ProFrac Holding Corp.: Form 10-Q for the period ended Sep 30, 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, which primarily relates to ProFrac LLC, 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, which primarily relates to Alpine, provides proppant to oilfield service providers and E&P companies. Our manufacturing segment sells products such as high horsepower pumps, valves, piping, swivels, large-bore manifold systems, and fluid ends.

Summary Financial Results

• Total revenue for the three and nine months ended September 30, 2024, was $575.3 million and $1,736.2 million, respectively, which represented an increase of $1.1 million and a decrease of $404.7 million from the same periods in 2023.
• Net loss attributable to ProFrac Holding Corp. for the three and nine months ended September 30, 2024, was $45.2 million and $110.1 million, respectively, which represented decreases of $26.3 million and $110.3 million from the same periods in 2023. The net losses for the three and nine months ended September 30, 2024 included pretax goodwill impairment charges of $6.8 million and $74.5 million, respectively.
• Cash provided by operating activities for the nine months ended September 30, 2024, was $290.8 million, a decrease of $220.0 million from the same period in 2023.
• Total principal amount of long-term debt was $1,205.7 million at September 30, 2024, an increase of $97.8 million from December 31, 2023.

2024 Developments

• In April 2024, we acquired all of the remaining equity interests of BPC. BPC is the parent company of FHE, which manufactures equipment used in the hydraulic fracturing industry. The total purchase consideration was $39.8 million, consisting of cash consideration of $14.9 million and our pre-existing investment of $24.9 million.
• In June 2024, we acquired 100% of the issued and outstanding capital stock of AST, a pressure pumping services provider serving the Permian Basin, for total purchase consideration of $174.0 million in cash.
• In June 2024, we acquired 100% of the issued and outstanding common stock of NRG for total purchase consideration of $6.0 million in cash.

Results of Operations

Revenues

Revenues by reportable segment are as follows:

Stimulation Services. Stimulation services revenues for the three months ended September 30, 2024 increased $17.6 million, or 4%, from the same period in 2023. This increase was primarily attributable to an increase in average fleets and higher fleet utilization. Additionally, the acquisition of AST contributed revenue starting in June 2024. This increase was partially offset by lower average pricing for our services and an increase in the portion of customers who provided their own proppant and chemistry. Stimulation services revenues for the nine months ended September 30, 2024 decreased $357.9 million, or 19%, from the same period in 2023. This decrease was primarily attributable to a lower number of average active fleets in 2024, lower average pricing for our services, and an increase in the portion of customers who provided their own proppant and chemistry. These decreases were partially offset by increased utilization of our active fleets in 2024.

Proppant Production. Proppant production revenues for the three and nine months ended September 30, 2024 decreased $45.6 million and $90.4 million, or 46% and 31%, respectively, from the same periods in 2023. These decreases were attributable to lower average prices for products sold and a reduction in volumes sold. Additionally, the acquisition of Performance Proppants contributed revenue starting in February 2023. Revenue recognized for the amortization of acquired off-market contracts for the three and nine months ended September 30, 2024 was $8.9 million and $36.1 million, respectively, compared to $16.4 million and $41.0 million, respectively, in the same periods in 2023. Refer to Item 8 "Financial Statements and Supplementary Data" in our Annual Report for information about our acquired contract liabilities. During the three and nine months ended September 30, 2024, approximately 24% and 26%, respectively, of the Proppant Production segment's revenues were intercompany, compared with 29% and 31% in the same periods in 2023.

Manufacturing. Manufacturing revenues for the three and nine months ended September 30, 2024 increased by $17.7 million and $18.9 million, or 40% and 13%, respectively, from the same periods in 2023. This increase was attributable to higher intercompany demand for manufacturing products in the third quarter of 2024. Additionally, the acquisition of BPC and NRG contributed revenue starting in April 2024 and June 2024, respectively. During the three and nine months ended September 30, 2024, approximately 80% and 77%, respectively, of the Manufacturing segment's revenues were intercompany, compared with 97% and 91% in the same periods in 2023.

Other. Other revenues for the three months ended September 30, 2024 increased by $2.7 million from the same period in 2023. This increase was primarily attributable to higher intercompany revenue at Flotek, which was partially offset by decreased revenue from external customers. Other revenues for the nine months ended September 30, 2024 decreased by $8.9 million from the same period in 2023. This decrease was primarily attributable to lower intercompany revenue at Flotek. Flotek recorded contract shortfall revenue of $6.7 million and $8.0 million for the three months ended September 30, 2024 and 2023, respectively, and $23.8 million and $10.0 million for the nine months ended September 30, 2024 and 2023, respectively, because ProFrac LLC did not purchase the minimum contractual commitment of chemistry products from Flotek. During the three and nine months ended September 30, 2024, approximately 68% and 66%, respectively, of other revenues were intercompany, compared with 63% and 68% in the same periods in 2023.

Cost of Revenues

Cost of revenues by reportable segment is as follows:

Stimulation Services. Stimulation services cost of revenues for the three months ended September 30, 2024 was consistent with the same period in 2023. Stimulation services cost of revenues for the nine months ended September 30, 2024 decreased by $262.5 million, or 19%, from the same period in 2023. This decrease was primarily attributable to a decrease in average active fleets and decreased volume of proppant and chemistry in 2024. Cost of revenues for this segment included intercompany supply commitment charges of $6.7 million and $8.0 million for the three months ended September 30, 2024 and 2023, respectively, and $23.8 million and $10.0 million for the nine months ended September 30, 2024 and 2023, respectively, because ProFrac LLC did not purchase the minimum contractual commitment of chemistry products from Flotek.

Proppant Production. Proppant production cost of revenues for the three and nine months ended September 30, 2024 decreased by $11.3 million and $17.8 million, or 27% and 14%, respectively, from the same periods in 2023. This reduction was primarily attributable to lower volumes sold in 2024. Additionally, the acquisition of Performance Proppants contributed costs beginning in February 2023.

Manufacturing. Manufacturing cost of revenues for the three and nine months ended September 30, 2024 increased by $15.6 million and $19.5 million, or 40% and 17%, respectively, from the same period in 2023. This increase was primarily attributable to higher volumes of products sold to intercompany and third-party customers in 2024. Additionally, the acquisition of BPC and NRG contributed costs beginning in April 2024 and June 2024, respectively.

Other. Other cost of revenues for the three months ended September 30, 2024 increased by $1.6 million, or 4%, from the same period in 2023. Other cost of revenues for the nine months ended September 30, 2024 decreased by $24.0 million, or 18%, from the same period in 2023. These decreases were primarily attributable to decreased product sales and lower freight costs.

Selling, General and Administrative

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

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Selling, general and administrative expenses, excluding stock-based compensation for the three months ended September 30, 2024 increased $2.6 million, or 5%, from the same period in 2023. Selling, general and administrative expenses, excluding stock-based compensation for the nine months ended September 30, 2024 decreased $8.1 million, or 5%, from the same period in 2023.

Depreciation, Depletion, and Amortization

Depreciation, depletion, and amortization for the three and nine months ended September 30, 2024 was $112.7 million and $328.9 million, respectively, which was consistent with $111.5 million and $330.7 million in the same periods 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. For the three and nine months ended September 30, 2024, these costs were $2.0 million and $5.1 million, respectively, compared with $2.6 million and $20.1 million in the same periods in 2023.

Goodwill Impairment

In 2024, a decline in natural gas prices reduced our customers’ activity levels in the Haynesville basin, which is heavily concentrated with natural gas wells. This activity downturn has significantly reduced the operating results of our Haynesville Proppant reporting unit. In the second quarter of 2024, we noted that our customers’ activity levels were not expected to significantly recover in the short-term. The reduced operating results of our Haynesville Proppant reporting unit therefore resulted in a triggering event and, accordingly, we performed an interim quantitative impairment test in the second quarter of 2024. Based upon the results of our interim quantitative impairment test, we concluded that the carrying value of the Haynesville Proppant reporting unit exceeded its estimated fair value, which resulted in a goodwill impairment charge of $67.7 million for the three months ended September 30, 2024. This goodwill impairment charge represented all of the goodwill recorded on the Haynesville Proppant reporting unit. If overall market conditions deteriorate, or if we are unable to achieve our forecasted results, future non-cash impairment charges may result in other reporting units which could be material.

In 2024, we experienced a decline in our operating results for our Permian Proppant reporting unit and our Eagle Ford Proppant reporting unit. In the third quarter of 2024, we noted that our operating results for these reporting units were not expected to significantly recover in the short-term. The reduced operating results for these reporting units resulted in triggering events and, accordingly, we performed interim quantitative impairment tests in the third quarter of 2024. Based upon the results of our interim quantitative impairment tests, we concluded that the carrying values of the Permian Proppant and Eagle Ford Proppant reporting units exceeded their estimated fair values, which resulted in goodwill impairment charges of $2.4 million and $4.4 million, respectively, for the three and nine months ended September 30, 2024, which represented all of the goodwill recorded on these reporting units.

Other Operating Expense, Net

The following table summarizes our other operating expenses, net:

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, substantially all of these costs represent litigation costs incurred in connection with certain patent infringement lawsuits with Halliburton, which were settled in September 2024. See "Note 9. Commitments and Contingencies" for a discussion of significant litigation matters.

Gain on insurance recoveries consists of insurance proceeds received for accidentally damaged or destroyed equipment in excess of its carrying value.

The transaction costs for the three and nine months ended September 30, 2024, represent deferred costs incurred for Alpine's initial public offering that were charged to earnings as a result of its postponement.

Severance charges for the three and nine months ended September 30, 2024 relate to the departure of certain highly-compensated employees.

(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.

Supply commitment charges for the three and nine months ended September 30, 2024, represent charges related to contractual inventory purchase commitments to certain proppant suppliers. These charges were attributable to our decreased volume of purchases from these suppliers due to certain customers decreasing their activity levels. If future customer demand differs from our contracted supply, we may incur supply commitment charges in future periods.

The acquisition earnout adjustment for the nine months ended September 30, 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 and nine months ended September 30, 2024 was $40.6 million and $117.8 million, respectively, which was consistent with $40.2 million and $116.1 million in the same periods in 2023.

Gain (Loss) on Extinguishment of Debt

For the nine months ended September 30, 2023, we recognized a net gain of $4.1 million, which was primarily due to the forgiveness of Flotek's Paycheck Protection Program loan in the first quarter of 2023.

Other (Expense) Income, Net

For the three and nine months ended September 30, 2024 we recognized a loss of $0.1 million and a gain of $1.2 million, respectively, compared with a loss of $4.9 million and $22.0 million in the same periods in 2023. 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 a benefit of $24.9 million and an expense of $9.6 million for the nine months ended September 30, 2024 and 2023, respectively. Our effective tax rate for the nine months ended September 30, 2024 was 19.0%, compared with 20.5% in the same period in 2023.

For the nine months ended September 30, 2024, our income tax provision included a discrete benefit of $25.6 million related to the release of a portion of the valuation allowance on our net deferred tax assets. This discrete item was caused by the assumption of a $25.6 million net deferred tax liability in our acquisition of AST, which made it more likely than not that we would be able to utilize a corresponding amount of our deferred tax assets. Excluding this discrete item, 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 September 30, 2024, we had $20.5 million of cash and cash equivalents, excluding Flotek, and $88.7 million available for borrowings under our revolving credit facility, which resulted in a total liquidity position of $109.2 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 $290.8 million and $510.8 million for the nine months ended September 30, 2024 and 2023, respectively. Cash flows from operating activities consist of net income or loss adjusted for non-cash items and changes in net working capital. Net income or loss adjusted for non-cash items for the nine months ended September 30, 2024 resulted in a cash increase of $255.6 million compared with a cash increase of $391.3 million in the same period of 2023. This change was primarily due to lower earnings in 2024. Changes in net working capital for the nine months ended September 30, 2024 resulted in a cash increase of $35.2 million compared with a cash increase of $119.5 million in the same period of 2023. This change was primarily due to decreased cash from accounts receivable in 2024, which was partially offset by increased cash provided by inventories and accounts payable in 2024.

Investing Activities. Net cash used in investing activities was $351.8 million and $687.4 million for the nine months ended September 30, 2024 and 2023, respectively. This change was primarily due to decreased cash used for acquisitions and capital expenditures in 2024.

Financing Activities. Net cash provided in financing activities was $61.2 million and $164.5 million for the nine months ended September 30, 2024 and 2023, respectively. Net cash provided in 2024 and 2023 was primarily attributable to borrowings to fund acquisitions and utilization of our revolving credit facility for general corporate purposes. Additionally, in 2023 we received net proceeds of $48.9 million from the issuance of Preferred Stock.

Cash Requirements

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

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

Debt Service Obligations

As of September 30, 2024 we have $1,205.7 million in aggregate principal amount of long-term debt outstanding, with $171.9 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 September 30, 2024, we were in compliance with these covenants.

The Alpine 2023 Term Loan originally contained a covenant commencing with the fiscal quarter ending September 30, 2024, 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. In the second quarter of 2024, this covenant was amended to commence testing compliance with the Total Net Leverage Ratio with the fiscal quarter ending on September 30, 2025. As a result of Alpine’s lower than expected operating results in 2024, Alpine is closely monitoring its forthcoming compliance obligation 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 nine months ended September 30, 2024 our capital expenditures were $191.8 million, consisting of maintenance capital expenditures for our hydraulic fracturing fleet, upgrades to legacy pumps, expenditures to maintain efficient operations at our sand mines, and investments in 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, upgrades to our hydraulic fracturing fleet and investments in next generation technology.

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 September 30, 2024, we had purchase commitments of $5.4 million in 2024 and $55.8 million in 2025 for minimum sand commitments and hydraulic fracturing equipment components.

Tax Receivable Agreement

As of September 30, 2024 we have $71.3 million of estimated tax receivable agreement obligations, with an estimated $3.2 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

Prior to September 2024, we were litigating multiple patent infringement lawsuits against Halliburton. In September 2024, we settled these lawsuits with Halliburton for a confidential amount and the financial effects of this matter have been included in our consolidated financial statements as of September 30, 2024. 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 will 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 revolving 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 September 30, 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 September 30, 2024, would increase the annual interest payments for this debt by approximately $11.1 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 September 30, 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 September 30, 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.