Profrac Holding Corp. annual report, FY2023

ProFrac Holding Corp. (Nasdaq: ACDC) — 2023 Form 10-K

Reporting period: Fiscal year ended December 31, 2023. The filing was signed March 15, 2024. ProFrac provides hydraulic fracturing and related completion services, produces frac sand, and manufactures oilfield equipment. Its three reportable segments are stimulation services, proppant production, and manufacturing.

Financial performance

Metric	2023	2022
Revenue	$2,630.0 million	$2,425.6 million
Operating income	$166.6 million	$412.4 million
Net income (loss), consolidated	$(59.2) million	$342.7 million
Net income (loss) attributable to ProFrac Holding Corp.	$(97.7) million	$91.5 million
Basic and diluted EPS	$(0.82)	$2.06
Adjusted EBITDA	$688.4 million	$811.2 million
Cash from operating activities	$553.5 million	$415.2 million
Cash used in investing activities	$715.8 million	$1,028.6 million
Capital expenditures	$267.0 million	$356.2 million

Revenue increased 8.4%, but operating income fell 59.6% and the company moved from consolidated net income to a net loss. Operating margin was approximately 6.3%, versus 17.0% in 2022. Adjusted EBITDA declined approximately 15.1%. The filing attributes the weaker results mainly to lower average active fleets and utilization, higher depreciation and interest expense, and other items described below. Results are affected by acquisitions and consolidation changes, so year-over-year comparisons are not fully like-for-like.

By segment, 2023 revenue was $2,291.2 million for stimulation services, $383.3 million for proppant production, $176.1 million for manufacturing, and $193.0 million for other activities, before $413.6 million of eliminations. Stimulation revenue decreased 2% year over year; proppant production revenue rose 326%, principally reflecting acquisitions; manufacturing revenue rose 6%. Segment Adjusted EBITDA was $479.9 million for stimulation, $195.6 million for proppant production, $14.5 million for manufacturing, and $(1.6) million for other.

Balance sheet, debt, and liquidity

• Total assets were $3.07 billion at year-end, compared with $2.93 billion in 2022. Current assets were $638.1 million and current liabilities were $648.9 million.
• Principal debt was $1.108 billion, up from $959.4 million; reported long-term debt, net of discounts and current maturities, was $942.1 million. Scheduled 2024 principal maturities totaled $126.4 million.
• Year-end cash and cash equivalents were $25.3 million consolidated. For its liquidity discussion, the company excluded Flotek cash and reported $19.3 million of cash plus $83.4 million of revolver availability, or $102.7 million total liquidity. Alpine cash and assets are subject to restrictions under its term loan.
• In December, ProFrac refinanced debt with $520 million of 2029 senior secured floating-rate notes and a $365 million Alpine term loan, extending major maturities to 2029. Year-end effective interest rates were 14.0% and 14.3%, respectively. The 2022 ABL facility had $117.4 million drawn and $83.4 million available.
• Net interest expense was $154.9 million, versus $59.5 million in 2022; cash interest paid was $139.1 million. Management estimates a 1 percentage-point increase in variable rates would add approximately $10 million to annual interest expense.

Material changes and notable items

• ProFrac acquired Producers Service Holdings for approximately $36.5 million and Performance Proppants for approximately $462.8 million in 2023. Performance Proppants added Haynesville frac-sand operations; the acquisition contributed $154.8 million of revenue after intercompany eliminations.
• All eligible holders redeemed 104.2 million ProFrac LLC units in April 2023 in exchange for an equivalent number of Class A shares; no Class B shares remained outstanding. Class A shares outstanding were 159.4 million at year-end.
• In September 2023, ProFrac issued $50 million of Series A redeemable convertible preferred stock to Wilks-affiliated entities. It carries cumulative 8% compounded paid-in-kind dividends and was convertible into 2.5 million common shares at year-end. Its reported temporary-equity carrying value was $58.7 million.
• Interest expense and a $33.5 million loss on debt extinguishment contributed to the year’s decline in earnings. Other expense included a $30.2 million unrealized loss on the BPC investment and an $8.5 million loss on a make-whole provision.
• Litigation expense and legal contingency accruals were $34.1 million, more than half related to patent litigation involving Halliburton. A 2023 jury verdict favored USWS in one case, but appeals, counterclaims, and other lawsuits remain unresolved.
• The company identified and corrected an immaterial deferred-tax accounting error: deferred tax assets and the related valuation allowance at December 31, 2022 had each been understated by $65.8 million, with no net effect on the balance sheet or reported 2022 earnings or cash flows. The company concluded prior periods were not materially misstated.

Outlook, risks, and contingencies

Management expects industry activity levels to be maintained during 2024 and believes operating cash flow can fund the planned capital program. It estimates 2024 capital expenditures of $150–$200 million for maintenance plus approximately $100 million for growth, primarily sand-mine improvements and fleet upgrades. Management’s priorities are customer service, asset utilization, and reducing cost per unit. The filing does not provide a numerical revenue or earnings forecast.

• Management reported $553.5 million of 2023 operating cash flow and stated that cash, operating cash flow, and revolver availability should fund obligations and maintain covenant compliance for at least 12 months. Further acquisitions may require additional financing.
• Flotek, which ProFrac consolidates as a variable interest entity, reported substantial doubt about its ability to continue as a going concern in its November 2023 Form 10-Q. ProFrac says it cannot access Flotek’s cash and believes the matter does not materially adversely affect ProFrac.
• Key risks include cyclical customer spending and commodity prices, lower fleet utilization or pricing, substantial debt and high borrowing costs, refinancing and covenant risks, acquisition integration, supplier and labor availability, water access, and environmental, hydraulic-fracturing, silica-exposure, and climate-related regulation.
• Other material considerations include the Wilks Parties’ approximately 84.4% voting control, significant related-party transactions, the Tax Receivable Agreement (including a current liability of $2.8 million and a potential estimated change-of-control termination payment exceeding $70 million), and the absence of anticipated cash dividends.
• ProFrac paid $20.1 million under a chemistry supply-contract shortfall arrangement with Flotek because stimulation services did not meet minimum purchase commitments. The agreement with related party Flying A covered $36.3 million of equipment and inventory; $28.9 million had been delivered in 2023, with the remainder expected in the first half of 2024.
• Management and the auditor reported effective internal control over financial reporting, but Performance Proppants—19% of consolidated assets and 6% of revenue—was excluded from the year-end control assessment while integration continued.

Most important facts for investors to verify

• Whether 2024 activity, utilization, pricing, and cost improvements support management’s outlook and planned capital spending.
• Debt service and liquidity capacity, especially 2024 maturities, high floating-rate borrowing costs, restricted Alpine liquidity, and covenant headroom.
• Whether the Performance Proppants acquisition delivers expected returns and whether its internal controls are fully integrated.
• Developments in Halliburton patent cases, including potential damages, appeals, and the scheduled June 2024 trial noted in the filing.
• The terms and potential dilution or redemption cost of the Series A preferred stock, and the cash demands and change-of-control exposure under the Tax Receivable Agreement.