NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MRC GLOBAL INC.
December 31, 2013
NOTE 1—SIGNIFICANT ACCOUNTING POLICIES
Business Operations
:
MRC Global Inc. is a holding company headquartered in Houston, Texas. Our wholly owned subsidiaries
are global distributors of pipe, valves, fittings and related products and services across each of the upstream (exploration, production and extraction of underground oil and gas), midstream (gathering and transmission of oil and gas, gas utilities, and the storage and distribution of oil and gas) and downstream (crude oil refining, petrochemical processing and general industrials) sectors. We have branches in principal industrial, hydrocarbon producing and refining areas throughout the United States, Canada, Europe, Asia and Australasia. Our products are obtained from a broad range of suppliers.
Basis of Presentation
:
The 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 such terms as “we,” “our” or “us”). All material intercompany balances and transactions have been eliminated in consolidation.
Use of Estimates
:
The preparation of financial statements in conformity with the accounting principles generally accepted in the United States of America requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reported period. We believe that our most significant estimates and assumptions are related to estimated losses on accounts receivable, the last-in, first-out (“LIFO”) inventory costing methodology, estimated realizable value on excess and obsolete inventories, goodwill, intangible assets, deferred taxes and self-insurance programs. Actual results could differ materially from those estimates.
Cash Equivalents
:
We consider all highly liquid investments with maturities of three months or less at the date of purchase to be cash equivalents.
Allowance for Doubtful Accounts
:
We evaluate the adequacy of the allowance for losses on receivables based upon periodic evaluation of accounts that may have a higher credit risk using information available about the customer and other relevant data. This formal analysis is inherently subjective and requires us to make significant estimates of factors affecting doubtful accounts, including customer specific information, current economic conditions, volume, growth and composition of the account, and other factors such as financial statements, news reports and published credit ratings. The amount of the allowance for the remainder of the trade balance is not evaluated individually but is based upon historical loss experience. Because this process is subjective and based on estimates, ultimate losses may differ from those estimates. Receivable balances are written off when we determine that the balance is uncollectible. Subsequent recoveries, if any, are credited to the allowance when received. The provision for losses on receivables is included in selling, general and administrative expenses in the accompanying consolidated statements of income.
Inventories
:
Our inventories are valued at the lower of cost, principally LIFO, or market. We believe that the use of LIFO results in a better matching of costs and revenues. This practice excludes certain inventories, which are held outside of the United States, approximating $264.0 million and $318.9 million at December 31, 2013 and 2012
, respectively
, which are valued at the lower of weighted-average cost or market. Our inventory is substantially comprised of finished goods.
Allowances for excess and obsolete inventories are determined based on analyses comparing inventories on hand to sales trends. The allowance, which totaled $23.2 million and $19.0 million at December 31, 2013 and 2012
, respectively
, is the amount deemed necessary to reduce the cost of the inventory to its estimated realizable value.
Debt Issuance Costs
:
We defer costs directly related to obtaining financing and amortize them over the term of the indebtedness on a straight-line basis. The use of the straight-line method does not produce results that are materially different from those which would result from the use of the effective interest method.
These
amounts are reflected in the consolidated statement of operations as a component of interest expense. Debt issuance costs are reflected in other assets and totaled $19.1 million and $25.2 million, net of accumulated amortization of $5.7 million and $4.8 million, at December 31, 2013 and 2012
, respectively
.
Fixed Assets
:
Land, buildings and equipment are stated on the basis of cost. For financial statement purposes, depreciation is computed over the estimated useful lives of such assets principally by the straight-line method; accelerated depreciation and cost recovery methods are used for income tax purposes. Leasehold improvements are amortized using the straight-line method over the shorter of the remaining lease term or the estimated useful life of the improvements. When assets are retired or otherwise disposed of, the cost and related accumulated depreciation are removed from the accounts and any gain or loss is reflected in income for the period. Maintenance and repairs are charged to expense as incurred.
Goodwill and Other Intangible Assets
:
Goodwill represents the excess of cost over the fair value of net assets acquired. Goodwill is tested for impairment annually or more frequently if circumstances indicate that impairment may exist. We evaluate goodwill for impairment at three reporting units that mirror our three segments (U.S., Canada and International).
The goodwill impairment test compares the carrying value of the reporting unit that has the goodwill with the estimated fair value of that reporting unit. If the carrying value is more than the estimated fair value, we then calculate the implied fair value of goodwill by deducting the fair value of all tangible and intangible net assets of the reporting unit from the estimated fair value of the reporting unit. Impairment losses are recognized to the extent that recorded goodwill exceeds implied goodwill. Our impairment methodology uses discounted cash flow and multiples of cash earnings valuation techniques, as well as valuation comparisons to similar businesses. These valuation methods require us to make certain assumptions and estimates regarding future operating results, the extent and timing of future cash flows, working capital, sales prices, profitability, discount rates and growth trends. While we believe that
these
assumptions and estimates are reasonable, the actual results may differ materially from the projected results.
Intangible assets with indefinite useful lives are tested for impairment annually or more frequently if circumstances indicate that impairment may exist. This test compares the carrying value of the indefinite lived intangible assets with their estimated fair value. If the carrying value is more than the estimated fair value, impairment losses are recognized in an amount equal to the excess of the carrying value over the estimated fair value. Our impairment methodology uses discounted cash flow and estimated royalty rate valuation techniques. These valuation methods require us to make certain assumptions and estimates regarding future operating results, sales prices, discount rates and growth trends. While we believe that such assumptions and estimates are reasonable, the actual results may differ materially from the projected results.
Other intangible assets primarily include trade names, customer bases and noncompetition agreements resulting from business acquisitions. Other intangible assets are recorded at fair value at the date of acquisition. Amortization is provided using the straight-line method over their estimated useful lives, ranging from two to twenty years.
The carrying value of amortizable intangible assets is subject to an impairment test when events or circumstances indicate a possible impairment. When events or circumstances indicate a possible impairment, we assess recoverability from future operations using undiscounted cash flows derived from the lowest appropriate asset group. If the carrying value exceeds the undiscounted cash flows, an impairment charge would be recognized to the extent that the carrying value exceeds the fair value, which is determined based on a discounted cash flow analysis. While we believe that assumptions and estimates utilized in the impairment analysis are reasonable, the actual results may differ materially from the projected results. These impairments are determined prior to performing our goodwill impairment test.
Derivatives and Hedging
:
From time to time, we utilize interest rate swaps to reduce our exposure to potential interest rate increases. Changes in the fair values of our derivative instruments are based upon independent market quotes. We do not designate our interest rate swaps as hedging instruments; therefore, we record our interest rate swaps on the consolidated balance sheets at fair value, with the gains and losses recognized in earnings in the period of change.
We utilize foreign exchange forward contracts (exchange contracts) and options to manage our foreign exchange rate risks resulting from purchase commitments and sales orders. Changes in the fair values of our exchange contracts are based upon independent market quotes. We do not designate our exchange contracts as hedging instruments; therefore, we record our exchange contracts on the consolidated balance sheets at fair value, with the gains and losses recognized in earnings in the period of change.
Fair Value
:
We measure certain of our assets and liabilities at fair value on a recurring basis. Fair value is an exit price, representing the amount that would be received to sell an asset or be paid to transfer a liability in an orderly transaction between market participants. As such, fair value is a market-based measurement that is determined based on assumptions that market participants would use in pricing an asset or a liability. A three-tier fair value hierarchy is established as a basis for considering such assumptions for inputs used in the valuation methodologies to measuring fair value:
Level 1
: Quoted prices (unadjusted) in active markets for identical assets or liabilities that the entity has the ability to access at the measurement date.
Level 2
: Significant observable inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly, such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active, and other inputs that are observable or can be corroborated by observable market data.
Level 3
: Significant unobservable inputs for the asset or liability. Unobservable inputs reflect our own assumptions about the assumptions that market participants would use in pricing an asset or liability (including all assumptions about risk).
Certain assets and liabilities are measured at fair value on a nonrecurring basis. Our assets and liabilities measured at fair value on a nonrecurring basis include property, plant and equipment, goodwill and other intangible assets. We do not measure these assets at fair
value on an ongoing basis; however, these assets are subject to fair value adjustments in certain circumstances, such as when there is evidence of impairment.
Our impairment methodology for goodwill and other intangible assets uses both (i) a discounted cash flow analysis requiring certain assumptions and estimates to be made regarding the extent and timing of future cash flows, discount rates and growth trends and (ii) valuation based on our publicly traded common stock. As all of the assumptions employed to measure these assets and liabilities on a nonrecurring basis are based on management’s judgment using internal and external data, these fair value determinations are classified as Level 3. We have not elected to apply the fair value option to any of our eligible financial assets and liabilities.
Insurance
:
We are self-insured for physical damage to automobiles
that we
own
, lease or rent
,
and
product warranty and recall
liabilities
. In addition, we maintain a nonmaterial deductible program as they relate to insurance for property, stock throughput, inventory, workers’ compensation, automobile liability, asbestos claims, general liability claims (including, among others, certain product liability claims for property damage, death or injury) and employee healthcare. These programs have deductibles ranging from $25,000 to $1.0 million and are secured by various letters of credit totaling $6.5 million. Our estimated liability and related expenses for claims are based in part upon estimates
that
insurance carri
ers, third-party administrators
and actuaries
provide. We believe that i
nsurance reserves are
sufficient to cover outstanding claims, including those incurred but not reported as of the estimation date. Further, we maintain a commercially reasonable umbrella/excess policy that covers liabilities in excess of the primary limits. We do not have excess coverage for physical damage to automobiles
that we own, lease or rent
,
and
product warranty and recall
liabilities
. Our accrued liabilities related to all deductibles/retentions under insurance programs (other than employee healthcare) were $7.8 million and $5.9 million as of December 31, 2013 and 2012, respectively. In the area of employee healthcare, we have a commercially reasonable excess stop loss protection on a per person per year basis. Reserves for self-insurance accrued liabilities for employee healthcare were $3.3 million and $4.0 million as of December 31, 2013 and 2012, respectively.
Income Taxes
:
We use the liability method for determining our income taxes, under which current and deferred tax liabilities and assets are recorded in accordance with enacted tax laws and rates. Under this method, the amounts of deferred tax liabilities and assets at the end of each period are determined using the tax rate expected to be in effect when taxes are actually paid or recovered.
Deferred tax assets and liabilities are recorded for differences between the financial reporting and tax bases of assets and liabilities using the tax rate expected to be in effect when the taxes will actually be paid or refunds received. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in earnings in the period that includes the enactment date. A valuation allowance to reduce deferred tax assets is established when it is more likely than not that some portion or all of the deferred tax assets will not be realized.
In determining the need for valuation allowances and our ability to utilize our deferred tax assets, we consider and make judgments regarding all the available positive and negative evidence, including the timing of the reversal of deferred tax liabilities, estimated future taxable income, ongoing, prudent and feasible tax planning strategies and recent financial results of operations. The amount of the deferred tax assets considered realizable however could be adjusted in the future if objective negative evidence in the form of cumulative losses is no longer present in certain jurisdictions and additional weight may be given to subjective evidence such as our projections for growth.
Our tax provision is based upon our expected taxable income and statutory rates in effect in each country in which we operate. We are subject to the jurisdiction of numerous domestic and foreign tax authorities, as well as to tax agreements and treaties among these governments. Determination of taxable income in any jurisdiction requires the interpretation of the related tax laws and regulations and the use of estimates and assumptions regarding significant future events such as the amount, timing and character of deductions, permissible revenue recognition methods under the tax law and the sources and character of income and tax credits. Changes in tax laws, regulations, agreements and treaties, foreign currency exchange restrictions or our level of operations or profitability in each taxing jurisdiction could have an impact on the amount of income taxes we provide during any given year.
A tax benefit from an uncertain tax position may be recognized when it is more likely than not that the position will be sustained upon examination, including any related appeals or litigation processes, on the basis of the technical merits. We adjust these liabilities when our judgment changes as a result of the evaluation of new information not previously available. Because of the complexity of some of these uncertainties, the ultimate resolution may result in a payment that is materially different from our current estimate of the tax liabilities. These differences will be reflected as increases or decreases to income tax expense in the period in which the new information is available. We classify interest and penalties related to unrecognized tax positions as income taxes in our financial statements.
We intend to permanently reinvest certain earnings of our foreign subsidiaries in operations outside the U.S., and accordingly, we have not provided for U.S. income taxes on such earnings.
Foreign Currency Translation and Transactions
:
The functional currency of our foreign operations is the applicable local currency. The cumulative effects of translating the balance sheet accounts from the functional currency into the U.S. dollar at current exchange
rates are included in accumulated other comprehensive income. The balance sheet accounts (with the exception of stockholders’ equity) are translated using current exchange rates as of the balance sheet date. Stockholders’ equity is translated at historical exchange rates and revenue and expense accounts are translated using a weighted-average exchange rate during the year. Gains or losses resulting from foreign currency transactions are recognized in the consol
idated statements of income
.
Equity-Based Compensation
:
Our equity-based compensation
consisted and consists of (i
) restricted common units and profit units of PVF Holding
s LLC, our former parent, and (ii
) restricted stock and nonqualified stock options of our Company.
The cost of employee services received in exchange for an award of an equity instrument is measured based on the grant-date fair value of the award. Our policy is to expense equity-based compensation using the fair-value of awards granted, modified or settled. Restricted common units, profit units and restricted stock are credited to equity as they are expensed over their vesting periods based on the grant date value of the shares vested. The fair value of nonqualified stock options is measured on the grant date of the related equity instrument using the Black-Scholes option-pricing model and is recognized as compensation expense over the applicable vesting period.
Revenue Recognition
:
Sales to our principal customers are made pursuant to agreements that normally provide for transfer of legal title and risk upon shipment. We recognize revenue as products are shipped, title has transferred to the customer and the customer assumes the risks and rewards of ownership, and collectability is reasonably assured. Freight charges billed to customers are reflected in revenues. Return allowances are estimated using historical experience. Amounts received in advance of shipment are deferred and recognized as revenue when the products are shipped and title transfers. Sales taxes collected from customers and remitted to governmental authorities are accounted for on a net basis and therefore are excluded from net sales in the accompanying consolidated statements of income.
Cost of Sales
:
Cost of sales includes the cost of inventory sold and related items, such as vendor rebates, inventory allowances, and shipping and handling costs associated with inbound and outbound freight
, as well as depreciation and amortization and amortization of intangible assets
. Certain purchasing costs and warehousing activities (including receiving, inspection and stocking costs), as well as general warehousing expenses, are included in selling, general and administrative expenses and not in cost of sales. As such, our gross profit may not be comparable to others that may include these expenses as a component of cost of sales. Purchasing and warehousing costs approximated $37.2 million, $34.8 million, and $27.3
million for the years ended December 31, 2013, 2012 and 2011, respectively.
Earnings per Share
:
Basic earnings per share are computed based on the weighted-average number of common shares outstanding, excluding any dilutive effects of unexercised stock options and unvested restricted stock. Diluted earnings per share are computed based on the weighted-average number of common shares outstanding including any dilutive effect of unexercised stock options and unvested restricted stock. The dilutive effect of unexercised stock options and unvested restricted stock is calculated under the treasury stock method.
Concentration of Credit Risk
:
Most of our business activity is with customers in the energy and industrial sectors. In the normal course of business, we grant credit to these customers in the form of trade accounts receivable. These receivables could potentially subject us to concentrations of credit risk; however, we minimize this risk by closely monitoring extensions of trade credit. We generally do not require collateral on trade receivables. We have a broad customer base doing business in many regions of the world. During 2013, 2012 and 2011, we did not have sales to any one customer in excess of 10% of gross sales. At those respective year-ends, no individual customer balances exceeded 10% of gross accounts receivable.
We have a broad supplier base, sourcing our products in most regions of the world. During 2013, 2012 and 2011, we did not have purchases from any one vendor in excess of 10% of our gross purchases. At those respective year-ends no individual vendor balance exceeded 10% of gross accounts payable.
We maintain the majority of our cash and cash equivalents with several financial institutions. These financial institutions are located in many different geographical regions with varying economic characteristics and risks. Deposits held with banks may exceed insurance limits. We believe the risk of loss associated with our cash equivalents to be remote.
Segment Reporting
:
We have three operating and reportable segments, the United States of America, Canada, and International, which includes Europe, Asia, and Australasia. These segments represent our global business of providing pipe, valves, fittings and related products and services to the energy and industrial sectors, across each of the upstream (exploration, production and extraction of underground oil and gas), midstream (gathering and transmission of oil and gas, gas utilities, and the storage and distribution of oil and gas) and downstream (crude oil refining and petrochemical processing) markets, through our distribution operations located throughout the world.
Reclassifications
:
Certain immaterial amounts in the prior years’ balance sheet and statements of cash flows have been reclassified to conform to the current year’s presentation.
Recently Issued Accounting Standards:
In February 2013, the Financial Accounting Standards Board (“FASB”) issued Standards Update
No. 2013-05, Parent’s Accounting for the Cumulative Translation Adjustment upon Derecognition of Certain Subsidiaries or Groups of Assets within a Foreign Entity or of an Investment in a Foreign Entity (ASU 2013-05), which specifies that a cumulative translation adjustment (“CTA”) should be released into earnings when an entity ceases to have a controlling financial interest in a subsidiary or group of assets within a consolidated foreign entity and the sale or transfer results in the complete or substantially complete liquidation of the foreign entity. For sales of an equity method investment that is a foreign entity, a pro rata portion of CTA attributable to the investment would be recognized in earnings upon sale of the investment. When an entity sells either a part or all of its investment in a consolidated foreign entity, CTA would be recognized in earnings only if the sale results in the parent no longer having a controlling financial interest in the foreign entity. CTA would be recognized in earnings in a business combination achieved in stages. ASU 2013-05
will be
effective for us prospectively in 2014. We do not expect this update to have a material impact on our financial statements.
In July 2013, the FASB
issued Standards Update No. 2013-
11, Income Taxes (Topic 740), Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists. The objective of this update is to eliminate the diversity in practice in the presentation of unrecognized tax benefits when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists. Under this guidance, an unrecognized tax benefit, or a portion of an unrecognized tax benefit, should be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss or a tax credit carryforward, except in certain circumstances. This update does not require any new disclosures and is effective for annual and interim periods beginning after December 31, 2013. The amendments in this update will be applied prospectively to all unrecognized tax benefits that exist at the effective date. W
e do not expect this update to have a material impact on our financial statements.
NOTE 2—ACQUISITIONS
In 2013, we completed two acquisitions for an aggregate purchase price of $46.8 million. These acquisitions included:
|
"
|
|
The assets and operations
of Dan H. Brown, Inc., d/b/a Flow Control Products (“Flow Control”). Flow Control is a leading provider in pneumatic and electro-hydraulic valve automation packages and related field support to the Permian Basin.
|
|
"
|
|
The assets and operations of
Flangefit
t
Stainless Ltd. Flangefit
t
, headquartered in Warrington, England, with a location in Aberdeen, Scotland, is a leading pipe, flange and fitting (PFF) distributor in the oil and gas industry
in England
.
|
The preliminary purchase price allocation of each acquisition was based on preliminary valuations. Our estimates and assumptions are subject to change upon the receipt and review of final valuations.
The goodwill recognized for the acquisitions was primarily attributable to
the expected profitability of the acquired business
es
and synergies expected to arise after the acquisitions
.
Goodwill recorded in connection with these transactions is deduct
i
ble. The consideration paid for these acquisitions has been allocated as follows (in millions):
|
|
|
2013
|
|
Acquisitions
|
Net assets acquired:
|
|
Current assets, net of cash acquired
|
$ 18.6
|
Other long-term assets
|
1.8
|
Customer base intangibles
|
9.7
|
Other intangible assets
|
2.3
|
Goodwill
|
24.7
|
Current liabilities
|
(9.8)
|
Other long-term liabilities
|
(0.5)
|
Cash consideration paid
|
$ 46.8
|
In 2012, we completed three acquisitions for an aggregate purchase price of $152.4 million. These acquisitions included OneSteel Piping Systems Australia (“MRC PSA”), a PVF distributor supplying the oil and gas, mining and mineral processing industries in Australia, the assets of Chaparral Supply with support in the Mississippian Lime formation in Oklahoma and Kansas, and the assets and operations of Production Specialty Services, Inc. (“PSS”), a PVF distributor in the Permian Basin and Eagle Ford shale regions of Texas and New Mexico.
In 2011, we completed two acquisitions for an aggregate purchase price of $41.9 million. These acquisitions included Stainless Pipe and Fittings Australia Pty. Ltd. (“MRC SPF”), a distributor of stainless steel piping products, and certain assets and operations of Valve Systems and Controls (“VSC”), a Houston, Texas based company specializing in valve automation.
The impact of these transactions was not material to our financial statements in each of these re
spective years. Accordingly,
pro forma information has
not
been presented.
NOTE 3—ACCOUNTS RECEIVABLE
The rollforward of our allowance for doubtful accounts is as follows (in thousands):
|
|
|
|
|
|
|
December 31,
|
|
2013
|
|
2012
|
|
2011
|
Allowance for doubtful accounts
|
|
|
|
|
|
Beginning balance
|
$ 5,270
|
|
$ 4,815
|
|
$ 4,451
|
Net Charge-offs
|
(2,435)
|
|
(1,973)
|
|
(69)
|
Provision
|
(298)
|
|
2,428
|
|
433
|
Ending balance
|
$ 2,537
|
|
$ 5,270
|
|
$ 4,815
|
Our accounts receivable is also presented net of
sales returns and
allowances. Those allowances approximated
$3.1
million and $
3.3
million at
December 31, 2013 and 2012
, respectively
.
NOTE 4—INVENTORIES
The composition of our inventory is as follows (in thousands):
|
|
|
|
|
December 31,
|
|
2013
|
|
2012
|
Finished goods inventory at average cost:
|
|
|
|
Energy carbon steel tubular products
|
$ 362,449
|
|
$ 387,609
|
Valves, fittings, flanges and all other products
|
763,119
|
|
752,630
|
|
1,125,568
|
|
1,140,239
|
Less: Excess of average cost over LIFO cost (LIFO reserve)
|
(130,802)
|
|
(150,982)
|
Less: Other inventory reserves
|
(23,199)
|
|
(19,029)
|
|
$ 971,567
|
|
$ 970,228
|
During 201
2
, our inventory quantities were reduced, resulting in a liquidation of a LIFO inventory layer that was carried at a lower cost prevailing from a prior year, as compared with current costs in the current year (a “LIFO decrement”). A LIFO decrement results in the erosion of layers created in earlier years, and, therefore, a LIFO layer is not created for years that have decrements. In
2012, the effect of this LIFO decrement decreased cost of sales by approximately $
1.3
million
. There was no LIFO decrement in
2013
.
NOTE 5—PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
December 31,
|
|
Depreciable Life
|
|
2013
|
|
2012
|
Land and improvements
|
-
|
|
$ 16,930
|
|
$ 17,465
|
Building and building improvements
|
40 years
|
|
63,494
|
|
58,090
|
Machinery and equipment
|
3 to 10 years
|
|
137,254
|
|
130,289
|
Property held under capital leases
|
20 to 30 years
|
|
4,438
|
|
3,500
|
|
|
|
222,116
|
|
209,344
|
Allowances for depreciation and amortization
|
|
|
(103,193)
|
|
(86,886)
|
|
|
|
$ 118,923
|
|
$ 122,458
|
NOTE 6—GOODWILL AND OTHER INTANGIBLE ASSETS
The changes in the carrying amount of goodwill by segment for t
he years ended December 31, 2013, 2012 and 2011
are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
US
|
|
Canada
|
|
International
|
|
Total
|
Goodwill at December 31, 2010 (1)
|
|
$ 509,478
|
|
$ -
|
|
$ 39,906
|
|
$ 549,384
|
Acquisition of VSC
|
|
2,780
|
|
-
|
|
-
|
|
2,780
|
Acquisition of MRC SPF
|
|
-
|
|
-
|
|
11,565
|
|
11,565
|
Other
|
|
(211)
|
|
-
|
|
-
|
|
(211)
|
Effect of foreign currency translation
|
|
-
|
|
-
|
|
(2,248)
|
|
(2,248)
|
|
|
|
|
|
|
|
|
|
Goodwill at December 31, 2011 (1)
|
|
$ 512,047
|
|
$ -
|
|
$ 49,223
|
|
$ 561,270
|
Acquisition of MRC PSA
|
|
-
|
|
-
|
|
21,829
|
|
21,829
|
Acquisition of PSS
|
|
25,051
|
|
-
|
|
-
|
|
25,051
|
Adjustment of MRC SPF purchase price
|
|
-
|
|
-
|
|
1,197
|
|
1,197
|
Effect of foreign currency translation
|
|
-
|
|
-
|
|
1,045
|
|
1,045
|
|
|
|
|
|
|
|
|
|
Goodwill at December 31, 2012 (1)
|
|
$ 537,098
|
|
$ -
|
|
$ 73,294
|
|
$ 610,392
|
Acquisition of Flow Control
|
|
15,257
|
|
-
|
|
-
|
|
15,257
|
Acquisition of Flangefitt
|
|
-
|
|
-
|
|
9,472
|
|
9,472
|
Adjustment of PSS purchase price
|
|
(378)
|
|
-
|
|
-
|
|
(378)
|
Effect of foreign currency translation
|
|
-
|
|
-
|
|
(2,459)
|
|
(2,459)
|
|
|
|
|
|
|
|
|
|
Goodwill at December 31, 2013 (1)
|
|
$ 551,977
|
|
$ -
|
|
$ 80,307
|
|
$ 632,284
|
(1)
Net of accumulated impairment losses of
$240.9
million
and
$69.0
million
in the U.S and Canadian segments, respectively.
Other intangible assets by major classification consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
|
|
Amortization
|
|
|
|
Accumulated
|
|
Net Book
|
|
|
Period (in years)
|
|
Gross
|
|
Amortization
|
|
Value
|
December 31, 2013
|
|
|
|
|
|
|
|
|
Customer base
|
|
15.8
|
|
$ 730,108
|
|
$ (291,116)
|
|
$ 438,992
|
Amortizable trade names
|
|
6.1
|
|
18,099
|
|
(9,268)
|
|
8,831
|
Indefinite lived trade names (1)
|
|
N/A
|
|
260,023
|
|
-
|
|
260,023
|
Noncompete agreements
|
|
3.0
|
|
244
|
|
(81)
|
|
163
|
|
|
15.5
|
|
$ 1,008,474
|
|
$ (300,465)
|
|
$ 708,009
|
|
|
|
|
|
|
|
|
|
December 31, 2012
|
|
|
|
|
|
|
|
|
Customer base
|
|
15.8
|
|
$ 721,010
|
|
$ (242,355)
|
|
$ 478,655
|
Amortizable trade names
|
|
6.7
|
|
15,671
|
|
(6,577)
|
|
9,094
|
Indefinite lived trade names (1)
|
|
N/A
|
|
260,023
|
|
-
|
|
260,023
|
Noncompete agreements
|
|
3.8
|
|
2,470
|
|
(970)
|
|
1,500
|
|
|
15.6
|
|
$ 999,174
|
|
$ (249,902)
|
|
$ 749,272
|
(1)
Net of accumulated impairment losses of
$76.
2
million.
Amortization of Intangible Assets
Total amortization of intangible assets for each of the years ending December 31, 2014 to 2018 is currently estimated as follows (in thousands):
|
|
|
|
|
|
2014
|
|
$ 53,830
|
|
|
|
2015
|
|
53,207
|
|
|
|
2016
|
|
51,671
|
|
|
|
2017
|
|
50,023
|
|
|
|
2018
|
|
49,092
|
|
|
|
NOTE 7—LONG-TERM DEBT
The significant components of our long-term debt are as follows (in thousands):
|
|
|
|
|
December 31,
|
|
2013
|
|
2012
|
Senior Secured Term Loan B, net of discount of $4,457 and $6,345
|
$ 787,059
|
|
$ 642,030
|
Global ABL Facility
|
199,630
|
|
608,006
|
Other
|
145
|
|
6,553
|
|
986,834
|
|
1,256,589
|
Less current portion
|
7,935
|
|
6,500
|
|
$ 978,899
|
|
$ 1,250,089
|
Senior Secured Term Loan B:
In November 2012, we entered into a
$650
million
seven
-year Term Loan B (the “Term Loan”), with Bank of America N.A. as administrative agent, and other lenders from time to time parties thereto. In November 2013, we increased the principal amount of the term loan to
$793.5
million and modified the interest rates to those outlined below.
Accordion.
The Term Loan allows for incremental increases up to an aggregate of
$200
million, plus an additional amount such that the Company’s senior secured leverage ratio (the ratio of the Company’s Consolidated EBITDA (as defined under the Term Loan) to senior secured debt) (net of up to
$75
million of unrestricted cash) would not exceed
3.50
to 1.00.
Maturity.
The scheduled maturity date of the Term Loan is
November 9, 2019
. The Term Loan will amortize in equal quarterly installments at
1%
a year with the payment of the balance at maturity.
Guarantees
. The Company and all of the U.S. borrower’s current and future wholly owned material U.S. subsidiaries guaranteed the Term Loan subject to certain exceptions.
Security.
The Term Loan is secured by a first lien on all of the Company’s assets and the assets of its domestic subsidiaries, subject to certain exceptions and other than the collateral securing the Global ABL Facility (which includes accounts receivable, inventory and related assets, collectively, the “ABL collateral”), and by a second lien on the ABL collateral. In addition, a pledge secures the Term Loan of all the capital stock of the Company’s domestic subsidiaries and
65%
of the capital stock of its first tier foreign subsidiaries, subject to certain exceptions.
Interest Rates and Fees.
The Company has the option to pay interest at a base rate, subject to a floor of
2.00%
, plus an applicable margin, or at a rate based on LIBOR, subject to a floor of
1.00%
, plus an applicable margin. The applicable margin for base rate loans is
300
basis points, and the applicable margin for LIBOR loans is
400
basis points. The margin steps down by
25
basis points if the Company’s consolidated total leverage ratio (as defined under the Term Loan) is less than
2.50
to 1.00.
Voluntary Prepayment.
The Company is able to voluntarily prepay the principal without penalty or premium, other than a
1%
premium for re-pricing transactions that occur prior to May 19, 2014.
Mandatory Prepayment
. The Company is required to repay the Term Loan with certain asset sale and insurance proceeds, certain debt proceeds and
50%
of excess cash flow (reducing to
25%
if the Company’s senior secured leverage ratio is no more than
2.75
to 1.00 and
0%
if the Company’s senior secured leverage ratio is no more than
2.50
to 1.00). The
C
ompany is not required to make a mandatory prepayment in 2014 related to the fiscal year 2013.
Restrictive Covenants.
The Term Loan does not include any financial covenants.
The Term Loan contains restrictive covenants (in each case, subject to exclusions) that limit, among other things, the ability of the Company and its restricted subsidiaries (including the Borrower) to:
•
make investments;
•
prepay certain indebtedness;
•
grant liens;
•
incur additional indebtedness;
•
sell assets;
•
make fundamental changes;
•
enter into transactions with affiliates; and
•
in the case of the Company, to pay dividends.
The Term Loan also contains other customary restrictive covenants. The covenants are subject to various baskets and materiality thresholds, with certain of the baskets permitted by the restrictions on the repayment of subordinated indebtedness, restricted payments and investments being available only when the senior secured leverage ratio of the Company and its restricted subsidiaries is less than
3.25
:1.00.
The Term Loan provides that the Company and its restricted subsidiaries may incur any first lien indebtedness that is
pari passu
to the Term Loan so long as the pro forma senior secured leverage ratio of the Company and its restricted subsidiaries is less than or equal to
3.50
:1.00. The Company and its restricted subsidiaries may incur any second lien indebtedness so long as the pro forma junior secured leverage ratio of the Company and its restricted subsidiaries is less than or equal to
4.00
:1.00. The Company and its restricted subsidiaries may incur any unsecured indebtedness so long as the total leverage ratio of the Company and its restricted subsidiaries is less than or equal to
5.00
:1.00. Additionally, under the Term Loan, the Company and its restricted subsidiaries may incur indebtedness under the Global ABL Facility (or any replacement facility) in an amount not to exceed the greater of
$1.3
billion and a borrowing base (equal to, subject to certain exceptions,
85%
of all accounts receivable and
65%
of the book value of all inventory owned by the Company and its restricted subsidiaries).
The Term Loan contains certain customary representations and warranties, affirmative covenants and events of default, including, among other things, payment defaults, breaches of representations and warranties, covenant defaults, cross-defaults to certain indebtedness, certain events of bankruptcy, certain events under ERISA, judgment defaults, actual or asserted failure of any material guaranty or security documents supporting the Term Loan to be in full force and effect and change of control. If such an event of default occurs, the Agent under the Term Loan is entitled to take various actions, including the acceleration of amounts due under the Term Loan and all other actions that a secured creditor is permitted to take following a default.
Global ABL Credit Facility:
In March 2012, we entered into a multi-currency global asset-based revolving credit facility (the “Global ABL Facility”) which replaced our then existing asset-based lending credit facility, our MRC Transmark term loan and revolving credit facility and our MRC Transmark overdraft facility. The
five
-year Global ABL Facility is comprised of
$1.25
billion of total revolving credit facilities, including
$977
million in the United States,
$170
million in Canada,
$12
million in the United Kingdom,
$75
million in Australia,
$9
million in the Netherlands and
$7
million in Belgium. The facility contains an accordion feature that allows us to increase the principal amount of the facility by up to
$300
million.
Each of our current and future wholly owned material U.S. subsidiaries and MRC Global Inc. guarantees the obligations of our borrower subsidiaries under the Global ABL Facility. Additionally, each of our non-U.S. borrower subsidiaries guarantees the obligations of our other non-U.S. borrower subsidiaries under the Global ABL Facility.
Obligations under the U.S. tranche are primarily secured, subject to certain exceptions, by a first-priority security interest in the accounts receivable, inventory and related assets of our wholly owned, material U.S. subsidiaries. The obligations of any of our non-U.S. borrower subsidiaries are primarily secured, subject to certain exceptions, by a first-priority security interest in the accounts receivable, inventory and related assets of the non-U.S. subsidiary and our wholly owned material U.S. subsidiaries.
No non-U.S. subsidiary guarantees the U.S. tranche and no property of our non-U.S. subsidiaries secures the U.S. tranche. The security interest in accounts receivable, inventory and related assets of the U.S. borrower subsidiaries ranks prior to the security interest in this collateral which secures the Term Loan.
Each of our non-U.S. borrower subsidiaries has a separate standalone borrowing base that limits the non-U.S. subsidiary’s ability to borrow under its respective tranche, provided that the non-U.S. subsidiaries may utilize excess availability under the U.S. tranche to borrow amounts in excess of their respective borrowing bases (but not to exceed the applicable commitment amount for the foreign
subsidiary’s jurisdiction), which utilization will reduce availability under the U.S. tranche dollar for dollar.
Subject to the foregoing, our ability to borrow in each jurisdiction, other than Belgium, under the Global ABL Facility is limited by a borrowing base in that jurisdiction equal to
85%
of eligible receivables, plus the lesser of
70%
of eligible inventory and
85%
of appraised net orderly liquidation value of the inventory. In Belgium, our borrowing is limited by a borrowing base determined under Belgian law.
U.S. borrowings under the facility bear interest at LIBOR plus a margin varying between
1.50%
and
2.00%
based on our fixed charge coverage ratio. Borrowings by our foreign borrower subsidiaries are generally subject to the same interest rate margins with the benchmark rate for such borrowings varying based on the currency in which such borrowings are made.
Senior Secured Notes:
In a series of transactions from June to September 2012, we purchased in the open market
$188.7
million in principal of our
9.50%
senior secured notes due 2016 for
$205.0
million. We incurred a pre-tax loss on the purchase of the senior secured notes of
$21.7
million related to the purchase premium, the write off of unamortized deferred financing costs and the write off of original discount.
In November 2012, we redeemed the remaining
$861.3
million of senior secured notes. The early redemption required the payment of a premium of
$68.9
million. When combined with the write off of unamortized deferred financing costs and write off of original issue discount, this redemption resulted in a pre-tax loss of
$92.2
million.
Availability
:
At December 31, 2013, availability under our revolving credit facilities was
$776.9
million.
Interest on Borrowings
:
The interest rates on our borrowings outstanding at December 31, 2013 and 2012, including the amortization of original issue discount on the Term Loan, were as follows:
|
|
|
|
|
December 31,
|
|
2013
|
|
2012
|
Senior Secured Term Loan B, net of discount
|
5.09%
|
|
6.39%
|
Global ABL Facility
|
2.12%
|
|
2.21%
|
Maturities of Long-Term Debt
:
At December 31, 2013, annual maturities of long-term debt during the next five years and thereafter are as follows (in thousands):
|
|
2014
|
$ 7,935
|
2015
|
8,080
|
2016
|
7,935
|
2017
|
207,565
|
2018
|
7,935
|
Thereafter
|
747,384
|
NOTE 8—DERIVATIVE FINANCIAL INSTRUMENTS
We use derivative financial instruments to help manage our exposure to interest rate risk and fluctuations in foreign currencies. All of our derivative instruments are freestanding and, accordingly, changes in their fair market value are recorded in earnings.
In December 2013, we entered into foreign exchange forward con
tracts with a notional amount of $1.6 billion Norwegian Krone
(
$260
million
)
related to
the
January 2014 acquisition of Stream AS
.
The table below provides data about the fair value of the derivative instruments that are recorded in our consolidated balance sheets (in thousands):
|
|
|
|
|
|
|
|
|
December 31, 2013
|
|
December 31, 2012
|
|
Assets
|
|
Liabilities
|
|
Assets
|
|
Liabilities
|
Derivatives not designated as hedging instruments:
|
|
|
|
|
|
|
|
Foreign exchange forward contracts (1)
|
$ 4,603
|
|
$ -
|
|
$ 3
|
|
$ -
|
|
(1)
|
|
Included in “Accrued expenses and other current liabilities” or “other current assets” in our consolidated balance sheets. The total notional amount of our forward foreign exchange contracts was approximately $331 million and $69 million at
December
31, 2013 and 2012
, respectively
.
|
The table below provides data about the amount of gains and (losses) recognized in our consolidated statements of operations related to our derivative instruments (in thousands):
|
|
|
|
|
|
|
Year Ended December 31,
|
Derivatives not designated as hedging instruments:
|
2013
|
|
2012
|
|
2011
|
Foreign exchange forward contracts
|
$ 4,731
|
|
$ 176
|
|
$ 71
|
Interest rate contracts
|
$ -
|
|
$ 2,010
|
|
$ 6,973
|
NOTE 9—INCOME TAXES
The components of our income before income taxes were (in thousands):
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2013
|
|
2012
|
|
2011
|
United States
|
$ 231,434
|
|
$ 156,226
|
|
$ 50,654
|
Foreign
|
5,477
|
|
25,470
|
|
5,114
|
|
$ 236,911
|
|
$ 181,696
|
|
$ 55,768
|
Income taxes included in the consolidated statements of income consist of (in thousands):
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2013
|
|
2012
|
|
2011
|
Current:
|
|
|
|
|
|
Federal
|
$ 90,063
|
|
$ 65,563
|
|
$ 32,080
|
State
|
8,058
|
|
6,569
|
|
2,878
|
Foreign
|
6,518
|
|
12,038
|
|
8,188
|
|
104,639
|
|
84,170
|
|
43,146
|
|
|
|
|
|
|
Deferred:
|
|
|
|
|
|
Federal
|
(21,102)
|
|
(15,776)
|
|
(14,960)
|
State
|
2,818
|
|
(1,256)
|
|
(1,177)
|
Foreign
|
(1,539)
|
|
(3,400)
|
|
(225)
|
|
(19,823)
|
|
(20,432)
|
|
(16,362)
|
Income tax expense
|
$ 84,816
|
|
$ 63,738
|
|
$ 26,784
|
Our effective tax rate varied from the statutory federal income tax rate for the following reasons (in thousands):
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2013
|
|
2012
|
|
2011
|
Federal tax expense at statutory rates
|
$ 82,918
|
|
$ 63,474
|
|
$ 19,518
|
State taxes
|
3,855
|
|
3,453
|
|
977
|
Nondeductible expenses
|
1,152
|
|
1,123
|
|
1,121
|
Effect of tax rate changes on existing temporary differences
|
3,074
|
|
-
|
|
3,993
|
Effect of foreign operations
|
(9,752)
|
|
(3,565)
|
|
(499)
|
Change in valuation allowance
|
7,714
|
|
(78)
|
|
522
|
Other
|
(4,145)
|
|
(669)
|
|
1,152
|
Income tax expense
|
$ 84,816
|
|
$ 63,738
|
|
$ 26,784
|
Effective tax rate
|
35.8%
|
|
35.1%
|
|
48.0%
|
Significant components of our current deferred tax assets and liabilities are as follows (in thousands):
|
|
|
|
|
December 31,
|
|
2013
|
|
2012
|
Deferred tax assets:
|
|
|
|
Allowance for doubtful accounts
|
$ 1,265
|
|
$ 2,046
|
Accruals and reserves
|
16,603
|
|
12,617
|
Net operating loss and tax credit carryforwards
|
13,423
|
|
5,453
|
Other
|
1,270
|
|
1,504
|
Subtotal
|
32,561
|
|
21,620
|
Valuation allowance
|
(14,155)
|
|
(2,059)
|
Total
|
18,406
|
|
19,561
|
|
|
|
|
Deferred tax liabilities:
|
|
|
|
Accounts receivable
|
-
|
|
(4,550)
|
Inventory valuation
|
(81,208)
|
|
(79,575)
|
Property, plant and equipment
|
(8,538)
|
|
(11,210)
|
Intangible assets
|
(236,832)
|
|
(252,976)
|
Debt
|
(5,798)
|
|
(5,745)
|
Other
|
(177)
|
|
(11)
|
Total
|
(332,553)
|
|
(354,067)
|
Net deferred tax liability
|
$ (314,147)
|
|
$ (334,506)
|
We record a valuation allowance when it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of the deferred tax assets depends on the ability to generate sufficient taxable income of the appropriate character in the future and in the appropriate taxing jurisdictions. If we were to determine that we would be able to realize our deferred tax assets in the future in excess of their net recorded amount, we would make an adjustment to the valuation allowance, which would reduce the provision for income taxes.
In the United States, we had approximately
$1
0
1.
6
million of state net operating loss carryforwards as of December 31, 2013, which will expire in future years through
2033
and foreign tax credit carryforwards of $4.4 million expiring in 2022.
In certain non-U.S. jurisdictions, we had
$34.6
million of net operating loss carryforwards, of which
$30.6
million have no expiration and
$4.0
million will expire in future years through
2022
.
We consider the undistributed earnings of our foreign subsidiaries to be indefinitely reinvested, as we have no current intention to repatriate these earnings. As such, deferred income taxes are not provided for temporary differences of approximately
$192.9
million and
$189.4
million as of December 31, 2013 and 2012
, respectively
, representing earnings of non-U.S. subsidiaries intended to be permanently reinvested. These additional foreign earnings could become subject to additional tax if remitted, or deemed remitted, as a
dividend. Computation of the potential deferred tax liability associated with these undistributed earnings and any other basis difference is not practicable.
Our tax filings for various periods are subject to audit by the tax authorities in most jurisdictions where we conduct business.
We are no longer subject to U.S. federal income tax examination for all years through 2009 and the statute of limitations at our international locations is generally six to seven years.
At December 31, 2013 and 2012, our unrecognized tax benefits were immaterial to our consolidated financial statements.
NOTE 10—STOCKHOLDERS’ EQUITY
Preferred Stock
We have authorized 100,000,000 shares of preferred stock. Our Board of Directors has the authority to issue shares and set the terms of the shares of preferred stock. As of December 31, 2013 and 2012, there were no shares of preferred stock issued or outstanding.
Accumulated Other Comprehensive Loss
Accumulated other comprehensive loss
,
net of tax
,
in the accompanying consolidated balance sheets consists of the following (in thousands):
|
|
|
|
|
|
|
|
|
December 31,
|
|
2013
|
|
2012
|
Currency translation adjustments
|
$ (40,173)
|
|
$ (21,829)
|
Pension related adjustments
|
(249)
|
|
(335)
|
Accumulated other comprehensive loss
|
$ (40,422)
|
|
$ (22,164)
|
|
|
|
|
Earnings per Share
Earnings per share are calculated in the table below (in thousands, except per share amounts).
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2013
|
|
2012
|
|
2011
|
Net income
|
$ 152,095
|
|
$ 117,958
|
|
$ 28,984
|
|
|
|
|
|
|
Average basic shares outstanding
|
101,712
|
|
96,465
|
|
84,417
|
Effect of dilutive securities
|
810
|
|
460
|
|
238
|
Average diluted shares outstanding
|
102,522
|
|
96,925
|
|
84,655
|
|
|
|
|
|
|
Net income per share:
|
|
|
|
|
|
Basic
|
$ 1.50
|
|
$ 1.22
|
|
$ 0.34
|
Diluted
|
$ 1.48
|
|
$ 1.22
|
|
$ 0.34
|
Stock options and shares of restricted stock are disregarded in this calculation if they are determined to be anti-dilutive. For the years ended December 31, 2013, 2012 and 2011, our anti-dilutive stock options approximated 0.5 million, 2.1 million and 2.3 million
, respectively
.
NOTE 11—EMPLOYEE BENEFIT PLANS
Equity Compensation Plans
:
Our 2007 Stock Option Plan permitted the grant of stock options to our employees, directors and consultants for up to
3,750,000
shares of common stock. The options were not to be granted with an exercise price less than the fair market value of the Company’s common stock on the date of the grant, nor for a term exceeding
ten
years. Vesting generally occurred over a
five
year period on the anniversaries of the date specified in the employees’ respective option agreements, subject to accelerated vesting under certain circumstances set forth in the option agreements.
During 2013,
262,586
stock options were exercised and
no
stock options were granted under this plan.
Under the terms of our 2007 Restricted Stock Plan, up to
500,000
shares of restricted stock could have been granted at the direction of the Board of Directors and vesting generally occurred in one-fourth increments on the second, third, fourth and fifth anniversaries of the date specified in the employees’ respective restricted stock agreements, subject to accelerated vesting under certain circumstances set forth in the restricted stock agreements. Fair value was based on the fair
market
value of our stock on the date of issuance. We
expense the fair value of the restricted stock grants on a straight-line basis over the vesting period.
Under the terms of the 2007 Stock Option
and Restricted Stock
Plan
s
, all previously granted stock options and restricted stock were to vest when funds affiliated with Goldman, Sachs & Co. ceased to own more than
5,141,547
shares of our common stock. Upon completion of
the
November 2013
sale of
our
common stock
by Goldman, Sachs & Co.
,
852,939
stock options and
134,211
shares of restricted stock vested triggering the accelerated recognition of
$5.2
million of equity-based compensation expense.
In April 2012, we replaced the 2007 Stock Option Plan and the 2007 Restricted Stock Plan with the 2011 Omnibus Incentive Plan. No additional shares or other equity interests will be awarded under the prior plans. The 2011 Omnibus Incentive Plan has
3,250,000
shares reserved for issuance pursuant to the plan. The 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 2011 Omnibus Incentive Plan, the Company’s Board of Directors has periodically granted stock options and restricted stock 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 their fair market value on the date of the grant, nor for a term exceeding ten years. For employees, vesting generally occurs over a
four
or
five
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 option agreements. Vesting for directors generally occurs in
one
year. In 2013,
726,746
stock options and
99,163
shares of restricted stock were granted to executive management, members of our Board of Directors and employees under this plan. To date,
1,890,670
shares have been granted under this plan. We expense the fair value of the stock option grants on a straight-line basis over the vesting period. A Black-Scholes option-pricing model is used to estimate the fair value of the stock options.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Weighted
|
|
Average
|
|
|
|
|
|
|
Average
|
|
Remaining
|
|
Aggregate
|
|
|
|
|
Exercise
|
|
Contractual
|
|
Intrinsic
|
|
|
Options
|
|
Price
|
|
Term
|
|
Value
|
|
|
|
|
|
|
(years)
|
|
(thousands)
|
Stock Options
|
|
|
|
|
|
|
|
|
Balance at December 31, 2012
|
|
3,758,758
|
|
$ 18.05
|
|
7.4
|
|
$ 36,585
|
Granted
|
|
726,746
|
|
29.53
|
|
|
|
|
Exercised
|
|
(262,586)
|
|
12.50
|
|
|
|
|
Forfeited
|
|
(286,257)
|
|
22.62
|
|
|
|
|
Expired
|
|
(2,576)
|
|
12.52
|
|
|
|
|
Balance at December 31, 2013
|
|
3,934,085
|
|
$ 20.47
|
|
7.0
|
|
$ 46,144
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2013
|
|
|
|
|
|
|
|
|
Options outstanding, vested and exercisable
|
|
2,397,955
|
|
$ 17.75
|
|
5.8
|
|
$ 34,772
|
Options outstanding, vested and expected to vest
|
|
3,883,434
|
|
$ 20.40
|
|
6.9
|
|
$ 45,798
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
Average
|
|
|
|
|
Grant-Date
|
|
|
Shares
|
|
Fair Value
|
Restricted Stock
|
|
|
|
|
Nonvested at December 31, 2012
|
|
134,211
|
|
$ 15.65
|
Granted
|
|
99,163
|
|
29.52
|
Vested
|
|
(135,179)
|
|
15.76
|
Forfeited
|
|
(4,712)
|
|
29.87
|
Nonvested at December 31, 2013
|
|
93,483
|
|
$ 29.48
|
The following table summarizes award activity under our stock option and restricted stock plans:
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
|
2013
|
|
2012
|
|
2011
|
Stock Options
|
|
|
|
|
|
|
|
|
Weighted-average, grant-date fair value of awards granted
|
|
|
|
$ 12.10
|
|
$ 6.52
|
|
$ 3.46
|
Total intrinsic value of stock options exercised
|
|
|
|
4,717,693
|
|
1,089,830
|
|
1,715
|
Total fair value of stock options vested
|
|
|
|
6,352,967
|
|
1,370,130
|
|
1,833,836
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
|
2013
|
|
2012
|
|
2011
|
Restricted Stock
|
|
|
|
|
|
|
|
|
Weighted-average, grant-date fair value of awards granted
|
|
|
|
$ 29.48
|
|
$ 15.65
|
|
$ 14.36
|
Total fair value of restricted stock vested
|
|
|
|
4,173,834
|
|
484,141
|
|
378,670
|
Stock Options
Following are the weighted-average assumptions used to estimate the fair values of our stock options:
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
|
2013
|
|
2012
|
|
2011
|
Risk-free interest rate
|
|
|
|
0.86%
|
|
0.90%
|
|
1.32%
|
Dividend yield (1)
|
|
|
|
0.00%
|
|
0.00%
|
|
0.00%
|
Expected volatility
|
|
|
|
40.96%
|
|
41.87%
|
|
46.05%
|
Expected life (in years)
|
|
|
|
6.2
|
|
6.6
|
|
5.0
|
|
(1)
|
|
The expected dividend yield reflects the restriction on our ability to pay dividends and does not anticipate “special” dividends.
|
Recognized compensation expense and related income tax benefits under our equity-based compensation plans are set forth in the table below (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
|
2013
|
|
2012
|
|
2011
|
Equity-based compensation expense:
|
|
|
|
|
|
|
|
|
Stock options
|
|
|
|
$ 13,329
|
|
$ 7,533
|
|
$ 6,707
|
Restricted stock
|
|
|
|
2,159
|
|
481
|
|
412
|
Restricted common units
|
|
|
|
-
|
|
-
|
|
(1)
|
Profit units
|
|
|
|
-
|
|
461
|
|
1,267
|
Total equity-based compensation expense
|
|
|
|
$ 15,488
|
|
$ 8,475
|
|
$ 8,385
|
Income tax benefits related to equity-based compensation
|
|
|
|
$ 5,743
|
|
$ 3,114
|
|
$ 3,081
|
Unrecognized compensation expense under our equity-based compensation plans is set forth in the table below (in thousands):
|
|
|
|
|
|
|
Weighted-
|
|
|
|
|
Average Vesting
|
|
December 31,
|
|
|
Period (in years)
|
|
2013
|
Unrecognized equity-based compensation expense:
|
|
|
|
|
Stock options
|
|
2.9
|
|
$ 10,168
|
Restricted stock
|
|
3.5
|
|
1,950
|
Total unrecognized equity-based compensation expense
|
|
|
|
$ 12,118
|
Defined Contribution Employee Benefit Plans
: We maintain defined contribution employee benefit plans in a number of countries in which we operate including the U.S., Canada, the United Kingdom, Australia, France, Belgium, the Netherlands, and New Zealand. These plans generally allow employees the option to defer a percentage of their compensation in accordance with local tax laws. In
addition, we make contributions under these plans ranging from
1%
to
10%
of eligible compensation.
Our provisions for the expense under defined contribution plans were
$10.5
million,
$9.0
million and
$6.5
million for the years ended December 31, 2013, 2012 and 2011, respectively.
Define
d Benefit Employee Benefit Plan:
We maintain a defined benefit pension plan for 13 current and former employees of our Belgi
an
subsidiary.
The
unfunded liability associated with this plan was $0.5 million and $0.7 million as of December 31, 2013 and 2012, respectively.
NOTE 12—RELATED PARTY TRANSACTIONS
Europump Systems Inc.
Certain MRC Canada ULC employees, who are shareholders of the Company, served as executive officers of Europump Systems Inc. (“Europump”). Europump is engaged in the business of selling, servicing and renting industrial pumps. During the years ended December 31, 2013, 2012 and 2011, our purchases from Europump approximated
$42.3
million,
$39.3
million and
$42.0
million
, respectively
. At December 31, 2013 and 2012, we had payables to Europump of approximately
$0
and
$4.9
million
, respectively
. During the years ended December
31, 2013, 2012 and 2011, our sales to Europump approximated
$2.1
million,
$1.2
million and
$2.5
million
, respectively
. At December 31, 2013 and 2012, we had receivables of approximately
$0.8
million
and
$0.2
million from Europump
, respectively
. We also agreed to make certain profit sharing payments to the Europump shareholders in respect of certain oilfield supply and service stores located in Western Canada. For the years ended December 31, 2013, 2012 and 2011, the expense we recognized for the aggregate profit participation for Europump was approximately
$6.2
million,
$7.9
million and
$5.8
million
, respectively
.
Leases
We lease land and buildings at various locations from Hansford Associates Limited Partnership (“Hansford Associates”), and Prideco LLC (“Prideco”), as well as certain employees. We lease equipment and vehicles from Prideco. Certain of our directors participate in ownership of Hansford Associates and Prideco. Most of these leases are renewable for various periods through 2019 and are renewable at our option. The renewal options are subject to escalation clauses. These leases contain clauses for payment of real estate taxes, maintenance, insurance and certain other operating expenses of the properties.
Rent expense attributable to related parties was
$2.0
million,
$4.3
million and
$5.5
million for the years ended December 31, 2013, 2012 and 2011, respectively.
Future minimum rental payments required under operating leases with related parties that have initial or remaining non-cancelable lease terms in excess of one year are
$2.0
million,
$1.4
million,
$1.5
million,
$1.4
million and
$1.4
million for the years 2014, 2015, 2016, 2017 and 2018 and thereafter, respectively.
Cypress Energy Partners
One of
our directors is the chairman, chief executive officer
and president of one of our customers, Cypress Energy Partners, LP. During 2013, we received revenue of
$0.4
million from Cypress Energy Partners, LP. Each sale was made on an arm’s-length basis at market pricing.
The
Goldman Sachs Funds
Up to and until November 13, 2013, certain affiliates of The Goldman Sachs Group, Inc., including GS Capital Partners V Fund, L.P., GS Capital Partners VI Fund, L.P. and related entities, or the Goldman Sachs Funds, were the majority owners of PVF Holdings, our largest stockholder. In March 2013, Goldman Sachs & Co. was the co-lead bookrunner on our secondary offering. In 2012, Goldman Sachs Credit Partners L.P. (“GSCP”), an affiliate of the Goldman Sachs Funds, was a co-lead arranger and joint bookrunner under our Global ABL Facility and our Term Loan as well as the syndication agent under those facilities. In addition, Goldman Sachs Lending Partners L.L.C. is a participant in our Global ABL Credit Facility. Goldman, Sachs & Co. was the co-lead bookrunner on our initial public offering and our November 2012 secondary offering.
Payments made to affiliates of the Goldman Sachs Funds in connection with these transactions were
$10.9
million,
$13.2
million and
$0.3
million for the years ended December 31, 2013, 2012 and 2011, respectively.
Affiliates of the Goldman Sachs Funds
From time to time, we sell products to affiliates of the Goldman Sachs Funds. The total revenues from these affiliates were
$33.7
million,
$23.1
million, and
$12.0
million for the years ended December 31, 2013, 2012 and 2011, respectively.
The total receivables due from these affiliates were
$7.0
million and
$5.0
million
as of December 31, 2013 and 2012, respectively.
In 2012, we engaged an affiliate of the Goldman Sachs Funds to provide services for treasury, accounts receivables collection software and disaster recovery systems and paid them approximately
$0.6
million and
$0.9
million for the years ended December 31, 2013 and 2012, respectively.
NOTE 13—SEGMENT, GEOGRAPHIC AND PRODUCT LINE INFORMATION
We operate as three business segments, U.S., Canada and International. Our International segment consists of our operations outside of the U.S. and Canada, principally Europe, Asia and Australasia. These segments represent our business of selling pipe, valves and fittings to the energy and industrial sectors, across each of the upstream (exploration, production and extraction of underground oil and gas), midstream (gathering and transmission of oil and gas, gas utilities, and the storage and distribution of oil and gas) and downstream (crude oil refining, petrochemical processing and general industrials) markets. The following table presents financial information for each segment (in millions):
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2013
|
|
2012
|
|
2011
|
Sales
|
|
|
|
|
|
|
U.S.
|
|
$ 3,967.6
|
|
$ 4,238.4
|
|
$ 3,849.2
|
Canada
|
|
709.4
|
|
765.2
|
|
653.6
|
International
|
|
553.8
|
|
567.2
|
|
329.6
|
Consolidated sales
|
|
$ 5,230.8
|
|
$ 5,570.8
|
|
$ 4,832.4
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
|
|
|
|
U.S.
|
|
$ 13.6
|
|
$ 11.2
|
|
$ 11.6
|
Canada
|
|
2.0
|
|
2.1
|
|
2.5
|
International
|
|
6.7
|
|
5.3
|
|
2.9
|
Total depreciation and amortization expense
|
|
$ 22.3
|
|
$ 18.6
|
|
$ 17.0
|
|
|
|
|
|
|
|
Amortization of intangibles
|
|
|
|
|
|
|
U.S.
|
|
$ 42.4
|
|
$ 40.0
|
|
$ 40.1
|
Canada
|
|
2.4
|
|
2.5
|
|
4.5
|
International
|
|
7.3
|
|
7.0
|
|
6.1
|
Total amortization of intangibles expense
|
|
$ 52.1
|
|
$ 49.5
|
|
$ 50.7
|
|
|
|
|
|
|
|
Operating income
|
|
|
|
|
|
|
U.S.
|
|
$ 280.1
|
|
$ 358.3
|
|
$ 166.5
|
Canada
|
|
20.9
|
|
27.2
|
|
17.4
|
International
|
|
10.8
|
|
21.5
|
|
10.7
|
Total operating income
|
|
311.8
|
|
407.0
|
|
194.6
|
|
|
|
|
|
|
|
Interest expense
|
|
60.7
|
|
112.5
|
|
136.8
|
Loss on early extinguishment of debt
|
|
-
|
|
114.0
|
|
-
|
Other (income) expense
|
|
14.2
|
|
(1.2)
|
|
2.0
|
Income before income taxes
|
|
$ 236.9
|
|
$ 181.7
|
|
$ 55.8
|
|
|
|
|
|
|
|
December 31,
|
|
|
2013
|
|
2012
|
Total assets
|
|
|
|
|
United States
|
|
$ 2,732.3
|
|
$ 2,732.4
|
Canada
|
|
204.7
|
|
249.1
|
International
|
|
398.7
|
|
388.2
|
Total assets
|
|
$ 3,335.7
|
|
$ 3,369.7
|
The percentages of our fixed assets relating to the following geographic areas are as follows:
|
|
|
|
|
|
|
December 31,
|
|
|
2013
|
|
2012
|
Fixed assets
|
|
|
|
|
United States
|
|
57%
|
|
56%
|
Canada
|
|
24%
|
|
24%
|
International
|
|
19%
|
|
20%
|
Total fixed assets
|
|
100%
|
|
100%
|
Our net sales by product line are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
Type
|
|
2013
|
|
2012
|
|
2011
|
Energy carbon steel tubular products:
|
|
|
|
|
|
|
|
|
|
|
|
|
Line pipe
|
|
$ 1,061,881
|
|
20%
|
|
$ 1,158,512
|
|
21%
|
|
$ 1,033,976
|
|
21%
|
Oil country tubular goods (OCTG)
|
|
463,656
|
|
9%
|
|
715,108
|
|
13%
|
|
809,163
|
|
17%
|
|
|
$ 1,525,537
|
|
29%
|
|
$ 1,873,620
|
|
34%
|
|
$ 1,843,139
|
|
38%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Valves, fittings, flanges and other products:
|
|
|
|
|
|
|
|
|
|
|
|
|
Valves and specialty products
|
|
$ 1,440,431
|
|
28%
|
|
$ 1,431,888
|
|
26%
|
|
$ 1,143,234
|
|
24%
|
Carbon steel fittings and flanges and stainless steel
|
|
|
|
|
|
|
|
|
|
|
|
|
and alloy pipe and fittings
|
|
1,135,818
|
|
22%
|
|
1,175,276
|
|
21%
|
|
870,581
|
|
18%
|
Other
|
|
1,129,006
|
|
21%
|
|
1,090,074
|
|
19%
|
|
975,469
|
|
20%
|
|
|
$ 3,705,255
|
|
71%
|
|
$ 3,697,238
|
|
66%
|
|
$ 2,989,284
|
|
62%
|
NOTE 14—FAIR VALUE MEASUREMENTS
We used the following methods and significant assumptions to estimate fair value for assets and liabilities recorded at fair value.
Interest Rate Contracts
:
Interest rate contracts are reported at fair value utilizing Level 2 inputs. We obtain dealer quotations to value our interest rate swap agreements. These quotations rely on observable market inputs such as yield curves and other market-based factors.
Foreign Exchange Forward
and Option
Contracts
:
Foreign exchange forward contracts are reported at fair value utilizing Level 2 inputs, as the fair value is based on broker quotes for the same or similar derivative instruments.
The following table presents assets and liabilities measured at fair value on a recurring basis, and the basis for that measurement (in thousands):
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at Reporting Date Using
|
|
|
Total
|
|
Quoted Prices in Active Markets for Identical Assets (Level 1)
|
|
Significant Other Observable Inputs (Level 2)
|
|
Significant Unobservable Inputs (Level 3)
|
|
December 31, 2013
|
|
|
|
|
|
|
|
|
Assets:
|
$ 4,603
|
|
$ -
|
|
$ 4,603
|
|
$ -
|
|
Liabilities:
|
-
|
|
-
|
|
-
|
|
-
|
|
|
|
|
|
|
|
|
|
|
December 31, 2012
|
|
|
|
|
|
|
|
|
Assets:
|
$ 3
|
|
$ -
|
|
$ 3
|
|
-
|
|
Liabilities:
|
-
|
|
-
|
|
-
|
|
-
|
|
W
ith 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
$0.987
billion and
$1.257
billion at
December 31, 2013 and 2012
, respectively. We estimate the fair value of the Term Loan using Level 2 inputs, or quoted market prices as of
December 31, 2013 and 2012
, respectively. The fair value of our debt was
$0.997
billion and
$1.261
billion at
December 31, 2013 and 2012
, respectively. The carrying values of our Global ABL Facility and remaining portions of our long-term debt approximate their fair values.
NOTE 15—COMMITMENTS AND CONTINGENCIES
Leases
We regularly enter into operating and capital lease arrangements for certain of our facilities and equipment. Our leases are renewable at our option for various periods through 2021. Certain renewal options are subject to escalation clauses and contain clauses for payment of real estate taxes, maintenance, insurance and certain other operating expenses of the properties. Leases with escalation clauses based on an index, such as the consumer price index, are expensed and projected based on current rates. Leases with specified escalation steps are expensed and projected based on the rate in effect in the respective period which is not materially different than the straight-line method. We amortize leasehold improvements over the remaining life of the lease. Rental expense under our operating lease arrangements
was $53.3 million, $48.3 million and $40.3 million for the years ended December 31, 2013, 2012, and 2011, respectively.
Future minimum lease payments under noncancelable operating and capital lease arrangements having initial terms of one year or more are as follows (in thousands):
|
|
|
|
|
Operating Leases
|
|
Capital Leases
|
2014
|
$ 41,328
|
|
$ 628
|
2015
|
33,268
|
|
297
|
2016
|
24,208
|
|
158
|
2017
|
18,448
|
|
117
|
2018
|
14,244
|
|
131
|
Thereafter
|
16,686
|
|
568
|
|
$ 148,182
|
|
$ 1,899
|
Legal Proceedings
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 various 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 the Company’s subsidiary, McJunkin Red Man Corporation, purportedly distributed. As of December 31, 2013, we are a named defendant in approximately 279 lawsuits involving approximately 930 claims. No asbestos lawsuit has resulted in a judgment against us to date, with the majority being settled, dismissed or otherwise resolved. Applicable third-party insurance has substantially covered these claims, and insurance should continue to cover a substantial majority of existing and anticipated future claims. Accordingly, we have recorded a liability for our estimate of the most likely settlement of asserted claims and a related receivable from insurers for our estimated recovery, to the extent we believe that the amounts of recovery are probable.
We annually conduct analyses of our asbestos-related litigation to estimate the adequacy of the reserve for pending and probable asbestos-related claims. Given these estimated reserves and existing insurance coverage that has been available to cover substantial portions of these claims, we believe that our current accruals and associated estimates relating to pending and probable asbestos-related litigation likely to be asserted over the next 15 years are currently adequate. This belief, however, relies on a number of assumptions, including:
|
·
|
|
That our future settlement payments, disease mix and dismissal rates will be materially consistent with historic experience;
|
|
·
|
|
That future incidences of asbestos-related diseases in the U.S. will be materially consistent with current public health estimates;
|
|
·
|
|
That the rates at which future asbestos-related mesothelioma incidences result in compensable claims filings against us will be materially consistent with its historic experience;
|
|
·
|
|
That insurance recoveries for settlement payments and defense costs will be materially consistent with historic experience;
|
|
·
|
|
That legal standards (and the interpretation of these standards) applicable to asbestos litigation will not change in material respects;
|
|
·
|
|
That there are no materially negative developments in the claims pending against us; and
|
|
·
|
|
That key co-defendants in current and future claims remain solvent.
|
If any of these assumptions prove to be materially different in light of future developments, liabilities related to asbestos-related litigation may be materially different than amounts accrued or estimated. Further, while we anticipate that additional claims will be filed in the future, we are unable to predict with any certainty the number, timing and magnitude of such future claims. In our opinion, there are no pending legal proceedings that are likely to have a material adverse effect on our consolidated financial statements.
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, there are no material pending legal proceedings that are likely to have a material effect on our business, financial condition, results of operations or cash flows.
Product Claims.
From time to time, in the ordinary course of our business, our customers may claim
that the products
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 ultimate disposition of these claims and proceedings is not expected to have a material adverse effect on our financial position, results of operations or cash flows.
Weatherford Claim.
In addition to PVF, our Canadian subsidiary, Midfield Supply (“Midfield”), now known as MRC Canada, also distributed progressive cavity pumps and related equipment (“PCPs”) under a distribution agreement with Weatherford Canada Partnership (“Weatherford”) within a certai
n geographical area located in s
outhern Alberta, Canada. Commencing in late 2005 and into early 2006, Midfield hired new employees, including individuals who left Weatherford, as part of Midfield’s desire t
o expand its PVF business into n
orthern Alberta. Shortly thereafter, many of these employees left Midfield and formed a PCP manufacturing, distribution and service company named Europump Systems Inc. (“Europump”) in 2006. The distribution
agreement with Weatherford
expired in 2006. Midfield supplied Europump with PVF products that Europump distributed along with sales of PCP pumps. In April 2007, Midfield purchased Europump’s distribution branches and began distributing and servicing Europump PCPs.
Pursuant to a complaint that Weatherford filed on April 11, 2006 in the Court of Queen’s Bench of Alberta, Judicial Bench of Edmonton (Action No. 060304628), Weatherford sued Europump, three of Europump’s part suppliers, Midfield, certain current and former employees of Midfield, as well as other entities related to these parties, asserting a host of claims including breach of contract, breach of fiduciary duty, misappropriation of confidential information related to the PCPs, unlawful interference with economic relations and conspiracy. The Company denies these allegations and contends that Midfield’s expansion and subsequent growth was the result of fair competition.
From 2006 through 2012, the case focused largely on Weatherford’s questioning of defense witnesses. In 2013, the defendants began substantive questioning of Weatherford and its witnesses. Discovery is ongoing and expected to last through 2014.
Due to ongoing discovery, and the limited information available related to any claimed damages, we cannot reasonably estimate potential loss at this time. The Company believes Weatherford’s claims are without merit and intends to defend against them vigorously.
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 been immaterial to our consolidated financial statements.
Letters of Credit
Our letters of credit outstanding at December 31, 2013 approximated $3
3.2
million.
Bank Guarantees
Certain of our international subsidiaries have trade guarantees
that banks have issued
on their behalf. The amount of these guarantees at December 31, 2013 was approximately $
6.7
million.
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.
Warranty Claims
We are involved from time to time in various warranty claims, which arise in the ordinary course of business. Historically, any settlements that have resulted from these warranty claims have been immaterial to our consolidated financial statements.
NOTE 16—QUARTERLY INFORMATION (UNAUDITED)
Our quarterly financial information is presented in the table below (in millions, except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
First
|
|
Second
|
|
Third
|
|
Fourth
|
|
Year
|
2013
|
|
|
|
|
|
|
|
|
|
Revenues
|
$ 1,305.1
|
|
$ 1,267.8
|
|
$ 1,313.7
|
|
$ 1,344.2
|
|
$ 5,230.8
|
Gross profit
|
246.6
|
|
243.9
|
|
238.3
|
|
226.0
|
|
954.8
|
Net income (1)
|
46.2
|
|
43.9
|
|
38.8
|
|
23.3
|
|
152.1
|
EPS:
|
|
|
|
|
|
|
|
|
|
Basic (1)
|
$ 0.45
|
|
$ 0.43
|
|
$ 0.38
|
|
$ 0.23
|
|
$ 1.50
|
Diluted (1)
|
$ 0.45
|
|
$ 0.43
|
|
$ 0.38
|
|
$ 0.23
|
|
$ 1.48
|
|
|
|
|
|
|
|
|
|
|
2012
|
|
|
|
|
|
|
|
|
|
Revenues
|
$ 1,382.6
|
|
$ 1,430.4
|
|
$ 1,451.1
|
|
$ 1,306.7
|
|
$ 5,570.8
|
Gross profit
|
236.6
|
|
241.7
|
|
277.2
|
|
258.3
|
|
1,013.7
|
Net income (loss) (1)
|
37.5
|
|
31.3
|
|
55.5
|
|
(6.4)
|
|
118.0
|
EPS:
|
|
|
|
|
|
|
|
|
|
Basic (1)
|
$ 0.44
|
|
$ 0.32
|
|
$ 0.55
|
|
$ (0.06)
|
|
$ 1.22
|
Diluted (1)
|
$ 0.44
|
|
$ 0.32
|
|
$ 0.54
|
|
$ (0.06)
|
|
$ 1.22
|
_______________
(1)
Net income and EPS do not add across due to rounding and transactions resulting in differing weighted average shares outstanding on a quarterly basis.
NOTE
17—
SUBSEQUENT EVENTS
In January 2014,
we terminated a profit sharing agreement with respect to certain oilfield supply and service stores in western Canada. This profit sharing agreement required us to make annual profit sharing payments to Europump related to PVF sales in the heavy oil region of Canada. In conjunction with the termination of this agreement, we sold our progressive cavity pump (“PCP”) distribution and servicing business to Europump, our primary supplier of PCP pumps. We believe this divestiture will allow us to focus on our core business of supplying PVF products and services to the energy and industrial markets.
We expect the impact of this divestiture to be a reduction in sales of approximately
$82
million in 2014
; however,
through the elimination of costs associated with the business, including
the
profit sharing payments to Europump, we expect
the impact of the sale
will have a modestly ac
cretive impact on profitability going forward. However, we do anticipate a first quarter 2014 pre-tax charge of approximately
$7
million (
$4.6
million after-tax) associated with the termination of the profit sharing agreement.
In January 2014, we completed the
$260
million acquisition of Stream AS. Headquartered in Norway, Stream is the leading pipe, valve and fittings distributor and provider of flow control products, solutions and services to the offshore oil and gas industry on the Norwegian Continental Shelf. The purchase price was funded with existing availability under our Global ABL Facility as well as cash on hand.