UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
__________________________________________
FORM
(Mark One)
| | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
| FOR THE QUARTERLY PERIOD ENDED | ||
| OR | ||
| | 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:
MRC GLOBAL INC.
(Exact name of registrant as specified in its charter)
| | |
| (State or Other Jurisdiction of | (I.R.S. Employer Identification No.) |
| | |
| (Address of Principal Executive Offices) | (Zip Code) |
(
(Registrant’s Telephone Number, including Area Code)
________________
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading symbol(s) | Name of each exchange on which registered |
| | | |
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.
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes
There were
INDEX TO QUARTERLY REPORT ON FORM 10-Q
| Page |
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| PART I – FINANCIAL INFORMATION |
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| ITEM 1. |
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| Condensed Consolidated Balance Sheets – SEPTEMBER 30, 2023 AND DECEMBER 31, 2022 |
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| Notes to the Condensed Consolidated Financial Statements – SEPTEMBER 30, 2023 |
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| ITEM 2. |
management’s discussion and analysis of financial condition and results of operations |
17 |
| ITEM 3. |
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| ITEM 4. |
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| PART II – OTHER INFORMATION |
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| ITEM 1. |
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| ITEM 1a. |
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| ITEM 2. |
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| ITEM 3. |
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| ITEM 4. |
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| ITEM 5. |
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| ITEM 6. |
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CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
MRC GLOBAL INC.
(in millions, except per share amounts)
| September 30, | December 31, | |||||||
| 2023 | 2022 | |||||||
| Assets | ||||||||
| Current assets: | ||||||||
| Cash | $ | $ | ||||||
| Accounts receivable, net | ||||||||
| Inventories, net | ||||||||
| Other current assets | ||||||||
| Total current assets | ||||||||
| Long-term assets: | ||||||||
| Operating lease assets | ||||||||
| Property, plant and equipment, net | ||||||||
| Other assets | ||||||||
| Intangible assets: | ||||||||
| Goodwill, net | ||||||||
| Other intangible assets, net | ||||||||
| $ | $ | |||||||
| Liabilities and stockholders' equity | ||||||||
| Current liabilities: | ||||||||
| Trade accounts payable | $ | $ | ||||||
| Accrued expenses and other current liabilities | ||||||||
| Operating lease liabilities | ||||||||
| Current portion of long-term debt | ||||||||
| Total current liabilities | ||||||||
| Long-term liabilities: | ||||||||
| Long-term debt, net | ||||||||
| Operating lease liabilities | ||||||||
| Deferred income taxes | ||||||||
| Other liabilities | ||||||||
| Commitments and contingencies | ||||||||
| % Series A Convertible Perpetual Preferred Stock, $ par value; authorized shares; shares issued and outstanding | ||||||||
| Stockholders' equity: | ||||||||
| Common stock, $ par value per share: million shares authorized, and issued, respectively | ||||||||
| Additional paid-in capital | ||||||||
| Retained deficit | ( | ) | ( | ) | ||||
| Less: Treasury stock at cost: shares | ( | ) | ( | ) | ||||
| Accumulated other comprehensive loss | ( | ) | ( | ) | ||||
| $ | $ | |||||||
| See notes to condensed consolidated financial statements. |
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
MRC GLOBAL INC.
(in millions, except per share amounts)
| Three Months Ended |
Nine Months Ended |
|||||||||||||||
| September 30, |
September 30, |
September 30, |
September 30, |
|||||||||||||
| 2023 |
2022 |
2023 |
2022 |
|||||||||||||
| Sales |
$ | $ | $ | $ | ||||||||||||
| Cost of sales |
||||||||||||||||
| Gross profit |
||||||||||||||||
| Selling, general and administrative expenses |
||||||||||||||||
| Operating income |
||||||||||||||||
| Other (expense) income: |
||||||||||||||||
| Interest expense |
) | ) | ) | ) | ||||||||||||
| Other, net |
) | ) | ) | |||||||||||||
| Income before income taxes |
||||||||||||||||
| Income tax expense |
||||||||||||||||
| Net income |
||||||||||||||||
| Series A preferred stock dividends |
||||||||||||||||
| Net income attributable to common stockholders |
$ | $ | $ | $ | ||||||||||||
| Basic earnings per common share |
$ | $ | $ | $ | ||||||||||||
| Diluted earnings per common share |
$ | $ | $ | $ | ||||||||||||
| Weighted-average common shares, basic |
||||||||||||||||
| Weighted-average common shares, diluted |
||||||||||||||||
See notes to condensed consolidated financial statements.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
MRC GLOBAL INC.
(in millions)
| Three Months Ended |
Nine Months Ended |
|||||||||||||||
| September 30, |
September 30, |
September 30, |
September 30, |
|||||||||||||
| 2023 |
2022 |
2023 |
2022 |
|||||||||||||
| Net income |
$ | $ | $ | $ | ||||||||||||
| Other comprehensive income (loss) |
||||||||||||||||
| Foreign currency translation adjustments |
( |
) | ( |
) | ( |
) | ( |
) | ||||||||
| Hedge accounting adjustments, net of tax |
||||||||||||||||
| Total other comprehensive loss, net of tax |
( |
) | ( |
) | ( |
) | ( |
) | ||||||||
| Comprehensive income |
$ | $ | $ | $ | ||||||||||||
See notes to condensed consolidated financial statements.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (UNAUDITED)
MRC GLOBAL INC.
(in millions)
| Accumulated |
||||||||||||||||||||||||||||||||
| Additional |
Other |
Total |
||||||||||||||||||||||||||||||
| Common Stock |
Paid-in |
Retained |
Treasury Stock |
Comprehensive |
Stockholders' |
|||||||||||||||||||||||||||
| Shares |
Amount |
Capital |
Deficit |
Shares |
Amount |
Loss |
Equity |
|||||||||||||||||||||||||
| Balance at December 31, 2022 |
$ | $ | $ | ( |
) | ( |
) | $ | ( |
) | $ | ( |
) | $ | ||||||||||||||||||
| Net income |
- | - | ||||||||||||||||||||||||||||||
| Foreign currency translation |
- | - | ( |
) | ( |
) | ||||||||||||||||||||||||||
| Shares withheld for taxes |
- | ( |
) | - | ( |
) | ||||||||||||||||||||||||||
| Equity-based compensation expense |
- | - | ||||||||||||||||||||||||||||||
| Dividends declared on preferred stock |
- | ( |
) | - | ( |
) | ||||||||||||||||||||||||||
| Balance at March 31, 2023 |
$ | $ | $ | ( |
) | ( |
) | $ | ( |
) | $ | ( |
) | $ | ||||||||||||||||||
| Net income |
- | - | ||||||||||||||||||||||||||||||
| Foreign currency translation |
- | - | ||||||||||||||||||||||||||||||
| Equity-based compensation expense |
- | - | ||||||||||||||||||||||||||||||
| Dividends declared on preferred stock |
- | ( |
) | - | ( |
) | ||||||||||||||||||||||||||
| Balance at June 30, 2023 |
$ | $ | $ | ( |
) | ( |
) | $ | ( |
) | $ | ( |
) | $ | ||||||||||||||||||
| Net income |
- | - | ||||||||||||||||||||||||||||||
| Foreign currency translation |
- | - | ( |
) | ( |
) | ||||||||||||||||||||||||||
| Equity-based compensation expense |
- | - | ||||||||||||||||||||||||||||||
| Dividends declared on preferred stock |
- | ( |
) | - | ( |
) | ||||||||||||||||||||||||||
| Balance at September 30, 2023 |
$ | $ | $ | ( |
) | ( |
) | $ | ( |
) | $ | ( |
) | $ | ||||||||||||||||||
| Accumulated |
||||||||||||||||||||||||||||||||
| Additional |
Other |
Total |
||||||||||||||||||||||||||||||
| Common Stock |
Paid-in |
Retained |
Treasury Stock |
Comprehensive |
Stockholders' |
|||||||||||||||||||||||||||
| Shares |
Amount |
Capital |
(Deficit) |
Shares |
Amount |
Loss |
Equity |
|||||||||||||||||||||||||
| Balance at December 31, 2021 |
$ | $ | $ | ( |
) | ( |
) | $ | ( |
) | $ | ( |
) | $ | ||||||||||||||||||
| Net income |
- | - | ||||||||||||||||||||||||||||||
| Foreign currency translation |
- | - | ||||||||||||||||||||||||||||||
| Hedge accounting adjustments |
- | - | ||||||||||||||||||||||||||||||
| Shares withheld for taxes |
- | ( |
) | - | ( |
) | ||||||||||||||||||||||||||
| Vesting of stock awards |
- | - | - | - | - | - | ||||||||||||||||||||||||||
| Equity-based compensation expense |
- | - | ||||||||||||||||||||||||||||||
| Dividends declared on preferred stock |
- | ( |
) | - | ( |
) | ||||||||||||||||||||||||||
| Balance at March 31, 2022 |
$ | $ | $ | ( |
) | ( |
) | $ | ( |
) | $ | ( |
) | $ | ||||||||||||||||||
| Net income |
- | - | ||||||||||||||||||||||||||||||
| Foreign currency translation |
- | - | ( |
) | ( |
) | ||||||||||||||||||||||||||
| Hedge accounting adjustments |
- | - | ||||||||||||||||||||||||||||||
| Equity-based compensation expense |
- | - | ||||||||||||||||||||||||||||||
| Dividends declared on preferred stock |
- | ( |
) | - | ( |
) | ||||||||||||||||||||||||||
| Balance at June 30, 2022 |
$ | $ | $ | ( |
) | ( |
) | $ | ( |
) | $ | ( |
) | $ | ||||||||||||||||||
| Net income |
- | - | ||||||||||||||||||||||||||||||
| Foreign currency translation |
- | - | ( |
) | ( |
) | ||||||||||||||||||||||||||
| Equity-based compensation expense |
- | - | ||||||||||||||||||||||||||||||
| Dividends declared on preferred stock |
- | ( |
) | - | ( |
) | ||||||||||||||||||||||||||
| Balance at September 30, 2022 |
$ | $ | $ | ( |
) | ( |
) | $ | ( |
) | $ | ( |
) | $ | ||||||||||||||||||
See notes to condensed consolidated financial statements.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
MRC GLOBAL INC.
(in millions)
| Nine Months Ended |
||||||||
| September 30, |
September 30, |
|||||||
| 2023 |
2022 |
|||||||
| Operating activities |
||||||||
| Net income |
$ | $ | ||||||
| Adjustments to reconcile net income to net cash provided by (used in) operations: |
||||||||
| Depreciation and amortization |
||||||||
| Amortization of intangibles |
||||||||
| Equity-based compensation expense |
||||||||
| Deferred income tax benefit |
( |
) | ( |
) | ||||
| (Decrease) increase in LIFO reserve |
( |
) | ||||||
| Other, net |
||||||||
| Changes in operating assets and liabilities: |
||||||||
| Accounts receivable |
( |
) | ( |
) | ||||
| Inventories |
( |
) | ( |
) | ||||
| Other current assets |
( |
) | ( |
) | ||||
| Accounts payable |
||||||||
| Accrued expenses and other current liabilities |
( |
) | ||||||
| Net cash provided by (used in) operations |
( |
) | ||||||
| Investing activities |
||||||||
| Purchases of property, plant and equipment |
( |
) | ( |
) | ||||
| Other investing activities |
( |
) | ( |
) | ||||
| Net cash used in investing activities |
( |
) | ( |
) | ||||
| Financing activities |
||||||||
| Payments on revolving credit facilities |
( |
) | ( |
) | ||||
| Proceeds from revolving credit facilities |
||||||||
| Payments on long-term obligations |
( |
) | ( |
) | ||||
| Debt issuance costs paid |
( |
) | ||||||
| Dividends paid on preferred stock |
( |
) | ( |
) | ||||
| Repurchases of shares to satisfy tax withholdings |
( |
) | ( |
) | ||||
| Net cash (used in) provided by financing activities |
( |
) | ||||||
| Increase (decrease) in cash |
( |
) | ||||||
| Effect of foreign exchange rate on cash |
( |
) | ( |
) | ||||
| Cash -- beginning of period |
||||||||
| Cash -- end of period |
$ | $ | ||||||
| Supplemental disclosures of cash flow information: |
||||||||
| Cash paid for interest |
$ | $ | ||||||
| Cash paid for income taxes |
$ | $ | ||||||
| See notes to condensed consolidated financial statements. |
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
MRC GLOBAL INC.
NOTE 1 – BACKGROUND AND BASIS OF PRESENTATION
Business Operations: MRC Global Inc. is a holding company headquartered in Houston, Texas. Our wholly owned subsidiaries are global distributors of pipe, valves, fittings (“PVF”) and infrastructure products and services across each of the following sectors:
| ● | Gas Utilities (storage and distribution of natural gas) | |
| ● | Downstream, Industrial and Energy Transition (crude oil refining, petrochemical and chemical processing, general industrials and energy transition projects) | |
| ● | Production and Transmission Infrastructure (exploration, production and extraction, gathering, processing and transmission of oil and gas) |
We have service centers in industrial, chemical, gas distribution and hydrocarbon producing and refining areas throughout the United States, Canada, Europe, Asia, Australasia and the Middle East. We obtain products from a broad range of suppliers.
Basis of Presentation: We have prepared our unaudited condensed consolidated financial statements in accordance with Rule 10-01 of Regulation S-X for interim financial statements. These statements do not include all information and footnotes that generally accepted accounting principles ("GAAP") require for complete annual financial statements. However, the information in these statements reflects all normal recurring adjustments that are, in our opinion, necessary for a fair presentation of the results for the interim periods. The results of operations for the three and nine months ended September 30, 2023, are not necessarily indicative of the results that will be realized for the fiscal year ending December 31, 2023. We have derived our condensed consolidated balance sheet as of December 31, 2022, from the audited consolidated financial statements for the year ended December 31, 2022. You should read these condensed consolidated financial statements in conjunction with the audited consolidated financial statements and notes thereto for the year ended December 31, 2022. Certain prior year amounts have been reclassified to conform to the current year presentation.
The condensed consolidated financial statements include the accounts of MRC Global Inc. and its wholly owned and majority owned subsidiaries (collectively referred to as the "Company" or by terms such as "we", "our" or "us"). All material intercompany balances and transactions have been eliminated in consolidation.
Adoption of New Accounting Standards: In the fourth quarter of 2022, we early adopted Accounting Standards Update ("ASU") No. 2020-04, Reference Rate Reform (Topic 848), which provides optional expedients and exceptions for applying U.S. GAAP to contracts, hedging relationships, and other transactions that the discontinuation of certain reference rates, including the London Interbank Offered Rate ("LIBOR"), impacts. The adoption of this ASU did not have a material impact on our condensed consolidated financial statements.
NOTE 2 – REVENUE RECOGNITION
We recognize revenue when we transfer control of promised goods or services to our customers in an amount that reflects the consideration to which we expect to be entitled in exchange for those goods or services. We recognize substantially all of our revenue when products are shipped or delivered to our customers, and payment is due from our customers at the time of billing with a majority of our customers having 30-day terms. We estimate and record returns as a reduction of revenue. Amounts received in advance of shipment are deferred and recognized when the performance obligations are satisfied. Sales taxes collected from customers and remitted to governmental authorities are accounted for on a net basis and, therefore, we exclude these taxes from sales in the accompanying condensed consolidated statements of operations. Cost of sales includes the cost of inventory sold and related items, such as vendor rebates, inventory allowances and reserves and shipping and handling costs associated with inbound and outbound freight, as well as depreciation and amortization of intangible assets. In some cases, particularly with third-party pipe shipments, we consider shipping and handling costs to be separate performance obligations, and as such, we record the revenue and cost of sales when the performance obligation is fulfilled.
Our contracts with customers ordinarily involve performance obligations that are one year or less. Therefore, we have applied the optional exemption that permits the omission of information about our unfulfilled performance obligations as of the balance sheet dates.
Contract Balances: Variations in the timing of revenue recognition, invoicing and receipt of payment result in categories of assets and liabilities that include invoiced accounts receivable, uninvoiced accounts receivable, contract assets and deferred revenue (contract liabilities) on the condensed consolidated balance sheets.
Generally, revenue recognition and invoicing occur simultaneously as we transfer control of promised goods or services to our customers. We consider contract assets to be accounts receivable when we have an unconditional right to consideration and only the passage of time is required before payment is due. In certain cases, particularly those involving customer-specific documentation requirements, we delay invoicing until we are able to meet the documentation requirements. In these cases, we recognize a contract asset separate from accounts receivable until those requirements are met, and we are able to invoice the customer. Our contract asset balance associated with these requirements as of September 30, 2023, and December 31, 2022, was $
We record contract liabilities, or deferred revenue, when we receive cash payments from customers in advance of our performance, including amounts that are refundable. The deferred revenue balance at September 30, 2023 and December 31, 2022 was $
Disaggregated Revenue:
The following table presents our revenue disaggregated by revenue source (in millions):
| Three Months Ended | ||||||||||||||||
| September 30, | ||||||||||||||||
| U.S. | Canada | International | Total | |||||||||||||
| 2023: | ||||||||||||||||
| Gas Utilities | $ | $ | $ | $ | ||||||||||||
| Downstream, Industrial & Energy Transition | ||||||||||||||||
| Production & Transmission Infrastructure | ||||||||||||||||
| $ | $ | $ | $ | |||||||||||||
| 2022: | ||||||||||||||||
| Gas Utilities | $ | $ | $ | $ | ||||||||||||
| Downstream, Industrial & Energy Transition | ||||||||||||||||
| Production & Transmission Infrastructure | ||||||||||||||||
| $ | $ | $ | $ | |||||||||||||
| Nine Months Ended | ||||||||||||||||
| September 30, | ||||||||||||||||
| U.S. | Canada | International | Total | |||||||||||||
| 2023: | ||||||||||||||||
| Gas Utilities | $ | $ | $ | $ | ||||||||||||
| Downstream, Industrial & Energy Transition | ||||||||||||||||
| Production & Transmission Infrastructure | ||||||||||||||||
| $ | $ | $ | $ | |||||||||||||
| 2022: | ||||||||||||||||
| Gas Utilities | $ | $ | $ | $ | ||||||||||||
| Downstream, Industrial & Energy Transition | ||||||||||||||||
| Production & Transmission Infrastructure | ||||||||||||||||
| $ | $ | $ | $ | |||||||||||||
NOTE 3 – INVENTORIES
The composition of our inventory is as follows (in millions):
| September 30, | December 31, | |||||||
| 2023 | 2022 | |||||||
| Finished goods inventory at average cost: | ||||||||
| Valves, automation, measurement and instrumentation | $ | $ | ||||||
| Carbon steel pipe, fittings and flanges | ||||||||
| Gas products | ||||||||
| All other products | ||||||||
| Less: Excess of average cost over LIFO cost (LIFO reserve) | ( | ) | ( | ) | ||||
| Less: Other inventory reserves | ( | ) | ( | ) | ||||
| $ | $ | |||||||
The Company uses the last-in, first-out (“LIFO”) method of valuing U.S. inventories. The use of the LIFO method has the effect of reducing net income during periods of rising inventory costs (inflationary periods) and increasing net income during periods of falling inventory costs (deflationary periods). Valuation of inventory under the LIFO method can be made only at the end of each year based on the inventory levels and costs at that time. Accordingly, we base interim LIFO calculations on management’s estimates of expected year-end inventory levels and costs and these estimates are subject to the final year-end LIFO inventory determination.
NOTE 4 – LEASES
We lease certain distribution centers, warehouses, office space, land and equipment. Substantially all of these leases are classified as operating leases. We recognize lease expense on a straight-line basis over the lease term. Leases with an initial term of 12 months or less are not recorded on the balance sheet.
Many of our facility leases include one or more options to renew, with renewal terms that can extend the lease term from year to
As most of our leases do not provide an implicit rate, we use an incremental borrowing rate based on the information available at the commencement date in determining the present value of the lease payments using a portfolio approach. Our lease agreements do not contain any material residual value guarantees or material restrictive covenants.
Expense associated with our operating leases was $
The maturity of lease liabilities is as follows (in millions):
| Maturity of Operating Lease Liabilities | ||||
| Remainder of 2023 | $ | |||
| 2024 | ||||
| 2025 | ||||
| 2026 | ||||
| 2027 | ||||
| After 2027 | ||||
| Total lease payments | ||||
| Less: Interest | ( | ) | ||
| Present value of lease liabilities | $ |
The term and discount rate associated with leases are as follows:
| September 30, | ||||
| Operating Lease Term and Discount Rate | 2023 | |||
| Weighted-average remaining lease term (years) | ||||
| Weighted-average discount rate | % | |||
Amounts maturing after 2027 include expected renewals for leases of regional distribution centers and certain corporate offices through dates up to 2048. Excluding these optional renewals, our weighted-average remaining lease term is
NOTE 5 – LONG-TERM DEBT
The components of our long-term debt are as follows (in millions):
| September 30, | December 31, | |||||||
| 2023 | 2022 | |||||||
| Senior Secured Term Loan B, net of discount and issuance costs of $ | $ | $ | ||||||
| Global ABL Facility | ||||||||
| Less: current portion | ||||||||
| $ | $ | |||||||
Senior Secured Term Loan B: We have a Senior Secured Term Loan B (the “Term Loan”) with an original principal amount of $
Global ABL Facility: The Company is a party to a multi-currency, global asset-based lending facility (the “Global ABL Facility”), including certain of its subsidiaries, its lenders and Bank of America, N.A. as administrative agent, security trustee and collateral agent. The Global ABL Facility is a revolving credit facility of $
Interest on Borrowings: The interest rates on our outstanding borrowings at September 30, 2023, including a floating to fixed interest rate swap at December 31, 2022, which expired in March 2023, are set forth below:
| September 30, | December 31, | |||||||
| 2023 | 2022 | |||||||
| Senior Secured Term Loan B | % | % | ||||||
| Global ABL Facility | % | % | ||||||
| Weighted average interest rate | % | % | ||||||
NOTE 6 – REDEEMABLE PREFERRED STOCK
Preferred Stock Issuance
In June 2015, we issued
The Preferred Stock is convertible at the option of the holders into shares of common stock at an initial conversion rate of
Holders of the Preferred Stock may, at their option, require the Company to repurchase their shares in the event of a fundamental change, as defined in the agreement. The repurchase price is based on the original $1,000 per share purchase price except in the case of a liquidation, in which case the holders would receive the greater of $1,000 per share and the amount that would be received if they held common stock converted at the conversion rate in effect at the time of the fundamental change. Because this feature could require redemption as a result of the occurrence of an event not solely within the control of the Company, the Preferred Stock is classified as temporary equity on our balance sheet.
MRC Global Inc. may not enter into any new, or amend, or modify any existing agreement or arrangement that by its terms restricts, limits, prohibits or prevents the Company from paying dividends on the Preferred Stock, redeeming or repurchasing the Preferred Stock or effecting the conversion of the Preferred Stock. Any such agreement, amendment or modification would require the consent of the holder of the Preferred Stock.
NOTE 7 – STOCKHOLDERS’ EQUITY
Equity Compensation Plans
The Company's Omnibus Incentive Plan permits the issuance of stock options, stock appreciation rights, restricted stock, restricted stock units, performance shares, performance units and other stock-based and cash-based awards. Since the adoption of the Plan, the Company’s board of directors has periodically granted stock options, restricted stock awards, restricted stock units and performance share units to directors and employees, but no other types of awards have been granted under the plan. Options and stock appreciation rights may not be granted at prices less than the fair market value of our common stock on the date of the grant, nor for a term exceeding years. For employees, vesting generally occurs over a -year period on the anniversaries of the date specified in the employees’ respective agreements, subject to accelerated vesting under certain circumstances set forth in the agreements, and in any event, no less than one year. Vesting for directors generally occurs on the -year anniversary of the grant date. A Black-Scholes option-pricing model is used to estimate the fair value of the stock options. A Monte Carlo simulation is completed to estimate the fair value of performance share unit awards with a stock price performance component. We expense the fair value of all equity grants, including performance share unit awards, on a straight-line basis over the vesting period. In 2023,
Accumulated Other Comprehensive Loss
Accumulated other comprehensive loss in the accompanying condensed consolidated balance sheets consists of the following (in millions):
| September 30, | December 31, | |||||||
| 2023 | 2022 | |||||||
| Currency translation adjustments | $ | ( | ) | $ | ( | ) | ||
| Hedge accounting adjustments | ||||||||
| Other adjustments | ( | ) | ( | ) | ||||
| Accumulated other comprehensive loss | $ | ( | ) | $ | ( | ) | ||
Earnings per Share
Earnings per share are calculated in the table below (in millions, except per share amounts):
| Three Months Ended | Nine Months Ended | |||||||||||||||
| September 30, | September 30, | September 30, | September 30, | |||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| Net income | $ | $ | $ | $ | ||||||||||||
| Less: Dividends on Series A Preferred Stock | ||||||||||||||||
| Net income attributable to common stockholders | $ | $ | $ | $ | ||||||||||||
| Weighted average basic shares outstanding | ||||||||||||||||
| Effect of dilutive securities | ||||||||||||||||
| Weighted average diluted shares outstanding | ||||||||||||||||
| Net income per share: | ||||||||||||||||
| Basic | $ | $ | $ | $ | ||||||||||||
| Diluted | $ | $ | $ | $ | ||||||||||||
Equity awards and shares of Preferred Stock are disregarded in the calculation of diluted earnings per share if they are determined to be anti-dilutive. For the three and nine months ended September 30, 2023, all of the shares of the Preferred Stock were dilutive. For the three and nine months ended September 30, 2022, all of the shares of the Preferred Stock were anti-dilutive. For the three and nine months ended September 30, 2023, we had approximately
NOTE 8 – SEGMENT INFORMATION
Our business is comprised of
The following table presents financial information for each reportable segment (in millions):
| Three Months Ended | Nine Months Ended | |||||||||||||||
| September 30, | September 30, | September 30, | September 30, | |||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| Sales | ||||||||||||||||
| U.S. | $ | $ | $ | $ | ||||||||||||
| Canada | ||||||||||||||||
| International | ||||||||||||||||
| Consolidated sales | $ | $ | $ | $ | ||||||||||||
| Operating income (loss) | ||||||||||||||||
| U.S. | $ | $ | $ | $ | ||||||||||||
| Canada | ( | ) | ( | ) | ( | ) | ||||||||||
| International | ||||||||||||||||
| Total operating income | ||||||||||||||||
| Interest expense | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Other, net | ( | ) | ( | ) | ( | ) | ||||||||||
| Income before income taxes | $ | $ | $ | $ | ||||||||||||
| September 30, | December 31, | |||||||
| 2023 | 2022 | |||||||
| Total assets | ||||||||
| U.S. | $ | $ | ||||||
| Canada | ||||||||
| International | ||||||||
| Total assets | $ | $ | ||||||
Our sales by product line are as follows (in millions):
| Three Months Ended | Nine Months Ended | |||||||||||||||
| September 30, | September 30, | September 30, | September 30, | |||||||||||||
| Type | 2023 | 2022 | 2023 | 2022 | ||||||||||||
| Line Pipe | $ | $ | $ | $ | ||||||||||||
| Carbon Fittings and Flanges | ||||||||||||||||
| Total Carbon Pipe, Fittings and Flanges | ||||||||||||||||
| Valves, Automation, Measurement and Instrumentation | ||||||||||||||||
| Gas Products | ||||||||||||||||
| Stainless Steel and Alloy Pipe and Fittings | ||||||||||||||||
| General Products | ||||||||||||||||
| $ | $ | $ | $ | |||||||||||||
NOTE 9 – FAIR VALUE MEASUREMENTS
From time to time, we use derivative financial instruments to help manage our exposure to interest rate risk and fluctuations in foreign currencies.
Interest Rate Swap: In March 2018, we entered into a -year interest rate swap that became effective on March 31, 2018, with a notional amount of $
We designated the interest rate swap as an effective cash flow hedge utilizing the guidance under ASU 2017-12. As such, the valuation of the interest rate swap was recorded as an asset or liability, and the gain or loss on the derivative was recorded as a component of other comprehensive income (loss). Interest rate swap agreements are reported on the accompanying balance sheets at fair value utilizing observable Level 2 inputs such as yield curves and other market-based factors. We obtain dealer quotations to value our interest rate swap agreements. The fair value of our interest rate swap was estimated based on the present value of the difference between expected cash flows calculated at the contracted interest rates and the expected cash flows at current market interest rates. The fair value of the interest rate swap was an asset of $
On March 31, 2023, the interest rate swap agreement expired and was not extended with any new agreements or amendments. An immaterial net gain recorded as a component of other comprehensive loss was reclassified to interest expense as of March 31, 2023.
Foreign Exchange Forward Contracts:
With the exception of long-term debt, the fair values of our financial instruments, including cash and cash equivalents, accounts receivable, trade accounts payable and accrued liabilities, approximate carrying value. The carrying value of our debt was $
NOTE 10 – COMMITMENTS AND CONTINGENCIES
Litigation
Asbestos Claims. We are one of many defendants in lawsuits that plaintiffs have brought seeking damages for personal injuries that exposure to asbestos allegedly caused. Plaintiffs and their family members have brought these lawsuits against a large volume of defendant entities as a result of the defendants’ manufacture, distribution, supply or other involvement with asbestos, asbestos containing-products or equipment or activities that allegedly caused plaintiffs to be exposed to asbestos. These plaintiffs typically assert exposure to asbestos as a consequence of third-party manufactured products that our MRC Global (US) Inc. subsidiary purportedly distributed. As of September 30, 2023, we are named a defendant in approximately
Other Legal Claims and Proceedings. From time to time, we have been subject to various claims and involved in legal proceedings incidental to the nature of our businesses. We maintain insurance coverage to reduce financial risk associated with certain of these claims and proceedings. It is not possible to predict the outcome of these claims and proceedings. However, in our opinion, the likelihood that the ultimate disposition of any of these claims and legal proceedings will have a material adverse effect on our condensed consolidated financial statements is remote.
Product Claims. From time to time, in the ordinary course of our business, our customers may claim that the products that we distribute are either defective or require repair or replacement under warranties that either we or the manufacturer may provide to the customer. These proceedings are, in the opinion of management, ordinary and routine matters incidental to our normal business. Our purchase orders with our suppliers generally require the manufacturer to indemnify us against any product liability claims, leaving the manufacturer ultimately responsible for these claims. In many cases, state, provincial or foreign law provides protection to distributors for these sorts of claims, shifting the responsibility to the manufacturer. In some cases, we could be required to repair or replace the products for the benefit of our customer and seek our recovery from the manufacturer for our expense. In our opinion, the likelihood that the ultimate disposition of any of these claims and legal proceedings will have a material adverse effect on our condensed consolidated financial statements is remote.
Customer Contracts
We have contracts and agreements with many of our customers that dictate certain terms of our sales arrangements (pricing, deliverables, etc.). While we make every effort to abide by the terms of these contracts, certain provisions are complex and often subject to varying interpretations. Under the terms of these contracts, our customers have the right to audit our adherence to the contract terms. Historically, any settlements that have resulted from these customer audits have not been material to our condensed consolidated financial statements.
Purchase Commitments
We have purchase obligations consisting primarily of inventory purchases made in the normal course of business to meet operating needs. While our vendors often allow us to cancel these purchase orders without penalty, in certain cases, cancellations may subject us to cancellation fees or penalties depending on the terms of the contract.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should read the following discussion and analysis of our financial condition and results of operations in conjunction with our financial statements and related notes included elsewhere in this report. This discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions. As used in this Form 10-Q, unless otherwise indicated or the context otherwise requires, all references to the “Company,” “MRC Global,” “we,” “our” or “us” refer to MRC Global Inc. and its consolidated subsidiaries.
Cautionary Note Regarding Forward-Looking Statements
Management’s Discussion and Analysis of Financial Condition and Results of Operations (as well as other sections of this Quarterly Report on Form 10-Q) contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Forward-looking statements include those preceded by, followed by or including the words “will,” “expect,” “intended,” “anticipated,” “believe,” “project,” “forecast,” “propose,” “plan,” “estimate,” “enable” and similar expressions, including, for example, statements about our business strategy, our industry, our future profitability, growth in the industry sectors we serve, our expectations, beliefs, plans, strategies, objectives, prospects and assumptions, and estimates and projections of future activity and trends in the oil and natural gas industry. These forward-looking statements are not guarantees of future performance. These statements are based on management’s expectations that involve a number of business risks and uncertainties, any of which could cause actual results to differ materially from those expressed in or implied by the forward-looking statements. These statements involve known and unknown risks, uncertainties and other factors, most of which are difficult to predict and many of which are beyond our control, including the factors described under “Risk Factors,” that may cause our actual results and performance to be materially different from any future results or performance expressed or implied by these forward-looking statements. Such risks and uncertainties include, among other things:
| ● | decreases in capital and other expenditure levels in the industries that we serve; |
| ● | U.S. and international general economic conditions; |
| ● | global geopolitical events; | |
| ● | decreases in oil and natural gas prices; |
| ● | unexpected supply shortages; |
| ● | loss of third-party transportation providers; |
| ● | cost increases by our suppliers and transportation providers; |
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| ● | increases in steel prices, which we may be unable to pass along to our customers which could significantly lower our profit; |
| ● | our lack of long-term contracts with most of our suppliers; |
| ● | suppliers’ price reductions of products that we sell, which could cause the value of our inventory to decline; |
| ● | decreases in steel prices, which could significantly lower our profit; |
| ● | a decline in demand for certain of the products we distribute if tariffs and duties on these products are imposed or lifted; | |
| ● | holding more inventory than can be sold in a commercial time frame; | |
| ● | significant substitution of renewables and low-carbon fuels for oil and gas, impacting demand for our products; | |
| ● | risks related to adverse weather events or natural disasters; | |
| ● | environmental, health and safety laws and regulations and the interpretation or implementation thereof; | |
| ● | changes in our customer and product mix; | |
| ● | the risk that manufacturers of the products we distribute will sell a substantial amount of goods directly to end users in the industry sectors we serve; | |
| ● | failure to operate our business in an efficient or optimized manner; | |
| ● | our ability to compete successfully with other companies in our industry; |
| ● | our lack of long-term contracts with many of our customers and our lack of contracts with customers that require minimum purchase volumes; |
| ● | inability to attract and retain our employees or the potential loss of key personnel; |
| ● | adverse health events, such as a pandemic; |
| ● | interruption in the proper functioning of our information systems; |
| ● | the occurrence of cybersecurity incidents; |
| ● | risks related to our customers’ creditworthiness; |
| ● | the success of our acquisition strategies; |
| ● | the potential adverse effects associated with integrating acquisitions into our business and whether these acquisitions will yield their intended benefits; |
| ● | impairment of our goodwill or other intangible assets; |
| ● | adverse changes in political or economic conditions in the countries in which we operate; |
|
| ● | our significant indebtedness; | |
| ● | the dependence on our subsidiaries for cash to meet our parent company's obligations; | |
| ● | changes in our credit profile; | |
| ● | potential inability to obtain necessary capital; | |
| ● | the sufficiency of our insurance policies to cover losses, including liabilities arising from litigation; | |
| ● | product liability claims against us; | |
| ● | pending or future asbestos-related claims against us; |
| ● | exposure to U.S. and international laws and regulations, regulating corruption, limiting imports or exports or imposing economic sanctions; |
| ● | risks relating to ongoing evaluations of internal controls required by Section 404 of the Sarbanes-Oxley Act; |
| ● | risks related to changing laws and regulations, including trade policies and tariffs; and |
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| ● | the potential share price volatility and costs incurred in response to any shareholder activism campaigns. |
Undue reliance should not be placed on our forward-looking statements. Although forward-looking statements reflect our good faith beliefs, reliance should not be placed on forward-looking statements because they involve known and unknown risks, uncertainties and other factors, which may cause our actual results, performance or achievements to differ materially from anticipated future results, performance or achievements expressed or implied by such forward-looking statements. We undertake no obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future events, changed circumstances or otherwise, except to the extent law requires.
Overview
We are the leading global distributor of pipe, valves, fittings ("PVF") and other infrastructure products and services to diversified energy, industrial and gas utility end-markets. We provide innovative supply chain solutions, technical product expertise and a robust digital platform to customers globally through our leading position across each of our diversified end-markets including the following sectors:
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Gas Utilities (storage and distribution of natural gas) |
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Downstream, Industrial and Energy Transition (crude oil refining, petrochemical and chemical processing, general industrials and energy transition projects) |
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Production and Transmission Infrastructure (exploration, production and extraction, gathering, processing and transmission of oil and gas) |
We offer over 250,000 SKUs, including an extensive array of PVF, oilfield supply, valve automation and modification, measurement, instrumentation and other general and specialty products from our global network of over 9,000 suppliers. With over 100 years of experience, our approximately 2,900 employees serve approximately 10,000 customers through 218 service locations including regional distribution centers, service centers, corporate offices and third-party pipe yards, where we often deploy pipe near customer locations.
Key Drivers of Our Business
We derive our revenue predominantly from the sale of PVF and other supplies to energy, industrial and gas utility customers globally. Our business is dependent upon both the current conditions and future prospects in these industries and, in particular, our customers' maintenance and expansionary operating and capital expenditures. The outlook for PVF spending is influenced by numerous factors, including the following:
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Gas Utility and Energy Infrastructure Integrity and Modernization. Ongoing maintenance and upgrading of existing energy facilities, pipelines and other infrastructure equipment is a meaningful driver for business across the sectors we serve. This is particularly true for Gas Utilities, which is currently our largest sector by sales. Activity with customers in this sector is driven by upgrades and replacement of existing infrastructure as well as new residential and commercial development. Continual maintenance of an aging network of pipelines and local distribution networks is a critical requirement for these customers irrespective of broader economic conditions. As a result, this business tends to be more stable over time than our traditional oilfield-dependent businesses and moves independently of commodity prices. |
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| ● | Oil and Natural Gas Demand and Prices. Sales of PVF and infrastructure products to the oil and natural gas industry constitute a significant portion of our sales. As a result, we depend upon the maintenance and capital expenditures of oil and natural gas companies to explore for, produce and process oil, natural gas and refined products. Demand for oil and natural gas, current and projected commodity prices and the costs necessary to produce oil and gas impact customer capital spending, additions to and maintenance of pipelines, refinery utilization and petrochemical processing activity. Additionally, as these participants rebalance their capital investment away from traditional, carbon-based energy toward alternative sources, we expect to continue to supply them and enhance our product and service offerings to support their changing requirements, including in areas such as carbon capture utilization and storage, biofuels, offshore wind and hydrogen processing. | |
| ● | Economic Conditions. Changes in the general economy or in the energy sector (domestically or internationally) can cause demand for fuels, feedstocks and petroleum-derived products to vary, thereby causing demand for the products we distribute to materially change. |
| ● | Manufacturer and Distributor Inventory Levels of PVF and Related Products. Manufacturer and distributor inventory levels of PVF and related products can change significantly from period to period. Increased inventory levels by manufacturers or other distributors can cause an oversupply of PVF and related products in the industry sectors we serve and reduce the prices that we are able to charge for the products we distribute. Reduced prices, in turn, would likely reduce our profitability. Conversely, decreased manufacturer inventory levels may ultimately lead to increased demand for our products and often result in increased revenue, higher PVF pricing and improved profitability. |
| ● | Steel Prices, Availability and Supply and Demand. Fluctuations in steel prices can lead to volatility in the pricing of the products we distribute, especially carbon steel line pipe products, which can influence the buying patterns of our customers. A majority of the products we distribute contain various types of steel. The worldwide supply and demand for these products and other steel products that we do not supply, impact the pricing and availability of our products and, ultimately, our sales and operating profitability. Additionally, supply chain disruptions with key manufacturers or in markets in which we source products can impact the availability of inventory we require to support our customers. Furthermore, logistical challenges, including inflation and availability of freight providers and containers for shipping can also significantly impact our profitability and inventory lead-times. These constraints can also present an opportunity, as our supply chain expertise allows us to meet customer expectations when the competition may not. |
Recent Trends and Outlook
During the three months ended September 30, 2023, revenue increased 2% sequentially from the three months ended June 30, 2023, and decreased 2% from the three months ended September 30, 2022. We are now projecting lower growth for the remainder of 2023 for our U.S. segment than we previously anticipated primarily due to reduced activity in our Gas Utilities sector sales.
Gas Utilities
Our Gas Utility business continues to be our largest sector, making up 36% of our total com