ProFrac Holding Corp. — Q3 2022 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2022. ProFrac provides hydraulic fracturing, completion services, oilfield equipment manufacturing and frac sand. Comparisons with 2021 are not fully like-for-like: the 2022 results reflect the May IPO and corporate reorganization, plus acquisitions and Flotek consolidation. Prior-period statements present the predecessor business.
Financial performance
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Revenue | $696.7 million | $195.9 million | $1,631.6 million | $520.3 million |
| Operating income (loss) | $169.0 million | $(6.9) million | $298.6 million | $(29.8) million |
| Net income (loss), consolidated | $143.4 million | $(14.1) million | $237.6 million | $(48.7) million |
| Net income attributable to ProFrac Holding Corp. | $44.9 million | Not reported | $51.5 million | Not reported |
| Adjusted EBITDA (non-GAAP) | $256.1 million | $34.5 million | $558.1 million | $86.3 million |
| Cash from operating activities | Not separately presented for the quarter | $256.7 million | $37.7 million |
Q3 operating margin was approximately 24.3%, versus negative 3.5% a year earlier; Adjusted EBITDA margin was approximately 36.8%, versus 17.6%. Q3 basic and diluted earnings per Class A share were $1.09. Consolidated net income substantially exceeded income attributable to ProFrac Holding, in part because $110.2 million was attributed to redeemable noncontrolling interests.
Balance sheet, cash flow and liquidity
- At September 30, cash and cash equivalents were $64.7 million; working capital was $290.9 million. Cash, cash equivalents and restricted cash totaled $66.7 million.
- Gross debt was $568.0 million, including $60.5 million current debt; long-term debt, net of issuance costs and current portion, was $484.2 million. Net debt using cash and cash equivalents was approximately $503.3 million.
- The $525.7 million New Term Loan carried an 11.1% interest rate at quarter-end and matures in March 2025. The $200 million ABL facility had no borrowings and $189.5 million remaining availability after letters of credit. The company reported covenant compliance and no defaults at September 30.
- Nine-month investing cash outflow was $629.8 million, primarily reflecting acquisitions, capital spending and investments; financing cash inflow was $434.5 million. Capital expenditures were $239.5 million.
- Operating cash flow benefited from higher activity and profitability but was partly offset by working-capital investment, including increases in receivables and inventory.
Changes versus the prior comparable period
- Revenue rose 256% in Q3 and 214% for the first nine months, driven by higher customer activity, more active fleets, pumping hours and pricing, as well as acquired operations. Average active fleets were 31 in Q3 2022 versus 15 in Q3 2021.
- Stimulation services remained the largest business and generated Q3 segment Adjusted EBITDA of $249.6 million, versus $31.6 million. Manufacturing and proppant production also improved; Flotek-related “Other” Adjusted EBITDA was negative $11.1 million.
- Costs increased with activity and input-cost inflation. SG&A rose materially, including IPO-related stock compensation and higher personnel, incentive and acquisition costs. Interest expense also increased with higher debt balances and rates.
- ProFrac acquired FTSI in March, consolidated Flotek from May 17, and acquired Monahans in July. These transactions significantly changed the asset base, revenue mix and debt profile.
Outlook, risks and unusual items
- Management estimated 2022 capital expenditures of $330–$350 million, excluding acquisitions, and expected to fund the program from operating cash flow. Plans included approximately $50 million for engine upgrades, $75 million for electric fleets, $45 million for the Lamesa sand plant and $30 million for maintenance and fleet-readiness initiatives. Management said the first electric fleet was fully deployed in November and expected 12 electric fleets by early 2023.
- Management cited stronger activity, pricing and utilization, while noting inflation, raw-material shortages, labor and shipping constraints. Oilfield demand remains sensitive to commodity prices and customer spending; ProFrac says it does not hedge commodity prices. A 1% increase in interest rates was estimated to add approximately $5.3 million of annual interest expense on quarter-end debt.
- On November 1, 2022, after quarter-end, ProFrac completed its USWS acquisition. It issued approximately 12.9 million shares valued at about $270 million, used approximately $170 million cash to retire USWS debt, left about $35 million of equipment financing outstanding, and borrowed approximately $164 million under the amended ABL. The ABL commitment increased to $280 million, with additional uncommitted capacity subject to conditions.
- The Tax Receivable Agreement generally requires ProFrac Corp. to pay eligible holders 85% of realized tax savings. The recorded liability was $3.5 million; an early-termination or change-of-control payment could be substantial, with the filing estimating it could exceed $500 million.
- Flotek is consolidated because ProFrac can appoint a board majority, but ProFrac says it cannot access or use Flotek’s cash or liquidity. Flotek’s acquired operations generated $21.1 million of pretax loss for the reported post-acquisition period, allocated to noncontrolling interests.
- Contingencies include the Vista Sand claim seeking approximately $8.3 million, with trial docket call scheduled for December 2022, and a historical FTSI lawsuit involving a prior $33 million reduced judgment that was reversed on appeal; the filing says insurance has met the deductible and management does not expect a material adverse effect from its resolution.
- Unusual items included $17.3 million of nine-month debt-extinguishment losses and significant stock-based compensation, including $33.7 million related to deemed IPO-related awards and $10.2 million recognized in Q3 for a performance award.
Important facts for investors to verify
- How USWS integration, its debt repayment and the new ABL borrowing affect leverage, interest expense, covenants and liquidity after September 30.
- Whether strong utilization and pricing persist as input, labor and equipment costs change, and whether planned capital projects deliver expected returns.
- The distinction between consolidated earnings and earnings attributable to Class A shareholders, given the 71% redeemable noncontrolling ownership of ProFrac LLC at quarter-end.
- Flotek’s continuing losses and liquidity needs, and the practical limits on ProFrac’s access to Flotek cash.
- Potential cash obligations under the Tax Receivable Agreement, including the effects of unit redemptions or a change of control.
- Final acquisition accounting and working-capital adjustments for FTSI, Flotek and Monahans, as well as outcomes of disclosed legal matters.