##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-Q
  þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2008
 OR
 o
    
    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 1-02199
 ALLIS-CHALMERS ENERGY INC.
  DELAWARE
    
    39-0126090(State or other jurisdiction of 
incorporation or organization)
    
    (I.R.S. Employer
Identification No.)5075 WESTHEIMER, SUITE 890, HOUSTON, TEXAS
    
    77056(Address of principal executive offices)
    
    (Zip Code)
 (713) 369-0550
 Registrants telephone number, including area code
 þ o
  Large accelerated filer
o
    
    Accelerated filer
þ
    
    Non-accelerated filer   o
(Do not check if a smaller reporting company)
    
    Smaller reporting company o
 o þ




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##### 



ALLIS-CHALMERS ENERGY INC.
 FORM 10-Q
 For the Quarterly Period Ended September 30, 2008
 TABLE OF CONTENTS
 PAGEPART IITEM1. Financial StatementsConsolidated Condensed Balance Sheets as of September 30, 2008 and December 31, 2007
    
    
    3Consolidated Condensed Income Statements for the three and nine months ended
September 30, 2008 and 2007
    
    
    4Consolidated Condensed Statements of Cash Flows for the nine months ended
September 30, 2008 and 2007
    
    
    5Notes to Consolidated Condensed Financial Statements
    
    
    62. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    273. Quantitative and Qualitative Disclosures about Market Risk
    
    
    384. Controls and Procedures
    
    
    38PART II1A. Risk Factors
    
    
    396. Exhibits
    
    
    39Signatures
    
    
    40EXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32.1
  2




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PART I. FINANCIAL INFORMATION
 
 ITEM 1. FINANCIAL STATEMENTS
 ALLIS-CHALMERS ENERGY INC.
 
 CONSOLIDATED CONDENSED BALANCE SHEETS
  September 30,
    
    
    December 31,2008
    
    
    2007(unaudited)AssetsCash and cash equivalents
    
    $
    6,810
    
    
    $
    43,693Trade receivables, net
    
    
    159,231
    
    
    
    130,094Inventories
    
    
    35,816
    
    
    
    32,209Prepaid expenses and other
    
    
    15,516
    
    
    
    11,898Total current assets
    
    
    217,373
    
    
    
    217,894Property and equipment, net
    
    
    694,040
    
    
    
    626,668Goodwill
    
    
    137,548
    
    
    
    138,398Other intangible assets, net
    
    
    30,670
    
    
    
    35,180Debt issuance costs, net
    
    
    12,774
    
    
    
    14,228Note receivable
    
    
    40,000
    
    
    
    Other assets
    
    
    41,472
    
    
    
    21,217Total assets
    
    $
    1,173,877
    
    
    $
    1,053,585Liabilities and Stockholders EquityCurrent maturities of long-term debt
    
    $
    8,819
    
    
    $
    6,434Trade accounts payable
    
    
    54,054
    
    
    
    37,464Accrued salaries, benefits and payroll taxes
    
    
    20,063
    
    
    
    15,283Accrued interest
    
    
    6,974
    
    
    
    17,817Accrued expenses
    
    
    32,519
    
    
    
    20,545Total current liabilities
    
    
    122,429
    
    
    
    97,543Long-term debt, net of current maturities
    
    
    560,960
    
    
    
    508,300Deferred income taxes
    
    
    35,680
    
    
    
    30,090Other long-term liabilities
    
    
    2,641
    
    
    
    3,323Total liabilities
    
    
    721,710
    
    
    
    639,256Commitments and contingenciesStockholders EquityPreferred stock, $0.01 par value (25,000,000 shares authorized, no shares issued)
    
    
    
    
    
    
    Common stock, $0.01 par value (100,000,000 shares authorized;
35,513,739 issued and outstanding at September 30, 2008 and
35,116,035 issued and outstanding at December 31, 2007)
    
    
    355
    
    
    
    351Capital in excess of par value
    
    
    333,009
    
    
    
    326,095Retained earnings
    
    
    118,803
    
    
    
    87,883Total stockholders equity
    
    
    452,167
    
    
    
    414,329Total liabilities and stockholders equity
    
    $
    1,173,877
    
    
    $
    1,053,585
  3




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ALLIS-CHALMERS ENERGY INC.
 
 CONSOLIDATED CONDENSED INCOME STATEMENTS
   For the Three Months Ended
    
    
    For the Nine Months EndedSeptember 30,
    
    
    September 30,2008
    
    
    2007
    
    
    2008
    
    
    2007Revenues
    
    $
    178,265
    
    
    $
    147,881
    
    
    $
    494,582
    
    
    $
    427,143Cost of revenuesDirect costs
    
    
    117,609
    
    
    
    89,120
    
    
    
    321,841
    
    
    
    249,943Depreciation
    
    
    15,601
    
    
    
    13,168
    
    
    
    45,328
    
    
    
    37,232Gross margin
    
    
    45,055
    
    
    
    45,593
    
    
    
    127,413
    
    
    
    139,968General and administrative
    
    
    15,161
    
    
    
    13,456
    
    
    
    44,082
    
    
    
    41,729Gain on asset dispositions
    
    
    (166
    )
    
    
    
    
    
    
    (166
    )
    
    
    (8,868
    )Amortization
    
    
    1,027
    
    
    
    989
    
    
    
    3,214
    
    
    
    3,015Income from operations
    
    
    29,033
    
    
    
    31,148
    
    
    
    80,283
    
    
    
    104,092Other income (expense):Interest expense
    
    
    (12,166
    )
    
    
    (11,805
    )
    
    
    (36,243
    )
    
    
    (37,671
    )Interest income
    
    
    1,457
    
    
    
    851
    
    
    
    4,147
    
    
    
    2,718Other
    
    
    115
    
    
    
    32
    
    
    
    591
    
    
    
    308Total other income (expense)
    
    
    (10,594
    )
    
    
    (10,922
    )
    
    
    (31,505
    )
    
    
    (34,645
    )Income before income taxes
    
    
    18,439
    
    
    
    20,226
    
    
    
    48,778
    
    
    
    69,447Provision for income taxes
    
    
    (6,127
    )
    
    
    (7,239
    )
    
    
    (17,858
    )
    
    
    (24,791
    )Net income
    
    $
    12,312
    
    
    $
    12,987
    
    
    $
    30,920
    
    
    $
    44,656Net income per common share:Basic
    
    $
    0.35
    
    
    $
    0.37
    
    
    $
    0.88
    
    
    $
    1.32Diluted
    
    $
    0.35
    
    
    $
    0.37
    
    
    $
    0.87
    
    
    $
    1.29Weighted average shares outstanding:Basic
    
    
    35,156
    
    
    
    34,784
    
    
    
    35,004
    
    
    
    33,934Diluted
    
    
    35,551
    
    
    
    35,286
    
    
    
    35,455
    
    
    
    34,512
  4




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ALLIS-CHALMERS ENERGY INC.
 
 CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
   For the Nine Months EndedSeptember 30,2008
    
    
    2007Cash Flows from Operating Activities:Net income
    
    $
    30,920
    
    
    $
    44,656Adjustments to reconcile net income to net cash
provided by operating activities:Depreciation and amortization
    
    
    48,542
    
    
    
    40,247Amortization and write-off of deferred financing fees
    
    
    1,563
    
    
    
    2,686Stock-based compensation
    
    
    6,212
    
    
    
    2,132Allowance for bad debts
    
    
    1,505
    
    
    
    441Deferred taxes
    
    
    4,315
    
    
    
    3,142Gain on sale of property and equipment
    
    
    (1,206
    )
    
    
    (1,085
    )Gain on asset dispositions
    
    
    (166
    )
    
    
    (8,868
    )Changes in operating assets and liabilities, net of acquisitions:(Increase) in trade receivable
    
    
    (30,642
    )
    
    
    (36,801
    )(Increase) in inventories
    
    
    (6,961
    )
    
    
    (4,998
    )Decrease in prepaid expenses and other current assets
    
    
    544
    
    
    
    10,551(Increase) decrease in other assets
    
    
    (2,271
    )
    
    
    173Increase in trade accounts payable
    
    
    16,590
    
    
    
    1,326(Decrease) in accrued interest
    
    
    (10,843
    )
    
    
    (5,093
    )Increase in accrued expenses
    
    
    12,083
    
    
    
    9,957Increase in accrued salaries, benefits and payroll taxes
    
    
    4,780
    
    
    
    2,412(Decrease) in other long-term liabilities
    
    
    (682
    )
    
    
    (68
    )Net Cash Provided By Operating Activities
    
    
    74,283
    
    
    
    60,810Cash Flows from Investing Activities:Investment in note receivable
    
    
    (40,000
    )
    
    
    Deposits on asset commitments
    
    
    (9,219
    )
    
    
    Acquisition of businesses, net of cash received
    
    
    
    
    
    
    (12,860
    )Purchase of investment interests
    
    
    (5,763
    )
    
    
    (498
    )Proceeds from sale of property and equipment
    
    
    6,004
    
    
    
    5,988Proceeds from asset dispositions
    
    
    3,000
    
    
    
    16,250Purchase of property and equipment
    
    
    (117,835
    )
    
    
    (86,087
    )Net Cash Used In Investing Activities
    
    
    (163,813
    )
    
    
    (77,207
    )Cash Flows from Financing Activities:Proceeds from issuance of stock, net
    
    
    
    
    
    
    100,055Proceeds from exercises of options
    
    
    633
    
    
    
    3,252Proceeds from long-term debt
    
    
    20,001
    
    
    
    250,000Net borrowings under line of credit
    
    
    38,500
    
    
    
    Payments on long-term debt
    
    
    (6,451
    )
    
    
    (307,542
    )Tax benefits on stock-based compensation plans
    
    
    73
    
    
    
    1,559Debt issuance costs
    
    
    (109
    )
    
    
    (7,581
    )Net Cash Provided By Financing Activities
    
    
    52,647
    
    
    
    39,743Net change in cash and cash equivalents
    
    
    (36,883
    )
    
    
    23,346Cash and cash equivalents at beginning of year
    
    
    43,693
    
    
    
    39,745Cash and cash equivalents at end of period
    
    $
    6,810
    
    
    $
    63,091
  5




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ALLIS-CHALMERS ENERGY INC.
 
 NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
 NOTE 1  NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 Nature of Operations
   Basis of Presentation
     6




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ALLIS-CHALMERS ENERGY INC.
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Continued)
 Fair Value Measurements,
 The Fair
Value Option for Financial Assets and Financial Liabilities
 Business Combinations,
 Non-controlling Interests in Consolidated Financial Statements  an amendment of ARB No. 51
 Disclosures
about Derivative Instruments and Hedging Activities  an amendment of FASB Statement No. 133
 7




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ALLIS-CHALMERS ENERGY INC.
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Continued)
 Determination of the Useful Life of
Intangible Assets Goodwill and Other
Intangible Assets Business
Combinations
 NOTE 2  ASSET DISPOSITIONS
   NOTE 3  STOCK-BASED COMPENSATION
 Share-Based Payment
    Weighted
    
    
    WeightedShares
    
    
    Average
    
    
    Average
    
    
    AggregateUnder
    
    
    Exercise
    
    
    Contractual
    
    
    Intrinsic ValueOption
    
    
    Price
    
    
    Life (Years)
    
    
    (millions)Balance at December 31, 2007
    
    
    986,763
    
    
    $
    10.77Granted
    
    
    
    
    
    
    Canceled
    
    
    (7,328
    )
    
    
    10.53Exercised
    
    
    (71,703
    )
    
    
    8.83Outstanding at September 30, 2008
    
    
    907,732
    
    
    
    10.93
    
    
    
    7.21
    
    
    $
    3.59Exercisable at September 30, 2008
    
    
    731,732
    
    
    $
    8.30
    
    
    
    6.82
    
    
    $
    3.59
 8




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ALLIS-CHALMERS ENERGY INC.
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Continued)
   For the Three Months Ended
    
    For the Nine Months EndedSeptember 30,
    
    September 30,2007
    
    2007Expected dividend yield
    
    
    
    
    
    
    Expected price volatility
    
    
    66.17
    %
    
    
    66.21
    %Risk free interest rate
    
    
    4.82
    %
    
    
    4.81
    %Expected life of options
    
    5 years
    
    
    5 yearsWeighted average fair
value of options granted
at market value
    
    $
    12.90
    
    
    $
    12.86
  Weighted AverageNumber of
    
    
    Grant-Date Fair ValueShares
    
    
    Per ShareNonvested at December 31, 2007
    
    
    993,203
    
    
    $
    17.45Granted
    
    
    97,667
    
    
    
    16.76Vested
    
    
    (252,574
    )
    
    
    17.06Forfeited
    
    
    
    
    
    
    Nonvested at September 30, 2008
    
    
    838,296
    
    
    $
    17.49
  NOTE 4  INCOME PER COMMON SHARE
 Earnings Per Share,
 9




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ALLIS-CHALMERS ENERGY INC.
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Continued)
  For the Three Months Ended
    
    
    For the Nine Months EndedSeptember 30,
    
    
    September 30,2008
    
    
    2007
    
    
    2008
    
    
    2007Numerator:Net income
    
    $
    12,312
    
    
    $
    12,987
    
    
    $
    30,920
    
    
    $
    44,656Denominator:Weighted average common shares
outstanding excluding nonvested
restricted stock
    
    
    35,156
    
    
    
    34,784
    
    
    
    35,004
    
    
    
    33,934Effect of potentially dilutive common shares:Warrants and employee and director
stock options and restricted shares
    
    
    395
    
    
    
    502
    
    
    
    451
    
    
    
    578Weighted average common shares
outstanding and assumed
conversions
    
    
    35,551
    
    
    
    35,286
    
    
    
    35,455
    
    
    
    34,512Net income per common shareBasic
    
    $
    0.35
    
    
    $
    0.37
    
    
    $
    0.88
    
    
    $
    1.32Diluted
    
    $
    0.35
    
    
    $
    0.37
    
    
    $
    0.87
    
    
    $
    1.29Potentially dilutive securities
excluded as anti-dilutive
    
    
    786
    
    
    
    905
    
    
    
    776
    
    
    
    1,031
 NOTE 5  GOODWILL AND INTANGIBLE ASSETS
 Goodwill and Other
Intangible Assets
  10




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ALLIS-CHALMERS ENERGY INC.
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Continued)
 NOTE 6  INVENTORIES
  September 30,
    
    
    December 31,2008
    
    
    2007ManufacturedFinished goods
    
    $
    2,984
    
    
    $
    2,198Work in process
    
    
    1,393
    
    
    
    1,781Raw materials
    
    
    1,389
    
    
    
    4,464Total manufactured
    
    
    5,766
    
    
    
    8,443Hammers
    
    
    2,077
    
    
    
    1,434Drive pipe
    
    
    549
    
    
    
    420Rental supplies
    
    
    3,372
    
    
    
    2,261Chemicals and drilling fluids
    
    
    3,753
    
    
    
    3,236Rig parts and related inventory
    
    
    10,724
    
    
    
    9,985Coiled tubing and related inventory
    
    
    2,272
    
    
    
    1,014Shop supplies and related inventory
    
    
    7,303
    
    
    
    5,416Total inventories
    
    $
    35,816
    
    
    $
    32,209
 NOTE 7  NOTE RECEIVABLE
    NOTE 8  DEBT
  September 30,
    
    
    December 31,2008
    
    
    2007Senior notes
    
    $
    505,000
    
    
    $
    505,000Bank term loans
    
    
    23,109
    
    
    
    4,926Revolving line of credit
    
    
    38,500
    
    
    
    Seller notes
    
    
    1,250
    
    
    
    2,350Notes payable to former directors
    
    
    32
    
    
    
    32Equipment and vehicle installment notes
    
    
    
    
    
    
    595Insurance premium financing
    
    
    1,888
    
    
    
    1,707Obligations under non-compete agreements
    
    
    
    
    
    
    110Capital lease obligations
    
    
    
    
    
    
    14Total debt
    
    
    569,779
    
    
    
    514,734Less: current maturities
    
    
    8,819
    
    
    
    6,434Long-term debt obligations
    
    $
    560,960
    
    
    $
    508,300
 11




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ALLIS-CHALMERS ENERGY INC.
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Continued)
 Senior notes, bank loans and line of credit agreements
      Notes payable
   12




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ALLIS-CHALMERS ENERGY INC.
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Continued)
   Other debt
   NOTE 9  STOCKHOLDERS EQUITY
  NOTE 10  CONDENSED CONSOLIDATING FINANCIAL INFORMATION
  13




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ALLIS-CHALMERS ENERGY INC.
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Continued)
 CONDENSED CONSOLIDATING BALANCE SHEETS
 Allis-Chalmers
    
    
    
    
    
    
    Subsidiary(Parent/
    
    
    Subsidiary
    
    
    Non-
    
    
    Consolidating
    
    
    ConsolidatedGuarantor)
    
    
    Guarantors
    
    
    Guarantors
    
    
    Adjustments
    
    
    TotalAssetsCash and cash equivalents
    
    $
    
    
    
    $
    5,637
    
    
    $
    1,173
    
    
    $
    
    
    
    $
    6,810Trade receivables, net
    
    
    
    
    
    
    96,251
    
    
    
    62,988
    
    
    
    (8
    )
    
    
    159,231Inventories
    
    
    
    
    
    
    18,246
    
    
    
    17,570
    
    
    
    
    
    
    
    35,816Intercompany receivables
    
    
    23,675
    
    
    
    
    
    
    
    
    
    
    
    (23,675
    )
    
    
    Note receivable from affiliate
    
    
    17,297
    
    
    
    
    
    
    
    
    
    
    
    (17,297
    )
    
    
    Prepaid expenses and other
    
    
    7,742
    
    
    
    4,126
    
    
    
    3,648
    
    
    
    
    
    
    
    15,516Total current assets
    
    
    48,714
    
    
    
    124,260
    
    
    
    85,379
    
    
    
    (40,980
    )
    
    
    217,373Property and equipment, net
    
    
    
    
    
    
    489,567
    
    
    
    204,473
    
    
    
    
    
    
    
    694,040Goodwill
    
    
    
    
    
    
    136,025
    
    
    
    1,523
    
    
    
    
    
    
    
    137,548Other intangible assets, net
    
    
    517
    
    
    
    30,122
    
    
    
    31
    
    
    
    
    
    
    
    30,670Debt issuance costs, net
    
    
    12,774
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    12,774Note receivable from affiliates
    
    
    13,428
    
    
    
    
    
    
    
    
    
    
    
    (13,428
    )
    
    
    Investments in affiliates
    
    
    892,308
    
    
    
    
    
    
    
    
    
    
    
    (892,308
    )
    
    
    Note receivable
    
    
    40,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    40,000Other assets
    
    
    9,830
    
    
    
    26,510
    
    
    
    5,132
    
    
    
    
    
    
    
    41,472Total Assets
    
    $
    1,017,571
    
    
    $
    806,484
    
    
    $
    296,538
    
    
    $
    (946,716
    )
    
    $
    1,173,877Liabilities and Stockholders EquityCurrent maturities of long-term debt
    
    $
    782
    
    
    $
    2,388
    
    
    $
    5,649
    
    
    $
    
    
    
    $
    8,819Trade accounts payable
    
    
    
    
    
    
    22,491
    
    
    
    31,571
    
    
    
    (8
    )
    
    
    54,054Accrued salaries, benefits and
payroll taxes
    
    
    
    
    
    
    4,767
    
    
    
    15,296
    
    
    
    
    
    
    
    20,063Accrued interest
    
    
    6,780
    
    
    
    23
    
    
    
    171
    
    
    
    
    
    
    
    6,974Accrued expenses
    
    
    973
    
    
    
    16,641
    
    
    
    14,905
    
    
    
    
    
    
    
    32,519Intercompany payables
    
    
    
    
    
    
    380,208
    
    
    
    1,185
    
    
    
    (381,393
    )
    
    
    Note payable to affiliate
    
    
    
    
    
    
    
    
    
    
    17,297
    
    
    
    (17,297
    )
    
    
    Total current liabilities
    
    
    8,535
    
    
    
    426,518
    
    
    
    86,074
    
    
    
    (398,698
    )
    
    
    122,429Long-term debt, net of current
maturities
    
    
    543,500
    
    
    
    
    
    
    
    17,460
    
    
    
    
    
    
    
    560,960Note payable to affiliate
    
    
    
    
    
    
    
    
    
    
    13,428
    
    
    
    (13,428
    )
    
    
    Deferred income taxes
    
    
    13,369
    
    
    
    13,695
    
    
    
    8,616
    
    
    
    
    
    
    
    35,680Other long-term liabilities
    
    
    
    
    
    
    75
    
    
    
    2,566
    
    
    
    
    
    
    
    2,641Total liabilities
    
    
    565,404
    
    
    
    440,288
    
    
    
    128,144
    
    
    
    (412,126
    )
    
    
    721,710Commitments and contingenciesStockholders EquityCommon stock
    
    
    355
    
    
    
    3,526
    
    
    
    42,963
    
    
    
    (46,489
    )
    
    
    355Capital in excess of par value
    
    
    333,009
    
    
    
    167,508
    
    
    
    74,969
    
    
    
    (242,477
    )
    
    
    333,009Retained earnings
    
    
    118,803
    
    
    
    195,162
    
    
    
    50,462
    
    
    
    (245,624
    )
    
    
    118,803Total stockholders equity
    
    
    452,167
    
    
    
    366,196
    
    
    
    168,394
    
    
    
    (534,590
    )
    
    
    452,167Total liabilities and
stockholders equity
    
    $
    1,017,571
    
    
    $
    806,484
    
    
    $
    296,538
    
    
    $
    (946,716
    )
    
    $
    1,173,877
 14




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##### Table of Contents



ALLIS-CHALMERS ENERGY INC.
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Continued)
 CONDENSED CONSOLIDATING INCOME STATEMENTS
  Allis-Chalmers
    
    
    
    
    
    
    Subsidiary(Parent/
    
    
    Subsidiary
    
    
    Non-
    
    
    Consolidating
    
    
    ConsolidatedGuarantor)
    
    
    Guarantors
    
    
    Guarantors
    
    
    Adjustments
    
    
    TotalRevenues
    
    $
    
    
    
    $
    283,961
    
    
    $
    210,640
    
    
    $
    (19
    )
    
    $
    494,582Cost of revenuesDirect costs
    
    
    
    
    
    
    158,887
    
    
    
    162,973
    
    
    
    (19
    )
    
    
    321,841Depreciation
    
    
    
    
    
    
    35,070
    
    
    
    10,258
    
    
    
    
    
    
    
    45,328Gross margin
    
    
    
    
    
    
    90,004
    
    
    
    37,409
    
    
    
    
    
    
    
    127,413General and administrative
    
    
    5,480
    
    
    
    30,814
    
    
    
    7,788
    
    
    
    
    
    
    
    44,082Gain on asset dispositions
    
    
    
    
    
    
    (166
    )
    
    
    
    
    
    
    
    
    
    
    (166
    )Amortization
    
    
    35
    
    
    
    3,154
    
    
    
    25
    
    
    
    
    
    
    
    3,214Income (loss) from operations
    
    
    (5,515
    )
    
    
    56,202
    
    
    
    29,596
    
    
    
    
    
    
    
    80,283Other income (expense):Equity earnings in affiliates,
net of tax
    
    
    67,898
    
    
    
    
    
    
    
    
    
    
    
    (67,898
    )
    
    
    Interest, net
    
    
    (31,520
    )
    
    
    62
    
    
    
    (638
    )
    
    
    
    
    
    
    (32,096
    )Other
    
    
    57
    
    
    
    97
    
    
    
    437
    
    
    
    
    
    
    
    591Total other income (expense)
    
    
    36,435
    
    
    
    159
    
    
    
    (201
    )
    
    
    (67,898
    )
    
    
    (31,505
    )Net income (loss)before income taxes
    
    
    30,920
    
    
    
    56,361
    
    
    
    29,395
    
    
    
    (67,898
    )
    
    
    48,778Provision for income taxes
    
    
    
    
    
    
    (7,329
    )
    
    
    (10,529
    )
    
    
    
    
    
    
    (17,858
    )Net income (loss)
    
    $
    30,920
    
    
    $
    49,032
    
    
    $
    18,866
    
    
    $
    (67,898
    )
    
    $
    30,920
 15




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##### Table of Contents



ALLIS-CHALMERS ENERGY INC.
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Continued)
 CONDENSED CONSOLIDATING INCOME STATEMENTS
 Allis-Chalmers
    
    
    
    
    
    
    Subsidiary(Parent/
    
    
    Subsidiary
    
    
    Non-
    
    
    Consolidating
    
    
    ConsolidatedGuarantor)
    
    
    Guarantors
    
    
    Guarantors
    
    
    Adjustments
    
    
    TotalRevenues
    
    $
    
    
    
    $
    100,510
    
    
    $
    77,761
    
    
    $
    (6
    )
    
    $
    178,265Cost of revenuesDirect costs
    
    
    
    
    
    
    57,642
    
    
    
    59,973
    
    
    
    (6
    )
    
    
    117,609Depreciation
    
    
    
    
    
    
    11,903
    
    
    
    3,698
    
    
    
    
    
    
    
    15,601Gross margin
    
    
    
    
    
    
    30,965
    
    
    
    14,090
    
    
    
    
    
    
    
    45,055General and administrative
    
    
    1,590
    
    
    
    10,826
    
    
    
    2,745
    
    
    
    
    
    
    
    15,161Gain on asset dispositions
    
    
    
    
    
    
    (166
    )
    
    
    
    
    
    
    
    
    
    
    (166
    )Amortization
    
    
    12
    
    
    
    1,007
    
    
    
    8
    
    
    
    
    
    
    
    1,027Income (loss) from
operations
    
    
    (1,602
    )
    
    
    19,298
    
    
    
    11,337
    
    
    
    
    
    
    
    29,033Other income (expense):Equity earnings in
affiliates, net of tax
    
    
    24,198
    
    
    
    
    
    
    
    
    
    
    
    (24,198
    )
    
    
    Interest, net
    
    
    (10,299
    )
    
    
    2
    
    
    
    (412
    )
    
    
    
    
    
    
    (10,709
    )Other
    
    
    15
    
    
    
    73
    
    
    
    27
    
    
    
    
    
    
    
    115Total other income
(expense)
    
    
    13,914
    
    
    
    75
    
    
    
    (385
    )
    
    
    (24,198
    )
    
    
    (10,594
    )Net income (loss)before
income taxes
    
    
    12,312
    
    
    
    19,373
    
    
    
    10,952
    
    
    
    (24,198
    )
    
    
    18,439Provision for income taxes
    
    
    
    
    
    
    (2,880
    )
    
    
    (3,247
    )
    
    
    
    
    
    
    (6,127
    )Net income (loss)
    
    $
    12,312
    
    
    $
    16,493
    
    
    $
    7,705
    
    
    $
    (24,198
    )
    
    $
    12,312
 16




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##### Table of Contents



ALLIS-CHALMERS ENERGY INC.
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Continued)
 CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOW
 Allis-
    
    
    
    
    
    
    OtherChalmers
    
    
    
    
    
    
    Subsidiaries(Parent/
    
    
    Subsidiary
    
    
    (Non-
    
    
    Consolidating
    
    
    ConsolidatedGuarantor)
    
    
    Guarantors
    
    
    Guarantors)
    
    
    Adjustments
    
    
    TotalCash Flows from Operating Activities:Net income (loss)
    
    $
    30,920
    
    
    $
    49,032
    
    
    $
    18,866
    
    
    $
    (67,898
    )
    
    $
    30,920Adjustments to reconcile net income
(loss) to net cash provided by
operating activities:Depreciation and amortization
    
    
    35
    
    
    
    38,224
    
    
    
    10,283
    
    
    
    
    
    
    
    48,542Amortization and write-off of
deferred financing fees
    
    
    1,563
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,563Stock based compensation
    
    
    6,212
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6,212Allowance for bad debts
    
    
    
    
    
    
    1,505
    
    
    
    
    
    
    
    
    
    
    
    1,505Equity earnings in affiliates
    
    
    (67,898
    )
    
    
    
    
    
    
    
    
    
    
    67,898
    
    
    
    Deferred taxes
    
    
    4,708
    
    
    
    (108
    )
    
    
    (285
    )
    
    
    
    
    
    
    4,315Gain on sale of property and
equipment
    
    
    
    
    
    
    (1,097
    )
    
    
    (109
    )
    
    
    
    
    
    
    (1,206
    )Gain on asset dispositions
    
    
    
    
    
    
    (166
    )
    
    
    
    
    
    
    
    
    
    
    (166
    )Changes in operating assets and
liabilities, net of acquisitions:(Increase) in trade receivables
    
    
    
    
    
    
    (14,627
    )
    
    
    (16,015
    )
    
    
    
    
    
    
    (30,642
    )(Increase) in inventories
    
    
    
    
    
    
    (5,901
    )
    
    
    (1,060
    )
    
    
    
    
    
    
    (6,961
    )(Increase) decrease in prepaid
expenses and other current assets
    
    
    (8
    )
    
    
    1,319
    
    
    
    (767
    )
    
    
    
    
    
    
    544(Increase) decrease in other assets
    
    
    (4,073
    )
    
    
    1,034
    
    
    
    768
    
    
    
    
    
    
    
    (2,271
    )Increase in trade accounts payable
    
    
    
    
    
    
    5,673
    
    
    
    10,917
    
    
    
    
    
    
    
    16,590(Decrease) increase in accrued
interest
    
    
    (10,929
    )
    
    
    (10
    )
    
    
    96
    
    
    
    
    
    
    
    (10,843
    )(Decrease) increase in accrued
expenses
    
    
    (687
    )
    
    
    9,623
    
    
    
    3,147
    
    
    
    
    
    
    
    12,083Increase in accrued salaries,
benefits and payroll taxes
    
    
    
    
    
    
    1,055
    
    
    
    3,725
    
    
    
    
    
    
    
    4,780(Decrease) in other long- term
liabilities
    
    
    (31
    )
    
    
    (167
    )
    
    
    (484
    )
    
    
    
    
    
    
    (682
    )Net Cash Provided By (Used In)
Operating Activities
    
    
    (40,188
    )
    
    
    85,389
    
    
    
    29,082
    
    
    
    
    
    
    
    74,283Cash Flows from Investing Activities:Notes receivable from affiliates
    
    
    (6,075
    )
    
    
    
    
    
    
    
    
    
    
    6,075
    
    
    
    Investment in note receivable
    
    
    (40,000
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (40,000
    )Deposits on asset commitments
    
    
    
    
    
    
    (19,544
    )
    
    
    10,325
    
    
    
    
    
    
    
    (9,219
    )Purchase of investment interests
    
    
    (5,742
    )
    
    
    (21
    )
    
    
    
    
    
    
    
    
    
    
    (5,763
    )Proceeds from sale of property and
equipment
    
    
    
    
    
    
    5,738
    
    
    
    266
    
    
    
    
    
    
    
    6,004Proceeds from asset disposition
    
    
    
    
    
    
    3,000
    
    
    
    
    
    
    
    
    
    
    
    3,000Purchase of property and equipment
    
    
    
    
    
    
    (52,560
    )
    
    
    (65,275
    )
    
    
    
    
    
    
    (117,835
    )Net Cash Provided By (Used in)
Investing Activities
    
    
    (51,817
    )
    
    
    (63,387
    )
    
    
    (54,684
    )
    
    
    6,075
    
    
    
    (163,813
    )
 17




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##### Table of Contents



ALLIS-CHALMERS ENERGY INC.
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Continued)
 CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOW
 Allis-
    
    
    
    
    
    
    OtherChalmers
    
    
    
    
    
    
    Subsidiaries(Parent/
    
    
    Subsidiary
    
    
    (Non-
    
    
    Consolidating
    
    
    ConsolidatedGuarantor)
    
    
    Guarantors
    
    
    Guarantors)
    
    
    Adjustments
    
    
    TotalCash Flows from Financing Activities:Accounts receivable from affiliates
    
    
    52,908
    
    
    
    
    
    
    
    
    
    
    
    (52,908
    )
    
    
    Accounts payable to affiliates
    
    
    
    
    
    
    (52,908
    )
    
    
    
    
    
    
    52,908
    
    
    
    Note payable to affiliate
    
    
    
    
    
    
    
    
    
    
    6,075
    
    
    
    (6,075
    )
    
    
    Proceeds from exercises of options
    
    
    633
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    633Proceeds from long-term debt
    
    
    
    
    
    
    
    
    
    
    20,001
    
    
    
    
    
    
    
    20,001Net borrowing under line of credit
    
    
    38,500
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    38,500Payments on long-term debt
    
    
    
    
    
    
    (4,633
    )
    
    
    (1,818
    )
    
    
    
    
    
    
    (6,451
    )Tax benefit on stock-based
compensation plans
    
    
    73
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    73Debt issuance costs
    
    
    (109
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (109
    )Net Cash Provided By (Used
In) Financing Activities
    
    
    92,005
    
    
    
    (57,541
    )
    
    
    24,258
    
    
    
    (6,075
    )
    
    
    52,647Net change in cash and cash
equivalents
    
    
    
    
    
    
    (35,539
    )
    
    
    (1,344
    )
    
    
    
    
    
    
    (36,883
    )Cash and cash equivalents at
beginning of year
    
    
    
    
    
    
    41,176
    
    
    
    2,517
    
    
    
    
    
    
    
    43,693Cash and cash equivalents at end
of period
    
    $
    
    
    
    $
    5,637
    
    
    $
    1,173
    
    
    $
    
    
    
    $
    6,810
 18




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##### Table of Contents



ALLIS-CHALMERS ENERGY INC.
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Continued)
 CONDENSED CONSOLIDATING BALANCE SHEETS
 Allis-Chalmers
    
    
    
    
    
    
    Subsidiary(Parent/
    
    
    Subsidiary
    
    
    Non-
    
    
    Consolidating
    
    
    ConsolidatedGuarantor)
    
    
    Guarantors
    
    
    Guarantors
    
    
    Adjustments
    
    
    TotalAssetsCash and cash equivalents
    
    $
    
    
    
    $
    41,176
    
    
    $
    2,517
    
    
    $
    
    
    
    $
    43,693Trade receivables, net
    
    
    
    
    
    
    83,126
    
    
    
    46,973
    
    
    
    (5
    )
    
    
    130,094Inventories
    
    
    
    
    
    
    15,699
    
    
    
    16,510
    
    
    
    
    
    
    
    32,209Intercompany receivables
    
    
    76,583
    
    
    
    
    
    
    
    
    
    
    
    (76,583
    )
    
    
    Note receivable from affiliate
    
    
    8,270
    
    
    
    
    
    
    
    
    
    
    
    (8,270
    )
    
    
    Prepaid expenses and other
    
    
    7,731
    
    
    
    2,564
    
    
    
    1,603
    
    
    
    
    
    
    
    11,898Total current assets
    
    
    92,584
    
    
    
    142,565
    
    
    
    67,603
    
    
    
    (84,858
    )
    
    
    217,894Property and equipment, net
    
    
    
    
    
    
    477,055
    
    
    
    149,613
    
    
    
    
    
    
    
    626,668Goodwill
    
    
    
    
    
    
    136,875
    
    
    
    1,523
    
    
    
    
    
    
    
    138,398Other intangible assets, net
    
    
    552
    
    
    
    34,572
    
    
    
    56
    
    
    
    
    
    
    
    35,180Debt issuance costs, net
    
    
    14,228
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    14,228Note receivable from affiliates
    
    
    16,380
    
    
    
    
    
    
    
    
    
    
    
    (16,380
    )
    
    
    Investments in affiliates
    
    
    824,410
    
    
    
    
    
    
    
    
    
    
    
    (824,410
    )
    
    
    Other assets
    
    
    15
    
    
    
    4,977
    
    
    
    16,225
    
    
    
    
    
    
    
    21,217Total Assets
    
    $
    948,169
    
    
    $
    796,044
    
    
    $
    235,020
    
    
    $
    (925,648
    )
    
    $
    1,053,585Liabilities and Stockholders EquityCurrent maturities of long-term debt
    
    $
    32
    
    
    $
    4,026
    
    
    $
    2,376
    
    
    $
    
    
    
    $
    6,434Trade accounts payable
    
    
    
    
    
    
    16,815
    
    
    
    20,654
    
    
    
    (5
    )
    
    
    37,464Accrued salaries, benefits and payroll taxes
    
    
    
    
    
    
    3,712
    
    
    
    11,571
    
    
    
    
    
    
    
    15,283Accrued interest
    
    
    17,709
    
    
    
    33
    
    
    
    75
    
    
    
    
    
    
    
    17,817Accrued expenses
    
    
    1,660
    
    
    
    7,127
    
    
    
    11,758
    
    
    
    
    
    
    
    20,545Intercompany payables
    
    
    
    
    
    
    433,116
    
    
    
    1,185
    
    
    
    (434,301
    )
    
    
    Note payable to affiliate
    
    
    
    
    
    
    
    
    
    
    8,270
    
    
    
    (8,270
    )
    
    
    Total current liabilities
    
    
    19,401
    
    
    
    464,829
    
    
    
    55,889
    
    
    
    (442,576
    )
    
    
    97,543Long-term debt, net of current maturities
    
    
    505,750
    
    
    
    
    
    
    
    2,550
    
    
    
    
    
    
    
    508,300Note payable to affiliate
    
    
    
    
    
    
    
    
    
    
    16,380
    
    
    
    (16,380
    )
    
    
    Deferred income taxes
    
    
    8,658
    
    
    
    13,809
    
    
    
    7,623
    
    
    
    
    
    
    
    30,090Other long-term liabilities
    
    
    31
    
    
    
    242
    
    
    
    3,050
    
    
    
    
    
    
    
    3,323Total liabilities
    
    
    533,840
    
    
    
    478,880
    
    
    
    85,492
    
    
    
    (458,956
    )
    
    
    639,256Commitments and contingenciesStockholders EquityCommon stock
    
    
    351
    
    
    
    3,526
    
    
    
    42,963
    
    
    
    (46,489
    )
    
    
    351Capital in excess of par value
    
    
    326,095
    
    
    
    167,508
    
    
    
    74,969
    
    
    
    (242,477
    )
    
    
    326,095Retained earnings
    
    
    87,883
    
    
    
    146,130
    
    
    
    31,596
    
    
    
    (177,726
    )
    
    
    87,883Total stockholders equity
    
    
    414,329
    
    
    
    317,164
    
    
    
    149,528
    
    
    
    (466,692
    )
    
    
    414,329Total liabilities and
stockholders equity
    
    $
    948,169
    
    
    $
    796,044
    
    
    $
    235,020
    
    
    $
    (925,648
    )
    
    $
    1,053,585
 19




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##### Table of Contents



ALLIS-CHALMERS ENERGY INC.
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Continued)
 CONDENSED CONSOLIDATING INCOME STATEMENTS
 Allis-Chalmers
    
    
    
    
    
    
    Subsidiary(Parent/
    
    
    Subsidiary
    
    
    Non-
    
    
    Consolidating
    
    
    ConsolidatedGuarantor)
    
    
    Guarantors
    
    
    Guarantors
    
    
    Adjustments
    
    
    TotalRevenues
    
    $
    
    
    
    $
    266,883
    
    
    $
    160,295
    
    
    $
    (35
    )
    
    $
    427,143Cost of revenuesDirect costs
    
    
    
    
    
    
    134,492
    
    
    
    115,486
    
    
    
    (35
    )
    
    
    249,943Depreciation
    
    
    
    
    
    
    28,929
    
    
    
    8,303
    
    
    
    
    
    
    
    37,232Gross margin
    
    
    
    
    
    
    103,462
    
    
    
    36,506
    
    
    
    
    
    
    
    139,968General and administrative
    
    
    1,856
    
    
    
    33,486
    
    
    
    6,387
    
    
    
    
    
    
    
    41,729Gain on
asset dispositions
    
    
    
    
    
    
    (8,868
    )
    
    
    
    
    
    
    
    
    
    
    (8,868
    )Amortization
    
    
    35
    
    
    
    2,955
    
    
    
    25
    
    
    
    
    
    
    
    3,015Income from operations
    
    
    (1,891
    )
    
    
    75,889
    
    
    
    30,094
    
    
    
    
    
    
    
    104,092Other income (expense):Equity earnings in
affiliates, net of tax
    
    
    82,864
    
    
    
    
    
    
    
    
    
    
    
    (82,864
    )
    
    
    Interest, net
    
    
    (36,356
    )
    
    
    2,364
    
    
    
    (961
    )
    
    
    
    
    
    
    (34,953
    )Other
    
    
    39
    
    
    
    224
    
    
    
    45
    
    
    
    
    
    
    
    308Total other income
(expense)
    
    
    46,547
    
    
    
    2,588
    
    
    
    (916
    )
    
    
    (82,864
    )
    
    
    (34,645
    )Net income before income
taxes
    
    
    44,656
    
    
    
    78,477
    
    
    
    29,178
    
    
    
    (82,864
    )
    
    
    69,447Provision for income taxes
    
    
    
    
    
    
    (15,069
    )
    
    
    (9,722
    )
    
    
    
    
    
    
    (24,791
    )Net income
    
    $
    44,656
    
    
    $
    63,408
    
    
    $
    19,456
    
    
    $
    (82,864
    )
    
    $
    44,656
 20




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##### Table of Contents



ALLIS-CHALMERS ENERGY INC.
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Continued)
 CONDENSED CONSOLIDATING INCOME STATEMENTS
 Allis-Chalmers
    
    
    
    
    
    
    Subsidiary(Parent/
    
    
    Subsidiary
    
    
    Non-
    
    
    Consolidating
    
    
    ConsolidatedGuarantor)
    
    
    Guarantors
    
    
    Guarantors
    
    
    Adjustments
    
    
    TotalRevenues
    
    $
    
    
    
    $
    89,343
    
    
    $
    58,546
    
    
    $
    (8
    )
    
    $
    147,881Cost of revenuesDirect costs
    
    
    
    
    
    
    45,943
    
    
    
    43,185
    
    
    
    (8
    )
    
    
    89,120Depreciation
    
    
    
    
    
    
    10,296
    
    
    
    2,872
    
    
    
    
    
    
    
    13,168Gross margin
    
    
    
    
    
    
    33,104
    
    
    
    12,489
    
    
    
    
    
    
    
    45,593General and administrative
    
    
    839
    
    
    
    10,398
    
    
    
    2,219
    
    
    
    
    
    
    
    13,456Amortization
    
    
    12
    
    
    
    969
    
    
    
    8
    
    
    
    
    
    
    
    989Income from operations
    
    
    (851
    )
    
    
    21,737
    
    
    
    10,262
    
    
    
    
    
    
    
    31,148Other income (expense):Equity earnings in
affiliates, net of tax
    
    
    25,235
    
    
    
    
    
    
    
    
    
    
    
    (25,235
    )
    
    
    Interest, net
    
    
    (11,411
    )
    
    
    736
    
    
    
    (279
    )
    
    
    
    
    
    
    (10,954
    )Other
    
    
    14
    
    
    
    109
    
    
    
    (91
    )
    
    
    
    
    
    
    32Total other income
(expense)
    
    
    13,838
    
    
    
    845
    
    
    
    (370
    )
    
    
    (25,235
    )
    
    
    (10,922
    )Net income before income
taxes
    
    
    12,987
    
    
    
    22,582
    
    
    
    9,892
    
    
    
    (25,235
    )
    
    
    20,226Provision for income taxes
    
    
    
    
    
    
    (4,057
    )
    
    
    (3,182
    )
    
    
    
    
    
    
    (7,239
    )Net income
    
    $
    12,987
    
    
    $
    18,525
    
    
    $
    6,710
    
    
    $
    (25,235
    )
    
    $
    12,987
 21




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##### Table of Contents



ALLIS-CHALMERS ENERGY INC.
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Continued)
 CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOW
 Allis-
    
    
    
    
    
    
    OtherChalmers
    
    
    
    
    
    
    Subsidiaries(Parent/
    
    
    Subsidiary
    
    
    (Non-
    
    
    Consolidating
    
    
    ConsolidatedGuarantor)
    
    
    Guarantors
    
    
    Guarantors)
    
    
    Adjustments
    
    
    TotalCash Flows from Operating Activities:Net income
    
    $
    44,656
    
    
    $
    63,408
    
    
    $
    19,456
    
    
    $
    (82,864
    )
    
    $
    44,656Adjustments to reconcile net income to
net cash provided by operating
activities:Depreciation and amortization
    
    
    35
    
    
    
    31,884
    
    
    
    8,328
    
    
    
    
    
    
    
    40,247Amortization and write-off of
deferred financing fees
    
    
    2,686
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,686Stock-based compensation
    
    
    2,132
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,132Allowance for bad debts
    
    
    
    
    
    
    441
    
    
    
    
    
    
    
    
    
    
    
    441Equity earnings in affiliates
    
    
    (82,864
    )
    
    
    
    
    
    
    
    
    
    
    82,864
    
    
    
    Deferred taxes
    
    
    2,907
    
    
    
    
    
    
    
    235
    
    
    
    
    
    
    
    3,142Gain on sale of property and
equipment
    
    
    
    
    
    
    (1,011
    )
    
    
    (74
    )
    
    
    
    
    
    
    (1,085
    )Gain on
asset dispositions
    
    
    
    
    
    
    (8,868
    )
    
    
    
    
    
    
    
    
    
    
    (8,868
    )Changes in operating assets and
liabilities, net of acquisitions:(Increase) in trade receivables
    
    
    
    
    
    
    (21,966
    )
    
    
    (14,835
    )
    
    
    
    
    
    
    (36,801
    )(Increase) in inventories
    
    
    
    
    
    
    (4,022
    )
    
    
    (976
    )
    
    
    
    
    
    
    (4,998
    )(Increase) decrease in prepaid
expenses and other current assets
    
    
    286
    
    
    
    11,570
    
    
    
    (1,305
    )
    
    
    
    
    
    
    10,551(Increase) decrease in other assets
    
    
    234
    
    
    
    (22
    )
    
    
    (39
    )
    
    
    
    
    
    
    173(Decrease) increase in trade
accounts
payable
    
    
    (31
    )
    
    
    (1,482
    )
    
    
    2,839
    
    
    
    
    
    
    
    1,326(Decrease) increase in accrued
interest
    
    
    (5,050
    )
    
    
    15
    
    
    
    (58
    )
    
    
    
    
    
    
    (5,093
    )Increase in accrued expenses
    
    
    297
    
    
    
    6,729
    
    
    
    2,931
    
    
    
    
    
    
    
    9,957(Decrease) increase in accrued
salaries, benefits and payroll
taxes
    
    
    
    
    
    
    (710
    )
    
    
    3,122
    
    
    
    
    
    
    
    2,412(Decrease) in other long- term
liabilities
    
    
    (21
    )
    
    
    (47
    )
    
    
    
    
    
    
    
    
    
    
    (68
    )Net Cash Provided By (Used In)
Operating Activities
    
    
    (34,733
    )
    
    
    75,919
    
    
    
    19,624
    
    
    
    
    
    
    
    60,810Cash Flows from Investing Activities:Notes receivable from affiliates
    
    
    1,540
    
    
    
    
    
    
    
    
    
    
    
    (1,540
    )
    
    
    Acquisition of businesses, net of cash
received
    
    
    
    
    
    
    (12,860
    )
    
    
    
    
    
    
    
    
    
    
    (12,860
    )Purchase of investment interests
    
    
    
    
    
    
    (498
    )
    
    
    
    
    
    
    
    
    
    
    (498
    )Proceeds from asset disposition
    
    
    
    
    
    
    16,250
    
    
    
    
    
    
    
    
    
    
    
    16,250Proceeds from sale of property and
equipment
    
    
    
    
    
    
    5,910
    
    
    
    78
    
    
    
    
    
    
    
    5,988Purchase of property and equipment
    
    
    
    
    
    
    (69,212
    )
    
    
    (16,875
    )
    
    
    
    
    
    
    (86,087
    )Net Cash Provided By (Used in)
Investing Activities
    
    
    1,540
    
    
    
    (60,410
    )
    
    
    (16,797
    )
    
    
    (1,540
    )
    
    
    (77,207
    )
 22




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##### Table of Contents



ALLIS-CHALMERS ENERGY INC.
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Continued)
 CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOW
 Allis-
    
    
    
    
    
    
    OtherChalmers
    
    
    
    
    
    
    Subsidiaries(Parent/
    
    
    Subsidiary
    
    
    (Non-
    
    
    Consolidating
    
    
    ConsolidatedGuarantor)
    
    
    Guarantors
    
    
    Guarantors)
    
    
    Adjustments
    
    
    TotalCash Flows from Financing Activities:Proceeds from long-term debt
    
    
    250,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    250,000Payments on long-term debt
    
    
    (300,000
    )
    
    
    (4,942
    )
    
    
    (2,600
    )
    
    
    
    
    
    
    (307,542
    )Accounts receivable from affiliates
    
    
    (14,092
    )
    
    
    
    
    
    
    
    
    
    
    14,092
    
    
    
    Accounts payable to affiliates
    
    
    
    
    
    
    12,924
    
    
    
    1,168
    
    
    
    (14,092
    )
    
    
    Note payable to affiliate
    
    
    
    
    
    
    
    
    
    
    (1,540
    )
    
    
    1,540
    
    
    
    Proceeds from issuance of common
stock
    
    
    100,055
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    100,055Proceeds from exercises of options
and warrants
    
    
    3,252
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,252Tax benefits on stock plans
    
    
    1,559
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,559Debt issuance costs
    
    
    (7,581
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (7,581
    )Net Cash Provided By (Used
In) Financing Activities
    
    
    33,193
    
    
    
    7,982
    
    
    
    (2,972
    )
    
    
    1,540
    
    
    
    39,743Net change in cash and cash
equivalents
    
    
    
    
    
    
    23,491
    
    
    
    (145
    )
    
    
    
    
    
    
    23,346Cash and cash equivalents at
beginning of year
    
    
    
    
    
    
    37,769
    
    
    
    1,976
    
    
    
    
    
    
    
    39,745Cash and cash equivalents at end
of period
    
    $
    
    
    
    $
    61,260
    
    
    $
    1,831
    
    
    $
    
    
    
    $
    63,091
 23




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##### Table of Contents



ALLIS-CHALMERS ENERGY INC.
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Continued)
 NOTE 11  SEGMENT INFORMATION
   For the Three Months Ended
    
    
    For the Nine Months EndedSeptember 30,
    
    
    September 30,2008
    
    
    2007
    
    
    2008
    
    
    2007RevenuesOilfield Services
    
    $
    73,390
    
    
    $
    60,432
    
    
    $
    209,946
    
    
    $
    173,985Drilling and Completion
    
    
    77,761
    
    
    
    58,546
    
    
    
    210,640
    
    
    
    160,295Rental Services
    
    
    27,114
    
    
    
    28,903
    
    
    
    73,996
    
    
    
    92,863$
    178,265
    
    
    $
    147,881
    
    
    $
    494,582
    
    
    $
    427,143Operating Income (Loss):Oilfield Services
    
    $
    13,831
    
    
    $
    11,782
    
    
    $
    40,218
    
    
    $
    44,069Drilling and Completion
    
    
    11,337
    
    
    
    10,262
    
    
    
    29,596
    
    
    
    30,094Rental Services
    
    
    8,545
    
    
    
    12,519
    
    
    
    24,033
    
    
    
    41,212General corporate
    
    
    (4,680
    )
    
    
    (3,415
    )
    
    
    (13,564
    )
    
    
    (11,283
    )$
    29,033
    
    
    $
    31,148
    
    
    $
    80,283
    
    
    $
    104,092Depreciation and Amortization:Oilfield Services
    
    $
    6,101
    
    
    $
    4,301
    
    
    $
    17,692
    
    
    $
    11,966Drilling and Completion
    
    
    3,706
    
    
    
    2,880
    
    
    
    10,283
    
    
    
    8,328Rental Services
    
    
    6,699
    
    
    
    6,841
    
    
    
    20,163
    
    
    
    19,592General corporate
    
    
    122
    
    
    
    135
    
    
    
    404
    
    
    
    361$
    16,628
    
    
    $
    14,157
    
    
    $
    48,542
    
    
    $
    40,247Capital Expenditures:Oilfield Services
    
    $
    11,782
    
    
    $
    15,615
    
    
    $
    35,599
    
    
    $
    37,469Drilling and Completion
    
    
    25,782
    
    
    
    11,005
    
    
    
    65,476
    
    
    
    16,875Rental Services
    
    
    5,594
    
    
    
    12,174
    
    
    
    16,700
    
    
    
    31,056General corporate
    
    
    14
    
    
    
    112
    
    
    
    60
    
    
    
    687$
    43,172
    
    
    $
    38,906
    
    
    $
    117,835
    
    
    $
    86,087
 24




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##### Table of Contents



ALLIS-CHALMERS ENERGY INC.
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Continued)
 As ofSeptember 30,
    
    
    December 31,2008
    
    
    2007Goodwill:Oilfield Services
    
    $
    29,643
    
    
    $
    30,493Drilling and Completion
    
    
    1,523
    
    
    
    1,523Rental Services
    
    
    106,382
    
    
    
    106,382$
    137,548
    
    
    $
    138,398Assets:Oilfield Services
    
    $
    334,052
    
    
    $
    299,300Drilling and Completion
    
    
    316,281
    
    
    
    235,020Rental Services
    
    
    445,013
    
    
    
    454,216General corporate
    
    
    78,531
    
    
    
    65,049$
    1,173,877
    
    
    $
    1,053,585Long Lived Assets:United States
    
    $
    673,991
    
    
    $
    655,513International
    
    
    282,513
    
    
    
    180,178$
    956,504
    
    
    $
    835,691
 For the Three Months Ended
    
    
    For the Nine Months EndedSeptember 30,
    
    
    September 30,2008
    
    
    2007
    
    
    2008
    
    
    2007Revenues:United States
    
    $
    96,600
    
    
    $
    85,160
    
    
    $
    269,542
    
    
    $
    255,626International
    
    
    81,665
    
    
    
    62,721
    
    
    
    225,040
    
    
    
    171,517$
    178,265
    
    
    $
    147,881
    
    
    $
    494,582
    
    
    $
    427,143
 NOTE 12  SUPPLEMENTAL CASH FLOW INFORMATION
 For the Nine Months EndedSeptember 30,2008
    
    
    2007Cash paid for interest and income taxes:Interest
    
    $
    45,904
    
    
    $
    40,493Income taxes
    
    
    16,564
    
    
    
    8,639Non-cash financing activities:Insurance premium financed
    
    $
    2,995
    
    
    $
    4,434Note payable issued for acquisition of business
    
    
    
    
    
    
    1,100Non-cash transaction in connection with asset disposition:Value on goodwill and other intangibles disposed
    
    $
    2,246
    
    
    $
    Value of inventory financed
    
    
    509
    
    
    
    Value of property and equipment disposed
    
    
    337
    
    
    
    Accrued expenses
    
    
    10
    
    
    
    Fair value of note receivable
    
    $
    3,102
    
    
    $
    
 25




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##### Table of Contents



ALLIS-CHALMERS ENERGY INC.
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Continued)
 NOTE 13  LEGAL MATTERS
    26




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##### Table of Contents



ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
 The following discussion and analysis should be read in conjunction with our consolidated financial
statements and the notes thereto included elsewhere in this report. This report contains
forward-looking statements that involve risks and uncertainties. Our actual results may differ
materially from the results discussed in such forward-looking statements. Factors that might cause
such differences include, but are not limited to, the general condition of the oil and natural gas
drilling industry, demand for our oil and natural gas service and rental products, and competition.
For more information on forward-looking statements please refer to the section entitled
Forward-Looking Statements on page 38.
 Overview of Our Business
     Cyclical Nature of Equipment Rental and Services Industry
  27




---



##### Table of Contents



Company Outlook
     Results of Operations
    28




---



##### Table of Contents



Comparison of Three Months Ended September 30, 2008 and 2007
       29




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##### Table of Contents



Revenues
    
    
    Income (Loss) from OperationsThree Months Ended
    
    
    Three Months EndedSeptember 30,
    
    
    September 30,2008
    
    
    2007
    
    
    Change
    
    
    2008
    
    
    2007
    
    
    Change(in thousands)Oilfield Services
    
    $
    73,390
    
    
    $
    60,432
    
    
    $
    12,958
    
    
    $
    13,831
    
    
    $
    11,782
    
    
    $
    2,049Drilling and Completion
    
    
    77,761
    
    
    
    58,546
    
    
    
    19,215
    
    
    
    11,337
    
    
    
    10,262
    
    
    
    1,075Rental Services
    
    
    27,114
    
    
    
    28,903
    
    
    
    (1,789
    )
    
    
    8,545
    
    
    
    12,519
    
    
    
    (3,974
    )General corporate
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (4,680
    )
    
    
    (3,415
    )
    
    
    (1,265
    )Total
    
    $
    178,265
    
    
    $
    147,881
    
    
    $
    30,384
    
    
    $
    29,033
    
    
    $
    31,148
    
    
    $
    (2,115
    )
 Oilfield Services
  Drilling and Completion
  30




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##### Table of Contents



Rental Services
  General Corporate
  Comparison of Nine Months Ended September 30, 2008 and 2007
     31




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##### Table of Contents



Revenues
    
    
    Income (Loss) from OperationsNine Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2008
    
    
    2007
    
    
    Change
    
    
    2008
    
    
    2007
    
    
    Change(in thousands)Oilfield Services
    
    $
    209,946
    
    
    $
    173,985
    
    
    $
    35,961
    
    
    $
    40,218
    
    
    $
    44,069
    
    
    $
    (3,851
    )Drilling and Completion
    
    
    210,640
    
    
    
    160,295
    
    
    
    50,345
    
    
    
    29,596
    
    
    
    30,094
    
    
    
    (498
    )Rental Services
    
    
    73,996
    
    
    
    92,863
    
    
    
    (18,867
    )
    
    
    24,033
    
    
    
    41,212
    
    
    
    (17,179
    )General corporate
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (13,564
    )
    
    
    (11,283
    )
    
    
    (2,281
    )Total
    
    $
    494,582
    
    
    $
    427,143
    
    
    $
    67,439
    
    
    $
    80,283
    
    
    $
    104,092
    
    
    $
    (23,809
    )
 32




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##### Table of Contents



Oilfield Services
  Drilling and Completion
  Rental Services
  General Corporate
  Liquidity and Capital Resources
  Operating Activities
  33




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##### Table of Contents



Investing Activities
   34




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##### Table of Contents



Financing Activities
         35




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##### Table of Contents



Notes payable
     Other debt
   Off Balance Sheet Arrangements
  Capital Requirements
   36




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##### Table of Contents



Critical Accounting Policies
  Fair Value Measurements,
 The Fair
Value Option for Financial Assets and Financial Liabilities
 Business Combinations,
 Non-controlling Interests in Consolidated Financial Statements  an amendment of ARB No. 51
 Disclosures
about Derivative Instruments and Hedging Activities  an amendment of FASB Statement No. 133
 37




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##### Table of Contents



Determination of the Useful Life of
Intangible Assets Goodwill and Other
Intangible Assets Business
Combinations
 Forward-Looking Statements
  
 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
  Interest Rate Risk.
   Foreign Currency Exchange Rate Risk.
  
 ITEM 4. CONTROLS AND PROCEDURES.
 (a) Evaluation of Disclosure Controls and Procedures
  38




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##### Table of Contents



(b) Change in Internal Control Over Financial Reporting.
  
 PART II. OTHER INFORMATION
 
 ITEM 1A. RISK FACTORS
  Our business depends on domestic spending by the oil and natural gas industry, and this spending
and our business may be adversely affected by industry and financial market conditions that are
beyond our control.
    
 ITEM 6. EXHIBITS
  39




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##### Table of Contents



SIGNATURES
  Allis-Chalmers Energy Inc.

(Registrant)/s/ Munawar H. Hidayatallah

Munawar H. HidayatallahChief Executive Officer and
Chairman
 40




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##### Table of Contents



EXHIBIT INDEX
 10.1
    
    Mutual Termination and Release Agreement, dated August 8, 2008, by and among Allis-Chalmers
Energy Inc., Elway Merger Sub LLC and Bronco Drilling Company, Inc.
(incorporated by reference to Exhibit 10.1 to the
Registrants Form 8-K filed on August 8, 2008).31.1 *
    
    Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.31.2*
    
    Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.32.1*
    
    Certification of the Chief Executive Officer and Chief Financial Officer pursuant to 18
U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 
 *
    
    Filed herewith 41