Cactus, Inc. (NYSE:WHD) Q3 2023 Earnings Call Transcript
Cactus, Inc. (NYSE:WHD) Q3 2023 Earnings Call Transcript November 9, 2023
Operator: Good day, and thank you for standing by. Welcome to the Cactus, Inc. Quarter Three Earnings Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker today, Alan Boyd, who is Director of Corporate Development and Investor Relations. Please stand by. Go ahead.
Alan Boyd: Thank you, and good morning. We appreciate you joining us on today's call. Our speakers will be Scott Bender, our Chairman and Chief Executive Officer; and Steve Tadlock, our Chief Financial Officer and CEO of FlexSteel. Also joining us today are Joel Bender, President; Steven Bender, Chief Operating Officer; and Will Marsh, our General Counsel. Please note that any comments we make on today's call regarding projections or expectations for future events are forward-looking statements covered by the Private Securities Litigation Reform Act. Forward-looking statements are subject to a number of risks and uncertainties, many of which are beyond our control. These risks and uncertainties can cause actual results to differ materially from our current expectations.
We advise listeners to review our earnings release and the risk factors discussed in our filings with the SEC. Any forward-looking statements we make today are only as of today's date, and we undertake no obligation to publicly update or review any forward-looking statements. In addition, during today's call, we will reference certain non-GAAP financial measures. Reconciliations of these non-GAAP measures to the most directly comparable GAAP measures are included in our earnings release. With that, I'll turn the call over to Scott.
Scott Bender: Thanks, Alan, and good morning to everyone. We were pleased with the company's execution in the third quarter, and encouraged by October's preliminary results despite the declines in the U.S. land rig count during the period. As expected, Pressure Control revenues decreased quarter-over-quarter, while Spoolable Technologies revenues remained relatively flat. Both segment sales outperformed the reduced activity levels, once again, reflecting our value proposition. Some third quarter total company highlights include: revenue of $288 million; adjusted EBITDA of $103 million; adjusted EBITDA margins of 35.8%; we paid a quarterly dividend of $0.12 per share; and as previously announced, we're pleased to have no bank debt after repaying the last of the $155 million of debt raised to finance the FlexSteel acquisition earlier in the quarter.
I now turn the call over to Steve Tadlock, our CFO and CEO of FlexSteel, who will review our financial results. Following his remarks, I'll provide some thoughts on our outlook for the near term before opening the lines for Q&A. Steve?
Steve Tadlock: Thank you. As Scott mentioned, total Q3 revenues were $288 million. Pressure Control revenues of $182 million were down 8.4% sequentially, driven primarily by decreased customer activity. Operating income decreased $6.7 million, or 12.3% sequentially, with operating margins declining 120 basis points, primarily due to lower operating leverage. Adjusted segment EBITDA decreased $10.5 million, or 15% sequentially, with margins falling by 250 basis points due to the reduction in activity and the aforementioned operating leverage. Spoolable Technologies revenues of $105 million were down 1.2% sequentially due to product mix. Operating income increased $45.8 million, primarily due to the quarter-over-quarter change and the remeasurement of the earnout liability associated with a FlexSteel acquisition, where we recorded a $5.1 million gain in the quarter compared to an $18.1 million loss in Q2, as well as by a reduction in inventory step-up expense, which was zero in the third quarter versus $19.3 million in the second quarter.
Operating income was also inclusive of $4 million of intangible amortization expense. Adjusted segment EBITDA, which excludes all of the above non-cash charges, decreased $1.8 million, or 3.9% sequentially, with margins decreasing by 110 basis points due to a transient increase in product input costs that impacted the cost of sales this quarter. On a total company basis, third quarter adjusted EBITDA was $103 million, down 11% from $115 million during the second quarter. Adjusted EBITDA margin for the quarter was 35.8% of revenues, down 190 basis points from the second quarter due to lower operating leverage. Adjustments to total company EBITDA during the third quarter of 2023 included approximately $1.1 million in transaction-related fees and expenses, non-cash charges of $4.4 million in stock-based compensation, a $5.1 million gain related to the FlexSteel earnout liability, and a $0.3 million gain due to the revaluation of the TRA liability.
Depreciation and amortization expense for the third quarter was $15 million. Total depreciation and amortization expense during the fourth quarter is expected to be approximately $15 million, $7 million of which is associated with our Pressure Control segment and $8 million of which is associated with Spoolable Technologies. $4 million of the $8 million total Spoolable Technologies D&A is related to the intangibles acquired from FlexSteel. We expect this expense to remain stable for the next several quarters. Net interest expense during the third quarter was approximately $1.4 million, decreasing sequentially due to the reduced debt level. Income tax expense during the third quarter was $18 million, up from $10 million in the second quarter.
Tax expense increased due to increased income from operations. During the third quarter, the public or Class A ownership of the company averaged 82% and ended the quarter at 82%. Barring further changes in our public ownership percentage, we expect an effective tax rate of approximately 21% for Q4 2023. GAAP net income was $68 million in the third quarter versus $32 million during the second quarter. The increase was driven by lower inventory step-up expense, decreased amortization of purchase price intangibles, the change in remeasurement of the earnout liability and decreased interest expense. We prefer to look at adjusted net income and earnings per share, which were $64 million and $0.80 per share, respectively, during the third quarter versus $67 million and $0.84 per share in the second quarter.
Adjusted net income for the third quarter applied a 26% tax rate to our adjusted pre-tax income generated during the quarter. We estimate that the tax rate for adjusted EPS will be 26% during the fourth quarter of 2023. During the third quarter, we paid a quarterly dividend of $0.12 per share, resulting in a cash outflow of approximately $10 million, including related distributions to members. The Board has approved a quarterly dividend of $0.12 per share to be paid in December. Additionally, we made cash TRA payments and associated distributions of approximately $32.7 million related to 2022 tax savings provided by the TRA. As previously announced, we also paid down the remaining $55 million of bank debt in the third quarter. We ended the quarter with a cash balance of $64 million.
Net CapEx was approximately $8 million during the third quarter of 2023. Our full-year 2023 CapEx outlook is now in the range of $35 million to $40 million, at the low-end of our prior guidance. That covers the financial review, and I'll now turn the call over to Scott.
Scott Bender: Thanks, Steve. Pardon me. I'll now touch on our expectations for the fourth quarter by reporting segment. During the fourth quarter, we expect Pressure Control revenue to be down low-single digits sequentially due to the anticipated decline in the average industry rig count quarter-over-quarter despite projected gains in Cactus rigs followed from today through the end of the year. We also expect U.S. land drilling activity will be up approximately 5% from today's levels in Q1 of 2024. For reference, our October total revenues were up over 10% from September, though our Q4 guide incorporates holiday seasonality. In addition, we expect our rental revenues to remain stable in Q4 from Q3 levels, despite forecasted declines in industry completion activity.
Adjusted EBITDA margins in our Pressure Control segment are expected to be 30% to 32% for the quarter, inclusive of Pressure Control SG&A and general corporate expenses. This adjusted EBITDA guidance excludes approximately $4 million of stock-based compensation expense within the segment as well as transaction-related expenses. Margins are expected to be approximately flat to down sequentially on modestly lower operating leverage. As mentioned last quarter, we've implemented supply chain initiatives in response to reduced year-to-date activity levels, which should positively impact inventory costs early next year. In the first half of next year, we also plan to introduce several new product enhancements, which should serve to generate additional benefits for our customers as well as support our operating results.
Our testing for a potential Mid-East customer continues to progress on schedule. We're also actively continuing our work on ownership structures in the region and still expect customer acceptance and first orders in late 2024. We'll share more with you on these efforts in the first half of next year. Switching over to our Spoolable Technologies segment, we expect revenue of $90 million to $95 million during the fourth quarter, a decrease of approximately 10% to 15% versus the third quarter due to the year-to-date U.S. land activity decline and seasonal impacts on the business as shipments depend to a meaningful degree on our customers' installation contractors and on completion activity. We expect adjusted EBITDA margins in this segment to be approximately 38% to 40% for Q4, moderating slightly from Q3 levels on lower operating leverage.
Note that this margin guidance excludes approximately a $1 million of stock-based comp in the segment. As previously announced, we're very pleased to report that our ownership of FlexSteel has progressed to the point where we're ready to transition to a new leader of this business. Steve Tadlock, currently our Executive Vice President and Chief Financial Officer, has taken over as CEO of FlexSteel. Steve brings over 10 years of experience with our company, several years of experience as a Director and Chairman of Polyflow, a spoolable pipe business sold to Baker Hughes in 2018. I'm confident Steve is the right person to lead FlexSteel in the next phase of our ownership, and would like to thank him for his outstanding contributions to Cactus as our CFO while we matured as a public company.
Next week, Steve will begin to transition his CFO duties to Al Keifer while we undertake a search for a permanent CFO. Al retired in 2016 from Baker Hughes as Vice President, Controller and Chief Accounting Officer, and have supported Cactus in an advisory capacity since our IPO in 2018. This remains a very exciting time at Cactus. We're very pleased with the initial financial and operational results of the FlexSteel business and are excited to have introduced an additional, highly differentiated product to our portfolio that diversifies our revenue streams both from industry and cycle timing perspectives. Our work on adding capacity in the Mid-East is progressing on schedule. In addition, we've undertaken significant efforts to diversify our low-cost supply chain in recent months, which will reduce potential geopolitical risk to our business and further solidify our position as a low-cost manufacturer.
Despite these various growth and supply chain initiatives, we expect to generate meaningful cash flow in the coming quarters to return to shareholders and to allow us to pursue attractive inorganic growth opportunities. While fourth-quarter activity levels for Cactus and FlexSteel are expected to be down, we're encouraged by indications received from customers regarding planned 2024 activity. Additionally, I'm pleased to see the recent wave of consolidation occurring among our E&P customers. Larger, well-capitalized and disciplined E&P companies benefit our industry by reducing breakeven costs with their larger manufacturing-type development programs while providing consistency in returns that attract investor capital into the energy sectors.
These customers also tend to gravitate to premium equipment and service providers such as Cactus, so I'm confident we'll be the beneficiary of further consolidation over time. With that, I'll turn it back over to the operator and we may begin Q&A. Operator?
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