8-K

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 8-K

CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

Date of report (Date of earliest event reported): February 25, 2009 (February 25, 2009)

KEY ENERGY SERVICES, INC.

(Exact Name of Registrant as Specified in Charter)

Maryland	1-8038	04-2648081
(State or Other Jurisdiction	(Commission	(IRS Employer
of Incorporation)	File Number)	Identification No.)

1301 McKinney Street, Suite 1800
Houston, Texas 77010
(Address of Principal Executive Offices and Zip Code)

713/651-4300
(Registrant’s telephone number, including area code)

Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions (see General Instruction A.2. below):

o Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)

o Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)

o Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))

o Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))

Item 2.02. Results of Operations and Financial Condition

     On February 25, 2009, the Company announced its results for the quarter and year ended December 31, 2008. A copy of the press release is attached to this Current Report on Form 8-K as Exhibit 99.1 and is incorporated by reference. The information contained in this Item 2.02 (including the exhibit hereto) shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), or incorporated by reference in any filing under the Securities Act of 1933, as amended, or the Exchange Act, except as shall be expressly set forth by specific reference in such a filing. 

Item 9.01. Financial Statements and Exhibits

(d) Exhibits.

     99.1 Press release dated February 25, 2009 reporting results for the quarter and year ended December 31, 2008.

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 hereunto duly authorized.

	KEY ENERGY SERVICES, INC.
Date: February 25, 2009	By:	/s/ KIMBERLY R. FRYE
		Kimberly R. Frye
		Senior Vice President and General Counsel

Exhibit Index

Exhibit No.	Description
99.1	Press release dated February 25, 2009 reporting results for the quarter and year ended December 31, 2008.

EX-99.1

Exhibit 99.1

For Immediate Release:
Wednesday, February 25, 2009 Contact: Bryan Norwood
(713) 651-4300

KEY ENERGY ANNOUNCES FOURTH QUARTER AND FULL YEAR 2008 RESULTS

HOUSTON, TX, February 25, 2009 – Key Energy Services, Inc. (NYSE: KEG) announced its results for the quarter ended and full year ended December 31, 2008. The Company’s earnings conference call will be held tomorrow at 11 a.m. EST.

Fourth Quarter and Full-Year Results

Quarterly Results

Revenue for the quarter ended December 31, 2008 was $478.1 million, an 11.5% increase over revenues for the fourth quarter of 2007 of $428.6 million. This increase in revenue was primarily the result of contributions from acquisitions completed during 2008 and the fourth quarter of 2007, strong growth in the Company’s Mexico operations and price increases implemented in the second and third quarters of 2008. The quarter was impacted by several one-time, non-cash charges. Excluding these charges, net income for the quarter would have been $34.7 million and fully diluted earnings per share for the quarter would have been $0.29 per share. Reflecting the impact of these one-time charges, the Company reported a net loss for the quarter of $42.9 million, or $0.35 per share, compared to net income of $33.1 million, or earnings per share of $0.25 for the fourth quarter of 2007.

The charges impacting the quarter included a pre-tax goodwill impairment charge of $69.8 million related to the Company’s pressure pumping and fishing and rental segments. They also included a pre-tax charge for accelerated vesting of options and stock appreciation rights of $10.9 million and a pre-tax write down of the Company’s investment in a Canadian oilfield services company of $5.4 million. The aggregate after-tax effect of these one-time, non-cash charges for the fourth quarter was $0.64 per fully diluted share. (See table below setting forth the income and per share impact of these charges.)

Adjusted EBITDA (which, as calculated in the reconciliations below, excludes the one-time, non-cash items) was $115.7 million, a 6.5% increase over Adjusted EBITDA of $108.6 million for the fourth quarter of 2007. As a percentage of revenues, Adjusted EBITDA for the quarter ended December 31, 2008 was 24.2%, compared to Adjusted EBITDA as a percentage of revenues of 24.5% for the quarter ended September 30, 2008. (See Adjusted EBITDA reconciliations below.)

The Company also recorded a pre-tax charge in the quarter of $2.6 million, or $0.01 per fully diluted share, as a result of a reduction in force largely comprised of general and administrative employees.

Total capital expenditures were $88.8 million for the quarter. For the full year of 2008, the Company had capital expenditures of $219.0 million.

Full Year Results

Revenue for the year ended December 31, 2008 was a new record for the Company, totaling $1,972.1 million, compared with revenue of $1,662.0 million for the year ended December 31, 2007. This increase in revenue is primarily attributable to price increases implemented during the second and third quarters of 2008, expansion of the Company’s cased-hole wireline operations and international operations in Mexico, and acquisitions completed during 2008 and the fourth quarter of 2007. Net income for 2008 was affected by the one-time charges described above that were recorded in the fourth quarter. Excluding these items, net income for the year would have been $161.6 million and diluted earnings per share for 2008 would have been $1.29 per share. Reported net income for the year was $84.1 million, or $0.67 per diluted share, compared to net income for 2007 of $169.3 million or $1.27 per diluted share. As previously reported, 2008 earnings were also affected by hurricanes and their aftereffects in the Gulf Coast during the third quarter, which the Company estimates decreased its earnings by $8.4 million, or $0.04 per diluted share.

Adjusted EBITDA for 2008 totaled $474.9 million compared to $446.0 million in 2007. Adjusted EBITDA as a percentage of revenues for 2008 was 24.1%, compared to an Adjusted EBITDA as a percentage of revenues of 26.8% for 2007.

Commenting on the fourth quarter results, Dick Alario, Chairman and CEO, stated, “I am extremely proud that, despite rapidly deteriorating market conditions, we were able to maintain our operating margins in the fourth quarter compared to the prior quarter. As we noted in our third quarter earnings call, we recognized early that our customers’ spending was going to decline and we therefore aggressively moved to align our cost structure with market conditions. Our executives, managers and employees have been unyielding in their pursuit of cost reduction and equipment utilization. This, coupled with Key’s superior geographic footprint inside and outside the U.S., enabled us to maintain overall margins in this difficult environment.”

Alario continued, “We are focused on maintaining our strong liquidity position and generating free cash flow. Our 2009 capital expenditures plan has been reduced to approximately $130 million, some of which is contingent on customer driven projects. Our committed capital expenditures for 2009 are approximately $50 million, which will finish out our 2008 programs, and we plan on a 2009 maintenance capital expenditure level of approximately $20 million per quarter.”

Activity Update

	For the month ending
	January 31,		December 31,		January 31,
	2009		2008		2008
Working Days		21		21		22
Rig Hours		177,928		195,022		227,077
Trucking Hours		182,601		195,766		197,331

The Company calculates working days as total weekdays for the month less any Company holidays that occur that month. For the month of February 2009, there are 20 working days.

Commenting on the January activity levels, Alario stated, “We believe that as our customers entered 2009, turmoil in the global markets caused many to shutter even profitable projects to conserve cash. As demonstrated in prior downcycles, we believe that our customers will seek to improve cash flow by focusing on improving production from their existing wells. This, coupled with an improved cost structure, should allow more projects to become economically feasible, even in the current environment. As the company that keeps oil and gas wells flowing, Key should benefit.”

Liquidity Update

The Company’s liquidity position remains strong. As of February 23, 2009, the Company had approximately $150 million in cash on hand and approximately $139 million available under its Senior Secured Credit Facility. The Company expects to remain in compliance with the financial covenants under its debt agreements.

Share Repurchase Program

During the fourth quarter of 2008, the Company repurchased approximately 2.3 million shares at an aggregate cost of approximately $14.4 million. During the full year 2008, the Company repurchased approximately 11.1 million shares at an aggregate cost of approximately $135.2 million. From the inception of the Company’s share repurchase program in November 2007 through January 31, 2009, the Company has repurchased approximately 13.4 million shares of its common stock, at an aggregate cost of approximately $167.3 million. The Company is authorized to repurchase up to $300.0 million of its common stock on or before March 31, 2009. As of February 23, 2009, the number of outstanding shares of common stock was 121.2 million.

Conference Call

The Company will hold an investor conference call tomorrow, February 26, 2009, at 11 am EST. To access the call, which is open to the public, please call the conference call operator at the following number: (888) 794-4637 and ask for the “Key Energy Conference Call.” International callers should dial (660) 422-4879. The conference call will also be available on the web. To access the webcast, go to www.keyenergy.com and select “Investor Relations.” A replay of the conference call will be available tomorrow afternoon beginning at 3:00 pm EST and will be available for one week. To access the replay, please call (800) 642-1687. The access code for the replay is 85290966.

Consolidated Results of Operations Data:

	Three Months Ended December 31,						Twelve Months Ended December 31,
	2008			2007			2008			2007
	(In thousands, except per share data)
REVENUES:
Well servicing	$	370,535		$	333,506		$	1,509,823		$	1,264,797
Pressure pumping		77,814			70,871			344,993			299,348
Fishing and rental		29,717			24,238			117,272			97,867
TOTAL REVENUES		478,066			428,615			1,972,088			1,662,012
COSTS AND EXPENSES:
Well servicing		230,735			192,711			939,751			738,694
Pressure pumping		54,984			46,345			239,870			189,645
Fishing and rental		18,284			15,341			70,706			57,275
Depreciation and amortization expense		45,851			38,140			170,774			129,623
Impairment of goodwill and equity method investment		75,137			—			75,137			—
General and administrative expenses		69,249			65,609			257,707			230,396
Interest expense, net of amounts capitalized		10,653			9,976			41,247			36,207
Loss on early extinguishment of debt		—			9,557			—			9,557
Loss (gain) on sale of assets, net		1,668			(193	)		(641	)		1,752
Interest income		(333	)		(1,041	)		(1,236	)		(6,630	)
Other expense (income), net		3,477			(827	)		4,717			(447	)
TOTAL COSTS AND EXPENSES, NET		509,705			375,618			1,798,032			1,386,072
(Loss) income before income taxes and minority interest		(31,639	)		52,997			174,056			275,940
Income tax expense		(11,261	)		(19,993	)		(90,243	)		(106,768	)
Minority interest		—			63			245			117
NET (LOSS) INCOME	$	(42,900	)	$	33,067		$	84,058		$	169,289
(LOSS) EARNINGS PER SHARE:
Basic	$	(0.35	)	$	0.25		$	0.68		$	1.29
Diluted	$	(0.35	)	$	0.25		$	0.67		$	1.27
WEIGHTED AVERAGE SHARES OUTSTANDING:
Basic		121,095			131,476			124,246			131,194
Diluted		121,095			133,320			125,565			133,551

Consolidated Balance Sheet Data:

	December 31,
	2008			2007
	(in thousands)
ASSETS
Current assets:
Cash and cash equivalents	$	92,691		$	58,503
Accounts receivable, net		377,353			343,408
Inventories		34,756			22,849
Prepaid expenses		15,513			12,997
Deferred tax assets		26,623			27,676
Income taxes receivable		4,848			15,796
Other current assets		7,338			6,636
Total current assets		559,122			487,865
Property and equipment, gross		1,858,307			1,595,225
Accumulated depreciation		(806,624	)		(684,017	)
Property and equipment, net		1,051,683			911,208
Goodwill		320,992			378,550
Other intangible assets, net		42,345			45,894
Deferred financing costs, net		10,489			12,117
Notes and accounts receivable — related parties		336			173
Equity method investments		24,220			11,217
Other assets		7,736			12,053
TOTAL ASSETS	$	2,016,923		$	1,859,077
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	46,185		$	35,159
Accrued liabilities		197,116			183,364
Accrued interest		4,368			3,895
Current portion of capital lease obligations		9,386			10,701
Current notes payable — related parties, net of discount		14,318			1,678
Current portion of long-term debt		2,000			—
Total current liabilities		273,373			234,797
Capital lease obligations, less current portion		13,763			16,114
Notes payable — related parties, less current portion		6,000			20,500
Long-term debt, less current portion		613,828			475,000
Workers’ compensation, vehicular, health and other insurance claims		43,151			43,818
Deferred tax liabilities		188,581			160,068
Other non-current accrued liabilities		17,495			19,531
Minority interest		—			251
Commitments and contingencies		—			—
Stockholders’ equity:
Common stock, $0.10 par value		12,131			13,114
Additional paid-in capital		601,872			704,644
Accumulated other comprehensive loss		(46,550	)		(37,981	)
Retained earnings		293,279			209,221
Total stockholders’ equity		860,732			888,998
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	2,016,923		$	1,859,077

Selected Consolidated Cash Flow Data:

	Year Ended December 31,
	2008			2007
	(In thousands)
Net cash provided by operating activities	$	367,164		$	249,919
Net cash used in investing activities		(329,074	)		(302,847	)
Net cash (used in) provided by financing activities		(7,970	)		23,240
Effect of changes in exchange rates on cash		4,068			(184	)
Net increase (decrease) in cash and cash equivalents		34,188			(29,872	)
Cash and cash equivalents, beginning of period		58,503			88,375
Cash and cash equivalents, end of period	$	92,691		$	58,503

Impact of One-time Non-Cash Charges on Consolidated Net Income and Earnings per Share :

(Please note that the earnings per share impacts of the items discussed below differ for the fourth quarter and annual results due to different number of weighted average shares outstanding for the quarterly and annual periods.)

	Three Months Ended December 31, 2008
	(in thousands, except per share amounts)
	(unaudited)
	(Loss) Income
	Before Income						Diluted (Loss)
	Taxes and			Net (Loss)			Earnings per
	Minority Interest			Income			Share
As reported	$	(31,639	)	$	(42,900	)	$	(0.35	)
Impact of items:
Goodwill impairment charges		69,752			67,413			0.55
Equity compensation acceleration charge		10,892			6,758			0.06
Impairment of equity-method investment		5,385			3,397			0.03
Excluding items	$	54,390		$	34,668		$	0.29

	Twelve Months Ended December 31, 2008
	(in thousands, except per share amounts)
			(unaudited)
	Income Before
	Income Taxes and				Diluted Earnings
	Minority Interest		Net Income		per Share
As reported	$	174,056	$	84,058	$	0.67
Impact of items:
Goodwill impairment charges		69,752		67,413		0.54
Equity compensation acceleration charge		10,892		6,758		0.05
Impairment of equity-method investment		5,385		3,397		0.03
Excluding items	$	260,085	$	161,626	$	1.29

RECONCILIATIONS OF NON-GAAP FINANCIAL MEASURES:

	Three Months Ended December			% of			Three Months Ended September			% of			Three Months Ended December			% of
	31, 2008			Revenue			30, 2008			Revenue			31, 2007			Revenue
	(in thousands, except for percentages)
	(unaudited)
Net (loss) income	$	(42,900	)		-8.97	%	$	48,462			9.05	%	$	33,067			7.71	%
Income tax expense		11,261			2.36	%		29,079			5.43	%		19,993			4.66	%
Minority interest		—			0.00	%		—			0.00	%		(63	)		-0.01	%
Loss (gain) on sale of assets, net		1,668			0.35	%		(1,683	)		-0.31	%		(193	)		-0.05	%
Other expense (income), net		3,477			0.73	%		2,152			0.40	%		(827	)		-0.19	%
Interest income		(333	)		-0.07	%		(213	)		-0.04	%		(1,041	)		-0.24	%
Interest expense, net of amounts capitalized		10,653			2.23	%		10,475			1.96	%		9,976			2.33	%
Depreciation and amortization expense		45,851			9.59	%		42,676			7.97	%		38,140			8.90	%
Loss on early extinguishment of debt		—			0.00	%		—			0.00	%		9,557			2.23	%
Impairment of goodwill		69,752			14.59	%		—			0.00	%		—			0.00	%
Impairment of equity method investment		5,385			1.13	%		—			0.00	%		—			0.00	%
Adjusted EBITDA	$	104,814			21.92	%	$	130,948			24.45	%	$	108,609			25.34	%
Equity compensation acceleration charge		10,892			2.28	%		—			0.00	%		—			0.00	%
Adjusted EBITDA, excluding equity acceleration charge	$	115,706			24.20	%	$	130,948			24.45	%	$	108,609			25.34	%

	Twelve Months Ended December			% of			Twelve Months Ended December			% of
	31, 2008			Revenue			31, 2007			Revenue
	(in thousands, except for percentages)
	(unaudited)
Net (loss) income	$	84,058			4.26	%	$	169,289			10.19	%
Income tax expense		90,243			4.58	%		106,768			6.42	%
Minority interest		(245	)		-0.01	%		(117	)		-0.01	%
(Gain) loss on sale of assets, net		(641	)		-0.03	%		1,752			0.11	%
Other expense (income), net		4,717			0.24	%		(447	)		-0.03	%
Interest income		(1,236	)		-0.06	%		(6,630	)		-0.40	%
Interest expense, net of amounts capitalized		41,247			2.09	%		36,207			2.18	%
Depreciation and amortization expense		170,774			8.66	%		129,623			7.80	%
Loss on early extinguishment of debt		—			0.00	%		9,557			0.58	%
Impairment of equity method investment		5,385			0.27	%		—			0.00	%
Impairment of goodwill		69,752			3.54	%		—			0.00	%
Adjusted EBITDA	$	464,054			23.53	%	$	446,002			26.84	%
Equity compensation acceleration charge		10,892			0.55	%		—			0.00	%
Adjusted EBITDA, excluding equity acceleration charge	$	474,946			24.08	%	$	446,002			26.84	%

“Adjusted EBITDA” is defined as net income before interest, taxes, minority interest, impairment charges, losses on early extinguishment of debt, depreciation and amortization, other expense (income), and (gain) losses on sale of assets. Management does not include (gain) loss on sale of assets, impairment charges, losses on early extinguishment of debt and other expense (income), net, in its calculations of Adjusted EBITDA, as it believes that they are either non-recurring or not representative of our core operations. Other expense (income), net generally represents our minority investment in IROC Energy Services, Corp. and foreign currency transaction gains and losses. As a minority shareholder in IROC, we cannot directly impact the performance of that investment. Further, management believes that most investors exclude impairment charges, minority interest, losses on early extinguishment of debt and (gain) loss on sale of assets, net from customary EBITDA calculations as those items are often viewed as non-recurring and not reflective of ongoing financial performance.

Adjusted EBITDA is a non-GAAP measure that is used as a supplemental financial measure by our management and directors and by external users of our financial statements, such as investors, to assess:

• The financial performance of our assets without regard to financing methods, capital structure or historical cost basis;

• The ability of our assets to generate cash sufficient to pay interest on our indebtedness; and

• Our operating performance and return on invested capital as compared to those of other companies in the well services industry, without regard to financing methods and capital structure.

Adjusted EBITDA has limitations as an analytical tool and should not be considered an alternative to net income, operating income, cash flow from operating activities or any other measure of financial performance or liquidity presented in accordance with GAAP. Adjusted EBITDA excludes some, but not all, items that affect net income and operating income and these measures may vary among other companies. Limitations to using Adjusted EBITDA as an analytical tool include:

• Adjusted EBITDA does not reflect our current or future requirements for capital expenditures or capital commitments;

• Adjusted EBITDA does not reflect changes in, or cash requirements necessary to service interest or principal payments on our debt;

• Adjusted EBITDA does not reflect income taxes;

• Although depreciation and amortization are non-cash charges, the assets being depreciated and amortized will often have to be replaced in the future, and Adjusted EBITDA does not reflect any cash requirements for such replacements; and

• Other companies in our industry may calculate Adjusted EBITDA differently than we do, limiting its usefulness as a comparative measure.

Adjusted EBITDA includes a charge associated with the accelerated vesting of certain stock options and stock appreciation rights. Management believes that for comparative purposes this charge should be excluded from Adjusted EBITDA as this charge is non-cash and non-recurring in nature and represents the acceleration of costs that otherwise would be recognized in future periods.

Certain statements contained in this press release constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are based on current expectations, estimates and projections about the Company, the Company’s industry, management’s beliefs and certain assumptions made by management. Whenever possible, the Company has identified these “forward-looking statements” by words such as “expects,” “believes,” “anticipates” and similar phrases. Readers are cautioned that any such forward-looking statements are not guarantees of future performance and are subject to certain risks, uncertainties and assumptions that are difficult to predict, including, but not limited to: risks associated with prolonged poor economic conditions in the United States and globally, the continued instability of the credit market, availability of credit under the Company’s revolving credit facility and related liquidity risks; risks affecting activity levels for rig hours, including the continued decline and instability of commodity prices and continued decreases in the capital budgets of the Company’s customers; risks that the Company will be unable to identify or complete acquisitions and that it will be unable to integrate acquired operations; risks affecting the Company’s foreign operations, including operations in Russia, Argentina, Mexico and Canada; risks affecting the ability of the Company to maintain or improve operations, including the ability to maintain prices for services under increasing pricing pressures, the impact of rig capacity in the market and weather risk; risks that the Company will be unable to achieve financial targets or cost reductions; and factors affecting the Company’s stock repurchase program, including, among others, the market price of the Company’s stock prevailing from time to time, the nature of other investment opportunities presented to the Company from time to time, the Company’s cash flows from operations and the availability of cash from other sources, including our revolving credit facility, from time to time. Other important risk factors that may affect the Company’s business, results of operations and financial condition are discussed in the Company’s most recently filed Annual Report on Form 10-K, recent Quarterly Reports on Form 10-Q, recent Current Reports on Form 8-K and in other Securities and Exchange Commission filings. Because such statements involve risks and uncertainties, the actual results and performance of the Company may differ materially from the results expressed or implied by such forward-looking statements. Given these uncertainties, readers are cautioned not to place undue reliance on such forward-looking statements. Unless otherwise required by law, the Company also disclaims any obligation to update its view of any such risks or uncertainties or to announce publicly the result of any revisions to the forward-looking statements made here; however, readers should review carefully reports or documents the Company files periodically with the Securities and Exchange Commission.