ProFrac Holding Corp. — Q1 2023 Form 10-Q
Business context and period: The filing covers the unaudited three months ended March 31, 2023. ProFrac provides hydraulic fracturing, completion services, proppants, and related products, through stimulation services, proppant production, and manufacturing segments. Comparisons with Q1 2022 require care: ProFrac completed its IPO and reorganization in May 2022, and the earlier-period statements reflect predecessor entities; acquisitions and Flotek consolidation also changed the business perimeter.
Financial performance
| Metric | Q1 2023 | Q1 2022 |
|---|---|---|
| Revenue | $851.7 million | $345.0 million |
| Operating income | $106.7 million | $30.0 million |
| Net income | $59.8 million | $20.0 million |
| Net income attributable to ProFrac Holding Corp. | $22.0 million; $0.40 per Class A share | $0.0 million |
| Adjusted EBITDA | $247.1 million | $87.6 million |
| Cash provided by operating activities | $233.5 million | $43.7 million |
| Cash used in investing activities | $525.8 million | $334.7 million |
| Cash provided by financing activities | $327.1 million | $316.3 million |
Revenue increased 147% year over year. Stimulation services revenue was $790.2 million, proppant production $82.2 million, manufacturing $67.1 million, and other revenue $49.2 million, before intersegment eliminations. The company attributed growth primarily to acquisitions, higher fleet activity, increased mining volume, and stronger proppant demand and pricing. Adjusted EBITDA margin was approximately 29.0% of revenue, versus 25.4% in Q1 2022; operating margin was approximately 12.5%, versus 8.7%. Cost of revenue excluding depreciation, depletion, and amortization was $541.7 million, or approximately 63.6% of revenue, compared with $236.5 million, or 68.6%.
Interest expense rose to $34.9 million from $9.3 million, reflecting higher average debt and interest rates. Depreciation, depletion, and amortization increased to $110.3 million from $44.6 million. Q1 2023 also included $12.3 million of acquisition and integration costs, $5.8 million of patent-litigation costs, and $9.4 million of other net expense, primarily noncash fair-value losses. A $4.1 million gain on debt extinguishment was primarily related to forgiveness of Flotek’s PPP loan.
Liquidity, debt, and cash flow
At March 31, 2023, cash and cash equivalents were $69.9 million, total current assets $993.6 million, and current liabilities $935.1 million. The company reported $57.5 million of cash excluding Flotek and $111.5 million of ABL availability, for $169.0 million of stated liquidity. Flotek is a consolidated variable-interest entity; its assets are restricted to its obligations and its creditors have no recourse to ProFrac’s assets.
Aggregate debt principal was $1.291 billion, compared with $959.4 million at December 31, 2022; reported long-term debt, including current maturities and related-party debt, totaled $1.109 billion. The ABL facility was increased to $400 million; $278 million was drawn and $10.5 million of letters of credit were outstanding. The filing reports approximately $140 million of debt coming due over the next 12 months. The company was in compliance with debt covenants at quarter-end. A 1 percentage-point increase in interest rates would increase annual interest expense by approximately $11.1 million, based on debt outstanding at quarter-end.
Operating cash flow benefited in part from a $136.5 million increase in accounts payable; receivables and inventories used cash. Investing outflow included $443.6 million for acquisitions and $83.2 million of property, plant, and equipment investment. Capital expenditures included maintenance, four electric-powered fracturing fleets, and engine upgrades. Cash increased by $34.8 million during the quarter.
Material changes and significant events
- ProFrac acquired Producers on January 3, 2023, for stated consideration of $36.5 million, and Performance Proppants on February 24, 2023, for $464.8 million. Performance Proppants contributed $22.7 million of revenue and $7.4 million of pretax income during the quarter. Purchase-price allocations were preliminary.
- In February, ProFrac borrowed $320 million under an amended term loan facility and increased ABL maximum availability to $400 million, partly to fund the Performance Proppants acquisition.
- After quarter-end, eligible holders tendered all 104.2 million ProFrac LLC units for redemption. ProFrac exercised its purchase right and issued 104.2 million Class A shares in April; the corresponding Class B shares were canceled. The company was evaluating potential tax and tax receivable agreement effects.
- Redeemable noncontrolling interest fell from $2.463 billion at year-end to $1.255 billion, largely reflecting a $1.268 billion adjustment to redemption value. This is a significant equity presentation item, not equivalent to cash proceeds.
Outlook, risks, and contingencies
Management stated that available cash, operating cash flow, and ABL availability should fund capital expenditures and obligations and maintain covenant compliance for at least 12 months. Capital expenditures were expected to accelerate over the following six months, with allocation adjusted to activity and return thresholds. Additional 2023 acquisitions would likely require additional debt and/or equity financing. The filing provides no specific revenue, earnings, or full-year capital expenditure guidance.
- The business is cyclical and depends on customer spending, oil and gas prices, activity levels, and demand for proppant; lower commodity prices or reduced customer spending could materially affect results.
- ProFrac disclosed substantial doubt about Flotek’s ability to continue as a going concern, while stating that it believes this does not materially affect ProFrac because it does not guarantee Flotek liabilities.
- Patent litigation with Halliburton remains uncertain. Some USWS patent claims were found invalid, appeals were pending, and Halliburton asserted counterclaims that could have a material adverse effect. Related cases were scheduled for trial in May 2024; a separate trial date was postponed to August 2023 or later.
- A change of control or early termination of the tax receivable agreement could accelerate payments; the company estimated a payment of up to more than $270 million if such an event had occurred on March 31, 2023. The recorded TRA liability was $3.3 million.
- The company reported substantial transactions with entities affiliated with controlling Wilks interests, including $62.3 million of related-party expenditures in Q1 2023. These relationships and terms merit review.
Important facts for investors to verify
- How much of the revenue, EBITDA, and operating cash flow growth reflects acquired operations, pricing, utilization, or sustainable organic performance.
- Debt repayment capacity and liquidity after acquisition spending, planned capital expenditures, and the next-12-month maturities; confirm current facility availability and covenant headroom.
- The final purchase-price allocations and integration performance for Producers and Performance Proppants, including acquired liabilities and expected synergies.
- Developments in Halliburton litigation, potential exposure, and any effects on operations or financial statements.
- The tax and TRA consequences of the April unit redemption and Class A share issuance, including any resulting increase in tax obligations or TRA payments.
- Flotek’s liquidity and going-concern status, while distinguishing its restricted resources from ProFrac’s available liquidity.