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 2023 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, Completion and Production Services (previously referred to as Well Site Services) and Downhole Technologies segments. In first quarter 2024, certain short-cycle, consumable product operations historically reported within the Offshore Manufactured Products segment (legacy frac plugs and elastomer products) were integrated into the Downhole Technologies segment to better align with the underlying activity demand drivers and current segment management structure, as well as provide for additional operational synergies. Historical financial data, supplemental disaggregated revenue and backlog information as of and for the three and nine months ended September 30, 2023 (presented herein) was conformed with the 2024 segment presentation. Additionally, following the sale of its remaining U.S. land-based drilling rigs and the exit of the flowback and well testing service offering in the third quarter of 2024, our Well Site Services segment name was changed to the Completion and Production Services segment. 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. 22 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) 2024 $ 82.92 $ 84.68 $ 80.01 $ — $ — 2023 81.01 77.99 86.65 $ 84.01 $ 82.47 WTI Crude (per bbl) 2024 $ 77.50 $ 81.81 $ 76.43 $ — $ — 2023 75.91 73.54 82.25 $ 78.53 $ 77.56 Henry Hub Natural Gas (per MMBtu) 2024 $ 2.15 $ 2.07 $ 2.11 $ — $ — 2023 2.64 2.16 2.59 $ 2.74 $ 2.53 ________________ (1) Source: U.S. Energy Information Administration (spot prices). On February 16, 2024, we amended the ABL Facility (as defined below) to extend its maturity date from February 10, 2025 to February 16, 2028. Certain short-cycle, consumable product operations historically reported within the Offshore Manufactured Products segment (legacy frac plugs and elastomer products) were integrated into our Downhole Technologies segment in the first quarter of 2024 to better align with the underlying activity demand drivers and current segment management structure, as well as provide for additional operational synergies. Historical segment financial data, backlog and other information were conformed with the 2024 segment presentation. Additionally, following the sale of its remaining U.S. land-based drilling rigs and the exit of the flowback and well testing service offering in the third quarter of 2024, the Company’s Well Site Services segment name was changed to the Completion and Production Services segment. In 2023, we began implementing initiatives, which are continuing into 2024, to reduce future costs. Management actions to-date in 2024 included: the consolidation, relocation and exit of certain underperforming locations; the exit of certain service offerings; reductions in our U.S. work force as well as the realignment of operations discussed above. We have also incurred legal and other related costs to enforce certain patents related to our proprietary technologies. As a result of these actions, our reported pre-tax results for the nine months ended September 30, 2024 included $23.4 million in non-cash goodwill, intangible and operating lease asset impairment charges as well as $11.8 million of facility consolidation and exit, patent defense and other charges. During the nine months ended September 30, 2024, our Offshore Manufactured Products segment sold a manufacturing and service facility that was classified as held for sale for net proceeds of $10.3 million, we purchased $11.5 million principal amount of our 2026 Notes (as defined below) for $10.8 million, and we purchased $5.5 million of our common stock. On October 24, 2024, our Board of Directors terminated our existing common stock repurchase program and replaced it with a new $50.0 million common stock repurchase authorization which expires in October 2026. On October 25, 2024, Brent crude oil, WTI crude oil and natural gas spot prices closed at $75.62 per barrel, $72.02 per barrel and $1.93 per MMBtu, respectively – below the third quarter 2024 averages. Additionally, the U.S. drilling rig count reported on October 25, 2024 was 585 rigs – comparable to the third quarter 2024 average. Overview Current and expected future pricing for WTI crude oil and natural gas and inflationary cost 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 and natural gas prices and levels of demand for crude oil and natural gas 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; the levels of domestic or international crude oil and natural gas production; changes in governmental rules and regulations; sanctions; the willingness of operators to invest capital in the 23 Table of Contents 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 U.S. crude oil and natural gas 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 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 (and have been awarded select contracts and are bidding on additional projects) to 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 89% of Offshore Manufactured Products segment sales in the first nine months of 2024 were driven by our customers’ capital spending for 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 $313 million as of September 30, 2024 from $300 million as of June 30, 2024. Bookings totaled $112 million in the third quarter of 2024, yielding a quarterly book-to-bill ratio of 1.1x (1.0x 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 2024 $ 305 $ 300 $ 313 2023 316 328 341 $ 327 2022 255 232 248 300 Our Completion and Production Services segment provides completion and production services in the United States (including the Gulf of Mexico) and internationally. Prior to the sale of its drilling rigs in August of 2024, the segment also provided land drilling services in the United States. U.S. drilling and completion activity and, in turn, our Completion and Production 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 frac plug, toe valve and other elastomer 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. 24 Table of Contents Demand for our completion-related products and services within our Completion and Production Services and Downhole Technologies 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. drilling rig count, as measured by Baker Hughes Company, as of and for the periods indicated. As of October 25, 2024 Average for the Three Months Ended September 30, Nine Months Ended September 30, 2024 2023 2024 2023 United States Rig Count: Land – Oil 465 465 499 475 543 Land – Natural gas and other 103 100 128 108 143 Offshore 17 21 22 21 21 585 586 649 604 707 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, 2024, oil-directed drilling accounted for 82% 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 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; competitive pricing pressures; customer consolidations; 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; management’s implementation of strategic decisions; 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, 2023. 25 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 “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, 2023 in order to understand factors, such as charges and credits, which may impact comparability of the selected financial data. In the first quarter of 2024, certain short-cycle manufacturing operations historically reported within the Offshore Manufactured Products segment (legacy frac plug and elastomer products) were integrated into the Downhole Technologies segment to better align with the underlying activity demand drivers and the current segment management structure, as well as provide for additional operational synergies. Historical financial data and supplemental disaggregated revenue information as of and for the three and nine months ended September 30, 2023 (presented herein) were conformed with the 2024 segment presentation. Additionally, following the sale of its remaining U.S. land-based drilling rigs and the exit of the flowback and well testing service offering in the third quarter of 2024, our Well Site Services segment name was changed to the Completion and Production Services segment. Unaudited Consolidated Results of Operations The following summarizes our consolidated results of operations for the three and nine months ended September 30, 2024 and 2023 (in thousands, except per share amounts): Three Months Ended September 30, Nine Months Ended September 30, 2024 2023 Variance 2024 2023 Variance Revenues: Products $ 100,798 $ 102,636 $ (1,838) $ 303,706 $ 295,106 $ 8,600 Services 73,550 91,653 (18,103) 224,287 278,911 (54,624) 174,348 194,289 (19,941) 527,993 574,017 (46,024) Costs and expenses: Product costs 79,167 80,188 (1,021) 236,807 231,524 5,283 Service costs 57,422 70,239 (12,817) 173,766 211,668 (37,902) Cost of revenues (exclusive of depreciation and amortization expense presented below) 136,589 150,427 (13,838) 410,573 443,192 (32,619) Selling, general and administrative expenses 22,754 24,241 (1,487) 71,623 71,785 (162) Depreciation and amortization expense 13,635 15,416 (1,781) 42,528 46,209 (3,681) Impairment of goodwill — — — 10,000 — 10,000 Impairments of intangible assets 10,787 — 10,787 10,787 — 10,787 Impairments of operating lease assets 2,579 — 2,579 2,579 — 2,579 Other operating (income) expense, net (955) (1,985) 1,030 76 (2,503) 2,579 185,389 188,099 (2,710) 548,166 558,683 (10,517) Operating income (loss) (11,041) 6,190 (17,231) (20,173) 15,334 (35,507) Interest expense, net (1,824) (1,928) 104 (5,986) (6,378) 392 Other income, net 731 186 545 1,311 672 639 Income (loss) before income taxes (12,134) 4,448 (16,582) (24,848) 9,628 (34,476) Income tax provision (2,215) (236) (1,979) (1,574) (2,700) 1,126 Net income (loss) $ (14,349) $ 4,212 $ (18,561) $ (26,422) $ 6,928 $ (33,350) Net income (loss) per share: Basic $ (0.23) $ 0.07 $ (0.42) $ 0.11 Diluted (0.23) 0.07 (0.42) 0.11 Weighted average number of common shares outstanding: Basic 62,084 62,651 62,357 62,760 Diluted 62,084 63,060 62,357 63,135 26 Table of Contents Unaudited Segment Results of Operations We manage and measure our business performance in three distinct operating segments: Offshore Manufactured Products, Completion and Production Services and Downhole Technologies. Supplemental financial information by operating segment for the three and nine months ended September 30, 2024 and 2023 is summarized below (in thousands): Three Months Ended September 30, Nine Months Ended September 30, 2024 2023 Variance 2024 2023 Variance Revenues: Offshore Manufactured Products Project-driven: Products $ 58,164 $ 58,169 $ (5) $ 171,053 $ 152,241 $ 18,812 Services 32,754 30,391 2,363 89,011 79,867 9,144 90,918 88,560 2,358 260,064 232,108 27,956 Military and other products 11,316 7,510 3,806 30,583 23,114 7,469 102,234 96,070 6,164 290,647 255,222 35,425 Completion and Production Services 40,099 59,831 (19,732) 133,812 191,425 (57,613) Downhole Technologies 32,015 38,388 (6,373) 103,534 127,370 (23,836) $ 174,348 $ 194,289 $ (19,941) $ 527,993 $ 574,017 $ (46,024) Operating income (loss): Offshore Manufactured Products (1) $ 19,310 $ 15,586 $ 3,724 $ 44,270 $ 32,122 $ 12,148 Completion and Production Services (2) (18,267) 3,285 (21,552) (19,221) 14,983 (34,204) Downhole Technologies (3) (3,653) (1,900) (1,753) (16,873) (148) (16,725) Corporate (8,431) (10,781) 2,350 (28,349) (31,623) 3,274 $ (11,041) $ 6,190 $ (17,231) $ (20,173) $ 15,334 $ (35,507) _______________ (1) During the three and nine months ended September 30, 2024, the Offshore Manufactured Products segment recognized facility consolidation and other charges of $0.4 million and $3.4 million, respectively, associated primarily with the consolidation and relocation of a manufacturing and service location. During the three and nine months ended September 30, 2023, the segment recognized facility consolidation charges of $1.6 million associated primarily with the consolidation and relocation of certain manufacturing and service locations. (2) During the three and nine months ended September 30, 2024, the Completion and Production Services segment recognized charges of $17.2 million and $21.1 million, respectively, associated primarily with the exit of its flowback and well testing service offering, the consolidation and exit of certain underperforming service locations, and the defense of certain patents. (3) During the both three and nine months ended September 30, 2024, the Downhole Technologies segment recognized charges of $0.6 million associated primarily with the exit of an underperforming location. Additionally during the nine months ended September 30, 2024, the segment recognized a $10.0 million non-cash impairment charge related to goodwill reassigned to the business in connection with the segment realignment discussed above. For further discussion of charges and credits recognized during the three and nine months ended September 30, 2024 and 2023, see Note 2, “Asset Impairments and Other Charges and Credits,” to the Unaudited Condensed Consolidated Financial Statements included in this Quarterly Report on Form 10-Q for additional discussion. 27 Table of Contents Three Months Ended September 30, 2024 Compared to Three Months Ended September 30, 2023 We reported a net loss for the three months ended September 30, 2024 of $14.3 million, or $0.23 per share. The reported third quarter net loss included charges of $18.2 million ($17.0 million after tax, or $0.27 per share) associated with the restructuring of certain of its U.S. land-based operations, facility consolidations and closures, patent defense and personnel reductions. These results compare to net income for the three months ended September 30, 2023 of $4.2 million, or $0.07 per share, which included facility consolidation and other charges of $1.6 million ($1.3 million after-tax, or $0.02 per share). Our third quarter 2024 results of operations reflect the impact of operators continued investments in offshore and international project activity and associated backlog conversion, partially offset by a decline in land-based investments by our U.S. customers, competitive market conditions and management’s decision to exit certain underperforming locations and service offerings in the United States. Management expects to continue to implement measures to reduce costs in areas experiencing lower activity levels. Revenues. Consolidated total revenues in the third quarter of 2024 decreased $19.9 million, or 10%, from the third quarter of 2023. Consolidated product revenues in the third quarter of 2024 decreased $1.8 million, or 2%, from the third quarter of 2023, driven primarily by lower U.S. short-cycle completion product sales volumes. Consolidated service revenues in the third quarter of 2024 decreased $18.1 million, or 20%, from the third quarter of 2023. This decrease was concentrated in the United States – driven by lower land-based customer investments (particularly in natural gas basins), competitive market conditions and our exit of certain underperforming locations during the first half of 2024, partially offset by higher offshore and international service activity. The following table provides supplemental disaggregated revenue from contracts with customers by operating segment for the three months ended September 30, 2024 and 2023 (in thousands): Offshore Manufactured Products Completion and Production Services Downhole Technologies Total Three Months Ended September 30 2024 2023 2024 2023 2024 2023 2024 2023 Project-driven: Products $ 58,164 $ 58,169 $ — $ — $ — $ — $ 58,164 $ 58,169 Services 32,754 30,391 — — — — 32,754 30,391 Total project-driven 90,918 88,560 — — — — 90,918 88,560 Military and other products 11,316 7,510 — — — — 11,316 7,510 Short-cycle products and services — — 40,099 59,831 32,015 38,388 72,114 98,219 $ 102,234 $ 96,070 $ 40,099 $ 59,831 $ 32,015 $ 38,388 $ 174,348 $ 194,289 By destination: Offshore and international $ 94,189 $ 87,857 $ 10,639 $ 10,729 $ 9,028 $ 6,164 $ 113,856 $ 104,750 U.S. land 8,045 8,213 29,460 49,102 22,987 32,224 60,492 89,539 $ 102,234 $ 96,070 $ 40,099 $ 59,831 $ 32,015 $ 38,388 $ 174,348 $ 194,289 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 2024 decreased $13.8 million, or 9%, compared to the level reported in the third quarter of 2023. Consolidated product costs in the third quarter of 2024 decreased $1.0 million, or 1%, from the third quarter of 2023 driven primarily by the decline in U.S. land-based products sales volumes. Consolidated service costs in the third quarter of 2024 decreased $12.8 million, or 18%, from the third quarter of 2023, with the impact of lower U.S. land-based activity levels and implemented cost control measures partially offset by facility exit and severance costs incurred in third quarter of 2024. Selling, General and Administrative Expense. Selling, general and administrative expense was $22.8 million in the third quarter of 2024, which included $1.3 million of costs associated with enforcing certain of our patents. Excluding these patent defense costs, selling, general and administrative costs decreased $2.8 million, or 12%, from the third quarter of 2023, due primarily to lower short- and long-term incentive expenses. Depreciation and Amortization Expense. Depreciation and amortization expense decreased $1.8 million, or 12%, in the third quarter of 2024 compared to the prior-year quarter. Note 10, “Segments and Related Information,” to our Unaudited Condensed Consolidated Financial Statements presents depreciation and amortization expense by segment. 28 Table of Contents Impairments of Intangible Assets. In the third quarter of 2024, as a result of our decision to exit an underperforming service offering, our Completion and Production Services segment recognized non-cash impairment charges of $10.8 million to reduce the carrying amount of its long-lived intangible assets to estimated fair value. See Note 2, “Asset Impairments and Other Charges and Credits,” to the Unaudited Condensed Consolidated Financial Statements included in this Quarterly Report on Form 10-Q for additional discussion. Impairments of Operating Lease Assets. In the third quarter of 2024, management made strategic decisions to exit five leased service locations within our Completion and Production Services segment and one within our Downhole Technologies segment. As a result of these decisions, our Completion and Production Services and Downhole Technologies segments recognized non-cash impairment charges totaling $2.6 million to reduce the carrying amount of the related operating lease assets. See Note 2, “Asset Impairments and Other Charges and Credits,” to the Unaudited Condensed Consolidated Financial Statements included in this Quarterly Report on Form 10-Q for additional discussion. Operating Income. Our consolidated operating loss was $11.0 million in the third quarter of 2024, which included $13.4 million in non-cash intangible and operating lease asset impairment charges and charges totaling $4.8 million associated with facility consolidations and exits, patent defense and other management actions. This compares to third quarter 2023 consolidated operating income of $6.2 million, which included facility consolidation and other charges of $1.6 million. Excluding these charges, operating results declined $0.7 million year-over-year, driven by the substantial decline in activity levels in the United States. Interest Expense, Net. Net interest expense totaled $1.8 million in the third quarter of 2024, which compares to $1.9 million in the same period of 2023. Interest expense as a percentage of total debt outstanding was approximately 7% in the third quarter of 2024, compared to 7% in the third quarter of 2023. Income Tax. Income tax provision for the three months ended September 30, 2024 and 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, 2024, our income tax provision was $2.2 million on a pre-tax loss of $12.1 million, which included unfavorable changes in valuation allowances recorded against deferred tax assets and certain non-deductible expenses. This compares to an income tax provision of $0.2 million on a pre-tax income of $4.4 million for the three months ended September 30, 2023, which included certain non-deductible expenses, discrete tax items and a reduction in valuation allowances recorded against deferred tax assets. Other Comprehensive Income (Loss). Reported comprehensive loss is the sum of reported net income (loss) and other comprehensive income (loss). Other comprehensive income was $9.6 million in the third quarter of 2024 compared to comprehensive loss of $5.7 million in the third quarter of 2023 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, 2024 and 2023, currency translation adjustments recognized as a component of other comprehensive income (loss) were primarily attributable to the United Kingdom and Brazil. During the third quarter of 2024, the exchange rate for the British pound and the Brazilian real strengthened compared to the U.S. dollar. In the third quarter of 2023, the exchange rates for 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 $6.2 million, or 6%, in the third quarter of 2024 compared to the third quarter of 2023 due to increased demand for military products and international and offshore project-driven products and services. Operating Income. Our Offshore Manufactured Products segment reported operating income of $19.3 million in the third quarter of 2024, which included $0.4 million in facility consolidation and other charges. This compares to operating income in the third quarter of 2023 of $15.6 million, which included $1.6 million in facility consolidation and other charges. Excluding these charges, operating income increased $2.4 million year-over-year. Backlog. Backlog in our Offshore Manufactured Products segment totaled $313 million as of September 30, 2024, with third quarter 2024 bookings of $112 million and a quarterly book-to-bill ratio of 1.1x. 29 Table of Contents Completion and Production Services Revenues. Our Completion and Production Services segment revenues decreased $19.7 million, or 33%, in the third quarter of 2024 compared to the prior-year period, driven primarily by lower U.S. land-based customer activity levels (particularly in natural gas basins), competitive market conditions and our exit of certain underperforming service locations during the first half of 2024. Operating Income (Loss). Our Completion and Production Services segment reported an operating loss of $18.3 million in the third quarter of 2024, which included charges totaling $17.2 million associated with the exit of a service offering, facility consolidations and exits, the defense of patents and other management actions. This compares to operating income of $3.3 million in the third quarter of 2023. Excluding the 2024 charges discussed above, the Completion and Production Services segment’s operating income declined $4.3 million from the prior-year period, with the impact of the decrease in U.S. land-based revenues partially offset by implemented cost control measures. The segment’s U.S. land-based service offerings and facilities exited during the third quarter of 2024 collectively generated revenues of $9.3 million and operating losses of $17.1 million in the current quarter, which included intangible and operating lease asset impairment, facility closure and other charges totaling $15.1 million as well as depreciation and amortization expense of $1.3 million. Downhole Technologies Revenues. Our Downhole Technologies segment revenues decreased $6.4 million, or 17%, in the third quarter of 2024 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 $3.7 million in the third quarter of 2024, which included charges totaling $1.2 million associated with the exit of a facility, personnel reductions and a customer bankruptcy. This compares to an operating loss of $1.9 million in the third quarter of 2023. Excluding the 2024 charges discussed above, the Downhole Technologies segment’s operating loss increased $0.6 million year-over-year due primarily to the reported decrease in revenues and lower manufacturing volumes. Corporate Operating Loss. Corporate expenses decreased $2.4 million, or 22%, in the third quarter of 2024 from the prior-year period due primarily to lower short- and long-term incentive expenses. 30 Table of Contents Nine Months Ended September 30, 2024 Compared to Nine Months Ended September 30, 2023 We reported a net loss for the nine months ended September 30, 2024 of $26.4 million, or $0.42 per share. The reported first nine months net loss included net charges and credits of $34.6 million ($31.6 million after tax, or $0.51 per share) associated with the restructuring of certain of its U.S. land-based operations, facility consolidations and closures, patent defense, personnel reductions and debt extinguishment. These results compare to net income for the nine months ended September 30, 2023 of $6.9 million, or $0.11 per share, which included facility consolidation and other charges of $1.6 million ($1.3 million after-tax, or $0.02 per share). Our results of operations for the first nine months of 2024 reflect the impact of operators continued investment in offshore and international project activity and associated backlog conversion, partially offset by a decline in land-based investments by our U.S. customers, competitive market conditions and management’s decision to exit certain underperforming locations and service offerings in the United States. Management expects to continue to implement measures to reduce costs in areas experiencing lower activity levels. Revenues. Consolidated total revenues in the first nine months of 2024 decreased $46.0 million, or 8%, from the first nine months of 2023. Consolidated product revenues in the first nine months of 2024 increased $8.6 million, or 3%, from the first nine months of 2023, with the impact of higher customer demand for project-driven production facility products and military products partially offset by a decline in U.S. customer demand for completion and perforating products. Consolidated service revenues in the first nine months of 2024 decreased $54.6 million, or 20%, from the first nine months of 2023. This decrease was concentrated in the United States – driven by lower land-based customer investments (particularly in natural gas basins), competitive market conditions and our exit of certain underperforming locations during the first half of 2024, partially offset by higher offshore and international service activity. The following table provides supplemental disaggregated revenue from contracts with customers by operating segment for the nine months ended September 30, 2024 and 2023 (in thousands): Offshore Manufactured Products Completion and Production Services Downhole Technologies Total Nine Months Ended September 30 2024 2023 2024 2023 2024 2023 2024 2023 Project-driven: Products $ 171,053 $ 152,241 $ — $ — $ — $ — $ 171,053 $ 152,241 Services 89,011 79,867 — — — — 89,011 79,867 Total project-driven 260,064 232,108 — — — — 260,064 232,108 Military and other products 30,583 23,114 — — — — 30,583 23,114 Short-cycle products and services — — 133,812 191,425 103,534 127,370 237,346 318,795 $ 290,647 $ 255,222 $ 133,812 $ 191,425 $ 103,534 $ 127,370 $ 527,993 $ 574,017 By destination: Offshore and international $ 268,363 $ 228,564 $ 35,703 $ 37,453 $ 28,595 $ 24,212 $ 332,661 $ 290,229 U.S. land 22,284 26,658 98,109 153,972 74,939 103,158 195,332 283,788 $ 290,647 $ 255,222 $ 133,812 $ 191,425 $ 103,534 $ 127,370 $ 527,993 $ 574,017 Cost of Revenues (exclusive of Depreciation and Amortization Expense). Our consolidated total cost of revenues (exclusive of depreciation and amortization expense) decreased $32.6 million, or 7%, in the first nine months of 2024 compared to the first nine months of 2023. Consolidated product costs in the first nine months of 2024 increased $5.3 million, or 2%, compared to the first nine months of 2023 due primarily to the reported product revenue increase. Consolidated service costs in the first nine months of 2024 decreased $37.9 million, or 18%, compared to the first nine months of 2023, with the impact of lower U.S. activity levels and implemented cost control measures partially offset by facility exit and severance costs incurred in 2024. Selling, General and Administrative Expense. Selling, general and administrative expense was $71.6 million in the first nine months of 2024, which included $2.7 million of costs associated with enforcing certain of our patents. Excluding these patent defense costs, selling, general and administrative costs decreased $2.8 million, or 4%, from the level reported in the first nine months of 2023, due primarily to lower short- and long-term incentive expenses. 31 Table of Contents Depreciation and Amortization Expense. Depreciation and amortization expense decreased $3.7 million, or 8%, in the first nine months of 2024 compared to the prior-year period. Note 10, “Segments and Related Information,” to our Unaudited Condensed Consolidated Financial Statements presents depreciation and amortization expense by segment. Impairment of Goodwill. During the first quarter of 2024, our Downhole Technologies operations recognized a non-cash impairment charge of $10.0 million related to goodwill transferred to the business in connection with segment realignment discussed above. See Note 2, “Asset Impairments and Other Charges and Credits,” to the Unaudited Condensed Consolidated Financial Statements included in this Quarterly Report on Form 10-Q for additional discussion. Impairments of Intangible Assets. In the first nine months of 2024, as a result of our decision to exit an underperforming service offering, our Completion and Production Services business recognized non-cash impairment charges of $10.8 million to reduce the carrying amount of its long-lived intangible assets to estimated fair value. See Note 2, “Asset Impairments and Other Charges and Credits,” to the Unaudited Condensed Consolidated Financial Statements included in this Quarterly Report on Form 10-Q for additional discussion. Impairments of Operating Lease Assets. In the first nine months of 2024, management made strategic decisions to exit five leased service locations within our Completion and Production Services segment and one within our Downhole Technologies segment. As a result of these decisions, our Completion and Production Services and Downhole Technologies segments recognized non-cash impairment charges totaling $2.6 million to reduce the carrying amount of the related operating lease assets. See Note 2, “Asset Impairments and Other Charges and Credits,” to the Unaudited Condensed Consolidated Financial Statements included in this Quarterly Report on Form 10-Q for additional discussion. Operating Income (Loss). Our consolidated operating loss was $20.2 million in the first nine months of 2024, which included $23.4 million in non-cash goodwill, intangible and operating lease asset impairment charges and other charges totaling $11.8 million associated with facility consolidations and exits, patent defense and other management actions. This compares to consolidated operating income of $15.3 million in the first nine months of 2023, which included facility consolidation and other charges of $1.6 million. Excluding these charges, operating results declined $2.0 million year-over-year, driven by the substantial decline in activity levels in the United States. Interest Expense, Net. Net interest expense totaled $6.0 million in the first nine months of 2024, which compares to $6.4 million in the first nine months of 2023. Interest expense as a percentage of total debt outstanding was approximately 7% in the first nine months of 2024, compared to 7% in the first nine months of 2023. Income Tax. Income tax provision for the first nine months of 2024 and 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 2024, our income tax provision was $1.6 million on a pre-tax loss of $24.8 million, which included a $10.0 million goodwill impairment charge, other non-deductible expenses and unfavorable changes in valuation allowances recorded against deferred tax assets. This compares to an income tax provision of $2.7 million on pre-tax income of $9.6 million for the first nine months of 2023, which included certain non-deductible expenses, discrete tax items and a reduction in valuation allowances recorded against deferred tax assets. Other Comprehensive Income. Reported comprehensive income (loss) is the sum of reported net income (loss) and other comprehensive income. Other comprehensive income was $3.4 million in the first nine months of 2024 compared to comprehensive income of $1.7 million in the first nine months of 2023 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 2024 and 2023, currency translation adjustments recognized as a component of other comprehensive income were primarily attributable to the United Kingdom and Brazil. During the first nine months of 2024, the exchange rates for the British pound strengthened compared to the U.S. dollar while the Brazilian real weakened compared to the U.S. dollar. This compares to the first nine months of 2023, when the exchange rates for the British pound and the Brazilian real strengthened compared to the U.S. dollar. Segment Operating Results Offshore Manufactured Products Revenues. Our Offshore Manufactured Products segment revenues increased $35.4 million, or 14%, in the first nine months of 2024 compared to the first nine months of 2023 due primarily to increased demand for international and offshore-project driven products and services. 32 Table of Contents Operating Income. Our Offshore Manufactured Products segment reported operating income of $44.3 million in the first nine months of 2024, which included $3.4 million in facility consolidation and other charges. This compares to operating income of $32.1 million in the first nine months of 2023, which included $1.6 million in facility consolidation and other charges. Excluding these charges, operating income increased $13.9 million year-over-year. Backlog. Backlog in our Offshore Manufactured Products segment totaled $313 million as of September 30, 2024 compared to $327 million as of December 31, 2023. Bookings during the first nine months of 2024 totaled $279 million, yielding a year-to-date book-to-bill ratio of 1.0x. Completion and Production Services Revenues. Our Completion and Production Services segment revenues decreased $57.6 million, or 30%, in the first nine months of 2024 compared to the first nine months of 2023, driven primarily by lower U.S. customer activity levels (particularly in natural gas basins), competitive market conditions and our exit of certain underperforming service locations during the first half of 2024. Operating Income (Loss). Our Completion and Production Services segment reported an operating loss of $19.2 million in the first nine months of 2024, which included charges totaling $21.1 million associated with the exit of a service offering, facility consolidations and exits, the defense of patents and other management actions. This compares to operating income of $15.0 million in the first nine months of 2023. Excluding the 2024 charges discussed above, the Completion and Production Services segment’s operating income declined $13.1 million from the prior-year period, with the impact of a decrease in U.S. land-based revenues partially offset by implemented cost control measures. The segment’s U.S. land-based service offerings and facilities exited during the first nine months of 2024 collectively generated revenues of $35.8 million and operating losses of $24.0 million in 2024, which included intangible and operating lease asset impairment, facility closure and other charges totaling $17.4 million as well as depreciation and amortization expense of $4.2 million. Downhole Technologies Revenues. Our Downhole Technologies segment revenues decreased $23.8 million, or 19%, in the first nine months of 2024 from the first nine months of 2023 due primarily to lower U.S. customer demand for perforating and completion products during the first quarter of 2024. Operating Loss. Our Downhole Technologies segment reported an operating loss of $16.9 million in the first nine months of 2024, which included the $10.0 million non-cash goodwill impairment charge related to the first quarter of 2024 segment realignment and $1.2 million in charges related to the exit of a facility, personnel reductions and a customer bankruptcy. This compares to an operating loss of $0.1 million reported in the first nine months of 2023. Excluding the 2024 charges discussed above, the Downhole Technologies segment’s operating loss increased $5.6 million from the prior-year period, due primarily to the reported decrease in revenue and lower manufacturing volumes. Corporate Operating Loss. Corporate expenses in the first nine months of 2024 decreased $3.3 million, or 10%, from the first nine months of 2023, due primarily to lower short- and long-term incentive expenses. 33 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 $27.7 million during the first nine months of 2024, compared to $52.4 million generated by operations during the first nine months of 2023. During the first nine months of 2024, $13.2 million was used to fund net working capital increases, primarily due to an activity-driven increase in inventories, the payment of accrued 2023 short- and long-term cash incentives in the first quarter of 2024 and a decrease in accounts payable, partially offset by the favorable impact of a decrease in accounts receivable. 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. Investing Activities Net cash used in investing activities during the first nine months of 2024 totaled $8.3 million, compared to $19.1 million used in investing activities during the first nine months of 2023. Capital expenditures totaled $23.3 million and $23.4 million during the first nine months of 2024 and 2023, respectively. These investments were offset by proceeds from the sale of property and equipment of $15.4 million and $4.4 million during the first nine months of 2024 and 2023, respectively. Within our Offshore Manufactured Products segment, we completed the consolidation of certain facilities in Houston, Texas during 2023 and have strategically relocated our Asian manufacturing and service operations from Singapore to Batam, Indonesia. With these consolidations, a facility classified as held for sale within prepaid expenses and other current assets as of December 31, 2023 was sold during the second quarter of 2024 for net proceeds of $10.3 million. Including investments associated with the construction of a new facility in Batam, we expect to invest approximately $30 million in capital expenditures during 2024. 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 2024, net cash of $20.2 million was used in financing activities, which included the purchase of $11.5 million principal amount of our outstanding 2026 Notes for $10.8 million in cash and the repurchase of $5.1 million of the Company’s common stock. This compares to $22.7 million of cash used in financing activities during the first nine months of 2023, which included the repayment of the $17.3 million principal amount outstanding under our 2023 Notes and the repurchase of $3.0 million of our common stock. As of September 30, 2024, we had cash and cash equivalents totaling $46.0 million, which compared to $47.1 million as of December 31, 2023. As of September 30, 2024, we had no borrowings outstanding under our ABL Facility, $123.5 million principal amount of our 2026 Notes (as defined below) outstanding and other debt of $3.0 million. Our reported interest expense included amortization of deferred financing costs of $1.2 million during the first nine months of 2024. For the first nine months of 2024, our contractual cash interest expense was $5.5 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. For companies like ours that support the energy industry, disruptions affecting the availability of capital have in the 34 Table of Contents past and may in the future negatively impact 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 negatively affect our liquidity. On March 6, 2024, the SEC finalized rules relating to the disclosure of a range of climate-related information (the “Rules”). The Rules were temporarily stayed by the SEC on April 4, 2024 pending judicial review. While subject to ongoing litigation, these new disclosure requirements are currently effective for us beginning with the year ending December 31, 2026, phased in over a five-year period. The ultimate impact on our business is uncertain but 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 2023 Annual Report on Form 10-K 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,” “The Inflation Reduction Act of 2022 could accelerate the transition to a low carbon economy and could impose new costs on our customers’ operations” and “Increasing attention to ESG matters may impact our business.” Stock Repurchase Program. On February 16, 2023, our Board of Directors authorized $25.0 million for 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. During the nine months ended September 30, 2024, $5.5 million in repurchases of common stock were made under the program. The amount remaining under our share repurchase authorization as of September 30, 2024 was $12.6 million. On October 24, 2024, our Board of Directors terminated our existing common stock repurchase program and replaced it with a new $50.0 million common stock repurchase authorization, which expires in October 2026. Revolving Credit Facility. Our senior secured credit facility provides for a $125.0 million asset-based revolving credit facility (as amended, the “ABL Facility”) under which credit availability is subject to a borrowing base calculation. On February 16, 2024, we amended the ABL Facility to extend the maturity date to February 16, 2028. 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 (as amended, the “ABL Agreement”). The ABL Agreement matures on February 16, 2028 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, 2024, we had $15.1 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, 2024 was $76.4 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. As of September 30, 2024, we have purchased a cumulative $11.5 million principal amount of the 2026 Notes for $10.8 million in cash, with $123.5 million principal amount outstanding. The outstanding 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, 2024, none of the conditions allowing holders of the 2026 Notes to convert, or requiring us to repurchase the 2026 Notes, had been met. 2023 Notes. On February 15, 2023, our 2023 Notes matured and the outstanding $17.3 million in principal amount was repaid in full. Our total debt represented 15% and 16% of our combined total debt and stockholders’ equity as of September 30, 2024 and December 31, 2023, respectively. 35 Table of Contents 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, 2024, 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, 2023. 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.