Edgar Filing: DRIL-QUIP INC

-------------------------------------------------------------------------------
-------------------------------------------------------------------------------

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

----------------

FORM 10-K

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

For the fiscal year ended December 31, 2001

Commission file number: 001-13439

----------------

Dril-Quip, Inc.
(Exact name of registrant as specified in its charter)

Delaware 74-2162088
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)

13550 Hempstead Highway 77040
Houston, Texas (Zip code)
(Address of principal executive
offices)

Registrant's telephone number, including area code: (713) 939-7711

Securities registered pursuant to Section 12(b) of the Act:

Name of Each Exchange
Title of Each Class On Which Registered
------------------- -----------------------

Common Stock, $.01 par value per share New York Stock Exchange
Rights to purchase Series A Junior Participating
Preferred Stock New York Stock Exchange

Securities registered pursuant to Section 12(g) of the Act: None

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 [X] NO [_]

Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]

At March 20, 2002, the aggregate market value of the registrant's Common
Stock held by non-affiliates of the registrant was approximately $158,166,000
based on the closing price of such stock on such date of $24.30.

At March 20, 2002, the number of shares outstanding of registrant's Common
Stock was 17,293,373.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Registrant's Proxy Statement for its 2002 Annual Meeting of
Stockholders to be filed pursuant to Regulation 14A are incorporated by
reference in Part III of this Form 10-K.

-------------------------------------------------------------------------------
-------------------------------------------------------------------------------

TABLE OF CONTENTS

PART I.................................................................... 2
Item 1. Business............................................. 2
Item 2. Properties........................................... 10
Item 3. Legal Proceedings.................................... 10
Item 4. Submission of Matters to a Vote of Security Holders.. 10
Item S-K 401(b). Executive Officers of the Registrant................. 11

PART II................................................................... 12
Item 5. Market for Registrant's Common Stock and Related
Shareholder Matters.................................. 12
Item 6. Selected Financial Data.............................. 13
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations.................. 13
Item 7A. Quantitative and Qualitative Disclosures About Market
Risk................................................. 19
Item 8. Financial Statements and Supplementary Data.......... 19
Item 9. Changes In and Disagreements With Accountants on
Accounting and Financial Disclosure.................. 34

PART III.................................................................. 35
Item 10. Directors and Executive Officers of the Registrant... 35
Item 11. Executive Compensation............................... 35
Item 12. Security Ownership of Certain Beneficial Owners and
Management........................................... 35
Item 13. Certain Relationships and Related Party Transactions. 35

PART IV................................................................... 36
Item 14. Exhibits, Financial Statement Schedules, and Reports
on Form 8-K.......................................... 36

FORWARD LOOKING STATEMENTS

This Annual Report on Form 10-K 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 Dril-Quip's control. You can identify Dril-Quip's forward looking
statements by the words "anticipate," "estimate," "expect," "may," "project,"
"believe" and similar expressions. These forward-looking statements include
the following types of information and statements as they relate to Dril-Quip:

. scheduled, budgeted and other future capital expenditures;

. working capital requirements;

. the availability of expected sources of liquidity;

. statements regarding the market for Dril-Quip products;

. statements regarding the exploration and production activities of Dril-
Quip customers; and

. all statements regarding future operations, financial results, business
plans and cash needs.

These statements are based upon certain assumptions and analyses made by
management of Dril-Quip in light of its experience and its perception of
historical trends, current conditions, expected future developments and other
factors it believes are appropriate in the circumstances. Such statements are
subject to a number of assumptions, risks and uncertainties, including but not
limited to, those relating to the volatility of oil and natural gas prices and
cyclical nature of the oil and gas industry, Dril-Quip's international
operations, operating risks, Dril-Quip's dependence on key employees, Dril-
Quip's dependence on skilled machinists and technical personnel, Dril-Quip's
reliance on product development and possible technological obsolescence,
control by certain stockholders, the potential impact of governmental
regulation and environmental matters, competition, reliance on significant
customers, political instability, acts of terrorism or war, the risk factors
discussed herein and other factors detailed in Dril-Quip's other filings with
the Securities and Exchange Commission. Prospective investors are cautioned
that any such statements are not guarantees of future performance, and that,
should one or more of these risks or uncertainties materialize, or should
underlying assumptions prove incorrect, actual outcomes may vary materially
from those indicated.

PART I

Item 1. Business

General

Dril-Quip, Inc., a Delaware corporation ("Dril-Quip" or the "Company"), is
one of the world's leading manufacturers of highly engineered offshore
drilling and production equipment which is well suited for use in deepwater,
harsh environment and severe service applications. The Company designs and
manufactures subsea equipment, surface equipment and offshore rig equipment
for use by major integrated, large independent and foreign national oil and
gas companies in offshore areas throughout the world. 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, wellhead connectors and
diverters. The Company also provides installation and reconditioning services
and rents running tools for use in connection with the installation and
retrieval of its products.

Dril-Quip has developed its broad line of subsea equipment, surface
equipment and offshore rig equipment primarily through its internal product
development efforts. The Company believes that it has achieved significant
market share and brand name recognition with respect to its established
products due to the technological capabilities, reliability, cost
effectiveness and operational timesaving features of these products. In
particular, the

Company's Quik-Thread(R) and Quik-Stab(R) specialty connectors, MS-15(R)
mudline hanger systems and SS-10(R) and SS-15(R) subsea wellheads are among
the most widely used in the industry. During the 1990s, the Company introduced
a number of new products, including diverters, wellhead connectors, dual-bore
and single-bore subsea production trees, subsea and platform valves, platform
wellheads, platform trees, drilling risers and Spar and TLP production risers.
Dril-Quip is currently involved in the development of a number of new
products, including liner hangers, slug suppression systems, and control
systems.

Dril-Quip markets its products through its offices and sales representatives
located in all of the major international energy markets throughout the world.
In 2001, the Company generated approximately 53% of its revenues from foreign
sales. The Company manufactures its products at its facilities located in
Houston, Texas; Aberdeen, Scotland; and Singapore, and maintains additional
facilities for fabrication and/or reconditioning in Brazil, Norway, Denmark
and Australia. Dril-Quip's manufacturing operations are vertically integrated,
with the Company performing substantially all of its forging, heat treating,
machining, fabrication, inspection, assembly and testing at its own
facilities.

The Company was co-founded in 1981 by Larry E. Reimert, Gary D. Smith, J.
Mike Walker and Gary W. Loveless. Together, Messrs. Reimert, Smith and Walker
have over 90 years of combined experience in the oilfield equipment industry,
essentially all of which has been with the Company and its major competitors.
In addition, key department managers have been with the Company over 10 years,
on average.

Industry Overview

Both the market for offshore 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 offshore. The level of capital expenditures is generally dependent
upon the prevailing view of future oil and gas prices, which are influenced by
numerous factors affecting the supply and demand for oil and gas, including
worldwide economic activity, interest rates and the cost of capital,
environmental regulation, tax policies, and the ability of OPEC and other
producing nations to set and maintain production levels and prices. Capital
expenditures are also dependent on the cost of exploring for and producing oil
and gas, the sale and expiration dates of offshore leases in the United States
and overseas, the discovery rate of new oil and gas reserves in offshore areas
and technological advances. Oil and gas prices and the level of offshore
drilling and production activity have historically been characterized by
significant volatility.

During 2001, the worldwide economic recession, combined with declining oil
and gas prices and the events of September 11, 2001, led to weakness in the
oil service sector. The Company expects this weakness to continue at least
through the first half of 2002. In any event, any significant future declines
in hydrocarbon prices would likely have a material adverse effect on the
Company's results of operations. There can be no assurance that the current
oil price levels will lead to increased oil and gas exploration and production
activity or that demand for the Company's products and services will reflect
such improvement, if any.

Products and Services

Product Group

Dril-Quip designs, manufactures, fabricates, inspects, assembles, tests and
markets subsea equipment, surface equipment and offshore rig equipment. In
2001, the Company derived approximately 86% of its revenues from the sale of
its products. The Company's products are used to explore for oil and gas on
offshore drilling rigs, such as floating rigs and jack-ups, and for drilling
and production of oil and gas wells on offshore platforms, TLPs, Spars and
moored vessels such as FPSOs. TLPs are floating production platforms that are
connected to the ocean floor via vertical mooring tethers (called tension
legs). A Spar is a floating cylindrical structure approximately six or seven
times longer than its diameter that is anchored in place (like a Spar buoy).
FPSOs are floating production, storage and offloading monohull moored vessels.
Sales of the Company's equipment in connection with TLPs, Spars and FPSOs are
becoming increasingly important sources of revenues.

Subsea Equipment. Subsea equipment is used in the drilling and production of
offshore oil and gas wells around the world. Included in the subsea equipment
product line are subsea wellheads, mudline hanger systems, specialty
connectors and associated pipe, subsea production trees, valves and TLP and
Spar well systems.

Subsea wellheads are pressure-containing forged and machined metal housings
in which casing hangers are landed and sealed subsea to suspend casing
(downhole pipe). As drilling depth increases, successively smaller diameter
casing strings are installed, each suspended by an independent casing hanger.
Subsea wellheads are utilized when drilling from floating drilling rigs,
either semi-submersible or drillship types, and TLPs and Spars. In 1999, the
Company introduced its SS-15 Big Bore Subsea Wellhead System, which was
designed to accommodate additional casing strings installed through a
conventional marine riser and a subsea blowout preventer. The Company
generally supplies subsea wellheads to customers from inventory.

Mudline hanger systems are used in jack-up drilling operations to support
the weight of the various casing strings at the ocean floor while drilling a
well. They also provide a method to disconnect the casing strings in an
orderly manner at the ocean floor after the well has been drilled, and
subsequently reconnect to enable production of the well by either tying it
back vertically to a subsequently-installed platform or by installing a subsea
tree. The Company generally supplies mudline hanger systems to customers from
inventory.

Large diameter weld-on specialty connectors (threaded or stab type) are used
in offshore wells drilled from floating drilling rigs, jack-ups, fixed
platforms, TLPs and Spars. Specialty connectors join lengths of conductor or
large diameter (16-inch or greater) casing. Specialty connectors provide a
more rapid connection than other methods of connecting lengths of pipe.
Connectors may be sold individually or as an assembly after being welded to
sections of Company or customer supplied pipe. Dril-Quip's weld-on specialty
connectors are designed to prevent cross threading and provide a quick,
convenient method of joining casing joints with structural integrity
compatible with casing strength. The Company generally supplies specialty
connectors individually or specialty connectors welded to pipe from inventory.

A subsea production tree is an assembly composed of valves, a wellhead
connector, control equipment and various other components installed on a
subsea wellhead or a mudline hanger system and used to control the flow of oil
and gas from a producing well. Subsea trees may be either stand alone
satellite type or template mounted cluster arrangements. Both types typically
produce via flowlines to a central control point located on a platform, TLP,
Spar or FPSO. The use of subsea production trees has become an increasingly
important method for producing wells located in hard-to-reach deepwater areas
or economically marginal fields located in shallower waters. The Company is an
established manufacturer of more complicated dual-bore production trees, which
are used in severe service applications. In addition, Dril-Quip manufactures a
patented single bore (SingleBore(TM)) subsea completion system which features
a hydraulic mechanism instead of a wireline-installed mechanism that allows
the operator to plug the tubing hanger annulus remotely from the surface via a
hydraulic control line and subsequently unplug it when the well is put on
production. This mechanism eliminates the need for an expensive multibore
installation and workover riser, thereby saving both cost and installation
time. In addition, Dril-Quip introduced a new guidelineless subsea production
tree in 1999 for use in ultra-deepwater applications. This tree features
remote multiple flowline and control connections, utilizing remotely operated
intervention tools. During 2000, the first tree of this type was successfully
installed in approximately 6,000 feet of water off the coast of Brazil, the
first of several that have been supplied to this area. The Company's subsea
production trees are generally custom designed and manufactured to customer
specifications.

Surface Equipment. Surface equipment is principally used for flow control on
offshore production platforms, TLPs and Spars. Included in the Company's
surface equipment product line are platform wellheads and platform production
trees. Dril-Quip's development of platform wellheads and platform production
trees was facilitated by adaptation of its existing subsea wellhead and tree
technology to surface wellheads and trees.

Platform wellheads are pressure-containing forged and machined metal
housings in which casing hangers are landed and sealed at the platform deck to
suspend casings. The Company emphasizes the use of metal-to-metal

sealing wellhead systems with operational time-saving features which can be
used in high pressure, high temperature and corrosive drilling and production
applications.

After installation of a wellhead, a platform production tree, consisting of
gate valves, a wellhead connector, controls, tree cap and associated
equipment, is installed on the wellhead to control and regulate oil or gas
production. Platform production trees are similar to subsea production trees
but utilize less complex equipment and more manual, rather than hydraulically
activated, valves and connectors. Platform wellheads and platform production
trees and associated equipment are designed and manufactured in accordance
with customer specifications.

Offshore Rig Equipment. Offshore rig equipment includes drilling and
production riser systems, wellhead connectors and diverters. The drilling
riser system consists of (i) lengths of riser pipe and associated riser
connectors that secure one to another; (ii) the telescopic joint, which
connects the entire drilling riser system to the diverter at the rig and
provides a means to compensate for vertical motion of the rig relative to the
ocean floor; and (iii) the wellhead connector, which provides a means for
remote connection and disconnection of the drilling riser system to and from
the BOP stack. Production risers provide a vertical conduit from the subsea
wellhead to a TLP, Spar or FPSO. The wellhead connector also provides remote
connection/disconnection of the BOP stack, production tree or production riser
to/from the wellhead. Diverters are used to provide protection from shallow
gas blowouts and to divert gases off of the rig during the drilling operation.

Wellhead connectors and drilling and production riser systems are also used
on both TLPs and Spars, which are being installed more frequently in deepwater
applications. The principal markets for offshore rig equipment are new rigs,
rig upgrades, TLPs and Spars. Diverters, drilling and production risers and
wellhead connectors are generally designed and manufactured to customer
specifications.

Certain products of the Company are used in potentially hazardous drilling,
completion and production applications that can cause personal injury, product
liability and environmental claims. Litigation arising from a catastrophic
occurrence at a location where the Company's equipment and/or services are
used may in the future result in the Company being named as a defendant in
lawsuits asserting potentially large claims. The Company maintains insurance
coverage that it believes is customary in the industry. Such insurance does
not, however, provide coverage for all liabilities (including liability for
certain events involving pollution), and there is no assurance that its
insurance coverage will be adequate to cover claims that may arise or that the
Company will be able to maintain adequate insurance at rates it considers
reasonable. The occurrence of an event not fully covered by insurance could
have a material adverse effect on the financial condition and results of
operations of the Company.

Service Group

Dril-Quip's Service Group provides field installation services,
reconditioning of its products which are customer-owned, and rental running
tools for installation and retrieval of its products. These services are
provided from the Company's worldwide locations and represented approximately
14% of revenues in 2001.

Field Installation. Dril-Quip provides field installation services through
the use of its technicians. These technicians assist in the onsite
installation of Company products and are available on a 24-hour call out from
the Company's facilities located in Houston, Texas; Aberdeen, Scotland;
Stavanger, Norway; Esbjerg, Denmark; Singapore; Perth, Australia; and Macae,
Brazil.

Reconditioning. The Company provides reconditioning of its products at its
facilities in Houston, Texas; Aberdeen, Scotland; Stavanger, Norway;
Singapore; and Macae, Brazil.

Rental. The Company rents running and installation tools for use in
installing its products. These tools are used to install and retrieve Company
products which are purchased by customers. Running tools are available from
Dril-Quip's locations in Houston, Texas; Aberdeen, Scotland; Stavanger,
Norway; Esbjerg, Denmark; Beverwijk, Holland; Singapore; Perth, Australia; and
Macae, Brazil.

Manufacturing

Dril-Quip has major manufacturing facilities in Houston, Texas; Aberdeen,
Scotland; and Singapore. Each location conducts a broad variety of processes,
including machining, fabrication, inspection, assembly and testing. The
Houston facility provides forged and heat treated products to all the major
manufacturing facilities.

The Company's Houston and Aberdeen manufacturing plants are ISO 9001 and
American Petroleum Institute certified. In addition, the Company's
manufacturing facility in Singapore is ISO 9001 certified. See "Properties--
Major Manufacturing Facilities." Dril-Quip maintains its high standards of
product quality through the use of quality assurance specialists who work with
product manufacturing personnel throughout the manufacturing process by
inspecting and documenting equipment as it is processed through the Company's
manufacturing facilities. The Company has the capability to manufacture
various products from each of its product lines at its major manufacturing
facilities and believes that this localized manufacturing capability is
essential in order to compete with the Company's major competitors.

The Company's manufacturing process is vertically integrated, producing, in
house, a majority of its forging requirements and essentially all of its heat
treatment, machining, fabrication, inspection, assembly and testing. The
Company's primary raw material is cast steel ingots, from which it produces
steel shaped forgings at its forging and heat treatment facility. The Company
routinely purchases steel ingots from approximately four suppliers on a
purchase order basis and does not have any long-term supply contracts. The
Company's Houston facility provides forgings and heat treatment for its
Aberdeen and Singapore facilities. The Company's major competitors depend on
outside sources for all or a substantial portion of their forging and heat
treatment requirements. The Company has made significant capital investments
in developing its vertically integrated manufacturing capability. Prolonged
periods of low demand in the market for offshore drilling and production
equipment could have a greater effect on the Company than on certain of its
competitors that have not made large capital investments in facilities.

Dril-Quip's manufacturing facilities utilize state-of-the-art computer
numerically controlled ("CNC") machine tools and equipment, which contribute
to the Company's product quality and timely delivery. The Company has also
developed a cost effective, in-house machine tool rebuild capability which
produces "like new" machine upgrades with customized features to enhance the
economic manufacture of its specialized products. The Company purchases
quality used machine tools as they become available and stores them at its
facilities to be rebuilt and upgraded as the need arises. Rebuilding used
machine tools allows for greater customization suitable for manufacturing
Dril-Quip proprietary product lines. This provides the added advantage of
requiring only in-house expertise for repairs and maintenance of these
machines. A significant portion of the Company's manufacturing capacity growth
has been through the rebuild/upgrade of quality used machine tools, including
the replacement of outdated control systems with state-of-the-art CNC
controls.

The Company has increased its facilities at its Eldridge site in Houston,
Texas from approximately 280,000 square feet at the end of 1997 to
approximately 851,000 square feet at the end of 2001. Dril-Quip has
consolidated its Houston manufacturing operations by moving its finish
machining, assembly and warehouse functions from its Hempstead Highway
location to its larger, state-of-the-art Eldridge Parkway facility.

Customers

The Company's principal customers are major integrated oil and gas
companies, large independent oil and gas companies and foreign national oil
and gas companies. Offshore drilling contractors and engineering and
construction companies also represent a minor customer base. The Company's
customers are generally oil and gas companies that are well-known participants
in offshore exploration and production.

The Company is not dependent on any one customer or group of customers. In
2001, the Company's top 15 customers represented approximately 87% of total
revenues, with BP p.l.c. accounting for approximately 17%, and ChevronTexaco
Corp. accounting for approximately 13% of revenues. During 2000, no single
customer accounted for more than 10% of the Company's total revenues. The
number and variety of the Company's products required in a given year by any
one customer depends upon the amount of that customer's capital expenditure
budget devoted

to offshore exploration and production in any single year and on the results
of competitive bids for major projects. Consequently, a customer that accounts
for a significant portion of revenues in one fiscal year may represent an
immaterial portion of revenues in subsequent years. While the Company is not
dependent on any one customer or group of customers, the loss of one or more
of its significant customers could, at least on a short-term basis, have an
adverse effect on the Company's results of operations.

Marketing and Sales

Dril-Quip markets its products and services throughout the world directly
through its sales personnel in two domestic and eleven international
locations. In addition, in certain foreign markets where the Company does not
maintain offices, it utilizes independent sales representatives to enhance its
marketing and sales efforts. Some of the locations in which Dril-Quip has
sales representatives are India, Canada, Mexico, the Philippines, Brazil,
Indonesia, Malaysia, China, Japan, and the Middle East. Although they do not
have authority to contractually bind the Company, these representatives market
the Company's products in their respective territories in return for sales
commissions. The Company also places print advertising from time to time in
trade and technical publications targeted to its customer base. It also
participates in industry conferences and trade shows to enhance industry
awareness of its products.

The Company's customers generally order products on a purchase order basis.
Orders are typically filled within two weeks to three months after receipt of
a purchase order, depending on the type of product and whether it is sold out
of inventory or requires some customization. Contracts for certain of the
Company's larger, more complex products, such as subsea production trees,
drilling risers and equipment for TLPs and Spars can take a year or more to
complete.

The primary factors influencing a customer's decision to purchase the
Company's products are the quality, reliability and reputation of the product,
price and technologically superior features. Timely delivery of equipment is
also very important to customer operations and the Company maintains an
experienced sales coordination staff to help assure such delivery. For large
drilling and production system orders, project management teams coordinate
customer needs with engineering, manufacturing and service organizations, as
well as with subcontractors and vendors.

A portion of the Company's business consists of designing, manufacturing,
selling and installing equipment for major projects pursuant to competitive
bids, and the number of such projects in any year fluctuates. The Company's
profitability on such projects is critically dependent on making accurate and
cost effective bids and performing efficiently in accordance with bid
specifications. Various factors can adversely affect the Company's performance
on individual projects, with potential adverse effects on project
profitability.

Product Development and Engineering

The technological demands of the oil and gas industry continue to increase
as offshore exploration and drilling expand into more hostile environments.
Conditions encountered in these environments include well pressures of up to
15,000 psi (pounds per square inch), mixed flows of oil and gas under high
pressure that may also be highly corrosive and water depths in excess of 8,000
feet. Since its founding, Dril-Quip has actively engaged in continuing product
development to generate new products and improve existing products. When
developing new products, the Company typically seeks to design the most
technologically advanced version for a particular application to establish its
reputation and qualification in that product. Thereafter, the Company
leverages its expertise in the more technologically advanced product to
produce less costly and complex versions of the product for less demanding
applications. The Company also focuses its activities on reducing the overall
cost to the customer, which includes not only the initial capital cost but
also operating and installation costs associated with its products.

The Company has continually introduced new products and product enhancements
since its founding in 1981. In the 1990s, the Company introduced a series of
new products, including diverters, wellhead connectors, SingleBore(TM) subsea
trees, improved severe service dual bore subsea trees, subsea and platform
valves, platform

wellheads, platform trees, subsea tree workover riser systems, drilling risers
and TLP and Spar production riser systems.

Dril-Quip's product development work is conducted at its facilities in
Houston, Texas and Aberdeen, Scotland. In addition to the work of its product
development staff, the Company's application engineering staff provides
engineering services to customers in connection with the design and sales of
its products. The Company's ability to develop new products and maintain
technological advantages is important to its future success. There can be no
assurance that the Company will be able to develop new products, successfully
differentiate itself from its competitors or adapt to evolving markets and
technologies.

The Company believes that the success of its business depends more on the
technical competence, creativity and marketing abilities of its employees than
on any individual patent, trademark or copyright. Nevertheless, as part of its
ongoing product development and manufacturing activities, Dril-Quip's policy
has been to seek patents when appropriate on inventions concerning new
products and product improvements. All patent rights for products developed by
employees are assigned to the Company and almost all of the Company's products
have components that are covered by patents.

Dril-Quip has numerous U.S. registered trademarks, including Dril-Quip(R),
Quik-Thread(R), Quick-Stab(R), Multi-Thread(R), MS-15(R), SS-15(R), SS-10(R),
SU-90(R) and DX(R). The Company has registered its trademarks in the countries
where such registration is deemed material.

Although in the aggregate the Company's patents and trademarks are of
considerable importance to the manufacturing and marketing of many of its
products, the Company does not consider any single patent or trademark or
group of patents or trademarks to be material to its business as a whole,
except the Dril-Quip(R) trademark. The Company also relies on trade secret
protection for its confidential and proprietary information. The Company
routinely enters into confidentiality agreements with its employees and
suppliers. There can be no assurance, however, that others will not
independently obtain similar information or otherwise gain access to the
Company's trade secrets.

Competition

Dril-Quip faces significant competition from other manufacturers of
exploration and production equipment. Several of its primary competitors are
diversified multinational companies with substantially larger operating staffs
and greater capital resources than those of the Company and which, in many
instances, have been engaged in the manufacturing business for a much longer
time than the Company. The Company competes principally with ABB Vetco Gray
Inc. (a subsidiary of Asea Brown Boveri, more commonly referred to as ABB),
the petroleum production equipment segment of Cooper Cameron Corporation, FMC
Technologies, Inc. and Kvaerner National Ltd. (a division of Kvaerner A.S.).

Because of their relative size and diversity of products, several of these
companies have the ability to provide "turnkey" services for offshore drilling
and production applications, which enables them to use their own products to
the exclusion of Dril-Quip's products. The Company also competes to a lesser
extent with a number of other companies in various products. The principal
competitive factors in the petroleum drilling and production equipment markets
are quality, reliability and reputation of the product, price, technology,
service and timely delivery.

Employees

The total number of the Company's employees as of December 31, 2001 was
1,495. Of these, 1,014 were located in the United States. The Company's
employees are not covered by collective bargaining agreements, and the Company
considers its employee relations to be good.

The Company's operations depend in part on its ability to attract a skilled
labor force. While the Company believes that its wage rates are competitive
and that its relationship with its skilled labor force is good, a significant

increase in the wages paid by competing employers could result in a reduction
of the Company's skilled labor force, increases in the wage rates paid by the
Company or both. If either of these events were to occur, in the near-term,
the profits realized by the Company from work in progress would be reduced
and, in the long-term, the production capacity and profitability of the
Company could be diminished and the growth potential of the Company could be
impaired.

Governmental Regulations

Many aspects of the Company's operations are affected by political
developments and are subject to both domestic and foreign governmental
regulations, including those relating to oilfield operations, worker safety
and the protection of the environment. In addition, the Company depends on the
demand for its services from the oil and gas industry and, therefore, is
affected by changing taxes, price controls and other laws and regulations
relating to the oil and gas industry generally, including those specifically
directed to offshore operations. The adoption of laws and regulations
curtailing 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 the Company's products.

In recent years, increased concern has been raised over the protection of
the environment. Offshore drilling in certain areas has been opposed by
environmental groups and, in certain areas, has been restricted. To the extent
that new laws or other governmental actions prohibit or restrict offshore
drilling or impose additional environmental protection requirements that
result in increased costs to the oil and gas industry in general and the
offshore drilling industry in particular, the business of the Company could be
adversely affected. The Company cannot determine to what extent its future
operations and earnings may be affected by new legislation, new regulations or
changes in existing regulations.

The Company's operations are affected by numerous foreign, federal, state
and local environmental laws and regulations. The technical requirements of
these laws and regulations are becoming increasingly expensive, complex and
stringent. These laws may provide for "strict liability" for damages to
natural resources or threats to public health and safety, rendering a party
liable for the environmental damage without regard to negligence or fault on
the part of such party. Sanctions for noncompliance may include revocation of
permits, corrective action orders, administrative or civil penalties and
criminal prosecution. Certain environmental laws provide for joint and several
strict liability for remediation of spills and releases of hazardous
substances. In addition, companies may be subject to claims alleging personal
injury or property damage as a result of alleged exposure to hazardous
substances, as well as damage to natural resources. Such laws and regulations
may also expose the Company to liability for the conduct of or conditions
caused by others, or for acts of the Company that were in compliance with all
applicable laws at the time such acts were performed. Compliance with
environmental laws and regulations may require the Company to obtain permits
or other authorizations for certain activities and to comply with various
standards or procedural requirements. The Company believes that its facilities
are in substantial compliance with current regulatory standards.

Based on the Company's experience to date, the Company does not currently
anticipate any material adverse effect on its business or consolidated
financial position as a result of future compliance with existing
environmental laws and regulations controlling the discharge of materials into
the environment. However, future events, such as changes in existing laws and
regulations or their interpretation, more vigorous enforcement policies of
regulatory agencies, or stricter or different interpretations of existing laws
and regulations, may require additional expenditures by the Company, which may
be material.

Item 2. Properties

Major Manufacturing Facilities

Building
Size Land
(Approximate (Approximate
Location Square Feet) Acreage) Owned or Leased
-------- ------------ ------------ ----------------

Houston, Texas
--13550 Hempstead Highway.......... 175,000 15 Owned
14,000 -- Leased (offices)
--6401 N. Eldridge Parkway......... 851,000 218 Owned
Aberdeen, Scotland................... 137,000 14 Owned
15,000 -- Leased (offices)
Singapore............................ 53,000 -- Owned
-- 3.4 Leased

Dril-Quip's manufacturing facilities in Houston and Aberdeen are capable of
manufacturing each of its products, and the facility in Singapore is capable
of manufacturing most of the Company's established products.

Sales, Service and Reconditioning Facilities

Building
Size Land
(Approximate (Approximate
Location(1) Square Feet) Acreage) Activity
----------- ------------ ------------ ---------------------------------------------------

New Orleans, Louisiana.. 2,300 -- Sales/Service
Beverwijk, Holland...... 5,200 0.2 Sales/Warehouse
Perth, Australia........ 1,600 -- Sales/Service
Darwin, Australia....... 2,500 1.0 Service/Warehouse
Stavanger, Norway....... 42,000 6.1 Sales/Service/Reconditioning/Warehouse/Fabrication
Esbjerg, Denmark........ 19,400 1.2 Sales/Service/Reconditioning/Warehouse
Macae, Brazil........... 32,000 10.0 Sales/Service/Reconditioning/ Warehouse/Fabrication
Paris, France........... 1,000 -- Sales

--------
(1) All facilities leased except Stavanger, Norway location which is owned.

The Company also performs sales, service and reconditioning activities at
its facilities in Houston, Aberdeen and Singapore. As part of its capital
expansion program, the Company has expanded its facilities in Stavanger and
Singapore to meet growing demands for its products and services in those
areas.

Item 3. Legal Proceedings

The Company is involved in a number of legal actions arising in the ordinary
course of business. Although no assurance can be given with respect to the
ultimate outcome of such legal actions, in the opinion of management, the
ultimate liability with respect thereto will not have a material adverse
effect on the Company's financial position.

Item 4. Submission of Matters to a Vote of Security Holders

No matters were submitted to a vote of security holders of the Company
during the quarter ended December 31, 2001.

Item S-K 401(b). Executive Officers of the Registrant

Pursuant to Instruction 3 to Item 401(b) of Regulation S-K and General
Instruction G(3) to Form 10-K, the following information is included in Part I
of this Form 10-K:

The following table sets forth the names, ages (as of March 15, 2002) and
positions of the Company's executive officers:

Name Age Position
---- --- --------

Larry E. Reimert........ 54 Co-Chairman of the Board and Co-Chief Executive Officer
Gary D. Smith........... 59 Co-Chairman of the Board and Co-Chief Executive Officer
J. Mike Walker.......... 58 Co-Chairman of the Board and Co-Chief Executive Officer
Jerry M. Brooks......... 50 Chief Financial Officer

Larry E. Reimert is Co-Chairman of the Board and Co-Chief Executive Officer
with principal responsibility for engineering, product development and
finance. He has been the Director--Engineering, Product Development and
Finance, as well as a member of the Board of Directors, since the Company's
inception in 1981. Prior to that, he worked for Vetco Offshore, Inc. in
various capacities, including Vice President of Technical Operations, Vice
President of Engineering and Manager of Engineering. Mr. Reimert holds a BSME
degree from the University of Houston and a MBA degree from Pepperdine
University.

Gary D. Smith is Co-Chairman of the Board and Co-Chief Executive Officer
with principal responsibility for sales, service, training and administration.
He has been the Director--Sales, Service, Training and Administration, as well
as a member of the Board of Directors, since the Company's inception in 1981.
Prior to that, he worked for Vetco Offshore, Inc. in various capacities,
including General Manager and Vice President of Sales and Service.

J. Mike Walker is Co-Chairman of the Board and Co-Chief Executive Officer
with principal responsibility for manufacturing, purchasing and facilities. He
has been the Director--Manufacturing, Purchasing and Facilities, as well as a
member of the Board of Directors, since the Company's inception in 1981. Prior
to that, he served as the Director of Engineering, Manager of Engineering and
Manager of Research and Development with Vetco Offshore, Inc. Mr. Walker holds
a BSME degree from Texas A&M University, an MSME degree from the University of
Texas at Austin and a Ph.D. in mechanical engineering from Texas A&M
University.

Jerry M. Brooks has been Chief Financial Officer since March 1999. Prior to
that, he served as Chief Accounting Officer since joining the Company in 1992.
From 1980 to 1991, he held various positions with Chiles Offshore Corporation,
most recently as Chief Financial Officer, Secretary and Treasurer. Mr. Brooks
holds a BBA in Accounting and an MBA from the University of Texas at Austin.

PART II

Item 5. Market for Registrant's Common Stock and Related Stockholder Matters

The Company's Common Stock is publicly traded on the New York Stock Exchange
under the symbol DRQ. The following table sets forth the quarterly high and low
sales prices of the Common Stock as reported on the New York Stock Exchange for
the indicated quarters of fiscal 2000 and 2001:

Sales Price ($)
------------------------
2000 2001
------------ -----------
Quarter Ended High Low High Low
------------- ------ ----- ----- -----

March 31............................................ 49.125 28.75 34.31 23.45
June 30............................................. 49.25 36.25 34.85 19.85
September 30........................................ 48.00 36.00 21.50 13.40
December 31......................................... 41.75 19.00 24.88 13.85

There were approximately 50 stockholders of record of the Company's Common
Stock as of March 20, 2002. This number does not include the number of security
holders for whom shares are held in a "nominee" or "street" name.

The Company currently intends to retain any earnings for the future operation
and development of its business and does not currently anticipate paying any
dividends in the foreseeable future. The Board of Directors will review this
policy on a regular basis in light of the Company's earnings, financial
condition and market opportunities.

Item 6. Selected Financial Data

The information set forth below should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Consolidated Financial Statements and Notes thereto
included elsewhere in this Report.

Year Ended December 31,
------------------------------------------------
1997 1998 1999 2000 2001
-------- -------- -------- -------- --------
(In Thousands, Except Per Share Amounts)

Statement of Operations Data:
Revenues..................... $146,823 $177,642 $156,368 $163,953 $202,900
Cost of sales................ 99,800 118,923 106,419 111,267 140,920
Selling, general and
administrative expenses..... 16,313 21,293 21,253 23,164 26,357
Engineering and product
development expenses........ 9,158 11,968 11,022 12,116 14,533
-------- -------- -------- -------- --------
125,271 152,184 138,694 146,547 181,810
Operating income............. 21,552 25,458 17,674 17,406 21,090
Interest expense (income).... 2,027 (1,197) (440) 495 2,452
-------- -------- -------- -------- --------
Income before income taxes... 19,525 26,655 18,114 16,911 18,638
Income tax provision......... 6,587 9,228 6,349 5,880 6,436
-------- -------- -------- -------- --------
Net income................... $ 12,938 $ 17,427 $ 11,765 $ 11,031 $ 12,202
======== ======== ======== ======== ========
Diluted earnings per share... $ .87 $ 1.01 $ .68 $ .63 $ .70
Weighted average shares
outstanding................. 14,895 17,275 17,277 17,505 17,352

Statement of Cash Flows Data:
Net cash provided by (used
in) operating activities.... $ 10,325 $ 9,118 $ 18,433 $(12,193) $ (725)
Net cash used in investing
activities.................. (10,240) (29,450) (19,748) (23,111) (24,866)
Net cash provided by (used
in) financing activities.... 31,386 (203) (165) 30,279 30,214

Other Data:
EBITDA(1).................... $ 26,541 $ 31,108 $ 24,352 $ 24,834 $ 29,687
Depreciation and
amortization................ 4,989 5,650 6,678 7,428 8,597
Capital expenditures......... 10,375 29,642 19,909 23,180 25,018

As of December 31,
------------------------------------------------
1997 1998 1999 2000 2001
-------- -------- -------- -------- --------
(In Thousands)

Balance Sheet Data:
Working capital.............. $ 89,373 $ 83,595 $ 81,912 $105,635 $131,098
Total assets................. 152,921 177,246 179,463 233,341 279,959
Total debt................... 518 315 149 28,935 58,888
Total stockholders' equity... 124,161 141,912 152,624 161,790 172,865

--------
(1) EBITDA, or "earnings from continuing operations before interest expense,
interest income, income taxes, depreciation and amortization," is not a
generally accepted accounting principle measure, but is a supplemental
financial measurement used by the Company in the evaluation of its
business. EBITDA should not be construed as an alternative to net income
or to cash flow from operations or any other measure of performance in
accordance with generally accepted accounting principles, and is presented
solely as a supplemental disclosure.

Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations

The following is management's discussion and analysis of certain significant
factors that have affected certain aspects of the Company's financial position
and results of operations during the periods included in the accompanying
consolidated financial statements. This discussion should be read in
conjunction with the Company's Consolidated Financial Statements and Notes
thereto presented elsewhere in this Report.

Overview

Dril-Quip manufactures highly engineered offshore drilling and production
equipment which is well suited for use in deepwater, harsh environment and
severe service applications. The Company designs and manufactures subsea
equipment, surface equipment and offshore rig equipment for use by major
integrated, large independent and foreign national oil and gas companies in
offshore areas throughout the world. 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, wellhead connectors and diverters. Dril-Quip also
provides installation and reconditioning services and rents running tools for
use in connection with the installation and retrieval of its products.

The Company operates its business and markets its products and services in
all of the 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 Company's ability to
manufacture its products in its facilities abroad or the demand in certain
regions for the 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 future. Interruption of the Company's
international operations could have a material adverse effect on its overall
operations.

Dril-Quip's revenues are generated by its two operating groups: the Product
Group and the Service Group. The Product Group manufactures offshore drilling
and production equipment, and the Service Group provides installation and
reconditioning services as well as rental running tools for installation and
retrieval of its products. In 2001, the Company derived 86% of its revenues
from the sale of its products and 14% of its revenues from services. Revenues
from the Service Group generally correlate to revenues from product sales,
because increased product sales generate increased revenues from installation
services and rental running tools. The Company has substantial international
operations, with approximately 48%, 58% and 53% of its revenues derived from
foreign sales in 1999, 2000 and 2001, respectively. During the same years,
approximately 70% of all products sold were manufactured in the United States.

Historically, Drip-Quip recognized revenues upon the delivery of a completed
product. Beginning in 1997, the Company began receiving orders relating to
larger and more complex projects that have longer manufacturing time frames.
The Company accounts for such projects on a percentage of completion basis and
revenues are generally recognized on the ratio of costs incurred to the total
estimated costs. Accordingly, price and cost estimates are reviewed
periodically as the work progresses, and adjustments proportionate to the
percentage of completion are reflected in the period when such estimates are
revised.

The principal elements of cost of sales are labor, raw materials and
manufacturing overhead. Variable costs, such as labor, raw materials, supplies
and energy, generally account for approximately two-thirds of the Company's
cost of

sales. The Company has experienced increased labor costs over the past few
years due to the limited supply of skilled workers. Fixed costs, such as the
fixed portion of manufacturing overhead, constitute the remainder of the
Company's cost of sales. The Company continually seeks to improve its
efficiency and cost position. Cost of sales as a percentage of revenues is
also influenced by the product mix sold in any particular quarter and market
conditions. The Company's costs related to its foreign operations do not
significantly differ from its domestic costs.

Results of Operations

The following table sets forth, for the periods indicated, certain statement
of operations data expressed as a percentage of revenues:

Year Ended
December 31,
-------------------
1999 2000 2001
----- ----- -----

Revenues:
Product Group........................................... 88.3% 86.0% 85.6%
Service Group........................................... 11.7 14.0 14.4
----- ----- -----
Total................................................. 100.0 100.0 100.0
Cost of sales........................................... 68.1 67.9 69.4
Selling, general and administrative expenses............ 13.6 14.1 13.0
Engineering and product development expenses............ 7.0 7.4 7.2
----- ----- -----
Operating income........................................ 11.3 10.6 10.4
Interest expense (income)............................... (0.3) 0.3 1.2
----- ----- -----
Income before income taxes.............................. 11.6 10.3 9.2
Income tax provision.................................... 4.1 3.6 3.2
----- ----- -----
Net income.............................................. 7.5% 6.7% 6.0%
===== ===== =====

Year ended December 31, 2001 Compared to Year Ended December 31, 2000

Revenues. Revenues increased by $38.9 million, or approximately 24%, to
$202.9 million in 2001 from $164 million in 2000. The increase was due to
increased domestic sales in the United States of $25.8 million, increased
sales of $15.2 million in the European area, and $6.3 million in the Asia
Pacific area, offset by decreased export sales from the United States of $8.4
million.

Cost of Sales. Cost of sales increased by $29.6 million, or 27%, to $140.9
million for the twelve months ended December 31, 2001 from $111.3 million for
the same period in 2000. As a percentage of revenues, cost of sales was
approximately 69.4% in 2001 and 67.9% in 2000. This increase was primarily due
to increases in manufacturing costs and changes in product mix.

Selling, General and Administrative Expenses. For the twelve months ended
December 31, 2001, selling, general and administrative expenses increased by
$3.2 million, or approximately 14%, to $26.4 from $23.2 million in the 2000
period. Selling, general and administrative expenses decreased as a percentage
of revenues from 14.1% in 2000 to 13% in 2001. Increased expenditures in this
area were made for the purposes of expanding the Company's worldwide sales
force and increasing its proposal and project management capabilities.

Engineering and Product Development Expenses. During the year ended December
31, 2001, engineering and product development expenses increased by $2.4
million, or approximately 20%, to $14.5 million from $12.1 million during the
same period in 2000. This increase primarily reflects expenses related to the
development of new products. As a percentage of revenues, engineering and
product development expenses decreased from 7.4% in 2000 to 7.2% in 2001.

Interest Expense/Income. Interest expense for 2001 was approximately $2.5
million, compared to $495,000 for 2000. This change resulted primarily from
borrowings made under the Company's unsecured revolving line of credit for
operating activities and capital expenditures.

Net Income. Net income increased by approximately 11%, from $11.0 million in
2000 to $12.2 million in 2001 for the reasons set forth above.

Year Ended December 31, 2000 Compared to Year Ended December 31, 1999

Revenues. Revenues increased by $7.6 million, or approximately 5%, to $164
million in 2000 from $156.4 million in 1999. In general, this increase was the
result of modest increases in worldwide exploration and development activity
by the major oil companies. Revenue increases of $10.7 million in the European
area were offset by decreased sales of $3.0 million in the United States area
and $100,000 in the Asia Pacific area. Domestic sales in the United States
area decreased by $13.2 million, or 16%, while export sales in the United
States area increased by $10.2 million, or 46%.

Cost of Sales. Cost of sales increased by $4.9 million, or 5%, to $111.3
million for the twelve months ended December 31, 2000 from $106.4 million for
the same period in 1999. As a percentage of revenues, cost of sales was
approximately 68% in both 1999 and 2000.

Selling, General and Administrative Expenses. For the twelve months ended
December 31, 2000, selling, general and administrative expenses increased by
$1.9 million, or 9%, to $23.2 from $21.3 million in the 1999 period. Selling,
general and administrative expenses increased as a percentage of revenues from
13.6% in 1999 to approximately 14% in 2000. Increased expenditures in this
area were made for the purposes of expanding the Company's worldwide sales
force and increasing its proposal and project management capabilities.

Engineering and Product Development Expenses. During the year ended December
31, 2000, engineering and product development expenses increased by $1.1
million, or 10%, to $12.1 million from $11.0 million during the same period in
1999. This increase primarily reflects expenses related to the development of
new products. As a percentage of revenues, engineering and product development
expenses increased slightly from 7.0% in 1999 to approximately 7.4% in 2000.

Interest Expense/Income. Interest expense for 2000 was $495,000, compared to
interest income of $440,000 for the prior year.

Net Income. Net income decreased by approximately 6%, from $11.8 million in
1999 to $11.0 million in 2000 for the reasons set forth above.

Liquidity and Capital Resources

The primary liquidity needs of the Company are (i) to fund capital
expenditures to increase manufacturing capacity, improve and expand facilities
and manufacture additional rental running tools and (ii) to fund working
capital. The Company's principal sources of funds are cash flows from
operations and bank indebtedness.

Net cash provided by operating activities was $18.4 million in 1999. Net
cash used in operating activities was $12.2 million in 2000, and $725,000 in
2001. Cash provided by net income, depreciation and amortization, reductions
in trade receivables and increases in accounts payables and accrued expenses
were offset by increases in worldwide inventories.

Capital expenditures by the Company were $19.9 million, $23.2 million and
$25.0 million in 1999, 2000 and 2001, respectively. Principal payments on long
term debt were $165,000, $92,000 and $632,000 in 1999, 2000 and 2001,
respectively.

The following table presents long-term contractual obligations of the
Company and the related payments due in total and by year as of December 31,
2001 (in thousands):

Payments due by year
------------------------------------------
After
Contractual Obligations 2002 2003 2004 2005 2006 2006 Total
----------------------- ------ ------ ------- ------ ------ ------ -------

Long-term debt maturities.... $1,074 $1,068 $50,568 $1,068 $ 980 $4,130 $58,888
Lease obligations............ 726 482 239 22 22 55 1,546
------ ------ ------- ------ ------ ------ -------
Total...................... $1,800 $1,550 $50,807 $1,090 $1,002 $4,185 $60,434
====== ====== ======= ====== ====== ====== =======

The Company has a credit facility with Guaranty Bank, FSB providing an
unsecured revolving line of credit of up to $60 million. At the option of the
Company, borrowing under this facility bears interest at either a rate equal
to LIBOR (London Interbank Offered Rate) plus 1.75% or the Guaranty Bank base
rate. The facility calls for quarterly interest payments and terminates on May
18, 2004. As of December 31, 2001, the Company had drawn down $49.5 million
under this facility for operating activities and capital expenditures.

Dril-Quip (Europe) Limited has a credit agreement with the Bank of Scotland
dated March 21, 2001 in the amount of U.K. Pounds Sterling 3.7 million
(approximately U.S. $5.5 million). Borrowing under this facility bears
interest at the Bank of Scotland base rate, currently 4%, plus 1%, and is
repayable in 120 equal monthly installments, plus interest. Substantially all
of this facility was used to finance capital expenditures in Norway.

Dril-Quip Asia Pacific PTE Ltd. has a secured term loan with the Overseas
Union Bank dated August 29, 2001 in the amount of Singapore Dollars $6.0
million (approximately U.S. $3.2 million). Borrowing under this facility bears
interest at the swap rate, approximately 1.4%, plus 1.5% and is repayable in
40 equal quarterly installments, plus interest. This facility was used to
finance capital expenditures in Singapore.

The Company believes that cash generated from operations plus cash on hand
and its existing line of credit will be sufficient to fund operations, working
capital needs and anticipated capital expenditure requirements. However, any
significant future declines in hydrocarbon prices could have a material
adverse effect on the Company's liquidity. Should market conditions result in
unexpected cash requirements, the Company believes that additional borrowing
from commercial lending institutions would be readily available and more than
adequate to meet such requirements.

Backlog

Backlog consists of firm customer orders for which a purchase order has been
received, satisfactory credit or financing arrangements exist and delivery is
scheduled. The Company's backlog was approximately $120 million at December
31, 2001, an increase of $27 million or 29% over the backlog of $93 million at
December 31, 2000. The Company expects to fill approximately 80% of the
December 31, 2001 backlog by December 31, 2002. The remaining backlog at
December 31, 2001 consists of longer-term projects which are being designed
and manufactured to customer specifications rather than sold out of inventory.
The Company can give no assurance that backlog will remain at current levels.
Sales of the Company's products are affected by prices for oil and natural
gas, which fluctuated significantly during 2000 and 2001. Any future decline
in oil and natural gas prices could reduce new customer orders, which would
cause the Company's backlog to decline. All of the Company's projects
currently included in its backlog are subject to change and/or termination at
the option of the customer. In the case of a change or termination, the
customer is required to pay the Company for work performed and other costs
necessarily incurred as a result of the change or termination.

Geographic Areas

The Company's operations are divided into three geographic areas based upon
the locations of its manufacturing facilities: the United States (Houston,
Texas); Europe, Middle East and Africa (Aberdeen, Scotland) and Asia-Pacific
(Singapore). The United States area includes sales to both North and South
America. The area of Europe, Middle East and Africa includes primarily sales
to the North Sea, the Middle East and Africa. The Asia-Pacific area includes
sales primarily to Australia, Thailand, Malaysia and Indonesia.

Revenues for each of these areas are dependent upon the ultimate sale of
products and services to the Company's customers. For information on revenues
by geographic area, see note 10 to the consolidated financial statements on
page 31. Revenues of the United States area are also influenced by its sale of
products to the European and Asia-Pacific subsidiaries. Accordingly, the
operating incomes of each area are closely tied to third-party sales, and the
operating income of the United States area is also dependent upon its level of
intercompany sales.

Currency Risk

Through its subsidiaries, the Company conducts a portion of business in
currencies other than the United States dollar, principally the British pound
sterling and the Norwegian kroner. The Company generally attempts to minimize
its currency exchange risk by seeking international contracts payable in local
currency in amounts equal to

the Company's estimated operating costs payable in local currency and in U.S.
dollars for the balance of the contract. Because of this strategy, the Company
has not experienced significant transaction gains or losses associated with
changes in currency exchange rates and does not anticipate such exposure to be
material in the future. In 1999, 2000 and 2001, the Company had net losses of
approximately $150,000, $434,000 and a gain of $85,000, respectively. The
losses in 1999, 2000 and the gain in 2001 were the result of currency
fluctuations related to payables and trade receivables. There is no assurance
that the Company will be able to protect itself against such fluctuations in
the future. Historically, the Company has not conducted business in countries
that limit repatriation of earnings. However, as the Company expands its
international operations, it may begin operating in countries that have such
limitations. Further, there can be no assurance that the countries in which
the Company currently operates will not adopt policies limiting repatriation
of earnings in the future. The Company also has significant investments in
countries other than the United States, principally its manufacturing
operations in Aberdeen, Scotland and, to a lesser extent, Singapore and
Norway. The functional currency of these foreign operations is the local
currency and, accordingly, financial statement assets and liabilities are
translated at current exchange rates. Resulting translation adjustments are
reflected as a separate component of stockholders' equity and have no current
effect on earnings or cash flow.

Critical Accounting Policies

The Company's discussion and analysis of its financial condition and results
of operations are based on the Company's Consolidated Financial Statements,
which have been prepared in accordance with United States generally accepted
accounting principles. The preparation of the Consolidated Financial
Statements requires the Company to make estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the Consolidated Financial Statements
and the reported amounts of revenues and expenses during the reporting period.
There can be no assurance that actual results will not differ from those
estimates. The Company believes the following accounting policies affect its
more significant judgments and estimates used in preparation of its
consolidated financial statements.

Revenue Recognition. For the majority of our sales, we record revenue at the
time our manufacturing process is complete and the products have been shipped
to the customer. Certain of our revenues are derived from long-term contracts,
which generally require more than one year to fulfill. Revenues and cost of
sales and related profits from long-term contracts are recognized under the
percentage-of-completion method based on a cost incurred basis. Losses on
long-term contracts are recognized when they become known. Contracts for long-
term projects usually contain provisions for customer progress payments.
Payments and billings in excess of revenues recognized are deferred and are
included as a customer prepayment liability. Allowances on accounts receivable
are provided primarily on the specific-identification method.

Inventories. Inventory costs are determined principally by the use of the
first-in, first-out (FIFO) method, and are stated at the lower of cost or
market. We value our inventory principally using standard costs that are
calculated based upon direct costs incurred and overhead allocations.
Periodically, we also perform obsolescence reviews on our slow moving
inventories and establish reserves based on current assessments about future
demands and market conditions. If market conditions are less favorable than
those projected by management, additional inventory reserves may be required.

We do not have any significant derivative instruments and we do not have any
off-balance sheet hedging or financing arrangements or contracts or operations
that rely upon credit or similar ratings.

New Accounting Standards

Effective January 1, 2001, Dril-Quip adopted Statement of Financial
Accounting Standards No. 133, Accounting for Derivative Instruments and
Hedging Activities, as amended ("FAS 133"). This statement establishes
accounting and reporting standards for derivative instruments and hedging
activities. Under FAS 133, all derivatives must be recognized as assets or
liabilities and measured at fair value. The adoption of this statement did not
have a significant impact on Dril-Quip's financial position or results of
operations.

In July 2001, the Financial Accounting Standards Board issued Statements of
Financial Accounting Standards No. 141, Business Combinations ("FAS 141") and
No. 142, Goodwill and Other Intangible Assets ("FAS 142"). FAS 141 requires
all business combinations initiated after June 30, 2001 to be accounted for
using the purchase method. Under FAS 142, goodwill and intangible assets with
indefinite lines are no longer amortized but are reviewed annually for
impairment. Separable intangible assets that are not deemed to have indefinite
lives will continue to be amortized over their useful lives. The amortization
provisions of FAS 142 apply to goodwill and intangible assets acquired after
June 30, 2001. With respect to goodwill and intangible assets acquired prior
to July 1, 2001, the Company is required to adopt FAS 142 effective January 1,
2002. FAS 142 is not expected to have a significant impact on Dril-Quips
financial position or results of operations.

In October 2001, the FASB issued Statements of Financial Accounting
Standards No. 144, Accounting for the Impairment or Disposal of Long-Lived
Assets. This statement is effective for fiscal years beginning after
December 15, 2001. The Company will adopt this statement effective January 1,
2002. This statement established a single accounting model for long-lived
assets to be disposed of by sale, whether previously held and used or newly
acquired. Additionally, the statement expands the definition of a discontinued
operation from a segment of business to a component of an entity that has been
disposed of or is classified as held for sale and can be clearly
distinguished, operationally and for reporting purposes, from the rest of the
entity. The results of operations of a component classified as held for sale
shall be reported in discontinued operations in the period incurred. Adoption
of this statement is not expected to have a significant effect on Drip-Quip's
financial position or results of operations.

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

Not applicable.

Item 8. Financial Statements and Supplementary Data

Page
----

Report of Independent Auditors............................................ 20
Consolidated Statements of Income for the Three Years in the Period Ended
December 31, 2001........................................................ 21
Consolidated Balance Sheets as of December 31, 2000 and 2001.............. 22
Consolidated Statements of Cash Flows for the Three Years in the Period
Ended December 31, 2001.................................................. 23
Consolidated Statements of Changes in Stockholders' Equity for the Three
Years in the Period Ended December 31, 2001.............................. 24
Notes to Consolidated Financial Statements................................ 25

REPORT OF INDEPENDENT AUDITORS

Board of Directors and Stockholders
Dril-Quip, Inc.

We have audited the accompanying consolidated balance sheets of Dril-Quip,
Inc., as of December 31, 2001 and 2000, and the related consolidated
statements of income, changes in stockholders' equity, and cash flows for each
of the three years in the period ended December 31, 2001. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.

We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Dril-Quip,
Inc., at December 31, 2001 and 2000, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
December 31, 2001, in conformity with accounting principles generally accepted
in the United States.

Ernst & Young LLP

Houston, Texas
February 26, 2002

DRIL-QUIP, INC.

CONSOLIDATED STATEMENTS OF INCOME

Year Ended December 31,
---------------------------------
1999 2000 2001
---------- ---------- ----------
(In Thousands, Except Share
Amounts)

Revenues...................................... $ 156,368 $ 163,953 $ 202,900

Cost and expenses:
Cost of sales............................... 106,419 111,267 140,920
Selling, general, and administrative........ 21,253 23,164 26,357
Engineering and product development......... 11,022 12,116 14,533
---------- ---------- ----------
138,694 146,547 181,810
---------- ---------- ----------
Operating income.............................. 17,674 17,406 21,090
Interest expense (income)..................... (440) 495 2,452
---------- ---------- ----------
Income before income taxes.................... 18,114 16,911 18,638
Income tax provision.......................... 6,349 5,880 6,436
---------- ---------- ----------
Net income.................................... $ 11,765 $ 11,031 $ 12,202
========== ========== ==========
Earnings per share:
Basic....................................... $ .68 $ .64 $ .71
========== ========== ==========
Fully diluted............................... $ .68 $ .63 $ .70
========== ========== ==========
Weighted average shares
Basic....................................... 17,245,000 17,274,249 17,292,295
========== ========== ==========
Fully diluted............................... 17,277,101 17,504,785 17,351,726
========== ========== ==========

The accompanying notes are an integral part of these statements.

DRIL-QUIP, INC.

CONSOLIDATED BALANCE SHEETS

December 31,
------------------
2000 2001
ASSETS -------- --------
(In Thousands)

Current assets:
Cash and cash equivalents................................ $ 5,870 $ 11,326
Trade receivables........................................ 63,345 59,789
Inventories.............................................. 69,481 98,283
Deferred taxes........................................... 5,367 5,320
Prepaids and other current assets........................ 2,243 2,642
-------- --------
Total current assets................................... 146,306 177,360

Property, plant, and equipment, net........................ 86,723 102,310

Other assets............................................... 312 289
-------- --------
Total assets........................................... $233,341 $279,959
======== ========

LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
Accounts payable......................................... $ 24,438 $ 28,009
Current maturities of long-term debt..................... 495 1,074
Accrued income taxes..................................... 857 490
Customer prepayments..................................... 7,251 7,725
Accrued compensation..................................... 4,185 5,675
Other accrued liabilities................................ 3,445 3,289
-------- --------
Total current liabilities.............................. 40,671 46,262
Long-term debt............................................. 28,440 57,814
Deferred taxes............................................. 2,440 3,018
-------- --------
Total liabilities...................................... 71,551 107,094

Stockholders' equity:
Preferred stock, 10,000,000 shares authorized at $0.01
par value (none issued)................................. -- --
Common stock:
50,000,000 shares authorized at $0.01 par value,
17,290,498 and 17,293,373 issued and outstanding at
December 31, 2000 and 2001............................ 173 173
Additional paid-in capital............................... 64,660 64,737
Retained earnings........................................ 102,813 115,015
Foreign currency translation adjustment.................. (5,856) (7,060)
-------- --------
Total stockholders' equity............................. 161,790 172,865
-------- --------
Total liabilities and stockholders' equity............. $233,341 $279,959
======== ========

The accompanying notes are an integral part of these statements.

DRIL-QUIP, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

Year Ended December 31,
----------------------------
1999 2000 2001
-------- -------- --------
(In Thousands)

Operating activities
Net income...................................... $ 11,765 $ 11,031 $ 12,202
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization................. 6,678 7,428 8,597
Loss (gain) on sale of equipment.............. 139 (51) (36)
Deferred income taxes......................... (599) (78) 608
Changes in operating assets and liabilities:
Trade receivables........................... 7,570 (26,935) 2,763
Inventories................................. 1,166 (18,304) (29,748)
Prepaids and other assets................... 229 (1,135) (426)
Trade accounts payable and accrued expenses. (8,515) 15,851 5,315
-------- -------- --------
Net cash provided by (used in) operating
activities..................................... 18,433 (12,193) (725)

Investing activities
Purchase of property, plant, and equipment...... (19,909) (23,180) (25,018)
Proceeds from sale of equipment................. 161 69 152
-------- -------- --------
Net cash used in investing activities........... (19,748) (23,111) (24,866)

Financing activities
Proceeds from revolving line of credit and long-
term borrowings................................ -- 29,001 30,769
Principal payments on long-term debt............ (165) (92) (632)
Proceeds from sale of stock..................... -- 1,370 77
-------- -------- --------
Net cash provided by (used in) financing
activities..................................... (165) 30,279 30,214
Effect of exchange rate changes on cash
activities..................................... 67 439 833
-------- -------- --------
Increase (decrease) in cash..................... (1,413) (4,586) 5,456
Cash at beginning of period..................... 11,869 10,456 5,870
-------- -------- --------
Cash at end of period........................... $ 10,456 $ 5,870 $ 11,326
======== ======== ========

The accompanying notes are an integral part of these statements.

DRIL-QUIP, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY

Unrealized
Common Paid-In Retained Translation
Stock Capital Earnings Adjustment Total
------ ------- -------- ----------- --------
(In Thousands)

Balance at December 31, 1998...... $172 $63,291 $ 80,017 $(1,568) $141,912
--------
Translation adjustment.......... -- -- -- (1,053) (1,053)
Net income...................... -- -- 11,765 -- 11,765
--------
Comprehensive income............ -- -- -- -- 10,712
---- ------- -------- ------- --------
Balance at December 31, 1999...... 172 63,291 91,782 (2,621) 152,624
--------
Translation adjustment.......... -- -- -- (3,235) (3,235)
Net income...................... -- -- 11,031 -- 11,031
--------
Comprehensive income............ -- -- -- -- 7,796
Options Exercised............... 1 1,369 -- -- 1,370
---- ------- -------- ------- --------
Balance at December 31, 2000...... 173 64,660 102,813 (5,856) 161,790
--------
Translation adjustment.......... -- -- -- (1,204) (1,204)
Net income...................... -- -- 12,202 -- 12,202
--------
Comprehensive income............ -- -- -- -- 10,998
Options Exercised............... -- 77 -- -- 77
---- ------- -------- ------- --------
Balance at December 31, 2001...... 173 $64,737 $115,015 $(7,060) $172,865
==== ======= ======== ======= ========

The accompanying notes are an integral part of these statements.

DRIL-QUIP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2001

1. Organization

Dril-Quip, Inc. (the "Company"), manufactures offshore drilling and
production equipment, which is well suited 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, wellhead connector and diverters for use by major
integrated, large independent and foreign national oil and gas companies in
offshore areas throughout the world. Dril-Quip also provides installation and
reconditioning services and rents running tools for use in connection with the
installation and retrieval of its products. The Company has four subsidiaries
that manufacture and market the Company's products abroad. Dril-Quip (Europe)
Limited is located in Aberdeen, Scotland, with branches in Norway, Holland,
and Denmark. Dril-Quip Asia Pacific PTE Ltd. is located in Singapore. DQ
Holdings PTY Ltd. is located in Perth, Australia and Dril-Quip do Brasil Ltda.
is located in Macae, Brazil.

2. Significant Accounting Policies

Principles of Consolidation

The 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 generally
accepted accounting principles requires management to make estimates and
assumptions that affect reported amounts of assets and liabilities and
disclosure of contingent 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 from those estimates.

Cash and cash equivalents

Short term investments that have a maturity of three months or less from the
date of purchase are classified as cash equivalents. At December 31, 2000,
cash and cash equivalents included $366,000, invested in United States
Treasury money market funds.

Inventories

The Company's inventories are reported at the lower of cost (first-in,
first-out method) or market.

Property, Plant, and Equipment

Property, plant, and equipment are carried at cost, with depreciation
provided on a straight-line basis over their estimated useful lives.

Income Taxes

The Company accounts for income taxes using the liability method. Deferred
income taxes are provided on income and expenses which are reported in
different periods for income tax and financial reporting purposes.

Revenue Recognition

The Company delivers most of its products on an as-needed basis by its
customers and records revenues as the products are shipped. Certain revenues
are derived from long-term contracts which generally require more than one

DRIL-QUIP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

December 31, 2001

year to fulfill. Revenues and profits on long-term contracts are recognized
under the percentage-of-completion method based on a cost-incurred basis.
Losses, if any, on contracts are recognized when they become known. Contracts
for long-term projects contain provisions for customer progress payments.
Payments in excess of revenues recognized are included as a customer
prepayment liability. At December 31, 2001 and 2000, trade receivables
included $3,468,000 and $18,827,000 respectively, in unbilled revenue, and
inventories had been reduced by $9,510,000 and $24,309,000, respectively, for
activities relating to long-term contracts.

Foreign Currency

The financial statements of foreign subsidiaries are translated into U.S.
dollars at current exchange rates except for revenues and expenses, which are
translated at average rates during each reporting period. Translation
adjustments are reflected as a separate component of stockholders' equity and
have no current effect on earnings or cash flows. These adjustments amounted
to a loss of $1,053,000, $3,235,000 and $1,204,000 in 1999, 2000 and 2001,
respectively.

Foreign currency exchange transactions are recorded using the exchange rate
at the date of the settlement. Exchange gains (losses) were approximately
($150,000) in 1999, ($434,000) in 2000 and $85,000 in 2001, net of income
taxes. These amounts are included in the consolidated statements of income.

Stock-Based Compensation

The Company has adopted the disclosure-only provisions of Statement of
Financial Accounting Standards No. 123. "Accounting For Stock Based
Compensation" ("SFAS No. 123"). Accordingly, no compensation cost has been
recognized for stock options granted under the Company's incentive plan.

Fair Value of Financial Instruments

The Company's financial instruments consist primarily of cash and cash
equivalents, receivables, payables, and debt instruments. The carrying values
of these financial instruments approximate their respective fair values as
they are either short-term in nature or carry interest rates which approximate
market rates.

Concentration of Credit Risk

Financial instruments which subject the Company to concentrations of credit
risk consist principally of trade receivables. The Company grants credit to
its customers, which operate primarily in the oil and gas industry. The
Company performs periodic credit evaluations of its customer's financial
condition and generally does not require collateral. The Company maintains
reserves for potential losses and such losses have historically been within
management's expectations.

Comprehensive Income

SFAS No. 130 requires the reporting of comprehensive income, which includes
net income plus unrealized foreign currency translation gains and losses.
Comprehensive income has been reported in the Consolidated Statements of
Changes in Stockholders' Equity.

Interest Capitalization

The Company capitalizes interest on significant construction projects for
which interest costs are being incurred. These projects principally consist of
construction or expansion of the Company's facilities. The company capitalized
approximately $220,000 of interest in 2001 and $283,000 of interest in 2000
and none in 1999.

DRIL-QUIP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

December 31, 2001

New Accounting Standards

In July 2001, the Financial Accounting Standards Board ("FASB") issued
Statements of Financial Accounting Standards No. 141, Business Combinations
("FAS 141") and No. 142, Goodwill and Other Intangible Assets ("FAS 142"). FAS
141 requires all business combinations initiated after June 30, 2001 to be
accounted for using the purchase method. Under FAS 142, goodwill and
intangible assets with intangible assets with indefinite lines are no longer
amortized but are reviewed annually for impairment. Separable intangible
assets that are not deemed to have indefinite lives will continue to be
amortized over their useful lives. The amortization provisions of FAS 142
apply to goodwill and intangible assets acquired after June 30, 2001. With
respect to goodwill and intangible assets acquired prior to July 1, 2001, the
Company is required to adopt FAS 142 effective January 1, 2002. FAS 142 is not
expected to have a significant impact on Dril-Quips financial position or
results of operations.

3. Inventories

Inventories consist of the following:

December 31,
---------------
2000 2001
------- -------
(In Thousands)

Raw materials and supplies.................................. $13,728 $28,774
Work in progress............................................ 22,805 22,418
Finished goods and purchased supplies....................... 32,948 47,091
------- -------
$69,481 $98,283
======= =======

4. Property, Plant, and Equipment

Property, plant, and equipment consist of:

Estimated December 31,
Useful -----------------
Lives 2000 2001
----------- -------- --------
(In Thousands)

Land and improvements......................... 10-25 years $ 11,715 $ 12,215
Buildings..................................... 15-40 years 42,855 51,489
Machinery and equipment....................... 3-10 years 81,491 94,742
-------- --------
136,061 158,446
Less accumulated depreciation................. 49,338 56,136
-------- --------
$ 86,723 $102,310
======== ========

DRIL-QUIP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

December 31, 2001

5. Long-Term Debt

Long-term debt consists of the following:

December 31,
---------------
2000 2001
------- -------
(In Thousands)

Bank Financing.............................................. $28,421 $58,196
Equipment financing agreements.............................. 514 692
------- -------
28,935 58,888
Less current portion........................................ 495 1,074
------- -------
$28,440 $57,814
======= =======

The Company has a credit facility with Guaranty Bank, FSB providing an
unsecured revolving line of credit of up to $60 million. At the option of the
Company, borrowing under this facility bears interest at either a rate equal
to LIBOR (London Interbank Offered Rate) plus 1.75% or the Guaranty Bank base
rate. In addition, the facility calls for quarterly interest payments and
terminates on May 18, 2004. As of December 31, 2001, the Company had drawn
down $49.5 million under this facility for operating activities and capital
expenditures.

Dril-Quip (Europe) Limited has a credit agreement with the Bank of Scotland
dated March 21, 2001 in the amount of U.K. Pounds Sterling 3.7 million
(approximately U.S. $5.5 million). Borrowing under this facility bears
interest at the Bank of Scotland base rate, currently 4%, plus 1%, and is
repayable in 120 equal monthly installments, plus interest. This facility was
used to finance capital expenditures in Norway.

Dril-Quip Asia Pacific PTE Ltd. has a secured term loan with the Overseas
Union Bank dated August 29, 2001 in the amount of Singapore Dollars $6 million
(approximately U.S. $3.2 million). Borrowing under this facility bears
interest at the swap rate, approximately 1.4%, plus 1.5% and is repayable in
40 equal quarterly installments, plus interest. This facility was used to
finance capital expenditures in Singapore.

Interest paid on long-term debt for the years ended December 31, 1999, 2000
and 2001 was $55,000, $471,000 and $2,644,000 respectively. Scheduled
maturities of long-term debt are as follows: 2002--$1,074,000; 2003--
$1,068,000; 2004--$50,568,000; 2005--$1,068,000; 2006--$980,000 and
thereafter--$4,130,000.

6. Income Taxes

Income before income taxes consisted of the following:

1999 2000 2001
------- ------- -------
(In Thousands)

Domestic........................................... $20,758 $16,988 $15,372
Foreign............................................ (2,644) (77) 3,266
------- ------- -------
Total.............................................. $18,114 $16,911 $18,638
======= ======= =======

DRIL-QUIP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

December 31, 2001

The income tax provision consists of the following:

1999 2000 2001
------ ------ ------
(In Thousands)

Current:
Federal............................................. $6,620 $5,463 $5,345
Foreign............................................. 330 437 466
------ ------ ------
Total current..................................... 6,950 5,900 5,811

Deferred:
Federal............................................. 232 187 -0-
Foreign............................................. (833) (207) 625
------ ------ ------
Total deferred.................................... (601) (20) 625
------ ------ ------
$6,349 $5,880 $6,436
====== ====== ======

The difference between the effective tax rate reflected in the provision for
income taxes and the U.S. federal statutory rate was as follows:

1999 2000 2001
---- ---- ----

Federal income tax statutory rate.......................... 35.0% 35.0% 35.0%
Benefit of foreign sales corporation....................... (1.6) (2.3) (.8)
Other...................................................... 1.6 2.1 .3
---- ---- ----
Effective tax rate......................................... 35.0% 34.8% 34.5%
==== ==== ====

Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components
of the Company's deferred tax liabilities and assets are as follows:

December 31,
-------------
2000 2001
------ ------
(In
Thousands)

Deferred tax liability:
Property, plant and equipment............................... $2,440 $3,018
Deferred tax assets:
Deferred profit on intercompany sales....................... 2,941 2,986
Other--net.................................................. 2,426 2,334
------ ------
Total deferred tax assets..................................... 5,367 5,320
------ ------
Net deferred tax asset........................................ $2,927 $2,302
====== ======

Undistributed earnings of the Company's foreign subsidiaries are considered
to be indefinitely reinvested and, accordingly, no provision for U.S. federal
income taxes has been provided thereon. Upon distribution of those earnings in
the form of dividends or otherwise, the Company would be subject to both U.S.
income taxes (subject to an adjustment for foreign tax credits) and
withholding taxes payable to the various foreign countries. Determination of
the amount of unrecognized deferred U.S. income tax liability is not
practicable.

The Company paid approximately, $8,116,000, $5,458,000 and $6,044,000 in
income taxes in 1999, 2000 and 2001, respectively.

DRIL-QUIP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

December 31, 2001

7. Employee Benefit Plans

The Company has a defined-contribution 401(k) plan covering domestic
employees and a defined-contribution pension plan covering certain foreign
employees. The Company generally makes contributions to the plans equal to
each participant's eligible contributions for the plan year up to a specified
percentage of the participant's annual compensation. The Company's
contribution expense was, $744,000, $785,000 and $820,000 in 1999, 2000 and
2001, respectively.

8. Commitments and Contingencies

The Company leases certain office, shop and warehouse facilities,
automobiles, and equipment. The Company expenses all lease payments when
incurred. Total lease expense incurred was $1,266,000, $1,093,000 and
$1,276,000 in 1999, 2000 and 2001, respectively. Annual minimum lease
commitments at December 31, 2001 are as follows: 2002--$726,000; 2003 --
$482,000; 2004--$239,000; 2005--$22,000; 2006--$22,000 and thereafter--
$55,000.

The Company operates its business and markets its products and services in
most of the significant oil and gas producing areas in the world and is,
therefore, subject to the risk customarily attendant to international
operations and dependency on the condition of the oil and gas industry.
Additionally, products of the Company are used in potentially hazardous
drilling, completion, and production applications that can cause personal
injury, product liability, and environmental claims. Although exposure to such
risk has not resulted in any significant problems in the past, there can be no
assurance that future developments will not adversely impact the Company.

The Company is involved in a number of legal actions arising in the ordinary
course of business. In the opinion of management, the amount of ultimate
liability with respect to these actions will not materially affect the
consolidated financial statements of the Company, although no assurance can be
given with respect to the ultimate outcome of this litigation.

9. Stockholders' Equity

Under a Stockholder Rights Plan adopted by the Board of Directors in 1997,
each share of common stock includes one Right to purchase from the Company a
unit consisting of one one-hundredth of a share (a "Fractional Share") of
Series A Junior Participating Preferred Stock at a specified purchase price
per Fractional Share, subject to adjustment in certain events. The Rights will
cause substantial dilution to any person or group that attempts to acquire the
Company without the approval of the Company's Board of Directors.

DRIL-QUIP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

December 31, 2001

10. Geographic Areas

1999 2000 2001
-------- -------- --------
(In Thousands)

Revenues
United States:
Domestic........................................ $ 82,634 $ 69,401 $ 95,179
Export.......................................... 22,269 32,474 24,100
Intercompany.................................... 10,727 16,128 29,607
-------- -------- --------
Total United States........................... 115,630 118,003 148,886

Europe, Middle East, and Africa................... 42,989 53,567 71,529
Asia-Pacific...................................... 9,112 9,017 15,336
Eliminations...................................... (11,363) (16,634) (32,851)
-------- -------- --------
Total......................................... $156,368 $163,953 $202,900
======== ======== ========

Operating Income
United States..................................... $ 21,645 $ 19,050 $ 18,612
Europe, Middle East, and Africa................... (2,160) 511 2,061
Asia-Pacific...................................... (545) (273) 1,157
Eliminations...................................... (1,266) (1,882) (740)
-------- -------- --------
Total......................................... $ 17,674 $ 17,406 $ 21,090
======== ======== ========

Identifiable Assets
United States..................................... $127,233 $171,203 $192,601
Europe, Middle East, and Africa................... 49,048 59,138 81,420
Asia-Pacific...................................... 8,395 8,460 11,484
Eliminations...................................... (5,213) (5,460) (5,546)
-------- -------- --------
Total......................................... $179,463 $233,341 $279,959
======== ======== ========

Export sales from the United States to unaffiliated customers consist of
worldwide sales outside the territorial waters of the United States. Europe
sales are primarily to the North Sea, with lesser sales to Africa and the
Middle East, while Asia-Pacific's sales are primarily to Australia, Thailand,
Malaysia, and Indonesia.

Eliminations of operating profits are related to intercompany inventory
transfers that are deferred until shipment is made to third party customers.

In 1999 Chevron USA Production Company accounted for approximately 15% of
consolidated sales. During 2000, no single customer accounted for more than
10% of the Company's total revenues. In 2001, BP p.l.c. and ChevronTexaco
Corp. accounted for approximately 17% and 13% of consolidated sales,
respectively.

DRIL-QUIP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

December 31, 2001

11. Employee Stock Option Plan and Awards

On September 19, 1997 the Company adopted the Dril-Quip, Inc. 1997 Incentive
Plan (as amended, the "1997 Plan") and the Company reserved 1,700,000 shares
of Common Stock for use in connection with the 1997 Plan. During 2001, the
Company reserved an additional 700,000 shares for use in connection with the
1997 Plan. Persons eligible for awards under the 1997 Plan are employees
holding positions of responsibility with the Company or any of its
subsidiaries. Options granted under the 1997 Plan have a term of ten years and
become exercisable in cumulative annual increments of one-fourth of the total
number of shares of Common Stock subject thereto, beginning on the first
anniversary of the date of the grant. Option activity for the years ended
December 31, 1997, 1998, 1999 , 2000 and 2001 were as follows:

Weighted
Average
Number of Exercise
Options Price
--------- --------

Outstanding at January 1, 1997........................... 0 $ 0.00
Granted--1997 Plan..................................... 411,250 24.00
--------- ------
Outstanding at December 31, 1997......................... 411,250 24.00
Granted--1997 Plan..................................... 261,596 19.81
--------- ------
Outstanding at December 31, 1998......................... 672,846 22.37
Granted--1997 Plan..................................... 250,280 23.44
--------- ------
Outstanding at December 31, 1999......................... 923,126 22.66
Exercised--1997 Plan................................... (45,498) 23.54
Granted--1997 Plan..................................... 216,214 32.13
--------- ------
Outstanding at December 31, 2000......................... 1,093,842 24.50
Exercised--1997 Plan................................... (2,875) 22.95
Granted--1997 Plan..................................... 321,495 18.00
--------- ------
Outstanding at December 31, 2001......................... 1,412,462 $23.03
========= ======

Weighted
Average
Number of Exercise
Options Price
--------- --------

Exercisable, December 31,
1998................................................... 102,813 $24.00
1999................................................... 271,024 $22.99
2000................................................... 456,308 $22.77
2001................................................... 738,268 $23.42

The following table summarizes information about stock options outstanding
at December 31, 2001.

Weighted Weighted
Average Average
Number Exercise Contractual
Range of Exercise Prices Outstanding Price Life
------------------------ ----------- -------- -----------

$18.00 to $24.00.............................. 1,196,248 $21.38 7.53 years
$32.13........................................ 216,214 31.13 8.82 years
--------- ------ -----------
1,412,462 $23.03 $7.73 years
========= ====== ===========

DRIL-QUIP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

December 31, 2001

The Company applied Accounting Principles Board Opinion No. 25 ("APB No.
25") and related interpretations in accounting for this plan. No compensation
cost has been recognized in the results of operations, as the exercise price
for options granted under this plan is equal to the market price on the date
of grant. Under FAS No. 123, pro forma information is required to reflect the
estimated effect on net income and earnings per share as if the Company has
accounted for the stock options using the fair value method. The fair value
was estimated at the date of grant using a Black-Scholes option pricing model
with the following assumptions:

1999 2000 2001
------ ------ ------

Risk-free interest rate................................. 6.0% 5.0% 4.9%
Violatility factor of the stock price................... .761 .645 .637
Expected life of options (in years)..................... 5 5 5
Expected dividend yield................................. 0.0% 0.0% 0.0%
Calculated fair value per share......................... $15.49 $18.82 $10.78

Had compensation cost for the Company's stock-based compensation plans been
determined based on the fair value at the grant dates for awards under the
above plan consistent with the method available under SFAS No. 123, the
Company's net income and earnings per share for the years ended December 31,
1999, 2000 and 2001 would have been reduced to the pro forma amounts listed
below.

Year Ended December 31,
-----------------------
1999 2000 2001
------- ------- -------

Net Income
As reported........................................... $11,765 $11,031 $12,202
======= ======= =======
Pro forma............................................. $11,071 $ 9,289 $ 9,979
======= ======= =======
Earnings per share
Basic................................................. $ .68 $ .64 $ .71
======= ======= =======
Diluted............................................... $ .68 $ .63 $ .70
======= ======= =======
Pro forma
Basic................................................. $ .64 $ .54 $ .58
======= ======= =======
Diluted............................................... $ .64 $ .53 $ .58
======= ======= =======

12. Quarterly Results of Operations: (unaudited)

Quarter Ended
-------------------------------
Sept.
Mar. 31 June 30 30 Dec. 31
------- ------- ------- -------
(In Thousands, Except Share
Amounts)

2001
Revenues........................................ $47,105 $48,900 $54,356 $52,539
Operating income................................ 4,904 5,353 5,422 5,411
Net income...................................... 2,808 3,086 3,150 3,158
Earnings per share:
Basic(1)...................................... 0.16 0.18 0.18 0.18
Diluted(1).................................... 0.16 0.18 0.18 0.18

Quarter Ended
-------------------------------
Sept.
Mar. 31 June 30 30 Dec. 31
------- ------- ------- -------
(In Thousands, Except Share
Amounts)

2000
Revenues........................................ $35,008 $39,345 $44,525 $45,075
Operating income................................ 3,622 4,444 4,769 4,571
Net income...................................... 2,390 2,842 2,934 2,865
Earnings per share:
Basic(1)...................................... 0.14 0.16 0.17 0.17
Diluted(1).................................... 0.14 0.16 0.17 0.16

(1) The sum of the quarterly per share amounts may not equal the annual amount
reported, as per share amounts are computed independently for each quarter
and for the full year.

Item 9. Changes In and Disagreements With Accountants on Accounting and
Financial Disclosure

None.

PART III

Item 10. Directors and Executive Officers of the Registrant

The information required by this item is set forth under the captions
"Election of Directors" and "--Compliance with Section 16(a) of the Exchange
Act" in the Company's definitive Proxy Statement (the "2002 Proxy Statement")
for its annual meeting of stockholders to be held on May 15, 2002, which
sections are incorporated herein by reference.

Pursuant to Item 401(b) of Regulation S-K, the information required by this
item with respect to executive officers of the Company is set forth in Part I
of this report.

Item 11. Executive Compensation

The information required by this item is set forth in the sections entitled
"Election of Directors--Director Compensation" and "Executive Compensation" in
the 2002 Proxy Statement, which sections are incorporated herein by reference.

Item 12. Security Ownership of Certain Beneficial Owners and Management

The information required by this item is set forth in the section entitled
"Security Ownership of Certain Beneficial Owners and Management" in the 2002
Proxy Statement, which section is incorporated herein by reference.

Item 13. Certain Relationships and Related Party Transactions

The information required by this item is set forth in the section entitled
"Election of Directors--Certain Transactions" in the 2002 Proxy Statement,
which section is incorporated herein by reference.

PART IV

Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K

(a)(1) Financial Statements

All financial statements of the registrant are set forth under Item 8 of
this Annual Report on Form 10-K.

(a)(2) Financial Statement Schedules

All schedules and other statements for which provision is made in the
applicable regulations of the Commission have been omitted because they are
not required under the relevant instructions or are inapplicable.

(a)(3) Exhibits

Dril-Quip will furnish any exhibit to a stockholder upon payment by the
stockholder of the Company's reasonable expenses to furnish the exhibit.

Exhibit
No. Description
------- -----------

*3.1 --Restated Certificate of Incorporation of the Company (Incorporated
herein by reference to Exhibit 3.2 to the Company's Registration
Statement on Form S-1 (Registration No. 333-33447)).

*3.2 --Bylaws of the Company (Incorporated herein by reference to Exhibit
3.3 to the Company's Registration Statement on Form S-1 (Registration
No. 333-33447)).

*3.3 --Certificate of Designations for Series A Junior Participating
Preferred Stock (Incorporated herein by reference to Exhibit 3.3 to
the Company's Report on Form 10-Q for the Quarter ended September 30,
1997).

*4.1 --Form of certificate representing Common Stock (Incorporated herein
by reference to Exhibit 4.1 to the Company's Registration Statement
on Form S-1 (Registration No. 333-33447)).

*4.2 --Registration Rights Agreement among the Company and certain
stockholders (Incorporated herein by reference to Exhibit 4.2 to the
Company's Registration Statement on Form S-1 (Registration No.
333-33447)).

*4.3 --Rights Agreement between the Company and ChaseMellon Shareholder
Services, L.L.C., as rights agent (Incorporated herein by reference
to Exhibit 4.3 to the Company's Registration Statement on Form S-1
(Registration No. 333-33447)).

*10.1 --Credit Agreement between the Company and Guaranty Bank, FSB dated
May 18, 2001 (Incorporated by reference to Exhibit 10.2 to the
Company's report on Form 10-Q for the quarter ended June 30, 2001
(SEC File No. 001-13439)).

*10.2 --Credit Agreement between Dril-Quip (Europe) Limited and Bank of
Scotland dated November 18, 1999 (Incorporated by reference to
Exhibit 10.2 to the Company's Report on Form 10-Q for the Quarter
ended March 30, 2000 (SEC File No. 001-13439)).

+*10.3 --Form of Employment Agreement between the Company and each of Messrs.
Reimert, Smith and Walker (Incorporated herein by reference to
Exhibit 10.12 to the Company's Registration Statement On Form S-1
(Registration No. 333-33447)).

+*10.4 --1997 Incentive Plan of Dril-Quip, Inc. (as amended March 16, 2001)
(Incorporated herein by reference to Appendix B to the Company's
Proxy Statement, filed on March 23, 2001, for the annual meeting of
Stockholders held on May 10, 2001 (SEC File No. 001-13439)).

*21.1 --Subsidiaries of the Registrant. (Incorporated herein by reference to
Exhibit 21.1 of the Company's Annual Report on Form 10-K for the year
ended December 31, 1998 (SEC File No. 001-13439)).

23.1 --Consent of Ernst & Young LLP.

--------
* Incorporated herein by reference as indicated.
+ Management contract or compensatory plan or arrangement required to be
filed as an exhibit pursuant to the requirements of Item 14(c) of Form 10-
K.

(b) Reports on Form 8-K

None.

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) 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 on March 22, 2002.

DRIL-QUIP, INC.

/s/ Larry E. Reimert
By:__________________________________
Larry E. Reimert
Co-Chairman of the Board of
Directors

Pursuant to the requirements of the Securities and Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.

Name Capacity Date
---- -------- ----

/s/ J. Mike Walker Co-Chairman of the Board March 22, 2002
______________________________________ and Director (Co-
J. Mike Walker Principal Executive
Officer)

/s/ Larry E. Reimert Co-Chairman of the Board March 22, 2002
______________________________________ and Director (Co-
Larry E. Reimert Principal Executive
Officer)

/s/ Gary D. Smith Co-Chairman of the Board March 22, 2002
______________________________________ and Director (Co-
Gary D. Smith Principal Executive
Officer)

/s/ Jerry M. Brooks Chief Financial Officer March 22, 2002
______________________________________ (Principal Financial and
Jerry M. Brooks Accounting Officer)

/s/ Gary W. Loveless Director March 22, 2002
______________________________________
Gary W. Loveless

/s/ James M. Alexander Director March 22, 2002
______________________________________
James M. Alexander

/s/ Gary L. Stone Director March 22, 2002
______________________________________
Gary L. Stone