N
OTES TO
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 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
and
petrochemical processing) sectors. We have branches in principal industrial, hydrocarbon producing and refining areas throughout the United States, Canada, Europe, Asia
,
Australasia
,
the Middle East
and
Caspian
. Our products are obtained 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 require for complete annual financial statements. However, the information in these statements reflects all normal recurring adjustments which are, in our opinion, necessary for a fair presentation of the results for the interim periods. The results of operations for the
three
months
ended
March 31,
2016
are not necessarily indicative of the results that will be realized for the fiscal year ending
December
3
1,
2016
. We have derived our condensed consolidated balance sheet as of
December 31,
2015
from the audited
consolidated
financial statements for the year ended
December 31, 2015
. You should read these condensed consolidated financial statements in conjunction with the consolidated financial statements and notes thereto for the year ended
December
31,
2015
.
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.
Reclassifications
:
Certain prior-period amounts have been reclassified to conform to the current year presentation, which include
s
the adoption of Accounting Standards Update (“ASU”) 20
15-03
Interest-Imputation of Interest (Subtopic 855-30): Simplifying the Presentation of Debt Issuance Costs
.
Recent Accounting Pronouncements
:
In May 2014, the Financial Accounting Standards Board (“FASB”) issued
ASU
2014-09,
Revenue from Contracts with Customers (Topic 606).
ASU 2014-09 provides comprehensive guidance on the recognition of revenue from customers arising from the transfer of goods and services. The ASU also provides guidance on accoun
ting for certain contract costs
and requires new disclosures. The FASB voted to defer the effective date of ASU 2014-09 by one year to annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period.
We are
currently evaluating
the effect of the adoption of ASU 2014-09 on our consolidated financial statements and the implementation approach to be used.
In July 2015, the FASB issued ASU 2015-11,
Inventory (Topic 330): Simplifying the Measurement of Inventory
. ASU 2015-11 provides guidance on simplifying the measurement of inventory. The current standard is to measure inventory at lower of cost or market; where market could be replace
ment cost, net realizable value
or net realizable value less an approximately normal profit margin. ASU 2015-11 updates this guidance to measure inventory at the lower of cost or net realizable value; where net realizable value is considered to be the estimated selling price in the ordinary course of business, less reasonably predictab
le cost of completion, disposal
and transportation. We expect to adopt this guidance in 2016. This amendment is not expected to have a material impact on the Company's financial position, results of operation or cash flows.
In February 2016, the FASB issued ASU 2016-02,
Leases,
which will replace the existing guidance in ASC 870,
Leases.
This ASU requires a dual approach for lessee accounting under which a lessee would account for leases as finance leases or operating leases. Both finance leases and operating leases will result in the lessee recognizing a right-of-use asset and a corresponding lease liability. For finance leases, the lessee would recognize interest expense and amortization of the right-of-use asset, and for operating leases, the lessee would recognize a straight-line total lease expense.
This guidance is effective for annual and interim reporting periods of public entities beginning after
December 15, 2018.
We are beginning to evaluate the effect of the adoption of ASU 2016-02 on our consolidated financial results.
In Ma
rch 2016, the FASB issued ASU 2016-09,
Compensation - Stock Compensation
, which simplifies the accounting for the taxes rela
ted to stock based compensation.
Under the standard
,
excess tax benefits and certain tax deficiencies will no longer be recorded in additional paid-in capital (“APIC”
) and
APIC
pools
will be eliminated. Instead, all excess tax benefits and tax deficiencies will be recorded as income tax expense or benefit in the income statement. In addition, excess tax benefits are required to be presented as operating activities rather than financing activities in the statement of cash flows.
This g
uidance is
effective for annual and interim reporting periods of public entities b
eginning after December 15, 2016
.
This amendment is not expected to have a material impact on the Company's financial position, results of operation
s
or cash flows.
NOTE
2
– INVENTORIES
The com
position of our inventory is as follows (in
millions
)
:
|
|
|
|
|
March 31,
|
|
December 31,
|
|
2016
|
|
2015
|
Finished goods inventory at average cost:
|
|
|
|
Energy carbon steel tubular products
|
$ 176
|
|
$ 253
|
Valves, fittings, flanges and all other products
|
653
|
|
647
|
|
829
|
|
900
|
Less: Excess of average cost over LIFO cost (LIFO reserve)
|
(78)
|
|
(89)
|
Less: Other inventory reserves
|
(31)
|
|
(30)
|
|
$ 720
|
|
$ 781
|
O
ur inventory quantities
are expected to be
reduced
for the year
, resulting in a liquidation of a
last-in, first out (“
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.
For the
three
months ended
March 31, 2016
and 2015
,
the effect of this LIFO decrement
decreased
cost of sales by approximately
$
1
millio
n
and
$0
million, respectively
.
NOTE
3
– LONG-TERM DEBT
The components of our long-term debt are as follows (in
millions
):
|
|
|
|
|
March 31,
|
|
December 31,
|
|
2016
|
|
2015
|
Senior Secured Term Loan B, net of discount and issuance costs of
$6
and
$7
, respectively
|
$ 518
|
|
$ 519
|
Global ABL Facility
|
-
|
|
-
|
|
518
|
|
519
|
Less: Current portion
|
8
|
|
8
|
|
$ 510
|
|
$ 511
|
Senior Secured Term Loan B
:
We have a
seven
year Senior Secured
Term Loan B (the “Term Loan”)
with an original principal amount of
$79
4
million which amortizes in equal quarterly installments of
1%
per year with the balance payable in
November 2019
when the facility matures.
Subject to securing additional lender commitments, t
he Term Loan allows for incremental increases
in facility size
up to an aggregate of
$200
million, plus an additional amount such that the Company’s senior secured leverage ratio (as defined under the Term Loan) would not exceed
3.50
to 1.00.
MRC Global (US) Inc.
is the borrower under this facility, which
is guaranteed by
MRC Global Inc.
as well as all of
its
wholly owned U.S. subsidiaries. In addition, it is secured by a second lien on the assets securing
our Global ABL Facility (which includes accounts receivable, inventory and related assets) and a first lien on substantially all of
the
other assets
of MRC Global Inc.
and those of
its
U.S. subsidiaries, as well as a pledge of all of the capital stock of our domestic subsidiaries and
65
%
of the capital stock of first tier, non-U.S. subsidiaries.
In certain circumstances, w
e are required to repay the Term Loan with certain asset sales and insurance proceeds, certain debt proceeds and
50%
of excess cash flow (reducing to
25%
if our senior secured leverage ratio is no more than
2.75
to 1.00 and
0%
if our senior secured leverage ratio is no more than
2.50
to 1.00). In addition, the Term Loan
contains a number of customary restrictive covenants.
The interest rate for the Term Loan
, including the amortization of original issue discount
and debt issuance costs
,
was
5.16%
as of
March
31,
2016
and
4.98%
at
December 31, 2015
.
Global ABL Facility
:
We have a
$1.
0
5
billion multi-currency global asset-based revolving credit facility (the “Global ABL Facility”) that matures in
July
201
9
. This facility is comprised of
$977
million in revolver commitments in the United States,
$30
million in Norway,
$20
million in Canada,
$5
million in the United Kingdom,
$10
million in Australia,
$4
million in th
e Netherlands and
$4
million in Belgium. It contains an accordion feature that allows us to increase the principal amount of the facility by up to
$300
million
, subject to securing additional lender commitments
.
MRC Global Inc.
and each of
its
current and future wholly owned material U.S. subsidiaries guarantee 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. Outstanding obligations are generally secured by a first priority security interest in accounts receivable, inventory and related assets.
Excess A
vailability
, as defined
under our Global ABL Facility
,
was
$587
million as of
March 31, 2016
.
Debt Issuanc
e Costs
:
In
the first quarter of 2016, we adopted ASU No. 2015-03
Interest-Imputation of Interest (Subtopic 855-30): Simplifying the Presentation of Debt Issuance Costs
.
This ASU requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability consistent with debt discounts. As a result of the adoption, we have reclassified debt issuance costs associated with our Term Loan of
$4
million and
$5
million as of March 31, 2016 and December 31, 2015, respectively, from other assets to long term debt in our balance sheet. Accordingly, long term debt reported as
$524
million at December 31, 2015 has been revised to
$519
million. Debt issuance costs associated with our Global ABL Facility will continue to be presented in other assets. These amounts were
$8
million as of March 31, 2016 and December 31, 2015, respectively.
NOTE 4
–
DISPOSITION
OF NON-CORE PRODUCT LINE
In February 2016, we
completed
the
dispos
i
tion
of our U.S. oil country tubular goods (“OCTG”) product line
for
$48
million
.
As a result of this transaction, we incurred a loss of
$5
million that was reflected in our
fourth quarter
2015 results
.
Net of reserves
,
including LIFO and an adjustment to write the inventory down to its net realizable value, the carrying value of the
U.S. OCTG inventories as of December 31, 2015
was
$50
million
.
NOTE 5
–
REDEEMABLE PREFERRED STOCK
Preferred Stock Issuance
In June 2015, we issued
363,000
shares of Series A Convertible Perpetual Preferred Stock (the “Preferred Stock”) and received gross proceeds of
$363
million. The Preferred Stock ranks senior to our common stock with respect to dividend rights and rights on liquidation, winding-up and dissolution. The Preferred Sto
ck has a stated value of
$1,000
per share, and holders of Preferred Stock are entitled to cumulative dividends payable quarterly in cash at a rate of
6.50%
per annum. Holders of Preferred Stock are entitled to vote together with the holders of the common stock as a single class, in each case, on an as-converted basis, except where a separate class vote of the common stockholders is required by law. Holders of Preferred Stock have certain limited special approval rights, including with respect to the issuance of pari passu or senior equity securities of the Company.
The Preferred Stock is convertible at the option of the holders into shares of common stock at an initial conversion rate of
55.9284
shares of common stock for each share of Preferred Stock, which represents an initial conversion
price of approximately
$17.88
per share of common stock, subject to adjustment. On or after the fifth anniversary of the initial issuance of the Preferred Stock, the Company will have the option to redeem, in whole but not in part, all the outstanding shares of Preferred Stock, subject to certain redemption price adjustments on the basis of the date of the conversion. We may elect to convert the Preferred Stock, in whole but not in part, into the relevant number of shares of common stock on or after the 54th month after the initial issuance of the Preferred Stock if the last reported sale price of the common stock has been at least
150%
of the conversion price then in effect for a specified period. The conversion rate is subject to customary anti-dilution and other adjustments.
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 they 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.
NOTE
6
– STOCKHOLDERS’ EQUITY
Share
Repurchase Program
In November 2015
, the Company’s board of directors authorized a share repurchase program for common stock up to
$100
million. The program is scheduled to expire
December 31, 2017
. The shares may be repurchased at management’s discretion in the open market. Depending on market conditions and other factors, these repurchases may be commenced or suspended from time to time without prior notice.
|
|
|
|
Summary of share repurchase activity under the repurchase program:
|
|
|
|
|
|
Three Months Ended
|
|
March 31,
|
|
March 31,
|
|
2016
|
|
2015
|
Number of shares acquired on the open market
|
2,878,874
|
|
-
|
Average price per share
|
$ 13.39
|
|
$ -
|
Total cost of acquired shares (in millions)
|
$ 38
|
|
$ -
|
In total, we have acquired
3,
695
,
263
shares under this program at a total cost of
$50
million. There were
98,650,627
shares of common stock outstanding as of March 31, 2016.
Equity Compensation Plans
Our 2011 Omnibus Incentive Plan
originally had
3
,250,000
shares r
eserved for issuance
under
the plan.
In April 2015, our shareholders approved an additional
4,250,000
shares for reserv
ation
for issuance under 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 period
ically granted stock options
,
restricted stock
award
s
, restric
ted stock units and performance
share
units
to directors and
employees
. 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
ten
years. For employees, vesting generally occurs
ratably
over a
three
to
five
year period on the anniversaries of the date specified in the employees’ respective
stock option
,
restricted stock
award, restricted stock unit
and performance
share unit
award
agreement
s
, subject to accelerated vesting under certain circumstances set forth in the agreements. Vesting for directors generally occurs
on the
on
e
-y
ear
anniversary of the grant date
.
In
February
201
6
,
16,789
shares
of restricted stock,
334,900
performance
share
unit
awards and
1,149,039
restricted
stock
units
were
granted
to employees
.
To date
,
before consideration of forfeitures
,
4,987,800
shares have been granted to management, members of our Board of Directors and key employees under this plan.
A Monte Carlo simulation is completed to estimate the fair value of perform
ance
share
unit awards with a stock price
performance component.
A Black-Scholes option-pricing model is used to estimate the fair value of the stock options.
We expense the fair value of
equity
grants on a straight-line basis over the vesting period.
Accumulated Other Comprehensive Loss
Accumulated other comprehensive loss in the accompanying consolidated balance sheets consists of the following (in
millions
):
|
|
|
|
|
|
|
|
|
March 31,
|
|
December 31,
|
|
2016
|
|
2015
|
|
|
|
|
Currency translation adjustments
|
$ (215)
|
|
$ (231)
|
Pension related adjustments
|
(1)
|
|
(1)
|
Accumulated other comprehensive loss
|
$ (216)
|
|
$ (232)
|
Earnings per Share
Earnings per share are calculated in the table below (in
millions
, except per share amounts).
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
March 31,
|
|
March 31,
|
|
2016
|
|
2015
|
|
|
|
|
|
|
|
|
Net (loss) income
|
$ (8)
|
|
$ 29
|
Less: Dividends on Series A Preferred Stock
|
6
|
|
-
|
Net (loss) income attributable to common stockholders
|
$ (14)
|
|
$ 29
|
|
|
|
|
Weighted average basic shares outstanding
|
100.7
|
|
102.1
|
Effect of dilutive securities
|
-
|
|
0.1
|
Weighted average diluted shares outstanding
|
100.7
|
|
102.2
|
|
|
|
|
Net (loss) income per share:
|
|
|
|
Basic
|
$ (0.14)
|
|
$ 0.28
|
Diluted
|
$ (0.14)
|
|
$ 0.28
|
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
months ended
March 31, 2016
,
all of the shares of the newly issued Preferred Stock were anti-dilutive.
For the
three
months ended
March 31, 2016
and
2015
, we had approximately
3.8
million
and
3.9
million anti-dilutiv
e stock options, respectively.
T
here w
ere
0.6
mi
llion
and
no
anti-dilutive restricted stock
, restricted units
or performance stock unit awards
for the
three
months ended
March 31, 2016
and
2015
, r
espectiv
ely
.
NOTE
7
– SEGMENT 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. These segments represent our business of selling pipe, valves and fittings
(“PVF”)
to the energy sector 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.
Effective April 1, 2016, we made organizational changes that will result in the Eastern and Western regions of the U.S. being considered separate operating segments. These
two
U.S. operating segments will be aggregated into a
single
reportable segment based on their economic similarities. As a result, we will continue to report
segment information for the U.S., Canada and International.
The following table presents financial information for each segment (in millions):
|
|
|
|
|
|
Three Months Ended
|
|
|
March 31,
|
|
March 31,
|
|
|
2016
|
|
2015
|
|
Sales
|
|
|
|
|
U.S.
|
$ 606
|
|
$ 972
|
|
Canada
|
64
|
|
119
|
|
International
|
113
|
|
201
|
|
Sales
|
$ 783
|
|
$ 1,292
|
|
|
|
|
|
|
Operating (loss) income
|
|
|
|
|
U.S.
|
$ 4
|
|
$ 52
|
|
Canada
|
(1)
|
|
6
|
|
International
|
(7)
|
|
3
|
|
Operating (loss) income
|
(4)
|
|
61
|
|
|
|
|
|
|
Interest expense
|
(8)
|
|
(15)
|
|
Other, net
|
(1)
|
|
(4)
|
|
Income (loss) before income taxes
|
$ (13)
|
|
$ 42
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
December 31,
|
|
|
2016
|
|
2015
|
|
Total assets
|
|
|
|
|
U.S.
|
$ 2,055
|
|
$ 2,135
|
|
Canada
|
148
|
|
142
|
|
International
|
231
|
|
220
|
|
Total assets
|
$ 2,434
|
|
$ 2,497
|
|
Our sales by product line are as follows (in
millions
):
|
|
|
|
|
|
|
Three Months Ended
|
|
|
March 31,
|
|
March 31,
|
Type
|
|
2016
|
|
2015
|
Energy carbon steel tubular products:
|
|
|
|
|
Line pipe
(1)
|
|
$ 132
|
|
$ 266
|
Oil country tubular goods (OCTG)
|
|
-
|
|
106
|
|
|
$ 132
|
|
$ 372
|
|
|
|
|
|
|
|
|
|
|
Valves, fittings, flanges and other products:
|
|
|
|
|
Valves and specialty products
|
|
$ 299
|
|
$ 411
|
Carbon steel fittings and flanges and
|
|
|
|
|
stainless steel and alloy pipe and fittings
|
|
168
|
|
269
|
Other
|
|
184
|
|
240
|
|
|
$ 651
|
|
$ 920
|
|
(1)
|
|
As a result of the disposition
of our OCTG product line
,
as
described in Note 4,
pre-
disposition OCTG sales of
$18
million have been included within line pipe sales
for the three months ended March 31, 2016
.
|
NOTE
8
– 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. All of our derivative instruments are freestanding and, accordingly, changes in their fair market value are recorded in earnings. As of
March 31, 2016
, we do not have any interest rate swap agreements. Foreign exchange forward contracts
and options
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 total notional amount of our forward foreign exchange contracts
and options
was
approximately
$4
8
million and
$41
million at
March 31, 2016
and
December 31, 2015
, respectively. We had approximate
l
y
$1
million
and
$
0
million
recorded as
liabilities
on our consolidated balance sheets as of
March 31, 2016
and
December 31, 2015
, respectively.
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
$
51
8
m
illion and
$519
m
illion
at
March 31, 2016
and
December 31, 2015
, respectively. We estimate the fair value of the Term Loan using Level 2 inputs, or quoted market prices. The fair value of our debt was
$507
m
illion and
$510
m
illion at
March 31, 2016
and
December 31, 2015
, respectively.
NOTE
9
– COMMITMENTS AND CONTINGENCIES
Litigation
As
bestos 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
March 31, 2016
, we are named a defendant in approximately
482
l
awsuits involving approximately
1,106
claims. No asbestos lawsuit has resulted in a judgment against us to date, with a 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. It is not possible to predict the outcome of these claims and proceedings. However, in our opinion, th
e likelihood that the ultimate disposition of any of these claims and legal
proceeding
s
will
have a material adverse effect on our consolidated financial statements
is remote
.
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, th
e likelihood that the ultimate disposition of any of these claims and legal
proceeding
s
will
have a material adverse effect on our 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, th
e likelihood that the ultimate disposition of any of these claims and legal
proceeding
s
will
have a material adverse effect on our consolidated financial statements
is remote
.
Weatherford Claim.
In addition to PVF, our Canadian subsidiary, Midfield Supply (“Midfield”), now known as MRC
Global
(Canada)
ULC
, also distributed progressive cavity pumps and related equipment (“PCPs”) under a
distribution agreement with Weatherford Canada Partnership (“Weatherford”) within a certain geographical area located in southern Alberta, Canada.
I
n late 2005 and early 2006, Midfield hired new employees, including
former
Weatherford
employees
, as part of Midfield’s desire to expand its PVF business into northern 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.
A subsidiary of Halliburton Company purchased Europump in 2014.
The distribution agreement with Weatherford expired in 2006. Midfield supplied Europump with PVF products that Europump distributed along with 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,
and
other
related
entities, 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 2016.
In April 2016, the court dismissed
two
suppliers from the case. Weatherford has appealed this dismissal.
The case is scheduled for trial on January 16, 2017.
While the Company believes Weatherford’s claims are without merit and we intend to defend against them vigorously, in November 2015, the Company filed with the Court a for
mal offer of settlement for
$2
million plus one half of the Weatherford party’s costs and interest under the
Judgment Interest Act
and reserved
$
3
million
for the offer. Weatherford declined to accept the offer.
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 consolidated financial statements.
Purchase Commitments
We ha
v
e 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.
All references throughout this section (and elsewhere in this report) to amounts available for borrowing under various credit facilities refer to amounts actually available for borrowing after giving effect to
any borrowing base limitations
that
the facility
imposes
.
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 oil and natural gas prices;
•
decreases in oil and natural gas industry expenditure levels, which may result from decreased oil and natural gas prices or other factors;
•
increased usage of alternative fuels, which may negatively affect oil and natural gas industry expenditure levels;
•
U.S. and international general economic conditions;
•
our ability to compete successfully with other companies in our industry;
•
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;
•
unexpected supply shortages;
•
cost increases by our suppliers;
•
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;
•
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 many of our customers and our lack of contracts with customers that require minimum purchase volumes;
•
changes in our customer and product mix;
•
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;
•
our
indebtedness;
•
the dependence on our subsidiaries for cash to meet our obligations;
•
changes in our credit profile;
•
a decline in demand for certain of the products we distribute if import restrictions on these products are lifted;
•
environmental, health and safety laws and regulations and the interpretation or implementation thereof;
•
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;
•
the potential loss of key personnel;
•
interruption in the proper functioning of our information systems;
•
t
he occurr
ence of cybersecurity incidents
;
•
loss of third-party transportation providers;
•
potential inability to obtain necessary capital;
•
risks related to adverse weather events or natural disasters;
•
impairment of our goodwill or other intangible assets;
•
adverse changes in political or economic conditions in the countries in which we operate;
•
exposure to U.S. and international laws and regulations, including the Foreign Corrupt Practices Act and the U.K. Bribery Act and other economic sanctions programs;
•
r
isks associated with international instability and geopolitical developments;
•
risks relating to ongoing evaluations of internal controls required by Section 404 of the Sarbanes-Oxley Act;
•
the impact on us of changes in U.S. generally accepted accounting principles or tax laws
or adverse positions taken by taxing authorities in the countries in which the company operates
;
•
our intention not to pay dividends
on our common stock
; and
•
compliance with and changes in laws and regulations in the countries in which we operate
.
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 largest global industrial distributor, based on sales, of
pipe, valves, and fittings
(“
PVF
”)
and related products and services to the energy industry and hold a leading position in our industry across each of the upstream (exploration, production and extraction of underground oil and natural gas), midstream (gathering and transmission of oil and natural gas, natural gas utilities and the storage and distribution of oil and natural gas) and downstream (crude oil refining, petrochemical and chemical, processing and general industrials) sectors. Our business is segregated into three
geographic reportable
segments, consisting of our U.S.,
Canadian and
International operations. We serve our customers
from
approximately
350
service locations. We offer a wide array of PVF and oilfield supplies encompassing a complete line of products from our
global
network of over 13,000
suppliers to
our
more than
19
,000 customers. We are diversified by geography, the industry sectors we serve and the products we sell. We seek to provide best-in-class service to our customers by satisfying the most complex, multi-site needs of many of
the largest compani
es in the energy and industrial
sectors as their primary PVF supplier. We believe the critical role we play in our customers’ supply chain, together with our extensive product offering, broad global presence, customer-linked scalable information systems and efficient distribution capabilities, serve to solidify our long-standing customer relationships and drive our growth. As a result, we have an
average relationship of over 2
5
years with our 25 largest customers.
Key Drivers of Our Business
Our revenues are predominantly derived from the sale of PVF and other oilfield and industrial supplies to the energy sector globally. Our business is therefore dependent upon both the current conditions and future prospects in the energy industry and, in particular, maintenance and expansionary operating and capital expenditures by our customers in the upstream, midstream and downstream sectors of the industry. Although we have seen customer spending fall off significantly beginning in late
2014 and continuing through the present time
as a result of
lower oil and natural gas price
s
, long-term growth in spending has been driven by several factors, including underinvestment in global energy infrastructure, growth in shale and unconventional exploration and production (“E&P”) activity, and anticipated strength in the oil, natural gas, refined products and petrochemical sectors.
The outlook for future oil, natural gas, refined products and petrochemical PVF spending is influenced by numerous factors, including the following:
•
Oil and Natural Gas Prices.
Sales of PVF and related products to the oil and natural gas industry constitute a significant portion of our sales. As a result, we depend upon the oil and natural gas industry and its ability and willingness to make maintenance and capital expenditures to explore for, produce and process oil and natural gas and refined products. Oil and natural gas prices, both current and projected, along with the costs necessary to produce oil and gas, impact other drivers of our business, including E&P spending, additions and maintenance to pipeline mileage, refinery utilization and petrochemical processing activity.
•
Economic Conditions.
The demand for the products we distribute is dependent on the general economy, the energy sector and other factors. Changes in the general economy or in the energy sector (domestically or internationally) can cause demand for the products we distribute to materially change.
•
Customer, Manufacturer and Distributor Inventory Levels of PVF and Related Products.
Customer, manufacturer and distributor inventory levels of PVF and related products can change significantly from period to period. Increases in our customers’ inventory levels can have an adverse effect on the demand for the products we distribute when customers draw from their inventory rather than purchase new products. Reduced demand, in turn, would likely result in reduced sales volume and profitability. 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 customer and manufacturer inventory levels may ultimately lead to increased demand for our products and would likely result in increased sales volumes and overall 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 tubular 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, or other steel products that we do not supply, impacts the pricing and availability of our products and, ultimately, our sales and operating profitability.
Recent Trends and Outlook
During the first
three
months of
2016
, the average oil price of West Texas Intermediate (“WTI”)
decreased
to
$
33.35
per barrel f
rom
$
48.49
per barrel in the first
three
months of
2015
.
Natural gas prices
decreased
to an average price of $
1.99
/Mcf (Henry Hub) for the first
three
months of
2016
compared to
$
2.90
/Mcf (Henry Hub) for the first
three
months of
2015
.
North American
drilling
r
ig activity
decreased
58%
in the first
three
months
of
2016
as compared to
the
first
three
months
of
2015
.
Recent exploration and production spending forecasts indicate that customer spending
in 2016
will be down 25% globally, including 40% in the U.S.
With the
sustained
decline in both oil and natural gas prices, and forecasts indicating that prices will be at low levels
throughout the remainder of 2016 and into 2017
, we expect our
customers
’ spending
, particularly those in the upstream sector within North America,
will continue to decline in 2016 as compared to 2015
.
With the exception of the gas utilities component of our midstream business, these lower s
pending levels
will also have
a
significant impact on our midstream and downstream business across all segments.
Because
the business environment remains challenging
, we have taken
further
steps
during
the
first quarter
to reduce our operating costs. We
have maintained
our hiring and salary freezes, which were implemented in 2015,
and eliminated
an
additional
2
25
full-
time
positions
during the first quarter of 2016
. As a result of th
ese actions, we recorded
pre-tax severance
and restructuring
charge
s of
$
5
m
illion in the first
three
months
of 2016
.
Excluding the impact of acquisitions, we have reduced our headcount by approximately
1,300
, or
2
5
%
,
over the past
two years
.
We will continue to monitor the business outlook and take actions as appropriate in response to negative changes in that outlook, which may require additional severance
and restructuring
charges.
In addition to these efforts to address costs, we
continuously manage
our investment in working
capital to an appropriate level.
To the extent customer spending in 2016 and beyond decline to levels below current expectations, additional actions may be required to reduce operating costs and working capital levels further. In such a situation, we may also incur charges related to impairment of the carrying value of certain assets, including goodwill and other intangible assets.
In February 2016, we
completed the disposition
of our U.S. oil country tubular goods (“OCTG”) product line
for $48 million
.
As a result of this transaction, we recorded a loss of $5 million that was reflected in our
fourth quarter
2015 results.
This divestiture represents the culmination of a multi-year strategy to decrease our exposure to the direct volatility of the drilling activity and lower margins as compared to our other product lines. For the year ended 2015, sales of U.S. OCTG totaled $305 million, or 7% of our total sales.
Net of reserves, including LIFO and
an
adjustment to write the inventory down to its net realizable value, the carrying value of
U.S. OCTG inventories
as of December 31,
2015
was
$50
million.
We determine backlog by the amount of
unshipped customer orders, either specific or general in nature (including orders held under pipe programs), which the customer may revise
or cancel in certain circumstances. At
March
31,
2016
, total backlog was $
612
m
illion, including $
318
million in our U.S. segment, $
45
million in our Canadian segment and $
249
million in our
International segment
.
Our backlog at December 31, 2015 was $542
million ($500 million excluding OCTG) including $347 million ($305 million excluding OCTG), $34 million and $161 million in our U.S., Canadian and International segments, respectively.
At
March 31, 2015
, total backlog was $
918
m
illion
($
826
million excluding OCTG)
, including $
667
million in our U.S. segment
($
575
million excluding OCTG)
, $
39
million in our Canadian segment and $
212
million in our International segment
.
There can be no assurance that the backlog amounts will ultimately be realized as revenue or that we will earn a profit on the backlog of orders, but we expect that a substantial majority of sales in our backlog will be realized in the next twelve months.
|
Three Months Ended
|
|
March 31,
|
|
March 31,
|
|
2016
|
|
2015
|
Average Rig Count (1):
|
|
|
|
United States
|
551
|
|
1,403
|
Canada
|
173
|
|
313
|
International
|
1,016
|
|
1,261
|
Total
|
1,740
|
|
2,977
|
|
|
|
|
Average Commodity Prices (2):
|
|
|
|
WTI crude oil (per barrel)
|
$ 33.35
|
|
$ 48.49
|
Brent crude oil (per barrel)
|
$ 33.84
|
|
$ 53.98
|
Natural gas ($/Mcf)
|
$ 1.99
|
|
$ 2.90
|
|
|
|
|
Average Monthly U.S. Well Permits
(3)
|
2,055
|
|
3,940
|
3:2:1 Crack Spread
(4)
|
$ 15.42
|
|
$ 21.65
|
_______________________
|
|
|
|
(1) Source-Baker Hughes (
www.bakerhughes.com
) (Total rig count includes oil, natural gas and other rigs.)
|
(2) Source-Department of Energy, EIA (
www.eia.gov
)
|
(3) Source-Rig Data (U.S.)
|
(4) Source-Bloomberg
|
Results of Operations
T
hree Months Ended
March 31, 2016
Compared to the Three Months Ended
March 31, 2015
The breakdown of our sales by sector for the three
months
ended
March 31, 2016
and
2015
was as follows
(in millions)
:
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
March 31, 2016
|
|
March 31, 2015
|
Upstream
|
$ 231
|
|
29%
|
|
$ 547
|
|
42%
|
Midstream
|
278
|
|
36%
|
|
379
|
|
30%
|
Downstream
|
274
|
|
35%
|
|
366
|
|
28%
|
|
$ 783
|
|
100%
|
|
$ 1,292
|
|
100%
|
|
|
|
|
|
|
|
|
For the
three months ended
March 31, 2016
and
2015
, the following table summarizes our results of operations (in millions)
:
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
|
|
March 31,
|
|
March 31,
|
|
|
|
|
|
2016
|
|
2015
|
|
$ Change
|
|
% Change
|
Sales:
|
|
|
|
|
|
|
|
U.S.
|
$ 606
|
|
$ 972
|
|
$ (366)
|
|
(38%)
|
Canada
|
64
|
|
119
|
|
(55)
|
|
(46%)
|
International
|
113
|
|
201
|
|
(88)
|
|
(44%)
|
Consolidated
|
$ 783
|
|
$ 1,292
|
|
$ (509)
|
|
(39%)
|
|
|
|
|
|
|
|
|
Operating (loss)
income:
|
|
|
|
|
|
|
|
U.S.
|
$ 4
|
|
$ 52
|
|
$ (48)
|
|
(92%)
|
Canada
|
(1)
|
|
6
|
|
(7)
|
|
(117%)
|
International
|
(7)
|
|
3
|
|
(10)
|
|
N/M
|
Consolidated
|
(4)
|
|
61
|
|
(65)
|
|
(107%)
|
|
|
|
|
|
|
|
|
Interest expense
|
(8)
|
|
(15)
|
|
7
|
|
(47%)
|
Other expense
|
(1)
|
|
(4)
|
|
3
|
|
(75%)
|
Income tax benefit (expense)
|
5
|
|
(13)
|
|
18
|
|
(138%)
|
Net (loss) income
|
(8)
|
|
29
|
|
(37)
|
|
(128%)
|
Series A preferred stock dividends
|
(6)
|
|
-
|
|
(6)
|
|
N/M
|
Net (loss) income attributable to common stockholders
|
$ (14)
|
|
$ 29
|
|
$ (43)
|
|
(148%)
|
|
|
|
|
|
|
|
|
Adjusted Gross Profit (1)
|
$ 147
|
|
$ 241
|
|
$ (94)
|
|
(39%)
|
Adjusted EBITDA (1)
|
$ 19
|
|
$ 87
|
|
$ (68)
|
|
(78%)
|
|
(1)
|
|
Adjusted Gross Profit and Adjusted EBITDA are non-GAAP financial measures. For a reconciliation of these measures to an equi
v
alent GAAP measure, see pages
19-21
herein.
|
Sales
.
Sales include the revenue recognized from the sale of the products we distribute
, the
services
we provide
to customers and freight billing
s to customers, less cash discounts
taken by customers in return for their early payment of our invoices to them. Our sales
were
$783
million for the
three months ended
March 31, 2016
as compared to
$1,292
million
for the
three months ended
March 31, 2015
.
The $509 million decrease in sales reflected a $1
5 million impact of the decline
in foreign currencies in areas where we operate compared to the U.S.
dollar.
U.S. Segment—
Our U.S. sales
decreased
to
$606
million for the three months ended
March 31, 2016
from
$972
million for the three months ended
March 31, 2015
. This
$366
million, or
38%
de
crease
reflected
a
$
226
million
decrease in the
upstream sector
, a
$94
million decrease in
the
midstream
sector
and a
$
46
million
decrease in
the
downstream
sector
.
The decline in the upstream
sector
included an $85 million impact from the disposition of our OCTG product line.
The
remaining
decrease
in
sales
in the
first
quarter
of 201
6
as compared to the same period in 201
5
was
caused by
decreased customer spending
driven by the sustained
decline in oil and
natural
gas prices
and the resulting decline in rig count
.
Canadian Segment—
Our Canadian sales
decreased
to
$64
million for the three months ended
March 31, 2016
from
$119
million for the three months ended
March 31, 2015
.
This
$55
million, or
46
%,
decrease reflected a $
44
million decrease in the upstream business
also
due
to
a decrease in customer spending.
Approximately $7 million
,
or 13%
,
of the total decline was a result of the weaker Canadian dollar relative to the U.S. dollar.
International Segment
—Our International sales
decreased
to
$113
million for the three months ended
March 31,
2016
from
$201
million for the same period in
2015
.
The
$88
million
, or
44
%,
decrease
reflected the combined impact
of lower project activity and
deferral of
maintenance, repair and operations (“MRO”)
expenditures particularly in Norway, the U.K
.,
Australia
and
Singapore
.
The impact of the decline in the foreign currencies in areas where we operate outside of
the U.S. dollar accounted for $8 million, or 9
%, of the total decline.
Gross Profit
.
Our gross profit was
$133
million
(
17.0%
of sales) for the three months ended
March 31, 2016
as compared to
$220
million
(
17.0%
of sales) for the three months ended
March 31, 2015
.
Gross profit for the three months ended
March 31, 2016
benefited
from
lower product costs reflected in our last-in, first-out (“LIFO”) inventory costing methodology. LIFO resulted in a reduction of cost of sales of $
3
million
and $0 million
in
the first
quarter
s
of 2016
and 2015, respectively.
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 cost
s were $
8
million and
$
10
million for the three
months ended
March
31,
2016
and
2015
, respectively.
Adjusted Gross Profit
.
Adjusted Gross Profit
decreased
to
$147
million
(
18.7%
of sales) for the three months ended
March 31, 2016
from
$241
million
(
18.6%
of sales) for the three months ended
March 31, 2015
,
a
decrease
of
$94
million. Adjusted Gross Profit is a non-GAAP financial measure. We define Adjusted Gross Profit as sales, less cost of sales, plus depreciation and amortization, plus amortization of intangibles, and plus or minus the impact of our LIFO inventory costing methodology. We present Adjusted Gross Profit because we believe it is a useful indicator of our operating performance without regard to items, such as amortization of intangibles, that can vary substantially from company to company depending upon the nature and extent of acquisitions. Similarly, the impact of the LIFO inventory costing method can cause results to vary substantially from company to company depending upon whether they elect to utilize LIFO and depending upon which method they may elect. We use Adjusted Gross Profit as a key performance indicator in managing our business. We believe that gross profit is the financial measure calculated and presented in accordance with U.S. generally accepted accounting principles that is most directly comparable to Adjusted Gross Profit.
The following table reconciles Adjusted Gross Profit with gross profit, as derived from our financial statements (in millions):
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
March 31,
|
|
Percentage
|
|
March 31,
|
|
Percentage
|
|
2016
|
|
of Revenue
|
|
2015
|
|
of Revenue
|
Gross profit, as reported
|
$ 133
|
|
17.0%
|
|
$ 220
|
|
17.0%
|
Depreciation and amortization
|
5
|
|
0.6%
|
|
5
|
|
0.4%
|
Amortization of intangibles
|
12
|
|
1.5%
|
|
16
|
|
1.2%
|
Decrease in LIFO reserve
|
(3)
|
|
(0.4%)
|
|
-
|
|
-
|
Adjusted Gross Profit
|
$ 147
|
|
18.7%
|
|
$ 241
|
|
18.6%
|
Selling, General and Administrative (“SG&A”) Expenses
.
Costs such as salaries, wages, employee benefits, rent, utilities, communications, insurance, fuel and taxes (other than state and federal income taxes) that are necessary to operate our branch and corporate operations are included in
SG&A
.
Also contained in this category are certain items that are nonoperational in nature, including certain costs of acquiring and integrating other businesses.
Our
SG&A
expenses were
$137
million for the three months ended
March 31, 2016
as compared to
$159
million for the three months ended
March 31, 2015
.
SG&A for the
first
qu
arter of 2016
included $
5
million of s
everance and
restructuring
charges
resulting from
cost reduction
s efforts
compared to $2 million of similar charges in the first quarter of 2015
.
The first qua
rter of 2016 also reflected a $4
million favorable impact from foreign exchange rates compared to the first quarter of 2015.
Excluding
these amounts, SG&A decreased $
21
million
which was
attributable to volume-related declines and the
cost
reduction
efforts
we have
made.
Operating
(Loss)
Income
.
Operating
loss
was
$
4
million for the three months ended
March 31, 2016
, as compared to
$61
million
of operating income
for the three months ended
March 31, 2015
, a
decrease
of
$65
million.
U.S. Segment
—
Operating income for our U.S. segment
decreased
to
$4
million for the three months ended
March
31,
2016
from
$52
million for the three months ended
March 31, 2015
.
The
decrease
in operating income
of
$
48
million
was
driven by lower
revenue
due to
decreased customer spending
offset by a
reduction
in SG&A expenses.
Canadian
Segment
—
Operating loss
for our Canadian segment
was
$
1
million for the three months ended
March
31,
2016
as compared to operating income of
$6
million for the three months ended
March 31, 2015
. The
decrease
of
$7
million
reflected
the decline in sal
es offset by
corresponding reductions
in SG&A.
International Segment
—
Our
International segment
incurred an operating loss of
$7
million for the three months ended
March 31, 2016
as compared to ope
r
a
ting income of
$3
million for the three months ended
March 31, 2015
.
The
decrease
of $
10
million was the result of lower sales
offset by
corresponding reductions
in SG&A.
Interest Expense
.
Our interest expense was
$8
million for the three months ended
March 31, 2016
as compared to
$15
million for the three months ended
March 31, 2015
. T
his represented a
decrease
of $
7
million resulting from
lower
average debt levels.
Oth
er
E
xpense
.
Our other
expense
was
$1
million for the three months ended
March 31, 2016
compared to
$4
million
for the three months ended
March 31, 2015
.
Income Tax
Benefit
(
Expense
)
.
Our income tax benefit
was
$5
million for the
three months ended
March 31, 2016
as compared to
expense of
$13
million for the
three months ended
March 31, 2015
. Our effective tax rates were
4
3
%
and
31
%
for the
three months ended
March 31, 2016
and
2015
, respectively.
Our first quarter 2016 effective tax rate of 43%
, computed in whole dollars,
was higher than the U.S. federal statutory rate of 35% primarily as a result of valuation allowances recorded in certain international jurisdi
ctions where pre-tax losses have
no corresponding tax benefit.
Our rates generally
differ from the
U.S.
federal statutory rate of 35% as a result of state income taxes and differing
, generally lower,
foreign income tax rates.
Net
(Loss)
Income
.
Our net
loss
was
$
8
million
for the three months ended
March 31, 2016
as compared to
net income of
$29
million for the three months ended
March 31, 2015
,
a
decrease
of
$37
million.
Adjusted EBITDA
.
We define Adjusted EBITDA as net income plus interest, income taxes, depreciation and amortization, amortization of intangibles and
certain
other
expenses
(such as gains/losses on the early extinguishment of debt, changes in the fair value of derivative instruments and goodwill impairment) and plus or minus the impact of our LIFO inventory costing methodology. Adjusted EBITDA, a non-GAAP financial measure, was
$19
million
(
2.4%
of sales)
for
the three months ended
March 31, 2016
as compared to
$87
million
(
6.7%
of sales)
for the three months ended
March 31, 2015
.
We believe Adjusted EBITDA provides investors a helpful measure for comparing our operating performance with the performance of other companies that have different financing and capital structures or tax rates. We believe that net income is the financial measure calculated and presented in accordance with U.S. generally accepted accounting principles that is most directly comparable to Adjusted EBITDA.
The following table reconciles Adjusted EBITDA with net
(loss)
income, as derived from our financial statements (in millions):
|
|
|
|
|
Three Months Ended
|
|
March 31,
|
|
March 31,
|
|
2016
|
|
2015
|
Net (loss) income
|
$ (8)
|
|
$ 29
|
Income tax (benefit) expense
|
(5)
|
|
13
|
Interest expense
|
8
|
|
15
|
Depreciation and amortization
|
5
|
|
5
|
Amortization of intangibles
|
12
|
|
16
|
Decrease in LIFO reserve
|
(3)
|
|
-
|
Change in fair value of derivative instruments
|
1
|
|
1
|
Equity-based compensation expense
|
3
|
|
2
|
Severance and restructuring charges
|
5
|
|
2
|
Foreign currency losses
|
1
|
|
4
|
Adjusted EBITDA
|
$ 19
|
|
$ 87
|
|
|
|
|
Liquidity and Capital Resources
Our primary sources of liquidity consist of cash generated from our operating activities, existing cash balances and borrowings under our Global ABL Facility. At
March 31, 2016
, our total liquidity, including cash on hand, was
$
708
million
. Our ability to generate sufficient cash flows from our operating activities will continue to be primarily dependent on our sales of products and services to our customers at margins sufficient to cover our fixed and variable expenses. As of
March 31, 2016
and
December 31, 2015
, we had cash and cash equivalents of $
121
million and $
69
million, respectively. As of
March 31, 2016
and
December 31, 2015
, $
68
million and $
51
million of our cash and cash
equivalents, respectively, were maintained in the accounts of our various foreign subsidiaries. If such amounts were transferred among countries or repatriated to the U.S., such amounts may be subject to additional tax liabilities, which would be recognized in our financial statements in the period during which such decision would be made. We have the intent and ability to indefinitely reinvest the cash held by our foreign subsidiaries, and there are currently no plans that require the repatriation of
this cash
.
Our primary credit facilities consist of a seven-year Term Loan maturing in November 2019
with an original principal amount of $
794
million
and a five-year $1.05 billion Global ABL Facility
that
provides a $977 million facility in the Unit
ed States, a $30 million facility in Norway, a $20 million facility in Canada, a $10 million facility in Australia, a $5 million facility in the United Kingdom, a $4 million facility in the Netherlands and a $4 million facility in Belgium.
As of
March 31, 2016
, the outstanding balance on our Term Loan, net of original issue discount
and issuance costs
, was $
518
million.
The Global ABL Facility matures in July 2019.
The Global ABL Facility contains an accordion feature that allows us to increase the principal amount of the facility by up to $300 million, subject to additional lender commitments.
As of
March 31, 2016
, we had
$587
million
of Excess Availability, as defined
u
nder
our
Global ABL Facility
. Availability is dependent on a borrowing base comprised of a percentage of eligible accounts receivable and inventory which i
s subject to redetermination fro
m time to time.
Our credit ratings are below “investment grade” and as such could impact both our ability to raise new funds as well as the interest rates on our future borrowings. Our ability to incur additional debt is restricted by our existing obligations. We were in compliance with the covenants contained in our various credit facilities as of and during the
three
months ended
March 31, 2016
.
We believe our sources of liquidity will be sufficient to satisfy the anticipated cash requirements associated with our existing operations for at least the next twelve months. However, our future cash requirements could be higher than
we currently expect as a result of various factors. Additionally, our ability to generate sufficient cash from our operating activities depends on our future performance, which is subject to general economic, political, financial, competitive and other factors beyond our control.
We may from time to time seek to raise additional debt or equity financing or re-price or refinance existing debt in the public or private markets, based on market conditions.
Any such capital market
s
activities would be subject to market conditions, reaching final agreement with lenders or investors, and other factors, and there can be no assurance that we would successfully consummate any such transactions.
In November 2015, the Company’s board of directors authorized a share repurchase program for common stock of up to $100 million. The program is scheduled to expire December 31, 2017. The shares may be repurchased at management’s discretion in the open market. Depending on market conditions and other factors, these repurchases may be commenced or suspended from time to time without prior notice.
During the first quarter of 2016, we purchased 2,878,874 shares of common stock at a total cost of $38 million. In total under this plan, we have purchased 3,695,263 shares at a total cost of $50 million.
Cash Flows
The following table sets forth our cash flows for the periods indicated below (in millions):
|
|
|
|
|
Three Months Ended
|
|
March 31,
|
|
March 31,
|
|
2016
|
|
2015
|
Net cash provided by (used in):
|
|
|
|
Operating activities
|
$ 58
|
|
$ 115
|
Investing activities
|
38
|
|
(7)
|
Financing activities
|
(46)
|
|
(80)
|
Net increase in cash and cash equivalents
|
$ 50
|
|
$ 28
|
|
|
|
|
Operating Activities
Net cash
provided by
operating activities was
$58
million during the
three
months ended
March 31, 2016
compared to
$115
million during the
three
months ended
March 31, 2015
.
The
decrease
in cash
provided by
operations was primarily the result
of
reduced profitability combined with a reduction in the pace of working capital
contraction
in res
ponse
to slowing sales
.
Working
capital de
creased $
31
million in the first
three
months of
2016
compared to
$62
million in the first
three
months of
2015
.
The current year
decline in working capital was impacted most
significantly by
$
6
7
million
and $
24
million
reduction
s
in accounts receivable
and inventory, respectively,
cause
d
by declining sales levels
.
We continue to actively
manage
our investment in working capital to an appropriate level
given current market conditions
.
Investing Activities
Net cash
provided by
investing activities was
$38
million for the
three
months ended
March 31, 2016
,
compared to
$7
million
used in investing activities
for the
three
months ended
March 31, 2015
.
The $45 million increase in cash provided by investing activities is the result of $48 million in proceeds from the distribution of our U.S. OCTG product line.
Our
capital expenditures were $
10
million for the
three
months ended
March 31, 2016
and $
4
million for the
three
months ended
March 31, 2015
.
We expect capital expenditures in 201
6
to
be
approximately
$
45
million
which
reflects
our plan to implement a new information technology system in
the inte
rnational segment.
F
i
nancing Activities
Net cash
used in
financing activities was
$46
million for the
three
months ended
March 31, 2016
compared to
$80
million
for
the
three
months ended
March 31, 2015
.
Net
repayments
on our Global ABL Facility totaled $
0
million in the first
three
months of
2016
, compared to $
78
million in the first
three
months of
2015
.
In the first quarter of 2016, we used $38 million and $6 million to fund purchases of our common stock and dividends on our preferred stock, respectively.
Critical Accounting Policies
The preparation of financial statements, in conformity with
accounting principles generally accepted in the United States of America
, requires management to make judgments, estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses in the financial statements. Management bases its estimates on historical experience and other assumptions, which it believes are reasonable. If actual amounts are ultimately different from these estimates, the revisions are included in our results of operations for the period in which the actual amounts become known.
Accounting policies are considered critical when they require management to make assumptions about matters that are highly uncertain at the time the estimates are made and when there are different estimates that management reasonably could have made, which would have a material impact on the presentation of our financial condition, changes in our financial condition or results of operations. For a description of our critical accounting policies,
see “
Item
7:
“Management’s Discussion and Analysis of Financial Condition and Results from Operations” in our Annual Report on Form 10-K for the fiscal year ended
December 31, 2015
.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are primarily exposed to the market risk associated with unfavorable movements in interest rates, foreign currencies and steel price volatility. There have been no material changes to our market risk policies or our market risk sensitive instruments and positions as described
in our Annual Report on Form 10-K for the fiscal year ended
December 31, 2015
.
ITEM 4.
CONTROLS AND PROCEDURES
Evaluation of disclosure controls and procedures
.
As of
March 31, 2016
, we have reviewed, under the direction of our Chief Executive Officer and Chief Financial Officer, the Company’s disclosure controls and procedures, as defined in Exchange Act Rule 13a-15(e). Based upon and as of the date of that review, the Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective to ensure that information required to be disclosed in the reports that the Company files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to the Company’s management, including the Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosures.
Changes in internal control over financial reporting
.
There were no changes in our internal control over financial reporting that occurred during the
first
three
months
of
2016
that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Part II
—
other information
ITEM 1.
LEGAL 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 pending legal proceedings that are likely to have a material effect on our business, financial condition
,
results of operations or cash flows, although it is possible that the resolution of certain actual, threatened or anticipated claims or proceedings could have a material adverse effect on our results of operation
s
in the period of resolution.
Also, 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 recovery from the manufacturer for our expense. In the opinion of management, the ultimate disposition of these claims and proceedings
is
not expected to have a material adverse effect on our financial
condition
, results of operations or cash flows.
For information regarding asbestos cases in which we are a defendant and other c
laims and proceedings, see Note
9
-
Commitments and Contingencies to our unaudited condensed
consolidated
financial statements.
Item 1A.
Risk Factors
We are affected by risks specific to us as well as factors that affect all businesses operating in a global market. The significant factors known to us that could materially adversely affect our business, financial condition or operating results are described in
Part I,
Item 2
of this Quarterly Report on Form 10-Q
and in Part I, Item 1A of our Annual Report on Form 10-K for the year ended
December 31, 2015
under “Risk Factors”.
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
|
|
|
|
|
|
|
|
A summary of our purchases of MRC Global Inc. common stock during the first quarter of fiscal year 2016 is as follows:
|
|
|
|
|
|
|
|
|
|
Total Number of Shares Purchased
(1)
|
|
Average Price Paid per Share
|
|
Total number of Shares Purchased as Part of Publicly Announced Plans or Programs
(2)
|
|
Maximum Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs
|
Jan 1 - Jan 31
|
-
|
|
$ -
|
|
-
|
|
$ 88,473,755
|
Feb 1- Feb 29
|
91,497
|
|
$ 9.56
|
|
-
|
|
$ 88,473,755
|
Mar 1- Mar 31
|
2,884,360
|
|
$ 13.40
|
|
2,878,874
|
|
$ 49,918,155
|
|
2,975,857
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) We purchased 96,983 shares in connection with funding employee income tax withholding obligations arising upon the lapse of restrictions on restricted shares.
|
(2) We purchased 2,878,874 shares during the period as part of a share repurchase program authorized by the Company's board in November 2015. The plan allows for purchases of common stock up to $100 million and is scheduled to expire in December 2017.
|
|
|
|
|
|
|
|
|
Item 3.
Defaults Upon Senior Securities
None.
Item 4
.
MINING SAFETY DISCLOSURES
None.
Item 5.
Other Information
None.
Item 6. Exhibits
|
|
|
|
|
|
Number
|
|
Description
|
|
|
|
31.1
*
|
|
Certification of the Chief Executive Officer pursuant to Rules 13a-14(a) and 15d-14(a) promulgated under the Securities Exchange Act of 1934, as amended, and Item 601(b)(31) of Regulation S-K, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
|
|
|
31.2
*
|
|
Certification of the Chief Financial Officer pursuant to Rules 13a-14(a) and 15d-14(a) promulgated under the Securities Exchange Act of 1934, as amended, and Item 601(b)(31) of Regulation S-K, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
|
|
|
32
**
|
|
Certification of the Chief Executive Officer and the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
|
|
|
100
*
|
|
The following financial information from MRC Global Inc.’s Quarterly Report on Form 10-Q for the period ended
March 31, 2016
, formatted in Extensible Business Reporting Language (XBRL): (i) the Condensed Consolidated Balance Sheet
s
at
March 31, 2016
and December 31, 201
5
, (ii) the Condensed Consolidated Statement
s
of
Operations
for the three
month
period
s
ended
March 31, 2016
and 2015
, (iii) the Condensed Consolidated Statement
s
of Comp
r
ehensive Income for the three
m
onth
period
s
ended
March 31, 2016 and 2015
, (iv) the Condensed Consolidated Statement
s
of Cash Flows for the
three
m
onth period
s
ended
March 31, 2016 and 2015
and (v) Notes to
Condensed Consolidated Financial Statements.
|
|
|
101
*
|
|
Interactive data file.
|
*
Filed herewith.
**
Furnished herewith.