Cactus, Inc. (WHD) FY 2021 MD&A

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

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 Cactus, Inc. and its consolidated subsidiaries, unless we state otherwise or the 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

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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

See “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 wells being drilled, the depth and working pressure of these wells, the number of well completions, 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 key market factors impacting our product sales are 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 against our competitors by the number of rigs that we are supporting on a monthly basis as it is correlated to wells drilled. Each active drilling rig produces different levels of revenue based on the customer’s drilling 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, 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, we have generally been able to forecast our product needs and anticipated revenue levels based on historic 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 day. Well completion activity generally follows the level of drilling activity over time, but can be delayed or accelerated due to such factors as pressure pumping availability, takeaway capacity, storage capacity, spot prices, overall service cost inflation and budget considerations.

Field 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. 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.

Recent Developments and Trends

In spite of multiple surges of COVID cases in the United States and worldwide, economies reopened throughout 2021 and global demand for fossil fuels rebounded. As demand grew and the Organization of Petroleum 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 January 2022, surpassing $90 per barrel in February 2022. Natural gas prices also increased significantly in 2021, increasing from an average of $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

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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 absent 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 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.

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Year Ended December 31, 2021 Compared to Year Ended December 31, 2020

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

nm = not meaningful

Revenues

Product revenue for the year ended December 31, 2021 was $280.9 million compared to $206.8 million for the year ended December 31, 2020. The increase of $74.1 million, representing a 36% increase from 2020, was primarily due to higher sales of wellhead and production related equipment resulting from higher drilling and completion activity by our customers compared to 2020 and the impact of cost recovery efforts implemented throughout 2021. In the prior year, the industry downturn impacted sales for the majority of 2020 due to depressed commodity prices as a result of the pandemic.

Rental revenue for the year ended December 31, 2021 was $61.6 million, a decrease of $4.5 million, or 7%, from $66.2 million for the year ended December 31, 2020. The decrease was primarily due to reduced completion rental activity among our customer base and the extraordinary market pressure driven by depressed energy demand associated with the COVID-19 pandemic. Recovery in our rental business 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 did not justify the deployment of our assets in certain cases.

Field service and other revenue for the year ended December 31, 2021 was $96.1 million, an increase of $20.5 million, or 27%, from $75.6 million for the year ended December 31, 2020. The increase was 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.

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Costs and expenses

Cost of product revenue for the year ended December 31, 2021 was $189.1 million, an increase of $57.4 million, or 44%, from $131.7 million for the year ended December 31, 2020. The increase was largely attributable to an increase in product sales and costs associated with materials, freight and overhead, including increased labor costs in 2021. Additionally, cost of product revenue in 2020 included $8.7 million in non-recurring credits related to tariff refunds.

Cost of rental revenue for the year ended December 31, 2021 was $54.4 million, an increase of $5.3 million, or 11%, from $49.1 million for the year ended December 31, 2020. The increase was primarily due to higher repair and reactivation costs offset by decreased scrap and rework expense, lower depreciation expenses on our rental fleet and other savings resulting from lower activity compared to 2020. Rental cost of sales in 2020 also included approximately $1.0 million in credits related to tariff refunds.

Cost of field service and other revenue for the year ended December 31, 2021 was $73.7 million, an increase of $17.5 million, or 31%, from $56.1 million for the year ended December 31, 2020. The increase was mainly related to higher personnel costs associated with higher wages and an increase in the number of field and branch personnel as well as higher fuel and other remobilization expenses associated with increased field service activity levels compared to the prior year. Additionally, gains from sales of field service vehicles decreased by $3.4 million from 2020 as we rationalized our fleet vehicles in line with the headcount reductions in the prior year.

Selling, general and administrative expense for the year ended December 31, 2021 was $46.0 million, an increase of $6.3 million, or 16%, from $39.7 million for the year ended December 31, 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 lower 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 revaluation of the liability related to the TRA and $0.4 million for professional fees and other expenses associated with the 2021 Secondary Offering. Other expense, net for the year ended December 31, 2020 of $0.6 million represented non-cash adjustments for the revaluation of the liability related to the TRA.

Income tax expense. Income tax expense for the year ended December 31, 2021 was $7.7 million (10.2% effective tax rate) compared to $11.0 million (15.6% effective tax rate) for 2020. Income tax expense for the year 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, 2020 was primarily due to approximately $11.0 million expense associated with our 2020 operations and a $2.8 million expense associated with changes in our valuation allowance. These expenses were partially offset by a $1.7 million tax benefit related to finalization of our 2019 tax returns and a $1.2 million 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.

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Liquidity and Capital Resources

At December 31, 2021 we had $301.7 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 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, 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 holders of CW units (other than Cactus Inc.).

We currently estimate our net capital expenditures for the year ending December 31, 2022 will range from $20 million to $30 million, excluding acquisitions, mostly related to rental fleet 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, volatility and company initiatives.

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 income of Cactus LLC 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. 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 pro rata distributions to its unitholders, 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 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, 2021, 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 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).

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Cash Flows

Year Ended December 31, 2021 Compared to Year Ended December 31, 2020

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

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

In preparing our financial statements in accordance 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 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.

Inventories

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 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 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

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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. 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.

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 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 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.

Redemptions of CW Units result in adjustments to the tax basis of the tangible and intangible assets of Cactus LLC. These adjustments are 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, 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 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, 2021 by approximately $15.2 million.

Recent Accounting Pronouncements

There were no new accounting standards adopted in 2021 and there are no new accounting pronouncements issued but not yet effective that are expected to have a material impact on our consolidated financial statements.

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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. 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 costs associated with freight, materials, vehicle-related costs and personnel expenses. While we believe 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 the lower levels experienced in prior years.