# Cactus, Inc. (WHD) FY 2024 MD&A

Verbatim Item 7 Management's Discussion and Analysis from Cactus, Inc.'s 10-K for fiscal year 2024.

SEC filing source: https://www.sec.gov/Archives/edgar/data/1699136/000169913625000014/whd-20241231.htm
Accession: 0001699136-25-000014
Filing date: 2025-02-27
Report date: 2024-12-31
Extracted structurally from real Item 7 body heading to real Item 7A/8 boundary.
Confidence: high

Company profile: /company/WHD/
All MD&A years: /company/WHD/mda/
Previous year: /company/WHD/mda/fy2023/ (FY 2023)
Next year: /company/WHD/mda/fy2025/ (FY 2025)

Item 7.    Management’s Discussion and Analysis of Financial Condition and Results of Operations

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.

Market Factors

See “Item 1. Business” for information on our products and business. Demand for our products and services depends primarily upon oil and gas industry activity levels, including the number of active drilling rigs, the number of wells being drilled, the number of wells being completed and the volume of newly producing wells, among other factors. Oil and gas exploration and production 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.

Revenues generated by our Pressure Control and Spoolable Technologies operating segments are derived from three sources: products, rentals, and field service and other. Product revenues are derived from the sale of wellhead systems, production trees and spoolable pipe and fittings. Rental revenues are primarily derived from the rental of equipment used during the completion process, the repair of such equipment and the rental of equipment or tools used to install wellhead equipment or spoolable pipe. Field service and other revenues are primarily earned when we provide installation and other field services for both product sales and equipment rental.

Pressure Control

The Pressure Control segment designs, manufactures, sells and rents a range of wellhead and pressure control equipment under the Cactus Wellhead brand. Products are sold and rented principally for onshore unconventional oil and gas wells and are utilized during the drilling, completion and production phases of our customers’ wells. In addition, we provide field services for all of our products and rental items to assist with the installation, maintenance and handling of the equipment.

We operate through service centers in the United States, which are strategically located in the key oil and gas producing regions, and in Eastern Australia. These service centers support our field services and provide equipment assembly and repair services. We also provide rental and service operations in the Middle East. Pressure Control manufacturing and production facilities are located in Bossier City, Louisiana and Suzhou, China.

Demand for our product sales in the Pressure Control segment are driven primarily by the number of new wells drilled, as each new well requires a wellhead and, after the completion phase, a production tree. Demand for our rental items is driven primarily by the number of well completions as we rent frac trees to oil and gas operators to assist in hydraulic fracturing. Rental demand is also driven to a lesser extent by drilling activity as we rent tools used in the installation of wellheads. Field service and other revenues are closely correlated with revenues from product sales and rentals, as items sold or rented almost always have an associated service component.

Spoolable Technologies

The Spoolable Technologies segment designs, manufactures and sells spoolable pipe and associated end fittings under the FlexSteel brand. Our customers use these products primarily as production, gathering and takeaway pipelines to transport oil, gas or other liquids. In addition, we also provide field services and rental items to assist our customers with the installation of these products. We support our field service operations through service centers and pipe yards located in oil and gas producing regions throughout the United States and Western Canada. Our manufacturing facility is located in Baytown, Texas.

Demand for our product sales in the Spoolable Technologies segment are driven primarily by the number of wells being placed into production after the completions phase as customers use our spoolable pipe and associated fittings to bring wells more rapidly onto production. Rental and field service and other revenues are closely correlated with revenues from product sales, as items sold usually have an associated rental and service component.

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Seasonality

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.

Recent Developments and Trends

Oil and Natural Gas Prices

The following table summarizes average oil and natural gas prices in North America over the indicated periods as well as industry activity levels as reflected by the average number of active onshore drilling rigs during the same periods.

[[GREPCENT_TABLE]]
[["","","Year Ended"],["","","December 31,"],["","","2024","","2023","","2022"],["WTI Oil Price ($/bbl) (1)","","$","76.63","","","$","77.58","","","$","94.90"],["Natural Gas Price ($/MMBtu) (2)","","$","2.19","","","$","2.53","","","$","6.45"],["U.S. Land Drilling Rigs (3)","","580","","667","","705"]]
[[/GREPCENT_TABLE]]

(1) U.S. Energy Information Administration (“EIA”) Cushing, OK WTI (“West Texas Intermediate”) spot price per barrel of crude oil.

(2) EIA Henry Hub Natural Gas spot price per million British Thermal Unit (“MMBtu”).

(3) Baker Hughes.

Onshore drilling and completion activity levels declined through the first half of 2024, resulting in the average number of U.S. land drilling rigs for 2024 to be 13% below 2023 levels. Average oil prices were relatively stable in 2024 and were down 1% from 2023 average levels. Natural gas prices declined approximately 13% in 2024 from 2023 with prices averaging $2.19 per MMBtu in 2024 compared to $2.53 per MMBtu in 2023. Natural gas prices were lower as inventory levels remained above five-year maximum levels through most of the first half of 2024. Spot prices averaged $3.01 per MMBtu in December 2024 and closed 2024 at $3.40 per MMBtu, as colder than forecasted weather impacted prices. The increased year-end 2024 natural gas prices could favorably impact oil and gas industry activity levels, although most of our customers are primarily oil-focused, thus moderating the potential impact to demand for our products and services.

The ongoing conflict in Ukraine and prolonged conflict in the Middle East have had repercussions globally by continuing to cause uncertainty, not only in the oil and natural gas markets, but also in the financial markets and global supply chain. Additionally, the U.S. presidential election outcome has introduced further uncertainty to global supply chains, as the new administration has signaled the potential to impose and increase tariffs, including on China, where we have a manufacturing facility. Such uncertainty could continue to result in stock price volatility and supply chain disruptions as well as higher oil and natural gas prices which could cause higher inflation worldwide, impact consumer spending and negatively impact demand for our goods and services.

Consolidated Results of Operations

The following discussions relating to significant line items from our condensed consolidated statements of income are based on available information and represent our analysis of significant changes or events that impact the comparability of reported amounts. Where appropriate, we have identified specific events and changes that affect comparability or trends and, where reasonably practicable, have quantified the impact of such items.

We have two operating segments consisting of the Pressure Control segment and the Spoolable Technologies segment. Our results of operations are evaluated by the Chief Executive Officer on a consolidated basis as well as at the segment level. The performance of our operating segments is primarily evaluated based on segment operating income (in addition to other measures), which is defined as income before taxes and before interest income (expense), net, other income (expense), net and corporate and other expenses not allocated to the operating segments.

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Year Ended December 31, 2024 Compared to Year Ended December 31, 2023

The following table presents summary consolidated operating results for the periods indicated: 

[[GREPCENT_TABLE]]
[["","Year Ended"],["","December 31,"],["","2024","","2023","","$ Change","","% Change"],["","(in thousands)"],["Revenues"],["Pressure Control","$","724,038","","","$","756,727","","","$","(32,689)","","","(4.3)%"],["Spoolable Technologies","407,038","","","340,233","","","66,805","","","19.6"],["Corporate and other","(1,262)","","","\u2014","","","(1,262)","","","\u2014"],["Total revenues","1,129,814","","","1,096,960","","","32,854","","","3.0"],["Operating income"],["Pressure Control","210,710","","","236,934","","","(26,224)","","","(11.1)"],["Spoolable Technologies","104,864","","","62,172","","","42,692","","","68.7"],["Total segment operating income","315,574","","","299,106","","","16,468","","","5.5"],["Corporate and other expenses","(25,961)","","","(34,740)","","","8,779","","","(25.3)"],["Total operating income","289,613","","","264,366","","","25,247","","","9.6"],["Interest income (expense), net","6,459","","","(6,480)","","","12,939","","","nm"],["Other income, net","3,204","","","4,490","","","(1,286)","","","(28.6)"],["Income before income taxes","299,276","","","262,376","","","36,900","","","14.1"],["Income tax expense","66,518","","","47,536","","","18,982","","","39.9"],["Net income","$","232,758","","","$","214,840","","","$","17,918","","","8.3"],["Less: net income attributable to non-controlling interest","47,351","","","45,669","","","1,682","","","3.7"],["Net income attributable to Cactus Inc.","$","185,407","","","$","169,171","","","$","16,236","","","9.6%"]]
[[/GREPCENT_TABLE]]

nm = not meaningful 

Pressure Control. Pressure Control revenue was $724.0 million for 2024, a decrease of $32.7 million, or 4.3%, from $756.7 million for 2023. The decrease in revenues was primarily due to decreased sales of wellhead and production related equipment resulting from lower drilling and completion activity by our customers. In addition, rental of drilling and completion equipment decreased as a result of the decline in customer activity. Operating income of $210.7 million in 2024 resulted in a decrease of $26.2 million, or 11.1%, from $236.9 million in 2023. The decrease was primarily attributable to lower gross margins during the period due to decreased customer activity levels and higher selling, general and administrative ("SG&A") expenses. The increase in SG&A expenses primarily related to higher personnel costs, stock-based compensation expense and other reserves, partially offset by a decrease in bad debt expense.

Spoolable Technologies. Spoolable Technologies revenue of $407.0 million for 2024, represented an increase of $66.8 million, or 19.6%, from $340.2 million for 2023 as results for 2023 only included ten months of revenues from the FlexSteel acquisition, which closed on February 28, 2023. Total operating income of $104.9 million for 2024, resulted in an increase of $42.7 million, or 68.7%, from $62.2 million for 2023 as results for 2023 only included ten months of revenues. Operating income for the 2024 included $16.3 million of expense related to the change in fair value of the earn-out liability for the FlexSteel acquisition and $16.0 million of intangible amortization. Operating income for 2023 included approximately $14.9 million of expense related to the change in fair value of the estimated earn-out liability, $23.5 million of inventory step-up expense and $20.3 million of intangible amortization expense, as well as depreciation expense of $13.8 million primarily associated with the step-up of fixed assets in connection with accounting for the purchased assets at fair value.

Corporate and other. Corporate and other revenue represents the elimination of inter-segment sales from our Pressure Control segment to our Spoolable Technologies segment. Corporate and other expenses include costs associated with executive management and other administrative functions not directly attributable to our reporting segments. Corporate and other expenses for 2024 were $26.0 million, a decrease of $8.8 million from $34.7 million for 2023. The decrease was largely

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attributable to lower professional fees related to transaction costs associated with growth initiatives, including the closing of and accounting for the FlexSteel acquisition in 2023.

Interest income (expense), net. Interest income, net was $6.5 million in 2024 compared to interest expense, net of $6.5 million in 2023. The increase in interest income, net of $12.9 million was primarily due to an increase in interest income earned on cash invested during the 2024 period. Interest expense in 2023 was primarily related to borrowings outstanding through July 2023 under the Amended ABL Credit Facility (as defined in Note 6 in the notes to the Consolidated Financial Statements) which were required to finance the FlexSteel acquisition.

Other income, net. Other income, net represents non-cash adjustments for the revaluation of the liability related to the tax receivable agreement as a result of changes to the forecasted state tax rate.

Income tax expense. Income tax expense for 2024 was $66.5 million (22.2% effective tax rate) compared to $47.5 million (18.1% effective tax rate) for 2023. Income tax expense for 2024 includes approximately $66.5 million of expense associated with current income. Additionally, in 2024 we recognized $2.1 million of expense associated with the revaluation of our deferred tax asset as a result of a change in our forecasted state tax rate, a $2.1 million benefit related to the finalization of our 2023 tax returns, a $0.7 million benefit associated with permanent differences related to equity compensation and $0.7 million of expense associated with other adjustments. Income tax expense for 2023 includes approximately $56.6 million of expense associated with current income offset by a $12.1 million benefit associated with the release of our valuation allowance previously provided for our investment in Cactus Companies based on the determination that the deferred tax asset was realizable due to our ability to generate sufficient taxable income of the appropriate type. Additionally in 2023, we recognized $4.9 million of expense associated with the revaluation of our deferred tax asset as a result of a change in our forecasted state tax rate, $0.5 million of expense related to the finalization of our 2022 tax returns, a $1.2 million benefit associated with permanent differences related to equity compensation and a $1.2 million benefit associated with other adjustments. Partial valuation releases occur in conjunction with redemptions of CC Units as a portion of Cactus Inc.’s deferred tax assets from its investment in Cactus Companies becomes realizable. Cactus Inc. is only subject to federal and state income tax on its share of income from Cactus Companies. Income allocated to the non-controlling interest is only taxable to the non-controlling interest.

Year Ended December 31, 2023 Compared to Year Ended December 31, 2022

The following table presents summary consolidated operating results for the periods indicated: 

[[GREPCENT_TABLE]]
[["","Year Ended"],["","December 31,"],["","2023","","2022","","$ Change","","% Change"],["","(in thousands)"],["Revenues"],["Pressure Control","$","756,727","","","$","688,369","","","$","68,358","","","9.9%"],["Spoolable Technologies","340,233","","","\u2014","","","340,233","","","\u2014"],["Total revenues","1,096,960","","","688,369","","","408,591","","","59.4"],["Operating income"],["Pressure Control","236,934","","","202,650","","","34,284","","","16.9"],["Spoolable Technologies","62,172","","","\u2014","","","62,172","","","\u2014"],["Total segment operating income","299,106","","","202,650","","","96,456","","","47.6"],["Corporate and other expenses","(34,740)","","","(27,902)","","","(6,838)","","","24.5"],["Total operating income","264,366","","","174,748","","","89,618","","","51.3"],["Interest income (expense), net","(6,480)","","","3,714","","","(10,194)","","","nm"],["Other income (expense), net","4,490","","","(1,910)","","","6,400","","","nm"],["Income before income taxes","262,376","","","176,552","","","85,824","","","48.6"],["Income tax expense","47,536","","","31,430","","","16,106","","","51.2"],["Net income","$","214,840","","","$","145,122","","","$","69,718","","","48.0"],["Less: net income attributable to non-controlling interest","45,669","","","34,948","","","10,721","","","30.7"],["Net income attributable to Cactus Inc.","$","169,171","","","$","110,174","","","$","58,997","","","53.5%"]]
[[/GREPCENT_TABLE]]

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Pressure Control. Pressure Control revenue was $756.7 million for 2023, an increase of $68.4 million, or 10%, from $688.4 million for 2022. The increase in revenues was primarily due to higher sales of wellhead and production related equipment resulting from higher drilling and completion activity by our customers. In addition, increased rental of drilling and completion equipment and field service associated with product and rental revenues also increased as a result of higher customer activity. Operating income of $236.9 million in 2023 increased $34.3 million, or 17%, from $202.7 million in 2022. The increase was primarily attributable to higher gross margins during the period and increased volume partially offset by higher segment selling, general and administrative (“SG&A”) expenses. The increase in SG&A expenses primarily related to higher bad debt expense, travel and entertainment expenses, professional fees and hardware and software expenses.

Spoolable Technologies. Spoolable Technologies revenue of $340.2 million and operating income of $62.2 million represents FlexSteel results generated from February 28, 2023, the date of acquisition, through December 31, 2023. The results for Spoolable Technologies include the following items resulting from purchase accounting: approximately $14.9 million of expense related to the change in fair value of the estimated earn-out payment for the FlexSteel acquisition, $23.5 million of inventory step-up expense, $20.3 million of intangible amortization expense and depreciation expense of $13.8 million primarily associated with the step-up of fixed assets.

Corporate and other expenses. Corporate and other expenses for 2023 were $34.7 million, an increase of $6.8 million from $27.9 million for 2022. The increase was largely attributable to higher professional fees of $3.8 million related to transaction costs associated with the closing of and accounting for the FlexSteel acquisition. Additional increases were attributable to higher personnel costs of which the largest increase was related to stock-based compensation.

Interest income (expense), net. Interest expense, net was $6.5 million in 2023 compared to interest income, net of $3.7 million in 2022. The increase in interest expense, net of $10.2 million was primarily related to borrowings under the Amended ABL Credit Facility related to financing the FlexSteel acquisition.

Other income (expense), net. Other income (expense), net represents non-cash adjustments for the revaluation of the liability related to the tax receivable agreement as a result of changes to the forecasted state tax rate.

Income tax expense. Income tax expense for 2023 was $47.5 million (18.1% effective tax rate) compared to $31.4 million (17.8% effective tax rate) for 2022. Income tax expense for 2023 includes approximately $56.6 million of expense associated with current income offset by a $12.1 million benefit associated with the release of our valuation allowance previously provided for our investment in Cactus Companies based on the determination that the deferred tax asset was realizable due to our ability to generate sufficient taxable income of the appropriate type. Additionally, we recognized $4.9 million of expense associated with the revaluation of our deferred tax asset as a result of a change in our forecasted state tax rate, $0.5 million of expense related to the finalization of our 2022 tax returns, a $1.2 million benefit associated with permanent differences related to equity compensation and a $1.2 million benefit associated with other adjustments. Income tax expense for 2022 primarily included approximately $36.4 million of expense associated with current income offset by a $1.7 million benefit associated with permanent differences related to equity compensation, a $1.7 million benefit resulting from a change in our forecasted state rate and a $1.4 million tax benefit associated with the partial valuation allowance release in conjunction with CW Unit redemptions during 2022. Partial valuation releases occur in conjunction with redemptions of CW Units (or CC Units, in the case of redemptions after the CC Reorganization) as a portion of Cactus Inc.’s deferred tax assets from its investment in Cactus LLC (or, after the CC Reorganization, its investment in Cactus Companies) becomes realizable. Cactus Inc. is only subject to federal and state income tax on its share of income from Cactus Companies. Income allocated to the non-controlling interest is only taxable to the non-controlling interest.

Liquidity and Capital Resources

At December 31, 2024, we had $342.8 million of cash and cash equivalents. Our primary sources of liquidity and capital resources are cash on hand, cash flows generated by operating activities and, if necessary, borrowings under our Amended ABL Credit Facility. Depending upon market conditions and other factors, we may also have the ability to issue additional equity and debt if needed. As of December 31, 2024, we had no borrowings outstanding under our Amended ABL Credit Facility and $222.6 million of available borrowing capacity. We had $2.4 million in letters of credit outstanding at December 31, 2024 which reduced our available borrowing capacity. We were in compliance with the covenants of the Amended ABL Credit Facility as of December 31, 2024.

In June 2023, our board of directors authorized the Company to repurchase shares of its Class A common stock for an aggregate purchase price of up to $150 million. Under our share repurchase program, shares may be repurchased from time to

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time in open market transactions or block trades, in privately negotiated transactions or any other method permitted under U.S. securities laws, rules and regulations. The repurchase program does not obligate the Company to purchase any particular amount of shares, and the repurchase program may be suspended or discontinued at any time at the Company’s discretion. At December 31, 2024, $146.3 million of Class A common stock could be repurchased under our share repurchase program.

We expect that our existing cash on hand, cash generated from operations and available borrowings under our Amended ABL Credit Facility will be sufficient for the next 12 months to meet our material cash requirements, including working capital requirements, debt service obligations, anticipated capital expenditures, lease obligations, repurchases of shares of our Class A common stock, expected TRA liability payments, anticipated tax liabilities and dividends to holders of our Class A common stock as well as pro rata cash distributions to holders of CC Units other than Cactus Inc.

We currently estimate our net capital expenditures for the year ending December 31, 2025 will range from $45 million to $55 million, mostly related to rental fleet investments including drilling tools, international expansion, diversification of our low cost supply chain, enhancements for our Baytown, TX manufacturing plant and additional deployment of equipment to facilitate installation of recent product introductions. 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, crude oil and natural gas price volatility and company initiatives.

For information concerning our future lease payments as of December 31, 2024, see Note 10 to our consolidated financial statements.

Our ability to satisfy our long-term liquidity requirements, including cash distributions to CC Unit Holders to fund their respective income tax liabilities relating to their share of the income of Cactus Companies and 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 raw materials, and financial, business and other factors, many of which are beyond our control. We will not be able to predict or control many of these factors, such as economic conditions in the markets where we operate and competitive pressures. If necessary, we could choose to further reduce our spending on capital projects and operating expenses to ensure we operate within the cash flow generated from our operations.

Tax Receivable Agreement (TRA)

The TRA generally provides for the payment by Cactus Inc. to the TRA Holders of 85% of the net cash savings, if any, in U.S. federal, state and local income tax and franchise tax that Cactus Inc. actually realizes or is deemed to realize in certain circumstances. Cactus Inc. retains the benefit of the remaining 15% of these net cash savings. To the extent Cactus Companies has available cash, we intend to cause Cactus Companies to make pro rata distributions to its unit holders, including 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 relating to Cactus Companies 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. 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.

Assuming no material changes in the relevant tax law, we expect that if the TRA were terminated as of December 31, 2024, the estimated termination payments, based on the assumptions discussed in Note 11 of the notes to the Consolidated Financial Statements, would be approximately $273.7 million, calculated using a discount rate equal to the 12-month term SOFR published by CME Group Benchmark Administration Limited, plus 71.513 basis points, applied against an undiscounted liability of $406.5 million. A 10% increase in the price of our Class A common stock at December 31, 2024 would have increased the discounted liability by $9.6 million to $283.3 million (an undiscounted increase of $15.8 million to $422.3 million), and likewise, a 10% decrease in the price of our Class A common stock at December 31, 2024 would have decreased the discounted liability by $9.6 million to $264.1 million (an undiscounted decrease of $15.8 million to $390.8 million).

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Cash Flows

Year Ended December 31, 2024 Compared to Year Ended December 31, 2023

The following table summarizes our cash flows for the periods indicated: 

[[GREPCENT_TABLE]]
[["","Year Ended December 31,"],["","2024","","2023"],["","(in thousands)"],["Net cash provided by operating activities","$","316,113","","","$","340,280"],["Net cash used in investing activities","(35,388)","","","(654,793)"],["Net cash provided by (used in) financing activities","(70,144)","","","103,275"]]
[[/GREPCENT_TABLE]]

Net cash provided by operating activities was $316.1 million in 2024 compared to $340.3 million in 2023. Operating cash flows decreased primarily due to an increase in cash outflows associated with working capital, largely related to increased purchases of inventory of $67.6 million as well as payout of the earn-out liability of $31.2 million. These decreases in operating cash flows were offset by an increase in customer collections of $24.9 million as well as an increase in operating income of $17.9 million in 2024 compared to 2023.

Net cash used in investing activities was $35.4 million and $654.8 million for 2024 and 2023, respectively. The decrease was primarily due to the non-recurrence of cash paid to acquire FlexSteel for $621.5 million, less $5.3 million in cash acquired during the first quarter of 2023. Additionally, our capital expenditures decreased approximately $4.8 million primarily due to the $7.0 million purchase of a previously leased facility during the first half of 2023.

Net cash used in financing activities was $70.1 million for 2024 compared to net cash provided by in financing activities of $103.3 million for 2023. The decrease in net cash provided by financing activities was primarily related to certain financing activities in 2023 associated with the FlexSteel acquisition. We received approximately $169.9 million of proceeds, net of issuance costs, from issuing shares of our Class A common stock during 2023. The year ended December 31, 2023 also included payments of approximately $6.9 million of debt issuance costs. The year ended December 31, 2024 includes a $4.1 million increase in share repurchases, primarily associated with the Company's share repurchase program, higher dividend payments of approximately $3.6 million and a $6.0 million payment related to the contingent consideration established as of the FlexSteel acquisition date. These increases are partially offset by a $3.4 million decrease in member distributions.

Year Ended December 31, 2023 Compared to Year Ended December 31, 2022

The following table summarizes our cash flows for the periods indicated: 

[[GREPCENT_TABLE]]
[["","Year Ended December 31,"],["","2023","","2022"],["","(in thousands)"],["Net cash provided by operating activities","$","340,280","","","$","117,884"],["Net cash used in investing activities","(654,793)","","","(25,536)"],["Net cash provided by (used in) financing activities","103,275","","","(47,382)"]]
[[/GREPCENT_TABLE]]

Net cash provided by operating activities was $340.3 million in 2023 compared to $117.9 million in 2022. Operating cash flows increased primarily due to higher income and a decrease in cash outflows associated with working capital, largely related to decreased purchases of inventory as well as higher collections on receivable balances. These increases in operating cash flows were slightly offset by $20.5 million of additional income tax payments, higher TRA payments of $15.2 million and $4.6 million of additional interest paid in 2023 compared to 2022.

Net cash used in investing activities was $654.8 million and $25.5 million for 2023 and 2022, respectively. The increase was primarily due to cash paid to acquire FlexSteel for $621.5 million, less $5.3 million in cash acquired. Additionally, our capital expenditures increased approximately $15.7 million primarily due to the $7.0 million purchase of a previously leased facility, Pressure Control rental fleet additions and enhancements and $3.0 million of capital expenditures for the Spoolable Technologies segment. Other movements in our investing activities were related to the increase in proceeds from sales of assets of approximately $2.6 million from 2022.

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Net cash provided by financing activities was $103.3 million for 2023 compared to net cash used in financing activities of $47.4 million for 2022. The increase in net cash provided by financing activities was primarily related to certain financing activities in 2023 associated with the FlexSteel acquisition. We received approximately $169.9 million of proceeds, net of issuance costs, from issuing shares of our Class A common stock during 2023. Additionally, we received $155.0 million from total borrowings under our Amended ABL Credit Facility of which all $155.0 million has been repaid. Increased payments of $6.6 million in deferred financing costs, increased distributions to members of $7.0 million, higher dividend payments of $3.4 million, $1.6 million of additional payments on finance leases and a $0.7 million increase in share repurchases partially offset the aforementioned cash inflows associated with the equity financing activities during 2023.

Critical Accounting Policies and Estimates

In preparing our financial statements in accordance with accounting principles generally accepted in the United States of America (“GAAP”), we make numerous estimates and assumptions that affect the accounting for and recognition and disclosure of assets, liabilities, equity, revenues and expenses. We must make these estimates and assumptions because certain information that we use is dependent on future events, cannot be calculated with a high degree of precision from available data or is not otherwise capable of being readily calculated based on generally accepted methodologies. In some cases, these estimates are particularly difficult to determine, and we must exercise significant judgment. Actual results could differ materially from the estimates and assumptions that we use in the preparation of our financial statements. We identify certain accounting policies as critical based on, among other things, their impact on the portrayal of our financial condition and results of operations and the degree of difficulty, subjectivity and complexity in their deployment. Note 2 of the notes to the Consolidated Financial Statements includes a summary of the significant accounting policies used in the preparation of the accompanying consolidated financial statements. The following is a brief discussion of our most critical accounting policies and related estimates and assumptions.

Determination of Fair Value in Business Combinations

Accounting for the acquisition of a business requires the allocation of the purchase price to the various assets acquired and liabilities assumed at their respective fair values. The determination of fair value requires the use of significant estimates and assumptions, and in making these determinations, management uses all available information. For tangible and identifiable intangible assets acquired in a business combination, the determination of fair value utilizes several valuation methodologies including discounted cash flows which has assumptions with respect to the timing and amount of future revenue and expenses associated with an asset. The assumptions made in performing these valuations include, but are not limited to, discount rates, future revenues and operating costs, projections of capital costs, and other assumptions believed to be consistent with those used by principal market participants. Due to the specialized nature of these calculations, we engage third-party specialists to assist management in evaluating our assumptions as well as appropriately measuring the fair value of assets acquired and liabilities assumed.

Inventories

Inventories are stated at the lower of cost or net realizable value. Cost is determined using standard cost (which approximates average cost). 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 based on a range of factors, including age, usage and technological or market changes that may impact demand for those products. The amount of reserve recorded is subjective and is susceptible to change from period to period.

Long‑Lived Assets

Key estimates related to long‑lived assets include useful lives and recoverability of carrying values. Such estimates could be modified, as impairment could arise as a result of changes in supply and demand fundamentals, technological developments, new competitors with disruptive technologies or 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 would be made where the cash flow is less than the carrying value of the asset. The estimation of future cash flows and fair value is highly subjective and inherently imprecise. Estimates can change materially from period to period based on many factors. Accordingly, if conditions change in the future, we may record impairment losses, which could be material to any particular reporting period.

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Goodwill

Goodwill represents the excess of purchase price paid over the fair value of the net assets of acquired businesses. Goodwill is not amortized, but we evaluate at least annually whether it is impaired. Goodwill is considered impaired if the carrying amount of the reporting unit exceeds its estimated fair value. We conduct our annual assessment of the recoverability of goodwill as of December 31 of each year. We first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the goodwill impairment test. If the qualitative assessment indicates that it is more likely than not that the fair value of the reporting unit is less than its carrying amount or we elect not to perform a qualitative assessment, the quantitative assessment of goodwill test is performed. 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 will 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.

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 laws and rates expected to apply to taxable income in the year in which the differences are expected to reverse. We assess the likelihood that our deferred tax assets will be recovered through adjustments to future taxable income. To the extent we believe recovery is not likely, we establish a valuation allowance to reduce the asset to a value we believe will be recoverable based on our expectation of future taxable income. In evaluating our ability to recover our deferred tax assets, we consider all available positive and negative evidence, including scheduled reversals of deferred tax liabilities, projected future taxable income, tax planning strategies and results of recent operations. The assumptions about future taxable income require significant judgment and are consistent with the plans and estimates management is using to manage the underlying business. If the projected future taxable income changes materially, we may be required to reassess the amount of valuation allowance recorded against our deferred tax assets.

Tax Receivable Agreement

The TRA generally provides for the payment by Cactus Inc. to the TRA Holders of 85% of the net cash savings, if any, in U.S. federal, state and local income tax and franchise tax that Cactus Inc. actually realizes or is deemed to realize in certain circumstances as a result of (i) certain increases in tax basis that occur as a result of Cactus Inc.’s acquisition (or deemed acquisition for U.S. federal income tax purposes) of all or a portion of such TRA Holder’s CW Units in connection with our IPO or any subsequent offering (or, following the completion of the CC Reorganization, such TRA Holder’s CC Units), 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 TRA. We retain the remaining 15% of the cash savings. The TRA liability is calculated 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.

Redemptions of CC Units (CW Units prior to the CC Reorganization) result in adjustments to the tax basis of the tangible and intangible assets of Cactus Companies (Cactus LLC prior to the CC Reorganization). These adjustments are allocated to Cactus Inc. Such adjustments to the tax basis of the tangible and intangible assets of Cactus Companies would not be available to Cactus Inc. absent its acquisition or deemed acquisition of CC Units or CW Units prior to the CC Reorganization. In addition, the repayment of borrowings outstanding under the Cactus LLC term loan facility resulted in adjustments to the tax basis of the tangible and intangible assets of Cactus LLC, a portion of which was allocated to Cactus Inc. These basis adjustments are expected to increase (for tax purposes) Cactus Inc.’s depreciation and amortization deductions and may also decrease Cactus Inc.’s gains (or increase its losses) on future dispositions of certain assets to the extent tax basis is allocated to those assets. Such increased deductions and losses and reduced gains may reduce the amount of tax that Cactus Inc. would otherwise be required to pay in the future. 

Estimating the amount and timing of the tax benefit is by its nature imprecise and the assumptions used in the estimates can change. The tax benefit is dependent upon future events and assumptions, the amount of the redeeming unit holders’ tax basis in its CC Units (formerly CW Units) at the time of the relevant redemption, the depreciation and amortization

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periods that apply to the increase in tax basis, the amount and timing of taxable income we generate in the future and the U.S. federal, state and local income tax rate then applicable, and the portion of Cactus Inc.’s payments under the TRA that constitute imputed interest or give rise to depreciable or amortizable tax basis. The most critical estimate included in calculating the TRA liability to record is the combined U.S. federal income tax rate and an assumed combined state and local income tax rate, to determine the future benefit we will realize. A 100 basis point decrease/increase in the blended tax rate used would decrease/increase the TRA liability recorded at December 31, 2024 by approximately $15.3 million. 

Recent Accounting Pronouncements

See Note 2 of the notes to the Consolidated Financial Statements for discussion of recent accounting pronouncements.

Inflation

While inflationary cost increases can affect our income from operations’ margin, we believe that inflation generally has not had a material adverse effect on our results of operations. Other than the potential for increased inflation as a result of new tariffs and retaliatory actions by other countries, inflationary cost increases are not expected to have a material adverse effect on our results of operations. In 2022, the United States experienced 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 was increased costs associated with freight, materials, vehicle-related costs and personnel expenses. Most of our costs associated with providing our products and services moderated in 2023 and 2024, except for salaries and wages. It is highly unlikely that salaries and wages will decrease to the levels experienced in prior years.