Attached files

file filename
EX-31.2 - EX-31.2 - UNION DRILLING INCd351671dex312.htm
EX-32.1 - EX-32.1 - UNION DRILLING INCd351671dex321.htm
EX-32.2 - EX-32.2 - UNION DRILLING INCd351671dex322.htm
EX-31.1 - EX-31.1 - UNION DRILLING INCd351671dex311.htm
EXCEL - IDEA: XBRL DOCUMENT - UNION DRILLING INCFinancial_Report.xls
XML - IDEA: XBRL DOCUMENT - UNION DRILLING INCR3.htm
XML - IDEA: XBRL DOCUMENT - UNION DRILLING INCR1.htm
XML - IDEA: XBRL DOCUMENT - UNION DRILLING INCR6.htm
XML - IDEA: XBRL DOCUMENT - UNION DRILLING INCR7.htm
XML - IDEA: XBRL DOCUMENT - UNION DRILLING INCR8.htm
XML - IDEA: XBRL DOCUMENT - UNION DRILLING INCR9.htm
XML - IDEA: XBRL DOCUMENT - UNION DRILLING INCR4.htm
XML - IDEA: XBRL DOCUMENT - UNION DRILLING INCR5.htm
XML - IDEA: XBRL DOCUMENT - UNION DRILLING INCR2.htm
XML - IDEA: XBRL DOCUMENT - UNION DRILLING INCR29.htm
XML - IDEA: XBRL DOCUMENT - UNION DRILLING INCR18.htm
XML - IDEA: XBRL DOCUMENT - UNION DRILLING INCR32.htm
XML - IDEA: XBRL DOCUMENT - UNION DRILLING INCR35.htm
XML - IDEA: XBRL DOCUMENT - UNION DRILLING INCR27.htm
XML - IDEA: XBRL DOCUMENT - UNION DRILLING INCR24.htm
XML - IDEA: XBRL DOCUMENT - UNION DRILLING INCR33.htm
XML - IDEA: XBRL DOCUMENT - UNION DRILLING INCR14.htm
XML - IDEA: XBRL DOCUMENT - UNION DRILLING INCR30.htm
XML - IDEA: XBRL DOCUMENT - UNION DRILLING INCR26.htm
XML - IDEA: XBRL DOCUMENT - UNION DRILLING INCR34.htm
XML - IDEA: XBRL DOCUMENT - UNION DRILLING INCR22.htm
XML - IDEA: XBRL DOCUMENT - UNION DRILLING INCR11.htm
XML - IDEA: XBRL DOCUMENT - UNION DRILLING INCR16.htm
XML - IDEA: XBRL DOCUMENT - UNION DRILLING INCR19.htm
XML - IDEA: XBRL DOCUMENT - UNION DRILLING INCR25.htm
XML - IDEA: XBRL DOCUMENT - UNION DRILLING INCR10.htm
XML - IDEA: XBRL DOCUMENT - UNION DRILLING INCR38.htm
XML - IDEA: XBRL DOCUMENT - UNION DRILLING INCR36.htm
XML - IDEA: XBRL DOCUMENT - UNION DRILLING INCR23.htm
XML - IDEA: XBRL DOCUMENT - UNION DRILLING INCR31.htm
XML - IDEA: XBRL DOCUMENT - UNION DRILLING INCR15.htm
XML - IDEA: XBRL DOCUMENT - UNION DRILLING INCR28.htm
XML - IDEA: XBRL DOCUMENT - UNION DRILLING INCR13.htm
XML - IDEA: XBRL DOCUMENT - UNION DRILLING INCR12.htm
XML - IDEA: XBRL DOCUMENT - UNION DRILLING INCR21.htm
XML - IDEA: XBRL DOCUMENT - UNION DRILLING INCR37.htm
XML - IDEA: XBRL DOCUMENT - UNION DRILLING INCR17.htm
XML - IDEA: XBRL DOCUMENT - UNION DRILLING INCR39.htm
XML - IDEA: XBRL DOCUMENT - UNION DRILLING INCR20.htm
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

 

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

For the quarterly period ended June 30, 2012

OR

 

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

For the transition period from                      to                     

Commission File Number 000-51630

 

 

UNION DRILLING, INC.

(Exact name of registrant as specified in its charter)

 

 

 

DELAWARE   16-1537048
(State or other jurisdiction of
incorporation or organization)
  (I.R.S. Employer
Identification Number)

4055 International Plaza

Suite 610

Fort Worth, Texas

  76109
(Address of principal executive offices)   (Zip Code)

817-735-8793

(Registrant’s telephone number, including area code)

www.uniondrilling.com

(Registrant’s website)

 

 

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 Regulation S-T 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, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer   ¨    Accelerated filer   x
Non-accelerated filer   ¨  (Do not check if a smaller reporting company)    Smaller reporting company   ¨

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

As of August 2, 2012, there were 25,228,816 shares of common stock, par value $0.01 per share, of the registrant issued and 21,398,534 shares outstanding.

 

 

 


Table of Contents

UNION DRILLING, INC.

FORM 10-Q

TABLE OF CONTENTS

 

          Page  

PART I. FINANCIAL INFORMATION

     2   

ITEM 1.

   FINANCIAL STATEMENTS      2   
  

CONDENSED BALANCE SHEETS

     2   
  

CONDENSED STATEMENTS OF OPERATIONS

     3   
  

CONDENSED STATEMENTS OF CASH FLOWS

     4   
  

CONDENSED STATEMENT OF STOCKHOLDERS’ EQUITY

     5   
  

NOTES TO CONDENSED FINANCIAL STATEMENTS

     6   

ITEM 2.

  

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

     13   

ITEM 3.

   QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK      20   

ITEM 4.

   CONTROLS AND PROCEDURES      20   

PART II. OTHER INFORMATION

     21   

ITEM 1.

   LEGAL PROCEEDINGS      21   

ITEM 1A.

   RISK FACTORS      21   

ITEM 6.

   EXHIBITS      21   

SIGNATURE

     22   

INDEX TO EXHIBITS

     23   


Table of Contents

PART I. FINANCIAL INFORMATION

 

ITEM 1. FINANCIAL STATEMENTS

Union Drilling, Inc.

Condensed Balance Sheets

(in thousands, except share data)

 

     June 30,
2012
    December 31,
2011
 
     (unaudited)        

Assets:

    

Current assets:

    

Cash and cash equivalents

   $ 7      $ 7   

Accounts receivable (net of allowance for doubtful accounts of $1,270 and $1,409 at June 30, 2012 and December 31, 2011, respectively)

     47,630        45,387   

Inventories

     943        832   

Income tax recoverable

     302        368   

Prepaid expenses, deposits and other receivables

     1,887        3,027   

Deferred taxes

     1,245        1,239   
  

 

 

   

 

 

 

Total current assets

     52,014        50,860   

Intangible assets (net of accumulated amortization of $1,371 and $1,221 at June 30, 2012 and December 31, 2011, respectively)

     829        979   

Property, buildings and equipment (net of accumulated depreciation of $231,934 and $212,173 at June 30, 2012 and December 31, 2011, respectively)

     314,870        289,429   

Other assets

     629        743   
  

 

 

   

 

 

 

Total assets

   $ 368,342      $ 342,011   
  

 

 

   

 

 

 

Liabilities and Stockholders’ Equity:

    

Current liabilities:

    

Accounts payable

   $ 20,596      $ 21,513   

Current portion of notes payable for equipment

     287        120   

Financed insurance premiums

     482        1,057   

Customer advances

     94        —     

Accrued expense and other liabilities

     12,331        10,811   
  

 

 

   

 

 

 

Total current liabilities

     33,790        33,501   

Revolving credit facility

     104,221        67,813   

Long-term notes payable for equipment

     52        70   

Deferred taxes

     42,771        42,972   
  

 

 

   

 

 

 

Total liabilities

     180,834        144,356   

Stockholders’ equity:

    

Common stock, par value $.01 per share; 75,000,000 shares authorized; and 25,228,816 shares issued at both June 30, 2012 and December 31, 2011

     252        252   

Additional paid in capital

     173,105        172,465   

Retained earnings

     34,221        35,828   

Treasury stock; 3,830,282 and 2,080,700 shares at June 30, 2012 and December 31, 2011, respectively

     (20,070     (10,890
  

 

 

   

 

 

 

Total stockholders’ equity

     187,508        197,655   
  

 

 

   

 

 

 

Total liabilities and stockholders’ equity

   $ 368,342      $ 342,011   
  

 

 

   

 

 

 

See accompanying notes to condensed financial statements.

 

2


Table of Contents

Union Drilling, Inc.

Condensed Statements of Operations

(Unaudited, in thousands, except share and per share data)

 

     Three Months Ended
June 30,
    Six Months Ended
June 30,
 
     2012     2011     2012     2011  

Revenues

        

Total revenues

   $ 68,095      $ 59,924      $ 132,715      $ 115,919   

Cost and expenses

        

Operating expenses

     47,988        43,918        95,776        86,493   

Depreciation and amortization

     11,765        12,803        23,982        25,412   

General and administrative

     7,465        7,248        14,977        14,501   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total cost and expenses

     67,218        63,969        134,735        126,406   
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating income (loss)

     877        (4,045     (2,020     (10,487

Interest expense, net

     (552     (280     (1,002     (667

Gain on disposal of assets

     478        248        798        444   

Other income

     186        67        361        154   
  

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before income taxes

     989        (4,010     (1,863     (10,556

Income tax expense (benefit)

     382        (577     (256     (2,527
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

   $ 607      $ (3,433   $ (1,607   $ (8,029
  

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) per common share:

        

Basic

   $ 0.03      $ (0.15   $ (0.07   $ (0.35
  

 

 

   

 

 

   

 

 

   

 

 

 

Diluted

   $ 0.03      $ (0.15   $ (0.07   $ (0.35
  

 

 

   

 

 

   

 

 

   

 

 

 

Weighted-average common shares outstanding:

        

Basic

     21,717,540        23,189,449        22,415,793        23,186,555   
  

 

 

   

 

 

   

 

 

   

 

 

 

Diluted

     21,955,330        23,189,449        22,415,793        23,186,555   
  

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying notes to condensed financial statements.

 

3


Table of Contents

Union Drilling, Inc.

Condensed Statements of Cash Flows

(Unaudited, in thousands)

 

     Six Months Ended
June 30,
 
     2012     2011  

Operating activities:

    

Net loss

   $ (1,607   $ (8,029

Adjustments to reconcile net loss to cash flow provided by operating activities:

    

Depreciation and amortization

     23,982        25,412   

Amortization of stock-based compensation expense

     640        727   

Provision for doubtful accounts

     42        —     

Gain on disposal of assets

     (798     (444

Benefit for deferred taxes

     (207     (2,108

Changes in operating assets and liabilities:

    

Accounts receivable

     (2,285     (3,561

Inventories

     (111     185   

Prepaid and other assets

     1,320        610   

Accounts payable

     (1,778     (730

Accrued expenses and other liabilities

     1,614        1,608   
  

 

 

   

 

 

 

Cash flow provided by operating activities

     20,812        13,670   

Investing activities:

    

Purchases of machinery and equipment

     (51,138     (36,578

Proceeds from sale of machinery and equipment

     1,192        762   
  

 

 

   

 

 

 

Cash flow used in investing activities

     (49,946     (35,816

Financing activities:

    

Borrowings on revolving credit facility

     168,833        146,363   

Repayments on revolving credit facility

     (132,425     (115,586

Cash overdrafts

     2,332        (415

Borrowings - other debt

     250        —     

Repayments - other debt

     (676     (610

Exercise of stock options

     —          57   

Purchases of treasury stock

     (9,180     —     
  

 

 

   

 

 

 

Cash flow provided by financing activities

     29,134        29,809   
  

 

 

   

 

 

 

Net increase in cash and cash equivalents

     —          7,663   

Cash and cash equivalents at beginning of period

     7        4   
  

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ 7      $ 7,667   
  

 

 

   

 

 

 

See accompanying notes to condensed financial statements.

 

4


Table of Contents

Union Drilling, Inc.

Condensed Statement of Stockholders’ Equity

(Unaudited, in thousands, except share data)

 

     Common Stock      Additional
Paid In
Capital
     Retained
Earnings
    Treasury
Stock
    Total  
     Shares     $                            

Balance at January 1, 2012

     23,148,116      $ 252       $ 172,465       $ 35,828      $ (10,890   $ 197,655   

Share-based compensation

     —          —           640         —          —          640   

Purchase of treasury stock

     (1,749,582     —           —           —          (9,180     (9,180

Net loss

     —          —           —           (1,607     —          (1,607
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Balance at June 30, 2012

     21,398,534      $ 252       $ 173,105       $ 34,221      $ (20,070   $ 187,508   
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

See accompanying notes to condensed financial statements.

 

5


Table of Contents

UNION DRILLING, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS

June 30, 2012

(Unaudited)

 

1. Business and Basis of Presentation

Union Drilling, Inc. (“Union Drilling,” “Company” or “we”) provides contract land drilling services and equipment to oil and natural gas producers in the United States. The accompanying unaudited condensed financial statements relate solely to the accounts of Union Drilling, Inc. The interim period condensed financial statements, including the notes thereto, have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring adjustments) necessary for a fair presentation have been included. The results for interim periods are not necessarily indicative of results for a full year. These interim period condensed financial statements should be read in conjunction with the financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2011.

To conform to the presentation of the June 30, 2012 statement of cash flows, certain balances have been reclassified on the comparative June 30, 2011 statement.

 

2. Recent Accounting Pronouncements

In June 2011, ASU No. 2011-05, Comprehensive Income (Topic 220): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs was issued. ASU No. 2011-05 is intended to create consistency between U.S. GAAP and International Financial Reporting Standards (“IFRS”) on the definition of comprehensive income, and how to present comprehensive income. Under ASU 2011-5, for companies that report items of other comprehensive income, there is a requirement to present comprehensive income along with net income in either a single continuous statement or two separate but consecutive statements. Effective January 1, 2012, we adopted ASU No. 2011-05 which did not have an impact to our financial position or results of operation. There were no differences between comprehensive income (loss) and reported net income (loss) in the periods presented.

 

3. Fair Value Measurement

The Fair Value Measurements and Disclosures Topic of the FASB Codification utilizes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three broad levels. The following is a brief description of those three levels:

 

Level 1:

   Observable inputs such as quoted prices for identical assets or liabilities in active markets;

Level 2:

   Other inputs that are observable directly or indirectly, such as quoted prices for similar assets or liabilities or market-corroborated inputs;

Level 3:

   Unobservable inputs for which there is little or no market data and which require us to develop our own assumptions about how market participants would price the assets or liabilities.

We use the following methods and assumptions in estimating our fair value disclosures for financial instruments. The carrying amount of cash and cash equivalents approximates fair value due to the short-term maturity of these instruments. For accounts and other receivables, accounts payable, financed insurance premiums and accrued liabilities, we believe that recorded amounts approximate fair value due to the relatively short maturity period. Further, the pricing mechanisms in our debt agreements combined with the short-term nature of the equipment financing arrangements result in the carrying values of these obligations approximating their respective fair values.

 

6


Table of Contents

We do not have any financial instruments for which estimates of fair value utilize Level 3 inputs.

 

4. Accounts Receivable

Accounts receivable consist of the following (in thousands):

 

     June 30,
2012
    December 31,
2011
 

Billed receivables

   $ 47,610      $ 45,320   

Unbilled receivables

     1,385        1,743   

Reserve for sales credits

     (95     (267
  

 

 

   

 

 

 

Total receivables

     48,900        46,796   

Allowance for doubtful accounts

     (1,270     (1,409
  

 

 

   

 

 

 

Net receivables

   $ 47,630      $ 45,387   
  

 

 

   

 

 

 

Unbilled receivables represent recorded revenue for contract drilling services performed that is billable by the Company at future dates based on contractual payment terms, and is anticipated to be billed and collected in the quarter following the balance sheet date. The decrease in unbilled receivables at June 30, 2012 is due to timing of billings.

 

5. Related Party Transactions

On March 9, 2012, we entered into a six month drilling contract with Jones Energy, Ltd. (“Jones”), an entity in which Metalmark Capital LLC has an equity ownership interest. Two managing directors of Metalmark Capital LLC are members of our Board of Directors and also serve on Jones’ Board of Directors. This drilling contract resulted in $1.5 million and $1.8 million of revenue for the three and six months ended June 30, 2012, respectively. The related accounts receivable balance with Jones at June 30, 2012 was $1.2 million.

 

6. Property, Buildings and Equipment

Major classes of property, buildings and equipment are as follows (in thousands):

 

     June 30,
2012
    December 31,
2011
 

Land

   $ 1,935      $ 1,935   

Buildings

     3,054        2,921   

Drilling and related equipment

     473,836        448,715   

Vehicles

     13,581        12,484   

Furniture and fixtures

     190        190   

Computer equipment

     4,215        3,786   

Leasehold improvements

     126        126   

Construction in progress

     49,867        31,445   
  

 

 

   

 

 

 
     546,804        501,602   

Accumulated depreciation

     (231,934     (212,173
  

 

 

   

 

 

 
   $ 314,870      $ 289,429   
  

 

 

   

 

 

 

 

7


Table of Contents

For the three months ended June 30, 2012, additions to drilling equipment included $19.1 million in progress payments for three new electric rigs under construction, of which two are expected to be deployed during the third quarter, and one during the fourth quarter. Other capital additions for the three months ended June 30, 2012, included a topdrive, mudpumps, and iron roughnecks, as well as other rig upgrades and capital additions.

During the six months ended June 30, 2012, additions to drilling equipment included progress payments of $27.6 million for the purchase and construction of four new rigs, of which one was completed and deployed to the Marcellus shale during the three months ended June 30, 2012. Of the remaining three rigs, two are expected to be deployed in August 2012 to the Fayetteville shale and one to the Marcellus shale in October 2012. Other capital additions for the three and six months ended June 30, 2012 included topdrives, mudpumps, iron roughnecks and drillpipe and collars, as well as other rig upgrades and capital additions.

During the six months ended June 30, 2012 and 2011, we capitalized $549,000 and $191,000, respectively, of interest costs incurred during the construction periods of certain drilling equipment.

 

7. Accrued Expenses and Other Liabilities

A detail of accrued expenses and other liabilities is as follows (in thousands):

 

     June 30,
2012
     December 31,
2011
 

Payroll and bonus

   $ 5,098       $ 3,900   

Workers’ compensation

     1,869         2,373   

Medical claims

     1,691         1,099   

Deferred revenue

     1,265         1,925   

Other taxes

     1,045         483   

Other

     1,363         1,031   
  

 

 

    

 

 

 
   $ 12,331       $ 10,811   
  

 

 

    

 

 

 

Other taxes include sales and use, franchise and property taxes.

 

8. Debt Obligations

On April 27, 2011, we entered into an Amended and Restated Revolving Credit and Security Agreement with PNC Bank, for itself and as agent for a group of lenders (“Credit Facility”). The Credit Facility matures April 27, 2016 and provides for a borrowing base equal to $150 million. Amounts outstanding bear interest, depending upon facility usage, at either (i) the higher of the Federal Funds Open Rate plus 50 to 100 basis points or PNC Bank’s base commercial lending rate (4.0% at June 30, 2012) or (ii) LIBOR plus 225 to 275 basis points (2.75% at June 30, 2012). Interest on outstanding loans is due monthly for domestic rate loans and at the end of the relevant interest period for LIBOR loans. Depending upon our facility usage, we are assessed an unused line fee of 25 to 50 basis points on the available borrowing capacity, which was $41.6 million at June 30, 2012. There is a $10.0 million sublimit for letters of credit issued under the Credit Facility. We will incur a prepayment penalty if the Credit Facility is terminated prior to April 2014. As of June 30, 2012, we had a loan balance of $104.2 million under the Credit Facility, and an additional $4.2 million of the total capacity was utilized to support our letter of credit requirements.

In general, the Credit Facility is secured by substantially all of our assets. The forced liquidation value of our assets serving as collateral is determined at least annually by an independent appraisal, with adjustments for acquisitions and dispositions between appraisals. The Credit Facility contains affirmative and negative covenants and also provides for events of default typical for such an agreement. Among the affirmative covenants are requirements to maintain a specified tangible net worth. As of June 30, 2012, our actual tangible net worth was $186.7 million compared to the required minimum tangible net worth of $158.8 million. Among the negative covenants are restrictions on major corporate transactions, incurrence of indebtedness and amendments to our organizational documents. Events of default would include a change in control and any change in our operations or a condition which has a material adverse effect. As of June 30, 2012, we were in compliance with all of our covenants.

 

8


Table of Contents

We use our Credit Facility to pay for rig acquisitions and for working capital requirements and it may also be used, subject to certain conditions, to repurchase our common stock and/or pay a cash dividend. See Note 10 for discussion of our share repurchase program.

In addition, the Company has entered into various equipment-specific financing agreements with various third-party financing institutions. The terms of these agreements have initial terms ranging from 24 to 48 months. As of June 30, 2012 and December 31, 2011, the total outstanding balance under these arrangements was approximately $339,000 and $190,000, respectively, and is classified, according to payment date, in current portion of notes payable for equipment and long-term notes payable for equipment in the accompanying balance sheets. At June 30, 2012, the stated interest rate on these borrowings is zero percent.

 

9. Commitments and Contingencies

From time to time, we are a party to claims, litigation or other legal or administrative proceedings that we consider to arise in the ordinary course of our business. While no assurances can be given regarding the outcome of these or any other pending proceedings, or the ultimate effect such outcomes may have, we do not believe we are a party to any legal or administrative proceedings which, if determined adversely to us, individually or in the aggregate, would have a material effect on our financial position, results of operations or cash flows.

As of June 30, 2012, we have agreements with Integrated Drilling Equipment Holdings, Inc. for the construction of three new electric rigs and the remaining commitment associated with the rigs and related equipment is approximately $11.2 million.

 

10. Stockholders’ Equity

As of June 30, 2012, the number of authorized shares of common stock was 75,000,000 shares, of which 21,398,534 shares were outstanding, and 1,641,744 shares were reserved for future issuance through the Company’s equity based compensation plans. The number of authorized shares of preferred stock was 100,000 shares at June 30, 2012. No shares of preferred stock were outstanding or reserved for future issuance.

In September 2011, the Company’s Board of Directors approved the 2011 Union Drilling, Inc. Share Repurchase Program under which up to three million shares of the Company’s outstanding common stock may be repurchased. For the three months ended June 30, 2012, 715,991 shares were repurchased at an average price, including commission, of $4.84, and for the six months ended June 30, 2012, 1,749,582 shares were purchased at an average price, including commission, of $5.25. On June 8, 2012, we suspended this repurchase program.

 

9


Table of Contents
11. Earnings/Loss Per Common Share

Basic earnings per share is based on the weighted-average number of common shares outstanding during the period. Diluted earnings per share includes the dilutive effect of stock options and restricted stock.

The following table presents a reconciliation of the numerators and denominators of basic earnings per share and diluted earnings per share computations for the three months ended June 30, 2012, when the Company’s stock compensation awards were not antidilutive (in thousands, except share and per share data):

 

     Three Months Ended
June 30, 2012
 

Net income

   $ 607   
  

 

 

 

Weighted average shares outstanding

     21,717,540   

Incremental shares from assumed conversion of stock options and RSU’s

     237,790   
  

 

 

 

Weighted average and assumed incremental shares

     21,955,330   
  

 

 

 

Earnings per share:

  

Basic

   $ 0.03   
  

 

 

 

Diluted

   $ 0.03   
  

 

 

 

Basic earnings per share have been computed by dividing net income by weighted average shares outstanding. Diluted earnings per share have been computed by dividing net income by weighted average and assumed incremental shares.

Because we incurred a net loss in the six months ended June 30, 2012 and the three and six months ended June 30, 2011, basic and diluted loss per share for these periods were calculated as our net loss divided by the weighted average shares outstanding. Approximately 155,000 weighted average options and restricted stock units to purchase shares of our common stock were excluded from the computation of diluted loss per share for the six months ended June 30, 2012 because the effect of including them would have been antidilutive. Similarly, during the three and six months ended June 30, 2011, 657,000 and 632,000 options and restricted stock units, respectively, were excluded from the computation of diluted loss per share because the effect of including them would have been antidilutive.

 

12. Management Compensation

Equity based plans

The Company has two equity based compensation plans, the Amended and Restated 2000 Stock Option Plan and the Amended and Restated 2005 Stock Incentive Plan. Given that more than 10 years have elapsed since the approval of the 2000 Stock Option Plan, no future stock option awards can be made under this plan. In addition to grants of incentive and non-qualified stock options to directors and employees, restricted stock and restricted stock units may also be granted under the Amended and Restated 2005 Stock Incentive Plan.

For the three and six months ended June 30, 2012, the Company recorded stock-based compensation expense of $324,000 ($206,000, net of tax) and $647,000 ($410,000, net of tax), respectively, which is included in general and administrative expense. For the three and six months ended June 30, 2011, the Company recorded stock-based compensation expense of $333,000 ($221,000 net of tax) and $672,000 ($448,000 net of tax), respectively. Total unamortized stock-based compensation was $2.8 million at June 30, 2012, and will be recognized over a weighted average service period of 2.3 years.

 

10


Table of Contents

Stock options. Options typically vest over a three or four year period and, unless earlier exercised or forfeited, expire on the tenth anniversary of the grant date. A summary of stock option activity for the six months ended June 30, 2012 is as follows:

 

     Number
of

Shares
    Weighted
Average
Exercise
Price
     Weighted
Average
Remaining
Contractual
Term in Years
     Aggregate
Intrinsic
Value
 

Outstanding at January 1, 2012

     895,091      $ 9.80         

Granted

     25,000        5.22         

Forfeited

     (4,500     6.32         
  

 

 

   

 

 

       

Outstanding at June 30, 2012

     915,591      $ 9.70         5.5       $ 33,565   
  

 

 

   

 

 

    

 

 

    

 

 

 

Options exercisable at June 30, 2012

     732,485      $ 10.56         4.9       $ 33,565   
  

 

 

   

 

 

    

 

 

    

 

 

 

The weighted average fair value of options granted during the three and six months ended June 30, 2012 was $3.47. The fair value of option grants is determined using the Black-Scholes option valuation model. The key input variables used in valuing these options were: risk free interest rate of 0.83%; stock price volatility of 84.97%; dividend yield of zero; and expected term of five years.

New shares of common stock are issued to satisfy options exercised. No stock options were exercised during the three and six months ended June 30, 2012.

A summary of options outstanding as of June 30, 2012, is as follows:

 

     Options Outstanding      Options Exercisable  

Range of Exercise Prices

   Number
Outstanding
     Weighted
Average Years
of Remaining
Contractual
Life
     Weighted
Average
Exercise
Price
     Number
Outstanding
     Weighted
Average
Exercise
Price
 

$3.80 to $9.89

     457,936         6.8       $ 5.89         274,830       $ 5.67   

$12.75 to $14.62

     457,655         4.3       $ 13.50         457,655       $ 13.50   
  

 

 

          

 

 

    
     915,591               732,485      
  

 

 

          

 

 

    

Restricted stock awards. Restricted stock awards consist of restricted stock unit grants of our common stock and are time vested over three to seven years and for a certain award granted to our Chief Executive Officer (“CEO”) contain a performance requirement. We recognize compensation expense on a straight-line basis over the vesting period. The fair value of restricted stock unit awards is determined based on the closing price of our shares on the grant date. As of June 30, 2012, there was $2.3 million of total unrecognized compensation cost related to unvested restricted stock unit awards. The cost is expected to be recognized over a weighted average period of 2.5 years.

 

11


Table of Contents

As of June 30, 2012, 481,477 restricted stock units were outstanding, at a weighted average grant date fair value of $12.37 per unit. No restricted stock units were granted during the three and six months ended June 30, 2012, and no restricted stock unit awards vested. During the three months ended June 30, 2012, 3,000 restricted stock units were forfeited at a weighted average grand date fair value of $7.10.

Of the outstanding restricted stock unit awards, 200,000 restricted stock units are subject to both performance and service criteria, of which the performance criteria for 50,000 restricted stock units were vested as of June 30, 2012.

Employee retirement plan

The Company has a 401(k) plan available to all eligible employees. Company contributions to the plan are discretionary. The Company made matching cash contributions of $111,000 and $187,000 for the three and six months ended June 30, 2012, respectively, and $87,000 and $175,000 during the three and six months ended June 30, 2011, respectively.

 

13. Income Taxes

Income tax expense for the three months ended June 30, 2012 was $382,000, which represented an effective rate of 39% of pre-tax book income. Income tax benefit for the six months ended June 30, 2012 was $256,000, which represented an effective rate of 14% of pre-tax book loss. Income tax benefit for the three and six months ended June 30, 2011 was $577,000 and $2.5 million, respectively, which represented an effective rate of 14% and 24%, respectively, of pre-tax book loss. These rates differ from the statutory rate of 35% primarily due to state income taxes, permanent book/tax differences such as those associated with the 50% deduction limitation on our per diem payments to field personnel for meals, and non-cash compensation.

At June 30, 2012 and December 31, 2011, we did not have any unrecognized tax benefits.

The Company files U.S. federal income tax returns and income tax returns in various state jurisdictions. The tax years 2006 to 2011 remain open to examination by the major taxing jurisdictions to which we are subject. In addition, tax years 1999, 2000, 2002 and 2003 remain open due to utilized losses in some jurisdictions.

 

12


Table of Contents
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

This management’s discussion and analysis of financial condition and results of operations (“MD&A”) section of our Quarterly Report on Form 10-Q discusses our results of operations, liquidity and capital resources, and certain factors that may affect our future results, including economic and industry-wide factors. You should read this MD&A in conjunction with our condensed financial statements and accompanying notes included under Part I, Item 1, of this Quarterly Report, as well as with our Annual Report on Form 10-K for the fiscal year ended December 31, 2011.

Statements we make in the following MD&A discussion and in other parts of this report that express a belief, expectation or intention, as well as those which are not historical fact, are forward-looking statements within the meaning of the federal securities laws and are subject to risks, uncertainties and assumptions. These forward-looking statements may be identified by the use of words such as “expect,” “anticipate,” “believe,” “estimate,” “potential” or similar words. These matters include statements concerning management’s plans and objectives relating to our operations or economic performance and related assumptions, including general economic and business conditions and industry trends, the continued strength or weakness of the contract land drilling industry in the geographic areas in which we operate, decisions about onshore exploration and development projects to be made by oil and gas companies, the highly competitive nature of our business, our future financial performance, including availability, terms and deployment of capital, the continued availability of qualified personnel, and changes in, or our failure or inability to comply with, government regulations, including those relating to workplace safety and the environment. Although we believe that the expectations reflected in these forward-looking statements are reasonable, we can give no assurance that such expectations will prove to have been correct. Further, we specifically disclaim any duty to update any of the information set forth in this report, including any forward-looking statements. Forward-looking statements are made based on management’s current expectations and beliefs concerning future events and, therefore, involve a number of assumptions, risks and uncertainties, including the risk factors described in Part II. Item 1A, “Risk Factors,” below. Management cautions that forward-looking statements are not guarantees, and our actual results could differ materially from those expressed or implied in the forward-looking statements.

Company Overview

Union Drilling, Inc. (“Union Drilling,” “Company” or “we”) provides contract land drilling services and equipment, primarily to oil and natural gas producers in the United States. In addition to drilling rigs, we provide the drilling crews and most of the ancillary equipment needed to operate our drilling rigs.

We provide drilling services to customers engaged in developing oil and natural gas bearing formations in selected areas of the United States. Our strategy is to focus on areas that have high growth potential, adequate takeaway capacity and low finding and development costs in order to maximize utilization and return on capital throughout the commodity price cycle. Since the global economic crisis in 2008, oil prices have rebounded while natural gas prices have not. Due to the divergence of oil and natural gas prices, many of our customers have shifted their investments to oil and liquids-rich plays; accordingly, many of the rigs in our fleet have been repositioned and are now concentrated in those oil and liquids-rich areas. Our principal operations are in the Appalachian Basin, extending from New York to Tennessee including the Marcellus, Huron, and Utica shales; the Arkoma Basin in eastern Oklahoma and Arkansas, including the Fayetteville, Caney, and Woodford shales; the Fort Worth Basin in North Texas, including the Barnett Shale and in West Texas extending to southeastern New Mexico, the Permian and Delaware Basins. Beginning in early 2012, we have expanded into the Mississippian oil plays in central Oklahoma and southern Kansas.

We specialize in shallow to deep horizontal drilling in select oil and gas producing basins of the United States. The emergence of shale plays, the application of new technologies to traditional basins, and the influx of investments in plays in the United States from the major and large independent E&P companies have all resulted in more complex drilling and customers who demand superior safety and efficiency. We have met these demands through investments in equipment designed for horizontal drilling, as well as investments in our people and processes to improve drilling productivity and safety, and reduce total well costs for our customers.

 

13


Table of Contents

We commenced operations in 1997 with 12 drilling rigs and related equipment acquired from an entity providing contract drilling services under the name “Union Drilling.” Since 2006, we have placed 30 new rigs into service and have an additional three new rigs scheduled to be delivered and deployed in 2012. Moreover, to better focus on safety and operational efficiency, we have upgraded many of our rigs with automation and other modern features designed for horizontal drilling, including adding top drives, pad drilling and skidding systems, larger circulating systems and automated pipe handling systems. Accordingly, our marketed rig fleet at June 30, 2012, contains 50 land drilling rigs, demonstrating our commitment to provide premium, modern rigs and experienced, knowledgeable crews to the major and large independent E&P companies.

Key Indicators of Financial Performance for Management

Key performance measurements in our industry are rig utilization, revenue per revenue day and operating expenses per revenue day. Revenue days for each rig are days when the rig is earning revenues under a contract, which is usually a period from the date the rig begins moving to the drilling location until the rig is released from the contract. We compute rig utilization rates by dividing revenue days by total available days during a period. Total available days are the number of calendar days during the period that we have owned and marketed the drilling rig.

The following table summarizes management’s key indicators of financial performance.

 

     Three Months Ended
June 30,
   

Six Months Ended

June 30,

 
     2012     2011     2012     2011  

Revenue days

     3,554        3,516        7,094        6,979   

Average number of marketed rigs

     50        71        50        71   

Marketed rig utilization rates

     78.1     54.4     77.7     54.3

Revenue per revenue day

   $ 19,160      $ 17,043      $ 18,708      $ 16,610   

Operating expenses per revenue day

   $ 13,503      $ 12,491      $ 13,501      $ 12,393   

Drilling margin per revenue day

   $ 5,657      $ 4,552      $ 5,207      $ 4,217   

EBITDA (000’s)

   $ 13,306      $ 9,073      $ 23,121      $ 15,523   

Our business is substantially dependent on and affected by the level of U.S. land-based oil and natural gas exploration and development activity. Since the global economic crisis in 2008, oil prices have rebounded while natural gas prices have not. Since that time, we experienced improvement in our marketed rig utilization rates as well as improvement in our revenue per revenue day due to upgrades in our drilling fleet, and a shift to oil drilling. Our operating expenses per revenue day have also increased due to more complex drilling required for unconventional and shale plays, higher wages and headcount across certain of our markets, an enhanced focus on retention and safety initiatives, and in 2012, as a result of certain relocation costs, as several of our rigs transitioned from primarily natural gas drilling to oil and liquids-rich areas.

EBITDA is earnings before net interest, income taxes, depreciation and amortization and non-cash impairment. We believe EBITDA is a useful measure in evaluating financial performance because it is used by external users, such as investors, commercial banks, research analysts and others, to assess: (1) the financial performance of Union Drilling’s assets without regard to financing methods, capital structure or historical cost basis, (2) the ability of Union Drilling’s assets to generate cash sufficient to pay interest costs and support its indebtedness, and (3) Union Drilling’s operating performance and return on capital as compared to those of other entities in our industry, without regard to financing or capital structure. EBITDA is not a measure of financial performance under generally accepted accounting principles. However, EBITDA is a common alternative measure of operating performance used by investors, financial analysts and rating agencies. A reconciliation of EBITDA to net earnings is included below. EBITDA as presented may not be comparable to other similarly titled measures reported by other companies (in thousands).

 

14


Table of Contents
    

Three Months Ended

June 30,

   

Six Months Ended

June 30,

 
     2012      2011     2012     2011  

Calculation of EBITDA:

         

Net income (loss)

   $ 607       $ (3,433   $ (1,607   $ (8,029

Interest expense, net

     552         280        1,002        667   

Income tax expense (benefit)

     382         (577     (256     (2,527

Depreciation and amortization

     11,765         12,803        23,982        25,412   
  

 

 

    

 

 

   

 

 

   

 

 

 

EBITDA

   $ 13,306       $ 9,073      $ 23,121      $ 15,523   
  

 

 

    

 

 

   

 

 

   

 

 

 

Drilling margin represents contract drilling revenues less contract drilling costs. We believe that drilling margin is a useful measure for evaluating financial performance, although it is not a measure of financial performance under generally accepted accounting principles. However, drilling margin is a common measure of operating performance used by management, investors and financial analysts. A reconciliation of drilling margin to operating income is included below. Drilling margin as presented may not be comparable to other similarly titled measures reported by other companies (in thousands, except day and per day data).

 

     Three Months Ended
June 30,
   

Six Months Ended

June 30,

 
     2012      2011     2012     2011  

Calculation of drilling margin:

         

Operating income (loss)

   $ 877       $ (4,045   $ (2,020   $ (10,487

Depreciation and amortization

     11,765         12,803        23,982        25,412   

General and administrative

     7,465         7,248        14,977        14,501   
  

 

 

    

 

 

   

 

 

   

 

 

 

Drilling margin

   $ 20,107       $ 16,006      $ 36,939      $ 29,426   

Revenue days

     3,554         3,516        7,094        6,979   

Drilling margin per revenue day

   $ 5,657       $ 4,552      $ 5,207      $ 4,217   

Critical Accounting Policies and Estimates

Our accounting policies that are critical or the most important to understand our financial condition and results of operations and that require management to make the most difficult judgments are described in our 2011 Annual Report on Form 10-K. There have been no material changes in these critical accounting policies.

Results of Operations

Our operations primarily consist of drilling oil or natural gas wells for our customers under either daywork contracts and, to a much lesser extent, footage contracts. The contract terms we offer generally depend on the location, depth and complexity of the well to be drilled; the on-site drilling conditions; the type of equipment used; the duration of the work to be performed; and the competitive forces of the market. In most instances, our contracts provide for additional payments related to rig mobilization and demobilization, as well as reimbursement of certain out-of-pocket costs.

 

15


Table of Contents

Statements of Operations Analysis

The following table provides selected information about our operations (in thousands).

 

     Three Months Ended
June 30,
    

Six Months Ended

June 30,

 
     2012     2011      2012      2011  

Revenues

   $ 68,095      $ 59,924       $ 132,715       $ 115,919   

Operating expenses

     47,988        43,918         95,776         86,493   

Depreciation and amortization

     11,765        12,803         23,982         25,412   

General and administrative expense

     7,465        7,248         14,977         14,501   

Interest expense, net

     552        280         1,002         667   

Other income and gain on disposal of assets

     664        315         1,159         598   

Income tax (expense) benefit

     (382     577         256         2,527   

Revenues. Our revenues during the three and six months ended June 30, 2012 compared to the same periods in 2011, increased $8.2 million, or 14%, and $16.8 million, or 14%, respectively. The increase in revenues was primarily attributable to the increase in dayrates and increased utilization. During the three months ended June 30, 2012, average dayrates were $19,160 compared to $17,043 during the same period in 2011; and during the six months ended June 30, 2012, average day rates were $18,708 compared to $16,610 during the same period in 2011. Average day rates increased during the three and six months ended June 30, 2012 compared to the same periods in 2011 due to the addition of three new rigs during 2011, and one new rig during 2012. These rigs had a higher average dayrate and utilization than certain operating rigs in 2011; additionally, we sold certain smaller rigs in an auction held in December 2011. We also realized pricing improvements in Texas due to market conditions, as well as slight increases in revenue days and utilization in Texas and Appalachia.

Operating expenses. Our operating expenses during the three and six months ended June 30, 2012 compared to the same periods in 2011, increased $4.1 million, or 9%, and $9.3 million, or 11%, respectively. The increase in operating expenses was primarily due to the increase in operating costs per day, and to a lesser extent, higher utilization. Operating costs per day were $13,503 compared to $12,491 for the three months ended June 30, 2012 and 2011, respectively, and $13,501 compared to $12,393 for the six months ended June 30, 2012 and 2011, respectively. The increase in operating costs per day for the three and six months ended June 30, 2012 and 2011, were due to higher employment costs, increased costs related to safety initiatives, retention efforts and training costs, and as a result of certain relocation costs as several of our rigs transitioned to oil and liquids rich areas.

Depreciation and amortization. The decrease in depreciation and amortization expense during the three and six months ended June 30, 2012 compared to the same periods in 2011 was due to the disposition of assets in an auction held in December 2011.

General and administrative expenses. Our general and administrative expenses during the three and six months ended June 30, 2012 compared to the same periods in 2011 increased $217,000, or 3%, and $476,000, or 3%, respectively. These increases were primarily attributable to higher employment costs due to increased wages and increased property tax expense.

Interest expense, net. The increase in interest expense for the three and six months ended June 30, 2012 compared to the same periods in 2011 was primarily attributable to the increase in the average outstanding balance of our revolving credit facility primarily in support of our rig building program.

 

16


Table of Contents

Other income and gain on disposal of assets. Other income and gain on disposal of assets increased by $349,000 and $561,000 for the three and six months ended June 30, 2012, respectively, compared to same periods in 2011. These increases were primarily due to the sale of a marketed rig and other related assets in an auction during the three months ended June 30, 2012, and the sales of marketed rigs and other related assets in a private transaction during the six months ended June 30, 2012. There were no such rig sales during the three and six months ended June 30, 2011.

Income tax (expense) benefit. The increase in income tax expense during the three months ended June 30, 2012, and the decrease in income tax benefit for the six months ended June 30, 2012, as compared to the same periods in 2011, was primarily due to net income during the three months ended June 30, 2012 and the decrease in pre-tax loss for the six months ended June 30, 2012. Our effective income tax rate of 39% and 14% for the three and six months ended June 30, 2012, respectively, differs from the federal statutory rate of 35% due to state income taxes and permanent book/tax differences such as those associated with the 50% deduction limitation on per diem meals expense and stock-based compensation.

Liquidity and Capital Resources

Our operations have historically generated sufficient cash flow to meet our requirements for debt service and equipment expenditures (excluding major business and asset acquisitions). Cash flow provided by operating activities during the first six months of 2012 was $20.8 million compared to $13.7 million during the first six months of 2011. This increase in cash flow from operating activities was primarily due to the decrease in net loss.

Our cash flow from operations was primarily used to invest in new machinery and equipment.

During the first six months of 2012 and 2011, cash used in investing activities totaled $49.9 million and $35.8 million, respectively. During the six months ended June 30, 2012, additions to drilling equipment included progress payments of $27.6 million for the purchase and construction of four new rigs, one of which was completed and deployed to the Marcellus shale during the three months ended June 30, 2012. Of the remaining three rigs, two are expected to be deployed in August 2012 to the Fayetteville shale and one to the Marcellus shale in October 2012. Other capital additions for the three and six months ended June 30, 2012 included topdrives, mudpumps, iron roughnecks and drillpipe and collars, as well as other rig upgrades and capital additions. As of June 30, 2012, we have agreements with Integrated Drilling Equipment Holdings, Inc. for the construction of three new electric rigs and the remaining commitment associated with the rigs and related equipment is approximately $11.2 million.

The six months ended June 30, 2011, included payments of $5.3 million for the purchase of a new 1,000 hp mechanical rig, and $12.7 million related to upgrades and initial construction costs for two 1,000 hp mechanical rigs.

Cash flow provided by financing activities was $29.1 million in the first six months of 2012, compared to $29.8 million of cash flow provided by financing activities for the first six months of 2011. During the six months ended June 30, 2012, we purchased 1,749,582 shares of our common stock for $9.2 million under a share repurchase program. On June 8, 2012, we suspended this program.

We believe cash generated by our operations and our ability to borrow the currently unused portion of our revolving credit facility of $41.6 million, after reductions for approximately $4.2 million outstanding letters of credit, as of June 30, 2012 should allow us to meet our routine financial obligations for the foreseeable future.

Sources of Capital Resources

Our rig fleet has grown from 12 rigs in 1997 to 50 marketed rigs at June 30, 2012. We have financed this growth with a combination of debt and equity financing, as well as operating cash flows. At June 30, 2012, our total debt to total capital was 36%.

See Note 8 “Debt Obligations” of the financial statements for information on the Company’s debt agreements as sources of capital resources, such information being incorporated herein by reference.

 

17


Table of Contents

Uses of Capital Resources

For the three and six months ended June 30, 2012 and 2011, the additions to our property and equipment consisted of the following (in thousands):

 

     Three Months Ended
June 30,
   

Six Months Ended

June 30,

 
     2012     2011     2012     2011  

Land

   $ 72      $ 1,997      $ 72      $ 1,997   

Buildings and furniture and fixtures

     126        69        126        69   

Drilling and related equipment

     28,872        22,931        49,178        37,262   

Vehicles

     1,322        788        1,438        1,446   

Information systems

     —          83        133        145   
  

 

 

   

 

 

   

 

 

   

 

 

 

Property and equipment additions

     30,392        25,868        50,947        40,919   

Plus adjustments for non-cash transactions:

        

Cash paid in current period for prior period accruals

     6,806        2,860        6,006        2,616   

Current period accruals

     (5,815     (6,957     (5,815     (6,957
  

 

 

   

 

 

   

 

 

   

 

 

 

Cash used for purchases of machinery and equipment

   $ 31,383      $ 21,771      $ 51,138      $ 36,578   
  

 

 

   

 

 

   

 

 

   

 

 

 

For the three months ended June 30, 2012, additions to drilling equipment included $19.1 million in progress payments for three new electric rigs under construction, of which two are expected to be deployed during the third quarter, and one during the fourth quarter. Other capital additions for the three months ended June 30, 2012, included a topdrive, mudpumps, and iron roughnecks, as well as other rig upgrades and capital additions.

During the six months ended June 30, 2012, additions to drilling equipment included progress payments of $27.6 million for the purchase and construction of four new rigs, one of which was completed and deployed to the Marcellus shale during the three months ended June 30, 2012. Of the remaining three rigs, two are expected to be deployed in August 2012 to the Fayetteville shale and one to the Marcellus shale in October 2012. Other capital additions for the six months ended June 30, 2012 included topdrives, mudpumps, iron roughnecks and drillpipe and collars, as well as other rig upgrades and capital additions.

For the three months ended June 30, 2011, additions to drilling equipment included $8 million for upgrades and initial construction costs of three mechanical rigs. Other capital additions for the three and six months ended June 30, 2011 included rig enhancements, such as top drives and pad drilling packages, as well as drillpipe and other capital maintenance. Additionally, during the three months ended June 30, 2011, the Company purchased office buildings, rig yards and surrounding land in West Texas and Arkansas for $800,000 and $1.2 million, respectively.

The six months ended June 30, 2011, included payments of $5.3 million for the purchase of a new mechanical rig, and $12.7 million related to upgrades and initial construction costs for two new mechanical rigs.

Working Capital

Our working capital was $18.2 million and $17.4 million at June 30, 2012 and December 31, 2011, respectively. Our current ratio, which we calculate by dividing our current assets by our current liabilities, was 1.5 at June 30, 2012 and December 31, 2011.

 

18


Table of Contents

The changes in the components of our working capital were as follows (in thousands):

 

     June 30,
2012
     December 31,
2011
     Change  

Cash and cash equivalents

   $ 7       $ 7       $ —     

Accounts receivable

     47,630         45,387         2,243   

Inventories

     943         832         111   

Income tax recoverable

     302         368         (66

Prepaid expenses, deposits and other receivables

     1,887         3,027         (1,140

Deferred taxes

     1,245         1,239         6   
  

 

 

    

 

 

    

 

 

 

Current assets

     52,014         50,860         1,154   

Accounts payable

     20,596       $ 21,513         (917

Current portion of notes payable for equipment

     287         120         167   

Financed insurance premiums

     482         1,057         (575

Customer advances

     94         —           94   

Accrued expenses and other liabilities

     12,331         10,811         1,520   
  

 

 

    

 

 

    

 

 

 

Current liabilities

     33,790         33,501         289   
  

 

 

    

 

 

    

 

 

 

Working capital

   $ 18,224       $ 17,359       $ 865   
  

 

 

    

 

 

    

 

 

 

The $2.2 million increase in our accounts receivable at June 30, 2012, from December 31, 2011, was primarily due to timing of customer receipts.

The $1.1 million decrease in prepaid expenses, deposits and other receivables at June 30, 2012, from December 31, 2011, was primarily due to collections received related to the auction held in December 2011, vendor rebates and an insurance claim, as well as scheduled amortization of prepaid insurance.

The $917,000 decrease in accounts payable at June 30, 2012, from December 31, 2011, was primarily due to timing of vendor payments.

The $1.5 million increase in accrued expenses and other liabilities at June 30, 2012, from December 31, 2011, is primarily due to an increase in accrued payroll, as well as an increase in property tax and medical accrual. These decreases were partially offset by a decrease in deferred revenue.

Long-term Debt

Our long-term debt consisted of $104.2 million and $67.8 million of outstanding borrowings under our revolving credit facility at June 30, 2012, and December 31, 2011, respectively, as well as $52,000 and $70,000 of outstanding borrowings related to long-term borrowing for equipment at June 30, 2012, and December 31, 2011, respectively.

Contractual Obligations

We did not enter into any significant contractual obligations during the three and six months ended June 30, 2012.

Inflation

Inflation did not have a significant effect on our results of operations in any of the periods reported.

 

19


Table of Contents

Off Balance Sheet Arrangements

We do not currently have any off balance sheet arrangements.

Recently Issued Accounting Standards

See Note 2 “Recent Accounting Pronouncements” of the financial statements for recently issued accounting standards, such information being incorporated herein by reference.

 

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We are subject to market risk exposure related to changes in interest rates on our revolving credit facility, which provides for interest on borrowings at a floating rate. At June 30, 2012, we had $104.2 million outstanding debt on our revolving credit facility. Assuming no change in the net principal balance, a hypothetical increase or decrease of 100 basis points in the interest rate would have a corresponding increase or decrease in our interest expense of approximately $1.042 million.

 

ITEM 4. CONTROLS AND PROCEDURES

 

(a) Evaluation of Disclosure Controls and Procedures

Our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”)), which we refer to as disclosure controls, are controls and procedures designed with the objective of ensuring that information required to be disclosed in our reports filed under the Exchange Act, such as this quarterly report, is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms. Disclosure controls are also designed with the objective of ensuring that such information is accumulated and communicated to our management, including our CEO and CFO, as appropriate to allow timely decisions regarding required disclosure. There are inherent limitations to the effectiveness of any control system. A control system, no matter how well conceived and operated, can provide only reasonable assurance that its objectives are met. No evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected.

As of June 30, 2012, an evaluation was carried out under the supervision and with the participation of our management, including the CEO and the CFO, of the effectiveness of the design and operation of our disclosure controls. Based upon that evaluation, the CEO and the CFO concluded that, as of such date, the design and operation of these disclosure controls were effective to accomplish their objectives at the reasonable assurance level.

 

(b) Changes in Internal Control over Financial Reporting

No change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) occurred during the fiscal quarter ended June 30, 2012 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

20


Table of Contents

PART II. OTHER INFORMATION

 

ITEM 1. LEGAL PROCEEDINGS

Refer to Note 9 “Commitments and Contingencies” of the financial statements for information on legal proceedings, such information being incorporated herein by reference.

 

ITEM 1A. RISK FACTORS

There have been no material changes during the quarter ended June 30, 2012 in our “Risk Factors” as discussed in detail in our 2011 Annual Report on Form 10-K. The risks described in our Form 10-K are not the only risks facing us. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may, especially in a volatile economic environment, materially adversely affect our business, financial condition and/or operating results.

Items 2, 3, 4 and 5 are not applicable and have been omitted.

 

ITEM 6. EXHIBITS

A list of the exhibits required by Item 601 of Regulation S-K to be filed as a part of this report is set forth in the Index to Exhibits on page 23, which immediately precedes such exhibits.

 

21


Table of Contents

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.

 

    UNION DRILLING, INC.
Dated: August 2, 2012     /s/    TINA L. CASTILLO        
    Tina L. Castillo
    Senior Vice President, Chief Financial Officer and Treasurer
    (Principal Financial and Accounting Officer)

 

22


Table of Contents

UNION DRILLING, INC.

INDEX TO EXHIBITS

 

Exhibit
Number

       

Description

  3.1      Form of Amended and Restated Certificate of Incorporation of Union Drilling (incorporated by reference to Exhibit 3.1 to our Registration Statement on Form S-1 (File No. 333-127525) filed on August 15, 2005).
  3.2      Form of Amended and Restated Bylaws of Union Drilling (incorporated by reference to Exhibit 3.1 to our Form 8-K (File No. 000-51630) filed on August 9, 2007).
31.1*      Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 filed herewith.**
31.2*      Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 filed herewith.**
32.1*      Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 filed herewith.**
32.2*      Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 filed herewith.**
101      Financial statements from the quarterly report on Form 10-Q of Union Drilling, Inc. for the quarter ended June 30, 2012, filed August 2, 2012, formatted in XBRL; (i) the Condensed Statements of Operations, (ii) Condensed Balance Sheets, (iii) Condensed Statement of Stockholders’ Equity, (iv) the Condensed Statements of Cash Flows and (v) the Notes to Condensed Financial Statements.***

 

* Filed with this Report.
** This Certification shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to the liability of that section. This Certification shall not be deemed to be incorporated by reference into any filing of the Company under the Securities Act of 1933 or the Securities Exchange Act of 1934, each as amended, whether made before or after the date hereof, except to the extent that the Company specifically incorporates it by reference.
*** The XBRL-related information in Exhibit 101 shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to liability under that section and shall not be incorporated by reference into any filing or other document pursuant to the Securities Act of 1933, as amended, except as shall be expressly set forth by specific reference in such filing or document.

 

23