SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10‑K10-K
☑ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31,
20182021
☐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: 001‑38390001-38390
(Exact name of registrant as specified in its charter)
| 35‑2586106
| | | | |
Delaware | 35-2586106 |
(State or other jurisdiction
of incorporation or organization) | (I.R.S. Employer
Identification No.) |
| |
920 Memorial City Way, Suite 300 Houston, Texas | 77024 |
(Address of principal executive offices) | (Zip code) |
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the
Act:Act | | | | | | | | | | | | | | |
Common Stock, par value $0.01 per share
| New York Stock Exchange
|
(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 registrant is a well‑known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☑ No ☐ Indicate by check mark if the registrant 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 every Interactive Data File required to be submitted 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 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 | ☐ |
| 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 has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C.7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☑ 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,
2018,2021, the aggregate market value of the common stock of the registrant held by non-affiliates of the registrant was
$893.7 million.$2.1 billion.
As of
March 13, 2019,February 24, 2022, the registrant had
37,873,07159,035,237 shares of Class A common stock, $0.01 par value per share, and
37,236,14216,674,282 shares of Class B common stock, $0.01 par value per share, outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
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.Report and other cautionary statements contained herein. 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‑
Important factors that could cause actual results to differ materially from those contained in the 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;
|
but are not limited to: | ·
| | the level of growth in number of rigs, pad sizes, well spacings and associated well count and lack of takeaway capacity in areas such as the Permian Basin;
|
•demand for our products and services, which is affected by, among other things, changes in the price of crude oil and natural gas in domestic and international markets; | ·
| | the level of fracturing activity;
|
•the number of active rigs, pad sizes, drilling and completion efficiencies, well spacings and associated well counts and availability of takeaway and storage capacity; | ·
| | the size and timing of orders;
|
•Disparities in activity levels between private operators and large publicly-traded exploration and production (“E&P”) companies | ·
| | availability of raw materials;
|
•the number of active workover rigs: | ·
| | transportation differentials associated with reduced capacity in and out of the storage hub in Cushing, Oklahoma;
|
•availability of capital and the associated capital spending discipline exercised by customers; | ·
| | expectations regarding raw materials, overhead and operating costs and margins;
|
•overall oilfield service cost inflation; | ·
| | availability of skilled and qualified workers;
|
•the financial health of our customers and our credit risk of customer non-payment; | ·
| | potential liabilities such as warranty and product liability claims arising out of the installation, use or misuse of our products;
|
•changes in the number of drilled but uncompleted wells (DUC’s) and the level of completion activity; | ·
| | the possibility of cancellation of orders;
|
•the size and timing of orders;•availability and cost of raw materials, components and imported items; | ·
| | our financial strategy, operating cash flows, liquidity and capital required for our business;
|
•increased inland and ocean shipping costs, the availability of containers and vessels from Asia as well as port congestion and domestic trucking capacity; | ·
| | our future revenue, income and operating performance;
|
•transportation differentials associated with reduced capacity in and out of the storage hub in Cushing, Oklahoma; | ·
| | the termination of relationships with major customers or suppliers;
|
•expectations regarding overhead and operating costs and margins; | ·
| | laws and regulations, including environmental regulations, that may increase our costs, limit the demand for our products and services or restrict our operations;
|
•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 business strategy;
•our financial strategy, operating cash flows, liquidity and capital required for our business;
•our future revenue, income and operating performance;
•the ability to pay dividends and the amount of any such dividends;
•consolidation activity involving our customers;
•the addition or termination of relationships with major customers or suppliers;
| ·
| | disruptions in the political, regulatory, economic and social conditions domestically or internationally;
|
•laws and regulations, including environmental regulations, that may increase our costs, limit the demand for our products and services or restrict our operations; | ·
| | increased import tariffs assessed on products from China or imported raw materials used in the manufacture of our goods in the United States;
|
•disruptions in political, regulatory, economic or social conditions domestically or internationally; | ·
| | 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 IPO;
|
•the severity and duration of the ongoing outbreak of coronavirus (“COVID-19”) and the extent of its impact on our business, including employee absenteeism; | ·
| | a failure of our information technology infrastructure or any significant breach of security;
|
•outbreaks of other pandemic or contagious diseases that may disrupt our operations, suppliers or facilities or impact demand for oil and natural gas; | ·
| | potential uninsured claims and litigation against us;
|
•the impact of actions taken by the Organization of Petroleum Exporting Countries (“OPEC”) and other oil and gas producing countries affecting the supply of oil and gas; | ·
| | our dependence on the continuing services of certain of our key managers and employees; and
|
•the impact of potential disruptions in Russian gas deliveries into Europe resulting from the conflict in Ukraine; | ·
| | plans, objectives, expectations and intentions contained in this Annual Report that are not historical.
|
•increases in import tariffs or duties assessed on products and imported raw materials used in the production and assembly of our goods 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 and capacity within the oilfield services industry;
•our dependence on the continuing services of certain of our key managers and employees;
•currency exchange rate fluctuations associated with our international operations; and
•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:
| ·
| | 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;
|
| ·
| | 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;
|
| ·
| | 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
|
| ·
| | obtain shareholder approval of any golden parachute payments not previously approved.
|
We will cease to be an emerging growth company upon the earliest of the:
| ·
| | last day of the fiscal year in which we have $1.07 billion or more in annual revenues;
|
| ·
| | 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);
|
| ·
| | date on which we issue more than $1.0 billion of non‑convertible debt over a three‑year period; or
|
| ·
| | last day of the fiscal year following the fifth anniversary of our initial public offering.
|
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
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 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.
Item 1.
BusinessOur History
General
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 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 in September 2011 and established our other production facility, located in Suzhou, China, in December 2013 through our subsidiary there. Since we began operating, we have grown to 15 U.S. service centers located in Texas, Pennsylvania, Oklahoma, North Dakota, New Mexico, Louisiana, Colorado and Wyoming. In July 2014, we formed a subsidiary in Australia and established a service center to develop the market for our products in Eastern Australia. Our corporate headquarters are located in Houston, Texas.Cactus Inc.”) and its consolidated subsidiaries (the “Company,” “we,” “us,” “our” and “Cactus”), 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. 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 asequipment. Additionally, we offer repair and refurbishment services.
Organization Structure
We operate through 15 U.S. service centers located in Texas, New Mexico, Pennsylvania, North Dakota, Louisiana, Oklahoma, Colorado, Utah and Wyoming as well as three service centers in Eastern Australia. We also provide rental and field service operations in the Kingdom of Saudi Arabia. Our corporate headquarters are 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”). We began operating in August 2011 following the formation of Cactus LLC in part by Scott Bender and Joel Bender, who have owned or operated wellhead manufacturing businesses since the late 1970s. 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 asPursuant to 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 LLC Agreement, holders, owners of CW Units are entitled to redeem their CW Units
for shares of Cactus Inc.’s Class A common stock, par value $0.01 per share (“Class A common stock”) on a one-for-one basis, which results in a corresponding increase in Cactus Inc.’s membership interest in Cactus LLC and an increase in the number of shares of Class A common stock outstanding.
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 We refer 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 2018 offering expenses for the IPO. We also paid $2.2 million in offering expenses during 2017 that were recorded to prepaid expenses in the consolidated balance sheet as of December 31, 2017. 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”), 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 $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 millionowners of CW Units, from certain direct and indirect owners of Cactus LLC. The remaining $2.2 million was held by Cactus LLC to cover offering expenses previously paid in 2017.
On July 16, 2018, we completed a public offering of 11,196,562 shares (consisting of 10,000,000 base shares and 1,196,562 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.other than Cactus Inc. contributed these net proceeds to Cactus LLC in exchange for(along with their permitted transferees), as “CW Unit Holders.” CW Units. Cactus LLC then used the net proceeds to redeem 11,196,562 CW Units from certainUnit Holders own one share of the owners of Cactus LLC, and Cactus Inc. canceled a corresponding number of shares ofour Class B common stock, par value $0.01 per share (“Class B common stock”).
Pursuant to the Cactus Wellhead LLC 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 an increase in the number of shares of Class A common stock outstanding. Pursuant to the Cactus Wellhead LLC Agreement, there were redemptions of 7,068 CW Units during the fourth quarter 2018. Future quarterly redemptions are also expected.
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. Holders of Class A common stock and Class B common stock vote together as a single class on all matters presented to our stockholders for their vote or approval, except as otherwise required by applicable law or our amended and restated certificate of incorporation. Cactus WH Enterprises, LLC (“Cactus WH Enterprises”) is the largest CW Unit Holder. Cactus WH Enterprises is a Delaware limited liability company owned by Scott Bender, Joel Bender, Steven Bender and certain other employees. Cadent Energy Partners II, L.P. (“Cadent”), an affiliate of Cadent Energy Partners LLC, owned more than 10% of issued and outstanding CW Units until March 2021, when it redeemed 4,111,250 of the CW Units (together with an equal number of shares of Class B common stock) owned by it in connection with our 2021 Secondary Offering, as defined below. Subsequently, in a series of additional transactions throughout 2021, Cadent and its affiliates transferred or redeemed the remainder of its CW Units. The redeemed CW Units were redeemed for Class A common stock, with such shares being distributed to their owners pro rata.
As of December 31,
2018, after giving effect to our IPO, Follow-on Offering and the related transactions,2021, Cactus Inc.
owns an approximate 50.3% interest in Cactus LLC,owned 78.0% and
the CW Unit Holders
own an approximate 49.7% interest inowned 22.0% of Cactus
LLC. These ownership percentages areLLC, which was based on
37,653,63059.0 million shares of Class A common stock
issued and
37,236,142outstanding and 16.7 million shares of Class B common stock issued and
outstandingoutstanding. Cactus WH Enterprises held approximately 20% of our voting power as of December 31,
2018.
Since our IPO in February 2018, 43.9 million CW Units and a corresponding number of shares of Class B common stock have been redeemed in exchange for shares of Class A common stock. The following is a rollforward of ownership of legacy CW Units by CW Unit Holders for the three years ended December 31, 2021:
| | | | | |
| CW Units |
| (in thousands) |
| CW Units held by legacy CW Unit Holders as of December 31, 2018 | 37,236 | |
| March 2019 follow-on equity offering | (8,474) | |
| Other CW Unit redemptions | (804) | |
| CW Units held by legacy CW Unit Holders as of December 31, 2019 | 27,958 | |
| Other CW Unit redemptions | (303) | |
| CW Units held by legacy CW Unit Holders as of December 31, 2020 | 27,655 | |
| March 2021 follow-on equity offering | (6,273) | |
| Cadent redemption in June 2021 | (3,292) | |
| Cadent redemption in September 2021 | (715) | |
| Other CW Unit redemptions | (701) | |
| CW Units held by legacy CW Unit Holders as of December 31, 2021 | 16,674 | |
On March 9, 2021, Cactus Inc. entered into an underwriting agreement with Cactus LLC, certain selling stockholders of Cactus (the “Selling Stockholders”) and the underwriters named therein, providing for the offer and sale by the Selling Stockholders (the “2021 Secondary Offering”) of up to 6,325,000 shares of Class A common stock at a price to the underwriters of $30.555 per share. On March 12, 2021, in connection with the 2021 Secondary Offering, certain of the Selling Stockholders exercised their right to redeem 6,272,500 CW Units, together with a corresponding number of shares of Class B common stock, as provided in the Cactus Wellhead LLC Agreement. Upon the closing of the 2021 Secondary Offering, Cactus Inc. acquired the redeemed CW Units and a corresponding number of shares of Class B common stock (which shares of Class B common stock were then canceled) and issued 6,272,500 new shares of Class A common stock to the underwriters at the direction of the redeeming Selling Stockholders, as provided in the Cactus Wellhead LLC Agreement. In addition, certain other Selling Stockholders sold 52,500 shares of Class A common stock in the 2021 Secondary Offering, which shares were owned by them directly as of the time of the 2021 Secondary Offering. Cactus did not receive any of the proceeds from the sale of common stock in the 2021 Secondary Offering, and there was no change in the combined number of Cactus Inc. voting shares outstanding.
On June 17, 2021, Cadent transferred ownership of 944,093 CW Units, together with a corresponding number of shares of Class B common stock, to its general partner, Cadent Energy Partners II - GP, L.P., (“Cadent GP”), and its manager, Cadent Management Services, LLC (“Cadent Management”). Cadent then redeemed its remaining 3.3 million CW Units, together with a corresponding number of shares of Class B common stock, as provided in the Cactus Wellhead LLC Agreement. The redeemed CW Units (and the corresponding shares of Class B common stock) were canceled and Cactus Inc. issued 3.3 million new shares of Class A common stock to Cadent, which then distributed such shares to its limited partners. Cactus received no proceeds from these events, and there was no change in the combined number of Cactus Inc. voting shares outstanding.
On September 13, 2021, Cadent GP and Cadent Management transferred their aggregate ownership of 228,878 CW Units, together with a corresponding number of shares of Class B common stock, to their respective owners, which included certain Cactus Inc. board members and executive management. The transfers were made at the discretion of Cadent GP and Cadent Management without the consent of the transferees. Additionally, Cadent GP and Cadent Management redeemed their remaining 715,215 CW Units held, together with a corresponding number of shares of Class B common stock, thus liquidating its ownership in Cactus Wellhead, LLC. These transactions were in accordance with the Cactus Wellhead LLC Agreement. The redeemed CW Units (and the corresponding shares of Class B common stock) were canceled and Cactus Inc. issued 715,215 new shares of Class A common stock. Cactus received no proceeds from these events, and there was no change in the combined number of Cactus Inc. voting shares outstanding.
In addition to these significant redemptions during 2021, 700,957 CW Units were redeemed in exchange for shares of Class A common stock during the year ended December 31, 2021 pursuant to our regular quarterly redemption program. The above discussion focuses on the 2021 activity and redemptions. For further information on the follow-on equity offering that occurred in March 2019, see Note 10 in the Notes to the Consolidated Financial Statements.
The following diagram indicates our simplified ownership
structure.
Overview
structure as of December 31, 2021:
Our Products
Our principal products include our Cactus SafeDrill®wellhead systems as well as frac stacks, our Cactus SafeLink® monobore, SafeClamp®and SafeInject® systems, zipper manifolds and production trees that we design and manufacture. Every oil and gas well requires a wellhead system, which is installed at the onset ofthroughout the drilling process thatand 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 including our SafeLink®, SafeClamp®and SafeInject® systems 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. Cactus, through its proprietary equipment, digital offerings and services, reduces the need for human intervention in the exclusion zone, minimizing non-productive time and leading to inherently safer and more environmentally responsible operations. For the subsequent production phase of a well, we sell production trees and equipment, when required, to interface 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 productthe highest quality products and service solutions.
We have achieved significantsubstantial 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
tointo increased safety, reduced environmental impact and cost savings at the wellsite.
We
primarily operate
15through 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,
Haynesville, Eagle Ford, Bakken and
SCOOP/STACK, among other active oil and gas regions in the United
States. We also have one service centerStates, and in Eastern Australia. These service centers support our field services and provide equipment assembly and repair services.
How We Generatealso conduct rental and field service operations in the Kingdom of Saudi Arabia. Our manufacturing and production facilities are located in Bossier City, Louisiana and Suzhou, China.
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 asthe repair of such equipment and 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
our products on their wellsite.wellheads or production trees. Items sold or rented generally have an associated service component. As a result, there is
some level ofa close correlation between field service and other revenues and revenues from product sales and rentals.
For the year ended December 31,
2018,2021, we derived
53%64% of our total revenues from the sale of our products,
25% of our total revenues14% from rental and 22%
of our total revenues from field service and other. In
2017,2020, we derived
55%59% of our total revenues from the sale of our products,
23%19% from rental and 22% from field service and other. In 2019, we derived 57% of our total revenues from
the sale of our products, 22% from rental and
22% of our total revenues21% from field service and other. We have predominantly domestic operations, with
99%a small amount of
our total sales foractivity in Australia and the
years ended December 31, 2018 and 2017 earned from U.S. operations. Kingdom of Saudi Arabia.
Most
all 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/orand 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 value perceived by our customers, the level of utilized capacity in the oil service sector, maintenance of market share, cost of producingmanufacturing the product, cost of providing the service 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
expenseexpenses 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
and vehicle lease
expense,expenses, fuel and supplies.
Selling, general and administrative expense is comprised of costs such as sales and marketing, engineering, expenses, general corporate overhead, business development, expenses, compensation, expense, stock-based compensation expense, IT expenses,employment benefits, insurance, information technology, safety and environmental, expenses, legal and professional expenses and other related administrative functions.
Interest expense, net is currently comprised primarily of interest expense associated with our Prior Credit Agreement (as defined below), our ABL Credit Facility (as defined below) and capital leases. A portion of the net proceeds of our IPO were used to repay the borrowings outstanding under our Prior Credit Agreement in February 2018.
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 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 percent global tariff on certain imported steel mill products and a 10 percent global tariff on certain imported aluminum products. On March 8, 2018 and March 22, 2018, the President issued proclamations temporarily exempting Mexico, Canada, Australia, Argentina, South Korea, Brazil and the European Union from the global steel and aluminum tariffs to imports until May 1, 2018. The President subsequently announced that the United States had successfully concluded discussions with South Korea on satisfactory alternative means to address U.S. national security threats posed by steel article imports from South Korea, thereby permanently excluding South Korea from the steel tariff, and had agreed in principle with Argentina, Australia and Brazil on satisfactory alternative means to address U.S. national security threats posed by steel and aluminum articles imported from those countries, and thus extended the temporary exemption of steel and aluminum products from those countries until details of those agreements are finalized and implemented. On May 31, 2018, the President issued proclamations permanently excluding Argentina, Australia and Brazil from the steel tariff and Argentina and Australia from the aluminum tariff, though imports of steel from Argentina and Brazil, as well as South Korea, and imports of aluminum from Argentina are subject to absolute quotas. Though the President had temporarily exempted tariffs on steel and aluminum imports from the European Union, Canada and Mexico, on May 31, 2018, the President opted to not extend such exemptions and as a result, imports of steel and aluminum from the European Union, Canada, and Mexico are subject to tariffs effective June 1, 2018. The tariffs and quotas have caused the cost of raw materials to increase.
professional.Impact of Section 301 of the Trade Act of 1974 (“Section 301”)
On September 21, 2018, the Office of the U.S. Trade Representative (‘‘USTR’’) determined to modify its prior actions in its investigation into certain acts, policies, and practices of the Government of China related to technology transfer, intellectual property, and innovation pursuant to Section 301 by imposing additional tariffs on products of China. Substantially all of the products that we import through our Chinese supply chain are subject to the tariffs that took effect on September 24, 2018. In the three months ended December 31, 2018, we estimate that 50% of our inventory received was sourced through our Chinese supply chain. These aforementioned tariffs were set at a level of 10% until the end of 2018, at which point the tariffs were to increase to 25%. However, on December 19, 2018, the USTR postponed the date on which the rate of the additional duties would increase to 25% until March 2, 2019. The USTR announced on March 5, 2019 that the rate of additional duty will remain at 10% until further notice. We believe that a combination of factors could largely offset the impact of these increases or potential increases in the tariff rate on our results of operations, including, among other things, our negotiations with customers and suppliers, favorable currency exchange expectations and our expected future growth but there can be no assurance that the impact will not be significant to us. We believe these increases in the tariff rate should not have a material adverse effect on our results of operations; however, there remains significant uncertainty as to the degree of any adverse impact.
Suppliers and Raw Materials
Forgings
and plate, castings,
tube 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
a majority of these items
and services from
over 250 vendors
both in the United States,
China, India and
China.Australia. For the
yearsyear ended December 31,
2018, 2017 and 2016,2021, two vendors each represented approximately
$46.7 million, $33.4 million and $10.8 million, respectively, of machined component purchases were made from a vendor located in China, representing approximately 21%, 22% and 20%, respectively,9% of our total third-party vendor purchases of raw materials, finished products,
components, equipment, machining and other services.
AlthoughDuring the years ended December 31, 2020 and 2019, we
historically made purchases from thishad one vendor
pursuant to a long term contract,who represented approximately 9% and 16%, respectively, of 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. While our relationships with our existing vendors, including the Chinese vendor referred to above, are important to us, we do not believe that we are overly dependent on any individual vendor to supply our required materials or services.
TheNotwithstanding the supply disruptions experienced starting in 2021, 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, although likely at higher costs and delayedwith extended deliveries.
Our manufacturing and production facilities are located in Bossier City, Louisiana and Suzhou, China. Although 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,of made-to-order equipment, while our facility in China is optimized for longer lead time orders and outsources its machining requirements.
Both our Bossier City and ChinaThe facilities are licensed to the latest 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-response production of made-to-order equipment. Where traditional manufacturing facilities are designed to run in batches with different machining processes occurring in stages, thisour Bossier City facility uses advanced computer numeric 5 Axis control (or CNC) machines to perform multiple machining operations in a single step.with fewer steps. We believe eliminating the setup and queue times between machining processesoperations allows us to
offer significantly shorter order-to-delivery time for equipment thantimes compared to our competitors, albeit at higher costs than our facility in China. Responsiveness to urgent needs strengthens our relationship with key customers.
Our The Bossier City manufacturing facility also functions as a repair and testing facility with its API 6A PSL3 certification and full QA/QC department. The facility also has the ability to perform hydrostatic testing, phosphate and oiling,oil coating, copper coating and frac valverental equipment remanufacturing.
Our production facility in China is configured to efficiently produce our range of pressure control products and components for less time-sensitive, higher-volume orders. All employees in ourThe Suzhou facility areassembles and tests finished and semi-finished machined components before shipment to Cactus facilities in the United States and Australia. Our Suzhou subsidiary is wholly-owned, and its facility is staffed by Cactus employees, which we believe is a key factor in ensuring high quality. Our Suzhou facility currently assemblesquality and tests some machined components before shipment to Cactus facilities in the United States and Australia.
dependable deliveries.
Trademarks and
Other Intellectual PropertyPatents
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
SafeDrill® trademark is complementaryU.S. Patent and Trademark Office and has also applied for registration status of several trademarks which are pending. Once registered, our trademarks can be renewed every 10 years as long as we are using them in commerce. We also seek to protect our technology through use of patents, which affords us 20 years of protection of our proprietary inventions and technology, although we do not deem patents to be critical to our marketing effortssuccess. We have been awarded several U.S. patents and brand recognition. These trademarks are registered in the United States.currently have additional patent applications 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.
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
practicedexercised 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.
Our business is not significantly impacted by seasonality, although our fourth quarter has historically been impacted by holidays and our
clients’customers’ budget cycles.
We serve over 200 customers representing majors, independents and other oil and gas companies with operations in the key U.S. oil and gas producing basins including the Permian, SCOOP/STACK, Marcellus, Utica, Eagle Ford, Bakken and other active oil and gas basins, as well as in Australia. ForAustralia and the years ended December 31, 2018 and 2017, Pioneer Natural ResourcesKingdom of Saudi Arabia. One customer represented 11%approximately 12% of our total revenue and no other customer represented 10% or more
of our total revenue. Forrevenues during the year ended December 31, 2016, Devon Energy Corporation represented 12% of our total revenue, and2021, whereas no other customer represented 10% or more of our total revenue.
revenues during the year ended December 31, 2020 and one customer represented approximately 10% of total revenues during the year ended December 31, 2019.
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,and TechnipFMC, and Weir as well as with a large number of smaller other
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 20% of the U.S. rental 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 manufactured generic products.
We believe
that the
principal competitive factors in the markets we serve
areinclude technical features, equipment availability, work force competency, efficiency, safety record, reputation,
experiencecontinuity of management 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,people, 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 Federal Clean Air Act;
|
•the Federal Water Pollution Control Act (the “Clean Water Act”); | ·
| | the Comprehensive Environmental Response, Compensation and Liability Act;
|
•the Clean Air Act; | ·
| | the Resource Conservation and Recovery Act;
|
•the Comprehensive Environmental Response, Compensation and Liability Act; | ·
| | the Occupational Safety and Health Act; and
|
•the Resource Conservation and Recovery Act; | ·
| | national and local environmental protection laws in the People’s Republic of China.
|
•the Occupational Safety and Health Act; and•national and local environmental protection laws in Australia, the People’s Republic of China and the Kingdom of Saudi Arabia.
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 clientscustomers are also subject to most, if not all, of the same laws and regulations relating to environmental protection and occupational safety and health in the United States and in foreign countries where we operate. Consequently, to the extent these environmental
compliance costs, pollution mitigation costs or remedialremediation costs are incurred by our clients,customers, those clientscustomers could elect to delay, restrictreduce or cancel drilling, exploration or production programs, which could reduce demand for our products and services and, as a result, have a material adverse effect on our business, financial condition, results of operations, or cash flows.
Consistent with our quality assurance and controlHealth, Safety & Environment (“HSE”) principles, we have established proactive environmental and worker safety policies in the United States and foreign countries for the management, handling, recycling or disposal of chemicals and gases and other materials and wastes resulting from our 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
Licenses and Certifications.Our manufacturing facility in Bossier City, Louisiana and our production facility in Suzhou, China are currently certifiedlicensed by the API as beingto monogram manufactured products in complianceaccordance with API 6A, 21st Edition product specification for both wellheads and valves andwhile the quality management system is certified to API Q1, 9th Edition, Addendum 2 and ISO9001:2015 quality management systems.ISO 9001:2015. These licenses and certifications expire every three years and are renewed upon successful completion of annual audits. Cactus has also developed an API Q2 program specific to our service business. At this time, we have not yet applied for API Q2 certification, but we are implementing the API Q2 Quality Management System at select service locations to reduce well site non-productive time, improve service tool reliability and enhance customer satisfaction and retention. Our current API licenses and certifications are published on our website under the “Quality Assurance & Control” section of our website at www.CactusWHD.com. 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. Hydraulic Fracturing.Many Most of our customers utilize hydraulic fracturing in their operations. Environmental concerns have been raised regarding the potential impact of hydraulic fracturing and the resulting wastewater disposal on underground water 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.
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,December 2021, the Texas Railroad Commission, which regulates the state’s oil and gas industry, suspended the use of deep wastewater disposal wells in four oil-producing counties in West Texas. The suspension is intended to mitigate earthquakes thought to be caused by the injection of waste fluids, including saltwater, that are a byproduct of hydraulic fracturing into disposal wells. The ban will require oil and gas production companies to find other options to handle the wastewater, which may include piping or trucking it longer distances to other locations not under the ban. 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 for which they perform,contract, which could negatively impact demand for our products.
Climate Change. State, national and internationalforeign governments and agencies continue to evaluate, and in some instances adopt, climate-related legislation and other regulatory initiatives that would restrict emissions of greenhouse gases. Changes in environmental requirements 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. In January 2021, the Acting Secretary of the Department of the Interior issued an order suspending new leasing and drilling permits for fossil fuel production on federal lands and waters for 60 days. President Biden then issued an executive order indefinitely suspending new oil and natural gas leases on public lands or in offshore waters pending completion of a comprehensive review and reconsideration of federal oil and gas permitting and leasing practices. Several states filed lawsuits challenging the suspension and in June 2021, a judge in the U.S. District Court for the Western District of Louisiana issued a nationwide temporary injunction blocking the suspension. The Department of the Interior appealed the U.S. District Court’s ruling and the appeal is pending. To the extent that the Department of the Interior’s report or other initiatives to reform federal leasing practices result in the development of additional restrictions on drilling, limitations on the availability of leases, or restrictions on the ability to obtain required permits, it could impact our customers’ opportunities and reduce demand for our products and services in the aforementioned areas.
Because our business depends on the level of activity in the oil 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 a negative impact on our business. Likewise, such restrictions may result in additional compliance obligations that could have a material adverse effect on our business, consolidated results of operations and consolidated financial
condition.position. In addition, our business could be impacted by initiatives to address greenhouse gases and climate change and incentives to conserve energy or use alternative energy sources. For example, the Build Back Better Act, passed by the U.S. House of Representatives and supported by President Biden, includes incentives to increase wind and solar electric generation and encourage consumers to use these alternative energy sources. At this time, it is uncertain whether, and in what form, the Build Back Better Act may become law. However, the Build Back Better Act or similar state or federal initiatives to incentivize a shift away from fossil fuels could reduce demand for hydrocarbons, thereby reducing demand for our products and services and negatively impacting our business.
Insurance and Risk Management
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
Human Capital Management
As of December 31, 2018,2021, we employed over 1,200 people. Our future success will depend partially on our ability to attract, retain and motivate qualified personnel.1,000 people worldwide, of which a little more than 900 were employed in the United States. 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 workforce to be good. Our business’s success depends mainly on our ability to attract, retain and motivate a diverse population of talented employees at all levels of our organization, including the individuals who comprise our global workforce and executive officers and other key personnel. To succeed in a competitive industry, we have developed key recruitment and retention strategies, objectives and measures which we focus on as part of the overall management of our business.
Recruiting and Development. Our talent strategy is focused on attracting the best talent and rewarding their performance while developing and retaining them. Fiscal year 2020 was a challenging year in which we made difficult staffing decisions, resulting in significant reductions to our workforce. As the economy showed signs of improvement in late 2020 and throughout 2021, we rebuilt our workforce, increasing our workforce by approximately 57% during 2021. We are approaching the workforce levels we were at right before the start of the pandemic in March 2020. We strive to maintain good relationships with our employees and have prioritized rehiring our most experienced branch and field positions as the industry has recovered. When hiring, we utilize employee referrals, a variety of social media platforms, regional job fairs and partner with educational organizations across the United States to find diverse, qualified, motivated and responsible candidates.
Training.We are dedicated to the continual training and development of our employees, especially those in field and branch operations. Our internal training focuses on safety, corporate and personal responsibility, product knowledge, behavioral development and ethical conduct. In 2021, Cactus built an internal database to track training progress and completion for all of our associates, with particular interest in tracking the training and skill sets of our field service technicians and managers. This tracking tool enables us to take a holistic view of our strength by branch and job title, which helps us to manage our operations and assign associates with the proper skills, training and experience to safely and efficiently meet or exceed customer demand. Other training courses offered outside of the company are attended by employees with specialized skills, knowledge or certifications as needed for their ongoing success and professional development.
Compensation and Benefits.We provide compensation and benefits programs to help meet the needs of our employees. In addition to salaries and wages, these programs (which vary by country) include annual bonuses, retirement plans such as a 401(k) plan, healthcare and insurance benefits, health savings accounts partially funded by the Company, standard flexible spending accounts, personal legal services insurance, company-sponsored long and short term disability, accident and critical illness, paid time off, family leave, partially paid maternity and paternity leave, family care resources and employee assistance programs, among others. We also offer tuition reimbursement in certain circumstances to support the continued growth and development of our employees. Additionally, we use targeted equity-based grants with vesting conditions to facilitate the retention of key personnel.
Health and Safety. Our health and safety programs are designed around global standards with appropriate variations addressing the multiple jurisdictions and regulations, specific hazards and unique working environments of our manufacturing and production facilities, service centers and headquarters. We require each location to conduct regular safety evaluations to verify that expectations for safety program procedures and training are being met. We also engage in third party conformity assessments of our HSE processes to determine adherence to our HSE management system and to global health and safety standards. We monitor our Occupational Safety and Health Administration Total Recordable Incident Rate (“TRIR”) to assess our operation’s health and safety performance. TRIR is defined as the number of incidents per 100 full-time employees that have resulted in a recordable injury or illness in the pertinent period. During fiscal year 2021, we had a TRIR of 1.29, which compares to 0.55 in 2020. We had no work-related fatalities in either year. Based on the most recent statistics available from the International Association of Drilling Contractors, our TRIR statistics are in line with the industry average.
We are committed to the health, safety and wellness of our employees. We provide our employees and their families with access to various flexible and convenient health and wellness programs. These programs include benefits that offer protection and security to have peace of mind concerning events that may require time away from work or impact their financial well-being. These tools also support their physical and mental health by providing resources to improve or maintain their health status. In response to the COVID-19 pandemic, we implemented additional safety measures for employees performing critical on-site work. Our facilities implemented mandatory personal protective wear, extensive deep cleaning and sanitation processes. We also work with third-party vendors to offer vaccination clinics and schedule vaccines for any associate who requests help in doing so. Any associate who has exhibited signs or symptoms or believes they may have been exposed to the virus is tested and quarantined based on guidelines provided by the Centers for Disease Control and Prevention. We provide paid time off for our associates to get vaccinated and boosted. We also provide additional time off for any fully vaccinated associates who miss work due to a breakthrough case of COVID-19. Additionally, during certain time periods, we have allowed administrative employees
to work from home if desired. Lastly, we encourage our employees to be
satisfactory.fully vaccinated against COVID-19 and offer financial incentives within our medical benefits plan to those associates who are fully vaccinated.
Our principal executive offices are located at 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”), including our Form 10-Ks, Form 10-Qs and Form 8-Ks, as well as amendments to such filings, 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.
Investing in our Class A common stock involves risks. You should carefully consider the information in this Annual Report, including the matters addressed under “Cautionary Statement Regarding Forward‑Looking Statements,” and the following risks before making an investment decision. Our business, 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, results of operations and financial condition. The trading price of our Class A common 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
The global outbreak of COVID-19 and associated responses have had, and are expected to continue to have, an adverse impact on our business and operations.
The ongoing COVID-19 pandemic has negatively affected, and could continue to negatively affect, our revenues and operations. We have experienced, and may experience in the future, slowdowns or temporary idling of certain of our manufacturing and service facilities due to a number of factors, including implementing additional safety measures, testing of our team members, team member absenteeism and governmental orders. A prolonged closure could have a material adverse impact on our ability to operate our business and on our results of operations. We have also experienced, and could continue to experience, disruption and volatility in our supply chain, which has resulted, and may continue to result, in increased costs for certain goods. The spread of COVID-19 has also disrupted and may continue to disrupt logistics necessary to import, export and deliver products to us and our customers. Further, we might experience temporary shortages of labor, making it difficult to provide field service technicians to install or service our equipment. The duration of the pandemic and its continued adverse impact on our business are unknown and impossible to predict with certainty. Despite vaccines and boosters being administered worldwide, the extent of future impacts of the coronavirus and any new variants related to COVID-19 on general economic conditions and on our business, operations and results of operations remains uncertain.
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 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 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 results of operations, financial condition and 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;
|
| ·
| | available excess production capacity within the Organization of Petroleum Exporting Countries (“OPEC”) and the level of oil and gas production by non‑OPEC countries;
|
•demand for hydrocarbons, which is affected by worldwide population growth, economic growth rates and general economic and business conditions; | ·
| | transportation differentials associated with reduced capacity in and out of the storage hub in Cushing, Oklahoma;
|
•available excess production capacity within OPEC and the level of oil and gas production by non‑OPEC countries; | ·
| | costs of exploring for, producing and delivering oil and natural gas;
|
| ·
| | political and economic uncertainty and sociopolitical unrest;
|
•oil and gas inventory levels, production capacity and investment levels; | ·
| | oil refining capacity and shifts in end‑customer preferences toward fuel efficiency and the use of natural gas;
|
•the continued development of shale plays which may influence worldwide supply; | ·
| | conservation measures and technological advances affecting energy consumption;
|
•transportation differentials associated with reduced capacity in and out of the storage hub in Cushing, Oklahoma; | ·
| | potential acceleration of the commercial development of alternative energy sources (such as wind, solar, geothermal, tidal, fuel cells and biofuels);
|
•costs of exploring for, producing and delivering oil and natural gas; | ·
| | access to capital and credit markets, which may affect our customers’ activity levels and spending for our products and services;
|
•political and economic uncertainty and geopolitical unrest; | ·
| | changes in laws and regulations related to hydraulic fracturing activities;
|
•oil refining activity and shifts in end‑customer preferences toward fuel efficiency and increased transition to electric vehicles; | ·
| | changes in environmental laws and regulations (including relating to the use of coal in power plants); and
|
•conservation measures and technological advances affecting energy consumption;•government initiatives to address greenhouse gases and climate change (including incentives to promote alternative energy sources); •potential acceleration of the commercial development of alternative energy sources (such as wind, solar, geothermal, tidal, fuel cells and biofuels);
•access to capital and credit markets and investors’ focus on shareholder returns, which may affect our customers’ activity levels and spending for our products and services;
•changes in laws and regulations related to hydraulic fracturing activities, saltwater disposal or oil and gas drilling, particularly on public properties;
•changes in environmental laws and regulations (including relating to the use of coal in power plants which can impact the demand for natural gas);
•adverse weather conditions and natural disasters (including adverse conditions related to climate change);
•supply disruptions in key oil producing regions;
•terrorist attacks and armed conflicts, including the current conflict between Russia and Ukraine could cause temporary price increases which could dampen demand; and
•global pandemics.
The oil and gas industry is cyclical and has historically experienced periodic downturns, which have been characterized by diminished demand for our products and services and downward pressure on the prices we charge. These downturns cause many E&P companies to reduce their capital budgets and drilling activity. Any future downturn or expected downturn could result in a significant decline in demand for oilfield services and adversely affect our
business, results of operations
financial condition and cash flows.
Growth in U.S. drilling and completionscompletion activity, and our ability to benefit from such growth, could be adversely affected by any significant constraints in equipment, labor or takeaway capacity in the regions in which we operate.
Growth in U.S. drilling and
completionscompletion activity may be impacted by, among other things,
pressure pumping capacity,the availability and cost of Oil Country Tubular Goods (OCTG), pipeline capacity, and material and labor shortages.
TheShould significant growth in
drilling and completions activity
that occurred over most of 2018, particularly in the Permian Basin, has led tooccur there could be concerns over availability of the equipment, materials and labor required to drill and complete a well, together with the ability to move the produced oil and natural gas to market. Should significant constraints develop that materially impact the
efficiency and economics of oil and gas producers, growth in U.S. drilling and
completionscompletion 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 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
both within and outside of our industry could result in increases in the wage rates that we must pay.
Throughout 2021, we experienced notable increases in salaries and wages, especially in certain key oil and gas producing regions, as we restored our workforce while trying to meet increasing customer demand. 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.cash flows.
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.
Additionally, we provide rental and field service operations in the Kingdom of Saudi Arabia. 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, ourbusiness, results of operations and
our financial condition.cash flows. These factors include, but are not limited to, the following:
| ·
| | nationalization and expropriation;
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•nationalization and expropriation;
•potentially burdensome taxation;•inflationary and recessionary markets, including capital and equity markets;
•outbreaks of Contents
pandemic or contagious diseases; | ·
| | potentially burdensome taxation;
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•supply disruptions in key oil producing countries; | ·
| | inflationary and recessionary markets, including capital and equity markets;
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•tariffs, trade restrictions, trade protection measures or price controls; | ·
| | civil unrest, labor issues, political instability, terrorist attacks, cyber‑terrorism, military activity and wars;
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•foreign ownership restrictions; | ·
| | supply disruptions in key oil producing countries;
|
•import or export licensing requirements; | ·
| | tariffs, trade restrictions, trade protection measures, including those associated with Section 232 and Section 301, or price controls;
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•restrictions on operations, trade practices, trade partners and investment decisions resulting from domestic and foreign laws and regulations; | ·
| | foreign ownership restrictions;
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•changes in, and the administration of, laws and regulations; | ·
| | import or export licensing requirements;
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•inability to repatriate income or capital; | ·
| | restrictions on operations, trade practices, trade partners and investment decisions resulting from domestic and foreign laws and regulations;
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•reductions in the availability of qualified personnel; | ·
| | changes in, and the administration of, laws and regulations;
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•development and implementation of new technologies; | ·
| | inability to repatriate income or capital;
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•foreign currency fluctuations or currency restrictions; and | ·
| | reductions in the availability of qualified personnel;
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•fluctuations in the interest rate component of forward foreign currency rates. | ·
| | development and implementation of new technologies;
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| ·
| | foreign currency fluctuations or currency restrictions; and
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| ·
| | fluctuations in the interest rate component of forward foreign currency rates.
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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,
but also in Australia and
Australia.the Kingdom of Saudi Arabia. Historically, we have been dependent on a relatively small number of customers for our revenues.
For each of the years ended December 31, 2018 and 2017, Pioneer Natural Resources represented 11% of our total revenue, and no other customer represented more than 10% of our total revenue. For the year ended December 31, 2016, Devon Energy Corporation represented 12% of our total revenue, and no other customer represented more than 10% of our total revenue.Our business, results of operations and financial conditionposition 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.
Delays in obtaining, or inability to obtain or renew, permits or authorizations by our customers for their operations could impair our business.
In both the United States and Australia, our
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, 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.
In addition, in January 2021, President Biden indefinitely suspended new oil and natural gas leases on public lands or in offshore waters pending completion of a comprehensive review and reconsideration of federal oil and gas permitting and leasing practices. In November 2021, the Department of the Interior completed its review and issued a report on the federal oil and gas leasing program. The Department of the Interior’s report recommends several changes to federal leasing practices, including changes to royalty payments, bidding, and bonding requirements. The effects of this report or other initiatives to reform the federal leasing process could result in additional restrictions or limitations on the issuance of federal leases and permits for drilling on public lands. Permitting, authorization or renewal delays, the inability to obtain new permits or the revocation of current permits could
impact our customers’ operations and cause a loss of revenue and potentially have a materially adverse effect on our business, results of operations and
financial condition.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 asincluding 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
from current levels 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 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.operations and cash flows.
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, bring to market, effectively use and implement new and emerging technologies may have a material adverse effect on our business, results of operations and
financial condition,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 castingsplate, tube and bar stock, forgings and machined components is critical to our ability to manufacturesuccessfully compete. Due to a shortage of steel caused primarily by production disruptions during the pandemic and sell our productsincreased demand as economies rebounded, steel and provide our services competitively.assembled component prices have been and continue to be elevated. Our results of operations may be
adversely affected by our inability to manage the rising costs and the availability of raw materials and components used in our wide variety of products and systems. Additionally, freight costs, specifically ocean freight costs, have risen significantly due to a number of factors including, but not limited to, a scarcity of shipping containers, congested seaports, a shortage of commercial drivers, capacity constraints on vessels or lockdowns in certain markets. We cannot assure that we will be able to continue to purchase and move these raw materials on a timely basis or at commercially viable prices, nor can we be certain of the impact of Section 232, Section 301changes to tariffs and other future
legislation that may impact trade with
China.China or other countries. 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.business, results of operations and cash flows.
Currently, the United States is experiencing the highest inflation in decades primarily due to supply-chain issues, a shortage of labor and a build-up of demand for goods and services. The most noticeable adverse impact to our business has been increased freight, materials and vehicle-related costs as well as higher salaries and wages. While we believe that the current rate of inflation is transitory as it is pandemic-driven, we are unsure how long an elevated rate will continue. We cannot be confident that all costs will return to the lower levels experienced in prior years even as the rate of inflation abates. Our results of operations may be adversely affected by these rising costs to the extent we are unable to recoup them from our customers.
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
business, results of operations and cash flows.
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, 2018, 2017 and 2016, approximately $46.7 million, $33.4 million and $10.8 million of purchases of machined components were made from this vendor, representing approximately 21%, 22% and 20%, 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 with such vendor, our results of operations could be adversely impacted until we are able to find an alternative vendor.
We design, manufacture, sell, rent and install equipment that is used in oil and gas E&P 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.sites, including sites in the Kingdom of Saudi Arabia. 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.operations and cash flows.
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.
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.business, results of operations and cash flows.
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, results of operations and cash flows.
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
business, results of operations
financial condition and cash flows.
In addition to our U.S. operations, we have operations in the People’s Republic of China, Australia and the Kingdom of Saudi Arabia. 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,
Australia and
Australiathe Kingdom of Saudi Arabia 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.cash flows.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
our operations or the exploration and production
and transportation of crude oil and natural gas by our customers, could adversely affect our business and operating results by increasing our costs
of compliance, increasing the costs of compliance and costs of doing business for our customers, 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.
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. These actions include a proposed 25% tariff on approximately $50 billion worth of imports from China, pursuit of dispute settlement in the World Trade Organization
Existing or future laws and
restrictions on investment in the United States directed or facilitated by China. On June 20, 2018 the USTR released the list of products imported from Chinaregulations related to
be subject to thesegreenhouse gases and climate change and related public and governmental initiatives and additional
tariffs. The initial U.S. tariffs were implemented on July 6, 2018 covering $34 billion worth of Chinese goods, with another $16 billion of goods facing tariffs beginning on August 23, 2018. In response to the initial U.S. action, the government of China specified that it would impose an additional 25% tariff on U.S. goods with a value of $50 billion. In response to China’s announcement, the President issued a statement directing the USTR to identify another $200 billion worth of Chinese goods for additional tariffs at a rate of 10%. The USTR issued a proposed list of products to be subject to an additional 10% tariff on July 17, 2018. On September 17, 2018, the President issued a statement directing the USTR to proceed with placing additional tariffs on approximately $200 billion worth of additional imports from China. These tariffs, which took effect on September 24, 2018, initially were set at a level of 10% until the end of 2018, at which point the tariffs were to rise to 25%. However, on December 19, 2018, the USTR postponed the date on which the rate of the additional duties would increase to 25% until March 2, 2019. The USTR announced on March 5, 2019 that the rate of the additional duties will remain at 10% until further notice. Substantially all of the products that we import through our Chinese supply chain are subject to the tariffs that took effect on September 24, 2018. In the three months ended December 30, 2018, we estimate that 50% of our inventory value received was sourced through our Chinese supply chain. If we are unable to mitigate the impact of the increased costs resulting from the tariff rate of 10% or an increase in the tariff rate to 25%, our business would be materially and adversely affected. 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 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.
We may become involved in 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 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. 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, whichcompliance obligations could have a material adverse effect on our business, and results of operations. In addition, weoperations, prospects, and financial condition.
Changes in environmental requirements related to greenhouse gas emissions may
be required to incur significant costs to protect against damage caused by these disruptions or security breaches in the future.Adverse weather conditions couldnegatively impact demand for our servicesproducts and services. For example, oil and natural gas E&P may decline as a result of environmental requirements, including land use policies and other actions to restrict oil and gas leasing and permitting in response to environmental and climate change concerns. In January 2021, the Acting Secretary of the Department of the Interior issued an order suspending new leasing and drilling permits for fossil fuel production on federal lands and waters for 60 days. President Biden then issued an executive order indefinitely suspending new oil and natural gas leases on public lands or materiallyin offshore waters pending completion of a comprehensive review and reconsideration of federal oil and gas permitting and leasing practices. Several states filed lawsuits challenging the suspension and in June 2021, a judge in the U.S. District Court for the Western District of Louisiana issued a nationwide temporary injunction blocking the suspension. The Department of the Interior appealed the U.S. District Court’s ruling. If the Department of the Interior succeeds on its appeal of the U.S. District Court’s decision and reinstitutes a leasing suspension, the reinstitution of such suspension could reduce demand for our services. Further, to the extent that the Department of Interior’s report or other initiatives to reform federal leasing practices result in the development of additional restrictions on drilling, limitations on the availability of leases, or restrictions on the ability to obtain required permits, it could impact our costs.
Our business could be materially adversely affected by adverse weather conditions. For example, unusually warm winters could adversely affect thecustomers’ opportunities and reduce demand for our products and services by decreasingin the demand foraforementioned areas.
Federal, state, and local agencies continue to evaluate 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
unusually cold wintersfuture laws and regulations related to greenhouse gases could
adversely affecthave a negative impact on 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: | ·
| | 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 attackbusiness if such laws 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 couldregulations reduce overall demand for oil and natural gas, potentially putting downward pressuregas. Likewise, such laws or regulations may result in additional compliance obligations with respect to the release, capture, sequestration, and use of greenhouse gases. These additional obligations could increase our costs and have a material adverse effect on our business, results of operations, prospects, and financial condition. Additional compliance obligations could also increase costs of compliance and costs of doing business for our customers, thereby reducing demand for our servicesproducts and causingservices. 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.
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 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. 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 December 2021, the Texas Railroad Commission, which regulates the state’s oil and gas industry, suspended the use of deep wastewater disposal wells in four oil-producing counties in West Texas. The suspension is intended to mitigate earthquakes thought to be caused by the injection of waste fluids, including saltwater, that are a reduction in our revenues. Oilbyproduct of hydraulic fracturing into disposal wells. The ban will require oil and gas production companies to find other options to handle the wastewater, which may include piping or trucking it longer distances to other locations not under the ban. 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. 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.
Increasing attention by the public and government agencies to climate change and environmental, social and governance (“ESG”) matters could also negatively impact demand for our products and services. In recent years, increasing attention has been given to corporate activities related facilitiesto ESG in public discourse and the investment community. A number of advocacy groups, both domestically and internationally, have campaigned for governmental and private action to promote change at public companies related to ESG matters, including through the investment and voting practices of investment advisers, public pension funds, universities and other members of the investing community. These activities include increasing attention and demands for action related to climate change and energy rebalancing matters, such as promoting the use of substitutes to fossil fuel products and encouraging the divestment of fossil fuel equities, as well as pressuring lenders and other financial services companies to limit or curtail activities with fossil fuel companies. If this were to continue, it could have a material adverse effect on the valuation of our Class A common stock and our ability to access equity capital markets.
In addition, our business could be
direct targetsimpacted by initiatives to address greenhouse gases and climate change and incentives to conserve energy or use alternative energy sources. For example, the Build Back Better Act, passed by the U.S. House of
terrorist attacks,Representatives and
our operations could be adversely impacted if infrastructure integralsupported by President Biden, includes incentives to
our customers’ operationsincrease wind and solar electric generation and encourage consumers to use these alternative energy sources. At this time, it is
destroyed or damaged. Costs for insuranceuncertain whether, and
other security may increase as a result of these threats, and some insurance coveragein what form, the Build Back Better Act may become
more difficultlaw. However, the Build Back Better Act or similar state or federal initiatives to
obtain, if available at all.incentivize a shift away from fossil fuels could reduce demand for hydrocarbons, thereby reducing demand for our products and services and negatively impacting our business.
Risks Related to Our Class A Common Stock
We are a holding company 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 TRA 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 TRA 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 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
and 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.subsidiaries. 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.
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 additional 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 significantly increases our costs and expenses.
The changes necessitated by becoming a public company require a significant commitment 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 costs 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.
We have identified a material weakness in our internal control over financial reporting. If we identify additional material weaknesses in the future or otherwise fail to maintain effective internal control over financial reporting, it could result in material misstatements of our financial statements.
Effective internal control over financial reporting is necessary for us to provide reliable financial reports. If we cannot provide reliable financial reports, our reputation and operating results could be harmed. During 2018 we identified a material weakness in our internal control over financial reporting. 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.
We did not effectively design and maintain controls related to the accounting of the liability and deferred tax asset associated with the tax receivable agreement. This material weakness, 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, our independent registered public accounting firm has not 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 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. If we are unable to successfully remediate our existing or any future material weakness in our internal control over financial reporting, or identify any additional material weaknesses that may exist, the accuracy and timing of our financial reporting may be adversely affected, and we may be unable to maintain compliance with securities law requirements regarding timely filing of periodic reports in addition to applicable stock exchange listing requirements.
Cadent and Cactus WH Enterprises LLC havehas the ability to direct the voting of a significant percentage of the voting power of our common stock, and theirits interests may conflict with those of our other shareholders.
Holders of Class A common stock and Class B common stock vote together as a single class on all matters presented to our stockholders for their vote or approval, except as otherwise required by applicable law or our amended and restated certificate of incorporation. Cadent and Cactus WH Enterprises LLC (“Cactus WH Enterprises”), a
Delaware limited liability company owned by Scott Bender, Joel Bender, Steven Bender and certain of our other officers and employees, own approximately 19.1% and 28.1%%20% of our voting power respectively, as of December 31, 2018.
As a result, Cadent and Cactus WH Enterprises effectively control matters requiring stockholder approval, including the election of directors, changes to our organizational documents and significant corporate transactions.2021. This concentration of ownership willmay limit youra stockholder’s 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 stockholders. In addition, the Chairman of our board of directors is currently a managing director of Cadent Energy 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 stockholders 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 stockholders 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 stock to the extent investors perceive a disadvantage in owning stock of a company with significant 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 Energy Partners and its affiliates potentially have access to resources greater than ours, which may make it more difficult for us to compete with Cadent Energy Partners 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 Energy Partners, on the other hand, will be resolved in our favor. As a result, competition from Cadent Energy Partners 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.
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;
|
•limitations on the removal of directors; | ·
| | establishing advance notice provisions for shareholder proposals and nominations for elections to the board of directors to be acted upon at meetings of shareholders;
|
•limitations on the ability of our shareholders to call special meetings; | ·
| | providing that the board of directors is expressly authorized to adopt, or to alter or repeal our bylaws; and
|
•establishing advance notice provisions for shareholder proposals and nominations for elections to the board of directors to be acted upon at meetings of shareholders; | ·
| | 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.
|
•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 TRA, which could be substantial and accordingly serve as a disincentive to a potential acquirer of our company.
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.
Future sales of our Class A common 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 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. Additionally, we may issue additional shares of Class A common stock or convertible securities in subsequent public offerings. We
have 37,653,630had 59,035,237 outstanding shares of Class A common stock and
37,236,14216,674,282 outstanding shares of Class B common stock as of December 31,
2018.2021. The CW Unit Holders own all
37,236,14216,674,282 shares of Class B common stock, representing approximately
49.7%22.0% of our total outstanding common stock.
Cadent and Cactus WH Enterprises are partyAs required pursuant to
athe terms of the registration rights agreement
between us andthat we entered into at the
CW Unit Holders, which will require ustime of our IPO, we have filed a registration statement on Form S-3 under the Securities Act of 1933, as amended, to
effectpermit the
registrationpublic resale of
their shares of Class A common stock
inowned by Cactus WH Enterprises, Lee Boquet and certain
circumstances.members of our board of directors. 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 stock or securities convertible into Class A common stock or the effect, if any, that future issuances and sales of shares of our Class A common stock will have on the market price of our Class A common stock. Sales of substantial amounts of our Class A common 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.
Under certain circumstances, redemptions of CW Units by CW Unit Holders will result in dilution to the holders of our Class A 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 stock outstanding and decrease in the number of shares of Class B common 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, the holders of our Class A common stock would experience dilution with respect to such accumulated distributions.
Cactus Inc. will be required to make payments under the TRA 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 the TRA with the TRA Holders. This agreement generally provides 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 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 TRA 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 (or the TRA 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 TRA. In addition, payments we make under the TRA 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 TRA is not terminated, the payments under the TRA 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 TRA are our 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. Estimating the amount and timing of payments that may become due under the TRA Agreement is by its nature imprecise. For purposes of the 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 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 rates then applicable, and the portion of our payments under the TRA that constitute imputed interest or give rise to depreciable or amortizable tax basis. The payments under the TRA are not conditioned upon a holder of rights under the TRA having a continued ownership interest in us. For additional information regarding the TRA, see
“Certain“Item 13. Certain Relationships and Related Party
Transactions—Transactions, and Director Independence—Tax Receivable Agreement.”
In certain cases, payments under the TRA may be accelerated and/or significantly exceed the actual benefits, if any, we realize in respect of the tax attributes subject to the TRA.
If we elect to terminate the TRA 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 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 TRA, including (i) the assumption that we have sufficient taxable income to fully utilize the tax benefits covered by the TRA 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 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. If the TRA were terminated as of December 31,
2018,2021, the estimated termination payments, based on the assumptions discussed above, would have been approximately
$280$361.9 million (calculated using a discount rate equal to one-year LIBOR plus 150 basis points, applied against an undiscounted liability of approximately
$400$422.0 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 TRA.
Payments under the TRA 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 TRA if any tax benefits that have given rise to payments under the TRA 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 TRA 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 TRA, and we would not be able to recover any payments previously made by us under the 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.
For
General Risks
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
long asanticipated 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
are an emerging growth company, we will notmay be required to
comply with certain reporting requirements, including those relatingincur significant costs to
accounting standards and disclosure about our executive compensation, that apply to other public companies.We are classified as an “emerging growth company” underprotect against damage caused by these disruptions or security breaches in the JOBS Act. For as long as we are an emerging growth company, unlike other public companies, we will not be required to, among other things: (i) 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; (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 may remain an emerging growth company for up to five years following the IPO, 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 valuefuture.
Holders of our Class A common stock held by non‑affiliates, or issue more than $1.0 billionmay not receive dividends on their Class A common stock.
Holders of
non‑convertible debt over a three‑year period.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 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 attractivethan 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.
If we are unable to fully protect our intellectual property rights or trade secrets, we may suffer a result, thereloss 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 a less active trading market forfound invalid or unenforceable or our Class A common stockproducts 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 stock price maybusiness, results of operations and financial condition. Any litigation concerning intellectual property could be more volatile.protracted and costly, is inherently unpredictable and could have an adverse effect on our business, regardless of its outcome.
Item 1B.
Unresolved Staff CommentsNone.
The following table sets forth information with respect to our principal facilities as of December 31,
2018.2021. We
also own, in some cases, land adjacentdo not believe any of the omitted properties, consisting primarily of sales offices and service centers, are individually or collectively material to our
service centers and we lease several sales offices.operations or business. We believe that our facilities are
suitable and adequate for our current operations.
| | | | | | | | | | | | | | |
| Location | | Type | | Own/
Lease |
Location
United States | | Type
| | Lease
|
United States
| | | | |
Athens, PA
| | Service Center
| | Lease
|
Bossier City, LA(1)LA(1) | | Manufacturing Facility and Service Center | | Lease |
Bossier City, LA(1)LA(1) | | Manufacturing and Assembly FacilityFacilities, Warehouse and Warehouse / Land | | Own |
Bridgeport, TX
Donora, PA | | Service Center | | Lease |
Broussard, LA
DuBois, PA(2) | | Service Center | | Lease |
Casper, WY
| | Service Center
| | Lease
|
Donora, PA
| | Service Center
| | Lease
|
DuBois, PA
| | Service Center
| | Lease
|
Fort Lupton, CO
| | Service Center
| | Lease
|
Grand Junction, CO
| | Service Center
| | Lease
|
Hobbs, NM | | Service Center / Land | | Own |
Houston, TX | | Administrative Headquarters | | Lease |
New Waverly, TX | | Service Center / Land | | Own |
Odessa, TX | | Service Center | | Lease |
Odessa, TX | | Land | | Own |
| Oklahoma City, OK | | Service Center | | Lease |
Pleasanton, TX(2) | | Service Center | | Lease |
Williston, ND(2) | | Service Center | | Lease |
China and Australia: Australia | | | | |
Queensland, Australia | | Service CenterCenters and Offices / Land | | Lease |
Suzhou, China | | Production Facility and Offices | | Lease |
(1) Consists of various facilities adjacent to each other constituting our manufacturing facility, assembly facility, warehouse and service center.
| (1)
| | Consists of various facilities adjacent to each other constituting our manufacturing facility, assembly facility, warehouse and service center.
|
(2) We also own land adjacent to these facilities.Item 3.
Legal ProceedingsWe 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.
Item 4.
Mine Safety Disclosures
Item 5.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity SecuritiesWe have issued and outstanding two classes of common stock, Class A common stock and Class B common stock. Holders of Class B common stock own a corresponding number of CW Units which may be redeemed for shares of Class A common stock. The principal market for our Class A common stock is the New York Stock Exchange (“NYSE”), where it is traded under the symbol “WHD.”
Our Class A common stock beganNo public trading
on the NYSE on February 8, 2018. Prior to that, there was no public market
currently exists for our Class
AB common stock.
As a result, we have not set forth quarterly information with respect to the high and low prices for our common stock prior to 2018. | | | | | |
| | Sales Price | |
| | High | | Low | |
2018 | | | | | |
First Quarter (1) | $ | 27.96 | $ | 19.18 | |
Second Quarter | $ | 37.50 | $ | 25.37 | |
Third Quarter | $ | 38.84 | $ | 31.36 | |
Fourth Quarter | $ | 40.97 | $ | 24.60 | |
| (1)
| | For the period from February 8, 2018 through March 31, 2018.
|
As of December 31, 2018,2021, there was one holderwere three holders of record of our Class A common stock. This number excludes owners for whom Class A Commoncommon stock may be held in “street”“street name.
Dividend Policy
We have” There were seven holders of record of our Class B common stock.
Dividends
In October 2019, our board of directors authorized the introduction of a regular quarterly cash dividend of $0.09 per share of Class A common stock. Dividends are not paid to our Class B common stock holders; however, a corresponding distribution up to the same amount per share as our Class A common stockholders is paid to our CW Unitholders for any dividends to holders ofdeclared on our Class A common stock. We have no immediate planspaid quarterly dividends uninterrupted since initiation of the program and in July 2021, our board of directors approved an increase in the quarterly cash dividend to pay$0.10 per share of Class A common stock. In fiscal year 2021, the annual dividend rate for our Class A common stock was $0.38 per share compared to $0.36 per share in fiscal year 2020.
In January 2022, our board of directors approved an additional increase in the quarterly cash
dividendsdividend of $0.01 per share to
holders$0.11 per share of
our Class A common stock. We currently intend to
retaincontinue paying the quarterly dividend at the current levels while retaining the balance of future earnings, if any, to finance the growth of our business.
We would seek to increase the dividend in the future if our financial condition and results of operations permit. 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 debt agreements limit our ability to pay cash dividends to holders of our Class A common stock. 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, 2018.2021. 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 shall not be deemed “soliciting material” or to be “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 filing.
Issuer Purchases of Equity Securities
We did not purchase any
The following sets forth information with respect to our repurchase of
our equity securitiesClass A common stock during the
quarterthree months ended December 31,
2018.Sales2021 (in whole shares).
| | | | | | | | |
| Period | Total number of shares purchased(1) | Average price paid per share(2) |
| October 1-31, 2021 | 1,196 | $44.80 | |
| November 1-30, 2021 | 436 | 41.34 | |
| December 1-31, 2021 | 539 | 35.79 | |
| Total | 2,171 | $41.87 | |
(1) Consists of Unregistered Equity Securities and Use of ProceedsIn connection with our IPO, Cactus Inc. and Cactus LLC effected a series of restructuring transactions as a result of which (a) all of the previously outstanding membership interests (including outstanding Class A units, Class A-1 units and Class B units) in Cactus LLC held by its pre-IPO owners were converted into CW Units; (b) Cactus Inc. issued 23,000,000 shares of Class A common stock and contributedrepurchased from employees to satisfy tax withholding obligations related to restricted stock units that vested during the net proceeds of our IPO to Cactus LLC in exchangeperiod.
(2) Average price paid for 23,000,000 CW Units; (c) Cactus LLC used the net proceeds of our IPO that it received from Cactus Inc. to repay the borrowings outstanding under its term loan facility and to redeem 8,667,841 CW Units from the existing owners; (d) Cactus Inc. issued and contributed 51,889,772 shares of its Class B common stock, equal to the number of outstanding CW Units held by the owners thereof following the redemption described in (c) above to Cactus LLC; and (e) Cactus LLC distributed to each of the owners that continued to own CW Units following our IPO one share of Class B common stock for each CW Unit such holder continued to hold following the redemption described in (c) above. With the exercise of the Option, Cactus Inc. issued an additional 3,450,000 shares of Class A common stock and usedpurchased from employees to satisfy tax withholding obligations related to restricted stock units that vested during the net proceeds 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. The issuances of CW Units and Class B common stock did not involve any underwriters, underwriting discounts or commissions or a public offering, and such issuances were exempt fromperiod.
registration requirements pursuant to Section 4(a)(2) of the Securities Act. The IPO was registered under the Securities Act of 1933, as amended (the “Securities Act”), pursuant to an effective Registration Statement on Form S-1 (Reg. No. 333-222540), as supplemented by the registration statement supplement filed pursuant to Rule 462(b) under the Securities Act of 1933 (Reg. No. 333-222919). Citigroup Global Markets Inc. and Credit Suisse Securities (USA) LLC acted as joint book-running managers of the offering and as representatives of the underwriters.
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 Inc. and 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 Annual Report.
| | | | | | | | | | | | | |
| | Year Ended December 31, | |
| | 2018 | | 2017 | | 2016 | | 2015 | |
| | (in thousands, except per unit data) | |
Consolidated Statements of Income Data: | | | | | | | | | | | | | |
Total revenues | | $ | 544,135 | | $ | 341,191 | | $ | 155,048 | | $ | 221,395 | |
Total costs and expenses | | | 366,434 | | | 252,328 | | | 144,433 | | | 179,190 | |
Income from operations | | | 177,701 | | | 88,863 | | | 10,615 | | | 42,205 | |
| | | | | | | | | | | | | |
Interest expense, net | | | (3,595) | | | (20,767) | | | (20,233) | | | (21,837) | |
Other income (expense), net | | | (4,305) | | | — | | | 2,251 | | | 1,640 | |
Income (loss) before income taxes | | | 169,801 | | | 68,096 | | | (7,367) | | | 22,008 | |
Income tax expense(1) | | | 19,520 | | | 1,549 | | | 809 | | | 784 | |
Net income (loss) | | $ | 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 | | | 84,950 | | | — | | | — | | | — | |
Net income attributable to Cactus Inc. | | $ | 51,683 | | $ | — | | $ | — | | $ | — | |
| | | | | | | | | | | | | |
Earnings per Class A share - basic (2) | | $ | 1.60 | | $ | — | | $ | — | | $ | — | |
Earnings per Class A share - diluted (2) | | $ | 1.58 | | $ | — | | $ | — | | $ | — | |
| | | | | | | | | | | | | |
Weighted average Class A shares outstanding - basic (2) | | | 32,329 | | | — | | | — | | | — | |
Weighted average Class A shares outstanding - diluted (2) | | | 32,695 | | | — | | | — | | | — | |
| | | | | | | | | | | | | |
Consolidated Balance Sheets Data (at period end): | | | | | | | | | | | | | |
Cash and cash equivalents | | $ | 70,841 | | $ | 7,574 | | $ | 8,688 | | $ | 12,526 | |
Total assets | | | 584,744 | | | 266,456 | | | 165,328 | | | 177,559 | |
Long-term debt, net (3) | | | — | | | 241,437 | | | 242,254 | | | 250,555 | |
Capital leases | | | 16,094 | | | 12,613 | | | 3,199 | | | — | |
Stockholders'/Members’ equity (deficit) (2) (4) | | | 362,328 | | | (36,217) | | | (103,321) | | | (93,167) | |
| (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)
| | Cactus Inc. completed an initial public offering of Class A common stock on February 12, 2018. See “Item 1. Business—Organization Structure” above.
|
| (3)
| | 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.
|
| (4)
| | In March 2014 and July 2014, Cactus LLC entered into an amendment and restatement of its then existing credit facility and a discount loan agreement, respectively, a portion of 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.
|
Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of OperationsExcept 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 LLC and its consolidated subsidiaries prior to the completion of our initial public offering on February 12, 2018 and (ii) Cactus, Inc. and its consolidated subsidiaries, (including Cactus LLC) followingunless we state otherwise or the completion of our initial public offering.context otherwise requires. 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 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.
This section includes comparisons of certain 2021 financial information to the same information for 2020. Year-to-year comparisons of the 2020 financial information to the same information for 2019 are contained in “Item 7. Management’s Discussion and Analysis of Financial Condition and Result of Operations” of our Annual Report on Form 10-K for the year ended December 31, 2020 filed with the Securities and Exchange Commission on March 1, 2021, which comparative information and the information therein under the caption “Factors Affecting the Comparability of our Financial Condition and Results of Operations” are incorporated by reference herein.
Market Factors
and TrendsSee “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 conditionsworking pressure of these wells, 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,
investor sentiment, availability of capital and oil and gas prices locally and worldwide, which have historically been volatile.
The full year 2018 weekly average U.S. onshore rig count as reported by Baker Hughes was 1,011 rigs. The weekly average U.S. onshore rig count for the full year 2017 was 853 rigs. These rig counts are a material increase relative to the full year 2016 weekly average of 483 rigs.
The key market
factorfactors 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,program and efficiencies, 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 and the rate at which production trees are eventually deployed. All of these factors may be influenced by the oil and gas region in which our customer is operating. While these factors may lead to differing revenues per rig,
they allow uswe have generally been able to forecast our product needs and anticipated revenue levels based on
generalhistoric 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. However, such favorable trends might be adversely affected by overall supply chain-related disruptions.
Our rental revenues are primarily dependent on the number of wells completed (i.e., hydraulically fractured), the number of wells on a well pad,
the number of fracture stages per well and the number of fracture stages
completed per
well. Rental revenues and prices are more dependent on overall industryday. Well completion activity
levels ingenerally follows the
short term than product sales. This islevel of drilling activity over time, but can be delayed or accelerated due to
the more competitivesuch factors as pressure pumping availability, takeaway capacity, storage capacity, spot prices, overall service cost inflation and
price sensitive nature of the rental market with more participants having access to completions focused rental equipment. We believe, however, that the current number of drilled but uncompleted wells (“DUCs”) and any increases thereto, particularly resulting from near-term takeaway issues, could provide additional opportunities although we recognize that not all DUCs may be completed and that certain customers may elect to maintain an increased inventory of DUCs to provide production flexibility. budget considerations.ServiceField service and other revenues are closely correlated to revenues from product sales and rentals, as items sold or rented almost always have an associated service component. Nearly 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 field service and other revenues generated.
Our business experiences some seasonality during the fourth 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 lower margins, particularly in field services due to lower labor utilization.
Factors Affecting
Recent Developments and Trends
In spite of multiple surges of COVID cases in the
ComparabilityUnited States and worldwide, economies reopened throughout 2021 and global demand for fossil fuels rebounded. As demand grew and the Organization of
Our Financial ConditionPetroleum Exporting Countries Plus (OPEC+) group constrained its production targets, oil prices increased. West Texas Intermediate (“WTI”) prices exceeded $80 per barrel in October 2021 and
ResultsJanuary 2022, surpassing $90 per barrel in February 2022. Natural gas prices also increased significantly in 2021, increasing from an average of
OperationsOur historical financial condition$2.59 per one million British Thermal Units (“MMBtu”) in December 2020 to $3.76 per MMBtu in December 2021 after exceeding $5.00 per MMBtu for three months beginning in September 2021. In January 2022, the U.S. Energy Information Administration forecasted that natural gas prices are expected to remain near $4.00 per MMBtu in 2022. These higher commodity prices have resulted in increased drilling and completion activity by customers and improved demand for our products and services which has translated into higher activity and revenues for our business. In response to increased activity levels, we added almost 400 associates during 2021, reinstated wages and salaries to their full
amounts and restored the 401(k) match and other programs that were suspended or reduced in response to the industry downturn in 2020. We have also added fleet vehicles in line with headcount additions and invested capital in our rental fleet primarily to use a more environmentally friendly method of powering certain equipment that reduces diesel fuel usage. Barring significant adverse impacts to fossil fuel demand, including that caused by the Delta variant, Omicron variant, other variants, or the perception thereof, we anticipate continued activity growth in 2022.
On February 24, 2022, Russia launched a “special military operation” and invaded Ukraine. The assault represents the biggest attack on a European state since World War Two. In response to news of the attack, WTI exceeded $100 per barrel before falling back down to the $90s range. Natural gas prices also spiked but not as dramatically as oil as natural gas prices have been high in 2022 due to several powerful winter storms that have impacted the U.S., particularly the Northeast. Additionally, with the current conflict in Ukraine, Russia has threatened to cut off all natural gas transported into the European Union adding to the volatility and high natural gas prices that began in early February 2022. The ongoing conflict in Ukraine could have repercussions globally and in the U.S. by continuing to cause uncertainty, not only in the oil and natural gas markets, but also in the stock market. Such uncertainty could result in stock price volatility and supply chain disruptions as well as higher oil and natural gas prices which could potentially result in higher inflation worldwide and could negatively impact demand for our goods and services.
The significant increase in commodity prices in 2021 and into early 2022 led to meaningful increases in the level of U.S. onshore drilling activity, particularly among private operators. At the end of 2020, the U.S. onshore rig count as reported by Baker Hughes was 332 rigs compared to 570 at the end of 2021. The weekly average U.S. onshore rig count for the three months ended December 31, 2021 was 543 rigs, an 84% increase when compared to 295 rigs for the comparable period in 2020. Although these gains are encouraging, current rig activity is still significantly reduced from the levels in 2019 when the weekly average rig count for the three months ended December 31, 2019 was 796. However, improved rig efficiencies have partially offset the impact of this reduction. As of February 25, 2022, the U.S. onshore rig count was 635.
Private E&P companies were responsible for the majority of the rig additions in the U.S. onshore market in 2021. We significantly increased our revenues and rigs followed since our recent low in activity in the third quarter of 2020 despite a greater portion of Cactus’ revenues having historically resulted from publicly traded E&P companies. During this time, Cactus meaningfully increased its business with private E&P companies. Disproportionate changes in activity from private or publicly traded E&P companies present both risks and opportunities for Cactus, depending on a number of factors, such as which customers add or drop rigs and their relative efficiency in drilling wells.
Increased Costs
While our revenues have benefited from increased demand and activity levels, we have also experienced substantial cost increases beginning in 2021. Due to COVID-related pressures on the supply chain and significantly increased demand for goods and services worldwide, we have experienced substantial increases in salaries and wages, raw materials and ocean freight costs. Salaries and wages increased significantly during 2021 as a result of competitive labor markets, especially in certain key oil and gas producing areas, but also due to labor shortages and inflation. Due to heightened demand and a shortage of steel caused primarily by production disruptions during the pandemic, steel and assembled component prices have been and remain elevated. Freight costs, specifically ocean freight costs, have also risen significantly due to a number of factors including, but not limited to, a scarcity of shipping containers, congested seaports, a shortage of commercial drivers, capacity constraints on vessels and lockdowns in certain markets. In addition to dealing with these unprecedented cost increases, we have also been impacted by the global supply chain issues which have, in some cases, resulted in increased costs when we are required to use other more expensive modes of transportation or substitute more costly products in order to meet customer demand. Although we believe certain cost increases are temporary, we do not believe that commodity and freight prices will normalize until late 2022. Additionally, we cannot be confident that prices will return to the lower levels experienced in prior years. These cost increases have already had, and could continue to have, a negative impact on our margins and results of operations forabsent further cost recovery efforts.
Consolidated Results of Operations
The following discussions relating to significant line items from our condensed consolidated statements of income are based on available information and represent our analysis of significant changes or events that impact the
periods presented may not be comparable, either from period to periodcomparability of reported amounts. Where appropriate, we have identified specific events and changes that affect comparability or
going forward, fortrends and, where reasonably practicable, have quantified the
following reasons: | ·
| | Selling, General and Administrative Expenses. We incur additional selling, general and administrative expenses as a result of being 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, administration expenses relating to the tax receivable agreement (the “TRA”) with certain direct and indirect owners of CW Units in Cactus LLC (the “TRA Holders”) and registrar and transfer agent fees. We also expect to incur greater stock-based compensation expense related to equity awards granted by Cactus Inc. These increases in selling, general and administrative expenses are not reflected in our historical financial statements prior to our IPO, other than a portion of these costs incurred in 2017 in preparation of becoming a public company and historical compensation expense related to equity awards granted as a private company.
|
| ·
| | Long‑Term Incentive Plan. To incentivize individuals providing services to us or our affiliates, our board of directors adopted a long term incentive plan (the “LTIP”) prior to the completion of our IPO. 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 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 our IPO, we issued 0.7 million restricted stock unit awards, which will vest over one to three years, to certain of our directors, officers and employees. Additional awards have also been granted since our IPO. We also expect to grant awards in the future. We recognize stock-based compensation expense over the vesting terms related to the respective issuance.
|
| ·
| | 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 the TRA 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. See Note 2 in the notes to the consolidated financial statements.
|
| ·
| | Income Taxes. Cactus Inc. is a corporation and is 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 and local income taxes, on its share of income of Cactus LLC. Consequently, we will report income tax expense or benefit attributable to U.S. federal income taxes for periods following our IPO. Our accounting predecessor was a limited liability company that was treated as a partnership for U.S. federal income tax purposes, and therefore was not subject to U.S. federal income taxes. Accordingly, no provision for U.S. federal income taxes has been made in our historical results of operations prior to our IPO because taxable income was passed through to Cactus LLC’s members.
|
| ·
| | Non-controlling Interest. As a result of our IPO and a series of related reorganization transactions in connection with the IPO (the “Reorganization”), Cactus Inc. is the sole managing member of Cactus LLC and consolidates entities in which it has a controlling financial interest. The Reorganization was considered a transaction between entities under common control. As a result, the financial statements for periods prior to our IPO and the Reorganization have been adjusted to combine the previously separate entities for presentation purposes. However, Cactus Inc. had no operations or assets and liabilities prior to our IPO. As such, for periods prior to the completion of our IPO, the consolidated financial statements represent the historical financial position and results of operations of Cactus LLC and its subsidiaries. For periods after the completion of our IPO, the financial position and results of operations include those of Cactus Inc. and report the non-controlling interest related to the portion of CW Units not owned by Cactus Inc. All shares of Class B common stock are held by non-controlling interest owners.
|
During 2018, we identified a material weakness in our internal control over financial reporting. This material weakness resulted in the immaterial errors described below that were corrected during the fourth quarter ended December 31, 2018.
During the fourth quarter ended December 31, 2018, we identified and corrected immaterial errors in the calculation of the liability and deferred tax asset associated with the TRA related to the Reorganization, our IPO and Follow-on Offering that reduced additional paid-in-capital by $1.6 million, reduced the deferred tax asset by $10.9 million and decreased the associated liability related to the TRA by $9.3 million. These corrections relate to immaterial errors associated with inputs (including estimates) and assumptions used in the calculation of the original step-up in basis during the interim periods of 2018.
These changes, if they had been recorded in the interim periods of 2018, would not have had a material impact to our net assets and would not have had any impact on our consolidated results of operations or cash flows.
Consolidated Results of Operations
Year Ended December 31, 20182021 Compared to Year Ended December 31, 2017
2020
The following table presents summary consolidated operating results for the periods indicated:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended | | | | | | | | Year Ended | | | | |
| | December 31, | | | | | | | | December 31, | | | | |
| | 2018 | | 2017 | | $ Change | | % Change | | | 2021 | | 2020 | | $ Change | | % Change |
| | (in thousands) | | | (in thousands) | | |
Revenues | | | | | | | | | | | | | Revenues | | | | | | | |
Product revenue | | $ | 290,496 | | $ | 189,091 | | $ | 101,405 | | 53.6 | % | Product revenue | $ | 280,907 | | | $ | 206,801 | | | $ | 74,106 | | | 35.8 | % |
Rental revenue | | | 133,418 | | | 77,469 | | | 55,949 | | 72.2 | | Rental revenue | 61,629 | | | 66,169 | | | (4,540) | | | (6.9) | |
Field service and other revenue | | | 120,221 | | | 74,631 | | | 45,590 | | 61.1 | | Field service and other revenue | 96,053 | | | 75,596 | | | 20,457 | | | 27.1 | |
Total revenues | | | 544,135 | | | 341,191 | | | 202,944 | | 59.5 | | Total revenues | 438,589 | | | 348,566 | | | 90,023 | | | 25.8 | |
Costs and expenses | | | | | | | | | | | | | Costs and expenses | | | | | | | |
Cost of product revenue | | | 174,675 | | | 124,030 | | | 50,645 | | 40.8 | | Cost of product revenue | 189,083 | | | 131,728 | | | 57,355 | | | 43.5 | |
Cost of rental revenue | | | 55,015 | | | 40,519 | | | 14,496 | | 35.8 | | Cost of rental revenue | 54,377 | | | 49,077 | | | 5,300 | | | 10.8 | |
Cost of field service and other revenue | | | 96,215 | | | 60,602 | | | 35,613 | | 58.8 | | Cost of field service and other revenue | 73,681 | | | 56,143 | | | 17,538 | | | 31.2 | |
Selling, general and administrative expenses | | | 40,529 | | | 27,177 | | | 13,352 | | 49.1 | | Selling, general and administrative expenses | 46,021 | | | 39,715 | | | 6,306 | | | 15.9 | |
| Severance expenses | | Severance expenses | — | | | 1,864 | | | (1,864) | | | nm |
Total costs and expenses | | | 366,434 | | | 252,328 | | | 114,106 | | 45.2 | | Total costs and expenses | 363,162 | | | 278,527 | | | 84,635 | | | 30.4 | |
Income from operations | | | 177,701 | | | 88,863 | | | 88,838 | | 100.0 | | Income from operations | 75,427 | | | 70,039 | | | 5,388 | | | 7.7 | |
| | | | | | | | | | | | | | | | | | | |
Interest expense, net | | | (3,595) | | | (20,767) | | | (17,172) | | (82.7) | | |
| Interest income (expense), net | | Interest income (expense), net | (774) | | | 701 | | | (1,475) | | | nm |
Other income (expense), net | | | (4,305) | | | — | | | 4,305 | | 100.0 | | Other income (expense), net | 492 | | | (555) | | | 1,047 | | | nm |
Income before income taxes | | | 169,801 | | | 68,096 | | | 101,705 | | 149.4 | | Income before income taxes | 75,145 | | | 70,185 | | | 4,960 | | | 7.1 | |
Income tax expense | | | 19,520 | | | 1,549 | | | 17,971 | | 1,160.2 | | Income tax expense | 7,675 | | | 10,970 | | | (3,295) | | | (30.0) | |
Net income | | $ | 150,281 | | $ | 66,547 | | $ | 83,734 | | 125.8 | % | Net income | 67,470 | | | 59,215 | | | 8,255 | | | 13.9 | |
Less: Pre-IPO net income attributable to Cactus LLC | | | 13,648 | | | 66,547 | | | (52,899) | | (79.5) | | |
Less: net income attributable to non-controlling interest | | | 84,950 | | | — | | | 84,950 | | nm | | Less: net income attributable to non-controlling interest | 17,877 | | | 24,769 | | | (6,892) | | | (27.8) | |
Net income attributable to Cactus Inc. | | $ | 51,683 | | $ | — | | | 51,683 | | nm | | Net income attributable to Cactus Inc. | $ | 49,593 | | | $ | 34,446 | | | $ | 15,147 | | | 44.0 | % |
| | | | | | | | | | | | | |
nm = not meaningful
Revenues
Revenues
Product revenue for the year ended December 31,
20182021 was
$290.5$280.9 million
an increase of $101.4 million, or 54%, from $189.1compared to $206.8 million for the year ended December 31,
2017.2020. The increase
of $74.1 million, representing a 36% increase from 2020, was primarily
attributabledue to
significant increase in U.S. onshore activity. Overall,higher sales of wellhead and production related equipment resulting from higher drilling and completion activity by our customers compared to 2020 and the
numberimpact of
drilling rigs operating has increased significantly as well ascost recovery efforts implemented throughout 2021. In the
number of wells drilled, which has increasedprior year, the
volume of our wellhead sales. The average monthly rigs followed by Cactus increased 29% to 272 rigsindustry downturn impacted sales for the
year ended December 31, 2018 comparedmajority of 2020 due to
211 rigs fordepressed commodity prices as a result of the
same period in 2017. We have also seen an increase in the sale of production trees as more wells are placed on production.pandemic.
Rental revenue for the year ended December 31,
20182021 was
$133.4$61.6 million,
an increasea decrease of
$55.9$4.5 million, or
72%7%, from
$77.5$66.2 million for the year ended December 31,
2017.2020. The
increasedecrease was primarily
attributabledue to
reduced completion rental activity among our customer base and the
increased investmentextraordinary market pressure driven by depressed energy demand associated with the COVID-19 pandemic. Recovery in our rental
fleetbusiness has been slower than our product business as an excess supply of competing rental equipment relative to demand from customers led to market dynamics that
enabled us to take advantagedid not justify the deployment of
more completions activities.our assets in certain cases.
Field service and other revenue for the year ended December 31, 20182021 was $120.2$96.1 million, an increase of $45.6$20.5 million, or 61%27%, from $74.6$75.6 million for the year ended December 31, 2017.2020. The increase was primarily attributable to
increased customer activity compared to the prior year, resulting in higher billable hours, ancillary services and repairs of customer property primarily related to product sales in 2021.
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,
20182021 was
$174.7$189.1 million, an increase of
$50.6$57.4 million, or
41%44%, from
$124.0$131.7 million for the year ended December 31,
2017.2020. The increase was largely attributable to
increasedan increase in product sales
volume as a resultand costs associated with materials, freight and overhead, including increased labor costs in 2021. Additionally, cost of
higher demand for our products. Margins improvedproduct revenue in
2018 due2020 included $8.7 million in non-recurring credits related to
a combination of higher volume and product mix, as well as supply chain efficiencies.tariff refunds.
Cost of rental revenue for the year ended December 31,
20182021 was
$55.0$54.4 million, an increase of
$14.5$5.3 million, or
36%11%, from
$40.5$49.1 million for the year ended December 31,
2017.2020. The increase was primarily due to higher
repair and reactivation costs offset by decreased scrap and rework expense, lower depreciation
expenseexpenses on our rental fleet and
repair costs associated with a larger, more active fleet. Margins improvedother savings resulting from lower activity compared to 2020. Rental cost of sales in
2018 due2020 also included approximately $1.0 million in credits related to
higher utilization and improved pricing.tariff refunds.
Cost of field service and other revenue for the year ended December 31,
20182021 was
$96.2$73.7 million, an increase of
$35.6$17.5 million, or
59%31%, from
$60.6$56.1 million for the year ended December 31,
2017.2020. The increase was
primarily attributablemainly related to higher
payroll costs due to additional field personnel
and higher operating costs due to activity increases, particularly in areas with high rotational costs. Margins were relatively flat year-over-year.Selling, general and administrative expenses for the year ended December 31, 2018 was $40.5 million, an increase of $13.4 million, or 49%, from $27.2 million for the year ended December 31, 2017. The increase was primarily due to higher payroll and incentive compensation costs associated with our overall growth,higher wages and an increase in the number of field and branch personnel as well as higher stock-based compensation expense related to equity awards issued in conjunction with our IPOfuel and increased costs associated with being a publicly traded company.
Interest expense, net. Interest expense, net for the year ended December 31, 2018 was $3.6 million, a decrease of $17.2 million, or 83%, from $20.8 million for the year ended December 31, 2017. The decrease is due to the repayment of our term loan in mid-February 2018 in connection with our IPO.
Other income (expense), net. Other income (expense), net for the year ended December 31, 2018 relates to a $4.3 million loss on debt extinguishment related to the write off of the unamortized balance of debt discount and deferred loan costs in connection with the repayment of our term loan with a portion of the net proceeds from our IPO.
Income tax expense. Income tax expense for the year ended December 31, 2018 was $19.5 million (11.5% effective tax rate) compared to $1.5 million (2.3% effective tax rate) for 2017. The change was primarily attributable to Cactus Inc. incurring U.S. federal income tax on its share of the income of Cactus LLC during the periods subsequent to our IPO in 2018.
Year Ended December 31, 2017 Compared to Year Ended December 31, 2016
The following table presents summary consolidated operating results for the periods presented:
| | | | | | | | | | | | |
| | Year Ended | | | | | | |
| | December 31, | | | | | | |
| | 2017 | | 2016 | | $ Change | | % Change | |
| | (in thousands) | |
Revenues | | | | | | | | | | | | |
Product revenue | | $ | 189,091 | | $ | 77,739 | | $ | 111,352 | | 143.2 | % |
Rental revenue | | | 77,469 | | | 44,372 | | | 33,097 | | 74.6 | |
Field service and other revenue | | | 74,631 | | | 32,937 | | | 41,694 | | 126.6 | |
Total revenues | | | 341,191 | | | 155,048 | | | 186,143 | | 120.1 | |
Costs and expenses | | | | | | | | | | | | |
Cost of product revenue | | | 124,030 | | | 62,766 | | | 61,264 | | 97.6 | |
Cost of rental revenue | | | 40,519 | | | 33,990 | | | 6,529 | | 19.2 | |
Cost of field service and other revenue | | | 60,602 | | | 28,470 | | | 32,132 | | 112.9 | |
Selling, general and administrative expenses | | | 27,177 | | | 19,207 | | | 7,970 | | 41.5 | |
Total costs and expenses | | | 252,328 | | | 144,433 | | | 107,895 | | 74.7 | |
Income from operations | | | 88,863 | | | 10,615 | | | 78,248 | | 737.1 | |
| | | | | | | | | | | | |
Interest expense, net | | | (20,767) | | | (20,233) | | | 534 | | 2.6 | |
Other income (expense), net | | | — | | | 2,251 | | | (2,251) | | (100.0) | |
Income before income taxes | | | 68,096 | | | (7,367) | | | 75,463 | | nm | |
Income tax expense | | | 1,549 | | | 809 | | | 740 | | 91.5 | |
Net income | | $ | 66,547 | | $ | (8,176) | | $ | 74,723 | | nm | % |
nm = not meaningful
Revenues
Product revenue for the year ended December 31, 2017 was $189.1 million, an increase of $111.4 million, or 143%, from $77.7 million for the year ended December 31, 2016. The increase was primarily attributable to accelerated U.S. land activity in 2017other remobilization expenses associated with increased E&P drilling, completions and production, which led to a higher onshore rig count in the United States, resulting in increased demand for our products and greater volume of product sales. Additionally, a change in mix toward higher value advanced wellheads has also contributedfield service activity levels compared to the increase in revenues.
Rental revenue for the year ended December 31, 2017 was $77.5 million, an increase of $33.1 million, or 75%,prior year. Additionally, gains from $44.4 million for the year ended December 31, 2016. 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 improvement in our rental fleet compared to 2016.
Field service and other revenue for the year ended December 31, 2017 was $74.6 million, an increase of $41.7 million, or 127%, from $32.9 million for the year ended December 31, 2016. The increase was primarily attributable to 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, 2017 was $124.0 million, an increase of $61.3 million, or 98%, from $62.8 million for the year ended December 31, 2016. The increase was largely attributable to increased product sales volume as a result of higher demand for our products. Product margins benefited from price increases together with a change in mix toward higher value advanced wellheads.
Cost of rental revenue for the year ended December 31, 2017 was $40.5 million, an increase of $6.5 million, or 19%, from $34.0 million for the year ended December 31, 2016. The increase was primarily due to higher depreciation expense from capital additions and higher operating costs due to an increase in activity. Increased utilization and better pricing contributed to higher margins.
Cost of field service and other revenue forvehicles decreased by $3.4 million from 2020 as we rationalized our fleet vehicles in line with the year ended December 31, 2017 was $60.6 million, an increase of $32.1 million, or 113%, from $28.5 million forheadcount reductions in the year ended December 31, 2016. The increase was primarily due to higher payroll costs attributable to additional field personnel and higher operating costs due to activity increases.
prior year.
Selling, general and administrative expense for the year ended December 31, 20172021 was $27.2$46.0 million, an increase of $8.0$6.3 million, or 42%16%, from $19.2$39.7 million for the year ended December 31, 2016.2020. The increase was largely attributable to increased personnel costs primarily related to higher salaries and wages and associated payroll taxes, increased annual incentive bonuses based on current year performance and higher stock-based compensation expense. Additional increases from 2020 related to higher professional fees, information technology expenses and travel and entertainment expenses. These increases were partially offset by a reduction in foreign currency losses.
Severance expense for the year ended December 31, 2020 of $1.9 million was related to severance benefits associated with headcount reductions resulting from the economic downturn and decline in demand for our products and services.
Interest income (expense), net. Interest expense, net was $0.8 million in 2021 compared to interest income, net of $0.7 million in 2020. The decrease in interest income, net of $1.5 million was primarily due to higher payroll and incentive compensation costslower interest income on cash invested resulting from significantly lower interest rates in 2021 as well as the prior year period including $0.5 million of interest income recognized on tariff refunds.
Other income (expense), net. Other income, net for the year ended December 31, 2021 of $0.5 million related to a $0.9 million non-cash gain associated with the overall growthrevaluation of Cactus. Also, we expensed $1.0 million of costs during 2017the liability related to preparingthe TRA and $0.4 million for being a public company.Interest expense, net. Interestprofessional fees and other expenses associated with the 2021 Secondary Offering. Other expense, net for the year ended December 31, 2017 was $20.82020 of $0.6 million an increaserepresented non-cash adjustments for the revaluation of $0.5 million, or 3%, from $20.2 millionthe liability related to the TRA.
Income tax expense. Income tax expense for the year ended December 31, 2016. The increase2021 was primarily due$7.7 million (10.2% effective tax rate) compared 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$11.0 million (15.6% effective tax rate) 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.2020. Income tax expense for the yearsyear ended 2021 was primarily related to approximately $16.3 million expense associated with our 2021 operations and $1.3 million expense resulting from a change in our forecasted state tax rate. This tax expense was partially offset by a $1.1 million benefit associated with permanent differences related to equity compensation and a $9.0 million tax benefit associated with the partial valuation allowance release in conjunction with 2021 redemptions of CW Units. Partial valuation releases occur in conjunction with redemptions of CW Units as a portion of Cactus Inc.’s deferred tax assets from its investment in Cactus LLC becomes realizable. Income tax expense for the year ended December 31, 20172020 was primarily due to approximately $11.0 million expense associated with our 2020 operations and 2016a $2.8 million expense associated with changes in our valuation allowance. These expenses were $1.5partially offset by a $1.7 million tax benefit related to finalization of our 2019 tax returns and $0.8a $1.2 million respectively.
benefit primarily comprised of tax credit adjustments and a change in our forecasted state tax rate.
Our effective tax rate is typically lower than the federal statutory rate of 21% due to the fact that Cactus Inc. is only subject to federal and state income tax on its share of income from Cactus LLC. Income allocated to the non-controlling interest is not subject to U.S. federal or state tax.
Liquidity and Capital Resources
In February 2018,
At December 31, 2021 we
completed our IPO and contributed all of the net proceeds of $469.6 million to Cactus LLC in exchange for CW Units. Cactus LLC used (i) $251.0had $301.7 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. The remaining $2.2 million was held by Cactus LLC to cover previously paid offering expenses. Following our IPO we had no term loan debt.In July 2018, we completed the Follow-on Offering and received $359.3 million of net proceeds. Cactus Inc. contributed the net proceeds to Cactus LLC in exchange for CW Units. Cactus LLC then used the net proceeds to redeem CW Units from certain of the other owners of Cactus LLC. No proceeds from this Follow-on Offering were retained by Cactus Inc.
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 ABL Credit Facility (described below).Facility. Depending upon market conditions and
other factors, we may also have the ability to issue additional equity and debt if needed. Our primary usesAs of capital areDecember 31, 2021, we had no borrowings outstanding under our ABL Credit Facility and had $75.0 million of available borrowing capacity. Additionally, we were in compliance with the covenants of the ABL Credit Facility as of December 31, 2021.
We expect that our existing cash on hand, cash generated from operations and available borrowings under our ABL Credit Facility will be sufficient for
the next 12 months to meet working capital requirements,
anticipated capital expenditures, expected TRA liability payments, anticipated tax liabilities and dividends to holders of our Class A common stock as well as pro rata cash distributions to
Cactus LLC members, payments of the liabilities related to the TRA and to service debt. Total debt, excluding capital leases, was $0.0 million, $248.5 million and $251.1 million at December 31, 2018, 2017 and 2016, respectively.Our ability to satisfy our liquidity requirements, including cash distributions to the holders of CW Units to fund their share of taxes of the partnership and liabilities related to the TRA, 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.
units (other than Cactus Inc.).
We currently estimate
that our
net capital expenditures for the year ending December 31,
20192022 will range from
$60$20 million to
$65$30 million, excluding acquisitions, mostly related to rental fleet
investments.investments, including drilling tools, additional investment and expansion of our manufacturing facility in Bossier and the further development of a research and development facility. 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.
During
Our ability to satisfy our long-term liquidity requirements, including cash distributions to CW Unit Holders to fund their respective income tax liabilities relating to their share of the
second and third quartersincome of
2018, Cactus LLC
paid pro rata distributionsand to fund liabilities related to the TRA, depends on our future operating performance, which is affected by, and subject to, prevailing economic conditions, market conditions in the E&P industry, availability and cost of
$4.2 millionraw materials, and
$1.6 million, respectively,financial, business and other factors, many of which are beyond our control. We will not be able to
its members other than Cactus Inc., which were funded bypredict or control many of these factors, such as economic conditions in the markets where we operate and competitive pressures. If necessary, we could choose to further reduce our spending on capital projects and operating expenses to ensure we operate within the cash flow generated from
operating activities.We believe that our existing cash on hand, cash generated from operations and available borrowings under our ABL Credit Facility will be sufficient to meet working capital requirements, anticipated capital expenditures, expected cash distributions to Cactus LLC members and anticipated tax liabilities for at least the next 12 months.
At December 31, 2018 and December 31, 2017, we had approximately $70.8 million and $7.6 million, respectively, of cash and cash equivalents and approximately $75 million and $50 million, respectively, of available borrowing capacity under our revolving credit facility.
Cash Flows
Year Ended December 31, 2018 Compared to Year Ended December 31, 2017
The following table summarizes our cash flows for the periods indicated:
| | | | | | |
| | Year Ended December 31, |
| | 2018 | | 2017 |
| | (in thousands) |
Net cash provided by operating activities | | $ | 167,180 | | $ | 34,707 |
Net cash used in investing activities | | | (68,154) | | | (30,678) |
Net cash used in financing activities | | | (35,004) | | | (5,313) |
Net cash provided by operating activities was $167.2 million and $34.7 million for the years ended December 31, 2018 and 2017, respectively. The primary reasons for the change were a $83.7 million increase in net income, a $30.0 million increase in non-cash items and a $18.7 million reduction in working capital use.
Net cash used in investing activities was $68.2 million and $30.7 million for the years ended December 31, 2018 and 2017, respectively. The reason for the increase was higher capital expenditures during 2018 related to investment in our rental fleet (to meet the increased customer demand for our frac equipment) as well as expansion of certain facilities.
operations. Net cash used in financing activities was $35.0 million and $5.3 million for the years ended December 31, 2018 and 2017, respectively. The primary reason for the increase in use of cash related to the payment of $31.8 million in Cactus LLC member distributions to provide funds to pay their federal and state liabilities associated with taxable income recognized by them as a result of their ownership in Cactus LLC. Also during 2018, we received $828.2 million of net proceeds from our IPO, the Option and the Follow-on Offering offset by (i) a $248.5 million repayment of the borrowings outstanding under the term loan portion of our Prior Credit Agreement (described below) and (ii) $575.7 million in redemptions of CW Units from certain direct and indirect owners of Cactus LLC in connection with our IPO, the Option and the Follow-on Offering resulting in $4.0 million of net cash provided by these activities. We also made capital lease payments of $6.3 million during 2018.
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, offset by a $67.2 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.
Credit Agreement
On August 21, 2018, Cactus LLC entered into a five-year senior secured asset-based revolving credit facility with a syndicate of lenders and JPMorgan Chase Bank, N.A., as administrative agent for such lenders and as an issuing bank and swingline lender (the “ABL Credit Facility”). The ABL Credit Facility provides for $75.0 million in revolving commitments, up to $15.0 million of which is available for the issuance of letters of credit. Subject to certain terms and conditions set forth in the ABL Credit Facility, Cactus LLC may request additional revolving commitments in an amount not to exceed $50.0 million, for a total of up to $125.0 million in revolving commitments.
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.
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 with 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. The Prior Credit Agreement was scheduled to mature on July 31, 2019.
Cactus LLC’s obligations under the ABL Credit Facility are secured by liens on Cactus LLC’s assets, other than equipment, intellectual property and real estate. Any subsidiary of Cactus LLC that is considered material pursuant to the ABL Credit Facility will be required to (i) guarantee on an unconditional basis all of Cactus LLC’s obligations under the ABL Credit Facility and (ii) grant a lien to secure such guarantee on its assets, other than equipment, intellectual property and real estate.
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 issued 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 average quarterly availability under the ABL Credit Facility for the immediately preceding fiscal quarter. The unused portion of the ABL Credit Facility is subject to a commitment fee that varies from 0.250% to 0.375% per annum, according to the average quarterly availability under the ABL Credit Facility for the immediately preceding fiscal quarter.
The ABL Credit Facility contains various covenants and restrictive provisions that limit Cactus LLC’s and each of its subsidiaries’ ability to, among other things:
• incur additional indebtedness and create liens;
• make investments or loans;
• enter into asset sales;
• make certain restricted payments and distributions; and
• engage in transactions with affiliates.
The ABL Credit Facility also requires Cactus LLC to maintain a fixed charge coverage ratio of 1.0 to 1.0 based on the ratio of EBITDA (as defined therein) minus Unfinanced Capital Expenditures (as defined therein) to Fixed Charges (as defined therein) during certain periods, including when availability under the ABL Credit Facility is under certain levels. If Cactus LLC fails to perform its obligations under the ABL Credit Facility, (i) the commitments under the ABL Credit Facility could be terminated, (ii) any outstanding borrowings under the ABL Credit Facility may be declared immediately due and payable and (iii) the lenders may commence foreclosure or other actions against the collateral.
As of December 31, 2018, we had no borrowings outstanding under the ABL Credit Facility. As of December 31, 2017, we had $248.5 million of borrowings outstanding under the term loan tranche of the Prior Credit Agreement, no borrowings outstanding under the Prior Revolving Credit Facility and no outstanding letters of credit.
At December 31, 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. At December 31, 2017, the weighted average interest rate for the borrowings under the Prior Credit Agreement was 7.3%.
As of December 31, 2018, we were in compliance with all covenants under the ABL Credit Facility and as of December 31, 2017, we were in compliance with all covenants under the Prior Credit Agreement.
Tax Receivable Agreement
(TRA)
The TRA
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
orand 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,Cactus Inc., in an amount at least sufficient to allow us to pay our taxes and to make payments under the TRA.
Except 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 if 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, wepayment. We may generally 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. In certain cases, payments under the TRA may be accelerated and/or significantly exceed the actual benefits, if any, we realize in respect of the tax attributes subject to the TRA. In these situations, our obligations under the TRA could have a substantial negative impact on our liquidity. For further discussion regarding
Assuming no material changes in the
potential acceleration of payments underrelevant tax law, we expect that if the TRA
and its potential impact, see Note 2 in the notes to the consolidated financial statements.Contractual Obligations
A summary of our contractual obligationswere terminated as of December 31, 2018 is provided2021, the estimated termination payments, based on the assumptions discussed in Note 9 of the Notes to the Consolidated Financial Statements, would be approximately $361.9 million, calculated using a discount rate equal to one-year LIBOR plus 150 basis points, applied against an undiscounted liability of $422.0 million. A 10% increase in the following table. We had no bank debt outstanding asprice of our Class A common stock at December 31, 2018.
| | | | | | | | | | | | | | | | | | | | | |
| | |
| | Payments Due by Period For the Year Ending December 31, |
| | 2019 | | 2020 | | 2021 | | 2022 | | 2023 | | Thereafter | | Total |
| | (in thousands) |
Operating lease obligations(1) | | $ | 6,638 | | $ | 4,618 | | $ | 3,487 | | $ | 2,195 | | $ | 1,426 | | $ | 3,339 | | $ | 21,703 |
Capital lease obligations(2) | | | 8,740 | | | 6,790 | | | 2,533 | | | 41 | | | — | | | — | | | 18,104 |
Liability related to TRA(3) | | | 9,574 | | | 7,806 | | | 7,798 | | | 7,972 | | | 8,134 | | | 106,305 | | | 147,589 |
Total | | $ | 24,952 | | $ | 19,214 | | $ | 13,818 | | $ | 10,208 | | $ | 9,560 | | $ | 109,644 | | $ | 187,396 |
| (1)
| | Operating lease obligations relate to real estate, vehicles and equipment.
|
| (2)
| | Capital lease obligations relate to vehicles used in our business.
|
Cash Flows | (3)
| | Represents obligations by Cactus Inc. to make payments under the TRA. The amount and timing of payments is subject to change.
|
Year Ended December 31, 2021 Compared to Year Ended December 31, 2020The following table summarizes our cash flows for the periods indicated:
| | | | | | | | |
| | Year Ended December 31, |
| | 2021 | 2020 |
| | (in thousands) |
| Net cash provided by operating activities | $ | 63,759 | | $ | 143,380 | |
| Net cash used in investing activities | (11,633) | | (18,147) | |
| Net cash used in financing activities | (39,388) | | (40,206) | |
Net cash provided by operating activities was $63.8 million and $143.4 million for the years ended December 31, 2021 and 2020, respectively. Operating cash flows for 2021 decreased from 2020 primarily due to an increase in working capital, largely related to the increase in accounts receivable and inventories, partially offset by an increase in accounts payable and other liabilities. Additionally, 2020 included $14.2 million in tariff refunds. A $4.5 million decrease in TRA payments offset these decreases slightly.
Net cash used in investing activities was $11.6 million and $18.1 million for the years ended December 31, 2021 and 2020, respectively. The decrease was primarily due to lower capital expenditures associated with our rental fleet in 2021 as well as lower proceeds from sale of assets.
Net cash used in financing activities was $39.4 million and $40.2 million for the years ended December 31, 2021 and 2020, respectively. The decrease was primarily related to the $6.6 million decrease in Cactus LLC member distributions offset by a $4.0 million increase in dividend payments and a $1.8 million increase in share repurchases from employees to satisfy tax withholding obligations related to restricted stock units that vested during the period.
Critical Accounting Policies and Estimates
The discussion
In preparing our financial statements in accordance with GAAP, we make numerous estimates and analysisassumptions 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 are based upon our consolidated financial statements, which have been preparedand the degree of difficulty, subjectivity and complexity in accordance with GAAP. Thetheir deployment. Note 2 of the Notes to the Consolidated Financial Statements includes a summary of the significant accounting policies used in the preparation of our financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, 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. 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 from these estimates and assumptions used in preparation of ouraccompanying consolidated financial statements. See Note 2 in the notes to the consolidated financial statements for an expandedThe following is a brief discussion of our significantmost critical accounting policies and related estimates made by management.
Accounts Receivable
We extend credit to customers in the normal course of business. 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. By its nature, such an estimate is highly subjective and it is possible that the amount of accounts receivable that we are unable to collect may be different from the amount initially estimated.
The allowance for doubtful accounts as of December 31, 2018 was $0.6 million, compared to $0.7 million as of December 31, 2017, representing approximately 1.0%, for the respective periods, of our consolidated gross accounts receivable. A 10% increase in our allowance for doubtful accounts at December 31, 2018 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.
assumptions.
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 obsolescence. Reserves are made
for obsolete and slow‑moving items based on a range of factors, including age, usage and technological or market changes that may impact demand for those products. The amount of
allowancereserve recorded is subjective and
it may be that the level of provision required may be differentis susceptible to change from
that initially recorded.The inventory obsolescence reserve as of December 31, 2018 was $7.3 million, comparedperiod to $5.9 million as of December 31, 2017, representing approximately 6.8% and 8.4%, respectively, of our consolidated gross inventories. A 10% increase in our inventory obsolescence reserve at December 31, 2018 would result in a change in reserves of approximately $0.7 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.
period.
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.
Actual impairment losses could vary from amounts estimated.Goodwill
Goodwill represents the excess of acquisition consideration paid over the fair value of identifiable net tangiblefuture cash flows 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 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 impairedhighly subjective and thus the two‑step goodwill impairment model is necessary, step one isinherently imprecise. Estimates can change materially from period to determine the fair value of the reporting unit and compare it to the reporting unit’s carrying value. Fair value is determinedperiod 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 performedmany factors. Accordingly, 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, 2018 was $7.8 million, which is the same value as the year ended December 31, 2017. We performed our annual impairment analysis and concluded there was no impairment. A 10% decrease in the fair value of our reporting unit at December 31, 2018 would not result in an impairment. Currently, management does not believe that there is a reasonable likelihood that there will be a materialconditions change in the carrying value of goodwill.
future, we may record impairment losses, which could be material to any particular reporting period.
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 laws and rates expected to apply to taxable income in effect for the year in which the differences are expected to reverse. The realizability of deferred tax assets are evaluated annually and a valuation allowance is provided if it is more likely than notWe assess the likelihood that theour deferred tax assets will not give risebe recovered through adjustments to future benefits intaxable 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 returns. See following discussion under “Taxassets, 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.” See also Note 5Agreement
The TRA generally provides for the payment by Cactus Inc. to the TRA Holders of 85% of the
notes to the consolidated financial statements.Due to our controlling interestnet cash savings, if any, in U.S. federal, state and local income tax and franchise tax that Cactus LLC, we do not expectInc. actually realizes or is deemed to realize the benefitin 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 the related deferred tax asset except through the salesuch TRA Holder’s CW Units in connection with our IPO or liquidationany subsequent offering, or pursuant to any other exercise of the investment. As such, we have recordedRedemption 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 valuation allowanceresult of, $31.2 million against this portionand additional tax basis arising from, any payments Cactus Inc. makes under the TRA. We will retain the remaining 15% of the deferredcash savings. The TRA liability is calculated by determining the tax asset.
Tax Receivable Agreement
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.
Redemptions of CW Units result in adjustments to the tax basis of the tangible and intangible assets of Cactus LLC. These adjustments will beare 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, 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 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 deferred tax assetTRA 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 deferred tax asset expected to be realized by approximately $7.1 million. This would decrease/increase the associated TRA liability recorded at December 31, 2021 by $6.1 million representing 85% of the tax-effected changeapproximately $15.2 million.
Recent Accounting Pronouncements
There were no new accounting standards adopted in
the deferred tax asset2021 and
decrease/increase additional paid-in capital by $1.0 million, representing 15% of the tax-effected change in the deferred tax asset. We account for any amounts payable under the TRA in accordance with Accounting Standards Codification (“ASC”) 450. We believethere are no new accounting for the TRA 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 TRA.
The term of the TRA commenced upon completion of our IPO and will continue until all tax benefitspronouncements issued but not yet effective 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 are anticipated to commence in 2019 and to continue for 16 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 25 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 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. Assuming no material changes in the relevant tax law, we expect that if the TRA were terminated as of December 31, 2018, the estimated termination payments, based on the assumptions discussed above, would be approximately $280 million (calculated using a discount rate equal to one-year LIBOR plus 150 basis points, applied against an undiscounted liability of $400 million).
Recent Accounting Pronouncements
See Note 2 in the notes to the consolidated financial statements 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 consolidated financial statements.
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 for the years ended December 31, 2018, 2017 and 2016. Although the impact of inflation has been insignificant in recent years, it is still a factor inoperations. Currently, the United States
economy,is experiencing the highest inflation in decades primarily due to supply-chain issues, a shortage of labor and
a build-up of demand for goods and services. The most noticeable adverse impact to our business has been increased costs associated with freight, materials, vehicle-related costs and personnel expenses. While we
tendbelieve that this current rate of inflation is transitory as it is pandemic-driven, we are unsure how long an elevated rate will continue. Additionally, we cannot be confident that costs will return to
experience inflationary pressure on wages and raw materials.Off‑Balance Sheet Arrangements
Currently, we do not have off‑balance sheet arrangements.
the lower levels experienced in prior years. Item 7A.
Quantitative and Qualitative Disclosures about Market RiskWe
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 outsource certain of our wellhead equipment to suppliershave subsidiaries with operations in China and our production facilityAustralia who conduct business in China assemblestheir local currencies (functional currencies) and tests these outsourced components, asare 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. Currently, we do not engagehave any open foreign currency forward contracts to hedge this risk.
Additionally, certain intercompany balances between our U.S. and foreign subsidiaries as well as other financial assets and liabilities are denominated in
machining operationsU.S. dollars. Since this is not the functional currency of our subsidiaries in
this facility.China and Australia, the changes in these balances are translated in our Consolidated Statements of Income, resulting in the recognition of a remeasurement gain or loss. In
addition, we haveorder to provide a
service center in Australia that sells products, rents frac equipment and provides field services. Tohedge against currency fluctuations on the
extent either facility has net U.S. dollar denominated assets
and liabilities held by our
profitability is eroded whenforeign subsidiaries, we enter into monthly foreign currency forward contracts (balance sheet hedges) to offset a portion of the remeasurement gain or loss recorded. As of December 31, 2021, if the U.S. dollar
weakens againststrengthened or weakened 5%, the
Chinese Yuan andimpact to 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 assetsunrealized value of our
facilities in Chinaforward contracts would be approximately $1.0 million. The gain or loss on the forward contracts would be largely offset by the gain or loss on the underlying transactions, and
Australia are eroded if the respective local currency value weakens against the U.S. dollar. Wetherefore, would have
not entered into any derivative arrangements to protect against fluctuations in foreign currency exchange rates.minimal impact on future earnings.
Interest Rate Risk
Our ABL Credit Facility is variable rate debt. At December 31,
2018,2021, 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.
We have short-term investments in interest bearing accounts and money market funds.
Item 8.
Financial Statements and Supplementary DataThe following Consolidated Financial Statements are filed as part of this Annual Report:
Cactus, Inc. and Subsidiaries
Management’s Report on Internal Control Over Financial Reporting
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”) inInternal Control-Integrated Framework(2013 framework). Based on this assessment, management has concluded that, as of December 31, 2021, 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, 2021, which appears herein.
| | | | | | | | |
| /s/ Scott Bender | | /s/ Stephen Tadlock |
| President, Chief Executive Officer and Director | | Vice President, Chief Financial Officer and Treasurer |
| | |
| | |
| Houston, Texas | | |
| February 28, 2022 | | |
Report of Independent Registered Public Accounting Firm
To
the Board of Directors and Stockholders of Cactus, Inc.Opinion
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, 20182021 and 2017,2020, 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, 2018,2021, 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, 2021, 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,
20182021 and
2017,2020, and the results of its operations and its cash flows for each of the three years in the period ended December 31,
20182021 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, 2021, based on criteria established in Internal Control - Integrated Framework (2013) issued by the COSO.
Basis for
OpinionTheseOpinions
The Company’s management is responsible for these consolidated financial statements,
are the responsibilityfor maintaining effective internal control over financial reporting, and for its assessment of the
Company’s management.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
an opinionopinions 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 of these consolidated financial statements in accordance with the standards of the PCAOB. Those standards require that we plan and perform the auditaudits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding offraud, and whether effective internal control over financial reporting but not for the purpose of expressing an opinion on the effectivenesswas maintained in all material respects.
Our audits of the
Company's internal control overconsolidated financial
reporting. Accordingly, we express no such opinion.Our auditsstatements 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 opinion.
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 alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Liability related to the Tax Receivable Agreement
As described in Notes 2 and 9 to the consolidated financial statements, the Company has a liability under the Tax Receivable Agreement (“TRA”) of $281.6 million as of December 31, 2021. In connection with its initial public offering, the Company entered into the TRA with certain direct and indirect owners of Cactus Wellhead, LLC (the “TRA Holders”). The TRA generally provides for the payment by the Company to the TRA Holders of 85% of the net cash tax savings, if any, in United States federal, state and local income tax and franchise tax that the Company actually realizes or is deemed to realize in certain circumstances as a result of (i) certain increases in tax basis that occur as a result of the Company’s acquisition (or deemed acquisition for U.S. federal income tax purposes) of all or a portion of such TRA Holder’s ownership interest in Cactus Wellhead, LLC, (ii) certain increases in tax basis resulting from the repayment of borrowings outstanding under Cactus Wellhead, LLC’s term loan facility, and (iii) imputed interest deemed to be paid by the Company as a result of, and additional tax basis arising from, any payments the Company makes under the TRA. Management calculates the TRA liability by determining the tax basis subject to the TRA (“tax basis”) and applying a blended tax rate to the basis differences and calculating the iterative impact. The blended tax rate consists of the U.S. federal income tax rate and an assumed combined state and local income tax rate driven by the apportionment factors applicable to each state.
The principal considerations for our determination that performing procedures relating to the liability related to the TRA is a critical audit matter are the significant complexity in i) management’s calculation of the tax basis, and (ii) developing the applicable state apportionment factors utilized in determining the appropriate blended tax rate. This in turn led to a high degree of auditor subjectivity and effort in performing procedures and evaluating the appropriateness of the calculation of the tax basis and the blended tax rate. In addition, the audit effort involved the use of professionals with specialized skill and knowledge to assist in performing these procedures and evaluating the audit evidence obtained from these procedures.
Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included testing the effectiveness of controls relating to the calculation and recognition of the TRA liability, including controls over the completeness and accuracy of the underlying data used in the tax basis and blended tax rate calculations. These procedures also included, among others, testing the information used in the calculation of the TRA liability, and the involvement of professionals with specialized skills and knowledge to assist in (i) developing an independent calculation of the tax basis, (ii) comparing the independent calculation to management’s calculations to evaluate the reasonableness of the tax basis, (iii) evaluating the apportionment factors and the resulting blended tax rate, and (iv) assessing management’s application of the tax laws. Evaluating management’s determination of the apportionment factors involved considering the current and expected activity levels of the Company and whether the apportionment factors were consistent with evidence obtained in other areas of the audit.
/s/ PricewaterhouseCoopers LLP
Houston, Texas
March 14, 2019
February 28, 2022
We have served as the
Company'sCompany’s auditor since 2015.2015, which includes periods before the Company became subject to SEC reporting requirements.
CACTUS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
| | | | | | | | | | | | | | | | |
| | December 31, | | December 31, | | December 31, |
| | 2018 | | 2017 | | 2021 | | 2020 |
| | (in thousands, except per share data) | | (in thousands, except per share data) |
Assets | | | | | | | Assets | | | |
Current assets | | | | | | | Current assets | | | |
Cash and cash equivalents | | $ | 70,841 | | $ | 7,574 | Cash and cash equivalents | $ | 301,669 | | | $ | 288,659 | |
Accounts receivable, net of allowance of $576 and $740, respectively | | | 92,269 | | | 84,173 | |
| Accounts receivable, net of allowance of $741 and $598, respectively | | Accounts receivable, net of allowance of $741 and $598, respectively | 89,205 | | | 44,068 | |
Inventories | | | 99,837 | | | 64,450 | Inventories | 119,817 | | | 87,480 | |
Prepaid expenses and other current assets | | | 11,558 | | | 7,732 | Prepaid expenses and other current assets | 7,794 | | | 4,935 | |
Total current assets | | | 274,505 | | | 163,929 | Total current assets | 518,485 | | | 425,142 | |
| Property and equipment, net | | | 142,054 | | | 94,654 | Property and equipment, net | 129,117 | | | 142,825 | |
| Operating lease right-of-use assets, net | | Operating lease right-of-use assets, net | 22,538 | | | 21,994 | |
Goodwill | | | 7,824 | | | 7,824 | Goodwill | 7,824 | | | 7,824 | |
Deferred tax asset, net | | | 159,053 | | | — | Deferred tax asset, net | 303,074 | | | 216,603 | |
Other noncurrent assets | | | 1,308 | | | 49 | Other noncurrent assets | 1,040 | | | 1,206 | |
Total assets | | $ | 584,744 | | $ | 266,456 | Total assets | $ | 982,078 | | | $ | 815,594 | |
Liabilities and Equity | | | | | | | Liabilities and Equity | | | |
Current liabilities | | | | | | | Current liabilities | | | |
Accounts payable | | $ | 42,047 | | $ | 35,080 | Accounts payable | $ | 42,818 | | | $ | 20,163 | |
Accrued expenses and other current liabilities | | | 15,650 | | | 10,559 | Accrued expenses and other current liabilities | 28,240 | | | 11,392 | |
Current portion of liability related to tax receivable agreement | | | 9,574 | | | — | Current portion of liability related to tax receivable agreement | 11,769 | | | 9,290 | |
Capital lease obligations, current portion | | | 7,353 | | | 4,667 | |
Current maturities of long-term debt | | | — | | | 2,568 | |
| Finance lease obligations, current portion | | Finance lease obligations, current portion | 4,867 | | | 3,823 | |
| Operating lease liabilities, current portion | | Operating lease liabilities, current portion | 4,880 | | | 4,247 | |
Total current liabilities | | | 74,624 | | | 52,874 | Total current liabilities | 92,574 | | | 48,915 | |
| Deferred tax liability, net | | | 1,036 | | | 416 | Deferred tax liability, net | 1,172 | | | 786 | |
Liability related to tax receivable agreement, net of current portion | | | 138,015 | | | — | Liability related to tax receivable agreement, net of current portion | 269,838 | | | 195,061 | |
Capital lease obligations, net of current portion | | | 8,741 | | | 7,946 | |
Long-term debt, net | | | — | | | 241,437 | |
| Finance lease obligations, net of current portion | | Finance lease obligations, net of current portion | 5,811 | | | 2,240 | |
| Operating lease liabilities, net of current portion | | Operating lease liabilities, net of current portion | 17,650 | | | 17,822 | |
Total liabilities | | | 222,416 | | | 302,673 | Total liabilities | 387,045 | | | 264,824 | |
Commitments and contingencies | | | | | | | Commitments and contingencies | 0 | | 0 |
Stockholders' / Members' equity (deficit) | | | | | | | |
Members' equity (deficit) | | | — | | | (36,299) | |
Preferred stock, $0.01 par value, 10,000 shares authorized, none issued and outstanding as of December 31, 2018 | | | — | | | — | |
Class A common stock, $0.01 par value, 300,000 shares authorized, 37,654 shares issued and outstanding as of December 31, 2018 | | | 377 | | | — | |
Class B common stock, $0.01 par value, 215,000 shares authorized, 37,236 shares issued and outstanding as of December 31, 2018 | | | — | | | — | |
| Stockholders’ equity | | Stockholders’ equity | | | |
| Preferred stock, $0.01 par value, 10,000 shares authorized, none issued and outstanding | | 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, 59,035 and 47,713 shares issued and outstanding | | Class A common stock, $0.01 par value, 300,000 shares authorized, 59,035 and 47,713 shares issued and outstanding | 590 | | | 477 | |
| Class B common stock, $0.01 par value, 215,000 shares authorized, 16,674 and 27,655 shares issued and outstanding | | Class B common stock, $0.01 par value, 215,000 shares authorized, 16,674 and 27,655 shares issued and outstanding | — | | | — | |
Additional paid-in capital | | | 126,418 | | | — | Additional paid-in capital | 289,600 | | | 202,077 | |
Retained earnings | | | 51,683 | | | — | Retained earnings | 178,446 | | | 150,086 | |
Accumulated other comprehensive income (loss) | | | (820) | | | 82 | |
Total stockholders' equity attributable to Cactus Inc. and members' equity (deficit) | | | 177,658 | | | (36,217) | |
| Accumulated other comprehensive income | | Accumulated other comprehensive income | 8 | | | 330 | |
| Total stockholders’ equity attributable to Cactus Inc. | | Total stockholders’ equity attributable to Cactus Inc. | 468,644 | | | 352,970 | |
Non-controlling interest | | | 184,670 | | | — | Non-controlling interest | 126,389 | | | 197,800 | |
Total stockholders' and members' equity (deficit) | | | 362,328 | | | (36,217) | |
| Total stockholders’ equity | | Total stockholders’ equity | 595,033 | | | 550,770 | |
Total liabilities and equity | | $ | 584,744 | | $ | 266,456 | Total liabilities and equity | $ | 982,078 | | | $ | 815,594 | |
The accompanying notes are an integral part of these consolidated financial statements.
CACTUS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, | | Year Ended December 31, |
| | 2018 | | 2017 | | 2016 | | 2021 | | 2020 | | 2019 |
| | (in thousands, except per share data) | | (in thousands, except per share data) |
Revenues | | | | | | | | | | Revenues | | | | | |
Product revenue | | $ | 290,496 | | $ | 189,091 | | $ | 77,739 | Product revenue | $ | 280,907 | | | $ | 206,801 | | | $ | 357,087 | |
Rental revenue | | | 133,418 | | | 77,469 | | | 44,372 | Rental revenue | 61,629 | | | 66,169 | | | 141,816 | |
Field service and other revenue | | | 120,221 | | | 74,631 | | | 32,937 | Field service and other revenue | 96,053 | | | 75,596 | | | 129,511 | |
Total revenues | | | 544,135 | | | 341,191 | | | 155,048 | Total revenues | 438,589 | | | 348,566 | | | 628,414 | |
Costs and expenses | | | | | | | | | | Costs and expenses | | | | | |
Cost of product revenue | | | 174,675 | | | 124,030 | | | 62,766 | Cost of product revenue | 189,083 | | | 131,728 | | | 220,615 | |
Cost of rental revenue | | | 55,015 | | | 40,519 | | | 33,990 | Cost of rental revenue | 54,377 | | | 49,077 | | | 69,829 | |
Cost of field service and other revenue | | | 96,215 | | | 60,602 | | | 28,470 | Cost of field service and other revenue | 73,681 | | | 56,143 | | | 103,163 | |
Selling, general and administrative expenses | | | 40,529 | | | 27,177 | | | 19,207 | Selling, general and administrative expenses | 46,021 | | | 39,715 | | | 51,657 | |
| Severance expenses | | Severance expenses | — | | | 1,864 | | | — | |
Total costs and expenses | | | 366,434 | | | 252,328 | | | 144,433 | Total costs and expenses | 363,162 | | | 278,527 | | | 445,264 | |
Income from operations | | | 177,701 | | | 88,863 | | | 10,615 | Income from operations | 75,427 | | | 70,039 | | | 183,150 | |
| | | | | | | | | | | | | | | |
Interest expense, net | | | (3,595) | | | (20,767) | | | (20,233) | |
| Interest income (expense), net | | Interest income (expense), net | (774) | | | 701 | | | 879 | |
Other income (expense), net | | | (4,305) | | | — | | | 2,251 | Other income (expense), net | 492 | | | (555) | | | 4,294 | |
Income (loss) before income taxes | | | 169,801 | | | 68,096 | | | (7,367) | |
| Income before income taxes | | Income before income taxes | 75,145 | | | 70,185 | | | 188,323 | |
Income tax expense | | | 19,520 | | | 1,549 | | | 809 | Income tax expense | 7,675 | | | 10,970 | | | 32,020 | |
Net income (loss) | | $ | 150,281 | | $ | 66,547 | | $ | (8,176) | |
Less: pre-IPO net income (loss) attributable to Cactus LLC | | | 13,648 | | | 66,547 | | | (8,176) | |
| Net income | | Net income | $ | 67,470 | | | $ | 59,215 | | | $ | 156,303 | |
Less: net income attributable to non-controlling interest | | | 84,950 | | | — | | | — | Less: net income attributable to non-controlling interest | 17,877 | | | 24,769 | | | 70,691 | |
Net income attributable to Cactus Inc. | | $ | 51,683 | | $ | — | | $ | — | Net income attributable to Cactus Inc. | $ | 49,593 | | | $ | 34,446 | | | $ | 85,612 | |
| | | | | | | | | | | | | | | |
Earnings per Class A share - basic | | $ | 1.60 | | $ | — | | $ | — | Earnings per Class A share - basic | $ | 0.90 | | | $ | 0.73 | | | $ | 1.90 | |
Earnings per Class A share - diluted | | $ | 1.58 | | $ | — | | $ | — | Earnings per Class A share - diluted | $ | 0.83 | | | $ | 0.72 | | | $ | 1.88 | |
| | | | | | | | | | | | | | | |
Weighted average Class A shares outstanding - basic | | | 32,329 | | | — | | | — | Weighted average Class A shares outstanding - basic | 55,398 | | | 47,457 | | | 44,983 | |
Weighted average Class A shares outstanding - diluted | | | 32,695 | | | — | | | — | Weighted average Class A shares outstanding - diluted | 76,107 | | | 75,495 | | | 75,353 | |
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, |
| | 2018 | | 2017 | | 2016 |
| | (in thousands) |
Net income (loss) | | $ | 150,281 | | $ | 66,547 | | $ | (8,176) |
Foreign currency translation | | | (902) | | | 557 | | | (284) |
Comprehensive income (loss) | | | 149,379 | | | 67,104 | | | (8,460) |
Less: pre-IPO comprehensive income (loss) attributable to Cactus LLC | | | 13,928 | | | 67,104 | | | (8,460) |
Less: comprehensive income attributable to non-controlling interest | | | 84,212 | | | — | | | — |
Comprehensive income attributable to Cactus Inc. | | $ | 51,239 | | $ | — | | $ | — |
| | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2021 | | 2020 | | 2019 |
| | (in thousands) |
| Net income | $ | 67,470 | | | $ | 59,215 | | | $ | 156,303 | |
| Foreign currency translation adjustments | (567) | | | 1,375 | | | 368 | |
| Comprehensive income | 66,903 | | | 60,590 | | | 156,671 | |
| Less: comprehensive income attributable to non-controlling interest | 17,632 | | | 25,362 | | | 70,581 | |
| Comprehensive income attributable to Cactus Inc. | $ | 49,271 | | | $ | 35,228 | | | $ | 86,090 | |
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, 2015 | | $ | (92,976) | | — | | $ | — | | — | | $ | — | | $ | — | | $ | — | | $ | (191) | | $ | — | | $ | (93,167) |
Member distributions | | | (2,055) | | — | | | — | | — | | | — | | | — | | | — | | | — | | | — | | | (2,055) |
Other comprehensive (loss) | | | — | | — | | | — | | — | | | — | | | — | | | — | | | (284) | | | — | | | (284) |
Equity-based compensation | | | 361 | | — | | | — | | — | | | — | | | — | | | — | | | — | | | — | | | 361 |
Net loss | | | (8,176) | | — | | | — | | — | | | — | | | — | | | — | | | — | | | — | | | (8,176) |
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 and Reorganization | | | 13,648 | | — | | | — | | — | | | — | | | — | | | — | | | — | | | — | | | 13,648 |
Effect of IPO and Reorganization (Note 1) | | | 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 (Note 1) | | | — | | 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 and Reorganization | | | — | | — | | | — | | — | | | — | | | — | | | 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 |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Class A
Common Stock | | Class B
Common Stock | | Additional Paid-In Capital | | Retained Earnings | | Accumulated Other Comprehensive Income (Loss) | | Non-controlling Interest | | Total Equity |
| (in thousands) | Shares | | Amount | | Shares | | Amount |
| Balance at December 31, 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) | | | — | |
| Tax impact of equity transactions | — | | | — | | | — | | | — | | | 5,499 | | | — | | | — | | | — | | | 5,499 | |
| 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 | |
| Member distributions | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (16,304) | | | (16,304) | |
| Effect of CW Unit redemptions | 303 | | | 3 | | | (303) | | | — | | | 2,155 | | | — | | | — | | | (2,158) | | | — | |
| Tax impact of equity transactions | — | | | — | | | — | | | — | | | 284 | | | — | | | — | | | — | | | 284 | |
| Equity award vestings | 251 | | | 2 | | | — | | | — | | | (238) | | | — | | | — | | | (1,208) | | | (1,444) | |
| Other comprehensive income | — | | | — | | | — | | | — | | | — | | | — | | | 782 | | | 593 | | | 1,375 | |
| Stock-based compensation | — | | | — | | | — | | | — | | | 5,420 | | | — | | | — | | | 3,179 | | | 8,599 | |
| Cash dividends declared ($0.36 per share) | — | | | — | | | | | | | — | | | (17,350) | | | — | | | — | | | (17,350) | |
| Net income | — | | | — | | | — | | | — | | | — | | | 34,446 | | | — | | | 24,769 | | | 59,215 | |
| Balance at December 31, 2020 | 47,713 | | | $ | 477 | | | 27,655 | | | $ | — | | | $ | 202,077 | | | $ | 150,086 | | | $ | 330 | | | $ | 197,800 | | | $ | 550,770 | |
| Member distributions | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (9,742) | | | (9,742) | |
| Effect of CW Unit redemptions | 10,981 | | | 110 | | | (10,981) | | | — | | | 79,276 | | | — | | | — | | | (79,386) | | | — | |
| Tax impact of equity transactions | — | | | — | | | — | | | — | | | 2,998 | | | — | | | — | | | — | | | 2,998 | |
| Equity award vestings | 341 | | | 3 | | | — | | | — | | | (1,141) | | | — | | | �� | | | (2,145) | | | (3,283) | |
| Other comprehensive loss | — | | | — | | | — | | | — | | | — | | | — | | | (322) | | | (245) | | | (567) | |
| Stock-based compensation | — | | | — | | | — | | | — | | | 6,390 | | | — | | | — | | | 2,230 | | | 8,620 | |
| Cash dividends declared ($0.38 per share) | — | | | — | | | | | | | — | | | (21,233) | | | — | | | — | | | (21,233) | |
| Net income | — | | | — | | | — | | | — | | | — | | | 49,593 | | | — | | | 17,877 | | | 67,470 | |
| Balance at December 31, 2021 | 59,035 | | | $ | 590 | | | 16,674 | | | $ | — | | | $ | 289,600 | | | $ | 178,446 | | | $ | 8 | | | $ | 126,389 | | | $ | 595,033 | |
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, | | Year Ended December 31, |
| | 2018 | | 2017 | | 2016 | | 2021 | | 2020 | | 2019 |
| | (in thousands) | | (in thousands) |
Cash flows from operating activities | | | | | | | | | | Cash flows from operating activities | | | | | |
Net income (loss) | | $ | 150,281 | | $ | 66,547 | | $ | (8,176) | |
Reconciliation of net income (loss) to net cash provided by operating activities | | | | | | | | | | |
| Net income | | Net income | $ | 67,470 | | | $ | 59,215 | | | $ | 156,303 | |
| Reconciliation of net income to net cash provided by operating activities: | | Reconciliation of net income to net cash provided by operating activities: | | | | | |
Depreciation and amortization | | | 30,153 | | | 23,271 | | | 21,241 | Depreciation and amortization | 36,308 | | | 40,520 | | | 38,854 | |
Debt discount and deferred loan cost amortization | | | 275 | | | 1,752 | | | 1,777 | |
| Deferred financing cost amortization | | Deferred financing cost amortization | 168 | | | 168 | | | 168 | |
Stock-based compensation | | | 4,704 | | | — | | | 361 | Stock-based compensation | 8,620 | | | 8,599 | | | 6,995 | |
Provision for (recovery of) bad debts | | | — | | | (100) | | | (357) | |
| Provision for expected credit losses | | Provision for expected credit losses | 310 | | | 342 | | | 355 | |
Inventory obsolescence | | | 1,451 | | | 1,259 | | | 1,851 | Inventory obsolescence | 3,490 | | | 4,840 | | | 2,552 | |
Loss on disposal of assets | | | 886 | | | 534 | | | 950 | |
| (Gain) loss on disposal of assets | | (Gain) loss on disposal of assets | (1,386) | | | (2,480) | | | 236 | |
Deferred income taxes | | | 15,201 | | | 220 | | | 132 | Deferred income taxes | 4,829 | | | 6,948 | | | 25,403 | |
Loss (gain) on debt extinguishment | | | 4,305 | | | — | | | (2,251) | |
| (Gain) loss from revaluation of liability related to tax receivable agreement | | (Gain) loss from revaluation of liability related to tax receivable agreement | (898) | | | 555 | | | (5,336) | |
Changes in operating assets and liabilities: | | | | | | | | | | Changes in operating assets and liabilities: | |
Accounts receivable | | | (8,105) | | | (50,094) | | | 509 | Accounts receivable | (45,492) | | | 44,829 | | | 4,204 | |
Inventories | | | (38,227) | | | (28,279) | | | 4,126 | Inventories | (36,083) | | | 18,201 | | | (17,592) | |
Prepaid expenses and other assets | | | (6,509) | | | (4,012) | | | 1,080 | Prepaid expenses and other assets | (2,789) | | | 6,177 | | | 438 | |
Accounts payable | | | 7,651 | | | 19,505 | | | 5,014 | Accounts payable | 22,281 | | | (19,434) | | | (607) | |
Accrued expenses and other liabilities | | | 5,114 | | | 4,104 | | | (2,282) | Accrued expenses and other liabilities | 16,628 | | | (10,893) | | | 6,994 | |
| Payments pursuant to tax receivable agreement | | Payments pursuant to tax receivable agreement | (9,697) | | | (14,207) | | | (9,335) | |
Net cash provided by operating activities | | | 167,180 | | | 34,707 | | | 23,975 | Net cash provided by operating activities | 63,759 | | | 143,380 | | | 209,632 | |
| | | | | | | | | | | | | | | |
Cash flows from investing activities | | | | | | | | | | Cash flows from investing activities | | | | | |
Capital expenditures and other | | | (70,053) | | | (32,082) | | | (21,721) | Capital expenditures and other | (13,939) | | | (24,493) | | | (59,703) | |
Proceeds from sale of assets | | | 1,899 | | | 1,404 | | | 4,363 | Proceeds from sale of assets | 2,306 | | | 6,346 | | | 3,755 | |
Net cash used in investing activities | | | (68,154) | | | (30,678) | | | (17,358) | Net cash used in investing activities | (11,633) | | | (18,147) | | | (55,948) | |
| | | | | | | | | | | | | | | |
Cash flows from financing activities | | | | | | | | | | Cash flows from financing activities | | | | | |
Principal payments on long-term debt | | | (248,529) | | | (2,569) | | | (7,908) | |
Payment of deferred financing costs | | | (840) | | | — | | | — | |
Payments on capital leases | | | (6,274) | | | (2,744) | | | (208) | |
Net proceeds from IPO and Follow-on Offering | | | 828,168 | | | — | | | — | |
| Payments on finance leases | | Payments on finance leases | (5,205) | | | (5,317) | | | (7,484) | |
| Dividends paid to Class A common stock shareholders | | Dividends paid to Class A common stock shareholders | (21,158) | | | (17,140) | | | (4,244) | |
Distributions to members | | | (31,848) | | | — | | | (2,055) | Distributions to members | (9,742) | | | (16,304) | | | (8,392) | |
Redemption of CW Units | | | (575,681) | | | — | | | — | |
| Repurchases of shares | | Repurchases of shares | (3,283) | | | (1,445) | | | (1,549) | |
Net cash used in financing activities | | | (35,004) | | | (5,313) | | | (10,171) | Net cash used in financing activities | (39,388) | | | (40,206) | | | (21,669) | |
| | | | | | | | | | | | | | | |
Effect of exchange rate changes on cash and cash equivalents | | | (755) | | | 170 | | | (284) | Effect of exchange rate changes on cash and cash equivalents | 272 | | | 1,029 | | | (253) | |
| | | | | | | | | | | | | | | |
Net increase (decrease) in cash and cash equivalents | | | 63,267 | | | (1,114) | | | (3,838) | |
| Net increase in cash and cash equivalents | | Net increase in cash and cash equivalents | 13,010 | | | 86,056 | | | 131,762 | |
| | | | | | | | | | |
Cash and cash equivalents | | | | | | | | | | Cash and cash equivalents | | | | | |
Beginning of period | | | 7,574 | | | 8,688 | | | 12,526 | Beginning of period | 288,659 | | | 202,603 | | | 70,841 | |
End of period | | $ | 70,841 | | $ | 7,574 | | $ | 8,688 | End of period | $ | 301,669 | | | $ | 288,659 | | | $ | 202,603 | |
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 ofprovide field service crews to assist in the installation and operations of pressure control systems. We operate through
15 U.S. service centers located in
Texas, New Mexico, Pennsylvania, Oklahoma, North Dakota, New Mexico, Louisiana, Oklahoma, Colorado, Wyoming and Wyoming, and one service centerUtah as well as in Eastern Australia, withAustralia. We also provide rental and service operations in the Kingdom of Saudi Arabia. Our manufacturing and production facilities are located in Bossier City, Louisiana and Suzhou, China and our corporate headquarters are located in Houston, Texas.Cactus Inc. was incorporated on February 17, 2017 as a Delaware corporation for the purpose of completing an initial public offering of equity and related
transactions.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. For detailed information regarding our IPO, see our Annual Report on Form 10-K for the
completion of our initial public offering and Cactus LLC and its consolidated subsidiaries prior to the completion of our initial public offering.Initial Public Offering
On February 12, 2018, we completed the initial public offering of 23,000,000 shares of Class A common stock (our “IPO”), par value $0.01 per share, 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 2018 offering expenses of our IPO. We also paid $2.2 million in offering expenses during 2017 that were recorded to prepaid expenses in the consolidated balance sheet as ofyear ended December 31, 2017. 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”), from which we received an additional $61.6 million of 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 units representing limited liability company interests in Cactus LLC (“CW Units”). Cactus Inc. is a holding company who became the sole managing member of Cactus LLC.
Cactus LLC used the total $469.6 million of net proceeds (including net proceeds from the Option) 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 held by Cactus LLC to cover previously paid offering expenses in 2017.
In conjunction with our IPO, Cactus Inc. became a holding company whose only material asset is CW Units. Cactus Inc. became the managing member of Cactus LLC upon the 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. 2018.
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.
Tax Receivable Agreement
In connection with our IPO, we entered into a tax receivable agreement (the “TRA”) with certain direct and indirect owners of CW Units (the “TRA Holders”). 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 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. See Note 2 for further details of the TRA.
Reorganization
In connection with our IPO, we completed a series of reorganization transactions (the “Reorganization”), 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 our IPO to Cactus LLC in exchange for 23,000,000 CW Units;
|
| (c)
| | Cactus LLC used the net proceeds of our 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 a total of 51,889,772 shares of its Class B common stock, par value $0.01 per share, equal to the number of outstanding CW Units held by the owners thereof following the redemption described in (c) above to Cactus LLC (the Class B common stock has no economic interest and does not share in cash dividends or liquidation rights, but entitles its holders to one vote on all matters to be voted on by Cactus’ shareholders generally);
|
| (e)
| | Cactus LLC distributed to each of the owners that continued to own CW Units following our IPO one share of Class B common stock for each CW Unit such 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.
|
Other IPO related items
In conjunction with our IPO, we also:
(a)wrote off $2.2 million of prepaid IPO costs incurred in 2017 as a reduction of additional paid-in capital;
(b)wrote off $4.3 million in unamortized debt discount and deferred loan costs related to the repayment of the term loan;
(c)issued 737,493 restricted stock units and began recording stock-based compensation on those units;
(d)recorded a deferred tax asset related to the step-up in basis resulting from the IPO and related transactions, a liability from the TRA representing 85% of the expected net cash tax savings from such step-up in basis that will be paid to TRA Holders, and recorded the remaining 15% as additional paid-in capital;
(e)reset the previous accumulated deficit in Cactus LLC to zero; and
(f)recorded $130.9 million of non-controlling interest representing the portion of CW Units not owned by Cactus Inc.
Prior to our IPO, on January 25, 2018, Cactus LLC paid a cash distribution of $26.0 million to pre-IPO owners. This distribution was funded by borrowing under a revolving credit facility. The purpose of the distribution was to provide funds to these owners to pay their federal and state tax liabilities associated with taxable income recognized by them for periods prior to the completion of our IPO as As a result, of their ownership interests in Cactus LLC. The borrowings under this revolving credit facility were repaid during the first quarter of 2018.
Follow-on Offering
On July 16, 2018, we completed a public offering of 11,196,562 shares (consisting of 10,000,000 base shares and 1,196,562 shares sold pursuant to the underwriters’ option to purchase additional shares) of Class A common stock (the “Follow-on Offering”) at $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 11,196,562 CW Units. Cactus LLC then used the net proceeds to redeem and retire 11,196,562 CW Units from certain of the other owners of Cactus LLC, and Cactus Inc. canceled corresponding shares of Class B common stock. In conjunction with the redemption of these CW Units, we recorded a deferred tax asset related to the step-up in basis, a liability from the TRA representing 85% of the expected net cash savings from the step-up in basis that will be paid to TRA Holders and recorded the remaining 15% as additional paid-in capital.
Offering expenses related to the Follow-on Offering were $0.7 million, which were recorded within equity, and were borne by Cactus Inc.
In conjunction with the Follow-on Offering and the additional ownership Cactus Inc. acquired in Cactus LLC, $25.2 million of equity was reclassified to Cactus Inc. from non-controlling interest representing the additional CW Units acquired and $0.1 million related to the cancellation of Class B common stock.
CW Unit Exchanges
For the year ended December 31, 2018, in accordance with the terms of the Cactus Wellhead LLC Agreement, CW Unit Holders redeemed 7,068 CW Units at a weighted average price of $31.30 per CW Unit, resulting in a corresponding increase in our membership interest in Cactus LLC, a corresponding increase in the number of shares of Class A common stock outstanding and a corresponding decrease in the number of shares of Class B common stock outstanding.
Ownership
After the above transactions and as of December 31, 2018, Cactus Inc. has outstanding 37,653,630 shares of Class A common stock (representing 50.3% of the total voting power) and 37,236,142 shares of Class B common stock (representing 49.7% of the total voting power). There was no change in the total aggregate number of shares of Class A common stock and Class B common stock outstanding of 74,889,772 following the completion of the above transactions.
2. Summary of Significant Accounting Policies and Other Items
Basis of Presentation
The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). These consolidated financial statements include the accounts of Cactus Inc. and its wholly owned subsidiaries. All significant intercompany transactions and balances have been eliminated upon consolidation.
As discussed in Note 1, as a result of our IPO and Reorganization, 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. stock, par value $0.01 per share (“Class A common stock”).
As of December 31, 2021, Cactus Inc. owned 78.0% of Cactus LLC, as compared to 63.3% as of December 31, 2020. As of December 31, 2021, Cactus Inc. had outstanding 59.0 million shares of Class A common stock (representing 78.0% of the total voting power) and 16.7 million shares of Class B common stock (representing 22.0% of the total voting power).
2.Summary of Significant Accounting Policies and Other Items
Basis of Presentation
The Reorganization was consideredconsolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). These consolidated financial statements include the accounts of Cactus Inc. and its wholly owned subsidiaries. All intercompany transactions and balances have been eliminated upon consolidation.
Cactus Inc. consolidates the financial results of Cactus LLC and its subsidiaries and reports a transaction between entities undernon-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.
In preparing our consolidated financial statements in conformity with GAAP, we make numerous estimates and assumptions that affect the accounting for and recognition and disclosure of assets, liabilities, equity, revenues and expenses. We must make these estimates and assumptions because certain information that we use is dependent on future events, cannot be calculated with a high degree of precision from available data or is not otherwise capable of being readily calculated based on accepted methodologies. In some cases, these estimates are particularly difficult to determine, and we must exercise significant judgment. Actual results could differ materially from the estimates and assumptions that we use in the preparation of our consolidated financial statements.
control. As a result, the financial statements for periods prior to our IPO and the Reorganization have been adjusted to combine the previously separate entities for presentation purposes.
Reclassifications
Certain prior period amounts have been reclassified to conform to the current period presentation.
Limitation of Members’ Liability
Under the terms of the Cactus Wellhead LLC Agreement, the members of Cactus LLC are not obligated for debt, liabilities, contracts or other obligations of Cactus LLC. Profits and losses are allocated to members as defined in the Cactus Wellhead LLC Agreement.
Segment and Related Information
We operate in a single operating segment, which reflects how we manage our business and the fact that all of our products and services are dependent upon the oil and natural gas industry. Substantially all of our products and services are sold in the U.S.
, which consists largely of to oil and natural gas exploration and production companies. We operate in the United States, Australia,
China and
China.the Kingdom of Saudi Arabia. Our operations
in Australia and Chinaoutside of the United States represented less than 10% of our consolidated operations for all periods presented in these consolidated financial statements.
Significant Customers and Concentration
Concentrations of Credit Risk
We had one customer representing 11% of total revenues for the years ended December 31, 2018 and 2017 and one customer representing 12% of total revenues in 2016. There were no other customers representing 10% or more of total revenues in 2018, 2017 or 2016.
Our assets that are potentially subject to concentrations of credit risk are cash
short-term investmentsand 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. For the year ended December 31, 2021, we had one customer representing approximately 12% of total revenues. No customer represented 10% or more of total revenues for the year ended December 2020 and one customer represented approximately 10% of total revenues in the year ended December 31, 2019.
Significant Vendors
We purchase a significant portion
The principal raw materials used in the manufacture of
supplies,our products and rental equipment
include forgings and plate, castings, tube and bar stock. In addition, we require accessory items (such as elastomers, ring gaskets, studs and nuts) and machined components
and assemblies. We purchase these items from
a single vendor. During 2018, 2017vendors primarily located in the United States, China, India and
2016, purchases from this vendor totaled $46.7 million, $33.4 million and $10.8 million, respectively. These figures representAustralia. For the year ended December 31, 2021, two vendors each represented approximately
21%, 22% and 20% for the respective periods,9% of
our total
third partythird-party vendor purchases of raw materials, finished products, equipment, machining and other services.
For the years ended December 31, 2020 and 2019, one vendor represented approximately 9% and 16%, respectively, of such purchases. Amounts due to
the vendorthese vendors included in accounts payable, in the consolidated balance sheets, as of December 31,
20182021 and
20172020 totaled
$5.0$6.4 million
(combined total for two vendors) and
$7.4$1.5 million, respectively.
Use of Estimates
The preparation 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 date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Such estimates include but are not limited to estimated losses on accounts receivables, estimated realizable value on excess and obsolete inventory, estimates related to fair value of reporting units for
purposes of assessing goodwill and other indefinite-lived intangible assets for impairment, assessments of all long-lived assets for possible impairment and estimates of deferred tax assets related to the step-up in basis under the TRA and the associated liability under the TRA. Actual results could differ from those estimates.
Tax Receivable Agreement
Pursuant to the Cactus Wellhead LLC Agreement, each TRA 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 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 generally provides 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 the Reorganization, our IPO, the Follow-on Offering and CW Unit exchanges. Accordingly, the TRA is expected to result in future payments, and we have recorded a total liability from the TRA of $147.6 million included in the current portion and long-term portion of the liability related to tax receivable agreement in the consolidated balance sheet as of December 31, 2018. Future exchanges of CW Units will create additional liability and follow the same accounting
(TRA)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, 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.
During the fourth quarter ended December 31, 2018, we identified and corrected immaterial errors in the calculation of the liability and deferred tax asset associated with the TRA related to the Reorganization, our IPO and Follow-on Offering that reduced additional paid-in-capital by $1.6 million, reduced the deferred tax asset by $10.9 million and decreased the associated liability related to the TRA by $9.3 million. These corrections relate to immaterial errors associated with inputs (including estimates) and assumptions used in the calculation of the original step-up in basis during the interim periods of 2018. These changes, if they had been recorded in the interim periods of 2018, would not have had a material impact to our net assets and would not have had any impact on our consolidated results of operations or cash flows.
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.
We account for any amounts payable under the TRA in accordance with ASCAccounting Standards Codification (“ASC”) Topic 450, Contingencies. We will recognizeAs such, subsequent period changes to the measurement of the TRA liability from the TRAare recognized in the statements of income statement as a component of other income before taxes. In(expense), net. During the case of any changes to any valuation allowance associated withyears ended December 31, 2021, 2020 and 2019, we recognized a $0.9 million gain, a $0.6 million loss and a $5.3 million gain on the underlying tax asset, given the link between the tax savings generated and the recognition of the liability from the TRA (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 liability from the TRA in the income statement is appropriate.
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 are anticipated to commence in 2019 and to continue for 16 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 25 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 TRA including the assumptions that (i) we have sufficient taxable income to fully utilize the tax benefits covered byliability, respectively. See Note 9 for further details on the TRA liability.
Revenue Recognition
The majority of our revenues are derived from short-term contracts for fixed consideration. 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
(ii) any CW Units (other than those heldrecognized as revenue when, or as, the performance obligation is satisfied. Revenues are recognized when we satisfy a performance obligation by
Cactus Inc.) outstanding ontransferring control of the
termination date are deemedpromised goods or providing services to our customers at a point in time, in an amount specified in the contract with our customer and that reflects the consideration to which we expect to be
redeemedentitled 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
termination date. Any early termination payment may be made significantly in advancecontext of the
actual realization, if any, ofcontract with the
future tax benefits to which the termination payment relates.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 wecustomer. We do not haveincur any material costs of obtaining contracts.
We do not adjust 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
paymentsconsideration per the contract for the effects of a significant financing component when we expect, at contract inception, 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 interestperiod between the
intereststransfer of
a promised good or service to a customer and when the
TRA Holderscustomer pays for that good or service will be one year or less, which is in substantially all cases. Payment terms and
other shareholders.Paymentsconditions vary, although terms generally include a requirement of payment within 30 to 45 days. Revenues are due under the TRA within five business days following the finalizationrecognized net of the schedule with respectany taxes collected from customers, which are subsequently remitted 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 period to which such payments relate until such payment due 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
governmental authorities. We treat shipping and
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 paymenthandling associated with outbound freight as a resultfulfillment cost instead of limitations imposed by our credit facility.as a separate performance obligation. We have no present intention to defer payments underrecognize the TRA.
Because wecost for the associated shipping and handling when incurred as an expense in cost of sales. Our revenues 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 subsidiariesderived from three sources: products, rentals, 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 distributionfield service 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 of its members, which could be significant. To the extent that weother:
Product revenue. Product revenues are unable to make payments under the TRA for any reason, such payments will be deferred and will accrue interest until paid.Revenue Recognition
Revenue is recognized when all of the following criteria have been met: (i) evidence of an arrangement exists; (ii) delivery and acceptance by the customer has occurred; (iii) the price to the customer is fixed or determinable; and (iv) collectability is reasonably assured, as follows:
Product revenue. Revenue is recognizedprimarily 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 rent Rental revenues areprimarily derived from the rental of equipment, tools and products used for well control during the drilling and completion phases 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, typically through an agreed upon rate for each rental job. 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 who have installed our productswellheads 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.
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 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 resultsstatements of operationsincome as incurred.
Derivative Financial Instruments
We utilize a hedging program to reduce the risks associated with changes in the value of monetary assets and liabilities denominated in currencies other than the functional currency of our subsidiaries. Under this program, we utilize foreign currency forward contracts to offset gains or losses recorded upon remeasurement of assets and liabilities stated in the non-functional currencies of our subsidiaries. These forward contracts are not designated as hedges for accounting purposes. As such, we record changes in fair value of the forward contracts in our consolidated statements of income along with the gain or loss resulting from remeasurement of the U.S. dollar denominated financial assets and liabilities held by our foreign subsidiaries. The forward contracts are typically only 30 days in duration and are settled and renewed each month. As of December 31, 2021 and 2020, the fair value of our forward contracts was a liability of approximately $37 thousand and $56 thousand, respectively.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 correspondingrequisite service period, which is usually the vesting period, usingperiod. Beginning with our 2021 grants, the straight‑line method. All grant date fair value is expensed immediately for awards that are fully vested asdetermined by the closing price of our Class A common stock on the grant date. Prior to 2021, the grant date fair value was determined by the average price of the trading high and trading low of our Class A common stock on the grant date.
Deferred taxes are recorded using the asset and liability method, whereby tax assets and liabilities are determined based on the differences between the financial statement and tax basis of assets and liabilities using enacted tax laws and rates expected to apply to taxable income in the year in which the differences are expected to reverse. We regularly evaluate the valuation allowances established for deferred tax assets for which future realization is uncertain. In assessing the realizability of deferred tax assets, we consider both positive and negative evidence, including scheduled reversals of deferred tax assets and liabilities, projected future taxable income, tax planning strategies and results of recent operations. If, based on the weight of available evidence, it is more likely than not that the deferred tax assets will not be realized, a valuation allowance is recorded.
Cactus Inc. is a corporation and is subject to U.S. federal as well as state income tax related to its ownership percentage in Cactus LLC.
Cactus LLC is a limited liability company treated as a partnership for U.S. federal income tax
purposes and files a U.S. Return of Partnership Income, which includes both our U.S. and foreign operations. Consequently, the 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.
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. The realizability of deferred tax assets are evaluated annually and a valuation allowance is provided if it is more likely than not that the deferred tax assets will not give rise to future benefits in our tax returns.
We recognize deferred tax assets to the extent we believe these assets are more-likely-than-not to be realized. In making such a determination, we consider all available positive and negative evidence, including future reversals of existing taxable temporary differences, projected future taxable income, tax planning strategies and recent results of operations.
We regularly review our deferred tax assets, including net operating loss carryforwards, tax credits, and other tax attributes, for recoverability and a valuation allowance is provided when it is more likely than not that some portion or all of a deferred tax asset may not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which the temporary differences are deductible. In assessing the need for a valuation allowance, we make estimates and assumptions regarding projected future taxable income, taxable income in carryback periods, the reversal of deferred tax liabilities, and the implementation of tax planning strategies.
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.
We record income tax related interest and penalties, if any, as a component in the provision for income tax expense.
See Note 5 “Income Taxes” for additional information regarding income taxes.
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 “Tax Act”). The Tax Act represents major tax reform legislation that, among other provisions, reduced the U.S. corporate tax rate. In conjunction with the Tax Act, the SEC staff issued Staff Accounting Bulletin No. 118, Income Tax Accounting Implications of the Tax Cuts and Jobs Act (SAB 118), which allows us to record provisional amounts during a measurement period not to extend beyond one year of the enactment date. However, we did not previously report provisional amounts of the income tax effects of the Tax Act due to our structure prior to our IPO.
Cash and Cash Equivalents
We consider all highly liquid instruments purchased with a maturity
Cash in excess of
three months or less to be cash equivalents. We invest excess cashcurrent operating requirements is invested in short-term
interest-bearing investments
such as interest bearing accounts and money market funds with maturities of three months or
less.less at the date of purchase and is stated at cost, which approximates fair value. Throughout the year we maintained cash balances that were not covered by federal deposit insurance. We have not experienced any losses in such accounts.
Accounts Receivable
and Allowance for Credit Losses
We extend credit to customers in the normal course of business. Our customers are predominantly oil and gas companies in the United States. Our receivables are short-term in nature and typically due in 30 to 45 days. We do not accrue interest on delinquent accounts receivable.receivables. Accounts receivable as of December 31, 2018includes amounts billed and 2017 includescurrently due from customers and unbilled revenue of $26.8 million and $24.9 million, respectively,amounts for products delivered and for services performed for which billings had not yet been submitted to the customers. Earnings are chargedTotal unbilled revenue included in accounts receivable as of December 31, 2021 and 2020 was $24.1 million and $8.7 million, respectively.
We maintain an allowance for credit losses to provide for the amount of billed receivables we believe to be at risk of loss. In our determination of the allowance for credit losses, we pool receivables with
a provision for doubtful accountssimilar risk characteristics based on
acustomer size, credit ratings, payment history, bankruptcy status and other factors known to us and apply an expected credit loss percentage. The expected credit loss percentage is determined using historical loss data adjusted for current
reviewconditions and forecasts of
the collectability of accounts.future economic conditions. Accounts deemed uncollectible are applied against the allowance for
doubtful accounts. Accounts receivable is net of allowance for doubtful accounts of $0.6 million and $0.7 million as of December 31, 2018 and 2017, respectively.credit losses. The following is a rollforward of our allowance for doubtful accounts:
credit losses: | | | | | | | | | | | | | | | |
| | Balance at | | | | | | | | | | | Balance at |
| | Beginning of | | Expense | | | | | | | | End of |
| | Period | | (recovery) | | Write off | | Other | | Period |
Year Ended December 31, 2018 | | $ | 740 | | $ | — | | $ | (164) | | $ | — | | $ | 576 |
Year Ended December 31, 2017 | | | 851 | | | (100) | | | (3) | | | (8) | | | 740 |
Year Ended December 31, 2016 | | | 1,208 | | | (357) | | | — | | | — | | | 851 |
| | | | | | | | | | | | | | | | | | | | | | | |
| | Balance at Beginning of Period | | Expense | | Write off | | Balance at End of Period |
| Year Ended December 31, 2021 | $ | 598 | | | $ | 310 | | | $ | (167) | | | $ | 741 | |
| Year Ended December 31, 2020 | 837 | | | 342 | | | (581) | | | 598 | |
| Year Ended December 31, 2019 | 576 | | | 355 | | | (94) | | | 837 | |
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,
duties, tariffs, freight and overhead
cost.costs. Net realizable value is the estimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal and transportation. Reserves are made for
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
$7.3$18.0 million and
$5.9$14.6 million as of December 31,
20182021 and
2017,2020, 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, 2018 | | $ | 5,885 | | $ | 1,451 | | $ | — | | $ | (26) | | $ | 7,310 |
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 |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Balance at Beginning of Period | | Expense | | Write off | | Translation Adjustments | | Balance at End of Period |
| Year Ended December 31, 2021 | $ | 14,637 | | | $ | 3,490 | | | $ | (62) | | | $ | (53) | | | $ | 18,012 | |
| Year Ended December 31, 2020 | 9,772 | | | 4,840 | | | (53) | | | 78 | | | 14,637 | |
| Year Ended December 31, 2019 | 7,310 | | | 2,552 | | | (90) | | | — | | | 9,772 | |
Property and equipment are stated at cost. We manufacture or construct most of our own rental assets and during the manufacture of these assets, they are reflected as construction in progress until complete. We depreciate the cost of property and equipment using the straight‑line method over the estimated useful lives and depreciate our rental assets to their salvage value. Leasehold improvements are amortized over the shorter of the remaining lease term or economic life of the related assets. When assets are retired or otherwise disposed of, the cost and related accumulated depreciation are removed from the accounts and
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 | | | Land | N/A |
Buildings and improvements | | 5 | - | 39 | years | Buildings and improvements | 5 | - | 30 | years |
Machinery and equipment | | | | 7 | years | Machinery and equipment | 2 | - | 12 | years |
Vehicles under capital lease | | | | 3 | years | |
| Vehicles under finance lease | | Vehicles under finance lease | | 3 | years |
Rental equipment | | 2 | - | 5 | years | Rental equipment | 2 | - | 11 | years |
Furniture and fixtures | | | | 5 | years | Furniture and fixtures | | 5 | years |
Computers and software | | 3 | - | 5 | years | Computers and software | | 4 | years |
Property and equipment as of December 31,
20182021 and
20172020 consists of the following:
| | | | | | |
| | December 31, |
| | 2018 | | 2017 |
Land | | $ | 3,614 | | $ | 2,241 |
Buildings and improvements | | | 20,803 | | | 11,657 |
Machinery and equipment | | | 47,606 | | | 43,528 |
Vehicles under capital lease | | | 25,165 | | | 15,557 |
Rental equipment | | | 124,002 | | | 85,292 |
Furniture and fixtures | | | 1,623 | | | 1,110 |
Computers and software | | | 3,094 | | | 2,636 |
Gross property and equipment | | | 225,907 | | | 162,021 |
Less: Accumulated depreciation | | | (96,412) | | | (72,917) |
Net property and equipment | | | 129,495 | | | 89,104 |
Construction in progress | | | 12,559 | | | 5,550 |
Total property and equipment, net | | $ | 142,054 | | $ | 94,654 |
| | | | | | | | | | | |
| | December 31, |
| | 2021 | | 2020 |
| Land | $ | 3,203 | | | $ | 3,203 | |
| Buildings and improvements | 22,532 | | | 21,935 | |
| Machinery and equipment | 56,937 | | | 57,726 | |
| Vehicles under finance lease | 23,450 | | | 14,371 | |
| Rental equipment | 180,704 | | | 172,012 | |
| Furniture and fixtures | 1,755 | | | 1,780 | |
| Computers and software | 3,495 | | | 3,530 | |
| Gross property and equipment | 292,076 | | | 274,557 | |
| Less: Accumulated depreciation | (175,992) | | | (147,221) | |
| Net property and equipment | 116,084 | | | 127,336 | |
| Construction in progress | 13,033 | | | 15,489 | |
| Total property and equipment, net | $ | 129,117 | | | $ | 142,825 | |
Depreciation of property and equipmentamortization was $30.2$36.3 million, $23.3$40.5 million and $21.2$38.9 million for 2018, 20172021, 2020 and 2016,2019, respectively. Depreciation and amortization expense is included in the consolidated statements of income as follows:
| | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, | | Year Ended December 31, |
| | 2018 | | 2017 | | 2016 | | 2021 | | 2020 | | 2019 |
Cost of product revenue | | $ | 3,262 | | $ | 3,169 | | $ | 2,869 | Cost of product revenue | $ | 3,176 | | | $ | 3,506 | | | $ | 3,304 | |
Cost of rental revenue | | | 17,997 | | 14,912 | | 15,121 | Cost of rental revenue | 25,812 | | | 28,063 | | | 24,881 | |
Cost of field service and other revenue | | | 8,456 | | 4,786 | | 2,659 | Cost of field service and other revenue | 6,863 | | | 8,075 | | | 9,986 | |
Selling, general and administrative expenses | | | 438 | | | 404 | | | 592 | Selling, general and administrative expenses | 457 | | | 876 | | | 683 | |
Total depreciation | | $ | 30,153 | | $ | 23,271 | | $ | 21,241 | |
| Total depreciation and amortization | | Total depreciation and amortization | $ | 36,308 | | | $ | 40,520 | | | $ | 38,854 | |
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
2018, 20172021. Due to reduced sales and
2016.cash flows in 2020, we assessed the recoverability of our long-lived assets at each interim period of 2020 and as of December 31, 2020. No impairments were recognized in 2020 as a result of these assessments. Additionally, no impairment charges of long‑lived assets were recognized in 2019.
Goodwill represents the excess of
acquisition considerationpurchase price paid over the fair value of
identifiablethe net
tangible and identifiable intangible assets
acquired. All of
theacquired businesses. Our 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
we evaluate at least annually whether it is
reviewed for impairment on animpaired. Goodwill is considered impaired if the carrying amount of the reporting unit exceeds its estimated fair value. We conduct our annual
basis (or more frequently if impairment indicators exist). We have establishedassessment of the recoverability of goodwill as of December 31
as the date of
our annual test for impairment of goodwill.each year. We
perform afirst assess qualitative
assessment offactors to determine whether it is more likely than not that the fair value of
oura reporting unit
before calculatingis less than its carrying amount as a basis for determining whether it is necessary to perform the
fair value of the reporting unit in step one of the two‑step goodwill impairment
model.test. If
through the qualitative assessment
we determineindicates 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 itis less than its carrying amount or we elect not to perform a qualitative assessment, the reporting unit’s carrying value. Fair valuequantitative assessment of goodwill test 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 exceedsperformed. The goodwill impairment test is also performed whenever events or changes in circumstances indicate that the carrying value may not be recoverable. If it is necessary to perform the quantitative assessment to determine if our goodwill is impaired, we typically utilize a discounted cash flow analysis using management’s projections that are subject to various risks and uncertainties of revenues, expenses and cash flows as well as assumptions regarding discount rates, terminal value and control premiums. Estimates of future cash flows and fair value are highly subjective and inherently imprecise. These estimates can change materially from period to period based on many factors. Accordingly, if conditions change in the future, we may record impairment losses, which could be material to any particular reporting period.
No goodwill impairment losses were deemed necessary in 2021. Due to the depressed oil price environment, reduced sales and cash flow projections and a significant decline in our market capitalization as of March 31, 2020, we assessed whether our goodwill may have been impaired as of March 31, 2020. Our quantitative impairment test using management’s current projections of revenues, expenses and cash flows as of March 31, 2020 calculated significant cushion and no impairment was recognized as a result of this assessment. Actual results during the remainder of the year were consistent with expectations and our forecasts had not materially changed; therefore, we concluded that our goodwill was not impaired
and no further testing is performed. The second step is performed if the carrying value exceeds the fair value. The implied fair valueat each subsequent interim period of
the reporting unit’s goodwill must be determined2020 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 2018, 2017 or 2016, based on our annual impairment analysis.Debt Discount and Deferred Loan Costs
Long-term debt relating to the Prior Credit Agreement (described below in Note 4) is presented in the consolidated balance sheet as of December 31, 2017 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
2020. Additionally, no goodwill impairment losses were deemed necessary in 2019. amortization of the discount totaled $0.1 million for 2018 and $0.8 million for 2017 and 2016, 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 the term loan portion of our Prior Credit Agreement. The amortization of the deferred loan costs totaled $0.1 million for 2018 and $0.9 million for 2017 and 2016, respectively.
In conjunction with our IPO and the repayment of the term loan portion of our Prior Credit Agreement, we recorded a loss on early debt extinguishment relating to the unamortized balance of debt discount and deferred loan costs of $2.1 million and $2.2 million, respectively, and is included under other income (expense), net, in the consolidated statement of income for the year ended December 31, 2018.
In connection with our ABL Credit Facility (described below in Note 4) we capitalized $0.8 million in deferred loan costs during the year ended December 31, 2018. The amortization of the deferred loan costs associated with our ABL Credit Facility for the year ended December 31, 2018 was less than $0.1 million.
As of December 31, 2018, the unamortized balance of deferred loan costs was $0.8 million and included in other noncurrent assets in the consolidated balance sheet. As of December 31, 2017, the unamortized balance of debt discount and deferred loan costs associated with our Prior Credit Agreement was $4.5 million.
Accrued Expenses and Other Current Liabilities
Accrued expenses and other current liabilities as of December 31,
20182021 and
20172020 are as follows:
| | | | | | | | | | | | | | | | |
| | December 31, | | December 31, |
| | 2018 | | 2017 | | 2021 | | 2020 |
| Accrued international freight and tariffs | | Accrued international freight and tariffs | $ | 14,794 | | | $ | 2,087 | |
Payroll, incentive compensation, payroll taxes and benefits | | $ | 7,842 | | $ | 4,033 | Payroll, incentive compensation, payroll taxes and benefits | 7,030 | | | 4,210 | |
| Deferred revenue | | Deferred revenue | 1,764 | | | 1,068 | |
| Taxes other than income | | Taxes other than income | 1,641 | | | 450 | |
Income based tax payable | | | 2,061 | | | 526 | Income based tax payable | 1,182 | | | 2,336 | |
Accrued international freight | | | 1,418 | | | 851 | |
Taxes other than income | | | 1,414 | | | 1,375 | |
Deferred revenue | | | 1,110 | | | 765 | |
| Accrued professional fees and other | | Accrued professional fees and other | 1,078 | | | 687 | |
| Accrued dividends | | Accrued dividends | 346 | | | 271 | |
| Accrued workers’ compensation insurance | | Accrued workers’ compensation insurance | 269 | | | — | |
Product warranties | | | 293 | | | 343 | Product warranties | 136 | | | 283 | |
Accrued insurance | | | — | | | 1,059 | |
Accrued interest | | | 24 | | | 161 | |
Other | | | 1,488 | | | 1,446 | |
Total | | $ | 15,650 | | $ | 10,559 | |
| Total accrued expenses and other current liabilities | | Total accrued expenses and other current liabilities | $ | 28,240 | | | $ | 11,392 | |
Deferred Revenue
Deferred revenue represents cash received
Self-Insurance Accrued Expenses
We maintain a partially self-insured health benefit plan which provides medical and prescription drug benefits to certain of our employees electing coverage under the plan. Our exposure is limited by individual and aggregate stop loss limits through third-party insurance carriers. Our self-insurance expense is accrued based upon the aggregate of the expected liability for reported claims and the estimated liability for claims incurred but not reported, based on historical claims experience provided by our third-party insurance advisors, adjusted as necessary based upon management’s reasoned judgment. Actual employee medical claims expense may differ from
customersestimated loss provisions based on historical experience. The liabilities for
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 $1.1 million and $1.3 million as of December 31, 2021 and 2020, respectively.
We generally warrant our manufactured products
for 12 months from the date placed in service.
The estimated liability for product warranties is based on historical and current claims experience.Fair Value Measures
FairMeasurements
Authoritative guidance on 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 provides a liability (an exit price) in an orderly transaction between market participants at the reporting date. Theframework for measuring fair value framework requiresand establishes a fair value hierarchy that prioritizes the categorization of assets and liabilities into three levels based upon the assumptions (inputs)inputs used to pricemeasure fair value, giving the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities with(Level 1 inputs) and the exception of certain assets and liabilities measured using the net asset value practical expedient, which are not requiredlowest priority 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 under our Prior Credit Agreement approximated the face value of the debt of $248.5 million as of December 31, 2017.
Other fair value disclosures—(Level 3 inputs). The carrying amountsvalue of cash and cash equivalents, short-term investments, receivables, accounts payable as well as amounts included in other current assets and other current liabilities that meetaccrued expenses approximates fair value based on the definitionshort-term nature of financial instruments, approximatethese accounts. The fair value.
Emerging Growth Company status
We are an “emerging growth company” as defined in the Jumpstart Our Business Startups Act of 2012. We will remain an emerging growth company until the earlier of (1) the last day of our fiscal year (a) following the fifth anniversary of the completion of our IPO, (b) in which our total annual gross revenue is at least $1.07 billion, or (c) in which we are deemed to be a large accelerated filer, which means the market value of our Class A common stock thatforeign currency forwards is held by non-affiliates exceeds $700.0 milliondetermined using market observable inputs including forward and spot prices (Level 2 inputs). We had no long-term debt outstanding as of December 31, 2021 or 2020.
Employee Benefit Plans
Our employees within the
last businessUnited States are eligible to participate in a 401(k) plan sponsored by us. These employees are eligible to participate on the first day of
the month following 30 days of employment and if they are at least eighteen years of age. Eligible employees may contribute a percentage of their compensation subject to a maximum imposed by the Internal Revenue Code. Similar benefit plans exist for employees of our
most recently completed second fiscal quarter (following twelve months from our IPO), and (2) the date on which we have issued more than $1.0 billion in non-convertible debt securities during the prior three-year period. An emerging growth company may take advantage of specified reduced reporting and other burdens that are otherwise generally applicable to public companies.foreign subsidiaries. We
have irrevocably opted outmatch 100% of the
extended transition periodfirst 3% of gross pay contributed by each employee and
as a result, we will adopt new or revised accounting standards on the relevant dates on which adoption of such standards is required for other public companies. Recent Accounting Pronouncements
Standards Adopted
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 application50% of the predominance principle. ASU 2016-15 is effective for public business entities for fiscal years beginning after December 15, 2017,next 4% of gross pay contributed by each employee and interim periods within those fiscal years. Early adoption is permitted, including adoption in an interim period. We adopted this ASU on January 1, 2018. The adoption of this pronouncement did not have a material impact onwe may also make additional non‑elective employer contributions at our consolidated financial statements.
In May 2014,discretion under the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606), which supersedesplan. Due to the current revenue recognition guidance. The ASU is based ondifficult economic environment at that time, the principle that revenue is recognized to depict the transfer of goods and services to customers401(k) match was temporarily suspended in the amount that reflects the consideration to which the entity expects to be entitledU.S. in exchange for those goods or services. The ASU also requires additional disclosure about the nature, amount, timing,June 2020 and uncertainty of revenuereinstated in August 2021. During 2021, 2020 and cash flows arising from customer contracts, including significant judgments2019, employer matching contributions totaled $1.2 million, $1.6 million and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract. The new standard is effective for public companies for the fiscal years beginning after December 31, 2017 using one of two retrospective application methods. We adopted this ASU on January 1, 2018 using the modified retrospective method. The adoption of this pronouncement did not have a material impact on the timing or amounts of revenue recognized in our unaudited condensed consolidated financial statements and therefore did not have a material impact on our financial position, results of operations, equity or cash flows as of the adoption date or for$3.1 million, respectively. During the year ended December 31, 2018. Furthermore, we expect the impact of the adoption of the new standard to be immaterial to our revenue and gross profit on an ongoing basis. We did not recognize any cumulative-effect adjustment to retained earnings upon adoption as the impact2019, a $0.1 million non-elective contribution was immaterial. Also, the comparative information has not been restated and continues to be reportedmade under the accounting standards401(k) plan, whereas no such contributions were made in effect for those periods.
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 assets2021 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 adopted this ASU on January 1, 2018. The adoption of this pronouncement did not have a material impact on our consolidated financial statements.
Standards Not Yet Adopted
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842), which requires assets and liabilities that arise from all leases to be recognized on the balance sheet for lessees and expanded financial statement disclosures
2020.for both lessees and lessors. Currently, only capital leases are recorded on the consolidated balance sheets. This update will require lessees to recognize a lease liability equal to the present value of its lease payments and a right-of-use asset representing its right to use the underlying asset for the lease term for all leases longer than 12 months. For leases with a term of 12 months or less, a lessee is permitted to make an accounting policy election by class of underlying asset not to recognize lease assets and liabilities and instead recognize lease expense for such leases generally on a straight-line basis over the lease term. Leases with a term of longer than 12 months will be classified as finance or operating, with classification affecting the pattern and classification of expense recognition in the income statement. We adopted the new standard effective January 1, 2019 and elected the modified retrospective transition method. As such, the comparative financial information will not be restated and will continue to be reported under the lease standard in effect during those periods. We also intend to elect other practical expedients provided by the new standard, including the package of practical expedients, the short-term lease recognition practical expedient in which leases with a term of 12 months or less will not be recognized on the balance sheet, and the practical expedient to not separate lease and non-lease components for the majority of our leases. The adoption of this standard will result in approximately $26 million of additional assets and liabilities on our consolidated balance sheet representing the recognition of operating lease right-of-use assets and operating lease liabilities.
In January 2017, the FASB issued ASU 2017-04, Intangibles - Goodwill and Other, 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 will have a material impact on our consolidated financial statements.
In February 2018, the FASB issued ASU 2018-02, Income Statement - Reporting Comprehensive Income (Topic 220) Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income. The amendments in this update allow a reclassification from accumulated other comprehensive income (loss) to retained earnings for stranded tax effects resulting from the Tax Cuts and Jobs Act. However, because the amendments only relate to the reclassification of the income tax effects of the Tax Cuts and Jobs Act, the underlying guidance that requires that the effect of a change in tax laws or rates be included in income from continuing operations is not affected. The amendments in this update also require certain disclosures about stranded tax effects. The amendments in this update are effective for fiscal years beginning after December 15, 2018 and interim periods within those fiscal years. Early adoption is permitted. We are currently evaluating the impact this pronouncement will have on our consolidated financial statements.
3. Inventories
Inventories consist of the following:
| | | | | | | | | | | | | | | | |
| | December 31, | | December 31, |
| | 2018 | | 2017 | | 2021 | | 2020 |
Raw materials | | $ | 1,925 | | $ | 1,532 | Raw materials | $ | 1,870 | | | $ | 2,003 | |
Work-in-progress | | | 3,582 | | | 3,590 | Work-in-progress | 4,288 | | | 3,598 | |
Finished goods | | | 94,330 | | | 59,328 | Finished goods | 113,659 | | | 81,879 | |
| | $ | 99,837 | | $ | 64,450 | |
| Total inventories | | Total inventories | $ | 119,817 | | | $ | 87,480 | |
4. Long‑Term DebtLong‑term
We had no debt
consistsoutstanding as of
the following:December 31, 2021 and 2020. | | | | | | | |
| | December 31, | |
| | 2018 | | 2017 | |
Term loan | | $ | — | | $ | 248,529 | |
Less: | | | | | | | |
Current portion | | | — | | | (2,568) | |
Unamortized debt discount and deferred loan costs | | | — | | | (4,524) | |
Long-term debt, net | | $ | — | | $ | 241,437 | |
Credit Agreement
On August 21, 2018, Cactus LLC entered into a five-year senior secured asset-based revolving credit facility with a syndicate of lenders and JPMorgan Chase Bank, N.A., as administrative agent for such lenders and as an issuing bank and swingline lender (the “ABL Credit Facility”). The ABL Credit Facility provides for $75.0 million in 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.
The ABL Credit Facility
replaced Cactus LLC’s prior credit agreement, dated aswas amended in September 2020 to incorporate certain changes related to revised and new definitions associated with alternative interest rates to LIBOR and satisfaction of
July 31, 2014, with Credit Suisse AG, as administrative agent, collateral agentpayment conditions for restricted payments, investments, permitted acquisitions and
issuing bank, andasset dispositions. The amendment did not change covenants, 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,Alternate Base Rate, applicable margin rates, commitment fees, 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,maturity date or borrowing availability under 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. The Prior Credit Agreement was scheduled to mature on July 31, 2019.Cactus LLC’s obligations under the ABL Credit Facility are secured by liens on Cactus LLC’s assets, other than equipment, intellectual property and real estate. Any subsidiary of Cactus LLC that is considered material pursuant to the ABL Credit Facility will be required to (i) guarantee on an unconditional basis all of Cactus LLC’s obligations under the ABL Credit Facility and (ii) grant a lien to secure such guarantee on its assets, other than equipment, intellectual property and real estate.
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 issued 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 average quarterly availability under the ABL Credit Facility for the immediately preceding fiscal quarter. The unused portion of the ABL Credit Facility is subject to a commitment fee that varies from 0.250% to 0.375% per annum, according to the average quarterly availability under the ABL Credit Facility for the immediately preceding fiscal quarter.
The ABL Credit Facility contains various covenants and restrictive provisions that limit Cactus LLC’s and each of its subsidiaries’ ability to, among other
things:•things, incur additional indebtedness and create liens;
•liens, make investments or loans;
• enter into asset sales;
•loans, merge or consolidate with other companies, sell assets, make certain restricted payments and distributions;distributions, and
• engage in transactions with affiliates.
The ABL Credit Facility also requires Cactus LLC to maintain a fixed charge coverage ratio of 1.0 to 1.0 based on the ratio of EBITDA (as defined therein) minus Unfinanced Capital Expenditures (as defined therein) to Fixed Charges (as defined therein) during certain periods, including when availability under the ABL Credit Facility is under certain levels. If Cactus LLC fails to perform its obligations under the ABL Credit Facility, (i) the commitments under the ABL Credit Facility could be terminated, (ii) any outstanding borrowings under the ABL Credit Facility may be declared immediately due and payable and (iii) the lenders may commence foreclosure or other actions against the collateral.
As of December 31, 2018, we had no borrowings outstanding under the ABL Credit Facility. As of December 31, 2017, we had $248.5 million of borrowings outstanding under the term loan tranche of the Prior Credit Agreement, no borrowings outstanding under the Prior Revolving Credit Facility and no outstanding letters of credit.
At December 31,
2018,2021 and 2020, although there were no borrowings outstanding, the applicable
marginmargins on our Eurodollar borrowings
was 1.5%were 1.50% and 1.75%, respectively, plus an adjusted base rate of one or three month LIBOR.
At December 31, 2017, the weighted average interest rate for the borrowings under the Prior Credit Agreement was 7.3%.As of December 31, 2018, weWe were in compliance with all covenants under the ABL Credit Facility.
(Gain) Loss on Debt Extinguishment
During the first quarterFacility as of 2018, 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 consists 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 (expense), net, in the consolidated statement of income for the year ended December 31, 2018.
For the year ended December 31, 2016, in accordance with the provisions of our Prior Credit Agreement, we redeemed $7.5 million of the term loan at a price of 65% of the principal amount. We paid $4.9 million for such
2021.redemptions, including fees, and recorded a gain on debt extinguishment of $2.3 million 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 of the unamortized debt discount and deferred loan costs. The gain on debt extinguishment is included under other income (expense), net, in the consolidated statement of income.
Interest (Income) Expense, net
Interest
(income) expense, net, including
debt discount and deferred
loan costsfinancing cost amortization,
iswas comprised of the following:
| | | | | | | | | |
| | Year Ended December 31, |
| | 2018 | | 2017 | | 2016 |
Interest under bank facilities | | $ | 2,669 | | $ | 18,627 | | $ | 18,414 |
Debt discount and deferred loan costs amortization | | | 275 | | | 1,752 | | | 1,777 |
Capital lease interest | | | 734 | | | 311 | | | 24 |
Other | | | 45 | | | 82 | | | 20 |
Interest (income) | | | (128) | | | (5) | | | (2) |
Interest expense, net | | $ | 3,595 | | $ | 20,767 | | $ | 20,233 |
| | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2021 | | 2020 | | 2019 |
| Interest under bank facilities | $ | 313 | | | $ | 317 | | | $ | 315 | |
| Deferred financing cost amortization | 168 | | | 168 | | | 168 | |
| Finance lease interest | 520 | | | 639 | | | 877 | |
| Other | 126 | | | 3 | | | 164 | |
| Interest income | (353) | | | (1,828) | | | (2,403) | |
| Interest (income) expense, net | $ | 774 | | | $ | (701) | | | $ | (879) | |
5.Income TaxesComponents of income (loss) before income taxes—
Domestic and foreign components of income
(loss) before income taxes were as follows:
| | | | | | | | | |
| | Year Ended December 31, |
| | 2018 | | 2017 | | 2016 |
Pre-IPO Domestic | | $ | 13,370 | | $ | 65,023 | | $ | (8,558) |
Post-IPO Domestic | | | 146,620 | | | — | | | — |
Pre-IPO Foreign | | | 512 | | | 3,073 | | | 1,191 |
Post-IPO Foreign | | | 9,299 | | | — | | | — |
Income before income taxes | | $ | 169,801 | | $ | 68,096 | | $ | (7,367) |
| | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2021 | | 2020 | | 2019 |
| Domestic | $ | 64,139 | | | $ | 61,028 | | | $ | 173,039 | |
| Foreign | 11,006 | | | 9,157 | | | 15,284 | |
| Income before income taxes | $ | 75,145 | | | $ | 70,185 | | | $ | 188,323 | |
Provision for income tax—
The provision for income taxes consisted of:
| | | | | | | | | |
| | Year Ended December 31, |
| | 2018 | | 2017 | | 2016 |
Current: | | | | | | | | | |
Federal | | $ | — | | $ | — | | $ | — |
State | | | 1,172 | | | 594 | | | 229 |
Foreign | | | 3,147 | | | 735 | | | 448 |
Total current income taxes | | | 4,319 | | | 1,329 | | | 677 |
Deferred: | | | | | | | | | |
Federal | | | 12,589 | | | — | | | — |
State | | | 1,992 | | | — | | | — |
Foreign | | | 620 | | | 220 | | | 132 |
Total deferred income taxes | | | 15,201 | | | 220 | | | 132 |
Total provision for income taxes | | $ | 19,520 | | $ | 1,549 | | $ | 809 |
| | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2021 | | 2020 | | 2019 |
| Current: | | | | | |
| Federal | $ | — | | | $ | (786) | | | $ | 1,088 | |
| State | 348 | | | 597 | | | 1,408 | |
| Foreign | 2,497 | | | 4,211 | | | 4,121 | |
| Total current income taxes | 2,845 | | | 4,022 | | | 6,617 | |
| Deferred: | | | | | |
| Federal | 2,658 | | | 8,040 | | | 14,853 | |
| State | 1,516 | | | (253) | | | 10,681 | |
| Foreign | 656 | | | (839) | | | (131) | |
| Total deferred income taxes | 4,830 | | | 6,948 | | | 25,403 | |
| Total provision for income taxes | $ | 7,675 | | | $ | 10,970 | | | $ | 32,020 | |
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, |
| | 2018 | | 2017 | | 2016 | | 2021 | | 2020 | | 2019 |
Income taxes at 21% (35% for 2017 and 2016) statutory tax rate | | $ | 35,658 | | $ | 23,834 | | $ | (2,578) | |
| Income taxes at 21% statutory tax rate | | Income taxes at 21% statutory tax rate | $ | 15,780 | | | $ | 14,739 | | | $ | 39,548 | |
Net difference resulting from: | | | | | | | | | | Net difference resulting from: | |
Profit of Cactus LLC pre-IPO not subject to U.S. federal tax | | | (2,808) | | | (22,758) | | | 2,990 | |
Profit of non-controlling interest not subject to U.S. federal tax | | | (18,570) | | | — | | | — | Profit of non-controlling interest not subject to U.S. federal tax | (3,754) | | | (5,508) | | | (15,477) | |
Foreign earnings subject to different tax rates | | | 828 | | | (302) | | | (122) | |
State income taxes | | | 2,746 | | | 594 | | | 229 | |
| Foreign income taxes (net of foreign tax credit) | | Foreign income taxes (net of foreign tax credit) | 2,423 | | | 269 | | | 364 | |
| State income taxes (excluding rate change) | | State income taxes (excluding rate change) | 1,348 | | | 883 | | | 4,887 | |
| Impact of change in forecasted state income tax rate | | Impact of change in forecasted state income tax rate | 1,347 | | | (1,216) | | | 5,774 | |
Foreign withholding taxes | | | 1,056 | | | 220 | | | 132 | Foreign withholding taxes | 730 | | | 462 | | | 988 | |
Change in valuation allowance | | | 733 | | | (39) | | | 158 | Change in valuation allowance | (8,977) | | | 2,840 | | | (3,888) | |
| Adjustments of prior year taxes | | Adjustments of prior year taxes | 79 | | | (1,663) | | | 1,336 | |
| Stock compensation | | Stock compensation | (1,096) | | | (34) | | | (762) | |
Other | | | (123) | | | — | | | — | Other | (205) | | | 198 | | | (750) | |
Total provision for income taxes | | $ | 19,520 | | $ | 1,549 | | $ | 809 | Total provision for income taxes | $ | 7,675 | | | $ | 10,970 | | | $ | 32,020 | |
Our effective tax rate was
11.5%10.2%, 15.6% and
2.3%17.0% for the years ended December 31,
20182021, 2020 and
2017,2019, respectively.
For the year ended December 31, 2016, we recorded income tax expense of $0.8 million on a loss before income taxes of $7.4 million. For the year ended December 31, 2018, the primary reason for the change to ourOur effective tax rate
relatesis typically lower than the federal statutory rate of 21% due to
the fact that Cactus Inc.
incurring U.S.is only subject to federal
and state income tax on its share of
income from Cactus LLC. Income allocated to the
income of Cactus LLC during the periods subsequent to our IPO. Prior to our IPO, our accounting predecessor was a limited liability company treated as a partnership for U.S. federal income tax purposes, and thereforenon-controlling interest is not subject to U.S. federal
income taxes. Our operations are subject toor state
taxes within the United States and our operations in China and Australia are subject to local country income taxes. Deferred tax components—tax.
The components of deferred tax assets and liabilities are as follows:
| | | | | | |
| | December 31, |
| | 2018 | | 2017 |
Investment in Cactus LLC | | $ | 181,390 | | $ | — |
Net operating loss carryforwards | | | 619 | | | 489 |
Imputed interest | | | 7,445 | | | — |
Tax credits | | | 1,988 | | | — |
Other | | | 144 | | | — |
Deferred tax assets | | | 191,586 | | | 489 |
Valuation allowance | | | (32,533) | | | (489) |
Deferred tax asset, net | | $ | 159,053 | | $ | — |
| | | | | | |
Foreign withholding taxes | | $ | 1,036 | | $ | 416 |
Deferred tax liability, net | | $ | 1,036 | | $ | 416 |
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 have foreign net operating losses of $1.4 million, $1.6 million and $1.9 million for 2018, 2017 and 2016, 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
| | | | | | | | | | | |
| | December 31, |
| | 2021 | | 2020 |
| Investment in Cactus LLC | $ | 292,956 | | | $ | 224,485 | |
| Imputed interest | 12,297 | | | 10,333 | |
| Tax credits | 3,713 | | | 5,719 | |
| Net operating loss carryforwards | 11,198 | | | 2,333 | |
| Other | 152 | | | 546 | |
| Deferred tax assets | 320,316 | | | 243,416 | |
| Valuation allowance | (17,242) | | | (26,813) | |
| Deferred tax asset, net | 303,074 | | | 216,603 | |
| | | |
| Foreign withholding taxes | 854 | | | 562 | |
| Other | 318 | | | 224 | |
| Deferred tax liability, net | $ | 1,172 | | | $ | 786 | |
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 such, we have recorded a valuation allowance of $31.2 million against this portion of the deferred tax asset. We have also recorded a valuation allowance of $0.7 million against our U.S. foreign tax credits. The foreign net operating losses have an indefinite carryforward period. We have recorded a full valuation allowance of $0.6 million against the deferred tax assets associated with the foreign net operating loss carryforwards and other items due to the uncertainty of realization.
Liabilities Related to the Tax Receivable Agreement—As of December 31, 2018,2021, our liability related to the TRA was $147.6$281.6 million, representing 85% of the calculated net cash savings in the United States federal, state and local orand 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. The projection of future taxable income involves significant judgment. Actual taxable income may differ from our estimates, which could significantly impact our liability under the TRA. We have determined it is more-likely-than-not that we will be able to utilize all of our deferred tax assetsbasis subject to the TRA; therefore, we have recorded a liability related to the TRA for the tax savings we may realize from certain increases in tax basis and certain tax benefits attributable to imputed interest as a result of our acquisition (or deemed acquisition for United States federal income tax purposes) of CW Units. If we determine the utilization of these deferredthis tax assetsbasis 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.
Uncertain Tax Benefits—operations in conjunction with an increase to the valuation allowance and an offsetting adjustment to tax expense.
We record a deferred tax asset for the differences between our tax and book basis in the investment in Cactus LLC and imputed interest on the TRA. Based upon our cumulative earnings history and forecasted future sources of taxable income, we believe that we will be able to realize the majority of our U.S. deferred tax assets in the future. We do not expect to realize the portion of our deferred tax asset for our investment in Cactus LLC that may only be realizable through the sale or liquidation of the investment and our ability to generate sufficient capital gains. For the year ended December 31, 2021, as a result of redemptions of CW Units, we released $9.0 million of our valuation allowance and recorded a tax benefit of $9.0 million related to the realizable portion of the deferred tax asset. As of December 31, 20182021, we have a valuation allowance of $13.5 million against the $293.0 million deferred tax asset. During the year ended December 31, 2020, as a result of redemptions of CW Units, we released $0.1 million of our valuation allowance and 2017,recorded a tax benefit of $0.1 million related to the realizable portion of the deferred tax asset. As of December 31, 2020, we had a valuation allowance of $22.5 million against the $224.5 million deferred tax asset. We also record deferred tax assets for imputed interest, certain tax credits and net operating loss carryforwards. As of December 31, 2021, we have a valuation allowance of $3.7 million against these deferred tax assets, primarily associated with our portion of Cactus LLC’s accrued foreign taxes and state tax credits, due to uncertainty of realization.
As of December 31, 2021, we have deferred tax assets on U.S. federal and state net operating loss (“NOL”) carryforwards of approximately $10.4 million and $0.8 million, respectively, which can be used to offset U.S. federal and state taxes payable in future years. The U.S. federal NOL carryforwards have no expiration date whereas the U.S. state NOL carryforwards generally will expire in periods beginning in 2040.
As of December 31, 2021 and 2020, we had no uncertain tax
benefits. If we were to record any uncertain tax positions, we have elected to recognize interest and penalties related to unrecognized tax benefits in income tax expense, notwithstanding the fact, that as of December 31, 2018 and 2017 we have not accrued any penalties and interest.Taxing Authority Examinations—The Texas Franchise state tax return for the year ended December 31, 2015 is 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. 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”) that provides for the grant of various stock-based compensation awards at the discretion of our compensation committee of our board of directors. Employees and non-employee directors are eligible
to receive awards under the LTIP. Stock-based
Compensationawards granted pursuant to the LTIP are expected to be settled in shares of our Class A common stock if they vest. Our stock-based awards do not have voting rights prior to vesting. Dividends declared are accumulated and paid upon vesting. We measureaccount for forfeitures when they occur and recognize the costimpact to stock-based compensation expense at that time. We recorded $8.6 million of equity-basedstock-based compensation expense during each of the years ended December 31, 2021 and 2020 and $7.0 million during the year ended December 31, 2019. Stock-based compensation expense is primarily recorded in selling, general and administrative expenses. We recognized $1.1 million, $34 thousand and $0.8 million in tax benefits for tax deductions from the vesting of stock-based awards benefits during the years ended December 31, 2021, 2020 and 2019, respectively. As of December 31, 2021, 1.3 million stock awards were available for grant.
Restricted Stock Units
Restricted stock units (“RSUs”) granted to our key employees generally vest over a three-year period (vesting ratably in equal tranches over a three-year period); however, RSUs granted to our non-employee directors generally vest on the first anniversary of the grant date. We recognize compensation expense over the requisite service period using straight-line amortization.
The following table summarizes our RSU activity during the year ended December 31, 2021 (RSUs in thousands):
| | | | | | | | | | | |
| | No. of RSUs | | Weighted Average Grant Date Fair Value ($) |
| Nonvested as of December 31, 2020 | 757 | | | $ | 19.97 | |
| Granted | 168 | | | 32.92 | |
| Vested | (447) | | | 20.20 | |
| Forfeited | (2) | | | 26.83 | |
| Nonvested as of December 31, 2021 | 476 | | | $ | 24.29 | |
There was approximately $6.6 million of unrecognized compensation expense relating to the unvested RSUs as of December 31, 2021. The unrecognized compensation expense will be recognized over the weighted average remaining vesting period of 1.8 years.
Performance Stock Units
Performance stock units (“PSUs”) are granted to our executive officers. Under these awards, the number of shares vested and earned is currently determined at the end of a three-year performance period based on our Return on Capital Employed (“ROCE”). The number of shares earned may range from 0% to 200% of the target units set forth in the applicable award agreement and is determined at the end of the performance period conditioned upon continued service and on our achievement of certain predefined targets as defined in the underlying performance stock unit agreements. PSUs cliff vest upon conclusion of the three-year performance period. As the ROCE target represents a performance condition, we recognize compensation expense for the performance share units on a straight-line basis over three years based on the probable outcome of the ROCE performance.
In 2020, we granted PSU awards that contained a two-year performance period. Our ROCE performance did not meet the minimum requirements for vesting; therefore, those awards were forfeited as of December 31, 2021. As of December 31, 2020, we had not recognized compensation expense related to any of the 2020 awards as it was not probable that the minimum performance level would be achieved for each award as determined by the actual and forecasted ROCE performance over the applicable performance periods. In 2021, we recorded a cumulative catch-up of compensation expense for the three-year awards as it was probable that the minimum ROCE performance level will be achieved.
The following table summarizes our PSU activity during the year ended December 31, 2021 (PSUs in thousands at their target values which assumes achievement of 100% of target):
| | | | | | | | | | | |
| No. of PSUs | | Weighted Average Grant Date Fair Value ($) |
| Nonvested as of December 31, 2020 | 152 | | | $ | 13.66 | |
| Granted | 74 | | | 32.82 | |
| Vested | — | | | — | |
| Forfeited | (28) | | | 13.66 | |
| Nonvested as of December 31, 2021 | 198 | | | $ | 20.80 | |
As of December 31, 2021, there was approximately $2.2 million of unrecognized compensation expense relating to the unvested PSUs (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. All grant date fair value is expensed immediately for awards that are fully vested as of the
grant date.We grant awards to directors, officers and employees under our long-term incentive plan (the “LTIP”) at the discretion100% of the board of directors or compensation committee. During the year ended December 31, 2018, 2017 and 2016, we recorded $4.7 million, none and $0.4 million of stock-based compensation expense, respectively, primarily included in selling, general and administrative expenses. As of December 31, 2018, there was $10.8 million of unrecognized compensation cost related to these unvested restricted stock unit awards,target) which is expected to be recognized over a weighted average period of 2.51.7 years.
A summary of restricted stock unit awards for the year ended December 31, 2018 is as follows:
| | | | | | |
| | Year Ended December 31, 2018 |
| | No. of Stock
Units | | Weighted Average Fair Value |
| | (in thousands) | | | |
Restricted stock units, beginning of year | | | — | | $ | — |
Granted | | | 782 | | $ | 19.84 |
Restricted stock units, end of year | | | 782 | | $ | 19.84 |
Subsequent to December 31, 2018, we issued 0.2 million restricted stock units with a grant date fair value of $37.37 per unit.
7. Revenue
Revenue Recognition
The majority of our revenues are derived from short-term contracts. Product sales generally do not include right of return or other significant post-delivery obligations. Revenues are recognized when we satisfy a performance obligation by transferring control of the promised goods or 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. We also assess our customer’s ability and intention to pay, which is based on a variety of factors including our customer’s historical payment experience and financial condition. Payment terms and conditions vary, although terms generally include a requirement of payment within 30 days. Revenues are recognized net of any taxes collected from customers, which are subsequently remitted to governmental authorities. We elected to treat shipping and handling associated with outbound freight as a fulfillment cost instead of as a separate performance obligation. We recognize the cost for shipping and handling when incurred as an expense in cost of sales.
Performance Obligations
A performance obligation is a promise in a contract to transfer a distinct good or service to the customer under Topic 606. A contract’s transaction price is allocated to each distinct performance obligation and recognized as revenue when, or as, the performance obligation is satisfied. 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. In accordance with Topic 606, 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.
All of our contracts are less than one year in duration. We do not disclose the value of unsatisfied performance obligations for (i) contracts with an original expected length of one year or less and (ii) contracts for which we recognize revenue at the amount to which we have the right to invoice for services performed.
Disaggregation of 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. Approximately 99%We have predominately domestic operations, with a small amount of our revenues are fromsales in Australia and the United States.Kingdom of Saudi Arabia. For the year ended December 31, 2018,2021, we derived 53%64% of our total revenues from the sale of our products, 25%14% of our total revenues from rental and 22% of our total revenues from field service and other. This compares to 55%59% of
our total revenues from the sale of our products, 23%19% of our total revenues from rental and 22% of our total revenues from field service and other for the year ended December 31, 2017.
Contract Balances
We perform our obligations under contracts with our customers by transferring services and products in exchange for consideration. The timing2020. In 2019, we derived 57% of our performance often differstotal revenues from the timingsale of invoicingour products, 22% from rental and 21% from field service and other. The following table presents our customer’s payment, which results in the recording of unbilled revenue and deferred revenue. Amounts in the consolidated balance sheet as ofrevenues disaggregated by category:
| | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2021 | | 2020 | | 2019 |
| Product revenue | $ | 280,907 | | | $ | 206,801 | | | $ | 357,087 | |
| Rental revenue | 61,629 | | | 66,169 | | | 141,816 | |
| Field service and other revenue | 96,053 | | | 75,596 | | | 129,511 | |
| Total revenue | $ | 438,589 | | | $ | 348,566 | | | $ | 628,414 | |
At December 31, 2018 representing unbilled revenue within accounts receivable, net, were $26.8 million and amounts representing2021, we had a deferred revenue withinbalance of $1.8 million compared to the December 31, 2020 balance of $1.1 million included in accrued expenses and other current liabilities were $1.1 million. This comparesin the consolidated balance sheets. Deferred revenue represents our obligation to transfer products or perform services for a customer for which we have received cash or billed in advance. The revenue that has been deferred will be recognized upon product delivery or as services are performed. As of December 31, 2021, we did not have any contracts with an unbilledoriginal length of greater than a year from which revenue is expected to be recognized in the future related to performance obligations that are unsatisfied.
8.Leases
We lease real estate, apartments, forklifts, vehicles and other equipment under non-cancellable agreements. Certain of our leases include one or more options to renew, with renewal terms that can extend the lease term from one to 10 years or greater. The exercise of lease renewal options is typically at our discretion. The measurement of the lease term includes options to extend or renew the lease when it is reasonably certain that we will exercise those options. Lease assets and liabilities are recognized at the commencement date based on the present value of minimum lease payments over the lease term. To determine the present value of future minimum lease payments, we use the implicit rate when readily determinable; however, many of our leases do not provide an implicit rate. Therefore, to determine the present value of minimum lease payments, we use our incremental borrowing rate based on the information available at the commencement date of the lease. Our finance lease agreements typically include an interest rate that is used to determine the present value of future lease payments. Short-term operating leases with an initial term of twelve months or less are not recorded on our balance sheet. Minimum lease payments are expensed on a straight-line basis over the lease term, including reasonably certain renewal options.
The following are the components of operating and a deferred revenue balance of $0.8 millionfinance lease costs:
| | | | | | | | | | | |
| Year Ended December 31, |
| | 2021 | | 2020 |
| Finance lease cost: | | | |
| Amortization of right-of-use assets | $ | 4,906 | | | $ | 5,739 | |
| Interest expense | 520 | | | 639 | |
| Operating lease cost | 6,638 | | | 7,747 | |
| Short-term lease cost | 1,894 | | | 329 | |
| Sublease income | (265) | | | (475) | |
| Total lease cost | $ | 13,693 | | | $ | 13,979 | |
The following is supplemental cash flow information for our operating and finance leases:
| | | | | | | | | | | |
| Year Ended December 31, |
| | 2021 | | 2020 |
| Cash paid for amounts included in the measurement of lease liabilities: | | | |
| Operating cash flows from finance leases | $ | 520 | | | $ | 639 | |
| Operating cash flows from operating leases | 5,398 | | | 6,875 | |
| Financing cash flows from finance leases | 5,205 | | | 5,317 | |
| Total | $ | 11,123 | | | $ | 12,831 | |
| | | | |
| Right-of-use assets obtained in exchange for new lease obligations: | | | |
| Operating leases | $ | 5,342 | | | $ | 1,329 | |
| Finance leases | 9,941 | | | 2,973 | |
| Total | $ | 15,283 | | | $ | 4,302 | |
The following is the aggregate future lease payments for operating and finance leases as of December 31,
2017.Contract Costs
We do not incur any material costs2021:
| | | | | | | | | | | |
| | Operating | | Finance |
| 2022 | $ | 5,506 | | | $ | 5,269 | |
| 2023 | 4,721 | | | 3,848 | |
| 2024 | 3,932 | | | 2,320 | |
| 2025 | 3,069 | | | 30 | |
| 2026 | 2,134 | | | — | |
| Thereafter | 5,269 | | | — | |
| Total undiscounted lease payments | 24,631 | | | 11,467 | |
| Less: effects of discounting | (2,101) | | | (789) | |
| Present value of lease payments | $ | 22,530 | | | $ | 10,678 | |
The following represents the average lease terms and discount rates for our IPO, we were party to a management services agreement with two Cactus LLC members, whereby Cactus 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. In conjunction with our IPO, the management services agreement terminated pursuant to its terms. Management fee expense totaled $0.1 million for 2018operating and $0.3 million for each of 2017 and 2016, respectively. There were no outstanding balances duefinance lease portfolio as of December 31, 20182021:
| | | | | | | | | | | | | | | | | |
| Year ended December 31, |
| | 2021 | | 2020 |
| Weighted average remaining lease term: | | | | | |
| Finance leases | 2.1 | years | | 1.6 | years |
| Operating leases | 5.8 | years | | 6.6 | years |
| | | | | |
| Weighted average discount rate | | | | | |
| Finance leases | 8.58 | | % | | 10.78 | | % |
| Operating leases | 3.01 | | % | | 3.52 | | % |
As a lessor, we rent a fleet of frac valves and 2017ancillary equipment for short-term rental periods, typically one to two months. Our lessor portfolio consists mainly of operating leases for equipment utilized during the drilling, completion and production phases of our customers’ wells. At this time, most lessor agreements contain less than three-month terms with no renewal options that are reasonably certain to exercise, or early termination options based on established terms specific to the individual agreement. See Note 7 for disaggregation of revenue.
9.Tax Receivable Agreement
In connection with our IPO, we entered into the TRA with certain direct and indirect owners of Cactus LLC (the “TRA Holders”). The TRA generally provides for payment by Cactus Inc. to the TRA Holders of 85% of the net cash savings, if any, in U.S. federal, state and local income tax and franchise tax that Cactus Inc. actually realizes or is deemed to realize in certain circumstances as a result of (i) certain increases in tax basis that occur as a result of Cactus Inc.’s acquisition (or deemed acquisition for U.S. federal income tax purposes) of all or a portion of such TRA Holder’s CW Units in connection with our IPO or any subsequent offering, or pursuant to any other exercise of the Redemption Right or the Call Right, (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
management services agreement.FromTRA. 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, 2021, the total liability from the TRA was $281.6 million with $11.8 million reflected in current liabilities based on the expected timing of our next payment. The payments under the TRA will not be conditional on a holder of rights under the TRA having a continued ownership interest in either Cactus LLC or Cactus Inc.
The term of the TRA commenced upon completion of our IPO and will continue until all tax benefits that are subject to the TRA have been utilized or expired, unless we exercise our right to terminate the TRA. If we elect to terminate the TRA early (or it is terminated early due to certain mergers, asset sales, other forms of business combinations or other changes of control), 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 1 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.
Any exercise by Cactus LLC or Cactus Inc. of the right to acquire redeemed CW Units for cash must be approved by the board of directors of Cactus Inc. To date, neither Cactus Inc. nor Cactus LLC have elected to acquire CW Units for cash in connection with exchanges by CW Unit Holders. It is the policy of Cactus Inc. that any exercise by Cactus Inc. or Cactus LLC of the right to acquire redeemed CW Units for cash must be approved by a majority of those members of the board of directors of Cactus Inc. who have no interest in such transaction.
Since our IPO in February 2018, 43.9 million CW Units and a corresponding number of shares of Class B common stock have been redeemed in exchange for shares of Class A common stock. For more information regarding our IPO, see our Annual Report on Form 10-K for the year ended December 31, 2018.
The following is a rollforward of ownership of legacy CW Units by CW Unit Holders for the three years ended December 31, 2021:
| | | | | |
| CW Units |
| (in thousands) |
| 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 | |
| Other CW Unit redemptions | (303) | |
| CW Units held by legacy CW Unit Holders as of December 31, 2020 | 27,655 | |
| March 2021 Secondary Offering | (6,273) | |
| Cadent redemption in June 2021 | (3,292) | |
| Cadent redemption in September 2021 | (715) | |
| Other CW Unit redemptions | (701) | |
| CW Units held by legacy CW Unit Holders as of December 31, 2021 | 16,674 | |
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, and there was no change in the
combined number of Cactus Inc. voting shares outstanding. Cactus incurred $1.0 million in offering expenses which were recorded in other income (expense), net, in the consolidated statements of income.
On March 9, 2021, Cactus Inc. entered into an underwriting agreement with Cactus LLC, certain selling stockholders of Cactus (the “Selling Stockholders”) and the underwriters named therein, providing for the offer and sale by the Selling Stockholders (the “2021 Secondary Offering”) of up to 6,325,000 shares of Class A common stock at a price to the underwriters of $30.555 per share. On March 12, 2021, in connection with the 2021 Secondary Offering, certain of the Selling Stockholders exercised their right to redeem 6,272,500 CW Units, together with a corresponding number of shares of Class B common stock, as provided in the Cactus Wellhead LLC Agreement. Upon the closing of the 2021 Secondary Offering, Cactus Inc. acquired the redeemed CW Units and a corresponding number of shares of Class B common stock (which shares of Class B common stock were then canceled) and issued 6,272,500 new shares of Class A common stock to the underwriters at the direction of the redeeming Selling Stockholders, as provided in the Cactus Wellhead LLC Agreement. In addition, certain other Selling Stockholders sold 52,500 shares of Class A common stock in the 2021 Secondary Offering, which shares were owned by them directly as of the time of the 2021 Secondary Offering. Cactus did not receive any of the proceeds from the sale of common stock in the 2021 Secondary Offering and incurred $0.4 million in expenses which were recorded in other expense, net, in the consolidated statements of income. There was no change in the combined number of Cactus Inc. voting shares outstanding as a result of the 2021 Secondary Offering.
On June 17, 2021, Cadent Energy Partners II, L.P. (“Cadent”) transferred ownership of 944,093 CW Units, together with a corresponding number of shares of Class B common stock, to its general partner, Cadent Energy Partners II - GP, L.P., (“Cadent GP”), and its manager, Cadent Management Services, LLC (“Cadent Management”). Cadent then redeemed its remaining 3.3 million CW Units, together with a corresponding number of shares of Class B common stock, as provided in the Cactus Wellhead LLC Agreement. The redeemed CW Units (and the corresponding shares of Class B common stock) were canceled and Cactus Inc. issued 3.3 million new shares of Class A common stock to Cadent, which then distributed such shares to its limited partners. Cactus received no proceeds from these events, and there was no change in the combined number of Cactus Inc. voting shares outstanding.
On September 13, 2021, Cadent GP and Cadent Management transferred their aggregate ownership of 228,878 CW Units, together with a corresponding number of shares of Class B common stock, to their respective owners, which included certain Cactus Inc. board members and executive management. The transfers were made at the discretion of Cadent GP and Cadent Management without the consent of the transferees. Additionally, Cadent GP and Cadent Management redeemed their remaining 715,215 CW Units held, together with a corresponding number of shares of Class B common stock, thus liquidating its ownership in Cactus Wellhead, LLC. These transactions were in accordance with the Cactus Wellhead LLC Agreement. The redeemed CW Units (and the corresponding shares of Class B common stock) were canceled and Cactus Inc. issued 715,215 new shares of Class A common stock. Cactus received no proceeds from these events, and there was no change in the combined number of Cactus Inc. voting shares outstanding.
In addition to the redemptions associated with the March 2019 Secondary Offering, the March 2021 Secondary Offering and the 2021 redemptions by Cadent and its affiliates, certain legacy CW Unit Holders redeemed 0.7 million, 0.3 million and 0.8 million CW Units (together with a corresponding number of shares of Class B common stock) pursuant to the Redemption Right for the years ended December 31, 2021, 2020 and 2019, respectively. 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 0.7 million, 0.3 million and 0.8 million shares of Class A common stock to the redeeming CW Unit Holders during the same respective time periods. Pursuant to the TRA described in Note 9, CW Unit redemptions create additional TRA liability. As a result of all of the CW Unit redemptions during the years ended December 31, 2021, 2020 and 2019, Cactus Inc. increased its ownership in Cactus LLC and accordingly, increased its equity by approximately $79.4 million, $2.2 million and $48.7 million, respectively, from the non-controlling interest.
Dividends
Aggregate cash dividends of $0.38, $0.36 and $0.09 per share of Class A common stock declared during the years ended December 31, 2021, 2020 and 2019 totaled $21.2 million, $17.4 million and $4.3 million, respectively. The fourth quarter of 2019 was the first quarter we declared and paid a dividend. Cash dividends paid during the years ended December 31, 2021, 2020 and 2019 totaled $21.2 million, $17.1 million and $4.2 million, respectively. Dividends accrue on unvested stock-based awards on the date of record and are paid upon vesting. Dividends are not paid to our Class B common stock holders; however, a corresponding distribution up to the same amount per share as our Class A common stockholders is paid to our CW Unitholders for any dividends declared on our Class A common stock. See Note 11 “Related Party Transactions” for further discussion of distributions made by Cactus LLC.
Limitation of Members’ Liability
Under the terms of the Cactus Wellhead LLC Agreement, the members of Cactus LLC are not obligated for debt, liabilities, contracts or other obligations of Cactus LLC. Profits and losses are allocated to members as defined in the Cactus Wellhead LLC Agreement.
11.Related Party Transactions
When needed, we rent a plane under dry-lease from a company owned by a member of Cactus LLC. These transactions are under short-term rental
arrangements. arrangements and the agreement governing these transactions does not qualify as a lease. We paid 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. During 2018, 20172021, 2020 and 2016,2019, expense recognized in connection with these rentals totaled $0.4$0.2 million, $0.3$0.1 million and $0.2$0.3 million, respectively. As of December 31, 20182021 and 2017,2020, we owed less than $0.1 million respectively, to the related party which are included in accounts payable in the consolidated balance sheets.We are also partyresponsible for employing pilots and fuel expenses. Our Chief Executive Officer and Chief Operating Officer paid the Company from $600 to a$1,800/day for their personal use of the pilots employed by the Company, depending on how many company pilots are utilized for the day.
The TRA
agreement is with certain direct and indirect holders of CW Units, including certain of our officers, directors and employees. These TRA Holders have the right in the future to receive 85% of the net cash savings, if any, in U.S. federal, state and local income tax and franchise tax that Cactus Inc. actually realizes or is deemed to realize in certain circumstances. The total liability from the TRA as of December 31,
20182021 was
$147.6$281.6 million.
We pay professional fees to assist with maintenance of the TRA which are reimbursable from the TRA Holders. As of December 31, 2021 and 2020, $0.2 million was due from the TRA Holders for fees paid on their behalf. The
estimated annual amounts and timing of this liability is presentedbalances are included in
Note 9.accounts receivable, net in the consolidated balance sheets.
Distributions made by Cactus LLC
are generally
require pro-rata distributionrequired to be made pro rata among all its members.
ForDuring the
yearyears ended December 31,
2018,2021, 2020 and 2019, Cactus LLC
made $3.8distributed $30.6 million,
in distributions$27.8 million and $14.2 million, respectively, to Cactus Inc. to
coverfund its
quarterlydividend, TRA liability and estimated tax
paymentpayments. During the years ended December 31, 2021, 2020 and 2019, Cactus LLC made pro rata distributions to the
IRS. Cactus LLC also made an aggregate $5.8 million in pro-rata distributions to its other members
over the same period.Prior to our IPO, on January 25, 2018, Cactus LLC paid a cash distribution of $26.0totaling $9.7 million, to holders of CW Units at that time. This distribution was funded by borrowing under a revolving credit facility. The purpose of the distribution was to provide funds to these owners to pay their federal$16.3 million and state tax liabilities associated with taxable income recognized by them for periods prior to the completion of our IPO as a result of their ownership interests in Cactus LLC. The borrowings under this revolving credit facility were repaid during the first quarter of 2018.
$8.4 million, respectively.9. 12.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 2018, 2017 and 2016 amounted to $7.7 million, $7.1 million and $7.3 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, | |
| | 2018 | | 2017 | |
Cost | | $ | 25,165 | | $ | 15,557 | |
Accumulated depreciation | | | (8,560) | | | (2,672) | |
Net | | $ | 16,605 | | $ | 12,885 | |
Future minimum annual lease payments, including executory costs and interest, for years subsequent to December 31, 2018 are approximately as follows:
| | | | | | | | | | | | |
| | Operating
Leases | | Capital
Leases | | Liability related to TRA | | Total |
2019 | | $ | 6,638 | | $ | 8,740 | | $ | 9,574 | | $ | 24,952 |
2020 | | | 4,618 | | | 6,790 | | | 7,806 | | | 19,214 |
2021 | | | 3,487 | | | 2,533 | | | 7,798 | | | 13,818 |
2022 | | | 2,195 | | | 41 | | | 7,972 | | | 10,208 |
2023 | | | 1,426 | | | — | | | 8,134 | | | 9,560 |
Thereafter | | | 3,339 | | | — | | | 106,305 | | | 109,644 |
| | $ | 21,703 | | $ | 18,104 | | $ | 147,589 | | $ | 187,396 |
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 Cactus Inc. in an amount sufficient to cover our obligations under the TRA. Distributions made by Cactus LLC generally require pro-rata distribution among all its members.
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.
10. Employee Benefit Plans
401K 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 upon employment hire date and obtaining the age of eighteen. All eligible employees may contribute a percentage of their compensation subject to a maximum imposed by the Code. During 2018, 2017 and 2016, 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 2018, 2017 and 2016, employer matching contributions totaled $3.7 million, $2.2 million and $1.2 million, respectively. We have not made non‑elective employer contributions under the plan.
11. 13.Earnings Per Share
Basic earnings per share of Class A common stock is calculated by dividing the net income attributable to Cactus Inc. during the period by the weighted average number of shares of Class A common stock outstanding during the same period. Diluted earnings per share of Class A common stock is calculated by dividing the net income attributable to Cactus Inc. during that period by the weighted average number of common shares outstanding assuming all potentially dilutive shares were issued.
Dilution for
We use the
period includesif-converted method to determine the
potential dilutive effect of outstanding CW Units (and corresponding shares of outstanding Class B common stock), the treasury stock method to determine the potential dilutive effect of unvested restricted stock units
under the treasury method assuming that the proceeds will be used to purchase shares of Class A common
stock. There were no sharesstock and the contingently issuable share method to determine the potential dilutive effect of Class A commonunvested performance stock or Class B common stock outstanding prior to February 12, 2018, therefore no earnings per share information has been presented for any period prior to that date.
units.
The following table summarizes the basic and diluted earnings per share calculations: | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2021 | | 2020 | | 2019 |
| Numerator: | | | | | |
| Net income attributable to Cactus Inc.—basic | $ | 49,593 | | | $ | 34,446 | | | $ | 85,612 | |
Net income attributable to non-controlling interest(1) | 13,744 | | | 19,934 | | | 56,012 | |
Net income attributable to Cactus Inc.—diluted(1) | $ | 63,337 | | | $ | 54,380 | | | $ | 141,624 | |
| Denominator: | | | | | |
| Weighted average Class A shares outstanding—basic | 55,398 | | | 47,457 | | | 44,983 | |
| Effect of dilutive shares | 20,709 | | | 28,038 | | | 30,370 | |
| Weighted average Class A shares outstanding—diluted | 76,107 | | | 75,495 | | | 75,353 | |
| | | | | |
| Earnings per Class A share—basic | $ | 0.90 | | | $ | 0.73 | | | $ | 1.90 | |
Earnings per Class A share—diluted(1) | $ | 0.83 | | | $ | 0.72 | | | $ | 1.88 | |
| | | |
| | Year Ended December 31, |
| | 2018 |
Numerator: | | | |
Net income attributable to Cactus Inc. | | $ | 51,683 |
Denominator: | | | |
Weighted average Class A shares outstanding—basic | | | 32,329 |
Effect of dilutive shares (1) | | | 366 |
Weighted average Class A shares outstanding—diluted (1) | | | 32,695 |
| | | |
Earnings per Class A share—basic | | $ | 1.60 |
Earnings per Class A share—diluted (1) | | $ | 1.58 |
| (1)
| | Diluted earnings per share for the period presented excludes 37,236,142 shares of Class B common stock, as the effect would be anti-dilutive.
|
12.
14.Supplemental Cash Flow Information Non-cash investing and financing activities were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, | | Year Ended December 31, |
| | 2018 | | 2017 | | 2016 | | 2021 | | 2020 | | 2019 |
Property and equipment acquired under capital lease | | $ | 9,966 | | $ | 12,941 | | $ | 2,616 | |
| Property and equipment acquired under finance leases | | Property and equipment acquired under finance leases | $ | 9,941 | | | $ | 2,973 | | | $ | 3,008 | |
Property and equipment in payables | | | 1,312 | | | 1,553 | | | 243 | Property and equipment in payables | 405 | | | 197 | | | 1,052 | |
Cash paid for interest and income taxes was as follows:
| | | | | | | | | |
| | Year Ended December 31, |
| | 2018 | | 2017 | | 2016 |
Cash paid for interest | | $ | 3,583 | | $ | 18,826 | | $ | 19,946 |
Cash paid for income taxes, net | | | 7,613 | | | 1,535 | | | 583 |
| | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2021 | | 2020 | | 2019 |
| Cash paid for interest | $ | 959 | | | $ | 959 | | | $ | 1,187 | |
| Cash paid for income taxes, net | 4,542 | | | 1,600 | | | 5,301 | |
In conjunction with our IPO,During the years ended December 31, 2021, 2020 and 2019, we issued 11.0 million, 0.3 million 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.
During the fourth quarter 2018, we issued 7,0689.3 million shares of Class A common stock, respectively, pursuant to redemptions of CW Units by holders thereof.
13. Quarterly Financial Information (Unaudited)
Summarized quarterly financial data for the years ended December 31, 2018 and 2017 are presented in the following tables. In the following tables, the sum of basic and diluted earnings per share 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 year earnings per share amount.
There were no shares of Class A common stock or Class B common stock outstanding prior to February 12, 2018, therefore no earnings per share information has been presented for any period prior to that date.
| | | | | | | | | | | | | | | |
| | 2018 Quarters |
| | Total | | Fourth | | Third | | Second | | First |
| | | | | | | | | | | | | | | |
Total revenues | | $ | 544,135 | | $ | 139,824 | | $ | 150,658 | | $ | 138,543 | | $ | 115,110 |
| | | | | | | | | | | | | | | |
Income from operations | | | 177,701 | | | 43,864 | | | 52,133 | | | 46,487 | | | 35,217 |
| | | | | | | | | | | | | | | |
Net income | | | 150,281 | | | 38,683 | | | 43,648 | | | 41,542 | | | 26,408 |
| | | | | | | | | | | | | | | |
Less: pre-IPO net income attributable to Cactus LLC | | | 13,648 | | | — | | | — | | | — | | | 13,648 |
| | | | | | | | | | | | | | | |
Less: net income attributable to non-controlling interest | | | 84,950 | | | 21,759 | | | 24,976 | | | 29,208 | | | 9,007 |
| | | | | | | | | | | | | | | |
Net income attributable to Cactus Inc. | | | 51,683 | | | 16,924 | | | 18,672 | | | 12,334 | | | 3,753 |
| | | | | | | | | | | | | | | |
Earnings per Class A share—basic | | $ | 1.60 | | $ | 0.45 | | $ | 0.52 | | $ | 0.47 | | $ | 0.14 |
Earnings per Class A share—diluted | | $ | 1.58 | | $ | 0.44 | | $ | 0.52 | | $ | 0.46 | | $ | 0.14 |
| | | | | | | | | | | | | | | |
| | | 2017 Quarters |
| | Total | | Fourth | | Third | | Second | | First |
| | | | | | | | | | | | | | | |
Total revenues | | $ | 341,191 | | $ | 104,784 | | $ | 96,027 | | $ | 81,877 | | $ | 58,503 |
| | | | | | | | | | | | | | | |
Income from operations | | | 88,863 | | | 28,737 | | | 28,059 | | | 22,073 | | | 9,994 |
| | | | | | | | | | | | | | | |
Net income | | | 66,547 | | | 22,814 | | | 22,301 | | | 16,578 | | | 4,854 |
| | | | | | | | | | | | | | | |
Earnings per Class A share—basic | | $ | — | | $ | — | | $ | — | | $ | — | | $ | — |
Earnings per Class A share—diluted | | $ | — | | $ | — | | $ | — | | $ | — | | $ | — |
Item 9.
Changes in and Disagreements with Accountants on Accounting and Financial DisclosureNone.
Item 9A.
Controls and ProceduresEvaluation of Disclosure Controls and Procedures
In accordance with Exchange Act Rules 13a‑15 and 15d‑15, we
We 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 as amended) as of December 31,
2018.2021. 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, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures were not effective as of December 31, 2018 at the level of reasonable assurance. See disclosure of a material weakness below under “Management’s Report on Internal Control over Financial Reporting.”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 accounting principles generally accepted in the United States of America.
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, 2018, our internal control over financial reporting was not effective due to the material weakness described below.
This Annual Report does not include an attestation report of our registered public accounting firm as the company qualifies as an “emerging growth company” as defined by the JOBS Act.
Material Weakness in Internal Control over Financial Reporting
A material weakness is defined as 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.
Management did not design and maintain effective controls related to the accounting of the liability and deferred tax asset associated with the tax receivable agreement (“TRA”). Specifically, certain control activities over the completeness and accuracy of inputs (including estimates) and assumptions used in the calculations for the preparation of our previously filed partnership tax return for 2017 and in the calculation of the basis step-up generated from our
Reorganization, IPO and Follow-on Offering, as well as the associated liability related to the TRA we entered into in conjunction with our IPO, were not designed to operate effectively. Management concluded this was a material weakness in our internal control over financial reporting.
This material weakness resulted in immaterial errors of the previously reported balance sheet financial statement line items for deferred tax asset, liability related to tax receivable agreement and additional paid-in capital at interim periods during 2018 that were corrected as of December 31, 2018. However, there was no impact on our consolidated results of operations or cash flows. Additionally, this material weakness could result in misstatements of tax related balances that would result in a material misstatement to the annual or interim consolidated financial statements that would not be prevented or detected.
Remediation Plan for Material Weakness
In order to address the material weakness related to accounting for the TRA described above, the Company’s management has implemented a remediation plan to address the control deficiencies that led to this material weakness. The remediation plan includes the following:
| ·
| | Replaced our outside service provider to direct our tax compliance, support accounting and reporting, and to recommend enhancements to our TRA accounting processes;
|
| ·
| | Implemented enhancements to the quarterly and annual processes around accounting for the TRA; and
|
| ·
| | Redesigned controls related to detailed reviews of the inputs (including estimates) and assumptions used in calculations to a level of precision sufficient to mitigate risk of material misstatement.
|
While management believes the enhanced controls will allow for the maintaining of adequate internal control over financial reporting related to accounting for the TRA, management has determined that a sustained period of operating effectiveness is required to conclude that the controls are operating effectively.
Based on its evaluation, the controls described above have not had sufficient time for management to conclude that they are operating effectively. Therefore, the material weakness described above existed at December 31, 2018 and will continue to exist until the controls described above have had sufficient time for management to conclude that they are effective.
Changes in Internal Control over Financial Reporting
Management has implemented enhanced controls around accounting for the TRA as described above
There have been no changes in our internal control over financial reporting during the quarter ended December 31, 20182021 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Item 9B.
Other Information
Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent InspectionsItem 10.
Directors, Executive Officers and Corporate GovernanceDirectors and Executive Officers
The directors and executive officers of the Company are:
| | | | | | | | |
Name | Age | | Age
| Title |
Bruce Rothstein | 6669 | Chairman of the Board of Directors |
Scott Bender | 6568 | President, Chief Executive Officer and Director |
Joel Bender | 5962 | Senior Vice President, Chief Operating Officer and Director |
Melissa Law | 48 | Director, Audit Committee member and Compensation Committee member |
| Michael McGovern | 6770 | Director, Compensation Committee Chairman and Audit Committee member |
John (Andy) O’Donnell | 7073 | Director, Audit Committee member, Compensation Committee member and Nominating and Governance Committee member |
Gary Rosenthal | 6972 | Director, Nominating and Governance Committee Chairman and Compensation Committee member |
Alan Semple | 5962 | Director, Audit Committee Chairman and Nominating and Governance Committee member |
Brian Small
Tym Tombar | 6248 | Chief Financial Officer
Director, Audit Committee member and Compensation Committee member |
Steven Bender | 3639 | Vice President of Operations |
Stephen Tadlock | 4043 | Vice President, Chief Financial Officer and Chief Administrative Officer Treasurer |
David Isaac | 5861 | General Counsel, Vice President of Administration and Secretary |
Set forth below is biographical information about each of our directors and executive officers.
Bruce Rothstein—Chairman of the Board of Directors. Bruce Rothstein has been our Chairman of the Board since 2011. Mr. Rothstein has been a Managing Director atco-founded 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‑foundingin 2003 and served as a Member of Cadent Energy Partners LLC in 2003.from 2003 until March 2021. From November 2005 until November 2017, Mr. Rothstein served on the board of directors of Array Holdings, Inc., formerly a portfolio company of Cadent. From May 2006 to August 2016, he served on the board of directors of Vedco Holdings, Inc., formerly a Cadent 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 portfolio company. From December 2008 until February 2012, Mr. Rothstein served as a director of Ardent Holdings, LLC, a portfolio company of Cadent.LLC. 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 our 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 fieldoilfield 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 fieldoilfield 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. Melissa Law—Director. Ms. Law has served as one of our directors since 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 has served 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 & 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 to 2017 as well as Baker Hughes’ Australasia geo-market from 2013 to 2014. 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.
Michael McGovern—Director. Mr. McGovern has served as one of our directors since 2011. He currently servesIn February 2021, Mr. McGovern was elected Chairman of the board of directors of Superior Energy Services, Inc. (“Superior”) and in March 2021, he assumed the role as our Compensation Committee chairman. He servedSuperior’s principal executive officer. In January 2022, he stepped down as the principal executive officer but remains as Superior’s Executive Advisor to Cadent Energy Partners LLC from January 2008 to December 2014 andChairman of the Board. Mr. McGovern has served as Chairman and Chief Executive Officer of Sherwood Energy, LLC a Cadent portfolio company, since March 2009. Mr. McGovern2009 and has also served as a directoron the board of GeoMet, Inc., an independent energy company, from September 2010 until December 2018.directors of Ion Geophysical (NYSE: IO) since June 2019. He also currently servesserved on the board of directors of Nuverra Environmental Solutions, Inc. sincefrom August 2017.2017 until February 2022. Mr. McGovern served on the board of directors of Quicksilver Resources Inc.as Executive Advisor to Cadent Energy Partners 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) since May 2016.January 2008 to December 2014. Mr. McGovern also served ongraduated from the boardCentenary College of directorsLouisiana in 1973 with a Bachelor of Sonneborn, Inc. from 2012 to December 2016.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.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 1, 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. He served as Chairman of the Board of Highline Aftermarket LLC, a former Sterling Group investment, from September 2019 until October 2020 and as a director from April 2016 until October 2020. Mr. Rosenthal has served as Chairman of the Board of Greenbridge
Investments LLC since March 2019 and Evergreen Recycling Investments LLC since June 2021. From October 2013 until February 2018, he was Chairman of the Board of Safe Fleet Investments LLC. Greenbridge Investments LLC, Evergreen Recycling Investments LLC and Safe Fleet Investments LLC are all Sterling Group portfolio companies. From 2001 until 2018, Mr. Rosenthal served as a director and chairman of the Compensation Committee of Oil States International, Inc. He also 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—TXTWheatley-TXT Corp., a manufacturer of pumps and valves for the oil field. Since April 2016, Mr. Rosenthal has served as a director of Highline Aftermarket LLC and from October 2013 until February 2018, he was also Chairman of the Board of Safe Fleet Investments LLC, both 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.oilfield. 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 committeeAudit Committee of Teekay Corporation, a leading provider of international crude oil and gas marine transportation services, and as the audit committee chairmanAudit Committee Chairman since March 2018. From May 2019 until January 2022, Mr. Semple 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 more than 30 years of finance experience, primarily in the energy industry, makes him qualified to serve on our board of directors.Our Executive Officers
Brian Small—Chief Financial Officer. Brian Small
Tym Tombar—Director. Mr. Tombar has been our Chief Financial Officer since 2011. Mr. Small has been a member of the Institute of Chartered Accountants in Scotland since 1980 and served as one of our directors since July 2021. Mr. Tombar is a Managing Director and Co-Founder of Arcadius Capital Partners and its predecessor SW Capital Partners. Since 2011, Arcadius Capital Partners, an audit managerenergy private equity firm, has invested growth capital into start-ups and early-stage companies in a big four accounting firm in both Scotland and Switzerland until 1994, when he was appointed as Internal Audit Manager to Wood Group, a provider of services to the upstream oil and gas sector. He thenindustry. From 2007 to 2011, he was a Managing Director and co-head of Scotiabank’s Energy Private Equity group. Since 2007, Mr. Tombar has served as Chief Financial Officeron the boards of over 12 private oil and gas companies. Prior to April 2007, he was a Vice President with Goldman, Sachs & Co. (“Goldman”) and led deal teams through sourcing, execution, and management of a variety of primary market energy investments in securities and loans. Prior to that, Mr. Tombar worked in Goldman’s Investment Banking Division in New York, London and Houston, where he advised several upstream oil and gas, oilfield services and petrochemical clients and executed a variety of transactions for Woodpublic and private oil and gas companies. Mr. Tombar began his career with Goldman in its Energy & Power Principal Investment Area and Banking Group Pressure Control,based in New York in 1994. Mr. Tombar graduated with a divisionMaster of Wood Group,Business Administration from 2000 until its acquisition by GE OilStanford University’s Graduate School of Business and Gasa Bachelor of Arts degree in 2011.Applied Math from Harvard University. We believe Mr. Tombar’s qualifications to serve on the board include his executive leadership and 25 years of investment and finance experience in the energy industry.
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 Chief Administrative OfficerTreasurer. Stephen Tadlock was appointed as our Vice President and Chief Administrative Officer in March 2018. On March 15, 2019, Mr. Tadlock will becomehas been our Vice President, Chief Financial Officer and Treasurer completing the transition thatsince March 2019. He was announced in November 2018. Mr. Tadlockour 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
sevennine members, including our Chief Executive Officer.
Among the nine members of our board of directors, we have one female director and one director who is a member of a racial or ethnic minority group. 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 ofwas amended in 2021 after Cadent
withdrew from the Agreement. The Amended and
Restated Stockholders’ Agreement provides 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
Party Transactions—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, 20192024, 2022 and 2020,2023, respectively. Messrs. McGovern, O’Donnell and O’DonnellTombar have been assigned to Class I, Mr.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 elected 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,
Rosenthal, Rothstein, Semple and
RosenthalTombar and Ms. Law 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.
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,
O’Donnell and
O’Donnell,Tombar 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.Messrs. Semple,
satisfiesMcGovern and Tombar satisfy 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.
website at www.CactusWHD.com.
Our Compensation Committee is currently comprised of Messrs. McGovern,
O’Donnell, Rosenthal and
O’Donnell,Tombar 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.website at www.CactusWHD.com.
Nominating and Governance Committee
Our Nominating and Governance Committee is currently comprised of Messrs.
O’Donnell, Rosenthal
Semple and
O’Donnell,Semple, 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.website at www.CactusWHD.com.
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”
coverscover the following principal subjects:
•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)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.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.
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 best 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
includesinclude 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.
TheOur 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. The
board has selected Mr. O’Donnell to serveChairman of the Board is independent and he serves 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.us, including information security and cybersecurity risks. Throughout the year, senior management reviews these risks
with the board at regular board
of directors 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.
Specific to information security and cybersecurity risks, the Company undertakes intrusion prevention and detection measures, penetration testing, vulnerability assessments and total threat telemetry of various aspects of our information system.
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
and information technology risk exposures and the steps our management has taken to monitor and control these exposures.
Risks specific to information security and cybersecurity are discussed with and presented to the board of directors as well as the audit committee on a quarterly basis. One member of the audit committee has information security experience. The Company has not experienced an information security breach in over three years. Over this three-year timeframe it has not incurred any net expenses related to information security breaches and it has not incurred any penalties or settlements related to information security breaches. In addition to a variety of projects designed to enhance the security of the Company’s systems, networks and technologies, the Company conducts periodic information security training for all employees.
Attendance at Annual Meetings
While we have no formal policy regarding director attendance at
itsour annual meetings of stockholders, directors are encouraged to attend our annual meetings, if practicable. All
but one of the directors attended our annual meeting held in
2018.2021.
Board
of Directors and Committee Meeting Attendance
During
2018,2021, the entire
Boardboard of directors held
sixteenten meetings, the Audit Committee
held five meetings, the Compensation Committee held one meeting and the Nominating and Governance Committee
did not hold a meeting.each held four meetings and the Compensation Committee held three meetings. Each of
theour directors attended
at leastmore than 75% of the
meetingsaggregate of the
total number of board
of directors meetings and the
committeestotal number of
the boardmeetings held by all committees on which
theyhe or she served.
Compensation Committee Interlocks and Insider Participation
During 2018, 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, 2018. No
Delinquent Section 16(a) Reports member of our Compensation Committee during 2018 has engaged in any related party transaction in which our company was a participant.
Section 16 Beneficial Ownership Reporting Compliance
Section 16(a) of the Exchange Act requires our directors, executive officers, directors and persons who beneficially own more than 10%ten percent of the shares of our common stock, to file initial reports of ownership and changes in ownership with the SECSecurities and the NYSE. Such personsExchange Commission. Copies of all filed reports are also required to furnish the Company with copies of all Section 16(a) reports they file.be furnished to us. Based solely on our review of the copies of such reports received by us and on the representations from certainof the reporting persons, we believe that during 2018, all of our executive officers, directors and beneficial owners of more than 10% of our common stockthese persons have complied with all Section 16(a)applicable filing requirements applicable to them,during the years ended December 31, 2021 except as follows:
•The deemed dispositions byin August 2021, a Form 4 was filed late for each of Cactus WH Enterprises, Scott Bender and Joel Bender of 7,068 shares of our Class B Common Stock in connection with certain redemptions of ownership interests in Cactus WH Enterprises by certain of Cactus WH Enterprise’s members pursuantBender. The Form 4s related to the first amended and restated limited liability company agreement of Cactus WH Enterprises were reported late on separate Form 4s dated December 7, 2018. Neither Scott Bender nor Joel Bender participated in the redemptions.
same transaction.
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 andor 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, 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 CompensationEXECUTIVE COMPENSATION
Named Executive Officers
We are currently considered an emerging growth company
Introduction
This Compensation Discussion and Analysis (“CD&A”) provides information about the compensation objectives and policies for purposes of the SEC’sour principal executive compensation disclosure rules. In accordance with such rules, we are required to provide a Summary Compensation Table and an Outstanding Equity Awards at Fiscal Year End Table, as well as limited narrative disclosures. Further,officer, our reporting obligations extend only to the individuals serving as our chief executiveprincipal financial officer and our twothree other most highly compensated executive officers. For fiscal year 2018,officers (collectively our named executive officers (“NEOs”or “NEOs”) were: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 | | | | Principal 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 Chief Administrative OfficerTreasurer |
| Steven Bender | | Vice President of Operations |
| David Isaac | | General Counsel, Vice President of Administration and Secretary |
SummaryExecutive Compensation Table
Philosophy and Objectives
The core principle of our executive compensation philosophy is to pay 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 table summarizes,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 shareholders, and to promote an ownership culture among our executive officers.
Our compensation philosophy is supported by the following 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 | ü | | |
| Short-term Incentives (STI) | •Annual variable cash award •Awards are tied to achievement of key financial and safety objectives | ü | ü | ü |
| Long-term Incentives (LTI) | •Provided in the form of performance-based and time-based 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 | ü | ü | ü |
Target Pay Mix
The charts below show the target mix of total direct compensation of our Chief Executive Officer and our other NEOs for 2021. These charts illustrate that a majority of NEO total direct compensation is at-risk (86% for our Chief Executive Officer and an average of 77% for our other NEOs).
Compensation Program Governance
We have worked extensively and deliberately to develop a thoughtful, fair, and effective executive compensation program that helps us to deliver long-term sustainable growth to our shareholders. 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 |
| ü | Significant majority of pay at risk | | X | No excessive perquisites |
| ü | 50% of CEO LTI value performance-based | | X | No guaranteed bonuses |
| ü | Balance of short-term and long-term incentives | | X | No excise tax gross-ups |
| ü | Clawback policy for NEOs that applies to cash and equity incentives | | X | Prohibition on hedging, pledging and short sales by insiders |
| ü | Share ownership guidelines for NEOs and directors | | X | Prohibition on option repricing |
| ü | Regularly evaluate risks of our compensation policy | | | |
| ü | Independent compensation consultant | | | |
| ü | One-year minimum vesting requirement for LTIP grants | | | |
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 (“say on frequency”), and we have implemented their recommendation. While not required to do so, the board of directors currently plan to hold another vote regarding say on frequency at the 2025 Annual Meeting. In addition, at the 2019 Annual Meeting, we also held an advisory vote on compensation for our NEOs (“say on pay”). The next advisory vote on this matter will therefore be held at the 2022 Annual Meeting. In 2019, our stockholders expressed their support regarding say on pay, 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 of our executive compensation policies and practices for our NEOs during 2018.
Our Compensation Committee values the opinions of our shareholders regarding NEO compensation. The Compensation Committee welcomes feedback from shareholders on the topic of executive compensation and is open to dialogue with shareholders on the topic. In reviewing our program, our Compensation Committee considered the results of the 2019 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 2021.
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. 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 to Board approval in certain circumstances, the Compensation Committee has the sole authority to make final decisions with respect to our NEOs,executive compensation program, and the Compensation Committee is under no obligation to use the input of other parties. For more detailed information relatingregarding 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 Executive Officers in Compensation Decisions
With respect to the compensation
earned for services rendered in all capacities during the fiscal years ended December 31, 2018 and 2017. | | | | | | | | | |
| | | | | | | | | |
Name and Principal Position | | | Year | Salary
($) | Bonus ($) | Non-Equity Incentive Plan Compensation
($)(1) | Stock Awards (2) | All Other
Compensation
($)(3) | Total ($) |
Scott Bender | 2018 | 300,000 | — | 300,000 | 1,000,008 | 28,125 | 1,628,133 |
(President, Chief Executive Officer and Director)(4) | 2017 | 260,096 | — | 300,000 | — | 24,726 | 584,822 |
Joel Bender | 2018 | 300,000 | — | 300,000 | 1,000,008 | 27,060 | 1,627,068 |
(Senior Vice President, Chief Operating Officer and Director)(4) | 2017 | 260,096 | — | 300,000 | — | 14,386 | 574,482 |
Stephen Tadlock | 2018 | 250,000 | — | 120,298 | 1,875,015 | 20,780 | 2,266,093 |
(Vice President and Chief Administrative Officer)(5) | | | | | | | |
(1)Our non-equity compensation program for 2017 and 2018 is described in greater detail below.
(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 assumptionsNEOs 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 CEO 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 thesethe 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 see Note 6 inunder the notesLTIP to certain individuals who are not executive officers.
Role of Independent Compensation Consultant
Pearl Meyer & Partners, LLC (“Pearl Meyer”) serves as independent compensation consultant for, and reports directly to, the consolidated financial statements. For additional information about restrictedCompensation 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 unit awards granted during 2018, see “Outstanding Equity Awards at 2018 Fiscal Year-End” below. For more information aboutperformance of peer companies and recommending changes to our long-term incentive plan, see “LTIP” below. (3)Amounts reflected withinpeer group, as necessary;
•reviewing executive compensation based on an analysis of market-based compensation data;
•analyzing the “Alleffectiveness 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 2021, 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
Compensation” column are comprisedthan those services requested by the Compensation Committee, Pearl Meyer did not have any business or personal relationships with members of the
following amounts: | | | | | |
Name | Year | Employer
Contributions
to 401(k)
Plan ($) | Vehicle
Allowance
($) | Gas
Allowance
($) | Total
($) |
Scott Bender | 2018 | 15,670 | 11,400 | 1,065 | 28,125 |
| 2017 | 13,545 | 10,800 | 381 | 24,726 |
Joel Bender | 2018 | 15,670 | 11,400 | — | 27,060 |
| 2017 | 3,586 | 10,800 | — | 14,386 |
Stephen Tadlock | 2018 | 9,380 | 11,400 | — | 20,780 |
(4)Although Messrs. Scott and Joel Bender each serve on our boardCompensation Committee or executives of directors, they arethe Company, did not compensated for their services as directors.
(5)Mr. Tadlock was not a named executive officer prior to 2018.
Narrative to the Summary Compensation Table
As of April 2017, the salaries of certain of our NEOs were set at the following levels: Scott Bender, $250,000; and Joel Bender, $250,000. For each of Messrs. Scott and Joel Bender, the base salary was restored to the same level as the salary paid to them prior to the 2015 salary reduction. In June 2017, the Board approved salary increases at the following levels: Scott Bender, $300,000; and Joel Bender, $300,000. These base salaries remained in effect during 2018. Stephen Tadlock’s base salary was set at $250,000 for 2018.
Under the Company’s discretionary bonus program based on financial and safety performance, we paid or will pay bonuses to each of Scott Bender and Joel Bender in the amounts of $300,000 for each of 2017 and 2018, and we paid or will pay a bonus to Stephen Tadlock in the amount of $120,298 for 2018. The bonuses for 2018 reflected the Company’s performance on financial and safety measures, including adjusted EBITDA and the rate of certain safety incidents, and were paid or will be paid in three installments in July 2018, December 2018 and March 2019.
In addition, in connection with our IPO, we made grants of restricted stock units designed to promote retention and provide incentives for long-term performance. Messrs. Scott and Joel Bender each received restricted stock unit grants with grant date values of $1,000,008 and Mr. Stephen Tadlock received a restricted stock unit grant with a grant date value of $1,875,015 that, in each case, will vest over three years.
Outstanding Equity Awards at 2018 Fiscal Year‑End
The following table reflects information regarding outstanding restricted stock units held by our NEOs as of December 31, 2018.
| | | |
Name
| Grant Date
| Number of Shares or Units of Stock That Have Not Vested (#)
| Market Value of Shares or Units That Have Not Vested ($) (1)
|
Scott Bender
| 02/07/2018
| 52,632 (2)
| 1,442,643 |
Joel Bender
| 02/07/2018
| 52,632 (2)
| 1,442,643 |
Stephen Tadlock
| 02/07/2018
| 98,685 (2)
| 2,704,956 |
(1)The market value of these units is based on the closing priceown 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 2021 did not create any conflicts of interest.
Role of Competitive Benchmarking
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 that 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. In selecting comparison companies, the Compensation Committee considers various factors including each company’s participation in the energy services sector as well as market capitalization, annual revenues, business complexity, profitability, returns on December 31, 2018 ($27.41)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. For the 2021 compensation analysis, the Company used the following peer group companies:
| | | | | |
2021 Compensation Peer Group(1) |
| Archrock, Inc. | ProPetro Holding Corp. |
| Core Laboratories, NV | Patterson-UTI Energy, Inc. |
| Dril-Quip, Inc. | Oil States International, Inc. |
| DMC Global Inc. | ChampionX Corporation |
| Frank’s International, NV | Liberty Oilfield Services Inc. |
| Helix Energy Solutions Group, Inc. | USA Compression Partners, LP |
(1) In 2020, the peer group companies included Forum Energy Technologies, NCS Multistage Holdings, Inc., Newpark Resources, Inc. and RPC, Inc. These companies were replaced by DMC Global Inc., ProPetro Holding Corp., Patterson-UTI Energy, Inc. and Liberty Oilfield Services Inc. for the last trading day2021 peer group analysis as our independent compensation consultant advised the Compensation Committee that the changes to the peer group would provide a better market comparison.
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. The Compensation Committee 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 of these factors together plus overall industry conditions.
At the time of the Compensation Committee meeting in January 2021, our NEOs were receiving reduced salaries due to the economic challenges that were faced by the Company in 2020. The base salaries of our NEOs, and in particular that of our CEO, were already well below those of our peer group median when they were voluntarily and substantially reduced in 2020 in light of the challenging economic conditions. The reductions reflected the alignment of the interests of our NEOs with those of our shareholders and resulted in reduced short-term incentive compensation, which is discussed in the next section. At the January 2021 meeting, the Compensation Committee approved the reinstatement of the previously approved base salary amounts for Messrs. Tadlock and Isaac. The base salaries for Scott Bender, Joel Bender and Steven Bender were approved by the Committee and also increased to previously approved amounts in April 2021. In January 2022, the Compensation Committee approved additional prospective salary increases for our NEOs in recognition of their contributions to the Company. The following table details our NEOs’ 2020 salaries prior to reduction, 2020 reduced salaries, fully-reinstated salaries in 2021 as well as their approved 2022 base salaries.
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Name | | Original 2020 Base Salary | | Reduced 2020 Base Salary | | 2021 Base Salary(1) | | 2022
Base Salary |
| Scott Bender | | $ | 300,000 | | | $ | 57,207 | | | $ | 300,000 | | | $ | 400,000 | |
| Joel Bender | | 300,000 | | | 135,000 | | | 300,000 | | | 400,000 | |
| Stephen Tadlock | | 335,000 | | | 226,125 | | | 335,000 | | | 400,000 | |
| Steven Bender | | 300,000 | | | 135,000 | | | 300,000 | | | 400,000 | |
| David Isaac | | 300,000 | | | 202,500 | | | 300,000 | | | 350,000 | |
(1) Reflects the reinstatement of salaries in January 2021 for Messrs. Tadlock and Isaac and April 2021 for Scott Bender, Joel Bender and Steven Bender as discussed above.
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 Adjusted EBITDA, Operating Capital Employed (“OCE”) divided by revenue and total recordable incident rate (“TRIR”).
In January 2021, the Board approved the 2021 Management Incentive Plan (the “2021 MIP”), pursuant to which all participating employees would be eligible to receive a cash bonus upon the achievement of certain financial performance and safety metrics. Under the 2021 MIP, all eligible employees, 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. Bonuses are calculated as a percentage of actual base salary paid in 2021. The approved 2021 Target Bonus percentage for each NEO, which remained unchanged from 2020, is set forth in the table below.
| | | | | | | | |
| Name | | Target Bonus % |
| Scott Bender | | 100% |
| Joel Bender | | 100% |
| Stephen Tadlock | | 80% |
| Steven Bender | | 80% |
| David Isaac | | 65% |
Target Bonus Opportunity
Performance under the MIP is assessed relative to pre-established goals approved by the Committee near the beginning of the fiscal year.
(2)Reflects For 2021, the Compensation Committee approved performance objectives under the 2021 MIP after considering a combination of factors, including alignment with the Company’s business strategy, 2021 budget, investor expectations, recommendations from management and the Committee’s assessment of management’s ability to impact outcomes. The 2021 MIP had three performance parameters on which the bonus for our NEOs was calculated. The first parameter was Earnings Before Interest, Taxes, Depreciation and Amortization, excluding exceptional items, as defined by the board of directors (“Adjusted EBITDA”), which was weighted as 80% of the bonus opportunity. Participants began to earn a bonus payout when Adjusted EBITDA performance reached Threshold Adjusted EBITDA, which was set at 80% of Target Adjusted EBITDA. NEOs and other participants were eligible for a Stretch bonus opportunity if actual Adjusted EBITDA exceeded Target Adjusted EBITDA. The maximum Stretch bonus payment was achieved when Adjusted EBITDA performance reached 120% of Target Adjusted EBITDA. The maximum Stretch payment was 40% of the full, non-stretch bonus payment. The calculation of the Adjusted EBITDA portion of the bonus payout is linear between Threshold and Target and between Target and Stretch. The second parameter was OCE divided by revenue which was weighted as 10% of the bonus opportunity. Participants began to earn a bonus payout on this parameter when the Company achieved its Threshold of 65.5% percent. A full bonus payout on this parameter would be earned when the Company achieved its Target of 61.5%. The calculation of the OCE/revenue portion of the bonus payout is linear between Threshold and Target. The third parameter was TRIR, which was weighted as 10% of the bonus opportunity. Participants began to earn a bonus payout when TRIR performance reached Threshold TRIR of 1.20. A full bonus payout on the TRIR parameter would be achieved when safety performance reached Target TRIR of 1.00 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 2021 MIP may be between 0% and 140% of the Target Bonus for each NEO. The percentages of base salary payable to each NEO with respect to 2021 performance are set forth in the tables below.
| | | | | | | | |
| Adjusted EBITDA | |
| (in millions) | Bonus % |
| Threshold | $89.2 | 0% |
| Target | 111.5 | 100% |
| Maximum (Stretch) | 133.8 | 140% |
| | | | | | | | |
| | OCE/Revenue | Payout |
| Threshold | 65.5% | 0% |
| Target | 61.5% | 100% |
| | | | | | | | |
| | TRIR | Payout |
| Threshold | 1.20 | 0% |
| Target | 1.00 | 100% |
2021 Award Determination
For 2021, the actual Adjusted EBITDA performance was $120.4 million which was between Target and Stretch performance. Actual OCE/Revenue performance in 2021 was 57.7% which was better than Target while the 2021 TRIR performance was 1.29 which was higher than the required Threshold. Based on this performance, in addition to earning a full target bonus on the Adjusted EBITDA component, our NEOs also earned 39.7% of their maximum stretch opportunity, or an additional 14.3% of the full, non-stretch bonus calculation. NEOs also earned 100% of their bonus for performance on the OCE/Revenue parameter. Based on the Company’s TRIR performance, our NEOs received no payment on the TRIR element. The table below summarizes the metrics and performance standards approved for the 2021 MIP, and management’s level of achievement under the plan: | | | | | | | | | | | | | | | | | |
| ($ in millions) | |
| Performance Parameter | Threshold | Target | Stretch | Actual(1) | % of Target |
| Adjusted EBITDA | $89.2 | $111.5 | $133.8 | $120.4 | 107.9% |
| | | | | |
| OCE/Revenue | 65.5% | 61.5% | | 57.7% | 100% |
| TRIR | 1.20 | 1.00 | | 1.29 | 0% |
(1)Adjusted EBITDA is a non-GAAP financial measure. See the reconciliation of actual Adjusted EBITDA to the most comparable financial measure calculated in accordance with GAAP under “Reconciliation of GAAP to Non-GAAP Financial Measures.”
The following table shows the calculation of the 2021 bonus payment:
| | | | | | | | | | | | | | | | | |
| Performance Parameter | % of Parameter Target | Parameter % Earned | Weighting | | Target Bonus % Earned |
| Adjusted EBITDA | 107.9% | 100.0% | 80.0% | | 100.0% |
| OCE/Revenue | 100.0% | 100.0% | 10.0% | | 10.0% |
| TRIR | 0.0% | 0.0% | 10.0% | | 0.0% |
| Total | | | 100.0% | | 90.0% |
Stretch Bonus Component (39.7%(1) of Non-Stretch Bonus) | | | | | 14.3% |
| Total Bonus Percentage | | | | | 104.3% |
(1) Represents the 7.9% Adjusted EBITDA performance above Target applied against the maximum 120% of Target Adjusted EBITDA.
Long-Term Incentives
The primary purpose of awards under our long‑term incentive plan (the “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 are contingent upon our stock price performance. Equity awards under the LTIP also promote long-term share ownership by our NEOs. 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.
In 2021, the Compensation Committee approved LTIP awards using a mix of performance stock units (“PSUs”) and time-based restricted stock units (“RSUs”). Under the PSU awards granted to our NEOs in 2021, NEOs may earn shares based upon the company’s Return on Capital Employed (“ROCE”) performance. The PSU Award Agreement provides for the issuance of a number of shares of our common stock within sixty (60) days of the end of the performance period based on the Company’s average annual ROCE during the applicable performance period, subject to a maximum based on the Company’s ROCE relative to the ROCE of the median performer of the Company’s compensation peer companies during such performance period.
2021 LTIP Awards
On March 11, 2021, our NEOs received grants of PSUs and RSUs as set forth in the table below.
| | | | | | | | | | | |
| NEO | Target # of PSUs Awarded(1) | # of RSUs Awarded(2) | Approximate Compensation Value Intended to be Delivered |
| Scott Bender | 23,358 | | 23,358 | | $ | 1,500,000 | |
| Joel Bender | 23,358 | | 23,358 | | 1,500,000 | |
| Stephen Tadlock | 9,390 | | 9,390 | | 603,000 | |
| Steven Bender | 9,343 | | 9,343 | | 600,000 | |
| David Isaac | 8,176 | | 8,176 | | 525,000 | |
(1) PSU awards vest upon the conclusion of the three-year performance period ending December 31, 2023 based on the Company’s ROCE performance.
(2) RSUs vest 33% per year, beginning on the first anniversary of the grant date.
2021-2023 Performance Stock Unit Metrics and Goals:
| | | | | | | | | | | | | | | | | |
| Weight | | Threshold | Target | Maximum |
| (% of Target) | | (50% Payout) | (100% Payout) | (200% Payout) |
ROCE for January 1, 2021 to December 31, 2023(1) | 100% | | 15% | 20% | 25% |
(1) The PSUs cliff vest upon the conclusion of the three-year performance period based on the ROCE performance.
If the Company’s ROCE performance falls between any of these payout levels, the percentage multiple of the target PSUs will be interpolated based on the actual ROCE of the Company in relation to the payout levels. Notwithstanding the foregoing, in the event the Company’s ROCE for the performance period is less than the ROCE of the median performer of the Company’s peer companies (as defined per the agreement), when ranked by ROCE over the performance period, then the number of earned PSUs will be capped at 100% of the target number of PSUs.
Other Compensation Practices and Policies
Stock Ownership Guidelines
The Committee has established stock ownership guidelines for our NEOs and non-employee directors which 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 11, 2022, each of our NEOs and non-employee directors met or exceeded the ownership expectations under the guidelines.
Clawback Policy
Our Executive Compensation Clawback Policy (the “Clawback Policy”) provides that 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.
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 also 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 has historically made 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
over three years20% per year on the first five anniversaries of the respective employee’s hire date. In light of the challenging economic environment, the Company temporarily suspended matching contributions to the retirement plan in
annual installments on February 7, 2019, February 7,June 2020 and
February 7,reinstated the matching contributions in August 2021.
Perquisites
We provide Scott Bender, Joel Bender, Stephen Tadlock and Steven Bender with bi-weekly vehicle allowances. Additionally, Scott Bender receives a gasoline reimbursement.
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 (adjusted in 2020 and early 2021 to address market conditions). We want our executives to be motivated to achieve our 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.
Employment, Severance,
or Change in Controland Change-in-Control Agreements
In
connection with the IPO,February 2019, we amended
and restated our employment agreements with Messrs. Scott and Joel Bender
to provide that they be eligible to receive an additional annual cash bonus of up to 40% of the regular annual target cash 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. In April 2021, the Company entered into Second Amended and Restated Employment Agreements (as amended and restated, each, an “Employment Agreement”)
. Each with Messrs. Scott and Joel Bender in order to establish new three-year terms of employment with each. Under 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.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 cash bonus of up to 100% of annual base salary (“Base Bonus”) and an opportunity to earn an additional Stretch Bonus opportunity of up to 40% of the Base Bonus in the good faith discretion of the board of directorsBoard if the executive satisfies budgetary and performance goals, as determined annually by the board of directors.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 our board of directors if the executive satisfies additional budgetary and performance goals, as determined annually by the board of directors. See additional discussion regarding annual bonus changes made in 2019 under “2019 Compensation Decisions—2019 MIP” below.
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. Severance payments that could become payable to Messrs. Scott and Joel Bender and Mr. Tadlock 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:
| | | | | | | | | | | | | | | | | | | | | | | |
| Name and Principal Position | Year | Salary | Bonus(1) | Non-Equity Incentive Plan Compensation(2) | Stock Awards(3) | All Other Compensation(4) | Total |
Scott Bender, President, Chief Executive Officer and Director(5) | 2021 | $ | 225,294 | | $ | 24,964 | | $ | 234,968 | | $ | 1,533,220 | | $ | 13,400 | | $ | 2,031,846 | |
| 2020 | 122,745 | | — | | 18,301 | | 1,500,004 | | 14,612 | | 1,655,662 | |
| 2019 | 300,000 | | — | | 334,835 | | 1,499,994 | | 29,102 | | 2,163,931 | |
Joel Bender, Senior Vice President, Chief Operating Officer and Director(5) | 2021 | 249,231 | | — | | 259,932 | | 1,533,220 | | 13,400 | | 2,055,783 | |
| 2020 | 183,750 | | — | | 18,301 | | 1,500,004 | | 15,201 | | 1,717,256 | |
| 2019 | 300,000 | | — | | 334,835 | | 1,499,994 | | 30,120 | | 2,164,949 | |
Stephen Tadlock, Vice President, Chief Financial Officer and Treasurer | 2021 | 328,719 | | — | | 274,266 | | 616,360 | | 11,313 | | 1,230,658 | |
| 2020 | 265,906 | | 28,827 | | 21,173 | | 603,007 | | 16,508 | | 935,421 | |
| 2019 | 321,923 | | — | | 180,971 | | 1,502,947 | | 24,773 | | 2,030,614 | |
Steven Bender, Vice President of Operations | 2021 | 249,231 | | 34,417 | | 207,946 | | 613,274 | | 10,456 | | 1,115,324 | |
| 2020 | 183,750 | | — | | 14,641 | | 600,016 | | 15,204 | | 813,611 | |
| 2019 | 296,154 | | — | | 248,489 | | 599,975 | | 25,789 | | 1,170,407 | |
David Isaac, General Counsel, Vice President of Administration and Secretary | 2021 | 294,375 | | — | | 199,560 | | 536,672 | | 865 | | 1,031,472 | |
| 2020 | 238,125 | | 21,094 | | 15,406 | | 525,022 | | 5,675 | | 805,322 | |
| 2019 | 296,154 | | — | | 165,659 | | 449,972 | | 14,260 | | 926,045 | |
(1) In calculating payments due under the 2021 Non-Equity Incentive Plan, the Company uses the NEO’s eligible earnings as a basis to determine the bonus amount. In recognition of the fact that Scott Bender voluntarily incurred a larger salary decrease than Joel Bender during a portion of 2021, the Compensation Committee approved a bonus award to Scott Bender in order for his total 2021 cash bonus payment to be equal to that of Joel Bender. Additionally, due to the fact that Steven Bender’s full salary was restored at a date later than the restoration of full salaries for Mr. Tadlock and Mr. Isaac, the Compensation Committee approved a bonus award for Steven Bender equivalent to the Non-Equity Incentive Plan payment Steven Bender would have received if his full salary had been restored on the same date as Messrs. Tadlock and Isaac.
(2) 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.”
(3) The amounts reported in this column represent the aggregate grant date fair value of RSUs and target PSUs granted to each NEO and computed in accordance with FASB ASC Topic 718.
(4) Amounts reflected within the “All Other Compensation” column for 2021 are comprised of the following amounts: | | | | | | | | |
| Name | Employer
Contributions to 401(k) Plan | Vehicle
Allowance |
| Scott Bender | $ | 6,200 | | $ | 7,200 | |
| Joel Bender | 6,200 | | 7,200 | |
| Stephen Tadlock | 4,113 | | 7,200 | |
| Steven Bender | 3,256 | | 7,200 | |
| David Isaac | 865 | | — | |
(5) Although Messrs. Scott and Joel Bender each serve on our Board, they are not compensated for their services as directors.
Grants of Plan-Based Awards
The following table provides information about equity and non-equity awards granted to our NEOs in 2021.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Estimated Future Payouts Under Non-Equity Incentive Plan Awards(1) | | Estimated Future Payouts Under Equity Incentive Plan Awards(2) | All Other Stock Awards: Number of Shares of Stock or Units (#)(3) | Grant Date Fair Value of Stock Awards ($)(4) |
| Name | Grant
Date | Threshold
($) | Target
($) | Maximum
($) | | Threshold (#) | Target
(#) | Maximum (#) |
| Scott Bender | | $ | — | | $ | 225,294 | | $ | 315,412 | | | | | | | |
| 3/11/2021 | | | | | 11,679 | | 23,358 | | 46,716 | | | $ | 766,610 | |
| | 3/11/2021 | | | | | | | | 23,358 | | 766,610 | |
| Joel Bender | | — | | 249,231 | | 348,923 | | | | | | | |
| 3/11/2021 | | | | | 11,679 | | 23,358 | | 46,716 | | | 766,610 | |
| | 3/11/2021 | | | | | | | | 23,358 | | 766,610 | |
| Stephen Tadlock | | — | | 262,975 | | 368,165 | | | | | | | |
| 3/11/2021 | | | | | 4,695 | | 9,390 | | 18,780 | | | 308,180 | |
| | 3/11/2021 | | | | | | | | 9,390 | | 308,180 | |
| Steven Bender | | — | | 199,385 | | 279,139 | | | | | | | |
| 3/11/2021 | | | | | 4,672 | | 9,343 | | 18,686 | | | 306,637 | |
| | 3/11/2021 | | | | | | | | 9,343 | | 306,637 | |
| David Isaac | | — | | 191,344 | | 267,881 | | | | | | | |
| 3/11/2021 | | | | | 4,088 | | 8,176 | | 16,352 | | | 268,336 | |
| | 3/11/2021 | | | | | | | | 8,176 | | 268,336 | |
(1)Amounts in these columns represent the threshold, target and maximum estimated payouts for 2021 MIP cash bonus awards. The actual value of bonuses paid to our NEOs for 2021 under this program can be found in the “Non-Equity Incentive Plan Compensation” column of the Summary Compensation Table above.
(2)Shares in these columns represent the threshold, target and maximum number of estimated PSUs eligible for vesting per the award agreements executed on March 11, 2021. “Threshold” reflects the lowest possible payout (50% of the grant), “Target” represents the number of PSUs awarded under each grant, and “Maximum” reflects the highest possible payout (200% of the grant). The award agreements under which the PSUs were issued provide that no PSUs will vest unless a specified threshold level of performance is achieved. Vested PSUs are paid in shares of our Class A common stock, and the payout, if any, with respect to PSUs will occur at the end of the three-year performance period. See “Compensation Discussion and Analysis—Elements of Compensation—Long-Term Incentives—2021 LTIP Awards” for more information regarding these PSUs. The target number of PSUs granted was determined based on the average of the closing price on the 20 business days prior to the grant date.
(3)This column includes the number of RSUs granted to our NEOs during 2021. The number of RSUs granted was determined based on the average of the closing price on the 20 business days prior to the grant date.
(4)The amounts shown in this column represent the grant date fair value of each equity award computed in accordance with FASB ASC Topic 718. With respect to the PSU awards, this column reflects the grant date fair value for such PSUs at target.
Outstanding Equity Awards at 2021 Fiscal Year-End
The following table reflects information regarding outstanding stock awards held by our NEOs as of December 31, 2021.
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Name | | Grant Date | | Number of Shares or Units of Stock That Have Not Vested (#) | Market Value of Shares or Units That Have Not Vested ($)(1) | | Equity Incentive Plan Awards: Number of Unearned Shares, Units or Other Rights That Have Not Vested (#) | Equity Incentive Plan Awards: Market or Payout Value of Unearned Shares, Units or Other Rights That Have Not Vested ($)(1) |
| Scott Bender | | 3/11/2019 | | 13,380(2) | $ | 510,179 | | | | |
| | | 3/11/2020 | | 36,603(3) | 1,395,672 | | | 54,905(5) | $ | 2,093,528 | |
| | 3/11/2021 | | 23,358(4) | 890,641 | | | 23,358(6) | 890,641 | |
| Joel Bender | | 3/11/2019 | | 13,380(2) | $ | 510,179 | | | | |
| | | 3/11/2020 | | 36,603(3) | 1,395,672 | | | 54,905(5) | $ | 2,093,528 | |
| | 3/11/2021 | | 23,358(4) | 890,641 | | | 23,358(6) | 890,641 | |
| Stephen Tadlock | | 3/11/2019 | | 13,406(2) | $ | 511,171 | | | | |
| | | 3/11/2020 | | 19,619(3) | 748,072 | | | 4,905(5) | $ | 187,028 | |
| | 3/11/2021 | | 9,390(4) | 358,041 | | | 9,390(6) | 358,041 | |
| Steven Bender | | 3/11/2019 | | 5,352(2) | $ | 204,072 | | | | |
| | | 3/11/2020 | | 19,522(3) | 744,374 | | | 4,880(5) | $ | 186,074 | |
| | 3/11/2021 | | 9,343(4) | 359,249 | | | 9,343(6) | 356,249 | |
| David Isaac | | 3/11/2019 | | 4,014(2) | $ | 153,054 | | | | |
| | | 3/11/2020 | | 17,082(3) | 651,337 | | | 4,270(5) | $ | 162,815 | |
| | 3/11/2021 | | 8,176(4) | 311,751 | | | 8,176(6) | 311,751 | |
(1)The market value of these units is based on $38.13 per share, the closing price of the Company’s Class A common stock on December 31, 2021, the last trading day of the fiscal year.
(2)Reflects RSUs which vest on March 11, 2022.
(3)Reflects RSUs which vest over two years in equal annual installments on March 11, 2022 and March 11, 2023.
(4)Reflects RSUs which vest over three years in equal annual installments on March 11, 2022, March 11, 2023 and March 11, 2024.
(5)Reflects PSUs which will vest on December 31, 2022 subject to the Company’s satisfaction of ROCE performance targets.
(6)Reflects PSUs which vest on December 31, 2023 subject to the Company’s satisfaction of ROCE performance targets.See “Compensation Discussion and Analysis—Elements of Compensation—2021 LTIP Awards.”
Stock Vested
The following table provides information for our NEOs on the number of shares of Class A common stock acquired upon the vesting of RSU awards in 2021 and the value realized, in each case before payment of any applicable withholding tax.
| | | | | | | | | | | | | | |
| | | Stock Awards(1) |
| Name | | Number of Shares Acquired on Vesting (#) | | Pre-tax Value Realized on Vesting ($) |
| Scott Bender | | 49,225 | | | $ | 1,549,073 | |
| Joel Bender | | 49,225 | | | 1,549,073 | |
| Stephen Tadlock | | 56,110 | | | 1,716,858 | |
| Steven Bender | | 25,638 | | | 801,546 | |
| David Isaac | | 15,593 | | | 548,169 | |
(1) Reflects shares received pursuant to RSU awards vesting in 2021. 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 dates. For Scott Bender, Joel Bender, Stephen Tadlock and Steven Bender, the applicable vesting dates were February 7, 2021 and March 11, 2021 and the closing price of the Class A common stock on these dates was $29.03 and $32.82, respectively. For David Isaac, the applicable vesting dates were March 11, 2021 and October 24, 2021, and the closing price of the Class A common stock on these dates was $32.82 and $44.80, respectively.
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.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.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.occurs, paid in lump sum within 30 days after the executive’s termination due to death. 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.
Upon a termination for “good reason” or without “cause,” or a death or disability, the applicable cash severance benefits will be paid in a single lump sum cash payment within the 30‑day period immediately following the date of the executive’s applicable termination.
Non‑Compete Agreements
In connection with the 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.
Potential Payments upon Termination. Severance payments that could become payable to Messrs. Scott and Joel Bender have been described above in connection with the description of the Employment Agreements.
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.
The Company’s RSU 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 incentivize individuals providing serviceshis or her death or a Disability or (iii) upon the employee’s Normal Retirement. As used in the RSU award agreements, “Disability” means that the employee is unable to usperform the essential functions of their duties for three consecutive months, or our affiliates, in 2018 our board of directors adoptedthree months during any six-month period, as determined after an examination by a long‑term incentive plan (the “LTIP”). The LTIP provides for the grant, from time to time, at the discretionmedical doctor selected by written agreement of the boardemployee and the Company. As used in the RSU award agreements, “Normal Retirement” means an employee’s separation from service without Cause on or following the age 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. The description65. For purposes of the LTIP set forth belowRSU award agreements, “Cause” means the employee (i) is convicted of, or enters a summarynolo 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 or she 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 featuresbreach of the LTIP. This summary does not purport to be a complete description of allany of the provisions of their employment agreement with the LTIPCompany (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 is qualified in its entirety by referenceresponsibilities (other than a failure resulting from Disability).
The Company’s PSU award agreements provide that 100% of target PSUs shall immediately become earned units upon (i) the employee’s termination of employment due to death or Disability or (ii) the LTIP, which is filed as an exhibit to the Annual Report. References to “common stock” in this description of the LTIP are to Class A common stock.LTIP Share Limits. Subject to adjustmentemployee’s Normal Retirement. As used in the eventPSU award agreement, the term “Disability” means an employee’s inability to perform the essential functions of certain transactionstheir duties for three consecutive months or changes of capitalization in accordance with the LTIP, a total of 3,000,000 shares of our Class A Common Stock has been reserved for issuance pursuant to awards under the LTIP. The total number of shares reserved for issuance under the LTIP may be issued pursuant to incentive stock options (which generally are stock options that meet the requirements of Section 422 of the Internal Revenue Code (the “Code”)). Class A Common Stock subject to an award that expires or is canceled, forfeited, exchanged, settled in cash or otherwise terminated without delivery of shares and shares withheld to pay the exercise price of, or to satisfy the withholding obligations with respect to, an award will again be available for delivery pursuant to other awards under the LTIP.
Individual Share Limits. Our non‑employee directors will not receive awards in excess of 100,000 shares of common stock or, if greater, awards valued in excess of $1,500,000 inthree months during any calendar year.
Administration. The Board has delegated to the Compensation Committee the authority to administer the LTIP. The Compensation Committee has broad discretion 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 grantedsix-month period, and the terms and conditions of awards. The Compensation Committee may also accelerate the vestingterm “Normal Retirement” means an employee’s separation from service without Cause on or exercise of any award and make all other determinations and take all other actions necessary or advisable for the administration of the LTIP.
Eligibility. 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 the Board, are eligible to receive awards under the LTIP at the discretion of the Compensation Committee.
Stock Options. The Compensation Committee may grant incentive stock options and options that do not qualify as incentive stock options, except that incentive stock options may only be granted to persons who are our employees or employees of one of our subsidiaries, in accordance with Section 422 of the Code. The exercise price of a stock option generally cannot be less than 100% of the fair market value of a share of our common stock on the date on which the option is granted and the option must not be exercisable for longer than ten years following the dateage of grant. In the case of an incentive stock option granted to an individual who owns (or is deemed to own) at least 10% of the total combined voting power of all classes of our capital stock, the exercise price of the stock option must be at least 110% of the fair market value of a share of our Class A Common Stock on the date of grant, and the option must not be exercisable more than five years from the date of grant.
Stock Appreciation Rights (“SARs”). A SAR is the right to receive an amount equal to the excess of the fair market value of one share of our common stock on the date of exercise over the grant price of the SAR. The grant price of a SAR generally cannot be less than 100% of the fair market value of a share of our common stock on the date on which the SAR is granted. The term of a SAR may not exceed ten years. SARs may be granted in connection with, or independent of, a stock option. SARs may be paid in cash, common stock or a combination of cash and common stock, as determined by the Compensation Committee.
Restricted Stock. Restricted stock is a grant of shares of common stock subject to the restrictions on transferability and risk of forfeiture imposed by the Compensation Committee. In the discretion of the Compensation Committee, dividends distributed prior to vesting may be subject to the same restrictions and risk of forfeiture as the restricted stock with respect to which the distribution was made.
Restricted Stock Units. A restricted stock unit is a right to receive cash, common stock or a combination of cash and common stock at the end of a specified period equal to the fair market value of one share of our common stock on the date of vesting. Restricted stock units may be subject to the restrictions, including a risk of forfeiture, imposed by the Compensation Committee.
Stock Awards. A stock award is a transfer of unrestricted shares of our common stock on terms and conditions determined by the Compensation Committee.
Dividend Equivalents. Dividend equivalents entitle an individual to receive cash, shares of common stock, other awards, or other property equal in value to dividends or other distributions paid with respect to a specified number of shares of our common stock. Dividend equivalents may be awarded on a free‑standing basis or in connection with another award (other than an award of restricted stock or a stock award). The Compensation Committee may provide that dividend equivalents will be paid or distributed when accrued or at a later specified date, including at the same time and subject to the same restrictions and risk of forfeiture as the award with respect to which the dividend equivalents accrue if they are granted in tandem with another award.
Other Stock‑Based Awards. Subject to limitations under applicable law and the terms of the LTIP, the Compensation Committee may grant other awards related to our common stock. Such awards may include, without limitation, awards that are convertible or exchangeable debt securities, other rights convertible or exchangeable into our common stock, purchase rights for common stock, awards with value and payment contingent upon our performance or
any other factors designated by the Compensation Committee, and awards valued by reference to the book value of our common stock or the value of securities of, or the performance of, our affiliates.
Cash Awards. The LTIP permits the grant of awards denominated in and settled in cash as an element of or supplement to, or independent of, any award under the LTIP.
Substitute Awards. Awards may be granted in substitution or exchange for any other award granted under the LTIP or any other right of an eligible person to receive payment from us. Awards may also be granted under the LTIP in substitution for similar awards held by individuals who become eligible persons as a result of a merger, consolidation or acquisition of another entity or the assets of another entity by or with us or one of our affiliates.
Performance Awards. Performance awards represent awards with respect to which a participant’s right to receive cash, shares of our common stock, or a combination of both, is contingent upon the attainment of one or more specified performance measures during a specified period. The Compensation Committee will determine the applicable performance period, the performance goals and such other conditions that apply to each performance award. The Compensation Committee may use any business criteria and other measures of performance it deems appropriate in establishing the performance goals applicable to a performance award.
Recapitalization. In the event of any change in our capital structure or business or other corporate transaction or event that would be considered an equity restructuring, the Compensation Committee shall or may (as required by applicable accounting rules) equitably adjust (i) the aggregate number or kind of shares that may be delivered under the LTIP, (ii) the number or kind of shares or amount of cash subject to an award, (iii) the terms and conditions of awards, including the purchase price or exercise price of awards and performance goals, and (iv) the applicable share‑based limitations with respect to awards provided in the LTIP, in each case to equitably reflect such event.
Change in Control.65.In the event of a change in control, the performance period will be deemed to have ended, and the Company shall calculate the number of earned units to which the employee is entitled (if any) based on actual performance during the truncated period.
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 other changes to us or our common stock,ill-health (as determined by the Compensation Committee may,Committee);
•Change of control; or
•Death.
Quantification of Payments
Shown in its discretion,the table below are potential payments upon the assumed (i) accelerateinvoluntary 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, 2021. In addition, the table that follows shows 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, 2021. The table includes estimated amounts because actual amounts to be paid can only be determined at the time of exercisabilitysuch executive’s separation from the Company or upon a Change of an award, (ii) require awards to be surrendered in exchange for a cash payment (including canceling a stock option or SAR for no consideration if it has an exercise price or grant price less thanControl.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | 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) | | — | | | 5,780,661(4) | | 4,577,773 | | | 5,780,661 | | | 5,780,661 | | | 4,577,773 | |
| | Performance Cash Awards(2) | | — | | | — | | | 234,968 | | | 234,968 | | | 234,968 | | | 234,968 | |
| | Benefits & Perquisites: | | | | | | | | | | | | |
| | Health and Welfare Benefits(3) | | — | | | 11,369 | | | 11,369 | | | 5,684 | | | 947 | | | — | |
| Total | | | $ | — | | | $ | 6,092,030 | | | $ | 5,124,110 | | | $ | 6,171,313 | | | $ | 6,041,576 | | | $ | 4,812,741 | |
| Joel Bender | Compensation: | | | | | | | | | | | | |
| | Cash Severance | | $ | — | | | $ | 300,000 | | | $ | 300,000 | | | $ | 150,000 | | | $ | 25,000 | | | $ | — | |
| | Stock Awards(1) | | — | | | — | | | 4,577,773 | | | 5,780,661 | | | 5,780,661 | | | 4,577,773 | |
| | Performance Cash Awards(2) | | — | | | — | | | 259,932 | | | 259,932 | | | 259,932 | | | 259,932 | |
| | Benefits & Perquisites: | | | | | | | | | | | | |
| | Health and Welfare Benefits(3) | | — | | | 11,369 | | | 11,369 | | | 5,684 | | | 947 | | | — | |
| Total | | | $ | — | | | $ | 311,369 | | | $ | 5,149,074 | | | $ | 6,196,277 | | | $ | 6,066,540 | | | $ | 4,837,705 | |
| Stephen Tadlock | Compensation: | | | | | | | | | | | | |
| | Cash Severance | | $ | — | | | $ | — | | | $ | 167,500 | | | $ | — | | | $ | — | | | $ | — | |
| | Stock Awards(1) | | — | | | — | | | 2,333,365 | | | 2,162,352 | | | 2,162,352 | | | 2,333,365 | |
| | Performance Cash Awards(2) | | — | | | — | | | 274,266 | | | 274,266 | | | 274,266 | | | 274,266 | |
| | Benefits & Perquisites: | | | | | | | | | | | | |
| | Health and Welfare Benefits(3) | | — | | | — | | | — | | | — | | | — | | | — | |
| Total | | | $ | — | | | $ | — | | | $ | 2,775,131 | | | $ | 2,436,618 | | | $ | 2,436,618 | | | $ | 2,607,631 | |
| Steven Bender | Compensation: | | | | | | | | | | | | |
| Cash Severance | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | |
| Stock Awards(1) | | — | | | — | | | 2,017,191 | | | 1,847,017 | | | 1,847,017 | | | 2,017,191 | |
| Performance Cash Awards(2) | | — | | | — | | | 207,946 | | | 207,946 | | | 207,946 | | | 207,946 | |
| Benefits & Perquisites: | | | | | | | | | | | | |
| Health and Welfare Benefits(3) | | — | | | — | | | — | | | — | | | — | | | — | |
| Total | | | $ | — | | | $ | — | | | $ | 2,225,137 | | | $ | 2,054,963 | | | $ | 2,054,963 | | | $ | 2,225,137 | |
| David Isaac | Compensation: | | | | | | | | | | | | |
| Cash Severance | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | |
| Stock Awards(1) | | — | | | — | | | 1,739,643 | | | 1,590,707 | | | 1,590,707 | | | 1,739,643 | |
| Performance Cash Awards(2) | | — | | | — | | | 199,560 | | | 199,560 | | | 199,560 | | | 199,560 | |
| Benefits & Perquisites: | | | | | | | | | | | | |
| Health and Welfare Benefits(3) | | — | | | — | | | — | | | — | | | — | | | — | |
| Total | | | $ | — | | | $ | — | | | $ | 1,939,203 | | | $ | 1,790,267 | | | $ | 1,790,267 | | | $ | 1,939,203 | |
(1) Reflects the value paid in the transaction), (iii) cancelof unvested RSU and target PSU awards that remain subject to a restricted period as of the date of the change in control or other event without payment, or (iv) make any other adjustments to awardsDecember 31, 2021 that the Compensation Committee deems appropriate to reflect the applicable transaction or event.No Repricing. Except in connection with (i) the issuance of substitute awards granted to new service providers in connection with a transaction or (ii) in connection with adjustments to awards granted under the LTIPwould be accelerated as a result of a transaction or recapitalization involving us, without the approval of the stockholders of the Company, the terms of outstanding options or SARs may not be amended to reduce the exercise price or grant price or to take any similar action that would have the same economic result.
Clawback. All awards granted under the LTIP are subject to reduction, cancellation or recoupment under any written clawback policy that we may adopt and that we determine should apply to awards under the LTIP.
Amendment and Termination. The LTIP will automatically expireseparation event based on the tenth anniversaryCompany’s stock price of its effective date, in February 2028. The Compensation Committee may amend or terminate$38.13, which was the LTIP at any time, subject to stockholder approval if required by applicable law, rule or regulation, including the rules of the stock exchange on which our shares of common stock are listed. The Compensation Committee may amend the terms of any outstanding award granted under the LTIP at any time so long as the amendment would not materially and adversely affect the rights of a participant under a previously granted award without the participant’s consent.
2019 Compensation Decisions
Base Salary.Effective February 17, 2019, after discussions regarding competitiveclosing market data with Pearl Meyer & Partners, LLC, our compensation consultant (“Pearl Meyer”), the Board approved a salary increase for Stephen Tadlock, who will complete his transition to Chief Financial Officer effective March 15, 2019, to an annual salary of $335,000. The base salaries for Scott Bender and Joel Bender remained unchanged for 2019.
2019 MIP. 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 named executive officers, will be eligible to receive a cash bonus upon the achievement of certain financial performance and safety metrics. The weighting of each financial performance and safety metric may differ for each participant depending on the department and facility to which they are assigned.
Under the 2019 MIP, executive officers, including named executive officers, will be eligible to receive base cash bonus payments equal to a certain specified percentage of their annual base salaries (the “Base Bonus”) if the Company meets the specified performance targets. The approved 2019 Base Bonus for eachprice of the Company’s named executive officersClass A common stock as of December 31, 2021. For PSUs, upon a change in control, the performance period is set forthdeemed to have ended and a calculation is made to determine the number of earned units for the truncated period. As of December 31, 2021, the Company’s ROCE performance relating to the 2020 PSU grants did not exceed the threshold level; therefore, the 2020 PSUs would not have vested upon a change in control event. Additionally, the Company’s ROCE performance relating to the 2021 PSU grants exceeded the maximum level as of December 31, 2021; therefore, the 2021 PSUs would have vested at 200% upon a change in control event.
(2) Reflects each NEO’s 2021 performance cash award earned under the Company’s short-term incentive program.
(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 table belowExecutive 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 RSUs and PSUs held by Mr. Bender as of December 31, 2021 that would be accelerated upon his “Normal Retirement.”
2021 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 2021, our last completed fiscal year:
•Scott Bender had total annual compensation of $2,031,846 as reflected in the Summary Compensation Table.
◦Our median employee’s annual total compensation was $92,211.
◦As a percentageresult, we estimate that Scott Bender’s 2021 annual total compensation was approximately 22 times that of our median employee.
•To identify the median employee, we took the following steps:
◦We determined that, as of December 1, 2021, our employee population consisted of 1,037 individuals. This population consisted of our full-time and part-time employees (including both active employees and employees on leave as of December 1, 2021).
◦We selected December 1, 2021 as our identification date for determining our median employee because it enabled us to make such identification in a reasonably efficient and economic manner.
◦We 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 2021.
◦For 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.
•To 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 executive’s 2019 base salary:employee’s compensation for the 2021 year in accordance with the requirements of Item 402(c)(2)(x) of Regulation S-K.
| |
Name:
| 2019 Base Bonus:
|
Scott Bender
| 100%
|
Joel Bender
| 100%
|
Stephen Tadlock
| 50%
|
In addition◦With respect to the Base Bonus, ifannual total compensation of our Chief Executive Officer, we used the Company meets certain more stringent performance standards (the “Stretch Bonus Targets”), executive officers, including named executive officers, will be eligible to receive an additional bonus (the “Stretch Bonus”)amount reported in the “Total” column of up to 40%our 2021 Summary Compensation Table.
Director Compensation
In April 2021, the Compensation Committee approved a restoration of the
executive’s Base Bonus payment.Other thancompensation program of non-employee directors to the levels prior to the 25% reductions enacted on April 1, 2020. Accordingly, in the casesecond quarter of an employee’s injury, death or ill health (as determined by the Board) or in the case of a change of control of the Company, an employee must remain employed by the Company at the time of any payout in order to be eligible to receive such payout. Any payments under the 2019 MIP will be made in the sole discretion of the Board after considering the Company’s cash needs. However, the Company’s executive officers will not be eligible to receive any bonus payments related to their service during any fiscal year until the Company’s audited financial statements for such fiscal year have been finalized.
2019 LTIP Awards. On March 11, 2019, our named executive officers2021, each non-employee director received grants of restricted stock units under our LTIP in the following amounts:
| |
Name:
| Restricted Stock Units:
|
Scott Bender
| 40,139
|
Joel Bender
| 40,139
|
Stephen Tadlock
| 40,218
|
The restricted stock unit awards will vest in three equal installments on each anniversary of the date of grant.
DIRECTOR COMPENSATION
Pursuant to our non‑employee director compensation program, each non‑employee director will receive 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-employeenon‑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-employeenon‑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.$100,000.
In addition, a cash retainer of $20,000 per year
will beis payable to a
non-employeenon‑employee Chairman of the Board quarterly in arrears. Each director
will beis 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 the IPO. All director restricted stock unit awards will generally be subject to a one year vesting schedule. In connection with the IPO, Messrs. Rosenthal and Semple also each received restricted stock unit awards with grant date values of $1,250,000 that will vest over three years.
Messrs. Scott and Joel Bender, as employees of the Company, do not receive compensation for their services as directors in addition to their employee compensation described above. The table below reflects the compensation provided during 20182021 to each member of the Board who was not employed by the Company.
| | | | | | | | | | | | | | | | | | | | |
Name | Fees Earned
or Paid in
Cash ($)(1) | Stock Awards ($) (2) | Total ($)(3) | Name | | Fees Earned or Paid in Cash(1) | | Stock Awards(2) | | Total |
Bruce Rothstein(3) | 89,583 | 100,016 | 189,599 | | $ | 92,239 | | | $ | 102,234 | | | $ | 194,473 | |
John (Andy) O’Donnell | 93,958 | 100,016 | 193,974 | |
| Melissa Law | | Melissa Law | | 87,628 | | | 102,234 | | | 189,862 | |
Michael McGovern | 93,958 | 100,016 | 193,974 | Michael McGovern | | 92,239 | | | 102,234 | | | 194,473 | |
| John (Andy) O'Donnell | | John (Andy) O'Donnell | | 92,239 | | | 102,234 | | | 194,473 | |
| Gary L. Rosenthal | | Gary L. Rosenthal | | 87,628 | | | 102,234 | | | 189,862 | |
Alan Semple | 100,417 | 1,350,026 | 1,450,443 | Alan Semple | | 96,851 | | | 102,234 | | | 199,085 | |
Gary L. Rosenthal | 87,500 | 1,350,026 | 1,437,526 | |
| Tym Tombar | | Tym Tombar | | 47,500 | | | 98,546 | | | 146,046 | |
(1)The amounts shown in this column reflect cash fees earned by each director during 2018. We will also reimburse all directors2021. Amounts reflect compensation at the 25% reduction previously enacted in 2020 for reasonable expenses incurredthe period from January 2021 through April 2021 and the reinstated cash fees enacted in attending all board or committee meetings.
April 2021 for the remainder of 2021.(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 2018.(3)Mr.2021.
On March 11, 2021, the Compensation Committee awarded each of Messrs. Rothstein, did not directly receive anyO’Donnell, McGovern, Semple and Rosenthal and Ms. Law 3,115 restricted stock units at a fair value of $32.82 per share. Consistent with the director compensation for his servicesprogram, the Compensation Committee also awarded Tym Tombar 2,512 RSUs at a fair value of $39.23 per share. The number of RSUs granted was determined based on the average of the closing price on the 20 business days prior to the grant date. The RSU awards 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 a director during 2018. Mr. Rothstein is a Managing Partnerwell as the terms of Cadent Energy Partners LLC. Due to Mr. Rothstein’s servicesthe LTIP on that date.
As of December 31, 2021, the aggregate number of unvested restricted stock unit awards held by non-employee directors were as
a managing partner at Cadent, all compensation and equity awards that he receives will be payable or transferred to Cadent.follows:
| | | | | | | | |
| Name | | Stock Awards (#) |
| Bruce Rothstein | | 3,115(1) |
| Melissa Law | | 3,115(1) |
| Michael McGovern | | 3,115(1) |
| John (Andy) O'Donnell | | 3,115(1) |
| Gary L. Rosenthal | | 3,115(1) |
| Alan Semple | | 3,115(1) |
| Tym Tombar | | 2,512(2) |
(1) RSUs vest on March 11, 2022.
(2) RSUs vest on July 1, 2022.
Compensation Committee Interlocks and Insider Participation
During 2021, the Company’s Compensation Committee consisted of Messrs. McGovern, O’Donnell, Rosenthal and Tombar and Ms. Law. During 2021, no member of the Compensation Committee had a relationship that must be described under the SEC rules relating to disclosure of related person transactions.In 2021, none of our executive officers served on the board of directors or compensation committee of any entity that had one or more of its executive officers serving on the Board or the Compensation Committee of Cactus Inc.
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 2022 annual meeting and the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2021.
| | | | | |
| Compensation Committee of the Board of Directors |
| Michael McGovern, Chairman
Melissa Law, Member
John (Andy) O’Donnell, Member
Gary Rosenthal, Member
Tym Tombar, Member |
Reconciliation of GAAP to Non-GAAP Financial Measures
EBITDA and Adjusted EBITDA are not measures of net income as determined by GAAP. EBITDA and Adjusted EBITDA are supplemental non-GAAP financial measures that are used by management and external users of the Company’s consolidated financial statements, such as industry analysts, investors, lenders and rating agencies. Cactus defines EBITDA as net income excluding net interest, income tax and depreciation and amortization. Cactus defines Adjusted EBITDA as EBITDA excluding the other items outlined below. See the following reconciliation (in thousands):
| | | | | |
| Year Ended December 31, 2021 |
| Net income | $ | 67,470 | |
| Interest income, net | 774 | |
| Income tax expense | 7,675 | |
| Depreciation and amortization | 36,308 | |
| EBITDA | 112,227 | |
| |
| Other non-operating income | (898) | |
| Secondary offering related expenses | 406 | |
| Stock-based compensation | 8,620 | |
| Adjusted EBITDA | $ | 120,355 | |
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder MattersSecurity Ownership of Certain Beneficial Owners and Management
The following table sets forth certain information regarding the beneficial ownership of common stock as of March 13, 2019,February 14, 2022, 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. In computing the number of shares beneficially owned by a person and the percentage ownership of that person, shares of Class A common stock issuable upon the vesting of RSUs held by that person
that will vest within 60 days of February 14, 2022, are deemed to be issued and outstanding. These shares, however, are not deemed outstanding for purposes of computing percentage ownership of any other stockholder. All of such information is based on publicly available filings, unless otherwise known to us from other sources.
As of February 14, 2022, 59,035,237 shares of our Class A common stock and 16,674,282 shares of our Class B common stock were outstanding. 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 March 13, 2019, 37,873,071 shares of our Class A common stock and 37,236,142 shares of our Class B common stock were outstanding.
| | | | | | |
| Shares Beneficially Owned by
Certain Beneficial Owners and Management(1) |
| Class A
Common Stock | Class B
Common Stock | Combined
Voting Power(2) |
| Number | % of class | Number | % of class | Number | % |
5% Stockholders | | | | | | |
Cadent Energy Partners II, L.P.(3) | 5,264 | *% | 14,297,466 | 38.4% | 14,302,730 | 19.0% |
Cactus WH Enterprises, LLC(4) | — | —% | 21,037,017 | 56.5% | 21,037,017 | 28.0% |
BlackRock, Inc.(5) | 3,080,379 | 8.1% | — | —% | 3,080,379 | 4.1% |
FMR LLC(6) | 2,072,007 | 5.5% | — | —% | 2,072,007 | 2.8% |
Neuberger Berman Group LLC(7) | 2,510,371 | 6.6% | — | —% | 2,510,371 | 3.3% |
The Vanguard Group(8) | 3,280,381 | 8.7% | — | —% | 3,280,381 | 4.4% |
Directors and NEOs: | | | | | | |
Bruce Rothstein(3) | — | —% | — | —% | — | —% |
Scott Bender(4) | 13,132 | *% | 21,037,017 | 56.5% | 21,050,149 | 28.0% |
Joel Bender(4) | 13,132 | *% | 21,037,017 | 56.5% | 21,050,149 | 28.0% |
Stephen Tadlock | 24,730 | *% | — | —% | 24,730 | *% |
John (Andy) O’Donnell | 5,264 | *% | 68,595 | *% | 73,859 | *% |
Michael McGovern | 5,264 | *% | 73,409 | *% | 78,673 | *% |
Alan Semple | 27,194 | *% | — | —% | 27,194 | —% |
Gary Rosenthal | 27,194 | *% | — | —% | 27,194 | —% |
Directors and executive officers as a group (11 persons) | 124,655 | *% | 21,179,021 | 56.9% | 21,303,676 | 28.4% |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Shares Beneficially Owned by Certain Beneficial Owners and Management(1) |
| | Class A
Common Stock | | Class B
Common Stock | | Combined Voting Power(2) |
| | Number | | % of
class | | Number | | % of
class | | Number | | % of
class |
| 5% Stockholders | | | | | | | | | | | |
Cactus WH Enterprises, LLC(3) | — | | | — | % | | 15,014,963 | | | 90.0 | % | | 15,014,963 | | | 19.8 | % |
The Vanguard Group(4) | 5,627,890 | | | 9.5 | % | | — | | | — | % | | 5,627,890 | | | 7.4 | % |
T. Rowe Price Associates(5) | 5,416,577 | | | 9.2 | % | | — | | | — | % | | 5,416,577 | | | 7.2 | % |
AllianceBernstein L.P.(6) | 4,864,730 | | | 8.2 | % | | — | | | — | % | | 4,864,730 | | | 6.4 | % |
BlackRock, Inc.(7) | 3,892,630 | | | 6.6 | % | | — | | | — | % | | 3,892,630 | | | 5.1 | % |
The Bank of New York Mellon Corporation(8) | 3,042,294 | | | 5.2 | % | | — | | | — | % | | 3,042,294 | | | 4.0 | % |
| Directors and NEOs: | | | | | | | | | | | |
Scott Bender(3) | 109,931 | | | * | | 15,014,963 | | | 90.0 | % | | 15,124,894 | | | 20.0 | % |
Joel Bender(3) | 108,071 | | | * | | 15,014,963 | | | 90.0 | % | | 15,123,034 | | | 20.0 | % |
Bruce Rothstein(9),(12) | 8,202 | | | * | | 212,186 | | | 1.3 | % | | 220,388 | | | * |
Stephen Tadlock(10) | 110,474 | | | * | | — | | | — | % | | 110,474 | | | * |
Steven Bender(11) | 54,794 | | | * | | — | | | — | % | | 54,794 | | | * |
Alan Semple(12) | 50,035 | | | * | | — | | | — | % | | 50,035 | | | * |
John (Andy) O’Donnell(12) | 18,375 | | | * | | 27,508 | | | * | | 45,883 | | | * |
Michael McGovern(12) | 18,375 | | | * | | 24,024 | | | * | | 42,399 | | | * |
David Isaac(13) | 30,003 | | | * | | — | | | — | % | | 30,003 | | | * |
Gary Rosenthal(12) | 20,208 | | | * | | — | | | — | % | | 20,208 | | | * |
| Tym Tombar | 15,400 | | | * | | — | | | — | % | | 15,400 | | | * |
Melissa Law(12) | 6,476 | | | * | | — | | | — | % | | 6,476 | | | * |
| Directors and executive officers as a group (12 persons) | 550,344 | | | * | | 15,278,681 | | | 91.6 | % | | 15,829,025 | | | 20.9 | % |
* Less than 1.0%
(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 which 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, its manager, are indirectly controlled by Cadent Energy Partners LLC. Cadent Energy Partners LLC 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 LLC. Certain of our directors and officers have passive interests in Cadent Energy Partners II, L.P. 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 35,334,483 shares of our Class B common stock, representing an aggregate combined voting power of 47.2%. Cadent Energy Partners II, L.P. 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 Services, LLC, 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 reported15,014,963 shares listed as being owned by Cactus WH Enterprises 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 certainThe number of nomineesshares shown under the columns “Class A Voting Stock” and “Combined Voting Power” for Scott Bender includes 39,467 shares of Class A Common Stock issuable to our boardScott Bender upon the vesting of directors so long as theypreviously granted RSU awards. The number of shares shown under the columns “Class A Voting Stock” and their respective affiliates collectively beneficially own at least 5%“Combined Voting Power” for Joel Bender includes 39,467 shares of Class A Common Stock issuable to Joel Bender upon the outstandingvesting of previously granted RSU awards. (4)Based on the Schedule 13G/A, filed February 9, 2022 by The Vanguard Group (“Vanguard”), which states that Vanguard has shared voting power over 105,918 shares of our Class A common stock, sole dispositive power over 5,471,985 shares of our Class A common stock and shared dispositive power over 155,905 shares of our Class A common stock. Therefore, CadentThe address of Vanguard is 100 Vanguard Boulevard, Malvern, PA 19355.
(5)Based on the Schedule 13G/A filed on February 14, 2022 by T. Rowe Price Associates, Inc. (“T. Rowe Price”), which states that T. Rowe Price and Cactus WH Enterprises may each be deemed to beneficially own an aggregate 35,334,483 shares, representing an aggregate combinedits affiliates have sole voting power over 1,796,800 shares of 47.2%.our Class A common stock and sole dispositive power over 5,416,577 shares of our Class A common stock. The address of T. Rowe Price is 100 E. Pratt Street, Baltimore, MD 21202. (5)(6)Based on the Schedule 13G filed on February 8, 201914, 2022 by AllianceBernstein L.P. (“AllianceBernstein”), which states that AllianceBernstein has sole voting power over 4,204,305 shares of our Class A common stock and sole dispositive power over 4,864,730 shares of our Class A common stock. The address of AllianceBernstein is 1345 Avenue of the Americas, New York, NY 10105.
(7)Based on the Schedule 13G/A, filed on February 3, 2022 by BlackRock, Inc., (“BlackRock”) a parent holding company, which states that BlackRock and its affiliates have sole investment discretionvoting power over 3,080,3793,818,218 shares of our Class A common stock and sole votingdispositive power over 2,911,6983,892,630 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)
(8)Based on the Schedule 13G filed on February 13, 20192, 2022 by FMR LLCThe Bank of New York Mellon Corporation (“FMR”The Bank of New York”), which states that FMR hasThe Bank of New York and its affiliates have sole voting power over 865,607 shares of our Class A common stock and sole dispositive power over 2,072,007 shares of our Class A common stock. The address of FMR is 245 Summer Street, Boston, Massachusetts 02210.(7)Based on Schedule 13G, filed February 13, 2019 by Neuberger Berman Group LLC (“Neuberger Berman”), which states that Neuberger Berman and its affiliates share voting power over 2,496,326 shares of our Class A common stock and share dispositive power over 2,510,371 shares of our Class A common stock. The address of Neuberger Berman is 1290 Avenue of the Americas, New York, NY 10104.
(8)Based on Schedule 13G, filed February 11, 2019 by The Vanguard Group (“Vanguard”), which states that Vanguard has sole voting power over 80,0592,882,029 shares of our Class A common stock, shared voting power over 2,227522 shares of our Class A common stock, sole dispositive power over 3,202,864917,683 shares of our Class A common stock and shared dispositive power over 77,5172,110,466 shares of our Class A common stock. All shares covered by such filings are held by The Bank of New York and/or its subsidiaries. The address of VanguardThe Bank of New York is 100 Vanguard Boulevard, Malvern, PA 19355.
*Less than 1.0%.
c/o The Bank of New York Mellon Corporation, 240 Greenwich Street, New York, NY 10286.
(9)The Class B common stock held by Mr. Rothstein includes 184,390 shares held in trusts for members of his family.
(10)The number of shares shown under the columns “Class A Voting Stock” and “Combined Voting Power” for Mr. Tadlock includes 26,345 shares of Class A Common Stock issuable to Mr. Tadlock upon the vesting of previously granted RSU awards.
(11)The number of shares shown under the columns “Class A Voting Stock” and “Combined Voting Power” for Mr. Steven Bender includes 18,228 shares of Class A Common Stock issuable to Mr. Steven Bender upon the vesting of previously granted RSU awards.
(12)The number of shares shown under the columns “Class A Voting Stock” and “Combined Voting Power” includes 3,115 shares of Class A Common Stock issuable upon the vesting of previously granted RSU awards.
(13)The number of shares shown under the columns “Class A Voting Stock” and “Combined Voting Power” for Mr. Isaac includes 15,281 shares of Class A Common Stock issuable to Mr. Isaac upon the vesting of previously granted RSU awards.
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 certain information relating to our LTIP as of December 31,
2018. | | | | | | |
Plan category | | Number of securities to be issued upon exercise of outstanding options, warrants and rights | | Weighted average exercise price of outstanding options, warrants and rights | | Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a)) |
| | (a) | | (b) | | (c) |
Equity compensation plans approved by security holders | | - | | - | | - |
Equity compensation plans not approved by security holders | | 781,715 | | $ 19.84 | | 2,218,285 |
Total | | 781,715 | | $ 19.84 | | 2,218,285 |
| | | | | | | | | | | | | | | | | |
| 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(4) | 673,337 | | N/A | | 1,295,150 |
| Total | 673,337 | | N/A | | 1,295,150 |
(1)This column reflects all shares subject to time-based restricted stock units and performance-based stock units granted under the LTIP that were outstanding and unvested as of December 31, 2021. 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.
shares remaining available for issuance under the LTIP as of December 31, 2021.(4)See “Item 11. Executive Compensation—Elements of Compensation” for more information about our LTIP.
Item 13.
Certain Relationships and Related Transactions, and Director IndependencePolicies 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‑lawmother-in-law, father-in-law, son-in-law, daughter-in-law, brother-in-law or sister‑in‑lawsister-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‑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
permitsuspend or otherwise restrict redemptions
of a lower number of units)under certain circumstances) 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.
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. 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.
For the year ended December 31, 2021, Cactus LLC distributed $30.6 million to Cactus Inc. to fund its dividend, TRA liability and estimated tax payments and made pro rata distributions to the other members totaling $9.7 million. Three of our independent directors, Messrs. McGovern, O’Donnell and Rothstein, have the right to receive pro rata distributions with respect to their percentage ownership of CW Units. During 2021, Messrs. McGovern, O’Donnell and Rothstein received approximately $12 thousand, $15 thousand and $21 thousand, respectively, in pro rata distributions from Cactus LLC. During 2021, a company controlled by Scott Bender and Joel Bender received approximately $8.1 million in pro rata distributions with respect to its percentage ownership of CW Units. In addition, Cadent and Steven Bender received pro rata distributions of approximately $0.8 million and $0.7 million, respectively, during 2021 with respect to their 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 inbuilt-in gains and losses and tax depletion, depreciation and amortization with respect to such
built inbuilt-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)
generally 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 such 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.
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 Offeringfollow-on equity offerings in July 2018, March 2019 and
March 2021 and other 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
willare 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.
We account for any amounts payable under the TRA in accordance with Accounting Standard Codification (“ASC”) Topic 450, Contingencies. We will recognize subsequent year changes to the measurement of the liability from the TRA in the income statement as a component of income before taxes. In the case of any changes to any valuation allowance associated with the underlying tax asset, given the link between the tax savings generated and the recognition of the liability from the TRA (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 liability from the TRA in the income statement is appropriate.
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,
are anticipated to commencewhich commenced in 2019,
and towill continue for
16approximately 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
2520 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 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. Assuming no material changes in the relevant tax law, we expect that if the TRA were terminated as of December 31,
2018,2021, the estimated termination payments, based on the assumptions discussed above, would be approximately
$280$361.9 million (calculated using a discount rate equal to one-year LIBOR plus 150 basis points, applied against an undiscounted liability of
$400$422.0 million).
A 10% increase in the price of our Class A Common Stock at December 31, 2021 would have increased the discounted liability by $12.9 million to $374.8 million (an undiscounted increase of $15.4 million to $437.5 million), and likewise, a 10% decrease in the price of our Class A Common Stock at December 31, 2021 would have decreased the discounted liability by $12.9 million to $349.0 million (an undiscounted decrease of $15.4 million to $406.7 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 period to which such payments relate until such payment
due 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.
In 2021, Messrs. McGovern and O’Donnell each received payments, net of administrative fees, under the TRA of approximately $6 thousand. Mr. Rothstein, one of our independent directors, and trusts established for the benefit of Mr. Rothstein’s family have the right to receive payments under the Tax Receivable Agreement in respect of CW Units distributed to them by Cadent in 2021. Mr. Rothstein did not receive any payments under the Tax Receivable Agreement during 2021. During 2021, a company controlled by Scott Bender and Joel Bender received approximately $2.8 million in payments, net of administrative fees, under the TRA in respect of CW Units owned by them. In addition, Cadent and Steven Bender received payments, net of administrative fees, under the TRA of approximately $6.4 million and $0.2 million, respectively, during 2021 in respect of CW Units owned by them.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 withBoquet. As Cadent no longer owns any “Registrable Securities,” as defined in the Registration Rights Agreement, references herein to the “Registration Rights Holders” refer to Cactus WH Enterprises and
Cadent, the “Registration Rights Holders”).Lee Boquet. 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.
We agreed to file
On March 15, 2019, in accordance with the requirements of the Registration Rights Agreement, we filed a shelf registration statement
on Form S-3 (the “Expiring Shelf Registration Statement”) pursuant to
the Securities Act of 1933, as amended, to, among other things, permit the resale by the Registration Rights Holders of shares of Class A Common Stock issuable upon the exercise of redemption
rights whenrights. Shortly following the filing of this annual report, we
become eligibleintend to
registerfile a new registration statement to replace the
sale of our securities on Form S‑3 under the Securities Act of 1933, as amended.Expiring Shelf Registration Statement. If at any time
after the 180th day following February 7, 2018, the date of the final prospectus relating to our IPO, 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 at 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.
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 theThe Stockholders’ Agreement
are set forth below. Among other things,was subsequently amended in 2021 after Cadent withdrew from the
Agreement. The Amended and Restated Stockholders’ Agreement provides
Cactus WH Enterprises, but not Cadent, with the right to designate a
certain 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(“CWHE Directors”) so long as Cadentit and its respective 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,our common stock as set forth below. Among other things, 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 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.
Under the Stockholders’ Agreement, Bruce Rothstein, John (Andy) O’Donnell and Michael McGovern are each deemed to be designees of Cadent, and
Currently, Scott Bender, Joel Bender and Alan Semple are each deemed to be designees of Cactus WH Enterprises.
Pursuant to the Stockholders’ Agreement,
we, Cadentthe Company 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
theirits 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 The Stockholders’ Agreement shall terminate on January 29, 2023.
Non-Exclusive Aircraft Lease Agreements
In June 2014,July 2019, Cactus LLC entered into a Non ExclusiveNon-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 hadhas 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 payspaid 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. The SusieAir Lease generally provides that Cactus LLC will indemnify SusieAir from liabilities arising from the operation of the aircraft. During 2018, 2017 and 2016,2021, total expense recognized in connection with these rentals totaled $0.4 million, $0.3 million and $0.2 million, respectively.million. As of December 31, 2018 and 2017,2021, we owed less than $0.1 million respectively, to the related partySusieAir, which areamount is included in accounts payable in the consolidated balance sheets.
Management Services Agreement
Prior to our IPO, we were party to a management services agreement with two Cactus LLC members, whereby Cactusis also responsible for employing pilots and certain fuel true up fees. Mr. Scott Bender and Mr. Joel Bender paid an annual management fee totaling approximately $0.3 million, payable in four installments, eachthe Company from $600 to be paid quarterly in advance, prorated$1,800/day for any partial year. In conjunction with our IPO,their personal use of the management services agreement terminated pursuant to its terms. Management fee expense totaled $0.1 millionpilots employed by the Company, depending on how many company pilots are utilized for 2018 and $0.3 million for each of 2017 and 2016, respectively. There were no outstanding balances due as of December 31, 2018 or December 31, 2017 under the management services agreement.
day.
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. For more information, please read Part III. Item 11. Executive Compensation—Employment, Severance
orand Change in Control Agreements—Employment
Agreements of this Annual Report.Other Transactions with Affiliates
On September 18, 2015, Cadent and Saguaro SPV, LLC (“Saguaro”), an entity managed by Cadent Management, acquired approximately $3.45 million and $7.46 million, respectively, of the principal amount of the then outstanding term loan debt of Cactus LLC. We contributed all the net proceeds of our IPO to Cactus LLC and caused Cactus LLC to use a portion of such proceeds to repay the borrowings outstanding under its term loan facility. As holders of a portion of our outstanding term loan debt, Cadent and Saguaro each received its pro rata share of the net proceeds of our IPO that we used to pay such outstanding debt.
Agreements.
See “Item 10. Directors, Executive Officers and Corporate
GovernanceGovernance” for a discussion of the directors who our
boardBoard has determined to be independent.
Item 14.
Principal AccountingAccountant Fees and ServicesThe table below sets forth the aggregate fees billed or expected to be billed by PricewaterhouseCoopers LLP, our independent registered public accounting firm, for
services rendered for each of the last two fiscal years:
| | |
| 2018 | 2017 |
| (in thousands) |
Audit Fees(1) | $ 1,545 | $ 1,409 |
Audit‑Related Fees | 10 | 1 |
Tax Fees(2) | 328 | 172 |
All Other Fees | — | — |
Total | $ 1,883 | $ 1,582 |
| | | | | | | | | | | |
| | 2021 | | 2020 |
| | (in thousands) |
Audit Fees(1) | $ | 1,722 | | | $ | 1,422 | |
| Audit-Related Fees | 1 | | | 1 | |
| Tax Fees | — | | | — | |
| All Other Fees | — | | | — | |
| Total | $ | 1,723 | | | $ | 1,423 | |
(1)Audit fees consist of the aggregate fees billed or expected to be billed for professional services rendered for (i) the audit of annual financial statements, (ii) reviews of our quarterly financial statements, (iii) statutory audits, (iv) research necessary to comply with generally accepted accounting principles and (v) other filings with the SEC, including consents and comfort 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.
letters.
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 2021 and 2020, all audit and non-audit services were pre-approved by the Audit Committee.
Item 15.
Exhibits, Financial Statement SchedulesThe consolidated financial statements of Cactus, Inc. and Subsidiaries and the Report of Independent Registered Public Accounting Firm are included in Part II, Item
88. of this 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.
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 | | |
| 3.2 | | |
3.2
| | |
| 4.1 | | |
10.1 | | |
| 10.2† | | |
10.2†
| | |
| 10.3† | | |
10.3†
10.4† | | |
| 10.5† | | |
| 10.6† | | |
10.4†
10.7† | | |
| 10.8† | | |
| 10.9† | | |
10.5†
| | |
| 10.10† | | |
10.6†
| | |
| 10.11†* | | |
10.7
10.12 | | |
| | | | | | | | |
| Exhibit No. | | Description |
10.8
10.13 | | |
| 10.14 | | |
10.9
| | Stockholders’Amended and Restated Stockholder’s Agreement effectivedated as of February 12, 2018.,March 24, 2021, by and amongbetween Cactus, Inc., Cadent Energy Partners II, L.P. and Cactus WH Enterprises, LLC (incorporated by reference to Exhibit 4.210.1 to the Registrant’s Form 8‑K (File No. 001‑38390)8-K filed with the Commission on February 12, 2018)March 29, 2021) |
| 10.15 | | |
10.10
| | |
| 10.16† | | |
| | |
Exhibit No.
| | Description
|
10.11
| | 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) |
| 10.17† | | |
10.12†
10.18† | | |
| 10.19† | | |
10.13†
| | |
| 10.20 | | |
10.14
| | 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 (File No. 000-38390) filed with the Commission on August 24, 2018) |
| 10.21 | | First Amendment to Credit Agreement, dated as of September 18, 2020, among Cactus Wellhead, LLC, as borrower, the lenders party thereto and JPMorgan Chase Bank, N.C., as administrative agent, an issuing bank and swingline lender (incorporated by reference to Exhibit 10.1 to the Registrant’s Form 10-Q filed with the Commission on November 5, 2020) |
10.15†
10.22† | | |
| 10.23† | | |
10.16†
| | |
| 10.24† | | |
10.17†*
10.25† | | |
| 10.26†* | | |
| 10.27† | | |
| 10.28† | | |
21.1*
10.29† | | |
| 21.1* | | |
| 23.1* | | |
23.1*
| | |
| 31.1* | | |
31.1*
| | |
| 31.2* | | |
31.2*
| | |
| 32.1** | | |
32.1**
| | |
| 32.2** | | |
32.2**
| | |
| | | | | | | | |
| Exhibit No. | | Description |
| 101.INS* | | XBRL Instance Document - the instance document does not appear in the Interactive Data File because XBRL tags are embedded within the Inline XBRL document |
| 101.SCH* | | XBRL Taxonomy Extension Schema Document |
| 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 |
| 104 | | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) |
* Filed
herewithherewith.
** 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.
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, 2022 | By: | /s/ Scott Bender |
| | Scott Bender |
| | President, Chief Executive Officer and Director |
| Date: March 14, 2019
|
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 and on the dates indicated.
| | | | | | | | | | | | | | |
Signature | | Title | | Date |
| | | | |
/s/ Scott Bender | | President, Chief Executive Officer and Director (Principal Executive Officer) | | March 14, 2019
February 28, 2022 |
Scott Bender | | | | |
| | | | |
/s/ Brian Small Stephen Tadlock | | Vice President, Chief Financial Officer and Treasurer (Principal Financial Officer) | | March 14, 2019
February 28, 2022 |
Brian Small
Stephen Tadlock | | | | |
| | | | |
/s/ Ike Smith Donna Anderson | | Chief Accounting Officer (Principal Accounting Officer) | | March 14, 2019
February 28, 2022 |
Ike Smith
Donna Anderson | | | | |
| | | | |
/s/ Bruce Rothstein | | Chairman of the Board and Director | | March 14, 2019
February 28, 2022 |
Bruce Rothstein | | | | |
| | | | |
/s/ Joel Bender | | Senior Vice President, Chief Operating Officer and Director | | March 14, 2019
February 28, 2022 |
Joel Bender | | | | |
| | | | |
/s/ Melissa Law | | Director | | February 28, 2022 |
| Melissa Law | | | | |
| | | | |
| /s/ Michael McGovern | | Director | | February 28, 2022 |
| Michael McGovern | | | | |
| | | | |
| /s/ John (Andy) O’Donnell | | Director | | March 14, 2019
February 28, 2022 |
John (Andy) O’Donnell | | | | |
| | | | |
/s/ Michael McGovern Gary Rosenthal | | Director | | March 14, 2019
February 28, 2022 |
Michael McGovern
Gary Rosenthal | | | | |
| | | | |
/s/ Alan Semple | | Director | | March 14, 2019
February 28, 2022 |
Alan Semple | | | | |
| | | | |
/s/ Gary Rosenthal Tym Tombar | | Director | | March 14, 2019
February 28, 2022 |
Gary Rosenthal
Tym Tombar | | | | |
