ProFrac Holding Corp. — Q1 2024 Form 10-Q
Reporting period: Three months ended March 31, 2024. ProFrac provides hydraulic fracturing and other completion services, proppant, and manufacturing products. Amounts below are in millions of dollars except per-share data and percentages.
Key financial results
| Metric | Q1 2024 | Q1 2023 | Change |
|---|---|---|---|
| Revenue | $581.5 | $857.5 | Down $276.0 (32%) |
| Operating income | $39.9 | $106.7 | Down $66.8 |
| Operating margin | 6.9% | 12.4% | Down 5.5 percentage points |
| Net income | $3.0 | $59.8 | Down $56.8 |
| Net income attributable to ProFrac Holding Corp. | $1.8 | $22.0 | Down $20.2 |
| Net income attributable to Class A common shareholders / EPS | $0.6 / $0.00 | $22.0 / $0.40 | Lower |
| Adjusted EBITDA | $159.7 | $247.1 | Down $87.4 |
| Cash from operating activities | $79.1 | $233.5 | Down $154.4 |
| Capital expenditures | $59.9 | $83.2 | Down $23.3 |
Cost of revenues before depreciation, depletion and amortization was $373.7, or 64.3% of revenue, versus $545.9, or 63.7%, a year earlier. Adjusted EBITDA margin was 27.5%, compared with 28.8%. Interest expense increased to $37.6 from $34.9, mainly due to higher average rates on variable-rate debt, partly offset by lower average debt balances.
Revenue and operating changes
- Stimulation services: Segment revenue declined 35% to $517.3. The company cited more customers supplying their own proppant and chemistry, lower average service pricing, and fewer average active fleets; higher utilization of active fleets partly offset the decline.
- Proppant production: Revenue declined 5% to $77.7, primarily from lower average selling prices, partly offset by higher volumes. Q1 2023 included an additional month of Performance Proppants revenue following its acquisition.
- Manufacturing: Revenue declined 35% to $43.5, reflecting lower intercompany demand associated with fewer active fleets.
- Lower SG&A, including acquisition synergies and reduced headcount, and lower acquisition and integration costs helped offset weaker operating results. Q1 2024 included $4.8 of litigation expenses and accruals and $0.7 of executive severance charges.
The 2023 comparison also includes acquisitions made during 2023; reported-period results are not a fully like-for-like comparison. The filing gives unaudited Q1 2023 pro forma revenue of $882.3 and net income of $67.2 as if specified acquisitions had occurred earlier.
Cash, debt and liquidity
- Cash and cash equivalents were $28.3 at March 31, 2024, compared with $25.3 at December 31, 2023. Management excludes Flotek cash from its available operating liquidity; it reported $23.1 of cash excluding Flotek.
- Management reported $143.8 of remaining availability under the ABL facility and total liquidity of $166.9, excluding Flotek cash. It stated that available cash, operating cash flow and revolver availability should fund capital expenditures and debt obligations for at least 12 months.
- Long-term debt principal was $1,085.1, down $22.8 from year-end; $136.4 was classified as current. Net carrying amount of total long-term debt was $912.2. The company reported $37.5 of long-term debt repayments during the quarter.
- Operating cash flow fell to $79.1. Investing cash outflow was $53.3, including $59.9 of property and equipment investment; financing cash outflow was $22.8. Cash increased by $3.0 during the quarter.
- Cash and assets of Alpine, which holds the proppant production business, are restricted under its term loan and generally cannot be used to meet obligations of other subsidiaries. Flotek liquidity is also not available for ProFrac’s operations.
Outlook, risks and unusual items
- Capital spending outlook: Management estimated 2024 maintenance capital expenditures of $150–$200, plus approximately $100 for growth initiatives, including sand mine improvements and fleet upgrades. Actual spending will depend partly on customer demand and industry activity.
- Alpine covenant: A maximum 2.00-to-1.00 total net leverage covenant begins with the quarter ending September 30, 2024. Following lower-than-expected Q1 operating results, Alpine is monitoring compliance. The company said Alpine believes it can meet, modify, or further defer the covenant, but gave no assurance.
- Debt-rate exposure: A 1-percentage-point increase in interest rates on variable-rate debt would increase annual interest payments by approximately $10.0.
- Litigation: USWS, a ProFrac subsidiary, obtained a jury verdict in 2023 in its patent case against Halliburton, which Halliburton indicated it would appeal. Separate Halliburton patent suits against USWS were scheduled together for trial in August 2024. The company said outcomes are uncertain, could materially affect results or liquidity when resolved, and that it could not estimate a reasonably possible loss range for the matters discussed.
- Subsequent event: In April 2024, ProFrac acquired the remaining equity interests of BPC for approximately $6 cash for common equity, paid $11 to repay certain BPC debt, and assumed $6 of BPC debt. Purchase accounting was still in process.
- Management reported compliance with the 2029 Senior Notes and ABL covenants at quarter-end and expected continued compliance for at least 12 months. It identified cyclical oilfield demand, commodity prices, customer spending, financing availability, acquisitions, regulation and litigation among material risks.
Important facts for investors to verify
- Whether stimulation-service pricing, active fleet count and customer-supplied materials continue to weigh on revenue and margins.
- Alpine’s performance and ability to satisfy or amend its leverage covenant before it takes effect in September 2024, given restrictions on using Alpine liquidity elsewhere in the group.
- Cash conversion, working-capital needs, planned capital spending and the availability of ABL borrowing capacity.
- Developments and potential financial exposure in the Halliburton litigation, including the scheduled 2024 trial and appeals.
- The final accounting and funding implications of the April 2024 BPC acquisition, and the extent to which its cash and assets are available to the broader company.
- The effects of related-party transactions and the Series A redeemable convertible preferred stock, including its redemption value and potential dilution.