ProFrac Holding Corp.: Form 10-Q for the period ended Mar 31, 2024

The following discussion and analysis of our financial condition and results of operations should be in conjunction with our unaudited condensed consolidated financial statements and the related notes thereto included in this Quarterly Report, as well as our Annual Report.

Overview

We are a vertically integrated and innovation-driven energy services holding company providing hydraulic fracturing, proppant production, other completion services and other complementary products and services to leading upstream oil and natural gas companies engaged in the exploration and production ("E&P") of North American unconventional oil and natural gas resources.

We operate in three reportable business segments: stimulation services, proppant production and manufacturing. Our stimulation services segment owns and operates a fleet of mobile hydraulic fracturing units and other auxiliary equipment that generates revenue by providing stimulation services to our customers. Our proppant production segment provides proppant to oilfield service providers and E&P companies. Our manufacturing segment sells highly engineered, tight tolerance machined, assembled, and factory tested products such as high horsepower pumps, valves, piping, swivels, large-bore manifold systems, and fluid ends.

Summary Financial Results

• Total revenue for the three months ended March 31, 2024, was $581.5 million, which represented a decrease of $276.0 million from the same period in 2023.
• Net income attributable to ProFrac Holding Corp. for the three months ended March 31, 2024, was $1.8 million, which represented a decrease of $20.2 million from the same period in 2023.
• Cash provided by operating activities for the three months ended March 31, 2024, was $79.1 million, a decrease of $154.4 million from the same period in 2023.
• Total principal amount of long-term debt was $1,085.1 million at March 31, 2024, a decrease of $22.8 million from December 31, 2023.

2024 Developments

• In April 2024, we acquired all of the remaining equity interests of BPC. Consideration transferred for this acquisition included approximately $6 million of cash for the common equity, $11 million of cash to repay certain of BPC’s debt obligations, and the assumption of $6 million of BPC’s debt obligations.

Results of Operations

Revenues

Revenues by reportable segment are as follows:

Stimulation Services. Stimulation services revenues for the three months ended March 31, 2024 decreased $272.9 million, or 35%, from the same period in 2023. This decrease was primarily attributable to an increase in the portion of customers who provided their own proppant and chemistry, lower average pricing for our services, and a lower number of average active fleets in 2024. These decreases were partially offset by increased utilization of our active fleets in 2024.

Proppant Production. Proppant production revenues for the three months ended March 31, 2024 decreased $4.5 million, or 5%, from the same period in 2023. The decrease was primarily attributable to lower average prices for products sold, which was partially offset by an increase in volumes sold. Additionally, the acquisition of Performance Proppants contributed approximately one month of revenue in the three months ended March 31, 2023. Revenue recognized for the amortization of acquired off-market contracts for the three months ended March 31, 2024 and 2023 was $13.6 and $8.1 million, respectively. Refer to Item 8 "Financial Statements and Supplementary Data" in our Annual Report for information about our acquired contract liabilities. During the three months ended March 31, 2024, approximately 31% of the Proppant Production segment's revenues were intercompany, compared with 32% in the same period last year.

Manufacturing. Manufacturing revenues for the three months ended March 31, 2024 decreased by $23.6 million, or 35%, from the same period in 2023. This decrease was attributable to lower intercompany demand for manufacturing products due to our lower average active fleets in 2024. During the three months ended March 31, 2024, approximately 78% of the Manufacturing segment's revenues were intercompany, compared with 95% in the same period last year.

Other. Other revenues for the three months ended March 31, 2024 decreased by $7.5 million from the same period in 2023. This decrease was primarily attributable to lower intercompany demand for chemistry products. This decrease was partially offset by $8.7 million of intercompany revenue related to contract shortfalls because the stimulation services segment did not purchase the minimum contractual commitment of chemistry products from Flotek. During the three months ended March 31, 2024, approximately 68% of other revenue was intercompany, compared with 76% in the same period last year.

Cost of Revenues

Cost of revenues by reportable segment is as follows:

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Stimulation Services. Stimulation services cost of revenues for the three months ended March 31, 2024 decreased by $175.2 million, or 33%, from the same period in 2023. This decrease was primarily attributable to a decrease in average active fleets and decreased volume of fracturing materials in 2024. In the first quarter of 2024, cost of revenues for this segment included an intercompany supply commitment charge of $8.7 million because the stimulation services segment did not purchase the minimum contractual commitment of chemistry products from Flotek.

Proppant Production. Proppant production cost of revenues for the three months ended March 31, 2024 increased by $3.9 million, or 10%, from the same period in 2023. This increase was primarily attributable to increased volumes sold in 2024. Additionally, the acquisition of Performance Proppants contributed approximately one month of costs in the three months ended March 31, 2023.

Manufacturing. Manufacturing cost of revenues for the three months ended March 31, 2024 decreased by $21.3 million, or 39%, from the same period in 2023. This decrease was primarily attributable to decreased volumes of products sold in 2024.

Other. Other cost of revenues for the three months ended March 31, 2024 decreased by $13.7 million, or 30% from the same period in 2023. This decrease was primarily attributable to decreased volumes of product sold and lower freight costs in 2024.

Selling, General and Administrative

Selling, general and administrative expenses are comprised of the following:

Selling, general and administrative expenses, excluding stock-based compensation for the three months ended March 31, 2024 decreased by $16.3 million, or 25%, from the same period in 2023. This decrease was primarily due to the achievement of acquisition synergies, primarily reduced headcount, in the second half of 2023.

Depreciation, Depletion, and Amortization

Depreciation, depletion, and amortization for the three months ended March 31, 2024 was consistent with the same period in 2023.

Acquisition and Integration Costs

Acquisition and integration costs primarily relate to professional fees, severance and other costs associated with our acquisition and integration activities. These costs for the three months ended March 31, 2024 decreased by $12.1 million from the same period in 2023.

Other Operating Expense, Net

The following table summarizes our other operating expenses, net:

(Gain) loss on disposal of assets, net consists of gains and losses on the sale of excess property, early equipment failures and other asset dispositions.

Litigation expenses and accruals for legal contingencies generally represent legal and professional fees incurred in litigation as well as estimates for loss contingencies with regards to certain vendor disputes and litigation matters. In the periods presented, these costs represent litigation costs incurred in connection with a patent infringement lawsuit against Halliburton. See "Note 9. Commitments and Contingencies" for a discussion of significant litigation matters.

Severance charges in the three months ended March 31, 2024 relate to the departure of an executive.

The acquisition earnout adjustment in the three months ended March 31, 2023 represents a decrease in the fair value of the contingent consideration related to our acquisition of REV in December 2022.

Interest Expense, Net

Interest expense, net of interest income, for the three months ended March 31, 2024 was $37.6 million compared with $34.9 million in the same period in 2023. This increase was due to higher average interest rates for our variable rate debt in 2024, which was partially offset by lower average long-term debt balances.

Gain (Loss) on Extinguishment of Debt

In the three months ended March 31, 2023, we recognized a net gain of $4.1 million, which was primarily due to the forgiveness of Flotek's Paycheck Protection Program loan.

Other (Expense) Income, Net

For the three months ended March 31, 2024 we recognized income of $1.8 million compared with a loss of $9.4 million in the same period in 2023. The 2024 income was primarily attributable to an increase in the fair value of our investment in BPC. The 2023 loss was primarily attributable to a decrease in the fair value of our investment in BPC and the change in fair value of our Munger make-whole provision.

Income Taxes

Income taxes were $0.3 million and $6.7 million for the three months ended March 31, 2024 and 2023, respectively. Our effective tax rate for the three months ended March 31, 2024 was 9.1%, compared with 10.1% in the same period in 2023.

In 2024, the difference between our effective tax rate and the federal statutory rate related to changes in the valuation allowance on our net deferred tax assets. In 2023, the difference between our effective tax rate and the federal statutory rate related to changes in the valuation allowance on our net deferred tax assets and to the income that was earned within the financial statement consolidated group that is not subject to tax within the financial statement consolidated group.

Liquidity and Capital Resources

Sources of Liquidity

Our primary sources of liquidity are cash flows from operations and availability under our revolving credit facility. While Flotek is included in our unaudited condensed consolidated financial statements, we do not have the ability to access or use Flotek’s cash or liquidity in our operations and, accordingly, have excluded Flotek’s cash and other sources of liquidity from the following discussion of our liquidity and capital resources. See "Note 10. Variable Interest Entity" in the notes to our unaudited condensed consolidated financial statements for discussion of our ownership of Flotek.

Our Alpine 2023 Term Loan requires us to segregate collateral associated with Alpine and limits our ability to use Alpine's cash or assets to satisfy our obligations or the obligations of our other subsidiaries. We also have limited ability to provide Alpine with liquidity to satisfy its obligations. Refer to our Annual Report and "Note 4. Debt" in the notes to our unaudited condensed consolidated financial statements for more information regarding the Alpine 2023 Term Loan.

At March 31, 2024, we had $23.1 million of cash and cash equivalents, excluding Flotek, and $143.8 million available for borrowings under our revolving credit facility, which resulted in a total liquidity position of $166.9 million. Refer to our Annual Report for more information regarding our revolving credit facility.

We believe that our cash and cash equivalents, cash provided by operations and the availability under our revolving credit facility will be sufficient to fund our capital expenditures and satisfy our debt obligations for at least the next 12 months. If we pursue additional acquisitions during 2024, we will likely need to raise additional debt and/or equity financing to fund them. There is no assurance we could do that on favorable terms, if at all.

Cash Flows

Cash flows provided by (used in) each type of activity were as follows:

Operating Activities. Net cash provided by operating activities was $79.1 million and $233.5 million in the three months ended March 31, 2024 and 2023, respectively. Cash flows from operating activities consists of net income or loss adjusted for non-cash items and changes in operating assets and liabilities. Net income or loss adjusted for non-cash items in the three months ended March 31, 2024 resulted in a cash increase of $103.0 million compared with a cash increase of $185.4 million in the same period of 2023. This change was primarily due to lower earnings in 2024. The net change in operating assets and liabilities in the three months ended March 31, 2024 resulted in a cash decrease of $23.9 million compared with a cash increase of $48.1 million in the same period of 2023. This change was primarily due to decreased cash from accounts payable in 2024, which was partially offset by increased cash provided by inventories in 2024.

Investing Activities. Net cash used in investing activities was $53.3 million and $525.8 million in the three months ended March 31, 2024 and 2023, respectively. This change was primarily due to decreased cash used for acquisitions and capital expenditures in 2024.

Financing Activities. Net cash used in financing activities was $22.8 million in the three months ended March 31, 2024, compared with net cash provided by financing activities of $327.1 million for the same period in 2023. Net cash used in 2024 related to debt repayments. Net cash provided in 2023 was primarily attributable to borrowings to fund our acquisition of Performance Proppants.

Cash Requirements

Our material cash requirements have consisted of, and we anticipate will continue to consist of the following:

• debt service obligations, including interest,
• capital expenditures,
• purchase commitments,
• tax receivable agreement payments, and
• acquisitions of strategic businesses.

Debt Service Obligations

As of March 31, 2024 we have $1,085.1 million in aggregate principal amount of long-term debt outstanding, with $136.4 million coming due over the next twelve months. For additional information about our long-term debt, see "Note 4. Debt" in the notes to our unaudited condensed consolidated financial statements and Item 8 "Financial Statements and Supplementary Data" in our Annual Report.

Both the 2029 Senior Notes and the ABL Credit Facility contain certain customary representations and warranties and affirmative and negative covenants. As of March 31, 2024, we were in compliance with these covenants.

Commencing with the fiscal quarter ending September 30, 2024, the Alpine 2023 Term Loan contains a covenant requiring Alpine not to exceed a maximum Total Net Leverage Ratio (as defined in the Alpine Term Loan Credit Agreement) of 2.00 to 1.00. This ratio is generally the consolidated total debt of Alpine divided by Alpine's adjusted EBITDA. As a result of Alpine’s lower than expected operating results in the three months ended March 31, 2024, Alpine is closely monitoring compliance with this covenant. While there can be no assurance, Alpine believes that it will be able to meet, modify, or further defer this debt covenant.

Capital Expenditures

The nature of our capital expenditures consists of a base level of investment required to support our current operations and amounts related to growth and company initiatives.

During the three months ended March 31, 2024 our capital expenditures were $59.9 million, consisting of maintenance capital expenditures for our hydraulic fracturing fleet and engine upgrades to convert legacy pumps to next generation technology.

For the full year of 2024, we estimate capital expenditures will range from $150 million to $200 million in maintenance related expenditures and an additional $100 million for growth initiatives across all segments. Currently, growth capital expenditures for 2024 are expected to be related to sand mine improvements and upgrades to our hydraulic fracturing fleet.

We continually evaluate our capital expenditures and the amount that we ultimately spend will depend on a number of factors, including customer demand for new fleets and expected industry activity levels.

Purchase Commitments

As of March 31, 2024, we had purchase commitments of $28.7 million in 2025 for hydraulic fracturing equipment components.

Tax Receivable Agreement

As of March 31, 2024 we have $71.1 million of estimated tax receivable agreement obligations, with an estimated $6.4 million coming due over the next twelve months. This obligation will generally be paid under the tax receivable agreement as the Company realizes actual cash tax savings from the tax benefits covered by the tax receivable agreement in future tax years. We do not expect a significant increase in the estimate of this liability in future periods. For additional information about our tax receivable agreement, please see Item 8 "Financial Statements and Supplementary Data" in our Annual Report.

Commitments and Contingencies

We are currently litigating multiple patent infringement lawsuits against Halliburton. The outcomes of these cases are uncertain and the ultimate resolution of them could have a material adverse effect on our liquidity in the periods in which these matters are resolved. See “Note 9. Commitments and Contingencies” in the notes to our unaudited condensed consolidated financial statements for further discussion.

Acquisitions of Strategic Businesses

Our growth strategy includes potential acquisitions and other strategic transactions. From time to time we enter into non-binding letters of intent as well as binding agreements to make investments or acquisitions. These arrangements may provide for purchase consideration including cash, notes payable by us, equity or some combination, the use of which could impact our liquidity needs. These letters of intent typically are subject to the completion of satisfactory due diligence, the negotiation and resolution of significant business and legal issues, the negotiation, documentation and completion of mutually satisfactory definitive agreements among the parties, the consent of our lenders, our ability to finance any cash payment at closing, and approval of our board of directors. Any binding agreements we may enter typically include customary closing conditions. We cannot guarantee that any such actual or potential transaction would be completed on acceptable terms, if at all.

We have historically funded our acquisitions through issuances of our equity securities and borrowings under our credit agreements. For any future acquisitions, we may utilize borrowings under our ABL credit facility and various financing sources available to us, including the issuance of equity or debt securities through public offerings or private placements, to fund these acquisitions. Our ability to complete future offerings of equity or debt securities and the timing and terms of these offerings will depend on various factors including prevailing market conditions and our financial condition.

At March 31, 2024, we held no derivative instruments that materially increased our exposure to market risks for interest rates, foreign currency rates, commodity prices or other market price risks. We are subject to interest rate risk on our variable-rate debt. A 1% increase in interest rates on our variable-rate debt as of March 31, 2024, would increase the annual interest payments for this debt by approximately $10.0 million.

Evaluation of Disclosure Controls and Procedures

In accordance with Exchange Act Rule 13a-15, we carried out an evaluation, under the supervision and with the participation of management, including our Executive Chairman (our principal executive officer) and our Chief Financial Officer (our principal financial officer), of the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report. Based on that evaluation, our Executive Chairman and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of March 31, 2024 to provide reasonable assurance that information required to be disclosed in our reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms. Our disclosure controls and procedures include controls and procedures designed to ensure that information required to be disclosed in reports filed or submitted under the Exchange Act is accumulated and communicated to our management, including our Executive Chairman and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosures.

Limitations on Controls and Procedures

In designing and evaluating our disclosure controls and procedures, management recognizes that disclosure controls and procedures, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the disclosure controls and procedures are met. Additionally, in designing disclosure controls and procedures, our management was required to apply its judgment in evaluating the cost-benefit relationship of possible disclosure controls and procedures. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, controls may become inadequate because of changes in conditions, or the degree of compliance with policies or procedures may deteriorate. Because of the inherent limitations in a control system, misstatements due to error or fraud may occur and not be detected.

Changes in Internal Control over Financial Reporting

There were no changes in our internal control over financial reporting during the three months ended March 31, 2024 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

There have been no material changes in the significant risk factors that may affect our business, results of operations or liquidity as described in Item 1A "Risk Factors" in our Annual Report.