Drilling Tools International Corp

Previous wording

The following discussion and analysis should be read in conjunction with the accompanying unaudited condensed consolidated financial statements and related notes as of June 30, 2025, and for the three and six months ended June 30, 2025 and 2024, included elsewhere herein. For additional information pertaining to our business, including risk factors which should be considered before investing in our common stock, refer to our Annual Report on Form 10-K for the fiscal year ended December 31, 2024. Our historical results are not necessarily indicative of the results that may be expected for any period in the future. All dollar amounts are expressed in thousands of United States dollars (“$”), unless otherwise indicated. Capitalized terms used in this section, but not otherwise defined, have the meanings ascribed to them in the Report.

Current wording

The following discussion and analysis should be read in conjunction with the accompanying unaudited condensed consolidated financial statements and related notes as of September 30, 2025, and for the three and nine months ended September 30, 2025 and 2024, included elsewhere herein. For additional information pertaining to our business, including risk factors which should be considered before investing in our common stock, refer to our Annual Report on Form 10-K for the fiscal year ended December 31, 2024. Our historical results are not necessarily indicative of the results that may be expected for any period in the future. All dollar amounts are expressed in thousands of United States dollars (“$”), unless otherwise indicated. Capitalized terms used in this section, but not otherwise defined, have the meanings ascribed to them in the Report.

Previous wording

Our revenues are derived from two sources: tool rental and product sales. Tool rental revenues are derived from the rental of tools used in bottom hole assemblies (“BHA”), various wellbore optimization tools, and tubular goods for drilling, workover, and completion operations. Additionally, tool rental revenue consists of the repair and inspection of such tools. Product sale revenues are derived from the sale of target depth technologies, the manufacturing and repair of tools for external customers, and tool recovery revenue. During the three months ended June 30, 2025 and 2024, we derived 83% and 75% of total revenues from tool rentals and 17% and 25% from product sales, respectively. During the six months ended June 30, 2025 and 2024, we derived 82% and 78% from tool rentals and 18% and 22% from product sales, respectively.

Current wording

Our revenues are derived from two sources: tool rental and product sales. Tool rental revenues are derived from the rental of tools used in bottom hole assemblies (“BHA”), various wellbore optimization tools, and tubular goods for drilling, workover, and completion operations. Additionally, tool rental revenue consists of the repair and inspection of such tools. Product sale revenues are derived from the sale of target depth technologies, the manufacturing and repair of tools for external customers, and tool recovery revenue. During the three months ended September 30, 2025 and 2024, we derived 82% and 70% of total revenues from tool rentals and 18% and 30% from product sales, respectively. During the nine months ended September 30, 2025 and 2024, we derived 82% and 75% from tool rentals and 18% and 25% from product sales, respectively.

Previous wording

In the first half of 2025, the oil and gas market witnessed a dynamic interplay of geopolitical tensions, shifting demand dynamics, and evolving geopolitical and economic factors. U.S. oil production reached record highs, averaging 13.5 million barrels per day, driven by the Permian Basin and offshore developments. However, this surge in supply coincided with an increasing surplus in global oil supply over demand, leading to downward pressure on prices. Crude oil prices experienced declines, specially WTI, whose quarterly average decreased from $78.41 per barrel to $64.63 per barrel from the fourth quarter of 2024 to the second quarter of 2025. Despite the high volatility in spot oil prices described above, our customers tend to be more focused on medium-term and long term commodity prices when making investment decisions due to the longer lead times for offshore projects.

Current wording

In the nine months ended September 30, 2025, the oil and gas market witnessed a dynamic interplay of geopolitical tensions, shifting demand dynamics, and evolving geopolitical and economic factors. U.S. oil production reached record highs, averaging 13.5 million barrels per day, driven by the Permian Basin and offshore developments. However, this surge in supply coincided with an increasing surplus in global oil supply over demand, leading to downward pressure on prices. Crude oil prices experienced declines, specially WTI, whose quarterly average decreased from $76.24 per barrel to $65.74 per barrel from the third quarter of 2024 to the third quarter of 2025. Despite the high volatility in spot oil prices described above, our customers tend to be more focused on medium-term and long term commodity prices when making investment decisions due to the longer lead times for offshore projects.

Previous wording

In the first half of 2025, U.S. natural gas prices experienced a notable rebound following the record lows of 2024. The Henry Hub spot price averaged approximately $3.19 per million British thermal units (MMBtu) during the first quarter, or a 30% increase compared to the fourth quarter of 2024, reflecting seasonal increases due to heightened heating demand during colder-than-average weather in January. This uptick in demand is expected to outpace any expected growth in U.S. production, leading to a tightening of inventories and supporting higher prices through the remainder of 2025

Current wording

In the nine months ended September 30, 2025, U.S. natural gas prices experienced a notable rebound following the record lows of 2024. The Henry Hub spot price averaged approximately $3.03 per million British thermal units (MMBtu) during the third quarter, or a 43% increase compared to the third quarter of 2024. An increase in demand is expected to outpace any expected growth in U.S. production, leading to a tightening of inventories and supporting higher prices through the remainder of 2025

Previous wording

Notwithstanding the significant commodity price volatility over the past several years, we have seen decreases both the Western and Eastern Hemisphere. During the three and six months ended June 30, 2025, the weekly average Western Hemisphere rig count, as reported by Baker Hughes was 832 and 881 rigs, respectively, compared to 897 and 946 rigs for the three and six months ended June 30, 2024. Additionally, during the three and six months ended June 30, 2025, the weekly average Eastern Hemisphere rig count, as reported by Baker Hughes was 714 and 719 rigs, respectively, compared to 764 and 760 rigs for the three and six months ended June 30, 2024. However, notwithstanding the impact of longer laterals, improved rig efficiencies have partially offset the impact of this reduction.

Current wording

Notwithstanding the significant commodity price volatility over the past several years, we have seen decreases in both the Western and Eastern Hemisphere. During the three and nine months ended September 30, 2025, the weekly average Western Hemisphere rig count, as reported by Baker Hughes was 851 and 871 rigs, respectively, compared to 947 and 946 rigs for the three and nine months ended September 30, 2024. Additionally, during the three and nine months ended September 30, 2025, the weekly average Eastern Hemisphere rig count, as reported by Baker Hughes was 887 and 900 rigs, respectively, compared to 950 and 969 rigs for the three and nine months ended September 30, 2024. However, notwithstanding the impact of longer laterals, improved rig efficiencies have partially offset the impact of this reduction.

Previous wording

Eastern Hemisphere revenue was $6.1 million for the three months ended June 30, 2025, a increase of $1.9 million, or 46% compared to the three months ended June 30, 2024. The increase in revenues was driven by the recent acquisitions of tool rental businesses located within the Eastern Hemisphere. Eastern Hemisphere segment income was $45.3 thousand, a decrease of $0.9 million, or 95%, compared to three months ended June 30, 2024. The decrease was driven by increased headcount as a result of the acquisitions and an activity decline seen in the Middle Eastern market.

Current wording

Eastern Hemisphere revenue was $6.2 million for the three months ended September 30, 2025, an increase of $1.8 million, or 41% compared to the three months ended September 30, 2024. The increase in revenues was driven by the recent acquisitions of tool rental businesses located within the Eastern Hemisphere. Eastern Hemisphere segment income was $0.2 million, a decrease of $0.5 million, or 73%, compared to three months ended September 30, 2024. The decrease was driven by increased headcount as a result of the acquisitions and an activity decline seen in the Middle Eastern market.

Previous wording

Depreciation and amortization expenses was $6.8 million for the three months ended June 30, 2025, an increase of $1.1 million, or 20%, compared to the three months ended June 30, 2025 and 2024. The increase corresponds with the increasing property, plant, and equipment and intangible asset balances as a result of acquisitions and capital expenditures.

Current wording

Depreciation and amortization expenses was $6.8 million for the three months ended September 30, 2025, an increase of $0.6 million, or 10%, compared to the three months ended September 30, 2025 and 2024. The increase corresponds with the increasing property, plant, and equipment and intangible asset balances as a result of acquisitions and capital expenditures.

Previous wording

Interest expense, net was $1.3 million for the three months ended June 30, 2025, an increase of $0.5 million, or 65%, compared to the three months ended June 30, 2025 and 2024. The increase was primarily a result of interest on the term loan, entered into in March 2024, interest on amounts drawn on the credit facility, and interest on the promissory note, entered into in September 2024.

Current wording

Interest expense, net was $1.3 million for the three months ended September 30, 2025, an increase of $0.3 million, or 29%, compared to the three months ended September 30, 2025 and 2024. The increase was primarily a result of interest on the term loan, entered into in March 2024, interest on amounts drawn on the credit facility, and interest on the promissory note, entered into in September 2024.

Previous wording

Western Hemisphere revenue was $37.6 million for the three months ended June 30, 2025, a increase of $2.0 million, or 6%, compared to the three months ended June 30, 2024. The increase in revenues was driven by the addition of our Diamond Products Division ("DPD") in August of 2024. The increase in Western Hemisphere segment income was insignificant despite the increase in revenue due to increases in personnel related costs.

Current wording

Western Hemisphere revenue was $113.7 million for the nine months ended September 30, 2025, an increase of $1.1 million, or 1%, compared to the nine months ended September 30, 2024. The increase in revenues was driven by the addition of our Diamond Products Division ("DPD") in August of 2024. Western Hemisphere segment income was $37.4 million, a decrease of $1.2 million, or 3%, compared to nine months ended September 30, 2024. The decrease was driven by increased headcount as a result of the acquisitions and other personnel related expenses.

Previous wording

Eastern Hemisphere revenue was $11.1 million for the six months ended June 30, 2025, an increase of $5.7 million, or 105% compared to the six months ended June 30, 2024. The increase in revenues was driven by the recent acquisitions of tool rental businesses located within the Eastern Hemisphere. Eastern Hemisphere segment loss was $0.1 million, a decrease of $1.5 million, or 111%, compared to six months ended June 30, 2024. The decrease was driven by increased headcount as a result of the acquisitions and an activity decline seen in the Middle Eastern market.

Current wording

Eastern Hemisphere revenue was $17.4 million for the nine months ended September 30, 2025, an increase of $7.5 million, or 76% compared to the nine months ended September 30, 2024. The increase in revenues was driven by the recent acquisitions of tool rental businesses located within the Eastern Hemisphere. Eastern Hemisphere segment loss was $0.0 million, a decrease of $2.0 million, or 98%, compared to nine months ended September 30, 2024. The decrease was driven by increased headcount as a result of the acquisitions and an activity decline seen in the Middle Eastern market.

Previous wording

Corporate and other expenses was $7.0 million for the six months ended June 30, 2025, a decrease of $0.9 million, or 12%, compared to the six months ended June 30, 2024. The decrease was primarily driven by the reallocation of certain corporate expenses as a result of the recent segment reorganization in January of 2025.

Current wording

Corporate and other expenses was $10.6 million for the nine months ended September 30, 2025, a decrease of $1.1 million, or 10%, compared to the nine months ended September 30, 2024. The decrease was primarily driven by the reallocation of certain corporate expenses as a result of the recent segment reorganization in January of 2025.

Previous wording

Deprecation and amortization expenses was $13.5 million for the six months ended June 30, 2025, an increase of $2.5 million, or 23%, compared to the six months ended June 30, 2024. The increase corresponds with the increasing property, plant, and equipment and intangible asset balances as a result of acquisitions and capital expenditures.

Current wording

Depreciation and amortization expenses was $20.4 million for the nine months ended September 30, 2025, an increase of $3.2 million, or 18%, compared to the nine months ended September 30, 2024. The increase corresponds with the increasing property, plant, and equipment and intangible asset balances as a result of acquisitions and capital expenditures.

Previous wording

Interest expense, net was $2.6 million for the six months ended June 30, 2025, an increase of $1.7 million, or 167%, compared to the six months ended June 30, 2024. The increase was primarily a result of interest on the term loan, entered into in March 2024, interest on amounts drawn on the credit facility, and interest on the promissory note, entered into in September 2024.

Current wording

Interest expense, net was $3.9 million for the nine months ended September 30, 2025, an increase of $2.0 million, or 96%, compared to the nine months ended September 30, 2024. The increase was primarily a result of interest on the term loan, entered into in March 2024, interest on amounts drawn on the credit facility, and interest on the promissory note, entered into in September 2024.

Previous wording

The following tables present a reconciliation of Adjusted EBITDA to net income (loss) for the three and six months ended June 30, 2025 and 2024 (non-recurring transaction expenses recorded to other (income) expense are presented separately within Adjusted EBITDA):

Current wording

The following tables present a reconciliation of Adjusted EBITDA to net income (loss) for the three and nine months ended September 30, 2025 and 2024 (non-recurring transaction expenses recorded to other (income) expense are presented separately within Adjusted EBITDA):

Previous wording

At June 30, 2025, we had $1.1 million of cash and cash equivalents. Our primary sources of liquidity and capital resources are cash on hand, cash flows generated by operating activities and, if necessary, borrowings under the Credit Facility Agreement. We may use additional cash generated to execute strategic acquisitions or for general corporate purposes. We believe that our existing cash on hand, cash generated from operations and available borrowings under the Credit Facility Agreement will be sufficient for at least the next 12 months to meet working capital requirements and anticipated capital expenditures.

Current wording

At September 30, 2025, we had $4.4 million of cash and cash equivalents. Our primary sources of liquidity and capital resources are cash on hand, cash flows generated by operating activities and, if necessary, borrowings under the Credit Facility Agreement. We may use additional cash generated to execute strategic acquisitions or for general corporate purposes. We believe that our existing cash on hand, cash generated from operations and available borrowings under the Credit Facility Agreement will be sufficient for at least the next 12 months to meet working capital requirements and anticipated capital expenditures.

Previous wording

Our capital expenditure relates to capital additions or improvements that add to our rental or repair capacity or extend the useful life of our drilling tools and related infrastructure. Also, our capital expenditures replace tools that are lost or damaged by a customer and these are funded by a rental tool recovery sale amount from the customer. We regularly incur capital expenditures on an on-going basis in order to (i) increase or maintain our rental tool fleet and equipment, (ii) extend the useful life of our rental tools and equipment and (iii)

Current wording

Our capital expenditure relates to capital additions or improvements that add to our rental or repair capacity or extend the useful life of our drilling tools and related infrastructure. Also, our capital expenditures replace tools that are lost or damaged by a customer and these are funded by a rental tool recovery sale amount from the customer. We regularly incur capital expenditures on an on-going basis in order to (i) increase or maintain our rental tool fleet and equipment, (ii) extend the useful life of our rental tools and equipment and (iii) acquire or upgrade computer hardware and software. The amount of our capital expenditures is influenced by, among other things, demand for our services, recovery of lost or damaged tools, schedules for refurbishing our various rental tools and equipment, cash flow generated by our operations, expected rates of return and cash required for other purposes.

Previous wording

Net cash provided by operating activities for the six months ended June 30, 2025 was $4.6 million, the driver being a net loss of $4.0 million and a decrease in net working capital of $4.8 million offset by non-cash adjustments of $13.5 million. We will continue to evaluate our capital requirements for both short-term and long-term liquidity needs, which could be affected by various risks and uncertainties, including, but not limited to, the effects of the current inflationary environment, rising interest rates, and other risks detailed in the section of this Report entitled “Risk Factors.”

Current wording

Net cash provided by operating activities for the nine months ended September 30, 2025 was $14.6 million, the driver being a net loss of $4.9 million and a decrease in net working capital of $1.3 million offset by non-cash adjustments of $21.4 million. We will continue to evaluate our capital requirements for both short-term and long-term liquidity needs, which could be affected by various risks and uncertainties, including, but not limited to, the effects of the current inflationary environment, rising interest rates, and other risks detailed in the section of this Report entitled “Risk Factors.”

Previous wording

Net cash provided by operating activities for the six months ended June 30, 2024 was $4.4 million, the driver being net income of $3.5 million, including non-cash charges of $8.6 million, offset by a decrease in net working capital of $7.7 million.

Current wording

Net cash provided by operating activities for the nine months ended September 30, 2024 was $9.7 million, the driver being net income of $4.4 million, including non-cash charges of $13.9 million, offset by a decrease in net working capital of $8.6 million.

Previous wording

Net cash used in investing activities for the six months ended June 30, 2025 was $12.1 million resulting from purchases of property, plant, and equipment of $12.6 million, purchases of intangible assets of $1.1 million, and the acquisition of Titan for $5.6 million, partially offset by proceeds from rental tool recovery sales of $7.1 million.

Current wording

Net cash used in investing activities for the nine months ended September 30, 2025 was $12.7 million resulting from purchases of property, plant, and equipment of $16.1 million, purchases of intangible assets of $1.4 million, and the acquisition of Titan for $5.6 million, partially offset by proceeds from rental tool recovery sales of $10.4 million.

Previous wording

Net cash used in investing activities for the six months ended June 30, 2024 was $26.7 million, resulting from purchases of property, plant, and equipment of $16.3 million and the acquisition of Deep Casing Tools for $18.2 million were partially offset by proceeds from rental tool recovery sales of $7.8 million.

Current wording

Net cash used in investing activities for the nine months ended September 30, 2024 was $46.1 million, resulting from purchases of property, plant, and equipment of $19.7 million and the acquisition of DCT and SDPI for $38.7 million were partially offset by proceeds from rental tool recovery sales of $10.9 million.

Previous wording

Net cash provided by financing activities for the six months ended June 30, 2025 was $2.4 million, resulting from net debt increases of $3.1 million offset by purchases of treasury stock of $0.6 million.

Current wording

Net cash used in financing activities for the nine months ended September 30, 2025 was $3.7 million, resulting from net debt decreases of $2.6 million and purchases of treasury stock of $1.2 million.

Previous wording

Net cash provided by financing activities for the six months ended June 30, 2024 was $23.5 million, resulting from net debt increases of $24.2 million offset by the payment of debt issuance costs of $0.7 million.

Current wording

Net cash provided by financing activities for the nine months ended September 30, 2024 was $43.4 million, resulting from net debt increases of $44.1 million offset by the payment of debt issuance costs of $0.7 million.