10-Q 1 mrc-20170630x10q.htm 10-Q MRC 20170630 10-Q



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

___________________________________________

FORM 10-Q

(Mark One)



 

 

 



 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

 



 



FOR THE QUARTERLY PERIOD ENDED JUNE  30, 2017



 



OR



 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

FOR THE TRANSITION PERIOD FROM _______ TO _______



 



 



Commission file number: 001-35479



MRC Global Inc.
(Exact name of registrant as specified in its charter)

Delaware

20-5956993

(State or Other Jurisdiction of
Incorporation or Organization)

(I.R.S. Employer

Identification No.)



 

Fulbright Tower

1301 McKinney Street, Suite 2300

Houston, Texas

77010

(Address of Principal Executive Offices)

(Zip Code)



(877) 294-7574
(Registrant’s Telephone Number, including Area Code)

________________



Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes [ X]      No  [   ]



Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes [X]    No [   ]



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



Large accelerated filer [ X Accelerated filer  [   ] Non-accelerated filer (do not check if a smaller reporting company)  [     

Smaller reporting company [   ]      Emerging growth company [   ]



If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  [   ]



Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes [   ]   No  [X]



The Company’s common stock is traded on the New York Stock Exchange under the symbol “MRC”.   There were 94,492,896 shares of the registrant’s common stock (excluding 286,481 unvested restricted shares), par value $0.01 per share, issued and outstanding as of July 28, 2017.


 

INDEX TO QUARTERLY REPORT ON FORM 10-Q





 

 

Page

PART I – FINANCIAL INFORMATION



 

 

ITEM 1.

financial statements (UNAUDITED)

1



 

 



Condensed Consolidated Balance Sheets – JUNE 30, 2017 and December 312016

 

1



 

 



Condensed Consolidated Statements of Operations – Three AND SIX MONTHS ended JUNE 30, 2017 AND JUNE 30, 2016

2



 

 



Condensed Consolidated Statements of other cOMPREHENSIVE INCOME – three AND SIX months ended JUNE 30, 2017 and JUNE 30, 2016



 

 



Condensed CONSOLIDATED STATEMENTS OF cash flows – SIX MONTHS ENDEd JUNE 30, 2017 and JUNE 30, 2016



 

 



Notes to the Condensed Consolidated Financial Statements – JUNE 302017



 

 

ITEM 2.

management’s discussion and analysis of financial condition and

 



results of operations

13 



 

 

ITEM 3.

quantitative and qualitative disclosures about market risk

26 



 

 

ITEM 4.

controls and procedures

26 



 

 

PART II – OTHER INFORMATION



 

 

ITEM 1.

LEGAL PROCEEDINGS

27 



 

 

ITEM 1a.

RISK FACTORS

27 



 

 

ITEM 2.

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

27 



 

 

ITEM 3.

Defaults Upon Senior Securities

27 



 

 

ITEM 4.

MINING SAFETY DISCLOSURES

28 



 

 

ITEM 5.

other information

28 



 

 

ITEM 6.

Exhibits

29 







 

 

 


 

Table Of Contents

 

CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)

MRC GLOBAL INC.

(in millions, except shares)







 

 

 



June 30,

 

December 31,



2017

 

2016



 

 

 

Assets

 

 

 

Current assets:

 

 

 

Cash

$                 37

 

$               109

Accounts receivable, net

522 

 

399 

Inventories, net

592 

 

561 

Other current assets

47 

 

48 

Total current assets

1,198 

 

1,117 



 

 

 

Other assets

21 

 

19 



 

 

 

Property, plant and equipment, net

138 

 

135 



 

 

 

Intangible assets:

 

 

 

Goodwill, net

485 

 

482 

Other intangible assets, net

390 

 

411 



 

 

 



$            2,232

 

$            2,164



 

 

 

Liabilities and stockholders' equity

 

 

 

Current liabilities:

 

 

 

Trade accounts payable

$               388

 

$               314

Accrued expenses and other current liabilities

114 

 

111 

Current portion of long-term debt

 

Total current liabilities

510 

 

433 



 

 

 

Long-term obligations:

 

 

 

Long-term debt, net

402 

 

406 

Deferred income taxes

177 

 

184 

Other liabilities

23 

 

23 



 

 

 

Commitments and contingencies

 

 

 



 

 

 

 6.5% Series A Convertible Perpetual Preferred Stock, $0.01 par value; authorized

 

 

 

 363,000 shares; 363,000 shares issued and outstanding

355 

 

355 



 

 

 

Stockholders' equity:

 

 

 

Common stock, $0.01 par value per share: 500 million shares authorized,

 

 

 

103,030,267 and 102,529,637 issued, respectively

 

Additional paid-in capital

1,683 

 

1,677 

Retained deficit

(574)

 

(574)

Less: Treasury stock at cost: 8,537,410  and 7,677,580 shares, respectively

(125)

 

(107)

Accumulated other comprehensive loss

(220)

 

(234)



765 

 

763 



$            2,232

 

$            2,164

See notes to condensed consolidated financial statements.

 

 

 





















 

1


 

Table Of Contents

 

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

MRC GLOBAL INC.

(in millions, except per share amounts)









 

 

 

 

 

 

 



Three Months Ended

 

Six Months Ended



June 30,

 

June 30,

 

June 30,

 

June 30,



2017

 

2016

 

2017

 

2016



 

 

 

 

 

 

 

Sales

$                   922

 

$                   746

 

$                1,784

 

$                1,529

Cost of sales

773 

 

621 

 

1,495 

 

1,271 

Gross profit

149 

 

125 

 

289 

 

258 

Selling, general and administrative expenses

132 

 

135 

 

258 

 

272 

Operating income (loss)

17 

 

(10)

 

31 

 

(14)

Other expense:

 

 

 

 

 

 

 

Interest expense

(8)

 

(9)

 

(15)

 

(17)

Other, net

 -

 

 -

 

 -

 

(1)



 

 

 

 

 

 

 

Income (loss) before income taxes

 

(19)

 

16 

 

(32)

Income tax expense (benefit)

 

(2)

 

 

(7)

Net income (loss)

 

(17)

 

12 

 

(25)

Series A preferred stock dividends

 

 

12 

 

12 

Net income (loss) attributable to common stockholders

$                        -

 

$                   (23)

 

$                        -

 

$                   (37)



 

 

 

 

 

 

 



 

 

 

 

 

 

 

Basic income (loss) per common share

$                        -

 

$                (0.24)

 

$                        -

 

$                (0.37)

Diluted income (loss) per common share

$                        -

 

$                (0.24)

 

$                        -

 

$                (0.37)

Weighted-average common shares, basic

94.5 

 

97.7 

 

94.6 

 

99.2 

Weighted-average common shares, diluted

95.6 

 

97.7 

 

96.0 

 

99.2 



See notes to condensed consolidated financial statements.



 

2

 


 

Table Of Contents

 

CONDENSED CONSOLIDATED STATEMENTS OF OTHER COMPREHENSIVE INCOME (UNAUDITED)

MRC GLOBAL INC.

(in millions)







 

 

 

 

 

 

 



Three Months Ended

 

Six Months Ended



June 30,

 

June 30,

 

June 30,

 

June 30,



2017

 

2016

 

2017

 

2016



 

 

 

 

 

 

 

Net income (loss)

$                    6

 

$                  (17)

 

$                  12

 

$                  (25)



 

 

 

 

 

 

 

Other comprehensive income (loss)

 

 

 

 

 

 

 

  Foreign currency translation adjustments

 

(4)

 

14 

 

12 

Comprehensive income (loss)

$                  14

 

$                  (21)

 

$                  26

 

$                  (13)



 

 

 

 

 

 

 



See notes to condensed consolidated financial statements.

3

 


 

Table Of Contents

 

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

MRC GLOBAL INC.

(in millions)







 

 

 



Six Months Ended



June 30,

 

June 30,



2017

 

2016



 

 

 

Operating activities

 

Net income (loss)

$                 12

 

$                   (25)

Adjustments to reconcile net income (loss) to net cash (used in)  provided by operations:

 

 

 

Depreciation and amortization

11 

 

10 

Amortization of intangibles

22 

 

23 

Equity-based compensation expense

 

Deferred income tax benefit

(7)

 

(5)

Amortization of debt issuance costs

 

Increase (decrease) in LIFO reserve

 

(4)

Foreign currency (gains) losses

(2)

 

Other

 

Changes in operating assets and liabilities:

 

 

 

Accounts receivable

(117)

 

104 

Inventories

(33)

 

51 

Other current assets

 

Income taxes payable

(12)

 

(6)

Accounts payable

68 

 

(10)

Accrued expenses and other current liabilities

 

(7)

Net cash (used in) provided by operations

(24)

 

148 



 

 

 

Investing activities

 

 

 

Purchases of property, plant and equipment

(14)

 

(14)

Proceeds from the disposition of non-core product line

 -

 

48 

Other investing activities

 -

 

Net cash (used in) provided by investing activities

(14)

 

36 



 

 

 

Financing activities

 

 

 

Payments on revolving credit facilities

(223)

 

(27)

Proceeds from revolving credit facilities

223 

 

27 

Payments on long-term obligations

(4)

 

(4)

Purchase of common stock

(18)

 

(71)

Dividends paid on preferred stock

(12)

 

(12)

Repurchases of shares to satisfy tax withholdings

(3)

 

 -

Net cash used in financing activities

(37)

 

(87)



 

 

 

(Decrease) increase in cash

(75)

 

97 

Effect of foreign exchange rate on cash

 

Cash -- beginning of period

109 

 

69 

Cash -- end of period

$                 37

 

$                  167



 

 

 

Supplemental disclosures of cash flow information:

 

 

 

Cash paid for interest

$                 13

 

$                    16

Cash paid for income taxes

$                 22

 

$                      6

See notes to condensed consolidated financial statements.

 

 

 









 

4

 


 

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

MRC GLOBAL INC.











 

NOTE 1 – BACKGROUND AND BASIS OF PRESENTATION



Business Operations:  MRC Global Inc. is a holding company headquartered in Houston, Texas. Our wholly owned subsidiaries are global distributors of pipe, valves, fittings (“PVF”) and related products and services across each of the upstream (exploration, production and extraction of underground oil and gas), midstream (gathering and transmission of oil and gas, gas utilities, and the storage and distribution of oil and gas) and downstream (crude oil refining and petrochemical and chemical processing and general industrials) sectors. We have branches in principal industrial, hydrocarbon producing and refining areas throughout the United States, Canada, Europe, Asia, Australasia, the Middle East and Caspian. Our products are obtained from a broad range of suppliers.



Basis of Presentation:  We have prepared our unaudited condensed consolidated financial statements in accordance with Rule 10-01 of Regulation S-X for interim financial statements.  These statements do not include all information and footnotes that generally accepted accounting principles require for complete annual financial statements. However, the information in these statements reflects all normal recurring adjustments which are, in our opinion, necessary for a fair presentation of the results for the interim periods. The results of operations for the three and six months ended June 30, 2017 are not necessarily indicative of the results that will be realized for the fiscal year ending December 31, 2017.  We have derived our condensed consolidated balance sheet as of December 31, 2016 from the audited consolidated financial statements for the year ended December 31, 2016.  You should read these condensed consolidated financial statements in conjunction with the audited consolidated financial statements and notes thereto for the year ended December 31, 2016.



The consolidated financial statements include the accounts of MRC Global Inc. and its wholly owned and majority owned subsidiaries (collectively referred to as the “Company” or by such terms as “we,” “our” or “us”). All material intercompany balances and transactions have been eliminated in consolidation. 



Recent Accounting Pronouncements:  In May 2014, the Financial Accounting Standards Board (“FASB”) issued a comprehensive new revenue recognition standard, which will supersede previous existing revenue recognition guidance. The Accounting Standards Update (“ASU”) also provides guidance on accounting for certain contract costs and requires new disclosures. During fiscal 2016, the FASB issued additional clarification guidance on the new revenue recognition standard, which also included certain scope improvements and practical expedients. The standard (including clarification guidance issued) is effective for fiscal periods beginning after December 15, 2017 and allows for either full retrospective or modified retrospective adoptionTo date, we have performed a formal review of contracts with 36 of our largest customers which represented 58% of 2016 revenue.  We are in the process of evaluating the impact of the new guidance based on our review of the contracts with these large customers.   The balance of our revenue is derived from thousands of customers with which we generally interact in a transactional relationship where goods are purchased from our branch locations.  Based on our analysis to date, we do not expect the guidance to have a material impact on the timing of our revenue recognition.  We plan to adopt the standard in the first quarter of 2018 and have determined that we will utilize the modified retrospective transition method.  We are still assessing the impact of the standard on our internal control processes and information systems.  However, we do not currently believe that significant modifications of our systems will be required.



In February 2016, the FASB issued ASU 2016-02, Leases, which will replace the existing guidance in ASC 870, Leases.  This ASU requires a dual approach for lessee accounting under which a lessee would account for leases as finance leases or operating leases.  Both finance leases and operating leases will result in the lessee recognizing a right-of-use asset and a corresponding lease liability.  For finance leases, the lessee would recognize interest expense and amortization of the right-of-use asset, and for operating leases, the lessee would recognize a straight-line total lease expense.  This guidance is effective for annual and interim reporting periods of public entities beginning after December 15, 2018.  We are in the process of evaluating the effect of the adoption of ASU 2016-02 on our consolidated financial statements.



In October 2016, the FASB issued ASU No. 2016-16, Income Taxes (Topic 740). The guidance requires companies to recognize the income tax effects of intercompany sales and transfers of assets, other than inventory, in the income statement as income tax expense (or benefit) in the period in which the transfer occurs. The effective date will be the first quarter of fiscal year 2018, with early adoption permitted. The changes are required to be applied by means of a cumulative-effect adjustment recorded in retained earnings as of the beginning of the fiscal year of adoption. The Company is currently assessing the impact adoption of this guidance will have on its consolidated financial statements.



In January 2017, the FASB issued ASU No. 2017-04, Simplifying the Test for Goodwill Impairment. The amendments in ASU 2017-04 eliminate the current two-step approach used to test goodwill for impairment and require an entity to apply a one-step quantitative test and record the amount of goodwill impairment as the excess of a reporting unit's carrying amount over its fair

5

 


 

value, not to exceed the total amount of goodwill allocated to the reporting unit. ASU 2017-04 is effective for fiscal years, including interim periods within, beginning after December 15, 2019 (upon the first goodwill impairment test performed during that fiscal year). Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. A reporting entity must apply the amendments in ASU 2017-04 using a prospective approach. The Company does not expect the adoption of ASU 2017-04 to have a material impact to its consolidated financial statements.



In May 2017, the FASB issued ASU No. 2017-09,  Compensation – Stock Compensation (Topic 718) Scope of Modification Accounting which clarifies modification accounting for share-based payment awards should not be applied if the fair value, vesting conditions, and the classification of the modified award as an equity instrument or as a liability instrument are the same before and immediately after the modification. This standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017. Adoption will be applied prospectively to awards modified on or after the adoption date. The Company does not expect the adoption of ASU 2017-09 to have a material impact to its consolidated financial statements.





NOTE 2 – INVENTORIES    



The composition of our inventory is as follows (in millions):



 

 

 



June 30,

 

December 31,



2017

 

2016

Finished goods inventory at average cost:

 

 

 

Line pipe

$                139

 

$              124

Valves, automation, measurement and instrumentation

240 

 

225 

All other products

320 

 

313 



699 

 

662 

Less: Excess of average cost over LIFO cost (LIFO reserve)

(73)

 

(67)

Less: Other inventory reserves

(34)

 

(34)



$                592

 

$              561

In 2016, we experienced reductions in inventory quantities, resulting in a liquidation of a last-in, first out (“LIFO”) inventory layer that was carried at a lower cost prevailing from a prior year, as compared with current costs (a “LIFO decrement”). A LIFO decrement results in the erosion of layers created in earlier years, and, therefore, a LIFO layer is not created for years that have decrements. For the three and six months ended June 30, 2016, the effect of this LIFO decrement decreased cost of sales by approximately $2 million and $3 million, respectively.  We do not anticipate a LIFO decrement in 2017.











NOTE 3 – LONG-TERM DEBT

The components of our long-term debt are as follows (in millions):





 

 

 



June 30,

 

December 31,



2017

 

2016

Senior Secured Term Loan B, net of discount and issuance costs of $3 and $4, respectively

$              410

 

$              414

Global ABL Facility

 -

 

 -



410 

 

414 

Less: current portion

 



$              402

 

$              406

Senior Secured Term Loan B:  We have a seven year Senior Secured Term Loan B (the “Term Loan”) with an original principal amount of $794 million which amortizes in equal quarterly installments of 1% per year with the balance payable in November 2019, when the facility matures.    Subject to securing additional lender commitments, the Term Loan allows for incremental increases in facility size up to an aggregate of $200 million, plus an additional amount such that the Company’s senior secured leverage ratio (as defined under the Term Loan) would not exceed 3.50 to 1.00.  MRC Global (US) Inc. is the borrower under this facility, which is guaranteed by MRC Global Inc. as well as all of its wholly owned U.S. subsidiaries.  In addition, it is secured by a second lien on the assets securing our Global ABL Facility (which includes accounts receivable, inventory and related assets) and a first lien on substantially all of the other assets of MRC Global Inc. and those of its U.S.

6

 


 

subsidiaries, as well as a pledge of all of the capital stock of our domestic subsidiaries and 65% of the capital stock of first tier, non-U.S. subsidiaries.  We are required to repay the Term Loan with certain asset sales and insurance proceeds, certain debt proceeds and 50% of excess cash flow (reducing to 25% if our senior secured leverage ratio is no more than 2.75 to 1.00 and 0% if our senior secured leverage ratio is no more than 2.50 to 1.00).  In addition, the Term Loan contains a number of customary restrictive covenants.

The interest rate for the Term Loan, including the amortization of original issue discount and debt issuance costs, was 5.57% as of June 30, 2017 and 5.51% at December 31, 2016.

Global ABL Facility:  We have a $1.05  billion multi-currency global asset-based revolving credit facility (the “Global ABL Facility”) that matures in July 2019. This facility is comprised of $977 million in revolver commitments in the United States, $30 million in Norway, $20 million in Canada, $5 million in the United Kingdom, $10 million in Australia, $4 million in the Netherlands and $4 million in Belgium. It contains an accordion feature that allows us to increase the principal amount of the facility by up to $300 million, subject to securing additional lender commitments.  MRC Global Inc. and each of its current and future wholly owned material U.S. subsidiaries guarantee the obligations of our borrower subsidiaries under the Global ABL Facility. Additionally, each of our non-U.S. borrower subsidiaries guarantees the obligations of our other non-U.S. borrower subsidiaries under the Global ABL Facility. Outstanding obligations are generally secured by a first priority security interest in accounts receivable, inventory and related assets. Excess Availability, as defined under our Global ABL Facility, was $505 million as of June 30, 2017. 



NOTE 4 – INCOME TAXES

In the first quarter of 2017, we adopted ASU 2016-09, Compensation - Stock Compensation, which simplified the accounting for taxes related to stock based compensation. Under the standard, excess tax benefits and certain tax deficiencies are no longer recorded in additional paid-in capital (“APIC”), and APIC pools are eliminated.  Instead, all excess tax benefits and tax deficiencies are recorded as income tax expense or benefit in the income statement.  In addition, excess tax benefits are presented as operating activities rather than financing activities in the statement of cash flows.    For the three and six months ended June 30, 2017, we recorded a tax benefit of $0 million and $2 million, respectively, related to the vesting of stock awards. The impacts of this standard are reflected in the consolidated financial statements on a prospective basis.

For interim periods, our income tax expense is computed based upon our estimated annual effective tax rate. Our effective tax rates for the three and six months ended June 30, 2017 were 33% and 25%, respectively. The effective tax rates for the three and six months ended June 30, 2016 were 11% and 22%, respectively.  Our rates generally differ from the U.S. federal statutory rate of 35% as a result of state income taxes and differing, generally lower, foreign income tax rates.  The effective tax rate for the six months ended June 30, 2017 was lower than our U.S. federal statutory rate primarily due to the discrete impact of the implementation of ASU 2016-09 and a benefit related to foreign currency exchange losses.  Our 2016 effective tax rates were significantly lower than our U.S. federal statutory rate due to forecasted pre-tax losses across all segments including significant pre-tax losses in jurisdictions where there was no corresponding tax benefit.



NOTE 5REDEEMABLE PREFERRED STOCK

Preferred Stock Issuance

In June 2015, we issued 363,000 shares of Series A Convertible Perpetual Preferred Stock (the “Preferred Stock”) and received gross proceeds of $363 million. The Preferred Stock ranks senior to our common stock with respect to dividend rights and rights on liquidation, winding-up and dissolution. The Preferred Stock has a stated value of $1,000 per share, and holders of Preferred Stock are entitled to cumulative dividends payable quarterly in cash at a rate of 6.50% per annum. Holders of Preferred Stock are entitled to vote together with the holders of the common stock as a single class, in each case, on an as-converted basis, except where a separate class vote of the common stockholders is required by law. Holders of Preferred Stock have certain limited special approval rights, including with respect to the issuance of pari passu or senior equity securities of the Company.

The Preferred Stock is convertible at the option of the holders into shares of common stock at an initial conversion rate of 55.9284 shares of common stock for each share of Preferred Stock, which represents an initial conversion price of approximately $17.88 per share of common stock, subject to adjustment. On or after the fifth anniversary of the initial issuance of the Preferred Stock, the Company will have the option to redeem, in whole but not in part, all the outstanding shares of Preferred Stock, subject to certain redemption price adjustments on the basis of the date of the conversion. We may elect to convert the Preferred Stock, in whole but not in part, into the relevant number of shares of common stock on or after the 54th month after the initial issuance of the Preferred Stock if the last reported sale price of the common stock has been at least 150% of the conversion price then in effect for a specified period. The conversion rate is subject to customary anti-dilution and other adjustments.

7

 


 

Holders of the Preferred Stock may, at their option, require the Company to repurchase their shares in the event of a fundamental change, as defined in the agreement.  The repurchase price is based on the original $1,000 per share purchase price except in the case of a liquidation in which case they would receive the greater of $1,000 per share and the amount that would be received if they held common stock converted at the conversion rate in effect at the time of the fundamental change.  Because this feature could require redemption as a result of the occurrence of an event not solely within the control of the Company, the Preferred Stock is classified as temporary equity on our balance sheet.

NOTE 6 – STOCKHOLDERS’ EQUITY

Share Repurchase Program

In November 2015, the Company’s board of directors authorized a share repurchase program for common stock up to $100 million, which was increased in November 2016 to $125 million.  The shares may be repurchased at management’s discretion in the open market.  Depending on market conditions and other factors, these repurchases may be commenced or suspended from time to time without prior notice.  In the first quarter of 2017, the Company completed the repurchase of all shares authorized under the program. 





 

 

 

 

 

 

 

Summary of share repurchase activity under the repurchase program:

 

 

 

 



 

 

 

 

 

 

 



Three Months Ended

 

Six Months Ended



June 30,

 

June 30,

 

June 30,

 

June 30,



2017

 

2016

 

2017

 

2016

Number of shares acquired on the open market

 -

 

2,399,400 

 

859,830 

 

5,278,274 

Average price per share

$                    -

 

$             13.82

 

$             20.54

 

$             13.59

Total cost of acquired shares (in millions)

$                    -

 

$                  33

 

$                  18

 

$                  71



In total, we have acquired 8,537,410 shares under this program at an average price per share of $14.64 for a total cost of $125 million.  There were 94,492,857 shares of common stock outstanding as of June 30, 2017.

Equity Compensation Plans

Our 2011 Omnibus Incentive Plan originally had 3,250,000 shares reserved for issuance under the plan.  In April 2015, our shareholders approved an additional 4,250,000 shares for reservation for issuance under the plan.  The plan permits the issuance of stock options, stock appreciation rights, restricted stock, restricted stock units, performance shares, performance units and other stock-based and cash-based awards.  Since the adoption of the 2011 Omnibus Incentive Plan, the Company’s Board of Directors has periodically granted stock options, restricted stock awards, restricted stock units and performance share units to directors and employees.  Options and stock appreciation rights may not be granted at prices less than the fair market value of our common stock on the date of the grant, nor for a term exceeding ten years. For employees, vesting generally occurs ratably over a three to five year period on the anniversaries of the date specified in the employees’ respective stock option, restricted stock award, restricted stock unit and performance share unit award agreements, subject to accelerated vesting under certain circumstances set forth in the agreements. Vesting for directors generally occurs on the one-year  anniversary of the grant date. In 2017,  164,098 performance share unit awards, 543,319 restricted stock units,  and 63,272 shares of restricted stock have been granted to employees and members of our board of directors.  To date, since the plan’s inception in 2011, before consideration of forfeitures, 5,858,998 shares have been granted to management, members of our board of directors and key employees under this plan.  A Black-Scholes option-pricing model is used to estimate the fair value of the stock options. A Monte Carlo simulation is completed to estimate the fair value of performance share unit awards with a stock price performance component.  We expense the fair value of all equity grants, including performance share unit awards, on a straight-line basis over the vesting period.  



8

 


 

Accumulated Other Comprehensive Loss 



Accumulated other comprehensive loss in the accompanying consolidated balance sheets consists of the following (in millions):



 

 

 



 

 

 



June 30,

 

December 31,



2017

 

2016



 

 

 

Currency translation adjustments

$             (219)

 

$             (233)

Pension related adjustments

(1)

 

(1)

Accumulated other comprehensive loss

$             (220)

 

$             (234)

Earnings per Share 

Earnings per share are calculated in the table below (in millions, except per share amounts). 



 

 

 

 

 

 

 



 

 

 

 

 

 

 



Three Months Ended

 

Six Months Ended



June 30,

 

June 30,

 

June 30,

 

June 30,



2017

 

2016

 

2017

 

2016



 

 

 

 

 

 

 



 

 

 

 

 

 

 

Net income (loss)

$                    6

 

$                 (17)

 

$                  12

 

$                 (25)

Less: Dividends on Series A Preferred Stock

 

 

12 

 

12 

Net income (loss) attributable to common stockholders

$                    -

 

$                 (23)

 

$                    -

 

$                 (37)



 

 

 

 

 

 

 

Weighted average basic shares outstanding

94.5 

 

97.7 

 

94.6 

 

99.2 

Effect of dilutive securities

1.1 

 

 -

 

1.4 

 

 -

Weighted average diluted shares outstanding

95.6 

 

97.7 

 

96.0 

 

99.2 



 

 

 

 

 

 

 

Net income (loss) per share:

 

 

 

 

 

 

 

  Basic

$                    -

 

$              (0.24)

 

$                    -

 

$              (0.37)

  Diluted

$                    -

 

$              (0.24)

 

$                    -

 

$              (0.37)



Equity awards and shares of Preferred Stock are disregarded in the calculation of diluted earnings per share if they are determined to be anti-dilutive.  For the three and six months ended June 30, 2017, all of the shares of the Preferred Stock were anti-dilutive.  For the three and six months ended June 30, 2017, we had approximately 2.1 million anti-dilutive stock options. For the three and six months ended June 30, 2016, we had approximately 3.7 million anti-dilutive stock options. There were 0.8 million and 0.7 million anti-dilutive restricted stock, restricted units or performance stock unit awards for the three and six months ended June 30, 2016, respectively.



NOTE 7 – SEGMENT INFORMATION

Our business is comprised of four operating segments: U.S. Eastern Region and Gulf Coast, U.S. Western Region, Canada and International. Our International segment consists of our operations outside of the U.S. and Canada. These segments represent our business of selling PVF to the energy sector across each of the upstream (exploration, production and extraction of underground oil and gas), midstream (gathering and transmission of oil and gas, gas utilities, and the storage and distribution of oil and gas) and downstream (crude oil refining and petrochemical and chemical processing and general industrials) markets. Our two U.S. operating segments have been aggregated into a single reportable segment based on their economic similarities.  As a result, we report segment information for the U.S., Canada and International.



9

 


 

The following table presents financial information for each reportable segment (in millions):





 

 

 

 

 

 

 



Three Months Ended

 

Six Months Ended



June 30,

 

June 30,

 

June 30,

 

June 30,



2017

 

2016

 

2017

 

2016

Sales

 

 

 

 

 

 

 

U.S.

$              720

 

$              551

 

$             1,386

 

$             1,157

Canada

69 

 

54 

 

146 

 

118 

International

133 

 

141 

 

252 

 

254 

Consolidated sales

$              922

 

$              746

 

$             1,784

 

$             1,529



 

 

 

 

 

 

 

Operating income (loss)

 

 

 

 

 

 

 

U.S.

$                21

 

$                 (2)

 

$                  32

 

$                    2

Canada

 

(2)

 

 

(3)

International

(5)

 

(6)

 

(5)

 

(13)

Total operating income (loss)

17 

 

(10)

 

$                  31

 

$                  (14)



 

 

 

 

 

 

 

Interest expense

(8)

 

(9)

 

(15)

 

(17)

Other, net

 -

 

 -

 

 -

 

(1)

Income (loss) before income taxes

$                  9

 

$               (19)

 

$                  16

 

$                  (32)



 

 

 

 

 

 

 



 

 

 

 

 

 

 



 

 

 

 

June 30,

 

December 31,



 

 

 

 

2017

 

2016

Total assets

 

 

 

 

 

 

 

U.S.

 

 

 

 

$             1,886

 

$             1,862

Canada

 

 

 

 

145 

 

139 

International

 

 

 

 

201 

 

163 

Total assets

 

 

 

 

$             2,232

 

$             2,164





 Our sales by product line are as follows (in millions):





 

 

 

 

 

 

 

 



 

Three Months Ended

 

Six Months Ended



 

June 30,

 

June 30,

 

June 30,

 

June 30,

Type

 

2017

 

2016

 

2017

 

2016



 

 

 

 

 

 

 

 

Valves, automation, measurement and instrumentation

 

$                327

 

$                299

 

$                649

 

$                598

Line pipe

 

170 

 

96 

 

316 

 

228 

Gas products

 

143 

 

108 

 

277 

 

208 

Carbon steel fittings and flanges

 

139 

 

116 

 

262 

 

236 

Stainless steel and alloy pipe and fittings

 

50 

 

47 

 

91 

 

95 

Other

 

93 

 

80 

 

189 

 

164 



 

$                922

 

$                746

 

$             1,784

 

$             1,529





NOTE 8 – FAIR VALUE MEASUREMENTS

From time to time, we use derivative financial instruments to help manage our exposure to interest rate risk and fluctuations in foreign currencies. All of our derivative instruments are freestanding and, accordingly, changes in their fair market value are recorded in earnings.  As of June 30, 2017, we do not have any interest rate swap agreements. Foreign exchange forward contracts and options are reported at fair value utilizing Level 2 inputs, as the fair value is based on broker quotes for the same or similar derivative instruments. The total notional amount of our forward foreign exchange contracts and options was approximately $54 million and $36 million at June 30, 2017 and December 31, 2016, respectively.  We had approximately $0 million recorded as liabilities on our consolidated balance sheets as of June 30, 2017 and December 31, 2016.  

10

 


 

With the exception of long-term debt, the fair values of our financial instruments, including cash and cash equivalents, accounts receivable, trade accounts payable and accrued liabilities approximate carrying value.  The carrying value of our debt was $410 million and $414 million at June 30, 2017 and December 31, 2016, respectively.  We estimate the fair value of the Term Loan using Level 2 inputs, or quoted market prices.  The fair value of our debt was $417 million at June 30, 2017 and December 31, 2016.  



NOTE 9 – COMMITMENTS AND CONTINGENCIES

Litigation 

Asbestos Claims.    We are one of many defendants in lawsuits that plaintiffs have brought seeking damages for personal injuries that exposure to asbestos allegedly caused. Plaintiffs and their family members have brought these lawsuits against a large volume of defendant entities as a result of the defendants’ manufacture, distribution, supply or other involvement with asbestos, asbestos containing-products or equipment or activities that allegedly caused plaintiffs to be exposed to asbestos.  These plaintiffs typically assert exposure to asbestos as a consequence of third-party manufactured products that our MRC Global (US) Inc. subsidiary purportedly distributed.  As of June 30, 2017, we are named a defendant in approximately 508 lawsuits involving approximately 1,128 claims.  No asbestos lawsuit has resulted in a judgment against us to date, with a majority being settled, dismissed or otherwise resolved.  Applicable third-party insurance has substantially covered these claims, and insurance should continue to cover a substantial majority of existing and anticipated future claims.  Accordingly, we have recorded a liability for our estimate of the most likely settlement of asserted claims and a related receivable from insurers for our estimated recovery, to the extent we believe that the amounts of recovery are probable.  It is not possible to predict the outcome of these claims and proceedings. However, in our opinion, the likelihood that the ultimate disposition of any of these claims and legal proceedings will have a material adverse effect on our consolidated financial statements is remote.

Other Legal Claims and Proceedings.    From time to time, we have been subject to various claims and involved in legal proceedings incidental to the nature of our businesses. We maintain insurance coverage to reduce financial risk associated with certain of these claims and proceedings. It is not possible to predict the outcome of these claims and proceedings. However, in our opinion, the likelihood that the ultimate disposition of any of these claims and legal proceedings will have a material adverse effect on our consolidated financial statements is remote.

Product Claims.    From time to time, in the ordinary course of our business, our customers may claim that the products that we distribute are either defective or require repair or replacement under warranties that either we or the manufacturer may provide to the customer. These proceedings are, in the opinion of management, ordinary and routine matters incidental to our normal business. Our purchase orders with our suppliers generally require the manufacturer to indemnify us against any product liability claims, leaving the manufacturer ultimately responsible for these claims. In many cases, state, provincial or foreign law provides protection to distributors for these sorts of claims, shifting the responsibility to the manufacturer. In some cases, we could be required to repair or replace the products for the benefit of our customer and seek our recovery from the manufacturer for our expense. In our opinion, the likelihood that the ultimate disposition of any of these claims and legal proceedings will have a material adverse effect on our consolidated financial statements is remote.  

Weatherford Claim.  In addition to PVF, our Canadian subsidiary, Midfield Supply (“Midfield”), now known as MRC Global (Canada) ULC, also distributed progressive cavity pumps and related equipment (“PCPs”) under a distribution agreement with Weatherford Canada Partnership (“Weatherford”) within a certain geographical area located in southern Alberta, Canada.  In late 2005 and early 2006, Midfield hired new employees, including former Weatherford employees, as part of Midfield’s desire to expand its PVF business into northern Alberta.  Shortly thereafter, many of these employees left Midfield and formed a PCP manufacturing, distribution and service company named Europump Systems Inc. (“Europump”) in 2006.  A subsidiary of Halliburton Company purchased Europump in 2014.  The distribution agreement with Weatherford expired in 2006.  Midfield supplied Europump with PVF products that Europump distributed along with PCP pumps.  In April 2007, Midfield purchased Europump’s distribution branches and began distributing and servicing Europump PCPs.

Pursuant to a complaint that Weatherford filed on April 11, 2006 in the Court of Queen’s Bench of Alberta, Judicial Bench of Edmonton (Action No. 060304628), Weatherford sued Europump, three of Europump’s part suppliers, Midfield, certain current and former employees of Midfield, and other related entities, asserting a host of claims including breach of contract, breach of fiduciary duty, misappropriation of confidential information related to the PCPs, unlawful interference with economic relations and conspiracy.  The Company denies these allegations and contends that Midfield’s expansion and subsequent growth was the result of fair competition. 

In June 2017, Midfield and Europump and certain individual defendants and related entities settled the case.  As part of the settlement, MRC Global (Canada) ULC agreed to pay $6 million in exchange for a release from Weatherford and agreement to dismiss the case.  The Company had previously recorded a reserve of $3 million.  As a result of the settlement, an additional charge of $3 million was recorded in the second quarter of 2017.

11

 


 



Customer Contracts



We have contracts and agreements with many of our customers that dictate certain terms of our sales arrangements (pricing, deliverables, etc.). While we make every effort to abide by the terms of these contracts, certain provisions are complex and often subject to varying interpretations. Under the terms of these contracts, our customers have the right to audit our adherence to the contract terms. Historically, any settlements that have resulted from these customer audits have not been material to our consolidated financial statements.



Purchase Commitments

We have purchase obligations consisting primarily of inventory purchases made in the normal course of business to meet operating needs. While our vendors often allow us to cancel these purchase orders without penalty, in certain cases, cancellations may subject us to cancellation fees or penalties depending on the terms of the contract.





12

 


 





ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS



You should read the following discussion and analysis of our financial condition and results of operations in conjunction with our financial statements and related notes included elsewhere in this report. This discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions. As used in this Form 10-Q, unless otherwise indicated or the context otherwise requires, all references to the “Company”, “MRC Global”, “we”, “our” or “us” refer to MRC Global Inc. and its consolidated subsidiaries.  All references throughout this section (and elsewhere in this report) to amounts available for borrowing under various credit facilities refer to amounts actually available for borrowing after giving effect to any borrowing base limitations that the facility imposes.  

Cautionary Note Regarding Forward-Looking Statements

Management’s Discussion and Analysis of Financial Condition and Results of Operations (as well as other sections of this Quarterly Report on Form 10-Q) contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”).  Forward-looking statements include those preceded by, followed by or including the words “will,” “expect,” “intended,” “anticipated,” “believe,” “project,” “forecast,” “propose,” “plan,” “estimate,” “enable,” and similar expressions, including, for example, statements about our business strategy, our industry, our future profitability, growth in the industry sectors we serve, our expectations, beliefs, plans, strategies, objectives, prospects and assumptions, and estimates and projections of future activity and trends in the oil and natural gas industry. These forward-looking statements are not guarantees of future performance. These statements are based on management’s expectations that involve a number of business risks and uncertainties, any of which could cause actual results to differ materially from those expressed in or implied by the forward-looking statements. These statements involve known and unknown risks, uncertainties and other factors, most of which are difficult to predict and many of which are beyond our control, including the factors described under “Risk Factors”, that may cause our actual results and performance to be materially different from any future results or performance expressed or implied by these forward-looking statements. Such risks and uncertainties include, among other things:  

decreases in oil and natural gas prices;

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

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

U.S. and international general economic conditions;

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

the risk that manufacturers of the products we distribute will sell a substantial amount of goods directly to end users in the industry sectors we serve;

unexpected supply shortages;

cost increases by our suppliers;

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

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

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

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

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

changes in our customer and product mix;

risks related to our customers’ creditworthiness;

the success of our acquisition strategies;

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

our significant indebtedness;

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

13

 


 

changes in our credit profile;

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

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

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

product liability claims against us;

pending or future asbestos-related claims against us;

the potential loss of key personnel;

interruption in the proper functioning of our information systems;

the occurrence of cybersecurity incidents;

loss of third-party transportation providers;

potential inability to obtain necessary capital;

risks related to adverse weather events or natural disasters;

impairment of our goodwill or other intangible assets;

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

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

risks associated with international instability and geopolitical developments;

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

the impact on us of changes in U.S. generally accepted accounting principles or tax laws;

our intention not to pay dividends; and

the impact of U.S government policies.

Undue reliance should not be placed on our forward-looking statements. Although forward-looking statements reflect our good faith beliefs, reliance should not be placed on forward-looking statements because they involve known and unknown risks, uncertainties and other factors, which may cause our actual results, performance or achievements to differ materially from anticipated future results, performance or achievements expressed or implied by such forward-looking statements. We undertake no obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future events, changed circumstances or otherwise, except to the extent law requires.

Overview

We are the largest global industrial distributor, based on sales, of pipe, valves, and fittings (“PVF”) and related products and services to the energy industry and hold a leading position in our industry across each of the upstream (exploration, production and extraction of underground oil and natural gas), midstream (gathering and transmission of oil and natural gas, natural gas utilities and the storage and distribution of oil and natural gas) and downstream (crude oil refining, petrochemical and chemical processing and general industrials) sectors. Our business is segregated into three geographic reportable segments, consisting of our U.S., Canada and International operations. We serve our customers from approximately 300 service locations. We offer a wide array of PVF and oilfield supplies encompassing a complete line of products from our global network of over 12,000 suppliers to our more than 17,000 customers. We are diversified by geography, the industry sectors we serve and the products we sell. We seek to provide best-in-class service to our customers by satisfying the most complex, multi-site needs of many of the largest companies in the energy sector as their primary PVF supplier. We believe the critical role we play in our customers’ supply chain, together with our extensive product offering, broad global presence, customer-linked scalable information systems and efficient distribution capabilities, serve to solidify our long-standing customer relationships and drive our growth. As a result, we have an average relationship of over 25 years with our 25 largest customers.

14

 


 

Key Drivers of Our Business

Our revenues are predominantly derived from the sale of PVF and other oilfield and industrial supplies to the energy sector globally. Our business is therefore dependent upon both the current conditions and future prospects in the energy industry and, in particular, maintenance and expansionary operating and capital expenditures by our customers in the upstream, midstream and downstream sectors of the industry. We saw customer spending fall off significantly beginning in late 2014 and continuing through 2016 as a result of lower oil and natural gas prices.   Long-term growth in spending has been driven by several factors, including underinvestment in global energy infrastructure, growth in shale and unconventional exploration and production (“E&P”) activity, and anticipated strength in the oil, natural gas, refined products and petrochemical sectors. The outlook for future oil, natural gas, refined products and petrochemical PVF spending is influenced by numerous factors, including the following:



Oil and Natural Gas Prices. Sales of PVF and related products to the oil and natural gas industry constitute over 90% of our sales. As a result, we depend upon the oil and natural gas industry and its ability and willingness to make maintenance and capital expenditures to explore for, produce and process oil, natural gas and refined products. Oil and natural gas prices, both current and projected, along with the costs necessary to produce oil and gas, impact other drivers of our business, including capital spending by customers, additions and maintenance to pipeline mileage, refinery utilization and petrochemical processing activity.

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

Manufacturer and Distributor Inventory Levels of PVF and Related Products. Manufacturer and distributor inventory levels of PVF and related products can change significantly from period to period. Increased inventory levels by manufacturers or other distributors can cause an oversupply of PVF and related products in the industry sectors we serve and reduce the prices that we are able to charge for the products we distribute. Reduced prices, in turn, would likely reduce our profitability. Conversely, decreased manufacturer inventory levels may ultimately lead to increased demand for our products and would likely result in increased sales volumes and overall profitability.

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

Recent Trends and Outlook

During the first six months of 2017, the average oil price of West Texas Intermediate (“WTI”) increased to $49.85 per barrel from $39.55 per barrel in the first six months of 2016. Natural gas prices increased to an average price of $3.05/Mcf (Henry Hub) for the first six months of 2017 compared to $2.07/Mcf (Henry Hub) for the first six months of 2016.    North American drilling rig activity increased 73% in the first six months of 2017 as compared to the first six months of 2016.



In recent years, there has been an increase in the global supply of crude oil, including the contribution of U.S. shale oil, at a pace exceeding demand growth.  This increase combined with a hesitance on the part of the Organization of Petroleum Exporting Countries (“OPEC”) to curb production triggered a dramatic decline in oil prices that began in late 2014 and continued throughout 2016.  This low price environment, in turn, resulted in a dramatic decline in E&P capital spending by our customers, which directly impacts our business.  In 2016, customer spending fell by 27%, following a 21% decline in 2015, which brought spending to its lowest levels since 2009.  This marked the first time in nearly 30 years that global spending has been down in consecutive years.  However, since its November 2016 announcement, OPEC has attempted to enforce production cuts and we are encouraged by recent improvements in oil prices and drilling activity and expect 2017 revenue to be higher than 2016.  Prominent E&P spending surveys, which include many of our customers, indicate that 2017 spending will increase in North America with additional growth in 2018 and 2019, while forecasts outside of North America are more subdued.  We expect our business to follow the same trend.  However, in the short-term, oil prices remain volatile and changes in oil prices could impact customer spending levels.



In January 2017, a new U.S. President took office and  a new U.S. Congress was seated.   They have publicly made statements regarding the desire to support United States energy producers, refocus the EPA on its core mission, focus on United States interests first and lessen the regulatory burden on businesses to create job growth.  These statements have been further supported by the approval of a number of pipeline projects. They have also announced an aggressive policy agenda to change the tax system, modify the relationships between the United States and other countries, cancel or modify trade treaties and remake relationships with other countries. Until specific laws are passed, executive actions are taken or federal regulatory

15

 


 

action is enacted, it is unclear what impact these policies will have on our business.  While at first impression these policies could decrease the regulatory and tax burden on our business and the businesses of our U.S. customers, increase oil and gas production in the U.S. and, as a result, our U.S. business activity and increase the sales of product from our U.S. suppliers, it is not clear that all impacts would be positive.  However, in the absence of specifics and given the government’s generally supportive stance for the oil and gas industry, and based on E&P spending surveys and our customers’ current outlook for oil and gas supply and demand, we expect our business to increase in 2017.

We determine backlog by the amount of unshipped customer orders, either specific or general in nature, which the customer may revise or cancel in certain instances.  The table below details our backlog by segment (in millions):





 

 

 

 

 



 

 

 

 

 



 

 

 

 

 



June 30,

 

December 31,

 

June 30,



2017

 

2016

 

2016

U.S.

$              564

 

$              472

 

$              376

Canada

34 

 

36 

 

34 

International

229 

 

241 

 

247 



$              827

 

$              749

 

$              657

Approximately 21% and 28% of our June 30, 2017 and December 31, 2016 ending backlog, respectively, was associated with one customer in our U.S. segment as the result of a significant ongoing customer project.  There can be no assurance that the backlog amounts will ultimately be realized as revenue or that we will earn a profit on the backlog of orders, but we expect that substantially all of the sales in our backlog will be realized in the next twelve months.





 

 

 

 

 

 

 



Three Months Ended

 

Six Months Ended



June 30,

 

June 30,

 

June 30,

 

June 30,



2017

 

2016

 

2017

 

2016

Average Rig Count (1):

 

 

 

 

 

 

 

United States

895 

 

422 

 

819 

 

483 

Canada

117 

 

48 

 

206 

 

108 

International

958 

 

943 

 

948 

 

979 

Total

1,970 

 

1,413 

 

1,973 

 

1,570 

Average Commodity Prices (2):

 

 

 

 

 

 

 

WTI crude oil (per barrel)

$           48.10

 

$           45.46

 

$             49.85

 

$             39.55

Brent crude oil (per barrel)

$           49.55

 

$           45.57

 

$             51.57

 

$             39.80

Natural gas ($/Mcf)

$             3.08

 

$             2.15

 

$               3.05

 

$               2.07



 

 

 

 

 

 

 

Average Monthly U.S. Well Permits (3)

3,482 

 

2,048 

 

3,391 

 

2,051 

3:2:1 Crack Spread (4)

$           17.04

 

$           17.12

 

$             16.38

 

$             16.29

_______________________

 

 

 

 

 

 

 

(1) Source-Baker Hughes (www.bhge.com) (Total rig count includes oil, natural gas and other rigs.)

(2) Source-Department of Energy, EIA (www.eia.gov)  

(3) Source-Rig Data (U.S.)

(4) Source- Bloomberg



16

 


 

Results of Operations

Three Months Ended June 30, 2017 Compared to the Three Months Ended June 30, 2016

The breakdown of our sales by sector for the three months ended June 30, 2017 and 2016 was as follows (in millions):



 

 

 

 

 

 

 



Three Months Ended



June 30, 2017

 

June 30, 2016

Upstream

$          258

 

28% 

 

$         211

 

28% 

Midstream

420 

 

46% 

 

292 

 

39% 

Downstream

244 

 

26% 

 

243 

 

33% 



$          922

 

100% 

 

$         746

 

100% 



 

 

 

 

 

 

 

For the three months ended June 30, 2017 and 2016, the following table summarizes our results of operations (in millions):





 

 

 

 

 

 

 



Three Months Ended

 

 

 

 



June 30,

 

June 30,

 

 

 

 



2017

 

2016

 

$ Change

 

% Change

Sales:

 

 

 

 

 

 

 

U.S.

$                   720

 

$                   551

 

$            169

 

31% 

Canada

69 

 

54 

 

15 

 

28% 

International

133 

 

141 

 

(8)

 

(6%)

Consolidated

$                   922

 

$                   746

 

$            176

 

24% 



 

 

 

 

 

 

 

Operating income (loss):

 

 

 

 

 

 

 

U.S.

$                     21

 

$                     (2)

 

$              23

 

N/M

Canada

 

(2)

 

 

N/M

International

(5)

 

(6)

 

 

(17%)

Consolidated

17 

 

(10)

 

27 

 

N/M



 

 

 

 

 

 

 

Interest expense

(8)

 

(9)

 

 

(11%)

Other income (expense)

 -

 

 -

 

 -

 

N/M

Income tax (expense) benefit

(3)

 

 

(5)

 

N/M

Net income (loss)

 

(17)

 

23 

 

N/M

Series A preferred stock dividends

 

 

 -

 

0% 

Net income (loss) attributable to common stockholders

$                        -

 

$                   (23)

 

$              23

 

N/M



 

 

 

 

 

 

 

Gross profit

$                   149

 

$                   125

 

$              24

 

19% 

Adjusted Gross Profit (1)

$                   171

 

$                   140

 

$              31

 

22% 

Adjusted EBITDA (1)

$                     44

 

$                     15

 

$              29

 

193% 

(1)

Adjusted Gross Profit and Adjusted EBITDA are non-GAAP financial measures. For a reconciliation of these measures to an equivalent GAAP measure, see pages 18-20 herein.

Sales.    Sales include the revenue recognized from the sale of products we distribute,  services we provide and freight billings to customers, less cash discounts taken by customers in return for their early payment. Our sales were $922 million for the three months ended June 30, 2017 as compared to $746 million for the three months ended June 30, 2016,  an increase of $176 million, or 24%.

U.S. Segment—Our U.S. sales increased to $720 million for the three months ended June 30, 2017 from $551 million for the three months ended June 30, 2016. This $169 million, or 31%, increase reflected a $60 million increase in the upstream sector,

17

 


 

a $103 million increase in the midstream sector and a $6 million increase in the downstream sector.  The increase in the midstream sector is related to a large, ongoing transmission project with one of our customers and the increase in the upstream sector is related to the increase in rig count and well completions.

Canada Segment—Our Canada sales increased to $69 million for the three months ended June 30, 2017 from $54 million for the three months ended June 30, 2016.  This $15 million, or 28%, increase was primarily due to the upstream business as a result of an increase in rig count and a milder spring break-up compared to a year ago.  Canadian sales were unfavorably impacted by $3 million, or 6%, as a result of the weaker Canadian dollar relative to the U.S. dollar.

International Segment—Our International sales decreased to $133 million for the three months ended June 30, 2017 from $141 million for the same period in 2016.   The $8 million, or 6%,  decrease was primarily due to a $26 million decrease in the upstream business, related to one of our project customers in Norway, and a $7 million decrease in the downstream business offset by a $25 million Australian line pipe contract in the midstream sector.  The impact of the decline in foreign currencies in areas where we operate outside of the U.S. dollar was a $3 million, or 2%, reduction in sales. 



Gross Profit.    Our gross profit was $149 million  (16.2% of sales) for the three months ended June 30, 2017 as compared to $125 million  (16.8% of sales) for the three months ended June 30, 2016.  The $24 million increase was primarily attributable to the increase in sales volumes.  The reduction in gross profit percentage for the three months ended June 30, 2017 compared to the same period in 2016 was the result of the lower margin nature of the large midstream projects in the U.S. and International segments.  In addition, our last-in, first-out (“LIFO”) inventory costing methodology resulted in an increase in cost of sales of $5 million and a reduction of cost of sales of $1 million in the second quarter of 2017 and 2016, respectively. 



Certain purchasing costs and warehousing activities (including receiving, inspection and stocking costs), as well as general warehousing expenses, are included in selling, general and administrative expenses and not in cost of sales.  As such, our gross profit may not be comparable to others that may include these expenses as a component of cost of sales.  Purchasing and warehousing costs were $7 million for each of the three months ended June 30, 2017 and 2016.



Adjusted Gross Profit.    Adjusted Gross Profit increased to $171 million (18.5% of sales) for the three months ended              June 30, 2017 from $140 million  (18.8% of sales) for the three months ended June 30, 2016,  an increase of $31 million. Adjusted Gross Profit is a non-GAAP financial measure. We define Adjusted Gross Profit as sales, less cost of sales, plus depreciation and amortization, plus amortization of intangibles, and plus or minus the impact of our LIFO inventory costing methodology. We present Adjusted Gross Profit because we believe it is a useful indicator of our operating performance without regard to items, such as amortization of intangibles, that can vary substantially from company to company depending upon the nature and extent of acquisitions. Similarly, the impact of the LIFO inventory costing method can cause results to vary substantially from company to company depending upon whether they elect to utilize LIFO and depending upon which method they may elect. We use Adjusted Gross Profit as a key performance indicator in managing our business. We believe that gross profit is the financial measure calculated and presented in accordance with U.S. generally accepted accounting principles that is most directly comparable to Adjusted Gross Profit.

The following table reconciles Adjusted Gross Profit, a non-GAAP financial measure, with gross profit, as derived from our financial statements (in millions):





 

 

 

 

 

 

 



Three Months Ended



June 30,

 

Percentage

 

June 30,

 

Percentage



2017

 

of Revenue*

 

2016

 

of Revenue*

Gross profit, as reported

$           149

 

16.2% 

 

$           125

 

16.8% 

Depreciation and amortization

 

0.7% 

 

 

0.7% 

Amortization of intangibles

11 

 

1.2% 

 

11 

 

1.5% 

Increase (decrease) in LIFO reserve

 

0.5% 

 

(1)

 

(0.1%)

Adjusted Gross Profit

$           171

 

18.5% 

 

$           140

 

18.8% 



 

 

 

 

 

 

 

*Does not foot due to rounding.



Selling, General and Administrative (“SG&A”) Expenses.    Costs such as salaries, wages, employee benefits, rent, utilities, communications, insurance, fuel and taxes (other than state and federal income taxes) that are necessary to operate our branch and corporate operations are included in SG&A.  Also contained in this category are certain items that are nonoperational in nature, including certain costs of acquiring and integrating other businesses.  Our SG&A expenses were $132 million for the three months ended June 30, 2017 as compared to $135 million for the three months ended June 30, 2016.   Severance and restructuring charges for the three months ended June 30, 2016 totaled $4 million. No such expenses were incurred for the three months ending June 30, 2017.       

18

 


 



Operating Income (Loss).   Operating income was $17 million for the three months ended June 30, 2017, as compared to a $10 million operating loss for the three months ended June 30, 2016, an improvement of $27 million.

U.S. SegmentOperating income for our U.S. segment was $21 million for the three months ended June 30, 2017 compared to a $2 million operating loss for the three months ended June 30, 2016The $23 million increase in operating income was primarily driven by higher sales.  Severance costs included in operating expenses were $2 million for the three months ended June 30, 2016.  No such expenses were incurred for the three months ending June 30, 2017

Canada SegmentOperating income for our Canada segment was $1 million for the three months ended June 30, 2017 as compared to  a $2 million operating loss for the three months ended June 30, 2016.  The $3 million increase was a result of higher sales volume. 

International SegmentOur International segment incurred an operating loss of $5 million for the three months ended June 30, 2017 as compared to an operating loss of $6 million for the three months ended June 30, 2016The improvement of $1 million was the result of lower SG&A including severance costs offset by the reduction in sales.    Severance costs included in operating expenses were $0 million and $2 million for the three months ended June 30, 2017 and 2016, respectively.

Interest Expense.   Our interest expense was $8 million for the three month period ended June 30, 2017 as compared to $9 million for the three months ended June 30, 2016.  This represented a decrease of $1 million resulting from lower average debt levels. 

Other Income (Expense).   Our other income was $0 million for the three month periods ended June 30, 2017 and 2016.    For the three months ended June 30, 2017, other expense included a $3 million charge associated with the settlement of a litigation matter offset by $2 million of foreign currency gains.

Income Tax (Expense)  Benefit.   Our income tax expense was $3 million for the three months ended June 30, 2017 as compared to  a $2 million benefit for the three months ended June 30, 2016For interim periods, our income tax expense is computed based upon our estimated annual effective tax rate. Our effective tax rates were 33% and 11% for the three months ended June 30, 2017 and 2016, respectively. Our rates generally differ from the U.S. federal statutory rate of 35% as a result of state income taxes and differing, generally lower, foreign income tax rates.    The 2016 effective tax rate was significantly lower than our federal statutory rate due to forecasted pre-tax losses across all segments including significant pre-tax losses in jurisdictions where there was no corresponding tax benefit.

Net Income (Loss).   Our net income was $6  million for the three months ended June 30, 2017 as compared to  a net loss of  $17 million for the three months ended June 30, 2016,  an increase of $23 million.

Adjusted EBITDA.   Adjusted EBITDA, a non-GAAP financial measure, was $ 44million  (4.8% of sales) for the three months ended June 30, 2017 as compared to $15 million (2.0% of sales) for the three months ended June 30, 2016.  

We define Adjusted EBITDA as net income plus interest, income taxes, depreciation and amortization, amortization of intangibles and certain other expenses, including non-cash expenses, (such as equity-based compensation, severance and restructuring, changes in the fair value of derivative instruments and asset impairments, including inventory) and plus or minus the impact of our LIFO inventory costing methodology.

We believe Adjusted EBITDA provides investors a helpful measure for comparing our operating performance with the performance of other companies that may have different financing and capital structures or tax rates. We believe it is a useful indicator of our operating performance without regard to items, such as amortization of intangibles, that can vary substantially from company to company depending upon the nature and extent of acquisitions. Similarly, the impact of the LIFO inventory costing method can cause results to vary substantially from company to company depending upon whether they elect to utilize LIFO and depending upon which method they may elect. We use Adjusted EBITDA as a key performance indicator in managing our business. We believe that net income is the financial measure calculated and presented in accordance with U.S. generally accepted accounting principles that is most directly comparable to Adjusted EBITDA.



19

 


 

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



 

 

 







 

 

 



Three Months Ended



June 30,

 

June 30,



2017

 

2016

Net income (loss)

$                   6

 

$                 (17)

Income tax expense (benefit)

 

(2)

Interest expense

 

Depreciation and amortization

 

Amortization of intangibles

11 

 

11 

Increase (decrease) in LIFO reserve

 

(1)

Change in fair value of derivative instruments

(1)

 

Equity-based compensation expense

 

Severance and restructuring charges

 -

 

Litigation settlement

 

 -

Foreign currency (gains) losses

(2)

 

Adjusted EBITDA

$                 44

 

$                 15



 

 

 



Six Months Ended June 30, 2017 Compared to the Six Months Ended June 30, 2016 

The breakdown of our sales by sector for the six months ended June 30, 2017 and 2016 was as follows (in millions):





 

 

 

 

 

 

 



Six Months Ended



June 30, 2017

 

June 30, 2016

Upstream

$          503

 

28% 

 

$         442

 

29% 

Midstream

791 

 

44% 

 

570 

 

37% 

Downstream

490 

 

28% 

 

517 

 

34% 



$       1,784

 

100% 

 

$      1,529

 

100% 

20

 


 

For the six months ended June 30, 2017 and 2016, the following table summarizes our results of operations (in millions):





 

 

 

 

 

 

 



Six Months Ended

 

 

 

 



June 30,

 

June 30,

 

 

 

 



2017

 

2016

 

$ Change

 

% Change

Sales:

 

 

 

 

 

 

 

U.S.

$                1,386

 

$                1,157

 

$            229

 

20% 

Canada

146 

 

118 

 

28 

 

24% 

International

252 

 

254 

 

(2)

 

(1%)

Consolidated

$                1,784

 

$                1,529

 

$            255

 

17% 



 

 

 

 

 

 

 

Operating income (loss):

 

 

 

 

 

 

 

U.S.

$                     32

 

$                       2

 

$              30

 

N/M

Canada

 

(3)

 

 

N/M

International

(5)

 

(13)

 

 

(62%)

Consolidated

31 

 

(14)

 

45 

 

N/M



 

 

 

 

 

 

 

Interest expense

(15)

 

(17)

 

 

(12%)

Other income (expense)

 -

 

(1)

 

 

N/M

Income tax (expense) benefit

(4)

 

 

(11)

 

N/M

Net income (loss)

12 

 

(25)

 

37 

 

N/M

Series A preferred stock dividends

12 

 

12 

 

 -

 

0% 

Net income (loss) attributable to common stockholders

$                        -

 

$                   (37)

 

$              37

 

N/M



 

 

 

 

 

 

 

Gross profit

$                   289

 

$                   258

 

$              31

 

12% 

Adjusted Gross Profit (1)

$                   328

 

$                   287

 

$              41

 

14% 

Adjusted EBITDA (1)