Business context and reporting period
ProFrac Holding Corp. filed this unaudited Form 10-Q for the quarter ended March 31, 2022. The reported operating results and balance sheet primarily reflect ProFrac Holdings, LLC and its subsidiaries, the predecessor to the public company; ProFrac Holding Corp. itself had no business activity through quarter-end. The predecessor operates in stimulation services, manufacturing and proppant production. Results include FTS International (FTSI) only from its March 4, 2022 acquisition date. The 2021 comparison was retrospectively combined for entities under common control.
Financial and operating highlights
| Metric | Q1 2022 | Q1 2021 |
|---|---|---|
| Revenue | $345.0 million | $149.6 million |
| Operating income (loss) | $34.2 million | $(20.2) million |
| Net income (loss) | $24.1 million | $(26.0) million |
| Adjusted EBITDA | $91.5 million | $17.7 million |
| Cash from operations | $43.7 million | $16.3 million |
| Capital expenditures | $41.5 million | $17.4 million |
Operating margin was approximately 9.9% (versus a 13.5% operating loss margin); net margin was approximately 7.0% (versus a 17.4% net loss margin). Adjusted EBITDA margin was approximately 26.5%, compared with 11.8%. Adjusted EBITDA is a non-GAAP measure.
Revenue increased 131% year over year. Stimulation services revenue was $336.2 million, manufacturing $32.0 million and proppant production $12.4 million, before intersegment eliminations. Average active fleets were 21.7, compared with 15 a year earlier; the company reported 31 of 34 conventional fleets active at March 31. Management attributed growth to higher customer activity, fleet utilization, pumping hours and pricing, as well as $48.6 million of revenue from FTSI after acquisition.
At March 31, cash and cash equivalents were $28.7 million (plus $2.1 million restricted cash). Working capital was $71.0 million. Gross debt was $648.0 million; balance-sheet debt carrying amounts, net of issuance costs, totaled approximately $625.6 million. The New Term Loan had $450.0 million outstanding at a 9.5% rate; the New ABL had $70.7 million outstanding at 4.75%, with $20.1 million remaining availability after letters of credit. Total assets were $1.314 billion and total liabilities $1.068 billion.
Cash from operations was more than offset by $334.7 million of investing outflows, principally FTSI acquisition payments, investments and capital spending. Financing provided $316.3 million, mainly from debt issuance and refinancing. Cash, cash equivalents and restricted cash increased by $25.3 million to $30.7 million.
Material changes versus the prior comparable period
- Revenue and segment Adjusted EBITDA improved substantially as activity and pricing recovered; the company moved from operating and net losses to profits.
- Costs also increased: cost of revenue rose with activity and input-cost inflation, while depreciation increased to $44.2 million and SG&A to $34.1 million. SG&A included $13.0 million of acquisition-related expenses, including severance and transaction costs.
- Debt was refinanced on March 4, 2022, replacing prior facilities with a $450 million term loan, a $100 million ABL facility and subordinated notes. The quarter included an $8.3 million loss on debt extinguishment.
- FTSI acquisition consideration was $405.7 million, comprising $332.8 million cash and $72.9 million related equity. The preliminary purchase-price allocation remains subject to revision.
- Investments rose to $78.3 million, including Flotek convertible notes and the BPC investment. A noncash $8.1 million Flotek fair-value gain was recorded in other income, a material contributor to reported earnings.
Outlook, commentary and risks
Management cited stronger oilfield activity and pricing, while noting inflation, supply-chain constraints and higher raw-material costs. It stated that increased pricing and utilization had supported margins, but future pass-through of cost increases is uncertain. The company does not hedge commodity-price exposure. Management identified oil and gas demand and prices, customer spending, interest rates, equipment availability, regulation and geopolitical events as risks.
The 2022 capital expenditure budget, excluding acquisitions, was $240–$290 million, including $65–$70 million for three electric-powered fleets and $25–$30 million for the West Munger sand mine. Management expected to fund the capital program with operating cash flow and stated it believed liquidity would be sufficient for planned needs and covenant compliance over the next 12 months and beyond. No revenue or earnings guidance was provided.
After quarter-end, the IPO and over-allotment generated $303.9 million of net proceeds. Uses included redeeming $72.9 million of FTSI-related equity, repaying $143.8 million of term-loan borrowings, fully repaying the $22 million Backstop Note and $22 million Closing Date Note, and repaying the $20.8 million remaining Equify Bridge Note. The ABL commitment was increased to $200 million; reported availability at April 30 was approximately $80.1 million.
Subsequent announced transactions include a proposed $90 million cash acquisition of the SP Companies and a proposed USWS merger, expected in Q4 2022 subject to conditions. Management anticipated up to approximately $250 million of new debt to support the transactions, in addition to approximately $55 million of USWS debt expected to be assumed. The company cautioned that financing may not be available on acceptable terms and that financing is not a closing condition for either transaction.
Other notable items include the Flotek supply agreement, expanded after quarter-end to ten years and 30 fleets, with minimum-volume commitments and potential shortfall damages; an annual $7 million shared-services fee to a Wilks-owned entity; and a tax receivable agreement requiring payment of 85% of specified realized tax savings to certain holders. The company reported disclosure controls were effective as of March 31.
Contingencies include an $8.31 million Vista Sand contract claim scheduled for trial docket call in September 2022, and a recorded $4.0 million liability for a vendor contract dispute. In the Patterson litigation, a prior approximately $100 million jury verdict was reduced and then reversed on appeal; a new trial date had not been set, and the company stated insurance had met the deductible and it did not expect a material adverse effect.
Important facts for investors to verify
- How much of the revenue and earnings improvement reflects durable pricing and utilization versus the partial-quarter FTSI contribution, and how results compare on a pro forma basis.
- The quality of reported earnings, particularly the $8.1 million noncash Flotek valuation gain and $8.3 million debt-extinguishment loss.
- Post-IPO debt, borrowing availability and covenant headroom, including the impact of planned acquisitions, capital spending and variable interest rates.
- Whether the SP Companies and USWS transactions close, their final consideration and financing, and the resulting debt, dilution and integration requirements.
- Progress and returns on the $240–$290 million capital budget, electric fleet builds and West Munger development.
- Related-party arrangements, including Wilks-affiliated services and the USWS merger consideration potentially payable to Wilks-affiliated holders.
- Resolution and reserve adequacy for the Vista Sand claim, vendor dispute and Patterson litigation.