10-Q 1 pdc10q3q2011.htm FORM 10-Q PDC.10Q.3Q.2011


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
 
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2011
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 1-8182
 
PIONEER DRILLING COMPANY
(Exact name of registrant as specified in its charter)
 
TEXAS
 
74-2088619
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification Number)
 
 
1250 N.E. Loop 410, Suite 1000, San Antonio, Texas
 
78209
(Address of principal executive offices)
 
(Zip Code)
210-828-7689
(Registrant’s telephone number, including area code)
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x  No  o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer
o
Accelerated filer
x
 
 
 
 
Non-accelerated filer
o
Smaller reporting company
o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No x
As of October 21, 2011 there were 61,634,640 shares of common stock, par value $0.10 per share, of the registrant issued and outstanding.



PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PIONEER DRILLING COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
 
September 30, 2011
 
December 31, 2010
 
(Unaudited)
 
(Audited)
 
(In thousands)
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
21,857

 
$
22,011

Short-term investments

 
12,569

Receivables:
 
 
 
Trade, net of allowance for doubtful accounts
102,228

 
61,345

Unbilled receivables
28,943

 
21,423

Insurance recoveries
5,842

 
4,035

Income taxes
2,954

 
2,712

Deferred income taxes
12,999

 
9,867

Inventory
10,365

 
9,023

Prepaid expenses and other current assets
8,264

 
8,797

Total current assets
193,452

 
151,782

Property and equipment, at cost
1,228,191

 
1,097,179

Less accumulated depreciation
510,861

 
441,671

Net property and equipment
717,330

 
655,508

Intangible assets, net of amortization
19,883

 
21,966

Noncurrent deferred income taxes
2,399

 

Assets held for sale
2,646

 

Other long-term assets
11,178

 
12,087

Total assets
$
946,888

 
$
841,343

LIABILITIES AND SHAREHOLDERS’ EQUITY
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
48,031

 
$
26,929

Current portion of long-term debt
850

 
1,408

Prepaid drilling contracts
4,338

 
3,669

Accrued expenses:
 
 
 
Payroll and related employee costs
21,893

 
18,057

Insurance premiums and deductibles
10,829

 
8,774

Insurance claims and settlements
5,842

 
4,035

Interest
1,060

 
7,307

Other
10,737

 
5,461

Total current liabilities
103,580

 
75,640

Long-term debt, less current portion
241,649

 
279,530

Noncurrent deferred income taxes
88,296

 
80,160

Other long-term liabilities
10,603

 
9,680

Total liabilities
444,128

 
445,010

Commitments and contingencies (Note 8)

 

Shareholders’ equity:
 
 
 
Preferred stock, 10,000,000 shares authorized; none issued and outstanding

 

Common stock $.10 par value; 100,000,000 shares authorized; 61,634,440 shares and 54,228,170 shares outstanding at September 30, 2011 and December 31, 2010, respectively
6,170

 
5,425

Additional paid-in capital
440,880

 
339,105

Treasury stock, at cost; 62,949 shares and 25,380 shares at September 30, 2011 and December 31, 2010, respectively
(613
)
 
(161
)
Accumulated earnings
56,323

 
51,964

Total shareholders’ equity
502,760

 
396,333

Total liabilities and shareholders’ equity
$
946,888

8

$
841,343

See accompanying notes to condensed consolidated financial statements.

2



PIONEER DRILLING COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2011
 
2010
 
2011
 
2010
 
(In thousands, except per share data)
Revenues:
 
 
 
 
 
 
 
Drilling services
$
108,764

 
$
85,667

 
$
315,043

 
$
217,580

Production services
78,887

 
49,877

 
197,242

 
121,012

Total revenues
187,651

 
135,544

 
512,285

 
338,592

Costs and expenses:
 
 
 
 
 
 
 
Drilling services
72,430

 
59,957

 
213,129

 
164,409

Production services
44,394

 
29,196

 
115,376

 
73,688

Depreciation and amortization
32,992

 
30,847

 
97,672

 
89,275

General and administrative
17,705

 
13,030

 
48,086

 
36,760

Bad debt expense (recovery)
322

 
(22
)
 
377

 
(104
)
Impairment of equipment
484

 

 
484

 

Total costs and expenses
168,327

 
133,008

 
475,124

 
364,028

Income (loss) from operations
19,324

 
2,536

 
37,161

 
(25,436
)
Other income (expense):
 
 
 
 
 
 
 
Interest expense
(6,137
)
 
(7,573
)
 
(21,659
)
 
(18,746
)
Other
(1,193
)
 
845

 
(6,956
)
 
1,644

Total other expense
(7,330
)
 
(6,728
)
 
(28,615
)
 
(17,102
)
Income (loss) before income taxes
11,994

 
(4,192
)
 
8,546

 
(42,538
)
Income tax (expense) benefit
(5,250
)
 
1,612

 
(4,187
)
 
15,269

Net income (loss)
$
6,744

 
$
(2,580
)
 
$
4,359

 
$
(27,269
)
Income (loss) per common share - Basic
$
0.11

 
$
(0.05
)
 
$
0.08

 
$
(0.51
)
Income (loss) per common share - Diluted
$
0.11

 
$
(0.05
)
 
$
0.08

 
$
(0.51
)
Weighted-average number of shares outstanding - Basic
59,898

 
53,811

 
56,045

 
53,770

Weighted-average number of shares outstanding - Diluted
61,428

 
53,811

 
57,522

 
53,770

See accompanying notes to condensed consolidated financial statements.


3



PIONEER DRILLING COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
 
 
Nine Months Ended September 30,
 
2011
 
2010
 
(In thousands)
Cash flows from operating activities:
 
 
 
Net income (loss)
$
4,359

 
$
(27,269
)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
 
 
Depreciation and amortization
97,672

 
89,275

Allowance for doubtful accounts
390

 
(76
)
Loss (gain) on dispositions of property and equipment
628

 
(1,201
)
Stock-based compensation expense
5,314

 
5,238

Amortization of debt issuance costs and discount
2,657

 
1,870

Impairment of equipment
484

 

Deferred income taxes
2,656

 
(14,339
)
Change in other long-term assets
2,136

 
(2,004
)
Change in other long-term liabilities
824

 
2,430

Changes in current assets and liabilities:
 
 
 
Receivables
(49,035
)
 
(14,361
)
Inventory
(1,342
)
 
(3,048
)
Prepaid expenses and other current assets
533

 
(1,643
)
Accounts payable
3,339

 
9,823

Prepaid drilling contracts
669

 
3,260

Accrued expenses
4,921

 
12,807

Net cash provided by operating activities
76,205

 
60,762

Cash flows from investing activities:
 
 
 
Acquisition of production services businesses
(5,000
)
 
(1,340
)
Purchases of property and equipment
(140,565
)
 
(99,909
)
Proceeds from sale of property and equipment
2,261

 
2,199

Proceeds from sale of auction rate securities
12,569

 

Net cash used in investing activities
(130,735
)
 
(99,050
)
Cash flows from financing activities:
 
 
 
Debt repayments
(113,158
)
 
(246,606
)
Proceeds from issuance of debt
74,000

 
266,375

Debt issuance costs
(3,220
)
 
(4,844
)
Proceeds from exercise of options
2,344

 
18

Proceeds from stock, net of underwriters' commissions and offering costs of $5,710
94,340

 

Purchase of treasury stock
(452
)
 
(130
)
Excess tax benefit of stock option exercises
522

 

Net cash provided by financing activities
54,376

 
14,813

Net decrease in cash and cash equivalents
(154
)
 
(23,475
)
Beginning cash and cash equivalents
22,011

 
40,379

Ending cash and cash equivalents
$
21,857

 
$
16,904

Supplementary disclosure:
 
 
 
Interest paid
$
26,595

 
$
16,604

Income taxes paid (refunded)
$
592

 
$
(40,100
)

See accompanying notes to condensed consolidated financial statements.

4



PIONEER DRILLING COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1.    Nature of Operations and Summary of Significant Accounting Policies
Business and Basis of Presentation
Pioneer Drilling Company and subsidiaries provide drilling and production services to our customers in select oil and natural gas exploration and production regions in the United States and Colombia. Our Drilling Services Division provides contract land drilling services with its fleet of 64 drilling rigs in the following locations:
Drilling Division Locations
Rig Count
South Texas
15
East Texas
7
West Texas
16
North Dakota
9
Utah
2
Appalachia
7
Colombia
8
Drilling revenues and rig utilization have steadily improved during 2010 and 2011, primarily due to increased demand for drilling services in domestic shale plays and oil or liquid rich regions. We capitalized on this trend by moving drilling rigs in our fleet to these higher demand regions from lower demand regions such as our Oklahoma, North Texas and East Texas drilling division locations which have conventional natural gas production. Since the beginning of 2010, we have moved a total of six additional drilling rigs into our North Dakota and Appalachia drilling division locations, both of which are shale regions. In early 2011, we established our West Texas drilling division location where we currently have 14 drilling rigs operating, with an additional two drilling rigs that we expect to begin operating by the end of 2011.
In September 2011, we evaluated the drilling rigs in our fleet that have remained idle and decided to place six mechanical drilling rigs as held for sale as of September 30, 2011. Four of the held for sale drilling rigs were previously assigned to our Oklahoma drilling division location and the remaining two drilling rigs were previously assigned to our East Texas drilling division location. See Note 10, Subsequent Events, for more information regarding the six mechanical drilling rigs that are held for sale. In addition, we decided to retire another drilling rig from our fleet that was previously assigned to our Utah drilling division location, with most of its components to be used for spare equipment.
At September 30, 2011, we have 64 drilling rigs in our fleet, which excludes the seven drilling rigs that are being sold or retired. We currently have term contracts for nine new-build AC drilling rigs that are fit for purpose for domestic shale plays, six of which we estimate will begin working in the first half of 2012, with the remaining three to begin operating by the end of 2012. As of October 21, 2011, 57 drilling rigs are operating under drilling contracts, 40 of which are under term contracts. We have seven drilling rigs that are idle. We are actively marketing all our idle drilling rigs.
In addition to our drilling rigs, we provide the drilling crews and most of the ancillary equipment needed to operate our drilling rigs. We obtain our contracts for drilling oil and natural gas wells either through competitive bidding or through direct negotiations with customers. Our drilling contracts generally provide for compensation on either a daywork, turnkey or footage basis. Contract terms generally depend on the complexity and risk of operations, the on-site drilling conditions, the type of equipment used, and the anticipated duration of the work to be performed.
Our Production Services Division provides a range of services to exploration and production companies, including well services, wireline services, and fishing and rental services. Our production services operations are managed through locations concentrated in the major United States onshore oil and gas producing regions in the Gulf Coast, Mid-Continent, Rocky Mountain and Appalachian states. As of October 21, 2011, we have a premium fleet of 86 well service rigs consisting of seventy-seven 550 horsepower rigs, eight 600 horsepower rigs and one 400 horsepower rig. All our well service rigs are currently operating or are being actively marketed, with October month-to-date utilization of approximately 95%. We currently provide wireline services with a fleet of 103 wireline units and rental services with approximately $14.9 million of fishing and rental tools. We plan to add another two well service rigs and three wireline units by the end of 2011.
The accompanying unaudited condensed consolidated financial statements include the accounts of Pioneer Drilling Company and its wholly owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation. The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and

5



with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of our management, all adjustments (consisting of normal, recurring accruals) necessary for a fair presentation have been included. In preparing the accompanying unaudited condensed consolidated financial statements, we make various estimates and assumptions that affect the amounts of assets and liabilities we report as of the dates of the balance sheets and income and expenses we report for the periods shown in the income statements and statements of cash flows. Our actual results could differ significantly from those estimates. Material estimates that are particularly susceptible to significant changes in the near term relate to our recognition of revenues and costs for turnkey contracts, our estimate of the allowance for doubtful accounts, our estimate of the liability relating to the self-insurance portion of our health and workers’ compensation insurance, our estimate of asset impairments, our estimate of deferred taxes, our estimate of compensation related accruals and our determination of depreciation and amortization expense. The condensed consolidated balance sheet as of December 31, 2010 has been derived from our audited financial statements. We suggest that you read these condensed consolidated financial statements together with the consolidated financial statements and the related notes included in our annual report on Form 10-K for the fiscal year ended December 31, 2010.
In preparing the accompanying unaudited condensed consolidated financial statements, we have reviewed events that have occurred after September 30, 2011, through the filing of this Form 10-Q, for inclusion as necessary.
Recently Issued Accounting Standards
Multiple Deliverable Revenue Arrangements. In October 2009, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2009-13, Revenue Recognition (Topic 605): Multiple Deliverable Revenue Arrangements – A Consensus of the FASB Emerging Issues Task Force. This update provides application guidance on whether multiple deliverables exist, how the deliverables should be separated and how the consideration should be allocated to one or more units of accounting. This update establishes a selling price hierarchy for determining the selling price of a deliverable. The selling price used for each deliverable will be based on vendor-specific objective evidence, if available, third-party evidence if vendor-specific objective evidence is not available, or estimated selling price if neither vendor-specific or third-party evidence is available. We are required to apply this guidance prospectively for revenue arrangements entered into or materially modified after January 1, 2011. The adoption of this new guidance has not had an impact on our financial position or results of operations.
Business Combinations. In December 2010, the FASB issued ASU No. 2010-29, Business Combinations (Topic 805): Disclosure of Supplementary Pro Forma Information for Business Combinations – A consensus of the FASB Emerging Issues Task Force. This update provides clarification requiring public companies that have completed material acquisitions to disclose the revenue and earnings of the combined business as if the acquisition took place at the beginning of the comparable prior annual reporting period, and also expands the supplemental pro forma disclosures to include a description of the nature and amount of material, nonrecurring pro forma adjustments directly attributable to the business combination included in the reported pro forma revenue and earnings. We are required to apply this guidance prospectively for business combinations for which the acquisition date is on or after January 1, 2011. The adoption of this new guidance has not had a material impact on our financial position or results of operations.
Fair Value Measurement. In May 2011, the FASB issued ASU No. 2011-04, Fair Value Measurement (Topic 820): Amendments to Achieve Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs. This update clarifies existing guidance about how fair value should be applied where it already is required or permitted and provides wording changes that align this standard with International Financial Reporting Standards (IFRS). We are required to apply this guidance prospectively beginning with our first quarterly filing in 2012. We do not expect the adoption of this new guidance to have a material impact on our financial position or results of operations.
Comprehensive Income. In June 2011, the FASB issued ASU No. 2011-05, Comprehensive Income (Topic 220): Presentation of Comprehensive Income. This update increases the prominence of other comprehensive income in financial statements, eliminating the option of presenting other comprehensive income in the statement of changes in equity, and instead, giving companies the option to present the components of net income and comprehensive income in either one or two consecutive financial statements. We are required to comply with this guidance prospectively beginning with our first quarterly filing in 2012. The adoption of this new guidance will not impact our financial position or statement of operations, other than changes in presentation.
Drilling Contracts
Our drilling contracts generally provide for compensation on either a daywork, turnkey or footage basis. Contract terms generally depend on the complexity and risk of operations, the on-site drilling conditions, the type of equipment used, and the

6



anticipated duration of the work to be performed. Generally, our contracts provide for the drilling of a single well and typically permit the customer to terminate on short notice. During periods of high rig demand, or for our newly constructed rigs, we enter into longer-term drilling contracts. Currently, we have contracts with terms of six months to four years in duration. As of October 21, 2011, we have 40 drilling rigs operating under term contracts. Of these 40 contracts, if not renewed at the end of their terms, 18 will expire by April 21, 2012, 14 will expire by October 21, 2012 and eight will expire by April 21, 2013. We have term contracts for an additional three drilling rigs that we expect will begin operating by the end of 2011 and we have nine term contracts for new-build AC drilling rigs, six of which we estimate will begin working in the first half of 2012, with the remaining three to begin operating by the end of 2012.

Foreign Currencies
Our functional currency for our foreign subsidiary in Colombia is the U.S. dollar. Nonmonetary assets and liabilities are translated at historical rates and monetary assets and liabilities are translated at exchange rates in effect at the end of the period. Income statement accounts are translated at average rates for the period. Gains and losses from remeasurement of foreign currency financial statements into U.S. dollars and from foreign currency transactions are included in other income or expense.
Restricted Cash
As of September 30, 2011, we had restricted cash in the amount of $1.3 million held in an escrow account to be used for future payments in connection with the acquisition of Prairie Investors d/b/a Competition Wireline (“Competition”). The former owner of Competition will receive annual installments of $0.7 million payable over the remaining two years from the escrow account. Restricted cash of $0.7 million and $0.7 million is recorded in other current assets and other long-term assets, respectively. The associated obligation of $0.7 million and $0.7 million is recorded in accrued expenses and other long-term liabilities, respectively.
Investments
As of December 31, 2010, short-term investments represented tax exempt, auction rate preferred securities (“ARPS”) that were classified as available for sale and reported at fair value. At December 31, 2010, we held $15.9 million (par value) of ARPSs, which were variable-rate preferred securities and had a long-term maturity with the interest rate being reset through “Dutch auctions” that were held every seven days. On January 19, 2011, we entered into an agreement with a financial institution to sell the ARPSs for $12.6 million, which represented 79% of the par value, plus accrued interest. The $3.3 million difference between the ARPSs’ par value of $15.9 million and the sales price of $12.6 million represented an other-than-temporary impairment of the ARPSs investment which was reflected as an impairment of investments in our consolidated statement of operations for the year ended December 31, 2010.
Under the ARPSs sales agreement, we retained the unilateral right for a period ending January 7, 2013 to: (a) repurchase all the ARPSs that were sold at the $12.6 million price at which they were initially sold to the financial institution; and (b) if not repurchased, receive additional proceeds from the financial institution upon redemption of the ARPSs by the original issuer of these securities (collectively, the “ARPSs Call Option”). Upon origination, the fair value of the ARPSs Call Option was estimated to be $0.6 million and was recognized as other income in our condensed consolidated statement of operations for the three months ended March 31, 2011. We are required to assess the value of the ARPSs Call Option at the end of each reporting period, with any changes in fair value recorded within our consolidated statement of operations. As of September 30, 2011, the ARPSs Call Option had an estimated fair value of $0.4 million, and was included in our other long-term assets in our condensed consolidated balance sheet.
Comprehensive Income (Loss)
Comprehensive income (loss) is comprised of net income (loss) and other comprehensive income (loss). During the three and nine months ended September 30, 2010, the difference between the par value and fair value of the ARPSs was considered temporary and was recorded as unrealized losses, net of taxes, in accumulated other comprehensive income (loss). At December 31, 2010, the difference between par value and fair value was determined to be an other-than-temporary impairment and was reflected as an impairment of investments in our consolidated statement of operations for the year ended December 31, 2010. The following table sets forth the components of comprehensive income (loss) (amounts in thousands):
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2011
 
2010
 
2011
 
2010
Net income (loss)
$
6,744

 
$
(2,580
)
 
$
4,359

 
$
(27,269
)
Other comprehensive loss - unrealized

 
(241
)
 

 
(360
)
Comprehensive income (loss)
$
6,744

 
$
(2,821
)
 
$
4,359

 
$
(27,629
)

7



Income Taxes
Pursuant to ASC Topic 740, Income Taxes, we follow the asset and liability method of accounting for income taxes, under which we recognize deferred tax assets and liabilities for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis. We measure our deferred tax assets and liabilities by using the enacted tax rates we expect to apply to taxable income in the years in which we expect to recover or settle those temporary differences. Under ASC Topic 740, we reflect in income the effect of a change in tax rates on deferred tax assets and liabilities in the period during which the change occurs.

Stock-based Compensation
We recognize compensation cost for stock option, restricted stock and restricted stock unit awards based on the fair value estimated in accordance with ASC Topic 718, Compensation—Stock Compensation. For our awards with graded vesting, we recognize compensation expense on a straight-line basis over the service period for each separately vesting portion of the award as if the award was, in substance, multiple awards.
We receive a tax deduction for certain stock option exercises during the period the options are exercised, generally for the excess of the market price of our common stock on the exercise date over the exercise price of the stock options. In accordance with ASC Topic 718, we reported all excess tax benefits resulting from the exercise of stock options as financing cash flows in our consolidated statement of cash flows.
Reclassifications
Certain amounts in the condensed consolidated financial statements for the prior years have been reclassified to conform to the current year’s presentation.
2.    Acquisitions
During the first quarter of 2011, we acquired two production services businesses for a total of $2.0 million in cash. The identifiable assets recorded in connection with these acquisitions include fixed assets of $1.0 million, including four wireline units, and intangible assets of $1.0 million representing customer relationships and two non-competition agreements.
During the three months ended September 30, 2011, we acquired another production services business for $3.0 million in cash. The identifiable assets recorded in connection with the acquisition include fixed assets of $2.9 million, including two well service rigs, and intangible assets of $0.1 million representing customer relationships and a non-competition agreement.
We did not recognize any goodwill in conjunction with the acquisitions and no contingent assets or liabilities were assumed. Our acquisitions have been accounted for as acquisitions of a business in accordance with ASC Topic 805, Business Combinations.
3.     Long-term Debt
Long-term debt as of September 30, 2011 and December 31, 2010 consists of the following (amounts in thousands):
 
 
September 30, 2011
 
December 31, 2010
Senior secured revolving credit facility
$

 
$
37,750

Senior notes
240,799

 
240,080

Subordinated notes payable and other
1,700

 
3,108

 
242,499

 
280,938

Less current portion
(850
)
 
(1,408
)
 
$
241,649

 
$
279,530

Senior Secured Revolving Credit Facility
We have a credit agreement, as amended on June 30, 2011, with Wells Fargo Bank, N.A. and a syndicate of lenders which provides for a senior secured revolving credit facility, with sub-limits for letters of credit and swing-line loans, of up to an aggregate principal amount of $250 million, all of which matures on June 30, 2016 (the “Revolving Credit Facility”). The Revolving Credit Facility contains customary mandatory prepayments from the proceeds of certain asset dispositions or debt issuances, which are applied to reduce outstanding revolving and swing-line loans and letter of credit exposure, but in no event will reduce the borrowing availability under the Revolving Credit Facility to less than $250 million.
Borrowings under the Revolving Credit Facility bear interest, at our option, at the LIBOR rate or at the bank prime rate, plus an applicable per annum margin that ranges from 2.50% to 3.25% and 1.50% to 2.25%, respectively. The LIBOR margin

8



and bank prime rate margin in effect at October 21, 2011 are 2.75% and 1.75%, respectively. The Revolving Credit Facility requires a commitment fee due quarterly based on the average daily unused amount of the commitments of the lenders, a fronting fee due for each letter of credit issued, and a quarterly letter of credit fee due based on the average undrawn amount of letters of credit outstanding during such period.
Our obligations under the Revolving Credit Facility are secured by substantially all of our domestic assets (including equity interests in Pioneer Global Holdings, Inc. and 65% of the outstanding equity interests of any first-tier foreign subsidiaries owned by Pioneer Global Holdings, Inc., but excluding any equity interest in, and any assets of, Pioneer Services Holdings, LLC) and are guaranteed by certain of our domestic subsidiaries, including Pioneer Global Holdings, Inc. Borrowings under the Revolving Credit Facility are available for acquisitions, working capital and other general corporate purposes.

On July 20, 2011, we received net proceeds of $94.3 million from the sale of 6,900,000 shares of our common stock. On July 22, 2011, we used a portion of these proceeds to pay down the entire debt balance outstanding under our Revolving Credit Facility. As of October 21, 2011, we had a zero balance outstanding and $9.2 million in committed letters of credit, which resulted in borrowing availability of $240.8 million under our Revolving Credit Facility. There are no limitations on our ability to access this borrowing capacity other than maintaining compliance with the covenants under the Revolving Credit Facility. At September 30, 2011, we were in compliance with our financial covenants. Our total consolidated leverage ratio was 1.5 to 1.0, our senior consolidated leverage ratio was 0.1 to 1.0, and our interest coverage ratio was 6.0 to 1.0. The financial covenants contained in our Revolving Credit Facility include the following:

A maximum total consolidated leverage ratio that cannot exceed 4.00 to 1.00;
A maximum senior consolidated leverage ratio, which excludes unsecured and subordinated debt, that cannot exceed 2.50 to 1.00;
A minimum interest coverage ratio that cannot be less than 2.50 to 1.00; and
If our senior consolidated leverage ratio is greater than 2.00 to 1.00 at the end of any fiscal quarter, our minimum asset coverage ratio cannot be less than 1.00 to 1.00.
The Revolving Credit Facility does not restrict capital expenditures as long as (a) no event of default exists under the Revolving Credit Facility or would result from such capital expenditures, (b) after giving effect to such capital expenditures there is availability under the Revolving Credit Facility equal to or greater than $25 million and (c) the senior consolidated leverage ratio as of the last day of the most recent reported fiscal quarter is less than 2.00 to 1.00. If the senior consolidated leverage ratio as of the last day of the most recent reported fiscal quarter is equal to or greater than 2.00 to 1.00, then capital expenditures are limited to $100 million for the fiscal year. The capital expenditure threshold may be increased by any unused portion of the capital expenditure threshold from the immediate preceding fiscal year up to $30 million.
At September 30, 2011, our senior consolidated leverage ratio was not greater than 2.00 to 1.00 and therefore, we were not subject to the capital expenditure threshold restrictions listed above.
The Revolving Credit Facility has additional restrictive covenants that, among other things, limit the incurrence of additional debt, investments, liens, dividends, acquisitions, redemptions of capital stock, prepayments of indebtedness, asset dispositions, mergers and consolidations, transactions with affiliates, hedging contracts, sale leasebacks and other matters customarily restricted in such agreements. In addition, the Revolving Credit Facility contains customary events of default, including without limitation, payment defaults, breaches of representations and warranties, covenant defaults, cross-defaults to certain other material indebtedness in excess of specified amounts, certain events of bankruptcy and insolvency, judgment defaults in excess of specified amounts, failure of any guaranty or security document supporting the credit agreement and change of control.
Senior Notes
On March 11, 2010, we issued $250 million of unregistered Senior Notes with a coupon interest rate of 9.875% that are due in 2018 (the “Senior Notes”). The Senior Notes were sold with an original issue discount of $10.6 million that was based on 95.75% of their face value, which will result in an effective yield to maturity of approximately 10.677%. On March 11, 2010, we received $234.8 million of net proceeds from the issuance of the Senior Notes after deductions were made for the $10.6 million of original issue discount and $4.6 million for underwriters’ fees and other debt offering costs. The net proceeds were used to repay a portion of the borrowings outstanding under our Revolving Credit Facility.
In accordance with a registration rights agreement with the holders of our Senior Notes, we filed an exchange offer registration statement on Form S-4 with the Securities and Exchange Commission that became effective on September 2,

9



2010. This exchange offer registration statement enabled the holders of our Senior Notes to exchange their Senior Notes for publicly registered notes with substantially identical terms. References to the “Senior Notes” herein include the Senior Notes issued in the exchange offer.
The Senior Notes are reflected on our condensed consolidated balance sheet at September 30, 2011 with a carrying value of $240.8 million, which represents the $250 million face value net of the $9.2 million unamortized portion of original issue discount. The original issue discount is being amortized over the term of the Senior Notes based on the effective interest method. The Senior Notes will mature on March 15, 2018 with interest due semi-annually in arrears on March 15 and September 15 of each year. We have the option to redeem the Senior Notes, in whole or in part, at any time on or after March 15, 2014 in each case at the redemption price specified in the Indenture dated March 11, 2010 (the “Indenture”) together with any accrued and unpaid interest to the date of redemption. Prior to March 15, 2014, we may also redeem the Senior Notes, in whole or in part, at a “make-whole” redemption price specified in the Indenture, together with any accrued and unpaid interest to the date of redemption. In addition, prior to March 15, 2013, we may, on one or more occasions, redeem up to 35% of the aggregate principal amount of the Senior Notes at a redemption price of 109.875% of the principal amount, plus any accrued and unpaid interest to the redemption date, with the net proceeds of certain equity offerings, if at least 65% of the aggregate principal amount of the Senior Notes remains outstanding after such redemption and the redemption occurs within 120 days of the closing of the equity offering.

Upon the occurrence of a change of control, holders of the Senior Notes will have the right to require us to purchase all or a portion of the Senior Notes at a price equal to 101% of the principal amount of each Senior Note, together with any accrued and unpaid interest to the date of purchase. Under certain circumstances in connection with asset dispositions, we will be required to use the excess proceeds of asset dispositions to make an offer to purchase the Senior Notes at a price equal to 100% of the principal amount of each Senior Note, together with any accrued and unpaid interest to the date of purchase.
The Indenture contains certain restrictions generally on our and certain of our subsidiaries’ ability to:
pay dividends on stock;
repurchase stock or redeem subordinated debt or make other restricted payments;
incur, assume or guarantee additional indebtedness or issue disqualified stock;
create liens on our assets;
enter into sale and leaseback transactions;
pay dividends, engage in loans, or transfer other assets from certain of our subsidiaries;
consolidate with or merge with or into, or sell all or substantially all of our properties to another person;
enter into transactions with affiliates; and
enter into new lines of business.
We were in compliance with these covenants as of September 30, 2011. The Senior Notes are not subject to any sinking fund requirements. The Senior Notes are fully and unconditionally guaranteed, jointly and severally, on a senior unsecured basis by certain of our existing domestic subsidiaries and by certain of our future domestic subsidiaries (see Note 9, Guarantor/Non-Guarantor Condensed Consolidated Financial Statements).
Subordinated Notes Payable
We have two subordinated notes payable to certain employees that are former shareholders of production services businesses which we have acquired. These subordinated notes payable have interest rates of 6% and 14%, require annual payments of principal and interest and have final maturity dates in March and April 2013.
Debt Issuance Costs
Costs incurred in connection with the Revolving Credit Facility were capitalized and are being amortized using the straight-line method over the term of the Revolving Credit Facility which matures in June 2016. Costs incurred in connection with the issuance of our Senior Notes were capitalized and are being amortized using the straight-line method over the term of the Senior Notes which mature in March 2018.

10



Capitalized debt costs related to the issuance of our long-term debt were approximately $8.0 million and $6.7 million as of September 30, 2011 and December 31, 2010, respectively. We recognized approximately $1.3 million and $1.4 million of associated amortization during the nine months ended September 30, 2011 and 2010, respectively. In June 2011, we recognized additional amortization expense related to the write-off of $0.6 million of debt issuance costs representing the portion of unamortized debt issuance costs associated with certain syndicate lenders who are no longer participating in the Revolving Credit Facility as amended on June 30, 2011.
4.    Fair Value of Financial Instruments
ASC Topic 820, Fair Value Measurements and Disclosures, defines fair value and provides a hierarchal framework associated with the level of subjectivity used in measuring assets and liabilities at fair value.
At September 30, 2011, our financial instruments consist primarily of cash, trade receivables, trade payables, long-term debt, and our ARPSs Call Option. At December 31, 2010, our financial instruments also included our investments in ARPSs, which were liquidated in January 2011. The carrying value of cash, trade receivables and trade payables are considered to be representative of their respective fair values due to the short-term nature of these instruments.
At December 31, 2010, our ARPSs were reported at amounts that reflected our estimate of fair value. To estimate the fair values of our ARPSs as of December 31, 2010, we used inputs defined by ASC Topic 820 as level 1 inputs which are quoted market prices in active markets for identical securities. We obtained a quoted market price and liquidated the ARPSs on January 19, 2011 based on the terms of the settlement agreement noted above. Therefore, the sales price under the settlement agreement of $12.6 million represented the fair value of the ARPSs at December 31, 2010. The $3.3 million difference between the ARPSs’ par value of $15.9 million and the sales price of $12.6 million represented an other-than-temporary impairment of the ARPSs investment which was reflected as an impairment of investments in our consolidated statement of operations for the year ended December 31, 2010.
At September 30, 2011, our ARPSs Call Option is reported at an amount that reflects our current estimate of fair value. To estimate the value of our ARPSs Call Option as of September 30, 2011, we used inputs defined by ASC Topic 820 as level 3 inputs, which are significant unobservable inputs. The fair value of the ARPSs Call Option was estimated using a modified Black-Scholes model, based on an analysis of recent historical transactions for securities with similar characteristics to the underlying ARPSs, and an analysis of the probability that the options would be exercisable as a result of the underlying ARPSs being redeemed or traded in a secondary market at an amount greater than the option price before the expiration date. As of September 30, 2011, the ARPSs Call Option had an estimated fair value of $0.4 million, and was included in our other long-term assets in our condensed consolidated balance sheet. Future changes in the fair values of the ARPSs Call Option will be reflected in other income (expense) in our consolidated statements of operations.
The fair value of our long-term debt at September 30, 2011 and December 31, 2010 is estimated using a discounted cash flow analysis, based on rates that we believe we would currently pay for similar types of debt instruments. This discounted cash flow analysis based on observable inputs for similar types of debt instruments represents level 2 inputs as defined by ASC Topic 820. The following table presents the supplemental fair value information about long-term debt at September 30, 2011 and December 31, 2010 (amounts in thousands):
 
 
September 30, 2011
 
December 31, 2010
 
Carrying
Amount
 
Fair
Value
 
Carrying
Amount
 
Fair
Value
Total debt
$
242,499

 
$
258,449

 
$
280,938

 
$
308,630



11



5.    Income (Loss) Per Common Share
The following table presents a reconciliation of the numerators and denominators of the basic income (loss) per share and diluted income (loss) per share computations (amounts in thousands, except per share data):
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2011
 
2010
 
2011
 
2010
Basic
 
 
 
 
 
 
 
Net income (loss)
$
6,744

 
$
(2,580
)
 
$
4,359

 
$
(27,269
)
Weighted-average shares
59,898

 
53,811

 
56,045

 
53,770

Income (loss) per share
$
0.11

 
$
(0.05
)
 
$
0.08

 
$
(0.51
)
Diluted
 
 
 
 
 
 
 
Net income (loss)
$
6,744

 
$
(2,580
)
 
$
4,359

 
$
(27,269
)
Effect of dilutive securities

 

 

 

Net income (loss) available to common shareholders after assumed conversion
6,744

 
(2,580
)
 
4,359

 
(27,269
)
Weighted-average shares:
 
 
 
 
 
 
 
Outstanding
59,898

 
53,811

 
56,045

 
53,770

Diluted effect of stock options, restricted stock, and restricted stock unit awards
1,530

 

 
1,477

 

 
61,428

 
53,811

 
57,522

 
53,770

Income (loss) per share
$
0.11

 
$
(0.05
)
 
$
0.08

 
$
(0.51
)
Outstanding stock options, restricted stock and restricted stock unit awards representing a total of 644,866 shares and 780,472 shares of common stock were excluded from the diluted loss per share calculations for the three and nine month periods ended September 30, 2010, respectively, because the effect of their inclusion would be antidilutive.
6.    Equity Transactions and Stock-based Compensation Plans
Equity Transactions
On July 20, 2011, we obtained $94.3 million in net proceeds when we sold 6,900,000 shares of our common stock at $14.50 per share, less underwriters’ commissions and other offering costs, pursuant to a public offering under the $300 million shelf registration statement filed in July 2009. On July 22, 2011, we used $57.0 million of these proceeds to pay down the entire debt balance outstanding under our Revolving Credit Facility. The remaining availability under the $300 million shelf registration statement for equity or debt offerings is $174.2 million.
Stock-based Compensation Plans
We grant stock option awards with vesting based on time of service conditions and we grant restricted stock unit awards with vesting based on time of service conditions, and in certain cases, subject to performance and market conditions. We recognize compensation cost for stock option, restricted stock and restricted stock unit awards based on the fair value estimated in accordance with ASC Topic 718, Compensation—Stock Compensation. For our awards with graded vesting, we recognize compensation expense on a straight-line basis over the service period for each separately vesting portion of the award as if the award was, in substance, multiple awards.
Stock Options
We grant stock option awards which generally become exercisable over a three-year period and expire ten years after the date of grant. Our stock-based compensation plans provide that all stock option awards must have an exercise price not less than the fair market value of our common stock on the date of grant. We issue shares of our common stock when vested stock option awards are exercised.

12



We estimate the fair value of each option grant on the date of grant using a Black-Scholes options-pricing model. There were no grants of stock option awards during the three months ended September 30, 2011. The following table summarizes the assumptions used in the Black-Scholes option-pricing model based on a weighted-average calculation for the nine months ended September 30, 2011 and for the three and nine months ended September 30, 2010:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2010
 
2011
 
2010
Expected volatility
64%
 
65%
 
62%
Risk-free interest rates
1.8%
 
1.5%
 
2.6%
Expected life in years
5.00
 
4.33
 
5.61
Options granted
53,000
 
602,298
 
787,200
Grant-date fair value
$3.28
 
$4.69
 
$4.91
The assumptions above are based on multiple factors, including historical exercise patterns of homogeneous groups with respect to exercise and post-vesting employment termination behaviors, expected future exercising patterns for these same homogeneous groups and volatility of our stock price. As we have not declared dividends since we became a public company, we did not use a dividend yield. In each case, the actual value that will be realized, if any, will depend on the future performance of our common stock and overall stock market conditions. There is no assurance the value an optionee actually realizes will be at or near the value we have estimated using the Black-Scholes options-pricing model.
The following table summarizes the compensation expense recognized for stock option awards during the three and nine months ended September 30, 2011 and 2010 (amounts in thousands):
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2011
 
2010
 
2011
 
2010
General and administrative expense
$
919

 
$
1,119

 
$
2,812

 
$
3,243

Operating costs
79

 
139

 
216

 
430

 
$
998

 
$
1,258

 
$
3,028

 
$
3,673

During the three and nine months ended September 30, 2011, 25,233 and 337,045 stock options were exercised at a weighted-average exercise price of $10.02 and $6.95, respectively. During the three and nine months ended September 30, 2010, 1,500 and 4,600 stock options were exercised, respectively, at a weighted-average exercise price of $3.84. We receive a tax deduction for certain stock option exercises during the period the options are exercised, generally for the excess of the fair market value of our stock on the date of exercise over the exercise price of the options. In accordance with ASC Topic 718, we reported all excess tax benefits resulting from the exercise of stock options as financing cash flows in our consolidated statement of cash flows.
Restricted Stock
We grant restricted stock awards that vest over a three-year period with a fair value based on the closing price of our common stock on the date of the grant. When restricted stock awards are granted, or when RSU awards are converted to restricted stock, shares of our common stock are considered issued, but subject to certain restrictions. We granted 32,360 shares of restricted stock during the nine months ended September 30, 2011, with a weighted-average grant-date price of $12.36. We granted 66,224 shares of restricted stock during the nine months ended September 30, 2010, with a weighted-average grant-date price of $6.04. During the nine months ended September 30, 2011, we issued an additional 166,918 shares of restricted stock upon the conversion of performance-based RSU awards, as described below.
The following table summarizes the compensation expense recognized for restricted stock awards during the three and nine months ended September 30, 2011 and 2010 (amounts in thousands):
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2011
 
2010
 
2011
 
2010
General and administrative expense
$
296

 
$
329

 
$
747

 
$
920

Operating costs
38

 
52

 
79

 
128

 
$
334

 
$
381

 
$
826

 
$
1,048


13



Restricted Stock Units
We grant restricted stock unit awards with vesting based on time of service conditions only (“time-based RSUs”), and we grant restricted stock unit awards with vesting based on time of service, which are also subject to performance and market conditions (“performance-based RSUs”). Shares of our common stock are issued to recipients of restricted stock units only when they have satisfied the applicable vesting conditions.
Our time-based RSUs generally vest over a three-year period, with fair values based on the closing price of our common stock on the date of grant. The following table summarizes the number of time-based RSUs granted and the weighted-average grant-date fair values of each time-based RSU during the three and nine months ended September 30, 2011 and 2010:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2011
 
2010
 
2011
 
2010
Time-based RSUs granted
12,750

 

 
246,223

 
72,120

Weighted-average grant-date fair value
$
15.50

 
$

 
$
11.20

 
$
8.86

Our performance-based RSUs are granted at a target number of issuable shares, for which the final number of shares of common stock is adjusted based on our actual achievement levels that are measured against predetermined performance conditions. There were no grants of performance-based RSUs during the three months ended September 30, 2011 or 2010. The following table summarizes the number of performance-based RSUs granted and the weighted-average grant-date fair values of each performance-based RSU during the nine months ended September 30, 2011 and 2010:
 
Nine Months Ended September 30,
 
2011
 
2010
Performance-based RSUs granted
146,479

 
194,680

Weighted-average grant-date fair value
$
10.23

 
$
8.86

Performance-based RSUs granted during the nine months ended September 30, 2011 will cliff vest after 39 months from the date of grant. The number of shares of common stock awarded will be based upon the Company’s achievement in certain performance conditions, as compared to a predefined peer group, over the performance period from January 1, 2011 through December 31, 2013. Approximately one-third of the performance-based RSUs are subject to a market condition, and therefore the fair value of these awards is measured using a Monte Carlo simulation model. Compensation expense for awards with a market condition is reduced only for estimated forfeitures; no adjustment to expense is otherwise made, regardless of the number of shares issued, if any. The remaining two-thirds of the performance-based RSUs are subject to performance conditions, and therefore the fair value is based on the closing price of our common stock on the date of grant, applied to the estimated number of shares that will be awarded. Compensation expense ultimately recognized for awards with performance conditions will be equal to the fair value of the restricted stock unit award based on the actual outcome of the service and performance conditions.
Performance-based RSUs granted during the nine months ended September 30, 2010 have a fair value that is based on the closing price of our common stock on the date of grant. Compensation cost ultimately recognized will be equal to the fair value of the restricted stock unit award based on the actual outcome of the service and performance conditions. In April 2011, we determined that 166,918 shares, or 86.7% of the target number of shares net of forfeitures, were earned based on the Company’s achievement of certain performance measures, as compared to the predefined peer group, over the performance period from January 1, 2008 through December 31, 2010. After the earned number of shares was determined, the performance-based RSUs were converted to 166,918 shares of restricted stock, subject to graded vesting over a three-year period. The first tranche of 55,618 shares vested in April 2011.
The following table summarizes the compensation expense recognized for all time-based and performance-based restricted stock unit awards during the three and nine months ended September 30, 2011 and 2010 (amounts in thousands):
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2011
 
2010
 
2011
 
2010
General and administrative expense
$
409

 
$
142

 
$
1,231

 
$
445

Operating costs
93

 
25

 
229

 
72

 
$
502

 
$
167

 
$
1,460

 
$
517



14



7.    Segment Information
We have two operating segments referred to as the Drilling Services Division and the Production Services Division which is the basis management uses for making operating decisions and assessing performance.
Drilling Services Division – Our Drilling Services Division provides contract land drilling services with its fleet of 64 drilling rigs that are assigned to the following locations:
Drilling Division Locations
Rig Count
South Texas
15
East Texas
7
West Texas
16
North Dakota
9
Utah
2
Appalachia
7
Colombia
8
Production Services Division – Our Production Services Division provides a range of services to oil and gas exploration and production companies, including well services, wireline services, and fishing and rental services. Our production services operations are managed through locations concentrated in the major United States onshore oil and gas producing regions in the Gulf Coast, Mid-Continent, Rocky Mountain and Appalachian states. We have a premium fleet of 86 well service rigs consisting of seventy-seven 550 horsepower rigs, eight 600 horsepower rigs and one 400 horsepower rig. We provide wireline services with a fleet of 103 wireline units and rental services with approximately $14.9 million of fishing and rental tools.
The following tables set forth certain financial information for our two operating segments and corporate for the three and nine months ended September 30, 2011 and 2010 (amounts in thousands):
 
 
As of and for the Three Months Ended September 30, 2011
 
Drilling
Services
Division
 
Production
Services
Division
 
Corporate
 
Total
Identifiable assets
$
645,104

 
$
269,080

 
$
32,704

 
$
946,888

Revenues
$
108,764

 
$
78,887

 
$

 
$
187,651

Operating costs
72,430

 
44,394

 

 
116,824

Segment margin
$
36,334

 
$
34,493

 
$

 
$
70,827

Depreciation and amortization
$
24,405

 
$
8,388

 
$
199

 
$
32,992

Capital expenditures
$
44,597

 
$
15,241

 
$

 
$
59,838


 
As of and for the Three Months Ended September 30, 2010
 
Drilling
Services
Division
 
Production
Services
Division
 
Corporate
 
Total
Identifiable assets
$
565,951

 
$
256,013

 
$
35,112

 
$
857,076

Revenues
$
85,667

 
$
49,877

 
$

 
$
135,544

Operating costs
59,957

 
29,196

 

 
89,153

Segment margin
$
25,710

 
$
20,681

 
$

 
$
46,391

Depreciation and amortization
$
23,756

 
$
6,771

 
$
320

 
$
30,847

Capital expenditures
$
25,328

 
$
7,765

 
$
254

 
$
33,347

 

15



 
As of and for the Nine Months Ended September 30, 2011
 
Drilling
Services
Division
 
Production
Services
Division
 
Corporate
 
Total
Identifiable assets
645,104

 
269,080

 
32,704

 
946,888

Revenues
$
315,043

 
$
197,242

 
$

 
$
512,285

Operating costs
213,129

 
115,376

 

 
328,505

Segment margin
$
101,914

 
$
81,866

 
$

 
$
183,780

Depreciation and amortization
$
73,594

 
$
23,393

 
$
685

 
$
97,672

Capital expenditures
$
110,352

 
$
47,986

 
$

 
$
158,338

 
 
As of and for the Nine Months Ended September 30, 2010
 
Drilling
Services
Division
 
Production
Services
Division
 
Corporate
 
Total
Identifiable assets
$
565,951

 
$
256,013

 
$
35,112

 
$
857,076

Revenues
$
217,580

 
$
121,012

 
$

 
$
338,592

Operating costs
164,409

 
73,688

 

 
238,097

Segment margin
$
53,171

 
$
47,324

 
$

 
$
100,495

Depreciation and amortization
$
68,805

 
$
19,542

 
$
928

 
$
89,275

Capital expenditures
$
95,794

 
$
19,972

 
$
418

 
$
116,184

The following table reconciles the segment profits reported above to income (loss) from operations as reported on the condensed consolidated statements of operations (amounts in thousands):
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2011
 
2010
 
2011
 
2010
Segment margin
$
70,827

 
$
46,391

 
$
183,780

 
$
100,495

Depreciation and amortization
(32,992
)
 
(30,847
)
 
(97,672
)
 
(89,275
)
General and administrative
(17,705
)
 
(13,030
)
 
(48,086
)
 
(36,760
)
Bad debt (expense) recovery
(322
)
 
22

 
(377
)
 
104

Impairment of equipment
(484
)
 

 
(484
)
 

Income (loss) from operations
19,324

 
2,536

 
37,161

 
(25,436
)

The following table sets forth certain financial information for our international operations in Colombia as of and for the three and nine months ended September 30, 2011 and 2010 which is included in our Drilling Services Division (amounts in thousands):
 
 
As of and for the Three Months Ended September 30,
 
As of and for the Nine Months Ended September 30,
 
2011
 
2010
 
2011
 
2010
Identifiable assets
$
154,255

 
$
162,464

 
$
154,255

 
$
162,464

Revenues
$
27,990

 
$
24,800

 
$
81,465

 
$
60,866

Identifiable assets as of September 30, 2011 and 2010 include five drilling rigs that are owned by our Colombia subsidiary and three drilling rigs that are owned by one of our domestic subsidiaries and leased to our Colombia subsidiary.
8.    Commitments and Contingencies
In connection with our expansion into international markets, our foreign subsidiaries have obtained bonds for bidding on drilling contracts, performing under drilling contracts, and remitting customs and importation duties. We have guaranteed payments of $50.1 million relating to our performance under these bonds.
The Colombian government enacted a tax reform act which, among other things, adopted a one-time, net-worth tax for all Colombian entities, which was assessed on January 1, 2011 and is payable in eight semi-annual installments from 2011 through 2014. Based on our Colombian operations’ net equity, measured on a Colombian tax basis as of January 1, 2011, our total net-

16



worth tax obligation is approximately $7.3 million, which is not deductible for tax purposes. We recognized this tax obligation in full during the first quarter of 2011 in other expense in our condensed consolidated statement of operations, and in other accrued expenses and other long-term liabilities on our condensed consolidated balance sheet as of September 30, 2011. As of September 30, 2011, the remaining obligation is $6.2 million.
Due to the nature of our business, we are, from time to time, involved in litigation or subject to disputes or claims related to our business activities, including workers’ compensation claims and employment-related disputes. Legal costs relating to these matters are expensed as incurred. In the opinion of our management, none of the pending litigation, disputes or claims against us will have a material adverse effect on our financial condition, results of operations or cash flow from operations.
9.    Guarantor/Non-Guarantor Condensed Consolidated Financial Statements
Our Senior Notes are fully and unconditionally guaranteed, jointly and severally, on a senior unsecured basis by our existing domestic subsidiaries, except for Pioneer Services Holdings, LLC, and certain of our future domestic subsidiaries. The subsidiaries that generally operate our non-U.S. business concentrated in Colombia do not guarantee our Senior Notes. The non-guarantor subsidiaries do not have any payment obligations under the Senior Notes, the guarantees or the Indenture. In the event of a bankruptcy, liquidation or reorganization of any non-guarantor subsidiary, such non-guarantor subsidiary will pay the holders of its debt and other liabilities, including its trade creditors, before it will be able to distribute any of its assets to us. In the future, any non-U.S. subsidiaries, immaterial subsidiaries and subsidiaries that we designate as unrestricted subsidiaries under the Indenture will not guarantee the Senior Notes. As of September 30, 2011, there were no restrictions on the ability of subsidiary guarantors to transfer funds to the parent company.
As a result of the guarantee arrangements, we are presenting the following condensed consolidated balance sheets, statements of operations and statements of cash flows of the issuer, the guarantor subsidiaries and the non-guarantor subsidiaries.

17




CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited, in thousands)
 
 
September 30, 2011
 
Parent
 
Guarantor
Subsidiaries
 
Non-Guarantor
Subsidiaries
 
Eliminations
 
Consolidated
ASSETS
 
 
 
 
 
 
 
 
 
Current assets:
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
21,272

 
$
(4,468
)
 
$
5,053

 
$

 
$
21,857

Receivables
(2
)
 
107,015

 
32,954

 

 
139,967

Intercompany receivable (payable)
(121,489
)
 
136,997

 
(15,508
)
 

 

Deferred income taxes
1,002

 
7,403

 
4,594

 

 
12,999

Inventory

 
3,757

 
6,608

 

 
10,365

Prepaid expenses and other current assets
435

 
3,840

 
3,989

 

 
8,264

Total current assets
(98,782
)
 
254,544

 
37,690

 

 
193,452

Net property and equipment
1,435

 
628,155

 
88,490

 
(750
)
 
717,330

Investment in subsidiaries
810,453

 
110,723

 

 
(921,176
)
 

Intangible assets, net of amortization
158

 
19,725

 

 

 
19,883

Noncurrent deferred income taxes
27,369

 

 
2,399

 
(27,369
)
 
2,399

Assets held for sale

 
2,646

 

 

 
2,646

Other long-term assets
8,406

 
2,141

 
631

 

 
11,178

Total assets
$
749,039

 
$
1,017,934

 
$
129,210

 
$
(949,295
)
 
$
946,888

LIABILITIES AND SHAREHOLDERS’ EQUITY
 
 
 
 
 
 
 
 
 
Current liabilities:
 
 
 
 
 
 
 
 
 
Accounts payable
$
536

 
$
43,788

 
$
3,707

 

 
$
48,031

Current portion of long-term debt

 
850

 

 

 
850

Prepaid drilling contracts

 
1,670

 
2,668

 

 
4,338

Accrued expenses
4,088

 
39,289

 
6,984

 

 
50,361

Total current liabilities
4,624

 
85,597

 
13,359

 

 
103,580

Long-term debt, less current portion
240,799

 
850

 

 

 
241,649

Deferred income taxes

 
115,665

 

 
(27,369
)
 
88,296

Other long-term liabilities
106

 
5,369

 
5,128

 

 
10,603

Total liabilities
245,529

 
207,481

 
18,487

 
(27,369
)
 
444,128

Total shareholders’ equity
503,510

 
810,453

 
110,723

 
(921,926
)
 
502,760

Total liabilities and shareholders’ equity
$
749,039

 
$
1,017,934

 
$
129,210

 
$
(949,295
)
 
$
946,888



18



CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited, in thousands)
 
 
December 31, 2010
 
Parent
 
Guarantor
Subsidiaries
 
Non-Guarantor
Subsidiaries
 
Eliminations
 
Consolidated
ASSETS
 
Current assets:
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
15,737

 
$
(1,840
)
 
$
8,114

 
$

 
$
22,011

Short-term investments
12,569

 

 

 

 
12,569

Receivables

 
78,575

 
10,940

 

 
89,515

Intercompany receivable (payable)
(80,900
)
 
80,942

 
(42
)
 

 

Deferred income taxes
178

 
4,167

 
5,522

 

 
9,867

Inventory

 
2,874

 
6,149

 

 
9,023

Prepaid expenses and other current assets
263

 
4,604

 
3,930

 

 
8,797

Total current assets
(52,153
)
 
169,322

 
34,613

 

 
151,782

Net property and equipment
1,601

 
562,390

 
92,267

 
(750
)
 
655,508

Investment in subsidiaries
714,292

 
114,483

 

 
(828,775
)
 

Intangible assets, net of amortization
235

 
21,731

 

 

 
21,966

Noncurrent deferred income taxes
14,632

 

 

 
(14,632
)
 

Other long-term assets
6,739

 
2,844

 
2,504

 

 
12,087

Total assets
$
685,346

 
$
870,770

 
$
129,384

 
$
(844,157
)
 
$
841,343

LIABILITIES AND SHAREHOLDERS’ EQUITY
 
 
 
 
 
 
 
 
 
Current liabilities:
 
 
 
 
 
 
 
 
 
Accounts payable
$
242

 
$
20,134

 
$
6,553

 
$

 
$
26,929

Current portion of long-term debt
63

 
1,345

 

 

 
1,408

Prepaid drilling contracts

 
1,000

 
2,669

 

 
3,669

Accrued expenses
9,861

 
30,786

 
2,987

 

 
43,634

Total current liabilities
10,166

 
53,265

 
12,209

 

 
75,640

Long-term debt, less current portion
277,830

 
1,700

 

 

 
279,530

Deferred income taxes

 
94,769

 
23

 
(14,632
)
 
80,160

Other long-term liabilities
267

 
6,744

 
2,669

 

 
9,680

Total liabilities
288,263

 
156,478

 
14,901

 
(14,632
)
 
445,010

Total shareholders’ equity
397,083

 
714,292

 
114,483

 
(829,525
)
 
396,333

Total liabilities and shareholders’ equity
$
685,346

 
$
870,770

 
$
129,384

 
$
(844,157
)
 
$
841,343



19



CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited, in thousands)
 
 
Three Months Ended September 30, 2011
 
Parent
 
Guarantor
Subsidiaries
 
Non-Guarantor
Subsidiaries
 
Eliminations
 
Consolidated
Revenues:
$

 
$
159,662

 
$
27,989

 
$

 
$
187,651

Costs and expenses:
 
 
 
 
 
 
 
 
 
Operating costs

 
95,021

 
21,803

 

 
116,824

Depreciation and amortization
198

 
29,653

 
3,141

 

 
32,992

General and administrative
4,983

 
12,132

 
698

 
(108
)
 
17,705

Intercompany leasing

 
(1,215
)
 
1,215

 

 

Bad debt expense

 
322

 

 

 
322

Impairment charges

 
484

 

 

 
484

Total costs and expenses
5,181

 
136,397

 
26,857

 
(108
)
 
168,327

Income (loss) from operations
(5,181
)
 
23,265

 
1,132

 
108

 
19,324

Other income (expense):
 
 
 
 
 
 
 
 
 
Equity in earnings of subsidiaries
13,663

 
(642
)
 

 
(13,021
)
 

Interest expense
(6,083
)
 
(58
)
 
4

 

 
(6,137
)
Other
(73
)
 
220

 
(1,232
)
 
(108
)
 
(1,193
)
Total other income (expense)
7,507

 
(480
)
 
(1,228
)
 
(13,129
)
 
(7,330
)
Income (loss) before income taxes
2,326

 
22,785

 
(96
)
 
(13,021
)
 
11,994

Income tax benefit (expense)
4,418

 
(9,122
)
 
(546
)
 

 
(5,250
)
Net income (loss)
$
6,744

 
$
13,663

 
$
(642
)
 
$
(13,021
)
 
$
6,744

 
 
 
 
 
 
 
 
 
 
 
Three Months Ended September 30, 2010
 
Parent
 
Guarantor
Subsidiaries
 
Non-Guarantor
Subsidiaries
 
Eliminations
 
Consolidated
Revenues:
$

 
$
110,744

 
$
24,800

 
$

 
$
135,544

Costs and expenses:
 
 
 
 
 
 
 
 
 
Operating costs

 
70,423

 
18,730

 

 
89,153

Depreciation and amortization
357

 
28,175

 
2,315

 

 
30,847

General and administrative
3,815

 
8,700

 
605

 
(90
)
 
13,030

Intercompany leasing

 
(1,228
)
 
1,228

 

 

Bad debt recovery

 
(22
)
 

 

 
(22
)
Total costs and expenses
4,172

 
106,048

 
22,878

 
(90
)
 
133,008

Income (loss) from operations
(4,172
)
 
4,696

 
1,922

 
90

 
2,536

Other income (expense):
 
 
 
 
 
 
 
 
 
Equity in earnings of subsidiaries
(688
)
 
2,358

 

 
(1,670
)
 

Interest expense
(7,497
)
 
(82
)
 
6

 

 
(7,573
)
Other

 
200

 
735

 
(90
)
 
845

Total other income (expense)
(8,185
)
 
2,476

 
741

 
(1,760
)
 
(6,728
)
Income (loss) before income taxes
(12,357
)
 
7,172

 
2,663

 
(1,670
)
 
(4,192
)
Income tax benefit (expense)
9,777

 
(7,860
)
 
(305
)
 

 
1,612

Net income (loss)
$
(2,580
)
 
$
(688
)
 
$
2,358

 
$
(1,670
)
 
$
(2,580
)


20



CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited, in thousands)
 
 
Nine Months Ended September 30, 2011
 
Parent
 
Guarantor
Subsidiaries
 
Non-Guarantor
Subsidiaries
 
Eliminations
 
Consolidated
Revenues:
$

 
$
430,820

 
$
81,465

 
$

 
$
512,285

Costs and expenses:
 
 
 
 
 
 
 
 
 
Operating costs

 
265,933

 
62,572

 

 
328,505

Depreciation and amortization
685

 
87,782

 
9,205

 

 
97,672

General and administrative
13,876

 
32,502

 
2,032

 
(324
)
 
48,086

Intercompany leasing

 
(3,645
)
 
3,645

 

 

Bad debt expense

 
377

 

 

 
377

Impairment charges

 
484

 

 

 
484

Total costs and expenses
14,561

 
383,433

 
77,454

 
(324
)
 
475,124

Income (loss) from operations
(14,561
)
 
47,387

 
4,011

 
324

 
37,161

Other income (expense):
 
 
 
 
 
 
 
 
 
Equity in earnings of subsidiaries
26,164

 
(3,079
)
 

 
(23,085
)
 

Interest expense
(21,487
)
 
(187
)
 
15

 

 
(21,659
)
Other
384

 
671

 
(7,687
)
 
(324
)
 
(6,956
)
Total other income (expense)
5,061

 
(2,595
)
 
(7,672
)
 
(23,409
)
 
(28,615
)
Income (loss) before income taxes
(9,500
)
 
44,792

 
(3,661
)
 
(23,085
)
 
8,546

Income tax benefit (expense)
13,859

 
(18,628
)
 
582

 

 
(4,187
)
Net income (loss)
$
4,359

 
$
26,164

 
$
(3,079
)
 
$
(23,085
)
 
$
4,359

 
 
 
 
 
 
 
 
 
 
 
Nine Months Ended September 30, 2010
 
Parent
 
Guarantor
Subsidiaries
 
Non-Guarantor
Subsidiaries
 
Eliminations
 
Consolidated
Revenues:
$

 
$
277,726

 
$
60,866

 
$

 
$
338,592

Costs and expenses:
 
 
 
 
 
 
 
 
 
Operating costs

 
189,540

 
48,557

 

 
238,097

Depreciation and amortization
1,047

 
81,363

 
6,865

 

 
89,275

General and administrative
10,918

 
24,134

 
1,978

 
(270
)
 
36,760

Intercompany leasing

 
(3,108
)
 
3,108

 

 

Bad debt recovery

 
(104
)
 

 

 
(104
)
Total costs and expenses
11,965

 
291,825

 
60,508

 
(270
)
 
364,028

Income (loss) from operations
(11,965
)
 
(14,099
)
 
358

 
270

 
(25,436
)
Other income (expense):
 
 
 
 
 
 
 
 
 
Equity in earnings of subsidiaries
(6,600
)
 
2,452

 

 
4,148

 

Interest expense
(18,481
)
 
(262
)
 
(3
)
 

 
(18,746
)
Other

 
581

 
1,333

 
(270
)
 
1,644

Total other income (expense)
(25,081
)
 
2,771

 
1,330

 
3,878

 
(17,102
)
Income (loss) before income taxes
(37,046
)
 
(11,328
)
 
1,688

 
4,148

 
(42,538
)
Income tax benefit (expense)
9,777

 
4,728

 
764

 

 
15,269

Net income (loss)
$
(27,269
)
 
$
(6,600
)
 
$
2,452

 
$
4,148