Attached files
file | filename |
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EX-31.2 - EX-31.2 - UNION DRILLING INC | d351671dex312.htm |
EX-32.1 - EX-32.1 - UNION DRILLING INC | d351671dex321.htm |
EX-32.2 - EX-32.2 - UNION DRILLING INC | d351671dex322.htm |
EX-31.1 - EX-31.1 - UNION DRILLING INC | d351671dex311.htm |
EXCEL - IDEA: XBRL DOCUMENT - UNION DRILLING INC | Financial_Report.xls |
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
(Registrants telephone number, including area code)
www.uniondrilling.com
(Registrants 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
Page | ||||||
2 | ||||||
ITEM 1. |
FINANCIAL STATEMENTS | 2 | ||||
2 | ||||||
3 | ||||||
4 | ||||||
5 | ||||||
6 | ||||||
ITEM 2. |
MANAGEMENTS 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 | ||||
21 | ||||||
ITEM 1. |
LEGAL PROCEEDINGS | 21 | ||||
ITEM 1A. |
RISK FACTORS | 21 | ||||
ITEM 6. |
EXHIBITS | 21 | ||||
22 | ||||||
23 |
Table of Contents
ITEM 1. | FINANCIAL STATEMENTS |
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 | ||||||
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|
|
|
|||||
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 | ||||||
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|
|
|||||
Total assets |
$ | 368,342 | $ | 342,011 | ||||
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|
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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 | ||||||
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|
|
|
|||||
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 | ) | ||||
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|
|||||
Total stockholders equity |
187,508 | 197,655 | ||||||
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|
|||||
Total liabilities and stockholders equity |
$ | 368,342 | $ | 342,011 | ||||
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|
|
See accompanying notes to condensed financial statements.
2
Table of Contents
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 | ||||||||||||
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|
|||||||||
Total cost and expenses |
67,218 | 63,969 | 134,735 | 126,406 | ||||||||||||
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|
|||||||||
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 | ||||||||||||
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|
|||||||||
Income (loss) before income taxes |
989 | (4,010 | ) | (1,863 | ) | (10,556 | ) | |||||||||
Income tax expense (benefit) |
382 | (577 | ) | (256 | ) | (2,527 | ) | |||||||||
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Net income (loss) |
$ | 607 | $ | (3,433 | ) | $ | (1,607 | ) | $ | (8,029 | ) | |||||
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Income (loss) per common share: |
||||||||||||||||
Basic |
$ | 0.03 | $ | (0.15 | ) | $ | (0.07 | ) | $ | (0.35 | ) | |||||
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Diluted |
$ | 0.03 | $ | (0.15 | ) | $ | (0.07 | ) | $ | (0.35 | ) | |||||
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Weighted-average common shares outstanding: |
||||||||||||||||
Basic |
21,717,540 | 23,189,449 | 22,415,793 | 23,186,555 | ||||||||||||
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Diluted |
21,955,330 | 23,189,449 | 22,415,793 | 23,186,555 | ||||||||||||
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|
See accompanying notes to condensed financial statements.
3
Table of Contents
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 | ||||||
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|
|
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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 | ||||||
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|
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|
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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 | ) | | |||||
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|
|||||
Cash flow provided by financing activities |
29,134 | 29,809 | ||||||
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Net increase in cash and cash equivalents |
| 7,663 | ||||||
Cash and cash equivalents at beginning of period |
7 | 4 | ||||||
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Cash and cash equivalents at end of period |
$ | 7 | $ | 7,667 | ||||
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See accompanying notes to condensed financial statements.
4
Table of Contents
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 | ) | ||||||||||||||||
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Balance at June 30, 2012 |
21,398,534 | $ | 252 | $ | 173,105 | $ | 34,221 | $ | (20,070 | ) | $ | 187,508 | ||||||||||||
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See accompanying notes to condensed financial statements.
5
Table of Contents
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 Companys 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 | ) | ||||
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Total receivables |
48,900 | 46,796 | ||||||
Allowance for doubtful accounts |
(1,270 | ) | (1,409 | ) | ||||
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Net receivables |
$ | 47,630 | $ | 45,387 | ||||
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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 | ||||||
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546,804 | 501,602 | |||||||
Accumulated depreciation |
(231,934 | ) | (212,173 | ) | ||||
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$ | 314,870 | $ | 289,429 | |||||
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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 | ||||||
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$ | 12,331 | $ | 10,811 | |||||
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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 Banks 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 Companys 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 Companys Board of Directors approved the 2011 Union Drilling, Inc. Share Repurchase Program under which up to three million shares of the Companys 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 Companys 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 RSUs |
237,790 | |||
|
|
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Weighted average and assumed incremental shares |
21,955,330 | |||
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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 |
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Outstanding at January 1, 2012 |
895,091 | $ | 9.80 | |||||||||||||
Granted |
25,000 | 5.22 | ||||||||||||||
Forfeited |
(4,500 | ) | 6.32 | |||||||||||||
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Outstanding at June 30, 2012 |
915,591 | $ | 9.70 | 5.5 | $ | 33,565 | ||||||||||
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Options exercisable at June 30, 2012 |
732,485 | $ | 10.56 | 4.9 | $ | 33,565 | ||||||||||
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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 |
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$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 | |||||||||||||
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915,591 | 732,485 | |||||||||||||||||||
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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.
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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.
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ITEM 2. | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
This managements 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 managements 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 managements 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.
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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 managements key indicators of financial performance.
Three Months Ended June 30, |
Six Months Ended June 30, |
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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 (000s) |
$ | 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 Drillings assets without regard to financing methods, capital structure or historical cost basis, (2) the ability of Union Drillings assets to generate cash sufficient to pay interest costs and support its indebtedness, and (3) Union Drillings 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).
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Three Months Ended June 30, |
Six Months Ended June 30, |
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2012 | 2011 | 2012 | 2011 | |||||||||||||
Calculation of EBITDA: |
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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 | ||||||||||||
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EBITDA |
$ | 13,306 | $ | 9,073 | $ | 23,121 | $ | 15,523 | ||||||||
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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, |
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2012 | 2011 | 2012 | 2011 | |||||||||||||
Calculation of drilling margin: |
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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 | ||||||||||||
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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.
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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, |
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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.
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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 Companys debt agreements as sources of capital resources, such information being incorporated herein by reference.
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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, |
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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 | ||||||||||||
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Property and equipment additions |
30,392 | 25,868 | 50,947 | 40,919 | ||||||||||||
Plus adjustments for non-cash transactions: |
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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 | ) | ||||||||
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Cash used for purchases of machinery and equipment |
$ | 31,383 | $ | 21,771 | $ | 51,138 | $ | 36,578 | ||||||||
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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.
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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 | |||||||||
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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 | |||||||||
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Current liabilities |
33,790 | 33,501 | 289 | |||||||||
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Working capital |
$ | 18,224 | $ | 17,359 | $ | 865 | ||||||
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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.
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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 Commissions 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.
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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.
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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) |
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INDEX TO EXHIBITS
Exhibit |
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. |
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