DRIL-QUIP INC (Form: 10-Q, Received: 11/09/2012 06:03:35)

Large accelerated filer

Accelerated filer

Non-accelerated filer

¨ (Do not check if a smaller reporting company)

Smaller reporting company

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(MARK ONE)

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

FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2012

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

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

incorporation or organization)

(I.R.S. Employer

Identification No.)

6401 N. ELDRIDGE PARKWAY

HOUSTON, TEXAS

77041

(Address of principal executive offices)

(Zip Code)

(713) 939-7711

(Registrant’s telephone number, including area code)

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 whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of regulations S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨

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

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

As of November 2 , 2012, the number of shares outstanding of the registrant’s common stock, par value $0.01 per share, was 40,435,393.

PART I—FINANCIAL INFORMATION

Item 1.

FINANCIAL STATEMENTS

DRIL-QUIP, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(UNAUDITED)


	September 30, 2012			December 31, 2011
	(In thousands)
ASSETS
Current assets:
Cash and cash equivalents	$	263,421		$	298,576
Trade receivables, net		240,839			180,095
Inventories, net		350,053			277,802
Deferred income taxes		24,229			23,868
Prepaids and other current assets		13,366			18,961

Total current assets		891,908			799,302
Property, plant and equipment, net		293,074			274,599
Other assets		11,221			11,957

Total assets	$	1,196,203		$	1,085,858

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	36,299		$	35,580
Accrued income taxes		4,516			5,447
Customer prepayments		75,026			76,610
Accrued compensation		14,058			12,584
Other accrued liabilities		25,322			20,779

Total current liabilities		155,221			151,000
Long-term debt, net of current maturities		—			—
Deferred income taxes		9,522			9,614

Total liabilities		164,743			160,614

Commitments and contingencies (Note 8)
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, 40,431,518 and 40,175,426 shares issued and outstanding at September 30, 2012 and December 31, 2011		404			402
Additional paid-in capital		177,050			162,505
Retained earnings		869,037			780,780
Accumulated other comprehensive income (loss)		(15,031	)		(18,443	)

Total stockholders’ equity		1,031,460			925,244

Total liabilities and stockholders’ equity	$	1,196,203		$	1,085,858

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

DRIL-QUIP, INC.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(UNAUDITED)


	Three months ended September 30,						Nine months ended September 30,
	2012			2011			2012			2011
				(In thousands, except per share data)
Revenues:
Products	$	159,465		$	134,238		$	455,846		$	368,901
Services		31,395			20,797			88,708			60,795

Total revenues		190,860			155,035			544,554			429,696
Cost and expenses:
Cost of sales:
Products		103,614			80,713			287,567			216,219
Services		18,207			15,774			49,629			42,381

Total cost of sales		121,821			96,487			337,196			258,600
Selling, general and administrative		20,764			18,274			58,614			52,572
Engineering and product development		9,552			8,498			28,640			25,725

		152,137			123,259			424,450			336,897

Operating income		38,723			31,776			120,104			92,799
Interest income		148			84			329			269
Interest expense		(7	)		(15	)		(21	)		(37	)

Income before income taxes		38,864			31,845			120,412			93,031
Income tax provision		9,207			8,582			32,155			25,888

Net income	$	29,657		$	23,263		$	88,257		$	67,143

Earnings per common share:
Basic	$	0.73		$	0.58		$	2.19		$	1.68

Diluted	$	0.73		$	0.58		$	2.18		$	1.67

Weighted average common shares outstanding:
Basic		40,423			40,059			40,292			40,055

Diluted		40,589			40,296			40,492			40,311

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

DRIL-QUIP, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(UNAUDITED)


	Three months ended September 30,					Nine months ended September 30,
	2012		2011			2012		2011
	(In thousands)
Net income	$	29,657	$	23,263		$	88,257	$	67,143
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustments		7,105		(17,666	)		3,412		(7,714	)

Total comprehensive income	$	36,762	$	5,597		$	91,669	$	59,429

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

DRIL-QUIP, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)


	Nine months ended September 30,
	2012			2011
	(In thousands)
Operating activities
Net income	$	88,257		$	67,143
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Depreciation and amortization		19,410			16,973
Stock-based compensation expense		3,922			3,438
Gain (loss) on sale of equipment		240			(636	)
Deferred income taxes		(459	)		(837	)
Changes in operating assets and liabilities:
Trade receivables, net		(59,487	)		(28,054	)
Inventories, net		(70,211	)		(29,498	)
Prepaids and other assets		5,409			1,460
Excess tax benefits of stock option exercises		(1,219	)		(297	)
Accounts payable and accrued expenses		4,222			21,553

Net cash provided by (used in) operating activities		(9,916	)		51,245
Investing activities
Purchase of property, plant and equipment		(40,606	)		(45,114	)
Proceeds from sale of equipment		1,303			2,258

Net cash used in investing activities		(39,303	)		(42,856	)
Financing activities
Principal payments on debt		(34	)		(257	)
Proceeds from exercise of stock options		10,040			404
Excess tax benefits of stock option exercises		1,219			297

Net cash provided by financing activities		11,225			444
Effect of exchange rate changes on cash activities		2,839			889

Increase (decrease) in cash and cash equivalents		(35,155	)		9,722
Cash and cash equivalents at beginning of period		298,576			245,850

Cash and cash equivalents at end of period	$	263,421		$	255,572

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

DRIL-QUIP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

1.	Organization and Principles of Consolidation

Dril-Quip, Inc., a Delaware corporation (the “Company” or “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’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’s products are used by major integrated, large independent and foreign national oil and gas companies in offshore areas throughout the world. Dril-Quip also provides technical advisory assistance on an as-requested basis during installation of its products, as well as rework and reconditioning services for customer-owned Dril-Quip products. In addition, Dril-Quip’s customers may rent or purchase running tools from the Company for use in the installation and retrieval of the Company’s products.

The Company’s operations are organized into three geographic segments—Western Hemisphere (including North and South America; headquartered in Houston, Texas), Eastern Hemisphere (including Europe and Africa; headquartered in Aberdeen, Scotland) and Asia-Pacific (including the Pacific Rim, Southeast Asia, Australia, India and the Middle East; headquartered in Singapore). Each of these segments sells similar products and services and the Company has major manufacturing facilities in all three of its headquarter locations as well as Macae, Brazil.

The condensed consolidated financial statements included herein are unaudited. The balance sheet at December 31, 2011, has been derived from the audited consolidated financial statements at that date. In the opinion of management, the unaudited condensed consolidated interim financial statements include all normal recurring adjustments necessary for a fair presentation of the financial position as of September 30, 2012 and the results of operations and comprehensive income for the three and nine-month periods ended September 30, 2012 and 2011, and cash flows for the nine-month periods ended September 30, 2012 and 2011. Although management believes the unaudited interim related disclosures in these condensed consolidated financial statements are adequate to make the information presented not misleading, certain information and footnote disclosures normally included in annual audited consolidated financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission. The results of operations, comprehensive income and the cash flows for the nine-month period ended September 30, 2012 are not necessarily indicative of the results to be expected for the full year. The condensed consolidated financial statements included herein should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2011.

2.	Significant Accounting Policies

Principles of Consolidation

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

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect reported amounts of assets and liabilities 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. Some of the Company’s more significant estimates are those affected by critical accounting policies for revenue recognition, inventories and contingent liabilities as discussed more fully in the Company’s Annual Report on Form 10-K for the year ended December 31, 2011.

Revenue Recognition

Product Revenue

The Company earns product revenues from two sources:

•

product revenues recognized under the percentage-of-completion method; and

•

product revenues from the sale of products that do not qualify for the percentage-of-completion method.

Revenues recognized under the percentage-of-completion method

The Company uses the percentage-of-completion method on long-term project contracts that have the following characteristics:

•

The contracts call for products which are designed to customer specifications;

•

The structural designs are unique and require significant engineering and manufacturing efforts generally requiring more than one year in duration;

•

The contracts contain specific terms as to milestones, progress billings and delivery dates; and

•

Product requirements cannot be filled directly from the Company’s standard inventory.

For each project, the Company prepares a detailed analysis of estimated costs, profit margin, completion date and risk factors which include availability of material, production efficiencies and other factors that may impact the project. On a quarterly basis, management reviews the progress of each project, which may result in revisions of previous estimates, including revenue recognition. The Company calculates the percent complete and applies this percentage to determine the revenues earned and the appropriate portion of total estimated costs. Losses, if any, are recorded in full in the period they become known. Historically, the Company’s estimates of total costs and costs to complete have approximated actual costs incurred to complete the project.

Under the percentage-of-completion method, billings do not always correlate directly to the revenue recognized. Based upon the terms of the specific contract, billings may be in excess of the revenue recognized, in which case the amounts are included in customer prepayments as a liability on the Condensed Consolidated Balance Sheets. Likewise, revenue recognized may exceed customer billings in which case the amounts are reported in trade receivables. Unbilled revenues are expected to be billed and collected within one year. At September 30, 2012 and December 31, 2011, receivables included $68.1 million and $30.5 million of unbilled receivables, respectively. During the quarter ended September 30, 2012, there were 17 projects representing approximately 21.0% of the Company’s total revenue and approximately 25.2% of its product revenues that were accounted for using percentage-of-completion accounting, compared to 11 projects during the third quarter of 2011 representing 12.8% of the Company’s total revenues and 14.8% of its product revenues. For the nine months ended September 30, 2012, there were 19 projects representing 19.1% of the Company’s total revenues and 22.3% of its product revenues, compared to 16 projects representing 18.8% of the Company’s total revenues and 22.4% of its product revenues for the nine months ended September 30, 2011, all of which were accounted for using percentage-of-completion accounting.

Revenues not recognized under the percentage-of-completion method

Revenues from the sale of inventory products, not accounted for under the percentage-of-completion method, are recorded at the time the manufacturing processes are complete and ownership is transferred to the customer.

Service revenue

The Company earns service revenues from three sources:

•

technical advisory assistance;

•

rental of running tools; and

•

rework and reconditioning of customer-owned Dril-Quip products.

The Company does not install products for its customers, but it provides technical advisory assistance. At the time of delivery of the product, the customer is not obligated to buy or rent the Company’s running tools and the Company is not obligated to perform any subsequent services relating to installation. Technical advisory assistance service revenue is recorded at the time the service is rendered. Service revenues associated with the rental of running and installation tools are recorded as earned. Rework and reconditioning service revenues are recorded when the refurbishment process is complete.

The Company normally negotiates contracts for products, including those accounted for under the percentage-of-completion method, and services separately. For all product sales, it is the customer’s decision as to the timing of the product installation as well as whether Dril-Quip running tools will be purchased or rented. Furthermore, the customer is under no obligation to utilize the Company’s technical advisory services. The customer may use a third party or their own personnel.

Fair Value of Financial Instruments

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

Earnings Per Share

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

In each relevant period, the net income used in the basic and dilutive earnings per share calculations is the same. The following table reconciles the number of common shares outstanding at September 30 of each year to the weighted average number of common shares outstanding and the weighted average diluted number of common shares outstanding for the purpose of calculating basic and diluted earnings per share:


	Three months ended September 30,						Nine months ended September 30,
	2012			2011			2012			2011
	(In thousands)
Number of common shares outstanding at end of period—basic		40,432			40,060			40,432			40,060
Effect of using weighted average common shares outstanding		(9	)		(1	)		(140	)		(5	)

Weighted average basic common shares outstanding—basic		40,423			40,059			40,292			40,055
Dilutive effect of common stock options		166			237			200			256

Weighted average diluted common shares outstanding—diluted		40,589			40,296			40,492			40,311

3.	New Accounting Standards

In December 2011, the FASB issued Accounting Standards Update (“ASU”) 2011-11, Balance Sheet—Disclosures about Offsetting Assets and Liabilities. This ASU was issued to alleviate some of the differences in presentation between U.S. generally accepted accounting principles (GAAP) and International Financial

Reporting Standards (IFRS) as to presentations showing gross versus netted amounts. Entities are required to disclose both gross and net information about instruments and transactions that are eligible for offset in the statements of financial position and instruments and transactions subject to an agreement similar to a master netting arrangement. This ASU is effective for annual reporting periods beginning on or after January 1, 2013 and interim periods within those annual periods. The adoption of this accounting standard update will not have a material impact on the Company’s condensed consolidated financial statements.

In June 2011, the FASB issued ASU 2011-05, Comprehensive Income. This ASU amended the guidance on the presentation of comprehensive income in financial statements to improve the comparability, consistency and transparency of financial reporting and to increase the prominence of items that are recorded in other comprehensive income. The new accounting guidance requires entities to report components of comprehensive income in either (1) a continuous statement of comprehensive income or (2) two separate but consecutive statements. The provisions of this new guidance were effective for the Company on January 1, 2012. The Company adopted ASU 2011-05 effective with the period ended March 31, 2012. In December 2011, the FASB issued ASU 2011-12, Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items out of Accumulated Other Comprehensive Income. It was determined that the reclassification would be difficult for preparers and may add unnecessary complexity to financial statements.

4.	Stock Options and Stock Awards

During the three and nine months ended September 30, 2012, the Company recognized approximately $1.3 million and $3.9 million, respectively, of stock-based compensation expense compared to $1.0 million and $3.4 million, respectively, for the three and nine months ended September 30, 2011. Stock-based compensation expense is included in the selling, general and administrative expense line of the Condensed Consolidated Statements of Income. No stock-based compensation expense was capitalized during the three and nine months ended September 30, 2012 or 2011. There were no stock options or stock awards granted in the third quarter of 2012 or 2011. Refer to Note 13 of the Company’s Annual Report on Form 10-K for the year ended December 31, 2011 for additional information regarding stock-based compensation plans.

5.	Inventories

Inventories consist of the following:


	September 30, 2012			December 31, 2011
	(In thousands)
Raw materials and supplies	$	75,536		$	48,240
Work in progress		81,522			75,690
Finished goods		221,018			180,100

		378,076			304,030
Less: allowance for obsolete and excess inventory		(28,023	)		(26,228	)

Total	$	350,053		$	277,802

6.	Geographic Areas


	Three months ended September 30,						Nine months ended September 30,
	2012			2011			2012			2011
	(In thousands)
Revenues:
Western Hemisphere
Products	$	74,598		$	69,670		$	215,180		$	198,547
Services		16,191			9,788			48,415			25,443
Intercompany		17,739			18,662			55,512			45,772

Total	$	108,528		$	98,120		$	319,107		$	269,762

Eastern Hemisphere
Products	$	50,488		$	43,515		$	151,010		$	120,424
Services		9,341			6,843			27,727			23,020
Intercompany		264			331			3,933			788

Total	$	60,093		$	50,689		$	182,670		$	144,232

Asia-Pacific
Products	$	34,379		$	21,053		$	89,656		$	49,930
Services		5,863			4,166			12,566			12,332
Intercompany		417			974			760			982

Total	$	40,659		$	26,193		$	102,982		$	63,244

Summary
Products	$	159,465		$	134,238		$	455,846		$	368,901
Services		31,395			20,797			88,708			60,795
Intercompany		18,420			19,967			60,205			47,542
Eliminations		(18,420	)		(19,967	)		(60,205	)		(47,542	)

Total	$	190,860		$	155,035		$	544,554		$	429,696

Income (loss) before income taxes:
Western Hemisphere	$	14,789		$	19,611		$	54,509		$	53,166
Eastern Hemisphere		9,848			10,703			34,158			27,199
Asia-Pacific		12,667			2,936			24,446			13,326
Eliminations		1,560			(1,405	)		7,299			(660	)

Total	$	38,864		$	31,845		$	120,412		$	93,031


	September 30, 2012			December 31, 2011
	(In thousands)
Total Long-Lived Assets:
Western Hemisphere	$	212,604		$	196,380
Eastern Hemisphere		35,744			34,927
Asia-Pacific		58,849			58,058
Eliminations		(2,902	)		(2,809	)

Total	$	304,295		$	286,556

Total Assets:
Western Hemisphere	$	702,720		$	666,915
Eastern Hemisphere		279,311			229,043
Asia-Pacific		254,029			209,143
Eliminations		(39,857	)		(19,243	)

Total	$	1,196,203		$	1,085,858

7.	Share Repurchase Plan

On June 18, 2012, the Company’s Board of Directors approved a share repurchase plan of up to $100 million of the Company’s common stock. As of September 30, 2012, no shares had been repurchased. The repurchase plan has no expiration date and all shares purchased are expected to be cancelled.

8.	Commitments and Contingencies

Deepwater Horizon Incident

On April 22, 2010, a deepwater U.S. Gulf of Mexico drilling rig known as the Deepwater Horizon, operated by BP Exploration & Production, Inc. (“BP”), sank after an explosion and fire that began on April 20, 2010. The Company is a party to an ongoing contract with an affiliate of BP to supply wellhead systems in connection with BP’s U.S. Gulf of Mexico operations, and the Company’s wellhead and certain of its other equipment were in use on the Deepwater Horizon at the time of the incident. A moratorium was placed on offshore deepwater drilling on May 28, 2010 in the U.S. Gulf of Mexico and was lifted on October 12, 2010. Since the first quarter of 2011, after delays attributed to new regulations that increased the complexity of the drilling permit process, the issuance of deepwater permits resumed and deepwater drilling activity in the U.S. Gulf of Mexico has steadily increased since that time.

The Company was named, along with other unaffiliated defendants, in both class action and other lawsuits arising from of the Deepwater Horizon incident. The actions filed against the Company were consolidated, along with hundreds of other lawsuits not directly naming the Company, in the multi-district proceeding In Re: Oil Spill by the Oil Rig “Deepwater Horizon” in the Gulf of Mexico, on April 20, 2010 (“MDL Proceeding”). The lawsuits generally allege, among other things, violation of state and federal environmental and other laws and regulations, negligence, gross negligence, strict liability, personal injury and/or property damages and generally seek awards of unspecified economic, compensatory and punitive damages and/or declaratory relief.

On January 20, 2012, the judge presiding over the MDL Proceeding, another related proceeding filed by affiliates of Transocean Ltd under the Limitation of Liability Act, and the U.S. government’s action under the Oil Pollution Act, issued an order that granted the Company’s Motion for Summary Judgment and dismissed all claims asserted against the Company in those proceedings with prejudice. On April 9, 2012, the judge issued an order granting a final judgment in favor of the Company with respect to the court’s prior order that granted the Company’s Motion for Summary Judgment.

Additional lawsuits may be filed and additional investigations may be launched in the future. An adverse outcome with respect to any of these lawsuits or investigations, or any lawsuits or investigations that may arise in the future, could have a material adverse effect on the Company’s results of operations. The Company intends to continue to vigorously defend any litigation, fine and/or penalty relating to the Deepwater Horizon incident. Accordingly, the Company does not believe this litigation will have a material impact and no liability has been accrued in conjunction with these matters.

At the time of the Deepwater Horizon incident, the Company had a general liability insurance program with an aggregate coverage limit of $100 million for claims with respect to property damage, injury or death and pollution. The coverage was increased to $200 million in October 2010. The insurance policies may not cover all potential claims and expenses relating to the Deepwater Horizon incident. In addition, the Company’s policies may not cover fines, penalties or costs and expenses related to government-mandated clean up of pollution. The Company has received a “reservation of rights” letter from its insurers. The incident may also lead to further tightening of the availability of insurance coverage. If liability limits are increased or the insurance market becomes more restricted, the risks and costs of conducting offshore exploration and development activities may increase, which could materially impact the Company’s results of operations.

Brazilian Tax Issue

From 2002 to 2007, the Company’s Brazilian subsidiary imported goods through the State of Espirito Santo in Brazil and subsequently transferred them to its facility in the State of Rio de Janeiro. During that period, the Company’s Brazilian subsidiary paid taxes to the State of Espirito Santo on its imports. Upon the final sale of these goods, the Company’s Brazilian subsidiary collected taxes from customers and remitted them to the State of Rio de Janeiro net of the taxes paid on importation of those goods to the State of Espirito Santo in accordance with the Company’s understanding of Brazilian tax laws.

In August 2007, the State of Rio de Janeiro served the Company’s Brazilian subsidiary with assessments to collect a state tax on the importation of goods through the State of Espirito Santo from 2002 to 2007 claiming that these taxes were due and payable to it under applicable law. The Company settled these assessments with payments to the State of Rio de Janeiro of $12.2 million in March 2010 and $3.9 million in December 2010. Approximately $7.8 million of these settlement payments were attributable to penalties, interest and amounts that had expired under the statute of limitations so that amount was recorded as an expense. The remainder of the settlement payments generated credits (recorded as a prepaid tax) that can be used to offset future state taxes on sales to customers in the State of Rio de Janeiro once certified by the tax authorities under a process that is currently ongoing.

In December 2010 and January 2011, the Company’s Brazilian subsidiary was served with additional assessments totaling approximately $13.0 million from the State of Rio de Janeiro to cancel the credits associated with the tax payments to the State of Espirito Santo (“Santo Credits”) on the importation of goods from July 2005 to October 2007. The Santo Credits are not related to the credits described in the immediately preceeding paragraph. The Company has objected to this assessment as it would represent double taxation on the importation of the same goods and that the Company is entitled to the credits under applicable Brazilian law. The Company believes that these credits are valid and that success in the matter is probable. Based upon this analysis and because the Company is not able to reasonably estimate a loss or range of losses based upon an adverse judgment, the Company has not accrued any liability in conjunction with this matter.

Since 2007, the Company’s Brazilian subsidiary has paid taxes on the importation of goods directly to the State of Rio de Janeiro and the Company does not expect any similar issues to exist for periods subsequent to 2007.

ATP Bankruptcy

The Company has entered into several contracts with ATP Oil & Gas Corporation (“ATP”). In August 2012, ATP filed for bankruptcy in the U.S Bankruptcy Court in the Southern District of Texas. As of September 30, 2012, the Company had $1.4 million of ATP receivables and $4.3 million in customer prepayments from ATP.

General

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 risks 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 ongoing and future developments will not adversely impact the Company.

The Company is also 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 action, in the opinion of management, the ultimate liability with respect thereto will not have a material adverse effect on the Company’s operations, comprehensive income, financial position or cash flows.

Item 2.

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 aspects of the Company’s financial position, results of operations, comprehensive income, 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 consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2011.

Overview

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.

Deepwater Horizon Incident

On April 22, 2010, a deepwater U.S. Gulf of Mexico drilling rig known as the Deepwater Horizon, operated by BP, sank after an explosion and fire that began on April 20, 2010. The Department of Interior issued an order imposing a moratorium on deepwater drilling in the U.S. Gulf of Mexico that was lifted on October 12, 2010. As a result of the Deepwater Horizon incident, the Company’s revenues and earnings may be affected by, among other things, new or revised governmental laws or regulations relating to offshore oil and gas exploration and production activities, both in the U.S. Gulf of Mexico and in other areas in which the Company’s customers operate, and the effect of such laws or regulations on the level of demand for the Company’s products and services. For additional information related to the impact of the Deepwater Horizon incident as well as information related to litigation and additional governmental investigations and regulations arising out of the incident, see “Commitments and Contingencies,” Note 8, of the Notes to Condensed Consolidated Financial Statements and Part II, Item 1, “Legal Proceedings.” As a result of recent scrutiny of the offshore drilling industry triggered by the Deepwater Horizon incident, the technical specifications for the Company’s existing and future products may change resulting in additional testing of its products to ensure their compliance with such specifications. If the Company’s products are unable to satisfy the requirements of the additional testing, or if the costs of the modifications to such products necessary to satisfy the testing are not acceptable to the Company’s customers, the customers may terminate their contracts with the Company or decide not to purchase the Company’s products.

Oil and Gas Prices

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.

According to the Energy Information Administration (“EIA”) of the U.S. Department of Energy, average crude oil (West Texas Intermediate Cushing) and natural gas (Henry Hub) closing prices are listed below for the periods covered by this report:


	Three months ended September 30,				Nine months ended September 30,
	2012		2011		2012		2011
Crude Oil ($/Bbl)	$	92.17	$	89.53	$	96.11	$	95.18
Natural gas ($/Mcf)		2.97		4.25		2.61		4.35

For the quarter ended September 30, 2012, West Texas Intermediate crude oil closing prices ranged between $83.72 per barrel and $98.94 per barrel with an average quarterly price of $92.17. During the quarter ended September 30, 2011, West Texas Intermediate crude oil prices ranged between $78.93 per barrel and $99.61 per barrel with an average quarterly price of $89.53. During the nine months ended September 30, 2012, West Texas Intermediate crude oil prices ranged between $77.72 per barrel and $109.39 per barrel with an average price of $96.11 per barrel, as compared to a range of $78.93 per barrel to $113.39 per barrel with an average price of $95.18 per barrel for the same period in 2011. West Texas Intermediate crude oil prices ended the third quarter of 2012 at $92.18 per barrel and Henry Hub natural gas prices at September 30, 2012 were $3.18 per Mcf.

According to the October 2012 release of the Short-Term Energy Outlook published by the EIA, West Texas Intermediate crude oil prices are projected to average $95.55 per barrel for the full year 2012 and $92.63 per barrel in 2013. The EIA projected Henry Hub natural gas prices to average $2.79 per Mcf for 2012 and $3.45 per Mcf in 2013. In its October 2012 Oil Market Report, the International Energy Agency (“IEA”) stated that global demand is estimated to be 89.7 million barrels per day for 2012, increasing to 90.5 million barrels per day in 2013.

Rig Count

Detailed below is the average contracted rig count for the Company’s geographic regions for the three and nine months ended September 30, 2012 and 2011. The rig count data includes floating rigs (semi-submersibles and drillships) and jack-up rigs. The Company has included only these types of rigs as they are the primary end users of the Company’s products.


	Three months ended September 30,				Nine months ended September 30,
	2012		2011		2012		2011
Western Hemisphere		214		189		208		181
Eastern Hemisphere		172		162		170		154
Asia-Pacific		271		255		266		245

		657		606		644		580

Source: ODS—Petrodata RigBase—September 30, 2012 and 2011

The above table represents rigs under contract and includes rigs currently drilling as well as rigs committed, but not yet drilling. According to ODS-Petrodata RigBase, as of September 30, 2012, there were 68 rigs under contract in the U.S. Gulf of Mexico (30 jack-up rigs and 38 floating rigs). Of the total contracted, 60 were actively drilling (29 jack-up rigs and 31 floating rigs). As of September 30, 2011, there were 54 rigs under contract in the U.S. Gulf of Mexico (29 jack-up rigs and 25 floating rigs), 49 of which were actively drilling (29 jack-up rigs and 20 floating rigs).

The Company believes that the number of rigs (semi-submersibles, drillships and jack-up rigs) under construction impacts its revenue because in certain cases, its customers order some of the Company’s products during the construction of such rigs. As a result, an increase in rig construction activity tends to favorably impact the Company’s backlog while a decrease in rig construction activity tends to negatively impact the Company’s backlog. According to ODS-Petrodata, at the end of September 2012 and 2011, there were 186 and 146 rigs, respectively, under construction. The expected delivery dates for the rigs under construction at September 30, 2012 are as follows:


2012			17
2013			70
2014			48
2015			16
After 2015 or unspecified delivery date			35

			186

Regulation

The demand for the Company’s products and services is also affected by laws and regulations relating to the oil and gas industry in general, including those specifically directed to offshore operations. The adoption of new laws and regulations, or changes to existing laws or regulations that curtail exploration and development drilling for oil and gas for economic or other policy reasons could adversely affect the Company’s operations by limiting demand for its products. For a description of certain actions taken by the U.S. government related to the Deepwater Horizon incident, see “Commitments and Contingencies” in Note 8 of the Notes to Condensed Consolidated Financial Statements.

Business Environment

Oil and gas prices and the level of offshore drilling and production activity have been characterized by significant volatility in recent years. Worldwide military, political and economic events have contributed to oil and natural gas price volatility and are likely to continue to do so in the future. West Texas Intermediate crude oil closing prices reached a high of $98.94 per barrel during the third quarter of 2012, but decreased to $86.65 by October 23, 2012. The Company expects continued volatility in both crude oil and natural gas prices, as well as in the level of drilling and production related activities. The volatility in prices appears to have impacted land drilling activity more so than offshore drilling, particularly in deeper offshore waters, where Dril-Quip’s products are more often utilized. Even during periods of high prices for oil and natural gas, companies exploring for oil and gas may cancel or curtail programs, or reduce their levels of capital expenditures for exploration and production for a variety of reasons. In addition, a significant and prolonged decline in hydrocarbon prices would likely have a material adverse effect on the Company’s results of operations.

The Company believes that its backlog should help mitigate the impact of negative market conditions; however, a prolonged decline in commodity prices, an extended continuation of the downturn in the global economy or future restrictions or declines in offshore oil and gas exploration and production could have a negative impact on the Company and/or its backlog. The Company’s backlog at September 30, 2012 was approximately $747 million compared to approximately $697 million at June 30, 2012, $716 million at December 31, 2011, and $730 million at September 30, 2011. In August 2012, the Company’s Brazilian subsidiary, Dril-Quip do Brasil LTDA, was awarded a four-year contract by Petrobras, Brazil’s national oil company. At current exchange rates, the contract is valued at $650 million, net of Brazilian taxes, if all the equipment under contract is ordered. Amounts will be included in the Company’s backlog as purchase orders under the contract are received. The Company’s September 30, 2012 backlog does not include any purchase order amounts relating to the new Petrobras contract. Subsequent to September 30, 2012 and as of November 7, 2012, purchase orders totaling approximately $60 million have been received under this contract. This amount, plus any subsequent orders received prior to December 31, 2012, will be included in the Company’s year-end backlog. 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. If the Company’s existing or future products are unable to satisfy the requirements for any testing required by its customers or additional testing triggered by the Deepwater Horizon incident, or if the costs of the modifications to such products necessary to satisfy the testing are not acceptable to the Company’s customers, the customers may terminate their contracts with the Company.

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 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.

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 the installation of the Company’s products, reconditioning services and rental of running tools for installation and retrieval of the Company’s products. For the nine months ended September 30, 2012 and 2011, the Company derived 84% and 86% of its revenues from the sale of its products and 16% and 14% of its revenues from services, respectively. Service revenues generally correlate to revenues from product sales because increased product sales typically generate increased demand for technical advisory services during installation and rental of running tools. The Company has substantial international operations, with approximately 78% and 69% of its revenues derived from foreign sales for the three months ended September 30, 2012 and 2011, respectively, and 74% and 70% for the nine months ended September 30, 2012 and 2011, respectively. Substantially all of the Company’s domestic revenue relates to operations in the U.S. Gulf of Mexico. Domestic revenue approximated 22% and 31%, respectively, of the Company’s total revenues for the three months ended September 30, 2012 and 2011 and 26% and 30% for the nine months ended September 30, 2012 and 2011, respectively.

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

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

The Company accounts for larger and more complex projects that have relatively longer manufacturing time frames on a percentage-of-completion basis. For the nine months ended September 30, 2012, 19 projects representing approximately 19.1% of the Company’s total revenue and approximately 22.3% of its product revenues were accounted for using percentage-of-completion accounting, compared to 16 projects representing approximately 18.8% of the Company’s total revenue and 22.4% of its product revenue for the first nine months of 2011. This percentage may fluctuate in the future. Revenues accounted for in this manner are generally recognized based upon a calculation of the percentage complete, which is used to determine the revenue earned and the appropriate portion of total estimated cost of sales. Accordingly, price and cost estimates are reviewed

periodically as the work progresses, and adjustments proportionate to the percent complete are reflected in the period when such estimates are revised. Losses, if any, are recorded in full in the period they become known. Amounts received from customers in excess of revenues recognized are classified as a current liability.

The following table sets forth, for the periods indicated, a breakdown of the Company’s U.S. Gulf of Mexico products and services revenues:


	Three months ended September 30,				Nine months ended September 30,
	2012		2011		2012		2011
	(In millions)
Revenues:
Products
Subsea equipment	$	27.3	$	29.2	$	90.9	$	67.2
Surface equipment		0.1		—		0.3		0.2
Offshore rig equipment		3.6		11.8		17.1		44.8

Total products		31.0		41.0		108.3		112.2
Services		11.9		6.9		35.7		17.6

Total Gulf of Mexico revenues	$	42.9	$	47.9	$	144.0	$	129.8

As a result of the U.S. Gulf of Mexico drilling moratorium and subsequent delays in the issuance of permits, many of the Company’s customers in the U.S. Gulf of Mexico still have unused inventory of the Company’s subsea wellhead equipment. However, the number of floating rigs actively drilling in the U.S. Gulf of Mexico has steadily increased and is currently greater than pre-moratorium levels, which should increase the Company’s opportunities for greater subsea equipment revenues in the future. The Company believes that the effects of the U.S. Gulf of Mexico drilling moratorium and related permitting delays have had little or no impact on revenues related to offshore rig equipment. The change in offshore rig equipment revenues in the nine months ended September 30, 2012 compared to the nine months ended September 30, 2011 resulted primarily from a reduction of revenues from projects accounted for under the percentage-of-completion method. The Company’s U.S. Gulf of Mexico service revenues, which decreased in each quarter of 2010 as a percentage of worldwide revenues as a result of the U.S. Gulf of Mexico drilling moratorium, have increased since the beginning of 2011. For the quarter ending March 31, 2011, U.S. Gulf of Mexico service revenues were 3.2% of total worldwide revenue and have increased to 6.2% of total worldwide revenue for the quarter ended September 30, 2012. The Company will continue to monitor any remaining effects of the U.S. drilling moratorium and the subsequent permitting delays on its ongoing business operations.

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, costs from projects accounted for under the percentage-of-completion method 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-based compensation 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 consolidated 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 September 30,						Nine months ended September 30,
	2012			2011			2012			2011
Revenues:
Products		83.6	%		86.6	%		83.7	%		85.9	%
Services		16.4			13.4			16.3			14.1

Total revenues:		100.0			100.0			100.0			100.0
Cost of sales:
Products		54.3			52.1			52.8			50.3
Services		9.5			10.1			9.1			9.9

Total cost of sales:		63.8			62.2			61.9			60.2
Selling, general and administrative expenses		11.0			11.9			10.8			12.3
Engineering and product development expenses		5.0			5.5			5.3			6.0
Operating income		20.2			20.4			22.0			21.5
Interest income		0.1			0.1			0.1			0.1
Interest expense		—			—			—			—

Income before income taxes		20.3			20.5			22.1			21.6
Income tax provision		4.8			5.5			5.9			6.0

Net income		15.5	%		15.0	%		16.2	%		15.6	%

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


	Three months ended September 30,				Nine months ended September 30,
	2012		2011		2012		2011
	(In millions)
Revenues:
Products
Subsea equipment	$	138.7	$	116.3	$	385.9	$	302.1
Surface equipment		9.2		6.3		30.3		16.4
Offshore rig equipment		11.6		11.6		39.7		50.4

Total products		159.5		134.2		455.9		368.9
Services		31.4		20.8		88.7		60.8

Total revenues	$	190.9	$	155.0	$	544.6	$	429.7

Three Months Ended September 30, 2012 Compared to Three Months Ended September 30, 2011

Revenues. Revenues increased by $35.9 million, or approximately 23.2%, to $190.9 million in the three months ended September 30, 2012 from $155.0 million in the three months ended September 30, 2011. Product revenues increased by approximately $25.3 million for the three months ended September 30, 2012 compared to the same period in 2011 as a result of increased revenues of $22.4 million in subsea equipment and $2.9 million in surface equipment. Offshore rig equipment remained constant at $11.6 million. Product revenues increased in the Western Hemisphere by $4.9 million, in the Eastern Hemisphere by $7.0 million and in Asia-Pacific by $13.4 million. In any given time period, the revenues recognized between the various product lines will vary depending upon the completion status of the projects accounted for under the percentage-of-completion accounting method,

market conditions and customer demand. Service revenues increased by approximately $10.6 million from higher service revenues in the Western Hemisphere of $6.4 million, the Eastern Hemisphere of $2.5 million and Asia-Pacific of $1.7 million. The majority of the increases in service revenues related to an increase in technical advisory services, partially offset by a decrease in reconditioning services.

Cost of Sales. Cost of sales increased by $25.3 million, or approximately 26.2%, to $121.8 million for the three months ended September 30, 2012 from $96.5 million for the same period in 2011. As a percentage of revenues, cost of sales were approximately 63.8% and 62.2% for the three-month period ended September 30, 2012 and 2011, respectively. The increase in cost of sales as a percentage of revenues resulted primarily from changes in the product mix and increases in unabsorbed manufacturing overhead expenses.

Selling, General and Administrative Expenses. For the three months ended September 30, 2012, selling, general and administrative expenses increased by approximately $2.5 million, or 13.7%, to $20.8 million from $18.3 million for the same period in 2011. The increase in selling, general and administrative expenses was primarily due to the effect of foreign currency transactions and increased personnel and related expenses. The Company experienced approximately $2.4 million in foreign currency transaction losses in the third quarter of 2012 as compared to $961,000 in foreign currency transaction losses in the third quarter of 2011. Stock option and awards expense was approximately $300,000 higher for the three months ended September 30, 2012 as compared to the same period in 2011 which was substantially offset by a decrease in legal expenses. Selling, general and administrative expenses as a percentage of revenues decreased to 11.0% in 2012 from 11.9% in 2011.

Engineering and Product Development Expenses. For the three months ended September 30, 2012, engineering and product development expenses increased by approximately $1.1 million, or 12.9%, to $9.6 million from $8.5 million in the same period of 2011. Engineering and product development staffs have been increased to meet the demands of the higher backlog related to long-term projects. Engineering and product development expenses as a percentage of revenues decreased to 5.0% in 2012 from 5.5% in 2011.

Interest Income. Interest income for the three months ended September 30, 2012 was approximately $148,000 as compared to $84,000 for the three-month period ended September 30, 2011. The Company continues to keep the majority of its short-term investments in funds which invest in U.S. Treasury obligations.

Interest expense . Interest expense for the three months ended September 30, 2012 was $7,000 compared to $15,000 for the same period in 2011.

Income tax provision . Income tax expense for the three months ended September 30, 2012 was $9.2 million on income before taxes of $38.9 million, resulting in an effective income tax rate of approximately 24%. Income tax expense for the three months ended September 30, 2011 was $8.6 million on income before taxes of $31.8 million, resulting in an effective tax rate of approximately 27%. The change in the effective income tax rate reflects the difference in income before income taxes among the Company’s three geographic areas, which have different income tax rates.

Net Income. Net income was approximately $29.7 million for the three months ended September 30, 2012 and $23.3 million for the same period in 2011, for the reasons set forth above.

Nine Months Ended September 30, 2012 Compared to Nine Months Ended September 30, 2011.

Revenues. Revenues increased by $114.9 million, or approximately 26.7%, to $544.6 million in the nine months ended September 30, 2012 from $429.7 million in the nine months ended September 30, 2011. Product revenues increased by approximately $87.0 million for the nine months ended September 30, 2012 compared to the same period in 2011 as a result of increased revenues of $83.8 million in subsea equipment, $13.9 million in surface equipment, partially offset by a decrease of $10.7 million in offshore rig equipment. Product revenues increased in the Western Hemisphere by $16.7 million, the Eastern Hemisphere by $30.6 million and $39.7 million in Asia-Pacific. Service revenues increased by approximately $27.9 million, from increased service

revenues in the Western Hemisphere of $23.0 million, the Eastern Hemisphere of $4.7 million and $200,000 in Asia-Pacific. The majority of the increase in service revenues related to an increase in technical advisory services and the rental of running tools.

Cost of Sales. Cost of sales increased by $78.6 million, or approximately 30.4%, to $337.2 million for the nine months ended September 30, 2012 from $258.6 million for the same period in 2011. As a percentage of revenues, cost of sales were approximately 61.9% and 60.2% for the nine-month periods ending September 30, 2012 and 2011, respectively. The increase in cost of sales as a percentage of revenues resulted primarily from changes in the product mix.

Selling, General and Administrative Expenses. For the nine months ended September 30, 2012, selling, general and administrative expenses increased by approximately $6.0 million, or11.4%, to $58.6 million from $52.6 million for the same period in 2011. The increase in selling, general and administrative expenses was primarily due to the effect of foreign currency transactions and increased personnel and related expenses. The Company experienced approximately $4.3 million in foreign currency transaction losses in the first nine months of 2012 compared to $2.9 million in foreign currency transaction losses in the first nine months of 2011. Stock option and awards expense was approximately $500,000 greater for the nine months ended September 30, 2012 as compared to the same period in 2011. Selling, general and administrative expenses as a percentage of revenues decreased to 10.8% in 2012 from 12.3% in 2011.

Engineering and Product Development Expenses. For the nine months ended September 30, 2012, engineering and product development expenses increased by $2.9 million, or approximately 11.3%, to $28.6 million from $25.7 million in the same period of 2011. Engineering and product development expenses as a percentage of revenues totaled 5.3% in 2012 and 6.0% in 2011. Engineering and product development staffs have increased due to the higher backlog related to long-term projects.

Interest Income. Interest income for the nine months ended September 30, 2012 was $329,000 as compared to $269,000 for the nine months ended September 30, 2011. The Company continues to keep the majority of its short-term investments in funds which invest in U.S. Treasury obligations.

Interest Expense. Interest expense for the nine months ended September 30, 2012 was $21,000 compared to $37,000 for the same period in 2011.

Income tax provision . Income tax expense for the nine months ended September 30, 2012 was $32.2 million on income before taxes of $120.4 million, resulting in an effective income tax rate of approximately 27%. Income tax expense for the nine months ended September 30, 2011 was $25.9 million on income before taxes of $93.0 million, resulting in an effective income tax rate of approximately 28%.

Net Income. Net income was approximately $88.3 million for the nine months ended September 30, 2012 and $67.1 million for the same period in 2011, for the reasons set forth above.

Liquidity and Capital Resources

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


	Nine months ended September 30,
	2012			2011
	(In thousands)
Operating activities	$	(9,916	)	$	51,245
Investing activities		(39,303	)		(42,856	)
Financing activities		11,225			444

		(37,994	)		8,833
Effect of exchange rate changes on cash activities		2,839			889

Increase (decrease) in cash and cash equivalents	$	(35,155	)	$	9,722

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

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

During the nine months ended September 30, 2012, the Company used $9.9 million of cash from operations as compared to generating $51.2 million for the same period in 2011. Cash totaling approximately $121.3 was used during the first nine months of 2012 due to increases in operating assets and liabilities, compared to $34.8 million that was used during the same period in 2011. The increase in operating assets and liabilities during the first nine months of 2012 primarily reflected an increase in trade receivables of $59.5 million, due primarily to a $36.4 million increase in unbilled revenues. Inventory increased by approximately $70.2 million due to higher balances in raw materials and finished goods to accommodate the higher backlog requirements. Trade accounts payable and accrued expenses were higher by approximately $4.2 million.

Capital expenditures by the Company were $40.6 million and $45.1 million in the first nine months of 2012 and 2011, respectively. Capital expenditures in 2012 and 2011 included expanding manufacturing facilities in the Asia-Pacific, Eastern and Western Hemispheres and increased expenditures on machinery and equipment and running tools due to expanded operations. The capital expenditures for the first nine months of 2012 were primarily $7.3 million for facilities, $21.3 million for machinery and equipment, $9.5 million for running tools and other expenditures of $2.5 million.

As of September 30, 2012, the Company has no commercial lending arrangement or lines of credit. The Company believes that cash generated from operations plus cash on hand will be sufficient to fund operations, working capital needs and anticipated capital expenditure requirements for the next twelve months. However, any significant future declines in hydrocarbon prices, catastrophic events or significant changes in regulations affecting the Company or its customers could have a material adverse effect on the Company’s liquidity. Should market conditions result in unexpected cash requirements, the Company believes that borrowing from commercial lending institutions would be available and adequate to meet such requirements.

On June 19, 2012, the Company announced that its Board of Directors authorized a stock repurchase plan under which the Company can repurchase up to $100 million of its common stock. The repurchase program has no expiration date. As of September 30, 2012, no shares had been repurchased.

Off-Balance Sheet Arrangements

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

Critical Accounting Policies

Refer to our Annual Report on Form 10-K for the year ended December 31, 2011 for a discussion of our critical accounting policies. During the nine months ended September 30, 2012, there were no material changes in our judgments and assumptions associated with the development of our critical accounting policies.

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

The Company is currently exposed to certain market risks related to interest rate changes on its short-term investments and fluctuations in foreign exchange rates. The Company does not engage in any material hedging transactions, forward contracts or currency trading which could mitigate the market risks inherent in such transactions. There have been no material changes in market risks for the Company from December 31, 2011.

Foreign Exchange Rate Risk

Through its subsidiaries, the Company conducts a portion of its business in currencies other than the United States dollar, principally the British pound sterling and to a lesser extent, the Brazilian real. The Company experienced a foreign currency pre-tax loss of approximately $2.4 million and $4.3 million during the three and nine months ended September 30, 2012, respectively, compared to a $961,000 and a $2.9 million pre-tax loss for the three and nine month periods ended September 30, 2011, respectively. Historically, the Company’s foreign currency gains and losses have not been significant. However, when significant disparities between the British pound sterling and the U.S. dollar or the Brazilian real and the U.S. dollar occur, there can be no assurance that the Company will be able to protect itself against such currency fluctuations.

Item 4.

Controls and Procedures

In accordance with Exchange Act Rules 13a-15 and 15d-15, the Company carried out an evaluation, under the supervision and with the participation of management, including the Company’s Chief Executive Officer and Chief Financial Officer, of the effectiveness of the Company’s disclosure controls and procedures as of the end of the period covered by this report. Based on that evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective as of September 30, 2012 to provide reasonable assurance that information required to be disclosed in the Company’s reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and such information is accumulated and communicated to management, including the Company’s Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding disclosure.

“Management’s Annual Report on Internal Control over Financial Reporting” appears on page 47 of the Company’s Annual Report on Form 10-K for the year ended December 31, 2011.

There has been no change in the Company’s internal controls over financial reporting that occurred during the quarter ended September 30, 2012 that has materially affected, or is reasonably likely to materially affect, the Company’s internal controls over financial reporting.

PART II—OTHER INFORMATION

Item 1.

Legal Proceedings.

In December 2010 and January 2011, the Company’s Brazilian subsidiary was served with assessments from the disallowance of netting certain import and export taxes. The Company is vigorously contesting these assessments.

In addition, the Company is involved in lawsuits filed as a result of the April 2010 Deepwater Horizon incident in the U.S. Gulf of Mexico. The judge presiding over the multi-district litigation proceedings for the Deepwater Horizon incident dismissed all claims consolidated against the Company in those proceedings in January 2012 and issued a final judgment ordering the same in April 2012, but new lawsuits may be filed against the Company in the future.

For a further description of the Company’s legal proceedings, see “Commitments and Contingencies,” Note 8 to the Notes to Condensed Consolidated Financial Statements.

Item 1A.

Risk Factors.

There have been no material changes from the risk factors disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2011.

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds.

None.

FORWARD LOOKING STATEMENTS

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

•

future operating results and cash flow;

•

scheduled, budgeted and other future capital expenditures;

•

working capital requirements;

•

the availability of expected sources of liquidity;

•

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

•

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

•

the Company’s ability to develop new applications for its technologies;

•

the exploration, development and production activities of the Company’s customers;

•

compliance with present and future environmental regulations and costs associated with environmentally related penalties, capital expenditures, remedial actions and proceedings;

•

effects of pending legal proceedings; and

•

future operations, financial results, business plans and cash needs.

These statements are based on assumptions and analyses in light of the Company’s experience and perception of historical trends, current conditions, expected future developments and other factors the Company believes were appropriate in the circumstances when the statements were made. Forward-looking statements by their nature involve substantial risks and uncertainties that could significantly impact expected results, and actual future results could differ materially from those described in such statements. While it is not possible to identify all factors, the Company continues to face many risks and uncertainties. Among the factors that could cause actual future results to differ materially are the risks and uncertainties discussed under “Item 1A. Risk Factors” in Part I of the Company’s Annual Report on Form 10-K for the year ended December 31, 2011 and the following:

•

the volatility of oil and natural gas prices;

•

the cyclical nature of the oil and gas industry;

•

uncertainties associated with the United States and worldwide economies;

•

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

•

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

•

uncertainties regarding future oil and gas exploration and production activities in the U.S. Gulf of Mexico and elsewhere, including new regulations, customs requirements and product testing requirements;

•

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

•

the Company’s reliance on product development;

•

technological developments;

•

the Company’s reliance on third-party technologies;

•

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

•

the Company’s reliance on sources of raw materials;

•

impact of environmental matters, including future environmental regulations;

•

competitive products and pricing pressures;

•

fluctuations in foreign currency;

•

the Company’s reliance on significant customers;

•

creditworthiness of the Company’s customers;

•

fixed price contracts;

•

changes in general economic, market or business conditions;

•

access to capital markets;

•

negative outcome of litigation, threatened litigation or government proceedings;

•

terrorists threats or acts, war and civil disturbances; and

•

the interpretation of foreign tax laws with respect to our foreign subsidiaries.

Many of such factors are beyond the Company’s ability to control or predict. Any of the factors, or a combination of these factors, could materially affect the Company’s future results of operations and the ultimate accuracy of the forward-looking statements. Management cautions against putting undue reliance on forward-looking statements or projecting any future results based on such statements or present or prior earnings levels. Every forward-looking statement speaks only as of the date of the particular statement, and the Company undertakes no obligation to publicly update or revise any forward-looking statement.

Item

The following exhibits are filed herewith:


*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	—	Certificate of Designations of Series A Junior Participating Preferred Stock of the Company (incorporated herein by reference to Exhibit 3.1 to the Company’s report on Form 8-K dated November 25, 2008).

*3.3	—	Amended and Restated Bylaws of the Company (incorporated herein by reference to Exhibit 3.1 to the Company’s report on Form 8-K filed January 17, 2012).

*4.1	—	Form of certificate representing Common Stock (incorporated herein by reference to Exhibit 4.2 to the Company’s Registration Statement on Form S-1 (Registration No. 333-33447).

*4.2	—	Rights Agreement dated as of November 24, 2008 between Dril-Quip, Inc. and Mellon Investor Services LLC, as Rights Agent (incorporated herein by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K filed on November 25, 2008).

10.1	—	Contract for Goods and Services dated August 20, 2012 between Petroleo Brasileiro S.A. and Dril-Quip, do Brasil LTDA (English translation).

*+10.2	—	2012 Performance Unit Award Agreement (incorporated herein by reference to Exhibit 10.1 to the Company’s report on Form 8-K filed on October 19, 2012).

31.1	—	Rule 13a-14(a)/15d-14(a) Certification of Blake T. DeBerry.

31.2	—	Rule 13a-14(a)/15d-14(a) Certification of Jerry M. Brooks.

32.1	—	Section 1350 Certification of Blake T. DeBerry.

32.2	—	Section 1350 Certification of Jerry M. Brooks.

101.INS	—	XBRL Instance Document

101.SCH	—	XBRL Schema Document

101.CAL	—	XBRL Calculation Document

101.DEF	—	XBRL Definition Linkbase Document

101.LAB	—	XBRL Label Linkbase Document

101.PRE	—	XBRL Presentation Linkbase Document

*	Incorporated herein by reference as indicated.

+	Management contract or compensatory plan or arrangement.

SIGNATURE

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


DRIL-QUIP, INC.

B Y :		/ S / J ERRY M. B ROOKS
		Jerry M. Brooks,
		Vice President—Finance and Chief Financial Officer (Principal Accounting Officer and Duly Authorized Signatory)

Date: November 8, 2012

Exhibit 10.1

[Translation]

CONTRACT

1.	GENERAL CONDITIONS:

1.1	This material supply contract is in accordance with decree 2745/98 of August 24, 1998 and ruled by the Materials Supply Conditions (CFM)—2005 revised on November 2, 2011, complemented by the notes of this Contract.

1.2	All stages of this supply – contract critical analysis, fabrication, delivery and technical assistance – must be performed in accordance with Norm ISO 9001.

1.3	Petrobras will deem the contract as accepted by the supplier whenever such, within a term of 10 (ten) days of the availability date of this contract by Petrobras, does not communicate in writing disagreement with its clauses.

1.4	The below listed documents are an integral part of this Contract: PROPOSAL #PPH-1123 Rev. SR: Quotation request CFC8.002/11; Circular letters and annexes; Minutes and e-mails regarding the negotiation; Sheet “TYPE OF INSPECTION_GLOBAL 2011_2S-01-2012 REV l.xls”; Sheet “Contract summary 4S0036880S”.

1.5	Upon eventual discrepancies between the supplier proposal conditions and the “CFM-200S revision 2 of Nov/2011,” the conditions of “CFM-2D0S revised on Nov 2/2011” prevail.

1.6

All of the documents (letters, e-mails, fax, collection bills, invoices etc.) must contain the contract/order numbers(ZRCT)/item/purchase order. Petrobras may use, at its own discretion, second or third parties with whom it maintains confidentiality to carry out technical analysis of the project and fabrication, verified, audit, etc, as to what regards projects and contracts.

1.7	Upon the material presenting divergence in relation to the “Order,” specification, damage, absence, excess and documentation, Petrobras will notify the supplier and will make available such materials for removal.

1.8

We inform there will be no entry authorization at Petrobras installations for materials whose CLM’s are not annexed to the collection bills, as specified in the Purchase Orders. Thus the deliveries that do not meet the above-referred conditions must be returned to the original installations, for adequacy of the delivery conditions to contractual demands. Transportation costs, for return as well as the new shipment, are an exclusive responsibility of the goods’ supplier. This clause does not apply to items released by inspection.

1.9	Petrobras reserves the right to halt invoice payments, whose materials are object of non-compliance in relation to the description of the material or clauses of the respective “Order.”

1.10	Upon spare parts supplies, the supplier will be responsible for same, with the respective PN (part number).

1.11	All spare parts referred in this Contract refer to the spare parts of installation.

1.12

All materials/equipment must be guaranteed against raw-material and fabrication defect for a period of 12 (twelve) months of operation or 18 (eighteen) months after supply, prevailing the event that happens first. Defects or project tasks, fabrication, inputs and labor, must be corrected according to item 10 of the CFM 2005, free of burden to Petrobras.

1.13	All expenses resulting from the supply or installation of new parts or accessories under Guarantee (according to item 10 of the CFM 2005), inclusive the transport to the delivery location, when necessary, will be incurred by the supplier.

1.14	The term of this contract will be of 1,440 days, with permission for extension for an equal term agreed-upon.

1.15	Effective purchase commitment: 80% (eighty percent) of the total contract value.

1.16	The manufacturing capacity of this contract is based on the statement omitted by the contractor dated July 15, 2011, rectified by e-mail of March 29, 2012, and is an integral part of this Contract.

1.17	The subsea wellhead systems (SCPS) object of this contract are described as follows:

(a)

16 3/4” x 15’ x 10 Ksi including tools = 50 SCPS (of items 20 to 610)

(b)

16 3/4” x l6 5/8” x l0 Ksi including tools = 20 SCPS (of items 620 to 1740)

(c)

16 3/4” x l6 5/8” x l5 Ksi including tools = 16 SCPS (of items 1750 to 2580)

(d)

18 3/4” x l6 5/8 x 20 x l0 Ksi including tools = 50 SCPS (of items 2590 to 3500)

(e)

18 3/4” x l8 5/8” x 20-x Ksi including tools = 53 SCPS (of items 3510 to 5020)

(f)

18 3/4” x l8 5/8” x 22” x 15 Ksi Full Bore including tools = 40 SCPS (of items 5030 to 6760)

2.	IDENTIFICATION OF VOLUMES FOR THE CONTRACT

2.1	The supplier must provide the material packaged and identified, indicating the following on the package:

—Order number:

—Addressee of the material:

—Product name:

3.	TECHNICAL DOCUMENTATION FOR THE CONTRACT

3.1

The terms for presentation of the project drawings for approval by Petrobras are those reported in Sheet “Contract summary 4600368806” annexed to this contract, counted as of the order issuance date. The items of this contract that will require presentation of the project drawings for Petrobras approval are identified in this document, which also identifies the items for which such drawing presentation will be necessary. All project drawings, whether presented or not for Petrobras approval, will be inserted into the manual of the respective wellhead system.

3.2	The technical documents’ approval term or presentation of the comments by Petrobras/designer will be 30 (thirty) straight days as of the reception date.

3.3	In the event the technical documents are released with comments, the supplier must revise such and re-present them within the maximum term of 30 days after presentation of the comments.

3.3.1

The drawings must be approved by Petrobras, limited to a maximum of three presentations (AO) by the contractor.

3.4

The technical documentation in accordance with the requirements in the KM must be directly forwarded to the E&P-CPM/CMP-SPO/SP/CAEI’, and with which the technical aspects involved are regarded. Copy of the forwarding document must be sent to the contract manager: PETROBRAS/EKP-SERV/US-CONT/CKP/CKXC Name: Ricardo Bethlem Monteiro E-MAIL: ricardo.bethlem@petrobras.com.br TELEPHONE: (21) 2144-1044

TAXES

4.1	The information on taxes inserted in this CONTRACT originate from the supplier’s statements, assuming total responsibility for such, inclusive for eventual burdens resulting from the stated information.

4.2

PETROBRAS/E&P-SERV/US-CONT/CMP/CMIC is not responsible for delay in invoice payments, in the event of errors in information regarding rates, by the supplier. Upon changes in legislation granting incentives with retroactive date, the supplier must return to Petrobras such amounts paid, regarding IPI, ICMS, PIS/PASEP, COFINS or any others, as called for in legislation, allowing discount of credits that must be returned, at the prices of the items of this order includes PIS/COFINS at a rate of 9.25%.

5.	CONTRACT SCHEDULE

5.1	In up to 30 days after the issuance date of the contract, the supplier must present to the contract manager the below listed documentation for approval:

(a)

letter presenting the manager/leader of the contract, indicating those responsible for coordination of the engagement area.

(b)

The order execution schedule (“benchmark schedule”), containing the main events of supply, such as project, input procurement, fabrication stages, inspection, transport plan, etc, for analysis and eventual comments by Petrobras. Any later alterations must be presented immediately, in the manner of revision, in compliance with the same previous procedure.

(c)

“S” curve of physical advance for supply in accordance with the above-referred schedule, where the line of orders must contemplate the realization percentage or of abscissas of months regarding the contractual term.

6	RESTATEMENT

6.1	The equipment supply prices will be readjusted in accordance with the following formula, with its application being suspended for a period of 1 (one) year as of the base date or shorter period, in the event legislation authorizes reduction of such period:

6.1.1

The prices must be quoted in R$ and restatement will be in accordance with the calculation formula set out below, following a period of 12 months in relation to the base date:

Restatement factor = {[(ABDIB/ABDIB) x 0,45] + [(col 30/col 30”) x 0,25 + VPI) whereas; VPI = VPOFF—VCHRE + VMPI vpoff i 0,12 x d/d» x kppi/ppi”] x 0,8 * [crospi/crdspi0] x 0,21] vchre = 0,10 X d/d» X [[ppi/ppi») X 0,60— (crdspi/crdspi”) x 0,4)] vmpi = 0,06 x d/d” x [cruspi/crdspi”) whereas: vpoff = variation of prices for pack-offs and sealing elements procured overseas. vchre = variation of prices for casing hangers with special threads procured overseas. vmpi = variation of prices for imported inputs. abdib = mechanical machinery with burdens, regarding the event date. abdib = mechanical machinery with burdens, regarding the base-date. col. 30 = series 1006823 – basic metallurgy of fgv, regarding the event date. col. 30a = series 1006823 – basic metallurgy of fgv, regarding the base-date d = PTAX BAcen dollar rate, regarding the event date. d = PTAX BAcen dollar rate, regarding the base-date. ppl = MO index of industry for mining and oil equipment In the USA, regarding the event date. ppl = MO index of industry for mining and oil equipment in the USA, regarding the base-date.—ppi: producer price index for mining and oil & gas field machinery manufacturing”—code: pcu33313-33313 (source: Bureau of Labor Statistics, quote: www.bls.gov/ppl/lldata ) cruspi = steel price index, regarding the event date. cruspi” = steel price index, regarding the base-date.

7.	INVOICING/PAYMENT

7.1	All provisions for shipping and transport of the materials of this contract are full responsibility of the supplier.

7.2	The supplier is responsible for the follow-up of invoice payments within the agreed terms. Upon identification of outstanding payments, the supplier must contact the contract manager via fax or e-mail.

7.3	For payment processing purposes all such documents listed below must be annexed to the invoices:

7.4 (a) in the event of shipment for industrialization, sale for future delivery or additional invoices, deliver letter with the first copy of the invoice.

(b)

Additional invoices corresponding to amounts already paid against receipt (upon anticipation), evidencing of compliance of the event to which final payment is conditioned (technical documentation, manuals, etc.), if applicable.

7.5	The following documents must be presented to the contract manager for purposes of payment regarding anticipation:

—anticipation collection documents;

—copy of event realization evidence document to which payment is conditioned.

7.6	Payment of the anticipation will only be carried out 30 (thirty) days after presentation of the collection documents.

7.7	The anticipation collection document must be presented to the payment entity at Petrobras, indicated in the purchase order together with copy of the event realization evidence document to which payment is conditioned.

7.8

Collection bills, invoices, receipts or event compliance evidencing documents must indicate the purchase order number, corresponding items or bank data and must refer to a single order, under penalty of return or recount of the payment term. The supplier must forward the invoices or receipts directly to the address set out below, which must compulsorily indicate the following: Bank name; agency name and code; payment venue; current account number; Address for forwarding of payment documentation: Petróleo Brasileiro S/A.—E&P-SERV/US-CONT/CMP Av. Chile,330—19» andar—centro cep: 20.031-170—Rio de Janeiro—RJ—Brazil

7.9

We inform that, for ICMS collection purposes, the invoices must be issued as follows: In the “recipient” field of the invoice, the below listed Petrobras entity: Petróleo Brasileiro S.A.—Petrobras Rod. Amaral Peixoto, 11.000—cep 27925-290—Imboassica—Macaé/RJ CGC: 33.000.167/1055-58 ie: 80.933.460 Material delivery site: PETROBRAS/E*P-SERV/US-TA/ARM-reception: Rod. Amaral Peixoto, 11.000—cep 27925-290—Imboassica—Macaé/RJ CGC: 33.000.167/1055-58 ie: 80,933.360

7.10	For payment purposes, Petrobras will consider such bank data reported in the invoice, even if same are in disagreement with the information set out in our records. The supplier is fully responsible for referred information.

7.11	The absence of any documents requested or omission of those specified, will impede continuation of the payment process, and Petrobras may at its own opinion, return all the documentation for new presentation, with new start of the stipulated payment term.

7.12	No financial compensation is due by Petrobras for the payment term.

8	PAYMENT CONDITION

(a)

20% (twenty percent) of the items installment value, free of taxes, of the Purchase Order regarding this Contract will be paid 30 (thirty) days after correct presentation of the invoice documentation with confirmation of approval by the contract manager regarding compliance with the following events set out below: -Evidence of procurement of all materials set-out below regarding referred SCPS:

Consumables:—Forged Body

Linings:—Rod lining;—Casing forging.

Imported items:—CVU, CVE

Test base:—Structure (pod pipes or plates >= 2” thickness)

(b)

10% (ten percent) of the item’s installment value, free of taxes, of the Purchase Order regarding this Contract will be paid 30 (thirty) days after correct presentation of the invoicing documentation with confirmation of approval by the contract manager, regarding compliance with the following events set out below:—Evidence of reception of the inputs referred in item “(o)”, regarding referred SCPS.

(c)

Contractual balance (70% remaining) of the delivered material value will be paid 30 (thirty) days after correct presentation of the collection documentation, entailed to delivery of such material, inclusive all technical documentation required.

8.1

The supplier’s payment order will be presented to Petrobras in writing and must be accompanied by an invoice or receipt describing, as applicable, events complied with, goods delivered or services performed or through lading documents in accordance with Part 14 of the Materials Supply Conditions after compliance with the remaining obligations established in the contract/ZRCT order.

8.2	Release of the payment in the conditions referred in points a) and b) of this item 8 are conditioned to registration of this contract and its Respective orders by the contractor, in the PROGREDIR program.

8.3	Upon evidencing contractor delays in excess of 180 days for goods set out in the orders regarding this contract Petrobras may, at its own opinion, recover such anticipations paid to the contractor, without prejudice of the other contractual clauses.

9.	LOCAL CONTENT CERTIFICATE

9.1

Local content (LC) minimum to be met by supplier (Contractor) for one contract-year; -50% of the LC per SCPS, for purchase orders issued during the first contract-year; -60% of the LC per SCPS, for purchase orders issued during the second contract-year; -70% of the LC per SCPS, for purchase orders issued during the third contract-year; -70% of the LC per SCPS, for purchase orders issued during the fourth contract-year;

9.2	The supplier must deliver the local content certificates to Petrobras with records of local content percentage of goods delivered in each invoice. The certificate validity must be in compliance with resolution 36 from ANP of 11.13.2007.

9.3	The supplier bears a maximum term of 60 (sixty) straight days after delivery of referred good for presentation of the Local Content Certificate to Petrobras’s contract manager.

9.4	The supplier is responsible for contracting a certification society accredited by ANP. Identification of the accredited certification societies must be carried out at ANP’s site at: ( vniw.anp.gov.br ).

9.5	The method set out in Annex III of Resolution ANP 35 of 11/13/07 must be adopted for measurement and evidencing of the Local content percentage reported to Petrobras through the certificate.

9.6	The goods supplier will provide the local content certification for its products through the certification societies accredited by ANP and will make available to referred societies all the information needed for gauging and evidencing of the local content, if needed, at ANP.

9.7	The supplier will be solely responsible for the veracity and reliability of such information presented to Petrobras, ANP and the certification societies accredited by ANP that were contracted to establish the local content level regarding the supplied good.

9.8

Upon Petrobras being assessed by ANP for non-compliance with the local content commitment, once the percentage of local content set out in the Local Content Certificates delivered by the supplier (Contractor) being not true or incorrect due to faulty information rendered by the supplier (contractor), the certification societies, Petrobras or ANP, the supplier (contractor) will be solely responsible for payment, to Petrobras, of the difference amount between the local content percentage of the good (service performance) effectively calculated and the faulty percentage reported in such certificate delivered by the supplier (contractor) to Petrobras.

9.9	There will be withholding of 3% of the item purchase order regarding delivery of the local content certificate.

9.9.1

The term of 30 days for payment of the withholding starts as of approval of the withholding release by the contract manager.

9.10	Assessment for non-compliance with the Contracted Minimum Percentage:

9.10.1

Upon the percentage of local content not realized (NR%) being below 55% of the minimum local content value to be met by the supplier (contractor), the penalty (M%) will be of 60% on the value of local content not realized, according to the following formula: If 0 < NR(%) < 55% M(%) = 50(%)

9.10.2

Upon the percentage of local content not realized (NR%) being equal or in excess of 55% of the minimum local content value to be met by the supplier (contractor) the penalty will be increscent starting at 50% and reaching 100% of the minimum local content value to be met by the supplier (contractor), in the event the percentage of local content not realized is 100%, according to the following formula: If NR(%) >= 55% M(%) =1,113 NR(%) -14,285

9.10.3

Collection will be through collection bill to be discounted from any supplier (contractor) invoice at Petrobras.

10	PENALTY AND CANCELLATION

10.1

Upon non-compliance with the delivery term the supplier is subject to assessment of such fine called for in clauses 15.1 to 15.7 of the “CFM—Material Supply Conditions 2005 revision 2 of November 2011”, in the amount of 0.10% (ten percentage one hundredths) daily, of the price of such material object of non-compliance, limited to 10% (ten percent) of the total order value regarding the Contract. 10.2. In addition to the fine, negative points will be recorded at the SGF (Suppliers Management System) which may imply restrictions to future consultation.

10.3	The penalty will be incident of the installment of the outstanding item.

11	CONTRACT CANCELLATION OR ORDER WITH REFERENCE TO THE CONTRACT (ORDER ZRCT).

11.1	Petrobras may, without prejudice to the other contractual penalties, rescind the contract or ZRCT Order according to the reasons foreseen in CFM/2005.

11.2

Upon cancellation for reasons attributable to the supplier, same will be subject to fine assessment as called for in item15.5 of the CFM. 11.3. The cancellation fine will be assessed on the contract or ZRCT Order total value, represented by 0.10% (ten percentage one hundredths) daily. The period to be considered upon calculation of the fine amount will be such comprised between the Contract or ZRCT Order issuance date and formalization of the rescission (CANCELLATION).”

12	DELIVERY CONDITIONS

12.1	Delivery in installments regarding materials procured regarding this contract will be allowed as long as authorized by the contract manager.

12.2	Anticipated delivery regarding materials procured in the Orders regarding this contract will be allowed as long as authorized by the contract manager.

12.3	Delivery of the materials will be from Monday through Friday from 7 am to 8 pm.

13	DELIVERY TERM

13.1

Terms count as of the date Petrobras makes available the Order regarding the contract for delivery.—New items: 14 months (consumables) = 420 days and 17 months (tools) = 510 days: The new items delivery term will only count as of final approval of the project by Petrobras. The project manager must review the original delivery dates for procurement orders so that the revised delivery dates reflect the above-referred terms, counted as of the date of final approval for each item. Upon contractor non-compliance with the agreed-upon terms for presentation of the projects the exceeded days will be discounted from the delivery terms of the items (minutes of the meeting on 09/30/2011). Items already previously supplied: 10 months (consumables) = 300 days and 12 months (tools) = 360 days; There will be no need of presenting drawing for technical approval from Petrobras as to what regards these items. Items in inconel: 20 months = 600 days.

13.2	Detailing of the terms per items are listed in sheet “contract summary 4600368806” annexed to this contract. Such terms must be listed upon issuance of the procurement orders.

14	CONTRACT INSPECTION

14.1	The inspection called for the materials procured for this contract will be in accordance with the following and must be performed in accordance with the minimum fabrication inspection activities chart, and according to the type of inspection defined in the sheet annexed to this contract.

14.2	INSPECTION “B” (for new items not previously supplied) – According to the items of sheet “TYPE OF INSPECTION_GL0BAL 2011_26-01-2012 REV l.xls” annexed to this contract. 14.2.1. Application of INSPECTION “B” for new test bases (changes) or 1st supply.

14.3	INSPECTION “A” (for items already previously supplied) – Items ordered or already supplied previously in accordance with the items of sheet “TYPE OF INSPECTION GLOBAL 20U_26-01-2012 REV l.xls” annexed to this contract.

14.4	Inspection “L” (Released from inspection – for test bases already previously supplied) – Items ordered or already supplied previously, in compliance with the items of sheet “TYPE OF INSPECTION_GLOBAL 20ll_26-01-2012 REV l.xls” annexed to this contract.

14.5	To identify the items not supplied previously (new) or for those already supplied, there will be consideration of the information contained in sheet – TYPE OF INSPECTION_GLOBAL 2011_26-01-2012 REV l.xls” annexed to this contract.

14.6	Supplier correspondence requesting the inspection must be forwarded directly to the inspection entity designated in the order with copy to the contract manager.

14.7	The inspection will be responsibility of: PETRÓLEO BRASILEIRO S/A—MATERIAIS/CDBS/IF av. ALMIRANTE BARROSO, 81 27º ANDAR RIO DE JANEIRO—CEP: 20030-003 TEL: (21) 3229-1899—FAX: (21) 3229-1837 E-MAIL: inspecaomateriois@petrobras.com.br

14.8

The supplier must forward to the inspection entity or inspection company appointed in the order, with copy to the contract manager, of the Inspection and Tests Plan (PIT—Standard) for approval (inspection type—B”) within a term of up to 30 (thirty) straight days after issuance of the final set/good for fabrication, the inspection entity or inspection company will bear the same term to issue a pronouncement. The supplier must make available for consultation or forward, when requested by the inspection entity, all technical documentation set out in the referred Inspection and Tests Plan (PIT).

14.9	The supplier must inform to the inspection entity or to the inspection company designated, with copy to the contract manager, with minimum anticipation of 05 (five) business days, according to item 7.2 of the CFM PETROBRAS/2005, that the material is available for inspection.

14.10

For suppliers with fabrication installations overseas, the communication must be to the inspection entity with copy to the contact manager, with minimum anticipation of 10 (ten) business days according to item 7.2.1 of the CFM PETROBRAS/2005, that the material is available for inspection.

14.11

Start of the inspection must be within 5 (five) business days according to item 7.2 of the CFM PETROBRAS/2005 or upon overseas supplier 10 (ten) business days according to item 7.2.1 of the CFM PETROBRAS/2005 counted as of the date in which the material is available for inspection.

14.12

Upon the supplier being a retailer or distributor the inspection must be performed by an independent inspection entity contracted by same and previously accepted by Petrobras for execution for the services directly at the original manufacturer of the material according to item 7.2.2 of the CFM PETROERAS/2005. The national inspectors must be qualified at ENGINEERING/SL/SEQUI in Fabrication Inspection and international inspectors must be qualified by entities nationally acknowledged in the country where the material is fabricated in accordance with the requirements of norm EN 45013 (in this case, previous approval from Petrobras is required).

14.13

Petrobras, through the inspection entity designated to follow-up on the process may formally request from the retailer or distributor presentation of the inspection and tests plan (PIT) and/or test procedures defined in the contact to designate the events to be performed by the contracted inspection company according to item 7.2.2.1 of the CFM PETROBRAS/2005.

14.14

The inspection site must be informed upon the summons, containing the full address of the manufacturer and/or supplier, telephone, fax and e-mail. The manufacturer’s contact person name and must be provided jointly with contact means (telephones, e-mail, etc).

14.15

The inspection may be performed at the supplier’s installations. The inspector must receive, free of charge for Petrobras, all technical assistance needed including access to contractual documentation, including drawings, production data and records, certificates and quality reports, according to item 7.3 of the CFM PETROBRAS/2005.

14.16

The material must be accompanied of the Material release Communication and CLK, containing at least the material certificates, quality records and reports issued. Copies of referred documents must be forwarded to the requesting entity. DELIVERED MATERIAL IS SUBJECT TO RECEPTION INSPECTION BY PETROBRAS.

14.16.1

The data book must be delivered in up to 30 (thirty) straight days counted as of reception of the equipment/tools.

14.17

Upon any item inspected or subjected to test not meeting the Material Requirements, Applicable Norms, or Contractual Inspection Requirements Petrobras may reject same and the supplier must replace such rejected item or carry out all changes needed to meet referred demands, free of charge to Petrobras, with the item once again being subjected to inspection and test according to item 7.5 of the CFM PETROBRAS/2005.

14.18

Upon partial or total rejection of the material of this order there will be issuance of the Material Rejection Communication (CRM) by the inspection entity or inspection company designated in the order. Upon need of new inspection as a result of previous CRM issuance the supplier will compensate Petrobras for such inspector attendance costs for its representatives at its installations, including eventual shuttle and accommodation costs according to item 7.3.2 of the CFM PETROBRAS/2005.

15	CONTRACT ADDRESSES

INVOICE PRESENTATION AND PAYMENT LOCATION PETROBRAS S.A. PETROBRAS/E&P-SERV-US-CONT/CMP/CMIC AVENIDA REPÚBLICA DO CHILE, 330 – 19º ANDAR CENTRO—RIO DE JANEIRO—RJ CEP: 20.031-170

16	CONTRACTUAL ALTERATION

16.1

Petrobras/designer comments that the supplier deems to imply changes in the order scope, resulting in extension of the supply term and/or price increases must be notified to Petrobras. Thus the manufacturer must forward to the Contract manager two copies of the “Contractual Changes Order—P.A.C.” within a maximum term of 30 (thirty) straight days, after the request for scope alteration.

16.2

Incorporation of the comments may only be carried out by the supplier after approval from the contract manager, which will take place within a maximum term of 30 (thirty) straight days after presentation of the “P.A.C.”. The comments not communicated within the established term of 30 (thirty) straight days may not, under any circumstance, be object of future claim by the supplier for increase of the term and/or price.

PACKAGING

17.1	The product must arrived duly packaged/preserved so as to ensure the characteristics of same, foreseeing storage for 12 months indoors, although in aggressive atmosphere.

18	OVERALL NOTES

18.1

The contractor is obligated to not use, in all activities related to execution of this instrument, child labor, according to the terms of incise xxxiii of article 7 of the Republic’s Constitution, as well as demand that referred action is adopted in contacts entered into with the suppliers of their inputs and/or service performers, under penalty of contract rescission.

18.2	The contractor is obligated, whenever requested by Petrobras, to issue a written statement that it is compliant or in compliance with such demand contained in the previous item.

18.3

Item 010 of this contract refers only to the quantity of total of systems to be supplied. Diligence By: UPK2 Restatement; Materials with restatement TOTAL CONTRACT VALUE—2.002.873.797,32 (TWO BILLION TWO MILLION EIGHT HUNDRED SEVENTY THREE THOUSAND SEVEN HUNDRED NINETY SEVEN REAIS AND THIRTY TWO CENTS)


PETRÓLEO BRASILEIRO S.A.

By:		/s/ Eduardo Antonio de Souza
Name:		Eduardo Antonio de Souza

By:		/s/ Felipe Fernandes Moreno
Name:		Felipe Fernandes Moreno


DRIL-QUIP, DO BRASIL LTDA

By:		/s/ Corbiniano Fonseca Neto
Name:		Corbiniano Fonseca Neto

[Translation]

PETRÓLEO BRASILEIRO S.A.

PETROBRAS

CONDITIONS OF MATERIAL SUPPLY

CFM

PETROBRAS

CFM—2005

SUMMARY


Part 1—PURPOSE			1
Part 2—DEFINITIONS			1
Part 3—USE OF DOCUMENTS AND CONTRACTUAL INFORMATION			2
Part 4—INDUSTRIAL PROPERTY RIGHTS			2
Part 5—SUPPLIER’S OBLIGATIONS AND LIABILITIES			3
Part 6—PETROBRAS’ OBLIGATIONS AND LIABILITIES			5
Part 7—INSPECTIONS			5
Part 8—PACKING FOR TRANSPORTATION			7
Part 9—DELIVERY			7
Part 10—PROPERTY’S GUARANTEE			10
Part 11—CONTRACTUAL AMENDMENTS			11
Part 12—ASSIGNMENT			11
Part 13—TERMS			12
Part 14—PAYMENTS			12
Part 15—PENALTIES			16
Part 16—TERMINATION OF THE CONTRACT			17
Part 17—HEALTH, SAFETY AND ENVIRONMENT – HSE			19
Part 18—CORPORATE LIABILITY			20
Part 19—PREVAILING LANGUAGE			20
Part 20—APPLICABLE LAW AND JURISDICTION			20
ANNEX I BILL OF LADING FORM			21
ANNEX II INTERNATIONAL BILL OF LADING FORM			23

Part 1—PURPOSE

1.1 To set forth the conditions that regulate the supply of Properties and Services Related to Petrobras.

1.2 Whenever necessary, the CONTRACT may contain clauses different from those Conditions, provided that it is previously defined in the instrument of notice.

1.2.1 Whenever there is a divergence between a contractual clause and its annexes, the CONTRACT shall prevail.

Part 2—DEFINITIONS

2.1 For simplifying purposes, the following definitions shall be adopted in these Conditions and all other contractual documents:

2.1.1 Petrobras means the company of the PETROLEO BRASILEIRO S.A. group purchasing the Property and Services related to this CONTRACT.

2.1.2 Requesting Unit means the Petrobras’ Unit that requested the purchase of the Property.

2.1.3 Receiving Unit means the Petrobras’ Unit that shall receive the purchased Property.

2.1.4 SUPPLIER means the company that shall directly supply to Petrobras the Property and the Related Service in accordance with the CONTRACT.

2.1.5 CONTRACT means the instrument of agreement entered into between PETROBRAS and the SUPPLIER, including all the documents and respective annexes attached thereto or therein mentioned.

2.1.6 Property means every system, equipment or any material that the SUPPLIER is committed to deliver to Petrobras in accordance with the CONTRACT.

2.1.7 Related Service means the supplementary service to the Property supply, such as: installation, packing, technical assistance, training and/or any other SUPPLIER’S obligation in accordance with the CONTRACT.

2.1.8 Inspecting Body means Petrobras’ Unit or a company contracted by it in order to perform the manufacturing inspection and to follow the Property’s acceptance tests, as well as the Related Services, in accordance with the CONTRACT.

2.1.9 Inspector means the physical person or the corporate body appointed by Petrobras to perform the manufacturing inspection and to follow the Property’s acceptance tests, as well as the related services in accordance with the CONTRACT.

2.1.10 Contractual Amount means the amount to be paid to the SUPPLIER in accordance with the CONTRACT for total compliance with its contractual obligations.

2.1.11 Contract Manager means the person appointed by Petrobras to perform the activities of follow up of the Parties’ contractual obligations.

2.1.12 Purchasing Unit means the Petrobras Unit that executes the purchase order.

2.2 For purposes of this CONTRACT, terms that determine the delivery condition and other commercial terms used to describe the parties’ obligations shall have the meanings ascribed to them in the version in force on the date of proposal or submission of the International Rules for the Interpretation of Commercial Terms published by the International Chamber of Commerce of Paris, normally known as “INCOTERMS”.

Part 3—USE OF DOCUMENTS AND CONTRACTUAL INFORMATION

3.1 SUPPLIER may not, without the previous written consent of Petrobras, disclose any specification, plant, drawing, sample or information furnished by Petrobras or on its behalf that appears in the CONTRACT to any person or entity that is not committed with the execution of the contractual scope.

3.2 SUPPLIER must not, without the previous consent of Petrobras, make use of any document or information mentioned in item 3.1 for any purpose other than those related to the CONTRACT’s execution.

3.3 Documents mentioned in item 3.1, except for the proper CONTRACT Instrument, shall remain Petrobras’ property and, if so requested, must be returned (with all copies) upon the termination of the contractual obligations.

Part 4—INDUSTRIAL PROPERTY RIGHTS

4.1 Payment of royalties concerning trademarks and patents licensed from third parties are the exclusive SUPPLIER’S property, unless when the industrial drawings are in writing supplied by Petrobras.

4.2 SUPPLIER shall release Petrobras and shall have the sole liability for an eventual eviction resulting from third parties’ claims by virtue of violation of the patent, trademarks or industrial drawing property rights as a consequence of the Property utilization, except in the event that the Property is supplied in writing in accordance with the specifications developed and/or supplied by Petrobras.

Part 5—SUPPLIER’S OBLIGATIONS AND LIABILITIES

5.1 SUPPLIER commits itself to:

5.1.1 Supply and deliver the Property and to execute the Related Service that is the CONTRACT’S object in the form, within the term and quality that are stipulated herein and in its annexes.

5.1.2 Assume within the limitations provided in the CONTRACT full liability for the actions and omissions of its employees, suppliers, and persons directly or indirectly employed by them. No CONTRACT provision shall create a contractual relationship between any subcontractor or subsupplier and Petrobras.

5.1.3 SUPPLIER commits itself to pay to Petrobras the amount that is imposed to it by virtue of eventual subsidiary or joint eviction sentenced by the Judiciary or by the administrative competent courts in relation to the default of labor, social security, tax and fund (FGTS) obligations with respect to SUPPLIER’S employees.

5.1.3.1 Such amount shall be accrued by all the expenses incurred such as legal fees, attorney’s fees and extrajudicial costs, among others.

5.1.4 SUPPLIER commits itself to not employ in all the activities related to this CONTRACT execution infantile labor under the terms of Item XXXIII of article 7 of the Constitution of the Republic, as well as to require that the mentioned measure is adopted by the contracts entered into by the suppliers of the industrial consumption materials and/or service suppliers, under the penalty of CONTRACT termination.

5.1.4.1 SUPPLIER commits itself, whenever requested by Petrobras, to issue a written statement that it has complied or is complying with the requirement provided in the above mentioned item.

5.1.5 SUPPLIER shall carry out its manufacturing obligations strictly observing the health, safety and labor medicine standards being liable for the violations committed. It shall provide, at its own cost, and keep under perfect use individual protection equipment.

5.1.6 SUPPLIER shall submit, whenever requested by Petrobras, the documentation supporting compliance with its labor, social security and tax obligations including the FGTS (Employment Security Fund) deposits.

5.1.7 Keep Petrobras informed in accordance with its convenience of all the details of the supply that is this CONTRACT’S object and to prepare specific reports, when requested.

5.1.8 Appear, whenever it is requested, in the locations previously agreed upon between Petrobras and the SUPPLIER through its representatives duly qualified and accredited for examinations and explanations of any problem related to supply.

5.1.9 Provide reports on the development of the different phases of Property manufacture when provided in the CONTRACT.

5.1.10 Facilitate the action of the contract management and of the inspection through representatives accredited by Petrobras providing the necessary resources for its execution whenever provided in the CONTRACT.

5.1.11 Repair, at its own cost, any divergence and provide the re-work or the replacement of any PROPERTY not accepted by the Inspector based upon the CONTRACT terms and its annexes.

5.1.12 SUPPLIER’S liability for damages shall be limited to direct damages according to the Brazilian Civil Code and applicable legislation, excluding the loss of profits and consequential damages, and direct damages are limited to 100% (one hundred percent) of the adjusted contractual amount, unless otherwise provided in the CONTRACT.

5.1.12.1 Petrobras shall be entitled to the right of recourse against the SUPPLIER in the event that Petrobras is bound to repair an eventual damage caused by the SUPPLIER to third parties under the terms of the sole Paragraph of article 927 of the Civil Code, not applying in this case the limit provided in item 5.1.12, unless otherwise provided in the CONTRACT.

5.1.12.2 Without prejudice to what is provided in item 5.1.12, SUPPLIER shall be liable for the costs of additional services necessary to repair, re-work or replace the Property resulting from its fault or willful misconduct in executing the CONTRACT, and the inspection of follow-up by Petrobras does not exclude or reduce this liability, taking into account the provision of item 10.3.1.

5.1.13 Supply products in conformity with the requirements specified in the CONTRACT irrespective of the approval of documents and manufacturing inspection are held by Petrobras or by a company contracted for this purpose. In the event that products supplied are non-conforming, the immediate replacement of the same shall be arranged, and SUPPLIER shall be liable for all the costs related thereto.

5.1.14 When the Property has been manufactured using raw material supplied by Petrobras, SUPPLIER shall submit the accounting relating to the application of the raw material as defined in the CONTRACT.

5.1.14.1 The rendering of accounts shall be accompanied by a list of bills of sale relating to the raw material that was received and the finished product indicating the respective dates, weight and quantity of material per bill of sale.

5.1.14.2 Any and all remaining raw material supplied by Petrobras shall be made available for it.

Part 6—PETROBRAS’ OBLIGATIONS AND LIABILITIES

6.1 Petrobras commits itself to:

6.1.1 Make the payments established as defined in the CONTRACT.

6.1.2 Provide, within the term defined in sub-item 7.2, the Property inspection at SUPPLIER’S factory when provided in the CONTRACT, as well as all the releases for the shipment.

6.1.3 Provide the necessary import documentation, as well as the payment of port fees, customs cost and tax obligations in Brazil in the case of a Property directly acquired by Petrobras abroad.

6.1.4 Cooperate with the SUPPLIER to the extent possible and without assuming any charges, whenever so requested, in the study and interpretation of the technical documents.

6.1.5 Notify the SUPPLIER in the event of application of eventual penalties or other sanctions provided in the CONTRACT or by Law.

6.1.5.1 Relating to the events of fine due to delay of delivery provided in the CONTRACT there shall not be a previous notice.

Part 7—INSPECTIONS

7.1 The Inspection Requirements required by Petrobras shall be defined in the instrument of notice or in another corresponding document in which a submission of a supply proposal is requested.

7.2 SUPPLIER shall inform the Inspecting Body indicated in the CONTRACT at least 5 (five) business days in advance the date from which the Property shall be available to be inspected. The beginning of the inspection shall occur up to 5 (five) business days after this date. If Petrobras is not able to perform the inspection, the Inspecting Body shall inform the SUPPLIER of a new date and other contractual conditions shall remain in force.

7.2.1 If the SUPPLIER’S facilities are located abroad, the communication upon the Inspecting Body shall be made at least 10 (ten) business days in advance.

7.2.2 When SUPPLIER is a Reseller or a Distributor, the inspection shall be performed by an independent inspection company, contracted by it and previously accepted by Petrobras in order to perform the services directly at the original manufacturer of the material.

7.2.2.1 Petrobras, through the Inspecting Body appointed for the process follow-up, may formally request the Reseller or Distributor to submit a quality plan and/or test procedures defined in the CONTRACT in order to specify the events to be performed by the contracted inspection company.

7.3 Inspections may be held at the SUPPLIER’S facilities or at the facilities of its subsupplier(s), at the place of delivery or the final destination of the Property. When performed at the SUPPLIER’S or its subsupplier(s) facilities, the inspector shall be provided with all of the technical assistance necessary without any cost to Petrobras, including the access to the contractual documentation, drawings, production data and registration/certificates/quality reports.

7.3.1 When there is a continuous presence of an Inspector at the SUPPLIER’S facilities it must provide a proper place for his stay within its installations taking into account SUPPLIER’S internal regulations.

7.3.2 If the inspection is not performed due to SUPPLIER’S exclusive responsibility, or if a new inspection is necessary by virtue of Property’s rejection in a previous inspection, it shall reimburse Petrobras the costs relating to the Inspector, or his representatives, presence in its installations including the eventual costs of displacement and lodging.

7.4 In order to perform any and all inspection phases, SUPPLIER shall submit to Inspector the drawings and documents certified by Petrobras pursuant to which the Property is being manufactured and, depending on the contractual conditions, the documents and drawings must be previously approved by Petrobras or by a company that is contracted for that purpose.

7.5 If any Property that is inspected or submitted to a test does not meet the Material Requirements, Applicable Rules or Contractual Inspection Requirements, Petrobras is entitled to reject it and SUPPLIER must replace the rejected Property or perform any and all modifications necessary in order to meet such requirements without any additional cost to Petrobras and the article must be once more submitted to inspection or test.

7.6 No Property submitted to inspection may be remitted without the release in writing of the Inspector, being the SUPPLIER subject to payment of all costs resulting from this decision.

7.7 Petrobras’ right to inspect and, when necessary, reject the Property after its arrival at final destination, shall in no way be limited to or put aside by virtue of inspection, testing, and acceptance of the Property by Petrobras or its representatives, before the shipment.

7.7.1 The Property that is released at the SUPPLIER’S facilities shall be subject to verification by the Requesting Unit on the moment of its reception.

Part 8—PACKING FOR TRANSPORTATION

8.1 SUPPLIER is responsible for Property packing and/or conditioning that shall be adequate to the kind of transportation defined in the CONTRACT and meet the requirements of the specific legislation for cargo transportation especially relating to health, safety and environment.

8.2 The volumes shall be marked with permanent ink and shall contain the following words: Petrobras; acronym of the Addressee Unit; address of the Addressee Unit; number and item(s) of the material purchase order (PCM) and of the CONTRACT, as well as receive a proper visual signalization adequate to the kind of material to be transported (example: FRAGILE, DANGEROUS, RADIOACTIVE, etc).

Part 9—DELIVERY

9.1 The Property delivery must be performed by the SUPPLIER in accordance with the CONTRACT and advanced deliveries are not allowed, unless defined in the CONTRACT or upon written authorization by Petrobras to be previously requested by the SUPPLIER.

9.1.1 Advanced delivery is the delivery that is made more than 15 (fifteen) consecutive days before the contractual date of delivery.

9.2 The Property under a CONTRACT or one of its items shall be object of a sole delivery or of delivery in installments as established in said document.

9.2.1 When the delivery in installments is provided for in the CONTRACT or further requested by Petrobras, the provisions hereunder shall apply to each delivered installment. When the delivery, due to transportation convenience, is to be made in installments, it shall be considered delivered on the date relating to the last installment.

9.3 The document that makes the Property of a CONTRACT available for transportation is:

9.3.1 In the events of delivery FCA-SUPPLIER and CIP-CARRIER: The Bill of Lading (AE), which model is attached hereto as ANNEX I and that may be replaced by any other document issued by the SUPPLIER that characterizes the availability of the Property and informs all the data necessary for transportation by Petrobras.

9.3.2 In the events of delivery FCA-SHIPMENT AIRPORT and FOB-SHIPMENT PORT: The International Bill of Lading (AEI), which model is attached hereto as ANNEX II and that may be replaced by any other document issued by the SUPPLIER that characterizes the availability of the Property and informs all the data necessary for transportation by Petrobras.

9.3.3 In the event of delivery EX-WORKS: The Bill of Lading (AE) or the International Bill of Lading, the models of which are attached hereto respectively in ANNEX I and II and that may be replaced by any other document issued by the SUPPLIER that characterizes the availability of the Property and informs all the data necessary for transportation by Petrobras.

9.3.4 If the Property, due to SUPPLIER’S liability, may not be shipped on the date indicated to Petrobras, SUPPLIER shall bear all cost resulting from the idle displacement of the carrying vehicle or the unreasonable shipment delay.

9.3.5 SUPPLIER shall deliver to Petrobras Unit in charge of the CONTRACT management the AE or the AEI duly filled in, when applicable, by a counterpart of the documents below:

Communication of Material Release (CLM) or material acceptance report (for a Property acquired abroad) for the Property subject to inspection;

Certificate of the classifying society for the Property subject to naval classification;

Emergency card or “Material Safety Data Sheet” (for the Property acquired abroad), if the Property is a controlled product (dangerous chemical product, explosive, radioactive, etc.).

Requirements/Special Instructions for lashing, protection, transportation, unloading and storage of the Property, whenever necessary.

9.3.6 The Property withdrawal shall be provided by Petrobras, if it is accompanied by the documents mentioned in

sub-item 9.3.5.

9.4 In the event that transportation is a SUPPLIER’S obligation, it shall ship the material with a counterpart of the documents mentioned in sub-item 9.3.5, if applicable, as well as require that the addressee registers in the bill of sale or in other document that certifies the effective delivery of the Property, its name, enrollment, office, company’s name and date of reception of the Property.

In the event of a foreign SUPPLIER it may only ship the Property with a written authorization to be previously requested to the Contract Manager.

9.5 The SUPPLIER’S liability shall cease when the Property is delivered in accordance with the INCOTERMS definitions in force, as defined in the respective CONTRACT.

9.6 The effective delivery date of the Property shall be the date defined below, in accordance with the delivery condition established in the CONTRACT:

EX WORKS: date of document protocol that informs the Property availability (Bill of Lading – AE or International Bill of Lading – AEI) or of any other document issued by the SUPPLIER that characterizes the Property availability, forwarded to the person in charge of the CONTRACT management or the date estimated for the readiness of the Property mentioned in AE or in AEI, prevailing whichever is the later.

FCA-SUPPLIER: date of Bill of Lading protocol (AE) or of any other document issued by the SUPPLIER that characterizes the Property availability, forwarded to the person in charge of the CONTRACT management or the date estimated for the readiness of the Property mentioned in AE, whichever is later.

FCA-SHIPMENT AIRPORT and FOB-SHIPMENT PORT: date of International Bill of Lading protocol (AEI) or of any other document issued by the SUPPLIER that characterizes the Property availability, forwarded to the person in charge of the CONTRACT management or the date estimated for the readiness of the Property mentioned in AEI, whichever is later.

CPT- DESTINATION AIRPORT: date of issuance of the “AIR WAYBILL – AWB”.

CFR-DESTINATION PORT: date of issuance of the “BILL OF LADING”.

CIP-Petrobras and CIP-THIRD PARTIES: date of issuance of the bill of transportation supplied by the Carrier.

CIP-CARRIER: date of issuance of the bill of transportation supplied by the Carrier indicated by Petrobras.

DDU (designated location) – the date of Property delivered at the location defined in the CONTRACT, registered in legible form in the bill of sale by the person who received the Property, who in addition to the date must register (in a legible form) in the same bill of sale his name, enrollment, the office, company’s name and the date of Property reception.

DDP (designated location)—the date of Property delivered at the location defined in the CONTRACT, registered in legible form in the bill of sale by the person who received the Property, who in addition to the date must register (in a legible form) in the same bill of sale his name, enrollment, the office, company’s name and the date of Property reception.

Part 10—PROPERTY’S GUARANTEE

10.1 SUPPLIER shall guarantee the quality of the Property for a period of 12 (twelve) months after the date on which Property begins to operate or 18 (eighteen) months from the date of delivery, whichever occurs first, unless another period of time is established in the CONTRACT.

10.1.1 The guarantee period shall be interrupted on the date of notice of divergence by Petrobras, and shall resume when the Property is under perfect conditions of use.

10.2 The guarantee comprises the recovery or replacement, at the SUPPLIER’S costs, including transportation from the location where the Property was delivered up to the SUPPLIER’S facilities of any component or equipment that present a divergence of characteristics or any design errors and manufacturing defects.

10.3 If, during the guarantee period, any defects or divergences in Property’s characteristics are verified, Petrobras shall communicate this fact in writing to SUPPLIER agreeing upon the period of time to correct the defects and delete the divergences.

10.3.1 When the SUPPLIER is not able to correct the defects, Petrobras may perform the necessary repairs directly or through third parties, at the SUPPLIER’S cost, and upon its previous authorization.

Part 11—CONTRACTUAL AMENDMENTS

11.1 Petrobras may, at any time upon written agreement with the SUPPLIER, perform amendments to the CONTRACT scope in one or more of following circumstances:

alteration of the quantity of any item;

alteration of the project, specification or of the requirement of manufacturing inspection;

alteration of the delivery condition;

alteration of delivery location;

alteration of the Related Service;

extinction of alteration of taxes or charges incident on the contracted prices.

11.2 If any of these modifications causes a change in any of the unitary contracted prices or in the delivery schedule, SUPPLIER shall, within 30 (thirty) days upon the receipt of the modification request, submit to the CONTRACT manager the respective revisions for evaluation and approval.

11.2.1 Any and all modification of the supply scope may only be executed upon analysis and agreement between SUPPLIER and Petrobras.

11.2.2 Approval by Petrobras shall provide that SUPPLIER effects the modifications defined, and the CONTRACT shall be amended incorporating the respective modifications.

Part 12—ASSIGNMENT

12.1 SUPPLIER may not assign, in whole or in part, the CONTRACT, unless upon previous and written authorization from Petrobras.

12.2 SUPPLIER may not assign nor pledge, at any title, in whole or in part, the credits of whatever nature, resulting or arising from the CONTRACT, unless upon previous and written authorization from Petrobras. The authorization shall obligatorily state that Petrobras assigns to the assignee all the exceptions that it is entitled to, expressly mentioning that payments to assignee are subject to the compliance by the assignor of all its contractual obligations.

Part 13—TERMS

13.1 The delivery terms shall be counted in consecutive days from the date defined in the CONTRACT.

13.2 The eventual delays from subcontractors or subsuppliers shall be the exclusive responsibility of the SUPPLIER.

13.3 SUPPLIER may request for analysis by Petrobras extension of the delivery term, due to force majeure, acts of God, or fair reasons.

13.4 Notwithstanding the contractual terms adjusted, the legal effects of the CONTRACT shall continue for up to 180 (one hundred and eighty) days after its termination date.

Part 14—PAYMENTS

14.1 The Property and the Related Service acquired shall be paid by Petrobras upon their delivery, whether total or partial, 30 (thirty) consecutive days from the date of the protocol of delivery of the collecting documentations at the locations indicated in the CONTRACT.

14.1.1 Payments to suppliers shall preferably be made through the payment of securities by means of collection registered with banks that perform the electronic issuance of securities using the CNAB-240 standard (Febaban). The payments made through DOC shall be paid in D + 1. When the payment is not made by means of a Bank Form, 1 (one) day will be added to the term.

14.2 Payments shall be made based upon the contractual events pursuant to the system established in the CONTRACT.

14.3 In the event of postponement provided in the CONTRACT, SUPPLIER shall request confirmation from the Contract Manager of compliance with the corresponding contractual event and the issuance of the respective supporting document.

14.3.1 Payments of amounts concerning advancements shall be made upon the receipt submission that must obligatorily state Petrobras and SUPPLIER’S CNPJ and a legible copy of the supporting document mentioned in item 14.3.

14.3.2 When the CONTRACT sets forth advancement installments, the payment of the amount relating to the property delivery shall only be made upon the submission of evidence to Petrobras that the bills of sale corresponding to the advancement payments already made have been issued.

14.4 The bills of sale, invoices, bill and invoices, and receipts shall always indicate the numbers of the CONTRACT purchase process and its corresponding items.

14.4.1 Each collecting document must correspond to a sole and exclusive CONTRACT.

14.5 The invoice, bill of sale, bill or receipt must obligatorily mention the SUPPLIER’S bank data, the bank number, the branch and the current bank account and the name of the drawee if it is not the supplier itself.

14.6 The following documents shall be submitted for the qualification to payment at the location defined in the CONTRACT:

DOCUMENTATION

DELIVERY CONDITION

FOR

PAYMENT

QUALIFICATION

Works

FCA

Supplier

CIP

Carrier

CIP

Petrobras

CIP

Third

Parties

DDP

Addressee

Invoice / Bill of Sale or Invoice-Bill.

Receipted Invoice or other document issued by Petrobras attesting the effective delivery of the Property.

Bill of Lading (AE) with the Protocol of its receipt by Petrobras, or other document that characterizes the availability of the Property for transportation.

Evidence of Delivery of the Property to the Carrier.

Communication of Material Release (CLM), when the Property is subject to inspection.

In the events of sub-item 14.3.2, a counterpart of the supplementary Bills of Sale corresponding to amounts already paid upon receipt, if not included in the delivery invoice.

Supporting Document of the compliance with the requirements bound to payment of the event of the Property delivery (delivery of technical documentation, manuals, etc) to be obtained with the Petrobras Unit in charge of the CONTRACT management.

14.6.1 In the delivery condition CIP-CARRIER, CIP-Petrobras or CIP-THIRD PARTIES, SUPPLIER may submit the collection documentation even if incomplete and within up to 10 (ten) consecutive days from this date submit the copy of the invoice or of other document issued by Petrobras and that attests the effective Property delivery. If this does not occur, the payment shall only be made 20 (twenty) consecutive days after the submission of said document.

14.6.2 In the event that the Requesting Unit and the Purchasing Unit are the same, the material delivery followed by the Bill of Sale will be enough for processing the payment.

14.7 The non-compliance with the requirements above mentioned shall imply the return of the collecting documentation within 5 (five) business days from the date of receipt and new counting for the payment term when it is submitted again, and in no way shall be paid any additional amount as a financial compensation.

14.8 CONTRACTS that provide for a price adjustment shall be entitled thereto, taking into consideration the Adjustment and Payment Conditions of Petrobras – CRP defined in the instrument of notice and in the CONTRACT.

PROPERTY ACQUIRED IN EXTERNAL MARKET.

14.9 For the Property payment, SUPPLIER shall provide a copy of following documents:

COMMERCIAL INVOICE describing the Property, quantities, unitary price and total amount, as well as the original certificate, if applicable;

B/L — BILL OF LADING or AWB-AIRWAY BILL and annexes;

material acceptance report, when the Property is subject to inspection;

evidence of compliance with the event to which final payment is subject (technical documentation, manuals, etc.) to be obtained with Petrobras, as the case may be;

When issuing the invoice it must be stated “ sold to and shipped to ” specified in the CONTRACT.

14.9.1 In the event of a Property acquired from a foreign SUPPLIER with international freight of its responsibility, this shall be paid in accordance with the amounts stated in the B/L or AWB limited to the CONTRACT amount.

14.10 Petrobras may perform debts of any amounts due to be directly reimbursed in any invoice pending payment to SUPPLIER, giving notice thereof.

Part 15—PENALTIES

15.1 Except for the provisions in Part 16, TERMINATION OF THE CONTRACT, whenever it is set forth in the CONTRACT, the default fine due to default of a contractual clause by the SUPPLIER, CONTRACT termination and delay in the Property delivery shall be 0.10% (ten hundredth percent) per day on the Property amount that is the object of default, termination or delay.

15.1.1 The Property and Related Service amount on which the fine is incurred shall always be its respective adjusted price, and if applicable, accrued by the incident charges, such as: taxes, freights and rates.

15.1.2 In the event of default of contractual clause and delay in Property delivery, the total fine amount shall be limited to 10% (ten percent) of the total CONTRACT amount, adjusted as the case may be, accrued by the incident charges, such as: taxes, freights, and rates, etc., excluding the loss of profits and indirect costs, as established in the Brazilian legislation in force.

15.1.3 In the event of contract termination, the fine amount shall be limited to the total CONTRACT amount, adjusted as the case may be, excluding the incident taxes.

15.2 For the purposes of fine application, the Property that is supplied and does not comply with the CONTRACT provisions shall be considered non-delivered.

15.3 The amount of the fine applied shall be deducted from the respective Property invoice or from any other invoice that is under payment process to the SUPPLIER by Petrobras, which shall inform this decision.

15.4 The date of effective Property delivery for the purposes of fine application is as defined in sub-item 9.6.

15.5 In the event of CONTRACT termination due to reasons inherent to SUPPLIER, as described in sub-item 16.1, the period to be considered in the calculation of the fine amount shall be that comprised between the date of CONTRACT execution and the formalization of the termination.

15.6 Any SUPPLIER’S delay without being duly excused by Petrobras in the execution of its obligations shall cause the application of any of the following sanctions, besides those provided by law:

execution of eventual contractual performance guarantees;

fine application;

CONTRACT termination due to default, and fine application;

registration sanctions.

15.7 If SUPPLIER incurs delay when correcting defects and eliminating the divergences verified in the characteristics of the Property, it will be subject to the suspension, cancellation, withdrawal from the registry penalties or impossibility to contract with Petrobras.

Part 16—TERMINATION OF THE CONTRACT

16.1 Petrobras may, without prejudice of other contractual penalties, upon previous 30 (thirty) days notice to SUPPLIER terminate the CONTRACT, in whole or in part, in following circumstances:

16.1.1 The non-compliance or the irregular compliance with the contractual clauses, specifications, projects or terms.

16.1.2 The slowness to comply with the CONTRACT leading Petrobras to evidence the impossibility to complete the supply of the Property or Related Service, within the stipulated terms.

16.1.3 Unreasonable delay to begin the Property or Related Service supply.

16.1.4 Property or Related Service supply stoppage without reasonable cause and notice to Petrobras.

16.1.5 Total or partial subcontracting of the CONTRACT’S object, the SUPPLIER’S association with another, the assignment or transfer, in whole or in part, as well as the merger, split-off or incorporation, except if allowed in the bidding and in the CONTRACT.

16.1.6 The non-compliance with the regular determinations of Petrobras’ representative appointed to manage the CONTRACT’S execution, as well as those of his chiefs.

16.1.7 The repeated commitment of faults in the CONTRACT’S execution, duly annotated in proper registration.

16.1.8 Adjudication of bankruptcy.

16.1.9 Winding up of the company.

16.1.10 Amendment of the articles of association or the modification of the company’s objects or structure that prejudices the CONTRACT’S execution.

16.1.11 The occurrence of acts of God or force majeure events, regularly proven, that hinder the CONTRACT’S execution.

16.2 In the event that Petrobras terminates part of the CONTRACT, SUPPLIER shall continue to execute the non-terminated part of the same.

16.3 Petrobras may, at any time, terminate the CONTRACT upon written notice to SUPPLIER, without any compensation, if SUPPLIER is adjudicated bankrupt, wound up, or otherwise becomes insolvent, without prejudice to any other right, action or recourse that might have resulted or that may result to Petrobras’ benefit.

16.4 CONTRACT may further be cancelled by Petrobras for its convenience, upon previous notice given at least 30 (thirty) days in advance. In this case, SUPPLIER shall be paid, upon evidence of, the amount corresponding to the part already executed of the order, including the project, and the amount of material specifically dedicated to Petrobras, which order may not be cancelled by the SUPPLIER, which amounts correspond to the respective original prices, accrued by the adjustments due on the date of termination. The materials and projects that are paid by Petrobras shall become its property.

16.5 CONTRACT may further be terminated upon following conditions:

16.5.1 Reasons of public interest, high relevance and wide knowledge, duly justified and determined by Petrobras and drawn up in the proceedings to which the CONTRACT refers.

16.5.2 Suspension of its execution by written order from Petrobras, for a period of time exceeding 120 (one hundred and twenty) days, except in the case of public calamity, serious disturbance of the internal order or war.

16.5.3 Delay exceeding 90 (ninety) days for the payments due by Petrobras resulting from supply or any installment of the supply already received or executed, except in cases of public calamity, serious disturbance of the internal order or war, the contractor being entitled to suspend the compliance with its obligations until the situation is regularized.

16.6 The CONTRACT may be terminated if the suppression by Petrobras of part of the contracted object causes a modification of the initial amount beyond the amount permitted by law.

Part 17—HEALTH, SAFETY AND ENVIRONMENT – HSE

17.1 SUPPLIER is liable for the acts of its employees and their consequences resulting from the inobservance of any laws, rules or regulations of Industrial Safety, Occupational Health, and Environmental Protection in force in the country.

17.2 During the CONTRACT execution, SUPPLIER may not allege that it is not aware of the Rules and Regulations of Industrial Safety, Occupational Health and Environmental Protection in force on the date of the proposal submission even if they are not attached hereto once this information is available for consultation in each operational segment of the Company.

17.3 SUPPLIER must perform its activities in a preventive manner protecting people and Environment, taking into account and restating following sub-items:

17.3.1 SUPPLIER is responsible for, and bound to supply free of cost, the EPI to all of its employees and in accordance with the provisions established in the Regulating Norm n° 6 of the Ministry of Labor and Employment – MTE. The selection and technical specification of the EPI must be defined by the SUPPLIER by virtue of the evaluation of risks pertaining to the services performed, which must be efficient and able to guarantee the preservation of the employees’ health from the risks of the working environment in which they are developed and levels to which they may be exposed. All EPI must have the stamp of the number of the Certificate of Approval (CA) attached thereto.

17.3.2 SUPPLIER is in charge of preparing and complying with the Program of Prevention of Environmental Risks (PPRA), Program of Medical Control of the Occupational Health (PCMSO) pursuant to NR-9 of its personnel and of the personnel of its subcontractor(s).

17.3.3 SUPPLIER, if in charge of handling and transportation of dangerous material, whether directly or by means of third parties, must assure that the legal requirements and regulations applicable shall be complied with. It is hereby outlined the need to comply with the Decree 96.044 of May 18, 1988 and its regulation published in the Federal Official Gazette (DOU) of May 19, 1988, and Directive n° 204/MT of May 26, 1997 issued by the Ministry of Transportation, and Decree 4.097 of January 23, 2002.

17.3.4 The vehicles used by the SUPPLIER may only transit within the internal areas of Petrobras since they abide by the National Traffic Code. In operational segments, SUPPLIER must abide by the instructions provided in the Petrobras Emergency Control Plan.

Part 18—CORPORATE LIABILITY

18.1 To assure and demonstrate through objective evidences at any time when requested by Petrobras, the commitment to meet the premises provided in a process of Corporate Liability Management, based upon Norm SA 8000.

18.2 To comply with the applicable legislation, as well as respect the international instruments mentioned in the CONTRACT. If any non-compliance is verified, to adopt measures aimed at prompt correction.

18.3 To continuously improve the conditions of the working place so that they are even safer and healthier, not allowing situations of serious and imminent danger or that may cause damage to human health and to the environment.

18.4 To furnish all necessary information to those involved in the supply chain of the contracted products, allowing the handling and use of the same in a safe manner during its life cycle.

18.5 Not allow the practice of infantile labor, forced work or disciplinary measures such as physical, mental, psychological, hierarchic coercion, oral abuse and other non-ethical duress.

18.6 To assure the non-existence of any kind of discrimination (race, social class, nationality, color, religious, sex, sexual orientation, association to unions, political party, etc.).

18.7 To act so that its subsuppliers, partners, and subcontractors commit themselves to comply with the requirements of Norm SA 8000.

18.8 To assure the documented publication for all of its employees of the corporate liability policy adopted by the Company.

Part 19—PREVAILING LANGUAGE

19.1 The CONTRACT shall be expressed in Portuguese language, and an English version may be adopted for the purposes of its execution. In any event, the Portuguese text shall prevail, and this language must be used in all the documentation resulting from the CONTRACT that may be issued by the parties, except for the technical specifications that may be in English.

Part 20—APPLICABLE LAW AND JURISDICTION

20.1 The construction and application of the CONTRACT terms shall be in accordance with the Brazilian laws and the court of the head office of the Unit that has executed the purchase shall have jurisdiction and competence on any controversy resulting from the CONTRACT, including the execution of any arbitration, constituting the elected jurisdiction, which shall prevail over any other, even if a more privileged one.

PETRÓLEO BRASILEIRO S.A. – PETROBRAS.

CONDITIONS OF MATERIAL SUPPLY (CFM 2005).

Form of Bill of Lading – AE

ANNEX I

SUPPLIER’S STATIONERY (4 COUNTERPARTS)

TO:

PETRÓLEO BRASILEIRO S.A. – PETROBRAS.

(Address of the Purchasing Body mentioned in the Contract)

- Provisional—Definitive

Bill of Lading N° Date:

Ref.: PCM- AFM/AEM—

AEM—

- FCA-SUPPLIER—CIP-CARRIER.

We inform you that the material purchased under the referenced document is ready for shipment, and must be taken on / / from the following address: , City: , State: , Contact Person: , Telephone: , Fax: .

SUPPLY DETAILS

1 – Amount: R$ , including IPI.

2 – Description of the Material:

3 – Material inspected and approved on / / - CLM N° .

4 – Items supplied and quantities:

5 – Total gross weight: (kg) and net weight: (kg).

6 – Total number of packages: Numbered from to .

7 – Boxes; Crates; Not Bound; Bound.

8 – Material/Load (dimensions in mm and weight in kg, per package):


Packages measuring:	Packages measuring:	Packages measuring:

Length:	Length:	Length:

Width:	Width:	Width:

Height:	Height:	Height:

Gross weight per package:	Gross weight per package:	Gross weight per package:

Allows overlapping of packages	Allows overlapping of packages	Allows overlapping of packages

9 – Additional recommendations to Carrier (shipment time, capacity/day, previous notice for shipment schedule, requirements/special instructions for load lashing/protection, transportation, unloading, storage, etc.):

NOTE: Item 3 only refers to material subject to inspection. Attach copy of the Communication of Material Release without which its removal may not be provided.

Yours Truly,

(Signature of the supplier’s authorized representative).

PETRÓLEO BRASILEIRO S.A. – PETROBRAS.

CONDITIONS OF MATERIAL SUPPLY (CFM 2005).

ANNEX II

SUPPLIER’S STATIONERY (2 COUNTERPARTS)

TO:

PETRÓLEO BRASILEIRO S.A.—PETROBRAS.

(Address of the Purchasing Body mentioned in the Contract)

International Bill of Lading N°

Date:

Ref.: PCM- AFM

AEM —

1	— IDENTIFICATION OF THE MATERIALS/LOAD:

ITEM AFM/AEM

QUANTITY

SHORT

DESCRIPTION

TAX

CLASSIFICATION

AMOUNT

2	— ESTIMATE DATE FOR LOAD READINESS: / /

3	— LOAD (DIMENSIONS IN MM AND WEIGHT IN KG, PER PACKAGE):


Packages measuring:	Packages measuring:	Packages measuring:

Length:	Length:	Length:

Width:	Width:	Width:

Height:	Height:	Height:

Gross weight per package:	Gross weight per package:	Gross weight per package:

Allows overlapping of packages	Allows overlapping of packages	Allows overlapping of packages

4	— TRANSPORTATION:

Condition of the AFM delivery:

Destination Port/Airport:

5	— SUPPLIER:

Corporate Name:

Address:

Contact Person:

Telephone Number:

Fax Number:

6	— SUPPLIER’S REPRESENTATIVE:

Corporate Name:

Contact Person:

Telephone Number:

Fax Number:

Yours Truly,

(Signature of the supplier’s authorized representative).

Exhibit 31.1

RULE 13a-14(a)/15d-14(a) CERTIFICATION

I, Blake T. DeBerry, certify that:

1.	I have reviewed this quarterly report on Form 10-Q of Dril-Quip, Inc.;

2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a)

Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b)

Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c)

Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d)

Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.	The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a)

All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b)

Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: November 8 , 2012

/s/ Blake T. DeBerry

Blake T. DeBerry

President and Chief Executive Officer

Exhibit 31.2

RULE 13a-14(a)/15d-14(a) CERTIFICATION

I, Jerry M. Brooks, certify that:

1.	I have reviewed this quarterly report on Form 10-Q of Dril-Quip, Inc.;

2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

(a)

(b)

(c)

(d)

5.	The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a)

(b)

Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: November 8 , 2012

/s/ Jerry M. Brooks

Jerry M. Brooks

Vice President—Finance and
Chief Financial Officer

Exhibit 32.1

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO SECTION 906

OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of Dril-Quip, Inc. (the “Company”) on Form 10-Q for the period ended September 30, 2012 (the “Report”), as filed with the Securities and Exchange Commission on the date hereof, I, Blake T. DeBerry, President and Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, to the best of my knowledge, that:

1.	The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and

2.	The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

/s/ Blake T. DeBerry

Blake T. DeBerry

President and Chief Executive Officer

November 8, 2012

Exhibit 32.2

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO SECTION 906

OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of Dril-Quip, Inc. (the “Company”) on Form 10-Q for the period ended September 30, 2012 (the “Report”), as filed with the Securities and Exchange Commission on the date hereof, I, Jerry M. Brooks, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, to the best of my knowledge, that:

1.	The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and

2.	The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

/s/ Jerry M. Brooks

Jerry M. Brooks

Vice President—Finance and
Chief Financial Officer

November 8 , 2012