The following is management's discussion and analysis of certain significant factors that have affected certain aspects of the Company's financial position, results of operations and cash flows during the periods included in the accompanying unaudited condensed consolidated financial statements. This discussion should be read in conjunction with the unaudited condensed consolidated financial statements presented elsewhere herein, as well as the discussion under "Risk Factors," "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the annual consolidated financial statements included in the Company's Annual Report on Form 10-K for the year ended December 31, 2008.

Overview and Industry Outlook

Dril-Quip designs, manufactures, sells and services highly engineered offshore drilling and production equipment that 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, subsea control systems and manifolds, mudline hanger systems, specialty connectors and associated pipe, drilling and production riser systems, liner hangers, wellhead connectors and diverters. Dril-Quip also provides technical advisory assistance on an as-requested basis during installation of its products, as well as rework and reconditioning services for customer-owned Dril-Quip products and rental of running tools for use in connection with the installation and retrieval of the Company's products.

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. Oil and gas prices and the level of offshore drilling and production activity have historically been characterized by significant volatility. Declines in oil and gas prices may adversely affect the willingness of some oil and gas companies to make capital expenditures on exploration, drilling and production operations offshore, which could have an adverse impact on the Company's operations, financial position or cash flows.

According to the Energy Information Administration ("EIA") of the U.S. Department of Energy, crude oil (West Texas Intermediate Cushing) and natural gas (Henry Hub) prices are listed below as the average closing prices for the first quarter of 2008 and 2009:

                                             Three months ended
                                                 March 31,
                                              2008         2009
                     Crude oil ($/Bbl)     $    97.94    $  42.90
                     Natural gas ($/Mcf)         8.92        4.71

During the first quarter of 2008, crude oil prices ranged between $87.16 per barrel and $110.21 per barrel with an average quarterly price of $97.94. For the first quarter of 2009, crude oil prices ranged between $34.03 per barrel and $53.87 per barrel with an average quarterly price of $42.90.

According to the March 2009 release of the Short-Term Energy Outlook published by the EIA, West Texas Intermediate crude oil prices are projected to average $42.06 per barrel in 2009 and $53.17 in 2010. These projections are lower than previously reported in the January and February 2009 reports. In April 2009, the EIA further adjusted its average price per barrel forecast to $52.64 per barrel in 2009 and, assuming an economic recovery next year, the EIA expects average prices to be $62.92 per barrel in 2010. In March 2009, the EIA projected Henry Hub natural gas prices to average $4.67 per Mcf in 2009 and increase to an average of $5.87 per Mcf in 2010. In April 2009, the EIA revised its estimated average projections to $4.24 per Mcf in 2009 and $5.83

Detailed below is the average contracted rig count for our geographic regions for the three months ended March 31, 2008 and 2009. The rig count data includes floating rigs (semi-submersibles and drill ships) and jack-ups. The Company has included only these types of rigs as they are the primary end users of the Company's products.

                                              Three months
                                               March 31,
                                              2008     2009
                        Western Hemisphere      182     177
                        Eastern Hemisphere      160     161
                        Asia - Pacific          227     239

Source: ODS - Petrodata RigBase - March 31, 2009

The table represents rigs under contract and includes rigs currently drilling as well as rigs committed, but not yet drilling.

We believe that the number of rigs (semi-submersibles, drill ships and jack-ups) under construction impacts our revenue because our customers generally order some of our products during the construction of such rigs. As a result, an increase in rig construction activity tends to favorably impact our backlog. According to ODS-Petrodata, at the end of both March 2008 and 2009, there were 162 rigs under construction and the expected delivery dates for the rigs under construction at March 31, 2009 are as follows:

                             Remainder of 2009    50
                             2010                 56
                             2011                 43
                             2012                 13

In mid-2008, crude oil and natural gas prices began to decline significantly. This decline has resulted in reduced capital spending by some oil and gas companies, many of which are our customers. Additional capital expenditure reductions could have an adverse impact on the Company's financial condition, results of operation and new customer orders. The Company believes that its backlog should help mitigate the impact of current market conditions; however, a prolonged decline in commodity prices or an extended continuation of the downturn in the global economy could have a negative impact on the Company. The Company's backlog at March 31, 2009 was approximately $573 million compared to approximately $438 million at March 31, 2008. The Company can give no assurance that backlog will remain at current levels. 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. In the past, terminations and cancellations have been immaterial to the Company's overall operating results.

Revenues. Dril-Quip's revenues are generated from two sources: products and services. Product revenues are derived from the sale of offshore drilling and production equipment. Service revenues are earned when the Company provides technical advisory assistance for installation of the Company's products, reconditioning services of customer-owned Dril-Quip products and rental of running tools for installation and retrieval of the

The Company accounts for larger and more complex projects that have relatively longer manufacturing time frames on a percentage-of-completion basis. For the first three months of 2009, 14 projects representing approximately 21% of the Company's total revenue and 26% of its product revenue were accounted for using percentage-of-completion accounting compared to 16 projects representing approximately 37% of the Company's total revenue and 44% of its product revenue for the first three months of 2008. This percentage may fluctuate in the future. For revenues accounted for under the percentage-of-completion method, the Company calculates the percentage complete and applies the percentage to determine earned revenues and the appropriate portion of total estimated costs. Losses, if any, are recognized when they first become known. Amounts received from customers in excess of revenues recognized are classified as a current liability.

The Company has substantial international operations, with approximately 67% and 66% of its revenues derived from foreign sales for the three months ended March 31, 2008 and 2009, respectively.

Cost of Sales. The principal elements of cost of sales are labor, raw materials and manufacturing overhead. Cost of sales as a percentage of revenues is influenced by the product mix sold in any particular period and market conditions. The Company's costs related to its foreign operations do not significantly differ from its domestic costs.

Selling, General and Administrative Expenses. Selling, general and administrative expenses include the costs associated with sales and marketing, general corporate overhead, compensation expense, stock option expense, legal expenses, foreign currency transaction gains and losses and other related administrative functions.

Engineering and Product Development Expenses. Engineering and product development expenses consist of new product development and testing, as well as application engineering related to customized products.

Income Tax Provision. The Company's effective income tax rate has historically been lower than the statutory rate primarily due to foreign income tax rate differentials, research and development credits and deductions related to domestic production activities.

Results of Operations

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



                                                        Three months ended
                                                             March 31,
                                                        2008           2009
       Revenues:
       Products                                           84.7 %         82.4 %
       Services                                           15.3           17.6

       Total revenues                                    100.0          100.0
       Cost of sales:
       Products                                           49.6           47.0
       Services                                            9.2            9.5

       Total cost of sales                                58.8           56.5
       Selling, general and administrative expenses       10.3           11.4
       Engineering and product development expenses        4.7            4.9

       Operating income                                   26.2           27.2
       Interest income                                     1.3            0.1
       Interest expense                                     -              -

       Income before income taxes                         27.5           27.3
       Income tax provision                                8.3            8.0

       Net income                                         19.2 %         19.3 %

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

                                              Three months ended
                                                  March 31,
                                                (In millions)
                                               2008         2009
                   Revenues:
                   Products
                   Subsea equipment         $     70.7    $   75.6
                   Surface equipment               6.9         6.3
                   Offshore rig equipment         34.6        23.2

                   Total products                112.2       105.1
                   Services                       20.2        22.4

                   Total revenues           $    132.4    $  127.5

Three Months Ended March 31, 2009 Compared to Three Months Ended March 31, 2008.

Revenues. Revenues decreased by $4.9 million, or approximately 3.7%, to $127.5 million in the three months ended March 31, 2009 from $132.4 million in the three months ended March 31, 2008. Product revenues decreased by approximately $7.1 million for the three months ended March 31, 2009 compared to the same period in 2008 as a result of decreased revenues of $11.4 million in offshore rig equipment and $600,000 in surface equipment offset by a $4.9 million increase in subsea equipment. The decrease in offshore rig equipment was primarily due to decreases in revenues related to several long-term projects. During the first quarter of 2008 the Company recognized revenues related to 16 projects, compared to 14 projects during the same period of 2009. The majority of these projects related to offshore rig equipment. In the first quarter of 2008, projects accounted for using the percentage-of-completion method represented 37% of the Company's total revenues

Cost of Sales. Cost of sales decreased by $5.8 million, or approximately 7.5%, to $72.0 million for the three months ended March 31, 2009 from $77.8 million for the same period in 2008. As a percentage of revenues, cost of sales were approximately 56.5% and 58.8% for the three-month periods ended March 31, 2009 and 2008, respectively. The decrease in cost of sales as a percentage of revenues resulted primarily due to improved manufacturing efficiencies since the first quarter of 2008 and product mix.

Selling, General and Administrative Expenses. For the three months ended March 31, 2009, selling, general and administrative expenses increased by approximately $900,000, or 6.6%, to $14.5 million from $13.6 million in the 2008 period. The increase in selling, general and administrative expenses was primarily due to the effect of foreign currency transaction gains and losses and increased stock option expenses. The Company experienced approximately $79,000 in foreign currency transaction losses in the first quarter of 2009 as compared to $508,000 in foreign currency transaction gains in the first quarter of 2008. Stock option expense for the first quarter of 2009 totaled $997,000 compared to $757,000 in the first quarter of 2008. Selling, general and administrative expenses as a percentage of revenues increased from 10.3% in 2008 to 11.4% in 2009.

Engineering and Product Development Expenses. For each of the three-month periods ended March 31, 2009 and 2008, engineering and product development expenses totaled $6.3 million. Engineering and product development expenses as a percentage of revenues increased from 4.7% in 2008 to 4.9% in 2009.

Interest Income. Interest income for the three-month period ended March 31, 2009 was approximately $200,000 as compared to $1.7 million for the three-month period ended March 31, 2008. This decrease was due to reduced interest earned on short-term investments due to lower interest rates and reduced balances in short-term investments. Due to the current global financial crisis, the company has transferred the majority of its short-term investments to funds which invest in U.S. Treasury obligations, which normally earn lower interest rates than money market funds.

Interest expense. Interest expense for the three months ended March 31, 2009 was $48,000 compared to $58,000 for the same period in 2008.

Income tax provision. Income tax expense for the three months ended March 31, 2009 was $10.2 million on income before taxes of $34.8 million, resulting in an effective income tax rate of approximately 29%. Income tax expense for the three months ended March 31, 2008 was $11.0 million on income before taxes of $36.4 million, resulting in an effective income tax rate of approximately 30%.

Net Income. Net income was approximately $24.7 million for the three months ended March 31, 2009 and $25.4 million for the same period in 2008, for the reasons set forth above.

Liquidity and Capital Resources

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



                                                               Three months
                                                                 March 31,
                                                            2008          2009
                                                              (In thousands)
     Operating activities                                 $  10,523     $  39,271
     Investing activities                                   (13,637 )     (13,599 )
     Financing activities                                       (86 )        (151 )

                                                             (3,200 )      25,521
     Effect of exchange rate changes on cash activities        (287 )          70

     Increase (decrease) in cash and cash equivalents     $  (3,487 )   $  25,591

Statements of cash flows for entities with international operations that are local currency functional exclude the effects of the changes in foreign currency exchange rates that occur during any given period, as these are noncash changes. As a result, changes reflected in certain accounts on the Condensed Consolidated Statements of Cash Flows may not reflect the changes in corresponding accounts on the Condensed Consolidated Balance Sheets.

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

During the three months ended March 31, 2009, the Company generated $39.3 million of cash from operations as compared to $10.5 million for the same period in 2008. The primary reasons for the increase were the changes in operating assets and liabilities during the first quarter of 2009 as compared to the same period in 2008. Cash totaling approximately $10.8 million was provided during the first quarter of 2009 due to reductions in operating assets and liabilities, compared to $18.5 million that was used to increase operating assets and liabilities during the same period in 2008. The reduction in operating assets and liabilities during the first three months of 2009 primarily reflected a decrease of $16.8 million in receivables due to a concentrated effort by the Company to increase collection efforts. The reduction in accounts receivable was partially offset by an increase in inventory of $10.9 million. The majority of the increase in inventory was in work-in-progress. Accounts payable and accrued expenses increased by $2.1 million largely due to the purchases of materials for inventory.

Capital expenditures by the Company were $13.8 million and $14.0 million in the first three months of 2009 and 2008, respectively. The capital expenditures for the first quarter of 2009 were primarily $5.0 million for machinery and equipment, $4.1 million for facilities and $4.1 million running tools and other expenditures of $600,000. Principal payments on long-term debt were approximately $151,000 during the three months ended March 31, 2009.

The Company has a credit facility with Guaranty Bank, FSB providing an unsecured revolving line of credit of up to $10 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 June 1, 2009. The Company is currently evaluating its options regarding the termination of this facility. The facility also contains certain covenants including maintaining minimum tangible net worth levels, not exceeding specified funded debt amounts and required interest coverage ratios. As of March 31, 2008 and 2009, the Company had no borrowings under this facility and was in compliance with all loan covenants.

Dril-Quip (Europe) Limited has a credit agreement with the Bank of Scotland dated March 21, 2001 in the original amount of U.K. Pounds Sterling 4.0 million (approximately U.S. $5.7 million). Borrowing under this

The Company believes that cash generated from operations plus cash on hand and its current line of credit will be sufficient to fund operations, working capital needs and anticipated capital expenditure requirements in 2009. 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 available and adequate to meet such requirements.

Off-Balance Sheet Arrangements

The Company has no off-balance sheet arrangements.

Critical Accounting Policies

Refer to our Annual Report on Form 10-K for the year ended December 31, 2008 for a discussion of our critical accounting policies. During the three months ended March 31, 2009 there were no material changes in our judgments and assumptions associated with the development of our critical accounting policies.