What changed in this filing

/stocks — the workspaceLOADING

Item 2. Management’s Discussion and Analysis

2021-04-29 compared with 2020-10-29 · 141 added, 275 removed, 211 unchanged (66% of the section changed)

6 unchanged sentences

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:

the impact of the COVID-19 pandemic and the effects thereof;

These forward-looking statements include the following types of information and statements as they relate to the Company:

the impact of the ongoing COVID-19 pandemic and the effects thereof;

the impact of actions taken by OPEC and non-OPEC nations in response to their dispute over production levels and the effects thereof;

5 unchanged sentences

the introduction into the market of the Company’s future products;

the Company’s ability to deliver its backlog in a timely fashion;

the market for the Company’s existing and future products;

10 unchanged sentences

Risk Factors” in Part II of this report, “Item 1A.

Risk Factors” in Part I of the Company’s Annual Report on Form 10-K for the year ended December 31, 2019 and the following:

the impact of the ongoing COVID-19 pandemic;

the effects of actions taken by third parties, including, but not limited to, governmental authorities, customers, contractors and suppliers, in response to the COVID-19 pandemic;

the impact of the recent significant decline in oil and natural gas prices and the general volatility of oil and natural gas prices;

the impact of actions taken by OPEC and non-OPEC nations in response to their dispute over production levels;

the cyclical nature of the oil and gas industry;

uncertainties associated with the United States and worldwide economies;

uncertainties regarding political tensions in the Middle East, South America, Africa and elsewhere;

current and potential governmental regulatory actions in the United States and regulatory actions and political unrest in other countries;

uncertainties regarding future oil and gas exploration and production activities, including new regulations, customs requirements and product testing requirements;

operating interruptions (including explosions, fires, weather-related incidents, mechanical failure, unscheduled downtime, labor difficulties, transportation interruptions, spills and releases and other environmental risks);

project terminations, suspensions or scope adjustments to contracts reflected in the Company’s backlog;

the Company’s reliance on product development;

technological developments;

declines in investor and lender sentiment with respect to, and new capital investments in, the oil and gas industry;

the Company’s reliance on third-party technologies;

acquisition and merger activities involving the Company or its competitors;

the Company’s dependence on key employees and skilled machinists, fabricators and technical personnel;

the Company’s reliance on sources of raw materials, including any increase in steel costs or decreases in steel supply as a result of global tariffs on certain imported steel mill products;

impact of environmental matters, including future environmental regulations;

competitive products and pricing pressures;

fluctuations in foreign currency, including those attributable to the Brexit;

the ability of the OPEC to set and maintain production levels and pricing;

oil and natural gas production levels by non-OPEC countries;

the Company’s reliance on significant customers;

creditworthiness of the Company’s customers;

fixed-price contracts;

changes in general economic, market or business conditions;

access to capital markets;

negative outcome of litigation, threatened litigation or government proceedings;

terrorist threats or acts, war and civil disturbances;

changes to, and differing interpretations of, tax laws with respect to our operations and subsidiaries.

Many of such factors are beyond the Company’s ability to control or predict, and the effects of the COVID-19 pandemic may give rise to risks that are currently unknown or amplify the risks associated with many of these factors.

Any of the factors, or a combination of these factors, could materially affect the Company’s future results of operations and the ultimate accuracy of the forward-looking statements.

Management cautions against putting undue reliance on forward-looking statements or projecting any future results based on such statements or present or prior earnings levels.

Every forward-looking statement speaks only as of the date of the particular statement, and the Company undertakes no obligation to publicly update or revise any forward-looking statement.

Risk Factors” in Part I of the Company’s Annual Report on Form 10-K for the year ended December 31, 2020.

Investors should note that Dril-Quip announces financial information in SEC filings, press releases and public conference calls.

3 unchanged sentences

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, 2019.

Results of Operations” and the financial statements included in the Company’s Annual Report on Form 10-K for t he year ended December 31, 2020 .

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.

4 unchanged sentences

Business Environment

On June 24, 2020, the Company and Proserv Group, Inc.

(“Proserv”) announced an agreement pursuant to which the Company would rely upon Proserv for the manufacture and supply of its subsea control systems.

The agreement allows the Company to continue to serve its existing subsea controls customers with the support and collaboration of Proserv and follows the Company’s strategic decision to consolidate the supply and development of control systems with a dedicated subsea controls provider.

This arrangement will allow the Company to avoid operating and research and development costs related to subsea controls, which typically are between $8 million and $10 million per year.

The outbreak of COVID-19 during the first quarter of 2020 and its subsequent development into a pandemic has continued to result in significant economic disruption globally.

Although we have seen some relaxation in the actions taken by various governmental authorities, individuals and companies around the world to prevent the spread of COVID-19, such actions continue to impact our business and have significantly reduced global economic activity and caused worldwide demand for oil and gas to decrease at an unprecedented rate.

This demand reduction was further exacerbated by disputes over oil production by the Organization of Petroleum Exporting Countries (OPEC) and non-OPEC nations.

Although the OPEC and non-OPEC nations have since implemented substantial production cuts to stabilize oil prices, the initial dispute coupled with the effects of the pandemic have led to a significant decline in crude oil prices, resulting in a challenging industry environment.

In addition to this, the pandemic has continued to cause disruption to our suppliers and their sub-contractors.

Our suppliers and their sub-contractors’ operations experienced disruptions related to worker absenteeism, quarantine, travel and health-related restrictions.

This in turn exerts downward pressure on our global manufacturing capacity and scheduling as our supply chain is disrupted causing delays in product shipments and leading to an increase of our inventory balance.

As a result of these disruptions and the related downturn in customer activity, overall production output decreased by 8% as compared to the prior quarter.

In February 2021, a severe winter storm resulted in widespread power outages across Texas.

This unprecedented event caused our Houston manufacturing facilities to be shut down for a week resulting in additional costs.

The COVID-19 pandemic continues to have an impact globally.

The introduction of the COVID-19 vaccine during the first quarter of 2021 and the recent availability of the vaccine to the general population has resulted in the rate of new infections trend downwards.

Although the downward trend is encouraging, the effect of the pandemic and the actions and changes in consumer behavior resulting from the pandemic continue to impact our business and have significantly reduced global economic activity and caused global demand for oil and gas to decrease at an unprecedented rate.

This demand reduction was further exacerbated by disputes over oil production between the OPEC and non-OPEC nations.

We continue to experience demand deterioration in 2021 as the market continues to be volatile and challenging.

As a result of these disruptions and the related downturn in customer activity, overall production output decreased in the current quarter by approximately 14% as compared to the first quarter of 2020.

We actively review our global production plans with our supply chain and manufacturing groups and adopt contingency plans where possible to minimize the impact of these COVID-19 related disruptions.

The proactive safety measures we had previously implemented in response to the COVID-19 pandemic to protect the health and safety of our employees, customers, partners and suppliers globally will continue to remain in place until we have determined that the COVID-19 pandemic has been adequately contained.

The extent of the impact of the pandemic, including economic impacts that may persist following the widespread deployment of vaccines, and the decline in oil prices on our operational and financial performance will depend on future developments, which are uncertain and cannot be predicted.

An extended period of economic disruption could have a material adverse impact on our business, results of operations, access to sources of liquidity and overall financial condition.

The proactive safety measures we had previously implemented in response to the COVID-19 pandemic to protect the health and safety of our employees, customers and suppliers globally will continue to remain in place until we have determined that the COVID-19 pandemic has been adequately contained.

We enacted rigorous safety measures in all of our sites, including implementing social distancing protocols, requiring remote work arrangements where possible, staggering shifts, suspending travel, extensively and frequently disinfecting our workspaces and providing masks to those employees who must be physically present at work.

Additionally, as Covid-19 vaccines have become available, the Company organized the administration of the vaccines on site to our employees and their families in the US.

Furthermore, we have also utilized government employee support packages where available, in an effort to retain employees during this uncertain period.

During the second and third quarter, the Company took advantage of the Payroll Tax Deferral provided by the Coronavirus, Aid, Relief and Economic Security Act (“CARES Act”).

During 2020, the Company took advantage of the Payroll Tax Deferral provided by the CARES Act.

The Payroll Tax Deferral allows the Company to defer the payment of the Company’s share of FICA taxes of 6.2%.

As such, the Company was able to defer its share of FICA taxes for the period beginning March 27, 2020 and ending December 31, 2020 to 2021.

This resulted in approximately $3.1 million in FICA cash tax payments being deferred to next year.

The Company must still deposit its share of the Medicare hospital insurance tax of 1.45% as well as all of the employee’s share of the payroll taxes withheld.

The CARES Act also provides for the five-year carryback of Net Operating Losses (“NOLs”) generated in the 2018, 2019 and 2020 taxable years.

Taxpayers with NOLs may be able to file amended returns to carry those NOLs back to previous years to generate immediate cash refunds.

In addition, the taxable income limitation is temporarily removed, allowing NOLs to fully offset net taxable income.

In view of this, the Company booked the estimated benefit of the expected 2019 NOL carryback refund in 2020 of $31.1 million.

During the second and third quarter of 2020, the Company also took advantage of the Singapore Job Support Scheme under which the Singaporean government introduced a plan to help businesses co-fund wages of workers to encourage employers to retain their workers.

The Company has recorded an estimated benefit of $1.9 million through September 30, 2020.

As such, the Company was able to defer to 2021 its share of FICA taxes for the period beginning March 27, 2020 and ending December 31, 2020.

This resulted in approximately $2.9 million in FICA cash tax payments being deferred to 2021 and 2022.

The CARES Act provided for the five-year carryback of Net Operating Losses (“NOLs”) generated in the 2018, 2019 and 2020 taxable years.

The Company filed returns to carryback its NOLs back to previous tax years to generate a refund of $31.0 million and expects to file a NOL carryback claim for the 2020 tax year in the second quarter of 2021.

During 2020 and the first quarter of 2021 the Company also took advantage of job support schemes in Singapore, Australia, the U.K.

and Denmark under which the governments introduced a plan to help businesses co-fund wages of workers to encourage employers to retain their workers.

The Company has recorded an estimated benefit of $0.4 million through March 31, 2021.

We expect to continue to implement these measures until we determine that the COVID-19 pandemic is adequately contained.

In compliance with the orders issue d by certain local ju r isdictions in which the Company operates , the Company has continued the practic e of requiring all employees to wear a face mask or covering while working at all sites.

W e may take further safety precautions as government authorities require or recommend or as we determine to be in the best interests of our employees, customers, partners and suppliers.

All our facilities currently remain operational with staggered shifts which has impacted production output.

In compliance with the orders issued by certain local jurisdictions in which the Company operates, the Company has continued the practice of requiring all employees to wear a face mask or covering while working at all sites.

We may take further safety precautions as government authorities require or recommend or as we determine to be in the best interests of our employees, customers, partners and suppliers.

All our facilities currently remain operational with staggered shifts which ha s impacted production output .

We expect the constraints and limits imposed on our operations to slow or diminish our research and development activities and qualification activities with our customers.

We do not believe that remote work arrangements have adversely affected our ability to maintain financial reporting systems, internal control over financial reporting and disclosure controls and procedures.

The Company has taken steps and adjusted its workforce to be in line with the current situation as we continue to monitor ongoing market conditions.

The C ompany has taken steps and adjust ed its workforce to be in line with the current situation as we continue to monitor ong o ing 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 of the pandemic, additional actions by businesses and governments in response to the pandemic, the speed and effectiveness of containing the virus and developments in the global oil markets.

8 unchanged sentences

Three months ended

Nine months ended

September 30,

Brent Crude Oil Price per Barrel

According to the October 2020 release of the Short-Term Energy Outlook published by the EIA, Brent Crude oil prices are projected to average approximately $41 per barrel in 2020 and $47 per barrel in 2021, compared with an average of $64 per barrel in 2019.

In its September 2020 Oil Market Report, the International Energy Agency projected global oil demand to decrease by 8.4 million barrels per day in 2020 but projected to grow by 5.5 million barrels per day in 2021.

Although the OPEC and non-OPEC nations have implemented substantial production cuts to stabilize oil prices, this decrease in demand coupled with an overabundance of supply has resulted in the Brent Crude Oil price per barrel to remain relatively unchanged at $39.06 as of October 26, 2020.

According to the April 2021 release of the Short-Term Energy Outlook published by the EIA, Brent Crude oil prices are projected to average approximately $62 per barrel in 2021 and $60 per barrel in 2022, compared with an average of $41.96 per barrel in 2020.

In its April 2021 Oil Market Report, the International Energy Agency projected global oil demand to grow by 5.7 million barrels per day to reach 96.7 million barrels per day in 2021, after contracting by 8.7 million barrels per day in 2020.

Lower crude oil and natural gas prices have resulted in a trend of customers seeking to renegotiate contract terms with the Company, including reductions in the prices of its products and services, extensions of delivery terms and, in some instances, contract revisions.

In some cases, a customer may already hold inventory of the Company’s equipment, which may delay the placement of new orders.

In addition, some of the Company’s customers could experience liquidity or solvency issues or could otherwise be unable or unwilling to perform under a contract, which could ultimately lead a customer to enter bankruptcy or otherwise encourage a customer to seek to repudiate, cancel or renegotiate a contract.

An extended period of reduced crude oil and natural gas prices may accelerate these trends.

1 unchanged sentence

Offshore Rig Count

Detailed below is the average contracted offshore rig count (rigs currently drilling as well as rigs committed, but not yet drilling) for the Company’s geographic regions for the nine months ended September 30, 2020 and 2019 .

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.

Nine months ended September 30,

Three months ended March 31,

Western Hemisphere

Eastern Hemisphere

IHS—Petrodata RigBase – September 30, 2020 and 2019

According to IHS-Petrodata RigBase, as of September 30, 2020, there were 479 contracted rigs for the Company’s geographic regions (132 floating rigs and 347 jack-up rigs), which represents an 11.0% decrease from the rig count of 538 rigs (158 floating rigs and 380 jack-up rigs) as of September 30, 2019 .

Since the outbreak of the COVID-19 pandemic, the industry has seen an increase in contract cancellations, and we expect this trend to continue due to the current market conditions as evidenced by the contracted rig count as of September 30, 2020.

The Company believes that the number of rigs (semi-submersibles, drillships and jack-up rigs) under construction impacts its backlog and resulting revenues because in certain cases, its customers order some of the Company’s products during the construction of such rigs.

As a result, an increase in rig construction activity tends to favorably impact the Company’s backlog while a decrease in rig construction activity tends to negatively impact the Company’s backlog.

According to IHS-Petrodata RigBase, as of September 30, 2020 and 2019, there were 67 and 84 rigs, respectively, under construction, which represents an approximate 20.2% decrease in rigs under construction.

The expected delivery dates for the rigs under construction at September 30, 2020 are as follows:

After 2023 or unspecified delivery date

However, given the developments in the current global oil markets and oversupply of offshore drilling rigs, the Company believes it is possible that delivery of some rigs under construction could be postponed or cancelled, limiting the opportunity for supply of the Company’s products.

IHS—Petrodata RigBase – March 31, 2021 and 2020

According to IHS-Petrodata RigBase, as of March 31, 2021, there were 475 contracted rigs for the Company’s geographic regions (126 floating rigs and 349 jack-up rigs), which represents an 11.4% decrease from the rig count of 536 rigs (152 floating rigs and 384 jack-up rigs) as of March 31, 2020 .

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.

6 unchanged sentences

In September 2018, the President directed the U.S.

Trade Representative (USTR) to place additional tariffs on approximately $200 billion worth of additi onal imports from China.

These tariffs, which took effect on September 24, 2018, were initially set at a level of 10 percent until the end of the year, at which point the tarif fs were to rise to 25 percent.

However, on December 19, 2018, USTR postponed the date on which the rate of the additional duties w ould increase to 25 percent until March 2, 2019.

Trade Representative (USTR) to place additional tariffs on approximately $200 billion worth of additional imports from China.

These tariffs, which took effect on September 24, 2018, were initially set at a level of 10 percent until the end of the year, at which point the tariffs were to rise to 25 percent.

However, on December 19, 2018, USTR postponed the date on which the rate of the additional duties would increase to 25 percent until March 2, 2019.

On May 9, 2019, USTR announced that the United States increased the level of tariffs from 10 percent to 25 percent on approximately $200 billion worth of Chinese imports.

1 unchanged sentence

On August 13, 2019 and August 23, 2019, USTR announced the imposition of an additional tariff of 15 percent on approximately $300 billion worth of Chinese imports, effective September 1, 2019 (or December 15, 2019 for certain articles).

The President also instructed USTR to begin the process of increasing the 25 percent tariff on approximately $250 billion worth of Chinese imports to 30 percent.

Following the conclusion of a phase one trade deal with China, USTR suspended the implementation of the 15 percent additional duty on approximately $160 billion worth of Chinese imports and reduced the applicable duty from 15 percent to 7.5 percent for $120 billion worth of Chinese imports.

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 described above.

However, 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.

In November 2018, the United States, Mexico and Canada signed the United States-Mexico-Canada Agreement (USMCA), the successor agreement to the North American Free Trade Agreement.

2 unchanged sentences

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.

On June 23, 2016 the United Kingdom (U.K.) held a referendum in which a majority of British voters voted to exit the E.U., commonly known as “Brexit”, with the U.K.

officially withdrawing from the E.U.

on January 31, 2020.

A transition period (during which the trading relationship between the E.U.

remained substantially the same as prior to Brexit) followed, and this transition period expired on December 31, 2020.

Shortly prior to expiration of the transition period, in December 2020, the U.K.

reached an accord on a trade and cooperation agreement (TCA).

Brexit and the terms of the 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.

The rights of people to freely move between the E.U.

have also been restricted.

The TCA is provisionally applicable from January 1, 2021, having been ratified by the UK Parliament on December 30, 2020 and it is currently awaiting formal approval of the European Parliament (expected on or around April 26, 2021).

For more information on the risks associate with Brexit and the TCA, see “Our international operations require us to comply with a number of U.S.

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, 2020.

In July 2017, the U.K.’s Financial Conduct Authority, which regulates LIBOR, announced that it intends to phase out LIBOR as a benchmark by the end of 2021.

At the present time, the ABL Credit Facility has a term that extends beyond 2021, and borrowings under the ABL Credit Facility (as defined herein) bear interest at the Company’s option at either (i) the CB Floating Rate (as defined therein), calculated as the rate of interest publicly announced by JPMorgan Chase Bank, N.A., as its “prime rate,” subject to each increase or decrease in such prime rate effective as of the date such change occurs, with such CB Floating Rate not being less than Adjusted One Month LIBOR (as defined therein) or (ii) the Adjusted LIBOR (as defined therein), plus, in each case, an applicable margin.

We have not yet pursued any technical amendment or other contractual alternative to address this matter.

We are currently evaluating the potential impact of the eventual replacement of the LIBOR interest rate.

The Company believes that its backlog should help mitigate the impact of 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, 2020 was approximately $221.6 million, compared to approximately $237.9 million at June 30, 2020, $261.1 million at March 31, 2020 and $272.5 million at December 31, 2019.

The following table represents the change in backlog for the three months ended September 30, 2020, June 30, 2020, March 31, 2020 and December 31, 2019:

The Company’s product backlog at March 31, 2021 was approximately $196.7 million, compared to approximately $195.7 million at December 31, 2020, and $261.1 million at March 31, 2020.

The following table represents the change in backlog for the three months ended March 31, 2021, December 31, 2020 and March 31, 2020:

Three months ended

September 30,

(In thousands)

5 unchanged sentences

Ending Backlog

The backlog data shown above includes all bookings as of September 30, 2020, 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 $76.5 million as of September 30, 2020 within “Revenue Recognition”, Note 4 to the Notes to Condensed Consolidated Financial Statements.

As of September 30, 2019 , the total number of th e Company's employees w ere 1,639 , of which 83 0 were located in the United States.

The total number of the Company’s e mployees as of December 31, 20 19 w ere 1, 690 , of which 851 were located in the United States.

As a result of worldwide reductions in workforce and natural attrition, the total number of employees as of September 30, 2020 was 1, 444 , a 14 .

6 % reduction from December 2019 , of which 748 were located in the United States.

The United Kingdom (U.K.) formally left the European Union (E.U.) on January 31, 2020, commonly known as “Brexit”.

Under the terms of the withdrawal agreement, the U.K.

entered a transition period until December 31, 2020 in order to allow U.K.

negotiations on the future of the U.K.

relationship to take place.

During the transition period, all E.U.

law, across all policy areas, is still applicable to, and in, the U.K., with the exception of provisions of those treaties and acts that were not binding upon, and in, the U.K.

before the withdrawal agreement entered into force.

The ninth round of negotiations between the E.U.

took place between September 29, 2020 and October 2, 2020.

On October 3, 2020, the U.K.

Prime Minister and the European Commission President approved a further month of Brexit negotiations after agreeing that enough progress has been made to justify a last push to reach a deal.

Even if some aspects of a future U.K.

relationship are agreed before December 31, 2020, further negotiations regarding the future U.K.

relationship may continue in the future and may be expected to result in continued volatility in the value of the British pound sterling.

A weaker British pound sterling compared to the U.S.

dollar during a reporting period would cause local currency results of the Company's U.K.

operations to be translated into fewer U.S.

In addition, the Company continues to monitor potential changes to trade and customs requirements as a result of Brexit.

Continued adverse consequences such as deterioration in economic conditions and volatility in currency exchange rates could have a negative impact on the Company's financial position and results of operations.

See “Our international operations expose us to instability and changes in economic and political conditions and other risks inherent to international business, which could have a material adverse effect on our results of operations, financial position or cash flows" under "Item 1A.

Risk Factors" in Part I of the Company's Annual Report on Form 10-K for the year ended December 31, 2019.

In July 2017, the U.K.’s Financial Conduct Authority, which regulates LIBOR, announced that it intends to phase out LIBOR as a benchmark by the end of 2021.

We have not yet pursued any technical amendment or other contractual alternative to address this matter.

We are currently evaluating the potential impact of the eventual replacement of the LIBOR interest rate.

The backlog data shown above includes all bookings as of March 31, 2021, 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 $69.4 million as of March 31, 2021 within “Revenue Recognition”, Note 4 to the Notes to Condensed Consolidated Financial Statements.

As a result of worldwide reductions in workforce and natural attrition, the total number of employees as of March 31, 2021 were reduced to 1,400, of which 727 were located in the United States.

The total number of the Company’s employees as of December 31, 2020 were 1,424, of which 729 were located in the United States.

As of March 31, 2020, the total number of the Company's employees were 1,831, of which 914 were located in the United States.

Dril-Quip’s revenues are generated from three sources:

3 unchanged sentences

Leasing revenues are derived from rental tools used during installation and retrieval of the Company’s products and from lease of our forging facility.

For the three months ended September 30, 2020 and 2019, the Company derived 72.8% and 75.6%, respectively, of its revenues from the sale of its products, 19.5% and 16.5%, respectively, of its revenue from services, and 7.7% and 7.9%, respectively, of its revenues from leasing.

For the nine months ended September 30, 2020 and 2019, the Company derived 71.0% and 73.3%, respectively, of its revenues from the sale of its products, 20.6% and 17.3%, respectively, of its revenue from services, and 8.4% and 9.4%, 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 66.7% and 64.3% of its revenues derived from foreign sales for the nine months ended September 30, 2020 and 2019, respectively.

For the three months ended March 31, 2021 and 2020, the Company derived 68.4% and 70.4%, respectively, of its revenues from the sale of its products, 21.8% and 19.6%, respectively, of its revenue from services, and 9.8% and 10.0%, 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 o perations, with approximately 68.5% and 63.1% of its revenues derived from foreign sales for the three months ended March 31, 2021 and 20 20 , respectively.

The majority of the Company’s domestic revenue relates to operations in the U.S.

Gulf of Mexico.

Domestic revenue approximated 33.3% and 35.7% of the Company’s total revenues for the nine months ended September 30, 2020 and 2019, respectively.

Domestic revenue approximated 31.5% an d 36.9% of the Compan y’s total revenues for the three months ended March 31, 2021 and 20 20 , respectively.

Product contracts are generally negotiated and sold separately from service contracts.

7 unchanged sentences

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, 2020 , there were 50 projects representing approximately 36.9% of the Company's total revenues and approximately 50.7% of its product revenues that were accounted for using over time accounting, compared to 29 projects for the three months ended September 30, 2019 , which represented approximately 21.9% of the Company's total revenues and approximately 28.9% of its product revenues.

For the nine months ended September 30, 2020 , there were 55 projects representing approximately 35.3% of the Company's total revenues and approximately 49.7% of its product revenues that were accounted for using over time accounting, compared to 31 projects for the nine months ended September 30, 2019 , which represented approximately 20.5% of the Company's total revenues and approximately 28.0% of its product revenues.

For the three months ended March 31, 2021, there were 41 projects representing approximately 17.1% of the Company's total revenues and approximately 24.9% of its product revenues that were accounted for using over time accounting, compared to 42 projects for the three months ended March 31, 2020, which represented approximately 31.4% of the Company's total revenues and approximately 44.7% of its product revenues.

These percentages may fluctuate in the future.

11 unchanged sentences

Engineering and product development expenses consist of new product development and testing.

Impairment losses consist of a full impairment of our goodwill balance of $7.7 million, which occurred in connection with our preparation and review of financial statements during the first quarter of 2020.

There were no impairment charges recorded for the three months ended September 30, 2020.

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 March 31, 2021.

Restructuring and Other Charges .

Restructuring and other charges consist of inventory write-downs, severance charges, long-lived assets write-downs and other charges of $17.3 million, $8.4 million, $7.8 million and $1.4 million, respectively, which occurred in connection with our preparation and review of financial statements for the nine months ended September 30, 2020.

During the three months ended September 30, 2020, we recorded restructuring and other charges of $0.6 million primarily related to consulting fees.

Restructuring and other charges consist of costs associated with our global strategic plan that was initiated in 2018 to better align our operations with market conditions.

This plan continued in 2020 as a result of the COVID-19 pandemic and the developments in global oil markets.

During the first quarter of 2021, we continued to incur restructuring charges under the global strategic plan as we exited from certain underperforming countries and markets and shifted from manufacturing in-house to a vendor outsourcing model.

(Gain) Loss on Sale of Assets.

Gain or loss on sale of assets consists of sales of certain property, plant and equipment.

Loss on sale of assets during the three months ended September 30, 2020 was immaterial.

Gain on sale of assets for the nine months ended September 30, 2020 was $0.5 million, which consisted primarily of the sale of our TIW Oklahoma facility.

Foreign Currency Transaction (Gains) and Losses.

2 unchanged sentences

The Company’s effective income tax rate fluctuates from the U.S.

statutory tax rate based on, among other factors, changes in pretax income in jurisdictions with varying statutory tax rates, impact of valuation allowances, and other permanent differences related to the recognition of income and expense between U.S.

statutory tax rate based on, among other factors, changes in pretax income in jurisdictions with varying statutory tax rates, 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.

Reclassifications.

We reclassified approximately $1.1 million and $2.1 million of foreign currency transaction gains for the three and nine months ended September 30, 2019, respectively, from selling, general and administrative to foreign currency transaction (gains) and losses.

These reclassifications did not have an impact on our condensed consolidated statements of income (loss), condensed consolidated balance sheets, condensed consolidated statements of comprehensive income (loss), condensed consolidated statements of stockholders’ equity and condensed consolidated statements of cash flows .

During the three months ended September 30, 2019, the Company identified errors related to a product contract in which the performance obligation was satisfied in the three months ended June 30, 2019 and product costs of sales were incorrectly eliminated at June 30, 2019.

The Company recorded in the three months ended September 30, 2019 out-of-period adjustments, which increased product revenue by $3.4 million and decreased net income (loss) by $1.5 million.

Management determined the errors were not material to the previously issued condensed consolidated interim financial statements as of and for the three and six months ended June 30, 2019.

In addition, the correction of the errors in the three months ended September 30, 2019 was not material on either a quantitative basis or a qualitative basis.

Results of Operations

1 unchanged sentence

Three months ended

Nine months ended

September 30,

Total revenues

6 unchanged sentences

Foreign currency transaction (gains) and losses

Operating income (loss)

Operating loss

Interest income

Interest expense

Income (loss) before income taxes

Loss before income taxes

Income tax provision (benefit)

Net income (loss)

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

Three months ended

Nine months ended

September 30,

(In millions)

5 unchanged sentences

Total revenues

Three Months Ended September 30, 2020 Compared to Three Months Ended September 30, 2019

Revenues decreased by $16.9 million, or approximately 15.6%, to $91.3 million for the three months ended September 30, 2020 from $108.2 million for the three months ended September 30, 2019.

Product revenues decreased by approximately $15.4 million for the three months ended September 30, 2020 as compared to the same period in 2019 as a result of decreased revenues in subsea equipment of $13.6 million, $2.1 million in downhole tools and $0.4 million in offshore rig equipment, partially offset by increased revenues of $0.7 million in surface equipment.

Product revenues in the Eastern Hemisphere and Western Hemisphere

decreased by $10.3 million and $6.5 million , respectively.

This was partially offset by an increase in product revenues in Asia-Pacific by $1.4 million .

O ur revenues continue to be negatively impacted by reduced pro duction output , customers requesting extension s o n their deliveries and supply chain disruptions attributable to COVID-19.

As the year progressed, the effects of the COVID-19 pandemic continue to cause delays and disruptions to our production schedule.

Addit i onally, we continue to experience delay s in our shipments due to reduced freight capacity.

Three Months Ended March 31, 2021 Compared to Three Months Ended March 31, 2020

Revenues decreased by $14.8 million, or approximately 15.4%, to $81.2 million for the three months ended March 31, 2021 from $96.0 million for the three months ended March 31, 2020.

Product revenues decreased by approximately $12.0 million for the three months ended March 31, 2021 as compared to the same period in 2020 as a result of decreased revenues in subsea equipment of $13.8 million, $0.9 million in offshore rig equipment and $0.5 million in surface equipment, partially offset by increased downhole tools revenue of $3.2 million.

Product revenues in the Eastern Hemisphere and Western Hemisphere decreased by $11.5 million and $3.5 million, respectively, partially offset by increased product revenues of $3.0 million in the Asia-Pacific region.

revenues continue to be negatively impacted by lower pro duction output primarily due to reduced global demand a nd customer request s to exten d their deliveries into future periods as a result of drilling schedule delays .

T hese negative impacts were attributable to both the COVID-19 pandemic and developments in the global oil markets.

The effects of the winter storm on our Houston manufacturing facilities were partially mitigated through extended production shifts.

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, completion status of the projects accounted for under the over time accounting method, market conditions and customer demand.

Service revenues decreased by approximately $0.1 million resulting mainly from decreased service revenues in the Eastern Hemisphere of $1.0 million, partially offset by increased revenues of $0.9 million in Asia-Pacific.

Service revenues in the Western Hemisphere remained relatively unchanged.

Lower service revenues in the Eastern Hemisphere resulted primarily from COVID-19 disruptions and delays.

Service revenues decreased by approximately $1.2 million resulting mainly from decreased service revenues in the Eastern Hemisphere of $1.6 million, in the Western Hemisphere of $0.5 million, partially offset by increased service revenues of $0.9 million in the Asia-Pacific region.

Lower service revenues in the Eastern Hemisphere and Western Hemisphere resulted primarily from COVID-19 disruptions and developments in the global oil markets.

Global travel restrictions also impacted service revenue, especially in the Eastern Hemisphere.

Increase in service revenues in Asia-Pacific is mainly due to increases in technical advisory services and maintenance requests related to products delivered.

Leasing revenues decreased by approximately $1.4 million resulting mainly from decreased leasing revenues in Asia-Pacific of $1.4 million and the Eastern Hemisphere of $0.7 million.

This was partially offset by increased leasing revenue in the Western Hemisphere of $0.7 million.

The decrease in Asia-Pacific is mainly due to resolution of a one-time customer dispute on rental equipment.

The majority of the decrease in the Eastern Hemisphere is related to decreased subsea rental tool utilization due to timing of customer drilling activity and COVID-19 related travel restrictions and the overall lower commodity price environment.

The increase in leasing revenues in the Western Hemisphere is mainly due to leasing of our forge facility to AFGlobal Corporation.

Increase in service revenues in Asia-Pacific is mainly due to customer specific increases in technical advisory services and maintenance requests in Malaysia.

Leasing revenues decreased by approximately $1.6 million resulting mainly from decreased leasing revenues in the Eastern Hemisphere of $1.6 million and in the Western Hemisphere of $0.3 million, partially offset by increased leasing revenue in Asia-Pacific region of $0.3 million.

The majority of the decrease in the Eastern Hemisphere is related to decreased subsea rental tool utilization due to timing of customer drilling activity and COVID-19 related travel restrictions.

Cost of Sales.

Cost of sales decreased by $8.8 million, or approximately 11.6%, to $67.2 million for the three months ended September 30, 2020 from $76.0 million for the same period in 2019.

The decrease in costs of sales were mainly in line with the decrease in revenue for the three months ended September 30, 2020.

Savings resulting from our business transformation activities were offset by higher COVID-19 related volume reductions, costs related to the COVID-19 pandemic comprising staggered shifts, supply chain disruptions, additional freight charges and more extensive cleaning and sanitization of workstations and unfavorable product mix.

Overall, the COVID-19 disruptions resulted in increase in cost of sales as a percentage of revenue to 73.7% from 70.3% for the three months ended September 30, 2020 and 2019, respectively.

This was partially offset by savings resulting from leasing of our forge facility to AFGlobal Corporation in the fourth quarter of 2019.

Cost of sales decreased by $14.6 million, or approximately 20.5%, to $56.8 million for the three months ended March 31, 2021 from $71.4 million for the same period in 2020.

The decrease in costs of sales were mainly in line with the decrease in revenue for the three months ended March 31, 2021.

Savings resulting from our business transformation activities were partially offset by higher costs related to the COVID-19 pandemic comprising staggered shifts, extensive cleaning and sanitization of workstations, and incremental production costs related to the winter storm shut down of our Houston manufacturing facility.

Overall, savings from our business transformation activities resulted in a decrease in cost of sales as a percentage of revenue to 69.9% from 74.4% for the three months ended March 31, 2021 and 2020, respectively.

Selling, General and Administrative Expenses.

For the three months ended September 30, 2020, selling, general and administrative expenses decreased by $8.3 million, or 28.4% to $20.8 million from $29.1 million for the same period in 2019.

This decrease was attributable mainly to workforce reductions as part of our global strategic plan and the suspension of our short-term incentive plans.

For the three months ended March 31, 2021, selling, general and administrative expenses increased by $4.9 million, or 19.9% to $29.6 million from $24.7 million for the same period in 2020.

This increase was attributable mainly to higher legal expenses in the current period related to an ongoing legal matter and an importation tax settlement under a recently introduced Brazilian tax amnesty program.

Restructuring and Other Charges.

As a result of unfavorable market conditions primarily due to the COVID-19 pandemic and developments in the global oil markets, which triggered historically low crude oil prices and decreases in our customers’ capital budgets, we incurred additional costs under our existing 2018 global strategic plan primarily focused on workforce reductions and to realign our manufacturing facilities during the first quarter of 2020.

For the three months ended September 30, 2020, w e recorded restructuring and other charges of $0.6 million primarily related to consulting fees.

In the third quarter of 2018, we initiated a global strategic plan to better align our operations with market conditions and finalized this plan in the second quarter of 2019.

As a result of this plan, we incurred restructuring charges consisting primarily of consulting fees of approximately $0.5 million during the three months ended September 30, 2019.

During the first quarter of 2021, the Company incurred additional costs under our existing 2018 global strategic plan to realign manufacturing facilities globally.

These charges were primarily related to the restructuring of our downhole tools business where we are exiting certain underperforming countries and markets and shifting 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 $3.0 million, consisting of facilities-related restructuring charges and professional fees.

We incurred restructuring and other charges of $32.7 million related to non-cash inventory write-downs, long-lived asset write-downs, severance and other charges of approximately $17.3 million, $6.9 million, $8.4 million and $0.1 million, respectively, for the three months ended March 31, 2020.

Engineering and Product Development Expenses.

For the three months ended September 30, 2020, engineering and product development expenses increased by approximately $0.2 million, or 6.1%, to $4.0 million from $3.8 million for the same period in 2019.

For the three months ended March 31, 2021, engineering and product development expenses decreased by approximately $1.5 million, or 26.9%, to $4.0 million from $5.5 million for the same period in 2020.

The decrease was attributable to lower spend on research and development activities for completed strategic projects.

(Gain) Loss on Sale of Assets.

During the three months ended September 30, 2020, loss on sale of assets was immaterial.

During the three months ended September 30, 2019, gain on sale of assets was $0.3 million.

During the three months ended March 31, 2021, gain on sale of assets was approximately $4.0 million primarily related to the sale of two of our buildings in Singapore.

During the three months ended March 31, 2020, gain on sale of assets was $0.5 million, which consisted primarily of the sale of our TIW Oklahoma facility.

Foreign Currency Transaction (Gains) and Losses.

Foreign exchange loss for the three months ended September 30, 2020 was $0.7 million as compared to a gain of $1.1 million for the same period in 2019.

Income Tax Provision (Benefit) .

Income tax benefit for the three months ended September 30, 2020 was $16.4 million on loss before taxes of $2.1 million, resulting in an effective tax rate of 797.5%.

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, the impact of NOL carrybacks and the change in valuation allowances in the United States and in various foreign countries.

Income tax expense for the three months ended September 30, 2019 was $3.4 million on an income before taxes of $2.1 million, resulting in an effective income tax rate of approximately 162.3%.

Income tax expense was different than the U.S federal statutory income tax rate of 21% primarily due to changes in the valuation allowances in the United States and in various foreign countries.

The change in the effective tax rate between the periods was primarily a result of a mix of earnings in jurisdictions with differing tax rates, and the discretely recognized tax benefits noted herein.

Net Income (Loss) .

N et income was approximately $14.3 million for the three months ended September 30, 2020 as compared to a net loss of $1.3 million for the same period in 20 19 for the reasons set forth above.

Nine Months Ended September 30, 2020 Compared to Nine Months Ended September 30, 2019

Revenues decreased by $28.7 million, or approximately 9.4%, to $277.7 million for the nine months ended September 30, 2020 from $306.4 million for the nine months ended September 30, 2019.

Product revenues decreased by approximately $27.4 million for the nine months ended September 30, 2020 as compared to the same period in 2019 as a result of decreased revenues of $28.2 million in subsea equipment, $0.6 million in downhole tools and $0.2 million in surface equipment, partially offset by increased revenues of $1.6 million in offshore rig equipment.

Product revenues decreased in the Eastern Hemisphere by $21.0 million, in the Western Hemisphere by $3.5 million and in Asia-Pacific by $2.9 million.

The Company’s revenues were negatively impacted by reduced production output, customers requesting extensions on their deliveries, related quarantine requirements in certain regions and supply chain disruptions attributable to both the COVID-19 pandemic and developments in the global oil markets.

For the nine months ended September 30, 2020, all regions were impacted by the spread of the pandemic and the developments in the global oil markets.

Service revenues increased by approximately $4.3 million resulting mainly from increased service revenues in the Western Hemisphere of $5.0 million and in Asia-Pacific of $2.2 million, partially offset by decreased service revenues of $2.9 million in the Eastern Hemisphere.

The increase in service revenues in the Western Hemisphere and Asia-Pacific is due largely to the increases in technical advisory services and maintenance requests related to products delivered.

Lower service revenues in the Eastern Hemisphere are attributable primarily to COVID-19 disruptions, including travel restrictions, and lower activity, which more than offset increased customer rework and conditioning activity during the period.

Leasing revenues decreased by approximately $5.6 million resulting mainly from decreased leasing revenues in the Eastern Hemisphere of $2.2 million, in the Western Hemisphere of $2.1 million and in Asia-Pacific of $1.3 million.

The majority of the decrease in the Eastern and Western Hemispheres is related to decreased subsea rental tool utilization due to timing of customer exploration activity, COVID-19 related travel restrictions and the unfavorable developments in the global oil markets.

The decrease in Asia-Pacific is mainly due to resolution of a one-time customer dispute on rental equipment.

Cost of Sales.

Cost of sales decreased by $13.7 million, or approximately 6.3%, to $205.6 million for the nine months ended September 30, 2020 from $219.3 million for the same period in 2019.

The decrease in costs of sales were mainly in line with the decrease in revenue for the nine months ended September 30, 2020.

Savings resulting from our business transformation executed in 2019 were offset by higher COVID-19 related volume reductions, costs associated with the COVID-19 pandemic which included staggered shifts, supply chain disruptions, additional freight charges and more extensive cleaning and sanitization of workstations and unfavorable product mix.

Overall, the COVID-19 disruptions resulted in the increase in cost of sales as a percentage of revenue to 74.0% from 71.6% for the nine months ended September 30, 2020 and 2019, respectively.

This was partially offset by savings resulting from leasing of our forge facility to AFGlobal Corporation in the fourth quarter of 2019.

Selling, General and Administrative Expenses.

For the nine months ended September 30, 2020, selling, general and administrative expenses decreased by $8.6 million, or 11.1%.

to $68.8 million from $77.4 million for the same period in 2019.

This decrease was attributable mainly to workforce reductions as part of our global strategic plan and the suspension of our short-term incentive plans, approximately $1.8 million related to accelerated vesting of restricted stock awards and approximately $2.4 million related to continued vesting of performance share units pursuant to a separation agreement with our former Chief Operating Officer entered into during the first quarter of 2019.

In March 2020, the overall offshore market conditions declined primarily due to the COVID-19 pandemic and unfavorable developments in the global oil markets.

This decline was evidenced by lower commodity prices, decline in expected offshore rig counts, decrease in our customers’ capital budgets and potential delays or cancellations of contracts.

As a result, an interim goodwill impairment analysis was performed in connection with the preparation and review of financial statements during the first quarter of 2020.

Based on this analysis, we fully impaired our goodwill balance of $7.7 million, all of which was in the Eastern Hemisphere reporting unit.

Restructuring and Other Charges.

We recorded inventory write-downs, severance charges, long-lived asset write-downs and other charges of $34.9 million during the nine months ended September 30, 2020.

In the third quarter of 2018, we initiated a global strategic plan to better align our operations with market conditions and finalized this plan in the second quarter of 2019.

During the nine months ended September 30, 2019, we incurred restructuring and other charges of approximately $4.0 million related to consulting fees and an approximate $1.1 million payout to our former Chief Operating Officer, pursuant to a separation agreement entered into with him during the first quarter of 2019.

Engineering and Product Development Expenses.

For the nine months ended September 30, 2020 , engineering and product development expenses increased by approximately $2.4 million , or 18.8% , to $14.9 million f rom $12.5 million for the same period in 2019 .

This was due to increased activity required to support strategic growth initiatives tied to committed customer orders and our continued research and development efforts within the Subsea Productions Systems product line which resulted in the Offshore Technology Conference award for the VXTe product.

Gain on Sale of Assets.

During the nine months ended September 30, 2020, gain on sale of assets was $0.5 million, which consisted primarily of the sale of our TIW Oklahoma facility.

During the nine months ended September 30, 2019, gain on sale of assets was $1.5 million, which consisted primarily of the sale of our Youngsville, Louisiana manufacturing and services facility.

Foreign Currency Transaction Gains.

Foreign exchange gain for the nine months ended September 30, 2020 was $1.7 million as compared to a gain of $2.1 million for the same period in 2019.

Foreign exchange loss for the three months ended March 31, 2021, was $1.4 million as compared to a gain of $3.2 million for the same period in 2020.

Income Tax Provision (Benefit) .

Income tax benefit for the nine months ended September 30, 2020 was $30.9 million on loss before taxes of $50.4 million, resulting in an effective tax rate of 61.3%.

Income tax expense was different than the U.S federal statutory income tax rate of 21% primarily due to the impact of recording the NOL benefit of the CARES Act, changes in the valuation allowance in the United States and in various foreign countries, changes in accruals for undistributed earnings and goodwill impairments.

Income tax expense for the nine months ended September 30, 2019 was $8.9 million on an income before taxes of $3.2 million, resulting in an effective income tax rate of approximately 278.3%.

Income tax expense was different than the U.S federal statutory income tax rate of 21% primarily due to changes in the valuation allowances in the United States and in various foreign countries.

Net loss was approximately $19.5 million for the nine months ended September 30, 2020 as compared to a net loss of $5.7 million for the same period in 2019 for the reasons set forth above.

Income tax provision for the three months ended March 31, 2021 was $2.4 million on a loss before taxes of $32.0 million, resulting in an effective tax rate of (7.5)%.

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.

Income tax benefit for the three months ended March 31, 2020 was $21.6 million on a loss before taxes of $41.3 million, resulting in an effective income tax rate of approximately 52.3%.

Income tax expense was different than the U.S federal statutory income tax rate of 21% primarily due to tax benefits of the CARES Act, changes in the valuation allowances in the United States and in various foreign countries.

The change in the effective tax rate between the periods was primarily a result of discretely recognized benefits of the CARES Act in 2020, changes in valuation allowances and a mix of earnings in jurisdictions with differing tax rates.

Net loss was approximately $34.4 million for the three months ended March 31, 2021 as compared to a net loss of $19.7 million for the same period in 20120 for the reasons set forth above.

Non-GAAP Financial Measures

11 unchanged sentences

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

Three months ended September 30,

Nine months ended September 30,

Three months ended March 31,

(In thousands)

Net income (loss)

Interest income, net

Interest (income) expense, net

Income tax provision (benefit)

1 unchanged sentence

Restructuring and other charges (2)

(Gain) loss on sale of assets

Gain on sale of assets

Foreign currency transaction (gains) and losses

Stock compensation expense

Brazilian amnesty settlement

Adjusted EBITDA (1)

(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 a non-recurring legal matter.

Liquidity and Capital Resources

Cash flows provided by (used in) type of activity were as follows:

Nine months ended September 30,

Three months ended March 31,

(In thousands)

3 unchanged sentences

Effect of exchange rate changes on cash activities

Decrease in cash and cash equivalents

Increase (decrease) in cash and cash equivalents

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.

2 unchanged sentences

The Company’s principal source of funds is cash flows from operations.

As of September 30, 2020, the Company had approximately $359.2 million of cash and cash equivalents on hand and an availability of $44.6 million under the ABL Credit Facility.

As of March 31, 2021, the Company had approximately $362.2 million of cash and cash equivalents on hand and an availability of $35.4 million under the ABL Credit Facility.

Although there still remains uncertainty related to the impact of the COVID-19 pandemic on our future results, we continue to monitor our spend and reduce non-essential spending.

Further, the Company adjusted the workforce to be in line with the current situation as we continue to monitor the ongoing market conditions.

We believe our business model, our current cash reserves and the recent restructuring and facility realignment will strengthen our balance sheet and leave us well-positioned to manage our business through this crisis as it continues to unfold.

We have reviewed numerous potential scenarios in connection with the impact of COVID-19 on the global economy and the oil and gas industry.

We believe our business model, our current cash reserves and the recent downhole tools business restructuring and facility realignment will strengthen our balance sheet and leave us well-positioned to manage our business through this crisis as it continues to unfold.

We continue to review potential scenarios in connection with the impact of COVID-19 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 th e nine months ended September 30, 2020 was $4.3 million as compared to $6.6 million of net cash provided by operating activities for the nine months ended September 30, 2019 .

9 million net c hange is primarily due to decrease d cash flow resulting from changes in operating assets and liabilities of $ 3 4 .

2 million and an increase in net loss of $ 1 3.8 million .

This was partially offset by $ 3 7 .

1 million of non-cash movements which included an increase in impairment, restructuring and other charges of $ 4 2.5 million, of which , $ 2 5 .

1 million is related to the write-down of inventory and long-lived assets and $ 7.7 million is related to the impairment of g oodwill .

The change in operating assets and liabilities for the nine months ended September 30, 2020 resulted in a $34.2 million decrease in cash as compared to the change in operating assets and liabilities for the nine months ended September 30, 2019.

The $35.9 million increase in prepaids and other assets was primarily due to the CARES Act and other tax benefits recognized due to losses incurred in various foreign jurisdictions.

The increase in inventory of $22.9 million was mainly due to delays in shipments due to COVID-19 pandemic related disruptions and the strategic stocking program activity related to our downhole tools business.

The decrease in accounts payable and accrued expenses of $14.8 million was mainly related to proactive discussions with most of our vendors on extending payment terms to be in line with the current market conditions.

Unbilled receivables decreased by $38.4 million mainly due to the timing difference on our milestone billing and progress on the projects that are accounted for on an over time basis.

Trade receivables decreased by $1.0 million primarily due to our increased focus on global cash collections during the third quarter of 2020.

The change in investing cash flows for the nine months ended September 30, 2020 resulted in a $6.6 million decrease to cash primarily due to capital expenditures incurred during the year.

Capital expenditures by the Company were $10.2 million and $8.6 million for the nine months ended September 30, 2020 and 2019, respectively.

Capital expenditures for the nine months ended September 30, 2020 were $4.4 million for rental tools to support our current and recently developed products, $3.5 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 and $2.3 million for other capital expenditures.

Net cash provided by operating activities for the three months ended March 31, 2021 was $13.1 million as compared to net cash used in operating activities of $21.2 million for the three months ended March 31, 2020.

The $34.3 million net change is primarily due to increased cash flow resulting from changes in operating assets and liabilities of $58.9 million.

This was partially offset by $9.9 million of non-cash movements which included decreases in items such as impairments, restructuring and other charges, and an increase in net loss of $14.7 million.

The change in operating assets and liabilities for the three months ended March 31, 2021 resulted in a $58.9 million increase in cash as compared to the change in operating assets and liabilities for the three months ended March 31, 2020.

Trade receivables decreased by $30.5 million during the first quarter of 2021, primarily due to our continued focus on global cash collections.

The $16.7 million decrease in prepaids and other assets was primarily due to receipt of tax receivables.

The increase in accounts payable and accrued expenses of $12.4 million was mainly related to proactive discussions with most of our vendors on extending payment terms to be in line with the current market conditions.

The decrease in inventory of $9.7 million was mainly related to our focus on inventory management and consumption during the year.

These were partially offset by increase in unbilled receivables by $10.4 million mainly due to the timing difference on our milestone billing and progress on the projects that are accounted for on an over time basis.

The change in investing cash flows for the three months ended March 31, 2021 resulted in a $3.4 million increase in cash primarily due to the sale of two of our buildings in Singapore.

Capital expenditures by the Company were $2.5 million and $4.2 million for the three months ended March 31, 2021 and 2020, respectively.

Capital expenditures for the three months ended March 31, 2021 were $1.2 million for rental tools to support our current and recently developed products, $0.6 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 and $0.7 million for other capital expenditures.

We constantly review capital expenditure needs to ensure these are justified expenditures.

Capital expenditures for the nine months ended September 30, 2019 were $4.8 million for machinery and equipment, $1.9 million for rental tools, $1.2 million for buildings and $0.7 million for other capital expenditures.

Capital expenditures for the three months ended March 31, 2020 were $0.7 million for machinery and equipment, $1.9 million for rental tools, and $1.6 million for other capital expenditures.

Repurchase of Equity Securities

3 unchanged sentences

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.

For the three months ended September 30, 2020, the Company purchased no shares under the share repurchase plan.

For the nine months ended September 30, 2020, the Company purchased 808,389 shares under the share repurchase plan at an average price of approximately $30.91 per share totaling approximately $25.0 million and has retired such shares.

For the three months period ended September 30, 2019, the Company purchased 75,737 shares under the share repurchase plan at an average price of approximately $44.45 per share totaling approximately $3.4 million and has retired such shares.

For the nine-month period ended September 30, 2019, the Company purchased 125,888 shares under the share repurchase plan at an average price of approximately $42.60 per share totaling approximately $5.4 million and has retired such shares.

For the three months ended March 31, 2021, the Company purchased no shares under the share repurchase plan.

For the three months ended March 31, 2020 , the Company purchased 808,389 shares under the share repurchase plan at an average price of approximately $30.91 per share totaling approximately $25.0 million and has retired such shares .

Asset Backed Loan (ABL) Credit Facility

On February 23, 2018, the Company, as borrower, and the Company’s subsidiaries TIW Corporation and Honing, Inc., as guarantors, entered into a five-year senior secured revolving credit facility (the “ABL Credit Facility”) with JPMorgan Chase Bank, N.A., as administrative agent, and other financial institutions as lenders with total commitments of $100.0 million, including up to $10.0 million available for letters of credit.

The maximum amount that the Company may borrow under the ABL Credit Facility is subject to the borrowing base, which is based on a percentage of eligible accounts receivable and eligible inventory, subject to reserves and other adjustments.

As of September 30, 2020, the availability under the ABL Credit Facility was $44.6 million, after taking into account the outstanding letters of credit of approximately $1.0 million issued under the facility.

As of March 31, 2021, the availability under the ABL Credit Facility was $35.4 million, after taking into account the outstanding letters of credit of approximately $1.0 million issued under the facility.

For additional information on the ABL Credit Facility, see "Asset Backed Loan (ABL) Credit Facility", Note 9 to the Notes to Condensed Consolidated Financial Statements.

8 unchanged sentences

Refer to our Annual Report on Form 10-K for the year ended December 31, 2020 for a discussion of our critical accounting policies.

During the nine months ended September 30, 2020, there were no material changes in our judgments and assumptions associated with the development of our critical accounting policies.

During the three months ended March 31, 2021, there were no material changes in our judgments and assumptions associated with the development of our critical accounting policies.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis