Innovex International, Inc.: Form 10-Q for the period ended Jun 30, 2024

Forward-Looking Statements

This Quarterly Report on Form 10-Q includes certain statements that may be deemed to be “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Statements contained in all parts of this document that are not historical facts are forward-looking statements that involve risks and uncertainties that are beyond the control of Dril-Quip, Inc. (the “Company” or “Dril-Quip”). You can identify the Company’s forward-looking statements by the words “anticipate,” “estimate,” “expect,” “may,” “project,” “believe” and similar expressions, or by the Company’s discussion of strategies or trends. Although the Company believes that the expectations reflected in such forward-looking statements are reasonable, no assurance can be given that these expectations will prove to be correct. These forward-looking statements include the following types of information and statements as they relate to the Company:

• the impact of actions taken by the Organization of Petroleum Exporting Countries and the expanded alliance (OPEC+) with respect to their production levels and the effects thereof;
• risks related to the acquisition of Innovex Downhole Solutions Inc., a Delaware corporation (“Innovex”), including the receipt of approval of Dril-Quip’s stockholders; the time required to complete the mergers; uncertainty as to whether the conditions to closing the mergers will be satisfied or whether the mergers will be completed; the occurrence of any event, change or other circumstances that could give rise to the termination of the merger agreement; the diversion of management time on merger-related issues; the ultimate timing, outcome and results of integrating the operations of the Company and Innovex; the effects of the business combination on Dril-Quip and Innovex, including the combined company’s future financial condition, results of operations, strategy and plans; potential adverse reactions or changes to business relationships resulting from the announcement or completion of the mergers; expected benefits from the mergers and the ability of the Company to realize those benefits; the significant costs required to complete the mergers and integrate operations of the Company and Innovex; whether merger-related litigation will occur and, if so, the results of any litigation, settlements and investigations;
• risks related to the acquisition of Great North, including the risk that the benefits of the transaction may not be fully realized or may take longer to realize than expected;
• the impact of general economic conditions, including inflationary pressures and interest rates, a general economic slowdown or recession or instability in financial institutions, on economic activity and on our operations;
• future operating results and cash flow;
• scheduled, budgeted and other future capital expenditures;
• planned or estimated cost savings;
• working capital requirements;
• the need for and the availability of expected sources of liquidity;
• the introduction into the market of the Company’s future products;
• the Company’s ability to deliver its bookings in a timely fashion;
• the market for the Company’s existing and future products;
• the Company’s ability to develop new applications for its technologies;
• the exploration, development and production activities of the Company’s customers;
• compliance with present and future environmental, social, and governance (ESG) standards and regulations and costs associated with environmentally related penalties, capital expenditures, remedial actions and proceedings;
• effects of pending legal proceedings;
• changes in customers’ future product and service requirements that may not be cost effective or within the Company’s capabilities;
• future operations, financial results, business plans and cash needs; and
• the overall timing and level of transition of the global energy sector from fossil-based systems of energy production and consumption to more renewable energy sources.

These statements are based on assumptions and analysis in light of the Company’s experience and perception of historical trends, current conditions, expected future developments and other factors the Company believes were appropriate in the circumstances when the statements were made. Forward-looking statements by their nature involve substantial risks and uncertainties that could significantly impact expected results, and actual future results could differ materially from those described in such statements. While it is not possible to identify all factors, the Company continues to face many risks and uncertainties. Among the factors that could cause actual future results to differ materially are the risks and uncertainties discussed under “Item 1A. Risk Factors” in Part I of the Company’s Annual Report on Form 10-K for the year ended December 31, 2023, as amended by the Company's Form 10-K/A filed with the SEC on July 8, 2024 and the Company's Form 10-K/A (Amendment No. 2) filed with the SEC on August 1, 2024 (as amended, the “Form 10-K/A”) and in “Item 1A. Risk Factors” in Part II of the Company’s Quarterly Report on Form 10-Q/A for the quarter ended March 31, 2024, filed with the SEC on July 8, 2024.

Investors should note that Dril-Quip announces financial information in SEC filings, press releases and public conference calls. Dril-Quip may use the Investors section of its website (www.dril-quip.com (http://www.dril-quip.com)) to communicate with investors. It is possible that the financial and other information posted there could be deemed to be material information. The information on Dril-Quip’s website is not part of this Form 10-Q.

The following is management’s discussion and analysis of certain significant factors that have affected aspects of the Company’s financial position, results of operations, comprehensive income (loss) and cash flows during the periods included in the accompanying unaudited condensed consolidated financial statements. This discussion should be read in conjunction with the Company’s unaudited condensed consolidated financial statements and notes thereto presented elsewhere herein as well as the discussion under “Risk Factors,” included herein and “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the financial statements included in the Form 10-K/A.

Overview

Dril-Quip, Inc., a Delaware corporation (the “Company” or “Dril-Quip”), is a leading developer of innovative technologies for the energy industry, designing and manufacturing best-in-class products for traditional oil and gas, and certain energy transition applications. The Company designs, manufactures, sells and services highly engineered drilling and production equipment for both offshore and onshore applications. The Company’s principal products consist of subsea and surface wellheads, specialty connectors and associated pipes, subsea production systems, mudline hanger systems, production riser systems, dry tree systems, subsea manifolds, line hangers and expandable liner systems, multi-frac well connections, conventional wellhead, thermal wellhead, completion packers and safety and kelly valves. Dril-Quip’s products are used by major integrated, large independent and foreign national oil and gas companies and drilling contractors throughout the world. Dril-Quip also provides technical advisory assistance on an as-requested basis during installation of its products, as well as rework and reconditioning services for customer-owned Dril-Quip products. In addition, Dril-Quip’s customers may rent or purchase running tools from the Company for use in the installation and retrieval of the Company’s products.

The Company’s operations are organized into three reportable business segments: Subsea Products, Subsea Services, and Well Construction. The Company’s Subsea Products business manufactures highly engineered, field-proven products with a wide array of deepwater drilling equipment and technology that meets the requirements for harsh subsea environments. The Company’s Subsea Services business provides high-level aftermarket support and technical services with field technicians that support the full installation and lifecycle management of regulatory and industry standards, as well as offering industry training programs. The Company’s Well Construction business provides products and services utilized in the construction of the wellbore such as completions, casing hardware and liner hanger systems. In 2023, the Company acquired Great North and includes its product, service and leasing solutions within the Well Construction segment. Great North offers pressure control and completion solutions, including customized and highly engineered wellhead products for use in heavy oil and thermal production locations, proprietary completion solutions such as the Multi-Well Frac Connector TM, as well as related installation and maintenance services. The Company’s products and services are used on both land and offshore markets. For information with respect to our segments, see “Business Segments,” Note 11 of Notes to the Consolidated Financial Statements.

Recent Developments

On March 18, 2024, the Company, Ironman Merger Sub, Inc., a Delaware corporation and wholly owned subsidiary of the Company (“Merger Sub Inc.”), and DQ Merger Sub, LLC, a Delaware limited liability company and wholly owned subsidiary of the Company (“Merger Sub LLC”), entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Innovex, pursuant to which, upon the terms and subject to the conditions set forth therein, (i) Merger Sub Inc. will merge with and into Innovex, with Innovex continuing as the surviving entity (the “Surviving Corporation”) (the “First Merger”) and (ii) immediately following the First Merger, the Surviving Corporation will merge with and into Merger Sub LLC (the “Second Merger” and, together with the First Merger, the “Mergers”), with Merger Sub LLC continuing as the surviving entity. Upon consummation of the transactions contemplated by the Merger Agreement (the “Transactions”), the Company expects that its current stockholders will own approximately 52% of the Combined Company (as defined below) and current stockholders of Innovex will own approximately 48% of the Combined Company.

Following the Transactions, the name of the Company will be changed to Innovex International, Inc. (the “Combined Company”), and its common stock will remain listed on the New York Stock Exchange.

The Mergers are currently expected to close in the third quarter of 2024; however, no assurance can be given as to when, or if, the Mergers will occur. The Merger Agreement contains termination rights, subject to certain conditions, for each of the Company and Innovex, including, among others: (i) if the consummation of the First Merger does not occur on or before December 18, 2024 (the “End Date”) or the extended End Date (March 18, 2025) and (ii) if the Company wishes to terminate the Merger Agreement to enter into a definitive agreement with respect to a superior proposal. Upon termination of the Merger Agreement under certain specified circumstances, including, among others, by Innovex for a material breach by the Company of its non-solicitation obligations or by the Company in order to enter into a definitive agreement with respect to a superior proposal, the Company would be required to pay Innovex a termination fee of $31.9 million. The above description of the Merger Agreement and the transactions contemplated thereby, including certain referenced terms, is a summary of certain principal terms and conditions contained in the Merger Agreement.

Business Environment

On August 16, 2022, President Biden signed into law the Inflation Reduction Act of 2022 (the “Inflation Reduction Act”). The Inflation Reduction Act contains a number of revisions to the Internal Revenue Code, including a 15% book-income corporate alternative minimum tax on any corporation that, along with the other members of its controlled group, if any, has average adjusted financial statement income over $1.0 billion for any 3-tax-year period ending with January 1, 2022 or later and a 1% excise tax on the fair market value of stock that is repurchased by publicly traded U.S. corporations or their specified affiliates. The alternative minimum tax and the excise tax are effective in taxable years beginning after December 31, 2022. Currently, we are not subject to the corporate alternative minimum tax. The Company will evaluate any impact related to the excise tax on stock repurchases by the Company in future periods.

During the first quarter of 2022, Dril-Quip entered into a collaboration agreement with Aker Solutions ASA (Aker Solutions) to offer subsea injection systems for carbon capture, utilization and storage (CCUS) projects. Under the agreement, Dril-Quip will provide Aker Solutions with CO2 injection Xmas trees and wellheads that will be fully integrated into a larger subsea injection system to provide customers with market-leading technology purposely designed for the injection and storage of CO2. The arrangement will leverage on Aker Solution’s position as an integrated supplier of CCUS systems along with its control systems and electrification components. We believe this collaboration agreement focuses on the strengths of both organizations, will deliver an optimum solution for carbon capture and storage, and is in line with each party’s strategic goals of collaboration and partnerships to unlock value for customers.

In February 2022, Russia invaded Ukraine, resulting in wide-ranging sanctions imposed on Russia by certain members of the European Union, the United Kingdom and the United States, among others, higher oil prices and increased uncertainty in global markets. As Russia’s invasion of Ukraine continues, there can be no certainty regarding whether such governments or other governments will impose additional sanctions, export-controls or other economic or military measures against Russia. Although we have minimal operational exposure in Russia and we do not intend to commit further capital towards projects in Russia, the full impact of the invasion of Ukraine, including economic sanctions and export controls or additional war or military conflict, as well as potential responses to them by Russia, is currently unknown and could adversely affect oil and gas companies, many of which are our customers, as well as the global supply chain. For more information on the risks associated with the invasion of Ukraine, see “Our business may also be affected by new sanctions and export controls targeting Russia and other responses to Russia’s invasion of Ukraine” discussed in the Form 10-K/A, “Item 1A. Risk Factors”.

Oil and gas prices and the level of drilling and production activity have been characterized by significant volatility in recent years. Worldwide military, political, economic and other events have contributed to oil and natural gas price volatility and are likely to continue to do so in the future. The Company expects continued pressure in both crude oil and natural gas prices, as well as in the level of drilling and production related activities. Even during periods of high prices for oil and natural gas, companies exploring for oil and gas may cancel or curtail programs, seek to renegotiate contract terms, including the price of products and services, or reduce their levels of capital expenditures for exploration and production for a variety of reasons. Any future deterioration of commodity prices could lead to material impairment charges to tangible or intangible assets or otherwise result in a material adverse effect on the Company’s results of operations.

The Company operates its business and markets its products and services in most of the significant oil and gas producing areas in the world and is, therefore, subject to the risks customarily attendant to international operations and investments in foreign countries. These risks include nationalization, expropriation, war, acts of terrorism and civil disturbance, restrictive action by local governments, limitation on repatriation of earnings, change in foreign tax laws and change in currency exchange rates, any of which could have an adverse effect on either the Company’s ability to manufacture its products in its facilities abroad or the demand in certain regions for the Company’s products or both. To date, the Company has not experienced any significant problems in foreign countries arising from local government actions or political instability, but there is no assurance that such problems will not arise in the future. Interruption of the Company’s international operations could have a material adverse effect on its overall operations.

Oil and Gas Prices

The market for drilling and production equipment and services and the Company’s business are substantially dependent on the condition of the oil and gas industry and, in particular, the willingness of oil and gas companies to make capital expenditures on exploration, drilling and production operations. Oil and gas prices and the level of drilling and production activity have historically been characterized by significant volatility.

According to the Energy Information Administration (EIA) of the U.S. Department of Energy, Brent Crude oil prices per barrel for the periods covered by this report were:

According to the July 2024 release of the Short-Term Energy Outlook published by the EIA, Brent Crude oil prices are expected to average approximately $89 per barrel for the remainder of 2024 and $88 per barrel in 2025, compared with an average of $82 per barrel in 2023. In its July 2024 Oil Market Report, the International Energy Agency projected the global oil demand to grow by approximately 1.0 million barrels per day in both 2024 and 2025.

Offshore Rig Count

Detailed below is the average contracted Mobile Offshore Drilling Units. These are rigs currently drilling as well as rigs committed, but not yet drilling, for the six months ended June 30, 2024 and 2023. The rig count data includes floating rigs (semi-submersibles and drillships) and jack-up rigs. The Company has included only these types of rigs as they are the primary assets used to deploy the Company’s products.

Source: IHS—Petrodata RigBase – June 30, 2024 and 2023

According to IHS-Petrodata RigBase, as of June 30, 2024, there were 558 contracted rigs (150 floating rigs and 408 jack-up rigs), an increase of 3.1% from the rig count of 541 rigs (144 floating rigs and 397 jack-up rigs) as of June 30, 2023.

Regulation

The demand for the Company’s products and services is also affected by laws and regulations relating to the oil and gas industry in general, including those specifically directed to offshore operations. The adoption of new laws and regulations, or changes to existing laws or regulations that curtail exploration and development drilling for oil and gas for economic or other policy reasons, could adversely affect the Company’s operations by limiting demand for its products.

In March 2018, the President of the United States issued a proclamation imposing a 25 percent global ad valorem tariff on imports of certain steel products and a 10 percent ad valorem tariff on certain aluminum products, effective March 23, 2018. The President subsequently proposed an additional 25 percent tariff on approximately $50 billion worth of imports from China, and the government of China responded with a proposal of an additional 25 percent tariff on U.S. goods with a value of $50 billion. In the following months, the United States and China placed additional, competing tariffs on imported goods until the two countries entered a phase one trade deal in January 2020, which included an agreement to reduce certain tariffs. Negotiations for a phase two trade deal with China had begun prior to the outbreak of COVID-19 but did not result in a deal. Effective July 10, 2024, President Biden announced new tariffs aimed at combating the circumvention of tariffs on steel and aluminum processed in Mexico and extending the 25% steel tariff on Mexican steel poured outside of Canada, Mexico, or the U.S. and 10% aluminum tariff on Mexican aluminum containing any metal cast or smelted in China, Belarus, Iran, or Russia.

The imposition of the most recent and/or any additional tariffs or initiation of trade restrictions by or against the United States could cause our cost of raw materials to increase or affect the markets for our products. However, given the uncertainty regarding the scope and duration of these trade actions by the United States and other countries, their ultimate impact on our business and operations remains uncertain.

The Company believes that its subsea products bookings should help mitigate the impact of any negative market conditions; however, slow recovery in commodity prices or an extended downturn in the global economy or future restrictions on, or declines in, oil and gas exploration and production could have a negative impact on the Company and its bookings. The Company’s subsea product bookings for the quarter ended June 30, 2024 were approximately $12.8 million, as compared to approximately $41.1 million and $66.6 million for the quarters ended March 31, 2024 and June 30, 2023, respectively.

Revenues. Dril-Quip’s revenues are generated from three sources: products, services and leasing. Product revenues are derived from the sale of drilling and production equipment. Service revenues are earned when the Company provides technical advisory assistance and rework and reconditioning services. Leasing revenues are derived from rental tools used during installation and retrieval of the Company’s products. For the three months ended June 30, 2024 and 2023, the Company derived 61.8% and 62.2%, respectively, of its revenues from the sale of its products, 27.2% and 26.5%, respectively, of its revenue from services, and 11.1% and 11.2% respectively, of its revenues from leasing. For the six months ended June 30, 2024 and 2023, the Company derived 60.2% and 63.8%, respectively, of its revenues from the sale of its products, 27.3% and 24.9%, respectively, of its revenue from services, and 12.5% and 11.3% respectively, of its revenues from leasing. Service and leasing revenues generally correlate to revenues from product sales because increased product sales typically generate increased demand for technical advisory assistance services and rental of running tools during installation. The Company has substantial international operations, with approximately 73.0% and 66.1% of its revenues derived from foreign sales for the six months ended June 30, 2024 and 2023, respectively. The majority of the Company’s domestic revenue relates to operations in the U.S. Gulf of Mexico. Domestic revenue approximated 27.0% and 33.9% of the Company’s total revenues for the six months ended June 30, 2024 and 2023, respectively.

Product contracts are negotiated and sold separately from service contracts. In addition, service contracts are not included in the product contracts or related sales orders and are not offered to the customer as a condition of the sale of the Company’s products. The demand for products and services is generally based on worldwide economic conditions in the oil and gas industry and is not based on a specific relationship between the two types of contracts. Substantially all of the Company’s sales are made on a purchase order basis. Purchase orders are subject to change and/or termination at the option of the customer. In case of a change or termination of over time contracts, the customer is required to pay the Company for work performed and other costs necessarily incurred due to the change or termination.

Generally, the Company attempts to raise its prices as its costs increase. However, the actual pricing of the Company’s products and services is impacted by a number of factors, including global oil prices, competitive pricing pressure, the level of utilized capacity in the oil service sector, maintenance of market share, the introduction of new products and general market conditions.

The Company accounts for more complex, customer specific projects that have relatively longer manufacturing time frames on an over-time basis. For the three months ended June 30, 2024, there were 48 projects representing approximately 20.5% of the Company’s total revenues and approximately 33.1% of its product revenues that were accounted for using over-time accounting, compared to 64 projects for the three months ended June 30, 2023, which represented approximately 30.0% of the Company’s total revenues and approximately 47.9% of its product revenues. For the six months ended June 30, 2024, there were 56 projects representing approximately 20.4% of the Company’s total revenues and approximately 33.9% of its product revenues that were accounted for using over-time accounting, compared to 66 projects for the six months ended June 30, 2023, which represented approximately 30.3% of the Company’s total revenues and approximately 47.4% of its product revenues. These percentages may fluctuate in the future. Revenues accounted for in this manner are generally recognized based upon a calculation of the percentage complete, which is used to determine the revenue earned and the appropriate portion of total estimated cost of sales to be recognized. Accordingly, price and cost estimates are reviewed periodically as the work progresses, and adjustments proportionate to the percentage complete are reflected in the period when such estimates are revised. Losses, if any, are recorded in full in the period they become known. Amounts received from customers in excess of revenues recognized are classified as a current liability.

Cost of Sales. The principal elements of cost of sales are labor, raw materials, manufacturing overhead, and application engineering expenses related to customized products. Cost of sales as a percentage of revenues is influenced by the product mix sold in any particular period, costs from projects accounted for under the over-time method, over/under manufacturing overhead absorption, pricing and market conditions. The Company’s costs related to its foreign operations do not significantly differ from its domestic costs.

Selling, General and Administrative Expenses. Selling, general and administrative expenses include the costs associated with sales and marketing, general corporate overhead, business development expenses, compensation expense, stock-based compensation expense, legal expenses and other related administrative functions.

Engineering and Product Development Expenses. Engineering and product development expenses consist of new product development and testing, as well as application engineering related to customized products.

Restructuring and Other Charges. Restructuring and Other Charges consist of costs under the 2021 global strategic plan. The 2021 global strategic plan concluded in the third quarter of 2023. As a result, the Company did not incur any costs under the 2021 global strategic plan for the three and six months ended June 30, 2024.

Acquisition Costs. Acquisition costs consist of expenses related to the acquisition and integration of a business acquired.

Change in Fair Value of Earn-Out Liability. The fair value of contingent consideration liabilities is remeasured at each reporting period at the estimated fair value based on the inputs on the date of remeasurement.

Gain on Sale of Property, Plant and Equipment. Gain or loss on sale of property, plant and equipment consists of sales of assets within this category of fixed assets.

Foreign Currency Transaction Gain. Foreign currency transaction gains results from a change in exchange rates between the functional currency and the currency in which a foreign currency transaction is denominated.

Income Tax Provision. The Company’s effective income tax rate fluctuates from the U.S. statutory tax rate based on, among other factors, changes in earnings mix by geography and tax jurisdiction, impact of valuation allowances, changes in tax legislation, and other permanent differences related to the recognition of income and expense between U.S. GAAP and applicable tax rules.

Reclassifications. We reclassified approximately $5.5 million of accrued professional fees for the year ended December 31, 2023, from accounts payable to other accrued liabilities to conform to our current year presentation. These reclassifications to the prior period were made to conform to the current period presentation and did not have an impact on our consolidated statements of income (loss), consolidated balance sheets, consolidated statements of comprehensive income (loss), consolidated statements of stockholders’ equity and consolidated statements of cash flows.

Results of Operations

The following table sets forth, for the periods indicated, a breakdown of our products, service and leasing revenues:

(In millions)

25

The following table sets forth, for the periods indicated, our revenues and operating income (loss) by business segments:

(In millions)

Three Months Ended June 30, 2024 Compared to Three Months Ended June 30, 2023

Revenues. Revenues increased by $30.7 million, or approximately 34.3%, to $120.3 million for the three months ended June 30, 2024 from $89.6 million for the three months ended June 30, 2023.

Subsea Products revenue decreased by approximately $1.9 million primarily driven by lower Connector and Surface Equipment orders in the second quarter of 2024.

Subsea Services revenue increased by approximately $3.1 million primarily driven by customer specific increases in international markets.

Well Construction revenue increased by approximately $29.5 million, which was primarily driven by the acquisition of Great North, which contributed $21.9 million in revenue in the second quarter of 2024, and large bore liner hanger growth in international offshore markets.

Cost of Sales. Cost of sales increased by $17.5 million, or approximately 26.7%, to $83.2 million for the three months ended June 30, 2024 from $65.7 million for the same period in 2023. This increase was primarily due to the acquisition of Great North. Cost of sales as a percentage of revenue decreased to 69.2% from 73.3% for the three months ended June 30, 2024 and 2023, respectively, primarily driven by favorable product mix within Subsea Products and Well Construction.

Selling, General and Administrative Expenses. For the three months ended June 30, 2024, selling, general and administrative expenses increased by $7.7 million, or 34.6% to $29.8 million from $22.1 million for the same period in 2023. This increase was primarily due to the addition of Great North expenses and higher personnel related costs.

Engineering and Product Development Expenses. For the three months ended June 30, 2024, engineering and product development expenses increased by approximately $0.4 million, or 12.1%, to $3.6 million from approximately $3.2 million for the same period in 2023. This increase was primarily due to the increased testing and qualifications related to specific international customer requirements.

Restructuring and Other Charges. For the three months ended June 30, 2024, the Company incurred no additional costs under the 2021 global strategic plan. During the three months ended June 30, 2023, the Company incurred costs of approximately ($0.6) million under the 2021 global strategic plan. During the second quarter of 2023, the Company reassessed the reasonability of a restructuring liability related to its Well Construction business. During our assessment, certain market exit costs became known and the liability was adjusted accordingly. This was partially offset by other charges that primarily consisted of office moves, site cleanup, preparation costs, consulting and legal fees.

Gain on Sale of Property, Plant and Equipment. For the three months ended June 30, 2024, there was an immaterial loss on sale of property, plant and equipment of less than $0.1 million. For the three months ended June 30, 2023, the gain on sale of property, plant and equipment was $0.7 million, primarily related to the sale of certain obsolete machinery and equipment and scrap parts.

Foreign Currency Transaction Gain. Foreign currency transaction loss for the three months ended June 30, 2024, was $6.7 million as compared to a gain of $4.8 million for the same period in 2023.

Operating Income (Loss). Subsea Products operating income was approximately $4.5 million higher for the three months ended June 30, 2024 as compared to the same period in 2023 due a favorable product mix and the impacts of productivity initiatives.

Subsea Services operating income increased by approximately $3.1 million, in line with increased revenue driven by customer specific increases in international markets.

Well Construction operating income was approximately $3.9 million lower for the three months ended June 30, 2024 as compared to the same period in 2023, which was primarily driven by lower activity for Well Construction services and the release of a $1.9 million restructuring liability in the second quarter of 2023, partially offset by the addition $1.7 million in operating income from Great North.

Corporate operating loss was approximately $11.9 million higher for the three months ended June 30, 2024 as compared to the same period in 2023, primarily due to a foreign currency transaction loss and higher payroll expense.

Income Tax Provision (Benefit). Income tax provision for the three months ended June 30, 2024 was $0.8 million on a loss before taxes of $2.6 million, resulting in an effective tax rate of 30.7%. Income tax expense was different than the U.S federal statutory income tax rate of 21% primarily due to the change in earnings mix by geography and tax jurisdiction, changes in valuation allowances in the United States, foreign withholding tax, and changes in nondeductible expenses. Income tax provision for the three months ended June 30, 2023 was $2.1 million on an income before taxes of $5.6 million, resulting in an effective income tax rate of approximately 37.6%. Income tax expense was different than the U.S federal statutory income tax rate of 21% primarily due to projected earnings mix by geography and tax jurisdiction, foreign withholding taxes, nondeductible compensation and the change in valuation allowances in the United States and in various foreign countries.

Net Income (Loss). Net loss was approximately $1.8 million for the three months ended June 30, 2024 as compared to a net income of $3.5 million for the same period in 2023 for the reasons set forth above.

Six Months Ended June 30, 2024 Compared to Six Months Ended June 30, 2023

Revenues. Revenues increased by $50.1 million, or approximately 27.8%, to $230.6 million for the six months ended June 30, 2024 from $180.5 million for the six months ended June 30, 2023.

Subsea Products revenue decreased by approximately $12.7 million primarily driven by lower Connector and Surface Equipment orders in the first half of 2024.

Subsea Services revenue increased by approximately $3.7 million primarily driven by customer specific increases in international markets.

Well Construction revenue increased by approximately $59.1 million, which was primarily driven by the acquisition of Great North, which contributed $47 million in revenue in the first half of 2024, and large bore liner hanger growth in international offshore markets.

Cost of Sales. Cost of sales increased by $30.4 million, or approximately 23.2% to $161.6 million for the six months ended June 30, 2024 from $131.2 million for the same period in 2023. This increase was primarily due to the acquisition of Great North. Cost of sales as a percentage of revenue decreased to 70.1% from 72.7% for the six months ended June 30, 2024 and 2023, respectively, primarily driven by favorable product mix within Subsea Products and Well Construction.

Selling, General and Administrative Expenses. For the six months ended June 30, 2024, selling, general and administrative expenses increased by $15.1 million, or 33.7% to $59.8 million from $44.7 million for the same period in 2023. This increase was primarily due to the addition of Great North expenses and higher personnel related costs.

Engineering and Product Development Expenses. For the six months ended June 30, 2024, engineering and product development expenses increased by approximately $0.7 million, or 11.0%, to $7.3 million from approximately $6.6 million for the same period in 2023. This increase was primarily due to the increased testing and qualifications related to specific international customer requirements.

Restructuring and Other Charges. For the six months ended June 30, 2024, the Company incurred no additional costs under the 2021 global strategic plan. During the six months ended June 30, 2023, the Company incurred costs of approximately $1.1 million under the 2021 global strategic plan. These charges were primarily related to office moves, site cleanup, preparation costs, consulting and legal fees.

Gain on Sale of Property, Plant and Equipment. For the six months ended June 30, 2024, the gain on sale of property, plant and equipment was $0.1 million, primarily related to the sale of scrap parts. For the six months ended June 30, 2023, the gain on sale of property, plant and equipment was $7.4 million, primarily related to the sale of our Houston aftermarket facility, the Houston forge facility buildings and certain obsolete machinery and equipment and scrap parts.

Foreign Currency Transaction Gain. Foreign currency transaction loss for the six months ended June 30, 2024, was $4.8 million as compared to a gain of $3.7 million for the same period in 2023.

Operating Income (Loss). Subsea Products operating income was approximately $3.6 million higher for the six months ended June 30, 2024 as compared to the same period in 2023, due a favorable product mix and the impacts of productivity initiatives.

Subsea Services operating income decreased by approximately $4.5 million, primarily driven by a gain of $5.9 million on the sale of our Houston aftermarket facility recognized in the first half of 2023.

Well Construction operating income was approximately $1.1 million higher for the six months ended June 30, 2024 as compared to the same period in 2023, which was primarily driven by the acquisition of Great North, which contributed $3.6 million in operating income. This is partially offset by the release of a $1.9 million restructuring liability in the first half of 2023 and higher payroll expense in 2024.

Corporate operating loss was approximately $30.5 million higher for the six months ended June 30, 2024 as compared to the same period in 2023, primarily due to $19.4 million in expenses related to the planned merger with Innovex and a foreign currency transaction loss in the first half of 2024.

Income Tax Provision (Benefit). Income tax provision for the six months ended June 30, 2024 was $2.6 million on a loss before taxes of $19.2 million resulting in an effective tax rate of (13.4%). Income tax expense was different than the U.S federal statutory income tax rate of 21% primarily due to the change in earnings mix by geography and tax jurisdiction, changes in valuation allowances in the United States, foreign withholding tax, and changes in nondeductible expenses. Income tax provision for the six months ended June 30, 2023 was $5.7 million on an income before taxes of $11.5 million, resulting in an effective income tax rate of approximately 49.7%. Income tax expense was different than the U.S federal statutory income tax rate of 21% primarily due to projected earnings mix by geography and tax jurisdiction, foreign withholding taxes, nondeductible compensation and the change in valuation allowances in the United States and in various foreign countries.

Net Income (Loss). Net loss was approximately $21.8 million for the six months ended June 30, 2024 as compared to a net income of $5.8 million for the same period in 2023 for the reasons set forth above.

Non-GAAP Financial Measures

We have performed a detailed analysis of the non-GAAP measures that are relevant to our business and its operations and determined that the appropriate unit of measure to analyze our performance is Adjusted EBITDA (earnings before interest, taxes, depreciation and amortization, as well as other significant non-cash items and other adjustments for certain charges and credits). The Company believes that the exclusion of these charges and credits from these financial measures enables it to evaluate more effectively the Company’s operations period over period and to identify operating trends that could otherwise be masked by excluded items. It is our determination that Adjusted EBITDA is a relevant measure of how the Company reviews its ability to meet commitments and pursue capital projects.

Adjusted EBITDA

We calculate Adjusted EBITDA as one of the indicators to evaluate and compare the results of our operations from period to period by removing the effect of our capital structure from our operating structure and certain other items, including those that affect the comparability of operating results. This measurement is used in concert with operating income and net income and cash from operating activities, which measures actual cash generated in the period. In addition, we believe that Adjusted EBITDA is a supplemental measurement tool used by analysts and investors to help evaluate overall operating performance ability to pursue and service possible debt opportunities and analyze possible future capital expenditures. Adjusted EBITDA does not represent funds available for our discretionary use and is not intended to represent or to be used as a substitute for net income, as measured under U.S. generally accepted accounting principles. The items excluded from Adjusted EBITDA, but included in the calculation of reported net income, are significant components of the condensed consolidated statements of income (loss) and must be considered in performing a comprehensive assessment of overall financial performance. Our calculation of Adjusted EBITDA may not be consistent with calculations of Adjusted EBITDA used by other companies.

The following table reconciles our reported net income to Adjusted EBITDA for each of the respective periods:

(In thousands)

(1) Adjusted EBITDA does not measure financial performance under GAAP and, accordingly, should not be considered as an alternative to net income as an indicator of operating performance.

Liquidity and Capital Resources

Cash Flows

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

(In thousands)

Statements of cash flows for entities with international operations that are local currency functional exclude the effects of the changes in foreign currency exchange rates that occur during any given period, as these are non-cash changes. As a result, changes reflected in certain accounts on the condensed consolidated statements of cash flows may not reflect the changes in corresponding accounts on the condensed consolidated balance sheets.

The primary liquidity needs of the Company are (i) to fund capital expenditures to improve and expand facilities and manufacture additional running tools and (ii) to fund working capital. The Company’s principal source of funds is cash flows from operations. The Company may use its liquidity for, among other things, the support of the Company’s research and development efforts, the funding of key projects and spending required by any upturn in the Company’s business and the pursuit of possible acquisitions. We believe our currently anticipated operating cash flows will be sufficient to meet our cash needs arising in the ordinary course of business for the next twelve months.

Net cash used in operating activities for the six months ended June 30, 2024 was $13.4 million as compared to $41.6 million for the six months ended June 30, 2023. The $28.2 million increase in cash from operating activities is primarily due to increases resulting from the change in operating assets and liabilities of $32.9 million.

The change in operating assets and liabilities for the six months ended June 30, 2024 resulted in a $32.9 million increase in cash as compared to the change in operating assets and liabilities for the six months ended June 30, 2023. The $21.5 million net increase in cash due to changes in trade receivables and unbilled receivables was mainly due to a significant increase in billings both for point in time orders and over-time orders as the rights became unconditional on the contract assets and were transferred to trade receivables. Increases in cash due to the changes in accounts payable and accrued expenses was $17.3 million primarily due to the timing of payroll cycles and accounts payable distributions. Increases in cash due to changes in inventory was $3.1 million due to changes in inventory levels as we continually reassess our needs. These increases were partially offset by a decrease in cash of $9.0 million due to changes in prepaids and other assets.

The change in investing cash flows for the six months ended June 30, 2024 resulted in a $15.5 million increase in cash, primarily due to $25.9 million of maturities in our short-term investments during the quarter, which were reinvested in investments classified as cash equivalents as per our accounting policy. This is partially offset by capital expenditures of $10.9 million for the six months ended June 30, 2024. Capital expenditures for the six months ended June 30, 2024 were $5.4 million for machinery and equipment related to our global strategic program which includes consolidation of our manufacturing facilities, $4.5 million for rental tools to support our developed products and $1.0 million for other capital expenditures.

Credit Facility

The Company’s ABL Credit Facility, dated February 23, 2018, as amended, was terminated effective February 22, 2022. We opened a new cash collateral account with JPMorgan Chase Bank, N.A., in which cash was transferred to facilitate our existing letters of credit. As of June 30, 2024, the cash balance in that account was approximately $3.6 million. The Company is required to maintain a balance equal to the outstanding letters of credit plus 5% at all times which is included in “Restricted cash” in our condensed consolidated balance sheets as at June 30, 2024 and December 31, 2023. Withdrawals from this cash collateral account are only allowed at such point a given letter of credit has expired or has been cancelled.

Repurchase of Equity Securities

On February 22, 2022, the Board authorized an incremental $100.0 million share repurchase plan. The repurchase plan has no set expiration date and any repurchased shares are expected to be cancelled. The manner, timing and amount of any purchase will be determined by management based on an evaluation of market conditions, stock price, liquidity and other factors. The program does not obligate the Company to acquire any amount of common stock and may be modified or superseded at any time at the Company’s discretion.

For the three and six months ended June 30, 2024 and 2023, the Company purchased no shares under the share repurchase plans.

The Company currently has no derivative instruments and no off-balance sheet hedging or financing arrangements, contracts or operations.

Other Matters

From time to time, the Company enters into discussions or negotiations to acquire other businesses or enter into joint ventures. The timing, size or success of any such efforts and the associated potential capital commitments are unpredictable and dependent on market conditions and opportunities existing at the time. The Company may seek to fund all or part of any such efforts with proceeds from debt or equity issuances. Debt or equity financing may not, however, be available at that time due to a variety of circumstances, including, among others, the Company’s credit ratings, industry conditions, general economic conditions and market conditions.

Critical Accounting Estimates

During the six months ended June 30, 2024, there were no material changes in our judgments and assumptions associated with the development of our critical accounting policies. Refer to the Form 10-K/A for a discussion of our critical accounting policies.

The Company is currently exposed to certain market risks related to interest rate changes on its short-term investments and fluctuations in foreign exchange rates. The Company does not engage in any material hedging transactions, forward contracts or currency trading which could mitigate the market risks inherent in such transactions. There have been no material changes in market risks for the Company since December 31, 2023.

Foreign Exchange Rate Risk

The Company has operations in various countries around the world and conducts business in a number of different currencies. Our significant foreign subsidiaries may also have monetary assets and liabilities not denominated in their functional currency. These monetary assets and liabilities are exposed to changes in currency exchange rates which may result in non-cash gains and losses primarily due to fluctuations between the U.S. dollar and each subsidiary’s functional currency.

The Company experienced a foreign currency pre-tax loss of approximately $6.7 million and $4.8 million during the three and six months ended June 30, 2024. The Company experienced a foreign currency pre-tax gain of approximately $4.8 million $3.7 million, during the three and six months ended June 30, 2023.

The Company does not engage in any material hedging transactions, forward contracts or currency trading which could mitigate the effects and risks inherent in such transactions. Additionally, there is no assurance that the Company will be able to protect itself against currency fluctuations in the future.

In accordance with Exchange Act Rules 13a-15 and 15d-15, the Company carried out an evaluation, under the supervision and with the participation of management, including the Company’s Chief Executive Officer and Chief Financial Officer, of the effectiveness of the Company’s disclosure controls and procedures as of the end of the period covered by this report. Disclosure controls and procedures are designed to provide reasonable assurance that information required to be disclosed in the Company’s reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and such information is accumulated and communicated to management, including the Company’s Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding disclosure. Based on that evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were not effective as of June 30, 2024 because of the material weakness in our internal control over financial reporting described in Part II, Item 9A of the Form 10-K/A.

Changes in Internal Control over Financial Reporting

There has been no change in the Company’s internal control over financial reporting that occurred during the three months ended June 30, 2024 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

Management’s Plan to Remediate the Material Weaknesses

As it relates to the material weakness that exists as of June 30, 2024, we are currently in the process of designing and implementing remediation plans and taking steps to address the root cause of the material weakness. Such plans include, but may not be limited to, the following:

• We will perform an evaluation of the design and implementation of certain internal controls impacted by the material weakness.
• We will enhance the design of the controls related to the review of financial statement classification of inventory write-downs related to restructuring.
• We will provide technical accounting training to individuals involved in determining financial statement classification of inventory write-downs related to restructuring.

While we believe these efforts will improve our internal controls and address the root cause of the material weakness, such material weakness will not be remediated until our remediation plan has been fully implemented and we have concluded, through testing, that our controls are operating effectively for a sufficient period of time.

There have been no material changes from the risk factors disclosed in the Company’s Annual Report on Form 10-K/A, as updated in our Quarterly Report on Form 10-Q/A for the period ending March 31, 2024.