Innovex International, Inc.: Form 10-Q for the period ended Mar 31, 2025

The following discussion and analysis of the results of operations, financial condition and liquidity position of Innovex for the three months ended March 31, 2025 and 2024 should be read in conjunction with (i) the accompanying unaudited condensed consolidated financial statements and the related notes included in Part I, Item 1 of this Quarterly Report and (ii) the audited consolidated financial statements and related notes for the year ended December 31, 2024 included in our Annual Report. The following discussion and analysis contains forward-looking statements that are based on management’s current expectations, estimates and projections about Innovex’s business and operations, and involves risks and uncertainties. Actual results may differ materially from those currently anticipated and expressed in such forward-looking statements because of various factors, including those described in the sections titled “Risk Factors” in our Annual Report and “Cautionary Statement Regarding Forward- Looking Statements,” “Risk Factors” and elsewhere in this Quarterly Report, all of which are difficult to predict. Innovex does not undertake any obligation to publicly update any forward-looking statements except as otherwise required by applicable law. References in this section to “Innovex,” the “Company,” the “Combined Company,” “we,”“us” and “our” are to Innovex International, Inc.(formerly known as Dril-Quip, Inc.) and its consolidated subsidiaries after giving effect to the Merger and related transactions, unless the context otherwise requires or as otherwise indicated. Except as otherwise indicated, references herein to “Dril-Quip” are to Dril-Quip, Inc. prior to the completion of the Merger.

Overview

Innovex designs, manufactures, sells and rents mission critical engineered products to the global oil and natural gas industry. Our vision has been to create a global leader in well-centric products and technologies through organic, customer-linked innovations and disciplined acquisitions to drive leading returns for our investors. Our products are used across the life cycle of the well (during the construction, completion, production and intervention phases) and are typically utilized downhole and consumable in nature. Our products perform a critical well function, and we believe they are chosen due to their reliability and capacity to save our customers time and lower costs during the well lifecycle. We believe that our products have a significant impact on a well’s performance and economic profile relative to the price we charge, creating a “Big Impact, Small Ticket” value proposition. Many of our products can be used in a significant portion of our customers’ wells globally, with our most advanced products providing mission critical solutions for some of the most challenging and complex wells in the world. We have a track record of developing proprietary products to address our customers’ evolving needs, and we maintain an active pipeline of potential new products across various stages of development.

We are a global company, and for the three months ended March 31, 2025, the U.S. and Canadian onshore (“NAM”) market made up approximately 50% of our revenue while the international and offshore (“International and Offshore”) markets constituted 50%. Within the NAM market, we have a strong presence in both the United States and Canada. The NAM market is core to us, and we maintain a robust sales and distribution infrastructure across the region. Our products have broad applicability in this market, particularly for horizontal or unconventional wells that have become prevalent methods of oil and natural gas development across the region. We are focused on significantly increasing our revenue from the International and Offshore markets, as these regions are typically subject to long-cycle investment horizons and exhibit relatively less cyclicality than the NAM market. The Middle East, and in particular Saudi Arabia, has been a key source of growth for Innovex. We also operate across Asia, Latin America, Europe and the Gulf of America, among other regions. To enhance our global reach, we have complemented our locations across these markets with a network of strategic distribution, sales and manufacturing partners.

We are an innovator and have a development process and culture focused on creating proprietary products for our customers. We seek to work with our customers to solve their operational challenges. We believe that these collaborations have been a source of growth as they have allowed us to develop new products with anchor customers that have served as an initial revenue base from which to scale. We have a unique culture that we view as having been critical to our success in the commercialization of new products. We define our culture as “No Barriers.” Our goal is to remove internal barriers that slow the pace of innovation and empower our employees to be responsive to our customers’ needs, while maintaining a focus on returns for the Company. As a result of our culture and our commitment to customer responsiveness, we believe that we are more agile and able to innovate faster than our larger competitors.

Our organic growth has been complemented by a disciplined and contrarian acquisition strategy. We view acquisitions as a core competency and have identified a rich opportunity set of acquisition targets that we believe are seeking to transact. We aim to execute a disciplined acquisition strategy for high-quality opportunities that meet our stringent investment criteria.

We have a broad customer base, ranging from International Oil Companies, National Oil Companies, and exploration and production (“E&P”) companies as well as multinational and regional oilfield service companies. Once a new product has been commercialized or acquired, our global sales and distribution infrastructure enables us to scale and drive customer adoption quickly.

Our business has produced strong returns on invested capital. Please see “Non-GAAP Financial Measures” within this section for Return on Capital Employed, which is how we assess the effectiveness of our capital allocation over time. For the three months ended March 31, 2025, our net income, income from operations and Adjusted EBITDA were equivalent to approximately 6%, 9% and 19% of revenue, respectively. Over the same period, capital expenditures accounted for only 3% of revenue, and we earned approximately $21.9 million in income from operations. For the three months ended March 31, 2024, our net income, income from operations and Adjusted EBITDA were equivalent to approximately 13%, 17% and 25% of revenue, respectively. Over the same period, capital expenditures accounted for only 2% of revenue, and we earned approximately $22.3 million in income from operations. We believe that our global sales and distribution network, as well as our manufacturing capacity and vendor network, position us well to drive revenue growth and margin expansion. Please see “Non-GAAP Financial Measures” within this section for the definitions of Adjusted EBITDA, Adjusted EBITDA Margin, and Return on Capital Employed, as well as a reconciliation of Adjusted EBITDA, Adjusted EBITDA Margin, and Return on Capital Employed to our most directly comparable financial measures calculated and presented in accordance with GAAP.

We believe that we can create value for our stockholders across the industry cycle and view our “through-cycle playbook” as providing a plan for us to outperform in all market environments. We prioritize protecting the long-term health of the Company through investments in R&D and sustaining engineering in our existing portfolio in all market environments. We seek to maintain a conservative balance sheet to preserve operational and financial flexibility through the industry cycle.

Recent Developments

On March 18, 2024, the Company (formerly known as Dril-Quip, Inc.) entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Innovex Downhole Solutions, Inc., a Delaware corporation (“Legacy Innovex”), Ironman Merger Sub, Inc., a Delaware corporation and wholly owned subsidiary of Dril-Quip, and DQ Merger Sub, LLC, a Delaware limited liability company and wholly owned subsidiary of the Company. Following the consummation of the transactions contemplated by the Merger Agreement (the “Merger”), Legacy Innovex became a wholly owned subsidiary of the Company, the name of the Company was changed to Innovex International, Inc., and its common stock remained listed on the New York Stock Exchange. The merger closed on September 6, 2024 and was accounted for using the acquisition method of accounting with Legacy Innovex being identified as the accounting acquirer. The consolidated financial statements of the Company reflect the financial position, results of operations and cash flows of only Legacy Innovex for all periods prior to the Merger and of the Combined Company (including activities of Dril-Quip) for all periods subsequent to the Merger.

Pursuant to the Merger Agreement, as of the effective time of the Merger, each outstanding share of common stock, par value $0.01 per share, of Legacy Innovex was converted into the right to receive 2.0125 shares of common stock, par value $0.01 per share, of the Company (the “Company Common Stock”). The number of shares of Company Common Stock received by the Legacy Innovex stockholders was equal to 32,183,966. On September 9, 2024, the first trading day following the closing of the Merger, the Company Common Stock began trading on the New York Stock Exchange under the new ticker symbol “INVX.”

On November 29, 2024, Innovex acquired 80% of the issued and outstanding equity securities of DWS. The acquisition was completed simultaneously with the signing of the Equity Purchase Agreement on November 29, 2024. The aggregate purchase price for the acquisition consisted of $75.1 million in cash, subject to post-closing adjustments, and 1,918,558 shares of Company Common Stock. The remaining 20% of the issued and outstanding equity securities of DWS were previously owned by Legacy Innovex, a wholly owned subsidiary of the Company.

On February 7, 2025, the Company acquired SCF Machining Corporation (“SCF”) in exchange for $17.7 million of cash, subject to post-closing adjustments. SCF is a Canadian-domiciled entity and parent company to SCF Machining Corporation Vietnam Company Limited, a Vietnam-based company that was established to grow Innovex’s low-cost country supply chain by establishing an exclusive manufacturing vendor to provide Innovex with high quality, low price machined goods.

For information with respect to the Merger and the acquisitions of DWS and SCF, see Note 3. Mergers and Acquisitions to our consolidated financial statements included elsewhere in this Quarterly Report.

On February 27, 2025, we entered into the Third Amended and Restated Revolving Credit, Guaranty and Security Agreement among the Company, and each party joined thereto from time to time as a guarantor, as guarantors, the financial institutions from time to time party thereto, as lenders, and PNC Bank, National Association, as the agent for lenders (the “Credit Agreement”) to replace the Previous Credit Agreement (as defined herein). The Credit Agreement provides for a $200 million senior secured revolving credit facility, subject to a borrowing base. The Credit Agreement matures on February 27, 2030. The Credit Agreement, among other things, (i) extended the maturity of the agreement from June 2026 to February 2030, (ii) increased the maximum revolving amount from $110 million to $200 million, which may, subject to certain conditions, be increased to $250 million, (iii) eliminated the term loan commitment and (iv) provided for an applicable margin for interest on the loans to be based on availability, effective as of April 1, 2025. The applicable margin under the Credit Agreement will range from 0.50% to 1.00% for swing loans and alternate base rate revolving loans and 1.50% to 2.00% for term SOFR revolving loans.

Market Factors and Trends

Our business is driven by the number of oil and natural gas wells drilled worldwide, which, in turn, is tied to the level of global spending of the oil and natural gas E&P industry. Rystad Energy, as of April 17, 2025, expects global upstream energy spending, excluding Iran, Venezuela, Cuba, Russia and China, to stay relatively flat through 2025, with spending forecasted to increase by 3% in 2027. Rystad Energy also estimates that the annual number of global wells drilled, excluding Iran, Venezuela, Cuba, Russia and China, will increase from approximately 31,700 in 2024 to approximately 32,300 in 2027. The pace of development activity is driven by expected well profitability and returns, which, in turn, are influenced by several factors, including current global oil and natural gas supply and demand balances, current and expected future prices for oil and natural gas and the perceived stability and sustainability of these commodity prices over time.

The oil and natural gas industry has historically been characterized by volatility in commodity prices and in the level of drilling and production activity, which are driven by a variety of market forces, including geopolitical instability, climate related initiatives, OPEC+ actions, among others. The global demand for oil and natural gas has consistently increased historically, and we believe that multiple years of under investment in oil and natural gas development has left the industry with a limited amount of spare production capacity. Additionally, public E&P operators have adopted a more conservative approach to capital spending in response to stockholders’ desire for increased return of capital. We believe that these factors have laid a foundation to support oil and natural gas prices and will lead to a sustained spending cycle and stable activity levels by our customers in the near and medium-term.

Description of Certain Components of Financial Data

Revenues

We generate our revenue from three primary sources: sales of products and other associated revenues with product sales, such as freight; rentals of tools that are used to deploy our products or to provide a critical well function; and services that are typically connected to the well-site deployment of our engineered products. We have global operations, with sales generated within both our NAM market operations and our International and Offshore markets.

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 March 31, 2025, there were 6 projects representing approximately 0.1% of the Company’s total revenues and approximately 0.1% of its product revenues that were accounted for using over-time accounting, compared to zero projects for the three months ended March 31, 2024. 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 revenues 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 revenues

Our cost of revenues consists of expenses relating to the manufacture and procurement of our products in addition to the costs of our support services. Cost of revenues related to manufacturing and procurement of our products includes the cost of components sourced from third-party suppliers and direct and indirect costs to manufacture and supply products, including labor, materials, machine time, lease expense related to our manufacturing facilities, freight and other variable manufacturing costs, such as shrinkage, obsolescence variances and revaluation or scrap related to our existing inventory. Our support services costs include personnel expenses for our field service organization, lease expense related to our operations facilities, threading charges, vehicle expenses and freight.

Selling, general and administrative expense

Selling, general and administrative expense consists of costs such as sales and marketing, engineering and R&D expenses, general corporate overhead, compensation expense, IT expenses, safety and environmental expenses, insurance costs, legal expenses and other related administrative functions.

Gain/loss on sale of assets

Gain/loss on sale of assets represents profit recognized on the sale of property and equipment, net.

Depreciation and amortization

Depreciation and amortization expense consists of depreciation related to our tangible assets, including investments in property and equipment, and amortization of intangible assets, including identified intangible assets related to acquisition purchase price accounting.

Impairment of long-lived assets

Impairment of long-lived assets consists of the write down of the carrying value of our long-lived assets to fair value when, as part of our periodic impairment evaluation performed in accordance with ASC 360, we determine that the carrying value of the asset or asset group is not recoverable and exceeds its fair value.

Acquisition and integration costs

Acquisition and integration costs consist of legal, accounting, advisory fees, and other integration costs incurred in connection with the acquisition and integration of a business.

Interest expense

Interest expense primarily consists of interest expense associated with the Term Loan and the Credit Facility (each as defined herein).

Other income/expense, net

Other income/expense, net consists of foreign exchange transaction gains or losses resulting from a change in exchange rates between the functional currency and the currency in which a foreign currency transaction is denominated and other non-operating items.

Equity method earnings

Equity method earnings consist of our proportional share of the earnings of our previous equity method investee, DWS, along with the associated amortization of our proportional share of the step up in fair value of the intangible assets acquired. The minority interest requiring equity method accounting treatment was acquired on May 1, 2023. On November 29, 2024, we purchased the remaining equity interest in DWS and therefore, the earnings of DWS after November 29, 2024 are fully consolidated as part of the Company. See “Gain on consolidation of equity method investment” below.

Income tax expense

We are subject to income taxes in both the United States and foreign jurisdictions in which we operate. Differences between our effective tax rate and the U.S. federal statutory tax rate are primarily due to state taxes, foreign jurisdiction rate differences, permanent differences between book and tax income and changes in the valuation allowance.

Factors Affecting the Comparability of Our Results of Operations

Our historical financial condition and results of operations for the periods presented may not be comparable, either from period to period or going forward, due to recent and future acquisitions. One way in which we have grown, and will continue to grow, our operations and financial results is through strategic acquisitions. In May 2023, Legacy Innovex acquired 20% of DWS, a company that manufactures and rents engineered downhole tools designed to improve the performance of directional and horizontal drilling operations. In March of 2024, Legacy Innovex entered into the Merger Agreement with Dril-Quip, and the Merger was consummated on September 6, 2024. In November of 2024, we acquired the remaining 80% equity interest in DWS. In February 2025, we acquired SCF, a Canadian-domiciled entity and parent company to SCF Machining Corporation Vietnam Company Limited, a Vietnam-based company. As a general matter, following an acquisition, our results of operations are affected by the results of the newly acquired business or operations, the purchase accounting for the acquisition, any debt incurred in connection with the acquisition and expenditures made to integrate the newly acquired business or operations. As a result of our acquisitions and the consolidation of our operating subsidiaries’ into the Company’s financial results, the periods presented in our historical financial statements may not be comparable to one another and our future results of operations and financial results may differ. Additionally, as a result of the Merger, we expect to incur recurring administrative expenses related to being a publicly traded corporation that are not reflected in the historical Legacy Innovex’s financial statements.

Results of Operations

The following table presents summary consolidated operating results for the periods presented:

(in thousands)

(a) Cost of revenues excludes depreciation and amortization.

Three Months Ended March 31, 2025 Compared to Three Months Ended March 31, 2024

Revenues. Our NAM market revenue for the three months ended March 31, 2025 was $120.5 million, an increase of $39.6 million from $80.9 million for the three months ended March 31, 2024, primarily driven by an increase in market share and incremental business operations due to the Merger and the acquisitions of DWS and SCF. This was offset by a reduction in drilling activity in North America due to a decline in the North America land rig count during the comparative period. Our International and Offshore market revenue for the three months ended March 31, 2025, was $119.9 million, an increase of $72.7 million from $47.1 million for the three months ended March 31, 2024, primarily driven by increased business operations due to the Merger.

Cost of revenues, exclusive of depreciation and amortization. Total cost of revenues for the three months ended March 31, 2025 was $163.9 million, an increase of $85.0 million from $78.9 million for three months ended March 31, 2024. The change was primarily attributable to a $41.4 million increase in product cost of goods sold, a $27.3 million increase in personnel expense due to increased activity levels due to the Merger, and a $9.0 million increase in supplies and general manufacturing expenses. This change was offset by a decrease of a net $4.5 million in variance, scrap and absorption expense due to reduced costing in lower cost geographies along with increased inventory absorption costs due to the Merger. The remaining difference is attributable to increases in facilities costs, inventory reserves, property taxes, and other miscellaneous costs.

Selling, general and administrative expenses. Selling, general and administrative expense for the three months ended March 31, 2025 was $32.3 million, an increase of $11.0 million from $21.3 million for the three months ended March 31, 2024. The change is primarily attributable to a $11.2 million increase in salaries, wages and other payroll costs caused by an increased headcount due to the Merger.

(Gain)/loss on sale of assets. (Gain)/loss on sale of assets for the three months ended March 31, 2025 and 2024 was $0.1 million and $(0.1) million, respectively. The change during the two periods was due to normal variations in property and equipment sales activity.

Depreciation and amortization. Total depreciation and amortization expense for the three months ended March 31, 2025 was $14.9 million, an increase of $10.1 million from $4.8 million for the three months ended March 31, 2024. The change in depreciation and amortization was primarily due to additional depreciation for assets acquired related to the Merger.

Long-lived asset impairments. Long-lived asset impairment expense for the three months ended March 31, 2025 was $2.9 million, an increase of $2.9 million from $0.0 million for the three months ended March 31, 2024. The impairment expense in 2025 was related to a land and building in Mexico acquired as part of the Merger, that is held for sale at March 31, 2025 and being marketed at an amount that is lower than the net book value, which ultimately resulted in an impairment expense of $2.9 million.

Acquisition and integration costs. Acquisition and integration costs for the three months ended March 31, 2025 was $4.3 million, an increase of $3.5 million from $0.8 million for the three months ended March 31, 2024. The change in acquisition and integration costs was due to the costs incurred in connection with the Merger and the acquisition of DWS and SCF.

Interest expense. Total interest expense was $0.7 million for the three months ended March 31, 2025 and 2024. Interest expense is comparable during both periods due to lower long-term debt balances during the three months ended March 31, 2025, offset by increased finance lease interest due to an increase in finance leases during the comparative periods.

Other (income) expense. Total other (income) expense for the three months ended March 31, 2025 was $(0.2) million, a decrease of $0.7 million from $0.5 million for the three months ended March 31, 2024, with the change primarily being due to the net change in our foreign currency exchange gains (losses).

Equity method earnings. Equity method earnings consist of the net earnings in DWS, along with the amortization of our proportional ownership interest in the step up of the fair value of the intangible assets acquired, during the period that DWS was accounted for as an equity method investee. With the purchase of the remaining 80% equity interest in DWS on November 29, 2024, the Company will not recognize equity method earnings in 2025. Total equity method earnings, excluding the amortization of the step up in fair value, for the three months ended March 31, 2024 was $0.8 million. The amortization of the step up in the fair value of the intangible assets acquired for the three months ended March 31, 2024 was $0.4 million.

Income tax expense. Our operations are subject to U.S. federal income tax at an entity level, as well as various state income and franchise taxes. In addition, our operations located in international jurisdictions are subject to local country income taxes. Income tax expense for the three months ended March 31, 2025 was $6.6 million, an increase of $1.5 million from $5.1 million for the three months ended March 31, 2024. The change was primarily driven by changes in mix of income before income taxes by geography and tax jurisdiction, discrete items recorded in the quarter, and other non-deductible expenses. For the three months ended March 31, 2025, income before income taxes was $21.4 million, representing a decrease of $0.1 million from $21.5 million for the three months ended March 31, 2024 primarily due to the factors discussed above.

Net income. Net income for the three months ended March 31, 2025 was $14.8 million, a decrease of $1.6 million from net income of $16.4 million for the three months ended March 31, 2024, as a result of the factors discussed above.

Liquidity and Capital Resources

Our primary sources of liquidity are our existing cash, cash provided by operating activities, and borrowings under the Credit Facility. The Company maintains an open market share repurchase program under our existing share repurchase authorization and may repurchase shares from time to time based on management’s evaluation of market conditions, share price and other factors. As of March 31, 2025, we had cash and restricted cash of $68.1 million and availability under the Revolver (as defined herein) of $103.3 million. Our total indebtedness was $25.2 million as of March 31, 2025.

Our principal liquidity needs have been, and are expected to continue to be, working capital, capital expenditures, debt service and potential mergers and acquisitions. Historically, capital expenditures have been relatively modest, with working capital being the predominant use of cash for the Company during periods of growth. We continuously evaluate our capital expenditures, and the amount we ultimately spend will depend on a number of factors, including, among other things, prevailing economic conditions, market conditions in the oil and natural gas industry, customers’ forecasts, demand volatility and company initiatives.

We have certain obligations related to debt maturities, finance leases and operating leases. As of March 31, 2025, we have $20.8 million of minimum non-cancelable lease obligations for the twelve months following March 31, 2025, comprised of $6.1 million of finance lease maturities and $14.7 million of operating lease obligations. We have an additional $62.1 million of minimum non-cancelable lease obligations for the periods after March 31, 2025, comprised of $5.4 million of finance lease maturities and $56.7 million of non-cancelable operating lease obligations. As of March 31, 2025, interest rates on our lease obligations range from 2.88% to 13.09%. In addition, as of March 31, 2025, all amounts borrowed under our Revolver become due and payable in 2030. For the three months ended March 31, 2024, the Company’s effective interest rate on the term loan was approximately 8.60% For the three months ended March 31, 2025 and 2024, the effective interest rate on the Revolver was approximately 8.25% and 8.52%, respectively. See Note 10. Debt to our consolidated financial statements included elsewhere in this Quarterly Report for additional information.

We believe that our existing cash on hand, cash generated from operations and available capacity under the Revolver will be sufficient to meet our liquidity needs in the short-and long-term. Our ability to satisfy our liquidity requirements depends on our future operating performance, which is affected by prevailing economic conditions, market conditions in the oil and natural gas industry, availability and cost of raw materials, and other factors, many of which are beyond our control.

Cash Flows

The following table summarizes our cash flows for the periods indicated:

(in thousands)

Three Months Ended March 31, 2025 Compared to Three Months Ended March 31, 2024

Net cash provided by operating activities for the three months ended March 31, 2025 was $31.1 million, an increase of $18.5 million from the three months ended March 31, 2024. The change in cash provided by operations for the comparative periods was primarily driven by the following:

• a decrease in net income of $1.6 million;
• changes in non-cash adjustments to net income from the comparative period as a result of a $10.1 million increase in depreciation and amortization, in connection with the increased size of the business primarily due to the Merger and other acquisitions between April 1, 2024 and March 31, 2025, a $6.2 million increase in deferred taxes due to timing differences, a $2.9 million increase in impairment of long-lived assets related to land and buildings in Mexico designated as assets held for sale, and a $1.3 million increase in stock compensation expense, primarily due to the accelerated vesting of equity based awards; and
• changes in operating assets and liabilities, net of assets acquired as part of the acquisitions, totaled $1.3 million.

Net cash used in investing activities for the three months ended March 31, 2025 was $23.5 million, a decrease of $21.2 million from the three months ended March 31, 2024. The change in cash used in investing activities was primarily due to a $17.4 million payment for the acquisition of SCF.

Net cash used in financing activities for the three months ended March 31, 2025 was $13.4 million, a decrease of $3.1 million from the three months ended March 31, 2024. The change in cash used in financing activities was primarily due to an increase of $1.4 million in net repayments of long term debt due to cash generated from positive operating cash flows and debt issuance costs incurred in connection with the Credit Agreement.

Credit Agreement

Legacy Innovex, Tercel Oilfield Products USA L.L.C., Top-Co Inc. and Pride (collectively, the “Original Borrowers”) entered into the Second Amended and Restated Revolving Credit, Term Loan, Guaranty and Security Agreement in June 2022 (as amended in November 2022, April 2023, December 2023, and June 2024, the “Previous Credit Agreement”), with PNC Bank, National Association, as agent, and the lenders party thereto. On September 6, 2024, the Company and TIW Corporation (collectively and together with the Original Borrowers, the “Borrowers”) joined the Credit Agreement as borrowers thereunder. The Previous Credit Agreement provided for (i) a term loan tranche in a principal amount of the lesser of $25.0 million and a certain amount determined based, in part, on appraised values of certain assets of Legacy Innovex and certain of its subsidiaries (the “Term Loan”) and (ii) a revolving credit facility of up to $110.0 million with a $5.0 million sublimit for letters of credit and an $11.0 million swing loan (collectively, the “Previous Revolver” and, together with the Term Loan, the “Previous Credit Facility”).

The consummation of the transactions contemplated by the Merger Agreement constituted a Change of Control (as defined in the Previous Credit Agreement). In June 2024, the Original Borrowers, the Agent and the lenders party thereto entered into the Fourth Amendment to the Second A&R Credit Agreement, which permitted the change in control event, the payment of the cash dividend contemplated by the Merger Agreement, and the acquisition of 80% of the issued and outstanding equity securities of DWS not then owned by Legacy Innovex.

The Company, as the borrower, entered into the Credit Agreement, dated as of February 27, 2025, to replace the Previous Credit Agreement and provide for a revolving credit facility of up to $200.0 million (the “Revolver” and, together with the Term Loan, the “Credit Facility”). The Credit Agreement, among other things, (a) extended the maturity of the agreement from June 10, 2026 to February 27, 2030, (b) increased the maximum revolving amount from $110 million to $200 million, which may, subject to certain conditions, be increased to $250 million, (c) eliminated the term loan commitment and (d) provided for an applicable margin for interest on the loans to be based on availability, effective as of April 1, 2025. See Note 10. Debt to our consolidated financial statements included elsewhere in this Quarterly Report.

Amounts borrowed under the Credit Agreement are subject to an interest rate per annum equal to, at the Company’s option, either (a) an alternate base rate determined as the highest of (i) the base commercial lending rate of PNC Bank, National Association, (ii) the overnight federal funds rate plus 0.5% and (iii) Daily Simple SOFR (as defined in the Credit Agreement) plus 1% (such base rate to be subject to a 0% floor) or (b) the forward-looking term rate based on the secured overnight financing rate (“SOFR”) for the applicable interest period two business days before such interest period divided by a number equal to 1.00 minus any SOFR reserve percentage (such term rate to be subject to a 0% floor), plus, in each case of clauses (a) and (b) above, an applicable margin based upon availability of the revolving credit line, of 0.50% to 1.00% for swing loans and alternate base rate revolving loans and 1.50% to 2.00% for term SOFR revolving loans. Interest is payable monthly for alternate base rate loans and at the end of the applicable interest period for term SOFR loans (or quarterly if the applicable interest period is longer than three months). The Credit Agreement provides for the issuance of letters of credit, limited to the lesser of total capacity or $10.0 million. As of March 31, 2025 and March 31, 2024, we had no letters of credit outstanding under the Credit Agreement.

In addition to paying interest on outstanding borrowings under the Credit Agreement, the Company is required to pay a quarterly commitment fee to the lenders under the Credit Agreement equal to 0.25% per annum on the amount by which $200.0 million exceeds the daily unpaid balance of the Revolver plus any swing loans plus any undrawn amount of outstanding letters of credit under the Credit Agreement on any day.

The Company is subject to various financial and non-financial covenants under the Credit Agreement, including limitations on the incurrence of debt, granting of liens, investments, dividends, asset sales, and affiliate transactions and, if at any time an Event of Default (as defined in the Credit Agreement) has occurred and is continuing or if Excess Availability (as defined in the Credit Agreement) is less than 20%, a requirement to maintain a fixed charge coverage ratio of not less than 1.10 to 1.00. As defined by the Credit Agreement, the fixed charge coverage ratio represents the ratio of Adjusted EBITDA (as defined in the Credit Agreement), less certain capital expenditures, dividends and tax payments, to all scheduled debt payments during the applicable period.

The obligations under the Credit Agreement are secured by liens on substantially all of the assets of the Company and certain current and future subsidiaries of the Company and guarantees from certain current and future subsidiaries of the Company (the Company together with such subsidiaries, the “Loan Parties”). The Credit Agreement requires the Company to make mandatory prepayments on the outstanding amount of (i) the Credit Facility if any Loan Party issues debt other than certain permitted debt and (ii) the Revolver with the proceeds of received with respect to certain insurance or condemnation claims.

The Credit Agreement matures on February 27, 2030. The applicable margin under the Credit Agreement will range from 0.50% to 1.00% for swing loans and alternate base rate revolving loans and 1.50% to 2.00% for term SOFR revolving loans.

As of March 31, 2024, we had $16.5 million of borrowings outstanding under the Term Loan. As of March 31, 2025 and March 31, 2024, we had $15.6 million, and $16.0 million, respectively, of borrowings under the applicable revolving credit facility.

Non-GAAP Financial Measures

Adjusted EBITDA and Adjusted EBITDA Margin

We define Adjusted EBITDA (a non-GAAP measure) as net income before interest expense, income tax expense, depreciation and amortization, (gain)/loss on sale of assets and other expense, net, further adjusted to exclude certain items which we believe are not reflective of our ongoing performance or which are non-cash in nature. Management uses Adjusted EBITDA to assess the profitability of our business operations and to compare our operating performance to our competitors without regard to the impact of financing methods and capital structure and excluding costs that management believes do not reflect our ongoing operating performance, and for this reason we believe this measure will provide useful information to investors. We track Adjusted EBITDA on an absolute dollar basis and as a percentage of revenue, which we refer to as Adjusted EBITDA Margin.

The following table presents a reconciliation of the GAAP financial measure of net income (loss) and net income (loss) as a percentage of revenue to Adjusted EBITDA and Adjusted EBITDA Margin, respectively, for each of the periods indicated:

(in thousands)

(1) Primarily represents foreign currency exchange gain/loss, gain/loss on lease terminations, and other non-operating items.

(2) For the three months ended March 31, 2025, acquisition and integration costs consisted of legal, accounting, advisory fees, and other integration costs associated with the Merger, the acquisition of the remaining equity interest in DWS, and the acquisition of SCF. For the three months ended March 31, 2024, acquisition and integration costs consisted of legal, accounting, advisory fees, and other integration costs associated with the acquisition of ownership interest in DWS and facility shut-down and integration costs for Rubicon facilities after the acquisition. These acquisition and integration costs are one-time in nature and represent expenses that we do not view as normal operating expenses necessary to operate our business.

(3) Reflects the elimination of our percentage of interest expense, depreciation, amortization and other non-recurring expenses included within Equity method earnings relating to our unconsolidated investment in DWS.

(4) Reflects legal, consulting and accounting fees and expenses related to preparation of Legacy Innovex’s initial public offering.

Adjusted EBITDA for the three months ended March 31, 2025 was $45.9 million, an increase of $13.4 million from $32.5 million for the three months ended March 31, 2024. See “—Results of Operations” for discussion of the changes in account activity comprising of the Adjusted EBITDA balance for the comparable period.

Return on Capital Employed

We utilize Return on Capital Employed (“ROCE”) (a non-GAAP measure) to assess the effectiveness of our capital allocation over time and to compare our capital efficiency to our competitors, and for this reason we believe this measure will provide useful information to investors. We define ROCE as income from operations, before acquisition and integration costs and after tax (resulting in Adjusted Income from Operations, after tax) divided by average capital employed. Capital employed is defined as the combined values of debt and stockholders’ equity.

The following table presents a reconciliation of the GAAP financial measure of income from operations to adjusted income from operations, after tax to ROCE for each of the periods indicated:

(in thousands)

ROCE for the twelve months ended March 31, 2025 was 12%, a decrease from 20% for the twelve months ended March 31, 2024. The primary reason for the decrease was an increase in average capital employed of $325.0 million for the twelve months ended March 31, 2025 as compared to the twelve months ended March 31, 2024, driven by an increase in average equity of $353.8 million primarily due to the effect of the Merger and the acquisitions of DWS and SCF.

Free Cash Flow

We also utilize Free Cash Flow (a non-GAAP measure) to evaluate the cash generated by our operations and results of operations. We define Free Cash Flow as net cash provided by operating activities less capital expenditures, as presented in our condensed consolidated statements of cash flows. Management believes Free Cash Flow is useful because it demonstrates the cash that was available in the period that was in excess of our needs to fund our capital expenditures. Free Cash Flow does not represent our residual cash flow available for discretionary expenditures, as we have non-discretionary expenditures, including, but not limited to, principal payments required under the terms of our Credit Facility, which are not deducted in calculating Free Cash Flow.

The following table presents a reconciliation of the GAAP financial measure of net cash provided by operating activities to Free Cash Flow for each of the periods indicated:

(in thousands)

Free Cash Flow for the three months ended March 31, 2025 was $24.0 million, an increase of $13.9 million, from $10.2 million for the three months ended March 31, 2024. The change was driven by an $18.5 million increase in cash provided by operating activities as described under “Cash Flows” above, and a $4.6 million decrease in capital expenditures.

Off-Balance Sheet Arrangements

Currently, we do not have any off-balance sheet arrangements that have or are reasonably likely to have a material current or future effect on the Company’s financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, cash requirements or capital resources.

Business Segments

The Company operates in one reportable segment as our chief operating decision maker (“CODM”) assesses performance and allocates resources based on financial information presented at a consolidated level.

Critical Accounting Estimates

The discussion and analysis of our financial condition and results of operations is derived from the review of our consolidated financial statements prepared in accordance with GAAP, which includes our interpretation of accounting guidance and application through accounting policies. The preparation of financial statements requires the use of judgments and estimates. Our critical accounting estimates are described below to provide a better understanding of how we develop our assumptions and judgments about future events and related estimates and how they can impact our financial statements. A critical accounting estimate is one that requires our most difficult, subjective or complex judgments and assessments and is fundamental to our results of operations.

We base our estimates on historical experience and on various other assumptions we believe to be reasonable according to the current facts and circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. We believe the following are the critical accounting estimates used in the preparation of our consolidated financial statements, as well as the significant estimates and judgments affecting the application of these policies. This discussion and analysis should be read in conjunction with our consolidated financial statements and related notes included elsewhere in this Quarterly Report and with our financial statements and related notes thereto for the year ended December 31, 2024 included in our Annual Report.

Income Taxes

Deferred taxes are recorded using the asset and liability method, whereby tax assets and liabilities are determined based on the differences between the carrying amount and tax basis of assets and liabilities using enacted tax laws and rates expected to apply to taxable income in the year in which the differences are expected to reverse. We regularly evaluate the valuation allowances established for deferred tax assets for which future realization is uncertain. In assessing the realizability of deferred tax assets, we consider both positive and negative evidence, including scheduled reversals of deferred tax assets and liabilities, projected future taxable income, tax planning strategies and results of recent operations. If, based on the weight of available evidence, it is more likely than not that the deferred tax assets will not be realized, a valuation allowance is recorded. As of March 31, 2025, the valuation allowance for deferred tax assets was $53.3 million. The Company recognizes a tax benefit in our financial statements for an uncertain tax position only if management’s assessment is that the position is “more likely than not” (i.e., a likelihood greater than 50 percent) to be allowed by the tax jurisdiction based solely on the technical merits of the position.

The term “tax position” in the accounting standards for income taxes refers to a position in a previously filed tax return or a position expected to be taken in a future tax return that is reflected in measuring current or deferred income tax assets and liabilities for interim or annual periods. Our financial statements could be materially affected if: (i) our actual results differ significantly from our forecast estimates; (ii) there are future changes in enacted tax laws with retroactive application; or (iii) tax authorities do not agree with our application of the tax law to our circumstances and the matter is not ultimately resolved in our favor.

Business Combinations and Goodwill

We recognize and measure the assets acquired and liabilities assumed in a business combination based on their estimated fair values at the acquisition date. Goodwill represents the excess of purchase price paid by the Company over the fair market value of the net assets acquired. A bargain purchase occurs when the fair market value of net assets acquired is higher than the purchase price paid. Certain assumptions and estimates are employed in evaluating the fair value of assets acquired and liabilities assumed. These estimates may be affected by factors such as changing market conditions, technological advances in the oil and natural gas industry or changes in regulations governing that industry. The most significant assumptions requiring judgment involve identifying and estimating the fair value of inventory, fixed assets and intangible assets. To finalize purchase accounting for significant acquisitions, we utilize the services of independent valuation specialists to assist in the determination of the fair value of acquired assets.

Impairments

We evaluate our property and equipment and identifiable intangible assets for impairment whenever changes in circumstances indicate that the carrying amount of an asset group may not be recoverable or if there are potential indicators of impairment. We also perform an annual impairment analysis of goodwill as of December 31st, or whenever there is a triggering event that indicates an impairment loss may have been incurred. Estimating future net cash flows requires us to make judgments regarding long-term forecasts of future revenues and costs related to the assets subject to review. These forecasts are uncertain in that they require assumptions about our revenue growth, operating margins, capital expenditures, future market conditions and technological developments. In addition, if we are required to determine the fair value of our reporting units to test goodwill for impairment, we must apply estimates, assumptions, and judgment regarding revenue growth, operating margins, capital expenditures, future market conditions, weighted average costs of capital and terminal growth rate, and we must evaluate the metrics of a deemed set of comparable companies and market earnings multiples. Actual results may not align with these assumptions, and our expectations regarding future net cash flows may change such that a material impairment could result.

In the first quarter of 2025, the Company identified a significant decrease in the market price of long-lived assets related to land and buildings acquired as part of the Merger classified as held for sale. The Company determined the carrying values were not recoverable and exceeded their fair values. The Company then measured the impairment losses by comparing the book values with current third-party quoted market prices, resulting in a total impairment of $2.9 million.

We believe that the estimates and assumptions used in our impairment assessments are reasonable. However, if market conditions change dramatically, the impact on our forecasts and projections may be significant which could result in future impairments for our reportable units with long-term assets including goodwill.

Recent Accounting Pronouncements

Refer to Note 2. Summary of Significant Accounting Policies to our unaudited Condensed Consolidated Financial Statements for a discussion of the recent accounting pronouncements issued by the Financial Accounting Standards Board.

Our financial position is exposed to a variety of risks, including commodity price risk, foreign currency exchange rate risk, and interest rate risk. 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.

Commodity Price Risk

The market for our products and services is indirectly exposed to fluctuations in the prices of oil and natural gas to the extent such fluctuations impact drilling and completion activity levels and thus impact the activity levels of our customers in the exploration and production industries. Additionally, because we do not sell our products under long-term contracts, we believe that we are particularly exposed to short-term fluctuations in the prices of oil and natural gas.

Foreign Currency Exchange Rate Risk

A portion of our revenues are derived internationally and, accordingly, our competitiveness and financial results may be impacted by foreign currency fluctuations where revenues and costs are denominated in local currencies rather than U.S. dollars. See “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2024 filed with the SEC on March 3, 2025 for further details on our foreign currency exchange risk.

Interest Rate Risk

We are primarily exposed to interest rate risk through the Revolver. As of March 31, 2025, we had variable rate debt outstanding consisting of $15.6 million under the Revolver which bear interest at an adjusted SOFR rate plus an applicable margin or at the alternate base rate plus an applicable margin.

Evaluation of Disclosure Controls and Procedures

Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act as of the end of the fiscal quarter ended March 31, 2025. Our disclosure controls and procedures are designed to provide reasonable assurance that information required to be disclosed in our reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

As described in Item 9A of our Annual Report, management excluded (1) Legacy Innovex and (2) DWS from its assessment of the effectiveness of the Company’s internal control over financial reporting and disclosure controls and procedures as of December 31, 2024. Our evaluation of disclosure controls and procedures as of March 31, 2025 excludes an assessment of those disclosure controls and procedures of Legacy Innovex and DWS that are subsumed by internal control over financial reporting.

Based on this evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that as of March 31, 2025, our disclosure controls and procedures were effective at the reasonable assurance level.

Remediation of Previously Disclosed Material Weaknesses

As disclosed in our Annual Report, we previously identified two material weaknesses for Legacy Innovex as we did not design and maintain effective controls related to the accounting for income taxes at a sufficient level of precision or rigor and failed to employ personnel with adequate expertise to identify and evaluate complex income tax accounting matters.

Our management has implemented remediation steps to address these material weaknesses. Specifically, we have (i) designed and implemented new controls for the preparation and review of the income tax provision, related income tax assets and liabilities and the corresponding valuation allowance, and the income tax disclosures in our consolidated financial statements (ii) engaged an accounting advisory firm to assist with the documentation, evaluation, remediation, and testing of the relevant internal controls related to the accounting for incomes taxes; and (iii) hired additional tax personnel, including an outside accounting advisory firm with adequate expertise to identify and evaluate complex income tax accounting matters.

During the first quarter of our current fiscal year, we completed our testing of the operating effectiveness and concluded that the material weaknesses have been remediated.

Changes in Internal Control Over Financial Reporting

As described in Part II, Item 9A of our Annual Report, the Merger was completed on September 6, 2024, and represented a change in internal control over financial reporting. Management continues to consolidate and integrate the internal control over financial reporting. The ongoing integration activities have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting during the quarter ended March 31, 2025.

Except as described above, there were no other changes in our internal control over financial reporting identified in connection with the evaluation required by Rule 13a-15(d) and 15d-15(d) of the Exchange Act that occurred during the quarter ended March 31, 2025 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

In addition to the other information set forth in this Quarterly Report, you should carefully consider the risks discussed in our Annual Report and those set forth from time to time in our other filings with the SEC. Other than the risk factor set forth below, there have been no material changes in risk factors from those reported in our Annual Report. The risks described within this Quarterly Report and our Annual Report are not the only risks facing us. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially and adversely affect our business, financial condition or future results.

U.S. trade policy, including the implementation of tariffs, could adversely affect the Company’s business and financial results.

The U.S. administration has implemented numerous tariffs on imported materials and products and, in response, various countries have imposed new, or increased existing, tariffs on imports. These tariffs, to the extent that they continue to be imposed, and any new or increased tariffs, may increase the cost of imported materials used by our suppliers and in our products. Tariffs imposed by other countries may apply to our products sold internationally. The ultimate impact of the announced tariffs and any future tariffs will depend on various factors, including the extent to which such tariffs are implemented, the timing of implementation and the amount, scope and nature of such tariffs. If we are unable to mitigate the impact of tariffs, including through product pricing and supply arrangements, our business and financial results could be adversely affected.

In addition, tariffs or other trade restrictions may lead to continuing uncertainty and volatility in U.S. and global financial and economic conditions and commodity markets, declining consumer confidence, significant inflation and diminished expectations for the economy, and ultimately reduced demand for our products and services and the demand for crude oil and gas. Such conditions could have a material adverse impact on our business, results of operations and cash flows.