OIL STATES INTERNATIONAL, INC 10-Q

ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations The following discussion and analysis should be read together with our condensed consolidated financial statements and notes to those statements included elsewhere in this Quarterly Report on Form 10-Q and our consolidated financial statements and notes to those statements included in our 2022 Annual Report on Form 10-K in order to understand factors, such as charges and credits, financing transactions and changes in tax regulations, which may impact comparability from period to period. We provide a broad range of manufactured products and services to customers in the energy, industrial and military sectors through our Offshore/Manufactured Products, Well Site Services and Downhole Technologies segments. Demand for our products and services is cyclical and substantially dependent upon activity levels in the oil and gas industry, particularly our customers' willingness to invest capital in the exploration for and development of crude oil and natural gas reserves. Our customers' capital spending programs are generally based on their cash flows and their outlook for near-term and long-term commodity prices, making demand for our products and services sensitive to expectations regarding future crude oil and natural gas prices, as well as economic growth, commodity demand and estimates of resource production and regulatory pressures related to environmental, social and governance ("ESG") considerations. 19 Table of Contents Recent Developments Brent and West Texas Intermediate ("WTI") crude oil and natural gas pricing trends were as follows: Average Price (1) for quarter ended Average Price (1) for year ended December 31 Year March 31 June 30 September 30 December 31 Brent Crude (per bbl) 2023 $ 81.01 $ 77.99 $ 86.65 2022 100.87 113.84 100.71 $ 88.77 $ 100.99 WTI Crude (per bbl) 2023 $ 75.91 $ 73.54 $ 82.25 2022 95.18 108.83 93.06 $ 82.79 $ 94.90 Henry Hub Natural Gas (per MMBtu) 2023 $ 2.64 $ 2.16 $ 2.59 2022 4.67 7.50 8.03 $ 5.55 $ 6.45 ________________ (1) Source: U.S. Energy Information Administration (spot prices). On October 20, 2023, Brent crude oil, WTI crude oil and natural gas spot prices closed at $93.72 per barrel, $89.12 per barrel and $2.60 per MMBtu, respectively. Additionally, as presented in more detail below, the U.S. drilling rig count reported on October 20, 2023 was 624 rigs – 4% below the third quarter 2023 average. In February 2023, we repaid the $17.3 million principal amount, plus accrued interest, outstanding under our 2023 Notes (as defined below). Additionally, our Board of Directors authorized a $25.0 million stock repurchase plan, which extends through February 2025. During the first nine months of 2023, $3.0 million of share repurchases were made under this authorization. Overview Current and expected future pricing for WTI crude oil and natural gas and inflationary costs increases, along with expectations regarding the regulatory environment in the regions in which we operate, are factors that will continue to influence our customers' willingness to invest capital in their businesses. Expectations for the longer-term price for Brent crude oil will continue to influence our customers' spending related to global offshore drilling and development and, thus, a significant portion of the activity of our Offshore/Manufactured Products segment. Crude oil prices and levels of demand for crude oil are likely to remain highly volatile due to numerous factors, including: geopolitical conflicts in Europe and the Middle East, along with associated international tensions; the perceived risk of a global economic recession; global uncertainties related to disruptions in the banking sector; domestic or international crude oil production; changes in governmental rules and regulations; sanctions; the willingness of operators to invest capital in the exploration for and development of resources; use of alternative fuels; improved vehicle fuel efficiency; timing of capital investments in alternative energy sources; a more sustained movement to electric vehicles; and the potential for ongoing supply/demand imbalances. U.S. drilling, completion and production activity and, in turn, our financial results, are sensitive to near-term fluctuations in commodity prices, particularly WTI crude oil prices, given the short-term, call-out nature of our U.S. operations. Customer spending in the natural gas shale plays has moderated over the last ten years due to technological advancements that have led to significant amounts of natural gas being produced from prolific basins in the Northeastern United States and from associated gas produced from the drilling and completion of unconventional oil wells in the United States. Our Offshore/Manufactured Products segment provides technology-driven, highly-engineered products and services for offshore oil and natural gas production systems and facilities globally, as well as certain products and services to the offshore and land-based drilling and completion markets. This segment also produces a variety of products for use in industrial, military and other applications outside the traditional energy industry. Additionally, we are investing in research and product development related to, and have been awarded select contracts and are bidding on additional projects that facilitate, the development of alternative energy sources, including offshore wind and deepsea mineral gathering opportunities. This segment is particularly influenced by global spending on deepwater drilling and production, which is primarily driven by our customers' longer-term commodity demand forecasts and outlook for crude oil and natural gas prices. Approximately 65% of Offshore/Manufactured Products segment sales in the first nine months of 2023 were driven by our customers' capital spending for 20 Table of Contents products and services used in exploratory and developmental drilling, greenfield offshore production infrastructure, and subsea pipeline tie-in and repair system applications, along with upgraded equipment for existing offshore drilling rigs and other vessels (referred to herein as "project-driven products and services"). Deepwater oil and gas development projects typically involve significant capital investments and multi-year development plans. Such projects are generally undertaken by larger exploration, field development and production companies (primarily international oil companies and state-run national oil companies) using relatively conservative crude oil and natural gas pricing assumptions. Given the long lead times associated with field development, we believe some of these deepwater projects, once approved for development, are generally less susceptible to change based on short-term fluctuations in the price of crude oil and natural gas. Backlog reported by our Offshore/Manufactured Products segment increased to $348 million as of September 30, 2023 from $308 million as of December 31, 2022 and $258 million as of September 30, 2022. Bookings totaled $129 million in the third quarter of 2023, yielding a book-to-bill ratio of 1.2x (1.2x year-to-date). The following table sets forth backlog as of the dates indicated (in millions). Backlog as of Year March 31 June 30 September 30 December 31 2023 $ 326 $ 338 $ 348 2022 265 241 258 $ 308 2021 226 214 249 260 Our Well Site Services segment provides completion services and, to a much lesser extent, land drilling services, in the United States (including the Gulf of Mexico) and internationally. U.S. drilling and completion activity and, in turn, our Well Site Services results, are sensitive to near-term fluctuations in commodity prices, particularly WTI crude oil prices, given the short-term, call-out nature of its operations. We primarily supply equipment and service personnel utilized in the completion of and initial production from new and recompleted wells in our U.S. operations, which are dependent primarily upon the level and complexity of drilling, completion and workover activity in our areas of operations. Well intensity and complexity have increased with the continuing transition to multi-well pads, the drilling of longer lateral wells and increased downhole pressures, along with the increased number of frac stages completed in horizontal wells. Our Downhole Technologies segment provides oil and gas perforation systems, downhole tools and services in support of completion, intervention, wireline and well abandonment operations. This segment designs, manufactures and markets its consumable engineered products to oilfield service as well as exploration and production companies. Product and service offerings for this segment include innovations in perforation technology through patented and proprietary systems combined with advanced modeling and analysis tools. This expertise has led to the optimization of perforation hole size, depth, and quality of tunnels, which are key factors for maximizing the effectiveness of hydraulic fracturing. Additional offerings include proprietary frac plug and toe valve products, which are focused on zonal isolation for hydraulic fracturing of horizontal wells, and a broad range of consumable products, such as setting tools and bridge plugs, that are used in completion, intervention and decommissioning applications. Demand drivers for the Downhole Technologies segment include continued trends toward longer lateral lengths, increased frac stages and more perforation clusters to target increased unconventional well productivity. Demand for our completion-related products and services within each of our segments is highly correlated to changes in the total number of wells drilled in the United States, total footage drilled, the number of drilled wells that are completed and changes in the drilling rig count. The following table sets forth a summary of the U.S. and international drilling rig count, as measured by Baker Hughes Company, as of and for the periods indicated. As of October 20, 2023 Average for the Three Months Ended September 30, Nine Months Ended September 30, 2023 2022 2023 2022 United States Rig Count: Land – Oil 477 499 581 543 543 Land – Natural gas and other 122 128 160 143 145 Offshore 25 22 20 21 18 624 649 761 707 706 The U.S. energy industry is primarily focused on crude oil and liquids-rich exploration and development activities in U.S. shale plays utilizing horizontal drilling and completion techniques. As of September 30, 2023, oil-directed drilling accounted for 81% of the total U.S. rig count – with the balance largely natural gas related. We use a variety of domestically produced and imported raw materials and component products, including steel, in the manufacture of our products. The United States has imposed tariffs on a variety of imported products, including steel and 21 Table of Contents aluminum. In response to the U.S. tariffs on steel and aluminum, the European Union and several other countries, including Canada and China, have threatened and/or imposed retaliatory tariffs. In addition, in response to Russia's invasion of Ukraine, governments in the European Union, the United States, the United Kingdom, Switzerland and other countries have enacted sanctions against Russia and Russian interests. The effect of these sanctions and tariffs and the application and interpretation of existing trade agreements and customs, anti-dumping and countervailing duty regulations continue to evolve, and we continue to monitor these matters. If we encounter difficulty in procuring these raw materials and component products, or if the prices we have to pay for these products increase and we are unable to pass corresponding cost increases on to our customers, our financial position, cash flows and results of operations could be adversely affected. Furthermore, uncertainty with respect to potential costs in the drilling and completion of oil and gas wells could cause our customers to delay or cancel planned projects which, if this occurred, would adversely affect our financial position, cash flows and results of operations. Other factors that can affect our business and financial results include but are not limited to: the general global economic environment (including disruptions in the banking sector); competitive pricing pressures; public health crises; natural disasters; labor market constraints; supply chain disruptions; inflation in wages, materials, parts, equipment and other costs; climate-related and other regulatory changes; geopolitical conflicts and tensions; and changes in tax laws in the United States and international markets. We continue to monitor the global economy, the prices of and demand for crude oil and natural gas, and the resultant impact on the capital spending plans and operations of our customers in order to plan and manage our business. Human Capital For more information on our health and safety, diversity and other workforce policies, please see "Part I, Item 1. Business – Human Capital" in our Annual Report on Form 10-K for the year ended December 31, 2022. 22 Table of Contents Selected Financial Data This selected financial data should be read in conjunction with our Unaudited Condensed Consolidated Financial Statements and related notes included in "Part I, Item 1. Financial Statements" of this Quarterly Report on Form 10-Q and in "Part II, Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" and our Consolidated Financial Statements and related notes included in "Part II, Item 8. Financial Statements and Supplementary Data" of our Annual Report on Form 10-K for the year ended December 31, 2022 in order to understand factors which may impact comparability of the selected financial data. We revised our presentation of supplemental disclosure of disaggregated revenue information in the second quarter of 2023. Prior-period disclosures of disaggregated revenue information presented within this discussion and analysis were conformed with the current-period presentation. Unaudited Consolidated Results of Operations The following summarizes our consolidated results of operations for the three and nine months ended September 30, 2023 and 2022 (in thousands, except per share amounts): Three Months Ended September 30, Nine Months Ended September 30, 2023 2022 Variance 2023 2022 Variance Revenues: Products $ 102,636 $ 99,743 $ 2,893 $ 295,106 $ 284,537 $ 10,569 Services 91,653 89,651 2,002 278,911 250,735 28,176 194,289 189,394 4,895 574,017 535,272 38,745 Costs and expenses: Product costs 80,188 81,576 (1,388) 231,524 225,765 5,759 Service costs 70,239 69,723 516 211,668 194,294 17,374 Cost of revenues (exclusive of depreciation and amortization expense presented below) 150,427 151,299 (872) 443,192 420,059 23,133 Selling, general and administrative expenses 24,241 23,374 867 71,785 70,964 821 Depreciation and amortization expense 15,416 16,413 (997) 46,209 51,469 (5,260) Other operating expense (income), net (1) (1,985) (6,750) 4,765 (2,503) (6,852) 4,349 188,099 184,336 3,763 558,683 535,640 23,043 Operating income (loss) 6,190 5,058 1,132 15,334 (368) 15,702 Interest expense, net (1,928) (2,637) 709 (6,378) (7,947) 1,569 Other income, net 186 491 (305) 672 1,892 (1,220) Income (loss) before income taxes 4,448 2,912 1,536 9,628 (6,423) 16,051 Income tax provision (236) (769) 533 (2,700) (6,002) 3,302 Net income (loss) $ 4,212 $ 2,143 $ 2,069 $ 6,928 $ (12,425) $ 19,353 Net income (loss) per share: Basic $ 0.07 $ 0.03 $ 0.11 $ (0.20) Diluted 0.07 0.03 0.11 (0.20) Weighted average number of common shares outstanding: Basic 62,651 62,674 62,760 61,292 Diluted 63,060 62,676 63,135 61,292 _______________ (1) In the three and nine months ended September 30, 2023, we recognized facility consolidation charges of $1.6 million associated with the Offshore/Manufactured Products segment's ongoing consolidation and relocation of certain manufacturing and service locations. In the three and nine months ended September 30, 2022, we recognized a gain of $6.1 million associated with the settlement of outstanding litigation against certain service providers. 23 Table of Contents Unaudited Segment Results of Operations We manage and measure our business performance in three distinct operating segments: Offshore/Manufactured Products, Well Site Services and Downhole Technologies. Supplemental financial information by operating segment for the three and nine months ended September 30, 2023 and 2022 is summarized below (in thousands): Three Months Ended September 30, Nine Months Ended September 30, 2023 2022 Variance 2023 2022 Variance Revenues: Offshore/Manufactured Products Project-driven: Products $ 45,527 $ 38,911 $ 6,616 $ 116,869 $ 113,853 $ 3,016 Services 30,391 23,421 6,970 79,867 71,714 8,153 75,918 62,332 13,586 196,736 185,567 11,169 Military and other products 7,195 9,995 (2,800) 22,157 23,104 (947) Short-cycle products 27,930 23,710 4,220 84,435 67,945 16,490 111,043 96,037 15,006 303,328 276,616 26,712 Well Site Services 59,831 60,509 (678) 191,425 163,500 27,925 Downhole Technologies 23,415 32,848 (9,433) 79,264 95,156 (15,892) $ 194,289 $ 189,394 $ 4,895 $ 574,017 $ 535,272 $ 38,745 Operating income (loss): Offshore/Manufactured Products (1) $ 17,804 $ 13,373 $ 4,431 $ 40,147 $ 33,010 $ 7,137 Well Site Services 3,285 2,359 926 14,983 (435) 15,418 Downhole Technologies (4,118) (342) (3,776) (8,173) (3,332) (4,841) Corporate (10,781) (10,332) (449) (31,623) (29,611) (2,012) $ 6,190 $ 5,058 $ 1,132 $ 15,334 $ (368) $ 15,702 _______________ (1) In the three and nine months ended September 30, 2023, we recognized facility consolidation charges of $1.6 million associated with the Offshore/Manufactured Products segment's ongoing consolidation and relocation of certain manufacturing and service locations. In the three and nine months ended September 30, 2022, we recognized a gain of $6.1 million associated with the settlement of outstanding litigation against certain service providers. 24 Table of Contents Three Months Ended September 30, 2023 Compared to Three Months Ended September 30, 2022 We reported net income for the three months ended September 30, 2023 of $4.2 million, or $0.07 per share, which included facility consolidation charges of $1.6 million ($1.3 million after-tax, or $0.02 per share). These results compare to net income for the three months ended September 30, 2022 of $2.1 million, or $0.03 per share, which included a gain of $6.1 million ($4.6 million after-tax, or $0.07 per share) recognized in connection with the favorable settlement of a litigation matter. Our reported results in the third quarter of 2023 reflect continued growth in international offshore-project activity and associated backlog conversion, partially offset by the impact of an industry-wide decline in U.S. well completions – which has been ongoing since the start of 2023. Revenues. Consolidated total revenues in the third quarter of 2023 increased $4.9 million, or 3%, from the third quarter of 2022. Consolidated product revenues in the third quarter of 2023 increased $2.9 million, or 3%, from the third quarter of 2022, driven primarily by the conversion of production facility products from backlog into revenue. Consolidated service revenues in the third quarter of 2023 increased $2.0 million, or 2%, from the third quarter of 2022 due to increased customer spending for project-driven services, partially offset by a decrease in U.S. customer demand for short-cycle services. The following table provides supplemental disaggregated revenue from contracts with customers by operating segment for the three months ended September 30, 2023 and 2022 (in thousands): Offshore/ Manufactured Products Well Site Services Downhole Technologies Total Three Months Ended September 30 2023 2022 2023 2022 2023 2022 2023 2022 Project-driven: Products $ 45,527 $ 38,911 $ — $ — $ — $ — $ 45,527 $ 38,911 Services 30,391 23,421 — — — — 30,391 23,421 Total project-driven 75,918 62,332 — — — — 75,918 62,332 Military and other products 7,195 9,995 — — — — 7,195 9,995 Short-cycle: Products 27,930 23,710 — — 21,984 27,127 49,914 50,837 Services — — 59,831 60,509 1,431 5,721 61,262 66,230 Total short-cycle 27,930 23,710 59,831 60,509 23,415 32,848 111,176 117,067 $ 111,043 $ 96,037 $ 59,831 $ 60,509 $ 23,415 $ 32,848 $ 194,289 $ 189,394 Percentage of total revenue by type - Products 73 % 76 % — % — % 94 % 83 % 53 % 53 % Services 27 % 24 % 100 % 100 % 6 % 17 % 47 % 47 % Cost of Revenues (exclusive of Depreciation and Amortization Expense). Our consolidated total cost of revenues (exclusive of depreciation and amortization expense) in the third quarter of 2023 decreased $0.9 million, or 1%, compared to the level reported in the third quarter of 2022. Consolidated product costs in the third quarter of 2023 decreased $1.4 million, or 2%, from the third quarter of 2022 due to a favorable shift in product sales mix. Consolidated service costs in the third quarter of 2023 increased $0.5 million, or 1%, from the third quarter of 2022, due primarily to the reported revenue growth. Selling, General and Administrative Expense. Selling, general and administrative expense in the third quarter of 2023 increased $0.9 million, or 4%, from the level reported in the third quarter of 2022. Depreciation and Amortization Expense. Depreciation and amortization expense decreased $1.0 million, or 6%, in the third quarter of 2023 compared to the prior-year quarter, reflective of certain intangible assets reaching the end of their economic life in 2022. Note 10, "Segments and Related Information," to our Unaudited Condensed Consolidated Financial Statements presents depreciation and amortization expense by segment. Other Operating Income, Net. In the third quarter of 2023, other operating income, net included gains on disposals of assets totaling $2.8 million, partially offset by charges of $1.6 million recognized in connection with our ongoing consolidation of certain manufacturing and service locations within our Offshore/Manufactured Products segment. Net other operating income for the third quarter of 2022 included a gain of $6.1 million recognized in connection with the settlement of outstanding 25 Table of Contents litigation against certain service providers within our Offshore/Manufactured Products segment and $0.4 million in gains on disposals of assets. Operating Income, Net. Our consolidated operating income was $6.2 million in the third quarter of 2023, which included the $1.6 million in facility consolidation charges reported within other operating income, net as discussed above. This compares to third quarter 2022 consolidated operating income of $5.1 million, which included the $6.1 million gain reported within other operating income, net, as discussed above. Interest Expense, Net. Net interest expense totaled $1.9 million in the third quarter of 2023, which compares to $2.6 million in the same period of 2022. Interest expense as a percentage of total debt outstanding was approximately 7% in the third quarter of 2023, compared to 6% in the third quarter of 2022. Income Tax. Income tax expense for the three months ended September 30, 2023 was calculated using a discrete approach. This methodology was used because changes in our results of operations and non-deductible expenses can materially impact the estimated annual effective tax rate. For the three months ended September 30, 2023, our income tax provision was $0.2 million on pre-tax income of $4.4 million, which included certain non-deductible expenses, discrete tax items and a reduction in valuation allowances recorded against deferred tax assets. This compares to an income tax provision of $0.8 million on a pre-tax income of $2.9 million for the three months ended September 30, 2022. Other Comprehensive Loss. Reported comprehensive loss is the sum of reported net income and other comprehensive loss. Other comprehensive loss was $5.7 million in the third quarter of 2023 compared to comprehensive loss of $11.9 million in the third quarter of 2022 due to fluctuations in currency exchange rates compared to the U.S. dollar which are used to translate certain of the international operations of our operating segments. For the three months ended September 30, 2023 and 2022, currency translation adjustments recognized as a component of other comprehensive loss were primarily attributable to the United Kingdom and Brazil. During the third quarter of both 2023 and 2022, the exchange rates for both the British pound and the Brazilian real weakened compared to the U.S. dollar. Segment Operating Results Offshore/Manufactured Products Revenues. Our Offshore/Manufactured Products segment revenues increased $15.0 million, or 16%, in the third quarter of 2023 compared to the third quarter of 2022 due primarily to the timing of conversion of production facility products from backlog into revenue as well as higher service and short-cycle product sales. Operating Income. Our Offshore/Manufactured Products segment reported operating income of $17.8 million in the third quarter of 2023, which included the $1.6 million in facility consolidation charges, compared to operating income in the third quarter of 2022 of $13.4 million, which included a $6.1 million gain recognized in connection with the settlement of outstanding litigation. Excluding the charges and prior-year gain, operating income increased $12.2 million year-over-year driven primarily by the reported revenue growth and a favorable shift in product sales mix. Backlog. Backlog in our Offshore/Manufactured Products segment totaled $348 million as of September 30, 2023, with third quarter 2023 bookings of $129 million and a quarterly book-to-bill ratio of 1.2x. Well Site Services Revenues. Our Well Site Services segment revenues decreased $0.7 million, or 1%, in the third quarter of 2023 compared to the prior-year period, driven primarily by lower U.S. customer activity levels and competitive market conditions. Operating Income. Our Well Site Services segment reported operating income of $3.3 million in the third quarter of 2023, compared to operating income of $2.4 million in the third quarter of 2022. The segment's operating results improved $0.9 million from the prior-year period, due primarily to a favorable shift in service mix and a $0.4 million decrease in depreciation and amortization expense, partially offset by increased labor, material and other costs. 26 Table of Contents Downhole Technologies Revenues. Our Downhole Technologies segment revenues decreased $9.4 million, or 29%, in the third quarter of 2023 from the prior-year period, driven primarily by lower U.S. customer activity levels and competitive market conditions. Operating Loss. Our Downhole Technologies segment reported an operating loss of $4.1 million in the third quarter of 2023, which compared to an operating loss of $0.3 million in the prior-year period. Operating loss increased $3.8 million year-over-year due primarily to the decline in reported revenue, lower manufacturing volumes and higher labor, material and other costs. Corporate Operating Loss. Corporate expenses increased $0.4 million, or 4%, in the third quarter of 2023 from the prior-year period. 27 Table of Contents Nine Months Ended September 30, 2023 Compared to Nine Months Ended September 30, 2022 We reported net income for the nine months ended September 30, 2023 of $6.9 million, or $0.11 per share, which included facility consolidation charges of $1.6 million ($1.3 million after-tax, or $0.02 per share). These results compare to a net loss for the nine months ended September 30, 2022 of $12.4 million, or $0.20 per share, which included a gain of $6.1 million ($4.6 million after-tax, or $0.07 per share) recognized in connection with the settlement of a litigation matter. Increased capital investments by our customers, together with our internal cost control and strict capital discipline measures and other corporate actions, resulted in significant improvements to our consolidated results in 2023. The favorable impact of continued growth in international offshore-project activity and associated backlog conversion was partially offset by the impact of an industry-wide decline in U.S. well completions – which has been ongoing since the start of 2023. Revenues. Consolidated total revenues in the first nine months of 2023 increased $38.7 million, or 7%, from the first nine months of 2022. Consolidated product revenues in the first nine months of 2023 increased $10.6 million, or 4%, from the first nine months of 2022, driven primarily by higher customer demand for short-cycle products. Consolidated service revenues in the first nine months of 2023 increased $28.2 million, or 11%, from the first nine months of 2022 due primarily to increased customer spending in the U.S. shale play regions in the first half of 2023. The following table provides supplemental disaggregated revenue from contracts with customers by operating segment for the nine months ended September 30, 2023 and 2022 (in thousands): Offshore/ Manufactured Products Well Site Services Downhole Technologies Total Nine Months Ended September 30 2023 2022 2023 2022 2023 2022 2023 2022 Project-driven: Products $ 116,869 $ 113,853 $ — $ — $ — $ — $ 116,869 $ 113,853 Services 79,867 71,714 — — — — 79,867 71,714 Total project-driven 196,736 185,567 — — — — 196,736 185,567 Military and other products 22,157 23,104 — — — — 22,157 23,104 Short-cycle: Products 84,435 67,945 — — 71,645 79,635 156,080 147,580 Services — — 191,425 163,500 7,619 15,521 199,044 179,021 Total short-cycle 84,435 67,945 191,425 163,500 79,264 95,156 355,124 326,601 $ 303,328 $ 276,616 $ 191,425 $ 163,500 $ 79,264 $ 95,156 $ 574,017 $ 535,272 Percentage of total revenue by type - Products 74 % 74 % — % — % 90 % 84 % 51 % 53 % Services 26 % 26 % 100 % 100 % 10 % 16 % 49 % 47 % Cost of Revenues (exclusive of Depreciation and Amortization Expense). Our consolidated total cost of revenues (exclusive of depreciation and amortization expense) increased $23.1 million, or 6%, in the first nine months of 2023 compared to the first nine months of 2022. Consolidated product costs in the first nine months of 2023 increased $5.8 million, or 3%, compared to the first nine months of 2022 due primarily to the reported revenue growth as well as higher material, transportation, labor and other costs. Consolidated service costs in the first nine months of 2023 increased $17.4 million, or 9%, compared to the first nine months of 2022, due primarily to the impact of higher revenue levels and increased labor and other costs. Selling, General and Administrative Expense. Selling, general and administrative expense in the first nine months of 2023 increased $0.8 million, or 1%, from the first nine months of 2022. Depreciation and Amortization Expense. Depreciation and amortization expense decreased $5.3 million, or 10%, in the first nine months of 2023 compared to the prior-year period, reflective of certain intangible assets reaching the end of their economic life in 2022 and reduced capital investments made in our Well Site Services segment in recent years. Note 10, "Segments and Related Information," to our Unaudited Condensed Consolidated Financial Statements presents depreciation and amortization expense by segment. 28 Table of Contents Other Operating Income, Net. In the first nine months of 2023, other operating income, net included gains on disposals of assets totaling $3.3 million, partially offset by charges of $1.6 million recognized in connection with our ongoing consolidation of certain manufacturing and service locations within our Offshore/Manufactured Products segment. Net other operating income for the first nine months of 2022 included a gain of $6.1 million recognized in connection with the settlement of outstanding litigation against certain service providers within our Offshore/Manufactured Products segment and $1.5 million in gains on disposals of assets. Operating Income (Loss). Our consolidated operating income was $15.3 million in the first nine months of 2023, which included the $1.6 million in facility consolidation charges reported within other operating income, net. This compares to a consolidated operating loss of $0.4 million, which included the $6.1 million gain reported within other operating income, net, recognized in the first nine months of 2022. Interest Expense, Net. Net interest expense totaled $6.4 million in the first nine months of 2023, which compares to $7.9 million in the first nine months of 2022. Interest expense as a percentage of total debt outstanding was approximately 7% in the first nine months of 2023, compared to 6% in the first nine months of 2022. Income Tax. Income tax expense for the first nine months of 2023 was calculated using a discrete approach. This methodology was used because changes in our results of operations and non-deductible expenses can materially impact the estimated annual effective tax rate. For the first nine months of 2023, our income tax provision was $2.7 million on pre-tax income of $9.6 million, which included certain non-deductible expenses, discrete tax items and a reduction in valuation allowances recorded against deferred tax assets. This compares to an income tax provision of $6.0 million on a pre-tax loss of $6.4 million for the first nine months of 2022, which was negatively impacted by valuation allowances recorded against deferred tax assets as well as certain non-deductible expenses and discrete tax items. Other Comprehensive Income (Loss). Reported comprehensive income (loss) is the sum of reported net income (loss) and other comprehensive income (loss). Other comprehensive income was $1.7 million in the first nine months of 2023 compared to comprehensive loss of $23.8 million in the first nine months of 2022 due to fluctuations in foreign currency exchange rates compared to the U.S. dollar for certain of the international operations of our operating segments. For the first nine months of 2023 and 2022, currency translation adjustments recognized as a component of other comprehensive income (loss) were primarily attributable to the United Kingdom and Brazil. During the first nine months of 2023, the exchange rates for the British pound and the Brazilian real strengthened compared to the U.S. dollar. During the first nine months of 2022, the exchange rate for the British pound weakened compared to the U.S. dollar, while the Brazilian real strengthened compared to the U.S. dollar. Segment Operating Results Offshore/Manufactured Products Revenues. Our Offshore/Manufactured Products segment revenues increased $26.7 million, or 10%, in the first nine months of 2023 compared to the first nine months of 2022 due primarily to increased demand for short-cycle products and offshore-project driven services. Operating Income. Our Offshore/Manufactured Products segment reported operating income of $40.1 million in the first nine months of 2023, which included the $1.6 million in facility consolidation charges. This compares to operating income of $33.0 million, which included a $6.1 million gain recognized in connection with the settlement of outstanding litigation, in the first nine months of 2022. Excluding the charges and prior-year gain, operating income increased $14.9 million year-over-year due primarily to the segment's reported revenue growth and lower bad debt expense, partially offset by the impact of higher material, transportation, labor and other costs. Backlog. Backlog in our Offshore/Manufactured Products segment totaled $348 million as of September 30, 2023 compared to $308 million as of December 31, 2022. Bookings during the first nine months of 2023 totaled $353 million, yielding a year-to-date book-to-bill ratio of 1.2x. Well Site Services Revenues. Our Well Site Services segment revenues increased $27.9 million, or 17%, in the first nine months of 2023 compared to the first nine months of 2022, driven primarily by higher U.S. customer activity levels during the first half of 2023. 29 Table of Contents Operating Income (Loss). Our Well Site Services segment reported operating income of $15.0 million in the first nine months of 2023, compared to an operating loss of $0.4 million in the first nine months of 2022. The segment's operating results improved $15.4 million from the prior-year period, due to the reported revenue growth and a $3.0 million decrease in depreciation and amortization expense, partially offset by increased labor, material and other costs. Downhole Technologies Revenues. Our Downhole Technologies segment revenues decreased $15.9 million, or 17%, in the first nine months of 2023 from the first nine months of 2022 due primarily to lower U.S. customer demand for perforating products. Operating Loss. Our Downhole Technologies segment reported an operating loss of $8.2 million in the first nine months of 2023, compared to an operating loss of $3.3 million reported in the first nine months of 2022. This year-over-year increase in operating loss is due primarily to the reported decrease in the segment's revenue as well as increased labor, material and other costs. Corporate Operating Loss. Corporate expenses in the first nine months of 2023 increased $2.0 million, or 7%, from the first nine months of 2022, due primarily to higher personnel and marketing costs. 30 Table of Contents Liquidity, Capital Resources and Other Matters Our primary liquidity needs are to fund operating and capital expenditures, new product development and general working capital needs. In addition, capital has been used to fund strategic business acquisitions, repay debt and fund share repurchases. Our primary sources of funds are cash flow from operations, proceeds from borrowings under our credit facilities and, less frequently, capital markets transactions. Operating Activities Cash flows from operations totaled $52.4 million during the first nine months of 2023, compared to $19.0 million provided by operations during the first nine months of 2022. During the first nine months of 2023, $3.2 million was used to fund net working capital increases, with an activity-driven increase in inventories and the payment of accrued 2022 short-and long-term cash incentives in the first quarter of 2023 substantially offset by the favorable impact of a decrease in accounts receivable and an increase in deferred revenues. During the first nine months of 2022, $27.5 million was used to fund net working capital increases, primarily due to increases in accounts receivable and inventories driven by higher activity levels. Investing Activities Net cash used in investing activities during the first nine months of 2023 totaled $19.1 million, compared to $19.3 million used in investing activities during the first nine months of 2022. Capital expenditures totaled $23.4 million and $13.3 million during the first nine months of 2023 and 2022, respectively. These investments were partially offset by proceeds from the sale of property and equipment of $4.4 million and $2.2 million during the first nine months of 2023 and 2022, respectively. In the second quarter of 2022, we acquired E-Flow Control Holdings Limited, a global provider of fully integrated handling, control, monitoring and instrumentation solutions. The purchase price of $8.1 million (net of cash acquired) was funded with cash on-hand. Within our Offshore/Manufactured Products segment, we completed the consolidation of certain facilities in Houston, Texas during the third quarter of 2023 and are in the process of strategically relocating our Asian manufacturing and service operations from Singapore to Batam, Indonesia. With these consolidations, two facilities are classified as held-for-sale assets within prepaid expenses and other current assets at September 30, 2023. With our planned purchase of land and the start of construction on a new facility in Batam in the fourth quarter of 2023, we currently expect to invest approximately $35 million in capital expenditures during 2023. In late 2023 or early 2024, we also expect to sell the two facilities (in Singapore and Houston), with expected proceeds ranging between $35 million and $40 million. We plan to fund our capital expenditures with available cash, internally generated funds and, if necessary, borrowings under our ABL Facility discussed below. Financing Activities During the first nine months of 2023, net cash of $22.7 million was used in financing activities, which included the repayment of the $17.3 million principal amount of our outstanding 2023 Notes and the repurchases of $3.0 million of the Company's common stock. This compares to $17.9 million of cash used in financing activities during the first nine months of 2022, which included a cash payment of $10.0 million related to the settlement of a promissory note to the seller of GEODynamics, Inc. (discussed below) and the purchase of $6.5 million principal amount of our outstanding 2023 Notes (as defined below). On June 28, 2022, we entered into a settlement agreement with the seller of GEODynamics, Inc. (acquired in 2018), which provided for the full and final settlement of all amounts due under a promissory note to the seller of GEODynamics, Inc. Pursuant to the settlement agreement, on July 1, 2022, we paid the seller $10.0 million in cash and issued approximately 1.9 million shares of our common stock. As of September 30, 2023, we had cash and cash equivalents totaling $52.9 million, which compared to $42.0 million as of December 31, 2022. As of September 30, 2023, we had no borrowings outstanding under our ABL Facility, $135.0 million principal amount of our 2026 Notes (as defined below) outstanding and other debt of $3.2 million. Our reported interest expense included 31 Table of Contents amortization of deferred financing costs of $1.3 million during the first nine months of 2023. For the first nine months of 2023, our contractual cash interest expense was $5.8 million, or approximately 6% of the average principal balance of debt outstanding. We believe that cash on-hand, cash flow from operations and borrowing capacity available under our ABL Facility will be sufficient to meet our liquidity needs in the coming twelve months. If our plans or assumptions change, or are inaccurate, we may need to raise additional capital. Our ability to obtain capital for additional projects to implement our growth strategy over the longer term will depend upon our future operating performance, financial condition and, more broadly, on the availability of equity and debt financing. Capital availability will be affected by prevailing conditions in our industry, the global economy, the global banking and financial markets, stakeholder scrutiny of ESG matters and other factors, many of which are beyond our control. In this regard, the effect of the four U.S. bank failures, which occurred in March, May and July 2023, resulted in significant disruptions to global banking and financial markets. For companies like ours that support the energy industry, these disruptions negatively impacted the value of our common stock and may reduce our ability to access capital in the bank and capital markets or result in such capital being available on less favorable terms, which could in the future negatively affect our liquidity. On March 21, 2022, the SEC proposed new rules relating to the disclosure of a range of climate-related information and risks. A final rule is expected to be released in the fourth quarter of 2023, but we cannot predict the final form and substance of the rule and its requirements at this time. The ultimate impact on our business is uncertain and, upon finalization, we and our customers may incur increased compliance costs related to the assessment and disclosure of climate-related risks. We may also face increased litigation risks related to disclosures made pursuant to the rule if finalized as proposed. In addition, enhanced climate disclosure requirements could accelerate the trend of certain stakeholders and lenders in restricting access to capital or seeking more stringent conditions with respect to their investments in us, our customers and other companies like ours that support the energy industry. For more information on our risks related to climate change, see the risk factors in "Part I, Item 1A. Risk Factors" included in our Annual Report on Form 10-K for the year ended December 31, 2022 titled, "Our and our customers' operations are subject to a series of risks arising out of the threat of climate change that could result in increased operating costs, limit the areas in which oil and natural gas production may occur, and reduce demand for the products and services we provide" and "Increasing attention to ESG matters may impact our business." Stock Repurchase Program. On February 16, 2023, the Board of Directors authorized $25.0 million for the repurchases of our common stock, par value $0.01 per share, through February 2025. Subject to applicable securities laws, such purchases will be at such times and in such amounts as we deem appropriate. As of September 30, 2023, $3.0 million of share repurchases have been made under this authorization. Revolving Credit Facility. On February 10, 2021, we entered into a senior secured credit facility with certain lenders, which provides for a $125.0 million asset-based revolving credit facility (the "ABL Facility") under which credit availability is subject to a borrowing base calculation. The ABL Facility is governed by a credit agreement, as amended, with Wells Fargo Bank, National Association, as administrative agent and the lenders and other financial institutions from time to time party thereto (the "ABL Agreement"). The ABL Agreement matures on February 10, 2025 with a springing maturity 91 days prior to the maturity of any outstanding indebtedness with a principal amount in excess of $17.5 million. See Note 4, "Long-term Debt," to the Unaudited Condensed Consolidated Financial Statements included in this Quarterly Report on Form 10-Q for further information regarding the ABL Agreement. As of September 30, 2023, we had $16.4 million of outstanding letters of credit, but no borrowings outstanding under the ABL Agreement. The total amount available to be drawn as of September 30, 2023 was $84.5 million, calculated based on the then-current borrowing base less outstanding letters of credit. 2026 Notes. We issued $135.0 million aggregate principal amount of 4.75% convertible senior notes due 2026 (the "2026 Notes") pursuant to an indenture, dated as of March 19, 2021 (the "2026 Indenture"), between us and Computershare Trust Company, National Association, as successor trustee. The 2026 Notes will mature on April 1, 2026, unless earlier repurchased, redeemed or converted. The 2026 Indenture contains certain events of default, including certain defaults by us with respect to other indebtedness of at least $40.0 million. See Note 4, "Long-term Debt," to the Unaudited Condensed Consolidated Financial Statements included in this Quarterly Report on Form 10-Q for further information regarding the 2026 Notes. As of September 30, 2023, none of the conditions allowing holders of the 2026 Notes to convert, or requiring us to repurchase the 2026 Notes, had been met. 32 Table of Contents 2023 Notes. On February 15, 2023, our 1.50% convertible senior notes due 2023 (the "2023 Notes") matured and the outstanding $17.3 million principal amount was repaid in full. Our total debt represented 16% and 18% of our combined total debt and stockholders' equity as of September 30, 2023 and December 31, 2022, respectively. Contingencies and Other Obligations. We are a party to various pending or threatened claims, lawsuits and administrative proceedings seeking damages or other remedies concerning our commercial operations, products, employees and other matters. See Note 11, "Commitments and Contingencies," to the Unaudited Condensed Consolidated Financial Statements included in this Quarterly Report on Form 10-Q for additional discussion. Off-Balance Sheet Arrangements. As of September 30, 2023, we had no off-balance sheet arrangements. Critical Accounting Policies For a discussion of the critical accounting policies and estimates that we use in the preparation of our condensed consolidated financial statements, see "Part II Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" in our Annual Report on Form 10-K for the year ended December 31, 2022. These estimates require significant judgments, assumptions and estimates. We have discussed the development, selection, and disclosure of these critical accounting policies and estimates with the audit committee of our Board of Directors. There have been no material changes to the judgments, assumptions and estimates upon which our critical accounting estimates are based. Recent Accounting Pronouncements From time to time, new accounting pronouncements are issued by the Financial Accounting Standards Board, which are adopted by us as of the specified effective date. Management believes that the impact of recently issued standards, which are not yet effective, will not have a material impact on our consolidated financial statements upon adoption.