S-1/A 1 d322764ds1a.htm AMENDMENT NO.2 TO FORM S-1 Amendment No.2 to Form S-1
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As filed with the Securities and Exchange Commission on March 28, 2012

Registration No. 333-178980

 

 

 

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

 

 

AMENDMENT NO. 2

TO

FORM S-1

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

 

 

MRC GLOBAL INC.

(Exact name of registrant as specified in its charter)

 

 

 

Delaware  

5084

  20-5956993

(State or other jurisdiction of

incorporation or organization)

 

(Primary Standard Industrial

Classification Code Number)

 

(I.R.S. Employer

Identification Number)

2 Houston Center

909 Fannin, Suite 3100

Houston, Texas 77010

(877) 294-7574

(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)

 

 

Daniel J. Churay

2 Houston Center

909 Fannin, Suite 3100

Houston, Texas 77010

(877) 294-7574

(Name, address, including zip code, and telephone number, including area code, of agent for service)

 

 

Copies to:

Michael A. Levitt, Esq.

Fried, Frank, Harris, Shriver & Jacobson LLP

One New York Plaza

New York, New York 10004

(212) 859-8000

 

Richard A. Drucker, Esq.

Davis Polk & Wardwell LLP

450 Lexington Avenue

New York, New York 10017

(212) 450-4000

Approximate date of commencement of proposed sale to the public: As soon as practicable after the effective date of this Registration Statement.

If any of the securities being registered on this form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box.    ¨

If this form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.    ¨

If this form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act Registration Statement of the earlier effective registration statement for the same offering.    ¨

If this form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.    ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer    ¨   Accelerated filer    ¨   Non-accelerated filer    x   Smaller reporting company   ¨
    (Do not check if a smaller reporting company)    

CALCULATION OF REGISTRATION FEE

 

 

Title of Each Class

of Securities to be

Registered

  Amount to be
Registered(1)
 

Proposed Maximum

Offering Price

Per Share

 

Proposed Maximum

Aggregate Offering

Price (1)(2)

  Amount of
Registration Fee

Common Stock, $0.01 par value

  26,136,364   $23.00   $601,136,372   $68,892(3)

 

(1) Includes shares of common stock which the underwriters have the option to purchase.
(2) Estimated solely for the purpose of calculating the registration fee pursuant to Rule 457(o) of the Securities Act of 1933, as amended.
(3) $57,300 previously paid in respect of an aggregate offering price of $500,000,000 based on the registration fee at the time. $11,592 included with this filing in respect of the additional $101,136,372 of common stock being hereby registered.

 

 

The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933, as amended, or until the Registration Statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to said Section 8(a), may determine.

 

 

 


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The information in this preliminary prospectus is not complete and may be changed. These securities may not be sold until the registration statement filed with the Securities and Exchange Commission is effective. This preliminary prospectus is not an offer to sell nor does it seek an offer to buy these securities in any jurisdiction where the offer or sale is not permitted.

 

Subject to Completion, Dated March 28, 2012

22,727,273 Shares

 

LOGO

MRC Global Inc.

Common Stock

 

 

This is an initial public offering of shares of common stock of MRC Global Inc. MRC Global Inc. is offering 17,045,455 shares of common stock and the selling stockholder named in this prospectus is offering 5,681,818 shares of common stock. We will not receive any proceeds from the sale of the shares by the selling stockholder.

Prior to this offering, there has been no public market for our common stock. It is currently estimated that the initial public offering price per share will be between $21.00 and $23.00. Our common stock has been approved for listing on the New York Stock Exchange under the symbol “MRC,” subject to official notice of issuance.

 

 

You should consider carefully the “Risk Factors” beginning on page 22 of this prospectus.

 

 

Neither the Securities and Exchange Commission nor any other regulatory body has approved or disapproved of these securities or passed upon the accuracy or adequacy of this prospectus. Any representation to the contrary is a criminal offense.

 

 

 

     Per Share    Total

Initial public offering price

   $                $            

Underwriting discount

   $    $

Proceeds to us before expenses

   $    $

Proceeds, before expenses, to the selling stockholder

   $    $

To the extent that the underwriters sell more than 22,727,273 shares of common stock, the underwriters have the option to purchase up to an additional 3,409,091 shares from the selling stockholder at the initial public offering price less the underwriting discount.

 

 

The underwriters expect to deliver the shares against payment in New York, New York on                     , 2012.

 

 

 

Goldman, Sachs & Co.

BofA Merrill Lynch

Raymond James

 

Baird

 

Barclays

Wells Fargo Securities

 

William Blair & Company

 
   

Stephens Inc.

 

 

Prospectus dated                    , 2012.


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Table of Contents

TABLE OF CONTENTS

 

     Page  

Prospectus Summary

     1   

Risk Factors

     22   

Cautionary Note Regarding Forward-Looking Statements

     41   

Use of Proceeds

     43   

Dividend Policy

     44   

Capitalization

     45   

Dilution

     47   

Selected Historical Consolidated Financial and Other Data

     49   

Unaudited Pro Forma Consolidated Financial Statements

     56   

Management’s Discussion and Analysis of Financial Condition and Results of Operations

     60   

Business

     94   

Management

     124   

Principal and Selling Stockholders

     160   

Corporate Structure

     166   

Certain Relationships and Related Party Transactions

     167   

Description of Our Capital Stock

     175   

Shares Eligible for Future Sale

     179   

Material United States Federal Tax Considerations for Non-U.S. Holders

     181   

Underwriting (Conflicts of Interest)

     185   

Legal Matters

     191   

Experts

     191   

Where You Can Find More Information

     191   

Index to Consolidated Financial Statements

     F-1   

 

 

Through and including                 , 2012 (the 25th day after the date of this prospectus), all dealers that effect transactions in these securities, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to a dealer’s obligation to deliver a prospectus when acting as an underwriter and with respect to an unsold allotment or subscription.

 

 

No dealer, salesperson or other person is authorized to give any information or to represent anything not contained in this prospectus or any free writing prospectus that we, or somebody on our behalf, have prepared. None of the Company, the selling stockholder, or any underwriter takes responsibility for, or can provide assurance as to the reliability of, any other information that others may give you. This prospectus is an offer to sell only the shares that we and the selling stockholder are offering in this prospectus, but only under circumstances and in jurisdictions where it is lawful to do so. The information contained in this prospectus is current only as of its date.

 

 

This prospectus contains registered and unregistered trademarks and service marks of MRC Global Inc. and its affiliates, as well as trademarks and service marks of third parties. All brand names, trademarks and service marks appearing in this prospectus are the property of their respective holders.

 

 

 


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PROSPECTUS SUMMARY

The following prospectus summary contains a summary of basic information contained elsewhere in this prospectus. It does not contain all the information that may be important to you. For a more complete understanding, we encourage you to read this entire prospectus carefully, including the “Risk Factors” section and the financial statements and related notes. Unless otherwise indicated or the context otherwise requires, all references to “the Company”, “MRC”, “we”, “us”, and “our” refer to MRC Global Inc. and its consolidated subsidiaries.

Our Company

We are the largest global industrial distributor of pipe, valves and fittings (“PVF”) and related products and services to the energy industry based on sales and hold the leading position in our industry across each of the upstream, midstream and downstream sectors. We offer more than 150,000 stock keeping units (“SKUs”), including an extensive array of PVF, oilfield supply, automation, instrumentation and other general and specialty industry supply products from over 12,000 suppliers. Through our North American and International segments, we serve more than 12,000 customers through over 400 service locations throughout North America, Europe, Asia and Australasia.

Our PVF and oilfield supplies are used in mission critical process applications that require us to provide a high degree of product knowledge, technical expertise and value added services to our customers. We seek to provide best-in-class service and a one-stop shop for our customers by satisfying the most complex, multi-site needs of many of the largest companies in the energy and industrial sectors as their primary PVF supplier. We provide services such as product testing, manufacturer assessments, multiple daily deliveries, volume purchasing, inventory and zone store management and warehousing, technical support, just-in-time delivery, truck stocking, order consolidation, product tagging and system interfaces customized to customer and supplier specifications for tracking and replenishing inventory, which we believe result in deeply integrated customer relationships. We believe the critical role we play in our customers’ supply chain, together with our extensive product offering, broad global presence, customer-linked scalable information systems and efficient distribution capabilities, serve to solidify our long-standing customer relationships and drive our growth. As a result, we have an average relationship of over 20 years with our largest 25 customers.

We believe that growth in PVF and industrial supply spending within the energy industry is likely to continue. Several factors have driven the long-term growth in spending, including underinvestment in North American energy infrastructure, production and capacity constraints, and market expectations of future improvements in the oil, natural gas, refined products, petrochemical and other industrial sectors. In addition, the products we distribute are often used in extreme operating environments, leading to the need for a regular replacement cycle. Approximately two-thirds of our sales are attributable to multi-year maintenance, repair and operations (“MRO”) arrangements. Our average annual retention rate for these contracts since 2000 is 95%. We consider MRO arrangements to be normal, generally repetitive business that primarily addresses the recurring maintenance, repair or operational work to existing energy infrastructure. Project activities, including facility expansions, exploration or new construction projects, are more commonly associated with a customer’s capital expenditures budget. Such projects can be more sensitive to global oil and natural gas prices and general economic conditions.

We distribute products globally, including in PVF intensive, rapidly expanding oil and natural gas exploration and production (“E&P”) areas such as the Bakken, Barnett, Eagle Ford, Fayetteville, Haynesville, Marcellus, Niobrara and Utica shales in North America. Furthermore, our Canadian subsidiary Midfield Supply ULC (“MRC Midfield”), one of the two largest Canadian PVF distributors based on sales, provides PVF products to oil and natural gas companies operating primarily in

 

 

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Western Canada, including the Western Canadian Sedimentary Basin, Alberta Oil Sands and heavy oil regions. These regions are still in the early stages of infrastructure investment with numerous companies seeking to facilitate the long-term harvesting of difficult to extract and process crude oil. Beyond North America, our acquisitions of Transmark Fcx Group BV (together with its subsidiaries, “MRC Transmark”) and Stainless Pipe and Fittings Australia Pty Ltd. (“MRC SPF”) have provided us with a well-established and integrated platform for international growth and further positioned us to be the leading global PVF distributor to the energy industry. The following map illustrates our global presence:

 

LOGO

MRC Locations – 18 Countries

 

Australia

  Kazakhstan

Belgium

  Netherlands

Canada

  New Zealand

China

  Singapore

Finland

  South Korea

France

  Thailand

Germany

  United Arab Emirates

Indonesia

  United Kingdom

Italy

  United States

 

 

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Our business is characterized by diversity in the industry sectors and regions we serve and in the products we supply. The following charts summarize our revenue by sector, geography and product, across both our North American and International segments, for the year ended December 31, 2011:

LOGO

Due to the demanding operating conditions in the energy industry, high costs and safety risks associated with equipment failure, customers prefer highly reliable products and vendors with established qualifications, reputation and experience. As our PVF products typically are mission critical yet represent a fraction of the total cost of the project, our customers often place a premium on service and high reliability given the high cost to them of maintenance or project delays. Our products are typically used in high-volume, high-stress and abrasive applications or in high-pressure, extreme temperature and high-corrosion applications.

With over 400 global service locations servicing the energy and industrial sectors, we are an important link between our more than 12,000 customers and our more than 12,000 suppliers. We add value to our customers and suppliers in a number of ways:

 

  Ÿ  

Broad Product Offering and High Customer Service Levels:    The breadth and depth of our product offering enables us to provide a high level of service to our energy and industrial customers. Given our global inventory coverage and branch network, we are able to fulfill orders more quickly, including orders for less common and specialty items, and provide our customers with a greater array of value added services than if we operated on a smaller scale or only at a local or regional level. These value added services include multiple daily deliveries, volume purchasing, product testing, manufacturer assessments, inventory management and warehousing, technical support, just-in-time delivery, order consolidation, product tagging and tracking and system interfaces customized to customer and supplier specifications.

 

  Ÿ  

Approved Manufacturer List (“AML”) Services:    Our customers rely on us to provide a high level of quality control for their PVF products. We do this by regularly auditing many of our suppliers for quality assurance through our Supplier Registration Process (“SRP”). We use our resulting Approved Supplier List (the “MRC ASL”) to supply products across many of the industries we support, particularly for downstream and midstream customers. Increasingly, many of our customers rely on the MRC ASL and our AML services to help devise and maintain their own approved manufacturer listings.

 

  Ÿ  

Customized and Integrated Service Offering:    We offer our customers integrated supply services, including product procurement, quality assurance, physical warehousing and

 

 

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inventory management and analysis, using our proprietary information technology (“IT”) platform. This is part of an overall strategy to provide a “one stop” solution for PVF purchases across the upstream-midstream-downstream spectrum through integrated supply agreements and MRO contracts. This enables our customers to focus on their core operations, generate cost savings and increase the overall efficiency of their businesses.

Our Industry

We primarily serve the global oil and natural gas industry, generating approximately 90% of our sales from supplying products and various services to customers throughout the energy industry. In each of 2010 and 2011, as part of the broader global economic recovery, our customers’ capital and operating expenditures increased as compared to 2009, although overall oil and natural gas drilling and completion spending still remained below 2006 and 2007 levels. Over the longer term, we expect to continue to see customer spending increase due to a variety of global supply and demand fundamentals, a slowly improving global economy, shale E&P activity and longer term outlooks for oil and natural gas prices.

During the last several years, the global energy industry has experienced a number of favorable supply and demand dynamics that have led our customers to make substantial investments to expand their physical infrastructure and processing capacities. On the demand side, world energy markets are benefiting from:

 

  Ÿ  

increased consumption of energy, caused in part by the industrialization of China, India and other countries that are not members of the Organization for Economic Cooperation and Development (“non-OECD countries”);

 

  Ÿ  

a slow recovery in economic growth in OECD countries from the severe downturn in 2009 and 2010;

 

  Ÿ  

continued global energy infrastructure expansion; and

 

  Ÿ  

increased use of natural gas, as opposed to coal, in power generation.

At the same time, global energy supply has been generally constrained due to increasing scarcity of natural resources, declining excess capacity of existing energy assets, geopolitical instability, natural and other unforeseen disasters and more stringent regulatory, safety and environmental standards. These demand and supply dynamics underscore the need for investment in energy infrastructure and increases in global exploration, extraction, production, transportation, refining and processing of energy inputs. Within the U.S., the energy industry has benefited from technological developments that have enabled more recent significant increases in U.S. oil production and natural gas supply. The U.S. Energy Information Administration (“EIA”) expects that U.S. crude oil production, which increased 2.1% in 2010 and 2.1% in 2011, will increase by a further 4.3% in 2012, driven by increased oil-directed drilling activity, particularly in unconventional shale formations. EIA expects that U.S. marketed natural gas production, which increased by 3.5% in 2010 and 7.8% in 2011, will grow further by 2.2% in 2012. Finally, as companies in the energy industry, both in North America and internationally, continue to focus on improving operating efficiencies, they have been increasingly looking to outsource their procurement and related administrative functions to distributors such as MRC.

 

 

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Our Strengths

Global Market Leader with Worldwide Branch Network and Significant Scale.    We are the leading global industrial distributor of PVF and related products to the energy industry based on sales, with nearly twice the sales of our nearest competitor in 2011. The benefits of our size and international presence include:

 

  Ÿ  

the ability to act as a single-source supplier to large, multi-national customers operating across the various segments of the global energy industry;

 

  Ÿ  

the ability to commit significant financial resources to further develop and invest in our operating infrastructure and provide a strong platform for future expansion;

 

  Ÿ  

the ability to secure improved access, service and volume purchasing benefits from our suppliers; and

 

  Ÿ  

the ability to leverage our global inventory coverage to provide greater overall breadth and depth of product offerings.

Proven Track Record of Successfully Identifying, Executing and Integrating Acquisitions.    We have demonstrated our ability to successfully integrate acquired companies in 26 acquisitions since 2000, collectively representing approximately $1.8 billion in sales in the respective years of acquisition, in addition to the business combination between McJunkin Corporation and Red Man Pipe & Supply Co. (“Red Man”) in October 2007 (which had approximately $2 billion of revenue in the year of merger). Our operating scale and integration capabilities have also enabled us to realize important synergies, while minimizing execution risk. All of our North American acquisitions have been integrated onto a single IT platform, which facilitates more efficient pricing, sourcing and inventory management.

High Level of Integration and MRO Contracts with a Global Energy Customer Base.    We have a diversified global customer base with over 12,000 active customers. We serve as the sole or primary supplier in all sectors or in specified sectors or geographies for many of our customers. Our largest 25 customers, with whom we have had relationships for more than 20 years on average, accounted for approximately half of our sales for 2011, while no single customer accounted for more than 6% of our sales during that period. We enjoy fully integrated relationships, including interconnected technology systems and daily communication, with many of our customers, and we provide an extensive range of integrated and outsourced supply services, allowing us to market a “total transaction value” concept as opposed to individual product prices. We sell products to our major customers through multi-year MRO contracts, which are typically renegotiated every three to five years. Although there are typically no guaranteed minimum purchase amounts under these contracts, these MRO customers, representing approximately two-thirds of our 2011 sales with an average annual retention rate of over 95% since 2000, provide a relatively stable revenue stream and help mitigate the effect of industry downturns on our business.

Business and Geographic Diversification in High-Growth Areas.    We are well diversified across the upstream, midstream and downstream operations of the energy industry, as well as through our participation in selected industrial sectors. This diversification affords us some measure of protection in the event of a downturn in any one sector while providing us the ability to offer a “one stop” solution for our integrated energy customers. In our North American operating segment, our more than 175 branch locations are located near major hydrocarbon and refining regions, including rapidly expanding oil and natural gas E&P areas, such as the Bakken, Barnett, Eagle Ford, Fayetteville, Haynesville, Marcellus, Niobrara and Utica shales. In these non-conventional shale areas, a typical well can produce three to five times the revenue for us than a conventional well due to the greater length and the higher quality of pipe and related PVF products we furnish. In our International

 

 

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operating segment, we have a network of over 30 branch locations throughout Europe, Asia and Australasia in close proximity to major projects in liquefied natural gas (“LNG”), mining and mineral processing and other high-growth energy and infrastructure development areas.

Strategic Supplier Relationships.    We have extensive relationships with our suppliers and have key supplier relationships dating back in certain instances over 60 years. Approximately 50% of our total purchases for the year ended December 31, 2011 were from our largest 25 suppliers. We believe our customers view us as an industry leader in part due to the formal processes we use to evaluate vendor performance and product quality. We employ individuals who specialize in conducting manufacturer assessments both domestically and internationally and who are certified by the International Registry of Certificated Auditors. Our Supplier Registration Process, which allows us to maintain the MRC ASL, serves as a significant strategic advantage to us in developing, maintaining and institutionalizing key supplier relationships. For our suppliers, inclusion on the MRC ASL represents an opportunity for them to increase their product sales to our customers. The SRP also adds value to our customers, as they collaborate with us regarding specific manufacturer performance, our past experiences with products and the results of our on-site manufacturer assessments.

IT Platform Focused on Customer Service.    Our proprietary, integrated, scalable, customer-linked and highly customized information systems support our business. A wide area network links these systems and our more than 4,000 employees. We operate a single information and operating system (“SIMS”) for all of our North American locations and a separate, Oracle-based system for our other international locations (other than those we have recently acquired). This enables real-time access to our business resources, including customer order processing, purchasing and material requests, distribution requirements planning, warehousing and receiving, inventory control and accounting and financial functions. In 2011, we had over 1.6 million electronic data interchange customer transactions (including purchase orders, advance ship notices, electronic funds transfer and internet ordering), compared to less than 700,000 in 2000. We have over 4 million customer part numbers cross referenced and integrated into MRC’s IT systems. Significant elements of our systems include firm-wide pricing controls, resulting in disciplined pricing strategies, advanced scanning and customized bar-coding capabilities, allowing for efficient warehousing activities at customer as well as our own locations, and significant levels of customer-specific integrations. We believe that the customized integration of our customers’ systems into our own information systems has increased customer retention by reducing our customers’ expenses, resulting in switching costs when our customers compare us to alternative sources of supply. Typically, smaller regional and local competitors do not have IT capabilities that are as advanced as ours, which we believe further differentiates us from our competition.

Highly Efficient, Flexible Operating Structure Drives Significant Free Cash Flow Generation.    We place a particular emphasis on practicing financial discipline as evidenced by our strong focus on return on net assets, minimal maintenance capital expenditures and high free cash flow generation. Our disciplined cost control, coupled with our active asset management strategies and IT and services capabilities, result in a business model exhibiting a high degree of operating leverage. As is typical with the flexibility associated with a distribution operating model, our variable cost base includes substantially all of our cost of goods sold and a large portion of our operating costs. Furthermore, our total capital expenditures were approximately 0.4% of our sales for the year ended December 31, 2011. This cost structure allows us to adjust effectively to changing industry dynamics.

Experienced and Motivated Management Team.    Our executive management team averages approximately 30 years of experience in the oilfield and industrial supply business, the majority of which has been with MRC or its predecessors. Employees own approximately 8% of our Company, including approximately 5% that is owned by executive and senior management, either directly or indirectly through their equity interests in PVF Holdings LLC (“PVF Holdings”), our largest shareholder.

 

 

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Our Strategy

Our goal is to grow our market position as the largest global industrial distributor of PVF and related products to the energy industry.

Increase Market Share Organically and Grow Business with Current Customers.    We are committed to expanding existing deep relationships with our current customer base while concurrently striving to secure new customers. To accomplish this, we are focused on providing a global “one stop” PVF procurement solution across the upstream, midstream and downstream sectors of the energy industry, maximizing bundling opportunities by leveraging our extensive product offering and increasing our penetration of existing customers’ new multi-year projects. Since 2000, we have retained in excess of 95% of our MRO contracts.

The migration of existing customer relationships to sole or primary sourcing arrangements is a core strategic focus. We seek to position ourselves as the sole or primary provider of a broad complement of PVF products and services for a particular customer, often by sector or region, or in certain instances across all of a customer’s global upstream, midstream and downstream operations. Several of our largest customers have recently switched to sole or primary sourcing contracts with us. Additionally, we believe that other significant opportunities exist to expand our deep customer and supplier relationships and thereby increase our market share. There is also a significant opportunity to extend our current North American MRO contracts internationally as well as bundle certain products, most notably pipe, flanges, fittings and other products (“PFF”), into MRC Transmark’s existing customer base, branch network and more valve-focused product platform.

We also aim to increase our penetration of our existing customers’ new projects. For example, while we often provide nearly 100% of the PVF products for certain customers under MRO contracts, increased penetration of those customers’ new downstream and midstream projects remains a strategic priority.

Increase Recurring Revenues through Integrated Supply and MRO Contracts.    We have entered into, and continue to pursue, integrated supply and MRO contracts with certain of our customers. Under these arrangements, we are typically the sole or primary source provider of the upstream, midstream or downstream requirements of our customers. In certain instances, we are the sole or primary source provider for our customers across all the energy sectors or North American geographies within which the customer operates. We will seek to extend these contracts internationally.

In addition, our customers have, over time, increasingly moved toward centralized PVF procurement management at the corporate level rather than at individual local units. These developments are partly due to significant consolidation among our customer base. Sole or primary sourcing arrangements allow customers to focus on their core operations and provide economic benefits by generating immediate savings for the customer through administrative cost and working capital reductions, while providing for increased volumes, more stable revenue streams and longer term visibility for us. We believe we are well positioned to obtain these arrangements due to our leadership position and technical expertise, geographically diverse branch network, breadth of available product lines, value added services and scale in purchasing and existing deep relationships with customers and suppliers.

We also have both exclusive and non-exclusive MRO contracts in place. Our customers are increasing their capital and operating spending, which is being driven by aging infrastructure, increasing regulatory, safety and environmental requirements, the increased utilization of existing facilities and the decreasing quality of energy feedstocks. Our customers benefit from MRO arrangements through lower inventory investment and the reduction of transaction costs associated

 

 

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with the elimination of the bid submission process, and our Company benefits from the recurring revenue stream that occurs with an MRO contract in place. We believe there are additional opportunities to utilize MRO arrangements through our “one-stop” PVF solution, both in North America and globally, for servicing the requirements of our customers. We are actively pursuing such opportunities.

Capitalize on Significant Growth in U.S. Shale Activity.    The development of shale oil and gas in the U.S. has been rapid over the past several years. Natural gas is a major source of energy in the U.S., providing about 25% of total U.S. energy according to the Department of Energy. Shale gas, as a percentage of total natural gas production, has, in turn, rapidly increased from less than 2% of total U.S. natural gas production in 2001 to 30% in 2011 and is projected to increase to 49% by 2035 according to the EIA. Over the past ten years, technological advances in directional drilling and fracturing technologies have enabled the production of oil and natural gas products in previously underdeveloped U.S. oil and natural gas shale basins. As a result, unconventional E&P activity in shale regions has accelerated significantly and production levels have increased. We believe that PVF expenditures for unconventional shale plays can amount to as much as five times that required for comparable conventional plays and have positioned ourselves to benefit from this increase in unconventional E&P and midstream infrastructure activity by investing in these shale regions.

In addition, we are well positioned to continue to benefit from the more recent marked shift in E&P activity in the U.S. towards oil production. During 2007, approximately 17% of E&P activity in the U.S. consisted of oil drilling and 83% consisted of natural gas drilling. During the fourth quarter of 2011, approximately 55% of E&P activity in the U.S. consisted of oil drilling and 45% consisted of natural gas drilling. This is the highest percentage of oil drilling in the U.S. in approximately two decades.

Capitalize on Anticipated Midstream MRO Activity.    Our major midstream customers face new safety regulations requiring additional inspection and hydro-testing requirements for U.S. pipelines. On January 3, 2012, the Pipeline Safety, Regulatory Certainty, and Job Creation Act of 2011 (the “Pipeline Act”) was enacted into law. The Pipeline Act is expected to accelerate PVF testing and replacement as well as require midstream participants to install additional automatic or remote-controlled shut-off valves and excess flow valves in new or replaced transmission pipelines. In addition, approximately 60% of the 178,000 miles of pipeline in the U.S. is over 40 years old. Recent initiatives from several of our major customers suggest a longer term trend towards continued replacement of this aged pipeline infrastructure and related MRO spending. Our acquisition of LaBarge Pipe & Steel Company (“LaBarge”), along with our increased focus and investments in line pipe and its attendant PVF and industrial supply products, uniquely positions us to benefit from increased pipeline replacement and MRO spending in the midstream sector over the next 10 years.

Further Penetrate the Canadian Oil Sands, Particularly the Downstream Sector.    The Canadian Oil Sands region and its attendant downstream sector represent long-term growth areas for our Company. The Canadian Association of Petroleum Producers and Energy Resources Conservation Board estimate that Oil Sands capital expenditures increased by approximately 18% in 2010 to $13 billion and projects that expenditures will increase to approximately $20 billion by 2016, a compound annual growth rate (“CAGR”) of 7.4%, which we believe will generate significant PVF expenditures. While MRC Midfield has historically focused on the upstream and midstream sectors in Canada, we believe that a significant opportunity exists to continue to penetrate the Canadian Oil Sands and downstream industries, which include the upgrader, refinery, petrochemical and other industrial processing sectors. Our sales to the Canadian Oil Sands region and downstream sectors increased by 45% to $361 million from 2010 to 2011. Additionally, we believe there is also a significant opportunity to penetrate the Canadian Oil Sands extraction sector involving in-situ recovery methods. We have made targeted inventory and facility investments in Canada, including a 74,000 square foot distribution center located near Edmonton and a 16,000 square foot warehouse near Fort McMurray, to address this opportunity.

 

 

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Expanding Globally Through Positioning on EPC Projects.    Projects are a growing part of our business and represent approximately one-third of our sales. In 2011, 15% of our revenue was derived from infrastructure projects through engineering, procurement and construction (“EPC”) firms and 19% was derived from drilling/production projects. These projects can be either brownfield or greenfield in nature, with the latter representing new construction and the former representing projects that are more refurbishment or replacement in scope. Infrastructure projects are an important part of all the sectors we serve but are typically more active in our downstream and midstream sectors. Due to our strong MRO position in these sectors, we are often our customers’ choice for brownfield expansion in these facilities. We are actively looking to increase our participation in new greenfield projects both domestically and internationally by working closely with both end customers and EPC contractors.

Expand into New Geographies and Adjacent Sectors.    We intend to continue to selectively establish new branches to facilitate our expansion into new geographies and enter adjacent sectors where extreme operating environments generate high PVF product replacement rates. We continue to evaluate establishing branches and service and supply centers in select domestic and international regions as well as identifying existing branches for overlap and strategic elimination.

We believe that an attractive opportunity exists to further expand our International operating segment. We continue to actively evaluate opportunities to selectively establish new branches in order to grow with our existing global customer base or to develop new customer relationships and extend our offering to key international markets, particularly in Asia, Europe, Australasia and the Middle East. The current installed base of energy infrastructure internationally, including the upstream, midstream and downstream sectors, is significantly larger than in North America, and, as a result, we believe represents an attractive long term opportunity for us. Since 2006, when 100% of our revenues were generated in the U.S., we have expanded into Canada, Europe, Asia and Australasia. In the year ended December 31, 2011, approximately 20% of our revenues were generated outside the U.S.

We also believe opportunities exist for expansion into new and under-penetrated sectors where PVF products are used in specialized or highly corrosive applications. These sectors include pulp and paper, waterworks, food and beverage and other general industrial sectors, in addition to other energy sectors such as power generation, mining and mineral processing, solar, LNG, coal, nuclear, ethanol and desalinization facilities.

Pursue Selective Strategic Acquisitions and Investments.    We continue to seek opportunities to strengthen our franchise through selective acquisitions and strategic investments. In particular, we will consider investments that enhance our presence in the energy infrastructure sector and enable us to leverage our existing operations, either through acquiring new branches or by acquiring companies offering complementary products or geographic breadth. Our industry remains highly fragmented while our customers and suppliers continue to consolidate. We believe a significant number of small and larger acquisition opportunities remain that offer favorable synergy potential and attractive growth characteristics. We intend to focus on utilizing our global operating scale and integration capabilities to further realize important synergies while minimizing execution risk.

Continued Focus on Operational Efficiency.    We strive for continued operational excellence. Our branch managers, regional management and corporate leadership team continually examine branch profitability, working capital management and return on managed assets and utilize this information to optimize global, regional and local strategies, reduce operating costs and maximize cash flow generation.

To improve efficiencies and profitability, we work to leverage operational best practices, optimize our vendor relationships, purchasing and inventory levels, and source inventory internationally when appropriate. As part of this strategy, we have integrated our purchasing functions into a central procurement function and believe we have developed strong relationships with vendors that value our international footprint, large sales force and volume purchasing capabilities. Because of this, we are often considered the preferred distribution channel.

 

 

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Recent Developments

Preliminary First Quarter 2012 Results

We expect to report the following results for each of sales, net income, Adjusted EBITDA and total indebtedness for the three months ending March 31, 2012 and as of March 31, 2012, as applicable:

 

  Ÿ  

Sales. We expect to report sales of between approximately $1.30 billion and $1.34 billion for the three months ending March 31, 2012, as compared to sales of $991.8 million for the three months ended March 31, 2011.

 

  Ÿ  

Net income. We expect to report net income of between approximately $30 million and $36 million for the three months ending March 31, 2012, as compared to a net loss of $(1.1) million for the three months ended March 31, 2011.

 

  Ÿ  

Adjusted EBITDA. We expect to report Adjusted EBITDA of between approximately $101 million and $111 million for the three months ending March 31, 2012, as compared to Adjusted EBITDA of $60 million for the three months ended March 31, 2011.

 

  Ÿ  

Total indebtedness. We expect that our total indebtedness outstanding at March 31, 2012 will be approximately $1.6 billion to $1.7 billion, as compared to $1.53 billion of total indebtedness as of December 31, 2011.

Expected results for the three months ending March 31, 2012 primarily reflect continued strength in each of the upstream, midstream and downstream sectors of our business, including strong drilling activity in North America, particularly in the shale and conventional oil regions. The results estimated above include an approximately $1.7 million write-off of deferred financing costs, which we expect to record in the three months ending March 31, 2012 in connection with the refinancing of our ABL Credit Facility. The expected increase in total indebtedness at March 31, 2012 primarily reflects the acquisition of OneSteel Piping Systems and working capital growth.

Management has prepared the estimates presented above in good faith based upon our internal reporting and expectations as of and for the three months ending March 31, 2012. These estimated ranges are preliminary, unaudited, subject to completion, reflect our current good faith estimates and may be revised as a result of results posted during the remainder of the quarter and management’s further review of our results. We and our auditors have not completed our normal quarterly review procedures as of and for the three months ending March 31, 2012, and there can be no assurance that our final results for this quarterly period will not differ from these estimates. Any such changes could be material. During the course of the preparation of our consolidated financial statements and related notes as of and for the three months ending March 31, 2012, we may identify items that would require us to make material adjustments to the preliminary financial information. These estimates should not be viewed as a substitute for full interim financial statements prepared in accordance with GAAP. In addition, these preliminary estimates as of and for the three months ending March 31, 2012 are not necessarily indicative of the results to be achieved for the remainder of 2012 or any future period. Our consolidated financial statements and related notes as of and for three months ending March 31, 2012 are not expected to be filed with the SEC until after this offering is completed.

Adjusted EBITDA is a non-GAAP measure within the rules of the SEC. The most closely comparable GAAP measure is net income. The following table reconciles Adjusted EBITDA to net income for the ranges presented above for the three months ending March 31, 2012 (estimated) and for the three months ended March 31, 2011 (actual). For more information about our use of Adjusted EBITDA, see footnote 2 to “—Summary Consolidated Financial Information” included elsewhere in this prospectus.

 

 

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     Three Months Ended March 31,  
      2012
(Estimated Low)
    2012
(Estimated High)
    2011
(Actual)
 
     ($ in millions)  

Net income (loss)

   $ 30.0      $ 36.1      $ (1.1

Income tax (benefit) expense

     16.9        20.3        (0.7

Interest expense

     33.5        33.9        33.5   

Depreciation and amortization

     4.1        4.2        4.0   

Amortization of intangibles

     12.1        12.2        12.4   

Change in fair value of derivative instruments

     (2.1     (1.9     (1.9

Share based compensation expense

     1.8        1.9        1.5   

Legal and consulting expenses

     (1.1     (0.9     1.2   

Increase in LIFO Reserve

     5.0        5.2        10.1   

Other noncash expenses (1)

     (0.9     (1.3     1.0   

Deferred financing costs

     1.7        1.7        —     
  

 

 

   

 

 

   

 

 

 

Adjusted EBITDA

   $ 101.0      $ 111.4      $ 60.0   
  

 

 

   

 

 

   

 

 

 

 

(1) For the three months ended March 31, 2012, estimated to include foreign exchange gains and losses. For the three months ended March 31, 2011, included transaction-related expenses, pre-acquisition EBITDA of MRC SPF and other items added back to net income pursuant to our then existing ABL credit facility.

Global ABL Facility

On March 27, 2012, we entered into a new multi-currency Global ABL Facility (the “Global ABL Facility”) which replaced our existing North American ABL Credit Facility, our European Transmark term loan and revolving credit facility and our UK overdraft facility. The administrative agent and collateral agent for the Global ABL Facility is Bank of America, N.A., and the co-syndication agents of the Global ABL Facility are Barclays Bank PLC and Wells Fargo Capital Finance LLC. The five-year Global ABL Facility contains up to US$1.25 billion of total revolving credit facilities, including US$1.025 billion in the United States, US$145 million in Canada, US$12 million in the United Kingdom, US$52 million in Australia, US$9 million in the Netherlands and US$7 million in Belgium. The facility also contains an accordion feature that allows us to increase the principal amount of the facility by up to US$300 million.

The Global ABL Facility is primarily secured by all of our receivables, inventory and related assets in the relevant countries. Our ability to borrow in each jurisdiction under the 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. The facility initially bears interest at LIBOR plus an initial margin of 1.75%, though from and after September 1, 2012 the margin will vary between 1.50% and 2.00% based on our fixed charge coverage ratio. For additional information about the Global ABL Facility, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Description of Our Indebtedness—Global ABL Facility.”

The Goldman Sachs Funds

Certain affiliates of The Goldman Sachs Group, Inc., including GS Capital Partners V Fund, L.P., GS Capital Partners VI Fund, L.P. and related entities, or the Goldman Sachs Funds, are the majority owners of PVF Holdings, our largest shareholder.

Since 1986, the Goldman Sachs Merchant Banking Division (“GS MBD”), which manages The Goldman Sachs Funds, has raised 16 private equity and principal debt investment funds aggregating over $78 billion of

 

 

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capital and invested in over 500 companies globally. GS Capital Partners VI is the current private equity vehicle through which Goldman Sachs conducts its large, privately negotiated, corporate equity investment activities. With six offices in five countries around the world, GS MBD is one of the largest managers of private capital globally.

Since 1998, GS MBD has invested over $8 billion in over 20 companies in the energy and industrial distribution sectors. Investments include, but are not limited to, Bill Barrett Corporation (natural gas exploration and production in the Rocky Mountain region of the U.S.), CCS Corporation (provider of integrated energy and environmental waste management services), Cobalt International Energy (deepwater Gulf of Mexico and West Africa oil exploration), CVR Energy (U.S. mid-continent based oil refinery), EF Energy Holdings, LLC (start-up upstream oil and gas company), Expro International (market leader in deepwater well testing and commissioning services), Horizon Wind Energy (one of the largest developers of wind power projects in North America), Kenan Advantage Group (largest provider of “last mile” fuel delivery services on a dedicated basis in the U.S.), Nalco Corporation (global provider of integrated water treatment and process improvement services), OIG Offshore Installation Group (provider of offshore mooring and subsea installation, module handling and logistics services), Associated Asphalt (largest asphalt terminalling operation in the U.S. and Ahlsell Sverige (industrial distributor in the Nordic region).

Risk Factors

Our business faces various risks. For example, decreased capital and operating expenditures in the energy industry could lead to decreased demand for our products and services and could therefore have a material adverse effect on our business, results of operations and financial condition. We face other risks including, among others, fluctuations in steel prices, particularly for our tubular product category, volatility of oil and natural gas prices, economic downturns, our lack of long-term contracts with many of our customers and suppliers and the absence of minimum purchase obligations under the long-term customer contracts that we do have. Additionally, we have significant indebtedness. As of December 31, 2011, we had total debt outstanding of $1,526.7 million, borrowing availability of $583.7 million under our credit facilities and total liquidity (borrowing capacity plus cash on hand) of $629.8 million, representing leverage of 4.1x as of December 31, 2011 under the terms of our then existing asset-based revolving credit facility (the “ABL Credit Facility”). Our significant indebtedness could limit our ability to obtain additional financing, our ability to use operating cash flow in other areas of our business, and our ability to compete with other companies that are less leveraged, and could have other negative consequences. See “Risk Factors” for a more detailed discussion of these risks and other risks associated with our business.

 

 

MRC Global Inc. was incorporated in Delaware on November 20, 2006. Our principal executive office is located at 2 Houston Center, 909 Fannin, Suite 3100, Houston, Texas 77010. Our telephone number is (877) 294-7574. Our website address is www.mrcpvf.com. Information contained on our website or on other external websites mentioned throughout this prospectus is expressly not incorporated by reference into this prospectus.

 

 

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The Offering

 

Issuer

MRC Global Inc.

 

Common stock offered by us

17,045,455 shares.

 

Common stock offered by the selling stockholder

5,681,818 shares.

 

Option to purchase additional shares of common stock from the selling stockholder

3,409,091 shares.

 

Common stock outstanding immediately after the offering

101,487,198 shares.

 

Use of proceeds

We estimate that the net proceeds we will receive from the sale of 17,045,455 shares of our common stock in this offering, after deducting underwriter discounts and commissions and estimated offering expenses payable by us (assuming the shares are sold at the midpoint of the range on the cover of the prospectus), will be approximately $349.9 million. We intend to use the net proceeds from this offering to repay indebtedness. We will not receive any proceeds from the sale of shares of our common stock by the selling stockholder in this offering (including any shares sold by the selling stockholder pursuant to the underwriters’ option to purchase additional shares). See “Use of Proceeds”.

 

Conflicts of Interest

Because Goldman, Sachs & Co., one of the participating underwriters, beneficially owns in excess of 10% of our issued and outstanding common stock, the Financial Industry Regulatory Authority (“FINRA”) deems Goldman, Sachs & Co. to be our “affiliate” and to have a “conflict of interest” with us within the meaning of FINRA Rule 5121 (“Rule 5121”), as administered by FINRA. Additionally, because we may use more than 5% of the net proceeds from the sale of our common stock to repay indebtedness under our Global ABL Facility owed by us to affiliates of Goldman, Sachs & Co., Barclays Capital Inc., Merrill Lynch, Pierce, Fenner & Smith Incorporated, Wells Fargo Securities, LLC and Raymond James & Associates, FINRA deems these underwriters to have a “conflict of interest” with us within the meaning of Rule 5121, as administered by FINRA. Therefore, this offering will be conducted in accordance with Rule 5121, which requires that a qualified independent underwriter (“QIU”), as defined in Rule 5121, participate in the preparation of the registration statement of which this prospectus forms a part and perform its usual standard of due diligence with respect thereto. Robert W. Baird & Co. Incorporated has agreed to act as QIU for this offering. We have agreed to indemnify Robert W. Baird & Co. Incorporated against certain liabilities incurred in connection with acting as QIU for this offering, including liabilities under the Securities Act of 1933, as amended (the “Securities Act”). In

 

 

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accordance with Rule 5121, these underwriters who are deemed to have a “conflict of interest” with us will not sell our common stock to a discretionary account without receiving the written approval from the account holder.

 

Proposed New York Stock Exchange (“NYSE”) symbol

“MRC”.

 

Risk Factors

See “Risk Factors” beginning on page 21 of this prospectus for a discussion of factors that you should carefully consider before deciding to invest in shares of our common stock.

The number of shares of common stock to be outstanding after the offering:

 

  Ÿ  

gives effect to a two-for-one reverse split of our common stock which occurred on February 29, 2012;

 

  Ÿ  

excludes 2,845,126 shares of common stock issuable upon the exercise of stock options granted to certain of our employees and directors pursuant to our 2007 Stock Option Plan; and

 

  Ÿ  

excludes 127,301 shares of non-vested restricted stock awarded to certain of our employees pursuant to our 2007 Restricted Stock Plan.

 

 

 

The data included in this prospectus regarding the industrial and oilfield PVF distribution industry, including trends in the market and our position and the position of our competitors within this industry, are based on our estimates which have been derived from management’s knowledge and experience in the areas in which our business operates, and information obtained from customers, suppliers, trade and business organizations, internal research, publicly available information, industry publications and surveys and other contacts in the areas in which our business operates. We have also cited information compiled by industry publications, governmental agencies and publicly available sources.

Depending on market conditions at the time of pricing of this offering and other considerations, we may sell fewer or more shares than the number set forth on the cover page of this prospectus. If we sell fewer shares of common stock without an increase in the anticipated price per share, or if we sell the same number of shares but at a lower price per share, the amount of proceeds we receive in this offering will be reduced, the amount of indebtedness we are able to repay will be reduced, and our leverage will be higher. As a result, the risks associated with our indebtedness and leverage will be greater than they would have been if we had repaid the amount of debt that we anticipated repaying. In addition, if we or the selling stockholder sells fewer shares of common stock, then the percentage of our shares controlled by affiliates of Goldman, Sachs & Co. will be higher. As a result, the risks associated with the control of our company by affiliates of Goldman Sachs will be greater than they would have been if these affiliates owned a smaller percentage of our company.

In this prospectus, unless otherwise indicated, foreign currency amounts are converted into U.S. dollar amounts at the exchange rate in effect on December 31, 2011, the last day of our fiscal year. Income statement figures are converted on a monthly basis, using each month’s average conversion rate.

 

 

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SUMMARY CONSOLIDATED FINANCIAL INFORMATION

On January 31, 2007, MRC Global Inc. (formerly known as McJunkin Red Man Holding Corporation), an affiliate of The Goldman Sachs Group, Inc., acquired a majority of the equity of the entity now known as McJunkin Red Man Corporation (then known as McJunkin Corporation) (the “GS Acquisition”). In this prospectus, the term “Predecessor” refers to McJunkin Corporation and its subsidiaries prior to January 31, 2007 and the term “Successor” refers to the entity now known as MRC Global Inc. and its subsidiaries on and after January 31, 2007. As a result of the change in McJunkin Corporation’s basis of accounting in connection with the GS Acquisition, Predecessor’s financial statement data for the one month ended January 30, 2007 and earlier periods are not comparable to Successor’s financial data for the eleven months ended December 31, 2007 and subsequent periods.

McJunkin Corporation completed a business combination transaction with Red Man (the “Red Man Transaction”) on October 31, 2007. At that time, McJunkin Corporation was renamed McJunkin Red Man Corporation. Operating results for the eleven-month period ended December 31, 2007 include the results of MRC Global Inc. for the full period and the results of Red Man for the two months after the business combination on October 31, 2007. Accordingly, our historical results for the years ended December 31, 2011, 2010, 2009 and 2008 and the 11 months ended December 31, 2007 are not comparable to McJunkin Corporation’s historical results for the one month ended January 30, 2007.

The summary consolidated financial information presented below under the captions Statement of Operations Data and Other Financial Data for the years ended December 31, 2011, 2010, 2009 and 2008, and the summary consolidated financial information presented below under the caption Balance Sheet Data as of December 31, 2011 and December 31, 2010, have been derived from the consolidated financial statements of MRC Global Inc. included elsewhere in this prospectus that Ernst & Young LLP, our independent registered public accounting firm, has audited. The summary consolidated financial information presented below under the captions Statement of Operations Data and Other Financial Data for the one month ended January 30, 2007 and the eleven months ended December 31, 2007, and the summary consolidated financial information presented below under the caption Balance Sheet Data as of December 31, 2009, December 31, 2008 and December 31, 2007, have been derived from the consolidated financial statements of MRC Global Inc. not included in this prospectus that Ernst & Young LLP has audited.

All information in this prospectus gives effect to the two-for-one reverse split of our common stock which occurred on February 29, 2012.

 

 

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The historical data presented below has been derived from financial statements that have been prepared using United States generally accepted accounting principles (“GAAP”). This data should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the consolidated financial statements and related notes included elsewhere in this prospectus.

 

    Successor          Predecessor  
    Year Ended December 31,     Eleven
Months

Ended
December 31,
         One
Month

Ended
January 30,
 
    2011     2010     2009     2008     2007          2007  
    (In millions, except per share and share information)  

Statement of Operations Data:

               

Sales

  $ 4,832.4      $ 3,845.5      $ 3,661.9      $ 5,255.2      $ 2,124.9          $ 142.5   

Cost of sales

    4,124.2        3,327.0        3,067.4        4,273.1        1,761.9            114.9   

Inventory write-down

    —          0.4        46.5        —          —              —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

       

 

 

 

Gross margin

    708.2        518.1        548.0        982.1        363.0            27.6   

Selling, general and administrative expenses

    513.6        451.7        411.6        482.1        218.5            15.9   

Goodwill and intangibles impairment charge

    —          —          386.1        —          —              —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

       

 

 

 

Operating income (loss)

    194.6        66.4        (249.7     500.0        144.5            11.7   

Other (expense) income

               

Interest expense

    (136.8     (139.6     (116.5     (84.5     (61.7         (0.1

Write off of debt issuance costs

    (9.5     —          —          —          —              —     

Change in fair value of derivative instruments

    7.0        (4.9     8.9        (6.2     —              —     

Other, net

    0.5        2.9        2.5        (2.6     (0.8         (0.4
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

       

 

 

 

Total other (expense) income

    (138.8     (141.6     (105.1     (93.3     (62.5         (0.5
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

       

 

 

 

Income (loss) before income taxes

    55.8        (75.2     (354.8     406.7        82.0            11.2   

Income taxes

    26.8        (23.4     (15.0     153.2        32.1            4.6   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

       

 

 

 

Net income (loss)

  $ 29.0      $ (51.8   $ (339.8   $ 253.5      $ 49.9          $ 6.6   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

       

 

 

 

Earnings per share, basic (in thousands)

  $ 0.34      $ (0.61   $ (4.30   $ 3.26      $ 1.44         

Earnings per share, diluted (in thousands)

  $ 0.34      $ (0.61   $ (4.30   $ 3.26      $ 1.44         

Weighted average shares, basic

    84,417        84,384        79,067        77,646        34,663         

Weighted average share, diluted

    84,655        84,384        79,067        77,828        34,731         
 

Other Financial Data:

               

Net cash provided by (used in) operations

  $ (102.9   $ 112.7      $ 505.5      $ (137.4   $ 110.2          $ 6.6   

Net cash provided by (used in) investing activities

    (48.0     (16.2     (66.9     (314.2     (1,788.9         (0.2

Net cash provided by (used in) financing activities

    140.6        (98.2     (393.9     452.0        1,687.2            (8.3

Adjusted Gross Margin(1)

    849.6        663.2        493.5        1,164.0        400.6            27.9   

Adjusted EBITDA(2)

    360.5        224.2        218.5        744.4        344.9            26.0   

Adjusted EBITDA RONA(3)

   
24.1

    19.6     18.6          

 

 

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     Successor  
     As of
December 31,
 
     2011      2010      2009      2008      2007  

Balance Sheet Data:

              

Cash and cash equivalents

   $ 46.1       $ 56.2       $ 56.2       $ 12.1       $ 10.1   

Working capital(4)

     1,074.7         842.6         930.2         1,208.0         674.1   

Total assets

     3,227.7         2,991.2         3,083.2         3,919.7         3,083.8   

Total debt(5)

     1,526.7         1,360.2         1,452.6         1,748.6         868.4   

Stockholders’ equity

     720.9         689.8         743.9         987.2         1,262.7   

 

(1) We define Adjusted Gross Margin as sales, less cost of sales, plus depreciation and amortization, plus amortization of intangibles, and plus or minus the impact of our last in, first out (“LIFO”) inventory costing methodology. We present Adjusted Gross Margin because we believe it is a useful indicator of our operating performance and facilitates a meaningful comparison to our peers. We believe this for the following reasons:

 

  Ÿ  

Our management uses Adjusted Gross Margin for planning purposes, including the preparation of our annual operating budget and financial projections. This measure is also used to assess the performance of our business.

 

  Ÿ  

Investors use Adjusted Gross Margin to measure a company’s operating performance without regard to items, such as depreciation and amortization, and amortization of intangibles, that can vary substantially from company to company depending upon the nature and extent of transactions they have been involved in. Similarly, the impact of the LIFO inventory costing method can cause results to vary substantially from company to company depending upon whether those companies elect to utilize the LIFO method and depending upon which LIFO method they may elect.

 

  Ÿ  

Securities analysts can use Adjusted Gross Margin as a supplemental measure to evaluate overall operating performance of companies.

In particular, we believe that Adjusted Gross Margin is a useful indicator of our operating performance because Adjusted Gross Margin measures our Company’s operating performance without regard to acquisition transaction-related amortization expenses.

However, Adjusted Gross Margin does not represent and should not be considered an alternative to gross margin or any other measure of financial performance calculated and presented in accordance with GAAP. Our Adjusted Gross Margin may not be comparable to similar measures that other companies report because other companies may not calculate Adjusted Gross Margin in the same manner as we do. Although we use Adjusted Gross Margin as a measure to assess the operating performance of our business, Adjusted Gross Margin has significant limitations as an analytical tool because it excludes certain material costs. For example, it does not include depreciation and amortization expense. Because we use capital assets, depreciation expense is a significant element of our costs and impacts our ability to generate revenue. In addition, the omission of amortization expense associated with our intangible assets further limits the usefulness of this measure. Furthermore, Adjusted Gross Margin does not account for our LIFO inventory costing methodology and, therefore, to the extent that recently purchased inventory accounts for a relatively large portion of our sales, Adjusted Gross Margin may overstate our operating performance. Because Adjusted Gross Margin does not account for certain expenses, its utility as a measure of our operating performance has material limitations. Because of these limitations, management does not view Adjusted Gross Margin in isolation or as a primary performance measure and also uses other measures, such as net income and sales, to measure operating performance.

 

 

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The following table reconciles Adjusted Gross Margin to gross margin (in millions):

 

    Successor          Predecessor  
    Year
Ended
December  31,
2011
    Year
Ended
December 31,
2010
    Year
Ended
December 31,
2009
    Year
Ended
December 31,
2008
    Eleven
Months
Ended
December 31,
2007
         One
Month
Ended
January 31,
2007
 
                

Gross margin

  $ 708.2      $ 518.1      $ 548.0      $ 982.1      $ 363.0          $ 27.6   

Depreciation and amortization

    17.0        16.6        14.5        11.3        5.4            0.3   

Amortization of intangibles

    50.7        53.9        46.6        44.4        21.9            —     

Increase (decrease) in LIFO reserve

    73.7        74.6        (115.6     126.2        10.3            —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

       

 

 

 

Adjusted Gross Margin

  $ 849.6      $ 663.2      $ 493.5      $ 1,164.0      $ 400.6          $ 27.9   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

       

 

 

 

 

(2) We define Adjusted EBITDA as net income plus interest, income taxes, depreciation and amortization, amortization of intangibles, other non-recurring and non-cash charges (such as gains/losses on the early extinguishment of debt, changes in the fair value of derivative instruments and goodwill impairment) and plus or minus the impact of our LIFO inventory costing methodology. We present Adjusted EBITDA because it is an important measure used to determine the interest rate and commitment fee we pay under our Global ABL Facility. In addition, we believe it is a useful factor indicator of our operating performance. We believe this for the following reasons:

 

  Ÿ  

Our management uses Adjusted EBITDA for planning purposes, including the preparation of our annual operating budget and financial projections, as well as for determining a significant portion of the compensation of our executive officers.

 

  Ÿ  

Adjusted EBITDA is widely used by investors to measure a company’s operating performance without regard to items, such as interest expense, income tax expense and depreciation and amortization, that can vary substantially from company to company depending upon their financing and accounting methods, the book value of their assets, their capital structures and the method by which their assets were acquired.

 

  Ÿ  

Securities analysts use Adjusted EBITDA as a supplemental measure to evaluate the overall operating performance of companies.

In particular, we believe that Adjusted EBITDA is a useful indicator of our operating performance because Adjusted EBITDA measures our Company’s operating performance without regard to certain non-recurring, non-cash or transaction-related expenses.

Adjusted EBITDA, however, does not represent and should not be considered as an alternative to net income, cash flow from operations or any other measure of financial performance calculated and presented in accordance with GAAP. Our Adjusted EBITDA may not be comparable to similar measures that other companies report because other companies may not calculate Adjusted EBITDA in the same manner as we do. Although we use Adjusted EBITDA as a measure to assess the operating performance of our business, Adjusted EBITDA has significant limitations as an analytical tool because it excludes certain material costs. For example, it does not include interest expense, which has been a significant element of our costs. Because we use capital assets, depreciation expense is a significant element of our costs and impacts our ability to generate revenue. In addition, the omission of the amortization expense associated with our intangible assets further limits the usefulness of this measure. Adjusted EBITDA also does not include the payment of certain taxes, which is also a significant element of our operations. Furthermore, Adjusted EBITDA does not account for our LIFO inventory costing

 

 

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methodology, and therefore, to the extent that recently purchased inventory accounts for a relatively large portion of our sales, Adjusted EBITDA may overstate our operating performance. Because Adjusted EBITDA does not account for certain expenses, its utility as a measure of our operating performance has material limitations. Because of these limitations, management does not view Adjusted EBITDA in isolation or as a primary performance measure and also uses other measures, such as net income and sales, to measure operating performance.

The calculation of Adjusted EBITDA is consistent with the computation of Consolidated Cash Flow, as defined in the indenture governing the Notes, except for the change in the LIFO reserve, which would not be an adjustment in determining Consolidated Cash Flow.

The following table reconciles Adjusted EBITDA with our net income (loss), as derived from our financial statements (in millions):

 

    Successor          Predecessor  
    Year Ended
December 31,
2011
    Year Ended
December 31,
2010
    Year Ended
December 31,
2009
    Year Ended
December 31,
2008
    Eleven
Months
Ended
December 31,
2007
         One Month
Ended
January 31,
2007
 
                

Net income (loss)

  $ 29.0      $ (51.8   $ (339.8   $ 253.5      $ 49.9          $ 6.6   

Income tax expense (benefit)

    26.8        (23.4     (15.0     153.2        32.1            4.6   

Interest expense

    136.8        139.6        116.5        84.5        61.7            0.1   

Write off of debt issuance costs

    9.5        —          —          —          —              —     

Depreciation and amortization

    17.0        16.6        14.5        11.3        5.4            0.3   

Amortization of intangibles

    50.7        53.9        46.6        44.4        21.9            —     

Amortization of Purchase Price Accounting

    —          —          15.7        2.4        —              —     

Change in fair value of derivative instruments

    (7.0     4.9        (8.9     6.2        —              —     

Closed locations

    —          (0.7     1.4        4.4        —              —     

Share based compensation expense

    8.4        3.7        7.8        10.2        3.0            —     

Franchise taxes

    0.4        0.7        1.4        1.5        —              —     

Gain on early extinguishment of debt

    —          —          (1.3     —          —              —     

Goodwill and intangibles impairment charge

    —          —          386.1        —          —              —     

Inventory write-down

    —          0.4        46.5        —          —              —     

IT system conversion costs

    —          —          2.4        1.4        —              —     

M&A transaction & integration expenses

    0.5        1.4        17.5        30.4        12.7            —     

Midway pre-acquisition contribution

    —          —          —          —          2.8            1.0   

Legal and consulting expenses

    9.9        4.2        1.9        0.4        —              —     

Joint venture termination

    1.7        —          —          —          —              —     

Provision for uncollectible accounts

    0.4        (2.0     1.0        7.7        0.4            —     

Red Man pre-acquisition contribution

    —          —          —          —          142.2            13.1   

Severance and related costs

    1.1        3.2        4.4        —          —              —     

MRC Transmark pre-acquisition contribution

    —          —          38.5        —          —              —     

LIFO

    73.7        74.6        (115.6     126.2        10.3            —     

Other non-cash expenses

    1.6        (1.1     (3.1     6.7        2.5            0.3   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

       

 

 

 

Adjusted EBITDA

  $ 360.5      $ 224.2      $ 218.5      $ 744.4      $ 344.9          $ 26.0   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

       

 

 

 

 

 

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(3) We define Adjusted EBITDA Return on Net Assets (“Adjusted EBITDA RONA”) as (a) Adjusted EBITDA divided by (b) accounts receivable, plus inventory, plus the LIFO reserve, plus property, plant & equipment, net, less accounts payable. The calculation of Adjusted EBITDA RONA is set forth below (dollars in thousands):

 

     Year Ended December 31,  
     2011     2010     2009  

Adjusted EBITDA

   $ 360,465      $ 224,124      $ 218,496   
  

 

 

   

 

 

   

 

 

 

Accounts receivable

   $ 791,280      $ 596,404      $ 506,194   

Inventory at LIFO

     899,064        765,367        871,653   

LIFO Reserve

     175,122        101,419        26,862   

Property, plant & equipment, net

     107,430        104,725        111,480   

Accounts payable

     (479,584     (426,632     (338,512
  

 

 

   

 

 

   

 

 

 

Total adjusted net assets

   $ 1,493,312      $ 1,141,283      $ 1,177,677   
  

 

 

   

 

 

   

 

 

 

Adjusted EBITDA RONA

     24.1     19.6     18.6

We present Adjusted EBITDA RONA because we believe it is a useful indicator of our operating performance. Management believes that Adjusted EBITDA RONA provides meaningful supplemental information regarding our performance by excluding certain income and expense items and assets and liabilities that may not be indicative of the core business operating results and may help in comparing current period results with those of prior periods as well as with our peers. Our management uses Adjusted EBITDA RONA for determining a significant portion of the compensation of our executive officers. In addition, Adjusted EBITDA RONA is a useful indicator of our operating performance because it measures our performance without regard to acquisition transaction-related assets such as intangibles and goodwill.

However, Adjusted EBITDA RONA does not represent and should not be considered an alternative to other GAAP measures of performance such as net income. Also, our definition of Adjusted EBITDA RONA may not be comparable to similar measures that other companies report. Further, Adjusted EBITDA RONA has certain limitations, such as excluding our LIFO inventory costing methodology. In addition, the omission of our substantial intangible assets and goodwill further limits the usefulness of this measure. As a result, management does not view Adjusted EBITDA RONA in isolation or as a primary performance measure and uses other measures such as net income and sales to measure operating performance.

Management believes that the GAAP-based measure which is most comparable to Adjusted EBITDA RONA is a percentage with net income in the numerator and stockholders’ equity in the denominator. We believe Adjusted EBITDA is a useful measure of performance as compared to net income for the reasons stated above in note 2. We believe that for our Company total adjusted net assets (as calculated above) is a more useful measure than stockholders’ equity for purposes of a RONA calculation because, among other things, our calculation omits intangible assets and goodwill arising from acquisitions. Given the Company’s history of making numerous acquisitions in recent years, the Company believes that the measure it uses is more comparable to similar measures used by other companies if the effects of acquisitions are eliminated.

 

 

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For a reconciliation of Adjusted EBITDA (the numerator in our calculation of Adjusted EBITDA RONA) to net income, see footnote 2 above. For a reconciliation of total adjusted net assets (the denominator in our calculation of Adjusted EBITDA RONA) to stockholders’ equity, see the following table:

 

     Year Ended December 31,  
     2011     2010     2009  
     (dollars in thousands)  

Stockholders’ equity

   $ 720,862      $ 689,758      $ 743,898   

Long term debt

     1,526,740        1,360,241        1,452,610   

Deferred taxes, net

     357,195        373,719        377,948   

Other liabilities

     143,306        140,844        170,188   

Intangible assets

     (1,333,137     (1,366,549     (1,425,721

LIFO Reserve

     175,122        101,419        26,862   

Other assets

     (50,649     (101,947     (111,864

Cash

     (46,127     (56,202     (56,244
  

 

 

   

 

 

   

 

 

 

Total adjusted net assets

   $ 1,493,312      $ 1,141,283      $ 1,177,677   
  

 

 

   

 

 

   

 

 

 

The following table summarizes (1) the numerator and denominator in our calculation of Adjusted EBITDA RONA and (2) the numerator (net income) and denominator (stockholders’ equity) in the most comparable GAAP-based measure.

 

     Year Ended December 31,  
     2011     2010     2009  
     (dollars in thousands)  

Adjusted EBITDA

   $ 360,465      $ 224,124      $ 218,496   

Total adjusted net assets

   $ 1,493,312      $ 1,141,283      $ 1,177,677   

Adjusted EBITDA RONA

     24.1     19.6     18.6

Net income (loss)

   $ 28,984      $ (51,824   $ (339,771

Stockholders’ equity

   $ 720,862      $ 689,758      $ 743,898   

Net income / stockholders’ equity

     4.02     (7.5 )%      (45.7 )% 

 

(4) Working capital is defined as current assets less current liabilities.

 

(5) Includes current portion.

 

 

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RISK FACTORS

Before investing in the securities offered through this prospectus, you should carefully consider the following risk factors as well as the other information that this prospectus provides. If one or more of these risks or uncertainties actually occurs, they could materially and adversely affect our business, financial condition and operating results. In this prospectus, unless the context expressly requires a different reading, when we state that a factor could “adversely affect us”, have a “material adverse effect”, “adversely affect our business” and similar expressions, we mean that the factor could materially and adversely affect our business, financial condition and operating results.

Risks Related to Our Business

Decreased capital and other expenditures in the energy industry, which can result from decreased oil and natural gas prices, among other things, can adversely impact our customers’ demand for our products and our revenue.

A large portion of our revenue depends upon the level of capital and operating expenditures in the oil and natural gas industry, including capital and other expenditures in connection with exploration, drilling, production, gathering, transportation, refining and processing operations. Demand for the products we distribute and services we provide is particularly sensitive to the level of exploration, development and production activity of, and the corresponding capital and other expenditures by, oil and natural gas companies. A material decline in oil or natural gas prices could depress levels of exploration, development and production activity and, therefore, could lead to a decrease in our customers’ capital and other expenditures. If our customers’ expenditures decline, our business will suffer.

Volatile oil and gas prices affect demand for our products.

Prices for oil and natural gas are subject to large fluctuations in response to relatively minor changes in the supply of and demand for oil and natural gas, market uncertainty and a variety of other factors that are beyond our control. For example, oil and natural gas prices during much of 2008 were at levels much higher than historical long term averages, and worldwide oil and natural gas drilling and exploration activity during much of 2008 was also at record high levels. Oil and natural gas prices decreased during the second half of 2008 and during 2009. This sustained decline in oil and natural gas prices resulted in decreased capital expenditures in the oil and natural gas industry and had an adverse effect on our business, results of operations and financial condition. Any sustained decrease in capital expenditures in the oil and natural gas industry could have a material adverse effect on us.

Many factors affect the supply of and demand for energy and, therefore, influence oil and natural gas prices, including:

 

  Ÿ  

the level of domestic and worldwide oil and natural gas production and inventories;

 

  Ÿ  

the level of drilling activity and the availability of attractive oil and natural gas field prospects, which governmental actions may affect, such as regulatory actions or legislation, or other restrictions on drilling, including those related to environmental concerns (e.g., the temporary moratorium on deepwater drilling in the Gulf of Mexico following the Deepwater Horizon drilling rig accident and subsequent oil spill);

 

  Ÿ  

the discovery rate of new oil and natural gas reserves and the expected cost of developing new reserves;

 

  Ÿ  

the actual cost of finding and producing oil and natural gas;

 

  Ÿ  

depletion rates;

 

  Ÿ  

domestic and worldwide refinery overcapacity or undercapacity and utilization rates;

 

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  Ÿ  

the availability of transportation infrastructure and refining capacity;

 

  Ÿ  

increases in the cost of products and services that the oil and gas industry uses, such as those that we provide, which may result from increases in the cost of raw materials such as steel;

 

  Ÿ  

shifts in end-customer preferences toward fuel efficiency and the use of natural gas;

 

  Ÿ  

the economic or political attractiveness of alternative fuels, such as coal, hydrocarbon, wind, solar energy and biomass-based fuels;

 

  Ÿ  

increases in oil and natural gas prices or historically high oil and natural gas prices, which could lower demand for oil and natural gas products;

 

  Ÿ  

worldwide economic activity including growth in non-OECD countries, including China and India;

 

  Ÿ  

interest rates and the cost of capital;

 

  Ÿ  

national government policies, including government policies that could nationalize or expropriate oil and natural gas exploration, production, refining or transportation assets;

 

  Ÿ  

the ability of the Organization of Petroleum Exporting Countries (“OPEC”) to set and maintain production levels and prices for oil;

 

  Ÿ  

the impact of armed hostilities, or the threat or perception of armed hostilities;

 

  Ÿ  

environmental regulation;

 

  Ÿ  

technological advances;

 

  Ÿ  

global weather conditions and natural disasters;

 

  Ÿ  

currency fluctuations; and

 

  Ÿ  

tax policies.

Oil and natural gas prices have been and are expected to remain volatile. This volatility has historically caused oil and natural gas companies to change their strategies and expenditure levels from year to year. We have experienced in the past, and we will likely experience in the future, significant fluctuations in operating results based on these changes. In particular, volatility in the oil and natural gas sectors could adversely affect our business.

General economic conditions may adversely affect our business.

U.S. and global general economic conditions affect many aspects of our business, including demand for the products we distribute and the pricing and availability of supplies. General economic conditions and predictions regarding future economic conditions also affect our forecasts. A decrease in demand for the products we distribute or other adverse effects resulting from an economic downturn may cause us to fail to achieve our anticipated financial results. General economic factors beyond our control that affect our business and customers include interest rates, recession, inflation, deflation, customer credit availability, consumer credit availability, consumer debt levels, performance of housing markets, energy costs, tax rates and policy, unemployment rates, commencement or escalation of war or hostilities, the threat or possibility of war, terrorism or other global or national unrest, political or financial instability, and other matters that influence our customers’ spending. Increasing volatility in financial markets may cause these factors to change with a greater degree of frequency or increase in magnitude. In addition, worldwide economic conditions, including those associated with the current European sovereign debt crisis, could have an adverse effect on our business, prospects, operating results, financial condition and cash flows going forward. The global economic downturn in 2009 and 2010 significantly adversely affected our business, results of operations and financial condition. Continued adverse economic conditions would have an adverse effect on us.

 

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We may be unable to compete successfully with other companies in our industry.

We sell products and services in very competitive markets. In some cases, we compete with large oilfield services providers with substantial resources. In other cases, we compete with smaller regional players that may increasingly be willing to provide similar products and services at lower prices. Competitive actions, such as price reductions, consolidation in the industry, improved delivery and other actions, could adversely affect our revenue and earnings. We could experience a material adverse effect to the extent that our competitors are successful in reducing our customers’ purchases of products and services from us. Competition could also cause us to lower our prices, which could reduce our margins and profitability. Furthermore, consolidation in our industry could heighten the impacts of competition on our business and results of operations discussed above, particularly if such consolidation results in competitors with stronger financial and strategic resources, and could also result in increases to the prices we are required to pay for acquisitions we may make in the future.

Demand for the products we distribute could decrease if the manufacturers of those products were to sell a substantial amount of goods directly to end users in the sectors we serve.

Historically, users of PVF and related products have purchased certain amounts of these products through distributors and not directly from manufacturers. If customers were to purchase the products that we sell directly from manufacturers, or if manufacturers sought to increase their efforts to sell directly to end users, we could experience a significant decrease in profitability. These or other developments that remove us from, or limit our role in, the distribution chain, may harm our competitive position in the marketplace and reduce our sales and earnings.

We may experience unexpected supply shortages.

We distribute products from a wide variety of manufacturers and suppliers. Nevertheless, in the future we may have difficulty obtaining the products we need from suppliers and manufacturers as a result of unexpected demand or production difficulties that might extend lead times. Also, products may not be available to us in quantities sufficient to meet our customer demand. Our inability to obtain products from suppliers and manufacturers in sufficient quantities, or at all, could adversely affect our product offerings and our business.

We may experience cost increases from suppliers, which we may be unable to pass on to our customers.

In the future, we may face supply cost increases due to, among other things, unexpected increases in demand for supplies, decreases in production of supplies or increases in the cost of raw materials or transportation. Any inability to pass supply price increases on to our customers could have a material adverse effect on us. For example, we may be unable to pass increased supply costs on to our customers because significant amounts of our sales are derived from stocking program arrangements, contracts and MRO arrangements, which provide our customers time limited price protection, which may obligate us to sell products at a set price for a specific period. In addition, if supply costs increase, our customers may elect to purchase smaller amounts of products or may purchase products from other distributors. While we may be able to work with our customers to reduce the effects of unforeseen price increases because of our relationships with them, we may not be able to reduce the effects of the cost increases. In addition, to the extent that competition leads to reduced purchases of products or services from us or a reduction of our prices, and these reductions occur concurrently with increases in the prices for selected commodities which we use in our operations, including steel, nickel and molybdenum, the adverse effects described above would likely be exacerbated and could result in a prolonged downturn in profitability.

 

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We do not have contracts with most of our suppliers. The loss of a significant supplier would require us to rely more heavily on our other existing suppliers or to develop relationships with new suppliers. Such a loss may have an adverse effect on our product offerings and our business.

Given the nature of our business, and consistent with industry practice, we do not have contracts with most of our suppliers. We generally make our purchases through purchase orders. Therefore, most of our suppliers have the ability to terminate their relationships with us at any time. Approximately 50% of our total purchases during the year ended December 31, 2011 were from our 25 largest suppliers. Although we believe there are numerous manufacturers with the capacity to supply the products we distribute, the loss of one or more of our major suppliers could have an adverse effect on our product offerings and our business. Such a loss would require us to rely more heavily on our other existing suppliers or develop relationships with new suppliers, which may cause us to pay higher prices for products due to, among other things, a loss of volume discount benefits currently obtained from our major suppliers.

Price reductions by suppliers of products that we sell could cause the value of our inventory to decline. Also, these price reductions could cause our customers to demand lower sales prices for these products, possibly decreasing our margins and profitability on sales to the extent that we purchased our inventory of these products at the higher prices prior to supplier price reductions.

The value of our inventory could decline as a result of manufacturer price reductions with respect to products that we sell. We have been selling the same types of products to our customers for many years and, therefore, do not expect that our inventory will become obsolete. However, there is no assurance that a substantial decline in product prices would not result in a write-down of our inventory value. Such a write-down could have an adverse effect on our financial condition.

Also, decreases in the market prices of products that we sell could cause customers to demand lower sales prices from us. These price reductions could reduce our margins and profitability on sales with respect to the lower-priced products. Reductions in our margins and profitability on sales could have a material adverse effect on us.

A substantial decrease in the price of steel could significantly lower our gross profit or cash flow.

We distribute many products manufactured from steel. As a result, the price and supply of steel can affect our business and, in particular, our tubular product category. When steel prices are lower, the prices that we charge customers for products may decline, which affects our gross profit and cash flow. At times pricing and availability of steel can be volatile due to numerous factors beyond our control, including general domestic and international economic conditions, labor costs, sales levels, competition, consolidation of steel producers, fluctuations in the costs of raw materials necessary to produce steel, steel manufacturers’ plant utilization levels and capacities, import duties and tariffs and currency exchange rates. Currently, steel pipe producers in the Western Hemisphere are in the process of adding more than two million tons of welded and seamless production capacity, most of which is due to come on line over the next three years. The increase in capacity could put pressure on the prices we receive for our tubular products. When steel prices decline, customer demands for lower prices and our competitors’ responses to those demands could result in lower sale prices and, consequently, lower gross profit or cash flow.

If steel prices rise, we may be unable to pass along the cost increases to our customers.

We maintain inventories of steel products to accommodate the lead time requirements of our customers. Accordingly, we purchase steel products in an effort to maintain our inventory at levels that

 

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we believe to be appropriate to satisfy the anticipated needs of our customers based upon historic buying practices, contracts with customers and market conditions. Our commitments to purchase steel products are generally at prevailing market prices in effect at the time we place our orders. If steel prices increase between the time we order steel products and the time of delivery of the products to us, our suppliers may impose surcharges that require us to pay for increases in steel prices during the period. Demand for the products we distribute, the actions of our competitors and other factors will influence whether we will be able to pass on steel cost increases and surcharges to our customers, and we may be unsuccessful in doing so.

We do not have long-term contracts or agreements with many of our customers. The contracts and agreements that we do have generally do not commit our customers to any minimum purchase volume. The loss of a significant customer may have a material adverse effect on us.

Given the nature of our business, and consistent with industry practice, we do not have long-term contracts with many of our customers. In addition, our contracts, including our MRO contracts, generally do not commit our customers to any minimum purchase volume. Therefore, a significant number of our customers, including our MRO customers, may terminate their relationships with us or reduce their purchasing volume at any time. Furthermore, the long-term customer contracts that we do have are generally terminable without cause on short notice. Our 25 largest customers represented approximately half of our sales for the year ended December 31, 2011. The products that we may sell to any particular customer depend in large part on the size of that customer’s capital expenditure budget in a particular year and on the results of competitive bids for major projects. Consequently, a customer that accounts for a significant portion of our sales in one fiscal year may represent an immaterial portion of our sales in subsequent fiscal years. The loss of a significant customer, or a substantial decrease in a significant customer’s orders, may have an adverse effect on our sales and revenue.

In addition, we are subject to customer audit clauses in many of our multi-year contracts. If we are not able to provide the proper documentation or support for invoices per the contract terms, we may be subject to negotiated settlements with our major customers.

Changes in our customer and product mix could cause our gross margin percentage to fluctuate.

From time to time, we may experience changes in our customer mix or in our product mix. Changes in our customer mix may result from geographic expansion, daily selling activities within current geographic markets and targeted selling activities to new customer segments. Changes in our product mix may result from marketing activities to existing customers and needs communicated to us from existing and prospective customers. If customers begin to require more lower-margin products from us and fewer higher-margin products, our business, results of operations and financial condition may suffer.

Customer credit risks could result in losses.

The concentration of our customers in the energy industry may impact our overall exposure to credit risk as customers may be similarly affected by prolonged changes in economic and industry conditions. Further, laws in some jurisdictions in which we operate could make collection difficult or time consuming. We perform ongoing credit evaluations of our customers and do not generally require collateral in support of our trade receivables. While we maintain reserves for potential credit losses, we cannot assure such reserves will be sufficient to meet write-offs of uncollectible receivables or that our losses from such receivables will be consistent with our expectations.

 

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We may be unable to successfully execute or effectively integrate acquisitions.

One of our key operating strategies is to selectively pursue acquisitions, including large scale acquisitions, in order to continue to grow and increase profitability. However, acquisitions, particularly of a significant scale, involve numerous risks and uncertainties, including intense competition for suitable acquisition targets, the potential unavailability of financial resources necessary to consummate acquisitions in the future, increased leverage due to additional debt financing that may be required to complete an acquisition, dilution of our stockholders’ net current book value per share if we issue additional equity securities to finance an acquisition, difficulties in identifying suitable acquisition targets or in completing any transactions identified on sufficiently favorable terms, assumption of undisclosed or unknown liabilities and the need to obtain regulatory or other governmental approvals that may be necessary to complete acquisitions. In addition, any future acquisitions may entail significant transaction costs and risks associated with entry into new markets. For example, we incurred $17.5 million in fees and expenses during 2009 related to our acquisition of MRC Transmark.

In addition, even when acquisitions are completed, integration of acquired entities can involve significant difficulties, such as:

 

  Ÿ  

failure to achieve cost savings or other financial or operating objectives with respect to an acquisition;

 

  Ÿ  

strain on the operational and managerial controls and procedures of our business, and the need to modify systems or to add management resources;

 

  Ÿ  

difficulties in the integration and retention of customers or personnel and the integration and effective deployment of operations or technologies;

 

  Ÿ  

amortization of acquired assets, which would reduce future reported earnings;

 

  Ÿ  

possible adverse short-term effects on our cash flows or operating results;

 

  Ÿ  

diversion of management’s attention from the ongoing operations of our business;

 

  Ÿ  

integrating personnel with diverse backgrounds and organizational cultures;

 

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coordinating sales and marketing functions;

 

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failure to obtain and retain key personnel of an acquired business; and

 

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assumption of known or unknown material liabilities or regulatory non-compliance issues.

Failure to manage these acquisition growth risks could have an adverse effect on us. We also agreed to acquire the piping systems business of OneSteel Ltd., and subsequently closed the acquisition in the first quarter of 2012. We may experience any of the risks described herein in closing and integrating the piping systems business of OneSteel Ltd.

Our significant indebtedness may affect our ability to operate our business, and this could have a material adverse effect on us.

We have now and will likely continue to have a significant amount of indebtedness. As of December 31, 2011, we had total debt outstanding of $1,526.7 million, borrowing availability of $583.7 million under our credit facilities and total liquidity (borrowing capacity plus cash on hand) of $629.8 million, representing leverage of 4.1x under the terms of our then existing ABL Credit Facility. In addition, as of December 31, 2011 on an adjusted basis, after giving effect to the use of proceeds of this offering and our entry into the Global ABL Facility, we would have had total indebtedness outstanding of $1,184.1 million, representing leverage of 3.2x under the terms of the Global ABL Facility. In addition, we may incur significant additional indebtedness in the future. If new indebtedness

 

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is added to our current indebtedness, the risks described below could increase. Our significant level of indebtedness could have important consequences, such as:

 

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limiting our ability to obtain additional financing to fund our working capital, acquisitions, expenditures, debt service requirements or other general corporate purposes;

 

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limiting our ability to use operating cash flow in other areas of our business because we must dedicate a substantial portion of these funds to service debt;

 

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limiting our ability to compete with other companies who are not as highly leveraged;

 

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subjecting us to restrictive financial and operating covenants in the agreements governing our and our subsidiaries’ long-term indebtedness;

 

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exposing us to potential events of default (if not cured or waived) under financial and operating covenants contained in our or our subsidiaries’ debt instruments that could have a material adverse effect on our business, results of operations and financial condition;

 

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increasing our vulnerability to a downturn in general economic conditions or in pricing of our products; and

 

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limiting our ability to react to changing market conditions in our industry and in our customers’ industries.

In addition, borrowings under our credit facilities bear interest at variable rates. If market interest rates increase, the variable-rate debt will create higher debt service requirements, which could adversely affect our cash flow. Our interest expense for the year ended December 31, 2011 was $136.8 million.

Our ability to make scheduled debt payments, to refinance our obligations with respect to our indebtedness and to fund capital and non-capital expenditures necessary to maintain the condition of our operating assets, properties and systems software, as well as to provide capacity for the growth of our business, depends on our financial and operating performance, which, in turn, is subject to prevailing economic conditions and financial, business, competitive, legal and other factors. Our business may not generate sufficient cash flow from operations, and future borrowings may not be available to us under our credit facilities in an amount sufficient to enable us to pay our indebtedness or to fund our other liquidity needs. We may seek to sell assets to fund our liquidity needs but may not be able to do so. We may also need to refinance all or a portion of our indebtedness on or before maturity. We may not be able to refinance any of our indebtedness on commercially reasonable terms or at all.

In addition, we are and will be subject to covenants contained in agreements governing our present and future indebtedness. These covenants include and will likely include restrictions on:

 

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certain payments and investments;

 

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the redemption and repurchase of capital stock;

 

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the issuance of stock of subsidiaries;

 

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the granting of liens;

 

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the incurrence of additional indebtedness;

 

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dividend restrictions affecting us and our subsidiaries;

 

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asset sales; and

 

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transactions with affiliates and mergers and acquisitions.

 

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They also include financial maintenance covenants which contain financial ratios we must satisfy each quarter. Any failure to comply with these covenants could result in a default under our credit facilities. Upon a default, unless waived, the lenders under our secured credit facilities and 9.50% senior secured notes due December 15, 2016 (the “Notes”) would have all remedies available to a secured lender. They could elect to terminate their commitments, cease making further loans, institute foreclosure proceedings against our or our subsidiaries’ assets and force us and our subsidiaries into bankruptcy or liquidation.

In addition, any defaults under our credit facilities, our Notes or our other debt could trigger cross defaults under other or future credit agreements and may permit acceleration of our other indebtedness. If our indebtedness is accelerated, we cannot be certain that we will have sufficient funds available to pay the accelerated indebtedness or that we will have the ability to refinance the accelerated indebtedness on terms favorable to us or at all. For a description of our credit facilities and Notes, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources”.

We are a holding company and depend upon our subsidiaries for our cash flow.

We are a holding company. Our subsidiaries conduct all of our operations and own substantially all of our assets. Consequently, our cash flow and our ability to meet our obligations or to pay dividends or make other distributions in the future will depend upon the cash flow of our subsidiaries and our subsidiaries’ payment of funds to us in the form of dividends, tax sharing payments or otherwise. In addition, McJunkin Red Man Corporation, our direct subsidiary and the primary obligor under our Global ABL Facility and our Notes, is also dependent to a significant extent on the cash flow of its subsidiaries to meet its debt service obligations.

The ability of our subsidiaries to make any payments to us will depend on their earnings, the terms of their current and future indebtedness, tax considerations and legal and contractual restrictions on the ability to make distributions. In particular, our subsidiaries’ credit facilities currently impose significant limitations on the ability of our subsidiaries to make distributions to us and consequently our ability to pay dividends to our stockholders. Subject to limitations in our credit facilities, our subsidiaries may also enter into additional agreements that contain covenants prohibiting them from distributing or advancing funds or transferring assets to us under certain circumstances, including to pay dividends.

Our subsidiaries are separate and distinct legal entities. Any right that we have to receive any assets of or distributions from any of our subsidiaries upon the bankruptcy, dissolution, liquidation or reorganization, or to realize proceeds from the sale of their assets, will be junior to the claims of that subsidiary’s creditors, including trade creditors and holders of debt that the subsidiary issued.

Changes in our credit profile may affect our relationship with our suppliers, which could have a material adverse effect on our liquidity.

Changes in our credit profile may affect the way our suppliers view our ability to make payments and may induce them to shorten the payment terms of their invoices, particularly given our high level of outstanding indebtedness. Given the large dollar amounts and volume of our purchases from suppliers, a change in payment terms may have a material adverse effect on our liquidity and our ability to make payments to our suppliers and, consequently, may have a material adverse effect on us.

If tariffs and duties on imports into the U.S. of line pipe, OCTG or certain of the other products that we sell are lifted, we could have too many of these products in inventory competing against less expensive imports.

U.S. law currently imposes tariffs and duties on imports from certain foreign countries of line pipe and OCTG and, to a lesser extent, on imports of certain other products that we sell. If these tariffs and duties are lifted or reduced or if the level of these imported products otherwise increases, and our U.S.

 

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customers accept these imported products, we could be materially and adversely affected to the extent that we would then have higher-cost products in our inventory or increased supplies of these products drive down prices and margins. If prices of these products were to decrease significantly, we might not be able to profitably sell these products, and the value of our inventory would decline. In addition, significant price decreases could result in a significantly longer holding period for some of our inventory.

We are subject to strict environmental, health and safety laws and regulations that may lead to significant liabilities and negatively impact the demand for our products.

We are subject to a variety of federal, state, local, foreign and provincial environmental, health and safety laws, regulations and permitting requirements, including those governing the discharge of pollutants or hazardous substances into the air, soil or water, the generation, handling, use, management, storage and disposal of, or exposure to, hazardous substances and wastes, the responsibility to investigate and clean up contamination and occupational health and safety. Regulations and courts may impose fines and penalties for non-compliance with applicable environmental, health and safety requirements and the failure to have or to comply with the terms and conditions of required permits. Our failure to comply with applicable environmental, health and safety requirements could result in fines, penalties, enforcement actions, third-party claims for property damage and personal injury, requirements to clean up property or to pay for the costs of cleanup or regulatory or judicial orders requiring corrective measures, including the installation of pollution control equipment or remedial actions.

Certain laws and regulations, such as the Comprehensive Environmental Response, Compensation and Liability Act (“CERCLA” or the “U.S. federal Superfund law”) or its state and foreign equivalents, may impose the obligation to investigate and remediate contamination at a facility on current and former owners or operators or on persons who may have sent waste to that facility for disposal. These laws and regulations may impose liability without regard to fault or to the legality of the activities giving rise to the contamination. Although we are not aware of any active litigation against us under the U.S. federal Superfund law or its state or foreign equivalents, contamination has been identified at several of our current and former facilities, and we have incurred and will continue to incur costs to investigate and remediate these conditions.

Moreover, we may incur liabilities in connection with environmental conditions currently unknown to us relating to our existing, prior or future owned or leased sites or operations or those of predecessor companies whose liabilities we may have assumed or acquired. We believe that indemnities contained in certain of our acquisition agreements may cover certain environmental conditions existing at the time of the acquisition, subject to certain terms, limitations and conditions. However, if these indemnification provisions terminate or if the indemnifying parties do not fulfill their indemnification obligations, we may be subject to liability with respect to the environmental matters that those indemnification provisions address.

In addition, environmental, health and safety laws and regulations applicable to our business and the business of our customers, including laws regulating the energy industry, and the interpretation or enforcement of these laws and regulations, are constantly evolving. It is impossible to predict accurately the effect that changes in these laws and regulations, or their interpretation or enforcement, may have on us. Should environmental laws and regulations, or their interpretation or enforcement, become more stringent, our costs, or the costs of our customers, could increase, which may have a material adverse effect on us.

In particular, legislation and regulations limiting emissions of greenhouse gases, including carbon dioxide associated with the burning of fossil fuels, are at various stages of consideration and implementation, at the international, national, regional and state levels. In 2005, the Kyoto Protocol to

 

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the 1992 United Nations Framework Convention on Climate Change, which established a binding set of emission targets for greenhouse gases, became binding on the countries that ratified it. Attention is now focused on the development of a post-2012 international policy framework to guide international action to address climate change when the Kyoto protocol expires in 2012. Certain states and regions have adopted or are considering legislation or regulation imposing overall caps on greenhouse gas emissions from certain facility categories or mandating the increased use of electricity from renewable energy sources. Similar legislation has been proposed at the federal level. In addition, the U.S. Environmental Protection Agency (the “EPA”) has begun to implement regulations that require permits for and reductions in greenhouse gas emissions for certain categories of facilities, the first of which became effective in January 2011. Pursuant to the terms of a settlement agreement, the EPA also intends to finalize greenhouse gas emissions standards, known as New Source Performance Standards (“NSPS”), for power plants in May 2012 and plans to issue such NSPS for refineries in the future. These laws and regulations could negatively impact the market for the products we distribute and, consequently, our business.

In addition, some states have adopted, and other states and the federal government are considering adopting, regulations that could impose more stringent permitting, disclosure, wastewater disposal and well construction requirements on hydraulic fracturing, a practice involving the injection of water containing more limited amounts of certain substances into rock formations (after perforating the formation with explosive charges) to stimulate production of hydrocarbons, particularly natural gas, from shale basin regions. These effective and potential regulations include a variety of well construction, set back, wastewater disposal and disclosure requirements limiting how fracturing can be performed and requiring various degrees of disclosures regarding the contents of chemicals injected into the rock formations, as well as moratoria on all hydraulic fracturing activity. Any increased federal, regional or state regulation of hydraulic fracturing could significantly reduce the demand for our products in the high-growth shale regions of the U.S.

We may not have adequate insurance for potential liabilities, including liabilities arising from litigation.

In the ordinary course of business, we have and in the future may become the subject of various claims, lawsuits and administrative proceedings seeking damages or other remedies concerning our commercial operations, the products we distribute, employees and other matters, including potential claims by individuals alleging exposure to hazardous materials as a result of the products we distribute or our operations. Some of these claims may relate to the activities of businesses that we have acquired, even though these activities may have occurred prior to our acquisition of the businesses. The products we distribute are sold primarily for use in the energy industry, which is subject to inherent risks that could result in death, personal injury, property damage, pollution, release of hazardous substances or loss of production. In addition, defects in the products we distribute could result in death, personal injury, property damage, pollution, release of hazardous substances or damage to equipment and facilities. Actual or claimed defects in the products we distribute may give rise to claims against us for losses and expose us to claims for damages.

We maintain insurance to cover certain of our potential losses, and we are subject to various self-retentions, deductibles and caps under our insurance. It is possible, however, that judgments could be rendered against us in cases in which we would be uninsured and beyond the amounts that we currently have reserved or anticipate incurring for these matters. Even a partially uninsured claim, if successful and of significant size, could have a material adverse effect on us. Furthermore, we may not be able to continue to obtain insurance on commercially reasonable terms in the future, and we may incur losses from interruption of our business that exceed our insurance coverage. Finally, even in cases where we maintain insurance coverage, our insurers may raise various objections and exceptions to coverage that could make uncertain the timing and amount of any possible insurance recovery.

 

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Due to our position as a distributor, we are subject to personal injury, product liability and environmental claims involving allegedly defective products.

Our customers use certain of the products we distribute in potentially hazardous applications that can result in personal injury, product liability and environmental claims. A catastrophic occurrence at a location where end users use the products we distribute may result in us being named as a defendant in lawsuits asserting potentially large claims, even though we did not manufacture the products. Applicable law may render us liable for damages without regard to negligence or fault. In particular, certain environmental laws provide for joint and several and strict liability for remediation of spills and releases of hazardous substances. Certain of these risks are reduced by the fact that we are a distributor of products that third-party manufacturers produce, and, thus, in certain circumstances, we may have third-party warranty or other claims against the manufacturer of products alleged to have been defective. However, there is no assurance that these claims could fully protect us or that the manufacturer would be able financially to provide protection. There is no assurance that our insurance coverage will be adequate to cover the underlying claims. Our insurance does not provide coverage for all liabilities (including liability for certain events involving pollution or other environmental claims).

We are a defendant in asbestos-related lawsuits. Exposure to these and any future lawsuits could have a material adverse effect on us.

We are a defendant in lawsuits involving approximately 981 claims as of December 31, 2011 alleging, among other things, personal injury, including mesothelioma and other cancers, arising from exposure to asbestos-containing materials included in products that we distributed in the past. Each claim involves allegations of exposure to asbestos-containing materials by a single individual, his or her spouse or family members. The complaints in these lawsuits typically name many other defendants. In the majority of these lawsuits, little or no information is known regarding the nature of the plaintiffs’ alleged injuries or their connection with the products we distributed. Based on our experience with asbestos litigation to date, as well as the existence of certain insurance coverage, we do not believe that the outcome of these pending claims will have a material impact on us. However, the potential liability associated with asbestos claims is subject to many uncertainties, including negative trends with respect to settlement payments, dismissal rates and the types of medical conditions alleged in pending or future claims, negative developments in the claims pending against us, the current or future insolvency of co-defendants, adverse changes in relevant laws or the interpretation of those laws and the extent to which insurance will be available to pay for defense costs, judgments or settlements. Further, while we anticipate that additional claims will be filed against us in the future, we are unable to predict with any certainty the number, timing and magnitude of future claims. Therefore, we can give no assurance that pending or future asbestos litigation will not ultimately have a material adverse effect on us. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Contractual Obligations, Commitments and Contingencies—Legal Proceedings” and “Business—Legal Proceedings” for more information.

If we lose any of our key personnel, we may be unable to effectively manage our business or continue our growth.

Our future performance depends to a significant degree upon the continued contributions of our management team and our ability to attract, hire, train and retain qualified managerial, sales and marketing personnel. In particular, we rely on our sales and marketing teams to create innovative ways to generate demand for the products we distribute. The loss or unavailability to us of any member of our management team or a key sales or marketing employee could have a material adverse effect on us to the extent we are unable to timely find adequate replacements. We face competition for these professionals from our competitors, our customers and other companies operating in our industry. We may be unsuccessful in attracting, hiring, training and retaining qualified personnel.

 

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Interruptions in the proper functioning of our information systems could disrupt operations and cause increases in costs or decreases in revenues.

The proper functioning of our information systems is critical to the successful operation of our business. We depend on our IT systems to process orders, track credit risk, manage inventory and monitor accounts receivable collections. Our information systems also allow us to efficiently purchase products from our vendors and ship products to our customers on a timely basis, maintain cost-effective operations and provide superior service to our customers. However, our information systems are vulnerable to natural disasters, power losses, telecommunication failures and other problems. If critical information systems fail or are otherwise unavailable, our ability to procure products to sell, process and ship customer orders, identify business opportunities, maintain proper levels of inventories, collect accounts receivable and pay accounts payable and expenses could be adversely affected. Our ability to integrate our systems with our customers’ systems would also be significantly affected. We maintain information systems controls designed to protect against, among other things, unauthorized program changes and unauthorized access to data on our information systems. If our information systems controls do not function properly, we face increased risks of unexpected errors and unreliable financial data or theft of proprietary Company information.

The loss of third-party transportation providers upon whom we depend, or conditions negatively affecting the transportation industry, could increase our costs or cause a disruption in our operations.

We depend upon third-party transportation providers for delivery of products to our customers. Strikes, slowdowns, transportation disruptions or other conditions in the transportation industry, including, but not limited to, shortages of truck drivers, disruptions in rail service, increases in fuel prices and adverse weather conditions, could increase our costs and disrupt our operations and our ability to service our customers on a timely basis. We cannot predict whether or to what extent increases or anticipated increases in fuel prices may impact our costs or cause a disruption in our operations going forward.

We may need additional capital in the future, and it may not be available on acceptable terms.

We may require more capital in the future to:

 

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fund our operations;

 

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finance investments in equipment and infrastructure needed to maintain and expand our distribution capabilities;

 

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enhance and expand the range of products we offer; and

 

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respond to potential strategic opportunities, such as investments, acquisitions and international expansion.

We can give no assurance that additional financing will be available on terms favorable to us, or at all. The terms of available financing may place limits on our financial and operating flexibility. If adequate funds are not available on acceptable terms, we may be forced to reduce our operations or delay, limit or abandon expansion opportunities. Moreover, even if we are able to continue our operations, the failure to obtain additional financing could reduce our competitiveness.

Adverse weather events or natural disasters could negatively affect our local economies or disrupt our operations.

Certain areas in which we operate are susceptible to adverse weather conditions or natural disasters, such as hurricanes, tornadoes, floods and earthquakes. These events can disrupt our

 

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operations, result in damage to our properties and negatively affect the local economies in which we operate. Additionally, we may experience communication disruptions with our customers, vendors and employees. These events can cause physical damage to our branches and require us to close branches. Additionally, our sales order backlog and shipments can experience a temporary decline immediately following these events.

We cannot predict whether or to what extent damage caused by these events will affect our operations or the economies in regions where we operate. These adverse events could result in disruption of our purchasing or distribution capabilities, interruption of our business that exceeds our insurance coverage, our inability to collect from customers and increased operating costs. Our business or results of operations may be adversely affected by these and other negative effects of these events.

We have a substantial amount of goodwill and other intangibles recorded on our balance sheet, partly because of our recent acquisitions and business combination transactions. The amortization of acquired assets will reduce our future reported earnings. Furthermore, if our goodwill or other intangible assets become impaired, we may be required to recognize charges that would reduce our income.

As of December 31, 2011, we had $1.3 billion of goodwill and other intangibles recorded on our balance sheet. A substantial portion of these intangible assets result from our use of purchase accounting in connection with the acquisitions we have made over the past several years. In accordance with the purchase accounting method, the excess of the cost of an acquisition over the fair value of identifiable tangible and intangible assets is assigned to goodwill. The amortization expense associated with our identifiable intangible assets will have a negative effect on our future reported earnings. Many other companies, including many of our competitors, will not have the significant acquired intangible assets that we have because they have not participated in recent acquisitions and business combination transactions similar to ours. Thus, the amortization of identifiable intangible assets will not negatively affect their reported earnings to the same degree as ours.

Additionally, under GAAP, goodwill and certain other intangible assets are not amortized, but must be reviewed for possible impairment annually, or more often in certain circumstances where events indicate that the asset values are not recoverable. These reviews could result in an earnings charge for the impairment of goodwill, which would reduce our net income even though there would be no impact on our underlying cash flow. For example, we recorded a non-cash impairment charge in the amount of $386 million during the year ended December 31, 2009. This charge was based on the results of our annual impairment tests for goodwill and intangible assets, which indicated that the book value of these assets exceeded their fair value by this amount.

We face risks associated with conducting business in markets outside of North America.

We currently conduct substantial business in countries outside of North America. In addition, we are evaluating the possibility of establishing distribution networks in certain other foreign countries, particularly in Europe, Asia, the Middle East and South America. We could be materially and adversely affected by economic, legal, political and regulatory developments in the countries in which we do business in the future or in which we expand our business, particularly those countries which have historically experienced a high degree of political or economic instability. Examples of risks inherent in such non-North American activities include:

 

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changes in the political and economic conditions in the countries in which we operate, including civil uprisings and terrorist acts;

 

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unexpected changes in regulatory requirements;

 

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  Ÿ  

changes in tariffs;

 

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the adoption of foreign or domestic laws limiting exports to or imports from certain foreign countries;

 

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fluctuations in currency exchange rates and the value of the U.S. dollar;

 

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restrictions on repatriation of earnings;

 

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expropriation of property without fair compensation;

 

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governmental actions that result in the deprivation of contract or proprietary rights; and

 

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the acceptance of business practices which are not consistent with or are antithetical to prevailing business practices we are accustomed to in North America including export compliance and anti-bribery practices and governmental sanctions.

If we begin doing business in a foreign country in which we do not presently operate, we may also face difficulties in operations and diversion of management time in connection with establishing our business there.

We are subject to U.S. and other anti-corruption laws, trade controls, economic sanctions, and similar laws and regulations, including those in the jurisdictions where we operate. Our failure to comply with these laws and regulations could subject us to civil, criminal and administrative penalties and harm our reputation.

Doing business on a worldwide basis requires us to comply with the laws and regulations of the U.S. government and various foreign jurisdictions. These laws and regulations place restrictions on our operations, trade practices, partners and investment decisions. In particular, our operations are subject to U.S. and foreign anti-corruption and trade control laws and regulations, such as the Foreign Corrupt Practices Act (“FCPA”), export controls and economic sanctions programs, including those administered by the U.S. Treasury Department’s Office of Foreign Assets Control (“OFAC”). As a result of doing business in foreign countries and with foreign partners, we are exposed to a heightened risk of violating anti-corruption and trade control laws and sanctions regulations.

The FCPA prohibits us from providing anything of value to foreign officials for the purposes of obtaining or retaining business or securing any improper business advantage. It also requires us to keep books and records that accurately and fairly reflect the Company’s transactions. As part of our business, we may deal with state-owned business enterprises, the employees of which are considered foreign officials for purposes of the FCPA. In addition, the United Kingdom Bribery Act (the “Bribery Act”) has been enacted and came into effect on July 1, 2011. The provisions of the Bribery Act extend beyond bribery of foreign public officials and also apply to transactions with individuals that a government does not employ. The provisions of the Bribery Act are also more onerous than the FCPA in a number of other respects, including jurisdiction, non-exemption of facilitation payments and penalties. Some of the international locations in which we operate lack a developed legal system and have higher than normal levels of corruption. Our continued expansion outside the U.S., including in developing countries, and our development of new partnerships and joint venture relationships worldwide, could increase the risk of FCPA, OFAC or Bribery Act violations in the future.

Economic sanctions programs restrict our business dealings with certain sanctioned countries, persons and entities. In addition, because we act as a distributor, we face the risk that our customers might further distribute our products to a sanctioned person or entity, or an ultimate end-user in a sanctioned country, which might subject us to an investigation concerning compliance with OFAC or other sanctions regulations.

Violations of anti-corruption and trade control laws and sanctions regulations are punishable by civil penalties, including fines, denial of export privileges, injunctions, asset seizures, debarment from

 

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government contracts and revocations or restrictions of licenses, as well as criminal fines and imprisonment. We have established policies and procedures designed to assist our compliance with applicable U.S. and international anti-corruption and trade control laws and regulations, including the FCPA, the Bribery Act and trade controls and sanctions programs administered by OFAC, and have trained our employees to comply with these laws and regulations. However, there can be no assurance that all of our employees, consultants, agents or other associated persons will not take actions in violation of our policies and these laws and regulations, and that our policies and procedures will effectively prevent us from violating these regulations in every transaction in which we may engage or provide a defense to any alleged violation. In particular, we may be held liable for the actions that our local, strategic or joint venture partners take inside or outside of the United States, even though our partners may not be subject to these laws. Such a violation, even if our policies prohibit it, could have a material adverse effect on our reputation, business, financial condition and results of operations. In addition, various state and municipal governments, universities and other investors maintain prohibitions or restrictions on investments in companies that do business with sanctioned countries, persons and entities, which could adversely affect the market for our common stock or our other securities.

We face risks associated with international instability and geopolitical developments.

In some countries, there is an increased chance for economic, legal or political changes that may adversely affect the performance of our services, sale of our products or repatriation of our profits. We do not know the impact that these regulatory, geopolitical and other factors may have on our business in the future and any of these factors could adversely affect us.

The requirements of being a public company, including compliance with the reporting requirements of the Exchange Act and the requirements of the Sarbanes-Oxley Act and the NYSE, may strain our resources, increase our costs and distract management, and we may be unable to comply with these requirements in a timely or cost-effective manner.

As a public company, we are subject to the reporting requirements of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and the corporate governance standards of the Sarbanes-Oxley Act of 2002, or the Sarbanes-Oxley Act, and the NYSE. These requirements may place a strain on our management, systems and resources. The Exchange Act requires us to file annual, quarterly and current reports with respect to our business and financial condition within specified time periods and to prepare proxy statements with respect to our annual meeting of shareholders. The Sarbanes-Oxley Act requires that we maintain effective disclosure controls and procedures and internal controls over financial reporting. The NYSE will require that we comply with various corporate governance requirements. To maintain and improve the effectiveness of our disclosure controls and procedures and internal controls over financial reporting and comply with the Exchange Act and NYSE requirements, significant resources and management oversight will be required. This may divert management’s attention from other business concerns, which could have a material adverse effect on us and the price of our common stock.

We also expect that it could be difficult and will be significantly more expensive to obtain directors’ and officers’ liability insurance, and we may be required to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage. As a result, it may be more difficult for us to attract and retain qualified persons to serve on our board of directors (the “Board”) or as executive officers. Advocacy efforts by shareholders and third parties may also prompt even more changes in governance and reporting requirements. We cannot predict or estimate the amount of additional costs we may incur or the timing of these costs.

 

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We will be exposed to risks relating to evaluations of controls required by Section 404 of the Sarbanes-Oxley Act.

We are in the process of evaluating our internal controls systems to allow management to report on, and our independent auditors to audit, our internal controls over financial reporting. We will be performing the system and process evaluation and testing (and any necessary remediation) required to comply with the management certification and auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act, and will be required to comply with Section 404 in full (including an auditor attestation on management’s internal controls report) in our annual report on Form 10-K for the year ending December 31, 2012 (subject to any change in applicable SEC rules). Furthermore, upon completion of this process, we may identify control deficiencies of varying degrees of severity under applicable U.S. Securities and Exchange Commission (“SEC”) and Public Company Accounting Oversight Board (“PCAOB”) rules and regulations that remain unremediated. As a public company, we will be required to report, among other things, control deficiencies that constitute a “material weakness” or changes in internal controls that, or that are reasonably likely to, materially affect internal controls over financial reporting. A “material weakness” is a significant deficiency or combination of significant deficiencies in internal control over financial reporting that results in a reasonable possibility that a material misstatement of the annual or interim financial statements will not be prevented or detected on a timely basis.

If we fail to implement the requirements of Section 404 in a timely manner, regulatory authorities such as the SEC or the PCAOB might subject us to sanctions or investigation. If we do not implement improvements to our disclosure controls and procedures or to our internal controls in a timely manner, our independent registered public accounting firm may not be able to certify as to the effectiveness of our internal controls over financial reporting pursuant to an audit of our controls. This may subject us to adverse regulatory consequences or a loss of confidence in the reliability of our financial statements. We could also suffer a loss of confidence in the reliability of our financial statements if our independent registered public accounting firm reports a material weakness in our internal controls, if we do not develop and maintain effective controls and procedures or if we are otherwise unable to deliver timely and reliable financial information. Any loss of confidence in the reliability of our financial statements or other negative reaction to our failure to develop timely or adequate disclosure controls and procedures or internal controls could result in a decline in the price of our common stock. In addition, if we fail to remedy any material weakness, our financial statements may be inaccurate, we may face restricted access to the capital markets and our stock price may be adversely affected.

We are a “controlled company” within the meaning of the NYSE rules and, as a result, will qualify for, and may rely on, exemptions from certain corporate governance requirements.

A company of which more than 50% of the voting power is held by an individual, a group or another company is a “controlled company” within the meaning of the NYSE rules and may elect not to comply with certain corporate governance requirements of the NYSE, including:

 

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the requirement that a majority of the Board consist of independent directors;

 

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the requirement that we have a nominating/corporate governance committee that is composed entirely of independent directors with a written charter addressing the committee’s purpose and responsibilities; and

 

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the requirement that we have a compensation committee that is composed entirely of independent directors with a written charter addressing the committee’s purpose and responsibilities.

Following this offering, we will rely on all of the exemptions listed above. Accordingly, you will not have the same protections afforded to stockholders of companies that are subject to all of the corporate governance requirements of the NYSE.

 

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The SEC’s move toward a single set of international accounting standards could materially impact our results of operations.

The SEC continues to move forward with a convergence to a single set of international accounting standards (such as International Financial Reporting Standards (“IFRS”)). The associated changes in regulatory accounting may negatively impact the way we record revenues, expenses, assets and liabilities. Currently, under IFRS, the LIFO method of valuing inventory is not permitted. If we had ceased valuing our inventory under the LIFO method at December 31, 2011, we would have been required to make tax payments approximating $136 million over the subsequent four years.

The financial statements presented in this prospectus may not provide an accurate indication of what our future results of operations are likely to be.

Given our recent history of consummating numerous acquisitions, our financial statements may not represent an accurate picture of what our future performance will be. We acquired the remaining 15% majority voting interest in McJunkin Appalachian Oilfield Supply Company (“McJunkin Appalachian”) in January 2007; we acquired Midway-Tristate Corporation (“Midway”) in April 2007; we entered into a business combination with Red Man in October 2007 (effectively doubling our size); we acquired the remaining approximately 49% noncontrolling interest in MRC Midfield in July 2008; we acquired LaBarge in October 2008; we acquired MRC Transmark in October 2009; we acquired MRC SPF in June 2011; and we acquired the piping systems business of OneSteel Ltd. in March 2012. Our limited combined operating history may make it difficult to forecast our future operating results and financial condition. In particular, because of the significance of the Red Man combination, the financial statements for periods prior to that transaction are not comparable with those after the transaction.

The occurrence of cyber incidents, or a deficiency in our cybersecurity, could negatively impact our business by causing a disruption to our operations, a compromise or corruption of our confidential information or damage to our Company’s image, all of which could negatively impact our financial results

A cyber incident is considered to be any adverse event that threatens the confidentiality, integrity or availability of our information resources. More specifically, a cyber incident is an intentional attack or an unintentional event that can include gaining unauthorized access to systems to disrupt operations, corrupt data or steal confidential information. As our reliance on technology has increased, so have the risks posed to our systems, both internal and those we have outsourced. Our three primary risks that could directly result from the occurrence of a cyber incident include operational interruption, damage to our Company’s image, and private data exposure. We have implemented solutions, processes, and procedures to help mitigate this risk, but these measures, as well as our organization’s increased awareness of our risk of a cyber incident, do not guarantee that our financial results will not be negatively impacted by such an incident.

Risks Related to this Offering and our Common Stock

There is no existing market for our common stock, and we do not know if one will develop to provide you with adequate liquidity. If our stock price fluctuates after this offering, you could lose a significant part of your investment.

Prior to this offering, there has not been a public market for our common stock. If an active trading market does not develop, you may have difficulty selling any of our common stock that you buy. Negotiations among the Company and the underwriters will determine the initial public offering price for the shares, which may not be indicative of prices that will prevail in the open market following this offering. Consequently, you may not be able to sell shares of our common stock at prices equal to or

 

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greater than the price you paid in this offering. The market price of our common stock may be influenced by many factors including:

 

  Ÿ  

fluctuations in oil and natural gas prices;

 

  Ÿ  

the failure of securities analysts to cover our common stock after this offering or changes in analysts’ financial estimates;

 

  Ÿ  

our or our competitors’ announcements of significant contracts or acquisitions or other business developments;

 

  Ÿ  

variations in quarterly results of operations;

 

  Ÿ  

loss of a large customer or supplier;

 

  Ÿ  

U.S. and international general economic conditions;

 

  Ÿ  

increased competition;

 

  Ÿ  

terrorist acts;

 

  Ÿ  

future sales of our common stock or the perception that such sales may occur;

 

  Ÿ  

investor perceptions of us and the industries in which our products are used; and

 

  Ÿ  

the other factors listed in “Risk Factors”.

As a result of these factors, investors in our common stock may not be able to resell their shares at or above the initial offering price. In addition, the stock market in general has experienced extreme price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of companies like us. These broad market and industry factors may significantly reduce the market price of our common stock, regardless of our operating performance.

Following the completion of this offering, certain affiliates of The Goldman Sachs Group, Inc. will continue to control us and may have conflicts of interest with other stockholders. Conflicts of interest may arise because affiliates of our principal stockholder have continuing agreements and business relationships with us.

Upon completion of this offering, the Goldman Sachs Funds will control 77% of our outstanding common stock, or 74% if the underwriters exercise their option to purchase additional shares in full. As a result, the Goldman Sachs Funds will continue to be able to control the election of our directors, determine our corporate and management policies and determine, without the consent of our other stockholders, the outcome of any corporate transaction or other matter submitted to our stockholders for approval, including potential mergers or acquisitions, asset sales and other significant corporate transactions. The Goldman Sachs Funds will also have sufficient voting power to amend our organizational documents.

Moreover, prior to the completion of this offering we will enter into a governance agreement with PVF Holdings, an affiliate of the Goldman Sachs Funds, that will give it certain rights relating to the nomination of candidates to our board of directors until the time that PVF Holdings first ceases to beneficially own at least 15.0% of the outstanding shares of our common stock. See “Certain Relationships and Related Party Transactions—Governance Agreement” for a more detailed description of the governance agreement.

Conflicts of interest may arise between our principal stockholder and us. Affiliates of our principal stockholder engage in transactions with our Company. An affiliate of Goldman Sachs is a lender under the Global ABL Facility. See “Certain Relationships and Related Party Transactions”. Further, the

 

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Goldman Sachs Funds are in the business of making investments in companies and may, from time to time, acquire and hold interests in businesses that compete directly or indirectly with us, and they may either directly, or through affiliates, also maintain business relationships with companies that may directly compete with us. In general, the Goldman Sachs Funds or their affiliates could pursue business interests or exercise their voting power as stockholders in ways that are detrimental to us but beneficial to themselves or to other companies in which they invest or with whom they have a material relationship. Conflicts of interest could also arise with respect to business opportunities that could be advantageous to the Goldman Sachs Funds and they may pursue acquisition opportunities that may be complementary to our business. As a result, those acquisition opportunities may not be available to us. Under the terms of our amended and restated certificate of incorporation, the Goldman Sachs Funds will have no obligation to offer us corporate opportunities. See “Description of Our Capital Stock—Corporate Opportunities”.

As a result of these relationships, the interests of the Goldman Sachs Funds may not coincide with the interests of our Company or other holders of our common stock. So long as the Goldman Sachs Funds continue to control a significant amount of the outstanding shares of our common stock, the Goldman Sachs Funds will continue to be able to strongly influence or effectively control our decisions, including potential mergers or acquisitions, asset sales and other significant corporate transactions. See “Certain Relationships and Related Party Transactions”.

We do not currently intend to pay dividends in the foreseeable future.

It is uncertain when, if ever, we will declare dividends to our stockholders. We do not currently intend to pay dividends in the foreseeable future. Our ability to pay dividends is constrained by our holding company structure under which we are dependent on our subsidiaries for payments. Additionally, we and our subsidiaries are parties to credit agreements which restrict our ability and their ability to pay dividends. See “Dividend Policy” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources”. You should not rely on an investment in us if you require dividend income. In the foreseeable future, the only possible return on an investment in us would come from an appreciation of our common stock and there can be no assurance that our common stock will appreciate after this offering.

Shares eligible for future sale may cause the price of our common stock to decline.

Sales of substantial amounts of our common stock in the public market, or the perception that these sales may occur, could cause the market price of our common stock to decline. This could also impair our ability to raise additional capital through the sale of our equity securities. Under our amended and restated certificate of incorporation, we will be authorized to issue up to 500 million shares of common stock, of which 101,487,198 shares of common stock (excluding 127,301 shares of non-vested restricted stock) will be outstanding upon consummation of this offering. Of these shares, the 22,727,273 shares of common stock sold in this offering (assuming that the underwriters do not exercise their option to purchase additional shares) will be freely transferable without restriction or further registration under the Securities Act by persons other than “affiliates”, as that term is defined in Rule 144 under the Securities Act. Our principal stockholder, directors and executive officers, who will collectively beneficially own 79,250,780 shares following this offering (assuming that the underwriters do not exercise their option to purchase additional shares), will enter into lock-up agreements, pursuant to which they will agree, subject to certain exceptions, not to sell or transfer, directly or indirectly, any shares of our common stock for a period of 180 days from the date of this prospectus, subject to extension in certain circumstances. Upon the expiration of these lock-up agreements, all of these shares of common stock will be tradable subject to limitations imposed by Rule 144 under the Securities Act. See “Shares Eligible for Future Sale”.

 

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CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

This prospectus contains forward-looking statements, 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, 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, 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:

 

  Ÿ  

decreases in oil and natural gas prices;

 

  Ÿ  

decreases in oil and natural gas industry expenditure levels, which may result from decreased oil and natural gas prices or other factors;

 

  Ÿ  

increased usage of alternative fuels, which may negatively affect oil and natural gas industry expenditure levels;

 

  Ÿ  

U.S. and international general economic conditions;

 

  Ÿ  

our ability to compete successfully with other companies in our industry;

 

  Ÿ  

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;

 

  Ÿ  

unexpected supply shortages;

 

  Ÿ  

cost increases by our suppliers;

 

  Ÿ  

our lack of long-term contracts with most of our suppliers;

 

  Ÿ  

increases in customer, manufacturer and distributor inventory levels;

 

  Ÿ  

suppliers’ price reductions of products that we sell, which could cause the value of our inventory to decline;

 

  Ÿ  

decreases in steel prices, which could significantly lower our profit;

 

  Ÿ  

increases in steel prices, which we may be unable to pass along to our customers, which could significantly lower our profit;

 

  Ÿ  

our lack of long-term contracts with many of our customers and our lack of contracts with customers that require minimum purchase volumes;

 

  Ÿ  

changes in our customer and product mix;

 

  Ÿ  

risks related to our customers’ credit;

 

  Ÿ  

the potential adverse effects associated with integrating acquisitions into our business and whether these acquisitions will yield their intended benefits;

 

  Ÿ  

the success of our acquisition strategies;

 

  Ÿ  

our significant indebtedness;

 

  Ÿ  

the dependence on our subsidiaries for cash to meet our debt obligations;

 

  Ÿ  

changes in our credit profile;

 

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  Ÿ  

a decline in demand for certain of the products we distribute if import restrictions on these products are lifted;

 

  Ÿ  

environmental, health and safety laws and regulations and the interpretation or implementation thereof;

 

  Ÿ  

the sufficiency of our insurance policies to cover losses, including liabilities arising from litigation;

 

  Ÿ  

product liability claims against us;

 

  Ÿ  

pending or future asbestos-related claims against us;

 

  Ÿ  

the potential loss of key personnel;

 

  Ÿ  

interruption in the proper functioning of our information systems;

 

  Ÿ  

loss of third-party transportation providers;

 

  Ÿ  

potential inability to obtain necessary capital;

 

  Ÿ  

risks related adverse weather events or natural disasters;

 

  Ÿ  

impairment of our goodwill or other intangible assets;

 

  Ÿ  

changes in tax laws or adverse positions taken by taxing authorities in the countries in which we operate;

 

  Ÿ  

adverse changes in political or economic conditions in the countries in which we operate;

 

  Ÿ  

exposure to U.S. and international laws and regulations, including the Foreign Corrupt Practices Act and the U.K. Bribery Act and other economic sanction programs;

 

  Ÿ  

potential increases in costs and distraction of management resulting from the requirements of being a publicly reporting company;

 

  Ÿ  

risks relating to evaluations of internal controls required by Section 404 of the Sarbanes-Oxley Act;

 

  Ÿ  

the operation of our Company as a “controlled company”; and

 

  Ÿ  

the limited usefulness of our historic financial statements.

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.

 

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USE OF PROCEEDS

We estimate that the net proceeds we will receive from the sale of 17,045,455 shares of our common stock in this offering, after deducting underwriter discounts and commissions and estimated offering expenses payable by us (assuming the shares are sold at the midpoint of the range on the cover of the prospectus), will be approximately $349.9 million. A $1.00 increase (decrease) in the assumed public offering price of $22.00 per share would increase (decrease) the net proceeds that we will receive from this offering by approximately $16.0 million, assuming the number of shares offered by us, as set forth on the cover of this prospectus, remains the same and after deducting the underwriting discounts and commissions and estimated offering expenses payable by us. We intend to use all of the net proceeds from this offering to repay indebtedness under our Global ABL Facility. We may later from time to time use borrowings under our Global ABL Facility for general corporate purposes. We will not receive any proceeds from the sale of shares of our common stock by the selling stockholder in this offering (including any shares sold by the selling stockholder pursuant to the underwriters’ option to purchase additional shares).

Certain of the underwriters of this offering or their affiliates are lenders under our Global ABL Facility. Accordingly, certain of the underwriters will receive net proceeds from this offering in connection with the repayment of our Global ABL Facility. In addition, funds affiliated with Goldman, Sachs & Co., one of the participating underwriters, are members of and own common units of the selling stockholder and beneficially own in excess of 10% of our issued and outstanding common stock. See “Underwriting—Conflicts of Interest.”

Our Global ABL Facility allows us to borrow up to $1.25 billion, subject to borrowing base limitations. The Global ABL Facility matures in March 2017. Borrowings initially bear interest at an initial rate per annum equal to, in the case of U.S. dollar borrowings, LIBOR plus 1.75%. The borrowings under the Global ABL Facility which will be repaid originated in the March 2012 refinancing of our then existing ABL Credit Facility.

 

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DIVIDEND POLICY

Following the completion of this offering, we do not anticipate paying any cash dividends in the foreseeable future. We currently intend to retain future earnings from our business, if any, to finance operations and the expansion of our business. Any future determination to pay cash dividends will be at the discretion of the Board and will be dependent upon our financial condition, results of operations, capital requirements and other factors that the Board deems relevant. In addition, the covenants contained in our subsidiaries’ credit facilities limit the ability of our subsidiaries to pay dividends to us, which limits our ability to pay dividends to our stockholders. Our ability to pay dividends is also limited by the covenants contained in our Global ABL Facility and the indenture governing our Notes (the “Indenture”). Covenants contained in the instruments governing future indebtedness that we or our subsidiaries may incur in the future may further limit our ability to pay dividends. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources”.

 

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CAPITALIZATION

The following table sets forth our consolidated cash and cash equivalents and capitalization as of December 31, 2011:

 

  Ÿ  

on an actual basis; and

 

  Ÿ  

on an as adjusted basis to give effect to the issuance of common stock in this offering, the application of proceeds from the offering and our entry into the Global ABL Facility as described in “Use of Proceeds” as if each had occurred on December 31, 2011.

You should read this table in conjunction with “Selected Historical Consolidated Financial and Other Data”, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the consolidated financial statements and related notes that we include elsewhere in this prospectus.

 

   

As of December 31, 2011

 
    Actual     As Adjusted  
    (Dollars in millions)  

Cash and cash equivalents

  $ 46.1      $ 46.1   
 

 

 

   

 

 

 

Total Debt (including current portion):

   

9.50% senior secured notes due 2016, net of discount

  $ 1,031.6      $ 1,031.6   

Global ABL Facility(1)

    —          151.8   

ABL Credit Facility(2)

    456.4        —     

MRC Transmark term loan(3)

    30.8        —     

MRC Transmark factoring facility

    7.2        —     

MRC Transmark revolving credit facility

    —          —     

Other

    0.7        0.7   
 

 

 

   

 

 

 

Total debt

    1,526.7        1,184.1   

Stockholders’ equity:

   

Common stock, $0.01 par value per share; 400,000,000 shares authorized, 84,427,000 shares issued and outstanding actual; 500,000,000 shares authorized and 101,487,198 shares issued and outstanding as adjusted(4)

    0.8        1.0   

Preferred stock, $0.01 par value per share; 150,00,000 shares authorized, no shares issued and outstanding actual; 100,000,000 shares authorized as adjusted, no shares issued and outstanding as adjusted

    —          —     

Additional paid-in capital

    1,283.0        1,632.7   

Retained (deficit)

    (536.8     (536.8

Other comprehensive (loss)

    (26.1     (26.1
 

 

 

   

 

 

 

Total equity(5)

    720.9        1,070.8   
 

 

 

   

 

 

 

Total capitalization

  $ 2,247.6      $ 2,254.9   
 

 

 

   

 

 

 

 

(1) We entered into the Global ABL Facility on March 27, 2012. The facility also includes a $300 million accordion, which may be drawn upon subject to certain conditions. The amount shown in the As Adjusted column reflects the repayment of $349.9 million under the Global ABL Facility with the proceeds of this offering and includes $7.3 million of borrowings under the Global ABL Facility to pay expenses incurred in connection with our entry into the facility. The As Adjusted column does not reflect the write-off of certain debt issuance costs associated with our previously existing ABL Credit Facility which are not material.
(2) As of December 31, 2011, we had availability of $538.7 million under our ABL Credit Facility. As of March 26, 2012, approximately $618 million was outstanding under the ABL Credit Facility, due in part to borrowing to finance the acquisition of OneSteel Piping Systems and working capital growth.

 

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(3) As of December 31, 2011, we had availability of $45.0 million under the MRC Transmark revolving credit facility.
(4) The number of shares of common stock outstanding on an actual and as adjusted basis as of December 31, 2011:

 

  Ÿ  

gives effect to the two-for-one reverse split of our common stock which occurred on February 29, 2012;

 

  Ÿ  

excludes 2,845,688 shares of common stock issuable upon the exercise of stock options granted to certain of our employees pursuant to our 2007 Stock Option Plan; and

 

  Ÿ  

excludes 127,301 shares of non-vested restricted stock awarded to certain of our employees and directors pursuant to our 2007 Restricted Stock Plan.

 

(5) A $1.00 increase (decrease) in the assumed initial public offering price of $22.00 per share would increase (decrease) total equity by approximately $16.0 million, assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same, and after deducting the underwriting discounts and commissions and estimated offering expenses payable by us.

 

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DILUTION

If you invest in our common stock, your interest will be diluted to the extent of the difference between the initial public offering price per share of our common stock and the net tangible book value per share of our common stock after this offering. Dilution results from the fact that the initial public offering price per share of common stock is substantially in excess of the net tangible book value per share of our common stock attributable to the existing shareholders for our presently outstanding shares of common stock. We calculate net tangible book value per share of our common stock by dividing the net tangible book value (total consolidated tangible assets less total consolidated liabilities) by the number of outstanding shares of our common stock (giving effect to the two-for-one reverse split of our common stock which occurred on February 29, 2012).

Our net tangible book value as of December 31, 2011 was a deficit of $612 million, or $7.25 per share of our common stock, based on 84,427,000 shares of our common stock outstanding immediately prior to the closing of this offering (giving effect to the two-for-one reverse split of our common stock which occurred on February 29, 2012).

After giving effect to the sale of 22,727,273 shares of our common stock in this offering, assuming an initial public offering price of $22.00 per share, less the underwriting discounts and commissions and the estimated offering expenses payable by us, and without taking into account any other changes in the net tangible book value after December 31, 2011, our pro forma net tangible book value at December 31, 2011 would have been a deficit of $262 million, or $2.58 per share. This represents an immediate increase in net tangible book value of $4.67 per share of our common stock to the existing shareholders and an immediate dilution in net tangible book value of $24.58 per share of our common stock, or 112% of the estimated offering price of $22.00, to investors purchasing shares of our common stock in this offering. The following table illustrates such per share of our common stock dilution:

 

Assumed initial public offering price per share

     $ 22.00   

Net tangible book value (deficit) per share before
the change attributable to new investors

   $ (7.25  

Increase in net tangible book value per share
attributable to new investors

   $ 4.67     

Pro forma net tangible book value (deficit) per
share after this offering

     $ (2.58
    

 

 

 

Dilution per share to new investors

     $ 24.58   
    

 

 

 

The following table summarizes, on a pro forma basis as of December 31, 2011, the total number of shares of our common stock purchased from us, the total cash consideration paid to us and the average price per share of our common stock that purchasers of the shares and new investors purchasing shares of our common stock in this offering paid (after giving effect to the two-for-one reverse split of our common stock which occurred on February 29, 2012).

 

     Shares of our Common Stock
Purchased
    Total
Consideration
(Amount)
(in millions)(2)
     Total
Consideration

(Percentage)
    Average Price
Per Share
 
     Number
(in millions)
     Percent         

Existing holders

     78,759,925         78   $ 784,308,000         61   $ 9.96   

New investors(1)

     22,727,273         22   $ 500,000,000         39   $ 22.00   

Total

     101,487,198         100   $ 1,284,308,000         100   $ 12.65   

 

(1)

A $1.00 increase (decrease) in the assumed initial public offering price of $22.00 per share, which is the midpoint of the price range set forth on the cover page of this prospectus, would increase

 

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(decrease) total consideration paid by new investors and total consideration paid by all stockholders by approximately $22.7 million, assuming the number of shares offered by us, as set forth on the cover page of the prospectus, remains the same.

(2) Consideration for existing shareholders includes rollover equity issued in connection with certain acquisitions and has been reduced by the amount of any dividends.

If the underwriters were to fully exercise the underwriters’ option to purchase 3,409,091 additional shares of our common stock, the percentage of shares of our common stock held by existing shareholders would be 75%, and the percentage of shares of our common stock held by new investors would be 25%.

As of December 31, 2011, there were options outstanding to purchase 2,845,688 shares of our common stock, with exercise prices ranging from $9.62 to $24.96 per share and a weighted average exercise price of $17.04 per share (after taking into account the two-for-one reverse split of our common stock which occurred on February 29, 2012). Also, as of December 31, 2011, there were 141,997 shares of unvested restricted stock outstanding (after taking into account the two-for-one reverse split of our common stock which occurred on February 29, 2012). The tables and calculations above assume that those options have not been exercised and the restricted stock has not vested. If these options were exercised at the weighted average exercise price and the restricted stock was fully vested, there would be no additional dilution per share to new investors.

To the extent that we grant options or other equity awards to our employees or directors in the future and the holders of those options or other equity awards exercised, or vest in, them or we issue other shares of our common stock, there will be further dilution to new investors.

 

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SELECTED HISTORICAL CONSOLIDATED FINANCIAL AND OTHER DATA

On January 31, 2007, MRC Global Inc. (formerly known as McJunkin Red Man Holding Corporation), an affiliate of The Goldman Sachs Group, Inc., acquired a majority of the equity of the entity now known as McJunkin Red Man Corporation (then known as McJunkin Corporation) (the “GS Acquisition”). In this prospectus, the term “Predecessor” refers to McJunkin Corporation and its subsidiaries prior to January 31, 2007 and the term “Successor” refers to the entity now known as MRC Global Inc. and its subsidiaries on and after January 31, 2007. As a result of the change in McJunkin Corporation’s basis of accounting in connection with the GS Acquisition, Predecessor’s financial statement data for the one month ended January 30, 2007 and earlier periods are not comparable to Successor’s financial data for the eleven months ended December 31, 2007 and subsequent periods.

McJunkin Corporation completed a business combination transaction with Red Man (the “Red Man Transaction”) on October 31, 2007. At that time, McJunkin Corporation was renamed McJunkin Red Man Corporation. Operating results for the eleven-month period ended December 31, 2007 include the results of MRC Global Inc. for the full period and the results of Red Man for the two months after the business combination on October 31, 2007. Accordingly, our historical results for the years ended December 31, 2011, 2010, 2009 and 2008 and the 11 months ended December 31, 2007 are not comparable to McJunkin Corporation’s historical results for the one month ended January 30, 2007.

The selected consolidated financial information presented below under the captions Statement of Operations Data and Other Financial Data for the years ended December 31, 2011, 2010, 2009 and 2008, and the selected consolidated financial information presented below under the caption Balance Sheet Data as of December 31, 2011 and December 31, 2010, have been derived from the consolidated financial statements of MRC Global Inc. included elsewhere in this prospectus that Ernst & Young LLP, our independent registered public accounting firm, has audited. The selected consolidated financial information presented below under the captions Statement of Operations Data and Other Financial Data for the one month ended January 30, 2007 and the eleven months ended December 31, 2007, and the selected consolidated financial information presented below under the caption Balance Sheet Data as of December 31, 2009, December 31, 2008 and December 31, 2007, have been derived from the consolidated financial statements of MRC Global Inc. not included in this prospectus that Ernst & Young LLP has audited.

All information in this prospectus gives retroactive effect to the two-for-one reverse split of our common stock which occurred on February 29, 2012.

 

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The selected historical consolidated financial data presented below has been derived from financial statements that have been prepared using accounting principles generally accepted in the United States of America (in millions, except share and per share amounts). This data should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the consolidated financial statements and related notes included elsewhere in this prospectus.

 

    Successor       Predecessor  
    Year Ended December 31,     Eleven
Months
Ended

December 31,
             One Month
Ended
January 30,
 
    2011     2010     2009(1)     2008     2007              2007  

Statement of Operations Data:

                 

Sales

  $ 4,832.4      $ 3,845.5      $ 3,661.9      $ 5,255.2      $ 2,124.9            $ 142.5   

Cost of sales

    4,124.2        3,327.0        3,067.4        4,273.1        1,761.9              114.9   

Inventory write-down

    —          0.4        46.5        —          —                —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

         

 

 

 

Gross margin

    708.2        518.1        548.0        982.1        363.0              27.6   

Selling, general and administrative expenses

    513.6        451.7        411.6        482.1        218.5              15.9   

Goodwill and intangibles impairment charge

    —          —          386.1        —          —                —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

         

 

 

 

Operating income (loss)

    194.6        66.4        (249.7     500.0        144.5              11.7   

Other (expenses) income:

                 

Interest expense

    (136.8     (139.6     (116.5     (84.5     (61.7           (0.1

Write off of debt issuance costs

    (9.5     —          —          —          —                —     

Change in fair value of derivatives

    7.0        (4.9     8.9        (6.2     —                —     

Other, net

    0.5        2.9        2.5        (2.6     (0.8           (0.4
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

         

 

 

 

Total other (expense) income

    (138.8     (141.6     (105.1     (93.3     (62.5           (0.5
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

         

 

 

 

Income (loss) before income taxes

    55.8        (75.2     (354.8     406.7        82.0              11.2   

Income taxes

    26.8        (23.4     (15.0     153.2        32.1              4.6   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

         

 

 

 

Net (loss) income

    29.0        (51.8     (339.8     253.5        49.9              6.6   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

         

 

 

 

Earnings (loss) per share amounts:

                 

Basic

  $ 0.34      $ (0.61   $ (4.30   $ 3.26      $ 1.44           

Diluted

  $ 0.34      $ (0.61   $ (4.30   $ 3.26      $ 1.44           

Weighted average shares, basic (in thousands)

    84,417        84,384        79,067        77,646        34,663           

Weighted average shares, diluted (in thousands)

    84,655        84,384        79,067        77,828        34,731           

Basic—Class A

                  $ 376.70   

Diluted—Class A

                  $ 376.70   

Basic—Class B

                  $ 376.70   

Diluted—Class B

                  $ 376.70   

Dividends

  $ —        $ —        $ 0.04      $ 6.10      $ —                —     
 

Balance Sheet Data:

                 

Cash

  $ 46.1      $ 56.2      $ 56.2      $ 12.1      $ 10.1            $ 2.0   

Working capital

    1,074.7        842.6        930.2        1,208.0        674.1              211.1   

Total assets

    3,227.7        2,991.2        3,083.2        3,919.7        3,083.8              474.2   

Total debt

    1,526.7        1,360.2        1,452.6        1,748.6        868.4              4.8   

Stockholders’ equity

    720.9        689.8        743.9        987.2        1,262.7              245.2   
 

Other Financial Data:

                 

Adjusted Gross Margin

  $ 849.6      $ 663.2      $ 493.5      $ 1,164.0      $ 400.6            $ 27.9   

Adjusted EBITDA

  $ 360.5      $ 224.2      $ 218.5      $ 744.4      $ 344.9            $ 26.0   

Adjusted EBITDA RONA

    24.1     19.6     18.6            
 

Net cash:

                 

Operating Activities

    (102.9     112.7        505.5        (137.4     110.2              6.6   

Investing Activities

    (48.0     (16.2     (66.9     (314.2     (1,788.9           (0.2

Financing Activities

    140.6        (98.2     (393.9     452.0        1,687.2              (8.3

 

(1) Includes $46.5 million inventory write-down and $386.1 million goodwill and intangibles impairment charge.

 

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We define Adjusted EBITDA as net income plus interest, income taxes, depreciation and amortization, amortization of intangibles, other non-recurring and non-cash charges (such as gains/losses on the early extinguishment of debt, changes in the fair value of derivative instruments and goodwill impairment) and plus or minus the impact of our LIFO inventory costing methodology. We present Adjusted EBITDA because it is an important measure used to determine the interest rate and commitment fee we pay under our Global ABL Facility. In addition, we believe it is a useful factor indicator of our operating performance. We believe this for the following reasons:

 

  Ÿ  

Our management uses Adjusted EBITDA for planning purposes, including the preparation of our annual operating budget and financial projections, as well as for determining a significant portion of the compensation of our executive officers;

 

  Ÿ  

Adjusted EBITDA is widely used by investors to measure a company’s operating performance without regard to items, such as interest expense, income tax expense and depreciation and amortization, that can vary substantially from company to company depending upon their financing and accounting methods, the book value of their assets, their capital structures and the method by which their assets were acquired; and

 

  Ÿ  

Securities analysts use Adjusted EBITDA as a supplemental measure to evaluate the overall operating performance of companies.

In particular, we believe that Adjusted EBITDA is a useful indicator of our operating performance because Adjusted EBITDA measures our Company’s operating performance without regard to certain non-recurring, non-cash or transaction-related expenses.

Adjusted EBITDA, however, does not represent and should not be considered as an alternative to net income, cash flow from operations or any other measure of financial performance calculated and presented in accordance with GAAP. Our Adjusted EBITDA may not be comparable to similar measures that other companies report because other companies may not calculate Adjusted EBITDA in the same manner as we do. Although we use Adjusted EBITDA as a measure to assess the operating performance of our business, Adjusted EBITDA has significant limitations as an analytical tool because it excludes certain material costs. For example, it does not include interest expense, which has been a significant element of our costs. Because we use capital assets, depreciation expense is a significant element of our costs and impacts our ability to generate revenue. In addition, the omission of the amortization expense associated with our intangible assets further limits the usefulness of this measure. Adjusted EBITDA also does not include the payment of certain taxes, which is also a significant element of our operations. Furthermore, Adjusted EBITDA does not account for our LIFO inventory costing methodology, and therefore, to the extent that recently purchased inventory accounts for a relatively large portion of our sales, Adjusted EBITDA may overstate our operating performance. Because Adjusted EBITDA does not account for certain expenses, its utility as a measure of our operating performance has material limitations. Because of these limitations, management does not view Adjusted EBITDA in isolation or as a primary performance measure and also uses other measures, such as net income and sales, to measure operating performance.

The calculation of Adjusted EBITDA is consistent with the computation of Consolidated Cash Flow, as defined in the indenture governing the Notes, except for the change in the LIFO reserve, which would not be an adjustment in determining Consolidated Cash Flow.

 

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The following table reconciles Adjusted EBITDA with our net income (loss), as derived from our financial statements (in millions):

 

    Successor          Predecessor  
    Year Ended
December 31,
2011
    Year Ended
December 31,

2010
    Year Ended
December 31,

2009
    Year Ended
December 31,

2008
    Eleven
Months Ended
December  31,

2007
         One
Month Ended
January 30,
2007
 

Net (loss) income

  $ 29.0      $ (51.8   $ (339.8   $ 253.5      $ 49.9          $ 6.6   

Income taxes

    26.8        (23.4     (15.0     153.2        32.1            4.6   

Interest expense

    136.8        139.6        116.5        84.5        61.7            0.1   

Write off of debt issuance costs

    9.5        —          —          —          —              —     

Depreciation and Amortization

    17.0        16.6        14.5        11.3        5.4            0.3   

Amortization of intangibles

    50.7        53.9        46.6        44.4        21.9            —     

Amortization of purchase price accounting

    —          —          15.7        2.4        —              —     

Change in fair value of derivative instruments

    (7.0     4.9        (8.9     6.2        —              —     

Closed locations

    —          (0.7     1.4        4.4        —              —     

Share based compensation

    8.4        3.7        7.8        10.2        3.0            —     

Franchise taxes

    0.4        0.7        1.4        1.5        —              —     

Gain on early extinguishment of debt

    —          —          (1.3     —          —              —     

Goodwill and intangibles impairment

    —          —          386.1        —          —              —     

Inventory write-down

    —          0.4        46.5        —          —              —     

IT system conversion costs

    —          —          2.4        1.4        —              —     

M&A transaction & integration expenses

    0.5        1.4        17.5        30.4        12.7            —     

Midway pre-acquisition contribution

    —          —          —          —          2.8            1.0   

Legal and consulting expenses

    9.9        4.2        1.9        0.4        —              —     

Joint venture termination

    1.7        —          —          —          —              —     

Provision for uncollectible accounts

    0.4        (2.0     1.0        7.7        0.4            —     

Red Man pre-acquisition Contribution

    —          —          —          —          142.2            13.1   

Severance and related costs

    1.1        3.2        4.4        —          —              —     

MRC Transmark pre-Acquisition contribution

    —          —          38.5        —          —              —     

LIFO

    73.7        74.6        (115.6     126.2        10.3            —     

Other non-cash expenses

    1.6        (1.1     (3.1     6.7        2.5            0.3   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

       

 

 

 

Adjusted EBITDA

  $ 360.5      $ 224.2      $ 218.5      $ 744.4      $ 344.9          $ 26.0   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

       

 

 

 

We define Adjusted Gross Margin as sales, less cost of sales, plus depreciation and amortization, plus amortization of intangibles, and plus or minus the impact of our LIFO inventory costing methodology. We present Adjusted Gross Margin because we believe it is a useful indicator of our operating performance and facilitates a meaningful comparison to our peers. We believe this for the following reasons:

 

  Ÿ  

Our management uses Adjusted Gross Margin for planning purposes, including the preparation of our annual operating budget and financial projections. This measure is also used to assess the performance of our business;

 

  Ÿ  

Investors use Adjusted Gross Margin to measure a company’s operating performance without regard to items, such as depreciation and amortization, and amortization of intangibles, that can vary substantially from company to company depending upon the nature and extent of

 

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transactions they have been involved in. Similarly, the impact of the LIFO inventory costing method can cause results to vary substantially from company to company depending upon whether those companies elect to utilize the LIFO method and depending upon which LIFO method they may elect; and

 

  Ÿ  

Securities analysts can use Adjusted Gross Margin as a supplemental measure to evaluate overall operating performance of companies.

In particular, we believe that Adjusted Gross Margin is a useful indicator of our operating performance because Adjusted Gross Margin measures our Company’s operating performance without regard to acquisition transaction-related amortization expenses.

However, Adjusted Gross Margin does not represent and should not be considered an alternative to gross margin or any other measure of financial performance calculated and presented in accordance with GAAP. Our Adjusted Gross Margin may not be comparable to similar measures that other companies report because other companies may not calculate Adjusted Gross Margin in the same manner as we do. Although we use Adjusted Gross Margin as a measure to assess the operating performance of our business, Adjusted Gross Margin has significant limitations as an analytical tool because it excludes certain material costs. For example, it does not include depreciation and amortization expense. Because we use capital assets, depreciation expense is a significant element of our costs and impacts our ability to generate revenue. In addition, the omission of amortization expense associated with our intangible assets further limits the usefulness of this measure. Furthermore, Adjusted Gross Margin does not account for our LIFO inventory costing methodology and, therefore, to the extent that recently purchased inventory accounts for a relatively large portion of our sales, Adjusted Gross Margin may overstate our operating performance. Because Adjusted Gross Margin does not account for certain expenses, its utility as a measure of our operating performance has material limitations. Because of these limitations, management does not view Adjusted Gross Margin in isolation or as a primary performance measure and also uses other measures, such as net income and sales, to measure operating performance.

The following table reconciles Adjusted Gross Margin to gross margin (in millions):

 

    Successor          Predecessor  
    Year Ended
December 31,
2011
    Year Ended
December 31,
2010
    Year Ended
December 31,
2009
    Year Ended
December 31,
2008
    Eleven Months
Ended
December 31,
2007
         One Month
Ended
January 30,
2007
 

Gross margin

  $ 708.2      $ 518.1      $ 548.0      $ 982.1      $ 363.0          $ 27.6   

Depreciation and amortization

    17.0        16.6        14.5        11.3        5.4            0.3   

Amortization of intangibles

    50.7        53.9        46.6        44.4        21.9            —     

Increase (decrease) in LIFO reserve

    73.7        74.6        (115.6     126.2        10.3            —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

       

 

 

 

Adjusted Gross Margin

  $ 849.6      $ 663.2      $ 493.5      $ 1,164.0      $ 400.6          $ 27.9   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

       

 

 

 

We define Adjusted EBITDA Return on Net Assets (Adjusted EBITDA RONA) as (a) Adjusted EBITDA divided by (b) accounts receivable, plus inventory, plus the LIFO reserve, plus property, plant & equipment, net, less accounts payable. The calculation of Adjusted EBITDA RONA is set forth below (dollars in thousands):

 

     Year Ended December 31,  
     2011     2010     2009  

Adjusted EBITDA

   $ 360,465      $ 224,124      $ 218,496   
  

 

 

   

 

 

   

 

 

 

Accounts receivable

   $ 791,280      $ 596,404      $ 506,194   

Inventory at LIFO

     899,064        765,367        871,653   

LIFO Reserve

     175,122        101,419        26,862   

Property, plant & equipment, net

     107,430        104,725        111,480   

Accounts payable

     (479,584     (426,632     (338,512
  

 

 

   

 

 

   

 

 

 

Total adjusted net assets

   $ 1,493,312      $ 1,141,283      $ 1,177,677   
  

 

 

   

 

 

   

 

 

 

Adjusted EBITDA RONA

     24.1     19.6     18.6

 

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We present Adjusted EBITDA RONA because we believe it is a useful indicator of our operating performance. Management believes that Adjusted EBITDA RONA provides meaningful supplemental information regarding our performance by excluding certain income and expense items and assets and liabilities that may not be indicative of the core business operating results and may help in comparing current period results with those of prior periods as well as with our peers. Our management uses Adjusted EBITDA RONA for determining a significant portion of the compensation of our executive officers. In addition, Adjusted EBITDA RONA is a useful indicator of our operating performance because it measures our performance without regard to acquisition transaction-related assets such as intangibles and goodwill.

However, Adjusted EBITDA RONA does not represent and should not be considered an alternative to other GAAP measures of performance such as net income. Also, our definition of Adjusted EBITDA RONA may not be comparable to similar measures that other companies report. Further, Adjusted EBITDA RONA has certain limitations, such as excluding our LIFO inventory costing methodology. In addition, the omission of our substantial intangible assets and goodwill further limits the usefulness of this measure. As a result, management does not view Adjusted EBITDA RONA in isolation or as a primary performance measure and uses other measures such as net income and sales to measure operating performance.

Management believes that the GAAP-based measure which is most comparable to Adjusted EBITDA RONA is a percentage with net income in the numerator and stockholders’ equity in the denominator. We believe Adjusted EBITDA is a useful measure of performance as compared to net income for the reasons stated above in note 2 under “Summary — Summary Consolidated Financial Information” included elsewhere in this prospectus. We believe that for our Company total adjusted net assets (as calculated above) is a more useful measure than stockholders’ equity for purposes of a RONA calculation because, among other things, our calculation omits intangible assets and goodwill arising from acquisitions. Given the Company’s history of making numerous acquisitions in recent years, the Company believes that the measure it uses is more comparable to similar measures used by other companies if the effects of acquisitions are eliminated.

For a reconciliation of Adjusted EBITDA (the numerator in our calculation of Adjusted EBITDA RONA) to net income, see footnote 2 under “Summary — Summary Consolidated Financial Information” included elsewhere in this prospectus. For a reconciliation of total adjusted net assets (the denominator in our calculation of Adjusted EBITDA RONA) to stockholders’ equity, see the following table:

 

     Year Ended December 31,  
     2011     2010     2009  
     (dollars in thousands)  

Stockholders’ equity

   $ 720,862      $ 689,758      $ 743,898   

Long term debt

     1,526,740        1,360,241        1,452,610   

Deferred taxes, net

     357,195        373,719        377,948   

Other liabilities

     143,306        140,844        170,188   

Intangible assets

     (1,333,137     (1,366,549     (1,425,721

LIFO Reserve

     175,122        101,419        26,862   

Other assets

     (50,649     (101,947     (111,864

Cash

     (46,127     (56,202     (56,244
  

 

 

   

 

 

   

 

 

 

Total adjusted net assets

   $ 1,493,312      $ 1,141,283      $ 1,177,677   
  

 

 

   

 

 

   

 

 

 

 

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The following table summarizes (1) the numerator and denominator in our calculation of Adjusted EBITDA RONA and (2) the numerator (net income) and denominator (stockholders’ equity) in the most comparable GAAP-based measure.

 

     Year Ended December 31,  
     2011     2010     2009  
     (dollars in thousands)  

Adjusted EBITDA

   $ 360,465      $ 224,124      $ 218,496   

Total adjusted net assets

   $ 1,493,312      $ 1,141,283      $ 1,177,677   

Adjusted EBITDA RONA

     24.1     19.6     18.6

Net income (loss)

   $ 28,984      $ (51,824   $ (339,771

Stockholders’ equity

   $ 720,862      $ 689,758      $ 743,898   

Net income / stockholders’ equity

     4.02     (7.5 )%      (45.7 )% 

 

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Table of Contents

UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS

The unaudited pro forma consolidated financial statements of MRC Global Inc. (the “Company”) have been derived from the audited historical financial statements of the Company for the year ended and as of December 31, 2011, which are included elsewhere in this prospectus.

The pro forma consolidated balance sheet as of December 31, 2011 and the pro forma consolidated statement of operations for the year ended December 31, 2011 have been adjusted to give effect to the following transactions:

 

  Ÿ  

the issuance by the Company of 17,045,455 shares of common stock to the public at an assumed offering price of $22.00 per share (the midpoint of the range on the front cover of the prospectus); and

 

  Ÿ  

the application of the net proceeds of the offering to be received by the Company after giving effect to underwriting discounts and commissions and other offering expenses ($349.9 million) to repay indebtedness outstanding under the Company’s Global ABL Facility.

The pro forma adjustments have been prepared as if the transactions described above had taken place on December 31, 2011, in the case of the pro forma balance sheet, or as of January 1, 2011, in the case of the pro forma statement of operations.

The Company entered into the new Global ABL Facility on March 27, 2012. The Global ABL Facility replaced our then existing ABL Credit Facility, and the proceeds of the offering will be used to repay indebtedness under the Global ABL Facility. The replacement of our previous ABL Credit Facility with the Global ABL Facility does not materially change the unaudited pro forma consolidated statements.

The unaudited pro forma consolidated financial statements are not necessarily indicative of the results that we would have achieved had the transactions described herein actually taken place at the dates indicated, and do not purport to be indicative of future financial position or operating results. The unaudited pro forma consolidated financial statements should be read in conjunction with the audited financial statements of the Company, the related notes and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” for the year ended December 31, 2011, included elsewhere herein.

The pro forma adjustments are based on available information and certain assumptions that we believe are reasonable. The pro forma adjustments and the assumptions included therein are described in the accompanying notes.

 

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MRC Global Inc.

Unaudited Pro Forma Consolidated Balance Sheet

As of December 31, 2011

 

     Actual as of
December 31,
2011
    Pro forma
adjustments
          Pro Forma as of
December 31,
2011
 
           (in thousands)              

Assets

        

Total current assets

   $ 1,747,908      $ —          $ 1,747,908   

Other assets

     39,212        —            39,212   

Fixed assets

     107,430        —            107,430   

Intangible assets

     1,333,137        —            1,333,137   
  

 

 

   

 

 

     

 

 

 

Total assets

     3,227,687        —            3,227,687   

Liabilities and stockholders’ equity

        

Total current liabilities

     673,167        —            673,167   

Long-term debt, net

     1,526,740        (349,900     (a     1,176,840   

Other long-term liabilities

     306,918        —            306,918   

Stockholders’ equity:

        

Common stock

     844        170        (b     1,014   

Preferred stock

     —          —            —     

Additional paid-in-capital

     1,282,949        349,730        (b     1,632,679   

Retained (deficit)

     (536,791     —            (536,791

Other comprehensive (loss)

     (26,140     —            (26,140
  

 

 

   

 

 

   

 

 

   

 

 

 

Total equity

     720,862        349,900          1,070,762   
  

 

 

   

 

 

     

 

 

 

Total liabilities and equity

   $ 3,227,687      $ —          $ 3,227,687   
  

 

 

   

 

 

     

 

 

 

The accompanying notes are an integral part of these unaudited pro forma consolidated financial statements.

 

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MRC Global Inc.

Unaudited Pro Forma Consolidated Statement of Operations

For the Year Ended December 31, 2011

 

     Actual as of
December 31,
2011
    Pro forma
adjustments
           Pro Forma
as of
December 31,
2011
 
           (in thousands)               

Sales

   $ 4,832,423      $ —           $ 4,832,423   

Cost of sales

     4,124,271        —             4,124,271   
  

 

 

   

 

 

      

 

 

 

Gross margin

     708,152        —             708,152   

Selling, general and administrative expenses

     513,563        —             513,563   
  

 

 

   

 

 

      

 

 

 

Operating income

     194,589        —             194,589   

Other income (expense):

         

Interest expense

     (136,844     7,833         (c     (129,011

Other

     (1,977     —             (1,977
  

 

 

   

 

 

      

 

 

 
     (138,821     7,833           (130,988

Income before income taxes

     55,768        7,833           63,601   

Income tax expense

     26,784        2,937         (d     29,721   
  

 

 

   

 

 

      

 

 

 

Net income

   $ 28,984      $ 4,895         $ 33,879   

Basic earnings per common share

   $ 0.34           $ 0.33   

Diluted earnings per common share

   $ 0.34           $ 0.33   

Weighted-average common shares, basic

     84,417        17,045         (e     101,462   

Weighted-average common shares, diluted

     84,655        17,045         (e     101,700   

The accompanying notes are an integral part of these unaudited pro forma consolidated financial statements.

 

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MRC Global Inc.

Notes to the Unaudited Pro Forma Consolidated Financial Statements

 

(a) Long-term debt, net has been adjusted to reflect the estimated repayment of indebtedness outstanding under the Company’s Global ABL Facility. This amount equals the estimated net proceeds of the offering at an assumed offering price of $22.00 per share (the midpoint of the range on the front cover of the prospectus) giving effect to underwriting discounts and commissions and other offering expenses, as the Company expects to apply all proceeds from the offering toward the repayment of this indebtedness.

 

(b) Stockholders’ equity has been adjusted to reflect an increase equal to the estimated net proceeds of the offering at an assumed offering price of $22.00 per share (the midpoint of the range on the front cover of the prospectus) giving effect to underwriting discounts and commissions and other offering expenses.

 

(c) Interest expense has been decreased to reflect lower debt balances resulting from the pro forma repayment of outstanding indebtedness utilizing net proceeds from the offering. This estimated reduction in interest expense has been computed assuming the repayment of $349.9 million of indebtedness under the Company’s Global ABL Facility as though it had occurred on January 1, 2011. The interest savings is computed using an effective interest rate of 2.24%, which represents actual borrowing rates under the ABL Credit Facility during 2011, less the amount of any commitment fees that would have been incurred had the debt not been outstanding.

 

(d) Income tax expense has been adjusted as a result of higher income before income taxes resulting from lower pro forma interest expense. The increase in income tax expense has been computed utilizing the Company’s 37.5% marginal U.S. income tax rate.

 

(e) Weighted average common shares outstanding have been adjusted to reflect the issuance of 17,045,455 shares of common stock as contemplated in the offering. This amount excludes 5,681,818 shares of common stock that are being offered by the selling shareholder as well as an option the underwriters have to purchase up to an additional 3,409,091 shares of common stock from the selling stockholder.

 

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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 prospectus. This discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of a number of factors, including, but not limited to, those set forth under “Cautionary Note Regarding Forward-Looking Statements” and “Risk Factors” and elsewhere in this prospectus. All references throughout this section (and elsewhere in this prospectus) to amounts available for borrowing under various credit facilities refer to amounts actually available for borrowing after giving effect to any borrowing base limitations imposed by the facility.

Overview

We are the largest global industrial distributor of pipe, valves and fittings (PVF) and related products and services to the energy industry based on sales and hold the leading position in our industry across each of the upstream (exploration, production and extraction of underground oil and natural gas), midstream (gathering and transmission of oil and natural gas, natural gas utilities and the storage and distribution of oil and natural gas) and downstream (crude oil refining, petrochemical processing and general industrials) sectors. Globally, we have two operating segments through which we serve our customers in over 400 service locations. Our North American segment includes over 175 branch locations, six distribution centers in the U.S., one distribution center in Canada, 12 valve automation service centers and over 160 third party pipe yards located in the most active oil and natural gas regions in North America. Our International segment includes over 30 branch locations throughout Europe, Asia and Australasia with distribution centers in the United Kingdom, Singapore and Australia and 10 automation service centers in Europe and Asia. We offer a wide array of PVF and oilfield supplies encompassing a complete line of products from our global network of suppliers to our more than 12,000 customers. We are diversified by geography, the industry sectors we serve and the products we sell. We seek to provide best-in-class service to our customers by satisfying the most complex, multi-site needs of many of the largest companies in the energy and industrial sectors as their primary PVF supplier. We believe the critical role we play in our customers’ supply chain, together with our extensive product offering, broad global presence, customer-linked scalable information systems and efficient distribution capabilities, serve to solidify our long-standing customer relationships and drive our growth. As a result, we have an average relationship of over 20 years with our largest 25 customers.

We have benefited from several growth trends within the energy industry, including high levels of customer expansion and maintenance expenditures and believe that longer-term growth in PVF and industrial supply spending within the energy industry is likely to continue. Several factors have driven the long-term growth in spending, including underinvestment in energy infrastructure, production and capacity constraints, and market expectations of future improvements in the oil, natural gas, refined products, petrochemical and other industrial sectors. In addition, the products we distribute are often used in extreme operating environments, leading to the need for a regular replacement cycle. Approximately two-thirds of our sales are attributable to multi-year MRO arrangements where we have demonstrated an average annual retention rate of over 95% since 2000. We consider MRO arrangements to be normal, generally repetitive business that primarily addresses the recurring maintenance, repair or operational work to existing energy infrastructure. Project activities, including facility expansions or new construction projects, are more commonly associated with a customer’s capital expenditures budget and can be more sensitive to global oil and natural gas prices and general economic conditions. We mitigate our exposure to price volatility by limiting the length of any price-protected contracts, and as pricing continues to rebound, we believe that we have the ability to pass price increases on to the marketplace.

 

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Key Drivers of Our Business

Our revenues are predominantly derived from the sale of PVF and other oilfield and industrial supplies to the energy sector in North America, Europe, Asia and Australasia. Our business is therefore dependent upon both the current conditions and future prospects in the energy industry and, in particular, maintenance and expansionary operating and capital expenditures by our customers in the upstream, midstream and downstream sectors of the industry. Long-term growth in spending has been, and we believe will continue to be, driven by several factors, including underinvestment in global energy infrastructure, growth in shale and unconventional exploration and production (E&P) activity, and anticipated strength in the oil, natural gas, refined products, petrochemical and other industrial sectors. The outlook for future oil, natural gas, refined products, petrochemical and other industrial PVF spending is influenced by numerous factors, including the following:

 

  Ÿ  

Oil and Natural Gas Prices.    Sales of PVF and related products to the oil and natural gas industry constitute a significant portion of our sales. As a result, we depend upon the oil and natural gas industry and its ability and willingness to make maintenance and capital expenditures to explore for, produce and process oil and natural gas and refined products. Oil and natural gas prices, both current and projected, along with the costs necessary to produce oil and gas, impact other drivers of our business, including E&P spending, additions and maintenance to pipeline mileage, refinery utilization and petrochemical and other industrial processing activity.

 

  Ÿ  

Steel Prices, Availability and Supply and Demand.    Fluctuations in steel prices can lead to volatility in the pricing of the products we distribute, especially carbon steel tubular products, which can influence the buying patterns of our customers. A majority of the products we distribute contain various types of steel. The worldwide supply and demand for these products, or other steel products that we do not supply, impacts the pricing and availability of our products and, ultimately, our sales and operating profitability.

 

  Ÿ  

Economic Conditions.    The demand for the products we distribute is dependent on the general economy, the energy and industrials sectors and other factors. Changes in the general economy or in the energy and industrials sectors (domestically or internationally) can cause demand for the products we distribute to materially change.

 

  Ÿ  

Customer, Manufacturer and Distributor Inventory Levels of PVF and Related Products.    Customer, manufacturer and distributor inventory levels of PVF and related products can change significantly from period to period. Increases in our customers’ inventory levels can have an adverse effect on the demand for the products we distribute when customers draw from their inventory rather than purchase new products. Reduced demand, in turn, would likely result in reduced sales volume and profitability. Increased inventory levels by manufacturers or other distributors can cause an oversupply of PVF and related products in the industry sectors we serve and reduce the prices that we are able to charge for the products we distribute. Reduced prices, in turn, would likely reduce our profitability. Conversely, decreased customer and manufacturer inventory levels may ultimately lead to increased demand for our products and would likely result in increased sales volumes and overall profitability.

Recent Trends and Outlook

The current outlook for activity in our end markets is positive. The period from 2005 to 2008 was a period of steady growth in North American oil and gas drilling and completion spending in our upstream market. Activity peaked in 2008, with oil pricing above $140 per barrel and natural gas prices above $14/mcf. Due to the associated record levels of E&P activity, there was a shortage of tubular products to meet the demand, and significant steel price inflation followed as a result. The price per ton on tubular products increased approximately 200% in 2008 as compared to the prior year (compared to

 

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an increase of 5% in 2011 compared to 2010). Approximately 44% of our sales and half of our gross profit was in tubular products during 2008 and these sales were typically at margins in excess of longer term historical levels for this product category. In 2008, we operated with five purchasing managers and five separate IT systems (versus one purchasing manager and North American IT system in 2011), and our OCTG inventories expanded to a greater than six month supply and accounted for over 30% of all inventory in 2008, as opposed to less than three months supply and approximately 20% in 2011. A significant contributor to the 2008 rise was spot purchases of inventory, which ultimately accounted for approximately 50% of our inventory purchases for 2008 (versus less than 10% in 2011). In our downstream/industrial market, 2005 to 2008 was a period of major refinery expansion projects in the U.S. to upgrade Midwestern and Gulf Coast refineries to handle heavier and more sour crude oil from Canada, Venezuela and other international sources. These large projects were in addition to normal “turnaround” and smaller project activity. Because of these large projects, MRO business represented approximately half of our business in 2008, compared to approximately two-thirds in 2011. During 2009 to 2010, as peak crude oil prices negatively impacted refining margins, the global economic recession reduced refined product demand, which resulted in decreased capital spending by our refining customers. In the U.S. petrochemical industry, the high natural gas prices of 2008 reduced investment, as natural gas is a primary cost and feedstock to this industry segment. In 2010 and 2011, increases in natural gas production from the U.S. shale plays led to lower natural gas commodity prices, which helped drive increases in customer spending and activity levels in this sector.

Global energy demand was negatively impacted in 2009 by the “great recession” in the global economy, which directly negatively affected oil and natural gas commodity prices. This resulted in lower spending by our major customers during 2009 and 2010, which, coupled with significant deflation in tubular steel prices, had a material impact on our profitability in 2009 and 2010 as customers renegotiated contracts with drilling contractors, energy service companies, equipment suppliers and distributors. The steep drop in demand, steel price deflation and new lower customer contract pricing along with high-cost inventory purchased in 2008 led to a major de-stocking effort of approximately $1 billion (including both inventory and outstanding purchase orders) at our Company during 2009, generating over $500 million in cash flow from operations. In certain instances, sales during this period in our tubular product category carried negative margins, which severely impacted our results during this period. Our non-tubular product lines were impacted to a much lesser degree.

Between 2008 and 2011, the gross profit contribution and gross profit margins of our two product categories, energy carbon steel tubular products (line pipe and oil country tubular goods) (“tubulars”) and valves, fittings, flanges and other products (“VFFO”), has shifted. The tubular and VFFO product categories each contributed approximately 50% of our gross profit in 2008, whereas in 2011 VFFO contributed approximately 75% of our gross profit and tubulars contributed approximately 25% of our gross profit. In addition, our gross profit margins (average cost) were consistent in 2008 and 2011 for our VFFO products, whereas our gross profit margins (average cost) for our tubular products in 2011 were approximately 50% of the tubular margins in 2008.

In 2010, our business stabilized, but given continued economic uncertainty and the slow recovery, activity levels remained slow relative to more historical levels. In 2011, commodity oil and natural gas pricing improved, our customers’ E&P budgets increased, and product pricing increased as a result of the improvement in PVF demand. In addition, our high-cost tubular inventory was largely sold during 2009 and 2010, and as a result, profitability in 2011 began to improve. Steel inflation and pricing levels currently remain well below 2008 levels, but carbon steel pricing in line pipe has returned to a more normal historic range. OCTG pricing currently remains challenging, and we are rebalancing our product portfolio towards higher margin products, such as valves, fittings, flanges and other industrial products as a result.

 

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During 2011, oil prices remained strong with an average price of approximately $95 per barrel for West Texas Intermediate (“WTI”), or approximately 19% above the average for 2010. Natural gas prices remained relatively flat at an average price during this period of $4/Mcf (Henry Hub), although they have declined below $3/Mcf more recently. Behind the strength of oil prices, in particular, North American drilling activity has increased an estimated 21% in 2011 relative to 2010. We continue to see a shift in rig counts from natural gas to oil, with oil drilling representing approximately 55% of the total North American rig count during 2011.

Activity levels in the upstream sector remain strong. In the U.S., the average total rig count was up 21% in 2011 as compared to 2010. Continued development within the Marcellus, Eagle Ford and Bakken shale regions primarily drove this increase in rig count. In 2011, we shipped approximately 674,000 tons of energy carbon steel tubular products in the U.S., 20% more tons than in 2010. In Canada, the average total rig count was up 20% in 2011 as compared to 2010. There we have experienced an increase in MRO, particularly in the heavy oil and tar sands regions, which has mitigated the downturn experienced in shallow natural gas drilling elsewhere in Canada.

The midstream sector, which includes gathering, transmission pipeline and natural gas utilities, is currently our fastest growing sector. We generated revenue growth of 33% in 2011 compared to 2010. New wells coming on line and the continued need for infrastructure within the shale basins has driven this growth. As a result of the shift in E&P activity from natural gas to oil, we have experienced a shift in activity from the natural gas regions of the Barnett, Haynesville, Woodford, and Fayetteville shales to the Bakken, Eagle Ford, Niobrara and Permian shales, which are heavier producing regions for oil and natural gas liquids. Revenue from our gathering and transmission customers increased 40% in 2011 as compared to 2010, while revenue from our natural gas utilities customers increased approximately 28% in 2011 compared to 2010, due to the increasing focus on pipeline integrity work and the need for utilities to repair or replace aging pipeline infrastructure.

Our downstream and other industrials sector performance has improved in 2011 as compared to 2010. However, downstream market participants still appear cautious with respect to major capital spending in refining because of international refining capacity additions, higher crude oil prices and relatively low margins relative to longer term historical levels. We believe there will be increased turnaround activity by our major customers in our U.S. refining end market in 2012 and 2013 due to customers’ delays in routine turnaround activity for maintenance and repair. Our chemical and general industrials sector increased approximately 5% in 2011 compared to 2010, due to an increase in general economic activity, and growth in maintenance and capital projects activity. Internationally, where our business is heavily weighted toward the downstream sector, excluding the impact of the acquisition of MRC SPF, we have seen an improvement of 3% in revenues in 2011 as compared to 2010 due to a modest recovery in capital and operating expenditures in Europe during 2011. The impact of the European debt crisis on general economic conditions and the impact on energy consumption and the downstream sector are uncertain.

We determine backlog by the amount of unshipped third-party customer orders, either specific or general in nature (including orders held under pipe programs), which the customer may revise or cancel in certain instances. There can be no assurance that the backlog amounts will be ultimately realized as revenue, or that we will earn a profit on the backlog of orders. Our backlog at December 31, 2011 was $823 million, including $693 million in our North American segment and $130 million in our International segment. In total, this backlog represents year over year growth of 41%, which we believe is a relatively good general indicator of overall activity for MRC.

 

 

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Results of Operations for the years ended December 31, 2011, 2010 and 2009

Our operating results by segment are as follows (in millions). The results for the year ended December 31, 2009 only include the results of MRC Transmark (which comprises a majority of our International segment) for the two months after the business combination on October 30, 2009. Corporate administrative costs are included in the North American segment.

 

     Year Ended  
     December 31,
2011
     December 31,
2010
     December 31,
2009
 

Sales:

        

North America

   $ 4,502.8       $ 3,589.9       $ 3,610.1   

International

     329.6         255.6         51.8   
  

 

 

    

 

 

    

 

 

 

Consolidated

   $ 4,832.4       $ 3,845.5       $ 3,661.9   
  

 

 

    

 

 

    

 

 

 

Operating Income (Loss):

        

North America

   $ 183.9       $ 56.0       $ (253.5

International

     10.7         10.4         3.8   
  

 

 

    

 

 

    

 

 

 

Consolidated

   $ 194.6       $ 66.4       $ (249.7
  

 

 

    

 

 

    

 

 

 

The following table shows key industry indicators for the years ended December 31, 2011, 2010 and 2009:

 

     Year Ended  
     December 31,
2011
     December 31,
2010
     December 31,
2009
 

Average Total Rig Count(1):

        

United States

     1,875         1,546         1,089   

Canada

     422         351         221   
  

 

 

    

 

 

    

 

 

 

Total North America

     2,297         1,897         1,310   

International

     1,167         1,094         997   
  

 

 

    

 

 

    

 

 

 

Total Worldwide

     3,464         2,991         2,307   
  

 

 

    

 

 

    

 

 

 

Average Oil Rig Count(1):

        

United States

     984         591         278   

Canada

     279         199         102   
  

 

 

    

 

 

    

 

 

 

Total North America

     1,263         790         380   
  

 

 

    

 

 

    

 

 

 

Average Natural Gas Rig Count(1):

        

United States

     888         943         801   

Canada

     141         148         120   
  

 

 

    

 

 

    

 

 

 

Total North America

     1,029         1,091         921   
  

 

 

    

 

 

    

 

 

 

Average Commodity Prices(2):

        

WTI crude oil (per barrel)

   $ 94.91       $ 79.48       $ 61.95   

Brent crude oil (per barrel)

   $ 111.26       $ 79.61       $ 61.74   

Natural gas ($/Mcf)

   $ 4.00       $ 4.37       $ 3.94   

Average Monthly Well Permits(3)

     5,811         5,317         4,266   

3:2:1 Crack Spread(4)

   $ 25.40       $ 12.92       $ 7.77   

PMI Index (as of December 1 of each year)(5)

     53.1         57.3         55.8   

 

(1) Source—Baker Hughes (www.bakerhughes.com) (Total rig count includes oil, natural gas and other rigs.)
(2) Source—Department of Energy, EIA (www.eia.gov)

 

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(3) Source—RigData (U.S.)
(4) Source—Commodity Systems, Inc.
(5) Source—Institute for Supply Management

The breakdown of our sales by sector for the years ended December 31, 2011, 2010 and 2009 was as follows:

 

     Year Ended December 31,  
     2011     2010     2009  

Upstream

     47     46     44

Midstream

     26     24     24

Downstream and other industrials

     27     30     32
  

 

 

   

 

 

   

 

 

 
     100     100     100
  

 

 

   

 

 

   

 

 

 

Year Ended December 31, 2011 Compared to the Year Ended December 31, 2010

For the years ended December 31, 2011 and 2010 the following table summarizes our results of operations (in millions):

 

     Year Ended
December 31,
             
     2011     2010     $ Change     % Change  

Sales:

        

North America

   $ 4,502.8      $ 3,589.9      $ 912.9        25

International

     329.6        255.6        74.0        29
  

 

 

   

 

 

   

 

 

   

Consolidated

   $ 4,832.4      $ 3,845.5      $ 986.9        26
  

 

 

   

 

 

   

 

 

   

Gross margin:

        

North America

   $ 613.7      $ 442.7      $ 171.0        39

International

     94.5        75.4        19.1        25
  

 

 

   

 

 

   

 

 

   

Consolidated

   $ 708.2      $ 518.1      $ 190.1        37
  

 

 

   

 

 

   

 

 

   

Selling, general and administrative expenses:

        

North America

   $ 429.8      $ 386.7      $ 43.1        11

International

     83.8        65.0        18.8        29
  

 

 

   

 

 

   

 

 

   

Consolidated

   $ 513.6      $ 451.7      $ 61.9        14
  

 

 

   

 

 

   

 

 

   

Operating income (loss):

        

North America

   $ 183.9      $ 56.0      $ 127.9        228

International

     10.7        10.4        0.3        3
  

 

 

   

 

 

   

 

 

   

Consolidated

   $ 194.6      $ 66.4      $  128.2        193

Interest expense

     (136.8     (139.6     2.8        2

Write off of deferred financing fees

     (9.5            (9.5     N/A   

Other, net

     7.5        (2.0     9.5        475

Income tax benefit (expense)

     (26.8     23.4        (50.2)        (215)
  

 

 

   

 

 

   

 

 

   

Net income (loss)

   $ 29.0      $ (51.8   $ 80.8        156
  

 

 

   

 

 

   

 

 

   

Adjusted Gross Margin

     849.6        663.2        186.4        28
  

 

 

   

 

 

   

 

 

   

Adjusted EBITDA

   $ 360.5      $ 224.2      $ 136.3        61
  

 

 

   

 

 

   

 

 

   

 

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Sales.    Sales include the revenue recognized from the sales of the products we distribute and services to customers and freight billings to customers, less cash discounts taken by customers in return for their early payment of our invoices to them. Our sales were $4,832.4 million for the year ended December 31, 2011 as compared to $3,845.5 million for the year ended December 31, 2010.

North American Segment—Our North American sales increased $912.9 million to $4,502.8 million for 2011 from $3,589.9 million for 2010. The 25% increase was due to an increase in volume related to the improved business environment, including, in particular, the upstream and midstream sectors, which have been driven by activity levels in the oil and natural gas shale regions in the U.S. as well as the heavy oil and tar sands regions of Canada.

International Segment—Our International sales increased $74.0 million to $329.6 million for 2011 from $255.6 million for 2010. Approximately $56 million of this increase was due to the acquisition of MRC SPF in June 2011, while the remainder of the increase is due to an improvement in volume in the downstream sector in Europe during 2011.

Gross Margin.    Our gross margin was $708.2 million (14.7% of sales) for the year ended December 31, 2011 as compared to $518.1 million (13.5% of sales) for the year ended December 31, 2010. The 1.2% improvement in gross margin percentage reflected the growth in sales, relative to certain costs such as depreciation and amortization, amortization of intangibles, and the impact of our LIFO inventory costing methodology, which are not directly related to activity levels and which remained relatively consistent from period to period. Excluding the impact of these items, gross margin percentage improved by 0.4%.

North American Segment—Gross margin for our North American segment increased to $613.7 million (13.6% of sales) for 2011 from $442.7 million (12.3% of sales) for 2010. The increase of $171.0 million was due to an increase in the volume of products sold year over year. The rig count increased 21% for that same period.

International Segment—Gross margin for our International segment increased to $94.5 million (28.7% of sales) for 2011 from $75.4 million (29.5% of sales) for 2010, an improvement of $19.1 million. The increase in gross margin was largely due to the acquisition of MRC SPF in June 2011, while the remainder of the increase is due to an increase in sales, particularly in Europe. The decrease in the gross margin percentage was due to the mix of products changing as a result of the acquisition of MRC SPF.

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 who may include these expenses as a component of costs of goods sold. Purchasing and warehousing activities costs approximated $27.3 million and $25.5 million for the years ended December 31, 2011 and 2010.

Adjusted Gross Margin.    Adjusted Gross Margin increased to $849.6 million (17.6% of sales) for 2011 from $663.2 million (17.2% of sales) for 2010, an improvement of $186.4 million. We define Adjusted Gross Margin as sales, less cost of sales, plus depreciation and amortization, plus amortization of intangibles, and plus or minus the impact of our LIFO inventory costing methodology. We present Adjusted Gross Margin 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 they have been involved in. 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 the LIFO method and depending upon which method they may elect. In particular, we believe that Adjusted Gross Margin is a useful indicator of our operating performance because Adjusted Gross Margin measures our Company’s operating performance without regard to acquisition transaction-related amortization

 

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expenses. We use Adjusted Gross Margin as a key performance indicator in managing our business. We believe that gross margin is the financial measure calculated and presented in accordance with U.S. generally accepted accounting principles that is most directly comparable to Adjusted Gross Margin. The following table reconciles Adjusted Gross Margin with our gross margin, as derived from our financial statements (in millions):