ProFrac Holding Corp. — Q2 2023 Form 10-Q
Reporting period: Three and six months ended June 30, 2023. Amounts are in millions of dollars, except per-share data. ProFrac provides hydraulic fracturing, completion services, proppant and related products through stimulation services, proppant production and manufacturing segments.
Key financial results
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Revenue | $709.2 | $589.8 | $1,566.7 | $934.8 |
| Operating income | $53.7 | $92.5 | $160.4 | $122.5 |
| Net income (loss) | $(4.6) | $67.4 | $55.2 | $87.4 |
| Net income (loss) attributable to ProFrac Holding Corp. | $(2.9) | $6.6 | $19.1 | $6.6 |
| Adjusted EBITDA | $182.5 | $208.1 | $429.6 | $295.7 |
| Net cash from operating activities | — | $387.2 | $84.5 |
- Q2 revenue rose 20% year over year, but declined $148.3 from Q1 2023, principally due to fewer active fleets and lower associated material sales. Q2 operating margin was about 7.6%, versus 15.7% a year earlier; net margin was about negative 0.6%, versus positive 11.4%.
- Q2 Adjusted EBITDA margin was about 25.7%, compared with 35.3% in Q2 2022. Adjusted EBITDA is a company-defined non-GAAP measure.
- For the first half, revenue increased about 68% and Adjusted EBITDA about 45% year over year, while net income fell about 37%. The company notes that the 2022 comparison includes predecessor results before its May 2022 IPO and reorganization.
- Interest expense was $41.0 in Q2 and $75.9 for the first half, up from $13.4 and $22.7, respectively, mainly due to higher average debt and interest rates.
Liquidity, debt and capital
- At June 30, cash and cash equivalents were $26.9 on the consolidated balance sheet; management reported $18.1 excluding Flotek, which it cannot access for its operations. ABL availability was $136.6, giving reported available liquidity of $154.7 excluding Flotek.
- Debt principal totaled $1,205.6, including $114.4 classified as current. The ABL facility had $252.9 outstanding and $10.5 of letters of credit against $400.0 maximum availability. The company reported compliance with debt covenants at quarter-end.
- First-half operating cash flow was $387.2; investing cash outflow was $641.7, including $461.8 for acquisitions and $181.3 of property, plant and equipment investment. Financing cash inflow was $244.4. Cash, cash equivalents and restricted cash ended at $27.8.
- Current assets of $828.9 and current liabilities of $837.8 imply a current ratio below 1.0. Management said available liquidity and operating cash flow should fund capital expenditures and obligations for at least 12 months, while noting it must manage leverage-covenant compliance.
Material changes and unusual items
- ProFrac acquired Producers for stated consideration of $36.5 in January and Performance Proppants, a Haynesville frac-sand provider, for $462.5 in February. The acquisitions materially expanded proppant operations; Performance Proppants contributed $60.2 of Q2 revenue and $28.0 of pretax income.
- Proppant production revenue increased to $109.8 in Q2 from $17.5 a year earlier, primarily due to acquisitions. Stimulation services revenue rose to $608.2 from $576.5, while segment Adjusted EBITDA fell to $122.9 from $196.2. Total Q2 Adjusted EBITDA decreased despite revenue growth.
- In April, all 104.2 million eligible ProFrac LLC units were redeemed; the company issued 104.2 million Class A shares and cancelled all Class B shares. Class A shares outstanding were 159.4 million at June 30, versus 53.9 million at year-end 2022. The transaction also contributed to recognition of a $58.9 TRA liability and a $77.6 deferred tax liability.
- The company received $36.3 from related party Flying A for surplus equipment, inventory components and equipment pre-orders, but recorded the proceeds as a related-party deposit pending delivery and final asset-mix approval. Verify the terms and completion status.
- Q2 included $7.4 of litigation expenses and a $9.3 non-cash investment fair-value loss; first-half other expense also included a $17.1 non-cash loss, primarily from the Munger make-whole provision and BPC investment valuation.
Outlook, risks and contingencies
- Management said it lowered active fleets in June and again in August 2023, reduced costs and adopted a more disciplined capital-allocation approach to align with customer activity. It expects 2023 capital expenditures of $300, down from the prior level implied by first-half spending; actual spending remains dependent on activity and demand.
- Management expects liquidity sources to cover obligations for at least 12 months but cautions that covenant compliance efforts may not succeed. The filing states there is substantial doubt about Flotek, a consolidated variable-interest entity, continuing as a going concern. ProFrac says it does not guarantee Flotek liabilities and that Flotek creditors have no recourse to ProFrac assets.
- Patent litigation involving USWS and Halliburton is ongoing, with trials identified for August 2023 and May 2024. The company says outcomes are uncertain and certain claims or counterclaims could materially affect results in the period resolved.
- Key operating exposures include cyclical oilfield-service demand, commodity prices, customer spending, competition, acquisition integration, input costs, regulation, operating hazards and access to financing. The company reported no material change in its stated risk factors.
- Disclosure controls were judged effective as of June 30, 2023; no material change in internal control over financial reporting was reported for the quarter.
Important facts for investors to verify
- Whether fleet reductions and cost actions stabilize per-fleet profitability as customer activity and pricing change.
- Cash availability excluding Flotek, debt maturities and interest burden, and compliance with leverage and other debt covenants.
- Performance Proppants integration, acquisition returns, and the final purchase-price allocations, which remain preliminary.
- Progress and potential financial exposure from the Halliburton patent disputes.
- Completion and final terms of the $36.3 related-party asset transaction, and the ongoing governance and economics of related-party dealings.
- How the share conversion, TRA obligations and tax liabilities affect future per-share results and cash requirements.