NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MRC GLOBAL INC.
December 31, 201
7
NOTE 1—SIGNIFICANT ACCOUNTING POLICIES
Business Operations
:
MRC Global Inc. is a holding company headquartered in Houston, Texas. Our wholly owned subsidiaries are global distributors of pipe, valves, fittings and related products and services across each of the upstream (exploration, production and extraction of underground oil and gas), midstream (gathering and transmission of oil and gas, gas utilities, and the storage and distribution of oil and gas) and downstream (crude oil refining 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
:
The accompanying consolidated financial statements include the accounts of MRC Global Inc. and its wholly owned and majority owned subsidiaries (collectively referred to as the Company” or by such terms as “we,” “our” or “us”). All material intercompany balances and transactions have been eliminated in consolidation.
Use of Estimates
:
The preparation of financial statements in conformity with the accounting principles generally accepted in the United States of America requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reported period. We believe that our most significant estimates and assumptions are related to estimated losses on accounts receivable, the last-in, first-out (“LIFO”) inventory costing methodology, estimated realizable value on excess and obsolete inventories, goodwill, intangible assets, deferred taxes and self-insurance programs. Actual results could differ materially from those estimates.
Cash Equivalents
:
We consider all highly liquid investments with maturities of three months or less at the date of purchase to be cash equivalents.
Allowance for Doubtful Accounts
:
We evaluate the adequacy of the allowance for losses on receivables based upon periodic evaluation of accounts that may have a higher credit risk using information available about the customer and other relevant data. This formal analysis is inherently subjective and requires us to make significant estimates of factors affecting doubtful accounts including customer specific information, current economic conditions, volume, growth and composition of the account, and other factors such as financial statements, news reports and published credit ratings. The amount of the allowance for the remainder of the trade balance is not evaluated individually but is based upon historical loss experience. Because this process is subjective and based on estimates, ultimate losses may differ from those estimates. Receivable balances are written off when we determine that the balance is uncollectible. Subsequent recoveries, if any, are credited to the allowance when received. The provision for losses on receivables is included in selling, general and administrative expenses in the accompanying consolidated statements of operations.
Inventories
:
Our inventories are valued at the lower of cost, principally LIFO, or market. We believe that the use of LIFO results in a better matching of costs and revenue. This practice excludes certain inventories, which are held outside of the United States, approximating
$168
million and
$164
million at December 31, 2017 and 2016, respectively, which are valued at the lower of weighted-average cost or market. Our inventory is substantially comprised of finished goods.
Reserves for excess and obsolete inventories are determined based on analyses comparing inventories on hand to sales activity over time. The reserve, which totaled
$34
million at December 31, 2017 and 2016, is the amount deemed necessary to reduce the cost of the inventory to its estimated realizable value.
Debt Issuance Costs
:
We defer costs directly related to obtaining financing and amortize them over the term of the indebtedness on a straight-line basis. The use of the straight-line method does not produce results that are materially different from those which would result from the use of the effective interest method. These amounts are reflected in the consolidated statement of operations as a component of interest expense. Debt issuance costs associated with our Global ABL Facility are presented in other assets and totaled
$3
million and
$6
million at December 31, 2017 and 2016, respectively. Debt issuance costs associated with ou
r Term Loan are presented as a r
eduction of the carrying amount of the debt liability and totaled
$2
million and
$3
million at December 31, 2017 and 2016, respectively.
Fixed Assets
:
Land, buildings and equipment are stated on the basis of cost. For financial statement purposes, depreciation is computed over the estimated useful lives of such assets principally by the straight-line method; accelerated depreciation and cost recovery methods are used for income tax purposes. Leasehold improvements are amortized using the straight-line method over the shorter of the remaining lease term or the estimated useful life of the improvements. When assets are retired or otherwise disposed of, the cost and related accumulated depreciation are removed from the accounts and any gain or loss is reflected in income for the period. Maintenance and repairs are charged to expense as incurred.
Certain systems development costs related to the purchase, development and installation of computer software are capitalized and amortized over the estimated useful life of the related asset. Costs incurred prior to the development stage, as well as maintenance, training costs, and general and administrative expenses are expensed as incurred.
Goodwill and Other Intangible Assets
:
Goodwill represents the excess of cost over the fair value of net assets acquired. Goodwill and intangible assets with indefinite useful lives are tested for impairment annually, or more frequently if circumstances indicate that impairment may exist. We evaluate goodwill for impairment at four reporting units (U.S. Eastern Region and Gulf Coast, U.S. Western Region, Canada and International). Within each reporting unit, we have elected to aggregate the component countries and regions into a single reporting unit based on their similar economic characteristics, products, customers, suppliers, methods of distribution and the manner in which we operate each reporting unit. We perform our annual tests for indications of goodwill impairment as of October 1
st
of each year, updating on an interim basis should indications of impairment exist.
The goodwill impairment test compares the carrying value of the reporting unit that has the goodwill with the estimated fair value of that reporting unit. If the carrying value is more than the estimated fair value, a second step is performed, whereby we calculate the implied fair value of goodwill by deducting the fair value of all tangible and intangible net assets of the reporting unit from the estimated fair value of the reporting unit. Impairment losses are recognized to the extent that recorded goodwill exceeds implied goodwill. Our impairment methodology uses discounted cash flow and multiples of cash earnings valuation techniques, acquisition control premium and valuation comparisons to similar businesses. Each of these methods involves Level 3 unobservable market inputs and require us to make certain assumptions and estimates regarding future operating results, the extent and timing of future cash flows, working capital, sales prices, profitability, discount rates and growth trends. While we believe that such assumptions and estimates are reasonable, the actual results may differ materially from the projected results.
Intangible assets with indefinite useful lives are tested for impairment annually or more frequently if circumstances indicate that impairment may exist. This test compares the carrying value of the indefinite-lived intangible assets with their estimated fair value. If the carrying value is more than the estimated fair value, impairment losses are recognized in an amount equal to the excess of the carrying value over the estimated fair value. Our impairment methodology uses discounted cash flow and estimated royalty rate valuation techniques. Each of these methods involves Level 3 unobservable market inputs and requires us to make certain assumptions and estimates regarding future operating results, sales prices, discount rates and growth trends. While we believe that such assumptions and estimates are reasonable, the actual results may differ materially from the projected results.
Other intangible assets primarily include trade names, customer bases and noncompetition agreements resulting from business acquisitions. Other intangible assets are recorded at fair value at the date of acquisition. Amortization is provided using the straight-line method over their estimated useful lives, ranging from
two
to
twenty
years.
The carrying value of amortizable intangible assets is subject to an impairment test when events or circumstances indicate a possible impairment. When events or circumstances indicate a possible impairment, we assess recoverability from future operations using undiscounted cash flows derived from the lowest appropriate asset group. If the carrying value exceeds the undiscounted cash flows, an impairment charge would be recognized to the extent that the carrying value exceeds the fair value, which is determined based on a discounted cash flow analysis. While we believe that assumptions and estimates utilized in the impairment analysis are reasonable, the actual results may differ materially from the projected results. These impairments are determined prior to performing our goodwill impairment test.
Derivatives and Hedging
:
From time to time, we utilize interest rate swaps to reduce our exposure to potential interest rate increases. Changes in the fair values of our derivative instruments are based upon independent market quotes.
We utilize foreign exchange forward contracts (exchange contracts) and options to manage our foreign exchange rate risks resulting from purchase commitments and sales orders. Changes in the fair values of our exchange contracts are based upon independent market quotes. We do not designate our exchange contracts as hedging instruments; therefore, we record our exchange contracts on the consolidated balance sheets at fair value, with the gains and losses recognized in earnings in the period of change.
Fair Value
:
We measure certain of our assets and liabilities at fair value on a recurring basis. Fair value is an exit price, representing the amount that would be received to sell an asset or be paid to transfer a liability in an orderly transaction between market participants. As such, fair value is a market-based measurement that is determined based on assumptions that market participants would use in pricing an asset or a liability. A three-tier fair value hierarchy is established as a basis for considering such assumptions for inputs used in the valuation methodologies to measuring fair value:
Level 1
: Quoted prices (unadjusted) in active markets for identical assets or liabilities that the entity has the ability to access at the measurement date.
Level 2
: Significant observable inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly, such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active, and other inputs that are observable or can be corroborated by observable market data.
Level 3
: Significant unobservable inputs for the asset or liability. Unobservable inputs reflect our own assumptions about the assumptions that market participants would use in pricing an asset or liability (including all assumptions about risk).
Certain assets and liabilities are measured at fair value on a nonrecurring basis. Our assets and liabilities measured at fair value on a nonrecurring basis include property, plant and equipment, goodwill and other intangible assets. We do not measure these assets at fair value on an ongoing basis; however, these assets are subject to fair value adjustments in certain circumstances, such as when there is evidence of impairment.
Our impairment methodology for goodwill and other intangible assets uses both (i) a discounted cash flow analysis requiring certain assumptions and estimates to be made regarding the extent and timing of future cash flows, discount rates and growth trends and (ii) valuation based on our publicly traded common stock. As all of the assumptions employed to measure these assets and liabilities on a nonrecurring basis are based on management’s judgment using internal and external data, these fair value determinations are classified as Level 3. We have not elected to apply the fair value option to any of our eligible financial assets and liabilities.
Insurance
:
We are self-insured for
employee healthcare as well as
physical damage to automobiles that we own, lease or rent, and product warranty and recall liabilities. In addition, we maintain a deductible/retention program as it relates to insurance for property, inventory, workers’ compensation, automobile liability, asbestos claims, general liability claims (including, among others, certain product liability claims for pr
operty damage, death or injury) and
cybersecurity claims. These programs have deductibles and self-insured retentions ranging from
$0
million to
$5
million and are secured by various letters of credit totaling
$6
million. Our estimated liability and related expenses for claims are based in part upon estimates that insurance carriers, third-party administrators and actuaries provide. We believe that insurance reserves are sufficient to cover outstanding claims, including those incurred but not reported as of the estimation date. Further, we maintain commercially reasonable umbrella/excess policy coverage in excess of the primary limits. We do not have excess coverage for physical damage to automobiles that we own, lease or rent, and product warranty and recall liabilities. Our accrued liabilities related to deductibles/retentions under insurance programs (other than employee healthcare) were
$8
million as of
December 31, 2017 and 2016
. In the area of employee healthcare, we have a commercially reasonable excess stop loss protection on a per person per year basis. Reserves for self-insurance accrued liabilities for employee healthcare were
$3
million as of
December 31, 2017 and 2016
.
Income Taxes
:
We use the liability method for determining our income taxes, under which current and deferred tax liabilities and assets are recorded in accordance with enacted tax laws and rates. Under this method, the amounts of deferred tax liabilities and assets at the end of each period are determined using the tax rate expected to be in effect when taxes are actually paid or recovered.
Deferred tax assets and liabilities are recorded for differences between the financial reporting and tax bases of assets and liabilities using the tax rate expected to be in effect when the taxes will actually be paid or refunds received. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in earnings in the period that includes the enactment date. A valuation allowance to reduce deferred tax assets is established when it is more likely than not that some portion or all of the deferred tax assets will not be realized.
In determining the need for valuation allowances and our ability to utilize our deferred tax assets, we consider and make judgments regarding all the available positive and negative evidence, including the timing of the reversal of deferred tax liabilities, estimated future taxable income, ongoing, prudent and feasible tax planning strategies and recent financial results of operations. The amount of the deferred tax assets considered realizable, however, could be adjusted in the future if objective negative evidence in the form of cumulative losses is no longer present in certain jurisdictions and additional weight may be given to subjective evidence such as our projections for growth.
Our tax provision is based upon our expected taxable income and statutory rates in effect in each country in which we operate. We are subject to the jurisdiction of numerous domestic and foreign tax authorities, as well as to tax agreements and treaties among these governments. Determination of taxable income in any jurisdiction requires the interpretation of the related tax laws and regulations and the use of estimates and assumptions regarding significant future events such as the amount, timing and character of deductions, permissible revenue recognition methods under the tax law and the sources and character of income and tax credits. Changes in tax laws, regulations, agreements and treaties, foreign currency exchange restrictions or our level of operations or profitability in each taxing jurisdiction could have an impact on the amount of income taxes we provide during any given year.
A tax benefit from an uncertain tax position may be recognized when it is more likely than not that the position will be sustained upon examination, including any related appeals or litigation processes, on the basis of the technical merits. We adjust these liabilities when our judgment changes as a result of the evaluation of new information not previously available. Because of the complexity of some of these uncertainties, the ultimate resolution may result in a payment that is materially different from our current estimate of the tax
liabilities. These differences will be reflected as increases or decreases to income tax expense in the period in which the new information is available. We classify interest and penalties related to unrecognized tax positions as income taxes in our financial statements.
W
e currently have the intent and ability to indefinitely reinvest the cash held by our
non-Canadian
foreign subsidiaries and, pending further analysis of the impact of the Tax Cuts and Jobs Act of 2017, there are currently no plans for the repatriation of those amounts. As such, no deferred income taxes have been provided for
differences between the financial reporting and income tax basis
inherent in these foreign subsidiaries.
In the first quarter of 2017, we
adopted
ASU 2016-09,
Compensation - Stock Compensation
, which simplified the accounting for taxes related to stock based compensation. Under the standard, excess tax benefits and certain tax deficiencies
are
no longer recorded in additional paid-in capital (“APIC”), and APIC pools are eliminated. Instead, all excess tax benefits and tax deficiencies
are
recorded as income tax expense or benefit in the income statement. In addition, excess tax benefits are presented as operating activities rather than financing activities in the statement of cash flows.
For the year ended December 31, 2017, w
e recorded a tax benefit of
$2
million related to the vesting of stock awards. The impacts of this standard are reflected in the consolidated financial statements on a prospective basis.
Foreign Currency Translation and Transactions
:
The functional currency of our foreign operations is the applicable local currency. The cumulative effects of translating the balance sheet accounts from the functional currency into the U.S. dollar at current exchange rates are included in accumulated other comprehensive income. The balance sheet accounts (with the exception of stockholders’ equity) are translated using current exchange rates as of the balance sheet date. Stockholders’ equity is translated at historical exchange rates and revenue and expense accounts are translated using a weighted-average exchange rate during the year. Gains or losses resulting from foreign currency transactions are recognized in the consolidated statements of operations.
Equity-Based Compensation
:
Our equity-based compensation consisted and consists of restricted stock, restricted unit awards, performance share unit awards and nonqualified stock options of our Company.
The cost of employee services received in exchange for an award of an equity instrument is measured based on the grant-date fair value of the award. Our policy is to expense equity-based compensation using the fair-value of awards granted, modified or settled. Restricted units and restricted stock are credited to equity as they are expensed over their vesting periods based on the grant date value of the shares vested. The fair value of nonqualified stock options is measured on the grant date of the related equity instrument using the Black-Scholes option-pricing model. A Monte Carlo simulation is completed to estimate the fair value of performance share unit awards with a stock price performance component. We expense the fair value of all equity grants, including performance share unit awards, on a straight line basis over the vesting period.
Revenue Recognition
:
Sales to our principal customers are made pursuant to agreements that normally provide for transfer of legal title and risk upon shipment. We recognize revenue as products are shipped, title has transferred to the customer and the customer assumes the risks and rewards of ownership, and collectability is reasonably assured. Freight charges billed to customers are reflected in revenue. Return allowances are estimated using historical experience. Amounts received in advance of shipment are deferred and recognized as revenue when the products are shipped and title is transferred. Sales taxes collected from customers and remitted to governmental authorities are accounted for on a net basis and therefore are excluded from net sales in the accompanying consolidated statements of operations.
Cost of Sales
:
Cost of sales includes the cost of inventory sold and related items, such as vendor rebates, inventory allowances and reserves, and shipping and handling costs associated with inbound and outbound freight, as well as depreciation and amortization and amortization of intangible assets. Certain purchasing costs and warehousing activities (including receiving, inspection and stocking costs), as well as general warehousing expenses, are included in selling, general and administrative expenses and not in cost of sales. As such, our gross profit may not be comparable to others that may include these expenses as a component of cost of sales. Purchasing and warehousing costs approximated
$29
million,
$30
million, and
$37
million for the years ended December 31, 2017, 2016 and 2015.
Earnings per Share
:
Basic earnings per share are computed based on the weighted-average number of common shares outstanding, excluding any dilutive effects of unexercised stock options, unvested restricted stock awards, unv
ested restricted stock unit awards,
unvested performance share unit awards
, and shares of preferred stock
. Diluted earnings per share are computed based on the weighted-average number of common shares outstanding including any dilutive effect o
f unexercised stock options,
unvested restricted stock
awards, unvested restricted stock unit awards, unvested performance share unit awards, and shares of preferred stock
. The dilutive effect of unexercised stock options and unvested restricted stock is calculated under the treasury stock method. Equity awards and shares of preferred stock are disregarded in the calculations of diluted earnings per share if they are determined to be anti-dilutive.
Concentration of Credit Risk
:
Most of our business activity is with customers in the energy sector. In the normal course of business, we grant credit to these customers in the form of trade accounts receivable. These receivables could potentially subject us to
concentrations of credit risk; however, we minimize this risk by closely monitoring extensions of trade credit. We generally do not require collateral on trade receivables. We have a broad customer base doing business in many regions of the world. During
2017
,
2016
and
2015
, we did not have sales to any one customer in excess of 10% of sales. At those respective year-ends, no individual customer balances exceeded 10% of accounts receivable.
We have a broad supplier base, sourcing our products in most regions of the world. During
2017
,
2016
and
2015
, we did not have purchases from any one vendor in excess of 10% of our inventory purchases. At those respective year-ends no individual vendor balance exceeded 10% of accounts payable.
We maintain the majority of our cash and cash equivalents with several financial institutions. These financial institutions are located in many different geographical regions with varying economic characteristics and risks. Deposits held with banks may exceed insurance limits. We believe the risk of loss associated with our cash equivalents to be remote.
Segment Reporting
:
Our business is comprised of four operating segments: U.S. Eastern Region and Gulf Coast, U.S. Western Region, Canada and International. Our International segment consists of our operations outside of the U.S. and Canada. These segments represent our business of selling 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, petrochemical and chemical processing and general industrials) markets. Our two U.S. operating segments have been aggregated into a single reportable segment based on their economic similarities. As a result, we report segment information for the U.S., Canada and International.
Recently Issued Accounting Standards
:
In May 2014, the Financial Accounting Standards Board (“FASB”) issued a comprehensive new revenue recognition standard, which will supersede previous existing revenue recognition guidance. The Accounting Standards Update (“ASU”) also provides guidance on accounting for certain contract costs and requires new disclosures. During 2016, the FASB issued additional clarification guidance on the new revenue recognition standard, which also included certain scope improvements and practical expedients. The standard (including clarification guidance issued) is effective for fiscal periods beginning after December 15, 2017 and allows for either full retrospective or modified retrospective adoption. We have completed a formal review of contracts with nearly
100
of our largest customers, based on revenue, which represented approximately 76% of 2017 revenue. This review encompassed customers from a wide variety of end markets and geographies and involved inquiry of sales and operations personnel responsible for servicing these accounts in addition to review of the contracts. The balance of our revenue is derived from thousands of smaller customers with which we generally interact in a transactional relationship where goods are purchased from our branch locations. Based on our analysis to date, we do not expect the guidance to have a material impact on the timing of our revenue recognition; however, our disclosures will be expanded to address the qualitative and quantitative requirements of the new standard. We expect to finalize our analysis and related documentation and to adopt the standard in the first quarter of 2018 and have determined that we will utilize the modified retrospective transition method. We have enhanced our internal control processes to address both the implementation and ongoing application of the standard. No significant modifications of our systems have been required.
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 in the process of evaluating the effect of the adoption of ASU 2016-02 on our consolidated financial statements.
In January 2017, the FASB issued ASU No. 2017-04,
Simplifying the Test for Goodwill Impairment
. The amendments in ASU 2017-04 eliminate the current two-step approach used to test goodwill for impairment and require an entity to apply a one-step quantitative test and record the amount of goodwill impairment as the excess of a reporting unit's carrying amount over its fair value, not to exceed the total amount of goodwill allocated to the reporting unit. ASU 2017-04 is effective for fiscal years, including interim periods within, beginning after December 15, 2019 (upon the first goodwill impairment test performed during that fiscal year). Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. A reporting entity must apply the amendments in ASU 2017-04 using a prospective approach. We do not expect the adoption of ASU 2017-04 to have a material impact on our consolidated financial statements.
In May 2017, the FASB issued ASU No. 2017-09,
Compensation – Stock Compensation (Topic 718) Scope of Modification Accounting
which clarifies modification accounting for share-based payment awards should not be applied if the fair value, vesting conditions, and the classification of the modified award as an equity instrument or as a liability instrument are the same before and immediately after the modification. This standard is effective for fiscal years, and interim periods within those fiscal years, beginning
after December 15, 2017. Adoption will be applied prospectively to awards modified on or after the adoption date. We do not expect the adoption of ASU 2017-09 to have a material impact on our consolidated financial statements.
In August 2017, the FASB issued ASU No. 2017-12,
Derivatives and Hedging (Topic 815) Targeted Improvements to Accounting for Hedging Activities
which amends the hedge accounting model to better portray an organization’s risk management activities in the financial statements. In addition, the ASU simplifies the application of certain hedge accounting guidance. This standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. Early adoption is permitted. We do not expect the adoption of ASU 2017-12 to have a material impact on our consolidated financial statements
.
NOTE 2—
TRANSACTIONS
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 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 3
—ACCOUNTS RECEIVABLE
The rollforward of our allowance for doubtful acco
unts is as follows (in millions
):
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
2017
|
|
2016
|
|
2015
|
Beginning balance
|
$
|
3
|
|
$
|
3
|
|
$
|
4
|
Net charge-offs
|
|
-
|
|
|
(4)
|
|
|
(3)
|
Provision
|
|
1
|
|
|
4
|
|
|
2
|
Ending balance
|
$
|
4
|
|
$
|
3
|
|
$
|
3
|
Our accounts receivable is also presented net of sales returns and allowances. Those allowances approximated
$
1
million at
December
31, 2017 and 2016
.
N
OTE 4
—INVENTORIES
The composition of our inventory is as follows (in
m
i
llions
):
|
|
|
|
|
|
|
December 31,
|
|
2017
|
|
2016
|
Finished goods inventory at average cost:
|
|
|
|
|
|
Valves, automation, measurement and instrumentation
|
$
|
292
|
|
$
|
225
|
Carbon steel pipe, fittings and flanges
|
|
268
|
|
|
202
|
All other products
|
|
270
|
|
|
235
|
|
|
830
|
|
|
662
|
Less: Excess of average cost over LIFO cost (LIFO reserve)
|
|
(95)
|
|
|
(67)
|
Less: Other inventory reserves
|
|
(34)
|
|
|
(34)
|
|
$
|
701
|
|
$
|
561
|
Our inven
tory qua
ntities were reduced during 2016
, 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 year ended
December 31, 2016
, the
effect of this LIFO de
creased cost of sales by
$
14
million.
In the fourth quarter of 2017, we incurred an inventory charge of
$6
million in our Internati
onal segment associated with a
decision to reduce our local presence in Iraq.
In the third quarter of 2016, we incurred inventory-related charges totaling
$45
million. These charges reflect adjustments necessary to reduce the carrying value of
certain
products determined to be excess or obsolete to their estimated net realizable value based on our
then
current market outlook for
those
products. This amount include
d
$24
million in the
International segment primarily related to a restructuring of our Australian business a
nd market conditions in Iraq. In addition, r
eserves for excess and obsolete inventory were increased in the U.S. and Canada by
$16
million and
$5
million, respectively.
NOTE 5
—PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consisted of the following (in
m
i
llions
):
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
Depreciable Life
|
|
|
2017
|
|
|
2016
|
Land and improvements
|
-
|
|
$
|
15
|
|
$
|
15
|
Building and building improvements
|
40 years
|
|
|
61
|
|
|
63
|
Machinery and equipment
|
3 to 10 years
|
|
|
146
|
|
|
140
|
Enterprise resource planning software
|
10 years
|
|
|
56
|
|
|
32
|
Software in progress
|
-
|
|
|
1
|
|
|
14
|
|
|
|
|
279
|
|
|
264
|
Allowances for depreciation and amortization
|
|
|
|
(132)
|
|
|
(129)
|
|
|
|
$
|
147
|
|
$
|
135
|
Building and building improvements include $8 million of non-cash leasehold improvements representing lease incentives as of December 31, 2017.
NOTE 6
—GOODWILL AND OTHER INTANGIBLE ASSETS
The changes in the carrying amount of goodwill by segment for the years ended
December 31, 2017, 2016 and 2015
are as follows (in
millions
):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
US
|
|
Canada
|
|
International
|
|
Total
|
Goodwill at December 31, 2014 (1)
|
|
$
|
552
|
|
$
|
-
|
|
$
|
254
|
|
$
|
806
|
Goodwill impairment
|
|
|
(109)
|
|
|
-
|
|
|
(183)
|
|
|
(292)
|
Other
|
|
|
(2)
|
|
|
-
|
|
|
-
|
|
|
(2)
|
Effect of foreign currency translation
|
|
|
-
|
|
|
-
|
|
|
(28)
|
|
|
(28)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill at December 31, 2015
|
|
$
|
441
|
|
$
|
-
|
|
$
|
43
|
|
$
|
484
|
Effect of foreign currency translation
|
|
|
-
|
|
|
-
|
|
|
(2)
|
|
|
(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill at December 31, 2016
|
|
$
|
441
|
|
$
|
-
|
|
$
|
41
|
|
$
|
482
|
Effect of foreign currency translation
|
|
|
-
|
|
|
-
|
|
|
4
|
|
|
4
|
Goodwill at December 31, 2017
|
|
$
|
441
|
|
$
|
-
|
|
$
|
45
|
|
$
|
486
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Net of
prior
years’
accumulated impairment losse
s of
$
241
millio
n and
$69
mil
lion
U.S
.
and
Canadian segments, respectively.
|
O
ther intangible assets by major classification consist of the following (in
millions
):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization
|
|
|
|
|
Accumulated
|
|
Net Book
|
|
|
|
Period (in years)
|
|
Gross
|
|
Amortization
|
|
Value
|
December 31, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer base (1)
|
|
|
16.2
|
|
$
|
665
|
|
$
|
(429)
|
|
$
|
236
|
Indefinite lived trade names (2)
|
|
|
N/A
|
|
|
132
|
|
|
-
|
|
|
132
|
|
|
|
|
|
$
|
797
|
|
$
|
(429)
|
|
$
|
368
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer base (1)
|
|
|
16.4
|
|
$
|
669
|
|
$
|
(390)
|
|
$
|
279
|
Amortizable trade names
|
|
|
N/A
|
|
|
12
|
|
|
(12)
|
|
|
-
|
Indefinite lived trade names (2)
|
|
|
N/A
|
|
|
132
|
|
|
-
|
|
|
132
|
|
|
|
|
|
$
|
813
|
|
$
|
(402)
|
|
$
|
411
|
|
(1)
|
|
Net of accumulated impairment losses of
$
4
2
million
as of December 31, 201
7
and 201
6
.
|
|
(2)
|
|
Net of accumulated impairment losses of
$
2
04
million
as of December 31, 2017
and 201
6
.
|
Impairment of Goodwill and Other Intangible Assets
With
the continued decline in commodity prices and activity levels
in late 2015
, we performed an assessment of current market conditions and our future long-term expectations of oil and gas markets as of December 31, 2015 and concluded it was more likely than not that the fair values of our reporting units were lower than their carrying values. Our assessment took into consideration, among other things, significant further reductions in projected spending by our customers
in 2016
and a more pessimistic long-term outlook for the price of oil and natural gas, and the resulting impact on our 2016 budget and long-term financial forecast. As a result of this assessment, we completed
an interim impairment test as of December 31, 2015. This test resulted in an impairment charge of $292 million comprised of $109 million
in our U.S. reporting unit and
$18
3
million in our International reporting unit.
No
impairment charges were recognized during t
he years ended December 31, 2017 and 2016
. In these years, the estimated fair value of each of our reporting units substantially exceeded their carrying values.
As a result of the same factors that necessitated an interim impairment test for goodwill, we completed an interim impairment test for indefinite-lived intangible assets as of December 31, 2015. This test resulted in an
impairment charge of $128
million
associated with our trade name.
No
impairment charges were recognized during t
he years ended December 31, 201
7 and 2016
. In these years, the estimated fair value of our indefinite-lived intangible assets substantially exceeded their carrying value.
As of December 31, 2015, the reduction in our long-term financial forecast was also an indication that our amortizable intangible assets may be impaired. We performed impairment tests as of that date and determined that certain of our customer base intangible assets
within our International segment
were impaired. An impairment charge of
$4
2
million was recognized in December 2015 to reduce the carrying value of these assets to their fair value.
A
mortization of Intangible Assets
Total amortization of intangible assets for each of th
e years ending December 31,
2018
to 2022
is currently estimated as follows (in
millions
):
|
|
|
|
|
|
|
|
2018
|
|
$
|
44
|
|
|
|
|
2019
|
|
|
41
|
|
|
|
|
2020
|
|
|
26
|
|
|
|
|
2021
|
|
|
23
|
|
|
|
|
2022
|
|
|
20
|
|
|
|
|
NOTE 7
—LONG-TERM DEBT
The significant components of our long-term debt are as follows (in
millions
):
|
|
|
|
|
|
|
|
December 31,
|
|
2017
|
|
2016
|
Senior Secured Term Loan B, net of discount and issuance costs of
$3
and
$4
, respectively
|
$
|
397
|
|
$
|
414
|
Global ABL Facility
|
|
129
|
|
|
-
|
|
|
526
|
|
|
414
|
Less: current portion
|
|
4
|
|
|
8
|
|
$
|
522
|
|
$
|
406
|
Senior Secured Term Loan B
:
In September 2017, the Company entered into a Refinancing Amendment and
Successor Administrative Agent Agreement relating to the Term Loan Credit Agreement, dated as of November 9, 2012, by and among the Company, MRC Global (US) Inc., as the borrower, the other subsidiaries of the Company from time to time party thereto as guarantors, the several lenders from time to time party thereto, Bank of America, N.A., as administrative agent, and U.S. Bank National Association, as collateral trustee. Pursuant to the amendment, the parties thereto agreed to appoint JPMorgan Chase Bank, N.A. as the new administrative agent for the lenders. As amended, the Term Loan Agreement provides for a
$400
million
seven
-year Term Loan B (the “Term Loan”) wh
ich matures in
September 2024
. As a result of this amendment
, we recorded a
charge of
$
5
million
for the write off of debt issuance costs
for the year ended December 31, 201
7
.
Accordion.
The Term Loan allows for incremental increases up to an aggregate of
$200
million, plus an additional amount such that the Company’s
first lien leverage ratio (the ratio of the Company’s Consolidated EBITDA (as defined under the Term Loan Agreement) to senior secured debt) (net of up to
$75.0
million of unrestricted cash) would not exceed
4.00
to 1.00.
Maturity.
The scheduled maturity
date
of the Term Loan is
September
22,
2024
. The Term Loan will amortize in equal quarterly installments at
1%
a year with the payment of the balance at maturity.
Guarantees
. The Company and all of the U.S. borrower’s current and future wholly owned material U.S. subsidiaries guaranteed the Term Loan subject to certain exceptions.
Security.
The Term Loan is secured by a first lien on all of the Company’s assets and the assets of its domestic subsidiaries, subject to certain exceptions and other than the collateral securing the Global ABL Facility (which includes accounts receivable, inventory and related assets, collectively, the “ABL collateral”), and by a second lien on the ABL collateral. In addition, a pledge secures the Term Loan of all the capital stock of the Company’s domestic subsidiaries and
65%
of the capital stock of its first tier foreign subsidiaries, subject to certain exceptions.
Interest Rates and Fees.
The Company has the option to pay interest at a base rate, subject to a floor of
2.00%
, plus an applicable margin, or at a rate based on LIBOR, subject to a floor of
1.00%
, plus an applicable margin. The applicable margin for base rate loans is
25
0
basis points, and the applicable margin for LIBOR loans is
35
0
basis points.
Mandatory Prepayment
. The Company is required to repay the Term Loan with certain asset sale and insurance proceeds, certain debt proceeds and
50%
of excess cash flow (reducing to
25%
if the Company’s senior secured leverage ratio is no more than
2.75
to 1.00 and
0%
if the Company’s senior secured leverage ratio is no more than
2.50
to 1.00).
Restrictive Covenants.
The Term Loan does not include any financial
maintenance
covenants.
The Term Loan contains restrictive covenants (in each case, subject to exclusions) that limit, among other things, the ability of the Company and its restricted subsidiaries to:
|
·
|
|
make investments
,
including acquisitions
;
|
|
·
|
|
prepay certain indebtedness;
|
|
·
|
|
incur additional indebtedness;
|
|
·
|
|
make fundamental changes
to our business
;
|
|
·
|
|
enter into transactions with affiliates; and
|
The Term Loan also contains other customary restrictive covenants. The covenants are subject to various baskets and materiality thresholds, with certain of the baskets permitted by the restrictions on the repayment of subordinated indebtedness, restricted payments and investments being available only when the senior secured leverage ratio of the Company and its restricted subsidiaries is less than
3.7
5
:1.00.
The Term Loan provides that the Company and its restricted subsidiaries may incur any first lien indebtedness that
is
pari passu
to the Term Loan so long as the pro forma senior secured leverage ratio of the Company and its restricted subsidiaries is less than or equal to
4.0
0
:1.00. The Company and its restricted subsidiaries may incur any second lien indebtedness so long as the pro forma junior secured leverage ratio of the Company and its restricted subsidiaries is less than or equal to
4.
75
:1.00. The Company and its restricted subsidiaries
may incur any unsecured indebtedness so long as the total leverage ratio of the Company and its restricted subsidiaries is less than or equal to
5.00
:1.00
or the pro forma consolidated interest coverage ratio of the Company and its restricted subsidiaries is greater than or equal to
2.00
to 1.00
. Additionally
, under the Term Loan, the Company and its restricted subsidiaries may incur indebtedness under the Global ABL Facility (or any replacement facility) in an amount not to exceed the greater of
$1.3
billion and a borrowing base (equal to, subject to certain exceptions,
85%
of all accounts receivable and
65%
of the book value of all inventory owned by the Company and its restricted subsidiaries).
The Term Loan contains certain customary representations and warranties, affirmative covenants and events of default, including, among other things, payment defaults, breaches of representations and warranties, covenant defaults, cross-defaults to certain indebtedness, certain events of bankruptcy, certain events under ERISA, judgment defaults, actual or asserted failure of any material guaranty or security documents supporting the Term Loan to be in full force and effect and change of control. If such an event of default occurs, the Agent under the Term Loan is entitled to take various actions, including the acceleration of amounts due under the Term Loan and all other actions that a secured creditor is permitted to take following a default.
Global ABL Credit Facility
:
: In September 2017, the Company entered into a Third Amended and Restated Loan, Security and Guarantee Agreement (the “Global ABL Facility”) by and among the Company, the subsidiaries of the Company from time to time party thereto as borrowers and guarantors, the several lenders from time to time party thereto and Bank of America, N.A. as administrative agent, security trustee and collateral agent. As part of the amendment, the multi-currency global asset-based revolving credit facility was re-sized to
$800
million from
$1.05
billion and the maturity was extended to
September 2022
from
July 2019
. This facility is comprised of
$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. It contains an accordion feature that allows us to increase the principal amount of the facility by up to
$200
million, subject to securing additional lender commitments.
As a result of the amendment, we
recorded a charge
of
$3
million for the write-off of debt issuance costs for the year ended December 31, 2017.
Guarantees
.
Each of our current and future wholly owned material U.S. subsidiaries and MRC Global Inc. guarantees the obligations of our borrower subsidiaries under the Global ABL Facility. Additionally, each of our non-U.S. borrower subsidiaries guarantees the obligations of our other non-U.S. borrower subsidiaries under the Global ABL Facility.
No non-U.S. subsidiary guarantees the U.S. tranche
,
and no property of our non-U.S. subsidiaries secures the U.S. tranche.
Security.
Obligations under the U.S. tranche are primarily secured, subject to certain exceptions, by a first-priority security interest in the accounts receivable, inventory and related assets of our wholly owned, material U.S. subsidiaries.
The security interest in accounts receivable, inventory and related assets of the U.S. borrower subsidiaries ranks prior to the security interest in this collateral which secures the Term Loan.
The obligations of any of our non-U.S. borrower subsidiaries are primarily secured, subject to certain exceptions, by a first-priority security interest in the accounts receivable, inventory and related assets of the non-U.S. subsidiary and our wholly owned material U.S. subsidiaries.
Borrowing Bases
.
Each of our non-U.S. borrower subsidiaries has a separate standalone borrowing base that limits the non-U.S. subsidiary’s ability to borrow under its respective tranche, provided that the non-U.S. subsidiaries may utilize excess availability under the U.S. tranche to borrow amounts in excess of their respective borrowing bases (but not to exceed the applicable commitment amount for the foreign subsidiary’s jurisdiction), which utilization will reduce availability under the U.S. tranche dollar for dollar.
Subject to the foregoing, our ability to borrow in each jurisdiction, other than Belgium, under the Global ABL Facility is limited by a borrowing base in that jurisdiction equal to
85%
of eligible receivables, plus the lesser of
70%
of eligible inventory and
85%
of appraised net orderly liquidation value of the inventory. In Belgium, our borrowing is limited by a borrowing base determined under Belgian law.
Interest Rates
.
U.S. borrowings under the facility bear interest at LIBOR plus a margin varying between
1.25%
and
1.75%
based on our fixed charge coverage ratio.
Canadian borrowings under the
facility bear interest at the
Canadian Dollar Bankers’ Acceptances
Rate
(“BA Rate”)
plus a margin varying between
1.25%
and
1.75%
based on our fixed charge coverage ratio.
Borrowings by our foreign borrower subsidiaries
bear
interest
at a benchmark rate, which varies
based on the currency in which such borrowings are made
, plus a margin varying between
1.25
%
and
1.75
%
based on our fixed charge coverage ratio
.
Excess
Availability
.
At
December 31, 2017
, availability under our revolving credit facilities was
$
437
million.
Interest on Borrowings
:
The interest rates on our borrowings outstanding at
December 31, 2017 and 2016
, including the amortization of original issue discount, were
as follows:
|
|
|
|
|
|
|
|
December 31,
|
|
|
2017
|
|
|
2016
|
Senior Secured Term Loan B
|
|
5.18%
|
|
|
5.51%
|
Global ABL Facility
|
|
3.19%
|
|
|
-
|
There was
no
outstanding balance on the Global ABL Facility at
December 31, 2016
.
Maturities of Long-Term Debt
:
At
December 31, 2017
, annual maturities of long-term debt during the next five years are as follows (in
millions
):
|
|
|
|
|
|
2018
|
|
$ 4
|
|
|
|
2019
|
|
4
|
|
|
|
2020
|
|
4
|
|
|
|
2021
|
|
4
|
|
|
|
2022
|
|
133
|
|
|
|
Thereafter
|
|
377
|
|
|
|
|
|
|
|
|
|
NOTE 8
—DERIVATIVE FINANCIAL INSTRUMENTS
We use derivative financial instruments to help manage our exposure to fluctuations in foreign currencies. All of our derivative instruments are freestanding and, accordingly, changes in their fair market value are recorded in earnings.
The fair value of derivative instruments recorded in our
consolidated balance sheets was
$0
million at
December 31, 2017
and
2016
. The total notional amount of forward foreign exchange contracts was approximately
$
60
million and
$
36
million at
December 31, 2017
and
2016
, respectively.
The table below provides data about the amount of gains and (losses) recognized in our consolidated statements of
operations
related to our derivative instruments (in
millions
):
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
Derivatives not designated as hedging instruments:
|
2017
|
|
2016
|
|
2015
|
Foreign exchange forward contracts
|
$
|
(1)
|
|
$
|
1
|
|
$
|
(1)
|
NOTE 9
—INCOME TAXES
On December 22, 2017, the Tax Cuts and Jobs Act
of 2017
(the “Tax Act”) was enacted. Among the significant changes to the U.S. Internal Revenue Code, the Tax Act reduced the U.S. federal corporate income tax rate from
35%
to
21%
effective January 1, 2018
and created a new dividend-exemption territorial system with a one-time transition tax on
foreign earnings which were previously
not taxed in the U.S
.
In December 2017, the Securities and Exchange Commission staff issued Staff Accounting Bulletin No. 118
(“SAB 118”)
, which addresses how a company recognizes provisional amounts when a company does not have
all
the necessary information available in reasonable detail to complete its accounting for the effect of the changes in the Tax Act.
Under SAB 118, a company recognizes provisional amounts for income tax effects of the Tax Act for which the accounting is incomplete but a reasonable estimate can be determined. The measurement period for adjusting provisional amounts ends when a company has analyzed the information necessary to finalize its accounting, but cannot extend beyond one year.
We have
determined a reasonable estimate for
the re
-
measurement of
o
ur
deferred tax assets and liabilities
a
s of December 31, 2017
due to the reduction in the corporate tax rate. The
provisional amount
recorded
for this
re-measurement
is a
$57
million tax benefit.
We have
also
recorded
a reasonable estimate of the transition tax on undistributed foreign earnings of
$7
million. Th
ese provisional
estimate
s are
subject to change as additional
necessary information becomes available and the final analysis is prepared and analyzed in reasonable detail to complete the accounting.
The additional information that needs to be gathered, analyzed and used to complete the accounting for the provisional $7 million transition tax includes the historical earnings and profit information of each foreign subsidiary. In addition, the finalization of the 2017 federal income tax return will impact the underlying temporary differences existing at the end of 2017 used to determine the provision
al
tax benefit of $57 million.
The components of our
income
(loss)
before income taxes were (in
millions
):
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2017
|
|
2016
|
|
2015
|
United States
|
$
|
49
|
|
$
|
(7)
|
|
$
|
(79)
|
Foreign
|
|
(42)
|
|
|
(84)
|
|
|
(263)
|
|
$
|
7
|
|
$
|
(91)
|
|
$
|
(342)
|
Income taxes included in the consolidated statements of
operations
consist of (in
millions
):
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2017
|
|
2016
|
|
2015
|
Current:
|
|
|
|
|
|
|
|
|
Federal
|
$
|
26
|
|
$
|
13
|
|
$
|
64
|
State
|
|
5
|
|
|
1
|
|
|
5
|
Foreign
|
|
4
|
|
|
1
|
|
|
7
|
|
|
35
|
|
|
15
|
|
|
76
|
|
|
|
|
|
|
|
|
|
Deferred:
|
|
|
|
|
|
|
|
|
Federal
|
|
(73)
|
|
|
(21)
|
|
|
(70)
|
State
|
|
(4)
|
|
|
(2)
|
|
|
(6)
|
Foreign
|
|
(1)
|
|
|
-
|
|
|
(11)
|
|
|
(78)
|
|
|
(23)
|
|
|
(87)
|
Income tax benefit
|
$
|
(43)
|
|
$
|
(8)
|
|
$
|
(11)
|
Our effective tax rate varied from the statutory federal income tax rate for the following reasons (in
millions
):
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2017
|
|
2016
|
|
2015
|
Federal income tax expense (benefit) at statutory rates
|
$
|
2
|
|
$
|
(32)
|
|
$
|
(120)
|
State income taxes, net of federal benefit
|
|
2
|
|
|
1
|
|
|
(1)
|
Effects of tax rate changes on existing temporary differences
|
|
(59)
|
|
|
-
|
|
|
-
|
Transition tax
|
|
7
|
|
|
-
|
|
|
-
|
Nondeductible expenses
|
|
1
|
|
|
1
|
|
|
1
|
Foreign operations taxed at different rates
|
|
(5)
|
|
|
6
|
|
|
(5)
|
Goodwill and intangible asset impairment
|
|
-
|
|
|
-
|
|
|
99
|
Change in valuation allowance related to foreign losses
|
|
10
|
|
|
16
|
|
|
15
|
Other
|
|
(1)
|
|
|
-
|
|
|
-
|
Income tax benefit
|
$
|
(43)
|
|
$
|
(8)
|
|
$
|
(11)
|
Effective tax rate
|
|
(614)%
|
|
|
9%
|
|
|
3%
|
Significant components of our deferred tax assets and liabilities are as follows (in
millions
):
|
|
|
|
|
|
|
December 31,
|
|
2017
|
|
2016
|
Deferred tax assets:
|
|
|
|
|
|
Allowance for doubtful accounts
|
$
|
1
|
|
$
|
1
|
Accruals and reserves
|
|
20
|
|
|
27
|
Net operating loss and tax credit carryforwards
|
|
57
|
|
|
44
|
Other
|
|
3
|
|
|
2
|
Subtotal
|
|
81
|
|
|
74
|
Valuation allowance
|
|
(63)
|
|
|
(50)
|
Total
|
|
18
|
|
|
24
|
|
|
|
|
|
|
Deferred tax liabilities:
|
|
|
|
|
|
Inventory valuation
|
|
(29)
|
|
|
(47)
|
Property, plant and equipment
|
|
(14)
|
|
|
(19)
|
Intangible assets
|
|
(78)
|
|
|
(138)
|
Other
|
|
(2)
|
|
|
(3)
|
Total
|
|
(123)
|
|
|
(207)
|
Net deferred tax liability
|
$
|
(105)
|
|
$
|
(183)
|
We record a valuation allowance when it is more likely than not that some portion or all of
our
deferred tax assets will not be realized. The ultimate realization of the deferred tax assets depends on the ability to generate sufficient taxable income of the appropriate character in the future and in the appropriate taxing jurisdictions. If we were to determine that we would be able to realize our deferred tax assets in the future in excess of their net recorded amount, we would make an adjustment to the valuation allowance, which would reduce the provision for income taxes.
In the United States, we had approximately
$
21
million of state net operating loss
(“NOL”)
carryforwards as of
December 31, 2017
, which will expire in future years through
203
2
and foreign tax credit
(“FTC”)
carryforwards of
$
7
million, which will expire in future years through 2028
. In certain non-U.S. jurisdictions, we had
$
1
72
million of
NOL
carryforwards, of which
$
159
million have no expiration and
$
13
million will expire in future years through
202
7
.
We believe that it is more likely tha
n not that the benefit from
U.S. state
NOL
and FTC
carryforwards
and non-U.S. jurisdiction NOL carryforwards
will not be realized. As such, we have recorded full valuation allowance on the deferred tax assets related to these
NOL
and FTC
carryforwards.
Our tax filings for various periods are subject to audit by the tax authorities in most jurisdictions where we conduct business.
We are no longer subject to U.S. federal income tax examin
ation for all years through 201
3
and the statute of limitations at our international locations is generally six
or
seven years.
As a result of the Tax Act,
we
intend to repatriate to the U.S.
all
available unremitted earnings of our foreign subsidiaries that were subject to the transition tax or will otherwise not result in additional income tax expense. Based on analysis completed to date, this includes the unremitted earnings of our Canadian subsidiaries.
We
currently have the intent and ability to indefinitely reinvest the cash held by our
non-Canadian
foreign subsidiaries and, pending further analysis of the impact of the Tax Act, there are currently no plans for the repatriation of those amounts. As such, no deferred income taxes have been provided for differences
between the financial reporting and income tax basis
inherent in these foreign subsidiaries. Determining the amount associated with these outside basis differences is not practicable at this time.
At
December 31, 2017 and 2016
, our unrecognized tax benefits were immaterial to our consolidated financial statements.
NOTE 10
—
REDEEMABLE PREFERRED STOCK
Preferred Stoc
k 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 Stock 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. In the event we fail to declare and pay the quarterly dividend for an amount equal to
six
or more dividend periods, the holders of the Preferred Stock would be entitled to designate
two
members to our Board of Directors. They are also permitted to designate
one
member to our Board of Directors after a period of three years. 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
shareholder
agreement
and related documents
. 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 the
y 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 11
—STOCKHOLDERS’ EQUITY
Preferred Stock
We have authorized
100,000,000
shares of preferred stock. Our Board of Directors has the authority to issue shares of the preferred stock. As of
December 31, 2017 and 2016
, the
363,000
shares of preferred stock described in Note 10 were issued and
outstanding
.
Share Repurchase Program
s
In
November 2015, the Company’s board of directors authorized a share repurchase program for common stock up to
$100
million
, which was increased to
$125
million in November 2016
.
During the first quar
ter of 2017, we purchased
859,83
0
shares of common stock at a total of
$18
million which completed the repurchase of all shares authorized under this prog
r
am
.
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.
During the fourth quarter of 2017, we
purchased
3,214,316
shares at a total cost of
$50
million.
In total, we have acquired
11
,75
1,726
shares under these
program
s
at an average price per share of
$14.89
for a total cost of
$1
7
5
million. There were
91,347,966
shares of common stock outstanding as of December 31, 2017.
|
|
|
|
|
|
Summary of share repurchase activity under the repurchase program:
|
|
|
|
|
|
|
2017
|
|
2016
|
Number of shares acquired on the open market
|
|
4,074,146
|
|
|
6,861,191
|
Average price per share
|
$
|
16.62
|
|
$
|
13.96
|
Total cost of acquired shares (in millions)
|
$
|
68
|
|
$
|
95
|
Accumulated Other Comprehensive Loss
Accum
ulated other comprehensive loss
in the accompanying consolidated balance sheets consists of the following (in
millions
):
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
2017
|
|
2016
|
Currency translation adjustments
|
$
|
(209)
|
|
$
|
(233)
|
Pension related adjustments
|
|
(1)
|
|
|
(1)
|
Accumulated other comprehensive loss
|
$
|
(210)
|
|
$
|
(234)
|
|
|
|
|
|
|
Earnings per Share
Earnings per share are calculated in the table below (in
millions
, except per share amounts):
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2017
|
|
2016
|
|
2015
|
Net income (loss) attributable to common stockholders
|
$
|
26
|
|
$
|
(107)
|
|
$
|
(344)
|
|
|
|
|
|
|
|
|
|
Average basic shares outstanding
|
|
94.3
|
|
|
97.3
|
|
|
102.1
|
Effect of dilutive securities
|
|
1.3
|
|
|
-
|
|
|
-
|
Average diluted shares outstanding
|
|
95.6
|
|
|
97.3
|
|
|
102.1
|
|
|
|
|
|
|
|
|
|
Net income per share:
|
|
|
|
|
|
|
|
|
Basic
|
$
|
0.28
|
|
$
|
(1.10)
|
|
$
|
(3.38)
|
Diluted
|
$
|
0.27
|
|
$
|
(1.10)
|
|
$
|
(3.38)
|
Equity awards and
shares of P
referred
S
tock are disregarded in this calculation if they are determined to be anti-dilutive. For the years ended
December 31, 2017, 2016 and 2015
, our anti-dilutive stock options approximated
3.6
million,
3.
6
million and
3.8
million, respectively.
There were 0.9 million
and 0.3 million
anti-dilutive restricted stock, restricted units or performance stock unit awards for
year
s
ended December 31,
2016
and 2015, respectively
.
NOTE 12
—EMPLOYEE BENEFIT PLANS
Equity Compensation Plans
:
Our 2007 Stock Option Plan
(prior to its replacement)
permitted the grant of stock options to our employees, directors and consultants for up to
3,750,000
shares of common stock. The options were not to be granted with an exercise price less than the fair market value of the Company’s common stock on the date of the grant, nor for a term exceeding
ten
years. Vesting generally occurred over a
five
year period on the anniversaries of the date specified in the employees’ respective option agreements, subject to accelerated vesting under certain circumstances set forth in the
option agreements. During
2017
,
88,966
stock options were exercised
,
and
no
stock options were granted under this plan.
Under the terms of our 2007 Restricted Stock Plan, up to
500,000
shares of restricted stock could have been granted
(prior to its replacement)
at the direction of the Board of Directors and vesting generally occurred in one-fourth increments on the second, third, fourth and fifth anniversaries of the date specified in the employees’ respective restricted stock agreements, subject to accelerated vesting under certain circumstances set forth in the restricted stock agreements. Fair value was based on the fair market value of our
stock on the date of issuance. We expense the fair value of the restricted stock grants on a straight-line basis over the vesting period.
In April 2012, we replaced the 2007 Stock Option Plan and the 2007 Restricted Stock Plan with the 2011 Omnibus Incentive Plan.
No
additional shares or other equity interests will be awarded under the prior plans. The 2011 Omnibus Incentive Plan
originally had
3,250,000
shares reserved for issuance pursuant to the plan.
In April 2015, our shareholders approved an additional
4,250,000
shares for reservation 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 periodically granted stock options
, restricted stock awards, restricted stock units
and
performance share units
to directors and employees, but no other types of awards have been granted under the plan. Options and stock appreciation rights may not be granted at prices less than their fair market value on the date of the grant, nor for a term exceeding
ten
years. For employees, vesting generally occurs over a
three
to
five
year period on the anniversaries of the date specified in the employees’ respective agreements, subject to accelerated vesting under certain circumstances set forth in the option agreements. Vesting for directo
rs generally occurs o
n
the
one
-
year anniversary of the grant date. In
2017
,
66,809
shares of restricted stock
,
164,098
performance share units and
551,714
restricted units were granted
to executive management, members of our Board of Directors and employees under this plan.
During
2016
,
103,701
shares of restricted stock,
344,922
performance share units and
1,152,614
restricted units were granted to executive management, members of our Board of Directors and employees under this plan
.
To date,
5,870,930
shares have been granted under this plan.
A Black-Scholes option
pricing model is used to estimate the fair value of the stock options.
A Monte Carlo simulation is completed to estimate the fair value of performance share unit awards with a stock price performance component. We expense the fair value of all equity grants, including performance
share unit awards, on a straight line basis over the vesting period.
Stock Options
The following tables summarize award activity for stock options:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
Weighted
|
|
Average
|
|
|
|
|
|
|
|
Average
|
|
Remaining
|
|
Aggregate
|
|
|
|
|
Exercise
|
|
Contractual
|
|
Intrinsic
|
|
|
Options
|
|
Price
|
|
Term
|
|
Value
|
Stock Options
|
|
|
|
|
|
|
|
(years)
|
|
|
(millions)
|
Balance at December 31, 2016
|
|
3,784,504
|
|
$
|
21.71
|
|
|
4.5
|
|
$
|
4
|
Exercised
|
|
(88,966)
|
|
|
10.37
|
|
|
|
|
|
|
Forfeited
|
|
(2,138)
|
|
|
28.67
|
|
|
|
|
|
|
Expired
|
|
(43,155)
|
|
|
23.81
|
|
|
|
|
|
|
Balance at December 31, 2017
|
|
3,650,245
|
|
$
|
21.96
|
|
|
3.5
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2017
|
|
|
|
|
|
|
|
|
|
|
|
Options outstanding, vested and exercisable
|
|
3,650,245
|
|
$
|
21.96
|
|
|
3.5
|
|
$
|
-
|
Options outstanding, vested and expected to vest
|
|
3,650,245
|
|
|
21.96
|
|
|
3.5
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
|
2017
|
|
2016
|
|
2015
|
Stock Options
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average, grant-date fair value of awards granted
|
|
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
Total intrinsic value of stock options exercised
|
|
|
|
|
633,244
|
|
|
457,834
|
|
|
72,495
|
Total fair value of stock options vested
|
|
|
|
|
10,738,309
|
|
|
3,351,797
|
|
|
3,494,879
|
Restricted Stock
Awards
The following tables summarizes award activity for restricted stock
awards
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
Average
|
|
|
|
|
Grant-Date
|
|
|
Shares
|
|
Fair Value
|
Restricted Stock Awards
|
|
|
|
|
|
Nonvested at December 31, 2016
|
|
553,488
|
|
$
|
16.01
|
Granted
|
|
66,809
|
|
|
18.31
|
Vested
|
|
(328,999)
|
|
|
15.61
|
Forfeited
|
|
(4,768)
|
|
|
17.38
|
Nonvested at December 31, 2017
|
|
286,530
|
|
$
|
16.97
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
|
2017
|
|
2016
|
|
2015
|
Restricted Stock Awards
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average, grant-date fair value of awards granted
|
|
|
|
$
|
18.31
|
|
$
|
13.24
|
|
$
|
13.51
|
Total fair value of restricted stock vested
|
|
|
|
|
6,473,330
|
|
|
3,692,961
|
|
|
1,279,628
|
Restricted Stock Unit Awards
The following table summarizes award activity for restricted unit awards:
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
Average
|
|
|
|
|
Grant-Date
|
|
|
Shares
|
|
Fair Value
|
Restricted Stock Unit Awards
|
|
|
|
|
|
Nonvested at December 31, 2016
|
|
1,163,832
|
|
$
|
9.73
|
Granted
|
|
551,714
|
|
|
20.55
|
Vested
|
|
(326,510)
|
|
|
9.88
|
Forfeited
|
|
(73,910)
|
|
|
13.22
|
Nonvested at December 31, 2017
|
|
1,315,126
|
|
$
|
14.08
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
|
2017
|
|
2016
|
|
2015
|
Restricted Stock Unit Awards
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average, grant-date fair value of awards granted
|
|
|
|
$
|
20.55
|
|
$
|
9.56
|
|
$
|
13.44
|
Total fair value of restricted stock units vested
|
|
|
|
|
6,672,405
|
|
|
298,773
|
|
|
8,258
|
Performance Share Unit Awards
Performance share units were granted to certain executive officers during
2017
, 2016
and
201
5
based on total shareholder performance as well as a return on
average
net capital employed calculation (“RANCE”). The performance unit awards will be earned only to the extent that MRC Global attains specified performance goals over a three-year period relating to MRC Global’s total shareholder return compared to companies within the Oil Service Index and specified RANCE goals set forth on the date in which the
award was granted. The number of shares awarded at the end of the
three
-year period could vary from
zero
, if performance goals are not met, to as much as
200%
of target, if performance goals are exceeded.
The following tables summarizes award activity for performance unit awards:
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
Average
|
|
|
|
|
Grant-Date
|
|
|
Shares
|
|
Fair Value
|
Performance Share Unit Awards
|
|
|
|
|
|
Nonvested at December 31, 2016
|
|
540,004
|
|
$
|
10.73
|
Granted
|
|
164,098
|
|
|
24.18
|
Vested
|
|
-
|
|
|
-
|
Forfeited
|
|
-
|
|
|
-
|
Nonvested at December 31, 2017
|
|
704,102
|
|
$
|
13.90
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
|
2017
|
|
2016
|
|
2015
|
Performance Share Unit Awards
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average, grant-date fair value of awards granted
|
|
|
|
$
|
24.18
|
|
$
|
10.02
|
|
$
|
11.98
|
Total fair value of performance share units vested
|
|
|
|
|
-
|
|
|
-
|
|
|
-
|
Recognized compensation expense and related income tax benefits under our equity-based compensation plans are set forth in the table below (in
millions
):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
|
2017
|
|
2016
|
|
2015
|
Equity-based compensation expense:
|
|
|
|
|
|
|
|
|
|
|
|
Stock options
|
|
|
|
$
|
2
|
|
$
|
3
|
|
$
|
3
|
Restricted stock awards
|
|
|
|
|
4
|
|
|
4
|
|
|
6
|
Restricted stock unit awards
|
|
|
|
|
8
|
|
|
4
|
|
|
-
|
Performance share unit awards
|
|
|
|
|
2
|
|
|
1
|
|
|
1
|
Total equity-based compensation expense
|
|
|
|
$
|
16
|
|
$
|
12
|
|
$
|
10
|
Income tax benefits related to equity-based compensation
|
|
|
|
$
|
6
|
|
$
|
5
|
|
$
|
4
|
Unrecognized compensation expense under our equity-based compensation plans is set forth in the table below (in
millions
):
|
|
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
Average Vesting
|
|
December 31,
|
|
|
Period (in years)
|
|
2017
|
Unrecognized equity-based compensation expense:
|
|
|
|
|
|
Stock options
|
|
-
|
|
$
|
-
|
Restricted stock awards
|
|
0.3
|
|
|
1
|
Restricted stock unit awards
|
|
1.8
|
|
|
9
|
Performance share unit awards
|
|
1.9
|
|
|
4
|
Total unrecognized equity-based compensation expense
|
|
|
|
$
|
14
|
Defined Contribution Employee Benefit Plans
: We maintain defined contribution employee benefit plans in a number of countries in which we operate including the U.S., Canada, the United Kingdom, Australia, France, Belgium,
Norway,
the Netherlands, and New Zealand. These plans generally allow employees the option to defer a percentage of their compensation in accordance with local tax laws. In addition, we make contributions under these plans ranging from
1%
to
10%
of eligible compensation.
E
xpense under defined contribution plans were
$9
million,
$9
million and
$11
million f
or the years ended
December 31, 2017, 2016 and 2015
,
respectively.
NOTE 13
—RELATED PARTY TRANSACTIONS
Leases
We lease land and buildings at various locations from Hansford Associates Limited Partnership (“Hansford Associates
”)
and Prideco LLC (“Prideco”)
. Certain of our directors participate in ownership of Hansford Associates and Prideco. Most of these leases are renewable for various periods through
2022
and are renewable at our option. The renewal options are subject to escalation clauses. These leases contain clauses for payment of real estate taxes, maintenance, insurance and certain other operating expenses of the properties.
Rent expense attributable to related parti
es was
$2
million
for the years ended
December 31, 2017, 2016 and 2015
, respectively.
Future minimum rental payments required under operating leases with related parties that have initial or remaining non-cancelable lease terms in excess of one year are
$
2
million
for
2018,
$1 million for
201
9
and
$0
million
thereafter.
Customers
Certain m
embers of our Board of D
irectors
are
also on the board of directors of
certain
of our
customers
with which we do business
in the ordinary course
.
We re
cognized
revenue of
$
5
million,
$
7
million and
$
2
6
million from
these customers
for the years ended
December 31, 2017, 2016 and 2015
, respectively. There was
$
1
million of
accounts receivable with these customers
outstanding as of
December 31, 2017
and
2016
.
NOTE 1
4
—SEGMENT, GEOGRAPHIC AND PRODUCT LINE INFORMATION
Our business is comprised of
four
operating
segments: U.S. East
ern
Region
and Gulf Coast, U.S. West
ern
Region
, Canada and International. Our International segment consists of our operations outside of the U.S. and Canada. These segments represent our business of selling 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,
petrochemical
and chemical
processing
and general industrials
) markets. Our two U.S. operating segments have been aggregated into a single reportable segment based on their economic similarities. As a result, we report segment information for the U.S., Canada and International.
The following table presents financial information for each segment (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2017
|
|
2016
|
|
2015
|
Sales
|
|
|
|
|
|
|
|
|
|
U.S.
|
|
$
|
2,860
|
|
$
|
2,297
|
|
$
|
3,572
|
Canada
|
|
|
294
|
|
|
243
|
|
|
333
|
International
|
|
|
492
|
|
|
501
|
|
|
624
|
Consolidated sales
|
|
$
|
3,646
|
|
$
|
3,041
|
|
$
|
4,529
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
|
|
|
|
|
|
|
U.S.
|
|
$
|
15
|
|
$
|
13
|
|
$
|
12
|
Canada
|
|
|
1
|
|
|
1
|
|
|
2
|
International
|
|
|
6
|
|
|
8
|
|
|
7
|
Total depreciation and amortization expense
|
|
$
|
22
|
|
$
|
22
|
|
$
|
21
|
|
|
|
|
|
|
|
|
|
|
Amortization of intangibles
|
|
|
|
|
|
|
|
|
|
U.S.
|
|
$
|
41
|
|
$
|
41
|
|
$
|
41
|
Canada
|
|
|
2
|
|
|
2
|
|
|
2
|
International
|
|
|
2
|
|
|
4
|
|
|
17
|
Total amortization of intangibles expense
|
|
$
|
45
|
|
$
|
47
|
|
$
|
60
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
|
|
|
|
|
|
|
|
U.S. (1)
|
|
$
|
67
|
|
$
|
6
|
|
$
|
(47)
|
Canada
|
|
|
11
|
|
|
(5)
|
|
|
9
|
International (1)
|
|
|
(32)
|
|
|
(57)
|
|
|
(244)
|
Total operating income (loss)
|
|
|
46
|
|
|
(56)
|
|
|
(282)
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
31
|
|
|
35
|
|
|
48
|
Other expense
|
|
|
8
|
|
|
-
|
|
|
12
|
Income (loss) before income taxes
|
|
$
|
7
|
|
$
|
(91)
|
|
$
|
(342)
|
________________
_________________
(1)
Includes goodwill and other intangibles impairment of
$237
million and
$22
5
million
in
2015 for
the U.S. and International segments
, respectively.
Total assets by segment are as follows (in millions):
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
2017
|
|
2016
|
Total assets
|
|
|
|
|
|
|
United States
|
|
$
|
1,970
|
|
$
|
1,862
|
Canada
|
|
|
162
|
|
|
139
|
International
|
|
|
208
|
|
|
163
|
Total assets
|
|
$
|
2,340
|
|
$
|
2,164
|
The percentages of our fixed assets relating to the following geographic areas are as follows:
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
2017
|
|
2016
|
Fixed assets
|
|
|
|
|
|
|
United States
|
|
|
74%
|
|
|
68%
|
Canada
|
|
|
10%
|
|
|
15%
|
International
|
|
|
16%
|
|
|
17%
|
Total fixed assets
|
|
|
100%
|
|
|
100%
|
Our net sales
and percentage of total
sales
by product line are as follows (in
millions
):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2017
|
|
2016
|
|
2015
|
Line pipe
|
|
$
|
685
|
|
19%
|
|
$
|
444
|
|
15%
|
|
$
|
864
|
|
19%
|
Carbon steel fittings and flanges
|
|
|
548
|
|
15%
|
|
|
460
|
|
15%
|
|
|
665
|
|
15%
|
Total carbon steel pipe, fittings and flanges
|
|
|
1,233
|
|
34%
|
|
|
904
|
|
30%
|
|
|
1,529
|
|
34%
|
Valves, automation, measurement and instrumentation
|
|
|
1,319
|
|
36%
|
|
|
1,161
|
|
38%
|
|
|
1,507
|
|
33%
|
Gas products
|
|
|
554
|
|
15%
|
|
|
443
|
|
14%
|
|
|
475
|
|
10%
|
Stainless steel alloy pipe and fittings
|
|
|
183
|
|
5%
|
|
|
206
|
|
7%
|
|
|
267
|
|
6%
|
Other
|
|
|
357
|
|
10%
|
|
|
327
|
|
11%
|
|
|
440
|
|
10%
|
Oil country tubular goods ("OCTG")
|
|
|
-
|
|
-
|
|
|
-
|
|
-
|
|
|
311
|
|
7%
|
|
|
$
|
3,646
|
|
|
|
$
|
3,041
|
|
|
|
$
|
4,529
|
|
|
NOTE 1
5
—FAIR VALUE MEASUREMENTS
We used the following methods and significant assumptions to estimate fair value for assets and liabilities recorded at fair value.
Foreign Exchange Forward
and Option
Contracts
:
Foreign exchange forward contracts are reported at fair value utilizing Level 2 inputs, as the fair value is based on broker quotes for the same or similar derivative instruments.
The fair value of foreign exchange forward contracts rec
orded in our balance sheets was
$0
million at
December 31, 2017
and
2016
.
Goodwill and Other Intangible Assets:
Goodwill and other intangible assets are subject to annual impairment testing, which requires a significant degree of management judgment. If the testing results in impairment, we would
measure
goodwill and other intangible assets
using
level 3 non-recurring
inputs
.
For the year ended
December 31, 2015, we recorded impairment charges to both goodwill and other intangible assets; therefore, these assets were classified
a
s
level 3 non-recurring fair value measurement
s
.
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
$
526
m
illion and
$
414
m
illion at
December 31, 2017
and
2016
, respectively. The fair value of our debt was
$
533
m
illion and
$
417
m
illion at
December 31, 2017
and
2016
, respectively. The carrying values of our Global ABL
Facility
approximate
s its fair value
. We estimate the fair value of the Term Loan using Level 2 inputs, or quoted market prices as of
December 31, 2017
and
2016
, respectively.
NOTE 16—COMMITMENTS AND CONTINGENCIES
Leases
We regularly enter into operating and capital lease arrangements for certain of our facilities and equipment. Our leases are renewable at our option for various periods through
2033
. Certain renewal options are subject to escalation clauses and contain clauses for payment of real estate taxes, maintenance, insurance and certain other operating expenses of the properties. Leases with escalation clauses based on an index, such as the consumer price index, are expensed based on current rates. Leases with specified escalation steps are expensed and projected based on
the total lease obligation ratably over the life of the lease
. We amortize leasehold improvements over the remaining life of the lease. Rental expense under our operating lease arrangements was
$
4
5
million,
$
48
million
,
and
$
5
1
million for the years ended
December 31, 2017, 2016 and 2015
, respectively.
Future minimum lease payments under noncancelable operating lease arrangements having initial terms of one year or more are as follows (in
m
i
llions
):
|
|
|
|
|
|
|
|
2018
|
$
|
41
|
|
|
|
|
|
2019
|
|
36
|
|
|
|
|
|
2020
|
|
29
|
|
|
|
|
|
2021
|
|
24
|
|
|
|
|
|
2022
|
|
18
|
|
|
|
|
|
Thereafter
|
|
89
|
|
|
|
|
|
Legal Proceedings
Asbestos Claims.
We are one of many defendants in lawsuits that plaintiffs have brought seeking damages for personal injuries that exposure to asbestos allegedly caused. Plaintiffs and their family members have brought these lawsuits against a large volume of defendant entities as a result of the various defendants’ manufacture, distribution, supply or other involvement with asbestos, asbestos-containing products or equipment or activities that allegedly caused plaintiffs to be exposed to asbestos. These plaintiffs typically assert exposure to asbestos as a consequence of third-party manufactured products that the Company’s subsidiary, MRC Global (US) Inc., purportedly dist
ributed. As of December 31, 201
7
, we are a named defendant in approximately
537
lawsuits involving approximately
1,
153
claims. No asbestos lawsuit has resulted in a judgment against us to date, with the majority being settled, dismissed or otherwise resolved. Applicable third-party insurance has substantially covered these claims, and insurance should continue to cover a substantial majority of existing and anticipated future claims. Accordingly, we have recorded a liability for our estimate of the most likely settlement of asserted claims and a related receivable from insurers for our estimated recovery, to the extent we believe that the amounts of recovery are probable.
We annually conduct analyses of our asbestos-related litigation to estimate the adequacy of the reserve for pending and probable asbestos-related claims. Given these estimated reserves and existing insurance coverage that has been available to cover substantial portions of these claims, we believe that our current accruals and associated estimates relating to pending and probable asbestos-related litigation likely to be asserted over the next
15
years are currently adequate. This belief, however, relies on a number of assumptions, including:
|
·
|
|
That our future settlement payments, disease mix and dismissal rates will be materially consistent with historic experience;
|
|
·
|
|
That future incidences of asbestos-related diseases in the U.S. will be materially consistent with current public health estimates;
|
|
·
|
|
That the rates at which future asbestos-related mesothelioma incidences result in compensable claims filings against us will be materially consistent with its historic experience;
|
|
·
|
|
That insurance recoveries for settlement payments and defense costs will be materially consistent with historic experience;
|
|
·
|
|
That legal standards (and the interpretation of these standards) applicable to asbestos litigation will not change in material respects;
|
|
·
|
|
That there are no materially negative developments in the claims pending against us; and
|
|
·
|
|
That key co-defendants in current and future claims remain solvent.
|
If any of these assumptions prove to be materially different in light of future developments, liabilities related to asbestos-related litigation may be materially different than amounts accrued or estimated. Further, while we anticipate that additional claims will be filed in the future, we are unable to predict with any certainty the number, timing and magnitude of such future claims. In our opinion, there are no pending legal proceedings that are likely to have a material adverse effect on our consolidated financial statements.
Other Legal Claims and Proceedings.
From time to time, we have been subject to various claims and involved in legal proceedings incidental to the nature of our businesses. We maintain insurance coverage to reduce financial risk associated with certain of these claims and proceedings. It is not possible to predict the outcome of these claims and proceedings. However,
in our opinion,
there are no pending legal proceedings that are likely to have a material adverse effect on our consolidated financial statements
.
Product Claims.
From time to time, in the ordinary course of our business, our customers may claim that the products we distribute are either defective or require repair or replacement under warranties that either we or the manufacturer may provide to the customer. These proceedings are, in the opinion of management, ordinary and routine matters incidental to our normal business. Our purchase orders with our suppliers generally require the manufacturer to indemnify us against any product liability claims, leaving the manufacturer ultimately responsible for these claims. In many cases, state, provincial or foreign law provides protection to distributors for these sorts of claims, shifting the responsibility to the manufacturer. In some cases, we could be required to repair or replace the products for the benefit of our customer and seek our recovery from the manufacturer for our expense.
In our opinion, the likelihood that the ultimate disposition of any of these claims and legal proceedings would 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. In 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. 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.
In June 2017, Midfield and Europump and certain individual defendants and related entities settled the case. As part of the settlement, MRC Global (Canada) ULC agreed to pay
$6
million in exchange for a release from Weatherford and agreement to dismiss the case. The Company had previously recorded a reserve of
$3
million. As a result of the settlement, an additional charge of
$3
million was recorded in the second quarter of 2017.
Customer Contracts
We have contracts and agreements with many of our customers that dictate certain terms of our sales arrangements (pricing, deliverables, etc.). While we make every effort to abide by the terms of these contracts, certain provisions are complex and often subject to varying interpretations. Under the terms of these contracts, our customers have the right to audit our adherence to the contract terms. Historically, any settlements that have resulted from these customer audits have been immaterial to our consolidated financial statements.
Letters of Credit
Our letters of credit outstanding at
December 31, 2017
approximated
$
47
million.
Bank Guarantees
Certain of our international subsidiaries have trade guarantees that banks have issued on their behalf. The amount of these guarantees at
December 31, 2017
was
approximately
$
8
million
.
Purchase Commitments
We have purchase obligations consisting primarily of inventory purchases made in the normal course of business to meet operating needs. While our vendors often allow us to cancel these purchase orders without penalty, in certain cases, cancellations may subject us to cancellation fees or penalties depending on the terms of the contract.
Warranty Claims
We are involved from time to time in various warranty claims, which arise in the ordinary course of business. Historically, any settlements that have resulted from these warranty claims have been immaterial to our consolidated financial statements.
NOTE
17
—
RESTRUCTURING
In the fourth quarter of 2017, we took action to reduce headcount and the cost structure within our international segment, particularly in Norway. As a result of these actions, we recorded
$20
million of charges. These charges included
$14
million of severance and restructuring costs and a
$
6
million write-down of inventory associated with a decision to reduce our local presence in Iraq.
In August 2016, we announced a plan to restructure and downsize our Australian operations in response to the continued downturn in the oil and gas and mining industries in the region. As a result of this plan, for the year ending December 31, 2016, we incurred
$17
million of charges, including
$10
million of inventory-related charges,
$4
million of lease termination and property costs,
$2
million of employee severance, and
$1
million of other relocation costs. These charges included
$7
million of cash costs. In the statement of operations, inventory-related charges are reflected in cost of sales while all other costs are reflected in selling, general and administrative expenses. The restructuring plan was substantially completed in the fourth quarter of 2016.
NOTE 18
—QUARTERLY INFORMATION (UNAUDITED)
Our quarterly financial information is presented in the table below (in millions, except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First
|
|
Second
|
|
Third
|
|
Fourth
|
|
Year
|
2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
$
|
862
|
|
$
|
922
|
|
$
|
959
|
|
$
|
903
|
|
$
|
3,646
|
Gross profit
|
|
140
|
|
|
149
|
|
|
152
|
|
|
141
|
|
|
582
|
Net income (loss) attributable to common stockholders
|
|
-
|
|
|
-
|
|
|
(3)
|
|
|
29
|
|
|
26
|
Earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
$
|
-
|
|
$
|
-
|
|
$
|
(0.03)
|
|
$
|
0.31
|
|
$
|
0.28
|
Diluted
|
$
|
-
|
|
$
|
-
|
|
$
|
(0.03)
|
|
$
|
0.30
|
|
$
|
0.27
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
$
|
783
|
|
$
|
746
|
|
$
|
793
|
|
$
|
719
|
|
$
|
3,041
|
Gross profit
|
|
133
|
|
|
125
|
|
|
88
|
|
|
122
|
|
|
468
|
Net loss attributable to common stockholders
|
|
(14)
|
|
|
(23)
|
|
|
(46)
|
|
|
(24)
|
|
|
(107)
|
Earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic (1)
|
$
|
(0.14)
|
|
$
|
(0.24)
|
|
$
|
(0.48)
|
|
$
|
(0.25)
|
|
$
|
(1.10)
|
Diluted (1)
|
$
|
(0.14)
|
|
$
|
(0.24)
|
|
$
|
(0.48)
|
|
$
|
(0.25)
|
|
$
|
(1.10)
|
_______________
(1)
Earnings
per share
do
es
not add across due to rounding and transactions resulting in differing weighted average shares outstanding on a quarterly basis.