Income Taxes

12 Months Ended

Dec. 31, 2023

Income Tax Disclosure [Abstract]

Income Taxes

Income Taxes

Domestic and foreign components of income before income taxes were as follows: 

	Year Ended December 31,
	2023		2022		2021
Domestic	$	241,084	$	155,380	$	64,139
Foreign	21,292		21,172		11,006
Income before income taxes	$	262,376	$	176,552	$	75,145

The provision for income taxes consisted of: 

	Year Ended December 31,
	2023		2022		2021
Current:
Federal	$	18,354	$	—	$	—
State	4,040		1,231		348
Foreign	7,799		4,900		2,497
Total current income taxes	30,193		6,131		2,845
Deferred:
Federal	12,925		23,945		2,658
State	4,249		514		1,516
Foreign	169		840		656
Total deferred income taxes	17,343		25,299		4,830
Total provision for income taxes	$	47,536	$	31,430	$	7,675

     The effective income tax rate was different from the statutory U.S. federal income tax rate due to the following: 

	Year Ended December 31,
	2023		2022		2021
Income taxes at 21% statutory tax rate	$	55,094	$	37,076	$	15,780
Net difference resulting from:
Profit of non-controlling interest not subject to U.S. federal tax	(9,951)		(7,339)		(3,754)
Foreign income taxes (net of foreign tax credit)	1,918		2,104		2,423
State income taxes (excluding rate change)	3,999		2,910		1,348
Impact of change in forecasted state income tax rate	4,906		(1,739)		1,347
Foreign withholding taxes	1,419		1,225		730
Change in valuation allowance	(12,067)		(1,381)		(8,977)
Adjustments of prior year taxes	480		(120)		79
Stock compensation	(1,193)		(1,743)		(1,096)
Nondeductible expenses associated with acquisition	3,951		—		—
Other	(1,020)		437		(205)
Total provision for income taxes	$	47,536	$	31,430	$	7,675

Our effective tax rate was 18.1%, 17.8% and 10.2% for the years ended December 31, 2023, 2022 and 2021, respectively. 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 Companies (Cactus LLC prior to the CC Reorganization). Income allocated to the non-controlling interest is not subject to U.S. federal or state tax.

The components of deferred tax assets and liabilities are as follows:

	December 31,
	2023		2022
Investment in Cactus Companies (Cactus LLC prior to the CC Reorganization)	$	179,196	$	299,253
Imputed interest	12,740		12,982
Tax credits	7,439		6,158
Net operating loss and other carryforwards	11,343		855
Other	359		—
Deferred tax assets	211,077		319,248
Valuation allowance	(6,225)		(17,604)
Deferred tax asset, net	204,852		301,644
Foreign withholding taxes	1,350		1,323
Other	2,239		643
Deferred tax liability, net	$	3,589	$	1,966

As of December 31, 2023, our liability related to the TRA was $270.9 million, representing 85% of the calculated net cash savings in the United States federal, state and local and 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 CC Units (CW Units prior to the CC Reorganization). We have determined it is more-likely-than-not that we will be able to utilize all of our tax basis subject to the TRA; therefore, we have recorded a 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 CC Units (CW Units prior to the CC Reorganization). If we determine the utilization of this tax basis is not more-likely-than-not in the future, our estimate of amounts to be paid under the TRA would be reduced. In this scenario, the reduction of the liability under the TRA would result in a benefit to our pre-tax consolidated results of operations 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 Companies (Cactus LLC prior to the CC Reorganization) 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. Subsequent to completion of the FlexSteel acquisition, we determined that we expect to generate sufficient taxable income of the appropriate type to allow for the realization of the deferred tax asset associated with our investment in Cactus Companies and recognized a $12.1 million tax benefit associated with the release of our valuation allowance previously provided. As such, as of December 31, 2023, we no longer have a valuation allowance against the deferred tax asset for the investment in Cactus Companies. During the first quarter of 2023, we recognized $4.3 million of tax expense associated with the revaluation of our deferred tax asset as a result of a change in our forecasted state rate primarily due to state impacts of the FlexSteel acquisition. During the year ended December 31, 2022, as a result of redemptions of CW Units, we released $1.4 million of our valuation allowance and recorded a tax benefit of $1.4 million related to the realizable portion of the deferred tax asset. As of December 31, 2022, we had a valuation allowance of $12.2 million against the $299.3 million deferred tax asset. We also record deferred tax assets for imputed interest, certain tax credits and net operating loss and other carryforwards. As of December 31, 2023, we have a valuation allowance of $6.2 million against these deferred tax assets, primarily associated with our portion of Cactus Companies’ accrued foreign taxes and state tax credits, due to uncertainty of realization.

As of December 31, 2023, we have deferred tax assets on U.S. federal and state net operating loss (“NOL”) carryforwards of approximately $8.3 million and $0.6 million, respectively, which can be used to offset U.S. federal and state taxes payable in future years. Additionally, we have a deferred tax asset on deferred interest of $2.5 million. The U.S. federal NOL and deferred interest carryforwards have no expiration date whereas the U.S. state NOL carryforwards generally will expire in periods beginning in 2040.

As a result of the FlexSteel acquisition, we acquired certain carryforward tax attributes, of which, $5.7 million were accounted for as unrecognized tax benefits in the acquisition accounting. This remains the balance of our uncertain tax positions as of December 31, 2023. We had no uncertain tax positions as of December 31, 2022. The unrecognized tax benefits have been

offset by an indemnification receivable from the seller of $5.7 million.

One of our subsidiaries is in the process of finalizing an Internal Revenue Service (“IRS”) audit of its 2021 federal income tax return with the expectation that no changes will occur as a result of this examination. None of our state income tax returns are currently under examination by state taxing authorities. Our federal and state income tax returns for the years ended December 31, 2020 through December 31, 2022 remain open for all purposes of examination by the IRS and applicable state taxing jurisdictions. However, certain earlier tax years remain open for adjustment to the extent of their net operating loss and deferred interest carryforwards available for future utilization.

The Organization for Economic Cooperation and Development (“OECD”) recently enacted rules (“Pillar Two”) for a new, global minimum tax of at least 15% on income arising in low-tax jurisdictions. The Pillar Two rules are expected to be enacted beginning January 1, 2024. We are currently evaluating the impact this new legislation will have on our consolidated financial statements.