What changed in Innovex International, Inc.'s 10-K — 2023 vs 2024

Item 1. B usiness. General Innovex designs, manufactures, sells and rents mission critical engineered products to the global oil and natural gas industry. Our vision has been to create a global leader in well-centric products and technologies through organic, customer-linked innovations and disciplined acquisitions to drive leading returns for our investors.

On September 6, 2024, the transactions contemplated in the Merger Agreement (as defined in “ Recent Developments ” within “Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations”) between Innovex Downhole Solutions, Inc. (“Legacy Innovex”) and Dril-Quip, Inc. (“Dril-Quip”) (the “Merger”) were consummated.

Following the Merger, Legacy Innovex became a wholly owned subsidiary of Dril-Quip, and the name “Dril-Quip, Inc.” was changed to “Innovex International, Inc.”.

In connection with the consummation of the Merger, the outstanding shares of common stock, par value $0.01 per share, of Legacy Innovex (the “Legacy Innovex Common Stock”) were converted into the right to receive 32,183,966 shares of common stock, par value $0.01 per share, of the Company (the “Company Common Stock”).

The number of shares of Company Common Stock received for each share of Legacy Innovex Common Stock by the Legacy Innovex shareholders was equal to 2.0125. On November 29, 2024, Innovex acquired 80% of the issued and outstanding equity securities of Downhole Well Solutions, LLC (“DWS”).

The acquisition was completed simultaneously with the signing of the Equity Purchase Agreement on November 29, 2024. The aggregate purchase price for the acquisition consisted of $ 75.1 million in cash, subject to post-closing adjustments, and 1,918,558 shares of Company Common Stock.

The remaining 20% of the issued and outstanding equity securities of DWS were previously owned by Legacy Innovex, a wholly owned subsidiary of the Company. For information with respect to the Merger and DWS acquisition, see Note 3. Mergers and Acquisitions to our Consolidated Financial Statements included elsewhere in this Annual Report.

Our products are used across the lifecycle of the well (during the construction, completion, production and intervention phases) and are typically utilized downhole and consumable in nature. Our products perform a critical well function, and we believe they are chosen due to their reliability and capacity to save our customers time and lower costs during the well lifecycle.

We believe that our products have a significant impact on a well’s performance and economic profile relative to the price we charge, creating a “Big Impact, Small Ticket” value proposition .

Prior to the Merger, we believe our total addressable market (or “TAM”) in 2023 was $4.5 billion, consisting of a $2.1 billion addressable market in NAM (as defined herein) and a $2.4 billion market in our International & Offshore regions.

Following the Merger, we were able to grow our addressable market both in our NAM and International and Offshore markets by expanding our product portfolio and gaining access to additional international markets.

Pro forma for the Merger, we estimate that our TAM for our applicable products in 2024 was $8.3 billion, consisting of a $3.6 billion TAM for NAM and a $4.7 billion TAM for our applicable products across International & Offshore regions. Please see “Business—Market Share Capture” for an explanation of how we calculate our TAM.

Many of our products can be used in a significant portion of our customers’ wells globally, with our most advanced products providing mission critical solutions for some of the most challenging and complex wells in the world.

We have a track record of developing proprietary products to address our customers’ evolving needs, and we maintain an active pipeline of potential new products across various stages of development. Our business is high margin and capital-light, enabling us to generate strong returns on invested capital. We have a disciplined history of successfully sourcing and integrating strategic acquisitions.

The U.S. and Canadian onshore (“NAM”) market made up approximately 55% of our 2024 revenue, while the international and offshore (“International and Offshore”) markets constituted 45%. Within the NAM market, we have a strong presence in the United States and a growing presence in Canada. Revenue is based on the location where services are provided and products are sold.

Changes in or waivers to the Company’s Code of Business Conduct and Ethical Practices involving directors and executive officers of the Company will be posted on its website. Overview and Industry Outlook The NAM market is core to us, and we maintain a robust sales and distribution infrastructure across the region.

Our products have broad applicability in this market, particularly for horizontal or unconventional wells that have become prevalent methods of oil and natural gas development across the region.

We are focused on significantly increasing our revenue in the International and Offshore markets as these regions are typically subject to long-cycle investment horizons and exhibit relatively less cyclicality than the NAM market. The Middle East, and in particular Saudi Arabia, has been a ke y source of growth for the Company.

We also operate across Asia, Latin America, Europe and the Gulf of Mexico, among other region s. To enhance our global reach, we have complemented our locations across these markets with a network of strategic distribution, sales and manufacturing partners. We are an innovator and have a development process and culture focused on creating proprietary products for our customers.

We seek to work with our customers to solve their operational challenges. We believe that these collaborations have been a source of growth as they have allowed us to develop new products with anchor customers that have served as an initial revenue base from which to scale.

We have a unique culture that we view as having been critical to our success in the commercialization of new products.

We define our culture as “ No Barriers .” Our goal is to remove internal barriers that slow the pace of innovation and empower our employees to be responsive to our customers’ needs, while maintaining a focus on returns for the Company.

As a result of our culture and our commitment to customer responsiveness, we believe that we are more agile and able to innovate faster than our larger competitors. Based on our TAM estimates, we believe that we are uniquely positioned to grow market share within larger addressable markets after the Merger with Dril-Quip .

On a pro forma basis, including both the revenue and additional market share relating to the Merger and the DWS acquisition, we estimate that our NAM market share in 2024 was 13% and that our International and Offshore market share was 12%.

We estimate that Innovex has grown market share since inception and believe we are well positioned to continue to capture market share across our geographic markets. In particular, we view the International and Offshore markets as a significant growth opportunity. Our organic growth has been complemented by a disciplined acquisition strategy.

We view acquisitions as a core competency and have identified a rich opportunity set of acquisition targets that we believe are seeking to transact. We aim to execute a disciplined acquisition strategy for high-quality opportunities that meet our stringent investment criteria, as evidenced by the Merger with Dril-Quip and our acquisition of DWS.

We have a broad customer base, ranging from the largest international oil companies (“IOCs”), national oil companies (“NOCs”) and exploration and production (“E&P”) companies to multinational and regional oilfield service companies. Once a new product has been commercialized or acquired, our global sales and distribution infrastructure enables us to scale and drive customer adoption quickly.

We believe that we can create value for our stockholders across the industry cycle and view our through-cycle playbook as having helped us outperform in all market environments. We prioritize protecting the long-term health of the Company through investments in research and development (“R&D”) and sustaining engineering in our existing portfolio in all market environments.

We seek to maintain a conservative balance sheet to preserve operational and financial flexibility through the industry cycle.

We generate our revenue from three primary sources: sales of products and other associated revenues with product sales, such as freight; rentals of tools that are used to deploy our consumable products or to provide a critical well function; and services that are typically connected to the well-site deployment of our engineered products.

Of our 2024 revenue, approximately 80% was generated from product sales, approximately 8% was generated from rental tools and approximately 12% was generated from services. 6 We believe that demand for our products is primarily activity-driven (i.e., correlated with global spending on exploration and production of oil and natural gas and with general industry activity), and we are not exposed to the highly cyclical capital equipment build cycle for the oil and natural gas industry.

Global spending on oil and natural gas can be measured by the number of wells drilled and oil and natural gas production volumes. According to the global energy consulting firm Rystad Energy, global E&P capital spending (excluding Iran, Venezuela, Cuba, Russia and China) is expected to remain consistent in 2025 relative to 2024.

We believe that our diverse product portfolio, operating track record and global footprint position us well to continue gaining market share. In the NAM market, Rystad Energy is forecasting a slight decline in E&P capital spending of 2% from 2024 through 2025.

NAM unconventional resources have emerged as a flexible, short-cycle source of oil and natural gas production for E&P operators and a critical component of the global hydrocarbon supply mix. This is a core market for us as our products have broad applicability and we maintain a robust sales presence as well as service and distribution infrastructure across the region.

We view the NAM market as relatively service intensive and believe E&P operators are prone to adopt the latest technologies. In the International and Offshore markets, Rystad Energy is forecasting E&P capital spending to slightly grow by 2% from 2024 through 2025, excluding Iran, Venezuela, Cuba, Russia and China.

We are focused on continually increasing our market presence in these regions as they are typically subject to long-cycle investment horizons and exhibit relatively less cyclicality than the NAM market.

In addition, we believe that we can benefit from higher barriers to entry that exist for product and service companies that support the primary end users in our International and Offshore markets, IOCs and NOCs, relative to the NAM market.

Risks Related to Our Business Our business and financial performance depends primarily upon the general level of activity in the oil and natural gas industry, including the number of drilling rigs in operation, the number of oil and natural gas wells being drilled, the volume of production, the number of well completions and the level of well remediation activity and the corresponding capital expenditures by oil and natural gas companies within North America, the Middle East, Latin America and Europe, among other global markets.

A decline in prices for oil and natural gas may have an adverse effect on our revenue, cash flows, profitability and growth. Demand for most of our products and services depends primarily on the level of activity in the oil and natural gas industry in North America, the Middle East, Latin America and Europe, among other global markets.

As a result, our operations are dependent on the levels of activity and capital spending in oil and natural gas exploration, development and production.

A prolonged reduction in oil and natural gas prices would generally depress the level of oil and natural gas exploration, development, production, and well completion activity and would result in a corresponding decline in the demand for the products and services that we provide.

The significant decline in oil and natural gas prices that occurred in 2020 caused a reduction in our customers’ spending and associated drilling and completion activities, which had an adverse effect on our revenue.

While oil and natural gas prices have since increased, should prices again decline, similar declines in our customers’ spending would have an adverse effect on our revenue.

In addition, a worsening of these conditions may result in a material adverse impact on certain of our customers’ liquidity and financial position resulting in further spending reductions, delays in the collection of amounts owing to us and other similar impacts.

Many factors over which we have no control affect the supply of and demand for, and our customers’ willingness to explore, develop and produce oil and natural gas, and therefore, influence the volumes we can sell and the prices we can charge for our products and services, including: • the global supply of, and demand for, oil and natural gas; • the level of prices, and expectations about future prices, of oil and natural gas; • the level of global oil and natural gas exploration and production; • the cost of exploring for, developing, producing and delivering oil and natural gas; • the supply of and demand for our products and services; • global or national health concerns, including health epidemics such as the COVID-19 pandemic; • the expected decline rates of current production; • inability to acquire or maintain necessary permits or mining or water rights; • the price and quantity of foreign imports; • political and economic conditions in oil and natural gas producing countries and regions, including the United States, the Middle East, Africa, Europe, Latin America and Russia; • actions by the members of OPEC+ and other oil-producing countries with respect to oil production levels and announcements of potential changes in such levels; • speculative trading in crude oil and natural gas derivative contracts; • the level of consumer product demand; • the discovery rates of new oil and natural gas reserves; • contractions in the credit market; • the strength or weakness of the U.S. dollar; • available pipeline and other transportation capacity; • the levels of oil and natural gas storage; • the proximity and capacity of oil and natural gas pipelines and other transportation facilities; • adverse weather conditions and other natural disasters; 15 • U.S. and non-U.S. tax policy; • U.S. and non-U.S. governmental approvals and regulatory requirements and conditions; • the continued threat of terrorism and the impact of military and other action, including military action in the Middle East and the Russia-Ukraine war; • technical advances affecting energy consumption; • the price and availability of alternative fuels and energy sources; • uncertainty in commodities markets and the ability of oil and natural gas producers to raise equity capital and debt financing; • acquisition and divestiture activity among oil and natural gas producers; • cyclical/seasonal business and dependence upon spending of our customers; • competition among oilfield service and equipment providers; • changes in transportation regulations that result in increased costs or administrative burdens; and • overall domestic and global economic conditions.

These factors and the volatility of the energy markets make it extremely difficult to predict future oil and natural gas price movements with any certainty. A decline in oil and natural gas prices may have a material adverse effect on our business, results of operations and financial condition.

The cyclical nature of the oil and natural gas industry may cause our operating results to fluctuate. We derive our revenues from companies in the oil and natural gas exploration and production and oilfield services industry, a historically cyclical industry with levels of activity that are significantly affected by the levels and volatility of oil and natural gas prices.

We have experienced, and may in the future experience, significant fluctuations in operating results as a result of the reactions of our customers to changes in oil and natural gas prices.

For example, prolonged low commodity prices experienced by the oil and natural gas industry during 2015, 2016 and in 2020, combined with adverse changes in the capital and credit markets, caused many exploration and production companies to reduce their capital budgets and drilling activity.

This resulted in a significant decline in demand for oilfield services and products and adversely impacted the volume of products and services oilfield services companies could sell, and the prices oilfield services companies could charge for their products and services. In addition, a majority of the revenue we earn is based upon product sales at market pricing.

By selling our products at market pricing, we are exposed to the risks of a rapid reduction in prices and resulting volatility in our revenues. We are subject to risks relating to existing international operations and expansion into new geographical markets.

We continue to focus on expanding sales globally as part of our overall growth strategy and expect sales from outside the United States to continue to represent a significant and growing portion of our revenue.

If we are unable to successfully manage the risks associated with expanding our global business or adequately manage operational risks of our existing international operations, these risks could have a material adverse effect on our growth strategy into new geographical markets,our reputation, our business, results of operations, financial condition and cash flows.

We often sell and rent products to IOCs and NOCs. Many IOCs and NOCs require products to undergo extensive registration and qualification processes before such product can be purchased or rented. This process can take several years to complete.

We will seek to undergo these registration and qualification processes for our current and future products, and there is no guarantee our products will successfully complete these processes, or if they do, that such IOCs or NOCs will purchase or rent such products in the future.

We must comply with export and import controls, economic sanctions and embargoes, anti-boycott, and other international trade laws and any failure to comply with such laws could subject us to liability and have a material adverse impact on our business, financial condition and results of operations.

We conduct business globally, and our business activities and services are subject to import and export controls, as well as economic sanctions, embargoes, anti-boycott, and other international trade laws of the United States and other countries. We must comply with U.S. and other applicable export and import controls, economic sanctions, embargoes, anti-boycott, and other international trade laws, including the U.S.

Commerce Department’s Export Administration Regulations and economic sanctions administered by the U.S. Department of the Treasury’s Office of Foreign Assets Control and the U.S. Department of State. In addition, the movement of goods, services and technology subjects us to complex legal regimes governing international trade.

Although we have instituted policies and procedures designed to promote compliance with such controls and laws, violations of import or export controls, economic sanctions, embargoes, anti-boycott, or other international trade laws could result in negative consequences to us, including government investigations, sanctions, criminal or civil fines or penalties, more onerous compliance requirements, loss of authorizations or licenses needed to conduct aspects of our business, default under debt, reputational harm and other adverse consequences.

Moreover, if any of our counterparties or jurisdictions where we do business becomes the target of economic sanctions or other trade restrictions, we may face an array of issues, including, but not limited to, having to abandon the related project or business, being unable to recoup prior invested time and capital or being subject to lawsuits, investigations or regulatory proceedings that could be time consuming and expensive to respond to, and which could lead to sanctions, criminal or civil fines or penalties, loss of authorizations or licenses needed to conduct aspects of our business, default under debt, reputational harm and other adverse consequences.

Furthermore, the laws concerning import and export controls, including record keeping and reporting, economic sanctions, embargoes, anti-boycott, and other international trade laws are complex and constantly changing and we cannot predict how these laws or their interpretation, administration and enforcement will change over time.

In response to Russia’s military action in Ukraine in 2022, the United States, the European Union and the United Kingdom, among others, have imposed significant economic sanctions and export control measures on Russia and others supporting Russia’s military and political actions in Ukraine, including, blocking or “asset freezing” sanctions on designated entities and individuals; restrictions on the Russian energy and financial sectors; blocking economic activity in certain areas of Ukraine not controlled by the Ukrainian government; prohibitions in relation to investment in Russia; prohibitions and restrictions relating to Russian origin oil and oil products; and export controls limiting the export of a wide range of goods and technical assistance to Russia.

In response, Russia has implemented counter-sanctions, including restrictions on the divestment from Russian assets by foreign investors and restrictions on the payments of dividends and transfers of funds out of Russia by foreign investors.

Item 1C. Cybersecurity. Innovex maintains a cyber risk management program designed to identify, assess, manage, mitigate, and respond to cybersecurity threats. The underlying controls of the cyber risk management program are based on recognized best practices and standards for cybersecurity and information technology, including the National Institute of Standards and Technology (“NIST”) and the Cybersecurity Framework.

Innovex has an annual assessment, performed by a third party, of the Company’s cyber risk management program against the NIST Cybersecurity Framework. Innovex contracts a Cyber Security Operations Center operating in three locations to provide 24/7 monitoring of its global cybersecurity environment and to coordinate the investigation and remediation of alerts.

An annual incident response drill is in place to prepare support teams in the event of a significant incident. Cyber partners are a key part of Innovex’s cybersecurity infrastructure. Innovex partners with leading cybersecurity companies and organizations, leveraging third-party technology and expertise.

Innovex engages with these partners to monitor and maintain the performance and effectiveness of products and services that are deployed in Innovex ’s environment. Innovex’s VP of IT reports to Innovex’s Chief Financial Officer and is the head of the Company’s cybersecurity team.

The VP of IT is responsible for assessing and managing Innovex’s cyber risk management program, informs senior management regarding the prevention, detection, mitigation, and remediation of cybersecurity incidents and supervises such efforts.

The cybersecurity team has decades of experience selecting, deploying, and operating cybersecurity technologies, initiatives, and processes around the world, and relies on threat intelligence as well as other information obtained from governmental, public or private sources, including external consultants engaged by Innovex.

The Audit Committee of the board of directors oversees Innovex’s cybersecurity risk exposures and the steps taken by management to monitor and mitigate cybersecurity risks. The IT department briefs the Audit Committee on the effectiveness of Innovex’s cyber risk management program, typically on a semiannual basis.

In addition, cybersecurity risks are reviewed by the Innovex board of directors, at least annually, as part of the Company’s corporate risk mapping exercise. Innovex faces risks from cybersecurity threats that could have a material adverse effect on its business, financial condition, results of operations, cash flows or reputation.

Innovex has experienced, and will continue to experience, cyber incidents in the normal course of its business. However, prior cybersecurity incidents have not had a material adverse effect on Innovex’s business, financial condition, results of operations, or cash flows. See “Item 1A. Risk Factors—Risks Related to Technology Advancement— We are subject to cyber security risks.

A cyber incident could occur and result in information theft, data corruption, operational disruption and/or financial loss” and “Item 1A. Risk Factors—Risks Related to Technology Advancement—We have experienced IT system disruptions and cyber attacks in the past, and a failure of our IT infrastructure and cyber attacks could adversely impact us in the future.”