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 ~~June~~September 30, 2012

¨ 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 000-51630

UNION DRILLING, INC.

(Exact name of registrant as specified in its charter)


DELAWARE		16-1537048
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification Number)

4055 International Plaza Suite 610 Fort Worth, Texas		76109
(Address of principal executive offices)		(Zip Code)

817-735-8793

(Registrant’s telephone number, including area code)

www.uniondrilling.com

(Registrant’s website)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):


Large accelerated filer	¨		Accelerated filer	x

Non-accelerated filer	¨	(Do not check if a smaller reporting company)	Smaller reporting company	¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ¨ No x

As of ~~August~~November 2, 2012, there were 25,228,816 shares of common stock, par value $0.01 per share, of the registrant issued and 21,398,534 shares outstanding.

UNION DRILLING, INC.

FORM 10-Q

TABLE OF CONTENTS

		Page
PART I. FINANCIAL INFORMATION			21
ITEM 1.	FINANCIAL STATEMENTS (UNAUDITED)		21
	CONDENSED BALANCE SHEETS		21
	CONDENSED STATEMENTS OF OPERATIONS		32
	CONDENSED STATEMENTS OF CASH FLOWS		43
	CONDENSED STATEMENT OF STOCKHOLDERS’ EQUITY		54
	NOTES TO CONDENSED FINANCIAL STATEMENTS		65
ITEM 2.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS		1314
ITEM 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK		2021
ITEM 4.	CONTROLS AND PROCEDURES		2021
PART II. OTHER INFORMATION			2122
ITEM 1.	LEGAL PROCEEDINGS		2122
ITEM 1A.	RISK FACTORS		2122
ITEM 6.	EXHIBITS		2122
SIGNATURE			2223
INDEX TO EXHIBITS			2324

PART I. FINANCIAL INFORMATION

ITEM 1.

FINANCIAL STATEMENTS

Union Drilling, Inc.

Condensed Balance Sheets

(in thousands, except share data)

	June 30,2012			December 31,2011
	September 30,2012			December 31,2011
	(unaudited)
Assets:
Current assets:
Cash and cash equivalents	$	7		$	7
Accounts receivable (net of allowance for doubtful accounts of $1,270 and $1,409 at June 30, 2012 and December 31, 2011, respectively)		47,630			45,387
Accounts receivable (net of allowance for doubtful accounts of $538 and $1,409 at September 30, 2012 and December 31, 2011, respectively)		38,883			45,387
Inventories		~~943~~944			832
Income tax recoverable		302			368
Prepaid expenses, deposits and other receivables		1,~~887~~379			3,027
Deferred taxes		1,~~245~~137			1,239
Total current assets		5242,~~014~~652			50,860
Intangible assets (net of accumulated amortization of $1,371 and $1,221 at June 30, 2012 and December 31, 2011, respectively)		829			979
Intangible assets (net of accumulated amortization of $1,447 and $1,221 at September 30, 2012 and December 31, 2011, respectively)		753			979
Property, buildings and equipment (net of accumulated depreciation of $231,934 and $212,173 at June 30, 2012 and December 31, 2011, respectively)		314,870			289,429
Property, buildings and equipment (net of accumulated depreciation of $238,709 and $212,173 at September 30, 2012 and December 31, 2011, respectively)		314,992			289,429
Other assets		~~629~~572			743
Total assets	$	~~368~~358,~~342~~969		$	342,011
Liabilities and Stockholders’ Equity:
Current liabilities:
Accounts payable	$	2014,596		$	21,513
Current portion of notes payable for equipment		~~287~~267			120
Financed insurance premiums		~~482~~192			1,057
Customer advances		9436			—
Accrued expense and other liabilities		12,331			10,811
Accrued expenses and other liabilities		11,612			10,811
Total current liabilities		3326,~~790~~703			33,501
Revolving credit facility		~~104~~100,~~221~~569			67,813
Long-term notes payable for equipment		52—			70
Deferred taxes		4243,~~771~~371			42,972
Total liabilities		~~180~~170,~~834~~643			144,356
Stockholders’ equity:
Common stock, par value $.01 per share; 75,000,000 shares authorized; and 25,228,816 shares issued at both June 30, 2012 and December 31, 2011		252			252
Common stock, par value $.01 per share; 75,000,000 shares authorized; 25,228,816 shares issued at both September 30, 2012 and December 31, 2011		252			252
Additional paid in capital		173,~~105~~437			172,465
Retained earnings		34,~~221~~707			35,828
Treasury stock; 3,830,282 and 2,080,700 shares at June 30, 2012 and December 31, 2011, respectively		(20,070	)		(10,890	)
Treasury stock; 3,830,282 and 2,080,700 shares at September 30, 2012 and December 31, 2011, respectively		(20,070	)		(10,890	)
Total stockholders’ equity		~~187~~188,~~508~~326			197,655
Total liabilities and stockholders’ equity	$	~~368~~358,~~342~~969		$	342,011

See accompanying notes to condensed financial statements.

Union Drilling, Inc.

Condensed Statements of Operations

(Unaudited, in thousands, except share and per share data)

	Three Months EndedJune 30,						Six Months EndedJune 30,
	Three Months EndedSeptember 30,						Nine Months EndedSeptember 30,
	2012			2011			2012			2011
Revenues
Total revenues	$	6863,~~095~~963		$	5966,~~924~~744		$	~~132~~196,~~715~~678		$	~~115~~182,~~919~~663
Cost and expenses
Operating expenses		4742,~~988~~040			4345,~~918~~463			95137,~~776~~816			86131,~~493~~956
Depreciation and amortization		11,~~765~~830			1213,~~803~~328			2335,~~982~~812			2538,~~412~~740
General and administrative		7,465			7,248			14,977			14,501
Impairment charge		—			808			—			808
Total cost and expenses		67,218			63,969			134,735			126,406
General and administrative		8,257			7,023			23,234			21,523
Operating income (loss)		877			(4,045	)		(2,020	)		(10,487	)
Total cost and expenses		62,127			66,622			196,862			193,027
Interest expense, net		(552	)		(280	)		(1,002	)		(667	)
Operating income (loss)		1,836			122			(184	)		(10,364	)
Gain on disposal of assets		478			248			798			444
Interest expense, net		(532	)		(392	)		(1,534	)		(1,059	)
Other income		186			67			361			154
(Loss) gain on disposal of assets		(170	)		625			628			1,068
Income (loss) before income taxes		989			(4,010	)		(1,863	)		(10,556	)
Other income (loss)		259			(138	)		620			16
Income tax expense (benefit)		382			(577	)		(256	)		(2,527	)
Income (loss) before income taxes		1,393			217			(470	)		(10,339	)
Net income (loss)	$	607		$	(3,433	)	$	(1,607	)	$	(8,029	)
Income tax expense (benefit)		907			(400	)		651			(2,926	)
Net income (loss)	$	486		$	617		$	(1,121	)	$	(7,413	)
Income (loss) per common share:
Basic	$	0.0302		$	(0.1503	)	$	(0.0705	)	$	(0.3532	)
Diluted	$	0.0302		$	(0.1503	)	$	(0.0705	)	$	(0.3532	)
Weighted-average common shares outstanding:
Basic		21,~~717~~398,~~540~~534			23,~~189~~191,~~449~~345			22,~~415~~074,~~793~~231			23,~~186~~188,~~555~~169
Diluted		21,~~955~~649,~~330~~197			23,~~189~~249,~~449~~245			22,~~415~~074,~~793~~231			23,~~186~~188,~~555~~169

See accompanying notes to condensed financial statements.

Union Drilling, Inc.

Condensed Statements of Cash Flows

(Unaudited, in thousands)

	Six Months EndedJune 30,
	Nine Months EndedSeptember 30,
	2012			2011
Operating activities:
Net loss	$	(1,~~607~~121	)	$	(87,~~029~~413	)
Adjustments to reconcile net loss to cash flow provided by operating activities:
Depreciation and amortization		2335,~~982~~812			2538,~~412~~740
Amortization of stock-based compensation expense		640			727
Impairment charge		—			808
Provision for doubtful accounts		42			—
Amortization of share-based compensation expense		972			950
Gain on disposal of assets		(798	)		(444	)
Provision for doubtful accounts		42			219
Benefit for deferred taxes		(207	)		(2,108	)
Gain on disposal of assets		(628	)		(1,068	)
Expense (benefit) for deferred taxes		501			(2,493	)
Changes in operating assets and liabilities:
Accounts receivable		(26,~~285~~462	)		(36,~~561~~649	)
Inventories		(~~111~~112	)		185
Prepaid and other assets		1,320			610
Income tax recoverable		66			(448	)
Accounts payable		(1,778	)		(730	)
Prepaid and other assets		1,819			1
Accrued expenses and other liabilities		1,614			1,608
Accounts payable		(2,540	)		753
Cash flow provided by operating activities		20,812			13,670
Accrued expenses and other liabilities		837			2,355
Cash flow provided by operating activities		42,110			25,940
Investing activities:
Purchases of machinery and equipment		(5167,~~138~~117	)		(3666,~~578~~971	)
Proceeds from sale of machinery and equipment		12,~~192~~089			~~762~~1,551
Cash flow used in investing activities		(4965,~~946~~028	)		(3565,~~816~~420	)
Financing activities:
Borrowings on revolving credit facility		168,833			146,363
Borrowings on line of credit		239,192			219,169
Repayments on revolving credit facility		(132,425	)		(115,586	)
Repayments on line of credit		(206,436	)		(179,928	)
Cash overdrafts		~~2,332~~130			~~(415~~863	)
Borrowings - other debt		250			—240
Repayments - other debt		(~~676~~1,038	)		(~~610~~918	)
Exercise of stock options		—			57
Purchases of treasury stock		(9,180	)		—
Cash flow provided by financing activities		2922,~~134~~918			2939,~~809~~483
Net increase in cash and cash equivalents		—			~~7,663~~3
Cash and cash equivalents at beginning of period		7			4
Cash and cash equivalents at end of period	$	7		$	7~~,667~~

See accompanying notes to condensed financial statements.

Union Drilling, Inc.

Condensed Statement of Stockholders’ Equity

(Unaudited, in thousands, except share data)

	Common Stock					AdditionalPaid InCapital		RetainedEarnings			TreasuryStock			Total
	Shares			$
Balance at January 1, 2012		23,148,116		$	252	$	172,465	$	35,828		$	(10,890	)	$	197,655
Share-based compensation		—			—		~~640~~972		—			—			~~640~~972
Purchase of treasury stock		(1,749,582	)		—		—		—			(9,180	)		(9,180	)
Net loss		—			—		—		(1,~~607~~121	)		—			(1,~~607~~121	)
Balance at June 30, 2012		21,398,534		$	252	$	173,105	$	34,221		$	(20,070	)	$	187,508
Balance at September 30, 2012		21,398,534		$	252	$	173,437	$	34,707		$	(20,070	)	$	188,326

See accompanying notes to condensed financial statements.

UNION DRILLING, INC.

NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS

~~June~~September 30, 2012

(Unaudited)

1.	Business and Basis of Presentation

Union Drilling, Inc. (“Union Drilling,” “Company” or “we”) provides contract land drilling services and equipment to oil and natural gas producers in the United States. The accompanying unaudited condensed financial statements relate solely to the accounts of Union Drilling, Inc. The interim period condensed financial statements, including the notes thereto, have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring adjustments) necessary for a fair presentation have been included. The results for interim periods are not necessarily indicative of results for a full year. These interim period condensed financial statements should be read in conjunction with the financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2011.

To conform to the presentation of the ~~June~~September 30, 2012 statement of cash flows, certain balances have been reclassified on the comparative ~~June~~September 30, 2011 statement.

On September 24, 2012, we entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Sidewinder Drilling Inc. (“Sidewinder”) and Fastball Acquisition Inc. (“Fastball”), a wholly-owned subsidiary of Sidewinder, under which Sidewinder will acquire all of the Company’s outstanding shares of common stock for $6.50 per share. The merger is expected to be consummated during the fourth quarter of 2012. On October 5, 2012, a tender offer was filed with the Securities and Exchange Commission by Sidewinder, detailing the purchase of the Company. The tender offer is set to expire at 12:00 midnight (New York time) at the end of the day on November 2, 2012, unless the tender offer is extended.

The Merger Agreement contains representations and warranties and covenants customary for a transaction of this nature, including a covenant of the Company to conduct its business in the ordinary course and not to take certain specified actions prior to consummation of the merger. The Merger Agreement can also be terminated by us or Sidewinder under certain other circumstances. In connection with certain terminations, we will be required to pay Sidewinder a termination fee equal to $5.0 million, and in connection with certain other terminations, Sidewinder will be required to pay us a termination fee equal to $10.0 million. Additionally, the Company will be required to pay the reasonable expenses of Sidewinder in an amount not to exceed $2.0 million in connection with certain terminations.

Beginning on October 3, 2012, two putative class action lawsuits were filed in the District Court of Tarrant County, Texas against the Company, its board of directors, Sidewinder and Fastball challenging the proposed transaction. The two actions, which have been consolidated under the caption In re Union Drilling, Inc. Shareholder Litigation, Cause No. 342-262036-12 (the “Consolidated Action”), allege that the Company's board of directors breached their fiduciary duties to the public shareholders of the Company by approving the proposed transaction and by failing to take steps to maximize the value of the Company, and that the Company, Sidewinder, and Fastball aided and abetted such breaches. The actions also allege that the Schedule 14D-9 filed by the Company on October 5, 2012 omitted certain material information. On October 18, 2012, the parties to the Consolidated Action reached an agreement in principle providing for the settlement of the action on the terms and conditions set forth in a memorandum of understanding, dated October 18, 2012 (the “MOU”). Pursuant to the MOU, the defendants made and publicly filed certain supplemental disclosures in an amendment to the Schedule 14D-9 in exchange for dismissal of the Consolidated Action on the merits and a customary release of defendants. The proposed settlement is conditioned on, among other things, consummation of the proposed transaction, completion of certain confirmatory discovery, class certification, and final approval by the Court following notice to the Company’s shareholders.

On October 19, 2012, another purported stockholder of the Company filed a lawsuit in the United States District Court for the Northern District of Texas, captioned Lewis. v. O'Neill, No: 3:12-cv-04213-G, against the same defendants who are named in the Consolidated Action. The lawsuit filed in federal court contains similar allegations as set forth in the Consolidated Action, and asserts individual and class action claims under state law and the Securities Exchange Act of 1934. On October 24, 2012, the parties to the federal action filed an agreed motion to stay that action pending the outcome of the final settlement hearing in the Consolidated Action. It is possible that other similar lawsuits may be filed, and following the consummation of the merger, would be the successor company’s liability.

During the three and nine months ended September 30, 2012, we incurred $1.4 million and $1.7 million of acquisition-related expenses that have been included in general and administrative expenses in the accompanying condensed statements of operations.

We periodically assess the need for an impairment of our property, buildings and equipment whenever events or changes in circumstances indicate that their carrying value may not be recoverable. We performed an impairment test at September 30, 2012, to determine whether our carrying value exceeds the estimated undiscounted future cash flows. Cash flows under a held and used methodology were estimated by management considering factors such as expectations of future industry trends and the impact on dayrates, utilization and operating expenses; historical performance of the asset; the remaining expected life of the asset; any cash investment required to make the asset more marketable; suitability, specification and size of the rig; and terminal value, as well as overall competitive dynamics. No impairment was required for the three and nine months ended September 30, 2012. Use of different assumptions could result in an impairment charge.

2.	Recent Accounting Pronouncements

In June 2011, ASU No. 2011-05, Comprehensive Income (Topic 220):; ~~Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs~~ was issued. ASU No. 2011-05 is intended to create consistency between U.S. GAAP and International Financial Reporting Standards (“IFRS”) on the definition of comprehensive income, and how to present comprehensive income. Under ASU No. 2011-5, for companies that report items of other comprehensive income, there is a requirement to present comprehensive income along with net income in either a single continuous statement or two separate but consecutive statements. Effective January 1, 2012, we adopted ASU No. 2011-05 which did not have an impact to our financial position or results of operation. There were no differences between comprehensive income (loss) and reported net income (loss) in the periods presented.

3.	Fair Value Measurement

The Fair Value Measurements and Disclosures Topic of the FASB Codification utilizes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three broad levels. The following is a brief description of those three levels:


Level 1:		Observable inputs such as quoted prices for identical assets or liabilities in active markets;

Level 2:		Other inputs that are observable directly or indirectly, such as quoted prices for similar assets or liabilities or market-corroborated inputs;

Level 3:		Unobservable inputs for which there is little or no market data and which require us to develop our own assumptions about how market participants would price the assets or liabilities.

We use the following methods and assumptions in estimating our fair value disclosures for financial instruments. The carrying amount of cash and cash equivalents approximates fair value due to the short-term maturity of these instruments. For accounts and other receivables, accounts payable, financed insurance premiums and accrued liabilities, we believe that recorded amounts approximate fair value due to the relatively short maturity period. Further, the pricing mechanisms in our debt agreements combined with the short-term nature of the equipment financing arrangements result in the carrying values of these obligations approximating their respective fair values.

We do not have any financial instruments for which estimates of fair value utilize Level 3 inputs.

4.	Accounts Receivable

Accounts receivable consist of the following (in thousands):

	June 30,2012			December 31,2011
	September 30,2012			December 31,2011
Billed receivables	$	4738,~~610~~709		$	45,320
Unbilled receivables		~~1,385~~860			1,743
Reserve for sales credits		(95148	)		(267	)
Total receivables		4839,~~900~~421			46,796
Allowance for doubtful accounts		(~~1,270~~538	)		(1,409	)
Net receivables	$	4738,~~630~~883		$	45,387

Unbilled receivables represent recorded revenue for contract drilling services performed that is billable by the Company at future dates based on contractual payment terms, and is anticipated to be billed and collected in the quarter following the balance sheet date. ~~The decrease in unbilled receivables at June 30, 2012 is due to timing of billings.~~

5.	Related Party Transactions

On March 9, 2012, we entered into a six month drilling contract with Jones Energy, Ltd. (“Jones”), an entity in which Metalmark Capital LLC has an equity ownership interest. Two managing directors of Metalmark Capital LLC are members of our Board of Directors and also serve on Jones’ Board of Directors. This drilling contract, which ended September 20, 2012, resulted in $~~1.5~~958,000 ~~million~~ and $12.8 7 million of revenue for the three and ~~six~~nine months ended ~~June~~September 30, 2012, respectively. The related accounts receivable balance with Jones at ~~June~~September 30, 2012, was $1725,000.2 ~~million.~~

6.	Property, Buildings and Equipment

Major classes of property, buildings and equipment are as follows (in thousands):

	June 30,2012			December 31,2011
	September 30,2012			December 31,2011
Land	$	1,935		$	1,935
Buildings		3,~~054~~058			2,921
Drilling and related equipment		~~473~~478,~~836~~646			448,715
Vehicles		1315,~~581~~198			12,484
Furniture and fixtures		190			190
Computer equipment		4,215			3,786
Information systems\		4,176			3,786
Leasehold improvements		126			126
Construction in progress		4950,~~867~~372			31,445
		546,804			501,602
		553,701			501,602
Accumulated depreciation		(~~231~~238,~~934~~709	)		(212,173	)
	$	314,~~870~~992		$	289,429

7For the three months ended September 30, 2012, additions to drilling equipment included $5.9 million in payments toward three new electric rigs, the first of which was placed into service in September 2012, the second of which was mobilizing at September 30, 2012, and the remaining rig is under construction and is expected to be delivered in November 2012. Other capital additions for the three months ended September 30, 2012, included generators, hydraulic catwalks, and topdrives, as well as other rig upgrades and capital additions.

~~For~~During the ~~three~~nine months ended ~~June~~September 30, 2012, additions to drilling equipment included progress payments of $1928.16 million ~~in progress~~toward ~~payments~~the ~~for~~purchase ~~three~~and ~~new~~construction ~~electric~~of ~~rigs~~four ~~under~~new ~~construction~~rigs, two of which ~~two~~were ~~are~~completed ~~expected~~and toplaced beinto ~~deployed~~service ~~during~~in the ~~third~~Fayetteville ~~quarter,~~ and Marcellus shales. Of the remaining two rigs, one ~~during~~was mobilizing as of September 30, 2012, and the ~~fourth~~remaining ~~quarter~~rig is under construction and expected to be delivered in November 2012. Other capital additions for the ~~three~~nine months ended ~~June~~September 30, 2012, included ~~a topdrive~~topdrives, mudpumps, generators and ~~iron~~hydraulic ~~roughnecks~~catwalks, iron roughnecks and drillpipe and collars as well as other rig upgrades and capital additions.

During the ~~six~~nine months ended ~~June~~September 30, 2012, ~~additions~~ toand ~~drilling~~2011, ~~equipment~~we ~~included~~capitalized ~~progress payments of~~ $~~27.6~~889,000 ~~million for the purchase~~ and ~~construction~~$402,000, ~~of four new rigs~~respectively, of ~~which~~interest ~~one~~costs ~~was~~incurred ~~completed and deployed to the Marcellus shale~~ during the ~~three~~construction ~~months~~periods ~~ended~~of ~~June 30,~~certain ~~2012.~~drilling ~~Of the remaining three rigs, two are expected to be deployed in August 2012 to the Fayetteville shale and one to the Marcellus shale in October 2012~~equipment. ~~Other capital additions for the three and six months ended June 30, 2012 included topdrives, mudpumps, iron roughnecks and drillpipe and collars, as well as other rig upgrades and capital additions.~~

During the six months ended June 30, 2012 and 2011, we capitalized $549,000 and $191,000, respectively, of interest costs incurred during the construction periods of certain drilling equipment.

7.	Accrued Expenses and Other Liabilities

A detail of accrued expenses and other liabilities is as follows (in thousands):

	June 30,2012		December 31,2011
	September 30,2012		December 31,2011
Payroll and bonus	$	53,~~098~~655	$	3,900
Workers’ compensation		12,~~869~~145		2,373
Medical claims		1,~~691~~628		1,099
Deferred revenue		1,265		1,925
Deferrred revenue		800		1,925
Other taxes		1,~~045~~238		483
Other		12,~~363~~146		1,031
	$	1211,~~331~~612	$	10,811

Other taxes include sales and use, franchise and property taxes.

8.	Debt Obligations

On April 27, 2011, we entered into an Amended and Restated Revolving Credit and Security Agreement with PNC Bank, for itself and as agent for a group of lenders (“Credit Facility”). The Credit Facility matures April 27, 2016 and provides for a borrowing base equal to $150 million. Amounts outstanding bear interest, depending upon facility usage, at either (i) the higher of the Federal Funds Open Rate plus 50 to 100 basis points or PNC Bank’s base commercial lending rate (4.0% at ~~June~~September 30, 2012) or (ii) LIBOR plus 225 to 275 basis points (2.757% at ~~June~~September 30, 2012). Interest on outstanding loans is due monthly for domestic rate loans and at the end of the relevant interest period for LIBOR loans. Depending upon our facility usage, we are assessed an unused line fee of 25 to 50 basis points on the available ~~borrowing~~ borrowing capacity, which was $4145.62 million at ~~June~~September 30, 2012. There is a $10.0 million sublimit for letters of credit issued under the Credit Facility. We will incur a prepayment penalty if the Credit Facility is terminated prior to April 2014 unless there is a change in control, such as the acquisition of the Company by Sidewinder, as more fully discussed in Note 1. As of ~~June~~ September 30, 2012, we had a loan balance of $~~104~~100.26 million under the Credit Facility, and an additional $4.2 million of the total capacity was utilized to support our letter of credit requirements.

In general, the Credit Facility is secured by substantially all of our assets. The forced liquidation value of our assets serving as collateral is determined at least annually by an independent appraisal, with adjustments for acquisitions and dispositions between appraisals. The Credit Facility contains affirmative and negative covenants and also provides for events of default typical for such an agreement. Among the affirmative covenants are requirements to maintain a specified tangible net worth. As of ~~June~~September 30, 2012, our actual tangible net worth was $~~186~~187.76 million compared to the required minimum tangible net worth of $~~158~~159.8 0 million. Among the negative covenants are restrictions on major corporate transactions, incurrence of indebtedness and amendments to our organizational documents. Events of default would include a change in control and any change in our operations or a condition which has a material adverse effect. As discussed in Note 1, the Company is expected to be acquired by Sidewinder during the fourth quarter of ~~June~~2012, and at closing, Sidewinder intends to repay all borrowings under the credit facility. As of September 30, 2012, we were in compliance with all of our covenants.

We use our Credit Facility to pay for rig acquisitions and for working capital requirements and it may also be used, subject to certain conditions, to repurchase our common stock and/or pay a cash dividend. See Note 10 for discussion of our share repurchase program.

In addition, the Company has entered into various equipment-specific financing agreements with various third-party financing institutions. The terms of these agreements have initial terms ranging from 2418 to 4824 months. As of ~~June~~September 30, 2012, and December 31, 2011, the total outstanding balance under these arrangements was approximately $~~339~~267,000 and $190,000, respectively, and is classified, according to payment date, in current portion of of notes payable for equipment and long-term notes payable for equipment in the accompanying balance sheets. At ~~June~~September 30, 2012, the stated interest rate on these borrowings is zero percent.

9.	Commitments and Contingencies

From time to time, we are a party to claims, litigation or other legal or administrative proceedings that we consider to arise in the ordinary course of our business. While no assurances can be given regarding the outcome of these or any other pending proceedings, or the ultimate effect such outcomes may have, we do not believe we are a party to any legal or administrative proceedings which, if determined adversely to us, individually or in the aggregate, would have a material effect on our financial position, results of operations or cash flows.

As of ~~June~~September 30, 2012, we have agreements with Integrated Drilling Equipment Holdings, Inc. for the construction and completion of ~~three~~two new electric rigs and the remaining commitment associated with ~~the~~these rigs, and related equipment, along with a withhold payment for the first rig, is approximately $115.23 million.

10.

Stockholders’ Equity

As of ~~June~~September 30, 2012, the number of authorized shares of common stock was 75,000,000 shares, of which 21,398,534 ~~shares~~ were outstanding, and 1,~~641~~604,~~744~~273 ~~shares~~ were reserved for future issuance through the Company’s equity based ~~compensation~~ plans. The number of authorized shares of preferred stock was 100,000 shares at ~~June~~September 30, 2012. No shares of preferred stock ~~were~~ were outstanding or reserved for future issuance.

InOn September 29, 2011, the Company’s Board of Directors approved the 2011 Union Drilling, Inc. Share Repurchase Program under which up to three million shares of the Company’s outstanding common stock may be repurchased. ~~For~~On ~~the three months ended~~ June 308, 2012, ~~715,991~~we ~~shares~~suspended ~~were~~this ~~repurchased~~repurchase atprogram; anas ~~average price~~such, ~~including~~ ~~commission,~~no ofshares ~~$4.84,~~were ~~and~~repurchased during ~~for~~ the ~~six~~three months ended ~~June~~September 30, 2012, and 1,749,582 shares were ~~purchased~~repurchased at an average price, including commission, of $5.25. Onfor ~~June 8,~~the ~~2012,~~nine wemonths ~~suspended~~ended ~~this~~September 30, ~~repurchase program~~2012.

910

11. Earnings/ (Loss) Per Common Share

Basic earnings (loss) per share is based on the weighted-average number of common shares outstanding during the period. Diluted earnings (loss) per share includes the dilutive effect of stock options and restricted stock.

The following table presents a reconciliation of the numerators and denominators of basic earnings per share and diluted earnings per share computations for the three months ended ~~June~~September 30, 2012, and September 30, 2011 when the Company’s stock compensation awards were not antidilutive (in thousands, except share and per share data):

	Three Months EndedJune 30, 2012
	Three Months EndedSeptember 30,
Net income	$	607
	2012		2011
Weighted average shares outstanding		21,717,540
Net income	$	486	$	617
Incremental shares from assumed conversion of stock options and RSU’s		237,790
Weighted average shares outstanding		21,398,534		23,191,345
Weighted average and assumed incremental shares		21,955,330
Incremental shares from assumed conversion of stock options and RSU’s		250,663		57,900
Earnings per share:
Weighted average and assumed incremental shares		21,649,197		23,249,245
Basic	$	0.03
Earnings per share:
Diluted	$	0.03
Basic	$	0.02	$	0.03
Diluted	$	0.02	$	0.03

Basic earnings per share have been computed by dividing net income by weighted average shares outstanding. ~~Diluted earnings per share have been computed by dividing net income by weighted average and assumed incremental shares.~~

~~Because~~Diluted weearnings ~~incurred a net loss in the six months ended June 30, 2012 and the three and six months ended June 30, 2011, basic and diluted loss~~ per share ~~for~~have ~~these~~been ~~periods~~computed ~~were~~by ~~calculated~~dividing ~~as our~~ net ~~loss~~income ~~divided~~ by ~~the~~ weighted average ~~shares outstanding. Approximately 155,000 weighted average options~~ and ~~restricted~~assumed ~~stock~~incremental ~~units to purchase~~ shares ~~of our common stock were excluded from the computation of diluted loss per share for the six months ended June 30, 2012 because the effect of including them would have been antidilutive~~. Similarly, during the three and six months ended June 30, 2011, 657,000 and 632,000 options and restricted stock units, respectively, were excluded from the computation of diluted loss per share because the effect of including them would have been antidilutive.

Approximately 1,198,000 and 630,000 weighted average options and restricted stock units to purchase shares of our common stock were excluded from the computation of diluted income per share for the three months ended September 30, 2012, and 2011, respectively, because the effect of including them would have been antidilutive.

Because we incurred a net loss in the nine months ended September 30, 2012, and September 30, 2011, basic and diluted loss per share for these periods were calculated as our net loss divided by the weighted average shares outstanding. Approximately 1,096,000 and 630,000 weighted average options and restricted stock units to purchase shares of our common stock were excluded from the computation of diluted loss per share for the nine months ended September 30, 2012, and 2011, respectively, because the effect of including them would have been antidilutive.

12.

Management Compensation

Equity based plans

The Company has two equity based compensation plans, the Amended and Restated 2000 Stock Option Plan and the Amended and Restated 2005 Stock Incentive Plan. Given that more than 10 years have elapsed since the approval of the 2000 Stock Option Plan, no future stock option awards can be made under this plan. In addition to grants of incentive and non-qualified stock options to directors and employees, restricted stock and restricted stock units may also be granted under the Amended and Restated 2005 Stock Incentive Plan.

For the three and six months ended June 30, 2012, the Company recorded stock-based compensation expense of $324,000 ($206,000, net of tax) and $647,000 ($410,000, net of tax), respectively, which is included in general and administrative expense. For the three and six months ended June 30, 2011, the Company recorded stock-based compensation expense of $333,000 ($221,000 net of tax) and $672,000 ($448,000 net of tax), respectively. Total unamortized stock-based compensation was $2.8 million at June 30, 2012, and will be recognized over a weighted average service period of 2.3 years.

Stock options. Options typically vest over a three or four year period and, unless earlier exercised or forfeited, expire on the tenth anniversary of the grant date. A summary of stock option activity for the six months ended June 30, 2012 is as follows:

	NumberofShares			WeightedAverageExercisePrice		WeightedAverageRemainingContractualTerm in Years		AggregateIntrinsicValue
Outstanding at January 1, 2012		895,091		$	9.80
Granted		25,000			5.22
Forfeited		(4,500	)		6.32
Outstanding at June 30, 2012		915,591		$	9.70		5.5	$	33,565
Options exercisable at June 30, 2012		732,485		$	10.56		4.9	$	33,565

The weighted average fair value of options granted during the three and six months ended June 30, 2012 was $3.47. The fair value of option grants is determined using the Black-Scholes option valuation model. The key input variables used in valuing these options were: risk free interest rate of 0.83%; stock price volatility of 84.97%; dividend yield of zero; and expected term of five years.

New shares of common stock are issued to satisfy options exercised. No stock options were exercised during the three and six months ended June 30, 2012.

A summary of options outstanding as of June 30, 2012, is as follows:

	Options Outstanding						Options Exercisable
Range of Exercise Prices	NumberOutstanding		WeightedAverage Yearsof RemainingContractualLife		WeightedAverageExercisePrice		NumberOutstanding		WeightedAverageExercisePrice
$3.80 to $9.89		457,936		6.8	$	5.89		274,830	$	5.67
$12.75 to $14.62		457,655		4.3	$	13.50		457,655	$	13.50
		915,591						732,485

Restricted stock awards. Restricted stock awards consist of restricted stock unit grants of our common stock and are time vested over three to seven years and for a certain award granted to our Chief Executive Officer (“CEO”) contain a performance requirement. We recognize compensation expense on a straight-line basis over the vesting period. The fair value of restricted stock unit awards is determined based on the closing price of our shares on the grant date. As of June 30, 2012, there was $2.3 million of total unrecognized compensation cost related to unvested restricted stock unit awards. The cost is expected to be recognized over a weighted average period of 2.5 years.

AsFor ofthe ~~June~~three and nine months ended September 30, 2012, ~~481,477~~the ~~restricted~~Company recorded stock-based ~~units~~compensation expense ~~were~~of ~~outstanding~~$328,000 at($209,000, anet ~~weighted~~of ~~average~~tax) ~~grant~~and ~~date fair~~$975,000 ~~value~~($618,000, net of ~~$12.37~~tax), ~~per~~respectively, ~~unit.~~which Nois ~~restricted~~included ~~stock~~in ~~units~~general ~~were~~and ~~granted~~administrative ~~during~~expense. For the three and ~~six~~nine months ended ~~June~~September 30, ~~2012~~2011, ~~and~~the noCompany ~~restricted~~recorded stock-based compensation ~~unit~~expense ~~awards~~of ~~vested.~~$318,000 ~~During~~($207,000 ~~the~~net ~~three~~of ~~months~~tax) ~~ended~~and ~~June 30~~$990,000 ~~2012~~($655,000 3net of tax),~~000~~ ~~restricted~~respectively. Total unamortized stock ~~units~~-based ~~were~~compensation ~~forfeited~~was $2.4 million at aSeptember 30, ~~weighted~~2012, ~~average~~and ~~grand~~will ~~date~~be ~~fair~~recognized ~~value~~over a weighted average service period of $72.100 years.

OfStock ~~the~~options. ~~outstanding~~Stock ~~restricted~~options ~~stock~~typically ~~unit~~vest ~~awards,~~over ~~200,000 restricted~~a ~~stock~~three ~~units~~or ~~are~~four ~~subject~~year toperiod ~~both~~and, ~~performance~~unless ~~and~~earlier ~~service~~exercised ~~criteria~~or forfeited, ofexpire ~~which~~on the ~~performance~~tenth ~~criteria~~anniversary ~~for~~of ~~50,000~~the ~~restricted~~grant date. A summary of stock ~~units~~option ~~were~~activity ~~vested~~for asthe ofnine ~~June~~months ended September 30, 2012. is as follows:


	Number of Shares			Weighted Average Exercise Price		Weighted Average Remaining Contractual Term in Years		Aggregate Intrinsic Value
Outstanding at January 1, 2012		895,091		$	9.80
Granted		25,000		$	5.22
Forfeited		(4,500	)	$	6.32

Outstanding at September 30, 2012		915,591		$	9.70		5.3	$	359,305

Options exercisable at September 30, 2012		749,735		$	10.46		4.8	$	293,125

The weighted average fair value of options granted during the nine months ended September 30, 2012 was $3.47. The fair value of option grants is determined using the Black-Scholes option valuation model. The key input variables used in valuing these options were: risk free interest rate of 0.83%; stock price volatility of 84.97%; dividend yield of zero; and expected term of five years. No options were granted during the three months ended September 30, 2012 and no options were granted during the three and nine months ended September 30, 2011.

New shares of common stock are issued to satisfy options exercised. No stock options were exercised during the three and nine months ended September 30, 2012. During the three and nine months ended September 30, 2011, zero and 9,000 options, respectively, were exercised. Cash received from the exercise of options for the nine months ended September 30, 2011 was $57,000. The total intrinsic value of options exercised during the nine months ended September 30, 2011 was $29,000.

A summary of options outstanding as of September 30, 2012, is as follows:


	Options Outstanding						Options Exercisable
Range of Exercise Prices	Number Outstanding		Weighted Average Years of Remaining Contractual Life		Weighted Average Exercise Price		Number Outstanding		Weighted Average Exercise Price
$3.80 to $9.89		457,936		6.5	$	5.89		292,080	$	5.71
$12.75 to $14.62		457,655		4.0	$	13.50		457,655	$	13.50

		915,591						749,735

Restricted stock awards. Restricted stock awards consist of restricted stock unit grants of our common stock and are time vested over three to seven years and for a certain award granted to our Chief Executive Officer (“CEO”) contain a performance requirement. We recognize compensation expense on a straight-line basis over the vesting period. The fair value of restricted stock unit awards is determined based on the closing price of our shares on the grant date. As of September 30, 2012, there was $2.0 million of total unrecognized compensation cost related to unvested restricted stock awards. The cost is expected to be recognized over a weighted average period of 2.2 years.

As of September 30, 2012, 367,000 restricted stock units were outstanding, at a weighted average grant date fair value of $12.37 per unit. No restricted stock units were granted during the three and nine months ended September 30, 2012, and no restricted stock unit awards vested. During the nine months ended September 30, 2012, 3,000 restricted stock units were forfeited at a weighted average grand date fair value of $7.10.

Of the outstanding restricted stock unit awards, 200,000 restricted stock units are subject to both performance and service criteria, of which the performance criteria for 50,000 restricted stock units were vested as of September 30, 2012.

As part of the Merger Agreement, as more fully described in Note 1, all outstanding stock options and restricted stock units will be cancelled. In consideration for this cancellation, each option holder will receive an amount in cash, for each share of the Company’s common stock subject to an option outstanding at the time of the merger’s completion, equal to the product obtained by multiplying (x) the aggregate number of shares underlying each stock option held by an option holder and (y) $6.50, less the per share exercise price for such option; each restricted stock unit holder will receive $6.50 per outstanding restricted stock unit.

Employee retirement plan

The Company has a 401(k) plan available to all eligible employees. Company contributions to the plan are discretionary. The Company made matching cash contributions of $~~111~~107,000 and $~~187~~294,000 for the three and ~~six~~nine months ended ~~June~~September 30, 2012, respectively, and $87105,000 and $~~175~~279,000 during the three and ~~six~~ nine months ended ~~June~~September 30, 2011, respectively.

13.

Income Taxes

Income tax expense for the three months ended ~~June~~September 30, 2012, was $~~382~~907,000, ~~which~~at ~~represented~~ an effective tax rate of 3965.1% of pre-tax ~~book~~ book income. Income tax ~~benefit~~expense for the ~~six~~nine months ended ~~June~~September 30, 2012, was $~~256~~651,000, ~~which~~at ~~represented~~ an effective rate of 14(138.5)% of pre-tax book loss. Income tax ~~benefit~~expense for the three ~~and six~~ months ended ~~June~~September 30, 2011, was $~~577~~400,000, ~~and~~which ~~$2.5~~represented ~~million~~an effective rate of (184.3)% of pre-tax book income. Income tax benefit for the nine months ended September 30, ~~respectively~~2011, was $2.9 million which represented an effective rate of 1428.3% ~~and 24%, respectively,~~ of pre-tax book loss. These rates differ from the statutory rate of 35% primarily due to state income taxes, permanent book/tax differences such as those associated with the 50% deduction limitation on ~~our~~ per diem payments ~~to field personnel~~ for meals, and non-cash compensation.

At ~~June~~ September 30, 2012, and December 31, 2011, we did not have any unrecognized tax benefits.

Interest and penalties related to uncertain tax positions are classified as interest expense and general and administrative expenses, respectively. There were no interest and penalties related to uncertain tax positions for the three or nine months ended September 30, 2012. During the three and nine months ended September 30, 2011, the Company recognized interest cost reversals of $22,500 and $17,500 in interest expense, respectively, related to unrecognized tax benefits.

The Company files U.S. federal income tax returns and income tax returns in various state jurisdictions. The tax years 2006 to 2011 remain open to examination by the major taxing jurisdictions to which we are subject. In addition, tax years 1999, 2000, 2002 and 2003 remain open due to utilized losses in some jurisdictions.

1213

ITEM 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

This management’s discussion and analysis of financial condition and results of operations (“MD&A”) section of our Quarterly Report on Form 10-Q discusses our results of operations, liquidity and capital resources, and certain factors that may affect our future results, including economic and industry-wide factors. You should read this MD&A in conjunction with our condensed financial statements and accompanying notes included under Part I, Item 1, of this Quarterly Report, as well as with our Annual Report on Form 10-K for the fiscal year ended December 31, 2011.

Statements we make in the following MD&A discussion and in other parts of this report that express a belief, expectation or intention, as well as those which are not historical fact, are forward-looking statements within the meaning of the federal securities laws and are subject to risks, uncertainties and assumptions. These forward-looking statements may be identified by the use of words such as “expect,” “anticipate,” “believe,” “estimate,” “potential” or similar words. These matters include statements concerning management’s plans and objectives relating to our operations or economic performance and related assumptions, including general economic and business conditions and industry trends, the continued strength or weakness of the contract land drilling industry in the geographic areas in which we operate, decisions about onshore exploration and development projects to be made by oil and gas companies, the highly competitive nature of our business, our future financial performance, including availability, terms and deployment of capital, the continued availability of qualified personnel, and changes in, or our failure or inability to comply with, government regulations, including those relating to workplace safety and the environment. Although we believe that the expectations reflected in these forward-looking statements are reasonable, we can give no assurance that such expectations will prove to have been correct. Further, we specifically disclaim any duty to update any of the information set forth in this report, including any forward-looking statements. Forward-looking statements are made based on management’s current expectations and beliefs concerning future events and, therefore, involve a number of assumptions, risks and uncertainties, including the risk factors described in Part II. Item 1A, “Risk Factors,” below. Management cautions that forward-looking statements are not guarantees, and our actual results could differ materially from those expressed or implied in the forward-looking statements.

Company Overview

Union Drilling, Inc. (“Union Drilling,” “Company” or “we”) provides contract land drilling services and equipment, primarily to oil and natural gas producers in the United States. In addition to drilling rigs, we provide the drilling crews and most of the ancillary equipment needed to operate our drilling rigs.

WeOn ~~provide~~September 24, ~~drilling~~2012, ~~services~~we toentered ~~customers~~into ~~engaged~~an inAgreement ~~developing oil~~ and ~~natural~~Plan ~~gas bearing formations in selected areas~~ of Merger (the ~~United~~“Merger ~~States.~~Agreement”) ~~Our~~with ~~strategy~~Sidewinder isDrilling toInc. ~~focus~~(“Sidewinder”) ~~on areas that have high growth potential, adequate takeaway capacity~~ and ~~low~~Fastball ~~finding~~Acquisition ~~and development costs in order to maximize utilization and return on capital throughout the commodity price cycle~~Inc. ~~Since the global economic crisis in 2008~~(“Fastball”), ~~oil~~a ~~prices~~wholly-owned ~~have~~subsidiary ~~rebounded while natural gas prices have not. Due to the divergence~~ of ~~oil and natural gas prices~~Sidewinder, ~~many~~under ofwhich ~~our~~Sidewinder ~~customers~~will ~~have~~acquire ~~shifted their~~all ~~investments to oil and liquids-rich plays; accordingly, many~~ of the Company’s ~~rigs~~outstanding inshares ~~our~~of ~~fleet~~common ~~have~~stock ~~been~~for ~~repositioned~~$6.50 ~~and~~per ~~are now concentrated in those oil and liquids-rich areas~~share. ~~Our~~See ~~principal~~Note ~~operations~~1 ~~are~~“Business ~~in the Appalachian Basin, extending from New York to Tennessee including the Marcellus, Huron,~~ and ~~Utica~~Basis ~~shales;~~of ~~the~~Presentation” ~~Arkoma~~of ~~Basin in eastern Oklahoma and Arkansas, including~~ the ~~Fayetteville,~~unaudited ~~Caney,~~condensed ~~and~~financial ~~Woodford~~statements ~~shales;~~for ~~the~~further ~~Fort Worth Basin in North Texas, including the Barnett Shale and in West Texas extending to southeastern New Mexico, the Permian and Delaware Basins~~information. ~~Beginning in early 2012, we have expanded into the Mississippian oil plays in central Oklahoma and southern Kansas.~~

We specialize in shallow to deep horizontal drilling in select oil and gas producing basins of the United States. The emergence of shale plays, the application of new technologies to traditional basins, and the influx of investments in plays in the United States from the major and large independent E&P companies have all resulted in more complex drilling and customers who demand superior safety and efficiency. We have met these demands through investments in equipment designed for horizontal drilling, as well as investments in our people and processes to improve drilling productivity and safety, and reduce total well costs for our customers.

We commenced operations in 1997 with 12 drilling rigs and related equipment acquired from an entity providing contract drilling services under the name “Union Drilling.” Since 2006, we have placed 30 new rigs into service and have an additional three new rigs scheduled to be delivered and deployed in 2012. Moreover, to better focus on safety and operational efficiency, we have upgraded many of our rigs with automation and other modern features designed for horizontal drilling, including adding top drives, pad drilling and skidding systems, larger circulating systems and automated pipe handling systems. Accordingly, our marketed rig fleet at June 30, 2012, contains 50 land drilling rigs, demonstrating our commitment to provide premium, modern rigs and experienced, knowledgeable crews to the major and large independent E&P companies.

Key Indicators of Financial Performance for Management

Key performance measurements in our industry are rig utilization, revenue per revenue day and operating expenses per revenue day. Revenue days for each rig are days when the rig is earning revenues under a contract, which is usually a period from the date the rig begins moving to the drilling location until the rig is released from the contract. We compute rig utilization rates by dividing revenue days by total available days during a period. Total available days are the number of calendar days during the period that we have owned and marketed the drilling rig.

The following table summarizes management’s key indicators of financial performance.

	Three Months EndedJune 30,						Six Months Ended June 30,
	Three Months EndedSeptember 30,						Nine Months EndedSeptember 30,
	2012			2011			2012			2011
Revenue days		3,~~554~~335			3,~~516~~868			710,~~094~~429			610,~~979~~847
Average number of marketed rigs		50.3			7170.8			50.0			7170.9
Marketed rig utilization rates		7872.10	%		5459.4	%		7776.74	%		5456.30	%
Revenue per revenue day	$	19,~~160~~179		$	17,~~043~~255		$	18,~~708~~859		$	16,~~610~~840
Operating expenses per revenue day	$	1312,~~503~~606		$	1211,~~491~~754		$	13,~~501~~215		$	12,~~393~~165
Drilling margin per revenue day	$	56,~~657~~573		$	45,~~552~~501		$	5,~~207~~644		$	4,~~217~~675
EBITDA (000’s)	$	13,306		$	9,073		$	23,121		$	15,523
EBITDA (in thousands)	$	13,755		$	14,745		$	36,876		$	30,268

Our business is substantially dependent on and affected by the level of U.S. land-based oil and natural gas exploration and development activity. Since the global economic crisis in 2008, oil prices have rebounded while natural gas prices have not. Since that time, we experienced improvement in our marketed rig utilization rates as well as improvement in our revenue per revenue day due to upgrades in our drilling fleet, and a shift to oil drilling. Our operating expenses per revenue day have also increased due to more complex drilling required for unconventional and shale plays, higher wages ~~and headcount~~ across certain of our markets, an enhanced focus on retention and safety initiatives, and in 2012, as a result of certain relocation costs, as several of our rigs transitioned from primarily natural gas drilling to oil and liquids-rich areas.

Average number of marketed rigs represents the average number of rigs we owned and marketed during the period. On September 15, 2011, we sold a marketed rig in a private transaction. Additionally, during December 2011, we sold 20 of our marketed rigs in an auction, which decreased the number of our marketed rigs at December 31, 2011 to 50.

EBITDA is earnings before net interest, income taxes, depreciation and amortization and non-cash impairment. We believe EBITDA is a useful measure in evaluating financial performance because it is used by external users, such as investors, commercial banks, research analysts and others, to assess: (1) the financial performance of Union Drilling’s assets without regard to financing methods, capital structure or historical cost basis, (2) the ability of Union Drilling’s assets to generate cash sufficient to pay interest costs and support its indebtedness, and (3) Union Drilling’s operating performance and return on capital as compared to those of other entities in our industry, without regard to financing or capital structure. EBITDA is not a measure of financial performance under generally accepted accounting principles. However, EBITDA is a common alternative measure of operating performance used by investors, financial analysts and rating agencies. A reconciliation of EBITDA to net earnings is included below. EBITDA as presented may not be comparable to other similarly titled measures reported by other companies (in thousands).


	Three Months Ended September 30,					Nine Months Ended September 30,
	2012		2011			2012			2011
Calculation of EBITDA:
Net income (loss)	$	486	$	617		$	(1,121	)	$	(7,413	)
Impairment charge		—		808			—			808
Interest expense, net		532		392			1,534			1,059
Income tax expense (benefit)		907		(400	)		651			(2,926	)
Depreciation and amortization		11,830		13,328			35,812			38,740

EBITDA	$	13,755	$	14,745		$	36,876		$	30,268

	Three Months Ended June 30,					Six Months Ended June 30,
	2012		2011			2012			2011
Calculation of EBITDA:
Net income (loss)	$	607	$	(3,433	)	$	(1,607	)	$	(8,029	)
Interest expense, net		552		280			1,002			667
Income tax expense (benefit)		382		(577	)		(256	)		(2,527	)
Depreciation and amortization		11,765		12,803			23,982			25,412
EBITDA	$	13,306	$	9,073		$	23,121		$	15,523

Drilling margin represents contract drilling revenues less contract drilling costs. We believe that drilling margin is a useful measure for evaluating financial performance, although it is not a measure of financial performance under generally accepted accounting principles. However, drilling margin is a common measure of operating performance used by management, investors and financial analysts. A reconciliation of drilling margin to operating income is included below. Drilling margin as presented may not be comparable to other similarly titled measures reported by other companies (in thousands, except day and per day data).

	Three Months EndedJune 30,					Six Months Ended June 30,
	Three Months EndedSeptember 30,					Nine Months EndedSeptember 30,
	2012		2011			2012			2011
Calculation of drilling margin:
Operating income (loss)	$	~~877~~1,836	$	~~(4,045~~122	)	$	(~~2,020~~184	)	$	(10,~~487~~364	)
Depreciation and amortization		11,~~765~~830		1213,~~803~~328			2335,~~982~~812			2538,~~412~~740
General and administrative		7,465		7,248			14,977			14,501
Impairment charge		—		808			—			808
Drilling margin	$	20,107	$	16,006		$	36,939		$	29,426
General and administrative		8,257		7,023			23,234			21,523
Revenue days		3,554		3,516			7,094			6,979
Drilling margin	$	21,923	$	21,281		$	58,862		$	50,707
Drilling margin per revenue day	$	5,657	$	4,552		$	5,207		$	4,217
Revenue days		3,335		3,868			10,429			10,847
Drilling margin per revenue day	$	6,573	$	5,501		$	5,644		$	4,675

Critical Accounting Policies and Estimates

Our accounting policies that are critical or the most important to understand our financial condition and results of operations and that require management to make the most difficult judgments are described in our 2011 Annual Report on Form 10-K. There have been no material changes in these critical accounting policies.

Results of Operations

Our operations primarily consist of drilling oil or natural gas wells for our customers under either daywork contracts and, to a much lesser extent, footage contracts. The contract terms we offer generally depend on the location, depth and complexity of the well to be drilled; the on-site drilling conditions; the type of equipment used; the duration of the work to be performed; and the competitive forces of the market. In most instances, our contracts provide for additional payments related to rig mobilization and demobilization, as well as reimbursement of certain out-of-pocket costs.

Statements of Operations Analysis

The following table provides selected information about our operations (in thousands).

	Three Months EndedJune 30,						Six Months Ended June 30,
	Three Months EndedSeptember 30,						Nine Months EndedSeptember 30,
	2012			2011			2012		2011
Revenues	$	6863,~~095~~963		$	5966,~~924~~744		$	~~132~~196,~~715~~678	$	~~115~~182,~~919~~663
Operating expenses		4742,~~988~~040			4345,~~918~~463			95137,~~776~~816		86131,~~493~~956
Depreciation and amortization		11,~~765~~830			1213,~~803~~328			2335,~~982~~812		2538,~~412~~740
General and administrative expense		7,465			7,248			14,977		14,501
Impairment		—			808			—		808
Interest expense, net		552			280			1,002		667
General and administrative expenses		8,257			7,023			23,234		21,523
Other income and gain on disposal of assets		664			315			1,159		598
Interest expense, net		532			392			1,534		1,059
Income tax (expense) benefit		(382	)		577			256		2,527
Other income (loss) and gain (loss) on disposal of assets		89			487			1,248		1,084
Income tax expense (benefit)		907			(400	)		651		(2,926	)

Revenues. Our revenues during the three and six months ended June 30, 2012 compared to the same periods in 2011, increased $8.2 million, or 14%, and $16.8 million, or 14%, respectively. The increase in revenues was primarily attributable to the increase in dayrates and increased utilization. During the three months ended June 30, 2012, average dayrates were $19,160 compared to $17,043 during the same period in 2011; and during the six months ended June 30, 2012, average day rates were $18,708 compared to $16,610 during the same period in 2011. Average day rates increased during the three and six months ended June 30, 2012 compared to the same periods in 2011 due to the addition of three new rigs during 2011, and one new rig during 2012. These rigs had a higher average dayrate and utilization than certain operating rigs in 2011; additionally, we sold certain smaller rigs in an auction held in December 2011. We also realized pricing improvements in Texas due to market conditions, as well as slight increases in revenue days and utilization in Texas and Appalachia.

Operating expenses. Our operating expenses during the three and six months ended June 30, 2012 compared to the same periods in 2011, increased $4.1 million, or 9%, and $9.3 million, or 11%, respectively. The increase in operating expenses was primarily due to the increase in operating costs per day, and to a lesser extent, higher utilization. Operating costs per day were $13,503 compared to $12,491 for the three months ended June 30, 2012 and 2011, respectively, and $13,501 compared to $12,393 for the six months ended June 30, 2012 and 2011, respectively. The increase in operating costs per day for the three and six months ended June 30, 2012 and 2011, were due to higher employment costs, increased costs related to safety initiatives, retention efforts and training costs, and as a result of certain relocation costs as several of our rigs transitioned to oil and liquids rich areas.

Depreciation and amortization. The decrease in depreciation and amortization expense during the three and six months ended June 30, 2012 compared to the same periods in 2011 was due to the disposition of assets in an auction held in December 2011.

General and administrative expenses. Our general and administrative expenses during the three and six months ended June 30, 2012 compared to the same periods in 2011 increased $217,000, or 3%, and $476,000, or 3%, respectively. These increases were primarily attributable to higher employment costs due to increased wages and increased property tax expense.

Interest expense, net. The increase in interest expense for the three and six months ended June 30, 2012 compared to the same periods in 2011 was primarily attributable to the increase in the average outstanding balance of our revolving credit facility primarily in support of our rig building program.

~~Other income and gain on disposal of assets~~Revenues. ~~Other~~Our ~~income~~revenues ~~and~~decreased ~~gain on disposal of assets increased~~ by $~~349~~2.8 million,~~000~~ ~~and~~or ~~$561~~4%,~~000~~ ~~for~~during the three ~~and six~~ months ended ~~June~~ September 30, 2012, ~~respectively,~~ compared to the same ~~periods~~period in 2011. ~~These~~This ~~increases~~decrease ~~were~~was primarily due todecreased ~~the~~utilization, ~~sale~~given ofthe adecline ~~marketed~~in ~~rig~~natural ~~and~~gas ~~other~~prices, ~~related~~as ~~assets~~revenue indays andecreased ~~auction~~to 3,335 during the three months ended ~~June~~September 30, 2012 from 3,868 ~~and~~during the ~~sales~~same ofperiod ~~marketed~~in ~~rigs~~2011. ~~and~~This ~~other~~decrease ~~related~~was ~~assets~~offset by an increase in arevenue ~~private~~per ~~transaction~~revenue day to $19,179 during the ~~six~~three months ended ~~June~~September 30, 2012., ~~There~~from ~~were~~$17,255 nofor ~~such~~the ~~rig~~same ~~sales~~period ~~during~~in 2011, primarily due to the addition of three new rigs in 2011 and ~~six~~two ~~months~~new ~~ended June 30,~~rigs in 2012. These rigs had a higher average dayrate than certain operating rigs in 2011.

~~Income~~The ~~tax (expense) benefit~~$14.0 million, ~~The~~or 8%, increase in ~~income~~revenues ~~tax~~for ~~expense~~the ~~during~~nine months ended September 30, 2012, compared to the ~~three~~nine months ended ~~June~~ September 30, ~~2012~~ 2011, ~~and~~was due to the ~~decrease~~increase in ~~income~~dayrates. ~~tax~~Dayrates ~~benefit~~increased ~~for~~to $18,859 during the ~~six~~nine months ended ~~June~~ September 30, 2012, asfrom ~~compared~~$16,840 toduring the same ~~periods~~period in 2011,. ~~was~~Revenue ~~primarily~~per ~~due~~revenue today ~~net~~increased ~~income~~due ~~during~~to the ~~three~~addition ~~months~~of ~~ended~~three ~~June~~new ~~30,~~rigs ~~2012~~in 2011 and ~~the~~two ~~decrease~~new rigs in ~~pre-tax~~2012. ~~loss~~These ~~for~~rigs ~~the six~~had ~~months~~a ~~ended~~higher ~~June~~average ~~30,~~dayrate ~~2012.~~than ~~Our~~certain ~~effective~~operating ~~income~~rigs ~~tax~~in 2011; ~~rate~~additionally, ofwe ~~39%~~sold ~~and~~certain ~~14%~~smaller ~~for~~rigs ~~the~~in ~~three~~an ~~and~~auction ~~six~~held ~~months~~in ~~ended~~December ~~June 30,~~2011. ~~2012,~~This ~~respectively,~~increase ~~differs~~was ~~from~~partially ~~the~~offset ~~federal~~by ~~statutory~~a ~~rate~~decrease ofin ~~35%~~utilization ~~due~~as torevenue ~~state~~days ~~income~~decreased ~~taxes~~to ~~and~~10,429 ~~permanent~~from ~~book/tax differences~~10,847 ~~such~~during ~~as those associated with~~ the ~~50%~~nine ~~deduction~~months ~~limitation~~ended onSeptember 30, 2012, ~~per~~compared ~~diem~~to ~~meals~~the ~~expense~~same ~~and~~period ~~stock-based~~in ~~compensation~~2011, respectively.

Operating expenses. Our operating expenses decreased by $3.4 million or 8%, during the three months ended September 30, 2012, compared to the same period in 2011, due to the decrease in utilization, as described above. This decrease was offset by an increase in operating costs per day to $12,606 for the three months ended September 30, 2012, from $11,754 for the three months ended September 30, 2011. The increase was due to higher employment costs, safety initiatives, retention and training costs.

Our operating expenses increased $5.9 million or 4% during nine months ended September 30, 2012, compared to the same periods in 2011, due to the increase in operating costs per day. Operating costs per day increased to $13,215 for the nine months ended September 30, 2012, compared to $12,165 during the nine months ended September 30, 2011. The increase was primarily due to higher employment costs, increased costs related to safety initiatives, retention efforts and training costs, and as a result of certain relocation costs as several of our rigs transitioned to oil and liquids rich areas.

Depreciation and amortization. The decrease in depreciation and amortization expense during the three and nine months ended September 30, 2012, compared to the same periods in 2011, was due to the disposition of assets in an auction held in December 2011.

Impairment. There was no impairment during the three and nine months ended September 30, 2012. The impairment during the three and nine months ended September 30, 2011, was due to the decision in 2011 to auction certain of our older, smaller rigs.

General and administrative expenses. Our general and administrative expenses during the three and nine months ended September 30, 2012, compared to the same periods in 2011, increased $1.2 million, or 17%, and $1.7 million, or 8%, respectively. These increases were primarily attributable to legal and advisory costs related to the acquisition of Union Drilling by Sidewinder, as more fully described in “Company Overview.” Additionally, increases to general and administrative expenses include higher employment costs due to increased wages and increased property tax expense.

Interest expense, net. The increase in interest expense for the three and nine months ended September 30, 2012, compared to the same periods in 2011, was primarily attributable to the increase in the average outstanding balance of our revolving credit facility primarily in support of our rig building program.

Other income and gain (loss) on disposal of assets. Other income (loss) and gain (loss) on disposal of assets decreased by $398,000 for the three months ended September 30, 2012, compared to the same period in 2011, due to the sale of a marketed rig in a private transaction during the three months ended September 30, 2011. There were no such sales during the three months ended September 30, 2012.

Other income (loss) and gain (loss) on disposal of assets increased by $164,000 during the nine months ended September 30, 2012, compared to the same period in 2011, due to various sales of equipment.

Income tax expense (benefit). The increase in income tax expense during the three months ended September 30, 2012, and the decrease in income tax benefit for the nine months ended September 30, 2012, as compared to the same periods in 2011, was primarily due to a change in the effective tax rate, and the decrease in pre-tax loss for the nine months ended September 30, 2012. Our effective income tax rate of 65.1% and (138.5)% for the three and nine months ended September 30, 2012, respectively, differs from the federal statutory rate of 35% due to state income taxes and permanent book/tax differences such as those associated with the 50% deduction limitation on per diem meals expense and stock-based compensation.

Liquidity and Capital Resources

Our operations have historically generated sufficient cash flow to meet our requirements for debt service and equipment expenditures (excluding major business and asset acquisitions). Cash flow provided by operating activities during the first ~~six~~nine months of 2012 was $2042.81 million compared to $1325.79 million during the first ~~six~~nine months of 2011. This increase in cash flow from operating activities was primarily due to the decrease in net loss and the timing collections of accounts receivables.

Our cash flow from operations was primarily used to invest in new ~~machinery and~~ equipment.

During the first nine ~~six~~ months of 2012 and 2011, cash used in investing activities totaled $4965.90 million and $3565.84 million, respectively. During the ~~six~~nine months ended ~~June~~September 30, 2012, additions to drilling equipment included progress payments of $2728.6 million toward ~~for~~ the purchase and construction of four new rigs, ~~one~~ of which ~~was~~two were completed and ~~deployed to~~placed ~~the~~into ~~Marcellus~~service ~~shale~~in ~~during~~ the ~~three~~Fayetteville ~~months~~and ~~ended~~Marcellus ~~June 30, 2012~~shales. Of the remaining ~~three~~two rigs, ~~two~~one ~~are~~was ~~expected~~mobilizing toas beof ~~deployed~~September 30, ~~in August~~ 2012 toand the ~~Fayetteville~~remaining ~~shale~~rig is under construction and ~~one~~expected to ~~the~~be ~~Marcellus~~delivered ~~shale~~ in ~~October~~November 2012. Other capital additions for the ~~three~~nine ~~and six~~ months ended ~~June~~September 30, 2012, included topdrives, mudpumps, generators and hydraulic catwalks, iron roughnecks and drillpipe and collars, as well as other rig upgrades and capital additions. As of June 30, 2012, we have agreements with Integrated Drilling Equipment Holdings, Inc. for the construction of three new electric rigs and the remaining commitment associated with the rigs and related equipment is approximately $11.2 million.

~~The~~During ~~six~~the nine months ended ~~June~~September 30, 2011, additions to drilling equipment included progress payments of $23.6 million for four new rigs and payments of $5.3 million for the purchase of a ~~new~~ 1,000 hp mechanical rig which deployed during June 2011. Other capital additions for the nine months ended September 30, 2011 included topdrives, mudpumps, iron roughnecks and ~~$12.7~~drillpipe ~~million~~and ~~related~~collars, toas well as other rig upgrades and ~~initial~~capital ~~construction~~additions. ~~costs~~Additionally, ~~for~~during ~~two~~the nine months ended September 30, 2011, the Company also purchased office buildings, rig yards 1and surrounding land in West Texas and Arkansas for $800,000 hpand ~~mechanical~~$1.2 ~~rigs~~million, respectively.

Cash flow provided by financing activities was $2922.19 million in the first ~~six~~nine months of 2012, compared to $2939.8 5 million of cash flow provided by financing activities for the first ~~six~~nine months of 2011. During the ~~six~~nine months ended ~~June~~September 30, 2012, we purchased 1,749,582 shares of our common stock for $9.2 million under a share repurchase program. On June 8, 2012, we suspended this program.

We believe cash generated by our operations and our ability to borrow the currently unused portion of our revolving credit facility of $4145.62 million at September 30, 2012, after reductions for approximately $4.2 million outstanding letters of credit, ~~as of June 30, 2012~~ should allow us to meet our routine financial obligations for the foreseeable future.

Sources of Capital Resources

Our rig fleet has grown from 12 rigs in 1997 to 5051 marketed rigs at ~~June~~September 30, 2012. We have financed this growth with a combination of debt ~~and~~ and equity financing, as well as operating cash flows. At ~~June~~September 30, 2012, our total debt to total capital was 3635%.

See Note 8 “Debt Obligations” of the unaudited condensed financial statements for information on the Company’s debt agreements as sources of capital resources, such information being incorporated herein by reference.

1718

Uses of Capital Resources

For the three and ~~six~~nine months ended ~~June~~September 30, 2012, and 2011, the additions to our property and equipment consisted of the following (in thousands):

	Three Months EndedJune 30,						Six Months Ended June 30,
	Three Months EndedSeptember 30,						Nine Months EndedSeptember 30,
	2012			2011			2012			2011
Land	$	72		$	1,997		$	72		$	1,997
Land and buildings	$	200		$	157		$	371		$	2,224
Buildings and furniture and fixtures		126			69			126			69
Drilling and related equipment		12,271			28,555			61,449			65,817
Drilling and related equipment		28,872			22,931			49,178			37,262
Vehicles		445			487			1,883			1,933
Vehicles		1,322			788			1,438			1,446
Furniture and fixtures		13			—			40			—
Information systems		—12			83336			~~133~~145			~~145~~481
Property and equipment additions		3012,~~392~~941			2529,~~868~~535			5063,~~947~~888			4070,~~919~~455
Plus adjustments for non-cash transactions:
Cash paid in current period for prior period accruals		65,~~806~~815			2,~~860~~869			6,006			2,616
Current period accruals		(52,~~815~~777	)		(6,~~957~~100	)		(52,~~815~~777	)		(6,~~957~~100	)
Cash used for purchases of machinery and equipment	$	3115,~~383~~979		$	2126,~~771~~304		$	5167,~~138~~117		$	3666,~~578~~971

For the three months ended ~~June~~September 30, 2012, additions to drilling equipment included $195.19 million in progress payments for ~~three new electric~~ rigs under construction~~, of which two are expected to be deployed during the third quarter, and one during the fourth quarter~~. Other capital additions for the three months ended ~~June~~September 30, 2012, included ~~a topdrive,~~generators ~~mudpumps,~~ and ~~iron~~hydraulic ~~roughnecks~~catwalks, as well as other rig upgrades and capital additions.

During the ~~six~~nine months ended ~~June~~September 30, 2012, additions to drilling equipment included ~~progress~~ payments of $2728.6 ~~million~~ for ~~the purchase and construction of four new~~ rigs, ~~one~~under ~~of which was completed and deployed to the Marcellus shale during the three months ended June 30, 2012~~construction. ~~Of the remaining three rigs, two are expected to be deployed in August 2012 to the Fayetteville shale and one to the Marcellus shale in October 2012.~~ Other capital additions for the ~~six~~nine months ended ~~June~~September 30, 2012, included ~~topdrives~~top drives, mudpumps, iron roughnecks, generators, hydraulic catwalks and drillpipe and collars, as well as other rig upgrades and capital additions.

For the three months ended ~~June~~September 30, 2011, additions to drilling equipment included payments of $819.0 million for ~~upgrades~~rigs ~~and~~under ~~initial~~ construction ~~costs of three mechanical rigs~~. Other capital additions for the three ~~and six~~ months ended ~~June~~September 30, 2011, included rig enhancements, such as top drives, ~~and pad~~mud ~~drilling~~pumps ~~packages~~and drawworks, as well as drillpipe ~~and~~as ~~other~~well ~~capital~~as ~~maintenance.~~other ~~Additionally, during the three months ended June 30, 2011, the Company purchased office buildings,~~ rig ~~yards~~upgrades and ~~surrounding~~capital ~~land in West Texas and Arkansas for $800,000 and $1~~additions.2 ~~million, respectively.~~

~~The~~During ~~six~~the nine months ended ~~June~~September 30, 2011, additions to drilling equipment included progress payments of $523.36 million for rigs under construction. Other capital additions for the ~~purchase~~nine ofmonths aended ~~new mechanical~~September 30, ~~rig~~2011 included topdrives, mudpumps, iron roughnecks and ~~$12.7~~drillpipe ~~million~~and ~~related~~collars, toas well as other rig upgrades and ~~initial~~capital ~~construction~~additions. ~~costs~~Additionally, during the nine months ended September 30, 2011, the Company also purchased office buildings, rig yards and surrounding land in West Texas and Arkansas for ~~two~~$800,000 ~~new~~and ~~mechanical~~$1.2 ~~rigs~~million, respectively.

Working Capital

Our working capital was $1815.29 million and $17.4 million at ~~June~~ September 30, 2012, and December 31, 2011, respectively. Our current ratio, which we calculate by dividing our current assets by our current liabilities, was 1.56 at ~~June~~September 30, 2012, ~~and~~compared to 1.5 at December 31, 2011.

1819

The changes in the components of our working capital were as follows (in thousands):

	June 30,2012		December 31,2011		Change
	September 30,2012		December 31,2011		Change
Cash and cash equivalents	$	7	$	7	$	—
Accounts receivable		4738,~~630~~883		45,387		2(6,~~243~~504	)
Inventories		~~943~~944		832		~~111~~112
Income tax recoverable		302		368		(66	)
Prepaid expenses, deposits and other receivables		1,~~887~~379		3,027		(1,~~140~~648	)
Deferred taxes		1,~~245~~137		1,239		6(102	)
Current assets		5242,~~014~~652		50,860		1(8,~~154~~208	)
Accounts payable		2014,596	$	21,513		(6,917	)
Current portion of notes payable for equipment		~~287~~267		120		~~167~~147
Financed insurance premiums		~~482~~192		1,057		(~~575~~865	)
Customer advances		9436		—		9436
Accrued expenses and other liabilities		1211,~~331~~612		10,811		~~1,520~~801
Current liabilities		3326,~~790~~703		33,501		~~289~~(6,798	)
Working capital	$	1815,~~224~~949	$	17,359	$	~~865~~(1,410	)

The $26.25 million ~~increase~~decrease in ~~our~~ accounts receivable at ~~June~~September 30, 2012, ~~from~~compared to December 31, 2011, was ~~primarily~~ primarily due to timing of customer receipts as well as decreased revenues for the three months ended September 30, 2012, compared to the three months ended December 31, 2011.

The $1.16 million decrease in prepaid expenses, deposits and other receivables at ~~June~~September 30, 2012, from December 31, 2011, was primarily due to collections received related to the auction held in December 2011, vendor rebates and an insurance claim, as well as scheduled amortization of prepaid insurance.

The $~~917,000~~6.9 million decrease in accounts payable at ~~June~~September 30, 2012, from December 31, 2011, was primarily due to a decrease in operating expenses due to decreased utilization as well as timing of vendor payments.

The $~~1.5~~865,000 ~~million~~decrease ~~increase~~ in ~~accrued~~financed ~~expenses~~insurance ~~and~~premiums ~~other liabilities~~ at ~~June~~September 30, 2012, from December 31, 2011, iswas primarily due toscheduled anpayments ~~increase~~of our infinanced ~~accrued~~insurance ~~payroll,~~premiums asfor ~~well~~the asnine anmonths ~~increase~~ended inSeptember 30, ~~property tax and medical accrual~~2012. ~~These decreases were partially offset by a decrease in deferred revenue.~~

The $801,000 increase in accrued expenses and other liabilities at September 30, 2012, from December 31, 2011, is primarily due to accrued legal fees relating to the Company’s acquisition by Sidewinder, as more fully described in “Company Overview”.

Long-term Debt

Our long-term debt consisted of $~~104~~100.26 million and $67.8 million of outstanding borrowings under our revolving credit facility at ~~June~~September 30, 2012, and December 31, 2011, respectively, as well as ~~$52,000~~zero and $70,000 of outstanding borrowings related to long-term borrowing for equipment at ~~June~~September 30, 2012, and December 31, 2011, respectively.

Contractual Obligations

WeOn ~~did~~September 24, ~~not~~2012, ~~enter~~we entered into ~~any~~a ~~significant~~definitive ~~contractual~~agreement ~~obligations~~and ~~during~~plan ~~the~~of ~~three~~merger, ~~and~~as ~~six~~more ~~months~~fully ~~ended~~described ~~June 30,~~in ~~2012~~“Company Overview”.

Inflation

Inflation did not have a significant effect on our results of operations in any of the periods reported.

Off Balance Sheet Arrangements

We do not currently have any off balance sheet arrangements.

Recently Issued Accounting Standards

See Note 2 “Recent Accounting Pronouncements” of the unaudited condensed financial statements for recently issued accounting standards, such information being incorporated herein by reference.

ITEM 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We are subject to market risk exposure related to changes in interest rates on our revolving credit facility, which provides for interest on borrowings at a floating rate. At ~~June~~September 30, 2012, we we had $~~104~~100.26 million outstanding debt on our revolving credit facility. Assuming no change in the net principal balance, a hypothetical increase or decrease of 100 basis points in the interest rate would have a corresponding increase or decrease in our interest expense of approximately $1.~~042~~0 million.

ITEM 4.

CONTROLS AND PROCEDURES

(a)

Evaluation of Disclosure Controls and Procedures

Our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”)), which we refer to as disclosure controls, are controls and procedures designed with the objective of ensuring that information required to be disclosed in our reports filed under the Exchange Act, such as this quarterly report, is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms. Disclosure controls are also designed with the objective of ensuring that such information is accumulated and communicated to our management, including our CEO and CFO, as appropriate to allow timely decisions regarding required disclosure. There are inherent limitations to the effectiveness of any control system. A control system, no matter how well conceived and operated, can provide only reasonable assurance that its objectives are met. No evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected.

As of ~~June~~September 30, 2012, an evaluation was carried out under the supervision and with the participation of our management, including the CEO and the CFO, of the effectiveness of the design and ~~operation~~ operation of our disclosure controls. Based upon that evaluation, the CEO and the CFO concluded that, as of such date, the design and operation of these disclosure controls were effective to accomplish their objectives at the reasonable assurance level.

(b)

Changes in Internal Control over Financial Reporting

No change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) occurred during the fiscal quarter ended ~~June~~September 30, 2012 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

2021

PART II. OTHER INFORMATION

ITEM 1.

LEGAL PROCEEDINGS

Refer to Note 9 “Commitments and Contingencies” of the unaudited condensed financial statements for information on legal proceedings, such information being incorporated herein by reference.

ITEM 1A.

RISK FACTORS

There have been no material changes during the quarter ended ~~June~~September 30, 2012, in our “Risk Factors” as discussed in detail in our 2011 Annual Report on Form 10-K, except as described below. The risks described in our Form 10-K are not the only risks facing us. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may, especially in a volatile economic environment, materially adversely affect our business, financial condition and/or operating results.

Failure To Complete the Merger with Sidewinder Could Negatively Affect Us.

On September 24, 2012, we entered into the Merger Agreement with Sidewinder and Fastball as more fully described in Note 1 of the unaudited condensed financial statements included herein. There is no assurance that the conditions to the completion of the tender offer or consummation of the merger will be satisfied. In connection with the proposed merger with Sidewinder, we and our stockholders will be subject to several risks, including the following:

•

the current market price of our common stock reflects a market assumption that the tender offer will be consummated and the merger will occur, and a failure to consummate the tender offer or complete the merger could result in a decline in the market price of our common stock;

•

certain costs relating to the merger and the tender offer, such as legal and accounting fees, are payable by us whether or not the merger is completed, and we could incur unexpected additional costs in connection with the merger;

•

upon termination of the Merger Agreement under certain circumstances, the Company would be required to pay Sidewinder a termination fee equal to $5 million and upon certain other circumstances, the Company would be required to reimburse certain expenses of Sidewinder and Fastball in an amount not to exceed $2 million, which could adversely affect our financial results;

•

there may be substantial disruption to our business and a distraction of our management and employees from day-to-day operations because matters related to the merger may require substantial commitments of their time and resources, which could adversely affect our operations and financial results;

•

pending the closing of the merger, the Merger Agreement restricts the Company from engaging in certain actions without Sidewinder’s consent, which could prevent us from pursuing business opportunities that may arise prior to the closing of the merger, and the Company will be subject to business uncertainties that could adversely affect our operations and financial results;

•

if the Merger Agreement is required to be adopted by our stockholders and our stockholders do not vote to adopt the Merger Agreement, or if the merger is not consummated for any other reason, there can be no assurance that any other transaction acceptable to us will be offered or that our business, prospects, or results of operations will not be adversely affected;

•

the length of time necessary to consummate the merger may be longer than anticipated;

•

uncertainty about the effect of the merger may adversely affect our relationships with our employees, customers, suppliers, and other persons with whom we have business relationships; and

•

we are aware of a number of lawsuits that have been filed against us as a result of the announcement of the Merger Agreement and there may be additional lawsuits filed against us relating to the merger, and an adverse judgment in such lawsuits may increase the costs relating to the merger or prevent the merger from becoming effective or from becoming effective within the expected timeframe.

Items 2, 3, 4 and 5 are not applicable and have been omitted.

ITEM 6.

EXHIBITS

A list of the exhibits required by Item 601 of Regulation S-K to be filed as a part of this report is set forth in the Index to Exhibits on page 2325, which immediately precedes such exhibits.

2122

SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

				UNION DRILLING, INC.
Dated: August 2, 2012				/s/ TINA L. CASTILLO
Dated: November 2, 2012				/s/ Tina L. Castillo
				Tina L. Castillo
				Senior Vice President, Chief Financial Officer and Treasurer
				Senior Vice President, Chief Financial Officer and Treasurer (Principal Financial and Accounting Officer)
				(Principal Financial and Accounting Officer)

2223

UNION DRILLING, INC.

INDEX TO EXHIBITS

ExhibitNumber			~~Description~~	Description
3.1	—		Form of Amended and Restated Certificate of Incorporation of Union Drilling (incorporated by reference to Exhibit 3.1 to our Registration Statement on Form S-1 (File No. 333-127525) filed on August 15, 2005).
2.1		—		Agreement and Plan of Merger, dated as of September 24, 2012, by and among Union Drilling, Inc., Sidewinder Drilling Inc. and Fastball Acquisition Inc. (incorporated by reference to Exhibit 2.1 to our Current Report on Form 8-K filed on September 28, 2012)
3.2	—		Form of Amended and Restated Bylaws of Union Drilling (incorporated by reference to Exhibit 3.1 to our Form 8-K (File No. 000-51630) filed on August 9, 2007).
2.2		—		Tender and Voting Agreement, dated as of September 24, 2012, by and between Sidewinder Drilling Inc. and Union Drilling Company LLC. (incorporated by reference to Exhibit 2.2 to our Current Report on Form 8-K filed on September 28, 2012)
31.1*	—		Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 filed herewith.**
2.3		—		Tender and Voting Agreement, dated as of September 24, 2012, by and between Sidewinder Drilling Inc. and each of Christopher D. Strong, Tina L. Castillo and David S. Goldberg. (incorporated by reference to Exhibit 2.3 to our Current Report on Form 8-K filed on September 28, 2012)
31.2*	—		Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 filed herewith.**
2.4		—		Contribution, Non-Tender and Support Agreement, dated as of September 24, 2012 by and between Sidewinder Drilling Inc., Wolf Marine S.A. and Lucky Star Ltd. (incorporated by reference to Exhibit 2.4 to our Current Report on Form 8-K filed on September 28, 2012)
32.1*	—		Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 filed herewith.**
2.5		—		Contribution, Non-Tender and Support Agreement, dated as of September 24, 2012 by and between Sidewinder Drilling Inc. and Steven A. Webster. (incorporated by reference to Exhibit 2.5 to our Current Report on Form 8-K filed on September 28, 2012)
32.2*	—		Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 filed herewith.**
3.1		—		Form of Amended and Restated Certificate of Incorporation of Union Drilling (incorporated by reference to Exhibit 3.1 to our Registration Statement on Form S-1 (File No. 333-127525) filed on August 15, 2005).
101	—		Financial statements from the quarterly report on Form 10-Q of Union Drilling, Inc. for the quarter ended June 30, 2012, filed August 2, 2012, formatted in XBRL; (i) the Condensed Statements of Operations, (ii) Condensed Balance Sheets, (iii) Condensed Statement of Stockholders’ Equity, (iv) the Condensed Statements of Cash Flows and (v) the Notes to Condensed Financial Statements.***
3.2		—		Form of Amended and Restated Bylaws of Union Drilling (incorporated by reference to Exhibit 3.1 to our Form 8-K (File No. 000-51630) filed on August 9, 2007).
31.1*		—		Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 filed herewith.**
31.2*		—		Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 filed herewith.**
32.1*		—		Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 filed herewith.**
32.2*		—		Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 filed herewith.**
101		—		Financial statements from the quarterly report on Form 10-Q of Union Drilling, Inc. for the quarter ended September 30, 2012, filed November 2, 2012, formatted in XBRL; (i) the Condensed Statements of Operations, (ii) Condensed Balance Sheets, (iii) Condensed Statement of Stockholders’ Equity, (iv) the Condensed Statements of Cash Flows and (v) the Notes to Condensed Financial Statements.***

*	Filed with this Report.

This Certification shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to the liability of that section. This Certification shall not be deemed to be incorporated by reference into any filing of the Company under the Securities Act of 1933 or the Securities Exchange Act of 1934, each as amended, whether made before or after the date hereof, except to the extent that the Company specifically incorporates it by reference.

***

The XBRL-related information in Exhibit 101 shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to liability under that section and shall not be incorporated by reference into any filing or other document pursuant to the Securities Act of 1933, as amended, except as shall be expressly set forth by specific reference in such filing or document.

23Schedules and exhibits have been omitted pursuant to Item 601(b)(2) of regulation S-K. The Company agrees to furnish supplementally to the Securities and Exchange Commission a copy of any omitted schedule upon request.

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