UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
__________________________________________
FORM
(Mark One)
| | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
| FOR THE QUARTERLY PERIOD ENDED | ||
| 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:
MRC GLOBAL INC.
(Exact name of registrant as specified in its charter)
| | |
| (State or Other Jurisdiction of | (I.R.S. Employer Identification No.) |
| Fulbright Tower | |
| (Address of Principal Executive Offices) | (Zip Code) |
(
(Registrant’s Telephone Number, including Area Code)
________________
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading symbol(s) | Name of each exchange on which registered |
| | | |
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.
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files).
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):
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
There were
INDEX TO QUARTERLY REPORT ON FORM 10-Q
| Page |
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| PART I – FINANCIAL INFORMATION |
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| ITEM 1. |
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| Condensed Consolidated Balance Sheets – JUNE 30, 2020 AND DECEMBER 31, 2019 |
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| Condensed CONSOLIDATED STATEMENTS OF cash flows – SIX MONTHS ENDEd JUNE 30, 2020 AND JUNE 30, 2019 |
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| Notes to the Condensed Consolidated Financial Statements – JUNE 30, 2020 |
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| ITEM 2. |
management’s discussion and analysis of financial condition and results of operations |
16 |
| ITEM 3. |
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| ITEM 4. |
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| PART II – OTHER INFORMATION |
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| ITEM 1. |
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| ITEM 1a. |
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| ITEM 2. |
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| ITEM 3. |
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| ITEM 4. |
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| ITEM 5. |
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| ITEM 6. |
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CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
MRC GLOBAL INC.
(in millions, except per share amounts)
| June 30, | December 31, | |||||||
| 2020 | 2019 | |||||||
| Assets | ||||||||
| Current assets: | ||||||||
| Cash | $ | $ | ||||||
| Accounts receivable, net | ||||||||
| Inventories, net | ||||||||
| Other current assets | ||||||||
| Total current assets | ||||||||
| Long-term assets: | ||||||||
| Operating lease assets | ||||||||
| Property, plant and equipment, net | ||||||||
| Other assets | ||||||||
| Intangible assets: | ||||||||
| Goodwill, net | ||||||||
| Other intangible assets, net | ||||||||
| $ | $ | |||||||
| Liabilities and stockholders' equity | ||||||||
| Current liabilities: | ||||||||
| Trade accounts payable | $ | $ | ||||||
| Accrued expenses and other current liabilities | ||||||||
| Operating lease liabilities | ||||||||
| Current portion of long-term debt | ||||||||
| Total current liabilities | ||||||||
| Long-term liabilities: | ||||||||
| Long-term debt, net | ||||||||
| Operating lease liabilities | ||||||||
| Deferred income taxes | ||||||||
| Other liabilities | ||||||||
| Commitments and contingencies | ||||||||
| % Series A Convertible Perpetual Preferred Stock, $ par value; authorized shares; shares issued and outstanding | ||||||||
| Stockholders' equity: | ||||||||
| Common stock, $ par value per share: million shares authorized, and issued, respectively | ||||||||
| Additional paid-in capital | ||||||||
| Retained deficit | ( | ) | ( | ) | ||||
| Less: Treasury stock at cost: shares | ( | ) | ( | ) | ||||
| Accumulated other comprehensive loss | ( | ) | ( | ) | ||||
| $ | $ | |||||||
| See notes to condensed consolidated financial statements. |
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, |
|||||||||||||
| 2020 |
2019 |
2020 |
2019 |
|||||||||||||
| Sales |
$ | $ | $ | $ | ||||||||||||
| Cost of sales |
||||||||||||||||
| Gross profit |
||||||||||||||||
| Selling, general and administrative expenses |
||||||||||||||||
| Goodwill and intangible asset impairment | ||||||||||||||||
| Operating (loss) income |
( |
) | ( |
) | ||||||||||||
| Other (expense) income: |
||||||||||||||||
| Interest expense |
( |
) | ( |
) | ( |
) | ( |
) | ||||||||
| Other, net |
( |
) | ( |
) | ||||||||||||
| (Loss) income before income taxes |
( |
) | ( |
) | ||||||||||||
| Income tax (benefit) expense |
( |
) | ( |
) | ||||||||||||
| Net (loss) income |
( |
) | ( |
) | ||||||||||||
| Series A preferred stock dividends |
||||||||||||||||
| Net (loss) income attributable to common stockholders |
$ | ( |
) | $ | $ | ( |
) | $ | ||||||||
| Basic (loss) income per common share |
$ | ( |
) | $ | $ | ( |
) | $ | ||||||||
| Diluted (loss) income per common share |
$ | ( |
) | $ | $ | ( |
) | $ | ||||||||
| Weighted-average common shares, basic |
||||||||||||||||
| Weighted-average common shares, diluted |
||||||||||||||||
See notes to condensed consolidated financial statements.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
MRC GLOBAL INC.
(in millions)
| Three Months Ended |
Six Months Ended |
|||||||||||||||
| June 30, |
June 30, |
June 30, |
June 30, |
|||||||||||||
| 2020 |
2019 |
2020 |
2019 |
|||||||||||||
| Net (loss) income |
$ | ( |
) | $ | $ | ( |
) | $ | ||||||||
| Other comprehensive income (loss) |
||||||||||||||||
| Foreign currency translation adjustments |
( |
) | ||||||||||||||
| Hedge accounting adjustments, net of tax |
( |
) | ( |
) | ( |
) | ||||||||||
| Total other comprehensive income (loss), net of tax |
( |
) | ( |
) | ( |
) | ||||||||||
| Comprehensive (loss) income |
$ | ( |
) | $ | $ | ( |
) | $ | ||||||||
See notes to condensed consolidated financial statements.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (UNAUDITED)
MRC GLOBAL INC.
(in millions)
| Six Months Ended June 30, 2020 | ||||||||||||||||||||||||||||||||
| Accumulated | ||||||||||||||||||||||||||||||||
| Additional | Other | Total | ||||||||||||||||||||||||||||||
| Common Stock | Paid-in | Retained | Treasury Stock | Comprehensive | Stockholders' | |||||||||||||||||||||||||||
| Shares | Amount | Capital | (Deficit) | Shares | Amount | (Loss) | Equity | |||||||||||||||||||||||||
| Balance at December 31, 2019 | $ | $ | $ | ( | ) | ( | ) | $ | ( | ) | $ | ( | ) | $ | ||||||||||||||||||
| Net income | - | - | ||||||||||||||||||||||||||||||
| Foreign currency translation | - | - | ( | ) | ( | ) | ||||||||||||||||||||||||||
| Hedge accounting adjustments | - | - | ( | ) | ( | ) | ||||||||||||||||||||||||||
| Shares withheld for taxes | - | ( | ) | - | ( | ) | ||||||||||||||||||||||||||
| Equity-based compensation expense | - | - | ||||||||||||||||||||||||||||||
| Dividends declared on preferred stock | - | ( | ) | - | ( | ) | ||||||||||||||||||||||||||
| Balance at March 31, 2020 | $ | $ | $ | ( | ) | ( | ) | $ | ( | ) | $ | ( | ) | $ | ||||||||||||||||||
| Net loss | - | ( | ) | - | ( | ) | ||||||||||||||||||||||||||
| Foreign currency translation | - | - | ||||||||||||||||||||||||||||||
| Equity-based compensation expense | - | - | ||||||||||||||||||||||||||||||
| Dividends declared on preferred stock | - | ( | ) | - | ( | ) | ||||||||||||||||||||||||||
| Balance at June 30, 2020 | $ | $ | $ | ( | ) | ( | ) | $ | ( | ) | $ | ( | ) | $ | ||||||||||||||||||
| Six Months Ended June 30, 2019 | ||||||||||||||||||||||||||||||||
| Accumulated | ||||||||||||||||||||||||||||||||
| Additional | Other | Total | ||||||||||||||||||||||||||||||
| Common Stock | Paid-in | Retained | Treasury Stock | Comprehensive | Stockholders' | |||||||||||||||||||||||||||
| Shares | Amount | Capital | (Deficit) | Shares | Amount | (Loss) | Equity | |||||||||||||||||||||||||
| Balance at December 31, 2018 | $ | $ | $ | ( | ) | ( | ) | $ | ( | ) | $ | ( | ) | $ | ||||||||||||||||||
| Net income | - | - | ||||||||||||||||||||||||||||||
| Foreign currency translation | - | - | ||||||||||||||||||||||||||||||
| Hedge accounting adjustments | - | - | ( | ) | ( | ) | ||||||||||||||||||||||||||
| Shares withheld for taxes | - | ( | ) | - | ( | ) | ||||||||||||||||||||||||||
| Equity-based compensation expense | - | - | ||||||||||||||||||||||||||||||
| Dividends declared on preferred stock | - | ( | ) | - | ( | ) | ||||||||||||||||||||||||||
| Purchase of common stock | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||
| Balance at March 31, 2019 | $ | $ | $ | ( | ) | ( | ) | $ | ( | ) | $ | ( | ) | $ | ||||||||||||||||||
| Net income | - | - | ||||||||||||||||||||||||||||||
| Foreign currency translation | - | - | ||||||||||||||||||||||||||||||
| Hedge accounting adjustments | - | - | ( | ) | ( | ) | ||||||||||||||||||||||||||
| Equity-based compensation expense | 1 | - | ||||||||||||||||||||||||||||||
| Dividends declared on preferred stock | - | ( | ) | - | ( | ) | ||||||||||||||||||||||||||
| Purchase of common stock | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||
| Balance at June 30, 2019 | $ | $ | $ | ( | ) | ( | ) | $ | ( | ) | $ | ( | ) | $ | ||||||||||||||||||
See notes to condensed consolidated financial statements.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
MRC GLOBAL INC.
(in millions)
| Six Months Ended |
||||||||
| June 30, |
June 30, |
|||||||
| 2020 |
2019 |
|||||||
| Operating activities |
||||||||
| Net (loss) income |
$ | ( |
) | $ | ||||
| Adjustments to reconcile net (loss) income to net cash provided by operations: |
||||||||
| Depreciation and amortization |
||||||||
| Amortization of intangibles |
||||||||
| Equity-based compensation expense |
||||||||
| Deferred income tax benefit |
( |
) | ( |
) | ||||
| Decrease in LIFO reserve |
( |
) | ( |
) | ||||
| Goodwill and intangible asset impairment | ||||||||
| Lease impairment and abandonment | ||||||||
| Inventory-related charges | ||||||||
| Provision for uncollectible accounts |
||||||||
| Other |
||||||||
| Changes in operating assets and liabilities: |
||||||||
| Accounts receivable |
( |
) | ||||||
| Inventories |
||||||||
| Other current assets |
( |
) | ||||||
| Accounts payable |
( |
) | ||||||
| Accrued expenses and other current liabilities |
( |
) | ( |
) | ||||
| Net cash provided by operations |
||||||||
| Investing activities |
||||||||
| Purchases of property, plant and equipment |
( |
) | ( |
) | ||||
| Other investing activities | ||||||||
| Net cash used in investing activities |
( |
) | ( |
) | ||||
| Financing activities |
||||||||
| Payments on revolving credit facilities |
( |
) | ( |
) | ||||
| Proceeds from revolving credit facilities |
||||||||
| Payments on long-term obligations |
( |
) | ( |
) | ||||
| Purchase of common stock |
( |
) | ||||||
| Dividends paid on preferred stock |
( |
) | ( |
) | ||||
| Repurchases of shares to satisfy tax withholdings |
( |
) | ( |
) | ||||
| Other |
||||||||
| Net cash used in financing activities |
( |
) | ( |
) | ||||
| Decrease in cash |
( |
) | ( |
) | ||||
| Effect of foreign exchange rate on cash |
( |
) | ||||||
| Cash -- beginning of period |
||||||||
| Cash -- end of period |
$ | $ | ||||||
| Supplemental disclosures of cash flow information: |
||||||||
| Cash paid for interest |
$ | $ | ||||||
| Cash paid for income taxes |
$ | $ | ||||||
| See notes to condensed consolidated financial statements. |
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 infrastructure products and services across each of the upstream production (exploration, production and extraction of underground oil and gas), midstream pipeline (gathering and transmission of oil and gas), gas utilities (gas utilities and the storage and distribution of oil and gas) and downstream and industrial (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. We obtain products 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, 2020 are not necessarily indicative of the results that will be realized for the fiscal year ending December 31, 2020. We have derived our condensed consolidated balance sheet as of December 31, 2019 from the audited consolidated financial statements for the year ended December 31, 2019. 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, 2019.
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 Issued Accounting Pronouncements: In March 2020, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2020-04, Reference Rate Reform (Topic 848) ("ASU 2020-04"), which provides optional expedients and exceptions for applying U.S. GAAP to contracts, hedging relationships, and other transactions affected by the discontinuation of the London Interbank Offered Rate ("LIBOR") or by another reference rate expected to be discontinued. The amendments are effective for all entities as of March 12, 2020 through December 31, 2022. We are currently evaluating the impacts of the the provisions of ASU 2020-04 on our consolidated financial statements.
In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes, an update intended to simplify various aspects related to accounting for income taxes. This guidance removes certain exceptions to the general principles in Topic 740 and clarifies and amends existing guidance to improve consistent application. This accounting standards update will be effective for annual and interim financial statement periods beginning after December 15, 2020, with early adoption permitted. We are currently evaluating the impact of this accounting standards update, but do not expect the adoption to materially impact our consolidated financial statements.
Adoption of New Accounting Standards: In June 2016, the FASB issued ASU 2016-13, Measurement of Credit Losses on Financial Instruments, which requires that an entity measure impairment of certain financial instruments, including trade receivables, based on expected losses rather than incurred losses. We adopted ASU 2016-13 on January 1, 2020. The adoption of this new standard resulted in the recognition of $
NOTE 2 – REVENUE RECOGNITION
Revenue is recognized when control of promised goods or services is transferred to our customers in an amount that reflects the consideration to which we expect to be entitled in exchange for those goods or services. Substantially all of our revenue is recognized when products are shipped or delivered to our customers, and payment is due from our customers at the time of billing with a majority of our customers having 30-day terms. Returns are estimated and recorded as a reduction of revenue. Amounts received in advance of shipment are deferred and recognized when the performance obligations are satisfied. Sales taxes collected from customers and remitted to governmental authorities are accounted for on a net basis and, therefore, are excluded from sales in the accompanying consolidated statements of operations. Cost of sales includes the cost of inventory sold and related items, such as vendor rebates, inventory allowances and reserves and shipping and handling costs associated with inbound and outbound freight, as well as depreciation and amortization and amortization of intangible assets. In some cases, particularly with third-party pipe shipments, shipping and handling costs are considered separate performance obligations, and as such, the revenue and cost of sales are recorded when the performance obligation is fulfilled.
Our contracts with customers ordinarily involve performance obligations that are one year or less. Therefore, we have applied the optional exemption that permits the omission of information about our unfulfilled performance obligations as of the balance sheet dates.
Contract Balances: Variations in the timing of revenue recognition, invoicing and receipt of payment result in categories of assets and liabilities that include invoiced accounts receivable, uninvoiced accounts receivable, contract assets and deferred revenue (contract liabilities) on the consolidated balance sheets.
Generally, revenue recognition and invoicing occur simultaneously as we transfer control of promised goods or services to our customers. We consider contract assets to be accounts receivable when we have an unconditional right to consideration and only the passage of time is required before payment is due. In certain cases, particularly those involving customer-specific documentation requirements, invoicing is delayed until we are able to meet the documentation requirements. In these cases, we recognize a contract asset separate from accounts receivable until those requirements are met, and we are able to invoice the customer. Our contract asset balance associated with these requirements as of June 30, 2020 and December 31, 2019 was $
We record contract liabilities, or deferred revenue, when cash payments are received from customers in advance of our performance, including amounts which are refundable. The deferred revenue balance at June 30, 2020 and December 31, 2019 was $
Disaggregated Revenue: Our disaggregated revenue represents our business of selling PVF to the energy sector across each of the upstream production (exploration, production and extraction of underground oil and gas), midstream pipeline (gathering and transmission of oil and gas), gas utilities and downstream and industrial (crude oil refining and petrochemical and chemical processing and general industrials) sectors in each of our reportable segments. Each of our end markets and geographical reportable segments are impacted and influenced by varying factors, including macroeconomic environment, commodity prices, maintenance and capital spending and exploration and production activity. As such, we believe that this information is important in depicting the nature, amount, timing and uncertainty of our contracts with customers.
The following table presents our revenue disaggregated by revenue source (in millions):
| Three Months Ended | ||||||||||||||||
| June 30, | ||||||||||||||||
| U.S. | Canada | International | Total | |||||||||||||
| 2020: | ||||||||||||||||
| Upstream production | $ | $ | $ | $ | ||||||||||||
| Midstream pipeline | ||||||||||||||||
| Gas utilities | ||||||||||||||||
| Downstream & industrial | ||||||||||||||||
| $ | $ | $ | $ | |||||||||||||
| 2019: | ||||||||||||||||
| Upstream production | $ | $ | $ | $ | ||||||||||||
| Midstream pipeline | ||||||||||||||||
| Gas utilities | ||||||||||||||||
| Downstream & industrial | ||||||||||||||||
| $ | $ | $ | $ | |||||||||||||
| Six Months Ended | ||||||||||||||||
| June 30, | ||||||||||||||||
| U.S. | Canada | International | Total | |||||||||||||
| 2020: | ||||||||||||||||
| Upstream production | $ | $ | $ | $ | ||||||||||||
| Midstream pipeline | ||||||||||||||||
| Gas utilities | ||||||||||||||||
| Downstream & industrial | ||||||||||||||||
| $ | $ | $ | $ | |||||||||||||
| 2019: | ||||||||||||||||
| Upstream production | $ | $ | $ | $ | ||||||||||||
| Midstream pipeline | ||||||||||||||||
| Gas utilities | ||||||||||||||||
| Downstream & industrial | ||||||||||||||||
| $ | $ | $ | $ | |||||||||||||
NOTE 3 – INVENTORIES
The composition of our inventory is as follows (in millions):
| June 30, | December 31, | |||||||
| 2020 | 2019 | |||||||
| Finished goods inventory at average cost: | ||||||||
| Valves, automation, measurement and instrumentation | $ | $ | ||||||
| Carbon steel pipe, fittings and flanges | ||||||||
| All other products | ||||||||
| Less: Excess of average cost over LIFO cost (LIFO reserve) | ( | ) | ( | ) | ||||
| Less: Other inventory reserves | ( | ) | ( | ) | ||||
| $ | $ | |||||||
The Company uses the last-in, first-out (“LIFO”) method of valuing U.S. inventories. The use of the LIFO method has the effect of reducing net income during periods of rising inventory costs (inflationary periods) and increasing net income during periods of falling inventory costs (deflationary periods). Valuation of inventory under the LIFO method can be made only at the end of each year based on the inventory levels and costs at that time. Accordingly, interim LIFO calculations are based on management’s estimates of expected year-end inventory levels and costs and are subject to the final year-end LIFO inventory determination. Our inventory quantities are expected to be reduced for the current year, resulting in a liquidation of a LIFO inventory layer that was carried at a lower cost prevailing from a prior year, as compared with current costs in the current year (a “LIFO decrement”). A LIFO decrement results in the erosion of layers created in earlier years, and, therefore, a LIFO layer is not created for years that have decrements. For the three and six months ended June 30, 2020, the effect of this LIFO decrement decreased cost of sales by approximately $
In the second quarter of 2020, we incurred non-cash inventory-related charges totaling $
NOTE 4 – LEASES
We lease certain distribution centers, warehouses, office space, land and equipment. Substantially all of these leases are classified as operating leases. We recognize lease expense on a straight-line basis over the lease term. Leases with an initial term of 12 months or less are not recorded on the balance sheet.
Many of our facility leases include one or more options to renew, with renewal terms that can extend the lease term from year to
As most of our leases do not provide an implicit rate, we use an incremental borrowing rate based on the information available at the commencement date in determining the present value of the lease payments using a portfolio approach. Our lease agreements do not contain any material residual value guarantees or material restrictive covenants.
Expense associated with our operating leases was $
The maturity of lease liabilities is as follows (in millions):
| Maturity of Operating Lease Liabilities | ||||
| Remainder of 2020 | $ | |||
| 2021 | ||||
| 2022 | ||||
| 2023 | ||||
| 2024 | ||||
| After 2024 | ||||
| Total lease payments | ||||
| Less: Interest | ( | ) | ||
| Present value of lease liabilities | $ |
Amounts maturing after 2024 include expected renewals for leases of regional distribution centers and certain corporate offices through dates up to 2048.
The term and discount rate associated with leases are as follows:
| June 30, | ||||
| Operating Lease Term and Discount Rate | 2020 | |||
| Weighted-average remaining lease term (years) | ||||
| Weighted-average discount rate | % | |||
During the second quarter of 2020, actions were taken to close a number of facilities as part of a broader plan to streamline operations and reduce costs. In connection with these closures, we incurred charges totaling $
NOTE 5 – GOODWILL AND INTANGIBLE ASSET IMPAIRMENT
We apply a fair value-based impairment test to the carrying value of goodwill and indefinite-lived intangible assets on an annual basis (as of October 1) and, if certain events or circumstances indicate that an impairment loss may have been incurred, on an interim basis.
In the first half of 2020, demand for oil and natural gas declined sharply as a result of the coronavirus disease 2019 (“COVID-19”) pandemic. This disruption in demand and the resulting decline in the price of oil has had a dramatic negative impact on our business. We experienced a significant reduction in sales beginning in April 2020 which continued throughout the second quarter. At this time, there remains ongoing uncertainty around the timing and extent of any recovery. We have taken a more pessimistic long-term outlook due to the significant reduction in the demand for oil, the implications of that demand destruction on the price of oil for an extended period of time and actions our customers have taken to curtail costs and reduce spending. As a result of these developments, we concluded that it was more likely than not the fair values of our U.S. and International reporting units were lower than their carrying values. Accordingly, we completed an interim goodwill impairment test as of April 30, 2020. This test resulted in a $
| U.S. | Canada | International | Total | |||||||||||||
| Balance at December 31, 2019 (1) | $ | $ | - | $ | $ | |||||||||||
| Impairment | ( | ) | - | ( | ) | ( | ) | |||||||||
| Foreign currency translation adjustments | - | - | ( | ) | ( | ) | ||||||||||
| Balance at June 30, 2020 | $ | $ | - | $ | - | $ | ||||||||||
| (1) | Net of prior years’ accumulated impairment of $ |
As a result of the same factors that necessitated an interim impairment test for goodwill, we completed an interim impairment test for our U.S. indefinite-lived tradename asset. This test resulted in an impairment charge of $
Our impairment methodology uses discounted cash flow and multiples of cash earnings valuation techniques, acquisition control premium and valuation comparisons to similar businesses to determine the fair value of a reporting unit. Each of these methods involves Level 3 unobservable market inputs and require us to make certain assumptions and estimates including future operating results, the extent and timing of future cash flows, working capital requirements, sales prices, profitability, discount rates, sales growth trends and cost trends. As of June 30, 2020, the discount rates utilized to value the reporting units were in a range from
NOTE 6 – LONG-TERM DEBT
The components of our long-term debt are as follows (in millions):
| June 30, | December 31, | |||||||
| 2020 | 2019 | |||||||
| Senior Secured Term Loan B, net of discount and issuance costs of $2 | $ | $ | ||||||
| Global ABL Facility | ||||||||
| Less: Current portion | ( | ) | ( | ) | ||||
| $ | $ | |||||||
Senior Secured Term Loan B: We have a Senior Secured Term Loan B (the “Term Loan”) with an original principal amount of $
In March 2020, we purchased and retired $
Global ABL Facility: We have an $
Interest on Borrowings: The interest rates on our borrowings outstanding at June 30, 2020 and December 31, 2019, including a floating to fixed interest rate swap and amortization of debt issuance costs, are as set forth below:
| June 30, | December 31, | |||||||
| 2020 | 2019 | |||||||
| Senior Secured Term Loan B | % | % | ||||||
| Global ABL Facility | % | % | ||||||
| Weighted average interest rate | % | % | ||||||
NOTE 7 – REDEEMABLE PREFERRED STOCK
Preferred Stock Issuance
In June 2015, we issued
The Preferred Stock is convertible at the option of the holders into shares of common stock at an initial conversion rate of
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 8 – STOCKHOLDERS’ EQUITY
Share Repurchase Program
From time to time, the Company’s board of directors has authorized repurchase programs for shares of the Company’s common stock. As of June 30, 2020, there were remaining authorizations outstanding under these programs. There were
The following table summarizes the share repurchase activity:
| Three Months Ended | Six Months Ended | |||||||||||||||
| June 30, | June 30, | June 30, | June 30, | |||||||||||||
| 2020 | 2019 | 2020 | 2019 | |||||||||||||
| Number of shares acquired on the open market | ||||||||||||||||
| Average price per share | $ | $ | $ | $ | ||||||||||||
| Total cost of acquired shares (in millions) | $ | $ | $ | $ | ||||||||||||
Equity Compensation Plans
Our 2011 Omnibus Incentive Plan originally had
Accumulated Other Comprehensive Loss
Accumulated other comprehensive loss in the accompanying consolidated balance sheets consists of the following (in millions):
| June 30, | December 31, | |||||||
| 2020 | 2019 | |||||||
| Foreign currency translation adjustments | $ | ( | ) | $ | ( | ) | ||
| Hedge accounting adjustments | ( | ) | ( | ) | ||||
| Pension related adjustments | ( | ) | ( | ) | ||||
| Accumulated other comprehensive loss | $ | ( | ) | $ | ( | ) | ||
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, | |||||||||||||
| 2020 | 2019 | 2020 | 2019 | |||||||||||||
| Net (loss) income | $ | ( | ) | $ | $ | ( | ) | $ | ||||||||
| Less: Dividends on Series A Preferred Stock | ||||||||||||||||
| Net (loss) income attributable to common stockholders | $ | ( | ) | $ | $ | ( | ) | $ | ||||||||
| Weighted average basic shares outstanding | ||||||||||||||||
| Effect of dilutive securities | ||||||||||||||||
| Weighted average diluted shares outstanding | ||||||||||||||||
| Net (loss) income per share: | ||||||||||||||||
| Basic | $ | ( | ) | $ | $ | ( | ) | $ | ||||||||
| Diluted | $ | ( | ) | $ | $ | ( | ) | $ | ||||||||
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, 2020 and 2019, all of the shares of the Preferred Stock were anti-dilutive. For the three and six months ended June 30, 2020, we had approximately
NOTE 9 – SEGMENT INFORMATION
Our business is comprised of operating and reportable segments: U.S., 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 production (exploration, production and extraction of underground oil and gas), midstream pipeline (gathering and transmission of oil and gas), gas utilities and downstream and industrial (crude oil refining and petrochemical and chemical processing and general industrials) sectors.
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, | |||||||||||||
| 2020 | 2019 | 2020 | 2019 | |||||||||||||
| Sales | ||||||||||||||||
| U.S. | $ | $ | $ | $ | ||||||||||||
| Canada | ||||||||||||||||
| International | ||||||||||||||||
| Consolidated sales | $ | $ | $ | $ | ||||||||||||
| Operating (loss) income | ||||||||||||||||
| U.S. | $ | ( | ) | $ | $ | ( | ) | $ | ||||||||
| Canada | ( | ) | ( | ) | ||||||||||||
| International | ( | ) | ( | ) | ||||||||||||
| Total operating (loss) income | ( | ) | ( | ) | ||||||||||||
| Interest expense | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Other, net | ( | ) | ( | ) | ||||||||||||
| (Loss) income before income taxes | $ | ( | ) | $ | $ | ( | ) | $ | ||||||||
| June 30, | December 31, | |||||||
| 2020 | 2019 | |||||||
| Total assets | ||||||||
| U.S. | $ | $ | ||||||
| Canada | ||||||||
| International | ||||||||
| Total assets | $ | $ | ||||||
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 | 2020 | 2019 | 2020 | 2019 | ||||||||||||
| Line pipe | $ | $ | $ | $ | ||||||||||||
| Carbon fittings and flanges | ||||||||||||||||
| Total carbon pipe, fittings and flanges | ||||||||||||||||
| Valves, automation, measurement and instrumentation | ||||||||||||||||
| Gas products | ||||||||||||||||
| Stainless steel and alloy pipe and fittings | ||||||||||||||||
| General products | ||||||||||||||||
| $ | $ | $ | $ | |||||||||||||
NOTE 10 – FAIR VALUE MEASUREMENTS
From time to time, we use derivative financial instruments to help manage our exposure to interest rate risk and fluctuations in foreign currencies.
Interest Rate Swap: In March 2018, we entered into a year interest rate swap that became effective on March 31, 2018, with a notional amount of $
We have designated the interest rate swap as an effective cash flow hedge utilizing the guidance under ASU 2017-12. As such, the valuation of the interest rate swap is recorded as an asset or liability, and the gain or loss on the derivative is recorded as a component of other comprehensive income. Interest rate swap agreements are reported on the accompanying balance sheets at fair value utilizing observable Level 2 inputs such as yield curves and other market-based factors. We obtain dealer quotations to value our interest rate swap agreements. The fair value of our interest rate swap is estimated based on the present value of the difference between expected cash flows calculated at the contracted interest rates and the expected cash flows at current market interest rates. The fair value of the interest rate swap was a liability of $
Foreign Exchange Forward Contracts: Foreign exchange forward contracts are reported at fair value utilizing Level 2 inputs, as the fair value is based on broker quotes for the same or similar derivative instruments. Our foreign exchange derivative instruments are freestanding, have not been designated as hedges and, accordingly, changes in their fair market value are recorded in earnings. The total notional amount of our forward foreign exchange contracts and options was approximately $
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 $
NOTE 11 – COMMITMENTS AND CONTINGENCIES
Litigation
Asbestos Claims. We are one of many defendants in lawsuits that plaintiffs have brought seeking damages for personal injuries that exposure to asbestos allegedly caused. Plaintiffs and their family members have brought these lawsuits against a large volume of defendant entities as a result of the defendants’ manufacture, distribution, supply or other involvement with asbestos, asbestos containing-products or equipment or activities that allegedly caused plaintiffs to be exposed to asbestos. These plaintiffs typically assert exposure to asbestos as a consequence of third-party manufactured products that our MRC Global (US) Inc. subsidiary purportedly distributed. As of June 30, 2020, we are named a defendant in approximately
Other Legal Claims and Proceedings. From time to time, we have been subject to various claims and involved in legal proceedings incidental to the nature of our businesses. We maintain insurance coverage to reduce financial risk associated with certain of these claims and proceedings. It is not possible to predict the outcome of these claims and proceedings. However, in our opinion, the likelihood that the ultimate disposition of any of these claims and legal proceedings will have a material adverse effect on our consolidated financial statements is remote.
Product Claims. From time to time, in the ordinary course of our business, our customers may claim that the products that we distribute are either defective or require repair or replacement under warranties that either we or the manufacturer may provide to the customer. These proceedings are, in the opinion of management, ordinary and routine matters incidental to our normal business. Our purchase orders with our suppliers generally require the manufacturer to indemnify us against any product liability claims, leaving the manufacturer ultimately responsible for these claims. In many cases, state, provincial or foreign law provides protection to distributors for these sorts of claims, shifting the responsibility to the manufacturer. In some cases, we could be required to repair or replace the products for the benefit of our customer and seek our recovery from the manufacturer for our expense. In our opinion, the likelihood that the ultimate disposition of any of these claims and legal proceedings will have a material adverse effect on our consolidated financial statements is remote.
Customer Contracts
We have contracts and agreements with many of our customers that dictate certain terms of our sales arrangements (pricing, deliverables, etc.). While we make every effort to abide by the terms of these contracts, certain provisions are complex and often subject to varying interpretations. Under the terms of these contracts, our customers have the right to audit our adherence to the contract terms. Historically, any settlements that have resulted from these customer audits have not been material to our consolidated financial statements.
Purchase Commitments
We have purchase obligations consisting primarily of inventory purchases made in the normal course of business to meet operating needs. While our vendors often allow us to cancel these purchase orders without penalty, in certain cases, cancellations may subject us to cancellation fees or penalties depending on the terms of the contract.