|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2021
|
|
|
2020
|
|
|
2021
|
|
|
2020
|
|
Sales
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
|
|
$
|
558
|
|
|
$
|
474
|
|
|
$
|
1,042
|
|
|
$
|
1,112
|
|
Canada
|
|
|
30
|
|
|
|
28
|
|
|
|
62
|
|
|
|
78
|
|
International
|
|
|
98
|
|
|
|
100
|
|
|
|
191
|
|
|
|
206
|
|
Consolidated sales
|
|
$
|
686
|
|
|
$
|
602
|
|
|
$
|
1,295
|
|
|
$
|
1,396
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
|
|
$
|
7
|
|
|
$
|
(226
|
)
|
|
$
|
6
|
|
|
$
|
(208
|
)
|
Canada
|
|
|
-
|
|
|
|
(2
|
)
|
|
|
-
|
|
|
|
(2
|
)
|
International
|
|
|
3
|
|
|
|
(61
|
)
|
|
|
7
|
|
|
|
(57
|
)
|
Total operating income (loss)
|
|
|
10
|
|
|
|
(289
|
)
|
|
|
13
|
|
|
|
(267
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
(6
|
)
|
|
|
(7
|
)
|
|
|
(12
|
)
|
|
|
(15
|
)
|
Other, net
|
|
|
1
|
|
|
|
(2
|
)
|
|
|
1
|
|
|
|
(2
|
)
|
Income (loss) before income taxes
|
|
$
|
5
|
|
|
$
|
(298
|
)
|
|
$
|
2
|
|
|
$
|
(284
|
)
|
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2021
|
|
|
2020
|
|
Total assets
|
|
|
|
|
|
|
|
|
U.S.
|
|
$
|
1,493
|
|
|
$
|
1,506
|
|
Canada
|
|
|
49
|
|
|
|
53
|
|
International
|
|
|
203
|
|
|
|
222
|
|
Total assets
|
|
$
|
1,745
|
|
|
$
|
1,781
|
|
Our sales by product line are as follows (in millions):
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
June 30,
|
|
|
June 30,
|
|
Type
|
|
2021
|
|
|
2020
|
|
|
2021
|
|
|
2020
|
|
Line pipe
|
|
$
|
100
|
|
|
$
|
80
|
|
|
$
|
165
|
|
|
$
|
180
|
|
Carbon fittings and flanges
|
|
|
88
|
|
|
|
73
|
|
|
|
173
|
|
|
|
188
|
|
Total carbon pipe, fittings and flanges
|
|
|
188
|
|
|
|
153
|
|
|
|
338
|
|
|
|
368
|
|
Valves, automation, measurement and instrumentation
|
|
|
243
|
|
|
|
249
|
|
|
|
484
|
|
|
|
572
|
|
Gas products
|
|
|
162
|
|
|
|
114
|
|
|
|
296
|
|
|
|
248
|
|
Stainless steel and alloy pipe and fittings
|
|
|
36
|
|
|
|
30
|
|
|
|
65
|
|
|
|
67
|
|
General products
|
|
|
57
|
|
|
|
56
|
|
|
|
112
|
|
|
|
141
|
|
|
|
$
|
686
|
|
|
$
|
602
|
|
|
$
|
1,295
|
|
|
$
|
1,396
|
|
NOTE 10 – FAIR VALUE MEASUREMENTS
From time to time, we use derivative financial instruments to help manage our exposure to interest rate risk and fluctuations in foreign currencies.
Interest Rate Swap: In March 2018, we entered into a five year interest rate swap that became effective on March 31, 2018, with a notional amount of $250 million from which the Company will receive payments at 1-month LIBOR and make monthly payments at a fixed rate of 2.7145% with settlement and reset dates on or near the last business day of each month until maturity. The fair value of the swap at inception was zero.
We have designated the interest rate swap as an effective cash flow hedge utilizing the guidance under ASU 2017-12. As such, the valuation of the interest rate swap is recorded as an asset or liability, and the gain or loss on the derivative is recorded as a component of other comprehensive income. Interest rate swap agreements are reported on the accompanying balance sheets at fair value utilizing observable Level 2 inputs such as yield curves and other market-based factors. We obtain dealer quotations to value our interest rate swap agreements. The fair value of our interest rate swap is estimated based on the present value of the difference between expected cash flows calculated at the contracted interest rates and the expected cash flows at current market interest rates. The fair value of the interest rate swap was a liability of $11 million and $14 million as of June 30, 2021 and December 31, 2020, respectively.
Foreign Exchange Forward 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. Our foreign exchange derivative instruments are freestanding, have not been designated as hedges and, accordingly, changes in their fair market value are recorded in earnings. The total notional amount of our forward foreign exchange contracts and options was approximately $2 million and $3 million at June 30, 2021 and December 31, 2020, respectively. The fair value of our foreign exchange contracts was not material as of June 30, 2021 and December 31, 2020.
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 $297 million and $383 million at June 30, 2021 and December 31, 2020, respectively. We estimate the fair value of the Term Loan using Level 2 inputs, or quoted market prices. The fair value of our debt was $297 million and $372 million at June 30, 2021 and December 31, 2020 respectively.
NOTE 11 – COMMITMENTS AND CONTINGENCIES
Litigation
Asbestos Claims. We are one of many defendants in lawsuits that plaintiffs have brought seeking damages for personal injuries that exposure to asbestos allegedly caused. Plaintiffs and their family members have brought these lawsuits against a large volume of defendant entities as a result of the defendants’ manufacture, distribution, supply or other involvement with asbestos, asbestos containing-products or equipment or activities that allegedly caused plaintiffs to be exposed to asbestos. These plaintiffs typically assert exposure to asbestos as a consequence of third-party manufactured products that our MRC Global (US) Inc. subsidiary purportedly distributed. As of June 30, 2021, we are named a defendant in approximately 586 lawsuits involving approximately 1,152 claims. No asbestos lawsuit has resulted in a judgment against us to date, with a majority being settled, dismissed or otherwise resolved. Applicable third-party insurance has substantially covered these claims, and insurance should continue to cover a substantial majority of existing and anticipated future claims. Accordingly, we have recorded a liability for our estimate of the most likely settlement of asserted claims and a related receivable from insurers for our estimated recovery, to the extent we believe that the amounts of recovery are probable. It is not possible to predict the outcome of these claims and proceedings. However, in our opinion, the likelihood that the ultimate disposition of any of these claims and legal proceedings will have a material adverse effect on our consolidated financial statements is remote.
Other Legal Claims and Proceedings. From time to time, we have been subject to various claims and involved in legal proceedings incidental to the nature of our businesses. We maintain insurance coverage to reduce financial risk associated with certain of these claims and proceedings. It is not possible to predict the outcome of these claims and proceedings. However, in our opinion, the likelihood that the ultimate disposition of any of these claims and legal proceedings will have a material adverse effect on our consolidated financial statements is remote.
Product Claims. From time to time, in the ordinary course of our business, our customers may claim that the products that we distribute are either defective or require repair or replacement under warranties that either we or the manufacturer may provide to the customer. These proceedings are, in the opinion of management, ordinary and routine matters incidental to our normal business. Our purchase orders with our suppliers generally require the manufacturer to indemnify us against any product liability claims, leaving the manufacturer ultimately responsible for these claims. In many cases, state, provincial or foreign law provides protection to distributors for these sorts of claims, shifting the responsibility to the manufacturer. In some cases, we could be required to repair or replace the products for the benefit of our customer and seek our recovery from the manufacturer for our expense. In our opinion, the likelihood that the ultimate disposition of any of these claims and legal proceedings will have a material adverse effect on our consolidated financial statements is remote.
Customer Contracts
We have contracts and agreements with many of our customers that dictate certain terms of our sales arrangements (pricing, deliverables, etc.). While we make every effort to abide by the terms of these contracts, certain provisions are complex and often subject to varying interpretations. Under the terms of these contracts, our customers have the right to audit our adherence to the contract terms. Historically, any settlements that have resulted from these customer audits have not been material to our consolidated financial statements.
Purchase Commitments
We have purchase obligations consisting primarily of inventory purchases made in the normal course of business to meet operating needs. While our vendors often allow us to cancel these purchase orders without penalty, in certain cases, cancellations may subject us to cancellation fees or penalties depending on the terms of the contract.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should read the following discussion and analysis of our financial condition and results of operations in conjunction with our financial statements and related notes included elsewhere in this report. This discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions. As used in this Form 10-Q, unless otherwise indicated or the context otherwise requires, all references to the “Company,” “MRC Global,” “we,” “our” or “us” refer to MRC Global Inc. and its consolidated subsidiaries.
Cautionary Note Regarding Forward-Looking Statements
Management’s Discussion and Analysis of Financial Condition and Results of Operations (as well as other sections of this Quarterly Report on Form 10-Q) contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Forward-looking statements include those preceded by, followed by or including the words “will,” “expect,” “intended,” “anticipated,” “believe,” “project,” “forecast,” “propose,” “plan,” “estimate,” “enable” and similar expressions, including, for example, statements about our business strategy, our industry, our future profitability, growth in the industry sectors we serve, our expectations, beliefs, plans, strategies, objectives, prospects and assumptions, and estimates and projections of future activity and trends in the oil and natural gas industry. These forward-looking statements are not guarantees of future performance. These statements are based on management’s expectations that involve a number of business risks and uncertainties, any of which could cause actual results to differ materially from those expressed in or implied by the forward-looking statements. These statements involve known and unknown risks, uncertainties and other factors, most of which are difficult to predict and many of which are beyond our control, including the factors described under “Risk Factors,” that may cause our actual results and performance to be materially different from any future results or performance expressed or implied by these forward-looking statements. Such risks and uncertainties include, among other things:
|
●
|
decreases in oil and natural gas prices;
|
|
●
|
decreases in oil and natural gas industry expenditure levels, which may result from decreased oil and natural gas prices or other factors;
|
|
●
|
U.S. and international general economic conditions;
|
|
●
|
our ability to compete successfully with other companies in our industry;
|
|
●
|
the risk that manufacturers of the products we distribute will sell a substantial amount of goods directly to end users in the industry sectors we serve;
|
|
●
|
unexpected supply shortages;
|
|
●
|
cost increases by our suppliers;
|
|
●
|
our lack of long-term contracts with most of our suppliers;
|
|
●
|
suppliers’ price reductions of products that we sell, which could cause the value of our inventory to decline;
|
|
●
|
decreases in steel prices, which could significantly lower our profit;
|
|
●
|
increases in steel prices, which we may be unable to pass along to our customers which could significantly lower our profit;
|
|
●
|
our lack of long-term contracts with many of our customers and our lack of contracts with customers that require minimum purchase volumes;
|
|
●
|
changes in our customer and product mix;
|
|
●
|
risks related to our customers’ creditworthiness;
|
|
●
|
the success of our acquisition strategies;
|
|
●
|
the potential adverse effects associated with integrating acquisitions into our business and whether these acquisitions will yield their intended benefits;
|
|
●
|
our significant indebtedness;
|
|
●
|
the dependence on our subsidiaries for cash to meet our obligations;
|
|
●
|
changes in our credit profile;
|
|
●
|
a decline in demand for or adverse change in the value of certain of the products we distribute if tariffs and duties on these products are imposed or lifted;
|
|
●
|
significant substitution of alternative fuels for oil and gas;
|
|
●
|
environmental, health and safety laws and regulations and the interpretation or implementation thereof;
|
|
●
|
the sufficiency of our insurance policies to cover losses, including liabilities arising from litigation;
|
|
●
|
product liability claims against us;
|
|
●
|
pending or future asbestos-related claims against us;
|
|
●
|
the potential loss of key personnel;
|
|
●
|
adverse health events, such as a pandemic;
|
|
●
|
interruption in the proper functioning of our information systems;
|
|
●
|
the occurrence of cybersecurity incidents;
|
|
●
|
loss of third-party transportation providers;
|
|
●
|
potential inability to obtain necessary capital;
|
|
●
|
risks related to adverse weather events or natural disasters;
|
|
●
|
impairment of our goodwill or other intangible assets;
|
|
●
|
adverse changes in political or economic conditions in the countries in which we operate;
|
|
●
|
exposure to U.S. and international laws and regulations, including the Foreign Corrupt Practices Act and the U.K. Bribery Act and other economic sanctions programs;
|
|
●
|
risks associated with international instability and geopolitical developments, including armed conflicts and terrorism;
|
|
●
|
risks relating to ongoing evaluations of internal controls required by Section 404 of the Sarbanes-Oxley Act;
|
|
●
|
our intention not to pay dividends; and
|
|
●
|
risks related to changing laws and regulations, including trade policies and tariffs.
|
Undue reliance should not be placed on our forward-looking statements. Although forward-looking statements reflect our good faith beliefs, reliance should not be placed on forward-looking statements because they involve known and unknown risks, uncertainties and other factors, which may cause our actual results, performance or achievements to differ materially from anticipated future results, performance or achievements expressed or implied by such forward-looking statements. We undertake no obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future events, changed circumstances or otherwise, except to the extent law requires.
Overview
We are the leading global distributor of pipe, valves, and fittings ("PVF") and other infrastructure products and services to diversified energy and industrial end-markets. We provide innovative supply chain solutions, technical product expertise and a robust digital platform to customers globally through our leading position across each of our diversified end-markets including the following sectors:
|
●
|
gas utilities (storage and distribution of natural gas)
|
|
●
|
downstream and industrial (crude oil refining and petrochemical and chemical processing and general industrials)
|
|
●
|
upstream production (exploration, production and extraction of underground oil and gas)
|
|
●
|
midstream pipeline (gathering, processing and transmission of oil and gas)
|
We offer over 200,000 SKUs, including an extensive array of PVF, oilfield supply, valve automation and modification, measurement, instrumentation and other general and specialty products from our global network of over 10,000 suppliers. With over 100 years of experience, our over 2,500 employees serve approximately 12,000 customers through approximately 220 service locations including regional distribution centers, branches, corporate offices and third party pipe yards, where we often deploy pipe near customer locations.
Key Drivers of Our Business
Our revenue is predominantly derived from the sale of PVF and other oilfield and industrial supplies to energy and industrial users globally. Our business is, therefore, dependent upon both the current conditions and future prospects in the energy industry and, in particular, maintenance and expansionary operating and capital expenditures by our customers in the gas utilities, downstream and industrial, upstream production and midstream pipeline sectors of the industry. Long-term growth in spending has been driven by several factors, including demand growth for petroleum and petroleum derived products, underinvestment in global energy infrastructure, growth in shale and unconventional exploration and production (“E&P”) activity, and anticipated strength in the oil, natural gas, refined products and petrochemical sectors. The outlook for future oil, natural gas, refined products and petrochemical PVF spending is influenced by numerous factors, including the following:
|
●
|
Energy Infrastructure Integrity and Modernization. Ongoing maintenance and upgrading of existing energy facilities, pipelines and other infrastructure equipment is a meaningful driver for business across the sectors we serve. This is particularly true for gas utilities which is currently our largest sector by sales. Activity with customers in this market is dependent on new residential and commercial development as well as upgrades of existing infrastructure. Maintenance of an aging network of pipelines is a critical requirement for these customers irrespective of broader economic conditions. As a result, this business tends to be more stable over time and moves independently of commodity prices.
|
|
|
|
|
●
|
Oil and Natural Gas Demand and Prices. Sales of PVF and related infrastructure products to the oil and natural gas industry constitute a significant portion of our sales. As a result, we depend upon the oil and natural gas industry and its ability and willingness to make maintenance and capital expenditures to explore for, produce and process oil, natural gas and refined products. Demand for oil and natural gas along with both current and projected prices and the costs necessary to produce oil and gas, impact other drivers of our business, including capital spending by customers, additions to and maintenance of pipelines, refinery utilization and petrochemical processing activity.
|
|
|
|
|
●
|
Economic Conditions. Changes in the general economy or in the energy sector (domestically or internationally) can cause demand for fuels, feedstocks and petroleum-derived products to vary thereby causing demand for the products we distribute to materially change.
|
|
|
|
|
●
|
Manufacturer and Distributor Inventory Levels of PVF and Related Products. Manufacturer and distributor inventory levels of PVF and related products can change significantly from period to period. Increased inventory levels by manufacturers or other distributors can cause an oversupply of PVF and related products in the industry sectors we serve and reduce the prices that we are able to charge for the products we distribute. Reduced prices, in turn, would likely reduce our profitability. Conversely, decreased manufacturer inventory levels may ultimately lead to increased demand for our products and would likely result in increased sales volumes and overall profitability.
|
|
|
|
|
●
|
Steel Prices, Availability and Demand. Fluctuations in steel prices can lead to volatility in the pricing of the products we distribute, especially carbon steel line pipe products, which can influence the buying patterns of our customers. A majority of the products we distribute contain various types of steel. The worldwide supply and demand for these products, or other steel products that we do not supply, impacts the pricing and availability of our products and, ultimately, our sales and operating profitability. Additionally, supply chain disruptions with key manufacturers or in markets in which we source products can impact the availability of inventory we require to support our customers. Furthermore, logistical challenges, including inflation and availability of freight providers and containers for shipping can also significantly impact our profitability and inventory lead-times.
|
Recent Trends and Outlook
During the first six months of 2021, the average oil price of West Texas Intermediate (“WTI”) increased to $62.21 per barrel from $36.58 per barrel in the first six months of 2020. Natural gas prices increased to an average price of $3.22/MMBtu (Henry Hub) for the first six months of 2021 compared to $1.80/MMBtu (Henry Hub) for the first six months of 2020. North American drilling rig activity decreased 24% in the six months ended June 30, 2021, as compared to the same period of 2020. U.S. well completions were up 3% in the six months ended June 30, 2021, compared to the same period in 2020.
The energy industry, and our business in turn, is cyclical in nature. In the first half of 2020, demand for oil and natural gas declined sharply because of the COVID-19 pandemic. This resulted in lower commodity prices, which, in turn, led to a significant decline in oil and gas industry spending. Based on an average of industry research estimates, there was a decrease in oil and gas industry spending in 2020 of 32% globally, including approximately 45% in the U.S. upstream production market. These reductions in spending directly impacted both the upstream production and midstream pipeline components of our business. In addition, our customers in the downstream and industrial sector deferred turnarounds and routine maintenance as well as idled facilities to preserve liquidity and comply with COVID-19 related limitations on employee activities. Furthermore, approximately 80% of our business is concentrated in the U.S. where the majority of industry spending reductions occurred.
In the first half of 2021, we began to see an improvement in the demand for oil and natural gas as the roll out of the COVID-19 vaccinations gradually improved around the globe and pandemic restrictions eased. The increasing optimism related to demand recovery has led to higher commodity prices and although demand levels remain below pre-pandemic levels, there is growing confidence of returning to 2019 levels in the coming years. Also contributing to the improvement in oil prices has been cooperation within OPEC to implement production cuts over the last year; however, it was recently announced that OPEC intends to increase production beginning in August 2021 that will continue into late 2022 to match increasing demand expectations. Demand recovery could still possibly slow or pause as a result of additional waves of pandemic outbreak or heightened pandemic control measures. Over the longer term, we could also experience a structural shift in the global economy and its demand for oil and natural gas as a result of changes in the way people work, travel and interact.
Notwithstanding the ongoing uncertainty, we experienced a 5% sequential growth in sales in the first quarter of 2021 as compared to the fourth quarter of 2020, followed by a 13% sequential growth in the second quarter of 2021. North American rig count, which is a leading indicator of activity levels, increased by 31% from the fourth quarter of 2020 to the second quarter of 2021. Recent spending plan estimates by sell-side research analysts indicate U.S. upstream spending in 2021 will be higher compared to 2020, although the percentage increases can vary significantly by customer and we expect a continued focus on capital discipline by oil and gas exploration and production operators. For example, the majority of rig count and completion activity increases to date have been led by private operators, which historically have not been our primary customer base. Despite this we have seen a substantial improvement in both our upstream and midstream sectors in the first half of 2021.
Our gas utility business had the most significant contribution to our revenue improvement in the second quarter of 2021, with an increase of 28% compared to the first quarter. This continues to be our largest sector making up approximately 39% of our total company revenue in the second quarter of 2021. This business, which is largely independent of oil and gas commodity prices, was also initially impacted by certain customer activity delays due to COVID-19 concerns but did not experience any material budget cuts or project cancellations. This sector is expected to have the most significant revenue improvement in 2021 with a double-digit percentage increase compared to 2020 due to increased customer activity levels as pandemic restrictions ease and customers continue to execute their integrity upgrade programs.
In January 2021, a new U.S. President took office and a new U.S. Congress was seated. Both have publicly stated a desire to support alternative energy sources such as solar, wind and “green” hydrogen, reduce U.S. emissions of greenhouse gases and generally address climate change. To that end, the new administration has implemented executive orders for the U.S. to rejoin the Paris Agreement, which presumably will require the U.S. to set greenhouse gas reduction goals and enact policies to meet those goals. It has also announced an aggressive policy agenda to change the tax system, increase corporate and other income taxes, modify the relationships between the United States and other countries and make changes that reverse actions taken by the prior President. Until specific laws are passed, executive actions are taken or federal regulatory action is enacted, it is unclear what impact these policies will have on our business. However, we believe that carbon-based energy will continue to play a critical role in supporting economic growth, particularly in developing countries, and that oil and gas demand will continue to be significant in the coming decades. The U.S. EIA in its Reference Case published in the Annual Energy Outlook 2021 projects U.S. energy consumption rising by 17% between 2020 and 2050. Even as the EIA projects in its Reference Case that renewables become the fastest growing energy source by 2050, the EIA also projects petroleum and other liquids demand in the U.S. to rise by 16% in that timeframe and natural gas to rise more than 22% after reaching a trough in 2021. While the U.S. EIA has not recently published a global outlook, its U.S. Reference Case suggests increasing world demand for hydrocarbons may also increase. This would require an increase in oil and gas to meet the rise in demand from current levels, which would continue to provide a robust market for our existing goods and services. Furthermore, our largest customers are among the leading investors in renewable energy technology. As they further rebalance their capital investment from traditional, carbon-based energy to alternative sources, we expect to continue to supply them and enhance our product and service offerings as needed to support their changing requirements, including in areas such as carbon capture, biofuels and wind.
During the COVID-19 pandemic crisis, we have continued to operate our business. Our warehouses and regional distribution centers have remained open. Under various isolation orders by national, state, provincial and local governments, we have been exempted as an "essential' business as the products we sell are necessary for the maintenance and functioning of the energy infrastructure. We have taken measures to safeguard the health and welfare of our employees. As the COVID-19 vaccines have become more widely distributed, we have begun to reopen our offices. In the U.S., in particular, all of our offices are open under appropriate safety measures.
As of July 12, 2021, of our approximate 2,500 employees, we had 5 employees with current cases of COVID-19. We monitor guidelines of the U.S. Centers for Disease Control ("CDC") and other authorities on an ongoing basis, and as various governmental isolation orders evolve, we continue to review our operational plans to continue operating our business while addressing the health and safety of our employees and those with whom our business comes into contact.
As a distribution business, we have also closely monitored the ability of our suppliers and transportation providers to continue the functioning of our supply chain, particularly in cases where there are limited alternative sources of supply. While there were initially some temporary interruptions of manufacturing for some of our products in the Spring of 2020, most of these manufacturers have now resumed production. We have not experienced significant delays by transportation providers, but we are experiencing significant increases in transportation costs as the economy of the U.S. and other countries begins to recover from the initial onset of the pandemic. Our inventory position for most products has allowed us to continue supply to most customers with little interruption. In those instances where there is interruption, we are working with our customers to discuss the impact of the COVID-19 delay. We continue to monitor the situation and have ongoing dialogue with our customers regarding the status of impacted orders.
In recent years, the United States imposed tariffs on imports of some products that we distribute. Although these actions generally cause the price we pay for products to increase, we are generally able to leverage long-standing relationships with our suppliers and the volume of our purchases to receive market competitive pricing. In addition, our contracts with customers generally allow us to react quickly to price increases through mechanisms that enable us to pass those increases along to customers as they occur. Of course, the price increases that tariffs and quotas engender may be offset by the pricing impacts of lower demand that the COVID-19 pandemic has caused. These issues are dynamic and continue to evolve. To the extent our products are further impacted by pricing fluctuations caused by tariffs and quotas, the ultimate impact on our revenue and cost of sales, which is determined using the last-in, first-out ("LIFO") inventory costing methodology, remains subject to uncertainty and volatility.
We determine backlog by the amount of unshipped customer orders, either specific or general in nature, which the customer may revise or cancel in certain instances. The table below details our backlog by segment (in millions):
|
|
June 30,
|
|
|
December 31,
|
|
|
June 30,
|
|
|
|
2021
|
|
|
2020
|
|
|
2020
|
|
U.S.
|
|
$
|
257
|
|
|
$
|
193
|
|
|
$
|
220
|
|
Canada
|
|
|
13
|
|
|
|
13
|
|
|
|
22
|
|
International
|
|
|
124
|
|
|
|
134
|
|
|
|
150
|
|
|
|
$
|
394
|
|
|
$
|
340
|
|
|
$
|
392
|
|
There can be no assurance that the backlog amounts will ultimately be realized as revenue or that we will earn a profit on the backlog of orders, but we expect that substantially all of the sales in our backlog will be realized within twelve months.
The following table shows key industry indicators for the three and six months ended June 30, 2021 and 2020:
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2021
|
|
|
2020
|
|
|
2021
|
|
|
2020
|
|
Average Rig Count (1):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
|
450
|
|
|
|
392
|
|
|
|
423
|
|
|
|
588
|
|
Canada
|
|
|
72
|
|
|
|
25
|
|
|
|
107
|
|
|
|
110
|
|
Total North America
|
|
|
522
|
|
|
|
417
|
|
|
|
530
|
|
|
|
698
|
|
International
|
|
|
734
|
|
|
|
834
|
|
|
|
716
|
|
|
|
954
|
|
Total
|
|
|
1,256
|
|
|
|
1,251
|
|
|
|
1,246
|
|
|
|
1,652
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average Commodity Prices (2):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
WTI crude oil (per barrel)
|
|
$
|
66.19
|
|
|
$
|
27.96
|
|
|
$
|
62.21
|
|
|
$
|
36.58
|
|
Brent crude oil (per barrel)
|
|
$
|
68.98
|
|
|
$
|
29.70
|
|
|
$
|
64.95
|
|
|
$
|
40.23
|
|
Natural gas ($/MMBtu)
|
|
$
|
2.95
|
|
|
$
|
1.70
|
|
|
$
|
3.22
|
|
|
$
|
1.80
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average Monthly U.S. Well Permits (3)
|
|
|
1,885
|
|
|
|
1,441
|
|
|
|
1,863
|
|
|
|
1,844
|
|
U.S. Wells Completed (2)
|
|
|
2,394
|
|
|
|
1,082
|
|
|
|
4,406
|
|
|
|
4,266
|
|
3:2:1 Crack Spread (4)
|
|
$
|
20.74
|
|
|
$
|
12.11
|
|
|
$
|
18.66
|
|
|
$
|
12.91
|
|
_______________________
|
(1) Source-Baker Hughes (www.bhge.com) (Total rig count includes oil, natural gas and other rigs.)
|
(2) Source-Department of Energy, EIA (www.eia.gov) (As revised)
|
(3) Source-Evercore ISI Research
|
(4) Source-Bloomberg
|
Results of Operations
Three Months Ended June 30, 2021 Compared to the Three Months Ended June 30, 2020
The breakdown of our sales by sector for the three months ended June 30, 2021 and 2020 was as follows (in millions):
|
|
Three Months Ended
|
|
|
|
June 30, 2021
|
|
|
June 30, 2020
|
|
Gas utilities
|
|
$
|
269
|
|
|
|
39
|
%
|
|
$
|
205
|
|
|
|
34
|
%
|
Downstream & industrial
|
|
|
191
|
|
|
|
28
|
%
|
|
|
176
|
|
|
|
29
|
%
|
Upstream production
|
|
|
143
|
|
|
|
21
|
%
|
|
|
134
|
|
|
|
22
|
%
|
Midstream pipeline
|
|
|
83
|
|
|
|
12
|
%
|
|
|
87
|
|
|
|
15
|
%
|
|
|
$
|
686
|
|
|
|
100
|
%
|
|
$
|
602
|
|
|
|
100
|
%
|
For the three months ended June 30, 2021 and 2020, the following table summarizes our results of operations (in millions):
|
|
Three Months Ended
|
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
|
|
|
|
|
|
|
|
2021
|
|
|
2020
|
|
|
$ Change
|
|
|
% Change
|
|
Sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
|
|
$
|
558
|
|
|
$
|
474
|
|
|
$
|
84
|
|
|
|
18
|
%
|
Canada
|
|
|
30
|
|
|
|
28
|
|
|
|
2
|
|
|
|
7
|
%
|
International
|
|
|
98
|
|
|
|
100
|
|
|
|
(2
|
)
|
|
|
(2
|
)%
|
Consolidated
|
|
$
|
686
|
|
|
$
|
602
|
|
|
$
|
84
|
|
|
|
14
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
|
|
$
|
7
|
|
|
$
|
(226
|
)
|
|
$
|
233
|
|
|
|
N/M
|
|
Canada
|
|
|
-
|
|
|
|
(2
|
)
|
|
|
2
|
|
|
|
N/M
|
|
International
|
|
|
3
|
|
|
|
(61
|
)
|
|
|
64
|
|
|
|
N/M
|
|
Consolidated
|
|
|
10
|
|
|
|
(289
|
)
|
|
|
299
|
|
|
|
N/M
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
(6
|
)
|
|
|
(7
|
)
|
|
|
1
|
|
|
|
(14
|
)%
|
Other, net
|
|
|
1
|
|
|
|
(2
|
)
|
|
|
3
|
|
|
|
N/M
|
|
Income tax (expense) benefit
|
|
|
(1
|
)
|
|
|
17
|
|
|
|
(18
|
)
|
|
|
N/M
|
|
Net income (loss)
|
|
|
4
|
|
|
|
(281
|
)
|
|
|
285
|
|
|
|
N/M
|
|
Series A preferred stock dividends
|
|
|
6
|
|
|
|
6
|
|
|
|
-
|
|
|
|
0
|
%
|
Net loss attributable to common stockholders
|
|
$
|
(2
|
)
|
|
$
|
(287
|
)
|
|
$
|
285
|
|
|
|
(99
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
$
|
112
|
|
|
$
|
79
|
|
|
$
|
33
|
|
|
|
42
|
%
|
Adjusted Gross Profit (1)
|
|
$
|
134
|
|
|
$
|
118
|
|
|
$
|
16
|
|
|
|
14
|
%
|
Adjusted EBITDA (1)
|
|
$
|
36
|
|
|
$
|
17
|
|
|
$
|
19
|
|
|
|
N/M
|
|
(1) Adjusted Gross Profit and Adjusted EBITDA are non-GAAP financial measures. For a reconciliation of these measures to an equivalent GAAP measure, see pages 22-24 herein.
Sales. Our sales were $686 million for the three months ended June 30, 2021 as compared to $602 million for the three months ended June 30, 2020, an increase of $84 million, or 14%. The strengthening of foreign currencies in areas where we operate relative to the U.S. dollar favorably impacted sales by $14 million, or 2%.
U.S. Segment—Our U.S. sales increased to $558 million for the three months ended June 30, 2021 from $474 million for the three months ended June 30, 2020. This $84 million, or 18%, increase reflected a $67 million increase in the gas utilities sector driven by the full implementation of a new customer contract as well as increased activity levels as pandemic restrictions eased and customers continued to execute their integrity upgrade programs, a $10 million increase in the downstream and industrial sector due to increased turnaround and small project spending, a $15 million increase in the upstream production sector due to increased customer spending driven by improved commodity prices and a corresponding increase in well completions, offset by an $8 million decrease in the midstream pipeline sector due to the completion of non-repeatable project activity in 2020.
Canada Segment—Our Canada sales increased to $30 million for the three months ended June 30, 2021 from $28 million for the three months ended June 30, 2020, an increase of $2 million, or 7%. Improved commodity pricing, the easing of pandemic restrictions, as well as small projects and turnarounds all contributed to the increase. The strengthening of the Canadian dollar relative to the U.S. dollar favorably impacted sales by $3 million, or 11%.
International Segment—Our International sales decreased to $98 million for the three months ended June 30, 2021 from $100 million for the same period in 2020. The $2 million, or 2%, decrease is primarily driven by lower activity levels in the upstream sector in the U.K. In addition, the strengthening of foreign currencies in areas where we operate relative to the U.S. dollar favorably impacted sales by $11 million, or 11%.
Gross Profit. Our gross profit was $112 million (16.3% of sales) for the three months ended June 30, 2021 as compared to $79 million (13.1% of sales) for the three months ended June 30, 2020. As compared to average cost, our LIFO inventory costing methodology increased cost of sales by $11 million for the second quarter of 2021 compared to a $6 million reduction in the second quarter of 2020. In addition, gross profit for the three months ended June 30, 2020 was negatively impacted by $34 million of inventory-related charges due to the COVID-19 pandemic and related economic downturn.
Adjusted Gross Profit. Adjusted Gross Profit increased to $134 million (19.5% of sales) for the three months ended June 30, 2021 from $118 million (19.6% of sales) for the three months ended June 30, 2020, an increase of $16 million. Adjusted Gross Profit is a non-GAAP financial measure. We define Adjusted Gross Profit as sales, less cost of sales, plus depreciation and amortization, plus amortization of intangibles, plus inventory-related charges incremental to normal operations and plus or minus the impact of our LIFO inventory costing methodology. We present Adjusted Gross Profit because we believe it is a useful indicator of our operating performance without regard to items, such as amortization of intangibles, that can vary substantially from company to company depending upon the nature and extent of acquisitions. Similarly, the impact of the LIFO inventory costing method can cause results to vary substantially from company to company depending upon whether they elect to utilize LIFO and depending upon which method they may elect. We use Adjusted Gross Profit as a key performance indicator in managing our business. We believe that gross profit is the financial measure calculated and presented in accordance with U.S. generally accepted accounting principles that is most directly comparable to Adjusted Gross Profit.
The following table reconciles Adjusted Gross Profit, a non-GAAP financial measure, with gross profit, as derived from our financial statements (in millions):
|
|
Three Months Ended
|
|
|
|
June 30,
|
|
|
Percentage
|
|
|
June 30,
|
|
|
Percentage
|
|
|
|
2021
|
|
|
of Revenue
|
|
|
2020
|
|
|
of Revenue*
|
|
Gross profit, as reported
|
|
$
|
112
|
|
|
|
16.3
|
%
|
|
$
|
79
|
|
|
|
13.1
|
%
|
Depreciation and amortization
|
|
|
5
|
|
|
|
0.7
|
%
|
|
|
5
|
|
|
|
0.8
|
%
|
Amortization of intangibles
|
|
|
6
|
|
|
|
0.9
|
%
|
|
|
6
|
|
|
|
1.0
|
%
|
Increase (decrease) in LIFO reserve
|
|
|
11
|
|
|
|
1.6
|
%
|
|
|
(6
|
)
|
|
|
(1.0
|
)%
|
Inventory-related charges
|
|
|
-
|
|
|
|
0.0
|
%
|
|
|
34
|
|
|
|
5.6
|
%
|
Adjusted Gross Profit
|
|
$
|
134
|
|
|
|
19.5
|
%
|
|
$
|
118
|
|
|
|
19.6
|
%
|
*Does not foot due to rounding
Selling, General and Administrative (“SG&A”) Expenses. Our SG&A expenses were $102 million for the three months ended June 30, 2021 as compared to $126 million for the three months ended June 30, 2020. The $24 million decrease in SG&A was driven by lower employee-related costs, including incentives and benefits, resulting from the decline in business activity. Additionally, the strengthening of foreign currencies in areas where we operate outside of the U.S. dollar unfavorably impacted SG&A by $3 million. For the three months ended June 30, 2020 personnel costs were partially offset by $15 million of expenses associated with facilities closures and $7 million of severance and restructuring charges. Excluding these charges, SG&A would have been $104 million.
Goodwill and Intangible Asset Impairment. In the first half of 2020, demand for oil and natural gas declined sharply as a result of the COVID-19 pandemic. This disruption in demand and the resulting decline in the price of oil had a dramatic negative impact on our business. We experienced a significant reduction in sales beginning in April 2020, which resulted in a more pessimistic long-term outlook due to the significant reduction in the demand for oil, the implications of that demand destruction on the price of oil for an extended period of time and actions our customers have taken to curtail costs and reduce spending. As a result of these developments, we concluded that it was more likely than not the fair values of our U.S. and International reporting units were lower than their carrying values. Accordingly, we completed an interim goodwill impairment test as of April 30, 2020. This test resulted in a $217 million goodwill impairment charge comprised of $177 million in our U.S. reporting unit and $40 million in our International reporting unit.
As a result of the same factors that necessitated an interim impairment test for goodwill, we completed an interim impairment test for our U.S. indefinite-lived tradename asset. This test resulted in an impairment charge of $25 million. The remaining balance of the indefinite-lived tradename was $107 million as of
June 30, 2021. The U.S. tradename is our only indefinite-lived intangible asset.
Operating Income (Loss). Operating income was $10 million for the three months ended June 30, 2021 as compared to operating loss of $289 million for the three months ended June 30, 2020, an increase of $299 million.
U.S. Segment—Operating income for our U.S. segment was $7 million for the three months ended June 30, 2021 compared to operating loss of $226 million for the three months ended June 30, 2020, a $233 million increase. Operating loss for the second quarter of 2020 was impacted by $202 million of goodwill and intangible asset impairments, $19 million of inventory-related charges, $6 million of severance costs, and $2 million of costs associated with facility closures. Excluding these charges, operating income would have been $3 million.
Canada Segment—Operating income for our Canada segment was $0 million for the three months ended June 30, 2021 and 2020 as compared to $2 million operating loss for the three months ended June 30, 2020.
International Segment—Operating income for our international segment was $3 million for the three months ended June 30, 2021 as compared to operating loss of $61 million for the three months ended June 30, 2020. The $61 million operating loss included $40 million of goodwill impairment charges, $14 million of inventory-related charges, $1 million of severance costs and $12 million of costs associated with facility closures. Excluding these charges, operating income would have been $6 million for the three months ended June 30, 2020.
Interest Expense. Our interest expense was $6 million and $7 million for the three months ended June 30, 2021 and 2020, respectively. The decrease in interest expense was attributable to lower average debt levels and interest rates during the second quarter of 2021 as compared to the second quarter of 2020.
Other, net. Our other income was $1 million for the three months ended June 30, 2021 as compared to other expense of $2 million for the three months ended June 30, 2020. Other expense in the second quarter of 2020 included $3 million of asset write-downs related to facility closures.
Income Tax Expense (Benefit). Our income tax expense was $1 million for the three months ended June 30, 2021 as compared to $17 million benefit for the three months ended June 30, 2020. We typically record income tax expense for interim periods based on estimated annual effective tax rates. However, due to the uncertainty in our industry and the effects of COVID-19, the income tax expense for the three months ended June 30, 2021 was computed based on a year-to-date effective tax rate. We will return to utilizing an estimated annual effective tax rate when appropriate. Our effective tax rates were 20% and 6% for the three months ended June 30, 2021 and 2020, respectively. Our rates generally differ from the U.S. federal statutory rate of 21% as a result of state income taxes and differing foreign income tax rates.
Net Income (Loss). Our net income was $4 million for the three months ended June 30, 2021 as compared to net loss of $281 million for the three months ended June 30, 2020.
Adjusted EBITDA. Adjusted EBITDA, a non-GAAP financial measure, was $36 million (5.2% of sales) for the three months ended June 30, 2021 as compared to $17 million (2.8% of sales) for the three months ended June 30, 2020.
We define Adjusted EBITDA as net income plus interest, income taxes, depreciation and amortization, amortization of intangibles and certain other expenses, including non-cash expenses such as equity-based compensation, severance and restructuring, changes in the fair value of derivative instruments, long-lived asset impairments (including goodwill and intangible assets), inventory-related charges incremental to normal operations and plus or minus the impact of our LIFO inventory costing methodology.
We believe Adjusted EBITDA provides investors a helpful measure for comparing our operating performance with the performance of other companies that may have different financing and capital structures or tax rates. We believe it is a useful indicator of our operating performance without regard to items, such as amortization of intangibles, which can vary substantially from company to company depending upon the nature and extent of acquisitions. Similarly, the impact of the LIFO inventory costing method can cause results to vary substantially from company to company depending upon whether they elect to utilize LIFO and depending upon which method they may elect. We use Adjusted EBITDA as a key performance indicator in managing our business. We believe that net income is the financial measure calculated and presented in accordance with U.S. generally accepted accounting principles that is most directly comparable to Adjusted EBITDA.
The following table reconciles Adjusted EBITDA, a non-GAAP financial measure, with net income, as derived from our financial statements (in millions):
|
|
Three Months Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2021
|
|
|
2020
|
|
Net income (loss)
|
|
$
|
4
|
|
|
$
|
(281
|
)
|
Income tax expense (benefit)
|
|
|
1
|
|
|
|
(17
|
)
|
Interest expense
|
|
|
6
|
|
|
|
7
|
|
Depreciation and amortization
|
|
|
5
|
|
|
|
5
|
|
Amortization of intangibles
|
|
|
6
|
|
|
|
6
|
|
Goodwill and intangible asset impairment
|
|
|
-
|
|
|
|
242
|
|
Inventory-related charges
|
|
|
-
|
|
|
|
34
|
|
Facility closures
|
|
|
-
|
|
|
|
18
|
|
Severance and restructuring
|
|
|
-
|
|
|
|
7
|
|
Increase (decrease) in LIFO reserve
|
|
|
11
|
|
|
|
(6
|
)
|
Equity-based compensation expense
|
|
|
2
|
|
|
|
3
|
|
Foreign currency losses (gains)
|
|
|
1
|
|
|
|
(1
|
)
|
Adjusted EBITDA
|
|
$
|
36
|
|
|
$
|
17
|
|
Six Months Ended June 30, 2021 Compared to the Six Months Ended June 30, 2020
The breakdown of our sales by sector for the six months ended June 30, 2021 and 2020 was as follows (in millions):
|
|
Six Months Ended
|
|
|
|
June 30, 2021
|
|
|
June 30, 2020
|
|
Gas utilities
|
|
$
|
479
|
|
|
|
37
|
%
|
|
$
|
407
|
|
|
|
29
|
%
|
Downstream & industrial
|
|
|
385
|
|
|
|
30
|
%
|
|
|
427
|
|
|
|
31
|
%
|
Upstream production
|
|
|
270
|
|
|
|
21
|
%
|
|
|
356
|
|
|
|
25
|
%
|
Midstream pipeline
|
|
|
161
|
|
|
|
12
|
%
|
|
|
206
|
|
|
|
15
|
%
|
|
|
$
|
1,295
|
|
|
|
100
|
%
|
|
$
|
1,396
|
|
|
|
100
|
%
|
For the six months ended June 30, 2021 and 2020, the following table summarizes our results of operations (in millions):
|
|
Six Months Ended
|
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
|
|
|
|
|
|
|
|
2021
|
|
|
2020
|
|
|
$ Change
|
|
|
% Change
|
|
Sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
|
|
$
|
1,042
|
|
|
$
|
1,112
|
|
|
$
|
(70
|
)
|
|
|
(6
|
)%
|
Canada
|
|
|
62
|
|
|
|
78
|
|
|
|
(16
|
)
|
|
|
(21
|
)%
|
International
|
|
|
191
|
|
|
|
206
|
|
|
|
(15
|
)
|
|
|
(7
|
)%
|
Consolidated
|
|
$
|
1,295
|
|
|
$
|
1,396
|
|
|
$
|
(101
|
)
|
|
|
(7
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
|
|
$
|
6
|
|
|
$
|
(208
|
)
|
|
$
|
214
|
|
|
|
N/M
|
|
Canada
|
|
|
-
|
|
|
|
(2
|
)
|
|
|
2
|
|
|
|
N/M
|
|
International
|
|
|
7
|
|
|
|
(57
|
)
|
|
|
64
|
|
|
|
N/M
|
|
Consolidated
|
|
|
13
|
|
|
|
(267
|
)
|
|
|
280
|
|
|
|
N/M
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
(12
|
)
|
|
|
(15
|
)
|
|
|
3
|
|
|
|
(20
|
)%
|
Other, net
|
|
|
1
|
|
|
|
(2
|
)
|
|
|
3
|
|
|
|
N/M
|
|
Income tax (expense) benefit
|
|
|
(1
|
)
|
|
|
12
|
|
|
|
(13
|
)
|
|
|
N/M
|
|
Net income (loss)
|
|
|
1
|
|
|
|
(272
|
)
|
|
|
273
|
|
|
|
N/M
|
|
Series A preferred stock dividends
|
|
|
12
|
|
|
|
12
|
|
|
|
-
|
|
|
|
0
|
%
|
Net loss attributable to common stockholders
|
|
$
|
(11
|
)
|
|
$
|
(284
|
)
|
|
$
|
273
|
|
|
|
(96
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
$
|
215
|
|
|
$
|
227
|
|
|
$
|
(12
|
)
|
|
|
(5
|
)%
|
Adjusted Gross Profit (1)
|
|
$
|
252
|
|
|
$
|
275
|
|
|
$
|
(23
|
)
|
|
|
(8
|
)%
|
Adjusted EBITDA (1)
|
|
$
|
60
|
|
|
$
|
51
|
|
|
$
|
9
|
|
|
|
18
|
%
|
(1) Adjusted Gross Profit and Adjusted EBITDA are non-GAAP financial measures. For a reconciliation of these measures to an equivalent GAAP measure, see pages 26-28 herein.
Sales. Our sales were $1,295 million for the six months ended June 30, 2021 as compared to $1,396 million for the six months ended June 30, 2020, a decrease of $101 million, or 7%. The decline was primarily due to the first quarter of 2020 being largely unaffected by the COVID-19 pandemic before impacting revenue in the second quarter of 2020. The strengthening of foreign currencies in areas where we operate relative to the U.S. dollar favorably impacted sales by $24 million, or 2%.
U.S. Segment—Our U.S. sales decreased to $1,042 million for the six months ended June 30, 2021 from $1,112 million for the six months ended June 30, 2020. This $70 million, or 6%, decrease reflected a $42 million decrease in the downstream and industrial sector, a $56 million decrease in the upstream production sector, a $49 million decrease in the midstream pipeline sector offset by a $77 million increase in the gas utilities sector. Downstream and industrial sales declined due to delayed or reduced maintenance spending from lower demand as well as non-recurring turnarounds. The decline in the upstream production sector is a result of reduced customer spending and lower activity levels. The decline in the midstream pipeline sector is attributable to lower production levels and reduced demand for infrastructure, as well as the timing of project activity. The increase in the gas utilities sector was primarily due to increasing activity levels as pandemic restrictions eased and customers continued to execute their integrity upgrade programs.
Canada Segment—Our Canada sales decreased to $62 million for the six months ended June 30, 2021 from $78 million for the six months ended June 30, 2020, a decrease of $16 million, or 21%. The decline was primarily due to an $11 million decrease in the upstream production sector, due to reduced demand. The strengthening of the Canadian dollar relative to the U.S. dollar favorably impacted sales by $5 million, or 6%.
International Segment—Our International sales decreased to $191 million for the six months ended June 30, 2021 from $206 million for the same period in 2020. The $15 million, or 7%, decrease is attributable to reduced spending in the upstream production sector due to lower activity associated with reduced demand. The strengthening of foreign currencies in areas where we operate relative to the U.S. dollar favorably impacted sales by $19 million, or 9%.
Gross Profit. Our gross profit was $215 million (16.6% of sales) for the six months ended June 30, 2021 as compared to $227 million (16.3% of sales) for the six months ended June 30, 2020. As compared to average cost, our LIFO inventory costing methodology increased cost of sales by $15 million for the first six months of 2021 compared to a reduction of $9 million in the first six months of 2020.
Adjusted Gross Profit. Adjusted Gross Profit decreased to $252 million (19.5% of sales) for the six months ended June 30, 2021 from $275 million (19.7% of sales) for the six months ended June 30, 2020, a decrease of $23 million. Adjusted Gross Profit is a non-GAAP financial measure. We define Adjusted Gross Profit as sales, less cost of sales, plus depreciation and amortization, plus amortization of intangibles, plus inventory-related charges incremental to normal operations and plus or minus the impact of our LIFO inventory costing methodology. We present Adjusted Gross Profit because we believe it is a useful indicator of our operating performance without regard to items, such as amortization of intangibles, that can vary substantially from company to company depending upon the nature and extent of acquisitions. Similarly, the impact of the LIFO inventory costing method can cause results to vary substantially from company to company depending upon whether they elect to utilize LIFO and depending upon which method they may elect. We use Adjusted Gross Profit as a key performance indicator in managing our business. We believe that gross profit is the financial measure calculated and presented in accordance with U.S. generally accepted accounting principles that is most directly comparable to Adjusted Gross Profit.
The following table reconciles Adjusted Gross Profit, a non-GAAP financial measure, with gross profit, as derived from our financial statements (in millions):
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
Percentage
|
|
|
June 30,
|
|
|
Percentage
|
|
|
|
2021
|
|
|
of Revenue
|
|
|
2020
|
|
|
of Revenue
|
|
Gross profit, as reported
|
|
$
|
215
|
|
|
|
16.6
|
%
|
|
$
|
227
|
|
|
|
16.3
|
%
|
Depreciation and amortization
|
|
|
10
|
|
|
|
0.8
|
%
|
|
|
10
|
|
|
|
0.7
|
%
|
Amortization of intangibles
|
|
|
12
|
|
|
|
0.9
|
%
|
|
|
13
|
|
|
|
0.9
|
%
|
Increase (decrease) in LIFO reserve
|
|
|
15
|
|
|
|
1.2
|
%
|
|
|
(9
|
)
|
|
|
(0.6
|
)%
|
Inventory-related charges
|
|
|
-
|
|
|
|
0.0
|
%
|
|
|
34
|
|
|
|
2.4
|
%
|
Adjusted Gross Profit
|
|
$
|
252
|
|
|
|
19.5
|
%
|
|
$
|
275
|
|
|
|
19.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, General and Administrative (“SG&A”) Expenses. Our SG&A expenses were $202 million for the six months ended June 30, 2021 as compared to $252 million for the six months ended June 30, 2020. The $50 million decrease in SG&A was driven by lower employee-related costs, including incentives and benefits, resulting from the decline in business activity. SG&A in the first half of 2021 included $2 million of employee separation costs. Additionally, the strengthening of foreign currencies in areas where we operate outside of the U.S. dollar unfavorably impacted SG&A by $5 million. In the first half of 2020, SG&A included $15 million of expenses associated with facilities closures and $7 million of severance and restructuring charges. Excluding these charges, SG&A would have been $230 million.
Goodwill and Intangible Asset Impairment. In the first half of 2020, demand for oil and natural gas declined sharply as a result of the COVID-19 pandemic. This disruption in demand and the resulting decline in the price of oil had a dramatic negative impact on our business. We experienced a significant reduction in sales beginning in April 2020, which resulted in a more pessimistic long-term outlook due to the significant reduction in the demand for oil, the implications of that demand destruction on the price of oil for an extended period of time and actions our customers have taken to curtail costs and reduce spending. As a result of these developments, we concluded that it was more likely than not the fair values of our U.S. and International reporting units were lower than their carrying values. Accordingly, we completed an interim goodwill impairment test as of April 30, 2020. This test resulted in a $217 million goodwill impairment charge comprised of $177 million in our U.S. reporting unit and $40 million in our International reporting unit.
As a result of the same factors that necessitated an interim impairment test for goodwill, we completed an interim impairment test for our U.S. indefinite-lived tradename asset. This test resulted in an impairment charge of $25 million. The remaining balance of the indefinite-lived tradename was $107 million as of June 30, 2021. The U.S. tradename is our only indefinite-lived intangible asset.
Operating Income (Loss). Operating income was $13 million for the six months ended June 30, 2021 as compared to operating loss of $267 million for the six months ended June 30, 2020, an increase of $280 million.
U.S. Segment—Operating income for our U.S. segment was $6 million for the six months ended June 30, 2021 compared to operating loss of $208 million for the six months ended June 30, 2020. The $208 million loss in the first half of 2020 was impacted by $202 million of goodwill and intangible asset impairments, $19 million of inventory-related charges, $6 million of severance costs, and $2 million of costs associated with facility closures. Excluding these charges, operating income would have been $21 million.
Canada Segment—Operating income for our Canada segment was $0 million for the six months ended June 30, 2021 compared to operating loss of $2 million for the six months ended June 30, 2020. The $2 million loss in the first half of 2020 included $1 million of costs associated with facility closures.
International Segment—Operating income for our International segment was $7 million for the six months ended June 30, 2021 compared to operating loss of $57 million for the six months ended June 30, 2020. The $57 million loss in the first half of 2020 included $40 million of goodwill impairment charges, $14 million of inventory-related charges, $1 million of severance and $12 million of cost associated with facility closures. Excluding these charges, operating income would have been $10 million.
Interest Expense. Our interest expense was $12 million and $15 million for the six months ended June 30, 2021 and 2020, respectively. The decrease in interest expense was primarily attributable to lower average debt levels during the first six months of 2021 as compared to the first six months of 2020.
Other, net. Our other income was $1 million for the six months ended June 30, 2021 compared to other expense of $2 million for the six months ended June 30, 2020.
Income Tax Expense (Benefit). Our income tax expense was $1 million for the six months ended June 30, 2021 as compared to income tax benefit of $12 million for the six months ended June 30, 2020. We typically record income tax expense for interim periods based on estimated annual effective tax rates. However, due to the uncertainty in our industry and the effects of COVID-19, the income tax expense for the six months ended June 30, 2021 was computed based on a year-to-date effective tax rate. We will return to utilizing an estimated annual effective tax rate when appropriate. Our effective tax rates were 50% and 4% for the six months ended June 30, 2021 and 2020, respectively. The 50% effective tax rate for the six months ended June 30, 2021 was primarily driven by the low level of pre-tax income and losses netted across all jurisdictions. Our rates generally differ from the U.S. federal statutory rate of 21% as a result of state income taxes and differing foreign income tax rates.
Net Income (Loss). We had net income of $1 million for the six months ended June 30, 2021 compared to net loss of $272 million for the six months ended June 30, 2020.
Adjusted EBITDA. Adjusted EBITDA, a non-GAAP financial measure, was $60 million (4.6% of sales) for the six months ended June 30, 2021 as compared to $51 million (3.7% of sales) for the six months ended June 30, 2020.
We define Adjusted EBITDA as net income plus interest, income taxes, depreciation and amortization, amortization of intangibles and certain other expenses, including non-cash expenses such as equity-based compensation, severance and restructuring, changes in the fair value of derivative instruments, long-lived asset impairments (including goodwill and intangible assets), inventory-related charges incremental to normal operations and plus or minus the impact of our LIFO inventory costing methodology.
We believe Adjusted EBITDA provides investors a helpful measure for comparing our operating performance with the performance of other companies that may have different financing and capital structures or tax rates. We believe it is a useful indicator of our operating performance without regard to items, such as amortization of intangibles, which can vary substantially from company to company depending upon the nature and extent of acquisitions. Similarly, the impact of the LIFO inventory costing method can cause results to vary substantially from company to company depending upon whether they elect to utilize LIFO and depending upon which method they may elect. We use Adjusted EBITDA as a key performance indicator in managing our business. We believe that net income is the financial measure calculated and presented in accordance with U.S. generally accepted accounting principles that is most directly comparable to Adjusted EBITDA.
The following table reconciles Adjusted EBITDA, a non-GAAP financial measure, with net income, as derived from our financial statements (in millions):
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2021
|
|
|
2020
|
|
Net income (loss)
|
|
$
|
1
|
|
|
$
|
(272
|
)
|
Income tax expense (benefit)
|
|
|
1
|
|
|
|
(12
|
)
|
Interest expense
|
|
|
12
|
|
|
|
15
|
|
Depreciation and amortization
|
|
|
10
|
|
|
|
10
|
|
Amortization of intangibles
|
|
|
12
|
|
|
|
13
|
|
Goodwill and intangible asset impairment
|
|
|
-
|
|
|
|
242
|
|
Inventory-related charges
|
|
|
-
|
|
|
|
34
|
|
Facility closures
|
|
|
-
|
|
|
|
18
|
|
Severance and restructuring
|
|
|
-
|
|
|
|
7
|
|
Employee separation
|
|
|
1
|
|
|
|
-
|
|
Increase (decrease) in LIFO reserve
|
|
|
15
|
|
|
|
(9
|
)
|
Equity-based compensation expense
|
|
|
7
|
|
|
|
5
|
|
Gain on early extinguishment of debt
|
|
|
-
|
|
|
|
(1
|
)
|
Foreign currency losses
|
|
|
1
|
|
|
|
1
|
|
Adjusted EBITDA
|
|
$
|
60
|
|
|
$
|
51
|
|
Liquidity and Capital Resources
Our primary credit facilities consist of a Term Loan maturing in September 2024 with an original principal amount of $400 million and an $800 million Global ABL Facility. As of June 30, 2021, the outstanding balance on our Term Loan, net of original issue discount and issuance costs, was $297 million. On an annual basis, we are required to repay an amount equal to 50% of excess cash flow, as defined in the Term Loan agreement, reducing to 25% if the Company’s senior secured leverage ratio is no more than 2.75 to 1.00. No payment of excess cash flow is required if the Company’s senior secured leverage ratio is less than or equal to 2.50 to 1.00. Under the terms of the Term Loan, the amount of cash used in the determination of the senior secured leverage ratio is limited to $75 million. Under this provision of the Term Loan, in April 2021 we made a payment of $86 million as a result of excess cash flow generation in 2020. We do not expect to make a similar payment for 2021 in 2022.
The Global ABL Facility matures in September 2022 and provides $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. The Global ABL Facility 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. Availability is dependent on a borrowing base comprised of a percentage of eligible accounts receivable and inventory which is subject to redetermination from time to time. As of June 30, 2021, we had no borrowings outstanding and $444 million of Excess Availability, as defined under our Global ABL Facility.
Our primary sources of liquidity consist of cash generated from our operating activities, existing cash balances and borrowings under our Global ABL Facility. Our ability to generate sufficient cash flows from our operating activities will continue to be primarily dependent on our sales of products and services to our customers at margins sufficient to cover our fixed and variable expenses. At June 30, 2021, our total liquidity, consisting of cash on hand and amounts available under our Global ABL Facility, was $507 million. As of June 30, 2021 and December 31, 2020, we had cash of $63 million and $119 million, respectively, a significant portion of which was maintained in the accounts of our various foreign subsidiaries and, if transferred among countries or repatriated to the U.S., may be subject to additional tax liabilities, which would be recognized in our financial statements in the period during which the transfer decision was made.
Our credit ratings are below “investment grade” and, as such, could impact both our ability to raise new funds as well as the interest rates on our future borrowings. In the first quarter of 2021, Moody's Investor Services changed our ratings outlook from negative to stable and, in the second quarter of 2021, Standard & Poor's Global Ratings revised the Company's outlook to stable. Our existing obligations restrict our ability to incur additional debt. We were in compliance with the covenants contained in our various credit facilities as of and during the six months ended June 30, 2021 and, based on our current forecasts, we expect to remain in compliance. Our credit facilities contain provisions that address the potential need to transition away from LIBOR if LIBOR is discontinued or replaced.
We believe our sources of liquidity will be sufficient to satisfy the anticipated cash requirements associated with our existing operations for the foreseeable future. However, our future cash requirements could be higher than we currently expect as a result of various factors. Additionally, our ability to generate sufficient cash from our operating activities depends on our future performance, which is subject to general economic, political, financial, competitive and other factors beyond our control. We may, from time to time, seek to raise additional debt or equity financing or re-price or refinance existing debt in the public or private markets, based on market conditions. Any such capital markets activities would be subject to market conditions, reaching final agreement with lenders or investors, and other factors, and there can be no assurance that we would successfully consummate any such transactions.
Cash Flows
The following table sets forth our cash flows for the periods indicated below (in millions):
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2021
|
|
|
2020
|
|
Net cash provided by (used in) :
|
|
|
|
|
|
|
|
|
Operating activities
|
|
$
|
47
|
|
|
$
|
84
|
|
Investing activities
|
|
|
(2
|
)
|
|
|
(5
|
)
|
Financing activities
|
|
|
(101
|
)
|
|
|
(90
|
)
|
Net decrease in cash and cash equivalents
|
|
$
|
(56
|
)
|
|
$
|
(11
|
)
|
Operating Activities
Net cash provided by operating activities was $47 million during the six months ended June 30, 2021 compared to $84 million during the six months ended June 30, 2020. In addition, a reduction in working capital used cash of $1 million in the first six months of 2021 compared to providing $48 million in the first six months of 2020. Accounts receivable used $62 million of cash in the first six months of 2021 compared to providing $69 million in the first six months of 2020. In addition, inventory provided $8 million of cash in the first six months of 2021 as compared to providing $41 million in the same period of 2020. An increase in accounts payable provided $86 million in the first six months of 2021 as compared to $51 million cash utilized in the first six months of 2020.
Investing Activities
Net cash used in investing activities was primarily comprised of capital expenditures totaling $4 million and $5 million for the six months ended June 30, 2021 and 2020, respectively.
Financing Activities
Net cash used in financing activities was $101 million for the six months ended June 30, 2021 compared to $90 million for the six months ended June 30, 2020. In the first six months of 2021, we made a payment of $86 million on our Term Loan as a result of excess cash flow generation in 2020. In the first six months of 2020, we made net payments under our Global ABL Facility of $71 million. We used $12 million to pay dividends on preferred stock for the six months ended June 30, 2021 and 2020. In addition, we repurchased and retired $3 million of our outstanding term loan in March 2020.
Critical Accounting Policies
The preparation of financial statements, in conformity with accounting principles generally accepted in the United States of America, requires management to make judgments, estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expense in the financial statements. Management bases its estimates on historical experience and other assumptions, which it believes are reasonable. If actual amounts are ultimately different from these estimates, the revisions are included in our results of operations for the period in which the actual amounts become known.
Accounting policies are considered critical when they require management to make assumptions about matters that are highly uncertain at the time the estimates are made and when there are different estimates that management reasonably could have made, which would have a material impact on the presentation of our financial condition, changes in our financial condition or results of operations. For a description of our critical accounting policies, see “Item 7: Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2020.