##### 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, 2006
 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 1-2199
 ALLIS-CHALMERS ENERGY INC.
  DELAWARE
    
    39-0126090(State or other jurisdiction of
    
    (I.R.S. Employerincorporation or organization)
    
    Identification No.)
 5075 WESTHEIMER, SUITE 890, HOUSTON, TEXAS 77056
 (713) 369-0550
 Registrants telephone number, including area code
 þ o
  o o þ
 o þ




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##### 



ALLIS-CHALMERS ENERGY INC.
 FORM 10-Q
 For the Quarterly Period Ended September 30, 2006
 TABLE OF CONTENTS
 ITEM
    
    
    
    PAGEPART I1.
    
    Financial StatementsConsolidated Condensed Balance Sheets as of September 30, 2006 and December 31, 2005
    
    
    3Consolidated Condensed Income Statements for the three and nine months ended
September 30, 2006 and 2005
    
    
    4Consolidated Condensed Statements of Cash Flows for the nine months ended
September 30, 2006 and 2005
    
    
    5Notes to Consolidated Condensed Financial Statements
    
    
    62.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    243.
    
    Quantitative and Qualitative Disclosures about Market Risk
    
    
    344.
    
    Controls and Procedures
    
    
    35PART II1.
    
    Legal Proceedings
    
    
    361A.
    
    Risk Factors
    
    
    362.
    
    Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    416.
    
    Exhibits
    
    
    41Signatures
    
    
    41Certification of CEO pursuant to Section 302Certification of CFO Pursuant to Section 302Certification of CEO and CFO pursuant to Section 906
  2




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##### Table of Contents



PART I. FINANCIAL INFORMATION
 
 ITEM 1. FINANCIAL STATEMENTS
 ALLIS-CHALMERS ENERGY INC.
 
 CONSOLIDATED CONDENSED BALANCE SHEETS
  September 30,
    
    
    December 31,2006
    
    
    2005(unaudited)AssetsCash and cash equivalents
    
    $
    50,311
    
    
    $
    1,920Trade receivables, net
    
    
    85,156
    
    
    
    26,964Inventory
    
    
    25,813
    
    
    
    5,945Prepaid expenses and other
    
    
    6,374
    
    
    
    823Total current assets
    
    
    167,654
    
    
    
    35,652Property and equipment, net
    
    
    341,483
    
    
    
    80,574Goodwill
    
    
    12,417
    
    
    
    12,417Other intangible assets, net
    
    
    6,802
    
    
    
    6,783Debt issuance costs, net
    
    
    8,585
    
    
    
    1,298Other assets
    
    
    155
    
    
    
    631Total assets
    
    $
    537,096
    
    
    $
    137,355Liabilities and Stockholders EquityCurrent maturities of long-term debt
    
    $
    8,493
    
    
    $
    5,632Trade accounts payable
    
    
    26,311
    
    
    
    9,018Accrued salaries, benefits and payroll taxes
    
    
    10,050
    
    
    
    1,271Accrued interest
    
    
    4,950
    
    
    
    289Accrued income taxes
    
    
    2,901
    
    
    
    668Accrued expenses
    
    
    13,853
    
    
    
    3,682Accounts payable, related parties
    
    
    
    
    
    
    60Total current liabilities
    
    
    66,558
    
    
    
    20,620Accrued postretirement benefit obligations
    
    
    304
    
    
    
    335Long-term debt, net of current maturities
    
    
    262,466
    
    
    
    54,937Deferred income taxes
    
    
    26,723
    
    
    
    Other long-term liabilities
    
    
    577
    
    
    
    588Total liabilities
    
    
    356,628
    
    
    
    76,480Commitments 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;
24,583,881 issued and outstanding at September 30, 2006 and
16,859,988 issued and outstanding at December 31, 2005)
    
    
    246
    
    
    
    169Capital in excess of par value
    
    
    153,135
    
    
    
    58,889Retained earnings
    
    
    27,087
    
    
    
    1,817Total stockholders equity
    
    
    180,468
    
    
    
    60,875Total liabilities and stockholders equity
    
    $
    537,096
    
    
    $
    137,355
  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 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Revenues
    
    $
    85,738
    
    
    $
    28,908
    
    
    $
    193,236
    
    
    $
    71,830Cost of revenuesDirect costs
    
    
    51,497
    
    
    
    19,280
    
    
    
    110,578
    
    
    
    47,756Depreciation
    
    
    5,448
    
    
    
    1,391
    
    
    
    12,606
    
    
    
    3,397Total cost of revenues
    
    
    56,945
    
    
    
    20,671
    
    
    
    123,184
    
    
    
    51,153Gross margin
    
    
    28,793
    
    
    
    8,237
    
    
    
    70,052
    
    
    
    20,677General and administrative
    
    
    9,058
    
    
    
    4,261
    
    
    
    24,540
    
    
    
    10,720Amortization
    
    
    681
    
    
    
    452
    
    
    
    1,954
    
    
    
    1,272Income from operations
    
    
    19,054
    
    
    
    3,524
    
    
    
    43,558
    
    
    
    8,685Other income (expense):Interest, net
    
    
    (4,660
    )
    
    
    (2,064
    )
    
    
    (12,085
    )
    
    
    (3,230
    )Other
    
    
    (26
    )
    
    
    63
    
    
    
    (6
    )
    
    
    221Total other income (expense)
    
    
    (4,686
    )
    
    
    (2,001
    )
    
    
    (12,091
    )
    
    
    (3,009
    )Net income before minority interest
and income taxes
    
    
    14,368
    
    
    
    1,523
    
    
    
    31,467
    
    
    
    5,676Minority interest in income of subsidiaries
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (488
    )Provision for income taxes
    
    
    (3,116
    )
    
    
    (230
    )
    
    
    (6,197
    )
    
    
    (559
    )Net income
    
    $
    11,252
    
    
    $
    1,293
    
    
    $
    25,270
    
    
    $
    4,629Net income per common share:Basic
    
    $
    0.52
    
    
    $
    0.09
    
    
    $
    1.33
    
    
    $
    0.33Diluted
    
    $
    0.50
    
    
    $
    0.08
    
    
    $
    1.25
    
    
    $
    0.30Weighted average shares outstanding:Basic
    
    
    21,644
    
    
    
    14,985
    
    
    
    18,944
    
    
    
    14,197Diluted
    
    
    22,453
    
    
    
    16,601
    
    
    
    20,155
    
    
    
    15,589
  4




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ALLIS-CHALMERS ENERGY INC.
 
 CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
   For the Nine Months EndedSeptember 30,2006
    
    
    2005Cash Flows from Operating Activities:Net income
    
    $
    25,270
    
    
    $
    4,629Adjustments to reconcile net income to net cash
provided by operating activities:Depreciation
    
    
    12,606
    
    
    
    3,397Amortization
    
    
    1,954
    
    
    
    1,272Imputed interest
    
    
    355
    
    
    
    Write-off of deferred financing fees due to refinancing
    
    
    
    
    
    
    653Stock option expense
    
    
    2,638
    
    
    
    Provision for bad debts
    
    
    353
    
    
    
    Minority interest in income of subsidiaries
    
    
    
    
    
    
    488Deferred taxes
    
    
    494
    
    
    
    Gain on sale of property and equipment
    
    
    (728
    )
    
    
    Changes in operating assets and liabilities, net of acquisitions:(Increase) in trade receivable
    
    
    (17,161
    )
    
    
    (7,250
    )(Increase) in inventory
    
    
    (2,161
    )
    
    
    (2,844
    )Decrease in other current assets
    
    
    1,322
    
    
    
    1,322Decrease (increase) in other assets
    
    
    530
    
    
    
    (171
    )(Decrease) increase in accounts payable
    
    
    (1,609
    )
    
    
    1,058Increase in accrued interest
    
    
    4,661
    
    
    
    497Increase in accrued expenses
    
    
    2,516
    
    
    
    1,269Increase (decrease) in accrued salaries, benefits and payroll taxes
    
    
    3,110
    
    
    
    (287
    )Decrease in other long-term liabilities
    
    
    (813
    )
    
    
    (151
    )Net Cash Provided By Operating Activities
    
    
    33,337
    
    
    
    3,882Cash Flows from Investing Activities:Acquisition of businesses, net of cash received
    
    
    (203,189
    )
    
    
    (15,416
    )Acquisition of assets
    
    
    
    
    
    
    (21,249
    )Proceeds from sale of property and equipment
    
    
    3,516
    
    
    
    Purchase of property and equipment
    
    
    (25,811
    )
    
    
    (9,585
    )Net Cash Used In Investing Activities
    
    
    (225,484
    )
    
    
    (46,250
    )Cash Flows from Financing Activities:Proceeds from exercises of options and warrants
    
    
    5,406
    
    
    
    Proceeds from issuance of common stock, net
    
    
    46,484
    
    
    
    15,888Proceeds from long-term debt
    
    
    257,820
    
    
    
    45,700Proceeds from line of credit
    
    
    5,000
    
    
    
    Repayments on long-term debt
    
    
    (51,712
    )
    
    
    (21,438
    )Repayments on related party debt
    
    
    (3,031
    )
    
    
    Repayments on line of credit
    
    
    (11,400
    )
    
    
    Debt issuance costs
    
    
    (8,029
    )
    
    
    (1,217
    )Net Cash Provided By Financing Activities
    
    
    240,538
    
    
    
    38,933Net change in cash and cash equivalents
    
    
    48,391
    
    
    
    (3,435
    )Cash and cash equivalents at beginning of year
    
    
    1,920
    
    
    
    7,344Cash and cash equivalents at end of period
    
    $
    50,311
    
    
    $
    3,909
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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
    Accounting for Uncertainty in Income
Taxes  an interpretation of FASB Statement No. 109 Accounting for Income Taxes
 Fair Value Measurements
 6




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ALLIS-CHALMERS ENERGY INC.
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
 NOTE 2  ACQUISITIONS
  Current assets
    
    $
    54,370Property and equipment
    
    
    150,441Other long-term assets
    
    
    21Total assets acquired
    
    
    204,832Current liabilities
    
    
    36,530Long-term debt, less current portion
    
    
    6,114Intercompany note
    
    
    17,256Other long-term liabilities
    
    
    27,000Total liabilities assumed
    
    
    86,900Net assets acquired
    
    $
    117,932
   Current assets
    
    $
    4,520Property and equipment
    
    
    9,866Intangible assets
    
    
    1,131Total assets acquired
    
    
    15,517Current liabilities
    
    
    1,717Other long-term liabilities
    
    
    100Total liabilities assumed
    
    
    1,817Net assets acquired
    
    $
    13,700
   7




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ALLIS-CHALMERS ENERGY INC.
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
 NOTE 2  ACQUISITIONS (Continued)
 Accounts receivable
    
    $
    7,167Other current assets
    
    
    425Property and equipment
    
    
    90,540Total assets acquired
    
    
    98,132Current liabilities
    
    
    2,058Long-term debt
    
    
    74Total liabilities assumed
    
    
    2,132Net assets acquired
    
    $
    96,000
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ALLIS-CHALMERS ENERGY INC.
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
 NOTE 2  ACQUISITIONS (Continued)
  For the Three Months Ended
    
    For the Nine Months EndedSeptember 30,
    
    September 30,2006
    
    2005
    
    2006
    
    2005Revenues
    
    $
    107,617
    
    
    $
    44,531
    
    
    $
    299,219
    
    
    $
    200,634Operating income
    
    
    20,530
    
    
    
    9,685
    
    
    
    56,668
    
    
    
    25,552Net income
    
    
    12,843
    
    
    
    2,400
    
    
    
    28,568
    
    
    
    4,858Net income per common share:Basic
    
    $
    0.56
    
    
    $
    0.11
    
    
    $
    1.19
    
    
    $
    0.24Diluted
    
    $
    0.54
    
    
    $
    0.11
    
    
    $
    1.14
    
    
    $
    0.22
 NOTE 3  STOCK-BASED COMPENSATION
 Share-Based Payment
  Accounting For Stock-Based Compensation
 9




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ALLIS-CHALMERS ENERGY INC.
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
 NOTE 3  STOCK-BASED COMPENSATION (Continued)
  Weighted
    
    WeightedShare
    
    Average
    
    Average
    
    AggregateUnder
    
    Exercise
    
    Contractual
    
    Intrinsic ValueOption
    
    Price
    
    Life (Years)
    
    (millions)Balance at beginning of period
    
    
    2,860,867
    
    
    $
    5.10Granted
    
    
    15,000
    
    
    
    14.74Canceled
    
    
    (53,234
    )
    
    
    5.85Exercised
    
    
    (1,335,166
    )
    
    
    3.46Outstanding at end of period
    
    
    1,487,467
    
    
    
    6.65
    
    
    
    8.56
    
    
    $
    11.9Exercisable at end of period
    
    
    668,136
    
    
    
    5.69
    
    
    
    8.31
    
    
    $
    6.0
   For the Three Months Ended
    
    For the Nine Months EndedSeptember 30,
    
    September 30,2006
    
    2005
    
    2006
    
    2005Expected dividend yield
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Expected price volatility
    
    
    72.28
    %
    
    
    98.65
    %
    
    
    72.28
    %
    
    
    98.65
    %Risk free interest rate
    
    
    5.07
    %
    
    
    6.63
    %
    
    
    5.07
    %
    
    
    6.63
    %Expected life of options
    
    7 years
    
    7 years
    
    7 years
    
    7 yearsWeighted average fair
value of options granted
at market value
    
    $
    10.58
    
    
    $
    3.12
    
    
    $
    10.58
    
    
    $
    3.12
 10




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ALLIS-CHALMERS ENERGY INC.
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
 NOTE 3  STOCK-BASED COMPENSATION (Continued)
  Three Months
    
    
    Nine MonthsEnded September 30,2005
    
    
    2005Net income: As reported
    
    
    
    
    
    
    
    
    
    $
    1,293
    
    
    $
    4,629Less total stock based employee
compensation expense
determined under fair value based
method for all
awards net of tax related
effects
    
    
    
    
    
    
    
    
    
    
    (863
    )
    
    
    (2,368
    )Pro forma net income
    
    
    
    
    
    
    
    
    
    $
    430
    
    
    $
    2,261Net income per share:Basic
    
    As reported
    
    
    
    
    
    $
    0.09
    
    
    $
    0.33Pro forma
    
    
    
    
    
    $
    0.03
    
    
    $
    0.16Diluted
    
    As reported
    
    
    
    
    
    $
    0.08
    
    
    $
    0.30Pro forma
    
    
    
    
    
    $
    0.03
    
    
    $
    0.15
 NOTE 4  INCOME PER COMMON SHARE
 Earnings Per
Share
  For the Three Months Ended
    
    
    For the Nine Months EndedSeptember 30,
    
    
    September 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Numerator:Net income
    
    $
    11,252
    
    
    $
    1,293
    
    
    $
    25,270
    
    
    $
    4,629Denominator:Basic earnings per share  weighted
average shares outstanding
    
    
    21,644
    
    
    
    14,985
    
    
    
    18,944
    
    
    
    14,197Effect of potentially dilutive common shares:Warrants and employee and director
stock options
    
    
    809
    
    
    
    1,616
    
    
    
    1,211
    
    
    
    1,392Diluted earnings per share  weighted average shares
outstanding and assumed conversions
    
    
    22,453
    
    
    
    16,601
    
    
    
    20,155
    
    
    
    15,589Net income per share  basic
    
    $
    0.52
    
    
    $
    0.09
    
    
    $
    1.33
    
    
    $
    0.33Net income per share  diluted
    
    $
    0.50
    
    
    $
    0.08
    
    
    $
    1.25
    
    
    $
    0.30
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ALLIS-CHALMERS ENERGY INC.
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
 NOTE 5  GOODWILL AND INTANGIBLE ASSETS
 Goodwill and Other Intangible Assets
  NOTE 6  INVENTORY
  September 30,
    
    
    December 31,2006
    
    
    2005Hammer bitsFinished goods
    
    $
    1,453
    
    
    $
    1,402Work in process
    
    
    1,880
    
    
    
    787Raw materials
    
    
    2,726
    
    
    
    233Total hammer bits
    
    
    6,059
    
    
    
    2,422Hammers
    
    
    884
    
    
    
    584Drive pipe
    
    
    762
    
    
    
    666Rental supplies
    
    
    335
    
    
    
    64Chemicals and drilling fluids
    
    
    1,837
    
    
    
    201Rig parts and related inventory
    
    
    10,243
    
    
    
    Coiled tubing and related inventory
    
    
    1,270
    
    
    
    1,145Shop supplies and related inventory
    
    
    4,423
    
    
    
    863Total inventory
    
    $
    25,813
    
    
    $
    5,945
 12




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ALLIS-CHALMERS ENERGY INC.
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
 NOTE 7- DEBT
  September 30,
    
    
    December 31,2006
    
    
    2005Senior notes
    
    $
    255,000
    
    
    $
    Bank term loans
    
    
    7,946
    
    
    
    42,090Revolving line of credit
    
    
    
    
    
    
    6,400Subordinated note payable to M-1 LLC
    
    
    
    
    
    
    4,000Subordinated seller note
    
    
    
    
    
    
    3,031Seller notes
    
    
    900
    
    
    
    850Obligations under non-compete agreements
    
    
    332
    
    
    
    698Notes payable to former directors
    
    
    32
    
    
    
    96Real estate loan
    
    
    
    
    
    
    548Rig, equipment and vehicle installment notes
    
    
    4,398
    
    
    
    1,939Insurance premium financing
    
    
    1,808
    
    
    
    Capital lease obligations
    
    
    543
    
    
    
    917Total debt
    
    
    270,959
    
    
    
    60,569Less: current maturities
    
    
    8,493
    
    
    
    5,632Long-term debt obligations
    
    $
    262,466
    
    
    $
    54,937
 Senior notes, bank loans and line of credit agreements
   
    
    A $13.0 million revolving line of credit. Borrowings were limited to 85% of eligible
accounts receivable plus 50% of eligible inventory (up to a maximum of $2.0 million of
borrowings based on inventory). This line of credit was to be used to finance working
capital requirements and other general corporate purposes, including the issuance of
standby letters of credit. Outstanding borrowings under this line of credit were $6.4
million at a margin above prime and LIBOR rates plus margin averaging approximately 8.1% as
of December 31, 2005.
    
    Two term loans totaling $42.0 million. Outstanding borrowings under these term loans
were $42.0 million as of December 31, 2005. These loans were at LIBOR rates plus a margin
which averages approximately 7.8% at December 31, 2005.
  13




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ALLIS-CHALMERS ENERGY INC.
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
 NOTE 7  DEBT (Continued)
   Notes payable and real estate loan
       14




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ALLIS-CHALMERS ENERGY INC.
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
 NOTE 7  DEBT (Continued)
  Other debt
  NOTE 8
 STOCKHOLDERS EQUITY
    NOTE 9  CONDENSED CONSOLIDATING FINANCIAL INFORMATION
  15




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ALLIS-CHALMERS ENERGY INC.
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
 NOTE 9  CONDENSED CONSOLIDATING FINANCIAL INFORMATION (Continued)
 CONDENSED CONSOLIDATING BALANCE SHEETS
 Allis-Chalmers
    
    
    
    
    
    
    Subsidiary(Parent/
    
    
    Subsidiary
    
    
    Non-
    
    
    Consolidating
    
    
    ConsolidatedGuarantor)
    
    
    Guarantors
    
    
    Guarantors
    
    
    Adjustments
    
    
    TotalAssetsCash and Cash equivalents
    
    $
    
    
    
    $
    48,679
    
    
    $
    1,632
    
    
    $
    
    
    
    $
    50,311Trade receivables, net
    
    
    
    
    
    
    53,342
    
    
    
    31,814
    
    
    
    
    
    
    
    85,156Inventory
    
    
    
    
    
    
    10,723
    
    
    
    15,090
    
    
    
    
    
    
    
    25,813Intercompany receivables
    
    
    110,149
    
    
    
    
    
    
    
    
    
    
    
    (110,149
    )
    
    
    Note receivable from affiliate
    
    
    5,897
    
    
    
    
    
    
    
    
    
    
    
    (5,897
    )
    
    
    Prepaid expenses and other
    
    
    
    
    
    
    2,816
    
    
    
    3,558
    
    
    
    
    
    
    
    6,374Total current assets
    
    
    116,046
    
    
    
    115,560
    
    
    
    52,094
    
    
    
    (116,046
    )
    
    
    167,654Property and equipment, net
    
    
    
    
    
    
    189,452
    
    
    
    152,031
    
    
    
    
    
    
    
    341,483Goodwill
    
    
    
    
    
    
    12,417
    
    
    
    
    
    
    
    
    
    
    
    12,417Other intangible assets, net
    
    
    609
    
    
    
    6,096
    
    
    
    97
    
    
    
    
    
    
    
    6,802Debt issuance costs, net
    
    
    8,585
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    8,585Note receivable from affiliates
    
    
    10,354
    
    
    
    
    
    
    
    
    
    
    
    (10,354
    )
    
    
    Investments in affiliates
    
    
    306,349
    
    
    
    
    
    
    
    
    
    
    
    (306,349
    )
    
    
    Other assets
    
    
    5
    
    
    
    129
    
    
    
    22
    
    
    
    (1
    )
    
    
    155Total Assets
    
    $
    441,948
    
    
    $
    323,654
    
    
    $
    204,244
    
    
    $
    (432,750
    )
    
    $
    537,096Liabilities and Stockholders EquityCurrent maturities of long-term debt
    
    $
    
    
    
    $
    4,919
    
    
    $
    3,574
    
    
    $
    
    
    
    $
    8,493Trade accounts payable
    
    
    31
    
    
    
    9,861
    
    
    
    16,419
    
    
    
    
    
    
    
    26,311Accrued salaries, benefits and payroll taxes
    
    
    
    
    
    
    2,644
    
    
    
    7,406
    
    
    
    
    
    
    
    10,050Accrued interest
    
    
    4,950
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,950Accrued income taxes
    
    
    3
    
    
    
    53
    
    
    
    2,845
    
    
    
    
    
    
    
    2,901Accrued expenses
    
    
    129
    
    
    
    8,280
    
    
    
    5,444
    
    
    
    
    
    
    
    13,853Intercompany payables
    
    
    
    
    
    
    110,149
    
    
    
    
    
    
    
    (110,149
    )
    
    
    Note payable to affiliate
    
    
    
    
    
    
    
    
    
    
    5,897
    
    
    
    (5,897
    )
    
    
    Total current liabilities
    
    
    5,113
    
    
    
    135,906
    
    
    
    41,585
    
    
    
    (116,046
    )
    
    
    66,558Accrued postretirement benefit obligations
    
    
    304
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    304Long-term debt, net of current maturities
    
    
    255,782
    
    
    
    1,200
    
    
    
    5,484
    
    
    
    
    
    
    
    262,466Note payable to affiliate
    
    
    
    
    
    
    
    
    
    
    10,354
    
    
    
    (10,354
    )
    
    
    Deferred income taxes
    
    
    281
    
    
    
    213
    
    
    
    26,229
    
    
    
    
    
    
    
    26,723Other long-term liabilities
    
    
    
    
    
    
    577
    
    
    
    
    
    
    
    
    
    
    
    577Total liabilities
    
    
    261,480
    
    
    
    137,896
    
    
    
    83,652
    
    
    
    (126,400
    )
    
    
    356,628Commitments and contingenciesStockholders EquityCommon Stock
    
    
    246
    
    
    
    3,425
    
    
    
    42,963
    
    
    
    (46,388
    )
    
    
    246Capital in excess of par value
    
    
    153,135
    
    
    
    133,918
    
    
    
    74,969
    
    
    
    (208,887
    )
    
    
    153,135Retained earnings
    
    
    27,087
    
    
    
    48,415
    
    
    
    2,660
    
    
    
    (51,075
    )
    
    
    27,087Total stockholders equity
    
    
    180,468
    
    
    
    185,758
    
    
    
    120,592
    
    
    
    (306,350
    )
    
    
    180,468Total liabilities and stock
holders equity
    
    $
    441,948
    
    
    $
    323,654
    
    
    $
    204,244
    
    
    $
    (432,750
    )
    
    $
    537,096
 16




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##### Table of Contents



ALLIS-CHALMERS ENERGY INC.
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
 NOTE 9  CONDENSED CONSOLIDATING FINANCIAL INFORMATION (Continued)
 CONDENSED CONSOLIDATING INCOME STATEMENTS
 Allis-Chalmers
    
    
    
    
    
    
    Subsidiary(Parent/
    
    
    Subsidiary
    
    
    Non-
    
    
    Consolidating
    
    
    ConsolidatedGuarantor)
    
    
    Guarantors
    
    
    Guarantors
    
    
    Adjustments
    
    
    TotalRevenues
    
    $
    
    
    
    $
    61,885
    
    
    $
    23,853
    
    
    $
    
    
    
    $
    85,738Cost of revenuesDirect costs
    
    
    
    
    
    
    34,173
    
    
    
    17,324
    
    
    
    
    
    
    
    51,497Depreciation
    
    
    
    
    
    
    3,949
    
    
    
    1,499
    
    
    
    
    
    
    
    5,448Total cost of revenues
    
    
    
    
    
    
    38,122
    
    
    
    18,823
    
    
    
    
    
    
    
    56,945Gross margin
    
    
    
    
    
    
    23,763
    
    
    
    5,030
    
    
    
    
    
    
    
    28,793General and administrative
    
    
    637
    
    
    
    7,534
    
    
    
    887
    
    
    
    
    
    
    
    9,058Amortization
    
    
    293
    
    
    
    385
    
    
    
    3
    
    
    
    
    
    
    
    681Income from operations
    
    
    (930
    )
    
    
    15,844
    
    
    
    4,140
    
    
    
    
    
    
    
    19,054Other income (expense):Equity earnings in
affiliates, net of tax
    
    
    16,872
    
    
    
    
    
    
    
    
    
    
    
    (16,872
    )
    
    
    Interest, net
    
    
    (4,701
    )
    
    
    264
    
    
    
    (223
    )
    
    
    
    
    
    
    (4,660
    )Other
    
    
    11
    
    
    
    (20
    )
    
    
    (17
    )
    
    
    
    
    
    
    (26
    )Total other income
(expense)
    
    
    12,182
    
    
    
    244
    
    
    
    (240
    )
    
    
    (16,872
    )
    
    
    (4,686
    )Net income before income
taxes
    
    
    11,252
    
    
    
    16,088
    
    
    
    3,900
    
    
    
    (16,872
    )
    
    
    14,368Provision for income taxes
    
    
    
    
    
    
    (1,876
    )
    
    
    (1,240
    )
    
    
    
    
    
    
    (3,116
    )Net income
    
    $
    11,252
    
    
    $
    14,212
    
    
    $
    2,660
    
    
    $
    (16,872
    )
    
    $
    11,252
 17




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##### Table of Contents



ALLIS-CHALMERS ENERGY INC.
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
 NOTE 9  CONDENSED CONSOLIDATING FINANCIAL INFORMATION (Continued)
 CONDENSED CONSOLIDATING INCOME STATEMENTS
 Allis-Chalmers
    
    
    
    
    
    
    Subsidiary(Parent/
    
    
    Subsidiary
    
    
    Non-
    
    
    Consolidating
    
    
    ConsolidatedGuarantor)
    
    
    Guarantors
    
    
    Guarantors
    
    
    Adjustments
    
    
    TotalRevenues
    
    $
    
    
    
    $
    169,383
    
    
    $
    23,853
    
    
    $
    
    
    
    $
    193,236Cost of revenuesDirect costs
    
    
    
    
    
    
    93,254
    
    
    
    17,324
    
    
    
    
    
    
    
    110,578Depreciation
    
    
    
    
    
    
    11,107
    
    
    
    1,499
    
    
    
    
    
    
    
    12,606Total cost of revenues
    
    
    
    
    
    
    104,361
    
    
    
    18,823
    
    
    
    
    
    
    
    123,184Gross margin
    
    
    
    
    
    
    65,022
    
    
    
    5,030
    
    
    
    
    
    
    
    70,052General and administrative
    
    
    2,032
    
    
    
    21,621
    
    
    
    887
    
    
    
    
    
    
    
    24,540Amortization
    
    
    777
    
    
    
    1,174
    
    
    
    3
    
    
    
    
    
    
    
    1,954Income from operations
    
    
    (2,809
    )
    
    
    42,227
    
    
    
    4,140
    
    
    
    
    
    
    
    43,558Other income (expense):Equity earnings in
affiliates,
net of
tax
    
    
    39,644
    
    
    
    
    
    
    
    
    
    
    
    (39,644
    )
    
    
    Interest, net
    
    
    (11,601
    )
    
    
    (261
    )
    
    
    (223
    )
    
    
    
    
    
    
    (12,085
    )Other
    
    
    36
    
    
    
    (25
    )
    
    
    (17
    )
    
    
    
    
    
    
    (6
    )Total other income
(expense)
    
    
    28,079
    
    
    
    (286
    )
    
    
    (240
    )
    
    
    (39,644
    )
    
    
    (12,091
    )Net income before income
taxes
    
    
    25,270
    
    
    
    41,941
    
    
    
    3,900
    
    
    
    (39,644
    )
    
    
    31,467Provision for income taxes
    
    
    
    
    
    
    (4,957
    )
    
    
    (1,240
    )
    
    
    
    
    
    
    (6,197
    )Net income
    
    $
    25,270
    
    
    $
    36,984
    
    
    $
    2,660
    
    
    $
    (39,644
    )
    
    $
    25,270
 18




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##### Table of Contents



ALLIS-CHALMERS ENERGY INC.
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
 NOTE 9  CONDENSED CONSOLIDATING FINANCIAL INFORMATION (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
    
    $
    25,270
    
    
    $
    36,984
    
    
    $
    2,660
    
    
    $
    (39,644
    )
    
    $
    25,270Adjustments to reconcile net income to
net cash provided by operating
activities:Depreciation
    
    
    
    
    
    
    11,107
    
    
    
    1,499
    
    
    
    
    
    
    
    12,606Amortization
    
    
    777
    
    
    
    1,177
    
    
    
    
    
    
    
    
    
    
    
    1,954Imputed interest
    
    
    
    
    
    
    355
    
    
    
    
    
    
    
    
    
    
    
    355Stock option expense
    
    
    1,655
    
    
    
    983
    
    
    
    
    
    
    
    
    
    
    
    2,638Provision for bad debts
    
    
    
    
    
    
    353
    
    
    
    
    
    
    
    
    
    
    
    353Equity earnings in affiliates
    
    
    (39,644
    )
    
    
    
    
    
    
    
    
    
    
    39,644
    
    
    
    Deferred taxes
    
    
    281
    
    
    
    213
    
    
    
    
    
    
    
    
    
    
    
    494(Gain) loss on sale of equipment
    
    
    
    
    
    
    (729
    )
    
    
    1
    
    
    
    
    
    
    
    (728
    )Changes in operating assets and
liabilities, net of acquisitions:(Increase) decrease in trade
receivables
    
    
    
    
    
    
    (17,883
    )
    
    
    722
    
    
    
    
    
    
    
    (17,161
    )(Increase) decrease in inventory
    
    
    
    
    
    
    (2,325
    )
    
    
    164
    
    
    
    
    
    
    
    (2,161
    )Decrease in other current assets
    
    
    396
    
    
    
    660
    
    
    
    266
    
    
    
    
    
    
    
    1,322(Increase) decrease in other assets
    
    
    548
    
    
    
    79
    
    
    
    (97
    )
    
    
    
    
    
    
    530(Decrease) increase in accounts
payable
    
    
    (82
    )
    
    
    (1,159
    )
    
    
    (368
    )
    
    
    
    
    
    
    (1,609
    )(Decrease) increase in accrued
interest
    
    
    4,703
    
    
    
    (42
    )
    
    
    
    
    
    
    
    
    
    
    4,661(Decrease) increase in accrued
expenses
    
    
    (387
    )
    
    
    3,560
    
    
    
    (657
    )
    
    
    
    
    
    
    2,516(Decrease) increase in accrued
salaries, benefits and payroll
taxes
    
    
    (1,957
    )
    
    
    2,988
    
    
    
    2,079
    
    
    
    
    
    
    
    3,110Increase in other long- term
liabilities
    
    
    (31
    )
    
    
    (782
    )
    
    
    
    
    
    
    
    
    
    
    (813
    )Net Cash Provided By Operating
Activities
    
    
    (8,471
    )
    
    
    35,539
    
    
    
    6,269
    
    
    
    
    
    
    
    33,337Cash Flows from Investing Activities:Acquisition of businesses, net of cash
    
    
    (191,940
    )
    
    
    (11,667
    )
    
    
    418
    
    
    
    
    
    
    
    (203,189
    )Notes receivable from affiliates
    
    
    1,005
    
    
    
    
    
    
    
    
    
    
    
    (1,005
    )
    
    
    Proceeds from sale of equipment
    
    
    
    
    
    
    3,516
    
    
    
    
    
    
    
    
    
    
    
    3,516Purchase of property and equipment
    
    
    
    
    
    
    (22,721
    )
    
    
    (3,090
    )
    
    
    
    
    
    
    (25,811
    )Net Cash Used in Investing
Activities
    
    
    (190,935
    )
    
    
    (30,872
    )
    
    
    (2,672
    )
    
    
    (1,005
    )
    
    
    (225,484
    )Cash Flows from Financing Activities:Proceeds from exercises of
options/warrants
    
    
    5,406
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,406Proceeds from issuance of common stock,
    
    
    46,484
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    46,484Accounts receivable from affiliates
    
    
    (51,691
    )
    
    
    
    
    
    
    
    
    
    
    51,691
    
    
    
    
 19




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##### Table of Contents



ALLIS-CHALMERS ENERGY INC.
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
 NOTE 9  CONDENSED CONSOLIDATING FINANCIAL INFORMATION (Continued)
 CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOW
 Allis-
    
    
    
    
    
    
    OtherChalmers
    
    
    
    
    
    
    Subsidiaries(Parent/
    
    
    Subsidiary
    
    
    (Non-
    
    
    Consolidating
    
    
    ConsolidatedGuarantor)
    
    
    Guarantors
    
    
    Guarantors)
    
    
    Adjustments
    
    
    TotalCash Flows from Financing Activities: (continued)Accounts payable to affiliates
    
    
    
    
    
    
    51,691
    
    
    
    
    
    
    
    (51,691
    )
    
    
    Note payable to affiliate
    
    
    
    
    
    
    
    
    
    
    (1,005
    )
    
    
    1,005
    
    
    
    Proceeds from long-term debt
    
    
    256,064
    
    
    
    1,756
    
    
    
    
    
    
    
    
    
    
    
    257,820Proceeds from line of credit
    
    
    5,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,000Repayments on long-term debt
    
    
    (43,478
    )
    
    
    (7,274
    )
    
    
    (960
    )
    
    
    
    
    
    
    (51,712
    )Repayments on related party debt
    
    
    
    
    
    
    (3,031
    )
    
    
    
    
    
    
    
    
    
    
    (3,031
    )Repayments on line of credit
    
    
    (11,400
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (11,400
    )Debt issuance costs
    
    
    (8,029
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (8,029
    )Net Cash Provided By Financing
Activities
    
    
    198,356
    
    
    
    43,142
    
    
    
    (1,965
    )
    
    
    1,005
    
    
    
    240,538Net change in cash and cash equivalents
    
    
    (1,050
    )
    
    
    47,809
    
    
    
    1,632
    
    
    
    
    
    
    
    48,391Cash and cash equivalents at beginning of
year
    
    
    1,050
    
    
    
    870
    
    
    
    
    
    
    
    
    
    
    
    1,920Cash and cash equivalents at end of period
    
    $
    
    
    
    $
    48,679
    
    
    $
    1,632
    
    
    $
    
    
    
    $
    50,311
 20




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##### Table of Contents



ALLIS-CHALMERS ENERGY INC.
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
 NOTE
10  SUPPLEMENTAL CASH FLOW INFORMATION
 For the Nine Months EndedSeptember 30,2006
    
    2005(in thousands)Cash paid for interest and income taxes:Interest
    
    $
    7,584
    
    
    $
    2,151Income taxes
    
    $
    5,581
    
    
    $
    459Noncash activities:Insurance premium financed
    
    $
    2,871
    
    
    $
    Common stock issued for acquisition of business
    
    $
    39,795
    
    
    $
    Note payable issued for acquisition of business
    
    $
    750
    
    
    $
    Settlement of lease receivable in conjunction with acquisition
    
    $
    
    
    
    $
    592Deferred income taxes
    
    
    
    
    
    
    750Non-compete payable in the future
    
    $
    250
    
    
    $
    
 NOTE 11- SEGMENT INFORMATION
  For the Three Months Ended
    
    
    For the Nine Months EndedSeptember 30,
    
    
    September 30,2006
    
    
    2005
    
    
    2006
    
    
    2005RevenuesDirectional drilling services
    
    $
    18,962
    
    
    $
    11,383
    
    
    $
    52,331
    
    
    $
    32,218Rental tools
    
    
    13,203
    
    
    
    1,559
    
    
    
    36,331
    
    
    
    3,499International drilling
    
    
    23,853
    
    
    
    
    
    
    
    23,853
    
    
    
    Casing and tubing services
    
    
    13,762
    
    
    
    5,103
    
    
    
    37,790
    
    
    
    12,596Compressed air drilling services
    
    
    12,000
    
    
    
    7,637
    
    
    
    32,048
    
    
    
    16,684Production services
    
    
    3,958
    
    
    
    3,226
    
    
    
    10,883
    
    
    
    6,833$
    85,738
    
    
    $
    28,908
    
    
    $
    193,236
    
    
    $
    71,830Operating Income (Loss):Directional drilling services
    
    $
    5,125
    
    
    $
    1,696
    
    
    $
    12,097
    
    
    $
    5,069Rental tools
    
    
    6,575
    
    
    
    454
    
    
    
    18,881
    
    
    
    780International drilling
    
    
    4,139
    
    
    
    
    
    
    
    4,139
    
    
    
    Casing and tubing services
    
    
    3,734
    
    
    
    1,336
    
    
    
    9,899
    
    
    
    4,015Compressed air drilling services
    
    
    3,176
    
    
    
    1,802
    
    
    
    8,617
    
    
    
    3,331Production services
    
    
    119
    
    
    
    (128
    )
    
    
    737
    
    
    
    (130
    )General corporate
    
    
    (3,814
    )
    
    
    (1,636
    )
    
    
    (10,812
    )
    
    
    (4,380
    )$
    19,054
    
    
    $
    3,524
    
    
    $
    43,558
    
    
    $
    8,685
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ALLIS-CHALMERS ENERGY INC.
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
 NOTE 11  SEGMENT INFORMATION (Continued)
 For the Three Months Ended
    
    
    For the Nine Months EndedSeptember 30,
    
    
    September 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Depreciation and Amortization:Directional drilling services
    
    $
    406
    
    
    $
    295
    
    
    $
    1,054
    
    
    $
    652Rental tools
    
    
    1,735
    
    
    
    121
    
    
    
    5,121
    
    
    
    386International drilling
    
    
    1,502
    
    
    
    
    
    
    
    1,502
    
    
    
    Casing and tubing services
    
    
    968
    
    
    
    510
    
    
    
    2,736
    
    
    
    1,418Compressed air drilling services
    
    
    821
    
    
    
    536
    
    
    
    2,236
    
    
    
    1,406Production services
    
    
    329
    
    
    
    279
    
    
    
    921
    
    
    
    604General corporate
    
    
    368
    
    
    
    102
    
    
    
    990
    
    
    
    203$
    6,129
    
    
    $
    1,843
    
    
    $
    14,560
    
    
    $
    4,669Capital Expenditures:Directional drilling services
    
    $
    384
    
    
    $
    945
    
    
    $
    3,789
    
    
    $
    2,145Rental tools
    
    
    1,715
    
    
    
    271
    
    
    
    2,816
    
    
    
    278International drilling
    
    
    3,090
    
    
    
    
    
    
    
    3,090
    
    
    
    Casing and tubing services
    
    
    2,300
    
    
    
    1,373
    
    
    
    7,800
    
    
    
    3,230Compressed air drilling services
    
    
    3,286
    
    
    
    915
    
    
    
    6,302
    
    
    
    2,841Production services
    
    
    686
    
    
    
    606
    
    
    
    1,732
    
    
    
    896General corporate
    
    
    104
    
    
    
    12
    
    
    
    282
    
    
    
    195$
    11,565
    
    
    $
    4,122
    
    
    $
    25,811
    
    
    $
    9,585
 As ofSeptember 30,
    
    
    December 31,2006
    
    
    2005Goodwill:Directional drilling services
    
    $
    4,168
    
    
    $
    4,168Rental tools
    
    
    
    
    
    
    International drilling
    
    
    
    
    
    
    Casing and tubing services
    
    
    3,673
    
    
    
    3,673Compressed air drilling services
    
    
    3,950
    
    
    
    3,950Production services
    
    
    626
    
    
    
    626General corporate
    
    
    
    
    
    
    $
    12,417
    
    
    $
    12,417Assets:Directional drilling services
    
    $
    28,222
    
    
    $
    20,960Rental tools
    
    
    107,391
    
    
    
    8,034International drilling
    
    
    204,243
    
    
    
    Casing and tubing services
    
    
    69,849
    
    
    
    45,351Compressed air drilling services
    
    
    53,648
    
    
    
    46,045Production services
    
    
    14,218
    
    
    
    12,282General corporate
    
    
    59,525
    
    
    
    4,683$
    537,096
    
    
    $
    137,355
 22




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ALLIS-CHALMERS ENERGY INC.
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
 NOTE 11  SEGMENT INFORMATION (Continued)
 For the Three Months Ended
    
    
    For the Nine Months EndedSeptember 30,
    
    
    September 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Revenues:United States
    
    $
    60,108
    
    
    $
    27,486
    
    
    $
    163,770
    
    
    $
    66,879International
    
    
    25,630
    
    
    
    1,422
    
    
    
    29,466
    
    
    
    4,951$
    85,738
    
    
    $
    28,908
    
    
    $
    193,236
    
    
    $
    71,830
 NOTE
12  LEGAL MATTERS
   NOTE
13  SUBSEQUENT EVENTS
   
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ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION
 This document 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. Other factors are identified in our SEC filings, including our Annual
Report on Form 10-K for the year ended December 31, 2005 under the heading Risk Factors located
at the end of Item 7, Managements Discussion and Analysis of Financial Condition and Results of
Operations.
 The following discussion and analysis should be read in conjunction with our selected historical
financial data and our accompanying financial statements and the notes to those financial
statements included elsewhere in this document. The following discussion contains forward-looking
statements within the meaning of the Private Securities Litigation Reform Act of 1995 that reflect
our plans, estimates and beliefs. Our actual results could differ materially from those
anticipated in these forward-looking statements as a result of risks and uncertainties, including,
but not limited to, those discussed above.
 Overview of Our Business
     24




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Comparison of Three Months Ended September 30, 2006 and 2005
    Share-Based Payment,
  25




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Revenues
    
    
    Income (Loss) from OperationsThree Months Ended
    
    
    Three Months EndedSeptember 30,
    
    
    September 30,2006
    
    
    2005
    
    
    Change
    
    
    2006
    
    
    2005
    
    
    Change(in thousands)Directional drilling services
    
    $
    18,962
    
    
    $
    11,383
    
    
    $
    7,579
    
    
    $
    5,125
    
    
    $
    1,696
    
    
    $
    3,429Rental tools
    
    
    13,203
    
    
    
    1,559
    
    
    
    11,644
    
    
    
    6,575
    
    
    
    454
    
    
    
    6,121International drilling
    
    
    23,853
    
    
    
    
    
    
    
    23,853
    
    
    
    4,139
    
    
    
    
    
    
    
    4,139Casing and tubing services
    
    
    13,762
    
    
    
    5,103
    
    
    
    8,659
    
    
    
    3,734
    
    
    
    1,336
    
    
    
    2,398Compressed air drilling services
    
    
    12,000
    
    
    
    7,637
    
    
    
    4,363
    
    
    
    3,176
    
    
    
    1,802
    
    
    
    1,374Production services
    
    
    3,958
    
    
    
    3,226
    
    
    
    732
    
    
    
    119
    
    
    
    (128
    )
    
    
    247General corporate
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3,814
    )
    
    
    (1,636
    )
    
    
    (2,178
    )Total
    
    $
    85,738
    
    
    $
    28,908
    
    
    $
    56,830
    
    
    $
    19,054
    
    
    $
    3,524
    
    
    $
    15,530
 Directional Drilling Services Segment
  Rental Tools Segment
  26




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International Drilling Segment
  Casing and Tubing Services Segment
  Compressed Air Drilling Services Segment
  Production Services Segment
  General Corporate
  Comparison of Nine Months Ended September 30, 2006 and 2005
  27




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Share-Based Payment,
      28




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Revenues
    
    
    Income (Loss) from OperationsNine Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2006
    
    
    2005
    
    
    Change
    
    
    2006
    
    
    2005
    
    
    Change(in thousands)Directional drilling services
    
    $
    52,331
    
    
    $
    32,218
    
    
    $
    20,113
    
    
    $
    12,097
    
    
    $
    5,069
    
    
    $
    7,028Rental tools
    
    
    36,331
    
    
    
    3,499
    
    
    
    32,832
    
    
    
    18,881
    
    
    
    780
    
    
    
    18,101International drilling
    
    
    23,853
    
    
    
    
    
    
    
    23,853
    
    
    
    4,139
    
    
    
    
    
    
    
    4,139Casing and tubing services
    
    
    37,790
    
    
    
    12,596
    
    
    
    25,194
    
    
    
    9,899
    
    
    
    4,015
    
    
    
    5,884Compressed air drilling services
    
    
    32,048
    
    
    
    16,684
    
    
    
    15,364
    
    
    
    8,617
    
    
    
    3,331
    
    
    
    5,286Production services
    
    
    10,883
    
    
    
    6,833
    
    
    
    4,050
    
    
    
    737
    
    
    
    (130
    )
    
    
    867General corporate
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (10,812
    )
    
    
    (4,380
    )
    
    
    (6,432
    )Total
    
    $
    193,236
    
    
    $
    71,830
    
    
    $
    121,406
    
    
    $
    43,558
    
    
    $
    8,685
    
    
    $
    34,873
 Directional Drilling Services Segment
  Rental Tools Segment
  International Drilling Segment
  29




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Casing and Tubing Services Segment
  Compressed Air Drilling Services Segment
  Production Services Segment
  General Corporate
  Liquidity and Capital Resources
  Operating Activities
  30




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Investing Activities
   Financing Activities
     31




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
    
    A $13.0 million revolving line of credit. Borrowings were limited to 85% of eligible
accounts receivable plus 50% of eligible inventory (up to a maximum of $2.0 million of
borrowings based on inventory). This line of credit was to be used to finance working
capital requirements and other general corporate purposes, including the issuance of
standby letters of credit. Outstanding borrowings under this line of credit were $6.4
million at a margin above prime and LIBOR rates plus margin averaging approximately 8.1% as
of December 31, 2005.
    
    Two term loans totaling $42.0 million. Outstanding borrowings under these term loans
were $42.0 million as of December 31, 2005. These loans were at LIBOR rates plus a margin
which averages approximately 7.8% at December 31, 2005.
        32




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Off Balance Sheet Arrangements
  Capital Requirements
   33




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Recent Developments
   
 Critical Accounting Policies
  Accounting for Uncertainty in Income
Taxes  an interpretation of FASB Statement No. 109 Accounting for Income Taxes
 Fair Value Measurements
 
 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK.
  Interest Rate Risk.
  34




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Foreign Currency Exchange Rate Risk.
  
 ITEM 4. CONTROLS AND PROCEDURES.
 (a) Evaluation of Disclosure Controls and Procedures
   Earnings Per Share
   35




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(b) Change in Internal Control Over Financial Reporting.
  
    
    We continued the engagement of an independent internal controls consulting firm which is
in the process of documenting, analyzing, identifying and testing internal controls.
    
    During the quarter we completed the process of consolidating our payroll functions,
excluding recent acquisitions, to improve quality control over the process. In addition,
we completed the change to a new third party processor to handle our payroll calculations.
    
    We hired an information technology director who has improved our back-up capability and
is in the process of upgrading our network infrastructure.
    
    We hired a tax manager with responsibility for tax notices and the preparation of income and franchise tax returns.
    
    We continue to implement improvements in the way the accounting software is utilized.
 
 PART II. OTHER INFORMATION
 
 ITEM 1. LEGAL PROCEEDINGS
  
 ITEM 1A. RISK FACTORS
  
    
    The first paragraph of the risk factor titled, We have a substantial amount of debt which
could adversely affect our financial health and prevent us from making principal and interest
payments on our senior notes and other debt is updated as follows:
  
    
    We updated the risk factor titled, Failure to maintain effective disclosure controls and
procedures and/or internal controls over financial reporting could have a material adverse
effect on our operations to include the added risk that we may not be able to conclude that
we have effective disclosure controls and procedures and/or effective internal controls over
financial reporting in accordance with Section 404 of the Sarbanes-Oxley Act if we are not
successful in integrating acquired businesses into our consolidated companys system of
disclosure controls and procedures and internal controls over financial reporting. We have
also added the following paragraph to the risk factor:
  
    
    We updated the risk factor titled, Historically, we have been dependent on a few customers
operating in a single industry, the loss of one or more could adversely affect our financial
condition and results of operation to include the following:
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##### Table of Contents




    
    In addition to the risk factors previously disclosed in the Annual Report, we have
identified the following new risk factors, which are primarily related to our recent
acquisition of DLS:
 We are a holding company, and as a result we are dependent on cash transfers from our subsidiaries
to meet our obligations, including with respect to our senior notes.
  We anticipate that our recent acquisition of DLS will substantially change the nature of our
operations and business.
  A material or extended decline in expenditures by oil and gas companies due to a decline or
volatility in oil and gas prices, a decrease in demand for oil and gas or other factors may reduce
demand for DLS services and substantially reduce DLS revenues, profitability, cash flows and/or
liquidity.
  
    
    oil and gas prices and expectations about future prices;
    
    the demand for oil and gas, both in Latin America and globally;
    
    the cost of producing and delivering oil and gas;
    
    advances in exploration, development and production technology;
    
    government regulations, including governmental imposed commodity price controls, export
controls and renationalization of a countrys oil and gas industry;
    
    local and international political and economic conditions;
    
    the ability of OPEC to set and maintain production levels and prices;
    
    the level of production by non-OPEC countries; and
    
    the policies of various governments regarding exploration and development of their oil and gas reserves.
  37




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DLS operations and financial condition could be affected by union activity and general labor
unrest. Additionally, DLS labor expenses could increase as a result of governmental regulation of
payments to employees.
   Rig upgrade, refurbishment and construction projects are subject to risks, including delays and
cost overruns, which could have an adverse effect on DLS results of operations and cash flows.
   An oversupply of comparable rigs in the geographic markets in which DLS competes could depress the
utilization rates and dayrates for DLS rigs and materially reduce DLS revenues and profitability.
  38




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Political and economic instability in South America may hurt DLS operations materially.
  
    
    expropriation of assets;
    
    nationalization of components of the energy industry in the geographic areas where DLS operates;
    
    foreign currency fluctuations and devaluation;
    
    new economic and tax policies;
    
    restrictions on currency, income, capital or asset repatriation;
    
    political instability, war and civil disturbances;
    
    uncertainty or instability resulting from armed hostilities or other crises in the
Middle East or the geographic areas in which DLS operates; and
    
    acts of terrorism.
    Devaluation of the Argentine peso will adversely affect DLS results of operations.
  Argentina continues to face considerable political and economic uncertainty.
   39




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An increase in inflation could have a material adverse effect on DLS results of operations.
  DLS is subject to numerous governmental laws and regulations, including those that may impose
significant liability on DLS for environmental and natural resource damages.
  DLS is subject to hazards customary for drilling operations, which could adversely affect its
financial performance if DLS is not adequately indemnified or insured.
  In connection with our recent acquisition of DLS, the DLS sellers have the right to designate two
nominees for election to our board of directors, and their interests may be different from yours.
  40




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ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
  
 ITEM 6. EXHIBITS
  
 SIGNATURES
  Allis-Chalmers Energy Inc.(Registrant)/s/ Munawar H. HidayatallahMunawar H. HidayatallahChief Executive Officer andChairman
 41




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EXHIBIT INDEX
 1.1
    
    Underwriting Agreement dated as of August 8, 2006 by and between the Registrant and the
underwriters listed on Schedule A thereto (incorporated by reference to Exhibit 1.1 to the
Registrants Form 8-K filed on August 9, 2006).4.1
    
    First Supplemental Indenture dated as of August 11, 2006 by and among Allis-Chalmers GP, LLC,
Allis-Chalmers LP, LLC, Allis-Chalmers Management, LP, Rogers Oil Tool Services, Inc., the
Registrant, the other Guarantors (as defined in the Indenture referred to therein) and Wells
Fargo Bank, N.A (incorporated by reference to Exhibit 4.2 to the Registrants Form 8-K filed
on August 14, 2006).10.1
    
    Purchase Agreement dated as of August 8, 2006 by and between the Registrant, the guarantors
listed on Schedule B thereto and RBC Capital Markets Corporation (incorporated by reference to
Exhibit 10.4 to the Registrants Form 8-K filed on August 14, 2006).10.2
    
    Registration Rights Agreement dated as of August 14, 2006 by and among the Registrant, the
guarantors listed on Schedule A thereto and RBC Capital Markets Corporation (incorporated by
reference to Exhibit 10.1 to the Registrants Form 8-K filed on August 14, 2006).10.3
    
    Investors Rights Agreement dated as of August 18, 2006 by and among the Registrant and the
investors named on Exhibit A thereto (incorporated by reference to Exhibit 10.1 to the
Registrants Form 8-K filed on August 14, 2006).10.4
    
    First Amendment to Amended and Restated Credit Agreement dated as of August 8, 2006, by and
among the Registrant, the guarantors named thereto and Royal Bank of Canada (incorporated by
reference to Exhibit 10.3 to the Registrants Form 8-K filed on August 14, 2006).10.5
    
    2006 Incentive Plan (incorporated by reference to Exhibit 10.1 to the Registrants Form 8-K
filed on September 18, 2006).10.6
    
    Form of Employee Restricted Stock Agreement (incorporated by reference to Exhibit 10.2 to the
Registrants Form 8-K filed on September 18, 2006).10.7
    
    Form of Employee Nonqualified Stock Option Agreement (incorporated by reference to Exhibit
10.3 to the Registrants Form 8-K filed on September 18, 2006).10.8
    
    Form of Employee Incentive Stock Option Agreement (incorporated by reference to Exhibit 10.4
to the Registrants Form 8-K filed on September 18, 2006).10.9
    
    Form of Non-Employee Director Restricted Stock Agreement (incorporated by reference to
Exhibit 10.5 to the Registrants Form 8-K filed on September 18, 2006).10.10
    
    Form of Non-Employee Director Nonqualified Stock Option Agreement (incorporated by reference
to Exhibit 10.6 to the Registrants Form 8-K filed on September 18, 2006).10.11
    
    Stock Purchase Agreement dated October 17, 2006 by and between Allis-Chalmers Production
Services, Inc. and Randolph J. Hebert (incorporated by reference to Exhibit 10.1 to the
Registrants Form 8-K filed on October 19, 2006).10.12
    
    Asset Purchase Agreement dated October 25, 2006 by and between the Registrant and Oil & Gas
Rental Services, Inc. (incorporated by reference to Exhibit 10.1 to the Registrants Form 8-K
filed on October 26, 2006).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