Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of regulations S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Exchange Act Rule 12b-2). Yes ☐ No ☒

As of ~~October 24, 2022,~~May 3, 2023, the number of shares outstanding of the registrant’s common stock, par value $0.01 per share, was ~~33,919,726~~34,172,911.


	September 30, 2022			December 31, 2021			March 31, 2023			December 31, 2022
	(In thousands, except per share data)						(In thousands, except per share data)
ASSETS
Current assets:
Cash and cash equivalents	$	290,279		$	355,451		$	235,343		$	264,804
Short-term investments		25,287			-			18,921			32,232
Trade receivables, net		81,666			100,987			132,206			91,504
Unbilled receivables		138,533			102,597			150,290			144,428
Inventories, net		140,530			145,724			152,770			146,004
Prepaids and other current assets		49,457			40,790
Prepaid expenses								15,592			19,874
Other current assets								36,161			34,359
Assets held for sale		20,006			-			10,828			19,383
Total current assets		745,758			745,549			752,111			752,588
Operating lease right of use assets		4,932			5,258			6,325			4,872
Property, plant and equipment, net		181,359			216,200			183,285			181,270
Deferred income taxes		8,893			11,381			4,850			4,488
Intangible assets		23,868			26,446			22,691			23,348
Other assets		5,714			5,592			6,134			5,949
Total assets	$	970,524		$	1,010,426		$	975,396		$	972,515
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable	$	46,484		$	35,232		$	47,212		$	43,019
Accrued income taxes		2,106			4,102			5,677			4,868
Contract liabilities		8,859			9,746			7,271			8,020
Accrued compensation		8,420			6,291			7,578			5,796
Operating lease liabilities		1,007			1,046			1,230			1,054
Other accrued liabilities		22,411			37,246			14,392			24,798
Total current liabilities		89,287			93,663			83,360			87,555
Deferred income taxes		3,918			3,925			4,025			3,756
Income tax payable		6,501			9,627			874			823
Operating lease liabilities, long-term		3,817			4,170			5,178			3,807
Other long-term liabilities		2,164			1,933			1,581			1,658
Total liabilities		105,687			113,318			95,018			97,599
Contingencies (Note 12)
Contingencies (Note 11)
Stockholders' equity:
Preferred stock: 10,000,000 shares authorized at $0.01 par value (none issued)		-			-			-			-
Common stock:
100,000,000 shares authorized at $0.01 par value, 33,919,726 and 34,774,156 shares issued and outstanding at September 30, 2022 and December 31, 2021		343			352
100,000,000 shares authorized at $0.01 par value, 34,171,856 and 34,157,057 shares issued and outstanding at March 31, 2023 and December 31, 2022								343			343
Additional paid-in capital		87,917			80,254			93,027			90,450
Retained earnings		952,991			973,087			955,043			952,732
Accumulated other comprehensive losses		(176,414	)		(156,585	)		(168,035	)		(168,609	)
Total stockholders' equity		864,837			897,108			880,378			874,916
Total liabilities and stockholders' equity	$	970,524		$	1,010,426		$	975,396		$	972,515

The accompanying notes are an integral part of these condensed consolidated financial statements.


	Three months ended						Nine months ended						Three months ended
	September 30,						September 30,						March 31,
	2022			2021			2022			2021			2023			2022
	(In thousands, except per share data)												(In thousands, except per share data)
Revenues:
Products	$	58,508		$	53,622		$	176,129		$	165,066		$	59,246		$	55,642
Services		20,443			19,560			57,538			54,763			21,281			17,499
Leasing		9,190			9,815			31,589			25,204			10,338			9,996
Total revenues		88,141			82,997			265,256			245,033			90,865			83,137
Cost and expenses:
Cost of sales:
Products		49,714			48,120			151,932			133,243			47,044			48,038
Services		8,105			7,020			24,773			24,687			12,003			8,784
Leasing		7,891			7,694			22,663			23,229			6,455			7,173
Total cost of sales		65,710			62,834			199,368			181,159			65,502			63,995
Selling, general and administrative		22,431			25,265			67,322			84,416			22,585			22,393
Engineering and product development		2,645			3,510			9,041			11,270			3,399			3,676
Restructuring and other charges		2,180			-			7,977			26,020			1,718			32
Gain on sale of property, plant and equipment		(17,276	)		(13	)		(17,770	)		(3,886	)		(6,647	)		(114	)
Foreign currency transaction gains		(1,901	)		(1,663	)		(5,574	)		(764	)
Foreign currency transaction (gain) loss														1,120			(1,254	)
Total costs and expenses		73,789			89,933			260,364			298,215			87,677			88,728
Operating income (loss)		14,352			(6,936	)		4,892			(53,182	)		3,188			(5,591	)
Interest income		379			188			1,155			300			2,827			203
Interest expense		(131	)		(94	)		(284	)		(592	)		(80	)		(54	)
Income (loss) before income taxes		14,600			(6,842	)		5,763			(53,474	)		5,935			(5,442	)
Income tax provision (benefit)		(610	)		4,301			5,061			11,094
Income tax provision														3,624			3,496
Net income (loss)	$	15,210		$	(11,143	)	$	702		$	(64,568	)	$	2,311		$	(8,938	)
Income (loss) per common share:
Basic	$	0.45		$	(0.31	)	$	0.02		$	(1.82	)	$	0.07		$	(0.26	)
Diluted	$	0.44		$	(0.31	)	$	0.02		$	(1.82	)	$	0.07		$	(0.26	)
Weighted average common shares outstanding:
Basic		33,948			35,387			34,304			35,386			34,128			34,494
Diluted		34,232			35,387			34,580			35,386			34,489			34,494

The accompanying notes are an integral part of these condensed consolidated financial statements.


	Nine months ended						Three months ended
	September 30,						March 31,
	2022			2021			2023			2022
	(In thousands)						(In thousands)
Operating activities
Net income (loss)	$	702		$	(64,568	)	$	2,311		$	(8,938	)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Adjustments to reconcile net income (loss) to net cash used in operating activities:
Depreciation and amortization		22,352			22,658			6,889			7,559
Stock-based compensation expense		7,669			9,541			2,577			2,527
Restructuring and other charges		6,119			22,465			683			32
Gain on sale of property, plant and equipment		(17,770	)		(3,886	)		(6,647	)		(114	)
Deferred income taxes		1,538			(993	)		(211	)		1,327
Changes in operating assets and liabilities:
Trade receivables, net		16,980			11,632			(39,531	)		14,849
Unbilled receivables		(38,097	)		25,961			(6,376	)		(6,951	)
Inventories, net		2,255			(6,680	)		(4,758	)		5,658
Prepaids and other assets		(10,775	)		14,706			1,335			(1,768	)
Accounts payable and accrued expenses		(10,124	)		2,902			(9,192	)		(25,109	)
Other, net		(16	)		-
Net cash provided by (used in) operating activities		(19,167	)		33,738
Net cash used in operating activities								(52,920	)		(10,928	)
Investing activities
Purchase of property, plant and equipment		(13,712	)		(7,928	)		(5,424	)		(2,066	)
Proceeds from sale of property, plant and equipment		18,535			5,967			15,460			208
Purchase of short-term investments		(25,287	)		-			(9,081	)		-
Net cash used in investing activities		(20,464	)		(1,961	)
Maturities of short-term investments								22,392			-
Net cash provided by (used in) investing activities								23,347			(1,858	)
Financing activities
Repurchase of common shares		(20,807	)		(1,132	)		-			(5,808	)
Other		(74	)		(113	)		(11	)		(51	)
Net cash used in financing activities		(20,881	)		(1,245	)		(11	)		(5,859	)
Effect of exchange rate changes on cash activities		(4,660	)		(1,315	)		123			1,202
Increase (decrease) in cash and cash equivalents		(65,172	)		29,217
Decrease in cash and cash equivalents								(29,461	)		(17,443	)
Cash and cash equivalents at beginning of period		355,451			345,955			264,804			355,451
Cash and cash equivalents at end of period	$	290,279		$	375,172		$	235,343		$	338,008

The accompanying notes are an integral part of these condensed consolidated financial statements.


	Common Stock			Additional Paid-In Capital			Retained Earnings			Accumulated Other Comprehensive Losses			Total			Common Stock			Additional Paid-In Capital		Retained Earnings			Accumulated Other Comprehensive Losses			Total
				(In thousands, except shares)												(In thousands, except shares)
Balance at July 1, 2022	$	348		$	85,351		$	948,917		$	(165,927	)	$	868,689
Balance at January 1, 2023																$	343		$	90,450	$	952,732		$	(168,609	)	$	874,916
Foreign currency translation adjustment		-			-			-			(10,487	)		(10,487	)		-			-		-			574			574
Net income		-			-			15,210			-			15,210			-			-		2,311			-			2,311
Comprehensive income														4,723														2,885
Repurchase of common shares (457,467 shares)		(5	)		-			(11,145	)		-			(11,150	)
Stock-based compensation expense		-			2,569			-			-			2,569			-			2,577		-			-			2,577
Other		-			(3	)		9			-			6
Balance at September 30, 2022	$	343		$	87,917		$	952,991		$	(176,414	)	$	864,837
Balance at March 31, 2023																$	343		$	93,027	$	955,043		$	(168,035	)	$	880,378

																Common Stock			Additional Paid-In Capital		Retained Earnings			Accumulated Other Comprehensive Losses			Total
																(In thousands, except shares)
Balance at January 1, 2022	$	352		$	80,254		$	973,087		$	(156,585	)	$	897,108		$	352		$	80,254	$	973,087		$	(156,585	)	$	897,108
Foreign currency translation adjustment		-			-			-			(19,829	)		(19,829	)		-			-		-			2,886			2,886
Net income		-			-			702			-			702
Comprehensive loss		-			-			-			-			(19,127	)
Repurchase of common shares (888,197 shares)		(9	)		-			(20,798	)					(20,807	)
Stock-based compensation expense		-			7,669			-			-			7,669
Other		-			(6	)		-			-			(6	)
Balance at September 30, 2022	$	343		$	87,917		$	952,991		$	(176,414	)	$	864,837

	Common Stock			Additional Paid-In Capital			Retained Earnings			Accumulated Other Comprehensive Losses			Total
				(In thousands, except shares)
Balance at July 1, 2021	$	363		$	71,878		$	1,071,838		$	(148,755	)	$	995,324
Foreign currency translation adjustment		-			-			-			(6,548	)		(6,548	)
Net loss		-			-			(11,143	)		-			(11,143	)		-			-		(8,938	)		-			(8,938	)
Comprehensive loss														(17,691	)													(6,052	)
Repurchase of common shares (45,225 shares)								(1,132	)					(1,132	)
Stock option expense		-			3,276			-			-			3,276
Balance at September 30, 2021	$	363		$	75,154		$	1,059,563		$	(155,303	)	$	979,777
Repurchase of common shares (273,629 shares)																	(3	)				(5,805	)					(5,808	)
Stock-based compensation expense																	-			2,527		-			-			2,527
Balance at March 31, 2022																$	349		$	82,781	$	958,344		$	(153,699	)	$	887,775

Balance at January 1, 2021	$	363		$	65,613		$	1,125,263		$	(149,711	)	$	1,041,528
Foreign currency translation adjustment		-			-						(5,592	)		(5,592	)
Net loss		-			-			(64,568	)		-			(64,568	)
Comprehensive loss		-			-			-			-			(70,160	)
Repurchase of common shares (45,225 shares)		-			-			(1,132	)		-			(1,132	)
Stock option expense		-			9,541			-			-			9,541
Balance at September 30, 2021	$	363		$	75,154		$	1,059,563		$	(155,303	)	$	979,777

The accompanying notes are an integral part of these condensed consolidated financial statements.

2. Significant Accounting Policies

Principles of Consolidation

The condensed consolidated financial statements include the accounts of the Company and its subsidiaries. All material intercompany accounts and transactions have been eliminated.

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect reported amounts of assets and liabilities as of the date of the financial statements and reported amounts of revenues and expenses during the reporting period. Actual results could differ materially from those estimates. Some of the Company’s more significant estimates are those affected by critical accounting policies for revenue recognition and asset recoverability tests and inventories.

Table of Contents

Revenue Recognition

The Company generates revenues through the sale of products, the sale of services and the leasing of running tools. The Company normally negotiates contracts for products, including those accounted for under the over-time method, rental tools and services separately. Modifications to the scope and price of sales contracts may occur in the form of variations and change orders. For all product sales, it is the customer’s decision as to the timing of the product installation, as well as whether Dril-Quip running tools will be purchased or rented. Furthermore, the customer is under no obligation to utilize the Company’s technical advisory assistance services. The customer may instead choose to use a third party or its own personnel.

Leasing Revenues

The Company earns leasing revenues from the rental of running tools. Revenues from rental of running tools are recognized on a day rate basis over the lease term, which is generally between one to three months.

On April 30, 2021, as a result of lower activity stemming from the COVID-19 pandemic, AFGlobal Corporation provided a 90-day written notice of termination of the lease agreement between the Company and AFGlobal in relation to the Company’s forge facility and equipment at its Houston Eldridge campus. As a result of the lease termination, the Company had approximately $~~2.3~~ million in unbilled revenue that was expensed in second quarter of 2021. Leasing revenue from renting this facility that was not recognized due to the termination of the lease agreement was approximately $~~0.5~~ ~~million and $1.5~~ million for the three and nine months ended September 30, 2021, respectively. The Company has numerous other forging suppliers and, through the end of the third quarter of 2022, has not experienced any disruptions in forging supply as a result of the lease termination.

Short-term Investments

Short-term investments that have a maturity greater than three months and less than a year from the date of purchase are comprised primarily of time deposits, certificates of deposit, commercial paper, bonds and notes, substantially all of which are denominated in U.S. dollars and are stated at cost plus accrued interest, which approximates fair value. The Company expects to hold all of its Short-term investments to maturity.

For purposes of the Condensed Consolidated Financial Statements, the Company does not consider Short-term investments to be cash equivalents.

Fair Value of Financial Instruments

The Company’s financial instruments consist primarily of cash and cash equivalents, receivables and payables. The carrying values of these financial instruments approximate their respective fair values as they are short-term in nature.

Impairment of Long-Lived Assets

Long-lived assets, including property, plant and equipment and definite-lived intangible assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. We evaluate our property and equipment and definite-lived intangible assets for impairment whenever changes in circumstances indicate that the carrying amount of an asset group may not be recoverable. Should the review indicate that the carrying value is not fully recoverable, the amount of the impairment loss is determined by comparing the carrying value to the estimated fair value. We assess recoverability based on undiscounted future net cash flows. Estimating future net cash flows requires us to make judgements regarding long-term forecasts of future revenues and costs related to the assets subject to review. These forecasts are uncertain in that they require assumptions about our revenue growth, operating margins, capital expenditures, future market conditions and technological developments. If changes in these assumptions occur, our expectations regarding future net cash flows may change such that a material impairment could result.

Restructuring and Other Charges

Restructuring and other charges consist of costs associated with our 2021 global strategic plan initiated in the fourth quarter of 2021, in an effort to realign our subsea product business with the market conditions. During the ~~third~~first quarter of ~~2022,~~2023, the Company incurred $~~2.2~~1.7 million of additional costs under the 2021 global strategic plan. These charges were primarily related to consulting and legal fees, office moves and site cleanup, and preparation costs. During the first ~~half~~quarter of ~~2021,~~2022, the Company incurred additional costs under the former 2018 global strategic plan to realign manufacturing facilities globally. These charges were primarily related to the restructuring of our downhole tools business where we exited certain underperforming countries and markets and shifted from manufacturing in-house to a vendor sourcing model. The Company did not incur any ~~additional~~significant costs inunder the ~~third quarter of 2021.~~2021 global strategic plan. These charges are reflected as "Restructuring and other charges" in our condensed consolidated statements of income (loss).

Repurchase of Equity Securities

On February 22, 2022, the Board of Directors authorized an incremental $100.0 million share repurchase plan. The repurchase plans have no set expiration date and any repurchased shares are expected to be cancelled. The manner, timing and amount of any purchase will be determined by management based on an evaluation of market conditions, stock price, liquidity and other factors. The program does not obligate the Company to acquire any amount of common stock and may be modified or superseded at any time at the Company’s discretion.

9For the three months ended March 31, 2023, the Company did

~~Table of Contents~~no

t purchase any shares under the share repurchase plans.

For the three months ended ~~September 30,~~March 31, 2022, the Company purchased ~~457,467~~ ~~shares under the share repurchase plans at an average price of approximately $24.35~~ ~~per share totaling approximately $11.1~~ ~~million and has retired such shares. For the nine months ended September 30, 2022, the Company purchased~~ ~~888,197~~ ~~shares under the share repurchase plans at an average price of approximately $23.41~~ ~~per share totaling approximately $20.8~~ ~~million and has retired such shares.~~

~~For the three and nine months ended September 30, 2021, the Company purchased~~ ~~45,225~~273,629 shares under the share repurchase plan at an average price of approximately $~~25.02~~21.20 per share totaling approximately $~~1.1~~5.8 million and has retired such shares.

Table of Contents

Earnings Per Share

Basic earnings per common share is computed by dividing net income (loss) by the weighted average number of shares of common stock outstanding during the period. Diluted earnings per common share is computed considering the dilutive effect of stock awards using the treasury stock method.

In each relevant period, the net income (loss) used in the basic and dilutive earnings per share calculations is the same. The following table reconciles the weighted average basic number of common shares outstanding and the weighted average diluted number of common shares outstanding for the purpose of calculating basic and diluted earnings per share:


	Three months ended				Nine months ended				Three months ended
	September 30,				September 30,				March 31,
	2022		2021		2022		2021		2023		2022
	(In thousands)								(In thousands)
Weighted average common shares outstanding – basic		33,948		35,387		34,304		35,386		34,128		34,494
Dilutive effect of common stock awards		284		-		276		-		361		-
Weighted average common shares outstanding – diluted		34,232		35,387		34,580		35,386		34,489		34,494

For the three ~~and nine~~ months ended ~~September 30,~~March 31, 2023 and 2022, ~~and 2021,~~ the Company has excluded the following common stock ~~options and~~ awards because their impact on the ~~income/~~income (loss) per share is anti-dilutive (in thousands on a weighted average basis):

Three months ended

Nine months ended

September 30,

September 30,

2022

2021

2022

2021

(In thousands)

Director stock awards

1

63

-

60

Stock options

-

54

-

56

Performance share units

-

323

-

328

Restricted stock awards

2

477

1

479

~~Table of Contents~~


	Three months ended
	March 31,
	2023		2022
	(In thousands)
Director stock awards		-		58
Performance share units		-		260
Restricted stock awards		-		516

3. Revenue Recognition

Revenues from contracts with customers (excludes leasing) consisted of the following:

Three months ended September 30,

Western
Hemisphere

Eastern
Hemisphere

Asia-
Pacific

Total

2022

2021

2022

2021

2022

2021

2022

2021

(In thousands)

Product Revenues

$
36,242

$
37,612

$
12,150

$
10,217

$
10,116

$
5,793

$
58,508

$
53,622

Service Revenues

14,416

12,872

3,980

2,458

2,047

4,230

20,443

19,560

Total

$
50,658

$
50,484

$
16,130

$
12,675

$
12,163

$
10,023

$
78,951

$
73,182

Nine months ended September 30,

Western
Hemisphere

Eastern
Hemisphere

Asia-
Pacific

Total

2022

2021

2022

2021

2022

2021

2022

2021

(In thousands)

Product Revenues

$
116,768

$
112,787

$
36,103

$
25,505

$
23,258

$
26,774

$
176,129

$
165,066

Service Revenues

39,067

33,813

10,507

7,748

7,964

13,202

57,538

54,763

Total

$
155,835

$
146,600

$
46,610

$
33,253

$
31,222

$
39,976

$
233,667

$
219,829


	Three months ended
	March 31,
	2023		2022
	(In thousands)
Revenues:
Products:
Subsea products	$	46,117	$	46,304
Well construction		13,129		9,338
Total products		59,246		55,642
Services:
Subsea services		16,487		13,157
Well construction services		4,794		4,342
Total services		21,281		17,499

Contract Balances

Balances related to contracts with customers consisted of the following:

Contract Assets (amounts shown in thousands)


Contract Assets at December 31, 2021	$	97,716
Contract Assets at December 31, 2022				$	138,592
Additions		108,136			180,755
Transfers to Trade Receivables, Net		(71,733	)		(176,410	)
Contract Assets at September 30, 2022	$	134,119
Contract Assets at March 31, 2023				$	142,937

Table of Contents

Contract Liabilities (amounts shown in thousands)


Contract Liabilities at December 31, 2021	$	9,222
Contract Liabilities at December 31, 2022				$	6,824
Additions		1,698			5,065
Revenue Recognized		(3,411	)		(6,107	)
Contract Liabilities at September 30, 2022	$	7,509
Contract Liabilities at March 31, 2023				$	5,782

Contract assets include unbilled accounts receivable associated with contracts accounted for under the over-time accounting method which were approximately $~~90.8~~101.9 million and $~~58.7~~92.6 million at ~~September 30, 2022~~March 31, 2023 and December 31, ~~2021,~~2022, respectively. Unbilled contract assets are transferred to trade receivables, net, when the rights become unconditional. Contract liabilities primarily relate to advance payments from customers.

Obligations for returns and refunds were considered immaterial as of ~~September 30, 2022.~~March 31, 2023.

Remaining Performance Obligations

The aggregate amount of the transaction price allocated to remaining performance obligations from our over-time product lines was $~~63.2~~69.3 million as of ~~September 30, 2022.~~March 31, 2023. The Company expects to recognize revenue on approximately ~~92.7~~77.5% of the remaining performance obligations over the next 12 months and the remaining ~~7.3~~22.5% thereafter.

The Company applies the practical expedient available under the revenue standard and does not disclose information about remaining performance obligations that have original expected durations of one year or less.

~~Table of Contents~~

4. Stock-Based Compensation and Stock Awards

During the three ~~and nine~~ months ended ~~September 30, 2022,~~March 31, 2023, the Company recognized approximately $2.6 million ~~and $7.7~~ ~~million~~of stock-based compensation expense. Stock-based compensation is included in "Selling, general and administrative" in our accompanying condensed consolidated statements of income (loss) and "Additional paid-in capital" in our accompanying condensed consolidated balance sheets. During the three ~~and nine~~ months ended ~~September 30, 2021,~~March 31, 2022, the Company recognized approximately $~~3.3~~ ~~million and $9.5~~2.5 million of stock-based compensation expense.

5. Inventories, net

Inventories consist of the following:


	September 30,			December 31,			March 31,			December 31,
	2022			2021			2023			2022
	(In thousands)						(In thousands)
Raw materials and supplies	$	25,778		$	27,398		$	30,981		$	29,995
Work in progress		30,814			28,361			44,555			41,700
Finished goods		173,197			218,946			148,471			150,170
		229,789			274,705			224,007			221,865
Less: allowance for slow moving and excess inventory		(89,259	)		(128,981	)
Less: reserve for slow moving and excess inventory								(71,237	)		(75,861	)
Total inventory	$	140,530		$	145,724		$	152,770		$	146,004

6. Assets Held for Sale

In the second quarter of 2022, the Company actively marketed for sale its corporate administrative building, forge ~~facilities~~facility and aftermarket ~~facilities~~facility in connection with the consolidation of its operations into a smaller footprint at its campus in Houston, Texas. In September 2022, we sold our forge facility for a net amount of approximately $18.9 million and a gain on sale of approximately $18.0 million of which $0.8 million was realized in the three months ended March 31, 2023. In March 2023, we sold our aftermarket facility for a net amount of approximately $14.5 million and a gain on sale of approximately $5.9 million. The Company expects to sell the ~~remaining two facilities~~corporate administrative building within a year.

In accordance with the applicable accounting guidance, FASB ASC 360-10-45-9, the Company reclassified the buildings' net carrying amount from Property, plant and equipment, net, to Assets held for sale on the Condensed Consolidated Balance ~~Sheets at September 30, 2022. Of~~Sheets. As of March 31, 2023, the Assets held for sale balance was $~~20.0~~10.8 million ~~classified as Assets Held for Sale, $11.5~~ ~~million was held in DQ Corporate and $8.6~~ ~~million in the Western Hemisphere. We wrote down approximately $2.6~~ ~~million in the nine months ended September 30, 2022 to reflect the net carrying amount~~comprising of the corporate administrative building ~~assets to their estimated fair value, less estimated costs to sell the building. The long-lived asset write-downs are included~~held in ~~the Restructuring and Other Charges line item~~Corporate.

Table of ~~the Condensed Consolidated Statements of Income (Loss) for the nine months ended period ended September 30, 2022.~~ ContentsNo

~~long-lived asset write downs were recorded in the three and nine-month period ended September 30, 2021.~~

8. Intangible Assets

Intangible assets, the majority of which were acquired in the acquisition of TIW Corporation in 2016 and ~~OPT,~~OilPatch Technologies in 2017, consist of the following:


		September 30, 2022											March 31, 2023
	Estimated Useful Lives	Gross Book Value		Accumulated Amortization			Foreign Currency Translation			Net Book Value		Estimated Useful Lives	Gross Book Value		Accumulated Amortization			Foreign Currency Translation			Net Book Value
		(In thousands)											(In thousands)
Trademarks	15 years	$	8,202	$	(1,963	)	$	(107	)	$	6,132	15 years	$	8,140	$	(2,243	)	$	8		$	5,905
Patents	15 - 30 years		6,049		(3,587	)		(1	)		2,461	15 - 30 years		6,039		(3,786	)		(1	)		2,252
Customer relationships	5 - 15 years		26,002		(10,407	)		(370	)		15,225	5 - 15 years		25,626		(11,153	)		33			14,506
Organizational costs	3 years		183		(112	)		(21	)		50	3 years		163		(136	)		1			28
		$	40,436	$	(16,069	)	$	(499	)	$	23,868		$	39,968	$	(17,318	)	$	41		$	22,691


		December 31, 2021											December 31, 2022
	Estimated Useful Lives	Gross Book Value		Accumulated Amortization			Foreign Currency Translation			Net Book Value		Estimated Useful Lives	Gross Book Value		Accumulated Amortization			Foreign Currency Translation			Net Book Value
		(In thousands)											(In thousands)
Trademarks	15 years	$	8,257	$	(1,579	)	$	(23	)	$	6,655	15 years	$	8,233	$	(2,118	)	$	(79	)	$	6,036
Patents	15 - 30 years		6,058		(3,285	)		(1	)		2,772	15 - 30 years		6,055		(3,699	)		-			2,356
Customer relationships	5 - 15 years		26,078		(9,128	)		(38	)		16,912	5 - 15 years		26,028		(10,878	)		(234	)		14,916
Organizational costs	3 years		185		(76	)		(2	)		107	3 years		183		(131	)		(12	)		40
		$	40,578	$	(14,068	)	$	(64	)	$	26,446		$	40,499	$	(16,826	)	$	(325	)	$	23,348

~~10.Geographic Areas~~

~~The~~During the quarter ended March 31, 2023, the Company reorganized its structure in order to streamline operations and leadership around more focused and integrated product and service lines to align with its business strategy. To reflect the Company’s new organizational structure, the Company changed presentation of its segments in 2023 into the following three reportable business segments: Subsea Products, Subsea Services, and Well Construction. Segment operating results for the prior year comparative period have been restated to reflect this change. Previously, the Company’s operations ~~are~~were organized into three geographic segments.

The Company evaluates segment performance based on operating income. The accounting policies of the segments ~~- Western Hemisphere (including North~~are the same as described in the summary of significant accounting policies.

Subsea Products. The Company’s Subsea Products segment designs, manufactures and ~~South America; headquartered in Houston, Texas), Eastern Hemisphere (including Europe~~sells a variety of products including subsea wellheads, connectors and ~~Africa; headquartered in Aberdeen, Scotland)~~surface equipment, and ~~Asia-Pacific (including the Pacific Rim, Southeast Asia, Australia, India~~subsea production systems.

Subsea Services. The Company’s Subsea Services segment delivers a variety of technical services including subsea rental services, subsea rework services and ~~the Middle East; headquartered in Singapore). Each of these segments sells similar~~subsea services shared support.

Well Construction. The Company's Well Construction business provides products and services utilized in the construction of the wellbore such as completions, casing hardware and ~~the Company has manufacturing facilities in all~~ ~~three~~ ~~of its regional headquarter locations as well as in Macae, Brazil.~~liner hanger systems.

~~Eliminations~~Corporate. Corporate includes the expenses and assets of ~~operating profits are related to intercompany inventory transfers~~the Company’s corporate office functions, legal and other administrative expenses that are ~~deferred until shipment is made to third party customers.~~managed at a consolidated level.

Three months ended September 30,

Western Hemisphere

Eastern Hemisphere

Asia-Pacific

DQ Corporate

Total

2022

2021

2022

2021

2022

2021

2022

2021

2022

2021

(In thousands)

Revenues

Products

Point in Time

$
17,355

$
22,692

$
3,992

$
6,276

$
4,628

$
3,953

$
-

$
-

$
25,975

$
32,921

Over-Time

18,887

14,920

8,158

3,941

5,488

1,840

-

-

32,533

20,701

Total Products

36,242

37,612

12,150

10,217

10,116

5,793

-

-

58,508

53,622

Services

Technical Advisory

9,899

10,814

3,303

2,038

1,131

3,629

-

-

14,333

16,481

Reconditioning

4,517

2,058

677

420

916

601

-

-

6,110

3,079

Total Services
(excluding rental tools)

14,416

12,872

3,980

2,458

2,047

4,230

-

-

20,443

19,560

Leasing

5,310

6,627

3,588

1,564

292

1,624

-

-

9,190

9,815

Total Services
(including rental tools)

19,726

19,499

7,568

4,022

2,339

5,854

-

-

29,633

29,375

Intercompany

1,352

4,029

120

920

1,518

576

-

2,990

5,525

Eliminations

-

-

-

-

-

-

(2,990
)

(5,525
)

(2,990
)

(5,525
)
Total Revenues

$
57,320

$
61,140

$
19,838

$
15,159

$
13,973

$
12,223

$
(2,990
)

$
(5,525
)

$
88,141

$
82,997

Depreciation and amortization

$
4,257

$
4,736

$
997

$
1,044

$
965

$
1,194

$
904

$
925

$
7,123

$
7,899

Income (loss) before income taxes

$
25,135

$
8,417

$
5,578

$
(1,273
)

$
(562
)

$
2,002

$
(15,551
)

$
(15,988
)

$
14,600

$
(6,842
)

During the three months ended ~~September 30, 2022,~~March 31, 2023, the Company incurred ~~additional~~ $~~2.2~~1.7 million costs under the 2021 global strategic plan. These charges were primarily related to office moves, site cleanup, preparation costs, consulting and legal fees at DQ Corporate. During the three months ended September 30, 2021, the Company did not incur any restructuring and other charges.

Nine months ended September 30,

Western Hemisphere

Eastern Hemisphere

Asia-Pacific

DQ Corporate

Total

2022

2021

2022

2021

2022

2021

2022

2021

2022

2021

(In thousands)

Revenues

Products

Point in Time

$
57,861

$
76,927

$
11,089

$
17,086

$
15,746

$
19,420

$
-

$
-

$
84,696

$
113,433

Over-Time

58,907

35,860

25,014

8,419

7,512

7,354

-

-

91,433

51,633

Total Products

116,768

112,787

36,103

25,505

23,258

26,774

-

-

176,129

165,066

Services

Technical Advisory

27,863

26,916

8,594

6,058

6,130

11,603

-

-

42,587

44,577

Reconditioning

11,204

6,897

1,913

1,690

1,834

1,599

-

-

14,951

10,186

Total Services
(excluding rental tools)

39,067

33,813

10,507

7,748

7,964

13,202

-

-

57,538

54,763

Leasing

18,937

15,297

8,059

4,635

4,593

5,272

-

-

31,589

25,204

Total Services
(including rental tools)

58,004

49,110

18,566

12,383

12,557

18,474

-

-

89,127

79,967

Intercompany

9,558

8,807

2,580

1,558

3,127

8,875

-

-

15,265

19,240

Eliminations

-

-

-

-

-

-

(15,265
)

(19,240
)

(15,265
)

(19,240
)
Total

$
184,330

$
170,704

$
57,249

$
39,446

$
38,942

$
54,123

$
(15,265
)

$
(19,240
)

$
265,256

$
245,033

Depreciation and amortization

$
13,486

$
13,291

$
3,072

$
3,021

$
3,064

$
3,576

$
2,730

$
2,770

$
22,352

$
22,658

Income (loss) before income taxes

$
47,780

$
(13,136
)

$
7,935

$
(583
)

$
(739
)

$
17,540

$
(49,213
)

$
(57,295
)

$
5,763

(53,474
)

~~Table~~ of ~~Contents~~

~~During the nine months ended September 30, 2022, the Company incurred~~ additional costs under the 2021 global strategic ~~plan. These charges were primarily related to a $2.6~~ ~~million write down~~plan all of ~~our Houston corporate administrative building~~which is in ~~DQ Corporate and other long-lived asset write downs of $2.5~~ ~~million in the Western Hemisphere. In addition, there were other charges of $2.9~~ ~~million primarily related to office moves, site cleanup, preparation costs, consulting and legal fees at DQ~~ Corporate. During the ~~nine~~three months ended ~~September 30, 2021, we recorded $26.0~~ million of restructuring and other charges. These charges were related to non-cash inventory write downs, severance charges and other charges, primarily consisting of facilities restructuring exit costs and consulting fees. Of these charges, $~~21.0~~ ~~million was recorded in the Western Hemisphere, $1.6~~ ~~million in the Eastern Hemisphere and $3.4~~ ~~million at DQ Corporate.~~

September 30,
2022

December 31,
2021

(In thousands)

Total long-lived assets:

Western Hemisphere

$
304,501

$
335,760

Eastern Hemisphere

218,909

224,345

Asia-Pacific

55,302

58,308

Eliminations

(353,946
)

(353,536
)
Total

$
224,766

$
264,877

Total assets:

Western Hemisphere

$
856,459

$
686,361

Eastern Hemisphere

794,465

805,574

Asia-Pacific

180,276

184,097

Eliminations

(860,676
)

(665,606
)
Total

$
970,524

$
1,010,426

~~As of September 30,~~March 31, 2022, the Company ~~had recorded a $~~did not incur any significant costs under the 2021 global strategic plan.

The following table presents selected financial data by business segment:~~2.6~~

~~million write down of our Houston corporate administrative building at DQ Corporate and other long-lived asset write downs of $~~


	Three months ended March 31,
	2023		2022			2023		2022		2023		2022		2023			2022			2023		2022
	Subsea Products					Subsea Services				Well Construction				Corporate						Total
	(In thousands)
Revenue	$	46,117	$	46,304		$	23,896	$	21,784	$	20,852	$	15,049	$	-		$	-		$	90,865	$	83,137
Depreciation and amortization		1,599		1,786			2,754		3,040		1,743		1,607		793			1,126			6,889		7,559
Operating income (loss)		1,495		(2,576	)		9,384		384		562		2,555		(8,253	)		(5,954	)		3,188		(5,591	)

~~2.5~~ ~~million~~The Company does not allocate assets to its reportable segments as they are not included in the ~~Western Hemisphere. As~~review performed by the Chief Operating Decision Maker (CODM) for purposes of ~~September 30, 2021, we had $19.1~~ ~~million of non-cash inventory write-downs~~assessing segment performance and allocating resources. The balance sheet is reviewed on a consolidated basis and is not used in the ~~Western Hemisphere and $~~context of segment reporting.~~0.2~~ ~~million in the Eastern Hemisphere as we shifted from the manufacturing of our downhole tools products business to a vendor outsourcing model.~~

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

This Quarterly Report on Form 10-Q includes certain statements that may be deemed to be “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Statements contained in all parts of this document that are not historical facts are forward-looking statements that involve risks and uncertainties that are beyond the control of Dril-Quip, Inc. (the “Company” or “Dril-Quip”). You can identify the Company’s forward-looking statements by the words “anticipate,” “estimate,” “expect,” “may,” “project,” “believe” and similar expressions, or by the Company’s discussion of strategies or trends. Although the Company believes that the expectations reflected in such forward-looking statements are reasonable, no assurance can be given that these expectations will prove to be correct. These forward-looking statements include the following types of information and statements as they relate to the Company:

These statements are based on assumptions and analysis in light of the Company’s experience and perception of historical trends, current conditions, expected future developments and other factors the Company believes were appropriate in the circumstances when the statements were made. Forward-looking statements by their nature involve substantial risks and uncertainties that could significantly impact expected results, and actual future results could differ materially from those described in such statements. While it is not possible to identify all factors, the Company continues to face many risks and uncertainties. Among the factors that could cause actual future results to differ materially are the risks and uncertainties discussed under “Item 1A. Risk Factors” in Part ~~II of this report, and “Item 1A. Risk Factors” in Part~~ I of the Company’s Annual Report on Form 10-K for the year ended December 31, ~~2021.~~2022.

Investors should note that Dril-Quip announces financial information in SEC filings, press releases and public conference calls. Dril-Quip may use the Investors section of its website (www.dril-quip.com) to communicate with investors. It is possible that the financial and other information posted there could be deemed to be material information. The information on Dril-Quip’s website is not part of this Form 10-Q.

The following is management’s discussion and analysis of certain significant factors that have affected aspects of the Company’s financial position, results of operations, comprehensive income (loss) and cash flows during the periods included in the accompanying unaudited condensed consolidated financial statements. This discussion should be read in conjunction with the Company's unaudited condensed consolidated financial statements and notes thereto presented elsewhere herein as well as the discussion under ~~Part II – Item 1A,~~ “Risk Factors,” included herein and “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, ~~2021.~~2022.

Dril-Quip, Inc., a Delaware corporation (the “Company” or “Dril-Quip”), designs, manufactures, sells and services highly engineered drilling and production equipment that is well suited primarily for use in deepwater, harsh environment and severe service applications. The Company’s principal products consist of subsea and surface wellheads, subsea and surface production trees, mudline hanger systems, specialty connectors and associated pipe, drilling and production riser systems, liner hangers, wellhead connectors, diverters and safety valves. Dril-Quip’s products are used by major integrated, large independent and foreign national oil and gas companies and drilling contractors throughout the world. Dril-Quip also provides technical advisory assistance on an as-requested basis during installation of its products, as well as rework and reconditioning services for customer-owned Dril-Quip products. In addition, Dril-Quip’s customers may rent or purchase running tools from the Company for use in the installation and retrieval of the Company’s products.

The Company’s organizational structure is based on product and service lines. The Company operates in three business segments— Subsea Products, Subsea Services, and Well Construction. Our Subsea Products business manufactures highly engineered, field-proven products with a wide array of deepwater drilling equipment and technology that meets the requirements for harsh subsea environments. Our Subsea Services business provides high-level aftermarket support and technical services with field technicians that support the full installation and lifecycle management of regulatory and industry standards, as well as offering industry training programs. Our Well Construction business provides products and services utilized in the construction of the wellbore such as completions, casing hardware and liner hanger systems. These products and services are used on both land and offshore markets.

On August 16, 2022, President Biden signed into law the Inflation Reduction Act of 2022 (the “Inflation Reduction Act”). The Inflation Reduction Act contains a number of revisions to the Internal Revenue Code, including a 15% book-income corporate alternative minimum tax on any corporation that, along with the other members of its controlled group, if any, has average adjusted financial statement income over $1.0 billion for any 3-tax-year period ending with January 1, 2022 or later and a 1% excise tax on the fair market value of stock that is repurchased by publicly traded U.S. corporations or their specified affiliates. The alternative minimum tax and the excise tax are effective in taxable years beginning after December 31, 2022. Currently, we are not subject to the corporate alternative minimum tax. The Company will evaluate any impact related to the excise tax on stock repurchases by the Company in future periods.

During the first quarter of 2022, Dril-Quip entered into a collaboration agreement with Aker Solutions ASA (Aker Solutions) to offer subsea injection systems for carbon capture, utilization and storage (CCUS) projects. Under the agreement, Dril-Quip will provide Aker Solutions with CO2 injection Xmas trees and wellheads that will be fully integrated into a larger subsea injection system to provide customers with market-leading technology purposely designed for the injection and storage of CO2. The arrangement will leverage on Aker Solution’s position as an integrated supplier of CCUS systems along with its control systems and electrification components. We believe this collaboration agreement focuses on the strengths of both organizations, will deliver an optimum solution for carbon capture and storage, and is in line with each party's strategic goals of collaboration and partnerships to unlock value for customers.

In February 2022, Russia invaded Ukraine, resulting in wide-ranging sanctions imposed on Russia by certain members of the European Union, the United Kingdom and the United States, among others, higher oil prices and increased uncertainty in global markets. As Russia's invasion of Ukraine continues, there can be no certainty regarding whether such governments or other governments will impose additional sanctions, export-controls or other economic or military measures against Russia. Although we have minimal operational exposure in Russia and we do not intend to commit further capital towards projects in Russia, the full impact of the invasion of Ukraine, including economic sanctions and export controls or additional war or military conflict, as well as potential responses to them by Russia, is currently unknown and could adversely affect oil and gas companies, many of which are our customers, as well as the global supply chain. For more information on the risks associated with the invasion of Ukraine, see "Our business may also be affected by new sanctions and export controls targeting Russia and other responses to Russia's invasion of ~~Ukraine." under~~Ukraine discussed in our Annual Report Form 10-K "Item 1A. Risk Factors" ~~in Part II of our Quarterly Report on Form 10-Q~~ for the ~~period ending March~~fiscal year ended December 31, 2022.

Crude oil prices increased in 2022, mainly driven by the Russian invasion of Ukraine, actions taken by OPEC+ to adjust their production levels and loosening of pandemic-related restrictions and the Company has seen an increase in drilling activity in the offshore market as a result of these continued price increases. In light of continued volatility in the crude oil market, global petroleum demand could be negatively impacted.

During the second quarter of 2021, Dril-Quip entered into a collaboration and supply agreement in which the Company will serve as a supplier of subsea wellheads, tubular goods, liner hangers and other related tools and services to a peer provider of subsea equipment and services. The arrangement provides a framework for bundling several of our products and services into an integrated engineering, procurement and construction offering by our peer for the subsea production system market. We believe this collaboration and supply agreement will lead to opportunities to participate in more subsea projects and bids as a subcontractor for this industry peer that we previously may not have had access to independently.

~~The Company has taken steps and adjusted its workforce to be in line with the current pandemic environment as we~~We continue to monitor ~~ongoing market conditions. The extent to which our future results are affected by these externalities will depend on various factors and circumstances beyond our control, such as~~ the ~~duration and scope~~impact of the COVID-19 pandemic, ~~additional~~government actions ~~by businesses~~ and ~~governments~~measures taken to prevent its spread, and the potential to affect our operations, particularly in ~~response to~~China. We are also monitoring the ~~pandemic,~~current global economic environment, specifically including inflationary pressures and the speed and effectiveness of containing the virus and developments in the global oil markets. Similarly, we expect that the uncertainty in the sustainability of current oil prices will continue to have a negativemacroeconomic impact on oil and gas activities. Further, Russia’s military incursion into Ukraine has led to, and could continue to, give rise to regional instability and result in heightened economic sanctions by certain members of the ~~European Union, the United Kingdom, the United States,~~conflict in Ukraine, and ~~certain other members~~any resulting impacts on our financial position and results of the international community that, in turn, could increase uncertainty with respect to global financial markets and production output from OPEC+ and other crude oil producing nations. In addition to this, continued outbreaks of new COVID-19 variants could also aggravate the risk factors identified inoperations. See our Annual Report on Form 10-K "Item 1A. Risk Factors" for the fiscal year ended December 31, ~~2021,~~2022.

Oil and ~~updated~~gas prices and the level of drilling and production activity have been characterized by ~~our Quarterly Report on Form 10-Q~~significant volatility in recent years. Worldwide military, political, economic and other events have contributed to oil and natural gas price volatility and are likely to continue to do so in the future. The Company expects continued pressure in both crude oil and natural gas prices, as well as in the level of drilling and production related activities. Even during periods of high prices for oil and natural gas, companies exploring for oil and gas may cancel or curtail programs, seek to renegotiate contract terms, including the ~~period ending March 31, 2022, including leading~~price of products and services, or reduce their levels of capital expenditures for exploration and production for a variety of reasons. Any future deterioration of commodity prices could lead to ~~further~~ material impairment ~~charges.~~charges to tangible or intangible assets or otherwise result in a material adverse effect on the Company’s results of operations.

The Company ~~took advantage~~operates its business and markets its products and services in most of the ~~Payroll Tax Deferral provided~~significant oil and gas producing areas in the world and is, therefore, subject to the risks customarily attendant to international operations and investments in foreign countries. These risks include nationalization, expropriation, war, acts of terrorism and civil disturbance, restrictive action by local governments, limitation on repatriation of earnings, change in foreign tax laws and change in currency exchange rates, any of which could have an adverse effect on either the ~~CARES Act~~Company’s ability to manufacture its products in ~~2020. This resulted~~its facilities abroad or the demand in ~~approximately $2.9 million in FICA cash tax payments being deferred to 2021 and 2022. The CARES Act provided~~certain regions for the ~~five-year carryback of Net Operating Losses (“NOLs”) generated~~Company’s products or both. To date, the Company has not experienced any significant problems in foreign countries arising from local government actions or political instability, but there is no assurance that such problems will not arise in the ~~2018, 2019 and 2020 taxable years. The Company filed returns to carryback~~future. Interruption of the Company’s international operations could have a material adverse effect on its ~~NOLs to generate a refund of $46.0 million.~~overall operations.

The market for drilling and production equipment and services and the Company’s business are substantially dependent on the condition of the oil and gas industry and, in particular, the willingness of oil and gas companies to make capital expenditures on exploration, drilling and production operations. Oil and gas prices and the level of drilling and production activity have historically been characterized by significant volatility.

According to the Energy Information Administration (EIA) of the U.S. Department of Energy, Brent Crude oil prices per barrel ~~are listed below~~ for the periods covered by this ~~report:~~report were:

According to the ~~October 2022~~April 2023 release of the Short-Term Energy Outlook published by the EIA, Brent Crude oil prices are projected to average approximately ~~$104.21~~$85 per barrel in ~~2022~~2023 and ~~$96.91~~$81 per barrel in ~~2023,~~2024, compared with an average of ~~$70.89~~$101 per barrel in ~~2021.~~2022. In its ~~October 2022~~April 2023 Oil Market Report, the International Energy Agency projected global oil demand ~~growth to reduce to 1.9 million barrels per day in 2022 and to 1.7~~will climb by two million barrels per day in 2023 ~~and is now forecast~~ to ~~average 101.3~~a record 101.9 million barrels per ~~day in 2023.~~day.

Although crude oil prices had rebounded sharply in 2022, we have ~~only recently~~ seen ~~an increase in activity from our customers as any recovery~~a downward trend in the ~~subsea market generally lags relative to the overall recovery in crude oil prices.~~first quarter of 2023. If the Company experiences significant contract terminations, suspensions or scope adjustments to its contracts, then its financial condition, results of operations and cash flows may be adversely impacted.

Detailed below is the average contracted ~~offshore rig count (rigs~~Mobile Offshore Drilling Units ("MODU"). These are rigs currently drilling as well as rigs committed, but not yet ~~drilling)~~drilling, for the ~~Company’s geographic regions for the nine~~three months ended ~~September 30, 2022~~March 31, 2023 and ~~2021~~.2022. The rig count data includes floating rigs (semi-submersibles and drillships) and jack-up rigs. The Company has included only these types of rigs as they are the primary assets used to deploy the Company’s products.

Source: IHS—Petrodata RigBase – ~~September~~ ~~30, 2022~~ March 31, 2023 and ~~2021~~2022

According to IHS-Petrodata RigBase, as of ~~September 30, 2022,~~March 31, 2023, there were ~~519~~534 contracted rigs ~~for the Company’s geographic regions (140~~(145 floating rigs and ~~379~~389 jack-up rigs), an increase of ~~8.1%~~8.8% from the rig count of ~~480~~491 rigs ~~(133~~(132 floating rigs and ~~347~~359 jack-up rigs) as of ~~September 30, 2021~~March 31, 2022.

The demand for the Company’s products and services is also affected by laws and regulations relating to the oil and gas industry in general, including those specifically directed to offshore operations. The adoption of new laws and regulations, or changes to existing laws or regulations that curtail exploration and development drilling for oil and gas for economic or other policy reasons, could adversely affect the Company’s operations by limiting demand for its products.

In March 2018, the President of the United States issued a proclamation imposing a 25 percent global tariff on imports of certain steel products, effective March 23, 2018. The President subsequently proposed an additional 25 percent tariff on approximately $50 billion worth of imports from China, and the government of China responded with a proposal of an additional 25 percent tariff on U.S. goods with a value of $50 billion. In the following months, the United States and China placed additional, competing tariffs on imported goods until the two countries entered a phase one trade deal, which included an agreement to reduce certain tariffs. Negotiations for a phase two trade deal with China had begun prior to the outbreak of the global COVID-19 pandemic and if continued could lead to additional changes to the tariff rates in the phase one trade deal. President Biden has indicated that these tariffs will likely remain in place while the ~~new~~ administration assesses the United States’ current posture, including a review of the phase one trade deal with China.

The imposition of any additional tariffs or initiation of trade restrictions by or against the United States could cause our cost of raw materials to increase or affect the markets for our products. However, given the uncertainty regarding the scope and duration of these trade actions by the United States and other countries, their ultimate impact on our business and operations remains uncertain.

The United Kingdom (U.K.) officially withdrew from the E.U. on January 31, ~~2020. (Brexit)~~2020 ("Brexit"). Brexit and the terms of a subsequent trade and cooperation agreement (TCA) brought to an end the U.K.’s automatic access to the E.U. single market, resulting in the U.K. no longer benefitting from the free movement of goods and services between the E.U. and the U.K. The rights of people to freely move between the E.U. and the U.K. have also been restricted. For more information on the risks associated with Brexit and the TCA, see “Our international operations require us to comply with a number of U.S. and foreign regulations governing the international trade of goods, services and technology, which expose us to compliance risks" under “Item 1A. Risk Factors” in Part ~~II of this report and “Item 1A. Risk Factors” in Part~~ I of the Company’s Annual Report on Form 10-K for the year ended December 31, ~~2021.~~2022.

The Company believes that its backlog should help mitigate the impact of any negative market conditions; however, slow recovery in commodity prices or an extended downturn in the global economy or future restrictions on, or declines in, oil and gas exploration and production could have a negative impact on the Company and its backlog. The Company’s product backlog at ~~September 30, 2022~~March 31, 2023 was approximately ~~$211.8~~$235.1 million, compared to approximately $~~208.6~~240.9 million at ~~June 30,~~December 31, 2022, and $220.9 million at March 31, ~~2022 and $210.1 million at December 31, 2021.~~2022.

The following table represents the change in backlog for the three months ended ~~September 30, 2022, June 30, 2022,~~ March 31, 2023, December 31, 2022 and ~~December~~March 31, ~~2021.~~2022.


	Three months ended												Three months ended
	September 30, 2022			June 30, 2022			March 31, 2022			December 31, 2021			March 31, 2023			December 31, 2022			March 31, 2022
	(In thousands)												(In thousands)
Beginning Backlog	$	208,586		$	220,934		$	210,119		$	179,012		$	240,865		$	211,767		$	210,119
Bookings:
Product (1)		74,945			56,780			63,155			83,105			55,902			98,967			63,155
Service		20,443			19,596			22,578			19,380			21,281			21,657			22,578
Leasing		9,190			12,403			9,996			9,837			10,338			10,444			9,996
Cancellation/Revision adjustments		(12,521	)		(7,879	)		(2,011	)		(3,336	)		(2,432	)		(5,007	)		(2,011	)
Translation adjustments		(735	)		730			234			33			56			(149	)		234
Total Bookings		91,322			81,630			93,952			109,019			85,145			125,912			93,952
Revenues:
Product		58,508			61,979			55,642			48,695			59,246			64,713			55,642
Service		20,443			19,596			17,499			19,380			21,281			21,657			17,499
Leasing		9,190			12,403			9,996			9,837			10,338			10,444			9,996
Total Revenue		88,141			93,978			83,137			77,912			90,865			96,814			83,137
Ending Backlog	$	211,767		$	208,586		$	220,934		$	210,119		$	235,145		$	240,865		$	220,934

(1) The backlog data shown above includes all bookings as of ~~September 30, 2022,~~March 31, 2023, including contract awards and signed purchase orders for which the

contracts would not be considered enforceable or qualify for the practical expedient under ASC 606. As a result, this table will not agree to the

disclosed performance obligations of ~~$63.2~~$69.3 million as of ~~September 30, 2022~~March 31, 2023 within “Revenue Recognition”, Note 3 to the Notes to Condensed

Revenues. Dril-Quip’s revenues are generated from three sources: products, services and leasing. Product revenues are derived from the sale of drilling and production equipment. Service revenues are earned when the Company provides technical advisory assistance and rework and reconditioning services. Leasing revenues are derived from rental tools used during installation and retrieval of the Company’s products. For the three months ended ~~September 30,~~March 31, 2023 and 2022, ~~and 2021,~~ the Company derived ~~66.4%~~65.2% and ~~64.6%~~66.9%, respectively, of its revenues from the sale of its products, ~~23.2%~~23.4% and ~~23.6%~~21.0%, respectively, of its revenue from services, and ~~10.4%~~11.4% and ~~11.8%, respectively, of its revenues from leasing. For the nine months ended September 30, 2022 and 2021, the Company derived 66.4% and 67.4%~~ , ~~respectively, of its revenues from the sale of its products, 21.7% and 22.3%, respectively, of its revenue from services, and 11.9% and 10.3%~~12.0%, respectively, of its revenues from leasing. Service and leasing revenues generally correlate to revenues from product sales because increased product sales typically generate increased demand for technical advisory assistance services and rental of running tools during installation. The Company has substantial international operations, with approximately ~~64.3%~~62.8% and ~~64.5%~~62.8% of its revenues derived from foreign sales for the ~~nine~~three months ended ~~September 30,~~March 31, 2023 and 2022, ~~and 2021,~~ respectively. The majority of the Company’s domestic revenue relates to operations in the U.S. Gulf of Mexico. Domestic revenue approximated ~~35.7%~~37.2% and ~~35.5%~~37.2% of the Company’s total revenues for the ~~nine~~three months ended ~~September 30,~~March 31, 2023 and 2022, ~~and 2021,~~ respectively.

Product contracts are generally negotiated and sold separately from service contracts. In addition, service contracts are not typically included in the product contracts or related sales orders and are not offered to the customer as a condition of the sale of the Company’s products. The demand for products and services is generally based on worldwide economic conditions in the oil and gas industry and is not based on a specific relationship between the two types of contracts. Substantially all of the Company’s sales are made on a purchase order basis. Purchase orders are subject to change and/or termination at the option of the customer. In case of a change or termination, the customer is required to pay the Company for work performed and other costs necessarily incurred due to the change or termination.

Generally, the Company attempts to raise its prices as its costs increase. However, the actual pricing of the Company’s products and services is impacted by a number of factors, including global oil prices, competitive pricing pressure, the level of utilized capacity in the oil service sector, preservation of market share, the introduction of new products and overall market conditions.

The Company accounts for more complex, customer specific projects that have relatively longer manufacturing time frames on an over-time basis. For the three months ended ~~September 30, 2022,~~March 31, 2023, there were 5863 projects representing approximately ~~36.9%~~32.7% of the Company's total revenues and approximately ~~55.6%~~50.2% of its product revenues that were accounted for using over-time accounting, compared to 2946 projects for the three months ended ~~September 30, 2021,~~March 31, 2022, which represented approximately ~~24.9%~~29.4% of the Company's total revenues and approximately ~~38.6% of its product revenues. For the nine months ended September 30, 2022,there were 66~~projects representing approximately 34.5% of the Company's total revenues and approximately 51.9% of its product revenues that were accounted for using over-time accounting, compared to 45 projects for the nine months ended September 30, 2021, which represented approximately 21.1% of the Company's total revenues and approximately 31.3%43.9% of its product revenues. These percentages may fluctuate in the future. Revenues accounted for in this manner are generally recognized based upon a calculation of the percentage complete, which is used to determine the revenue earned and the appropriate portion of total estimated cost of sales to be recognized. Accordingly, price and cost estimates are reviewed periodically as the work progresses, and adjustments proportionate to the percentage complete are reflected in the period when such estimates are revised. Losses, if any, are recorded in full in the period they become known. Amounts received from customers in excess of revenues recognized are classified as a current liability.

Cost of Sales. The principal elements of cost of sales are labor, raw materials, manufacturing overhead, and application engineering expenses related to customized products. Cost of sales as a percentage of revenues is influenced by the product mix sold in any particular period, costs from projects accounted for under the over-time method, over/under manufacturing overhead absorption, pricing and market conditions. The Company’s costs related to its foreign operations do not significantly differ from its domestic costs.

Selling, General and Administrative Expenses. Selling, general and administrative expenses include the costs associated with sales and marketing, general corporate overhead, business development expenses, compensation expense, stock-based compensation expense, legal expenses and other related administrative functions.

Engineering and Product Development Expenses. Engineering and product development expenses consist of new product development and testing.

~~Impairments.~~ We evaluate our property and equipment for impairment whenever changes in circumstances indicate that the carrying amount of an asset may not be recoverable, and we could incur additional impairment charges related to the carrying value of our long-lived assets. There were no impairment charges recorded for the three months ended September 30, 2022.

Restructuring and Other Charges. During the three ~~and nine~~ months ended ~~September 30, 2022,~~March 31, 2023, the Company incurred additional costs of approximately ~~$2.5~~$1.7 million ~~and $8.0 million, respectively,~~ under the 2021 global strategic plan. ~~The year-to-date~~These charges ~~were~~ primarily ~~related to the write-downs of long-lived assets and other charges of approximately $5.1 million and $2.9 million, respectively. Other charges~~ consisted of office moves, site cleanup, preparation costs, consulting and legal fees.

~~(Gain) Loss~~Gain on Sale of Property, Plant and Equipment. Gain ~~or loss~~ on sale of property, plant and equipment consists of sales of certain property, plant and equipment.

Foreign Currency Transaction ~~(Gains) and Losses.~~(Gain) Loss. Foreign currency transaction (gains) and losses result from a change in exchange rates between the functional currency and the currency in which a foreign currency transaction is denominated.

Income Tax Provision ~~(Benefit)~~. The Company’s effective income tax rate fluctuates from the U.S. statutory tax rate based on, among other factors, changes in earnings mix by geography and tax jurisdiction, impact of valuation allowances, changes in tax legislation, and other permanent differences related to the recognition of income and expense between U.S. GAAP and applicable tax rules.

The following table sets forth, for the periods indicated, certain condensed consolidated statements of income (loss) data expressed as a percentage of revenues:

The following table sets forth, for the periods indicated, a breakdown of our products, service and ~~service~~leasing revenues:

The following table sets forth, for the periods indicated, our revenues by business segments:

Three Months Ended ~~September 30, 2022~~March 31, 2023 Compared to Three Months Ended ~~September 30, 2021~~March 31, 2022

Revenues. Revenues increased by ~~$5.1~~$7.7 million, or approximately ~~6.2%~~9.3%, to ~~$88.1~~$90.9 million for the three months ended ~~September 30, 2022~~March 31, 2023 from ~~$83.0~~$83.1 million for the three months ended ~~September 30, 2021. Within~~March 31, 2022.

Subsea product revenues ~~subsea equipment~~decreased marginally by approximately $0.2 million which was mainly in line with our expectations.

Subsea service revenues increased by ~~$7.1~~approximately $2.1 million ~~partially offset by decrease~~primarily due to customer specific increases in ~~downhole tools~~technical advisory services and maintenance requests tied to drilling schedules.

Well construction revenue ~~by $2.2 million. Product revenues in the Asia-Pacific region and the Eastern Hemisphere~~ increased by ~~$4.3~~approximately $5.9 million primarily due to continued growth and ~~$1.9 million, respectively, partially offset by decreased product revenues~~timing of ~~$1.3 million in~~deliveries against the ~~Western Hemisphere.~~ backlog.

As crude oil prices have continued to rise, the Company has seen an increase in drilling activity in the offshore market. Further, our overall revenues were favorably impacted by an increase in global demand and increased activity from customer drilling schedules. In any given time period, the revenues recognized between the various product lines ~~and geographic areas~~ will vary depending upon the timing of shipments to customers, our product mix and completion status of the projects accounted for under the over-time accounting method, market conditions and customer demand.

Service revenues increased by approximately $0.9 million resulting mainly from an increase in the Western Hemisphere and the Eastern Hemisphere of $1.6 million and $1.5 million, respectively, partially offset by a decrease in the Asia-Pacific region of $2.2 million. Increase in service revenues in the Western Hemisphere and the Eastern Hemisphere is mainly due to customer specific increases in technical advisory services and maintenance requests tied to drilling schedules. Lower service revenues in the Asia-Pacific region is primarily due to standby rates that the customers paid as a result of travel restrictions and increase in rig mobilization activities in 2021 as companies resumed their well completion activities.

Leasing revenues decreased by approximately $0.6 million resulting mainly from decreased leasing revenues in the Western Hemisphere and the Asia-Pacific region of $1.3 million and $1.3 million, respectively, partially offset by increased leasing revenues in the Eastern Hemisphere of $2.0 million. The majority of changes in all regions were a result of subsea rental tool utilization due to timing of customer drilling activity.

Cost of Sales. Cost of sales increased by ~~$2.9~~$1.5 million, or approximately ~~4.6%~~2.4%, to ~~$65.7~~$65.5 million for the three months ended ~~September 30, 2022~~March 31, 2023 from ~~$62.8~~$64.0 million for the same period in ~~2021.~~2022. Cost of sales as a percentage of revenue decreased to ~~74.6%~~72.1% from ~~75.8%~~77.0% for the three months ended ~~September 30,~~March 31, 2023 and 2022, ~~and 2021,~~ respectively, primarily due to favorable product ~~mix.~~mix and as a result of savings from our business transformation initiatives.

Selling, General and Administrative Expenses. For the three months ended ~~September 30, 2022,~~March 31, 2023, selling, general and administrative expenses ~~decreased~~increased marginally by ~~$2.8~~$0.2 million, or ~~11.2%~~0.9% to ~~$22.4~~$22.6 million from ~~$25.3~~$22.4 million for the same period in 2021. This decrease was attributable mainly to lower legal expenses in the current period related to costs incurred in the second quarter of 2021 in connection with the FMC Technologies, Inc. lawsuit and administrative costs associated with the importation tax settlement under the Brazilian tax amnesty program.2022.

Engineering and Product Development Expenses. For the three months ended ~~September 30, 2022,~~March 31, 2023, engineering and product development expenses decreased by approximately ~~$0.9~~$0.3 million, or ~~24.6%~~7.5%, to ~~$2.6~~$3.4 million from ~~$3.5~~$3.7 million for the same period in ~~2021. This decrease was attributable mainly to lower spend on research and development activities as we completed certain strategic projects.~~

~~Restructuring and Other Charges.~~ For the three months ended September 30, 2022, the Company incurred additional costs of approximately $2.2 million under the 2021 global strategic plan. These charges were primarily related to office moves, site cleanup, preparation costs, consulting and legal fees. During the three months ended September 30, 2021, the Company did not incur any additional costs.

~~Gain on Sale of Property, Plant and Equipment.~~ For the three months ended September 30, 2022, the gain on sale of property, plant and equipment was $17.3 million, primarily related to the sale of our Houston forge facility building. For the three months ended September 30, 2021, gain on sale of property, plant and equipment was deemed immaterial.

~~Foreign Currency Transaction Gains.~~ ~~Foreign exchange gain for the three months ended September 30, 2022, was $1.9 million as compared to a gain of $1.7 million for the same period in 2021.~~

~~Income Tax Provision (Benefit). Income tax benefit for the three months ended September 30, 2022 was $0.6 million on an income~~before taxes of $14.6 million, resulting in an effective tax rate of (4.2)%. Income tax expense was different than the U.S federal statutory income tax rate of 21% primarily due to change in projected earnings mix by geography and tax jurisdiction, changes in uncertain tax positions, nondeductible compensation and the change in valuation allowances in the United States and in various foreign countries. Income tax provision for the three months ended September 30, 2021 was $4.3 million on a loss before taxes of $6.8 million, resulting in an effective income tax rate of approximately (62.9)%. Income taxexpense was different than the U.S federal statutory income tax rate of 21% primarily due to changes in pre-tax income or loss in foreign jurisdictions, nondeductible compensation and the change in valuation allowances in the United States and in various foreign countries.

~~Net Income (Loss).~~ ~~Net income was approximately $15.2 million for the three months ended September 30, 2022 as compared to a net loss of $11.1 million for the same period in 2021 for the reasons set forth above.~~

~~Nine Months Ended September 30, 2022Compared to~~ ~~Nine~~ ~~Months Ended September 30, 2021~~

~~Revenues.~~ Revenues increased by $20.2 million, or approximately 8.3% to $265.3 million for the nine months ended September 30, 2022 from $245.0 million for the nine months ended September 30, 2021. Within product revenues, subsea equipment increased by $14.3 million, partially offset by decreased downhole tools revenues of $3.3 million. Product revenues in the Eastern Hemisphere and the Western Hemisphere increased by $10.6 million and $3.9 million, respectively, partially offset by decreased product revenues of $3.5 million in the Asia-Pacific region. As crude oil prices have continued to rise, the Company has seen an increase in drilling activity in the offshore market. Further, our revenues were favorably impacted by an increase in global demand and increased activity from customer drilling schedules. In any given time period, the revenues recognized between the various product lines and geographic areas will vary depending upon the timing of shipments to customers, our product mix and completion status of the projects accounted for under the over-time accounting method, market conditions and customer demand.

Service revenues increased by approximately $2.8 million resulting mainly from an increase in the Western Hemisphere and the Eastern Hemisphere of $5.2 million and $2.8 million, respectively, partially offset by a decrease in the Asia-Pacific region of $5.2 million. Increase in service revenues in the Western Hemisphere and the Eastern Hemisphere is mainly due to customer specific increases in technical advisory services and maintenance requests tied to drilling schedules. Lower service revenues in the Asia-Pacific region resulted primarily due to standby rates that the customers paid as a result of travel restrictions and increase in rig mobilization activities in 2021 as companies resumed their well completion activities.

Leasing revenues increased by approximately $6.4 million resulting from increased leasing revenues in the Western Hemisphere and the Eastern Hemisphere of $3.7 million, and $3.4 million, respectively, partially offset by a decrease in leasing revenues in the Asia-Pacific region of $0.7 million. The majority of changes in all regions were a result of subsea rental tool utilization due to timing of customer drilling activity.

~~Cost of Sales.~~ Cost of sales increased by $18.2 million, or approximately 10.1%, to $199.4 million for the nine months ended September 30, 2022 from $181.2 million for the same period in 2021. Cost of sales as a percentage of revenue increased to 75.1% from 74.0% for the nine months ended September 30, 2022 and 2021, respectively, primarily due to unfavorable product mix and inflationary pressures resulting in an increase in the cost of raw materials.

~~Selling, General and Administrative Expenses.~~ For the nine months ended September 30, 2022, selling, general and administrative expenses decreased by $17.1 million, or 20.2% to $67.3 million from $84.4 million for the same period in 2021. This decrease was attributable mainly to lower legal expenses in the current period related to costs incurred in 2021 in connection with the FMC Technologies, Inc. lawsuit and administrative costs associated with the importation tax settlement under the Brazilian tax amnesty program.

~~Engineering and Product Development Expenses.~~ For the nine months ended September 30, 2022, engineering and product development expenses decreased by approximately $2.2 million, or 19.8%, to $9.0 million from $11.3 million for the same period in 2021.2022. This decrease was attributable mainly to lower spend on research and development activities as we completed certain strategic projects. We are in the process of reprioritizing new research and development initiatives.

Restructuring and Other Charges. For the ~~nine~~three months ended ~~September 30, 2022,~~March 31, 2023, the Company incurred additional costs of approximately ~~$8.0~~$1.7 million under the 2021 global strategic plan. These charges were primarily related to ~~the write-downs of long-lived assets and other charges of approximately $5.1 million and $2.9 million, respectively. Other charges consisted of~~ office moves, site cleanup, preparation costs, consulting and legal fees. During the ~~nine~~three months ended ~~September 30, 2021,~~March 31, 2022, the Company ~~incurred $26.0 million additional costs under the 2018 global strategic plan to realign manufacturing facilities globally. These charges were primarily related to the~~did not incur any significant restructuring of our downhole tools business where we exited certain underperforming countries and markets and shifted from manufacturing in-house to a vendor sourcing model which resulted in non-cash inventory write downs of $19.3 million, severance charges of $2.7 million and other charges of $4.0 million, consisting of facilities-related market exit costs and consulting fees.costs.

Gain on Sale of Property, Plant and Equipment. For the ~~nine~~three months ended ~~September 30, 2022,~~March 31, 2023, the gain on sale of property, plant and equipment was ~~approximately $17.8~~$6.7 million, primarily related to the sale of our Houston aftermarket facility and the Houston forge facility ~~building.~~buildings. For the ~~nine~~three months ended ~~September 30, 2021,~~March 31, 2022, gain on sale of ~~assets~~property, plant and equipment was ~~approximately $3.9 million, primarily related to the sale of two of our buildings in Singapore.~~not significant.

Foreign Currency Transaction ~~Gains.~~(Gain) Loss. Foreign exchange ~~gain~~loss for the ~~nine~~three months ended ~~September 30, 2022,~~March 31, 2023, was ~~$5.6~~$1.1 million as compared to a gain of ~~$0.8~~$1.3 million for the same period in ~~2021.~~2022.

25Operating Income (Loss). Subsea product operating income was higher for the three months ended March 31, 2023 as compared to the same period in 2022, primarily due to a favorable product mix coupled with overall price increases during 2022 that were implemented in response to higher costs that were realized in the first half of 2022 such as increased transportation costs and an increase in the cost of raw materials.

Subsea services operating income was higher for the three months ended March 31, 2023 as compared to the same period in 2022, primarily due to gain on sale of the Houston aftermarket facility recognized in the current period, overall increased utilization in the current period and rate increases during 2022 that were implemented in response to higher costs that were realized in the first half of 2022 such as increased transportation costs and an increase in the cost of raw materials.

Well Construction operating income was lower for the three months ended March 31, 2023 as compared to the same period in 2022, primarily due to an unfavorable foreign exchange movements mainly impacting Mexico and costs associated with preparation for anticipated growth and entry into new markets.

Corporate operating loss increased for the three months ended March 31, 2023 as compared to the same period in 2022, primarily due to restructuring costs of $1.7 million.

Income Tax Provision. Income tax provision for the ~~nine~~three months ended ~~September 30, 2022~~March 31, 2023 was ~~$5.1~~$3.6 million on an incomebefore taxes of ~~$5.8~~$5.9 million, resulting in an effective tax rate of ~~87.8%~~61.1%. Income tax expense was different than the U.S federal statutory income tax rate of 21% primarily due to ~~change in~~ projected earnings mix by geography and tax jurisdiction, ~~changes in uncertain tax positions,~~foreign withholding taxes, nondeductible compensation and the change in valuation allowances in the United States and in various foreign countries. Income tax provision for the ~~nine~~three months ended ~~September 30, 2021~~March 31, 2022 was ~~$11.1~~$3.5 million on a loss before taxes of ~~$53.5~~$5.4 million, resulting in an effective income tax rate of approximately ~~(20.7)~~(64.2)%. Income tax expense was different than the U.S federal statutory income tax rate of 21% primarily due to ~~changes in~~ pre-tax income or loss in foreign jurisdictions, nondeductible compensation and the change in valuation allowances in the United States and in various foreign countries.

Net Income (Loss). Net income was approximately ~~$0.7~~$2.3 million for the ~~nine~~three months ended ~~September 30, 2022~~March 31, 2023 as compared to a net loss of ~~$64.6~~$8.9 million for the same period in ~~2021~~2022 for the reasons set forth above.

We have performed a detailed analysis of the non-GAAP measures that are relevant to our business and its operations and determined that the appropriate unit of measure to analyze our performance is Adjusted EBITDA (earnings before interest, taxes, depreciation and amortization, as well as other significant non-cash items and other adjustments for certain charges and credits). The Company believes that the exclusion of these charges and credits from these financial measures enables it to evaluate more effectively the Company's operations period over period and to identify operating trends that could otherwise be masked by excluded items. It is our determination that Adjusted EBITDA is a ~~more~~ relevant measure of how the Company reviews its ~~ability to meet commitments and pursue capital projects.~~operating performance.

We calculate Adjusted EBITDA as one of the indicators to evaluate and compare the results of our operations from period to period by removing the effect of our capital structure from our operating structure. This measurement is used in concert with net income and cash flows from operations, which measures actual cash generated in the period. In addition, we believe that Adjusted EBITDA is a supplemental measurement tool used by analysts and investors to help evaluate overall operating ~~performance, ability to pursue and service possible debt opportunities and analyze possible future capital expenditures.~~performance. Adjusted EBITDA does not represent funds available for our discretionary use and is not intended to represent or to be used as a substitute for net income, as measured under U.S. generally accepted accounting principles. The items excluded from Adjusted EBITDA, but included in the calculation of reported net income, are significant components of the condensed consolidated statements of income (loss) and must be considered in performing a comprehensive assessment of overall financial performance. Our calculation of Adjusted EBITDA may not be consistent with calculations of Adjusted EBITDA used by other companies.

The following table reconciles our reported net income to Adjusted EBITDA for each of the respective periods:

(1) Adjusted EBITDA does not measure financial performance under GAAP and, accordingly, should not be considered as an alternative
to net income as an indicator of operating performance.
~~(2)~~ Restructuring and other charges include legal expenses related to the FMC Technologies, Inc. lawsuit. These legal expenses are
included in "Selling, general and administrative" in our condensed consolidated statements of income (lo~~ss) for the~~
~~three and nine months endedSeptember 30, 2021(in thousands).~~

Statements of cash flows for entities with international operations that are local currency functional exclude the effects of the changes in foreign currency exchange rates that occur during any given period, as these are non-cash changes. As a result, changes reflected in certain accounts on the condensed consolidated statements of cash flows may not reflect the changes in corresponding accounts on the condensed consolidated balance sheets.

The primary liquidity needs of the Company are (i) to fund capital expenditures to improve and expand facilities and manufacture additional running tools and (ii) to fund working capital. The Company’s principal source of funds is cash flows from operations.

We believe our business model, our current cash and short-term investment reserves and the ongoing business restructuring and facility realignment will strengthen our balance sheet and leave us well-positioned to manage our business. ~~We continue to review potential scenarios in connection with the potential impact of any new COVID-19 variant outbreaks on the global economy and the oil and gas industry.~~ Based on our analysis, we believe our existing balances of cash and cash equivalents and our currently anticipated operating cash flows will be sufficient to meet our cash needs arising in the ordinary course of business for the next twelve months.

Net cash used in operating activities for the ~~nine~~three months ended ~~September 30, 2022~~March 31, 2023 was ~~$19.2~~$52.9 million as compared to ~~net cash provided by operating activities of $33.7~~$10.9 million for the ~~nine~~three months ended ~~September 30, 2021.~~March 31, 2022. The ~~$52.9~~$42.0 million ~~net change~~increase in cash used is primarily due to ~~decreased~~ cash ~~flow~~outflows resulting from changes in operating assets and liabilities of ~~$88.3~~$45.2 million and ~~$29.9~~$8.0 million of non-cash movements which includes ~~decreases in~~ items such as restructuring and other charges, gain on sale of property, plant and equipment, stock-based compensation, deferred income taxes, depreciation and amortization. This was partially offset by a decrease in net loss of ~~$65.3~~$11.2 million.

The change in operating assets and liabilities for the ~~nine~~three months ended ~~September 30, 2022~~March 31, 2023 resulted in a ~~$88.3~~$45.2 million decrease in cash as compared to the change in operating assets and liabilities for the ~~nine~~three months ended ~~September 30, 2021.~~March 31, 2022. The ~~$64.1~~$54.4 million decrease in cash due to changes in ~~unbilled~~trade receivables was mainly due to a significant increase in ~~projects that are accounted for~~billings as the rights became unconditional on the contract assets and transferred to trade receivables. Decrease in cash due to changes in inventory levels was $10.4 million as we continually reassess our needs based on backlog trends. This was partially offset by an ~~over-time basis~~increase in cash due to the changes in accounts payable and accrued expenses of $15.9 million primarily due to the ~~completion timelines of some~~payment of our ~~major projects.~~agent fees in the Middle East and certain taxes in Mexico in the prior period that did not occur in the current period. The ~~$25.5~~$3.1 million ~~decrease~~increase in cash due to changes in prepaids and other assets was primarily due to ~~an increase~~a decrease in advances to vendors related to projects accounted for on an over-time ~~basis and receipt of tax receivables and the reimbursement of the security amounts deposited with the Brazilian courts related~~basis. The $0.6 million increase in cash due to the ~~tax amnesty program~~decrease in ~~2021. The decrease~~unbilled receivables was mainly due to ~~changes in accounts payable and accrued expenses~~completion timelines of ~~$13.0 million was mainly related to the payout~~some of our short-term incentive bonuses, payment of our agent fees in the Middle East and the payment of certain property taxes. These decreases in cash were partially offset by a decrease in inventory of $8.9 million mainly related to our continued focus on inventory management and consumption during the year and decrease in trade receivables by $5.4 million primarily due to a decrease in billing activity related to our ongoing projects.

The change in investing cash flows for the ~~nine~~three months ended ~~September 30, 2022~~March 31, 2023 resulted in a ~~$20.5~~$23.3 million ~~decrease~~increase in cash primarily due to ~~purchase~~the sale of our Houston aftermarket facility for approximately $15.4 million and a net change of $13.3 million in our short-term investments ~~of $25.3~~as some investments matured during the quarter and were reinvested in investments classified as cash equivalents as per our accounting policy. This was partially offset by $5.4 million ~~and $13.7 million~~of capital expenditure spend by the Company ~~partially offset by~~during the ~~proceeds from the sale of property, plant and equipment totaling $18.5 million.~~current quarter. Capital expenditures by the Company were ~~$13.7~~$5.4 million and ~~$7.9~~$2.1 million for the ~~nine~~three months ended ~~September 30,~~March 31, 2023 and 2022, ~~and 2021,~~ respectively. Capital expenditures for the ~~nine~~three months ended ~~September 30, 2022~~March 31, 2023 were ~~$7.2~~$2.8 million for rental tools to support our developed products, ~~$5.5~~$2.2 million for machinery and equipment related to our global strategic program which includes consolidation of our manufacturing facilities ~~from the Eastern Hemisphere to the Western Hemisphere, $0.9~~and $0.4 million for other capital ~~expenditures and $0.1 million for buildings.~~expenditures. Capital expenditures for the ~~nine~~three months ended ~~September 30, 2021~~March 31, 2022 were ~~$3.7~~$1.5 million for rental tools to support our developed products, $0.4 million for machinery and equipment related to our global strategic program which included consolidation of our manufacturing facilities ~~from the Eastern Hemisphere to the Western Hemisphere, $2.8 million for rental tools to support our developed products~~ and ~~$1.4~~$0.2 million for other capital expenditures. We constantly review capital expenditure needs to ensure these are justified expenditures.

The Company's ABL Credit Facility, dated February 23, 2018, as amended, was terminated effective February 22, 2022. In addition, we opened a new cash collateral account with JPMorgan Chase Bank, N.A., in which cash was transferred to facilitate our existing letters of credit. As of ~~September 30, 2022,~~March 31, 2023, the cash balance in that account was approximately $5.4 million. The Company is required to maintain a balance equal to the outstanding letters of credit plus 5% at all times which is considered as restricted cash and is included in "Cash and cash equivalents" in our condensed consolidated balance sheets as at ~~September 30, 2022~~March 31, 2023 and December 31, ~~2021.~~2022. Withdrawals from this cash collateral account are only allowed at such point a given letter of credit has expired or has been cancelled.

For the three months ended ~~September 30, 2022,~~March 31, 2023, the Company purchased ~~457,467~~no shares under the share repurchase ~~plans at an average price of approximately $24.35 per share totaling approximately $11.1 million and has retired such shares.~~ plans.

For the ~~nine~~three months ended ~~September 30,~~March 31, 2022, the Company purchased ~~888,197 shares under the share repurchase plans at an average price of approximately $23.41 per share totaling approximately $20.8 million and has retired such shares.~~

~~For the three and nine months ended September 30, 2021, the Company purchased 45,225~~273,629 shares under the share repurchase plan at an average price of approximately ~~$25.02~~$21.20 per share totaling approximately ~~$1.1~~$5.8 million and ~~has~~had retired such shares.

The Company currently has no derivative instruments and no off-balance sheet hedging or financing arrangements, contracts or operations.

From time to time, the Company enters into discussions or negotiations to acquire other businesses or enter into joint ventures. The timing, size or success of any such efforts and the associated potential capital commitments are unpredictable and dependent on market conditions and opportunities existing at the time. The Company may seek to fund all or part of any such efforts with proceeds from debt or equity issuances. Debt or equity financing may not, however, be available at that time due to a variety of circumstances, including, among others, the Company’s credit ratings, industry conditions, general economic conditions and market conditions.

During the ~~nine~~three months ended ~~September 30, 2022,~~March 31, 2023, there were no material changes in our judgments and assumptions associated with the development of our critical accounting policies. Refer to our Annual Report on Form 10-K for the year ended December 31, ~~2021~~2022 for a discussion of our critical accounting policies.

The Company is currently exposed to certain market risks related to interest rate changes on its short-term investments and fluctuations in foreign exchange rates. The Company does not engage in any material hedging transactions, forward contracts or currency trading which could mitigate the market risks inherent in such transactions. There have been no material changes in market risks for the Company since December 31, ~~2021.~~2022.

The Company has operations in various countries around the world and conducts business in a number of different currencies. Our significant foreign subsidiaries may also have monetary assets and liabilities not denominated in their functional currency. These monetary assets and liabilities are exposed to changes in currency exchange rates which may result in non-cash gains and losses primarily due to fluctuations between the U.S. dollar and each subsidiary's functional currency.

The Company experienced a foreign currency pre-tax ~~gain~~loss of approximately ~~$1.9 million and a pre-tax gain $5.6~~$1.1 million during the three ~~and nine~~ months ended ~~September 30, 2022, respectively.~~March 31, 2023. The Company experienced a foreign currency pre-tax gain of approximately ~~$1.7 million and $0.8~~$1.3 million during the three ~~and nine~~ months ended ~~September 30, 2021, respectively.~~March 31, 2022.

The Company does not engage in any material hedging transactions, forward contracts or currency trading which could mitigate the effects and risks inherent in such transactions. Additionally, there is no assurance that the Company will be able to protect itself against currency fluctuations in the future.

In accordance with Exchange Act Rules 13a-15 and 15d-15, the Company carried out an evaluation, under the supervision and with the participation of management, including the Company’s Chief Executive Officer and Chief Financial Officer, of the effectiveness of the Company’s disclosure controls and procedures as of the end of the period covered by this report. Based on that evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective as of ~~September 30, 2022~~March 31, 2023 to provide reasonable assurance that information required to be disclosed in the Company’s reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and such information is accumulated and communicated to management, including the Company’s Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding disclosure.

There has been no change in the Company’s internal control over financial reporting that occurred during the three months ended ~~September 30, 2022~~March 31, 2023 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

For a description of the Company’s legal proceedings, see “Contingencies,” Note 1211 to the Notes to Condensed Consolidated Financial Statements.

There have been no material changes from the risk factors disclosed in the ~~Company's~~Company’s Annual Report on Form 10-K for the year ended December 31, ~~2021 and updated in our Quarterly Report on Form 10-Q for the period ending March 31,~~ 2022.

~~The following table summarizes the repurchase and cancellation of our common stock during the nine months ended September 30, 2022.~~

~~(1)~~ On February 22, 2022, the Board of Directors authorized an incremental $100.0 million share repurchase plan. The repurchase plans have no set expiration date and any repurchased shares are expected to be cancelled.

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


Title of each class	Trading symbol(s)	Name of each exchange on which registered
Common Stock, $0.01 par value per share	DRQ	New York Stock Exchange





		Page
PART I
Item 1.	Condensed Consolidated Financial Statements	3
	Balance Sheets	3
	Statements of Income (Loss)	4
	Statements of Comprehensive Income (Loss)	5
	Statements of Cash Flows	6
	Statements of Stockholders' Equity	7
	Notes to Financial Statements	8
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	1715
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	2925
Item 4.	Controls and Procedures	2926
PART II
Item 1.	Legal Proceedings	3027
Item 1A.	Risk Factors	30
~~Item 2.~~	~~Unregistered Sales of Equity Securities and Use of Proceeds~~	3027
Item 6.	Index to Exhibits	3128
	Signatures	3229


	Total			Total
Beginning balance at January 1, 2022	$	4,000
Beginning balance at January 1, 2023				$	3,802
Additions for costs expensed		2,901			-
Reductions for payments		(3,347	)		(512	)
Other		4			1
Ending balance at September 30, 2022	$	3,558
Ending balance at March 31, 2023				$	3,291


	Three months ended				Nine months ended				Three months ended
	September 30,				September 30,				March 31,
Brent Crude Oil Price per Barrel	2022		2021		2022		2021		2023		2022
Low	$	82.55	$	65.51	$	78.25	$	50.37	$	71.03	$	78.25
High		121.80		78.85		133.18		78.85		87.54		133.18
Average		100.71		73.51		105.00		67.89		81.07		100.87
Closing		88.90		77.81		88.90		77.81		79.19		107.29


	Three months ended				Nine months ended
	September 30,				September 30,
	2022		2021		2022		2021
	(In millions)
Revenues:
Products:
Subsea equipment	$	48.5	$	41.4	$	144.2	$	129.9
Downhole tools		10.0		12.2		31.9		35.2
Total products		58.5		53.6		176.1		165.1
Services:
Subsea equipment		15.8		15.6		43.8		43.4
Downhole tools		4.6		4.0		13.8		11.3
Total services		20.4		19.6		57.6		54.7
Leasing
Subsea equipment		6.8		7.8		25.9		20.4
Downhole tools		2.4		2.0		5.7		4.8
Total leasing		9.2		9.8		31.6		25.2
Total revenues	$	88.1	$	83.0	$	265.3	$	245.0


☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934


☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934


Large accelerated filer	☒	Accelerated filer	☐
Non-accelerated filer	☐	Smaller reporting company	☐
		Emerging growth company	☐


	Three months ended September 30,
	Western Hemisphere				Eastern Hemisphere				Asia- Pacific				Total
	2022		2021		2022		2021		2022		2021		2022		2021
	(In thousands)
Product Revenues	$	36,242	$	37,612	$	12,150	$	10,217	$	10,116	$	5,793	$	58,508	$	53,622
Service Revenues		14,416		12,872		3,980		2,458		2,047		4,230		20,443		19,560
Total	$	50,658	$	50,484	$	16,130	$	12,675	$	12,163	$	10,023	$	78,951	$	73,182

	Nine months ended September 30,
	Western Hemisphere				Eastern Hemisphere				Asia- Pacific				Total
	2022		2021		2022		2021		2022		2021		2022		2021
	(In thousands)
Product Revenues	$	116,768	$	112,787	$	36,103	$	25,505	$	23,258	$	26,774	$	176,129	$	165,066
Service Revenues		39,067		33,813		10,507		7,748		7,964		13,202		57,538		54,763
Total	$	155,835	$	146,600	$	46,610	$	33,253	$	31,222	$	39,976	$	233,667	$	219,829


	Three months ended September 30,
	Western Hemisphere				Eastern Hemisphere					Asia-Pacific					DQ Corporate						Total
	2022		2021		2022		2021			2022			2021		2022			2021			2022			2021
	(In thousands)
Revenues
Products
Point in Time	$	17,355	$	22,692	$	3,992	$	6,276		$	4,628		$	3,953	$	-		$	-		$	25,975		$	32,921
Over-Time		18,887		14,920		8,158		3,941			5,488			1,840		-			-			32,533			20,701
Total Products		36,242		37,612		12,150		10,217			10,116			5,793		-			-			58,508			53,622
Services
Technical Advisory		9,899		10,814		3,303		2,038			1,131			3,629		-			-			14,333			16,481
Reconditioning		4,517		2,058		677		420			916			601		-			-			6,110			3,079
Total Services (excluding rental tools)		14,416		12,872		3,980		2,458			2,047			4,230		-			-			20,443			19,560
Leasing		5,310		6,627		3,588		1,564			292			1,624		-			-			9,190			9,815
Total Services (including rental tools)		19,726		19,499		7,568		4,022			2,339			5,854		-			-			29,633			29,375
Intercompany		1,352		4,029		120		920			1,518			576					-			2,990			5,525
Eliminations		-		-		-		-			-			-		(2,990	)		(5,525	)		(2,990	)		(5,525	)
Total Revenues	$	57,320	$	61,140	$	19,838	$	15,159		$	13,973		$	12,223	$	(2,990	)	$	(5,525	)	$	88,141		$	82,997
Depreciation and amortization	$	4,257	$	4,736	$	997	$	1,044		$	965		$	1,194	$	904		$	925		$	7,123		$	7,899
Income (loss) before income taxes	$	25,135	$	8,417	$	5,578	$	(1,273	)	$	(562	)	$	2,002	$	(15,551	)	$	(15,988	)	$	14,600		$	(6,842	)


	Nine months ended
	September 30, 2022
	Total Number of Shares Purchased		Average Price paid per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (1)		Maximum Dollar Value (in millions) of Shares that May Yet be Purchased Under the Plans or Programs
January 1 - 31, 2022		273,629	$	21.20		273,629	$	18.5
February 1 - 28, 2022		-		-		-		118.5
March 1 - 31, 2022		-		-		-		118.5
April 1 - 30, 2022		-		-		-		118.5
May 1 - 31, 2022		-		-		-		118.5
June 1 - 30, 2022		157,101		24.49		157,101		114.6
July 1 - 31, 2022		-		-		-		114.6
August 1 - 31, 2022		-		-		-		114.6
September 1 - 30, 2022		457,467		24.35		457,467		103.5
		888,197	$	23.41		888,197	$	103.5




Exhibit No.		Description
*3.1	—	Restated Certificate of Incorporation of the Company (incorporated herein by reference to Exhibit 3.1 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2017).

*3.2	—	Amended and Restated Bylaws of the Company (incorporated herein by reference to Exhibit 3.2 to the Company’s Current Report on Form 8-K filed on May 20, 2014).

*4.1	—	Form of Certificate representing Common Stock (incorporated herein by reference to Exhibit 4.1 to the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2018, File No. 001-13439).

31.1	—	Rule 13a-14(a)/15d-14(a) Certification of Jeffrey J. Bird.

31.2	—	Rule 13a-14(a)/15d-14(a) Certification of Kyle F. McClure.

32.1	—	Section 1350 Certification of Jeffrey J. Bird.

32.2	—	Section 1350 Certification of Kyle F. McClure.

101.INS	—	Inline XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.

101.SCH	—	Inline XBRL Taxonomy Extension Schema Document.

101.CAL	—	Inline XBRL Taxonomy Extension Calculation Linkbase Document.

101.DEF	—	Inline XBRL Taxonomy Extension Definition Linkbase Document.

101.LAB	—	Inline XBRL Taxonomy Extension Label Linkbase Document.

101.PRE	—	Inline XBRL Taxonomy Extension Presentation Linkbase Document

104	—	Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101).


	DRIL-QUIP, INC.

Date: ~~October 27, 2022~~May 9, 2023	BY:	/s/ Kyle F. McClure
		Kyle F. McClure,
		Vice President – Chief Financial Officer
		(Principal Financial Officer and
		Duly Authorized Signatory)


	Nine months ended September 30,
	2022				2021
	Floating Rigs		Jack-up Rigs		Floating Rigs		Jack-up Rigs
Western Hemisphere		58		42		56		40
Eastern Hemisphere		49		62		45		58
Asia-Pacific		29		265		30		252
Total		136		369		131		350


	Three months ended March 31,
	2023				2022
	Floating Rigs		Jack-up Rigs		Floating Rigs		Jack-up Rigs
Mobile Offshore Drilling Units		146		391		135		357