthal | | 32,167 | | | * | % | | — | | | — | % | | 32,167 | | | * | % |
Melissa Law | | — | | | — | % | | — | | | — | % | | — | | | — | |
Directors and executive officers as a group (12 persons) | | 204,954 | | | * | % | | 18,042,882 | | | 64.5 | % | | 18,247,836 | | | 24.2 | % |
(1)Subject to the terms of the First Amended and Restated Limited Liability Company Operating Agreement of Cactus LLC (the “Cactus Wellhead LLC Agreement”), each holder of common units representing limited liability company interests in Cactus LLC (such units, “CW Units” and holders of CW Units, “CW Unit Holders”), subject to certain limitations, has the right (the “Redemption Right”) to cause Cactus LLC to acquire all or at least a minimum portion of its CW Units for, at our election, (x) shares of our Class A Common Stock at a redemption ratio of one share of Class A Common Stock for each CW Unit redeemed, subject to
conversion rate adjustments for stock splits, stock dividends and reclassifications and other similar transactions, or (y) an equivalent amount of cash. Alternatively, upon the exercise of the Redemption Right, Cactus Inc. (instead of Cactus LLC) will have the right (the “Call Right”) to acquire each tendered CW Unit directly from the exchanging CW Unit Holder for, at its election, (x) one share of Class A Common Stock, subject to conversion rate adjustments for stock splits, stock dividends and reclassification and other similar transactions, or (y) an equivalent amount of cash. In connection with any redemption of CW Units pursuant to the Redemption Right or our Call Right, the corresponding number of shares of Class B Common Stock will be canceled. See “Transactions with Related Persons—Cactus Wellhead LLC Agreement.” The amounts and percentages of common stock beneficially owned are reported on the basis of regulations of the SEC governing the determination of beneficial ownership of securities. Under the rules of the SEC, a person is deemed to be a “beneficial owner” of a security if that person has or shares voting power, which includes the power to vote or direct the voting of such security, or investment power, which includes the power to dispose of or to direct the disposition of such security. Securities that can be so acquired are deemed to be outstanding for purposes of computing such person’s ownership percentage, but not for purposes of computing any other person’s percentage. Under these rules, more than one person may be deemed a beneficial owner of the same securities, and a person may be deemed to be a beneficial owner of securities as to Itemwhich such person has no economic interest. Except as otherwise indicated in these footnotes, each of the beneficial owners has, to our knowledge, sole voting and investment power with respect to the indicated shares of common stock, except to the extent this power may be shared with a spouse.
(2)Represents percentage of voting power of our Class A Common Stock and Class B Common Stock voting together as a single class. The CW Unit Holders hold one share of Class B Common Stock for each CW Unit that they own. Each share of Class B Common Stock has no economic rights but entitles the holder thereof to one vote for each CW Unit held by such holder. Accordingly, the CW Unit Holders collectively have a number of votes in Cactus Inc. equal to the number of CW Units that they hold.
(3)Cadent Energy Partners II, L.P., its general partner, Cadent Energy Partners II—GP, L.P., and Cadent Management Services, LLC (“Cadent Management”), its manager, are indirectly controlled by Cadent Energy Partners. Cadent Energy Partners controls all voting and dispositive power over the reported shares and therefore may be deemed to be the beneficial owner of such shares. Any decision taken by Cadent Management to vote, or to direct to vote, and to dispose, or to direct the disposition of, the securities held by Cadent has to be approved by its investment committee. There are four members of the investment committee, and unanimous approval of the members of the investment committee is required to approve an action. Under the so-called “rule of three,” if voting and dispositive decisions regarding an entity’s securities are made by three or more individuals, and a voting or dispositive decision requires the approval of a majority of those individuals, then none of the individuals is deemed a beneficial owner of the entity’s securities. This is the situation with regard to the investment committee of Cadent Management. Bruce Rothstein, the Chairman of our board of directors, is a Managing Director of Cadent Energy Partners. Certain of our directors and officers have passive interests in Cadent. In connection with our IPO, Cactus Inc. entered into a Stockholders’ Agreement with Cadent and Cactus WH Enterprises, which provides Cadent and Cactus WH Enterprises with the right to designate a certain number of nominees to our board of directors so long as they and their respective affiliates collectively beneficially own at least 5% of the outstanding shares of our common stock. Therefore, Cadent and Cactus WH Enterprises may each be deemed to beneficially own an aggregate 26,281,822 shares of our Class B common stock, representing an aggregate combined voting power of 34.9%. Cadent also owns 5,264 shares of Class A common stock that was issued to Mr. Rothstein in connection with the vesting of previously granted restricted stock units. Due to Mr. Rothstein’s position as a managing director at Cadent Energy Partners, all compensation and equity awards that he receives are directly payable or transferred to Cadent Management, a subsidiary of Cadent Energy Partners.
(4)Scott Bender and Joel Bender control Cactus WH Enterprises and may be deemed to share voting and dispositive power over the reported shares and, therefore, will also be deemed to be the beneficial owners of such shares. In connection with our IPO, Cactus Inc. entered into a Stockholders’ Agreement with Cadent and
Cactus WH Enterprises, which provides Cadent and Cactus WH Enterprises with the right to designate a certain number of nominees to our board of directors so long as they and their respective affiliates collectively beneficially own at least 5% of the outstanding shares of our common stock. Therefore, Cadent and Cactus WH Enterprises may each be deemed to beneficially own an aggregate 26,281,822 shares, representing an aggregate combined voting power of 34.9%.
(5)Based on the Schedule 13G/A, filed February 5, 2020 by BlackRock, Inc., (“BlackRock”) a parent holding company, which states that BlackRock and its affiliates have sole investment discretion over 3,311,308 shares of our Class A common stock and sole voting power over 3,229,404 shares of our Class A common stock. All shares covered by such filings are held by BlackRock and/or its subsidiaries. The address of BlackRock, Inc. is 55 East 52nd Street, New York, NY 10055.
(6)Based on the Schedule 13G/A, filed February 12, will be set2020 by The Vanguard Group (“Vanguard”), which states that Vanguard has sole voting power over 98,023 shares of our Class A common stock, shared voting power over 4,804 shares of our Class A common stock, sole dispositive power over 4,205,331 shares of our Class A common stock and shared dispositive power over 97,850 shares of our Class A common stock. The address of Vanguard is 100 Vanguard Boulevard, Malvern, PA 19355.
*Less than 1.0%.
Changes in Control
We know of no arrangements, including any pledge by any person of our securities, the operation of which may at a subsequent date result in a change in control of the Company.
Securities Authorized for Issuance under Equity Compensation Plans
The following table sets forth in the Proxy Statement for the Annual Meeting and is incorporated herein by reference.certain information relating to our LTIP as of December 31, 2019.
| | | | | | |
Plan category | | Number of securities to be issued upon exercise of outstanding options, warrants and rights (1) | | Weighted average exercise price of outstanding options, warrants and rights ($)(2) | | Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a))(3) |
| | (a) | | (b) | | (c) |
Equity compensation plans approved by security holders | | N/A | | N/A | | N/A |
Equity compensation plans not approved by security holders | | 688,865 | | N/A | | 2,036,788 |
Total | | 688,865 | | N/A | | 2,036,788 |
| (1) | | This column reflects all shares subject to time-based restricted stock units granted under the LTIP that were outstanding and unvested as of December 31, 2019. No stock options or warrants have been granted under the LTIP. |
| (2) | | No stock options have been granted under the LTIP, and the restricted stock units reflected in column (a) are not reflected in this column as they do not have an exercise price. |
| (3) | | This column reflects the total number of shares remaining available for issuance under the LTIP as of December 31, 2019. |
Item 13. Certain Relationships and Related Transactions, and Director Independence
InformationPolicies and Procedures for Review of Related Party Transactions
A “Related Party Transaction” is a transaction, arrangement or relationship in which we or any of our subsidiaries was, is or will be a participant, the amount of which involved exceeds $120,000, and in which any related person had, has or will have a direct or indirect material interest. A “Related Person” means:
•any person who is, or at any time during the applicable period was, one of our executive officers or one of our directors;
•any person who is known by us to be the beneficial owner of more than 5% of any class of our voting securities;
•any immediate family member of any of the foregoing persons, which means any child, stepchild, parent, stepparent, spouse, sibling, mother‑in‑law, father‑in‑law, son‑in‑law, daughter‑in‑law, brother‑in‑law or sister‑in‑law of a director, executive officer or a beneficial owner of more than 5% of our Common Stock, and any person (other than a tenant or employee) sharing the household of such director, executive officer or beneficial owner of more than 5% of our Common Stock; and
•any firm, corporation or other entity in which any of the foregoing persons is a partner or principal or in a similar position or in which such person has a 10% or greater beneficial ownership interest.
Our board of directors adopted a written Related Party Transactions policy prior to the completion of our IPO. Pursuant to this policy, our Audit Committee has and will continue to review all material facts of all Related Party Transactions and either approve or disapprove entry into the Related Party Transaction, subject to certain limited exceptions. In determining whether to approve or disapprove entry into a Related Party Transaction, our Audit Committee takes into account, among other factors, the following: (i) whether the Related Party Transaction is on terms no less favorable than terms generally available to an unaffiliated third party under the same or similar circumstances and (ii) the extent of the Related Person’s interest in the transaction. Further, the policy requires that all Related Party Transactions required to be disclosed in our filings with the SEC be so disclosed in accordance with applicable laws, rules and regulations.
Cactus Wellhead LLC Agreement
Under the Cactus Wellhead LLC Agreement, each CW Unit Holder, subject to certain limitations, has the right, pursuant to the Redemption Right, to cause Cactus LLC to acquire all or at least a minimum portion of its CW Units for, at Cactus LLC’s election, (x) shares of our Class A Common Stock at a redemption ratio of one share of Class A Common Stock for each CW Unit redeemed, subject to conversion rate adjustments for stock splits, stock dividends and reclassification and other similar transactions, or (y) an equivalent amount of cash. Alternatively, upon the exercise of the Redemption Right, Cactus Inc. (instead of Cactus LLC) will have the right, pursuant to the Call Right, to acquire each tendered CW Unit directly from the exchanging CW Unit Holder for, at its election, (x) one share of Class A Common Stock, subject to conversion rate adjustments for stock splits, stock dividends and reclassifications and other similar transactions, or (y) an equivalent amount of cash. In connection with any redemption of CW Units pursuant to the Redemption Right or our Call Right, the corresponding number of shares of Class B Common Stock will be canceled. In addition, any redemptions involving all of the CW Units held by a CW Unit Holder (subject to the discretion of Cactus Inc. to restrict redemptions of a lower number of units) may occur at any time. As the CW Unit Holders redeem their CW Units, our membership interest in Cactus LLC will be correspondingly increased, the number of shares of Class A Common Stock outstanding will be increased, and the number of shares of Class B Common Stock outstanding will be reduced.
Under the Cactus Wellhead LLC Agreement, we have the right to determine when distributions will be made to CW Unit Holders and the amount of any such distributions. If we authorize a distribution, such distribution will be made to the holders of CW Units on a pro rata basis in accordance with their respective percentage ownership of CW Units.
The holders of CW Units, including us, will generally incur U.S. federal, state and local income taxes on their proportionate share of any taxable income of Cactus LLC and will be allocated their proportionate share of any taxable loss of Cactus LLC. Net profits and net losses of Cactus LLC generally will be allocated to holders of CW Units on a pro rata basis in accordance with their respective percentage ownership of CW Units, except that certain non pro rata adjustments will be required to be made to reflect built-in gains and losses and tax depletion, depreciation and amortization with respect to such built-in gains and losses. To the extent Cactus LLC has available cash and subject to the terms of any current or future credit agreements or debt instruments, we intend to cause Cactus LLC to make (i) pro rata distributions to the holders of CW Units, including us, in an amount at least sufficient to allow us to pay our taxes and make payments under the Tax Receivable Agreement that we entered into with the TRA Holders in connection with our IPO and (ii) non pro rata payments to Cactus Inc. to reimburse us for our corporate and other overhead expenses incurred by us in connection with serving as a managing member of Cactus LLC.
The Cactus Wellhead LLC Agreement provides that, except as otherwise determined by us, at any time we issue a share of our Class A Common Stock or any other equity security, the net proceeds received by us with respect to Item 13such issuance, if any, shall be concurrently invested in Cactus LLC, and Cactus LLC shall issue to us one CW Unit or other economically equivalent equity interest. Conversely, if at any time, any shares of our Class A Common Stock are redeemed, repurchased or otherwise acquired, Cactus LLC shall redeem, repurchase or otherwise acquire an equal number of CW Units held by us, upon the same terms and for the same price, as the shares of our Class A Common Stock are redeemed, repurchased or otherwise acquired.
Under the Cactus Wellhead LLC Agreement, Cadent and its affiliates are not required to offer to us an opportunity to participate in specified business opportunities that are from time to time presented to Cadent and its affiliates, including any of our directors affiliated with Cadent. The Cactus Wellhead LLC Agreement further provides that if Cadent or an affiliate, including any of our directors affiliated with Cadent, becomes aware of a potential business opportunity, transaction or other matter, they will have no duty to communicate or offer that opportunity to us (unless such opportunity is expressly offered to such director in his capacity as one of our directors). In addition, the Cactus Wellhead LLC Agreement provides that none of Cadent and its affiliates, including any of our directors affiliated with Cadent, will have any duty to refrain from (i) engaging in a corporate opportunity in the same or similar lines of business in which we or our affiliates now engage or propose to engage or (ii) otherwise competing with us or our affiliates.
Cactus LLC will be dissolved only upon the first to occur of (i) the sale of substantially all of its assets or (ii) an election by us to dissolve the company. Upon dissolution, Cactus LLC will be liquidated and the proceeds from any liquidation will be applied and distributed in the following manner: (a) first, to creditors (including to the extent permitted by law, creditors who are members) in satisfaction of the liabilities of Cactus LLC, (b) second, to establish cash reserves for contingent or unforeseen liabilities and (c) third, to the members in proportion to the number of CW Units owned by each of them.
Tax Receivable Agreement
Pursuant to the Cactus Wellhead LLC Agreement, each TRA Holder will, subject to certain limitations, have the right (the “Redemption Right”) to cause Cactus LLC to acquire all or at least a minimum portion of its CW Units for, at Cactus LLC’s election, (x) shares of our Class A common stock at a redemption ratio of one share of Class A common stock for each CW Unit redeemed, subject to conversion rate adjustments for stock splits, stock dividends and reclassification and other similar transactions, or (y) an equivalent amount of cash. Alternatively, upon the exercise of the Redemption Right, Cactus Inc. (instead of Cactus LLC) will have the right (the “Call Right”) to acquire each tendered CW Unit directly from the exchanging TRA Holder for, at its election, (x) one share of Class A common stock,
subject to conversion rate adjustments for stock splits, stock dividends and reclassifications and other similar transactions, or (y) an equivalent amount of cash. In connection with any redemption of CW Units pursuant to the Redemption Right or our Call Right, the corresponding number of shares of Class B common stock will be canceled.
Cactus LLC has made for itself (and for each of its direct or indirect subsidiaries that is treated as a partnership for U.S. federal income tax purposes and that it controls) an election under Section 754 of the Internal Revenue Code (the “Code”) that will be effective for 2018 and each taxable year in which a redemption of CW Units pursuant to the Redemption Right or the Call Right occurs. Pursuant to the Section 754 election, redemptions of CW Units pursuant to the Redemption Right or the Call Right are expected to result in adjustments to the tax basis of the tangible and intangible assets of Cactus LLC. These adjustments will be 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 pursuant to the exercise of the Redemption Right or the Call Right. 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.
These basis adjustments are expected to increase (for tax purposes) Cactus Inc.’s depreciation and amortization deductions and may also decrease Cactus Inc.’s gains (or increase its losses) on future dispositions of certain assets to the extent tax basis is allocated to those assets. Such increased deductions and losses and reduced gains may reduce the amount of tax that Cactus Inc. would otherwise be required to pay in the future.
The TRA will generally provide for the payment by Cactus Inc. to each TRA Holder of 85% of the net cash savings, if any, in U.S. federal, state and local income tax and franchise tax that Cactus Inc. actually realizes or is deemed to realize in certain circumstances as a result of (i) certain increases in tax basis that occur as a result of Cactus Inc.’s acquisition (or deemed acquisition for U.S. federal income tax purposes) of all or a portion of such TRA Holder’s CW Units in connection with CW Unit exchanges or pursuant to the exercise of the Redemption Right or the Call Right, (ii) certain increases in tax basis resulting from the repayment of borrowings outstanding under Cactus LLC’s term loan facility and (iii) imputed interest deemed to be paid by Cactus Inc. as a result of, and additional tax basis arising from, any payments Cactus Inc. makes under the TRA. We will retain the benefit of the remaining 15% of the cash savings.
The payment obligations under the TRA are Cactus Inc.’s obligations and not obligations of Cactus LLC, and we expect that the payments we will be required to make under the TRA will be substantial. We have determined that it is more likely than not that actual cash tax savings will be realized by Cactus Inc. from the tax benefits resulting from our IPO (and the related transactions), the follow-on equity offering in July 2018 and March 2019 and CW Unit exchanges. Future exchanges of CW Units create additional liability and follow the same accounting procedures. Estimating the amount and timing of payments that may become due under the TRA is by its nature imprecise and the assumptions used in the estimate can change. For purposes of the TRA, net cash savings in tax generally will be calculated by comparing Cactus Inc.’s actual tax liability (determined by using the actual applicable U.S. federal income tax rate and an assumed combined state and local income tax rate) to the amount it would have been required to pay had it not been able to utilize any of the tax benefits subject to the TRA. The amounts payable, as well as the timing of any payments under the TRA, are dependent upon significant future events and assumptions, including the timing of the redemption of CW Units, the price of our Class A common stock at the time of each redemption, the extent to which such redemptions are taxable transactions, the amount of the redeeming unit holder’s tax basis in its CW Units at the time of the relevant redemption, the depreciation and amortization periods that apply to the increase in tax basis, the amount and timing of taxable income we generate in the future and the U.S. federal income tax rate then applicable, and the portion of Cactus Inc.’s payments under the TRA that constitute imputed interest or give rise to depreciable or amortizable tax basis.
A delay in the timing of redemptions of CW Units, holding other assumptions constant, would be expected to decrease the discounted value of the amounts payable under the TRA as the benefit of the depreciation and amortization deductions would be delayed and the estimated increase in tax basis could be reduced as a result of allocations of Cactus
LLC taxable income to the redeeming unit holder prior to the redemption. Stock price increases or decreases at the time of each redemption of CW Units would be expected to result in a corresponding increase or decrease in the undiscounted amounts payable under the TRA in an amount equal to 85% of the tax-effected change in price. The amounts payable under the TRA are dependent upon Cactus Inc. having sufficient future taxable income to utilize the tax benefits on which it is required to make payments under the TRA. If Cactus Inc.’s projected taxable income is significantly reduced, the expected payments would be reduced to the extent such tax benefits do not result in a reduction of Cactus Inc.’s future income tax liabilities.
It is possible that future transactions or events could increase or decrease the actual tax benefits realized and the corresponding liability from the TRA. Moreover, there may be a negative impact on our liquidity if, as a result of timing discrepancies or otherwise, (i) the payments under the TRA exceed the actual benefits we realize in respect of the tax attributes subject to the TRA or (ii) distributions to Cactus Inc. by Cactus LLC are not sufficient to permit Cactus Inc. to make payments under the TRA after it has paid its taxes and other obligations. The payments under the TRA will not be conditional on a holder of rights under the TRA having a continued ownership interest in either Cactus LLC or Cactus Inc.
In addition, although we are not aware of any issue that would cause the Internal Revenue Service (“IRS”) or other relevant tax authorities to challenge potential tax basis increases or other tax benefits covered under the TRA, the TRA Holders will not reimburse us for any payments previously made under the TRA if such basis increases or other benefits are subsequently disallowed, except that excess payments made to any such holder will be netted against payments otherwise to be made, if any, to such holder after our determination of such excess. As a result, in such circumstances, Cactus Inc. could make payments that are greater than its actual cash tax savings, if any, and may not be able to recoup those payments.
The term of the TRA commenced upon completion of our IPO and will continue until all tax benefits that are subject to the TRA have been utilized or expired, unless we exercise our right to terminate the TRA. In the event that the TRA is not terminated, the payments under the TRA, which commenced in 2019, will continue for approximately 20 years after the date of the last redemption of CW Units. Accordingly, it is expected that payments will continue to be made under the TRA for more than 20 years. If we elect to terminate the TRA early (or it is terminated early due to certain mergers, asset sales, other forms of business combinations or other changes of control), our obligations under the TRA would accelerate and we would be required to make an immediate payment equal to the present value of the anticipated future payments to be made by us under the TRA (determined by applying a discount rate of one-year LIBOR plus 150 basis points) and such payment is expected to be substantial. The calculation of anticipated future payments will be based upon certain assumptions and deemed events set forth in the Proxy StatementTRA, including the assumptions that (i) we have sufficient taxable income to fully utilize the tax benefits covered by the TRA and (ii) any CW Units (other than those held by Cactus Inc.) outstanding on the termination date are deemed to be redeemed on the termination date. Any early termination payment may be made significantly in advance of the actual realization, if any, of the future tax benefits to which the termination payment relates. Assuming no material changes in the relevant tax law, we expect that if the TRA were terminated as of December 31, 2019, the estimated termination payments, based on the assumptions discussed above, would be approximately $331.3 million (calculated using a discount rate equal to one-year LIBOR plus 150 basis points, applied against an undiscounted liability of $434.7 million). A 10% increase in the price of our Class A Common Stock at December 31, 2019 would have increased the discounted liability by $17.2 million to $348.5 million (an undiscounted increase of $23.2 million to $457.9 million), and likewise, a 10% decrease in the price of our Class A Common Stock at December 31, 2019 would have decreased the discounted liability by $17.3 million to $314.0 million (an undiscounted decrease of $23.3 million to $411.4 million).
The TRA provides that in the event that we breach any of our material obligations under the TRA, whether as a result of (i) our failure to make any payment when due (including in cases where we elect to terminate the TRA early, the TRA is terminated early due to certain mergers, asset sales, or other forms of business combinations or changes of control or we have available cash but fail to make payments when due under circumstances where we do not have the
right to elect to defer the payment, as described below), (ii) our failure to honor any other material obligation under it or (iii) by operation of law as a result of the rejection of the TRA in a case commenced under the U.S. Bankruptcy Code or otherwise, then the TRA Holders may elect to treat such breach as an early termination, which would cause all our payment and other obligations under the TRA to be accelerated and become due and payable applying the same assumptions described above.
As a result of either an early termination or a change of control, we could be required to make payments under the TRA that exceed our actual cash tax savings under the TRA. In these situations, our obligations under the TRA could have a substantial negative impact on our liquidity and could have the effect of delaying, deferring or preventing certain mergers, asset sales, or other forms of business combinations or changes of control.
Decisions we make in the course of running our business, such as with respect to mergers, asset sales, other forms of business combinations or other changes in control, may influence the timing and amount of payments that are received by the TRA Holders under the TRA. For example, the earlier disposition of assets following a redemption of CW Units may accelerate payments under the TRA and increase the present value of such payments, and the disposition of assets before a redemption of CW Units may increase the TRA Holders’ tax liability without giving rise to any rights of the TRA Holders to receive payments under the TRA. Such effects may result in differences or conflicts of interest between the interests of the TRA Holders and other shareholders.
Payments generally are due under the TRA within five business days following the finalization of the schedule with respect to which the payment obligation is calculated. However, interest on such payments will begin to accrue from the due date (without extensions) of our U.S. federal income tax return for the Annual Meetingperiod to which such payments relate until such payment date at a rate equal to one-year LIBOR plus 150 basis points. Except in cases where we elect to terminate the TRA early or it is otherwise terminated as described above, generally we may elect to defer payments due under the TRA if we do not have available cash to satisfy our payment obligations under the TRA. Any such deferred payments under the TRA generally will accrue interest from the due date for such payment until the payment date at a rate of one-year LIBOR plus 550 basis points. However, interest will accrue from the due date for such payment until the payment date at a rate of one-year LIBOR plus 150 basis points if we are unable to make such payment as a result of limitations imposed by our credit facility. We have no present intention to defer payments under the TRA.
Because we are a holding company with no operations of our own, our ability to make payments under the TRA is dependent on the ability of Cactus LLC to make distributions to us in an amount sufficient to cover our obligations under the TRA. This ability, in turn, may depend on the ability of Cactus LLC’s subsidiaries to make distributions to it. The ability of Cactus LLC, its subsidiaries and other entities in which it directly or indirectly holds an equity interest to make such distributions will be subject to, among other things, the applicable provisions of Delaware law (or other applicable jurisdiction) that may limit the amount of funds available for distribution and restrictions in relevant debt instruments issued by Cactus LLC or its subsidiaries and other entities in which it directly or indirectly holds an equity interest. Additionally, distributions made by Cactus LLC generally require pro-rata distribution among all its members, which could be significant. To the extent that we are unable to make payments under the TRA for any reason, such payments will be deferred and will accrue interest until paid.
Two of our independent directors, Messrs. McGovern and O’Donnell, have the right to receive payments under the Tax Receivable Agreement in respect of CW Units owned by them at the time of our IPO. During 2019, a company controlled by Scott Bender and Joel Bender received approximately $2.1 million in payments under the TRA in respect
of CW Units owned by them. In addition, Cadent and Steven Bender received payments under the TRA of approximately $6.3 million and $0.2 million, respectively, during 2019 in respect of CW Units owned by them.
| | | |
| | Liability related to TRA |
2020 | | $ | 14,630 |
2021 | | | 11,959 |
2022 | | | 12,183 |
2023 | | | 12,439 |
2024 | | | 12,700 |
Thereafter | | | 152,621 |
| | $ | 216,532 |
Registration Rights Agreement
In connection with our IPO, we entered into a registration rights agreement (the “Registration Rights Agreement”) with Cadent, Cactus WH Enterprises and Lee Boquet (together with Cactus WH Enterprises and Cadent, the “Registration Rights Holders”). Pursuant to the Registration Rights Agreement, we agreed to register the sale of shares of Class A Common Stock by the Registration Rights Holders under certain circumstances as described below.
On March 15, 2019, in accordance with the requirements of the Registration Rights Agreement, we filed a shelf registration statement on Form S-3 pursuant to the Securities Act of 1933, as amended, to, amount other things, permit the resale by the Registration Rights Holders of shares of Class A Common Stock issuable upon the exercise of redemption rights. If at any time we are not eligible to register the sale of our securities on Form S‑3, each of Cadent and Cactus WH Enterprises will have the right to request three “demand” registrations, provided that the aggregate amount of registrable securities that are requested to be included in such demand registration is incorporated hereinat least $25,000,000. Further, the Registration Rights Holders and certain of their assignees will have customary “piggyback” registration rights.
Upon the demand of a Registration Rights Holder, we will facilitate in the manner described in the Registration Rights Agreement a “takedown” of Class A Common Stock off of an effective shelf registration statement. A shelf takedown may take the form of an underwritten public offering provided that the aggregate amount of registrable securities that are requested to be included in such offering is at least $25,000,000.
These registration rights are subject to certain conditions and limitations, including the right of the underwriters to limit the number of shares to be included in a registration and our right to delay or withdraw a registration statement under certain circumstances. Also, any demand for a registered offering or a takedown and the exercise of any piggyback registration rights will be subject to the constraints of any applicable lock‑up arrangements. In addition, we may postpone the filing of a demanded registration statement, suspend the initial effectiveness of any shelf registration statement or delay offerings and sales under any effective shelf registration statement for a reasonable “blackout period” not in excess of 90 days if the board determines that such registration or offering could materially interfere with a bona fide business, acquisition or divestiture or financing transaction or is reasonably likely to require premature disclosure of information, the premature disclosure of which could materially and adversely affect us; provided that we shall not delay the filing of any demanded registration statement more than once in any 12‑month period.
We will generally pay all registration expenses in connection with our obligations under the registration rights agreement, regardless of whether a registration statement is filed or becomes effective.
Stockholders’ Agreement
In connection with our IPO, we entered into a stockholders’ agreement (the “Stockholders’ Agreement”) with Cadent and Cactus WH Enterprises. Summaries of certain material terms of the Stockholders’ Agreement are set forth below. Among other things, the Stockholders’ Agreement provides Cadent with the right to designate a number of nominees (each, a “Cadent Director”) to our board of directors such that:
•at least 50% of the directors on the board are Cadent Directors for so long as Cadent and its affiliates collectively beneficially own at least 20% of the outstanding shares of Common Stock;
•at least 25% of the directors on the board are Cadent Directors for so long as Cadent and its affiliates collectively beneficially own less than 20% but at least 10% of the outstanding shares of Common Stock;
•at least one of the directors on the board are Cadent Directors for so long as Cadent and its affiliates collectively beneficially own less than 10% but at least 5% of the outstanding shares of Common Stock; and
•once Cadent and its affiliates collectively own less than 5% of the outstanding shares of Common Stock, Cadent will not have any board designation rights.
Further, the Stockholders’ Agreement provides Cactus WH Enterprises with the right to designate a number of nominees (each, a “CWHE Director”) to the Board such that:
•at least 50% of the directors on the board are CWHE Directors for so long as Cactus WH Enterprises and its affiliates collectively beneficially own at least 20% of the outstanding shares of Common Stock;
•at least 25% of the directors on the board are CWHE Directors for so long as Cactus WH Enterprises and its affiliates collectively beneficially own less than 20% but at least 10% of the outstanding shares of Common Stock;
•at least one of the directors on the board are CWHE Directors for so long as Cactus WH Enterprises and its affiliates collectively beneficially own less than 10% but at least 5% of the outstanding shares of Common Stock; and
•once Cactus WH Enterprises and its affiliates collectively own less than 5% of the outstanding shares of Common Stock, Cactus WH Enterprises will not have any Board designation rights.
In the event that the percentage ownership of Cadent or Cactus WH Enterprises declines such that the number of Cadent Directors or CWHE Directors, as the case may be, exceeds the number of directors that Cadent or Cactus WH Enterprises is then entitled to designate to our board of directors under the Stockholders’ Agreement, then if requested by reference.the Company, Cadent or Cactus WH Enterprises shall take such actions as are reasonably necessary to remove such excess Cadent Directors or CWHE Directors from the board.
Currently, Bruce Rothstein and Michael McGovern are each deemed to be designees of Cadent, and Scott Bender, Joel Bender and Alan Semple are each deemed to be designees of Cactus WH Enterprises.
Pursuant to the Stockholders’ Agreement, we, Cadent and Cactus WH Enterprises are required to take all necessary action, to the fullest extent permitted by applicable law (including with respect to any fiduciary duties under Delaware law), to cause the election of the nominees designated by Cadent and Cactus WH Enterprises.
The rights granted to Cadent and Cactus WH Enterprises to designate directors are additive to and not intended to limit in any way the rights that Cadent and Cactus WH Enterprises or any of their affiliates may have to nominate, elect or remove our directors under our amended and restated certificate of incorporation, our amended and restated bylaws or the Delaware General Corporation Law.
Non-Exclusive Aircraft Lease Agreements
In July 2019, Cactus LLC entered into a Non-Exclusive Aircraft Lease Agreement (the “SusieAir Lease”) with SusieAir, LLC (“SusieAir”), an entity wholly owned by Mr. Scott Bender, pursuant to which Cactus LLC leases an aircraft, excluding crew, from SusieAir. The 2019 agreement replaced the previous agreement originally entered into in 2014 due to the sale of the aircraft under the previous lease. Under the SusieAir Lease, the aircraft may be subject to use by other lessees. The SusieAir Lease has an initial term of one year and automatically renews for successive one year terms unless either party gives at least 15 days’ advance notice of its intention to terminate the agreement. The SusieAir Lease shall terminate automatically upon a sale or total loss of the aircraft or at any time, upon 30 days’ written notice by either party. Cactus LLC pays SusieAir a base hourly rent of $1,750 per flight hour of use of the aircraft, payable monthly, for the hours of aircraft operation during the prior calendar month. Cactus LLC is also responsible for employing pilots and certain fuel true up fees. Mr. Scott Bender and Mr. Joel Bender pay the Company $1,800/day for their personal use of the pilots employed by the Company. The SusieAir Lease generally provides that Cactus LLC will indemnify SusieAir from liabilities arising from the operation of the aircraft. During 2019, total expense recognized in connection with these rentals totaled $0.3 million. As of December 31, 2019, we owed less than $0.1 million to SusieAir, which amount is included in accounts payable in the consolidated balance sheets.
Employment Agreements
We have entered into employment agreements and non‑compete agreements with Scott Bender, our Chief Executive Officer, and Joel Bender, our Chief Operating Officer. Mr. Tadlock has an agreement providing him severance pay under certain circumstances. Mr. Isaac also has an agreement providing him severance pay under certain circumstances and he also has a non-compete agreement. For more information, please read Part III. Item 11. Executive Compensation—Employment, Severance and Change in Control Agreements—Employment Agreements.
Director Independence
See “Item 10. Directors, Executive Officers and Corporate Governance” for a discussion of the directors who our Board has determined to be independent.
Item 14. Principal Accounting Fees and Services
Information asThe table below sets forth the aggregate fees billed or expected to Item 14 will be set forth inbilled by PricewaterhouseCoopers LLP, our independent registered public accounting firm, for services rendered for each of the Proxy Statementlast two fiscal years:
| | | | | | |
| | 2019 | | 2018 |
| | (in thousands) |
Audit Fees(1) | | $ | 1,760 | | $ | 1,645 |
Audit-Related Fees | | | 3 | | | 10 |
Tax Fees(2) | | | — | | | 328 |
All Other Fees | | | — | | | — |
Total | | $ | 1,763 | | $ | 1,983 |
(1)Audit fees consist of the aggregate fees billed or expected to be billed for professional services rendered for (i) the Annual Meetingaudit of annual financial statements, (ii) reviews of our quarterly financial statements, (iii) statutory
audits, (iv) research necessary to comply with generally accepted accounting principles, (v) other filings with the SEC, including consents and is incorporated hereincomfort letters, and (vi) services related to our IPO and our follow-on equity offering.
(2)Tax fees consist of fees for tax compliance, including the preparation, preview and filing of tax returns, and for tax advice and tax planning.
The charter of the Audit Committee and its pre‑approval policy require that the Audit Committee review and pre‑approve the plan and scope of our independent registered public accounting firm’s audit, audit‑related, tax and other services. During 2019 and 2018, all audit and non-audit services were pre-approved by reference.the Audit Committee.
PART IV
Item 15. Exhibits, Financial Statement Schedules
(1) Financial Statements
The consolidated financial statements of Cactus, Inc. and Cactus Wellhead, LLC and Subsidiaries and the ReportsReport of Independent Registered Public Accounting Firm are included in Part II, Item 8 of this report.Annual Report. Reference is made to the accompanying Index to Consolidated Financial Statements.
(2) Financial Statement Schedules
All financial statement schedules have been omitted because they are not applicable or the required information is presented in the financial statements or the notes thereto.
(3) Index to Exhibits
The exhibits required to be filed or furnished pursuant to Item 601 of Regulation S-K are set forth below.
| | |
Exhibit No. | | Description |
3.1 | | Amended and Restated Certificate of Incorporation of Cactus, Inc., effective February 12, 2018 (incorporated by reference to Exhibit 3.1 to the Registrant’s Form 8‑K (File No. 001‑38390) filed with the Commission on February 12, 2018) |
| | |
3.2*3.2
| | Amended and Restated Bylaws of Cactus, Inc. (incorporated by reference to Exhibit 3.2 to the Registrant’s Form 8-K filed with the Commission on February 12, 2018) |
| | |
3.3 | | First Amendment to the Amended and Restated Bylaws of Cactus, Inc (incorporated by reference to Exhibit 3.1 to the Registrant’s Form 8-K filed with the Commission on January 31, 2020). |
| | |
4.1* | | Description of Securities |
| | |
10.1 | | First Amended and Restated Limited Liability Company Operating Agreement of Cactus Wellhead, LLC, (incorporated by reference to Exhibit 10.2 to the Registrant’s Form 8‑K (File No. 001‑38390) filed with the Commission on February 12, 2018) |
| | |
10.2† | | Amended and Restated Employment Agreement with Scott Bender, dated as of February 12, 2018 (incorporated by reference to Exhibit 10.3 to the Registrant’s Form 8‑K (File No. 001‑38390) filed with the Commission on February 12, 2018). |
| | |
10.3† | | First Amendment to the Amended and Restated Employment Agreement, dated February 21, 2019, by and between Scott Bender and Cactus Wellhead, LLC (incorporated by reference to Exhibit 10.1 to the Registrant’s Form 8-K filed with the Commission on February 22, 2019) |
| | |
10.4† | | Amended and Restated Employment Agreement with Joel Bender, dated as of February 12, 2018 (incorporated by reference to Exhibit 10.4 to the Registrant’s Form 8‑K (File No. 001‑38390) filed with the Commission on February 12, 2018). |
| | |
| | |
Exhibit No. | | Description |
10.5† | | First Amendment to the Amended and Restated Employment Agreement, dated February 21, 2019, by and between Joel Bender and Cactus Wellhead, LLC (incorporated by reference to Exhibit 10.2 to the Registrant’s Form 8-K filed with the Commission on February 22, 2019) |
| | |
10.4†10.6†
| | Amended and Restated Noncompetition Agreement with Scott Bender, dated as of February 12, 2018 (incorporated by reference to Exhibit 10.5 to the Registrant’s Form 8‑K (File No. 001‑38390) filed with the Commission on February 12, 2018). |
| | |
10.5†10.7†
| | Amended and Restated Noncompetition Agreement with Joel Bender, dated as of February 12, 2018 (incorporated by reference to Exhibit 10.6 to the Registrant’s Form 8‑K (File No. 001‑38390) filed with the Commission on February 12, 2018). |
| | |
10.6†
| | Indemnification Agreement (Scott Bender) (incorporated by reference to Exhibit 10.7 to the Registrant’s Form 8‑K (File No. 001‑38390) filed with the Commission on February 12, 2018).
|
| | |
| | |
Exhibit No.
| | Description
|
10.7†
| | Indemnification Agreement (Joel Bender) (incorporated by reference to Exhibit 10.8 to the Registrant’s Form 8‑K (File No. 001‑38390) filed with the Commission on February 12, 2018).
|
| | |
10.8† | | Form of Director and Officer Indemnification Agreement (Bruce Rothstein) (incorporated(incorporated by reference to Exhibit 10.910.5 to the Registrant’s Registration Statement on Form 8‑K (File No. 001‑38390)S-1 filed with the Commission on FebruaryJanuary 12, 2018). |
| | |
10.9†* | | Schedule of Director and Officer Indemnification Agreements Identical in All Material Respects to the Form of Director and Officer Indemnification Agreement Filed as Exhibit 10.8 to this Annual Report pursuant to Instruction 2 to Item 6-1 of Regulation S-K |
| | |
10.9†
| | Indemnification Agreement (Brian Small) (incorporated by reference to Exhibit 10.10 to the Registrant’s Form 8‑K (File No. 001‑38390) filed with the Commission on February 12, 2018).
|
| | |
10.10†
| | Indemnification Agreement (Steven Bender) (incorporated by reference to Exhibit 10.11 to the Registrant’s Form 8‑K (File No. 001‑38390) filed with the Commission on February 12, 2018).
|
| | |
10.11†
| | Indemnification Agreement (Stephen Tadlock) (incorporated by reference to Exhibit 10.12 to the Registrant’s Form 8‑K (File No. 001‑38390) filed with the Commission on February 12, 2018).
|
| | |
10.12†
| | Indemnification Agreement (John (Andy) O’Donnell) (incorporated by reference to Exhibit 10.13 to the Registrant’s Form 8‑K (File No. 001‑38390) filed with the Commission on February 12, 2018).
|
| | |
10.13†
| | Indemnification Agreement (Michael McGovern) (incorporated by reference to Exhibit 10.14 to the Registrant’s Form 8‑K (File No. 001‑38390) filed with the Commission on February 12, 2018).
|
| | |
10.14†
| | Indemnification Agreement (Alan Semple) (incorporated by reference to Exhibit 10.15 to the Registrant’s Form 8‑K (File No. 001‑38390) filed with the Commission on February 12, 2018).
|
| | |
10.15†
| | Indemnification Agreement (Gary Rosenthal) (incorporated by reference to Exhibit 10.16 to the Registrant’s Form 8‑K (File No. 001‑38390) filed with the Commission on February 12, 2018).
|
| | |
10.16†
| | Indemnification Agreement (Ike Smith) (incorporated by reference to Exhibit 10.17 to the Registrant’s Form 8‑K (File No. 001‑38390) filed with the Commission on February 12, 2018).
|
| | |
10.17
| | Tax Receivable Agreement (incorporated by reference to Exhibit 10.1 to the Registrant’s Form 8‑K (File No. 001‑38390) filed with the Commission on February 12, 2018). |
| | |
10.1810.11
| | Registration Rights Agreement (incorporated by reference to Exhibit 4.1 to the Registrant’s Form 8‑K (File No. 001‑38390) filed with the Commission on February 12, 2018). |
| | |
10.1910.12
| | Stockholders’ Agreement, effective as of February 12, 2018., by and among Cactus, Inc., Cadent Energy Partners II, L.P. and Cactus WH Enterprises, LLC (incorporated by reference to Exhibit 4.2 to the Registrant’s Form 8‑K (File No. 001‑38390) filed with the Commission on February 12, 2018) |
| | |
10.2010.13
| | Credit Agreement, dated July 31, 2014, among Cactus Wellhead, LLC, Credit Suisse AG, as administrative agent, collateral agent and issuing bank, and the lenders named therein as parties thereto (incorporated by reference to Exhibit 10.1 to the Registrant’s Registration Statement on Form S‑1 (File No. 333‑222540) filed with the Commission on January 12, 2018). |
| | |
10.2110.14†
| | Cactus, Inc. Long Term Incentive Plan (incorporated by reference to Exhibit 10.18 to the Registrant’s Form 8‑K (File No. 001‑38390) filed with the Commission on February 12, 2018) |
| | |
| | |
Exhibit No. | | Description |
10.18 | | Credit Agreement, dated as of August 21, 2018, among Cactus Wellhead, LLC, as borrower, the lenders party thereto and JPMorgan Chase Bank, N.A., as administrative agent, an issuing bank and swingline lender (incorporated by reference to Exhibit 10.1 to the Registrant’s Form 8-K filed with the Commission on August 24, 2018) |
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10.19† | | Form of Restricted Stock Unit Agreement (Directors, one-year vesting) (incorporated by reference to Exhibit 4.7 to the Registrants Form S-8 Registration Statement (File No. 333-22569) filed with the Commission on May 29, 2018) |
| | |
10.20† | | Form of Restricted Stock Unit Agreement (Directors, three-year vesting) (incorporated by reference to Exhibit 4.7 to the Registrants Form S-8 Registration Statement (File No. 333-22569) filed with the Commission on May 29, 2018) |
| | |
10.21† | | Offer Letter to Stephen Tadlock dated May 30, 2017 (incorporated by reference to Item 10.17 of the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2018, filed with the Commission on March 15, 2019 |
| | |
10.22†* | | Offer letter to David Isaac dated September 17, 2018 |
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10.23†* | | Severance Agreement by and between Cactus Wellhead, LLC and David Isaac, dated as of September 24, 2018 |
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21.1* | | List of Subsidiaries of Cactus, Inc. |
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23.1* | | Consent of PricewaterhouseCoopers LLP |
| | |
31.1* | | Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
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31.2* | | Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
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32.1** | | Certification of Chief Executive Officer pursuant to 18 U.S.C. § 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
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32.2** | | Certification of Chief Financial Officer pursuant to 18 U.S.C. § 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
| | |
101.INS* | | XBRL Instance Document |
| | |
101.SCH* | | XBRL Taxonomy Extension Schema Document |
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101.CAL* | | XBRL Taxonomy Calculation Linkbase Document |
| | |
101.LAB* | | XBRL Taxonomy Label Linkbase Document |
| | |
101.PRE* | | XBRL Taxonomy Presentation Linkbase Document |
| | |
101.DEF* | | XBRL Taxonomy Definition Document |
* Filed herewith
** Furnished herewith. Pursuant to SEC Release No. 33‑8212, this certification will be treated as “accompanying” this Annual Report and not “filed” as part of such report for purposes of Section 18 of the Exchange Act or otherwise subject to the liability of Section 18 of the Exchange Act, and this certification will not be deemed to be incorporated by reference into any filing under the Securities Act, except to the extent that the registrant specifically incorporates it by reference.
† Management contract or compensatory plan or arrangement.
Item 16. Form 10‑K Summary
None.
Signatures
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| | |
| Cactus, Inc. |
| |
Date: February 28, 2020 | By: | /s/ Scott Bender |
| | Scott Bender |
| | President, Chief Executive Officer and Director |
| Date: March 19, 2018
|
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicatedand on March 19, 2018.the dates indicated.
| | | | |
| | |
Signature | | Title | | Date |
| | | | |
/s/ Scott Bender | | President, Chief Executive Officer and Director (Principal Executive Officer) | | February 28, 2020 |
Scott Bender | | Officer)
|
| | |
/s/ Brian Small
| | Chief Financial Officer (Principal Financial Officer)
|
Brian Small
| | |
| | | | |
/s/ Ike SmithStephen Tadlock | | Vice President, Chief Financial Officer and Treasurer (Principal Financial Officer) | | February 28, 2020 |
Stephen Tadlock | | | | |
| | | | |
/s/ Donna Anderson | | Chief Accounting Officer (Principal Accounting Officer) | | February 28, 2020 |
Ike SmithDonna Anderson
| | | | |
| | | | |
/s/ Bruce Rothstein | | Chairman of the Board and Director | | February 28, 2020 |
Bruce Rothstein | | | | |
| | | | |
/s/ Joel Bender | | Senior Vice President, Chief Operating Officer and Director | | February 28, 2020 |
Joel Bender | | | | |
| | | | |
/s/ John (Andy) O’Donnell | | Director | | February 28, 2020 |
John (Andy) O’Donnell | | | | |
| | | | |
/s/ Michael McGovern | | Director | | February 28, 2020 |
Michael McGovern | | | | |
| | | | |
/s/ Alan Semple | | Director | | February 28, 2020 |
Alan Semple | | | | |
| | | | |
/s/ Gary Rosenthal | | Director | | February 28, 2020 |
Gary Rosenthal | | | | |
| | | | |
/s/ Melissa Law | | Director | | February 28, 2020 |
Melissa Law | | | | |