mrc20220930_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, 2022

 
   
 

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.)

  

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 83,608,579 shares of the registrant’s common stock (excluding 119,782 unvested restricted shares), par value $0.01 per share, issued and outstanding as of November 2, 2022.

 

 

 

INDEX TO QUARTERLY REPORT ON FORM 10-Q

 

Page

PART I – FINANCIAL INFORMATION

     

ITEM 1.

financial statements (UNAUDITED)

3

     
 

Condensed Consolidated Balance Sheets – SEPTEMBER 30, 2022 AND DECEMBER 31, 2021

3

     
 

cONdENSED cONSOLIDATED STATEMENTS OF OPERATIONS – THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2022 AND SEPTEMBER 30, 2021

4

     
 

Condensed Consolidated Statements of cOMPREHENSIVE INCOME (LOSS) – three AND NINE months ended SEPTEMBER 30, 2022 AND SEPTEMBER 30, 2021

5

     
 

Condensed CONSOLIDATED STATEMENTS OF STOCKHOLDERs’ EQUITY – three AND NINE MONTHS ENDED SEPTEMBER 30, 2022 AND SEPTEMBER 30, 2021

6

     
 

Condensed CONSOLIDATED STATEMENTS OF cash flows – NINE MONTHS ENDEd SEPTEMBER 30, 2022 AND SEPTEMBER 30, 2021

7

     
 

Notes to the Condensed Consolidated Financial Statements – SEPTEMBER 30, 2022

8

     

ITEM 2.

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

17
     

ITEM 3.

quantitative and qualitative disclosures about market risk

29

     

ITEM 4.

controls and procedures

30

     

PART II – OTHER INFORMATION

     

ITEM 1.

LEGAL PROCEEDINGS

31

     

ITEM 1a.

RISK FACTORS

31

     

ITEM 2.

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

31

     

ITEM 3.

Defaults Upon Senior Securities

31

     

ITEM 4.

MINING SAFETY DISCLOSURES

32

     

ITEM 5.

other information

32

     

ITEM 6.

Exhibits

33

 

 

 

CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)

MRC GLOBAL INC.

(in millions, except per share amounts)

 

  

September 30,

  

December 31,

 
  

2022

  

2021

 
         

Assets

        

Current assets:

        

Cash

 $29  $48 

Accounts receivable, net

  526   379 

Inventories, net

  584   453 

Other current assets

  30   19 

Total current assets

  1,169   899 
         

Long-term assets:

        

Operating lease assets

  194   191 

Property, plant and equipment, net

  83   91 

Other assets

  23   22 
         

Intangible assets:

        

Goodwill, net

  264   264 

Other intangible assets, net

  189   204 
  $1,922  $1,671 
         

Liabilities and stockholders' equity

        

Current liabilities:

        

Trade accounts payable

 $479  $321 

Accrued expenses and other current liabilities

  96   80 

Operating lease liabilities

  34   33 

Current portion of long-term debt

  3   2 

Total current liabilities

  612   436 
         

Long-term liabilities:

        

Long-term debt, net

  338   295 

Operating lease liabilities

  177   177 

Deferred income taxes

  55   53 

Other liabilities

  22   32 
         

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, 107,819,492 and 107,284,171 issued, respectively

  1   1 

Additional paid-in capital

  1,754   1,747 

Retained deficit

  (783)  (819)

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

  (375)  (375)

Accumulated other comprehensive loss

  (234)  (231)
   363   323 
  $1,922  $1,671 

 

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,

 
   

2022

   

2021

   

2022

   

2021

 
                                 

Sales

  $ 904     $ 685     $ 2,494     $ 1,980  

Cost of sales

    739       590       2,042       1,670  

Gross profit

    165       95       452       310  

Selling, general and administrative expenses

    120       102       347       304  

Operating income (loss)

    45       (7 )     105       6  

Other (expense) income:

                               

Interest expense

    (6 )     (6 )     (17 )     (18 )

Other, net

    (5 )     -       (11 )     1  

Income (loss) before income taxes

    34       (13 )     77       (11 )

Income tax expense (benefit)

    10       (2 )     23       (1 )

Net income (loss)

    24       (11 )     54       (10 )

Series A preferred stock dividends

    6       6       18       18  

Net income (loss) attributable to common stockholders

  $ 18     $ (17 )   $ 36     $ (28 )
                                 
                                 

Basic earnings (loss) per common share

  $ 0.22     $ (0.21 )   $ 0.43     $ (0.34 )

Diluted earnings (loss) per common share

  $ 0.21     $ (0.21 )   $ 0.42     $ (0.34 )

Weighted-average common shares, basic

    83.6       82.7       83.5       82.5  

Weighted-average common shares, diluted

    85.0       82.7       84.8       82.5  

 

See notes to condensed consolidated financial statements.

 

 

 

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (UNAUDITED)

MRC GLOBAL INC.

(in millions)

 

   

Three Months Ended

   

Nine Months Ended

 
   

September 30,

   

September 30,

   

September 30,

   

September 30,

 
   

2022

   

2021

   

2022

   

2021

 
                                 

Net income (loss)

  $ 24     $ (11 )   $ 54     $ (10 )
                                 

Other comprehensive (loss) income

                               

Foreign currency translation adjustments

    (5 )     (3 )     (9 )     (3 )

Hedge accounting adjustments, net of tax

          1       6       4  

Total other comprehensive (loss) income, net of tax

    (5 )     (2 )     (3 )     1  

Comprehensive income (loss)

  $ 19     $ (13 )   $ 51     $ (9 )

 

See notes to condensed consolidated financial statements.

 

 

 

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (UNAUDITED)

MRC GLOBAL INC.

(in millions)

 

                                                   

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, 2021

    106     $ 1     $ 1,747     $ (819 )     (24 )   $ (375 )   $ (231 )   $ 323  

Net income

    -       -       -       16       -       -       -       16  

Foreign currency translation

    -       -       -       -       -       -       2       2  

Hedge accounting adjustments

    -       -       -       -       -       -       3       3  

Shares withheld for taxes

    -       -       (2 )     -       -       -       -       (2 )

Vesting of stock awards

    2       -       -       -       -       -       -       -  

Equity-based compensation expense

    -       -       3       -       -       -       -       3  

Dividends declared on preferred stock

    -       -       -       (6 )     -       -       -       (6 )

Balance at March 31, 2022

    108     $ 1     $ 1,748     $ (809 )     (24 )   $ (375 )   $ (226 )   $ 339  

Net income

    -       -       -       14       -       -       -       14  

Foreign currency translation

    -       -       -       -       -       -       (6 )     (6 )

Hedge accounting adjustments

    -       -       -       -       -       -       3       3  

Equity-based compensation expense

    -       -       3       -       -       -       -       3  

Dividends declared on preferred stock

    -       -       -       (6 )     -       -       -       (6 )

Balance at June 30, 2022

    108     $ 1     $ 1,751     $ (801 )     (24 )   $ (375 )   $ (229 )   $ 347  

Net income

    -       -       -       24       -       -       -       24  

Foreign currency translation

    -       -       -       -       -       -       (5 )     (5 )

Equity-based compensation expense

    -       -       3       -       -       -       -       3  

Dividends declared on preferred stock

    -       -       -       (6 )     -       -       -       (6 )

Balance at September 30, 2022

    108     $ 1     $ 1,754     $ (783 )     (24 )   $ (375 )   $ (234 )   $ 363  

 

                                                   

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, 2020

    106     $ 1     $ 1,739     $ (781 )     (24 )   $ (375 )   $ (234 )   $ 350  

Net loss

    -       -       -       (3 )     -       -       -       (3 )

Foreign currency translation

    -       -       -       -       -       -       (1 )     (1 )

Hedge accounting adjustments

    -       -       -       -       -       -       1       1  

Shares withheld for taxes

    -       -       (2 )     -       -       -       -       (2 )

Vesting of stock awards

    1       -       -       -       -       -       -       -  

Equity-based compensation expense

    -       -       5       -       -       -       -       5  

Dividends declared on preferred stock

    -       -       -       (6 )     -       -       -       (6 )

Balance at March 31, 2021

    107     $ 1     $ 1,742     $ (790 )     (24 )   $ (375 )   $ (234 )   $ 344  

Net income

    -       -       -       4       -       -       -       4  

Foreign currency translation

    -       -       -       -       -       -       1       1  

Hedge accounting adjustments

    -       -       -       -       -       -       2       2  

Equity-based compensation expense

    -       -       2       -       -       -       -       2  

Dividends declared on preferred stock

    -       -       -       (6 )     -       -       -       (6 )

Balance at June 30, 2021

    107     $ 1     $ 1,744     $ (792 )     (24 )   $ (375 )   $ (231 )   $ 347  

Net loss

    -       -       -       (11 )     -       -       -       (11 )

Foreign currency translation

    -       -       -       -       -       -       (3 )     (3 )

Hedge accounting adjustments

    -       -       -       -       -       -       1       1  

Equity-based compensation expense

    -       -       3       -       -       -       -       3  

Dividends declared on preferred stock

    -       -       -       (6 )     -       -       -       (6 )

Balance at September 30, 2021

    107     $ 1     $ 1,747     $ (809 )     (24 )   $ (375 )   $ (233 )   $ 331  

 

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,

 
   

2022

   

2021

 
                 

Operating activities

               

Net income (loss)

  $ 54     $ (10 )

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

               

Depreciation and amortization

    14       14  

Amortization of intangibles

    15       18  

Equity-based compensation expense

    9       10  

Deferred income tax benefit

    (1 )     (7 )

Amortization of debt issuance costs

    1       1  

Increase in LIFO reserve

    50       47  

Other

    12       3  

Changes in operating assets and liabilities:

               

Accounts receivable

    (159 )     (81 )

Inventories

    (197 )     (15 )

Other current assets

    (11 )     (11 )

Accounts payable

    165       68  

Accrued expenses and other current liabilities

    18       (21 )

Net cash (used in) provided by operations

    (30 )     16  
                 

Investing activities

               

Purchases of property, plant and equipment

    (8 )     (6 )

Other investing activities

    (2 )     2  

Net cash used in investing activities

    (10 )     (4 )
                 

Financing activities

               

Payments on revolving credit facilities

    (523 )     (262 )

Proceeds from revolving credit facilities

    569       290  

Payments on long-term obligations

    (2 )     (87 )

Debt issuance costs paid

    -       (3 )

Dividends paid on preferred stock

    (18 )     (18 )

Repurchases of shares to satisfy tax withholdings

    (2 )     (2 )

Net cash provided by (used in) financing activities

    24       (82 )
                 

Decrease in cash

    (16 )     (70 )

Effect of foreign exchange rate on cash

    (3 )     (2 )

Cash -- beginning of period

    48       119  

Cash -- end of period

  $ 29     $ 47  
                 

Supplemental disclosures of cash flow information:

               

Cash paid for interest

  $ 16     $ 16  

Cash paid for income taxes

  $ 25     $ 16  

 

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 infrastructure products and services across each of the following sectors:

 

 gas utilities (storage and distribution of natural gas)
 downstream, industrial and energy transition (crude oil refining, petrochemical and chemical processing, general industrials and energy transition projects)
 upstream production (exploration, production and extraction of underground oil and gas)
 midstream pipeline (gathering, processing and transmission of oil and gas)

 

We have service centers in industrial, chemical, gas distribution and hydrocarbon producing and refining areas throughout the United States, Canada, Europe, Asia, Australasia, and the Middle East. 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 ("GAAP") 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, 2022, are not necessarily indicative of the results that will be realized for the fiscal year ending December 31, 2022. We have derived our condensed consolidated balance sheet as of December 31, 2021, from the audited consolidated financial statements for the year ended December 31, 2021. 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, 2021.

 

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 terms such as “we,” “our” or “us”). All material intercompany balances and transactions have been eliminated in consolidation.

 

Recently Issued Accounting Pronouncements: In March 2020, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update ASU 2020-04, Reference Rate Reform (Topic 848) ("ASU 2020-04"), which provides optional expedients and exceptions for applying U.S. GAAP to contracts, hedging relationships and other transactions that the discontinuation of certain reference rates, including the London Interbank Offered Rate ("LIBOR"), impacts. The update was effective upon issuance and the expedients and exceptions may be applied prospectively to contract modifications and hedging relationships entered into or evaluated through December 31, 2022. We are currently evaluating the impacts of the provisions of ASU 2020-04 on our consolidated financial statements; however, with respect to existing transactions, we do not believe the update will have a material impact.

 

Adoption of New Accounting StandardsIn August 2020, the 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 calculations. This accounting standard update, which we adopted as of January 1, 2022, did not have a material impact on our consolidated financial statements. 

 

 

8

 
 

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, we exclude these taxes 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 of intangible assets. In some cases, particularly with third-party pipe shipments, we consider shipping and handling costs to be separate performance obligations, and as such, we record the revenue and cost of sales 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, we delay invoicing 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, 2022, and December 31, 2021, was $17 million and $12 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 that are refundable. The deferred revenue balance at September 30, 2022 and December 31, 2021 was $5 million and $4 million, respectively. During the three and nine months ended September 30, 2022, we recognized $0 million and $3 million of revenue that was deferred as of December 31, 2021. During the three and nine months ended September 30, 2021, we recognized $1 million and $6 million of revenue that was deferred as of December 31, 2020. Deferred revenue balances are included within accrued expenses and other current liabilities in the accompanying consolidated balance sheets.

 

 

 

 

Disaggregated Revenue:

Our disaggregated revenue represents our business of selling PVF to the energy and industrial sectors across each of the gas utilities (storage and distribution of natural gas), downstream, industrial and energy transition (crude oil refining, petrochemical and chemical processing, general industrials and energy transition projects), upstream production (exploration, production and extraction of underground oil and gas) and midstream pipeline (gathering, processing and transmission of oil and gas) sectors, in each of our reportable segments. Varying factors, including macroeconomic environment, commodity prices, maintenance and capital spending and exploration and production activity influence each of our end market sectors and geographical reportable segments. 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

 

2022:

                

Gas utilities

 $355  $3  $1  $359 

Downstream, industrial & energy transition

  209   6   61   276 

Upstream production

  118   25   33   176 

Midstream pipeline

  86   3   4   93 
  $768  $37  $99  $904 

2021:

                

Gas utilities

 $269  $2  $  $271 

Downstream, industrial & energy transition

  143   6   48   197 

Upstream production

  82   18   32   132 

Midstream pipeline

  76   4   5   85 
  $570  $30  $85  $685 

 

Nine Months Ended

 

September 30,

 
                 
  

U.S.

  

Canada

  

International

  

Total

 

2022:

                

Gas utilities

 $934  $9  $1  $944 

Downstream, industrial & energy transition

  576   20   165   761 

Upstream production

  336   83   93   512 

Midstream pipeline

  257   8   12   277 
  $2,103  $120  $271  $2,494 

2021:

                

Gas utilities

 $745  $5  $  $750 

Downstream, industrial & energy transition

  417   15   150   582 

Upstream production

  231   62   109   402 

Midstream pipeline

  219   10   17   246 
  $1,612  $92  $276  $1,980 

 

10

 
 

NOTE 3 – INVENTORIES

 

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

 

  

September 30,

  

December 31,

 
  

2022

  

2021

 

Finished goods inventory at average cost:

        

Valves, automation, measurement and instrumentation

 $272  $240 

Carbon steel pipe, fittings and flanges

  216   151 

Gas products

  234   184 

All other products

  147   110 
   869   685 

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

  (263)  (213)

Less: Other inventory reserves

  (22)  (19)
  $584  $453 

 

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, we base interim LIFO calculations on management’s estimates of expected year-end inventory levels and costs and these estimates are subject to the final year-end LIFO inventory determination. 

 

 

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. Leasehold improvements are depreciated over 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 $30 million for the three and nine months ended September 30, 2022, and $9 million and $28 million for the three and nine months ended September 30, 2021, which we have classified in selling, general and administrative expenses. Cash paid for leases recognized as liabilities was $10 million and $31 million for the three and nine months ended September 30, 2022, and $8 million and $27 million for the three and nine months ended  September 30, 2021.

 

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

 

Maturity of Operating Lease Liabilities

    

Remainder of 2022

 $10 

2023

  38 

2024

  34 

2025

  28 

2026

  23 

After 2026

  191 

Total lease payments

  324 

Less: Interest

  (113)

Present value of lease liabilities

 $211 

 

The term and discount rate associated with leases are as follows:

 

  

September 30,

 

Operating Lease Term and Discount Rate

 

2022

 

Weighted-average remaining lease term (years)

  13 

Weighted-average discount rate

  6.7%

 

Amounts maturing after 2026 include expected renewals for leases of regional distribution centers and certain corporate offices through dates up to 2048. Excluding optional renewals, our weighted-average remaining lease term is 7 years.

 

11

 
 

NOTE 5 – LONG-TERM DEBT

 

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

 

  

September 30,

  

December 31,

 
  

2022

  

2021

 

Senior Secured Term Loan B, net of discount and issuance costs of $1

 $296  $297 

Global ABL Facility

  45    
   341   297 

Less: current portion

  3   2 
  $338  $295 

 

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 MRC Global Inc. as well as all of its wholly owned U.S. subsidiaries guarantees. In addition, the Term Loan 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. In addition, the Term Loan contains a number of customary restrictive covenants. We are required to repay the Term Loan with the proceeds from certain asset sales and certain 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. The amount of cash used in the determination of the senior secured leverage ratio is limited to $75 million. 

 

Global ABL Facility: In September 2021, the Company entered into a Fourth Amended and Restated Loan, Security and Guarantee Agreement (the “Global ABL Facility”) by and among the Company, certain of its subsidiaries, its lenders and Bank of America, N.A. as administrative agent, security trustee and collateral agent. As part of the amendment, the multi-currency global asset-based revolving credit facility was reduced to $750 million from $800 million and the maturity was extended to September 2026 from September 2022. The Global ABL Facility is comprised of $705 million in revolver commitments in the United States, which includes a $30 million sub-limit for Canada, $12 million in Norway, $10 million in Australia, $10.5 million in the Netherlands, $7.5 million in the United Kingdom and $5 million in Belgium. The Global ABL Facility contains an accordion feature that allows us to increase the principal amount of the facility by up to $250 million, subject to securing additional lender commitments. MRC Global Inc. and each of its current and future wholly owned material U.S. subsidiaries guarantee the obligations of our borrower subsidiaries under the Global ABL Facility. Additionally, each of our non-U.S. borrower subsidiaries guarantees the obligations of our other non-U.S. borrower subsidiaries under the Global ABL Facility. Outstanding obligations are generally secured by a first priority security interest in accounts receivable, inventory and related assets. U.S. borrowings under the facility bear interest at LIBOR plus a margin varying between 1.25% and 1.75% based on our fixed charge coverage ratio. Canadian borrowings under the facility bear interest at the Canadian Dollar Bankers' Acceptances Rate ("BA Rate") plus a margin varying between 1.25% and 1.75% based on our fixed charge coverage ratio. Borrowings under our foreign borrower subsidiaries bear interest at a benchmark rate, which varies based on the currency in which such borrowings are made, plus a margin varying between 1.25% and 1.75% based on our fixed charge coverage ratio. 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 $612 million as of  September 30, 2022.

 

Interest on Borrowings: The interest rates on our outstanding borrowings at September 30, 2022 and December 31, 2021, including a floating to fixed interest rate swap, are set forth below:

 

  

September 30,

  

December 31,

 
  

2022

  

2021

 

Senior Secured Term Loan B

  5.90%  5.41%

Global ABL Facility

  4.87%  -%

Weighted average interest rate

  5.77%  5.41%

 

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NOTE 6 – 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 law requires a separate class vote of the common stockholders. 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. The Company currently has the option to redeem, in whole but not in part, all the outstanding shares of Preferred Stock at 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 the holders 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 7 – STOCKHOLDERS’ EQUITY

 

Equity Compensation Plans

 

The Company's Omnibus Incentive 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 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 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, and in any event, no less than one year. Vesting for directors generally occurs on the one-year anniversary of the grant date. In 2022, 90,015 shares of restricted stock, 423,896 performance share unit awards and 1,014,213 shares of restricted stock units have been granted to executive management, members of our Board of Directors and employees. To date, 12,582,372 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.

 

Accumulated Other Comprehensive Loss

 

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

 

  

September 30,

  

December 31,

 
  

2022

  

2021

 

Currency translation adjustments

 $(234) $(225)

Hedge accounting adjustments

  1   (5)

Other adjustments

  (1)  (1)

Accumulated other comprehensive loss

 $(234) $(231)

 

13

 

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,

 
  

2022

  

2021

  

2022

  

2021

 

Net income (loss)

 $24  $(11) $54  $(10)

Less: Dividends on Series A Preferred Stock

  6   6   18   18 

Net income (loss) attributable to common stockholders

 $18  $(17) $36  $(28)
                 

Weighted average basic shares outstanding

  83.6   82.7   83.5   82.5 

Effect of dilutive securities

  1.4   -   1.3   - 

Weighted average diluted shares outstanding

  85.0   82.7   84.8   82.5 
                 

Net income (loss) per share:

                

Basic

 $0.22  $(0.21) $0.43  $(0.34)

Diluted

 $0.21  $(0.21) $0.42  $(0.34)

 

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, 2022 and 2021, all of the shares of the Preferred Stock were anti-dilutive. For the three and nine months ended September 30, 2022, we had approximately 1 million and 1.3 million anti-dilutive stock options, restricted stock units, and performance units. For the three and nine months ended  September 30, 2021, we had approximately 4.2 million and 4.1 million anti-dilutive stock options, restricted stock units, and performance units.

 

 

NOTE 8 – 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, downstream, industrial and energy transition, upstream production and midstream pipeline sectors.

 

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,

 
  

2022

  

2021

  

2022

  

2021

 

Sales

                

U.S.

 $768  $570  $2,103  $1,612 

Canada

  37   30   120   92 

International

  99   85   271   276 

Consolidated sales

 $904  $685  $2,494  $1,980 
                 

Operating income (loss)

                

U.S.

 $40  $(7) $99  $(1)

Canada

  -   (1)  (1)  (1)

International

  5   1   7   8 

Total operating income (loss)

  45   (7)  105   6 
                 

Interest expense

  (6)  (6)  (17)  (18)

Other, net

  (5)  -   (11)  1 

Income (loss) before income taxes

 $34  $(13) $77  $(11)

 

  

September 30,

  

December 31,

 
  

2022

  

2021

 

Total assets

        

U.S.

 $1,596  $1,427 

Canada

  90   53 

International

  236   191 

Total assets

 $1,922  $1,671 

 

14

 

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

 

  

Three Months Ended

  

Nine Months Ended

 
  

September 30,

  

September 30,

  

September 30,

  

September 30,

 

Type

 

2022

  

2021

  

2022

  

2021

 

Line pipe

 $173  $103  $417  $268 

Carbon fittings and flanges

  119   96   335   269 

Total carbon pipe, fittings and flanges

  292   199