FlexSteel Acquisition

3 Months Ended

Mar. 31, 2024

Business Combination and Asset Acquisition [Abstract]

On February 28, 2023 we completed the acquisition of FlexSteel. Including final adjustments for closing working capital, cash on hand and indebtedness adjustments as set forth in the merger agreement, we paid total cash consideration of $621.5 million. There is also a future earn-out payment of up to $75.0 million to be paid no later than the third quarter of 2024, if certain revenue targets are met by FlexSteel.

Purchase Price Consideration

The final purchase price consideration for the acquisition was $627.5 million and is summarized as follows:


	Purchase Price Consideration
Cash consideration	$	621,505
Add: Contingent consideration (1)	5,960
Fair value of consideration transferred	$	627,465

(1) Represents the estimated fair value as of the acquisition date of the earn-out payment of up to $75.0 million of additional cash consideration if certain revenue targets are met by FlexSteel. The estimated fair value of the earn-out payment was determined using a Monte Carlo simulation valuation methodology based on probability-weighted performance projections and other inputs, including a discount rate.

Changes in the fair value of the earn-out liability subsequent to the acquisition date are recognized in the consolidated statements of income. As of March 31, 2024, the estimated earn-out payment is $34.1 million. The increase is based on the improvements in FlexSteel's expected revenues for the period January 1, 2023 through June 30, 2024, compared to projections made at the time of the acquisition. See further discussion of the calculation of fair value of the earn-out liability in Note 12.

Purchase Price Allocation

The following table provides the final allocation of the purchase price as of the acquisition date:


Cash and cash equivalents	$	5,316
Receivables	58,002
Inventories	91,746
Prepaid expenses and other current assets	1,283
Property and equipment	206,928
Operating lease right-of-use assets	1,021
Identifiable intangible assets	200,300
Other noncurrent assets	5,666
Total assets acquired	570,262
Accounts payable	(14,975)
Accrued expenses and other current liabilities	(26,827)
Finance lease obligations	(974)
Operating lease liabilities	(906)
Deferred tax liabilities	(94,319)
Total liabilities assumed	(138,001)

Net assets acquired	432,261

Goodwill	$	195,204

The acquisition was accounted for using the acquisition method of accounting, with Cactus being treated as the accounting acquirer. Under the acquisition method of accounting, the assets and liabilities were recorded at their respective fair values as of the acquisition date. Fair values were determined by management, based in part on independent valuations performed by third-party valuation specialists. The valuation methods used to determine the fair value of intangible assets included the excess earnings approach for customer relationships and backlog using customer inputs and contributory charges and the relief from royalty method for tradename and developed technology.

The fair values determined for accounts receivable, accounts payable and most other current assets and liabilities, other than inventory, were equivalent to the carrying value due to their short-term nature. Acquired inventories were comprised of raw materials, work-in-progress and finished goods. The fair value of finished goods was calculated as the estimated selling price, less costs of the selling effort and a reasonable profit allowance relating to the selling effort. The fair value of identifiable fixed assets was calculated using a combination of valuation approaches, but primarily consisted of the cost approach which adjusts estimates of replacement cost for the age, condition and utility of the associated assets.

Goodwill is calculated as the excess of the purchase price over the estimated fair value of net assets acquired.

Pro forma financial information

The pro forma financial information below represents the combined results of operations as if the acquisition had occurred as of January 1, 2022. The unaudited pro forma financial information is presented for informational purposes only and is neither indicative of the results of operations that would have occurred if the acquisition had taken place at the beginning of the period presented nor indicative of future operating results.


	Three Months Ended March 31,
	2023
Revenues	$	281,784
Net Income attributable to Cactus, Inc.	40,803