Annual Report for Fiscal Year Ending December 31, 2025 (Form 10-K)

Management's Discussion and Analysis of Financial Condition and Results of Operations.

The following discussion and analysis of our financial condition and results of operations should be read together with our consolidated financial statements and related notes included within "Item 8. Financial Statements and Supplementary Data." Refer to Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations, in our Form 10-K for the fiscal year ended December 31, 2024, for discussion of our financial condition and results of operations for the year ended December 31, 2024, compared to the year ended December 31, 2023, which is incorporated by reference herein.

In addition to historical consolidated financial information, the following discussion contains forward-looking statements that reflect the Company's plans, estimates, or beliefs. Actual results could differ materially from those discussed in the forward-looking statements. Factors that could cause or contribute to these differences include those discussed below and elsewhere in this Annual Report, including, without limitation, those described in the sections titled "Cautionary Note Regarding Forward-Looking Statements" and Part I, Item 1A "Risk Factors."

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 four reportable business segments: Stimulation Services, Proppant Production, Manufacturing and Flotek. 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. Flotek is a leading chemistry and data technology company focused on servicing the E&P industry.

Summary Financial Results

2025 Developments

In April 2025, Flotek acquired certain gas conditioning equipment from our Stimulation Services segment for total consideration of $107.5 million and our Stimulation Services segment leased these assets back from Flotek for a six year term. We believe this Flotek partnership provides ownership exposure to a highly-scalable gas quality and asset integrity business. The effects of this sale-leaseback transaction have been eliminated from our consolidated financial statements. Part of the $107.5 million consideration was a $40.0 million intercompany note payable from Flotek to our Stimulation Services segment ("Flotek PWRtek Note"). In November 2025, the Stimulation Services segment agreed to assign this note receivable to PC Energy Credit I, LLC, a related party to the Company controlled by the Wilks Parties, in exchange for cash consideration of $40.4 million, which represented the sum of the unpaid principal amount of the note and all accrued and unpaid interest on the note through the closing date.

In June and December 2025 ProFrac Holdings II, LLC issued a total $60 million aggregate principal amount of its 2029 Senior Notes at par to Beal Bank USA and Wilks Brothers, LLC, which is a Wilks Party, in a private placement to fund capital expenditures with any remaining proceeds used for general corporate purposes.

In June 2025, we amended the Alpine 2023 Term Loan. Under the terms of the amendment, the amortization payments required to be made on June 30, 2025, September 30, 2025 and December 31, 2025 were reduced from $15.0 million to $5.0 million and we will pay an exit fee of $3.4 million when the term loan is repaid. In December 2025, we amended the Alpine 2023 Term Loan. Under the terms of the amendment, the amortization payments required to be made on March 31, 2026 and June 30, 2026 were reduced from $15.0 million to $7.5 million. Additionally, the Alpine 2023 Term Loan contained a covenant commencing with the fiscal quarter ending March 31, 2026, 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 covenant was amended to commence testing compliance with the Total Net Leverage Ratio with the fiscal quarter ending on March 31, 2028.

In June 2025, we disposed of our EKU Power Drives subsidiary in our Manufacturing Segment. We recorded a loss of $10.5 million in connection with this disposal.

In August 2025, we issued 20.6 million shares of Class A common stock, par value $0.01 per share at an offering price of $4.00 per share. The issuance of these shares generated net proceeds of $79.0 million, after deducting underwriter discounts and commissions and offering costs. The Wilks Parties bought 5.0 million shares of these Class A common stock, generating $20.0 million of gross proceeds. We used the net proceeds from this offering to repay borrowings outstanding under our 2022 ABL Credit Facility, for working capital and for other general corporate purposes.

2024 Developments

In April 2024, we acquired all of the remaining equity interests of Basin Production and Completion LLC ("BPC"). BPC is the parent company of FHE USA LLC, 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 Advanced Stimulation Technologies, Inc. ("AST"), a pressure pumping services provider serving the Permian Basin, for total purchase consideration of $173.4 million in cash.

In June 2024, we acquired 100% of the issued and outstanding common stock of NRG Manufacturing, Inc., which manufactures equipment used in the hydraulic fracturing industry, and its affiliate, AMI US Holdings, Inc., which develops commercial software used in hydraulic fracturing industry (collectively, "NRG"), for total purchase consideration of $6.0 million in cash.

In May 2024, the Company formed a new entity, Livewire Power, LLC ("Livewire"), which began operations in October 2024. Livewire enables onsite power generation services for oilfield and non-oilfield customers that require off-grid power solutions. Livewire's power generation equipment is comprised of owned and leased natural gas reciprocating engines and turbine assets. Livewire's results of operations were immaterial for 2024.

In December 2024, we sold certain stimulation service equipment to the Wilks Parties in exchange for cash consideration of approximately $40.0 million. We now lease such equipment from the Wilks Parties in exchange for aggregate monthly lease payments totaling $44.8 million through December 2028. The cash consideration received was $26.5 million more than the carrying value of these assets. Because this sale was to an affiliate under common control, we accounted for the $26.5 million as an equity transaction recorded as a deemed contribution within our consolidated statements of changes in equity.

Recent Trends and Outlook

Our business depends on the willingness of E&P companies to make expenditures to explore for, develop, and produce oil and natural gas in the United States. The willingness of E&P companies to undertake these activities is predominantly influenced by current and expected future prices for oil and natural gas. Beginning in April 2025, oil commodity prices decreased from their near-term average through the first quarter of 2025 with increased volatility. As a result, many of our customers began reducing their activity levels and our results of operations and operating cash flows correspondingly declined compared to 2024. As described below, we have taken a number of actions to improve our liquidity. Also, as we anticipated, our results of operations in the fourth quarter 2025 increased relative to the third quarter 2025 with improved demand in Stimulation Services and Proppant Production. Although adverse weather impacted our results early in the first quarter of 2026, activity has recently increased into February and early March on a relative basis. . In the second half of 2025, we implemented initiatives to enhance the resiliency of the platform resulting in lower cash operating expenses and capital expenditures. We remain focused on financial and operational discipline and optimizing our asset base. While we have limited visibility for future demand for our products and services and continue to focus on liquidity management, we are encouraged by recent customer engagement.

We also actively monitor the effects of inflation and tariffs on our business; however, the potential effects of inflation and tariffs on our business remain uncertain at this time.

Results of Operations

Revenues

The following table summarizes revenues by reportable segment:

Stimulation Services revenues in 2025 decreased $231.5 million, or 12%, from 2024. The decrease was primarily due to a decrease in average active fleets and lower average pricing for our services in 2025.

Proppant Production revenues in 2025 increased $89.5 million, or 36%, from 2024. The increase was primarily due to higher average pricing for our proppant in 2025, which was due to a shift in intercompany sales mix from mine-gate pricing to wellsite pricing that began in the second quarter of 2025. Exclusive of this mix shift, revenues also increased due to higher sales volumes in 2025. Revenue recognized for the amortization of acquired off-market contracts was $7.6 million and $43.7 million in 2025 and 2024, respectively. Intersegment revenues for the Proppant Production segment were 64% and 26% in 2025 and 2024, respectively.

Manufacturing revenues in 2025 decreased $10.5 million, or 5%, from 2024. The decrease was primarily due to decreased intercompany demand for manufacturing products in the last nine months of 2025, which was partially offset by increased demand in the first quarter of 2025. Additionally, the acquisition of BPC and NRG contributed revenue starting in April 2024 and June 2024, respectively. Intersegment revenues for the Manufacturing segment were 82% and 77% in 2025 and 2024, respectively.

Flotek revenues in 2025 increased $51.2 million, or 27%, from 2024. This increase was primarily due to increased intercompany and third-party revenue. Flotek recorded $27.4 million and $32.5 million of revenue in 2025 and 2024, respectively, related to contract shortfalls with the Stimulation Services segment. Intersegment revenues for the Flotek segment were 63% in 2025 and 2024, respectively.

Other revenues in 2025 increased $14.2 million from 2024. This increase is primarily due to Livewire being operational for twelve months in 2025 compared to three months in 2024. Intersegment revenues for these business activities were 99% and 81% in 2025 and 2024, respectively.

Cost of Revenues

The following table summarizes our cost of revenues, exclusive of depreciation, depletion, and amortization, by reportable segment:

Stimulation Services cost of revenues in 2025 decreased $26.7 million, or 2%, from 2024. This decrease was primarily due to a decrease in average active fleets in 2025. Cost of revenues for this segment included an intercompany supply commitment charge of $27.4 million in 2025 and $32.5 million in 2024 because the Stimulation Services segment did not purchase the minimum contractual commitment of chemistry products from Flotek.

Proppant Production cost of revenues in 2025 increased $121.7 million, or 88%, from 2024. This increase was primarily due to increased costs to support the shift in intercompany sales mix from mine-gate pricing to wellsite pricing, which began in the second quarter of 2025. Exclusive of this mix shift, costs of revenues also increased due to higher sales volumes in 2025.

Manufacturing cost of revenues in 2025 decreased $16.4 million, or 9%, from 2024. This decrease was primarily due to decreased volumes of products sold to intercompany customers in the last nine months of 2025, which was partially offset by increased volumes of products sold to intercompany customers in the first quarter of 2025. Additionally, the acquisition of BPC and NRG contributed costs beginning in April 2024 and June 2024, respectively.

Flotek cost of revenues in 2025 increased $27.3 million, or 19%, from 2024. This increase was primarily due to increased costs related to the increased volume of business.

Other cost of revenues in 2025 increased $11.6 million from 2024. This increase is primarily due to Livewire being operational for twelve months in 2025 compared to three months in 2024.

Selling, General and Administrative

The following table summarizes our selling, general and administrative expenses:

Selling, general and administrative ("SG&A") expenses in 2025 decreased $14.1 million, or 7%, from 2024. Excluding stock-based compensation expense, SG&A expenses decreased $17.2 million, or 9%. This decrease was due to lower labor costs resulting from cost control measures and reduced incentive compensation expense. These decreases were partially offset by increased expense at Flotek. The decrease was also partially offset by increased labor and facility costs related to our acquisitions of BPC, AST and NRG in the second quarter of 2024. Additionally, management fees of approximately $5.0 million owed to Wilks Brothers, LLC was reclassified to stock-based compensation expense as a result of an agreement to settle certain management fee payments by issuing common stock. See "Note 11. Stock-based Compensation" in the notes to our consolidated financial statements for a discussion of our stock-based compensation.

Depreciation, Depletion, and Amortization

The following table summarizes our depreciation, depletion, and amortization:

Depreciation, depletion, and amortization decreased $25.9 million, or 6%, from 2024. Depreciation expense decreased $27.7 million, or 7%, from 2024. The decrease in depreciation was primarily due to certain assets becoming fully depreciated in 2025, combined with lower capital expenditures in 2025 when compared to prior years.

Acquisition Related Expenses

Acquisition and integration costs consist of professional and advisory fees, acquisition related severance expenditures, and other costs associated with acquisition and integration activities. Acquisition related expenses were $0.2 million and $7.8 million in 2025 and 2024, respectively. These costs related to our acquisition and integration activities in the respective periods.

Impairment of Long-lived Assets and Goodwill

In 2025, we recorded a $41.4 million impairment to the long-lived assets related to our idle Merryville sand mine. See "Note 5. Impairments" in the notes to our consolidated financial statements for further discussion.

In 2025, we recorded a $11.2 million goodwill impairment related to our BPC reporting unit. In 2024, we recorded goodwill impairments of $67.7 million, $4.4 million and $2.4 million related to our Haynesville Proppant, Eagle Ford Proppant and

Permian Proppant reporting units, respectively. See "Note 5. Impairments" in the notes to our consolidated financial statements for a discussion of these goodwill impairments.

Other Operating Expenses, 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 significant litigation as well as estimates for loss contingencies with regards to certain vendor disputes and litigation matters. In 2025, substantially all of these costs represent litigation costs incurred in connection with certain patent infringement lawsuits. In 2024, substantially all of these costs represent litigation costs incurred in connection with certain patent infringement lawsuits with Halliburton Company, which were settled in September 2024.

Provision for credit losses in 2025 primarily related to a revised estimate of the payments to be received from an insolvent customer.

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

Transaction costs in 2025 represent legal and professional fees incurred for strategic initiatives. Transaction costs for 2024 represent deferred costs incurred for Alpine's initial public offering that were charged to earnings as a result of its postponement.

Severance charges related to the departure of certain highly-compensated employees.

Gain or loss on disposal of assets, net consists of gains or losses on excess property, early equipment failures, and other asset dispositions. In 2025, loss on disposal of assets included the scrapping of certain equipment that was determined to be uneconomical to repair.

Inventory write-down for 2025 was recorded to reduce the inventory held at our Merryville sand mine to its net realizable value. See "Note 5. Impairments" in the notes to our consolidated financial statements for discussion of the impairment of long-lived assets at our Merryville sand mine.

Supply commitment charges for 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.

Interest Expense, Net

Interest expense, net in 2025 was $138.8 million, compared to $156.6 million in 2024. The decrease is due to lower average interest rates and lower average outstanding debt balances in 2025. We are subject to interest rate risk on our variable-rate debt. See "Note 7. Debt" in the notes to our consolidated financial statements for additional discussion related to our debt.

Other Income (Expense), Net

Other expense, net in 2025 was $3.8 million, compared to other income, net in 2024 of $3.0 million. The net change in 2025 was primarily due to the $10.5 million loss on disposal of EKU Power Drives, which was partially offset by a decrease in the fair value of our Munger make-whole provision in 2025. See "Note 15. Fair Value Measurements" in the notes to our consolidated financial statements for discussion of the Munger make-whole provision.

Income Tax Benefit (Expense)

Income tax benefit in 2025 was $12.9 million for an effective tax rate of 3.5%. Our income tax provision included a benefit of approximately $15 million from a reduction in Flotek's valuation allowance. Excluding this item, the difference between our effective tax rate and the federal statutory rate related to a permanent book-tax difference in the accounting for a sale-leaseback transaction with Flotek and changes in the valuation allowance on our deferred tax assets.

Income tax benefit in 2024 was $7.0 million for an effective tax rate of 3.3%. Our income tax provision included a benefit of $25.6 million related to the release of a portion of the valuation allowance on our deferred tax assets. This 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 item, the difference between our effective tax rate and the federal statutory rate related to changes in the valuation allowance on our deferred tax assets.

Liquidity and Capital Resources

Sources of Liquidity

Historically, our primary sources of liquidity are cash flows from operations and availability under our revolving credit facility. While Flotek is included in our 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 1. Organization and Description of Business" in the notes to our 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. See "Note 7. Debt" in the notes to our consolidated financial statements for more information regarding the Alpine 2023 Term Loan.

At December 31, 2025, we had $17.2 million of cash and cash equivalents, excluding Flotek, and $135.4 million available for borrowings under our revolving credit facility which resulted in a total liquidity position of $152.6 million. Refer to "Note 7. Debt" and "Note 18. Subsequent Events" in the notes to our consolidated financial statements for more information regarding our revolving credit facility.

Beginning in April 2025, many of our customers began reducing their activity levels as a result of a depressed commodity price environment, and our results of operations and operating cash flows correspondingly began to decline. In an attempt to ensure that the Company has sufficient near-term liquidity during a prolonged depressed commodity environment, we have executed the following initiatives to optimize the cost structure of the business with a focus on operational efficiency:

As a result of these actions, we believe our cost structure and liquidity are better positioned for the long term and we believe that our sources of liquidity and our cash provided by operations will be sufficient to fund our capital expenditures, satisfy our obligations, and remain in compliance with our existing debt covenants for at least the next 12 months.

In addition, Alpine is closely monitoring its forthcoming debt covenant compliance obligation that commences in the fiscal quarter ending March 31, 2028. While there can be no assurance, Alpine believes that it will be able to meet, modify, or further defer this debt covenant. See "Note 7. Debt" in the notes to our consolidated financial statements for more information about this forthcoming debt covenant.

Cash Flows

The following table provides a summary of our cash flows:

Operating Activities. Net cash provided by operating activities was $189.5 million and $367.3 million 2025 and 2024, respectively. Cash flows from operating activities consists 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 in 2025 resulted in a cash increase of $152.8 million compared to a cash increase of $278.8 million in 2024. The change was primarily due to lower earnings in 2025. The net change in working capital in 2025 resulted in a cash increase of $36.7 million compared to a cash increase of $88.5 million in 2024. The change was primarily due to a decrease in cash provided by accounts receivable and inventories in 2025.

Investing Activities. Net cash used in investing activities was $163.7 million and $372.3 million in 2025 and 2024, respectively. The change was primarily due to decreased capital expenditures in 2025 and our acquisitions in 2024.

Financing Activities. Net cash used by financing activities was $17.7 million and $5.5 million in 2025 and 2024, respectfully. In 2025 debt repayments net of cash borrowed was $93.9 million. In 2024 debt repayments net of cash borrowed was $4.0 million. In 2025 we received proceeds, net of $79.0 million from issuances of common stock.

Cash Requirements

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

Debt Service Obligations

The following table summarizes our outstanding indebtedness as of December 31, 2025 and our future maturities:

See "Note 7. Debt" and "Note 8. Leases" in the notes to our consolidated financial statements for the discussion of our various debt agreements and finance leases, respectively. In January 2026 ProFrac Holdings II, LLC issued an additional $25.0 million aggregate principal amount of its 2029 Senior Notes at par to Beal Bank USA in a private placement to fund capital expenditures with any remaining proceeds used for general corporate purposes. These notes were issued as additional notes pursuant to the original indenture as amended. These new notes and the notes previously issued under the indenture are treated as a single series of securities under the indenture and the new notes have substantially identical terms, other than the issue date, issue price and first payment date, as the existing notes and are secured by a security interest in the same collateral.

Both the 2029 Senior Notes and the ABL Credit Facility contain certain customary representations and warranties and affirmative and negative covenants. As of December 31, 2025, we were in compliance with these covenants.

As a result of the amendment of the Alpine 2023 Term Loan described in "Note 7. Debt" in the notes to our consolidated financial statements, the Alpine 2023 Term Loan contains a covenant commencing with the fiscal quarter ending March 31, 2028, 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. Alpine is closely monitoring its forthcoming compliance obligations 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.

In 2025 our capital expenditures were $169.9 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.

In 2026 we estimate capital expenditures will range from $80.0 million to $100.0 million in maintenance related expenditures and an additional $75.0 million to $85.0 million for growth initiatives. Currently, growth capital expenditures for 2026 are expected to be related to upgrades to our hydraulic fracturing fleet, investments in next generation technology and sand mine improvements.

We continually evaluate our capital expenditures and the amount that we ultimately spend will depend on a number of factors, including our liquidity position, customer demand for fleets, and expected industry activity levels. If the actions designed to improve our liquidity described above are ineffective, we may reduce capital expenditures.

Purchase Commitments

As of December 31, 2025, we had purchase commitments of $6.5 million in 2025.

Tax Receivable Agreement

As of December 31, 2025 we have $86.5 million of estimated tax receivable agreement obligations, with an estimated $4.6 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 "Note 12. Income Taxes" in the notes to our consolidated financial statements.

Acquisitions of Strategic Businesses

Our growth strategy includes potential acquisitions and other strategic transactions. This strategy would need to be suspended if the actions described above to improve our liquidity are ineffective. 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, borrowings under our credit agreements, and issuance of debt securities. 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.

Critical Accounting Policies and Estimates

The preparation of our consolidated financial statements and related notes requires us to make estimates that affect the reported amounts of assets, liabilities, revenue and expenses, and related disclosures of contingent assets and liabilities. We base these estimates on historical results and various other assumptions believed to be reasonable, all of which form the basis for making estimates concerning the carrying values of assets and liabilities that are not readily available from other sources. Actual results may differ from these estimates, and such differences could be material.

In the notes accompanying the consolidated financial statements included elsewhere in this annual report, we describe the significant accounting policies used in the preparation of our consolidated financial statements. We believe that the following represent the most significant estimates and management judgments used in preparing the consolidated financial statements.

Business Combinations

Business combinations are accounted for under the acquisition method of accounting. Under this method, the assets acquired and liabilities assumed are recognized at their respective fair values as of the date of acquisition. The excess, if any, of the acquisition price over the fair values of the assets acquired and liabilities assumed is recorded as goodwill. For significant acquisitions, we utilize third-party appraisal firms to assist us in determining the fair values for certain assets acquired and liabilities assumed. The measurement of these fair values requires us to make significant estimates and assumptions which are inherently uncertain.

Adjustments to the fair values of assets acquired and liabilities assumed are made until we obtain all relevant information regarding the facts and circumstances that existed as of the acquisition date (the "measurement period"), not to exceed one year from the date of the acquisition. We recognize measurement-period adjustments in the period in which we determine the amounts, including the effect on earnings of any amounts we would have recorded in previous periods if the accounting had been completed at the acquisition date.

The estimation of net assets acquired in business combinations requires significant judgment in determination of the fair value of the assets and liabilities acquired. Our fair value estimates require us to use significant observable and unobservable inputs. The estimates of fair value are also subject to significant variability, are sensitive to changes in market conditions, and are reasonably likely to change in the future. A significant change in the observable and unobservable inputs and determination of fair value of the assets and liabilities acquired could significantly impact our consolidated financial statements.

Goodwill Impairment

Goodwill is evaluated for impairment annually in the fourth quarter or whenever events or circumstances indicate the carrying value may not be recoverable. The impairment test involves a comparison of the fair value of each reporting unit with its carrying value. Fair value reflects our estimate of the price a potential market participant would be willing to pay for the reporting unit in an arms-length transaction. Reporting units with significant goodwill balances at December 31, 2025, include our Stimulation Services reporting unit and our Flotek reporting unit.

Determining the fair value of a reporting unit requires complex analysis and judgment. We use a combination of discounted cash flow models and market data, such as earnings multiples and quoted market prices, for observable comparable companies. Discounted cash flow models require detailed forecasts of cash flow drivers, such as revenue growth rates, margin rates, and capital investments as well as estimates of weighted-average cost of capital rates. These estimates are made in the context of many uncertain factors, such as the effectiveness of our strategy, changes in customer behavior, technological changes, competitor actions, regulatory changes and macroeconomic trends.

Income Taxes

ProFrac Corp. is a taxable entity and is required to account for income taxes under the asset and liability method. Deferred taxes are recognized for the tax consequences of temporary differences by applying enacted statutory tax rates applicable to future years to differences between the financial statement carrying amounts and the tax bases of existing assets and liabilities. We recognize future tax benefits to the extent that such benefits are more likely than not to be realized.

We record a valuation allowance to reduce the value of a deferred tax asset if based on the consideration of all available evidence, it is more likely than not that all or some portion of the deferred tax asset will not be realized. Significant weight is given to evidence that can be objectively verified. We evaluate our deferred income taxes at each reporting date to determine if a valuation allowance is required by considering all available evidence, including historical and projected taxable income and tax planning strategies. We will adjust a previously established valuation allowance if we change our assessment of the amount of deferred income tax asset that is more likely than not to be realized.

An estimate of whether a valuation allowance is necessary and the related amount of the valuation allowance contain uncertainties because it requires us to apply judgment to all positive and negative evidence available to us. When considering the likelihood of whether a deferred tax asset will be available to offset future taxable income, we assess, among other things, our historical and projected income or loss. When performing this assessment, we must consider the cyclical nature of our business. Our business is heavily influenced by current and expected prices for oil and natural gas. These prices are outside of our control and a downturn in the market can result in periods of significant losses for us, which could prevent the realization of a deferred tax asset. We therefore must consider the future possibility of an industry downturn and the severity of its effect on our business when considering all positive and negative evidence related to the realization of our deferred tax assets. Although we believe that our judgments and estimates are reasonable, an adjustment to a valuation allowance in a given period may require a material adjustment in a future period if our assumptions regarding our future taxable income are proven inaccurate due to industry cycles.

We record uncertain tax positions, if any, in accordance with ASC 740 on the basis of a two-step process in which (1) we determine whether it is more likely than not that the tax positions will be sustained on the basis of the technical merits of the position and (2) for those tax positions that meet the more-likely-than-not recognition threshold, we recognize the largest amount of tax benefit that is more than 50 percent likely to be realized upon ultimate settlement with the related tax authority. We had no uncertain tax positions during the periods presented.

Property, Plant and Equipment

We calculate depreciation based on the estimated useful lives of our assets. When assets are placed into service, we make estimates with respect to their useful lives that we believe are reasonable. However, the cyclical nature of our business, which

results in fluctuations in the use of our equipment and the environments in which we operate, could cause us to change our estimates, thus affecting the future calculation of depreciation.

We continuously perform repair and maintenance expenditures on our service and mining equipment. Expenditures for betterments and renewals that extend the lives of our equipment, which may include the replacement of significant components of equipment, are capitalized and depreciated. Other repairs and maintenance costs are expensed as incurred. The determination of whether an expenditure should be capitalized or expensed requires management judgment with regard to the effect of the expenditure on the useful life of the equipment.

We separately identify and account for certain significant components of our hydraulic fracturing units including the engine, transmission, and pump, which requires us to separately estimate the useful lives of these components.

Impairment of Long-Lived Assets

We evaluate property, plant, and equipment, operating lease right-of-use assets, and definite-lived intangible assets for impairment when events or changes in circumstances indicate that the carrying value of a long-lived asset may not be recoverable, such as insufficient cash flows or plans to dispose of or sell long-lived assets before the end of their previously estimated useful lives. Recoverability is assessed based on the undiscounted future cash flows generated by the asset or asset group. Estimates of future undiscounted cash flows take into account possible outcomes and probabilities of their occurrence, which require us to apply judgment. If the carrying amount is not recoverable, we recognize an impairment loss equal to the amount by which the carrying amount exceeds fair value. We estimate fair value based on the income, market or cost valuation techniques. Our fair value calculations for long-lived assets contain uncertainties because they require us to apply judgment and estimates concerning future cash flows, strategic plans, useful lives and assumptions about market performance. We also apply judgment in the selection of a discount rate that reflects the risk inherent in our current business model.

Recent Accounting Pronouncements

See "Note 2. Summary of Significant Accounting Policies" in the notes to our consolidated financial statements for further discussion regarding recently issued accounting standards.

Related Party Transactions

See "Note 17. Related Party Transactions" in the notes to our consolidated financial statements for further discussion regarding related party transactions.