mrc20200630_10q.htm
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Table of Contents



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 September 30, 2020

 
   
 

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)

________________

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

Trading symbol(s)

Name of each exchange on which registered

Common Stock, par value $0.01

MRC

New York Stock Exchange

 

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 ☒ No ☐

 

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).  Yes ☒ 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 ☒ Accelerated Filer ☐ Non-Accelerated Filer ☐ 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 ☒

 

There were 82,238,993 shares of the registrant’s common stock (excluding 169,603 unvested restricted shares), par value $0.01 per share, issued and outstanding as of October 22, 2020.

 

 

 

INDEX TO QUARTERLY REPORT ON FORM 10-Q

 

Page

PART I – FINANCIAL INFORMATION

     

ITEM 1.

financial statements (UNAUDITED)

1

     
 

Condensed Consolidated Balance Sheets – SEPTEMBER 30, 2020 AND DECEMBER 31, 2019

1

     
 

cONdENSED cONSOLIDATED STATEMENTS OF OPERATIONS – THREE AND NINE MONTHS ENDED sEPTEMBER 30, 2020 AND september 30, 2019

2

     
 

Condensed Consolidated Statements of cOMPREHENSIVE INCOME – three AND NINE months ended SEPTEMBER 30, 2020 and september 30, 2019

3

     
 

Condensed CONSOLIDATED STATEMENTS OF STOCKHOLDERs’ EQUITY – NINE MONTHS ENDEd SEPTEMBER 30, 2020 and september 30, 2019

4

     
 

Condensed CONSOLIDATED STATEMENTS OF cash flows – NINE MONTHS ENDEd SEPTEMBER 30, 2020 AND september 30, 2019

6

     
 

Notes to the Condensed Consolidated Financial Statements – SEPTEMBER 30, 2020

7

     

ITEM 2.

management’s discussion and analysis of financial condition and results of operations

17
     

ITEM 3.

quantitative and qualitative disclosures about market risk

30

     

ITEM 4.

controls and procedures

31

     

PART II – OTHER INFORMATION

     

ITEM 1.

LEGAL PROCEEDINGS

32

     

ITEM 1a.

RISK FACTORS

32

     

ITEM 2.

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

32

     

ITEM 3.

Defaults Upon Senior Securities

32

     

ITEM 4.

MINING SAFETY DISCLOSURES

33

     

ITEM 5.

other information

33

     

ITEM 6.

Exhibits

34

 

 

 

 

CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)

MRC GLOBAL INC.

(in millions, except per share amounts)

 

  

September 30,

  

December 31,

 
  

2020

  

2019

 
         

Assets

        

Current assets:

        

Cash

 $40  $32 

Accounts receivable, net

  343   459 

Inventories, net

  582   701 

Other current assets

  29   26 

Total current assets

  994   1,218 
         

Long-term assets:

        

Operating lease assets

  168   186 

Property, plant and equipment, net

  128   138 

Other assets

  16   19 
         

Intangible assets:

        

Goodwill, net

  264   483 

Other intangible assets, net

  235   281 
  $1,805  $2,325 
         

Liabilities and stockholders' equity

        

Current liabilities:

        

Trade accounts payable

 $293  $357 

Accrued expenses and other current liabilities

  86   91 

Operating lease liabilities

  34   34 

Current portion of long-term debt

  4   4 

Total current liabilities

  417   486 
         

Long-term liabilities:

        

Long-term debt, net

  405   547 

Operating lease liabilities

  160   167 

Deferred income taxes

  80   91 

Other liabilities

  41   37 
         

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, 106,284,968 and 105,624,750 issued, respectively

  1   1 

Additional paid-in capital

  1,736   1,731 

Retained deficit

  (770)  (483)

Less: Treasury stock at cost: 24,216,330 shares

  (375)  (375)

Accumulated other comprehensive loss

  (245)  (232)
   347   642 
  $1,805  $2,325 

 

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

  

Nine Months Ended

 
  

September 30,

  

September 30,

  

September 30,

  

September 30,

 
  

2020

  

2019

  

2020

  

2019

 
                 

Sales

 $585  $942  $1,981  $2,896 

Cost of sales

  471   768   1,640   2,374 

Gross profit

  114   174   341   522 

Selling, general and administrative expenses

  100   137   352   409 
Goodwill and intangible asset impairment  -   -   242   - 

Operating income (loss)

  14   37   (253)  113 

Other (expense) income:

                

Interest expense

  (7)  (10)  (22)  (31)

Other, net

  1   2   (1)  3 
                 

Income (loss) before income taxes

  8   29   (276)  85 

Income tax expense (benefit)

  5   8   (7)  22 

Net income (loss)

  3   21   (269)  63 

Series A preferred stock dividends

  6   6   18   18 

Net (loss) income attributable to common stockholders

 $(3) $15  $(287) $45 
                 
                 

Basic (loss) income per common share

 $(0.04) $0.18  $(3.50) $0.54 

Diluted (loss) income per common share

 $(0.04) $0.18  $(3.50) $0.53 

Weighted-average common shares, basic

  82.1   82.7   81.9   83.4 

Weighted-average common shares, diluted

  82.1   83.4   81.9   84.2 

 

See notes to condensed consolidated financial statements.

 

 

 

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)

MRC GLOBAL INC.

(in millions)

 

  

Three Months Ended

  

Nine Months Ended

 
  

September 30,

  

September 30,

  

September 30,

  

September 30,

 
  

2020

  

2019

  

2020

  

2019

 
                 

Net income (loss)

 $3  $21  $(269) $63 
                 

Other comprehensive income (loss)

                

Foreign currency translation adjustments

  5   (8)  (8)  (3)

Hedge accounting adjustments, net of tax

  1   -   (5)  (6)

Total other comprehensive income (loss), net of tax

  6   (8)  (13)  (9)

Comprehensive income (loss)

 $9  $13  $(282) $54 

 

See notes to condensed consolidated financial statements.

 

 

 

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (UNAUDITED)

MRC GLOBAL INC.

(in millions)

 

  

Nine Months Ended September 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

  106  $1  $1,731  $(483)  (24) $(375) $(232) $642 

Net income

  -   -   -   9   -   -   -   9 

Foreign currency translation

  -   -   -   -   -   -   (21)  (21)

Hedge accounting adjustments

  -   -   -   -   -   -   (6)  (6)

Shares withheld for taxes

  -   -   (3)  -   -   -   -   (3)

Equity-based compensation expense

  -   -   2   -   -   -   -   2 

Dividends declared on preferred stock

  -   -   -   (6)  -   -   -   (6)

Balance at March 31, 2020

  106  $1  $1,730  $(480)  (24) $(375) $(259) $617 

Net loss

  -   -   -   (281)  -   -   -   (281)

Foreign currency translation

  -   -   -   -   -   -   8   8 

Equity-based compensation expense

  -   -   3   -   -   -   -   3 

Dividends declared on preferred stock

  -   -   -   (6)  -   -   -   (6)

Balance at June 30, 2020

  106  $1  $1,733  $(767)  (24) $(375) $(251) $341 
Net income  -   -   -   3   -   -   -   3 
Foreign currency translation  -   -   -   -   -   -   5   5 
Hedge accounting adjustments  -   -   -   -   -   -   1   1 
Equity-based compensation expense  -   -   3   -   -   -   -   3 
Dividends declared on preferred stock  -   -   -   (6)  -   -   -   (6)
Balance at September 30, 2020  106  $1  $1,736  $(770)  (24) $(375) $(245) $347 

 

 

4

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (UNAUDITED)

MRC GLOBAL INC.

(in millions)

 

  

Nine Months Ended September 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

  105  $1  $1,721  $(498)  (19) $(300) $(232) $692 

Net income

  -   -   -   18   -   -   -   18 

Foreign currency translation

  -   -   -   -   -   -   3   3 

Hedge accounting adjustments

  -   -   -   -   -   -   (2)  (2)

Shares withheld for taxes

  -   -   (6)  -   -   -   -   (6)

Equity-based compensation expense

  -   -   4   -   -   -   -   4 

Dividends declared on preferred stock

  -   -   -   (6)  -   -   -   (6)

Purchase of common stock

  -   -   -   -   (2)  (25)  -   (25)

Balance at March 31, 2019

  105  $1  $1,719  $(486)  (21) $(325) $(231) $678 

Net income

  -   -   -   24   -   -   -   24 

Foreign currency translation

  -   -   -   -   -   -   2   2 

Hedge accounting adjustments

  -   -   -   -   -   -   (4)  (4)

Equity-based compensation expense

  1   -   3   -   -   -   -   3 

Dividends declared on preferred stock

  -   -   -   (6)  -   -   -   (6)

Purchase of common stock

  -   -   -   -   (1)  (25)  -   (25)

Balance at June 30, 2019

  106  $1  $1,722  $(468)  (22) $(350) $(233) $672 
Net income  -   -   -   21   -   -   -   21 
Foreign currency translation  -   -   -   -   -   -   (8)  (8)
Equity-based compensation expense  -   -   5   -   -   -   -   5 
Dividends declared on preferred stock  -   -   -   (6)  -   -   -   (6)
Purchase of common stock  -   -   -   -   (1)  (13)  -   (13)
Balance at September 30, 2019  106  $1  $1,727  $(453)  (23) $(363) $(241) $671 

 

See notes to condensed consolidated financial statements.

 

 

 

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

MRC GLOBAL INC.

(in millions)

 

  

Nine Months Ended

 
  

September 30,

  

September 30,

 
  

2020

  

2019

 
         

Operating activities

        

Net (loss) income

 $(269) $63 

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

        

Depreciation and amortization

  15   16 

Amortization of intangibles

  20   33 

Equity-based compensation expense

  8   12 

Deferred income tax benefit

  (10)  (5)

Decrease in LIFO reserve

  (20)  (3)
Goodwill and intangible asset impairment  242   - 
Lease impairment and abandonment  15   - 
Inventory-related charges  34   - 

Provision for uncollectible accounts

  3   2 

Other

  3   2 

Changes in operating assets and liabilities:

        

Accounts receivable

  110   (4)

Inventories

  102   56 

Other current assets

  (3)  - 

Accounts payable

  (63)  (3)

Accrued expenses and other current liabilities

  (9)  (35)

Net cash provided by operations

  178   134 
         

Investing activities

        

Purchases of property, plant and equipment

  (8)  (12)
Other investing activities  1   2 

Net cash used in investing activities

  (7)  (10)
         

Financing activities

        

Payments on revolving credit facilities

  (655)  (786)

Proceeds from revolving credit facilities

  519   733 

Payments on long-term obligations

  (5)  (3)

Purchase of common stock

  -   (63)

Dividends paid on preferred stock

  (18)  (18)

Repurchases of shares to satisfy tax withholdings

  (3)  (6)

Other

  -   1 

Net cash used in financing activities

  (162)  (142)
         

Increase (decrease) in cash

  9   (18)

Effect of foreign exchange rate on cash

  (1)  - 

Cash -- beginning of period

  32   43 

Cash -- end of period

 $40  $25 
         

Supplemental disclosures of cash flow information:

        

Cash paid for interest

 $21  $30 

Cash paid for income taxes

 $3  $27 

 

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 gas utilities (gas utilities and the storage and distribution of oil and gas), downstream and industrial (crude oil refining and petrochemical and chemical processing and general industrials), upstream production (exploration, production and extraction of underground oil and gas) and midstream pipeline (gathering and transmission of oil and gas) 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 nine months ended September 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 August 2020, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2020-06, Debt – Debt with Conversion and Other Options and Derivative Hedging – Contracts in Entity’s Own Equity (Subtopic 815-40) ("ASU 2020-06"), which simplifies guidance on the topics of convertible instruments, derivative contracts and earnings per share ("EPS") calculations. This update will be effective for fiscal years beginning after December 15, 2021, and interim periods within those fiscal years. We are currently evaluating the impacts of the provisions of ASU 2020-06 on our consolidated financial statements.

 

In March 2020, the 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 certain reference rates, including the London Interbank Offered Rate ("LIBOR"). The amendments are effective for all entities as of March 12, 2020 through December 31, 2022. We are currently evaluating the impacts of 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 $1 million of incremental bad debt expense in the nine months ended September 30, 2020.

 

 

 

 

 

NOTE 2 – REVENUE RECOGNITION

 

We recognize revenue when we transfer control of promised goods or services to our customers in an amount that reflects the consideration to which we expect to be entitled in exchange for those goods or services. We recognize substantially all of our revenue 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. We estimate and record returns 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 September 30, 2020 and December 31, 2019 was $13 million and $26 million, respectively. These contract asset balances are included within accounts receivable in the accompanying consolidated balance sheets.

 

We record contract liabilities, or deferred revenue, when we receive cash payments from customers in advance of our performance, including amounts which are refundable. The deferred revenue balance at September 30, 2020 and December 31, 2019 was $3 million and $4 million, respectively. During the three and nine months ended September 30, 2020, we recognized $0 million and $4 million of revenue that was deferred as of December 31, 2019, respectively. During the three and nine months ended September 30, 2019, we recognized $0 million and $6 million of revenue that was deferred as of December 31, 2018. Deferred revenue balances are included within accrued expenses and other current liabilities in the accompanying consolidated balance sheets.

 

8

 

Disaggregated Revenue: Our disaggregated revenue represents our business of selling PVF to the energy sector across each of the gas utilities (gas utilities and the storage and distribution of oil and gas), downstream and industrial (crude oil refining and petrochemical and chemical processing and general industrials), upstream production (exploration, production and extraction of underground oil and gas) and midstream pipeline (gathering and transmission of oil and gas) 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

 

September 30,

 
                 
  

U.S.

  

Canada

  

International

  

Total

 

2020:

                

Gas utilities

 $206  $2  $  $208 

Downstream & industrial

  131   4   50   185 

Upstream production

  61   17   40   118 

Midstream pipeline

  65   4   5   74 
  $463  $27  $95  $585 

2019:

                

Gas utilities

 $215  $1  $  $216 

Downstream & industrial

  218   7   60   285 

Upstream production

  189   43   55   287 

Midstream pipeline

  141   6   7   154 
  $763  $57  $122  $942 

 

Nine Months Ended

 

September 30,

 
                 
  

U.S.

  

Canada

  

International

  

Total

 

2020:

                

Gas utilities

 $605  $10  $  $615 

Downstream & industrial

  447   12   153   612 

Upstream production

  266   72   136   474 

Midstream pipeline

  257   11   12   280 
  $1,575  $105  $301  $1,981 

2019:

                

Gas utilities

 $663  $14  $  $677 

Downstream & industrial

  667   18   176   861 

Upstream production

  583   130   170   883 

Midstream pipeline

  435   21   19   475 
  $2,348  $183  $365  $2,896 

 

 

NOTE 3 – INVENTORIES

 

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

 

  

September 30,

  

December 31,

 
  

2020

  

2019

 

Finished goods inventory at average cost:

        

Valves, automation, measurement and instrumentation

 $303  $355 

Carbon steel pipe, fittings and flanges

  183   268 

All other products

  249   268 
   735   891 

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

  (135)  (155)

Less: Other inventory reserves

  (18)  (35)
  $582  $701 

 

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 nine months ended September 30, 2020, the effect of this LIFO decrement decreased cost of sales by approximately $14 million and $22 million, respectively.  

 

During the nine months ended September 30, 2020, we incurred non-cash inventory-related charges totaling $34 million necessary to reduce the carrying value of certain products determined to be excess or obsolete to their net realizable value based on our current market outlook for these products. This amount includes $19 million in our U.S. segment, $1 million in our Canada segment, and $14 million in our International segment due to increased reserves for excess and obsolete inventory as well as the exit of our Thailand business. We may continue to sell to customers in Thailand from time-to-time on an export basis.

 

9

 
 

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 one year to 15 years with a maximum lease term of 30 years, including renewals. The exercise of lease renewal options is at our sole discretion; therefore, renewals to extend the terms of most leases are not included in our right of use (“ROU”) assets and lease liabilities as they are not reasonably certain of exercise. In the case of our regional distribution centers and certain corporate offices, where the renewal is reasonably certain of exercise, we include the renewal period in our lease term. Leases with escalation adjustments based on an index, such as the consumer price index, are expensed based on current rates. Leases with specified escalation steps are expensed based on the total lease obligation ratably over the life of the lease. The depreciable life of assets and leasehold improvements are limited by the expected lease term. Non-lease components, such as payment of real estate taxes, maintenance, insurance and other operating expenses, have been excluded from the determination of our lease liability.

 

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 $10 million and $29 million for the three and nine months ended September 30, 2020, respectively, and $10 million and $31 million for the three and nine months ended September 30, 2019, respectively, which is classified in selling, general and administrative expenses. Cash paid for leases recognized as liabilities was $10 million and $32 million for the three and nine months ended September 30, 2020, respectively, and $11 million and $34 million for the three and nine months ended September 30, 2019, respectively.  

 

The maturity of lease liabilities is as follows (in millions):

 

Maturity of Operating Lease Liabilities

    

Remainder of 2020

 $10 

2021

  39 

2022

  31 

2023

  24 

2024

  20 

After 2024

  194 

Total lease payments

  318 

Less: Interest

  (124)

Present value of lease liabilities

 $194 

 

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:

 

  

September 30,

 

Operating Lease Term and Discount Rate

 

2020

 

Weighted-average remaining lease term (years)

  14 

Weighted-average discount rate

  7.0%

 

During the nine months ended September 30, 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 $15 million related to impairments of right of use assets, lease abandonments and charges associated with contractual obligations under lease agreements. These are reflected in selling, general and administrative expense in the accompanying statement of operations and amounted to $2 million, $1 million, and $12 million in our U.S., Canada and International segments, respectively.

 

In September and October 2020, we agreed, subject to certain conditions, to sell and leaseback certain owned office and warehouse facilities. These leases are expected to commence during the fourth quarter of 2020. Upon commencement, we will record approximately $23 million of operating lease liabilities for these arrangements.

 

10

 
 

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 that time, there remained ongoing uncertainty around the timing and extent of any recovery. We took 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 had taken to curtail costs and reduce spending. As a result of those developments, we concluded that it was more likely than not the fair values of our U.S. and International reporting units were lower than their carrying values. Accordingly, we completed an interim goodwill impairment test as of April 30, 2020. This test resulted in a $217 million goodwill impairment charge during the nine months ended September 30, 2020 comprised of $177 million in our U.S. reporting unit and $40 million in our International reporting unit. 

 

Goodwill by reporting unit is shown as follows (in millions):
 
  

U.S.

  

Canada

  

International

  

Total

 

Balance at December 31, 2019 (1)

 $441  $-  $42  $483 

Impairment

  (177)  -   (40)  (217)

Foreign currency translation adjustments

  -   -   (2)  (2)

Balance at September 30, 2020

 $264  $-  $-  $264 

 

 

(1)

Net of prior years’ accumulated impairment of $350 million, $69 million and $183 million in the United States, Canada and International, respectively.

 

As a result of the same factors that necessitated an interim impairment test for goodwill, we completed an interim impairment test, as of April 30, 2020, for our U.S. indefinite-lived tradename asset. This test resulted in an impairment charge of $25 million during the nine months ended September 30, 2020. The remaining balance of the indefinite-lived tradename was $107 million as of September 30, 2020. The U.S. tradename is our only indefinite-lived intangible asset.

 

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 April 30, 2020, the discount rates utilized to value the reporting units were in a range from 9.75% to 11.25%. We utilized third-party valuation advisors to assist us with these valuations. These impairment assessments incorporate inherent uncertainties, which are difficult to predict in volatile economic environments. While we believe that our assumptions and estimates were reasonable, actual results may differ materially from projected results which could result in the recognition of additional impairment charges in future periods.

 

 

NOTE 6 – LONG-TERM DEBT

 

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

 

  

September 30,

  

December 31,

 
  

2020

  

2019

 

Senior Secured Term Loan B, net of discount and issuance costs of $2

 $384  $390 

Global ABL Facility

  25   161 
   409   551 

Less: Current portion

  (4)  (4)
  $405  $547 

 

Senior Secured Term Loan B: We have a Senior Secured Term Loan B (the “Term Loan”) with an original principal amount of $400 million, which amortizes in equal quarterly installments of 1% per year with the balance payable in September 2024, when the facility matures. The Term Loan has an applicable interest rate margin of 300 basis points in the case of loans incurring interest based on LIBOR, and 200 basis points in the case of loans incurring interest based on the base rate. The Term Loan allows for incremental increases in facility size by up to an aggregate of $200 million, plus an additional amount such that the Company’s first lien leverage ratio (as defined under the Term Loan) would not exceed 4.00 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, defined below, (which includes accounts receivable and inventory) and a first lien on substantially all of the other assets of MRC Global Inc. and those of its U.S. 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. In addition, on an annual basis, we are required to repay an amount equal to 50% of excess cash flow, as defined in the Term Loan, reducing to 25% if our first lien leverage ratio is no more than 2.75 to 1.00. No payment of excess cash flow is required if the first lien leverage ratio is less than or equal 2.50 to 1.00. In addition, the Term Loan contains a number of customary restrictive covenants.

 

In March 2020, we purchased and retired $3 million of the outstanding interests in the Term Loan at a cost of $2 million. We recognized a gain of $1 million on the extinguishment of the debt in the nine months ended September 30, 2020.

 

11

 

Global ABL Facility: We have an $800 million multi-currency asset-based revolving credit (the “Global ABL Facility”) that matures in September 2022. This facility is comprised of revolver commitments of $675 million in the United States, $65 million in Canada, $18 million in Norway, $15 million in Australia, $13 million in the Netherlands, $7 million in the United Kingdom and $7 million in Belgium. It contains an accordion feature that allows us to increase the principal amount of the facility by up to $200 million, subject to securing additional lender commitments. 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 and inventory. Availability is dependent on a borrowing base comprised of a percentage of eligible accounts receivable and inventory which is subject to redetermination from time to time. Excess Availability, as defined under our Global ABL Facility, was $437 million as of September 30, 2020.

 

Interest on Borrowings: The interest rates on our borrowings outstanding at September 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:

 

  

September 30,

  

December 31,

 
  

2020

  

2019

 

Senior Secured Term Loan B

  4.92%  5.50%

Global ABL Facility

  2.71%  3.47%

Weighted average interest rate

  4.79%  4.91%

 

 

NOTE 7 – REDEEMABLE 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. In June 2018, the holders of Preferred Stock designated one member to our board of directors. If we fail to declare and pay the quarterly dividend for an amount equal to six or more dividend periods, the holders of the Preferred Stock would be entitled to designate an additional member to our board of directors. 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 $17.88 per share of common stock, subject to adjustment. Effective June 10, 2020, the Company has the option to redeem, in whole but not in part, all the outstanding shares of Preferred Stock at 105% of par value, subject to certain redemption price adjustments. We may elect to convert the Preferred Stock, in whole but not in part, into the relevant number of shares of common stock if the last reported sale price of the common stock has been at least 150% of the conversion price then in effect for a specified period. The conversion rate is subject to customary anti-dilution and other adjustments.

 

Holders of the Preferred Stock may, at their option, require the Company to repurchase their shares in the event of a fundamental change, as defined in the 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 September 30, 2020, there were no remaining authorizations outstanding under these programs. There were 82,068,638 shares of common stock outstanding as of September 30, 2020.

 

The following table summarizes the share repurchase activity:

 

  

Three Months Ended

  

Nine Months Ended

 
  

September 30,

  

September 30,

  

September 30,

  

September 30,

 
  

2020

  

2019

  

2020

  

2019

 

Number of shares acquired on the open market

  -   957,869   -   4,088,490 

Average price per share

 $-  $13.59  $-  $15.43 

Total cost of acquired shares (in millions)

 $-  $13  $-  $63 

 

Equity Compensation Plans

 

Our 2011 Omnibus Incentive Plan originally had 3,250,000 shares reserved for issuance under the plan. In both April 2015 and 2019, our shareholders approved an additional 4,250,000 and 2,500,000 shares, respectively, for reservation for issuance under the plan. The plan permits the issuance of stock options, stock appreciation rights, restricted stock, restricted stock units, performance shares, performance units and other stock-based and cash-based awards. Since the adoption of the 2011 Omnibus Incentive Plan, the Company’s board of directors has periodically granted stock options, restricted stock awards, restricted stock units and performance share units to directors and employees, but no other types of awards have been granted under the plan. Options and stock appreciation rights may not be granted at prices less than 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 over a three year to five year period on the anniversaries of the date specified in the employees’ respective agreements, subject to accelerated vesting under certain circumstances set forth in the agreements. Vesting for directors generally occurs on the one year anniversary of the grant date. In 2020, 336,325 performance share unit awards, 169,603 restricted stock shares and 1,336,430 shares of restricted stock units have been granted to employees. To date, 9,553,717 shares have been granted under this plan. A Black-Scholes option-pricing model is used to estimate the fair value of the stock options. A Monte Carlo simulation is completed to estimate the fair value of performance share unit awards with a stock price performance component. We expense the fair value of all equity grants, including performance share unit awards, on a straight-line basis over the vesting period.

 

12

 

Accumulated Other Comprehensive Loss 

 

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

 

  

September 30,

  

December 31,

 
  

2020

  

2019

 

Foreign currency translation adjustments

 $(232) $(224)

Hedge accounting adjustments

  (12)  (7)

Pension related adjustments

  (1)  (1)

Accumulated other comprehensive loss

 $(245) $(232)

 

Earnings per Share 

 

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

 

  

Three Months Ended

  

Nine Months Ended

 
  

September 30,

  

September 30,

  

September 30,

  

September 30,

 
  

2020

  

2019

  

2020

  

2019

 

Net income (loss)

 $3  $21  $(269) $63 

Less: Dividends on Series A Preferred Stock

  6   6   18   18 

Net (loss) income attributable to common stockholders

 $(3) $15  $(287) $45 
                 

Weighted average basic shares outstanding

  82.1   82.7   81.9   83.4 

Effect of dilutive securities

  -   0.7   -   0.8 

Weighted average diluted shares outstanding

  82.1   83.4   81.9   84.2 
                 

Net (loss) income per share:

                

Basic

 $(0.04) $0.18  $(3.50) $0.54 

Diluted

 $(0.04) $0.18  $(3.50) $0.53 

 

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 nine months ended September 30, 2020 and 2019, all of the shares of the Preferred Stock were anti-dilutive. For the three and nine months ended September 30, 2020, we had approximately 3.7 million and 3.8 million anti-dilutive stock options, respectively. For the three and nine months ended September 30, 2019, we had approximately 2.5 million anti-dilutive stock options. There were 0.4 million and 0.5 million anti-dilutive restricted stock, restricted units or performance stock unit awards for the three and nine months ended September 30, 2020, respectively. There were no anti-dilutive restricted stock, restricted units or performance stock unit awards for the three and nine months ended September 30, 2019.

 

 

NOTE 9 – SEGMENT INFORMATION

 

Our business is comprised of three 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 gas utilities (gas utilities and the storage and distribution of oil and gas), downstream and industrial (crude oil refining and petrochemical and chemical processing and general industrials), upstream production (exploration, production and extraction of underground oil and gas) and midstream pipeline (gathering and transmission of oil and gas) sectors.

 

13

 

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

 

  

Three Months Ended

  

Nine Months Ended

 
  

September 30,

  

September 30,

  

September 30,

  

September 30,

 
  

2020

  

2019

  

2020

  

2019

 

Sales

                

U.S.

 $463  $763  $1,575  $2,348 

Canada

  27   57   105   183 

International

  95   122   301   365 

Consolidated sales

 $585  $942  $1,981  $2,896 
                 

Operating income (loss)

                

U.S.

 $13  $31  $(195) $