|• FORM 10-Q • CERTIFICATION OF CHIEF EXECUTIVE OFFICER PURSUANT TO SECTION 302 • CERTIFICATION OF CHIEF FINANCIAL OFFICER PURSUANT TO SECTION 302 • CERTIFICATION OF CHIEF EXECUTIVE OFFICER PURSUANT TO 18 U.S.C. SECTION 1350 • CERTIFICATION OF CHIEF FINANCIAL OFFICER PURSUANT TO 18 U.S.C. SECTION 1350 • XBRL INSTANCE DOCUMENT • XBRL TAXONOMY EXTENSION SCHEMA • XBRL TAXONOMY EXTENSION CALCULATION LINKBASE • XBRL TAXONOMY EXTENSION DEFINITION LINKBASE • XBRL TAXONOMY EXTENSION LABEL LINKBASE • XBRL TAXONOMY EXTENSION PRESENTATION LINKBASE|
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
For the quarterly period ended March 31, 2012
For the transition period from to
Commission File Number 000-51630
UNION DRILLING, INC.
(Exact name of registrant as specified in its charter)
(Registrants telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of 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):
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 May 1, 2012, there were 25,228,816 shares of common stock, par value $0.01 per share, of the registrant issued and 21,914,946 shares outstanding.
UNION DRILLING, INC.
Condensed Balance Sheets
(in thousands, except share data)
See accompanying notes to condensed financial statements.
Condensed Statements of Operations
(Unaudited, in thousands, except share and per share data)
See accompanying notes to condensed financial statements.
Condensed Statements of Cash Flows
(Unaudited, in thousands)
See accompanying notes to condensed financial statements.
Condensed Statement of Stockholders Equity
(Unaudited, in thousands, except share data)
See accompanying notes to condensed financial statements.
NOTES TO CONDENSED FINANCIAL STATEMENTS
March 31, 2012
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.
For all periods reported, other comprehensive income (loss) equals net income (loss).
To conform to the presentation of the March 31, 2012 statement of cash flows, certain balances have been reclassified on the comparative March 31, 2011 statement.
In May 2011, ASU No. 2011-04, Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs was issued. ASU No. 2011-04 is intended to create consistency between U.S. GAAP and International Financial Reporting Standards (IFRS) on the definition of fair value, how to measure fair value, and what to disclose about fair value measurements. Effective January 1, 2012, we adopted ASU No. 2011-04 which did not have an impact to our financial position or results of operation.
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:
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.
We do not have any financial instruments for which estimates of fair value disclosures utilize Level 3 inputs.
Accounts receivable consist of the following (in thousands):
Unbilled receivables represent recorded revenue for contract drilling services performed that is billable by the Company at future dates based on contractual terms, and is anticipated to be billed and collected in the quarter following the balance sheet date. The increase in unbilled receivables at March 31, 2012 is due to timing of billings.
At March 31, 2012, approximately $4.0 million of invoices were under dispute; we believe that our current reserve adequately provides for such disputes, as well as any other potential write-offs related to outstanding amounts at March 31, 2012.
On March 9, 2012, we entered into a six month drilling contract with Jones Energy, Ltd. (Jones), an entity in which, Metalmark Capital, our majority shareholder, also has an ownership interest. Further, two managing directors of Metalmark Capital, are members of our Board of Directors and also serve on Jones Board of Directors. This drilling contract resulted in $286,000 of revenue for the three months ended March 31, 2012. The related accounts receivable balance with Jones at March 31, 2012 was $286,000.
Major classes of property, buildings and equipment are as follows (in thousands):
During January 2012, the Company made an initial payment of $5.1 million for the purchase and construction of a 1,000 hp electric drilling rig, with an expected delivery date of September 15, 2012. Other capital additions for the three months ended March 31, 2012 included partial payments toward four rigs currently under construction, as well as other rig upgrades and capital additions. During the three months ended March 31, 2012 and 2011, we capitalized $259,000 and $63,000, respectively, of interest costs incurred during the construction periods of certain drilling equipment.
A detail of accrued expenses and other liabilities is as follows (in thousands):
Other taxes include sales and use, franchise and property taxes.
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 March 31, 2012) or (ii) LIBOR plus 225 to 275 basis points (2.75% at March 31, 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 $64.2 million at March 31, 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 March 31, 2012, we had a loan balance of $81.6 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 March 31, 2012, our actual tangible net worth was $189.1 million compared to the required minimum tangible net worth of $158.5 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 condition which has a material adverse effect. As of March 31, 2012, we were in compliance with all of our covenants.
We use our Credit Facility to pay for rig acquisitions and for working capital requirements and may also be used by the Company, subject to certain conditions, to repurchase its 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 range from 24 to 48 months. As of March 31, 2012 and December 31, 2011, the total outstanding balance under these arrangements was approximately $410,000 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 March 31, 2012, the stated interest rates on these borrowings are zero percent.
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. Management believes that there are adequate levels of insurance necessary to cover business risk.
As of March 31, 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 $32.0 million.
At March 31, 2012, the number of authorized shares of common stock was 75,000,000 shares, of which 22,114,525 were outstanding, and 1,000,000 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 March 31, 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 March 31, 2012, 1,033,591 shares were purchased at an average price, including commission, of $5.53. Additionally, since April 1, 2012, we purchased 199,579 shares of our common stock through May 1, 2012.
Because we incurred a net loss in the three months ended March 31, 2012 and 2011, basic and diluted loss per share for each period were calculated as our net loss divided by the weighted average shares outstanding. Approximately 451,000 and 623,000 weighted average stock options and restricted stock units to purchase shares of our common stock were excluded from the computation of diluted loss per share for the three months ended March 31, 2012 and 2011, respectively, because the effect of including them would have been antidilutive.
Equity based compensation 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 months ended March 31, 2012 and 2011, the Company recorded stock-based compensation expense of $323,000 ($204,000, net of tax) and $339,000 ($227,000, net of tax), respectively, which is included in general and administrative expense. Total unamortized stock-based compensation was $3.0 million at March 31, 2012, and will be recognized over a weighted average service period of 3.4 years.
Stock options. Stock 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 three months ended March 31, 2012 is as follows:
No options were granted during the three months ended March 31, 2012.
New shares of common stock are issued to satisfy options exercised. No stock options were exercised during the three months ended March 31, 2012.
A summary of options outstanding as of March 31, 2012, is as follows:
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 awards is determined based on the closing price of our shares on the grant date. As of March 31, 2012, there was $2.6 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 4.0 years. As of March 31, 2012, 484,477 restricted stock units were outstanding, at a weighted average grant date fair value of $11.79 per unit. No restricted stock units were granted during the three months ended March 31, 2012, and no restricted stock unit awards vested or were forfeited.
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 March 31, 2012.
Employee benefit plan
The Company has a defined contribution employee benefit plan covering substantially all of its employees. Company contributions to the plan are discretionary. The Company made contributions of approximately $76,000, and $88,000 for the three months ended March 31, 2012 and 2011, respectively.
Income tax benefit for the three months ended March 31, 2012 was $638,000, or an effective rate of 22.4% of pre-tax book loss. This rate differs 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 per diem payments for meals and non-cash compensation. Income tax benefit for the three months ended March 31, 2011 was $1.9 million, or an effective rate of 30% of pre-tax book loss.
At March 31, 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 through 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.
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.
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 has 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 liquid-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 invested in our people and processes to improve drilling productivity and safety, and reduce total well costs for our customers.
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 27 new rigs into service and have an additional four 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 pipe handling systems. Accordingly, our marketed rig fleet at March 31, 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.
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 has 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 loss is included below. EBITDA as presented may not be comparable to other similarly titled measures reported by other companies (in thousands).
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, financial analysts and rating agencies. 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).
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 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.
Statements of Operations Analysis
The following table provides selected information about our operations for the three months ended March 31, 2012 and 2011 (in thousands).
Revenues. Our revenues increased by $8.6 million, or 15%, in the three months ended March 31, 2012 compared to the same period in 2011. This increase in revenues was primarily attributable to the increase in our marketed rig utilization and higher dayrates. Average day rates increased to $18,254 at March 31, 2012 from $16,170 at March 31, 2011, due to rig mix and an increase in pricing in West Texas. Utilization increased to 77.8% at March 31, 2012, from 54.2% at March 31, 2011, primarily due to the addition of three new rigs that were added in 2011 with higher average utilization than certain operating rigs in 2011, as well as the disposition of certain smaller rigs in an auction held in December 2011.
Operating expenses. Our operating expenses during the three months ended March 31, 2012, compared to the same period in 2011 increased $5.2 million, or 12%. 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 increased to $13,499 at March 31, 2012, from $12,295 at March 31, 2011, 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 months ended March 31, 2012 compared to the same period in 2011 is due to the disposition of assets in an auction held in December 2011.
General and administrative expenses. During the three months ended March 31, 2012, general and administrative expenses increased $259,000, or 4%, compared to the same period in 2011. This increase was primarily due to increased wages and property taxes during the three months ended March 31, 2012, compared to the same period in 2011.
Interest expense. The $63,000 increase in interest expense for the three months ended March 31, 2012 compared to the same period in 2011 was primarily attributable to the increase in the average balance of our credit facility, proceeds of which were used to fund our capital expenditures and share repurchase program.
Other income and gain on disposal of assets. Other income and gain on disposal of assets increased by $213,000 for the three months ended March 31, 2012, compared to the same period in 2011, due to net gains on the sale of a marketed rig in a private transaction as well as disposition of drill pipe during 2012 compared to 2011.
Income tax benefit. Income tax benefit for the three months ended March 31, 2012 was $638,000, or an effective rate of 22.4% of pre-tax book loss. This rate differs 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 per diem payments for meals and non-cash 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 three months of 2012 was $10.5 million compared to $2.0 million during the first three months of 2011. This increase in cash flow from operating activities was primarily due to a decrease in net loss, and the timing of collections of accounts receivable offset by the timing of payments related to accounts payable and other liabilities.
Our cash flow from operations was primarily used to invest in new machinery and equipment. During the first three months of 2012 and 2011, cash used in investing activities totaled $19.3 million and $11.6 million, respectively. The three months ended March 31, 2012 includes an initial payment of $5.1 million on a new rig purchase and partial payments on four rigs under construction. The three months ended March 31, 2011 includes a rig purchase of $5.3 million. As of March 31, 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 $32.0 million.
Cash flow provided by financing activities was $8.8 million in the first three months of 2012, compared to $9.6 million for the first three months of 2011. During the three months ended March 31, 2012, we purchased 1,033,591 shares of our common stock for $5.7 million under a share repurchase program.
We believe cash generated by our operations and our ability to borrow the currently unused portion of our revolving credit facility of approximately $64.2 million, after reductions for approximately $4.2 million outstanding letters of credit, as of March 31, 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 March 31, 2012. We have financed this growth with a combination of debt and equity financing, as well as operating cash flows. At March 31, 2012, our ratio of total debt to total capital was approximately 30%.
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.
Uses of Capital Resources
For the three months ended March 31, 2012 and 2011, the additions to our property and equipment consisted of the following (in thousands):
During January 2012, the Company made an initial payment of $5.1 million for the purchase and construction of a 1,000 hp electric drilling rig, with an expected delivery date of September 15, 2012. Other capital additions for the three months ended March 31, 2012 included partial payments toward four rigs currently under construction, as well as other rig upgrades and capital additions.
Additions to drilling equipment during the three months ended March 31, 2011 included $5.3 million for the purchase of a 1,000 hp mechanical rig. Additional capital additions for the three months ended March 31, 2011 included rig enhancements, such as top drives and mud pumps, as well as drillpipe. Additionally, in January 2011, the Company completed the implementation of a new information system that encompasses financial reporting, general ledger, and other similar and related processes.
Our working capital was $16.1 million and $17.4 million at March 31, 2012 and December 31, 2011, respectively. Our current ratio, which we calculate by dividing our current assets by our current liabilities, was 1.5 both at March 31, 2012 and December 31, 2011.
The changes in the components of our working capital were as follows (in thousands):
The $4.0 million decrease in our accounts receivable at March 31, 2012 from December 31, 2011 was primarily due to timing of customer receipts as well as decreased revenues for the three months ended March 31, 2012, compared to the three months ended December 31, 2011.
The $1.0 million decrease in prepaid expenses, deposits and other receivables at March 31, 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.
The $2.3 million decrease in accounts payable at March 31, 2012 from December 31, 2011 was primarily due to timing of payments.
The $1.6 million decrease in accrued expenses and other liabilities at March 31, 2012 from December 31, 2011 is primarily due to a decrease in accrued payroll and deferred revenue. These decreases were partially offset by an increase in medical claims.
Our long-term debt consisted of $81.6 million and $67.8 million of outstanding borrowings under our revolving credit facility at March 31, 2012 and December 31, 2011, respectively. Proceeds from borrowings were used to fund capital expenditures and our share repurchase program.
We did not enter into any significant contractual obligations during the three months ended March 31, 2012.
Inflation did not have a significant effect on our results of operations in any of the periods reported.
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.
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 March 31, 2012, we had $81.6 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 decrease or increase in our interest expense of approximately $816,000.
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 March 31, 2012 an evaluation was carried out under the supervision and with the participation of our management, including the CEO and CFO, of the effectiveness of the design and operation of our disclosure controls. Based upon that evaluation, the CEO and 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.
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 March 31, 2012 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
Refer to Note 9 Commitments and Contingencies of the financial statements for information on legal proceedings, such information being incorporated herein by reference.
There have been no material changes during the quarter ended March 31, 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.
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, which immediately precedes such exhibits.
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.
INDEX TO EXHIBITS