82504619ea484cc

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

___________________________________________

FORM 10-Q

(Mark One)

 

 

 

 

 

 

x

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

SECURITIES EXCHANGE ACT OF 1934

 

 

 

 

FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2013

 

 

 

Or

 

 

o

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.)

 

 

2 Houston Center, 909 Fannin, Suite 3100

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 or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer [ X  ]      Accelerated filer  [   ] Non-accelerated filer  [    ]        Smaller reporting company [   ]

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 101,753,498 shares of the registrant’s common stock, par value $0.01 per share, issued and outstanding as of October 25, 2013.

 

 


 

Table Of Contents

 

INDEX TO QUARTERLY REPORT ON FORM 10-Q

 

 

 

 

Page

PART I – FINANCIAL INFORMATION

 

 

 

ITEM 1

financial statements (UNAUDITED)

 

 

 

 

Condensed Consolidated Balance Sheets – September 30, 2013 and December 312012

 

 

 

 

Condensed Consolidated Statements of INCOME – Three AND nine MONTHS

 

 

ended september 30, 2013 AND september 30, 2012

 

 

 

 

Condensed Consolidated Statements of cOMPREHENSIVE INCOME – Three And

 

 

nine Months Ended september 30, 2013 AND september 30, 2012

 

 

 

 

Condensed CONSOLIDATED STATEMENTS OF cash flows – nine MONTHS ENDED

 

 

september 30, 2013 and september 30, 2012

 

 

 

 

Notes to the Condensed Consolidated Financial Statements – september 30, 2013

 

 

 

ITEM 2.

management’s discussion and analysis of financial condition and

 

 

results of operations

11 

 

 

 

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

27 

 

 

 

ITEM 5.

other information

27 

 

 

 

ITEM 6.

Exhibits

28 

 

 

 

 

 


 

Table Of Contents

 

CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)

 

MRC GLOBAL INC.

 

 

 

 

 

 

(In thousands, except per share amounts)

September 30,

 

December 31,

 

2013

 

2012

Assets

 

 

 

Current assets:

 

 

 

Cash

$                 33,439

 

$                 37,090

Accounts receivable, net

841,545 

 

823,236 

Inventories, net

929,529 

 

970,228 

Other current assets

31,954 

 

20,020 

Total current assets

1,836,467 

 

1,850,574 

 

 

 

 

Other assets

33,357 

 

37,031 

 

 

 

 

Property, plant and equipment, net

118,445 

 

122,458 

 

 

 

 

Intangible assets:

 

 

 

Goodwill, net

623,714 

 

610,392 

Other intangible assets, net

711,574 

 

749,272 

 

 

 

 

 

$            3,323,557

 

$            3,369,727

 

 

 

 

Liabilities and stockholders' equity

 

 

 

Current liabilities:

 

 

 

Trade accounts payable

$               498,797

 

$               438,344

Accrued expenses and other current liabilities

121,874 

 

125,599 

Deferred income taxes

82,813 

 

79,661 

Current portion of long-term debt

6,500 

 

6,500 

Total current liabilities

709,984 

 

650,104 

 

 

 

 

Long-term obligations:

 

 

 

Long-term debt, net

1,037,264 

 

1,250,089 

Deferred income taxes

241,090 

 

261,448 

Other liabilities

18,659 

 

22,164 

 

 

 

 

Commitments and contingencies

 

 

 

 

 

 

 

Stockholders' equity:

 

 

 

Common stock, $0.01 par value per share: 500,000 shares authorized, 101,745 and 101,563 issued and outstanding, respectively

1,017 

 

1,016 

Preferred stock, $0.01 par value per share; 100,000 shares authorized,  no shares issued and outstanding

 -

 

 -

Additional paid-in capital

1,637,003 

 

1,625,900 

Retained deficit

(290,038)

 

(418,830)

Accumulated other comprehensive loss

(31,422)

 

(22,164)

 

1,316,560 

 

1,185,922 

 

$            3,323,557

 

$            3,369,727

See notes to condensed consolidated financial statements.

 

 

 

 

 

 

 

 

 

 

 

 

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CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

 

MRC GLOBAL INC.

 

 

 

 

 

 

 

 

 

 

 

(In thousands, except per share amounts)

Three Months Ended

 

Nine Months Ended

 

September 30,

 

September 30,

 

September 30,

 

September 30,

 

2013

 

2012

 

2013

 

2012

Sales

$          1,313,711

 

$          1,451,114

 

$          3,886,589

 

$          4,264,125

Cost of sales

1,075,418 

 

1,173,916 

 

3,157,792 

 

3,508,686 

Gross profit

238,293 

 

277,198 

 

728,797 

 

755,439 

 

 

 

 

 

 

 

 

Selling, general and administrative expenses

160,910 

 

154,955 

 

475,642 

 

452,528 

Operating income

77,383 

 

122,243 

 

253,155 

 

302,911 

 

 

 

 

 

 

 

 

Other income (expense):

 

 

 

 

 

 

 

Interest expense

(15,463)

 

(28,177)

 

(45,988)

 

(92,621)

Loss on early extinguishment of debt

 -

 

(10,322)

 

 -

 

(21,746)

Write off of debt issuance costs

 -

 

 -

 

 -

 

(1,685)

Change in fair value of derivative instruments

(1,828)

 

845 

 

589 

 

1,770 

Other, net

(87)

 

1,232 

 

(13,471)

 

3,554 

Income before income taxes

60,005 

 

85,821 

 

194,285 

 

192,183 

Income tax expense

21,248 

 

30,280 

 

65,493 

 

67,783 

Net income

$               38,757

 

$               55,541

 

$             128,792

 

$             124,400

 

 

 

 

 

 

 

 

Basic earnings per common share

$                   0.38

 

$                   0.55

 

$                   1.27

 

$                   1.31

Diluted earnings per common share

$                   0.38

 

$                   0.54

 

$                   1.26

 

$                   1.31

Weighted-average common shares, basic

101,715 

 

101,490 

 

101,673 

 

94,768 

Weighted-average common shares, diluted

102,393 

 

102,029 

 

102,455 

 

95,185 

 

See notes to condensed consolidated financial statements.

 

 

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CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)

 

MRC GLOBAL INC.

 

 

 

 

 

 

 

 

 

 

(In thousands)

Three Months Ended

 

Nine Months Ended

 

September 30,

 

September 30,

 

September 30,

 

September 30,

 

2013

 

2012

 

2013

 

2012

Net income

$           38,757

 

$           55,541

 

$         128,792

 

$         124,400

 

 

 

 

 

 

 

 

Other comprehensive income (loss) before tax -

 

 

 

 

 

 

 

Foreign currency translation adjustments

12,550 

 

13,049 

 

(9,944)

 

3,549 

Income tax benefit (expense) related to components of other comprehensive income

(437)

 

(898)

 

686 

 

(654)

Total other comprehensive income (loss), net of tax

12,113 

 

12,151 

 

(9,258)

 

2,895 

Comprehensive income

$           50,870

 

$           67,692

 

$         119,534

 

$         127,295

 

 

 

 

 

 

 

 

 

See notes to condensed consolidated financial statements.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

 

MRC GLOBAL INC.

 

 

 

 

 

 

 

 

(In thousands)

Nine Months Ended

 

September 30,

 

September 30,

 

2013

 

2012

Operating activities

 

 

 

Net income

$              128,792

 

$              124,400

Adjustments to reconcile net income to net cash provided by operations:

 

 

 

Depreciation and amortization

16,782 

 

13,180 

Amortization of intangibles

39,128 

 

37,184 

Equity-based compensation expense

8,602 

 

5,859 

Deferred income tax benefit

(16,747)

 

(3,463)

Amortization of debt issuance costs

4,376 

 

7,088 

Write off of debt issuance costs

 -

 

1,685 

Loss on early extinguishment of debt

 -

 

21,746 

(Decrease) increase in LIFO reserve

(21,247)

 

3,080 

Change in fair value of derivative instruments

(589)

 

(1,770)

Provision for uncollectible accounts

(355)

 

3,936 

Foreign currency losses

11,993 

 

(520)

Other non-cash items

(133)

 

5,738 

Changes in operating assets and liabilities:

 

 

 

Accounts receivable

(25,448)

 

(105,234)

Inventories

48,026 

 

(78,889)

Income taxes payable

(815)

 

5,867 

Other current assets

(11,961)

 

(5,836)

Accounts payable

64,849 

 

9,562 

Accrued expenses and other current liabilities

(3,878)

 

22,154 

Net cash provided by operations

241,375 

 

65,767 

 

 

 

 

Investing activities

 

 

 

Purchases of property, plant and equipment

(14,902)

 

(21,002)

Proceeds from the disposition of property, plant and equipment

4,025 

 

2,451 

Acquisitions, net of cash acquired

(21,909)

 

(89,893)

Other investment and notes receivable transactions

(2,116)

 

(3,979)

Net cash used in investing activities

(34,902)

 

(112,423)

 

 

 

 

Financing activities

 

 

 

Proceeds from the sale of common stock

 -

 

333,342 

Payments on revolving credit facilities

(1,534,095)

 

(1,801,675)

Proceeds from revolving credit facilities

1,328,296 

 

1,755,456 

Purchase of senior secured notes

 -

 

(205,003)

Payments on long-term obligations

(4,875)

 

(31,456)

Debt issuance costs paid

(189)

 

(7,930)

Proceeds from exercise of stock options

2,230 

 

51 

Tax benefit on stock options

302 

 

422 

Other financing activities

(6)

 

 -

Net cash (used in) provided by financing activities

(208,337)

 

43,207 

 

 

 

 

Decrease in cash

(1,864)

 

(3,449)

Effect of foreign exchange rate on cash

(1,787)

 

(5,839)

Cash -- beginning of period

37,090 

 

46,127 

Cash -- end of period

$                33,439

 

$                36,839

 

 

 

 

Supplemental disclosures of cash flow information:

 

 

 

Cash paid for interest

$                41,566

 

$                64,368

Cash paid for income taxes

$                82,589

 

$                66,190

See notes to condensed consolidated financial statements.

 

 

 

 

 

 

 

 

 

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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, McJunkin Red Man Corporation and its subsidiaries, are global distributors of pipe, valves, fittings (“PVF”) and related products and services to the energy and industrial sectors, 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, petrochemical processing and general industrials) sectors. We have branches in principal industrial, hydrocarbon producing and refining areas throughout the United States, Canada, Europe, Asia and Australasia. 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 nine months ended September 30, 2013 are not necessarily indicative of the results that will be realized for the fiscal year ending December 31, 2013.  We have derived our condensed consolidated balance sheet as of December 31, 2012 from the audited consolidated financial statements for the year ended December 31, 2012.  You should read these condensed consolidated financial statements in conjunction with the consolidated financial statements and notes thereto for the year ended December 312012.

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.

Recently Issued Accounting Standards: In February 2013, the Financial Accounting Standards Board (“FASB”) issued Standards Update No. 2013-05, Parent’s Accounting for the Cumulative Translation Adjustment upon Derecognition of Certain Subsidiaries or Groups of Assets within a Foreign Entity or of an Investment in a Foreign Entity (ASU 2013-05), which specifies that a cumulative translation adjustment (“CTA”) should be released into earnings when an entity ceases to have a controlling financial interest in a subsidiary or group of assets within a consolidated foreign entity and the sale or transfer results in the complete or substantially complete liquidation of the foreign entity.  For sales of an equity method investment that is a foreign entity, a pro rata portion of CTA attributable to the investment would be recognized in earnings upon sale of the investment.  When an entity sells either a part or all of its investment in a consolidated foreign entity, CTA would be recognized in earnings only if the sale results in the parent no longer having a controlling financial interest in the foreign entity.  CTA would be recognized in earnings in a business combination achieved in stages.  ASU 2013-05 will be effective for us prospectively in 2014.  We do not expect this update to have a material impact on our financial statements.

 

In July 2013, the FASB issued Standards Update No. 2013-11, Income Taxes (Topic 740), Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists.  The objective of this update is to eliminate the diversity in practice in the presentation of unrecognized tax benefits when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists.  Under this guidance, an unrecognized tax benefit, or a portion of an unrecognized tax benefit, should be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss or a tax credit carryforward, except in certain circumstances.  This update does not require any new disclosures and is effective for annual and interim periods beginning after December 31, 2013.  The amendments in this update will be applied prospectively to all unrecognized tax benefits that exist at the effective date.  We do not expect this update to have a material impact on our financial statements. 

 

NOTE 2 – ACQUISITiON

 

On July 1, 2013, we completed the acquisition of Dan H. Brown Inc., d/b/a Flow Control Products (“Flow Control”).  Flow Control is a leading provider in pneumatic and electro-hydraulic valve automation packages and related field support to the Permian Basin.  The total purchase price was $24 million subject to customary holdback amounts and

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working capital adjustments. Pro forma financial information has not been provided as this acquisition is not material to our consolidated financial statements.

 

NOTE 3 – INVENTORIES

 

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

 

 

 

 

 

September 30,

 

December 31,

 

2013

 

2012

Finished goods inventory at average cost:

 

 

 

Energy carbon steel tubular products

$         361,925

 

$        387,609

Valves, fittings, flanges and all other products

718,854 

 

752,630 

 

1,080,779 

 

1,140,239 

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

(129,735)

 

(150,982)

Less: Other inventory reserves

(21,515)

 

(19,029)

 

$         929,529

 

$        970,228

 

 

 

 

NOTE 4 – LONG-TERM DEBT

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

 

 

 

 

 

 

September 30,

 

December 31,

 

2013

 

2012

Senior Secured Term Loan B, net of discount of $5,649 and $6,345

$          637,851

 

$           642,030

Global ABL Facility

405,732 

 

608,006 

Other

181 

 

6,553 

 

1,043,764 

 

1,256,589 

Less current portion

6,500 

 

6,500 

 

$       1,037,264

 

$        1,250,089

Senior Secured Term Loan B:  We have a $650 million seven-year Senior Secured Term Loan B (the “Term Loan”) 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 above $650 million 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.  This facility is guaranteed by us as well as all of our wholly owned U.S. subsidiaries.  In addition, it is secured by a second lien on those assets securing our Global ABL Facility (which includes accounts receivable, inventory and related assets) and a first lien on substantially all of our other assets and those of our 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,  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, was 6.14% and 6.39% as of September 30, 2013 and December 31, 2012, respectively.    

Global ABL FacilityWe have a $1.25 billion multi-currency global asset-based revolving credit facility (the “Global ABL Facility”) that matures in March 2017. This facility is comprised of $977 million in revolver commitments in the United States, $170 million in Canada, $12 million in the United Kingdom, $75 million in Australia, $9 million in the Netherlands and $7 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.  

We and each of our 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

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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. 

The interest rate for the Global ABL Facility was 2.10% and 2.21% as of September 30, 2013 and December 31, 2012, respectively.    Availability under our Global ABL Facility was $573 million as of September 30, 2013.

 

NOTE 5 – STOCKHOLDERS’ EQUITY

Stock Options and Restricted Stock

Our 2011 Omnibus Incentive Plan has 3,250,000 shares reserved for issuance pursuant to 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 and restricted stock 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 their fair market value on the date of the grant, nor for a term exceeding ten years. For employees, vesting generally occurs over a four or 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 option agreements. Vesting for directors generally occurs in one year.  In March 2013, 641,294 stock options and 87,914 shares of restricted stock were issued to employees. In May 2013, 71,878 stock options and 9,413 shares of restricted stock were issued to members of our Board of Directors. During the third quarter of 2013, an additional 13,574 and 1,836 stock options and shares of restricted stock were issued to employees and members of our Board of Directors.  To date, 1,891,670 shares have been granted to management, members of our Board of Directors and key employees under this plan.  We expense the fair value of the stock option grants on a straight-line basis over the vesting period. A Black-Scholes option-pricing model is used to estimate the fair value of the stock options.

 

Accumulated Other Comprehensive Loss 

 

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

 

 

 

 

 

 

 

 

 

 

September 30,

 

December 31,

 

2013

 

2012

Currency translation adjustments

$         (31,087)

 

$         (21,829)

Pension related adjustments

(335)

 

(335)

Accumulated other comprehensive loss

$         (31,422)

 

$         (22,164)

Earnings per Share

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Nine Months Ended

 

September 30,

 

September 30,

 

September 30,

 

September 30,

 

2013

 

2012

 

2013

 

2012

Net income

$            38,757

 

$            55,541

 

$          128,792

 

$          124,400

 

 

 

 

 

 

 

 

Average basic shares outstanding

101,715 

 

101,490 

 

101,673 

 

94,768 

Effect of dilutive securities

678 

 

539 

 

782 

 

417 

Average diluted shares outstanding

102,393 

 

102,029 

 

102,455 

 

95,185 

 

 

 

 

 

 

 

 

Net income per share:

 

 

 

 

 

 

 

  Basic

$                0.38

 

$                0.55

 

$                1.27

 

$                1.31

  Diluted

$                0.38

 

$                0.54

 

$                1.26

 

$                1.31

 

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Stock options and shares of restricted stock are disregarded in this calculation if they are determined to be anti-dilutive.  For the three and nine months ended September 30, 2013, we had approximately 1.2 million and 0.6  million anti-dilutive stock options, respectively For the three and nine months ended September 30, 2012,  we had approximately 1.8 million and 2.3 million anti-dilutive stock options, respectively. There was no anti-dilutive restricted stock for the three and nine months ended September 30, 2013 and 2012.

 

NOTE 6 – SEGMENT INFORMATION

We operate as three business segments, U.S., Canada and International. Our International segment consists of our operations outside of the U.S. and Canada, principally Europe, Asia and Australasia. These segments represent our business of selling PVF and related products and services to the energy and industrial sectors, 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, petrochemical processing and general industrials) sectors. 

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

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Nine Months Ended

 

September 30,

 

September 30,

 

September 30,

 

September 30,

 

2013

 

2012

 

2013

 

2012

Sales

 

 

 

 

 

 

 

U.S.

$           1,015.0

 

$         1,111.9

 

$          2,955.8

 

$           3,284.2

Canada

162.1 

 

185.6 

 

520.1 

 

553.3 

International

136.6 

 

153.6 

 

410.7 

 

426.6 

Consolidated

$           1,313.7

 

$         1,451.1

 

$          3,886.6

 

$           4,264.1

 

 

 

 

 

 

 

 

Operating income

 

 

 

 

 

 

 

U.S.

$                72.9

 

$            108.5

 

$             229.8

 

$              265.1

Canada

3.2 

 

5.7 

 

14.6 

 

17.5 

International

1.3 

 

8.0 

 

8.8 

 

20.3 

Consolidated

77.4 

 

122.2 

 

253.2 

 

302.9 

 

 

 

 

 

 

 

 

Interest expense

(15.5)

 

(28.2)

 

(46.0)

 

(92.6)

Other, net

(1.9)

 

(8.2)

 

(12.9)

 

(18.1)

Income before income taxes

$                60.0

 

$              85.8

 

$             194.3

 

$              192.2

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30,

 

December 31,

 

 

 

 

 

2013

 

2012

Total assets

 

 

 

 

 

 

 

U.S.

 

 

 

 

$          2,753.0

 

$           2,732.4

Canada

 

 

 

 

187.9 

 

249.1 

International

 

 

 

 

382.6 

 

388.2 

Total assets

 

 

 

 

$          3,323.5

 

$           3,369.7

 

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

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

September 30,

 

September 30,

 

September 30,

 

September 30,

Type

 

2013

 

2012

 

2013

 

2012

Energy carbon steel tubular products:

 

 

 

 

 

 

 

 

Line pipe

 

$         278,460

 

$           294,599

 

$           771,230

 

$            879,305

Oil country tubular goods (OCTG)

 

105,500 

 

186,367 

 

345,139 

 

600,955 

 

 

$         383,960

 

$           480,966

 

$        1,116,369

 

$         1,480,260

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Valves, fittings, flanges and other products:

 

 

 

 

 

 

 

 

Valves and specialty products

 

$         355,726

 

$           373,512

 

$        1,071,205

 

$         1,073,435

Carbon steel fittings and flanges and stainless steel and alloy pipe and fittings

 

286,732 

 

311,162 

 

869,995 

 

887,678 

Other

 

287,293 

 

285,474 

 

829,020 

 

822,752 

 

 

$         929,751

 

$           970,148

 

$        2,770,220

 

$         2,783,865

 

 

NOTE 7 – 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 September 30, 2013, we do not have any interest rate swap agreements. 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. The total notional amount of our forward foreign exchange contracts was approximately $48 million and $69 million at September 30, 2013 and December 31, 2012, respectively.  We had approximately $0 and $3,000 recorded as assets on our consolidated balance sheets as of September 30, 2013 and December 31, 2012, respectively.

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 $1.044 billion and $1.257 billion at September 30, 2013 and December 31, 2012, 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 $1.051 billion and $1.261 billion at September 30, 2013 and December 31, 2012, respectively.

 

NOTE 8 – 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 MRC purportedly distributed.  As of September 30, 2013, we are named a defendant in approximately 282  lawsuits involving approximately 934 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, there are no pending legal proceedings that are likely to have a material adverse effect on our consolidated financial statements.

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

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proceedings. However, in our opinion, there are no pending legal proceedings that are likely to have a material adverse effect on our consolidated financial statements.

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 the opinion of management, the ultimate disposition of these claims and proceedings is not expected to have a material adverse effect on our consolidated financial statements.

 

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.

 

 

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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, references to the “Company”, “MRC Global”,“MRC”, “we”, “our” or “us” refer to MRC Global Inc. and its 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, 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, 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, natural gas, and natural gas liquids 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;

increases in customer, manufacturer and distributor inventory levels;

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

the success of our acquisition strategies;

our significant indebtedness;

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

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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;

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;

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

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 sanction programs;

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

the impact on us of the SEC’s move toward convergence with IFRS; and 

the occurrence of cyber security incidents.

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 operating segments, consisting of our U.S. operations, our Canadian operations and our International operations. We serve our customers from over 400 service locations. We offer a wide array of PVF and oilfield supplies encompassing a complete line of products from our global network of suppliers to more than 18,000 customers. We are diversified by geography, the industry sectors we serve and the products we sell. We seek to provide best-in-class service to our customers by satisfying the most complex, multi-site needs of many of the largest companies in the energy and industrials sectors as their primary PVF supplier. We believe the critical role we play in our customers’ supply chain, together with our extensive product offering, broad global presence, customer-linked scalable information systems and efficient distribution capabilities, serve to solidify our long-standing customer relationships and drive our growth. As a result, we have an average relationship of over 20 years with our 25 largest customers.

Key Drivers of Our Business

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

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anticipated strength in the oil, natural gas, refined products, petrochemical and other industrials sectors. The outlook for future oil, natural gas, refined products, petrochemical and other industrial 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 a significant portion of our sales. As a result, we depend upon the oil and natural gas industry and its ability and willingness to make maintenance and capital expenditures to explore for, produce and process oil and natural gas and refined products. Oil and natural gas prices, both current and projected, along with the costs necessary to produce oil and gas, impact other drivers of our business, including E&P spending, additions to and maintenance of pipelines and pipeline gathering systems, refinery utilization and petrochemical and other industrial processing activity.

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

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

•  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 nine months of 2013, the average oil price of West Texas Intermediate (“WTI”) increased to $98.15 from $96.11 per barrel in the first nine months of 2012.  Despite the relative strength of oil prices, North American drilling activity decreased 9% in the first nine months of 2013 as compared to the same period of 2012. Natural gas prices increased to an average price of $3.69/Mcf (Henry Hub) for the first nine months of 2013 compared to $2.54/Mcf (Henry Hub) for the first  nine months of 2012. At September 30, 2013, the natural gas price was $3.48/Mcf (Henry Hub).  However, rig activity continues to be heavily weighted toward oil relative to natural gas, with oil drilling representing 78% of the total U.S. rig count during the first nine months of 2013 compared to 69% for the same time period in 2012.

Near the end of the fourth quarter of 2012, we experienced the impact of a general slow-down in the activities of our U.S. customers.  This trend continued into the first half of 2013, particularly in the upstream and midstream sectors, which were also negatively impacted by adverse winter weather conditions in certain parts of the country.  Capital spending by some of our largest midstream customers was impacted by lower upstream drilling activity and lower natural gas liquid (“NGL”) prices, which resulted in lower line pipe sales.  In addition, the permitting environment for new crude oil pipelines has slowed, resulting in the continued use by many customers of rail and trucks to transport oil.  As a result of these factors, our line pipe sales decreased $108 million in the first nine months of 2013 as compared to the same period in 2012.  While this trend eased in the third quarter of 2013, we still experienced a $16 million decline in line pipe sales as compared to the same period in 2012.  Our downstream and other industrials sector performance remains stable.

Business has remained relatively strong in the heavy oil and oil sands regions of Canada, although we did see a reduction in large project sales in the third quarter of 2013 as compared to the third quarter of 2012

 

Internationally, while our backlog continues to grow, the outlook remains cautious. Europe continues to experience slow economic growth.  Slow downs in China continue to negatively impact investment in Australia.

 

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On July 1, 2013, we completed the $24 million acquisition of Dan H. Brown, Inc. d/b/a Flow Control Products (“Flow Control”).  Flow control is a leading provider in pneumatic and electro-hydraulic valve automation packages and related field support to the Permian Basin.  Concurrent with this transaction, we are expanding our existing facility in Odessa, Texas, into a 110,000 square foot regional distribution center.  When completed in 2014, the Flow Control business will begin to operate from this newly expanded facility.

In 2012, we implemented our strategy to focus on our higher margin product lines and reduce exposure to the oil country tubular goods (“OCTG”) business.  As a result of this strategy, OCTG represented only 9% of total sales in the first nine months of 2013 compared to 14% in the first nine months of 2012, and our investment in OCTG inventory at September 30, 2013 was $87 million compared to $110 million a year ago.  The impact of this rebalancing effort was to reduce our OCTG sales by approximately $256 million in the first nine months of 2013 as compared to the same period in 2012. 

We determine backlog by the amount of unshipped customer orders, either specific or general in nature (including orders held under pipe programs), which the customer may revise or cancel in certain instances.  At September 30, 2013, total backlog was $739 million, including $419 million in our U.S. segment, $107 million in our Canadian segment and $213 million in our International segment.  At December 31, 2012, total backlog was $664 million, including $455 million in our U.S segment, $62 million in our Canadian segment and $147 million in our International segment.  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.

There have been several recent changes in the competitive landscape.  In September, National Oilwell Varco, Inc. announced plans to spin off their distribution business as a separate standalone entity.  In addition, Marubeni-Itochu, a venture between two of Japan’s largest trading houses, agreed to buy Sooner, Inc., a U.S. distributor of pipe and tubing for the oil and gas industry.  Finally, in October, Sumitomo, a large Japanese conglomerate, announced their plans to acquire Edgen Group, further expanding Sumitomo’s global presence in the upstream, midstream and downstream sectors.

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The following table shows key industry indicators for the three and nine months ended September 30, 2013 and 2012:

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Nine Months Ended

 

September 30,

 

September 30,

 

September 30,

 

September 30,

 

2013

 

2012

 

2013

 

2012

Average Rig Count (1):

 

 

 

 

 

 

 

United States

1,770 

 

1,906 

 

1,763 

 

1,955 

Canada

350 

 

325 

 

344 

 

362 

Total North America

2,120 

 

2,231 

 

2,107 

 

2,317 

International

1,285 

 

1,260 

 

1,288 

 

1,226 

Total Worldwide

3,405 

 

3,491 

 

3,395 

 

3,543 

 

 

 

 

 

 

 

 

Average Oil Rig Count (1):

 

 

 

 

 

 

 

United States

1,383 

 

1,417 

 

1,370 

 

1,351 

Canada

225 

 

241 

 

238 

 

261 

Total North America

1,608 

 

1,658 

 

1,608 

 

1,612 

Average Natural Gas Rig Count (1):

 

 

 

 

 

 

 

United States

380 

 

486 

 

388 

 

600 

Canada

124 

 

84 

 

107 

 

101 

Total North America

504 

 

570 

 

495 

 

701 

 

 

 

 

 

 

 

 

Average Commodity Prices (2):

 

 

 

 

 

 

 

WTI crude oil (per barrel)

$         105.83

 

$           92.17

 

$           98.15

 

$           96.11

Brent crude oil (per barrel)

$         110.23

 

$         109.63

 

$         108.33

 

$         112.14

Natural gas ($/Mcf)

$             3.55

 

$             2.88

 

$             3.69

 

$             2.54

 

 

 

 

 

 

 

 

Well Counts (1)

9,175 

 

9,411 

 

26,720 

 

28,166 

Average Monthly U.S. Well Permits (3)

5,854 

 

5,236 

 

5,906 

 

5,809 

3:2:1 Crack Spread (4)

$           18.22

 

$           32.42

 

$           25.10

 

$           29.65

_______________________

 

 

 

 

 

 

 

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

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

 

 

 

 

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

 

 

 

 

 

 

 

(4) Source-Commodity Systems, Inc.

 

 

 

 

 

 

 

 

Results of Operations

Three Months Ended September 30, 2013 Compared to the Three Months Ended September 30, 2012

The breakdown of our sales by sector for the three months ended September 30, 2013 and 2012 was as follows (in millions):

 

 

 

 

 

 

 

 

 

Three Months Ended

 

September 30, 2013

 

September 30, 2012

Upstream

$            588.1

 

45% 

 

$            653.6

 

45% 

Midstream

377.3 

 

29% 

 

403.9 

 

28% 

Downstream and other industrials

348.3 

 

26% 

 

393.6 

 

27% 

 

$         1,313.7

 

100% 

 

$         1,451.1

 

100% 

 

 

 

 

 

 

 

 

 

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For the three months ended September 30, 2013 and 2012, the following table summarizes our results of operations (in millions):

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

 

 

September 30,

 

September 30,

 

 

 

 

 

2013

 

2012

 

$ Change

 

% Change

Sales:

 

 

 

 

 

 

 

U.S.

$         1,015.0

 

$         1,111.9

 

$       (96.9)

 

(8.7%)

Canada

162.1 

 

185.6 

 

(23.5)

 

(12.7%)

International

136.6 

 

153.6 

 

(17.0)

 

(11.1%)

Consolidated

$         1,313.7

 

$         1,451.1

 

$     (137.4)

 

(9.5%)

 

 

 

 

 

 

 

 

Operating income:

 

 

 

 

 

 

 

U.S.

$              72.9

 

$            108.5

 

$       (35.6)

 

(32.8%)

Canada

3.2 

 

5.7 

 

(2.5)

 

(43.9%)

International

1.3 

 

8.0 

 

(6.7)

 

(83.8%)

Consolidated

77.4 

 

122.2 

 

(44.8)

 

(36.7%)

 

 

 

 

 

 

 

 

Interest expense

(15.5)

 

(28.2)

 

12.7 

 

(45.0%)

Loss on early extinguishment of debt

 -

 

(10.3)

 

10.3 

 

N/M

Other (expense) income

(1.9)

 

2.1 

 

(4.0)

 

N/M

Income tax expense

(21.2)

 

(30.3)

 

9.1 

 

(30.0%)

Net income

$              38.8

 

$              55.5

 

$       (16.7)

 

(30.1%)

 

 

 

 

 

 

 

 

Adjusted Gross Profit

$            251.3

 

$            278.8

 

$       (27.5)

 

(9.9%)

Adjusted EBITDA

$              96.4

 

$            125.3

 

$       (28.9)

 

(23.1%)

 

Sales.    Sales include the revenue recognized from the sale of the products we distribute, the services we provide to customers and freight billings to customers, less cash discounts taken by customers in return for their early payment of our invoices to them. Our sales decreased 9.5% to $1,313.7 million for the three months ended September 30, 2013 as compared to $1,451.1 million for the three months ended September 30, 2012.  

U.S. Segment—Our U.S. sales decreased to $1,015.0 million for the three months ended September 30, 2013 from $1,111.9 million for the three months ended September 30, 2012. This $96.9 million, or 8.7%, decrease reflected an  $83 million reduction in OCTG sales resulting from our strategy to rebalance our sales and inventories away from this more volatile, lower margin portion of our business.  Our third quarter 2013 revenues benefitted from the December 2012 and July 2013 acquisitions of the business of Production Specialty Services Inc. (“PSS”) and Flow Control which collectively contributed sales of $33 million. The remaining decrease in sales was driven by lower capital spending by our customers in the three months ended September 30, 2013 as compared to the same period in 2012.

Canadian Segment—Our Canadian sales decreased to $162.1 million for the three months ended September 30, 2013 from $185.6 million for the three months ended September 30, 2012.  Approximately one-third of this 12.7% overall decrease was the result of a decline in the Canadian dollar relative to the U.S. dollar.  The balance of the decrease was largely attributable to a decline in project sales particularly in the tar sands region of northern Alberta.  

International Segment—Our International sales decreased to $136.6 million for the three months ended September 30, 2013 from $153.6 million for the same period in 2012.  Nearly half of this 11.1% overall decrease was the result of a decline in the Australian dollar relative to the U.S. dollar.  The balance of the revenue decline reflected continued demand weakness, particularly in parts of Australia, where we have seen reduced customer spending in the mining and oil and gas sectors.  Sales in our European operations have remained flat while sales in Asia were up slightly as compared to the third quarter of 2012.

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Gross Profit.    Our gross profit was $238.3 million  (18.1% of sales) for the three months ended September 30, 2013 as compared to $277.2 million  (19.1% of sales) for the three months ended September 30, 2012. The 100 basis point decline in gross profit percentage was a result of our last-in, first-out (“LIFO”) inventory costing methodology.  LIFO resulted in a reduction in cost of sales of $5.7 million for the three months ended September 30, 2013 compared to a reduction in cost of sales of $15.4 million during the same period of 2012.  In addition to the decline in gross profit percentage, gross profit was further reduced by the 9.5% decline in sales we experienced.  

 

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 approximated $9.2 million and $9.4 million for the three months ended September 30, 2013 and 2012, respectively.

Adjusted Gross Profit.    Adjusted Gross Profit decreased to $251.3 million (19.1% of sales) for the three months ended September 30, 2013 from $278.8 million (19.2% of sales) for the three months ended September 30, 2012,  a decrease of $27.5 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 they have been involved in. Similarly, the impact of the LIFO inventory costing method can cause results to vary substantially from company to company depending upon whether they elect to utilize the LIFO method and depending upon which method they may elect. In particular, we believe that Adjusted Gross Profit is a useful indicator of our operating performance because Adjusted Gross Profit measures our operating performance without regard to acquisition transaction-related amortization expenses. 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 with gross profit, as derived from our financial statements (in millions):

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

September 30,

 

Percentage

 

September 30,

 

Percentage

 

2013

 

of Revenue

 

2012

 

of Revenue

Gross profit, as reported

$            238.3

 

18.1% 

 

$            277.2

 

19.1% 

Depreciation and amortization

5.6 

 

0.4% 

 

4.6 

 

0.3% 

Amortization of intangibles

13.1 

 

1.0% 

 

12.4 

 

0.9% 

(Decrease) increase in LIFO reserve

(5.7)

 

(0.4%)

 

(15.4)

 

(1.1%)

Adjusted Gross Profit

$            251.3

 

19.1% 

 

$            278.8

 

19.2% 

 

 

 

 

 

 

 

 

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 selling, general and administrative expenses. Also contained in this category are certain items that are nonoperational in nature, including certain costs of acquiring and integrating other businesses.  Our selling, general and administrative expenses were $160.9 million for the three months ended September 30, 2013 as compared to $155.0 million for the three months ended September 30, 2012.  This increase was primarily attributable to our December 2012 and July 2013 acquisitions of PSS and Flow Control which added an incremental $5 million of SG&A expense in the third quarter of 2013.  In addition, third quarter 2013 SG&A included $2.0 million of expenses related to the separation of an executive officer comprised of $0.8 million of cash compensation and $1.2 million of equity-based compensation.      

 

Operating Income.    Operating income was $77.4 million for the three months ended September 30, 2013, as compared to $122.2 million for the three months ended September 30, 2012, a decrease of $44.8 million.

U.S. SegmentOperating income for our U.S. segment decreased to $72.9 million for the three months ended September 30, 2013 from $108.5 million for the three months ended September 30, 2012.  This decline in operating income was a result of the decline in both sales and gross profit as noted above

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Canadian SegmentOperating income for our Canadian segment decreased to $3.2 million for the three months ended September 30, 2013 from $5.7 million for the three months ended September 30, 2012.  The decrease of $2.5 million was primarily the result of lower sales levels

International SegmentOperating income for our International segment decreased to $1.3 million for the three months ended September 30, 2013 from $8.0 million for the three months ended September 30, 2012.  The decrease of $6.7 million was the result of the reduction in sales we experienced.  

Interest Expense.    Our interest expense was $15.5 million for the three months ended September 30, 2013 as compared to $28.2 million for the three months ended September 30, 2012.  The majority of the $12.7 million decrease was due to the November 2012 redemption of our 9.5% senior secured notes, which was funded by borrowings on our lower cost Term Loan B  and revolving credit facilities.  We also benefitted from an outstanding debt balance that was lower, on average, in the third quarter of 2013 by approximately $271 million as compared to the third quarter of 2012. This reduced level of debt was attributable to free cash flow we have generated, particularly from working capital.

Other expense, net. Our other expense decreased to $1.9 million for the three months ended September 30, 2013 from $8.2 million for the three months ended September 30, 2012.  The current quarter expenses included a $2.0 million charge related to the bankruptcy of a workers’ compensation insurance carrier, which required the Company to assume the obligation for existing workers’ compensation claims, as well as a $1.4 million foreign currency exchange gain.  Our 2012 third quarter results reflected a $10.3 million pre-tax charge associated with the open market purchase, at a premium, of $86.7 million of our previously outstanding senior secured notes.  There were no similar charges in the third quarter of 2013.  Other income in the third quarter of 2012 also reflected a $2.0 million foreign exchange gain.

Income Tax Expense.    Our income tax expense was $21.2 million for the three months ended September 30, 2013 as compared to $30.3 million for the three months ended September 30, 2012.  Our effective tax rates were 35.4% and 35.3% for the three months ended September 30, 2013 and 2012, respectively. Our rates generally differ from the federal statutory rate of 35% as a result of state income taxes and differing foreign income tax rates.      

Net Income.    Our net income was $38.8 million for the three months ended September 30, 2013 as compared to $55.5 million for the three months ended September 30, 2012,  a decline of $16.7 million.

Adjusted EBITDA.    We define Adjusted EBITDA as net income plus interest, income taxes, depreciation and amortization, amortization of intangibles and certain other expenses (such as gains/losses on the early extinguishment of debt, changes in the fair value of derivative instruments and goodwill impairment) and plus or minus the impact of our LIFO inventory costing methodology. Adjusted EBITDA, a non-GAAP financial measure, was $96.4 million for the three months ended September 30, 2013, as compared to $125.3 million for the three months ended September 30, 2012.  

We believe Adjusted EBITDA provides investors a helpful measure for comparing our operating performance with the performance of other companies that have different financing and capital structures or tax rates. 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.

 

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

 

 

 

 

 

Three Months Ended

 

September 30,

 

September 30,

 

2013

 

2012

Net income

$               38.8

 

$               55.5

Income tax expense

21.2 

 

30.3 

Interest expense

15.5 

 

28.2 

Loss on early extinguishment of debt

 -

 

10.3 

Depreciation and amortization

5.6 

 

4.6 

Amortization of intangibles

13.1 

 

12.4 

(Decrease) increase in LIFO reserve

(5.7)

 

(15.4)

Change in fair value of derivative instruments

1.8 

 

(0.8)

Equity-based compensation expense

4.0 

 

2.2 

Executive separation expense (cash portion)

0.8 

 

 -

Insurance charge

2.0 

 

 -

Foreign currency gains

(1.4)

 

(2.0)

Other expense

0.7 

 

 -

Adjusted EBITDA

$               96.4

 

$             125.3

 

 

 

 

 

Nine Months Ended September 30, 2013 Compared to the Nine Months Ended September 30, 2012

The breakdown of our sales by sector for the nine months ended September 30, 2013 and 2012 was as follows (in millions):

 

 

 

 

 

 

 

 

 

 

Nine Months Ended

 

September 30, 2013

 

September 30, 2012

Upstream

$         1,708.9

 

44% 

 

$         1,960.3

 

46% 

Midstream

1,098.8 

 

28% 

 

1,160.3 

 

27% 

Downstream and other industrials

1,078.9 

 

28% 

 

1,143.5 

 

27% 

 

$         3,886.6

 

100% 

 

$         4,264.1

 

100% 

 

 

 

 

 

 

 

 

 

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For the nine months ended September 30, 2013 and 2012, the following table summarizes our results of operations (in millions):

 

 

 

 

 

 

 

 

 

Nine Months Ended

 

 

 

 

 

September 30,

 

September 30,

 

 

 

 

 

2013

 

2012

 

$ Change

 

% Change

Sales:

 

 

 

 

 

 

 

U.S.

$         2,955.8

 

$         3,284.2

 

$      (328.4)

 

(10.0%)

Canada

520.1 

 

553.3 

 

(33.2)

 

(6.0%)

International

410.7 

 

426.6 

 

(15.9)

 

(3.7%)

Consolidated

$         3,886.6

 

$         4,264.1

 

$      (377.5)

 

(8.9%)

 

 

 

 

 

 

 

 

Operating income:

 

 

 

 

 

 

 

U.S.

$            229.8

 

$            265.1

 

$        (35.3)

 

(13.3%)

Canada

14.6 

 

17.5 

 

(2.9)

 

(16.6%)

International

8.8 

 

20.3 

 

(11.5)

 

(56.7%)

Consolidated

253.2 

 

302.9 

 

(49.7)

 

(16.4%)

 

 

 

 

 

 

 

 

Interest expense

(46.0)

 

(92.6)

 

46.6 

 

(50.3%)

Loss on early extinguishment of debt

 -

 

(21.7)

 

21.7 

 

N/M

Write off of deferred financing fees

 -

 

(1.7)

 

1.7 

 

N/M

Other (expense) income

(12.9)

 

5.3 

 

(18.2)

 

N/M

Income tax expense

(65.5)

 

(67.8)

 

2.3 

 

(3.4%)

Net income

$            128.8

 

$            124.4

 

$           4.4

 

3.5% 

 

 

 

 

 

 

 

 

Adjusted Gross Profit

$            763.5

 

$            808.9

 

$        (45.4)

 

(5.6%)

Adjusted EBITDA

$            299.2

 

$            364.1

 

$        (64.9)

 

(17.8%)

Sales.    Our sales decreased 8.9% to $3,886.6 million for the nine months ended September 30, 2013 as compared to $4,264.1 million for the nine months ended  September 30, 2012.  

U.S. Segment—Our U.S. sales decreased to $2,955.8 million for the nine months ended September 30, 2013 from $3,284.2 million for the nine months ended September 30, 2012. This $328.4 million, or 10.0%, decrease reflected a planned $272 million reduction in OCTG sales resulting from our strategy to rebalance our sales and inventories away from this more volatile, lower margin portion of our business.  In addition, our line pipe sales declined $91 million for the nine months ended September 30, 2013 compared to the same period of 2012 as a result of our upstream and midstream customers’ decreased spending in 2013.  Our sales in the first nine months of 2013 benefitted from the June and December 2012 and July 2013 acquisitions of the business of Chaparral Supply, LLC, PSS, and Flow Control which collectively contributed an incremental $124 million of sales in the first nine months of 2013.  The remaining decrease in sales was driven by lower capital spending by our customers in the nine months ended September 30, 2013 as compared to the same period in 2012.

Canadian Segment—Our Canadian sales decreased to $520.1 million for the nine months ended September 30, 2013 from $553.3 million for the nine months ended September 30, 2012.  Approximately one-third of this 6.0% overall decrease was the result of a decline in the Canadian dollar relative to the U.S. dollar.  The balance of the decrease was largely attributable to a longer than normal spring break-up as well as a decline in project sales particularly in the tar sands region of northern Alberta.  

International Segment—Our International sales decreased to $410.7 million for the nine months ended September 30, 2013 from $426.6 million for the same period in 2012. The acquisition of the Piping Systems division of OneSteel (“MRC PSA”) in March 2012 accounted for $27 million in incremental revenues.  Excluding the impact of this acquisition, revenues declined 10%  reflecting weaker demand particularly in parts of Australia where we

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experienced reduced customer spending in the mining and oil and gas sectorsApproximately one-third of this 10% overall decrease was the result of a decrease in the the Australian dollar relative to the U.S. dollar. 

Gross Profit.    Our gross profit was $728.8 million (18.8% of sales) for the nine months ended September 30, 2013 as compared to $755.4 million (17.7% of sales) for the nine months ended September 30, 2012. The 110 basis point improvement in gross profit percentage was a result of planned changes in our product mix as well as other gross profit enhancement strategies.  Gross profit was further benefitted by lower product costs reflected in our last-in, first-out (“LIFO”) inventory costing methodology.  LIFO resulted in a reduction in cost of sales of $21.2 million for the nine months ended September 30, 2013 compared to an increase in cost of sales of $3.1 million during the same period of 2012.  These improvements in gross profit percentage were offset by a reduction in gross profit from lower sales.  

 

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 approximated $27.9 million and $25.4 million for the nine months ended September 30, 2013 and 2012, respectively.

Adjusted Gross Profit.    Adjusted Gross Profit decreased to $763.5 million (19.6% of sales) for the nine months ended September 30, 2013 from $808.9 million (19.0% of sales) for the nine months ended September 30, 2012, a decrease of $45.4 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 they have been involved in. Similarly, the impact of the LIFO inventory costing method can cause results to vary substantially from company to company depending upon whether they elect to utilize the LIFO method and depending upon which method they may elect. In particular, we believe that Adjusted Gross Profit is a useful indicator of our operating performance because Adjusted Gross Profit measures our operating performance without regard to acquisition transaction-related amortization expenses. 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 with gross profit, as derived from our financial statements (in millions):

 

 

 

 

 

 

 

 

 

Nine Months Ended

 

September 30,

 

Percentage

 

September 30,

 

Percentage

 

2013

 

of Revenue

 

2012

 

of Revenue

Gross profit, as reported

$            728.8

 

18.8% 

 

$            755.4

 

17.7% 

Depreciation and amortization

16.8 

 

0.4% 

 

13.2 

 

0.3% 

Amortization of intangibles

39.1 

 

1.0% 

 

37.2 

 

0.9% 

(Decrease) increase in LIFO reserve

(21.2)

 

(0.5%)

 

3.1 

 

0.1% 

Adjusted Gross Profit

$            763.5

 

19.6% 

 

$            808.9

 

19.0% 

 

 

 

 

 

 

 

 

 

Selling, General and Administrative (“SG&A”) Expenses.   Our selling, general and administrative expenses were $475.6 million for the nine months ended September 30, 2013 as compared to $452.5 million for the nine months ended September 30, 2012Approximately $21 million of this $23 million increase was attributable to the incremental SG&A expenses of our March and December 2012 and July 2013 acquisitions of MRC PSA, PSS, and Flow Control, respectively.  The remainder of the increase was due to $2.0 million of expenses related to the separation of an executive officer comprised of  $0.8 million of  cash compensation and $1.2 million of equity-based compensation.      

 

Operating Income.    Operating income was $253.2 million for the nine months ended September 30, 2013, as compared to  $302.9 million for the nine months ended September 30, 2012, a decrease of $49.7 million.

U.S. SegmentOperating income for our U.S. segment decreased to $229.8 million for the nine months ended September 30, 2013 from $265.1 million for the nine months ended September 30, 2012.  This decline was a result of decreased sales offset by an improvement in gross profit percentage

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Canadian SegmentOperating income for our Canadian segment decreased to $14.6 million for the nine months ended September 30, 2013 from $17.5 million for the nine months ended September 30, 2012.  The decrease of $2.9 million was primarily a function of a decrease in sales. 

International SegmentOperating income for our International segment decreased to $8.8 million for the nine months ended September 30, 2013 from $20.3 million for the nine months ended September 30, 2012.  The decrease of $11.5 million was the result of the reduction in sales we experienced.  

Interest Expense.    Our interest expense was $46.0 million for the nine months ended September 30, 2013 as compared to $92.6 million for the nine months ended September 30, 2012.  The majority of the $46.6 million decrease was due to the November 2012 redemption of our 9.5% senior secured notes, which was funded by borrowings on our lower cost Term Loan  B and revolving credit facilities.  We also benefitted from an outstanding debt balance that was lower, on average, in the first nine months of 2013 by approximately $321 million as compared to the first nine months of 2012.  Our reduced indebtedness was largely attributable to our April 2012 initial public offering that generated net proceeds of $333 million that, in combination with free cash flow we generated, were used to repay debt.

Other expense, net. Our other expense decreased to $12.9 million for the nine months ended September 30, 2013 from $18.1 million for the nine months ended September 30, 2012.   The expenses for the first nine months of 2013 included $12.0 million of foreign currency exchange losses due primarily to the weaker Australian and Canadian dollars as compared to the U.S. dollar.  Our first nine months of 2012 results reflected a $21.7 million pre-tax charge associated with the open market purchase, at a premium, of $189 million of our previously outstanding senior secured notes.   There were no similar charges in the first nine months of 2013.  The expense was offset by $1.8 million of income related to the change in our fair value of derivatives.

Income Tax Expense.    Our income tax expense was $65.5 million for the nine months ended September 30, 2013 as compared to $67.8 million for the nine months ended September 30, 2012.  Our effective tax rates were 33.7% and 35.3% for the nine months ended September 30, 2013 and 2012, respectively.  Our rates generally differ from the federal statutory rate of 35% as a result of state income taxes and differing foreign income tax rates.  In the nine months ended September 30, 2013, our tax rate was favorably impacted by a $2.3 million discrete reduction to our deferred tax liabilities.  Excluding the impact of this discrete reduction, our effective tax rate would have been 34.9%.

Net Income.    Our net income was $128.8 million for the nine months ended September 30, 2013 as compared to $124.4 million for the nine months ended September 30, 2012, an improvement of $4.4 million.

Adjusted EBITDA.    We define Adjusted EBITDA as net income plus interest, income taxes, depreciation and amortization, amortization of intangibles and certain other expenses (such as gains/losses on the early extinguishment of debt, changes in the fair value of derivative instruments and goodwill impairment) and plus or minus the impact of our LIFO inventory costing methodology. Adjusted EBITDA, a non-GAAP financial measure, was $299.2 million for the nine months ended September 30, 2013, as compared to $364.1 million for the nine months ended September 30, 2012.  

We believe Adjusted EBITDA provides investors a helpful measure for comparing our operating performance with the performance of other companies that have different financing and capital structures or tax rates. 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.

 

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