ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should read the following discussion and analysis of our financial condition and results of operations in conjunction with our financial statements and related notes included elsewhere in this report. This discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions.
As used in this Form 10-Q, unless otherwise indicated or the context otherwise requires, all references to the “Company”, “MRC Global”, “we”, “our” or “us” refer to MRC Global Inc. and its consolidated subsidiaries.
Cautionary Note Regarding Forward-Looking Statements
Management’s Discussion and Analysis of Financial Condition and Results of Operations (
as well as other sections of this Quarterly Report on Form 10-Q
) contain forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Forward-looking statements include those preceded by, followed by or including the words “will,” “expect,” “intended,” “anticipated,” “believe,” “project,” “forecast,” “propose,” “plan,” “estimate,” “enable,” and similar expressions
, including, for example, statements about our business strategy, our industry, our future profitability, growth in the industry sectors we serve, our expectations, beliefs, plans, strategies, objectives, prospects and assumptions, and estimates and projections of future activity and trends in the oil and natural gas industry. These forward-looking statements are not guarantees of future performance. These statements are based on management’s expectations that involve a number of business risks and uncertainties, any of which could cause actual results to differ materially from those expressed in or implied by the forward-looking statements. These statements involve known and unknown risks, uncertainties and other factors, most of which are difficult to predict and many of which are beyond our control, including the factors described under “Risk Factors”, that may cause our actual results and performance to be materially different from any future results or performance expressed or implied by these forward-looking statements. Such risks and uncertainties include, among other things
:
•
decreases in 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
significant
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 occurrence 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;
•
our intention not to pay dividends; and
•
the impact of U.S government policies.
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 refin
ing, petrochemical and chemical
processing and general industrials) sectors. Our business is segregated into three
geographic reportable
segments, consisting of our U.S.,
Canad
a
and
International operations. We serve our customers
from approximately
300
service locations. We offer a wide array of PVF and oilfield supplies encompassing a complete line of products from our
global network of over 12,000
suppliers to
our
more than
17
,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 sector
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 revenue is
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. We
saw
customer spending fall off significantly beginning in late 2014 and continuing through
2016
as a result of lower oil and natural gas price
s
.
However, customer spending has increased in 2017 as oil and natural gas prices have improved from the lows of the past two years.
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 over 90% 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, 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 capital spending by customers, 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.
•
Manufacturer and Distributor Inventory Levels of PVF and Related Products.
Manufacturer and distributor inventory levels of PVF and related products can change significantly from period to period. Increased inventory levels by manufacturers or other distributors can cause an oversupply of PVF and related products in the industry sectors we serve and reduce the prices that we are able to charge for the products we distribute. Reduced prices, in turn, would likely reduce our profitability. Conversely, decreased manufacturer inventory levels may ultimately lead to increased demand for our products and 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
nine
months of
2017
, the average oil price of West Texas Intermediate (“WTI”)
increased
to $
49.30
per barrel f
rom
$
41.35
per barrel in the first
nine
months of
2016
.
Natural gas prices
increased
to an average price of $
3.01
/Mcf (Henry Hub) for the first
nine
months of
2017
compared to
$
2.34
/Mcf (Henry Hub) for the first
nine
months of
2016
.
North American drilling r
ig activity
increased
80%
in the first
nine
months of
2017
as compared to the first
nine
months of
2016
.
U.S. well completions were up 36% in the first nine months of 2017 comp
ared to the same period in 2016.
In recent years, there has been an increase in the global supply of crude oil, including the contribution of U.S. shale oil, at a pace exceeding demand growth. This increase combined with a hesitance on the part of the Organization of Petroleum Exporting Countries (“OPEC”) to curb production triggered a dramatic decline in oil prices that began in late 2014 and continued throughout 2016. This low price environment, in turn, resulted in a dramatic decline in
E&P
capital spending by our customers, which directly
impact
ed
our business. In 2016, customer spending fell by 27%, following a 21% decline in 2015, which brought spending to its lowest levels since 2009. This marked the first time in nearly 30 years that global spending has been down in consecutive years. However,
since
its
November
2016
announcement, OPEC
has attempted to enforce
production cuts
,
and
we
have been
encouraged by
stability i
n oil prices and
increased
drilling activity.
As a result, our 2017 revenue will be higher than 2016 and p
rominent
E&P
spending surveys, which include many
of our customers, indicate that spending will continue to
increase
in North America
in 2018 and 2019
, while forecasts outside of North America are more subdued
. We expect our business to follow the same trend.
However, in the short-term, oil prices remain volatile and changes in oil prices could impact customer spending levels.
Beginning in 2015, the international segment has seen customer spending continue to decline, even as the U.S. and Canadian segment sales have increased from improved spending by our customer base in 2017. We took actions in 2016 to reduce our international footprint and cost structure and yet we have been unable to return to profitability. For the first nine months of
2017 our international segment is reporting an operating loss of $8 million. As such, we are in the process of further reducing our headcount and cost structure in the international segment and expect to record
a
severance and restructuring charge in the fourth quarter of 2017.
In January 2017, a new U.S. President took office and
a
new U.S. Congress was seated. They have publicly made statements regarding the desire to support United States energy producers, refocus the EPA on its core mission, focus on United States interests first and lessen the regulatory burden on businesses to create job growth.
These statements have been further supported by the approval of a number of pipeline projects.
They have also announced an aggressive policy agenda to change the tax system, modify the relationships between the United States and other countries, cancel or modify trade treaties and remake relationships with other countries. Until specific laws are passed, executive actions are taken or federal regulatory action is enacted, it is unclear what impact these policies will have on our business. While at first impression these policies could decrease the regulatory and tax burden on our business and the businesses of our U.S. customers, increase oil and gas production in the U.S. and, as a result, our U.S. business activity and increase the sales of product from our U.S. suppliers, it is not clear that all impacts would be positive. However, in the absence of specifics and given the government’s generally supportive stance for the oil and gas industry, and based on E&P spending surveys and our customers’ current outlook for oil and gas supply and demand, we expect our business to increase in 2017
and 2018
.
We determine backlog by the amount of unshipped customer orders, either specific or general in nature, which the customer may revise or cancel in certain instances. The table below details our backlog by segment (in millions):
|
|
|
|
|
|
|
September 30,
|
|
December 31,
|
|
September 30,
|
|
2017
|
|
2016
|
|
2016
|
U.S.
|
$ 520
|
|
$ 472
|
|
$ 411
|
Canada
|
35
|
|
36
|
|
29
|
International
|
247
|
|
241
|
|
219
|
|
$ 802
|
|
$ 749
|
|
$ 659
|
Approximately
20
% and
28% of our
September 30, 2017
and
December 31, 2016
ending backlog
, respectively,
was associated with one customer in our U.S. segment as the result of a significant ongoing customer project. 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 substantially all of the sales in our backlog will be realized in
the next twelve months
.
The following table shows key industry indicators for the three and nine months ended September 30, 2017 and 2016:
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
September 30,
|
|
September 30,
|
|
September 30,
|
|
September 30,
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Average Rig Count (1):
|
|
|
|
|
|
|
|
United States
|
946
|
|
479
|
|
861
|
|
482
|
Canada
|
208
|
|
121
|
|
207
|
|
112
|
Total North America
|
1,154
|
|
600
|
|
1,068
|
|
594
|
International
|
947
|
|
936
|
|
948
|
|
965
|
Total
|
2,101
|
|
1,536
|
|
2,016
|
|
1,559
|
|
|
|
|
|
|
|
|
Average Commodity Prices (2):
|
|
|
|
|
|
|
|
WTI crude oil (per barrel)
|
$ 48.18
|
|
$ 44.85
|
|
$ 49.30
|
|
$ 41.35
|
Brent crude oil (per barrel)
|
$ 52.10
|
|
$ 45.80
|
|
$ 51.75
|
|
$ 41.86
|
Natural gas ($/Mcf)
|
$ 2.95
|
|
$ 2.88
|
|
$ 3.01
|
|
$ 2.34
|
|
|
|
|
|
|
|
|
Average Monthly U.S. Well Permits
(3)
|
3,877
|
|
2,678
|
|
3,553
|
|
2,260
|
U.S. Wells Completed
(2)
|
3,370
|
|
2,287
|
|
8,913
|
|
6,531
|
3:2:1 Crack Spread
(4)
|
$ 19.77
|
|
$ 13.61
|
|
$ 17.52
|
|
$ 15.38
|
(1) Source-Baker Hughes (
www.bhge.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
September 30, 2017
Compared to the Three Months Ended
September 30, 2016
The breakdown of our sales by sector for the three
months
ended
September 30, 2017
and
2016
was as follows
(in millions)
:
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
September 30, 2017
|
|
September 30, 2016
|
Upstream
|
$ 269
|
|
28%
|
|
$ 224
|
|
28%
|
Midstream
|
437
|
|
46%
|
|
327
|
|
41%
|
Downstream
|
253
|
|
26%
|
|
242
|
|
31%
|
|
$ 959
|
|
100%
|
|
$ 793
|
|
100%
|
|
|
|
|
|
|
|
|
For the
three months ended
September 30, 2017
and
2016
, the following table summarizes our results of operations (in millions)
:
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
|
|
September 30,
|
|
September 30,
|
|
|
|
|
|
2017
|
|
2016
|
|
$ Change
|
|
% Change
|
Sales:
|
|
|
|
|
|
|
|
U.S.
|
$ 759
|
|
$ 590
|
|
$ 169
|
|
29%
|
Canada
|
77
|
|
70
|
|
7
|
|
10%
|
International
|
123
|
|
133
|
|
(10)
|
|
(8%)
|
Consolidated
|
$ 959
|
|
$ 793
|
|
$ 166
|
|
21%
|
|
|
|
|
|
|
|
|
Operating income (loss):
|
|
|
|
|
|
|
|
U.S.
|
$ 21
|
|
$ (4)
|
|
$ 25
|
|
N/M
|
Canada
|
4
|
|
(4)
|
|
8
|
|
N/M
|
International
|
(3)
|
|
(28)
|
|
25
|
|
N/M
|
Consolidated
|
22
|
|
(36)
|
|
58
|
|
N/M
|
|
|
|
|
|
|
|
|
Interest expense
|
(9)
|
|
(9)
|
|
-
|
|
0%
|
Other (expense) income
|
(8)
|
|
3
|
|
(11)
|
|
N/M
|
Income tax (expense) benefit
|
(2)
|
|
2
|
|
(4)
|
|
N/M
|
Net income (loss)
|
3
|
|
(40)
|
|
43
|
|
N/M
|
Series A preferred stock dividends
|
6
|
|
6
|
|
-
|
|
0%
|
Net loss attributable to common stockholders
|
$ (3)
|
|
$ (46)
|
|
$ 43
|
|
N/M
|
|
|
|
|
|
|
|
|
Gross profit
|
$ 152
|
|
$ 88
|
|
$ 64
|
|
73%
|
Adjusted Gross Profit (1)
|
$ 182
|
|
$ 103
|
|
$ 79
|
|
77%
|
Adjusted EBITDA (1)
|
$ 56
|
|
$ 24
|
|
$ 32
|
|
N/M
|
|
(1)
|
|
Adjusted Gross Profit and Adjusted EBITDA are non-GAAP financial measures. For a reconciliation of these measures to an equi
valent GAAP measure, see pages
19-21
herein.
|
Sales
.
Sales include the revenue recognized from the sale of products we distribute
,
services
we provide
and freight billings to customers, less cash discounts taken by customers in return for their early payment.
Our sales
were
$959
million for the
three months ended
September 30, 2017
as compared to
$793
million for the
three months ended
September 30, 2016
,
an increase of
$166
million
, or
21%
.
U.S. Segment—
Our U.S. sales
increased
to
$759
million for the three months ended
September 30, 2017
from
$590
million for the three months ended
September 30, 2016
. This
$169
million, or
29%
,
in
crease
reflected a $
49
million
in
crease in the upstream sector, a $
110
million increase
in the midstream
sector and a $
10
million
in
crease in the downstream sector.
The
increase
in the midstream sector is related
to
increase
d
activity
in the gas utility and transmission and gathering subsectors
with several
of our customers
,
and the increase in the upstream sector is related to the increase in rig count
and well completions
.
We estimate that business disruption from hurricanes negatively impacted sales by $8 million in the third quarter of 2017.
Canada Segment—
Our Canad
a
sales
increased
to
$77
million for the three months ended
September 30, 2017
from
$70
million for the three months ended
September 30, 2016
.
This $
7
million, or
10%
,
increase
was primarily due to
the upstre
am business
as a result of an increase in rig count
and well completions
offset by a decrease in the midstream sector
. Canadian sales were
favorably
impacted by $3 million
,
or
4
%
,
as a
result of the
stronger
Canadian dollar relative to the U.S. dollar.
International Segment
—Our International sales
decreased
to
$123
million for the three months ended
September 30, 2017
from
$133
million for the same period in
2016
.
The
$10
million, or
8%
,
decrease
was primarily due to a
$24
million dec
rease in the upstream business
,
related to one of our project customers in Norway
,
offset by a
$12
million Australian line pipe
sale
in the midstr
eam sector. The
strengthening of
foreign currencies in areas where we operate outsi
de of the U.S. dollar
favorably impacted sales by
$3 million, or 2
%.
Gross Profit
.
Our gross profit was
$152
million
(
15.8%
of sales) for the three months ended
September 30, 2017
as compared to
$88
million
(
11.1%
of sales) for the three months ended
September 30, 2016
.
T
hird quarter 2016 gross profit was negatively impacted by $45 million of inventory-related charges to reduce the carrying value of certain excess and obsolete inventory items to their net realizable value.
Aside from the impact of this charge, the $64 million increase was primarily attributable to the increase in sales volumes.
Excluding this charge, the reduction
in g
ross profit
percentage
for the three months ended
September 30, 2017
,
compared to the same period in 2016
,
was the result of
o
ur last-in, first-out (“LIFO”)
inventory costing methodology
which
resulted in a
n i
ncrease in cost of sales of
$13
million and a
reduction of cost of sales of $
3
million in the
thir
d
quarter
of
2017
and
2016
, 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 $
7
million
and $8 million
for
the three months ended
September 30, 2017
and
2016
, respectively.
Adjusted Gross Profit
.
Adjusted Gross Profit
increased
to
$182
million (
19.0%
of sales) for the three months ended
September 30, 2017
from
$103
million
(
13.0%
of sales) for the three months ended
September 30, 2016
,
a
n
increase
of
$79
million.
Third quarter 2016 Adjusted Gross Profit included the impact of the $45 million of inventory-related charges discussed
above.
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
, a non-GAAP financial measure,
with gross profit, as derived from our financial statements (in millions):
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
September 30,
|
|
Percentage
|
|
September 30,
|
|
Percentage
|
|
2017
|
|
of Revenue
|
|
2016
|
|
of Revenue
|
Gross profit, as reported
|
$ 152
|
|
15.8%
|
|
$ 88
|
|
11.1%
|
Depreciation and amortization
|
5
|
|
0.5%
|
|
6
|
|
0.8%
|
Amortization of intangibles
|
12
|
|
1.3%
|
|
12
|
|
1.5%
|
Increase (decrease) in LIFO reserve
|
13
|
|
1.4%
|
|
(3)
|
|
(0.4%)
|
Adjusted Gross Profit
|
$ 182
|
|
19.0%
|
|
$ 103
|
|
13.0%
|
|
|
|
|
|
|
|
|
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
$130
million for the three months ended
September 30, 2017
as compared to
$124
million for the three months ended
September 30, 2016
.
Severance and restructuring charges for the
three months ended
September 30, 2016
totaled $
3
million
.
No such expenses
were incurred
for the three months ending
September 30, 2017
.
The increase in SG&A is primarily related to an increase in volume-related activity.
Operating
Income
(Loss)
.
Operating
income
was
$22
million for the three months ended
September 30, 2017
, as compared to
a $
36
million
operating loss
for the three months ended
September 30, 2016
, a
n improvement
of
$58
million.
U.S. Segment
—
Operating
income
for our U.S. segment
was
$21
million for the three months ended
September 30, 2017
compared to
a
$
4
million
operating loss
for
the three months ended
September 30, 2016
.
The $
25
million
i
mprovement
in operating incom
e
was driven
, in part,
by higher sales.
In
addition, in
2016, we
recorded $16 million of inventory-related charges to reduce the carrying value of certain obsolete and excess inventory items to their net realizable value.
Canad
a
Segment
—
Operating
income
for our Canad
a
segment
was
$4
million for the
three months ended
September 30, 2017
as compared to
a
$4
million
operating loss
for the three months ended
September 30, 2016
. The
$8
million
i
mprovement
was
driven, in part, by higher sales
.
In
addition, in
2016
,
we
recorded $5
million of inventory-related charges to reduce the carrying value of certain obsolete and excess inventory items to their net realizable value.
International Segment
—
Our
International segment
incurred
an
operating
loss
of
$3
million for the three months ended
September 30, 2017
as compared to
an operating loss of
$28
million for the three months ended
September 30, 2016
.
In the third quarter of 2016, we
recorded $
24
million of inventory-related charges to reduce the carrying value of certain obsolete and excess inventory items to their net realizable value.
No such charges were recorded in the
third quarter of 2017.
Interest Expense
.
Our interest expense was
$9
million for the three month
period
s
ended
September 30, 2017
and
2016
.
Other
(Expense)
Income
.
Our other
expense
was
$8
million for the three month period ended
September 30, 2017
as compared to other income of $3 million for the
three
month period ending September 30, 2016
.
Other expense for t
he three months ended
September 30, 2017
included an $8
million charge
for the write off of debt issuance costs
associated with the refinancing of our Term Loan and Global ABL Facility
. Other income for the three months end
ed September 30, 2016 included
$
1 million of foreign currency gains.
Income Tax
(
Expense
)
Benefit
.
Our income tax
expense
was
$2
million for the
three months ended
September 30, 2017
,
as compared to
a
$2
million
benefit
for the
three months ended
September 30, 2016
.
For interim periods, our income tax expense is computed based upon our estimated annual effective tax rate.
Our effective tax rates were
40%
and
5%
for the
three months ended
September 30, 2017
and
2016
, respectively.
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.
The
2016 effective tax rate was significantly lower than our federal statutory rate due to forecasted pre-tax losses across all segments
including
significant pre-tax losses in jurisdictions where there was no corresponding tax benefit
.
Net Income
(Loss)
.
Our net
income
was
$3
m
illion for the three months ended
September 30, 2017
as compared to
a
net
loss
of
$40
million
for the three months ended
September 30, 2016
,
a
n
improvement
of
$43
million.
Adjusted EBITDA
.
Adjusted EBITDA, a non-GAAP financial measure, was
$
56
million
(
5.8
%
of sales) for
the three months ended
September 30, 2017
as compared to $
24
million
(
3
.0%
of sales)
for the three months ended
September 30, 2016
.
We define Adjusted EBITDA as net income plus interest, income taxes, depreciation and amortization, amortization of intangibles and
certain
other
expenses
, including non-cash expenses,
(such as
equity-based compensation, severance and restructuring
, changes in the fair value of derivative instruments and
asset
impairment
s, including inventory
) and plus or minus the impact of our LIFO inventory costing methodology.
We believe Adjusted EBITDA provides investors a helpful measure for comparing our operating performance with the performance of other companies that
may
have different financing and capital structures or tax rates.
W
e 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
EBITDA
as a key performance indicator in managing our business. 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
, a non-GAAP financial measure,
with net income
(loss)
, as derived from our financial statements (in millions):
|
|
|
|
|
Three Months Ended
|
|
September 30,
|
|
September 30,
|
|
2017
|
|
2016
|
Net income (loss)
|
$ 3
|
|
$ (40)
|
Income tax expense (benefit)
|
2
|
|
(2)
|
Interest expense
|
9
|
|
9
|
Depreciation and amortization
|
5
|
|
6
|
Amortization of intangibles
|
12
|
|
12
|
Increase (decrease) in LIFO reserve
|
13
|
|
(3)
|
Inventory-related charges
|
-
|
|
40
|
Change in fair value of derivative instruments
|
1
|
|
(2)
|
Equity-based compensation expense
|
3
|
|
2
|
Write off of debt issuance costs
|
8
|
|
-
|
Severance and restructuring charges
|
-
|
|
3
|
Foreign currency gains
|
-
|
|
(1)
|
Adjusted EBITDA
|
$ 56
|
|
$ 24
|
|
|
|
|
Nine Months Ended September 30, 2017
Compared to the
Nine Months Ended September 30, 2016
The breakdown of our sales by sector for the
nine
months
ended
September 30, 2017
and
2016
was as follows
(in millions)
:
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
September 30, 2017
|
|
September 30, 2016
|
Upstream
|
$ 772
|
|
28%
|
|
$ 666
|
|
29%
|
Midstream
|
1,228
|
|
45%
|
|
897
|
|
38%
|
Downstream
|
743
|
|
27%
|
|
759
|
|
33%
|
|
$ 2,743
|
|
100%
|
|
$ 2,322
|
|
100%
|
For the
nine
months ended
September 30, 2017
and
2016
, the following table summarizes our results of operations (in millions)
:
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
|
|
|
September 30,
|
|
September 30,
|
|
|
|
|
|
2017
|
|
2016
|
|
$ Change
|
|
% Change
|
Sales:
|
|
|
|
|
|
|
|
U.S.
|
$ 2,145
|
|
$ 1,747
|
|
$ 398
|
|
23%
|
Canada
|
223
|
|
188
|
|
35
|
|
19%
|
International
|
375
|
|
387
|
|
(12)
|
|
(3%)
|
Consolidated
|
$ 2,743
|
|
$ 2,322
|
|
$ 421
|
|
18%
|
|
|
|
|
|
|
|
|
Operating income (loss):
|
|
|
|
|
|
|
|
U.S.
|
$ 53
|
|
$ (2)
|
|
$ 55
|
|
N/M
|
Canada
|
8
|
|
(7)
|
|
15
|
|
N/M
|
International
|
(8)
|
|
(41)
|
|
33
|
|
N/M
|
Consolidated
|
53
|
|
(50)
|
|
103
|
|
N/M
|
|
|
|
|
|
|
|
|
Interest expense
|
(24)
|
|
(26)
|
|
2
|
|
(8%)
|
Other (expense) income
|
(8)
|
|
2
|
|
(10)
|
|
N/M
|
Income tax (expense) benefit
|
(6)
|
|
9
|
|
(15)
|
|
N/M
|
Net income (loss)
|
15
|
|
(65)
|
|
80
|
|
N/M
|
Series A preferred stock dividends
|
18
|
|
18
|
|
-
|
|
0%
|
Net loss attributable to common stockholders
|
$ (3)
|
|
$ (83)
|
|
$ 80
|
|
N/M
|
|
|
|
|
|
|
|
|
Gross profit
|
$ 441
|
|
$ 346
|
|
$ 95
|
|
27%
|
Adjusted Gross Profit (1)
|
$ 510
|
|
$ 390
|
|
$ 120
|
|
31%
|
Adjusted EBITDA (1)
|
$ 136
|
|
$ 58
|
|
$ 78
|
|
N/M
|
(1)
Adjusted Gross Profit and Adjusted EBITDA are non-GAAP financial measures. For a reconciliation of these measures to an equivalent GAAP measure, see pages
23-25
herein.
Sales
.
Our sales
were $
2,743
million for the
nine
months ended
September 30, 2017
as compared to $
2,322
million for the
nine
months
ended
September 30,
2016
, an increase of $421 million,
or
18%
.
U.S. Segment—
Our U.S. sales
increased
t
o
$2,145
million for the
nine
months ended
September 30, 2017
from
$1,747
million for the
nine
months ended
September 30, 2016
. This
$398
million, or
23%
,
in
crease
reflected a $
11
8
million increase in the upstream sector, a $
29
5
million increase in the midstream sector and a $
15
million decrease in the downstream sector. The increase in the midstream sector is
primarily
related to a large, ongoing transmission project with one of our customers while the decrease in the downstream sector was a result of the conclusion of a large petrochemical project
in 2016
.
The increase in the upstream sector is related to the increase in rig count
and well completions
.
Canada Segment—
Our Canad
a
sales
in
creased to
$223
million for the
nine
months ended
September 30, 2017
from
$188
million for the
nine
months ended
September 30, 2016
.
This
$35
million, or
19%
, increase was primarily due to the increase in the upstream business
as a result of the increase in rig count and well completions
.
International Segment
—Our International sales
d
ecreased to
$375
million for the
nine
months ended
September 30, 2017
from
$387
million for the same period in
2016
.
The
$12 million, or
3%
,
decrease was
due
to
a $58 million
decline
related to one of our project customers in Norway offset by a $50 million increase in the midstream sector related to the Australian line pipe sale.
Gross Profit
.
Our gross profit was
$441
million
(
16.1%
of sales) for the
nine
months ended
September 30, 2017
as compared to
$346
million
(
14.9%
of sales) for the
nine
months ended
September 30, 2016
.
The $
95
million
increase was primarily attributable to the increase in sales volumes
.
In addition, gross profit for the nine months ended September 30, 2016 was negatively impacted by $45 million of inventory-related charges to reduce the carrying value of certain obsolete and excess inventory items to their realizable value.
Excluding the 2016 charge, t
he
reduction in gross profit percentage for the
nine
months ended
September 30, 2017
compared to the same period in
2016
was the result of
o
ur
LIFO
inventory costing method
ology
, which
resulted in
an increase
in cost of sales of $
19
million and a
reductio
n
in
cost of sales of $
7
million in the first
nine months
of
2017
and
2016
, 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 $
22
million and
$
23
million for the
nine
months ended
September 30, 2017
and
2016
, respectively.
Adjusted Gross Profit
.
Adjusted Gross Profit
in
creased to
$510
million (
18.6%
of sales) for the
nine
months ended
September 30, 2017
from
$390
million
(
16.8%
of sales) for the
nine
months ended
September 30, 2016
,
an in
crease
of
$120
million.
Adjusted Gross Profit for the nine months ended September 30, 2016 included the impact of the $45 million of inventory-related charges discussed above.
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
, a non-GAAP financial measure,
with gross profit, as derived from our financial statements (in millions):
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
September 30,
|
|
Percentage
|
|
September 30,
|
|
Percentage
|
|
2017
|
|
of Revenue
|
|
2016
|
|
of Revenue
|
Gross profit, as reported
|
$ 441
|
|
16.1%
|
|
$ 346
|
|
14.9%
|
Depreciation and amortization
|
16
|
|
0.6%
|
|
16
|
|
0.7%
|
Amortization of intangibles
|
34
|
|
1.2%
|
|
35
|
|
1.5%
|
Increase (decrease) in LIFO reserve
|
19
|
|
0.7%
|
|
(7)
|
|
(0.3%)
|
Adjusted Gross Profit
|
$ 510
|
|
18.6%
|
|
$ 390
|
|
16.8%
|
|
|
|
|
|
|
|
|
Selling, General and Administrative (“SG&A”) Expenses
.
Our
SG&A
expenses were
$388
million for the
nine
months ended
September 30, 2017
as compared to
$396
million for the
nine
months ended
September 30, 2016
. The
$8
million decline in SG&A is attributable to 2016 cost reduction measures including headcount reductions and associated severance costs
offset by volume-related increases
.
Severance and restructuring charges for the
nine
months ended
September 30, 2016
totaled $
12
million
.
No such expenses
were incurred
for the
nine
months ending
September 30, 2017
.
Operating
Income
(Loss)
.
Operating
income
was
$53
million for the
nine
months ended
September 30, 2017
, as compared to
a
$
50
million
operating loss
for the
nine months e
nded September 30, 2016
, a
n improvement
of
$103
m
illion.
U.S. Segment
—
Operating
income
for our U.S. segment
was
$53
million for the
nine
months ended
September 30, 2017
compared to
a
$2
million
operating loss
for the
nine
months ended
September 30, 2016
.
The
$55
million
i
mprovement
was primarily driven by higher
sales
.
Severance costs included in operating expenses were $
5
million for the
nine
months ended
September 30, 2016
. No such expenses
were incurred
for the
nine months ended
September 30, 2017
.
In addition,
in 2016
,
we recorded $16
million of inventory-related charges to reduce the carrying value of certain obsolete
and excess inventory items to their net realizable value
.
Canad
a
Segment
—
Operating
income
for our Canad
a
segment
was
$8
million for the
nine
months ended
September 30, 2017
as compared to a
$7
million
operating
loss
for the
nine
months ended
September 30, 2016
. The
$15
million
improvement
was
primarily
a result of higher sales volume.
In addition
,
in 2016
we recorded $
5
million of inventory-related charges to reduce the carrying value of certain obsolete and excess inventory items to their net realizable value.
International Segment
—
Our
International segment
incurred
an
operating
loss
of
$8
million for the
nine
months ended
September 30, 2017
as compared to
an operating loss of
$41
million for the
nine
months ended
September 30, 2016
.
In
2016,
we recorded $
24
million of inventory-related charges to reduce the carrying value of certain obsolete and excess inventory items to their net realizable value.
The improvement of
$33
million was
primarily due to these prior year charges combined with
lower SG&A
attributable to 2016 cost reduction measures including
head
count reductions and associated severance costs
.
Severance costs included in operating expenses were $
0
million and $
6
million for the
nine
months ended
September 30, 2017
and
2016
, respectively
.
Interest Expense
.
Our interest expense was
$24
million for the
nine
month
period
ended
September 30, 2017
as compared to
$26
million for the
nine
months ended
September
30, 2016. T
his represented a decrease of
$2
million resulting from lower average debt levels.
Other
(Expense)
Income
.
Our other expense
was
$8
million for the
nine
month period ended
September 30, 2017
as compared to
other income of
$2
million for the
nine
month period ended
September 30, 2016
.
For the
nine
months ended
September 30, 2017
, other expense included an $8
million charge
for
the
write off of debt issuance costs
associated with the refinancing of our Term Loan and Global ABL Facility
.
Income Tax
(
Expense
) Benefit.
Our income tax
expense
was
$6
million for the
nine
months ended
September 30, 2017
as compared to
a benefit
of
$9
million for the
nine
months ended
September 30, 2016
.
For interim periods, our income tax expense is computed based upon our estimated annual effective tax rate.
Our effective tax rates were
29
%
and
1
2
% for the
nine
months ended
September 30, 2017
and
2016
, respectively.
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.
In the first
nine
months
of 2017, we adopted
ASU 2016-09,
Compensation - Stock Compensation
, which
requires
all excess tax benefits and tax deficiencies
are
recorded as income tax expense or benefit in the income statement
on a prospective basis
.
In the
first
nine
months of 2017, we recorded a tax benefit of $2
million related to the vesting of stock awards
.
The 2017 effective tax rate is
lower than our federal statutory rate
primarily due to this discrete tax benefit
and a benefit related to foreign currency exchange losses
.
The
2016 effective tax rate was significantly lower than our federal statutory rate due to forecasted pre-tax losses across all segments
including
significant pre-tax losses in jurisdictions where there was no corresponding tax benefit
.
Net Income
(Loss)
.
Our net
income
was
$15
m
illion for the
nine
months ended
September 30, 2017
as compared to
a net loss of
$65
million for the
nine
months ended
September 30, 2016
,
an
improvement
of
$80
million.
Adjusted EBITDA
.
Adjusted EBITDA, a non-GAAP financial measure, was
$136
million
(
5.0%
of sales) for
the
nine
months ended
September 30, 2017
as compared to
$58
million
(
2.5%
of sales)
for the
nine
months ended
September 30, 2016
.
We define Adjusted EBITDA as net income plus interest, income taxes, depreciation and amortization, amortization of intangibles and
certain
other
expenses, including non-cash expenses,
(such as
equity-based compensation, severance and restructuring
, changes in the fair value of derivative instruments and
asset
impairment
s, including inventory
) and plus or minus the impact of our LIFO inventory costing methodology.
We believe Adjusted EBITDA provides investors a helpful measure for comparing our operating performance with the performance of other companies that
may
have different financing and capital structures or tax rates.
W
e 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 EBITDA as a key performance indicator in managing our business. 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
, a non-GAAP financial measure,
with net income
(loss)
, as derived from our financial statements (in millions):
|
|
|
|
|
Nine Months Ended
|
|
September 30,
|
|
September 30,
|
|
2017
|
|
2016
|
Net income (loss)
|
$ 15
|
|
$ (65)
|
Income tax expense (benefit)
|
6
|
|
(9)
|
Interest expense
|
24
|
|
26
|
Depreciation and amortization
|
16
|
|
16
|
Amortization of intangibles
|
34
|
|
35
|
Increase (decrease) in LIFO reserve
|
19
|
|
(7)
|
Inventory-related charges
|
-
|
|
40
|
Change in fair value of derivative instruments
|
1
|
|
-
|
Equity-based compensation expense
|
12
|
|
9
|
Write off of debt issuance costs
|
8
|
|
-
|
Severance and restructuring charges
|
-
|
|
12
|
Litigation settlement
|
3
|
|
-
|
Foreign currency
(gains)
losses
|
(2)
|
|
1
|
Adjusted EBITDA
|
$ 136
|
|
$ 58
|
|
|
|
|
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 asset-based lending facility
(“
Global ABL Facility
”)
. At
September 30, 2017
, our total liquidity, including cash on hand, was
$529
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 costs. As of
September 30, 2017
and
December 31, 2016
, we had cash and cash equivalents of
$
40
million
and $
109
million, respectively. As of
September
30,
2017
and
December 31, 2016
, $
40
million
and $6
1 million of our cash and cash equivalents, respectively, were maintained in the accounts of our various foreign subsidiaries. If
these
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
September 2024
with an original principal amount of $
400
million and a five-year $
800
m
illion Global ABL Facility that provides a
$
675
million in revolver commitments in the United States, $
65
million in Canada, $
18
million in Norway, $15 million in Australia, $
13
million in the Netherlands, $7
million in the United Kingdom and $
7
million in Belgium
. As of
September 30, 2017
, the outstanding balance on our Term Loan, net of original issue discount and issuance costs, was $
397
million. The Global ABL Facility
, which was re-sized to $800 million from $1.05 billion in our September 2017 amendment,
matures in
September
2022
. The Global ABL Facility contains an accordion feature that allows us to increase the principal am
ount of the facility by up to $2
00 million, subject to
securing
additional lender commitments.
As of
September 30, 2017
, we had
$50
million
of borrowings outstanding
and
$489
million
of Excess Availability, as defined
under
our
Global ABL Facility
. Availability is dependent on a borrowing base comprised of a percentage of eligible accounts receivable and inventory which is subject to redetermination from 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
nine
months ended
September
30,
2017
.
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 up to
$100
millio
n, which was increased in November 2016 to $125 million.
During the first
quarter
of
2017
, we purchased
859,830
shares of common stock at a total cost of $
18
million
, which completed the repurchase of all shares authorized under the program
. In total under this plan, we have purchased
8,537,410 shares
at a total cost of $125 million
.
In
October
2017, the Company’s board of directors authorized a
new
share repurchase program for common stock of up to $100 million. The program is scheduled to expire December 31, 2018. 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.
Cash Flows
The following table sets forth our cash flows for the periods indicated below (in millions):
|
|
|
|
|
Nine Months Ended
|
|
September 30,
|
|
September 30,
|
|
2017
|
|
2016
|
Net cash (used in) provided by:
|
|
|
|
Operating activities
|
$ (37)
|
|
$ 230
|
Investing activities
|
(23)
|
|
25
|
Financing activities
|
(14)
|
|
(112)
|
Net (decrease) increase in cash and cash equivalents
|
$ (74)
|
|
$ 143
|
|
|
|
|
Operating Activities
Net cash
used in
operating activities
was
$37
million during
the
nine
months ended
September 30, 2017
compared to
$230
million
provided by operating activities
during the
nine
months ended
September 30, 2016
.
The decrease in cash provided by
operations was primarily the result
of
working capital expansion in response to th
e increase in sales activity in
the
first
nine
months of
2017
as
compared to a working capital
contraction in the
first
nine
months of
2016
.
Working
capital
growth used cash of $
13
2
million
in the first
nine
months of
2017
compared to
the working capital contraction providing cash of
$
201
m
illion in the first
nine
months of
2016
.
In particular, growth in ac
counts receivable utilized
$165
m
illion of cash in the first
nine
months
of 2017 as a result of the
18
% increase in sales relative to the
first
nine
months
of 2016
when accounts receivable contraction provided cash of
$88
million
.
Growth in inventory required to support higher sales levels utilized $100 million of cash in the first nine months of 2017 as compared to cash provided of $119 million in the same period of 2016. These
use
s of cash were
offset by
$127
million generated from an increase in accounts payable, which was attributable to
higher purchasing activities and
the timi
ng of payments to our suppliers
.
Investing Activities
Net cash
used in
investing
activities was
$23
million
for the
nine
months ended
September 30, 2017
,
compared to
$25
million
provided by
investing activities
for the
nine
months ended
September 30, 2016
.
The $
48
million increase in cash
used in
investing activities is the result of $48 million in proceeds from the disposition of our U.S. OCTG product line
in February 2016
.
Our capital expenditures were $
2
3
million
and $24 million
for
of
the
nine
months ended
September 30, 2017
and 2016
, respectively
.
F
i
nancing Activities
Net cash
used in
financing activities was
$14
million for the
nine
months ended
September 30, 2017
compared to
$112
million
for
the
nine
months ended
September 30, 2016
.
In the
first
nine
months of
2017
and 2016,
we used $
18
million and $
88
million to fund purchases of our common 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, 2016
.
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, 2016
.
ITEM 4.
CONTROLS AND PROCEDURES
Evaluation of disclosure controls and procedures
.
As of
September 30, 2017
, 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 accum
ulated 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.
As part of a continuing effort to improve the Company’s business processes
,
management is evaluating its internal controls and may update certain controls to accommodate any modifications to its business processes or accounting procedures.
Changes in internal control over financial reporting
.
The Company has undertaken a multi-year enterprise resource planning (“ERP”) project to migrate certain systems to SAP software. During the second quarter of 2016, we completed the SAP implementation in our Asia Pacific-bas
ed businesses.
During
the second quarter of 2017
, we
completed the
implementation effort in our European and Middle Eastern
bu
sinesses. During the third quarter of 2017, we completed t
he implementation
effort
in
our
Nordic businesses
.
As a part of these implementations, various controls over financial reporting for th
e international segment changed during the third quarter.
Other than described above, there were no changes in our internal control over financial reporting that occurred during the first
nine
months of 2017 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, 2016
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 third quarter of fiscal year 2017 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
|
|
Maximum Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs
|
Jul 1 - Jul 31
|
15
|
|
$ 16.18
|
|
-
|
|
$ -
|
Aug 1 - Aug 31
|
569
|
|
$ 16.10
|
|
-
|
|
$ -
|
Sep 1 - Sep 30
|
88
|
|
$ 16.49
|
|
-
|
|
$ -
|
|
672
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) We purchased 672 shares in connection with funding employee income tax withholding obligations arising upon the lapse of restrictions on restricted shares.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
September
30, 2017
, formatted in Extensible Business Reporting Language (XBRL): (i) the Condensed Consolidated Balance Sheet
s
at
September
30, 2017
and December 31, 201
6
, (ii) the Condensed Consolidated Statement
s
of
Operations
for the
three and
nine
month
period
s
ended
September
30, 2017 and 2016
, (iii) the Condensed Consolidated Statement
s
of Comp
r
ehensive Income for the
three and
nine
month
period
s
ended
September
30, 2017 and 2016
, (iv) the Condensed Consolidated Statement
s
of Cash Flows for the
nine
month period
s
ended
September
30, 2017 and 2016
and (v) Notes to Condensed Consolidated Financial Statements.
|
|
|
101
*
|
|
Interactive data file.
|
*
Filed herewith.
**
Furnished herewith.