##### 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 MARCH 31, 2007 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 
incorporation or organization)
    
    (I.R.S. Employer
Identification No.)
 5075 WESTHEIMER, SUITE 890, HOUSTON, TEXAS 77056
 (713) 369-0550  Registrants telephone number, including area code
 þ o
  o þ o
 o þ




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##### 



ALLIS-CHALMERS ENERGY INC.
 FORM 10-Q
 For the Quarterly Period Ended March 31, 2007
 TABLE OF CONTENTS
 PAGEPART IITEM1.
    
    Financial StatementsConsolidated Condensed Balance Sheets as of March 31, 2007 and December 31, 2006
    
    
    3Consolidated Condensed Income Statements for the three months ended
March 31, 2007 and 2006
    
    
    4Consolidated Condensed Statements of Cash Flows for the three months ended
March 31, 2007 and 2006
    
    
    5Notes to Consolidated Condensed Financial Statements
    
    
    62.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    203.
    
    Quantitative and Qualitative Disclosures about Market Risk
    
    
    274.
    
    Controls and Procedures
    
    
    28PART II2.
    
    Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    286.
    
    Exhibits
    
    
    28Signatures
    
    
    29Second Amended Credit AgreementAmended GuarantyAmended Pledge and Security AgreementCertification of CEO Pursuant to Section 302Certification of CFO Pursuant to Section 302Certification of CEO & CFO Pursuant to Section 1350
  2




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##### Table of Contents



PART I. FINANCIAL INFORMATION
 
 ITEM 1. FINANCIAL STATEMENTS
 ALLIS-CHALMERS ENERGY INC.
 
 CONSOLIDATED CONDENSED BALANCE SHEETS
  March 31,
    
    
    December 31,2007
    
    
    2006(unaudited)AssetsCash and cash equivalents
    
    $
    75,287
    
    
    $
    39,745Trade receivables, net
    
    
    117,595
    
    
    
    95,766Inventories
    
    
    30,440
    
    
    
    28,615Prepaid expenses and other
    
    
    9,321
    
    
    
    16,636Total current assets
    
    
    232,643
    
    
    
    180,762Property and equipment, net
    
    
    562,951
    
    
    
    554,258Goodwill
    
    
    125,854
    
    
    
    125,835Other intangible assets, net
    
    
    31,801
    
    
    
    32,840Debt issuance costs, net
    
    
    14,991
    
    
    
    9,633Other assets
    
    
    5,020
    
    
    
    4,998Total assets
    
    $
    973,260
    
    
    $
    908,326Liabilities and Stockholders EquityCurrent maturities of long-term debt
    
    $
    5,248
    
    
    $
    6,999Trade accounts payable
    
    
    29,024
    
    
    
    25,666Accrued salaries, benefits and payroll taxes
    
    
    11,845
    
    
    
    10,888Accrued interest
    
    
    8,636
    
    
    
    11,867Accrued expenses
    
    
    19,075
    
    
    
    16,951Total current liabilities
    
    
    73,828
    
    
    
    72,371Long-term debt, net of current maturities
    
    
    510,423
    
    
    
    561,446Deferred income taxes
    
    
    21,491
    
    
    
    19,953Other long-term liabilities
    
    
    588
    
    
    
    623Total liabilities
    
    
    606,330
    
    
    
    654,393Commitments 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;
34,309,797 issued and outstanding at March 31, 2007 and
28,233,411 issued and outstanding at December 31, 2006)
    
    
    343
    
    
    
    282Capital in excess of par value
    
    
    316,979
    
    
    
    216,208Retained earnings
    
    
    49,608
    
    
    
    37,443Total stockholders equity
    
    
    366,930
    
    
    
    253,933Total liabilities and stockholders equity
    
    $
    973,260
    
    
    $
    908,326
  3




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##### Table of Contents



ALLIS-CHALMERS ENERGY INC.
 
 CONSOLIDATED CONDENSED INCOME STATEMENTS
   For the Three Months EndedMarch 31,2007
    
    
    2006Revenues
    
    $
    135,900
    
    
    $
    47,911Cost of revenuesDirect costs
    
    
    77,605
    
    
    
    27,998Depreciation
    
    
    11,816
    
    
    
    3,330Total cost of revenues
    
    
    89,421
    
    
    
    31,328Gross margin
    
    
    46,479
    
    
    
    16,583General and administrative
    
    
    13,971
    
    
    
    7,343Amortization
    
    
    1,488
    
    
    
    607Income from operations
    
    
    31,020
    
    
    
    8,633Other income (expense):Interest expense
    
    
    (13,571
    )
    
    
    (3,705
    )Interest income
    
    
    759
    
    
    
    77Other
    
    
    184
    
    
    
    25Total other income (expense)
    
    
    (12,628
    )
    
    
    (3,603
    )Income before income taxes
    
    
    18,392
    
    
    
    5,030Provision for taxes
    
    
    (6,227
    )
    
    
    (607
    )Net income
    
    $
    12,165
    
    
    $
    4,423Net income per common share:Basic
    
    $
    0.38
    
    
    $
    0.26Diluted
    
    $
    0.37
    
    
    $
    0.23Weighted average shares outstanding:Basic
    
    
    32,330
    
    
    
    17,105Diluted
    
    
    33,011
    
    
    
    19,113
  4




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##### Table of Contents



ALLIS-CHALMERS ENERGY INC.
 
 CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
   For the Three Months EndedMarch 31,2007
    
    
    2006Cash Flows from Operating Activities:Net income
    
    $
    12,165
    
    
    $
    4,423Adjustments to reconcile net income to net cash
used in operating activities:Depreciation
    
    
    11,816
    
    
    
    3,330Amortization
    
    
    1,488
    
    
    
    607Write-off of deferred financing fees due to refinancing
    
    
    1,225
    
    
    
    Imputed interest
    
    
    
    
    
    
    355Stock option expense
    
    
    453
    
    
    
    942Allowance for bad debts
    
    
    172
    
    
    
    180Deferred taxes
    
    
    1,538
    
    
    
    Gain on sale of property and equipment
    
    
    (862
    )
    
    
    (514
    )Changes in operating assets and liabilities, net of acquisitions:(Increase) in trade receivable
    
    
    (22,001
    )
    
    
    (4,288
    )(Increase) in inventories
    
    
    (1,825
    )
    
    
    (1,484
    )Decrease in other current assets
    
    
    7,315
    
    
    
    7(Increase) in other assets
    
    
    (41
    )
    
    
    (88
    )Increase (decrease) in accounts payable
    
    
    3,358
    
    
    
    (1,286
    )Increase (decrease) in accrued interest
    
    
    (3,231
    )
    
    
    2,764Increase (decrease) in accrued expenses
    
    
    2,124
    
    
    
    (11,017
    )Increase in accrued salaries, benefits and payroll taxes
    
    
    957
    
    
    
    483Increase (decrease) in other long-term liabilities
    
    
    (35
    )
    
    
    27Net Cash Provided By (Used In) Operating Activities
    
    
    14,616
    
    
    
    (5,559
    )Cash Flows from Investing Activities:Acquisition of businesses, net of cash received
    
    
    
    
    
    
    (83,447
    )Proceeds from sale of property and equipment
    
    
    2,698
    
    
    
    1,200Purchase of property and equipment
    
    
    (22,345
    )
    
    
    (7,586
    )Net Cash Used In Investing Activities
    
    
    (19,647
    )
    
    
    (89,833
    )Cash Flows from Financing Activities:Proceeds from issuance of stock, net
    
    
    100,078
    
    
    
    Proceeds from exercises of options and warrants
    
    
    301
    
    
    
    972Proceeds from long-term debt
    
    
    250,000
    
    
    
    161,412Repayments on long-term debt
    
    
    (302,774
    )
    
    
    (43,481
    )Repayments on related party debt
    
    
    
    
    
    
    (3,031
    )Repayments on line of credit
    
    
    
    
    
    
    (6,400
    )Debt issuance costs
    
    
    (7,032
    )
    
    
    (5,339
    )Net Cash Provided By Financing Activities
    
    
    40,573
    
    
    
    104,133Net change in cash and cash equivalents
    
    
    35,542
    
    
    
    8,741Cash and cash equivalents at beginning of year
    
    
    39,745
    
    
    
    1,920Cash and cash equivalents at end of period
    
    $
    75,287
    
    
    $
    10,661Supplemental information:Interest paid
    
    $
    15,566
    
    
    $
    586Income taxes paid
    
    $
    178
    
    
    $
    232
  5




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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
 NOTE 1  NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
 Accounting for Uncertainty in Income
Taxes  an interpretation of FASB Statement No. 109 Accounting for Income Taxes
  Fair Value Measurements
 The Fair Value Option for Financial Assets and
Financial Liabilities
 NOTE 2  STOCK-BASED COMPENSATION
 Share-Based Payment
   7




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ALLIS-CHALMERS ENERGY INC.
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
 NOTE 2  STOCK-BASED COMPENSATION (Continued)
  Weighted
    
    WeightedShares
    
    Average
    
    Average
    
    AggregateUnder
    
    Exercise
    
    Contractual
    
    Intrinsic ValueOption
    
    Price
    
    Life (Years)
    
    (millions)Balance at beginning of period
    
    
    1,350,365
    
    
    $
    6.88
    
    
    
    Granted
    
    
    
    
    
    
    
    
    
    
    Canceled
    
    
    
    
    
    
    
    
    
    
    Exercised
    
    
    (73,233
    )
    
    
    4.11
    
    
    
    Outstanding at end of period
    
    
    1,277,132
    
    
    
    7.04
    
    
    
    8.14
    
    
    $
    11.13Exercisable at end of period
    
    
    1,037,115
    
    
    $
    6.34
    
    
    
    8.03
    
    
    $
    9.76
    Weighted AverageGrant-Date Fair ValueNumber of shares
    
    
    per ShareNonvested at December 31, 2006
    
    
    27,000
    
    
    $
    18.30Granted
    
    
    13,700
    
    
    
    16.16Vested
    
    
    
    
    
    
    Forfeited
    
    
    
    
    
    
    Nonvested at March 31, 2007
    
    
    40,700
    
    
    $
    17.58
  8




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ALLIS-CHALMERS ENERGY INC.
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
 NOTE 3  INCOME PER COMMON SHARE
 Earnings Per
Share
  For the Three Months EndedMarch 31,2007
    
    
    2006Numerator:Net income
    
    $
    12,165
    
    
    $
    4,423Denominator:Basic earnings per share  weighted
average shares outstanding
    
    
    32,330
    
    
    
    17,105Effect of potentially dilutive common shares:Warrants and employee and director
stock options
    
    
    681
    
    
    
    2,008Diluted earnings per share -
weighted average shares
outstanding and assumed
conversions
    
    
    33,011
    
    
    
    19,113Net income per share  basic
    
    $
    0.38
    
    
    $
    0.26Net income per share  diluted
    
    $
    0.37
    
    
    $
    0.23
 NOTE 4  GOODWILL AND INTANGIBLE ASSETS
 Goodwill and Other Intangible Assets
  9




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ALLIS-CHALMERS ENERGY INC.
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
 NOTE 5  INVENTORIES
  March 31,
    
    
    December 31,2007
    
    
    2006Hammer bitsFinished goods
    
    $
    1,839
    
    
    $
    1,476Work in process
    
    
    2,129
    
    
    
    2,266Raw materials
    
    
    3,318
    
    
    
    2,638Total hammer bits
    
    
    7,286
    
    
    
    6,380Hammers
    
    
    1,088
    
    
    
    1,016Drive pipe
    
    
    607
    
    
    
    716Rental supplies
    
    
    1,828
    
    
    
    1,845Chemicals and drilling fluids
    
    
    2,702
    
    
    
    2,673Rig parts and related inventory
    
    
    10,169
    
    
    
    9,762Coiled tubing and related inventory
    
    
    2,268
    
    
    
    1,627Shop supplies and related inventory
    
    
    4,492
    
    
    
    4,596Total inventory
    
    $
    30,440
    
    
    $
    28,615
 NOTE 6  DEBT
  March 31,
    
    
    December 31,2007
    
    
    2006Senior notes
    
    $
    505,000
    
    
    $
    255,000Bridge loan
    
    
    
    
    
    
    300,000Bank term loans
    
    
    6,672
    
    
    
    7,302Revolving line of credit
    
    
    
    
    
    
    Seller notes
    
    
    900
    
    
    
    900Obligations under non-compete agreements
    
    
    270
    
    
    
    270Notes payable to former directors
    
    
    32
    
    
    
    32Equipment and vehicle installment notes
    
    
    2,184
    
    
    
    3,502Insurance premium financing
    
    
    331
    
    
    
    1,025Capital lease obligations
    
    
    282
    
    
    
    414Total debt
    
    
    515,671
    
    
    
    568,445Less: current maturities
    
    
    5,248
    
    
    
    6,999Long-term debt obligations
    
    $
    510,423
    
    
    $
    561,446
 Senior notes, bank loans and line of credit agreements
   10




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ALLIS-CHALMERS ENERGY INC.
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
 NOTE 6  DEBT (Continued)
    Notes payable
     Other debt
  11




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ALLIS-CHALMERS ENERGY INC.
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
 NOTE 7  STOCKHOLDERS EQUITY
   NOTE 8  CONDENSED CONSOLIDATING FINANCIAL INFORMATION
  12




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ALLIS-CHALMERS ENERGY INC.
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
 NOTE 8  CONDENSED CONSOLIDATING FINANCIAL INFORMATION (Continued)
 CONDENSED CONSOLIDATING BALANCE SHEETS
 Allis-Chalmers
    
    
    
    
    
    
    Subsidiary(Parent/
    
    
    Subsidiary
    
    
    Non-
    
    
    Consolidating
    
    
    ConsolidatedGuarantor)
    
    
    Guarantors
    
    
    Guarantors
    
    
    Adjustments
    
    
    TotalAssetsCash and cash equivalents
    
    $
    
    
    
    $
    70,246
    
    
    $
    5,041
    
    
    $
    
    
    
    $
    75,287Trade receivables, net
    
    
    
    
    
    
    78,892
    
    
    
    39,131
    
    
    
    (428
    )
    
    
    117,595Inventory
    
    
    
    
    
    
    14,645
    
    
    
    15,795
    
    
    
    
    
    
    
    30,440Intercompany receivables
    
    
    97,722
    
    
    
    
    
    
    
    
    
    
    
    (97,722
    )
    
    
    Note receivable from affiliate
    
    
    6,666
    
    
    
    
    
    
    
    
    
    
    
    (6,666
    )
    
    
    Prepaid expenses and other
    
    
    5,703
    
    
    
    2,729
    
    
    
    889
    
    
    
    
    
    
    
    9,321Total current assets
    
    
    110,091
    
    
    
    166,512
    
    
    
    60,856
    
    
    
    (104,816
    )
    
    
    232,643Property and equipment, net
    
    
    
    
    
    
    430,969
    
    
    
    131,982
    
    
    
    
    
    
    
    562,951Goodwill
    
    
    
    
    
    
    124,331
    
    
    
    1,523
    
    
    
    
    
    
    
    125,854Other intangible assets, net
    
    
    586
    
    
    
    31,134
    
    
    
    81
    
    
    
    
    
    
    
    31,801Debt issuance costs, net
    
    
    14,991
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    14,991Note receivable from affiliates
    
    
    11,457
    
    
    
    
    
    
    
    
    
    
    
    (11,457
    )
    
    
    Investments in affiliates
    
    
    748,324
    
    
    
    
    
    
    
    
    
    
    
    (748,324
    )
    
    
    Other assets
    
    
    10
    
    
    
    4,989
    
    
    
    21
    
    
    
    
    
    
    
    5,020Total Assets
    
    $
    885,459
    
    
    $
    757,935
    
    
    $
    194,463
    
    
    $
    (864,597
    )
    
    $
    973,260Liabilities and Stockholders EquityCurrent maturities of long-term debt
    
    $
    32
    
    
    $
    2,840
    
    
    $
    2,376
    
    
    $
    
    
    
    $
    5,248Trade accounts payable
    
    
    31
    
    
    
    14,728
    
    
    
    14,266
    
    
    
    (1
    )
    
    
    29,024Accrued salaries, benefits and payroll taxes
    
    
    
    
    
    
    3,346
    
    
    
    8,499
    
    
    
    
    
    
    
    11,845Accrued interest
    
    
    8,565
    
    
    
    
    
    
    
    71
    
    
    
    
    
    
    
    8,636Accrued expenses
    
    
    101
    
    
    
    10,622
    
    
    
    8,779
    
    
    
    (427
    )
    
    
    19,075Intercompany payables
    
    
    
    
    
    
    455,440
    
    
    
    
    
    
    
    (455,440
    )
    
    
    Note payable to affiliate
    
    
    
    
    
    
    
    
    
    
    6,666
    
    
    
    (6,666
    )
    
    
    Total current liabilities
    
    
    8,729
    
    
    
    486,976
    
    
    
    40,657
    
    
    
    (462,534
    )
    
    
    73,828Long-term debt, net of current maturities
    
    
    505,750
    
    
    
    377
    
    
    
    4,296
    
    
    
    
    
    
    
    510,423Note payable to affiliate
    
    
    
    
    
    
    
    
    
    
    11,457
    
    
    
    (11,457
    )
    
    
    Deferred income taxes
    
    
    3,761
    
    
    
    10,713
    
    
    
    7,017
    
    
    
    
    
    
    
    21,491Other long-term liabilities
    
    
    289
    
    
    
    299
    
    
    
    
    
    
    
    
    
    
    
    588Total liabilities
    
    
    518,529
    
    
    
    498,365
    
    
    
    63,427
    
    
    
    (473,991
    )
    
    
    606,330Commitments and contingenciesStockholders EquityCommon stock
    
    
    343
    
    
    
    3,526
    
    
    
    42,963
    
    
    
    (46,489
    )
    
    
    343Capital in excess of par value
    
    
    316,979
    
    
    
    167,508
    
    
    
    74,969
    
    
    
    (242,477
    )
    
    
    316,979Retained earnings
    
    
    49,608
    
    
    
    88,536
    
    
    
    13,104
    
    
    
    (101,640
    )
    
    
    49,608Total stockholders equity
    
    
    366,930
    
    
    
    259,570
    
    
    
    131,036
    
    
    
    (390,606
    )
    
    
    366,930Total liabilities and
stockholders equity
    
    $
    885,459
    
    
    $
    757,935
    
    
    $
    194,463
    
    
    $
    (864,597
    )
    
    $
    973,260
 13




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ALLIS-CHALMERS ENERGY INC.
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
 NOTE 8  CONDENSED CONSOLIDATING FINANCIAL INFORMATION (Continued)
 CONDENSED CONSOLIDATING INCOME STATEMENTS
 Allis-Chalmers
    
    
    
    
    
    
    Subsidiary(Parent/
    
    
    Subsidiary
    
    
    Non-
    
    
    Consolidating
    
    
    ConsolidatedGuarantor)
    
    
    Guarantors
    
    
    Guarantors
    
    
    Adjustments
    
    
    TotalRevenues
    
    $
    
    
    
    $
    87,029
    
    
    $
    48,888
    
    
    $
    (17
    )
    
    $
    135,900Cost of revenuesDirect costs
    
    
    
    
    
    
    43,035
    
    
    
    34,587
    
    
    
    (17
    )
    
    
    77,605Depreciation
    
    
    
    
    
    
    9,117
    
    
    
    2,699
    
    
    
    
    
    
    
    11,816Total cost of revenues
    
    
    
    
    
    
    52,152
    
    
    
    37,286
    
    
    
    (17
    )
    
    
    89,421Gross margin
    
    
    
    
    
    
    34,877
    
    
    
    11,602
    
    
    
    
    
    
    
    46,479General and administrative
    
    
    418
    
    
    
    11,573
    
    
    
    1,980
    
    
    
    
    
    
    
    13,971Amortization
    
    
    462
    
    
    
    1,018
    
    
    
    8
    
    
    
    
    
    
    
    1,488Income from operations
    
    
    (880
    )
    
    
    22,286
    
    
    
    9,614
    
    
    
    
    
    
    
    31,020Other income (expense):Equity earnings in
affiliates, net of tax
    
    
    26,122
    
    
    
    
    
    
    
    
    
    
    
    (26,122
    )
    
    
    Interest, net
    
    
    (13,089
    )
    
    
    652
    
    
    
    (375
    )
    
    
    
    
    
    
    (12,812
    )Other
    
    
    12
    
    
    
    47
    
    
    
    125
    
    
    
    
    
    
    
    184Total other income
(expense)
    
    
    13,045
    
    
    
    699
    
    
    
    (250
    )
    
    
    (26,122
    )
    
    
    (12,628
    )Net income before income
taxes
    
    
    12,165
    
    
    
    22,985
    
    
    
    9,364
    
    
    
    (26,122
    )
    
    
    18,392Provision for income taxes
    
    
    
    
    
    
    (3,195
    )
    
    
    (3,032
    )
    
    
    
    
    
    
    (6,227
    )Net income
    
    $
    12,165
    
    
    $
    19,790
    
    
    $
    6,332
    
    
    $
    (26,122
    )
    
    $
    12,165
 14




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ALLIS-CHALMERS ENERGY INC.
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
 NOTE 8  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
    
    $
    12,165
    
    
    $
    19,790
    
    
    $
    6,332
    
    
    $
    (26,122
    )
    
    $
    12,165Adjustments to reconcile net income to
net cash provided by operating
activities:Depreciation
    
    
    
    
    
    
    9,117
    
    
    
    2,699
    
    
    
    
    
    
    
    11,816Amortization
    
    
    461
    
    
    
    1,019
    
    
    
    8
    
    
    
    
    
    
    
    1,488Bridge Fees
    
    
    1,225
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,225Stock option expense
    
    
    453
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    453Provision for bad debts
    
    
    
    
    
    
    172
    
    
    
    
    
    
    
    
    
    
    
    172Equity earnings in affiliates
    
    
    (26,122
    )
    
    
    
    
    
    
    
    
    
    
    26,122
    
    
    
    Deferred taxes
    
    
    1,558
    
    
    
    (1
    )
    
    
    (19
    )
    
    
    
    
    
    
    1,538(Gain) on sale of equipment
    
    
    
    
    
    
    (862
    )
    
    
    
    
    
    
    
    
    
    
    (862
    )Changes in operating assets and
liabilities, net of acquisitions:(Increase) in trade receivables
    
    
    
    
    
    
    (17,055
    )
    
    
    (4,946
    )
    
    
    
    
    
    
    (22,001
    )(Increase) in inventories
    
    
    
    
    
    
    (1,451
    )
    
    
    (374
    )
    
    
    
    
    
    
    (1,825
    )(Increase) decrease in other
current assets
    
    
    
    
    
    
    7,685
    
    
    
    (370
    )
    
    
    
    
    
    
    7,315(Increase) decrease in other assets
    
    
    247
    
    
    
    (270
    )
    
    
    (18
    )
    
    
    
    
    
    
    (41
    )Increase in accounts payable
    
    
    
    
    
    
    1,217
    
    
    
    2,141
    
    
    
    
    
    
    
    3,358(Decrease) in accrued interest
    
    
    (3,190
    )
    
    
    
    
    
    
    (41
    )
    
    
    
    
    
    
    (3,231
    )(Decrease) increase in accrued
expenses
    
    
    (34
    )
    
    
    1,242
    
    
    
    916
    
    
    
    
    
    
    
    2,124Increase in accrued salaries,
benefits and payroll taxes
    
    
    
    
    
    
    353
    
    
    
    604
    
    
    
    
    
    
    
    957(Decrease) in other long- term
liabilities
    
    
    (15
    )
    
    
    (20
    )
    
    
    
    
    
    
    
    
    
    
    (35
    )Net Cash Provided By (Used In)
Operating Activities
    
    
    (13,252
    )
    
    
    20,936
    
    
    
    6,932
    
    
    
    
    
    
    
    14,616Cash Flows from Investing Activities:Notes receivable from affiliates
    
    
    (282
    )
    
    
    
    
    
    
    
    
    
    
    282
    
    
    
    Purchase of property and equipment
    
    
    
    
    
    
    (19,625
    )
    
    
    (2,720
    )
    
    
    
    
    
    
    (22,345
    )Proceeds from sale of equipment
    
    
    
    
    
    
    2,698
    
    
    
    
    
    
    
    
    
    
    
    2,698Net Cash Provided By (Used in)
Investing Activities
    
    
    (282
    )
    
    
    (16,927
    )
    
    
    (2,720
    )
    
    
    282
    
    
    
    (19,647
    )Cash Flows from Financing Activities:Proceeds from long-term debt
    
    
    250,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    250,000Payments on long-term debt
    
    
    (300,000
    )
    
    
    (1,362
    )
    
    
    (1,412
    )
    
    
    
    
    
    
    (302,774
    )Accounts receivable from affiliates
    
    
    (29,813
    )
    
    
    
    
    
    
    
    
    
    
    29,813
    
    
    
    
 15




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ALLIS-CHALMERS ENERGY INC.
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
 NOTE 8  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
    
    
    
    
    
    
    29,830
    
    
    
    (17
    )
    
    
    (29,813
    )
    
    
    Note payable to affiliate
    
    
    
    
    
    
    
    
    
    
    282
    
    
    
    (282
    )
    
    
    Proceeds from issuance of
common stock
    
    
    100,078
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    100,078Proceeds from exercises of
options/warrants
    
    
    301
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    301Debt issuance costs
    
    
    (7,032
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (7,032
    )Net Cash Provided By
(Used In) Financing
Activities
    
    
    13,534
    
    
    
    28,468
    
    
    
    (1,147
    )
    
    
    (282
    )
    
    
    40,573Net change in cash and cash
equivalents
    
    
    
    
    
    
    32,477
    
    
    
    3,065
    
    
    
    
    
    
    
    35,542Cash and cash equivalents at
beginning of year
    
    
    
    
    
    
    37,769
    
    
    
    1,976
    
    
    
    
    
    
    
    39,745Cash and cash equivalents at
end of period
    
    $
    
    
    
    $
    70,246
    
    
    $
    5,041
    
    
    $
    
    
    
    $
    75,287
 16




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##### Table of Contents



ALLIS-CHALMERS ENERGY INC.
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
 NOTE 9  SEGMENT INFORMATION
  For the Three Months EndedMarch 31,2007
    
    
    2006RevenuesRental Services
    
    $
    31,581
    
    
    $
    10,421International Drilling
    
    
    48,888
    
    
    
    Directional Drilling
    
    
    20,489
    
    
    
    15,937Tubular Services
    
    
    14,386
    
    
    
    9,459Underbalanced Drilling
    
    
    10,555
    
    
    
    9,099Production Services
    
    
    10,001
    
    
    
    2,995$
    135,900
    
    
    $
    47,911Operating Income (Loss):Rental Services
    
    $
    13,923
    
    
    $
    4,998International Drilling
    
    
    9,614
    
    
    
    Directional Drilling
    
    
    4,285
    
    
    
    2,605Tubular Services
    
    
    3,193
    
    
    
    1,851Underbalanced Drilling
    
    
    2,611
    
    
    
    2,237Production Services
    
    
    1,603
    
    
    
    277General corporate
    
    
    (4,209
    )
    
    
    (3,335
    )$
    31,020
    
    
    $
    8,633Depreciation and Amortization:Rental Services
    
    $
    6,261
    
    
    $
    1,671International Drilling
    
    
    2,707
    
    
    
    Directional Drilling
    
    
    465
    
    
    
    289Tubular Services
    
    
    1,203
    
    
    
    699Underbalanced Drilling
    
    
    823
    
    
    
    684Production Services
    
    
    1,297
    
    
    
    293General corporate
    
    
    548
    
    
    
    301$
    13,304
    
    
    $
    3,937Capital Expenditures:Rental Services
    
    $
    8,513
    
    
    $
    684International Drilling
    
    
    2,720
    
    
    
    Directional Drilling
    
    
    4,283
    
    
    
    2,698Tubular Services
    
    
    2,664
    
    
    
    1,127Underbalanced Drilling
    
    
    1,458
    
    
    
    2,224Production Services
    
    
    2,358
    
    
    
    681General corporate
    
    
    349
    
    
    
    172$
    22,345
    
    
    $
    7,586
 17




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##### Table of Contents



ALLIS-CHALMERS ENERGY INC.
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
 NOTE 9
 SEGMENT INFORMATION (Continued)
 As ofMarch 31,
    
    
    December 31,2007
    
    
    2006Goodwill:Rental Services
    
    $
    106,132
    
    
    $
    106,132International Drilling
    
    
    1,523
    
    
    
    1,504Directional Drilling
    
    
    4,168
    
    
    
    4,168Tubular Services
    
    
    6,464
    
    
    
    6,464Underbalanced Drilling
    
    
    3,950
    
    
    
    3,950Production Services
    
    
    3,617
    
    
    
    3,617General corporate
    
    
    
    
    
    
    $
    125,854
    
    
    $
    125,835Assets:Rental Services
    
    $
    461,684
    
    
    $
    453,802International Drilling
    
    
    194,462
    
    
    
    185,677Directional Drilling
    
    
    35,562
    
    
    
    28,585Tubular Services
    
    
    77,247
    
    
    
    74,372Underbalanced Drilling
    
    
    55,163
    
    
    
    54,288Production Services
    
    
    61,692
    
    
    
    57,954General corporate
    
    
    87,450
    
    
    
    53,648$
    973,260
    
    
    $
    908,326Long Lived Assets:United States
    
    $
    596,243
    
    
    $
    574,302International
    
    
    144,374
    
    
    
    153,262$
    740,617
    
    
    $
    727,564
 For the Three Months EndedMarch 31,2007
    
    
    2006Revenues:United States
    
    $
    84,234
    
    
    $
    45,972International
    
    
    51,666
    
    
    
    1,939$
    135,900
    
    
    $
    47,911
 NOTE 10  LEGAL MATTERS
   18




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##### Table of Contents



ALLIS-CHALMERS ENERGY INC.
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
 NOTE 11  SUBSEQUENT EVENTS
  19




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##### Table of Contents



ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION
 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 27.
 Overview of Our Business
     Cyclical Nature of Equipment Rental and Services Industry
   20




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##### Table of Contents



Results of Operations
   Comparison of Three Months Ended March 31, 2007 and 2006
    Share-Based Payment,
 21




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##### Table of Contents



Revenues
    
    
    Income (Loss) from OperationsThree Months Ended
    
    
    Three Months EndedMarch 31,
    
    
    March 31,2007
    
    
    2006
    
    
    Change
    
    
    2007
    
    
    2006
    
    
    Change(in thousands)Rental Services
    
    $
    31,581
    
    
    $
    10,421
    
    
    $
    21,160
    
    
    $
    13,923
    
    
    $
    4,998
    
    
    $
    8,925International Drilling
    
    
    48,888
    
    
    
    
    
    
    
    48,888
    
    
    
    9,614
    
    
    
    
    
    
    
    9,614Directional Drilling
    
    
    20,489
    
    
    
    15,937
    
    
    
    4,552
    
    
    
    4,285
    
    
    
    2,605
    
    
    
    1,680Tubular Services
    
    
    14,386
    
    
    
    9,459
    
    
    
    4,927
    
    
    
    3,193
    
    
    
    1,851
    
    
    
    1,342Underbalanced Drilling
    
    
    10,555
    
    
    
    9,099
    
    
    
    1,456
    
    
    
    2,611
    
    
    
    2,237
    
    
    
    374Production Services
    
    
    10,001
    
    
    
    2,995
    
    
    
    7,006
    
    
    
    1,603
    
    
    
    277
    
    
    
    1,326General corporate
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (4,209
    )
    
    
    (3,335
    )
    
    
    (874
    )Total
    
    $
    135,900
    
    
    $
    47,911
    
    
    $
    87,989
    
    
    $
    31,020
    
    
    $
    8,633
    
    
    $
    22,387
 Rental Services Segment
  22




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##### Table of Contents



International Drilling Segment
  Directional Drilling Segment
  Tubular Services Segment
  Underbalanced Drilling Segment
  Production Services Segment
  General Corporate
  Liquidity and Capital Resources
  23




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##### Table of Contents



Operating Activities
     Investing Activities
   Financing Activities
  24




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##### Table of Contents



25




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##### Table of Contents



Off Balance Sheet Arrangements
  Capital Requirements
   Recent Developments
  Critical Accounting Policies
  Accounting for Uncertainty in Income
Taxes  an interpretation of FASB Statement No. 109 Accounting for Income Taxes
 26




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##### Table of Contents



Fair Value Measurements
 The Fair Value Option for Financial Assets and
Financial Liabilities
 Forward-Looking Statements
  
 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK.
  Interest Rate Risk.
    27




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##### Table of Contents



Foreign Currency Exchange Rate Risk.
  
 ITEM 4. CONTROLS AND PROCEDURES.
 (a) Evaluation of Disclosure Controls and Procedures
   (b) Change in Internal Control Over Financial Reporting.
  
    
    We started the foundation of an internal audit department. We have written a charter
and have started to hire staff for the department.
 
 PART II. OTHER INFORMATION
 
 ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
  
 ITEM 6. EXHIBITS
  28




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##### Table of Contents



SIGNATURES
  Allis-Chalmers Energy Inc.(Registrant)/s/ Munawar H. HidayatallahMunawar H. HidayatallahChief Executive Officer and
Chairman
 29




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##### Table of Contents



EXHIBIT INDEX
 4.1
    
    Second Supplemental Indenture dated as of January 23, 2007 by and among Petro-Rentals,
Incorporated, Allis-Chalmers Energy Inc., the other Guarantor parties thereto and Wells Fargo
Bank, N.A., as trustee (incorporated by reference to Exhibit 10.1 to the Registrants Form 8-K
filed on January 24, 2007).4.2
    
    Indenture, dated as of January 29, 2007, by and among Allis-Chalmers Energy Inc., the
Guarantors named therein and Wells Fargo Bank, N.A. (incorporated by reference to Exhibit 4.1
to the Registrants Form 8-K filed on January 29, 2007).4.3
    
    Form of 8.5% Senior Note due 2017 (included in Exhibit 4.2).10.1*
    
    Second Amended and Restated Credit Agreement dated as of April 26, 2007 by and among
Allis-Chalmers Energy Inc., as borrower, Royal Bank of Canada, as administrative agent and
Collateral Agent, RBC Capital Markets, as lead arranger and sole bookrunner, and the lenders
party thereto.10.2*
    
    Amended and Restated Guaranty, dated as of April 26, 2007, by each of the guarantors named
thereto, in favor of Royal Bank of Canada, as administrative agent for the lenders thereto,
which is also the form of Guaranty for Petro-Rentals, Inc., as set forth on the schedule
thereto.10.3*
    
    Amended and Restated Pledge and Security Agreement, dated as of April 26, 2007, by
Allis-Chalmers Energy Inc., for the benefit of Royal Bank of Canada, as administrative agent
and collateral agent for the lenders named thereto, which is also the form of Pledge and
Security Agreement for each of AirComp L.L.C., Allis-Chalmers GP, LLC, Allis-Chalmers LP, LLC,
Allis-Chalmers Management, LP, Allis-Chalmers Production Services, Inc., Allis-Chalmers Rental
Services, Inc., Allis-Chalmers Tubular Services, Inc., Mountain Compressed Air, Inc.,
Petro-Rentals, Inc., OilQuip Rentals, Inc., and Strata Directional Technology, Inc. as set
forth on the schedule thereto.10.4
    
    Purchase Agreement dated as of January 24, 2007 by and among Allis-Chalmers Energy Inc., the
Guarantors named therein and the Initial Purchasers named therein (incorporated by reference
to Exhibit 10.1 to the Registrants Form 8-K filed on January 29, 2007).10.5
    
    Registration Rights Agreement dated as of January 29, 2007 by and among Allis-Chalmers Energy
Inc., the Guarantors named therein and the Initial Purchasers named therein (incorporated by
reference to Exhibit 10.2 to the Registrants Form 8-K filed on January 29, 2007).10.6
    
    Agreement, dated April 1, 2007, between Allis-Chalmers Energy Inc. and David Wilde
(incorporated by reference to Exhibit 99.1 to the Registrants Form 8-K filed on April 3,
2007).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 30