mrc20230930_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, 2023

 
   
 

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 84,301,902 shares of the registrant’s common stock (excluding 142,304 unvested restricted shares), par value $0.01 per share, issued and outstanding as of November 1, 2023.

 

 

 

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, 2023 AND DECEMBER 31, 2022

3

     
 

cONdENSED cONSOLIDATED STATEMENTS OF OPERATIONS – THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2023 AND SEPTEMBER 30, 2022

4

     
 

Condensed Consolidated Statements of cOMPREHENSIVE INCOME – three AND NINE months ended SEPTEMBER 30, 2023 AND SEPTEMBER 30, 2022

5

     
 

Condensed CONSOLIDATED STATEMENTS OF STOCKHOLDERs’ EQUITY – three AND NINE MONTHS ENDED SEPTEMBER 30, 2023 AND SEPTEMBER 30, 2022

6

     
 

Condensed CONSOLIDATED STATEMENTS OF cash flows – NINE MONTHS ENDEd SEPTEMBER 30, 2023 AND SEPTEMBER 30, 2022

7

     
 

Notes to the Condensed Consolidated Financial Statements – SEPTEMBER 30, 2023

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,

 
  

2023

  

2022

 
         

Assets

        

Current assets:

        

Cash

 $52  $32 

Accounts receivable, net

  518   501 

Inventories, net

  620   578 

Other current assets

  35   31 

Total current assets

  1,225   1,142 
         

Long-term assets:

        

Operating lease assets

  206   202 

Property, plant and equipment, net

  77   82 

Other assets

  18   22 
         

Intangible assets:

        

Goodwill, net

  264   264 

Other intangible assets, net

  168   183 
  $1,958  $1,895 
         

Liabilities and stockholders' equity

        

Current liabilities:

        

Trade accounts payable

 $438  $410 

Accrued expenses and other current liabilities

  111   115 

Operating lease liabilities

  38   36 

Current portion of long-term debt

  3   3 

Total current liabilities

  590   564 
         

Long-term liabilities:

        

Long-term debt, net

  300   337 

Operating lease liabilities

  184   182 

Deferred income taxes

  46   49 

Other liabilities

  20   22 
         

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, 108,512,938 and 107,864,421 issued, respectively

  1   1 

Additional paid-in capital

  1,764   1,758 

Retained deficit

  (693)  (768)

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

  (375)  (375)

Accumulated other comprehensive loss

  (234)  (230)
   463   386 
  $1,958  $1,895 

 

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,

 
   

2023

   

2022

   

2023

   

2022

 
                                 

Sales

  $ 888     $ 904     $ 2,644     $ 2,494  

Cost of sales

    705       739       2,107       2,042  

Gross profit

    183       165       537       452  

Selling, general and administrative expenses

    126       120       378       347  

Operating income

    57       45       159       105  

Other (expense) income:

                               

Interest expense

    (9 )     (6 )     (26 )     (17 )

Other, net

    1       (5 )     (3 )     (11 )

Income before income taxes

    49       34       130       77  

Income tax expense

    14       10       37       23  

Net income

    35       24       93       54  

Series A preferred stock dividends

    6       6       18       18  

Net income attributable to common stockholders

  $ 29     $ 18     $ 75     $ 36  
                                 
                                 

Basic earnings per common share

  $ 0.34     $ 0.22     $ 0.89     $ 0.43  

Diluted earnings per common share

  $ 0.33     $ 0.21     $ 0.88     $ 0.42  

Weighted-average common shares, basic

    84.3       83.6       84.2       83.5  

Weighted-average common shares, diluted

    105.9       85.0       105.8       84.8  

 

See notes to condensed consolidated financial statements.

 

 

 

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)

MRC GLOBAL INC.

(in millions)

 

   

Three Months Ended

   

Nine Months Ended

 
   

September 30,

   

September 30,

   

September 30,

   

September 30,

 
   

2023

   

2022

   

2023

   

2022

 
                                 

Net income

  $ 35     $ 24     $ 93     $ 54  
                                 

Other comprehensive income (loss)

                               

Foreign currency translation adjustments

    (4 )     (5 )     (4 )     (9 )

Hedge accounting adjustments, net of tax

                      6  

Total other comprehensive loss, net of tax

    (4 )     (5 )     (4 )     (3 )

Comprehensive income

  $ 31     $ 19     $ 89     $ 51  

 

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, 2022

    108     $ 1     $ 1,758     $ (768 )     (24 )   $ (375 )   $ (230 )   $ 386  

Net income

    -       -       -       34       -       -       -       34  

Foreign currency translation

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

Shares withheld for taxes

    -       -       (4 )     -       -       -       -       (4 )

Equity-based compensation expense

    -       -       3       -       -       -       -       3  

Dividends declared on preferred stock

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

Balance at March 31, 2023

    108     $ 1     $ 1,757     $ (740 )     (24 )   $ (375 )   $ (231 )   $ 412  

Net income

    -       -       -       24       -       -       -       24  

Foreign currency translation

    -       -       -       -       -       -       1       1  

Equity-based compensation expense

    -       -       4       -       -       -       -       4  

Dividends declared on preferred stock

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

Balance at June 30, 2023

    108     $ 1     $ 1,761     $ (722 )     (24 )   $ (375 )   $ (230 )   $ 435  

Net income

    -       -       -       35       -       -       -       35  

Foreign currency translation

    -       -       -       -       -       -       (4 )     (4 )

Equity-based compensation expense

    -       -       3       -       -       -       -       3  

Dividends declared on preferred stock

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

Balance at September 30, 2023

    108     $ 1     $ 1,764     $ (693 )     (24 )   $ (375 )   $ (234 )   $ 463  

 

 

                                                   

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  

 

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,

 
   

2023

   

2022

 
                 

Operating activities

               

Net income

  $ 93     $ 54  

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

               

Depreciation and amortization

    15       14  

Amortization of intangibles

    15       15  

Equity-based compensation expense

    10       9  

Deferred income tax benefit

    (3 )     (1 )

(Decrease) increase in LIFO reserve

    (3 )     50  

Other, net

    12       13  

Changes in operating assets and liabilities:

               

Accounts receivable

    (20 )     (159 )

Inventories

    (45 )     (197 )

Other current assets

    (4 )     (11 )

Accounts payable

    27       165  

Accrued expenses and other current liabilities

    (5 )     18  

Net cash provided by (used in) operations

    92       (30 )
                 

Investing activities

               

Purchases of property, plant and equipment

    (10 )     (8 )

Other investing activities

    (2 )     (2 )

Net cash used in investing activities

    (12 )     (10 )
                 

Financing activities

               

Payments on revolving credit facilities

    (776 )     (523 )

Proceeds from revolving credit facilities

    743       569  

Payments on long-term obligations

    (2 )     (2 )

Debt issuance costs paid

    (1 )     -  

Dividends paid on preferred stock

    (18 )     (18 )

Repurchases of shares to satisfy tax withholdings

    (4 )     (2 )

Net cash (used in) provided by financing activities

    (58 )     24  
                 

Increase (decrease) in cash

    22       (16 )

Effect of foreign exchange rate on cash

    (2 )     (3 )

Cash -- beginning of period

    32       48  

Cash -- end of period

  $ 52     $ 29  
                 

Supplemental disclosures of cash flow information:

               

Cash paid for interest

  $ 25     $ 16  

Cash paid for income taxes

  $ 44     $ 25  

 

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)
 Production and Transmission Infrastructure (exploration, production and extraction, 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 that 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, 2023, are not necessarily indicative of the results that will be realized for the fiscal year ending December 31, 2023. We have derived our condensed consolidated balance sheet as of December 31, 2022, from the audited consolidated financial statements for the year ended December 31, 2022. 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, 2022. Certain prior year amounts have been reclassified to conform to the current year presentation.

 

The condensed 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.

 

Adoption of New Accounting StandardsIn the fourth quarter of 2022, we early adopted Accounting Standards Update ("ASU") No. 2020-04, Reference Rate Reform (Topic 848), 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 adoption of this ASU did not have a material impact on our condensed 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 condensed 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 condensed 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, 2023, and December 31, 2022, was $12 million and $24 million, respectively. These contract asset balances are included within accounts receivable in the accompanying condensed 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, 2023 and December 31, 2022 was $6 million and $9 million, respectively. During the three and nine months ended September 30, 2023, we recognized $3 million and $8 million of revenue that was deferred as of December 31, 2022. 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. Deferred revenue balances are included within accrued expenses and other current liabilities in the accompanying condensed consolidated balance sheets.

 

9

 

Disaggregated Revenue:

In the first quarter of 2023, the Company combined the sectors formerly known as Upstream Production and Midstream Pipeline into one sector, Production and Transmission Infrastructure. The similarity of market drivers, the overlap of customers and the combined management structure of both sectors was the primary basis for the change.
 
Our disaggregated revenue represents our business of selling PVF to energy and industrial end users 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), and Production and Transmission Infrastructure (exploration, production and extraction, 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

 

2023:

                

Gas Utilities

 $311  $2  $1  $314 

Downstream, Industrial & Energy Transition

  210   7   62   279 

Production & Transmission Infrastructure

  224   29   42   295 
  $745  $38  $105  $888 

2022:

                

Gas Utilities

 $355  $3  $1  $359 

Downstream, Industrial & Energy Transition

  209   6   61   276 

Production & Transmission Infrastructure

  204   28   37   269 
  $768  $37  $99  $904 

  

Nine Months Ended

 

September 30,

 
                 
  

U.S.

  

Canada

  

International

  

Total

 

2023:

                

Gas Utilities

 $938  $4  $2  $944 

Downstream, Industrial & Energy Transition

  599   16   187   802 

Production & Transmission Infrastructure

  675   98   125   898 
  $2,212  $118  $314  $2,644 

2022:

                

Gas Utilities

 $934  $9  $1  $944 

Downstream, Industrial & Energy Transition

  576   20   165   761 

Production & Transmission Infrastructure

  593   91   105   789 
  $2,103  $120  $271  $2,494 

 

10

 
 

NOTE 3 – INVENTORIES

 

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

 

  

September 30,

  

December 31,

 
  

2023

  

2022

 

Finished goods inventory at average cost:

        

Valves, automation, measurement and instrumentation

 $287  $271 

Carbon steel pipe, fittings and flanges

  210   201 

Gas products

  278   257 

All other products

  144   147 
   919   876 

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

  (276)  (279)

Less: Other inventory reserves

  (23)  (19)
  $620  $578 

 

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 $11 million and $31 million for the three and nine months ended September 30, 2023, and $10 million and $30 million for the three and nine months ended September 30, 2022, which we have classified in selling, general and administrative expenses. Cash paid for leases recognized as liabilities was $10 million and $30 million for the three and nine months ended September 30, 2023, and $10 million and $31 million for the three and nine months ended September 30, 2022.

 

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

 

Maturity of Operating Lease Liabilities

    

Remainder of 2023

 $11 

2024

  43 

2025

  36 

2026

  30 

2027

  27 

After 2027

  184 

Total lease payments

  331 

Less: Interest

  (109)

Present value of lease liabilities

 $222 

 

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

 

  

September 30,

 

Operating Lease Term and Discount Rate

 

2023

 

Weighted-average remaining lease term (years)

  12 

Weighted-average discount rate

  6.6%

 

Amounts maturing after 2027 include expected renewals for leases of regional distribution centers and certain corporate offices through dates up to 2048. Excluding these optional renewals, our weighted-average remaining lease term is 6 years.

 

11

 
 

NOTE 5 – LONG-TERM DEBT

 

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

 

  

September 30,

  

December 31,

 
  

2023

  

2022

 

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

 $293  $295 

Global ABL Facility

  10   45 
   303   340 

Less: current portion

  3   3 
  $300  $337 

 

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. In accordance with ASC 470, we have classified the Term Loan as a non-current liability as of  September 30, 2023, as the Company has the intent and ability to refinance the Term Loan with its Global ABL Facility on a long-term basis. 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. Beginning  July 1, 2023, the LIBOR interest rate is now calculated as the aggregate Chicago Mercantile Exchange ("CME") Term SOFR plus the International Swaps and Derivatives Association (ISDA) credit adjustment spread. "Term SOFR" is the forward-looking, per annum secured overnight financing rate administered by CME Group Benchmark Administration Limited and published on the applicable Thompson Reuters Corporation website page for each of 1-month, 3-month, and 6-month maturities. 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: The Company is a party to a multi-currency, global asset-based lending facility (the “Global ABL Facility”), including certain of its subsidiaries, its lenders and Bank of America, N.A. as administrative agent, security trustee and collateral agent. The Global ABL Facility is a revolving credit facility of $750 million, which matures in September 2026. 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. In December 2022, the Company and Administrative Agent entered into an amendment to the Global ABL Facility to replace the London Interbank Offered Rate with a new prevailing benchmark interest rate known as Term SOFR for all U.S. dollar borrowings. U.S. borrowings under the amended facility bear interest at the Term SOFR 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 $696 million as of  September 30, 2023.

 

Interest on Borrowings: The interest rates on our outstanding borrowings at  September 30, 2023, including a floating to fixed interest rate swap at December 31, 2022, which expired in March 2023, are set forth below:

 

  

September 30,

  

December 31,

 
  

2023

  

2022

 

Senior Secured Term Loan B

  8.86%  6.05%

Global ABL Facility

  6.35%  5.20%

Weighted average interest rate

  8.78%  5.94%

 

12

 
 

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.

 

MRC Global Inc. may not enter into any new, or amend, or modify any existing agreement or arrangement that by its terms restricts, limits, prohibits or prevents the Company from paying dividends on the Preferred Stock, redeeming or repurchasing the Preferred Stock or effecting the conversion of the Preferred Stock. Any such agreement, amendment or modification would require the consent of the holder of the Preferred Stock.

 

 

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. 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. In 2023, 335,959 performance share unit awards, 135,019 restricted stock awards, and 745,039 shares of restricted stock units have been granted to executive management, members of our Board of Directors and employees.

 

Accumulated Other Comprehensive Loss

 

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

 

  

September 30,

  

December 31,

 
  

2023

  

2022

 

Currency translation adjustments

 $(234) $(230)

Hedge accounting adjustments

  1   1 

Other adjustments

  (1)  (1)

Accumulated other comprehensive loss

 $(234) $(230)

 

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,

 
  

2023

  

2022

  

2023

  

2022

 

Net income

 $35  $24  $93  $54 

Less: Dividends on Series A Preferred Stock

  6   6   18   18 

Net income attributable to common stockholders

 $29  $18  $75  $36 
                 

Weighted average basic shares outstanding

  84.3   83.6   84.2   83.5 

Effect of dilutive securities

  21.6   1.4   21.6   1.3 

Weighted average diluted shares outstanding

  105.9   85.0   105.8   84.8 
                 

Net income per share:

                

Basic

 $0.34  $0.22  $0.89  $0.43 

Diluted

 $0.33  $0.21  $0.88  $0.42 

 

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, 2023, all of the shares of the Preferred Stock were dilutive. For the three and nine months ended September 30, 2022, all of the shares of the Preferred Stock were anti-dilutive. For the three and nine months ended September 30, 2023, we had approximately 1.2 million and 1.3 million dilutive stock options, restricted stock units, and performance units. For the three and nine months ended September 30, 2022, we had approximately 1.4 million and 1.3 million 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, and Production and Transmission Infrastructure 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,

 
  

2023

  

2022

  

2023

  

2022

 

Sales

                

U.S.

 $745  $768  $2,212  $2,103 

Canada

  38   37   118   120 

International

  105   99   314   271 

Consolidated sales

 $888  $904  $2,644  $2,494 
                 

Operating income (loss)

                

U.S.

 $54  $40  $149  $99 

Canada

  (2)  -   (6)  (1)

International

  5   5   16   7 

Total operating income

  57   45   159   105 
                 

Interest expense

  (9)  (6)  (26)  (17)

Other, net

  1   (5)  (3)  (11)

Income before income taxes

 $49  $34  $130  $77 

 

  

September 30,

  

December 31,

 
  

2023

  

2022

 

Total assets

        

U.S.

 $1,579  $1,518 

Canada

  98   101 

International

  281   276 

Total assets

 $1,958  $1,895 

 

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

 

2023

  

2022

  

2023

  

2022

 

Line Pipe

 $164  $173  $433  $417 

Carbon Fittings and Flanges

  117   119   353   335 

Total Carbon Pipe, Fittings and Flanges

  281   292   786   752 

Valves, Automation, Measurement and Instrumentation

  306   290   920   821 

Gas Products

  191   205   612   587 

Stainless Steel and Alloy Pipe and Fittings

  40   53   108   147 

General Products

  70   64   218   187 
  $888  $904  $2,644  $2,494 

 

15

 
 

NOTE 9 – FAIR VALUE MEASUREMENTS

 

From time to time, we use derivative financial instruments to help manage our exposure to interest rate risk and fluctuations in foreign currencies.

 

Interest Rate Swap: In March 2018, we entered into a five-year interest rate swap that became effective on March 31, 2018, with a notional amount of $250 million from which the Company received payments at 1-month LIBOR and made monthly payments at a fixed rate of 2.7145% with settlement and reset dates on or near the last business day of each month until maturity. The fair value of the swap at inception was zero.

 

We designated the interest rate swap as an effective cash flow hedge utilizing the guidance under ASU 2017-12. As such, the valuation of the interest rate swap was recorded as an asset or liability, and the gain or loss on the derivative was recorded as a component of other comprehensive income (loss). Interest rate swap agreements are reported on the accompanying balance sheets at fair value utilizing observable Level 2 inputs such as yield curves and other market-based factors. We obtain dealer quotations to value our interest rate swap agreements. The fair value of our interest rate swap was estimated based on the present value of the difference between expected cash flows calculated at the contracted interest rates and the expected cash flows at current market interest rates. The fair value of the interest rate swap was an asset of $1 million as of  December 31, 2022.

 

On March 31, 2023, the interest rate swap agreement expired and was not extended with any new agreements or amendments. An immaterial net gain recorded as a component of other comprehensive loss was reclassified to interest expense as of March 31, 2023.  

 

Foreign Exchange Forward Contracts:

Foreign exchange forward contracts are reported at fair value utilizing Level 2 inputs, as the fair value is based on broker quotes for the same or similar derivative instruments. Our foreign exchange derivative instruments are freestanding, and we have not designated them as hedges; accordingly, we have recorded changes in their fair market value in earnings. There were no outstanding forward foreign exchange contracts as of September  30, 2023. The total notional amount of our forward foreign exchange contracts and options was approximately $3 million at  December 31, 2022. We had approximately $0 million recorded as liabilities on our condensed consolidated balance sheets as  December 31, 2022
.

 

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 $303 million and $340 million at September 30, 2023 and December 31, 2022, 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 $301 million and $337 million at September 30, 2023 and December 31, 2022, respectively.

 

 

NOTE 10 – COMMITMENTS AND CONTINGENCIES

 

Litigation

 

Asbestos Claims.  We are one of many defendants in lawsuits that plaintiffs have brought seeking damages for personal injuries that exposure to asbestos allegedly caused. Plaintiffs and their family members have brought these lawsuits against a large volume of defendant entities as a result of the defendants’ manufacture, distribution, supply or other involvement with asbestos, asbestos containing-products or equipment or activities that allegedly caused plaintiffs to be exposed to asbestos. These plaintiffs typically assert exposure to asbestos as a consequence of third-party manufactured products that our MRC Global (US) Inc. subsidiary purportedly distributed. As of September 30, 2023, we are named a defendant in approximately 548 lawsuits involving approximately 1,113 claims. No asbestos lawsuit has resulted in a judgment against us to date, with a majority being settled, dismissed or otherwise resolved. Applicable third-party insurance has substantially covered these claims, and insurance should continue to cover a substantial majority of existing and anticipated future claims. Accordingly, we have recorded a liability for our estimate of the most likely settlement of asserted claims and a related receivable from insurers for our estimated recovery, to the extent we believe that the amounts of recovery are probable. It is not possible to predict the outcome of these claims and proceedings. However, in our opinion, the likelihood that the ultimate disposition of any of these claims and legal proceedings will have a material adverse effect on our condensed consolidated financial statements is remote.

 

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

 

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

 

Customer Contracts

 

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

 

16

 
 

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

 

You should read the following discussion and analysis of our financial condition and results of operations in conjunction with our financial statements and related notes included elsewhere in this report. This discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions. As used in this Form 10-Q, unless otherwise indicated or the context otherwise requires, all references to the “Company,” “MRC Global,” “we,” “our” or “us” refer to MRC Global Inc. and its consolidated subsidiaries.

 

Cautionary Note Regarding Forward-Looking Statements

 

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

 

  decreases in capital and other expenditure levels in the industries that we serve;
 

U.S. and international general economic conditions;

  global geopolitical events;
  decreases in oil and natural gas prices;
  unexpected supply shortages;
 

loss of third-party transportation providers;

 

cost increases by our suppliers and transportation providers;

  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 most of our suppliers;

 

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

 

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

  a decline in demand for certain of the products we distribute if tariffs and duties on these products are imposed or lifted;
  holding more inventory than can be sold in a commercial time frame;
  significant substitution of renewables and low-carbon fuels for oil and gas, impacting demand for our products;
  risks related to adverse weather events or natural disasters;
  environmental, health and safety laws and regulations and the interpretation or implementation thereof;
  changes in our customer and product mix;
  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;
  failure to operate our business in an efficient or optimized manner;
  our ability to compete successfully with other companies in our industry;
 

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

 

 

  inability to attract and retain our employees or the potential loss of key personnel;
 

adverse health events, such as a pandemic;

 

interruption in the proper functioning of our information systems;

 

the occurrence of cybersecurity incidents;

 

risks related to our customers’ creditworthiness;

 

the success of our acquisition strategies;

 

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

 

impairment of our goodwill or other intangible assets;

 

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

  our significant indebtedness;
  the dependence on our subsidiaries for cash to meet our parent company's obligations;
  changes in our credit profile;
  potential inability to obtain necessary capital;
  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;
  exposure to U.S. and international laws and regulations, regulating corruption, limiting imports or exports or imposing economic sanctions;
 

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

 

risks related to changing laws and regulations, including trade policies and tariffs; and

  the potential share price volatility and costs incurred in response to any shareholder activism campaigns.

 

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 leading global distributor of pipe, valves, fittings ("PVF") and other infrastructure products and services to diversified energy, industrial and gas utility end-markets. We provide innovative supply chain solutions, technical product expertise and a robust digital platform to customers globally through our leading position across each of our diversified end-markets including 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)

 

Production and Transmission Infrastructure (exploration, production and extraction, gathering, processing and transmission of oil and gas)

 

We offer over 250,000 SKUs, including an extensive array of PVF, oilfield supply, valve automation and modification, measurement, instrumentation and other general and specialty products from our global network of over 9,000 suppliers. With over 100 years of experience, our approximately 2,900 employees serve approximately 10,000 customers through 218 service locations including regional distribution centers, service centers, corporate offices and third-party pipe yards, where we often deploy pipe near customer locations.

 

 

Key Drivers of Our Business

 

We derive our revenue predominantly from the sale of PVF and other supplies to energy, industrial and gas utility customers globally. Our business is dependent upon both the current conditions and future prospects in these industries and, in particular, our customers' maintenance and expansionary operating and capital expenditures. The outlook for PVF spending is influenced by numerous factors, including the following:

 

 

Gas Utility and Energy Infrastructure Integrity and Modernization. Ongoing maintenance and upgrading of existing energy facilities, pipelines and other infrastructure equipment is a meaningful driver for business across the sectors we serve. This is particularly true for Gas Utilities, which is currently our largest sector by sales. Activity with customers in this sector is driven by upgrades and replacement of existing infrastructure as well as new residential and commercial development. Continual maintenance of an aging network of pipelines and local distribution networks is a critical requirement for these customers irrespective of broader economic conditions. As a result, this business tends to be more stable over time than our traditional oilfield-dependent businesses and moves independently of commodity prices.

 

 

 

  Oil and Natural Gas Demand and Prices. Sales of PVF and infrastructure products to the oil and natural gas industry constitute a significant portion of our sales. As a result, we depend upon the maintenance and capital expenditures of oil and natural gas companies to explore for, produce and process oil, natural gas and refined products. Demand for oil and natural gas, current and projected commodity prices and the costs necessary to produce oil and gas impact customer capital spending, additions to and maintenance of pipelines, refinery utilization and petrochemical processing activity. Additionally, as these participants rebalance their capital investment away from traditional, carbon-based energy toward alternative sources, we expect to continue to supply them and enhance our product and service offerings to support their changing requirements, including in areas such as carbon capture utilization and storage, biofuels, offshore wind and hydrogen processing.
     
  Economic Conditions. Changes in the general economy or in the energy sector (domestically or internationally) can cause demand for fuels, feedstocks and petroleum-derived products to vary, thereby causing demand for the products we distribute to materially change.
     
  Manufacturer and Distributor Inventory Levels of PVF and Related Products. Manufacturer and distributor inventory levels of PVF and related products can change significantly from period to period. Increased inventory levels by manufacturers or other distributors can cause an oversupply of PVF and related products in the industry sectors we serve and reduce the prices that we are able to charge for the products we distribute. Reduced prices, in turn, would likely reduce our profitability. Conversely, decreased manufacturer inventory levels may ultimately lead to increased demand for our products and often result in increased revenue, higher PVF pricing and improved 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 line pipe 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 and other steel products that we do not supply, impact the pricing and availability of our products and, ultimately, our sales and operating profitability. Additionally, supply chain disruptions with key manufacturers or in markets in which we source products can impact the availability of inventory we require to support our customers. Furthermore, logistical challenges, including inflation and availability of freight providers and containers for shipping can also significantly impact our profitability and inventory lead-times. These constraints can also present an opportunity, as our supply chain expertise allows us to meet customer expectations when the competition may not.

 

Recent Trends and Outlook

 

During the three months ended September 30, 2023, revenue increased 2% sequentially from the three months ended June 30, 2023, and decreased 2% from the three months ended September 30, 2022. We are now projecting lower growth for the remainder of 2023 for our U.S. segment than we previously anticipated primarily due to reduced activity in our Gas Utilities sector sales. 

 

Gas Utilities
Our Gas Utility business continues to be our largest sector, making up 36% of our total company revenue for the first nine months of 2023. Sales for the nine months ended September 30, 2023, were flat compared to the nine months ended September 30, 2022. Although the long-term growth fundamentals of this sector remain intact, several key gas utilities customers are currently focused on reducing their own product inventory levels due to more certainty in the supply chain and associated lead times. Higher interest rates and inflation in construction costs are also causing customers to delay project activity. Although we have experienced lower sales activity in this sector over the last few quarters, the long-term market drivers remain positive due to distribution integrity upgrade programs as well as new home construction in certain U.S. states. The majority of the work we perform with our gas utility customers are multi-year programs where they continually evaluate, monitor and implement measures to improve their pipeline distribution networks, ensuring the safety and the integrity of their system. As of 2022, which is the most recently available information, the U.S. Pipeline and Hazardous Materials Safety Administration (PHMSA) estimates approximately 35% of the gas distribution main and service line miles are over 40 years old or of unknown origin. This infrastructure requires continuous replacement and maintenance as these gas distribution networks continue to age. We supply many of the replacement products including valves, line pipe, smart meters, risers and other gas products. A large percentage of the line pipe we sell is sold to our gas utilities customers for line replacement and new sections of their distribution network. Additionally, as our gas utility customers connect new homes and businesses to their gas distribution network, the growth in the housing market creates new revenue opportunities for our business to supply the related infrastructure products. While new housing market starts have declined with interest rate increases, we do not anticipate this to have a significant impact, as customers will generally reallocate their budgets towards integrity upgrade projects. The compound annual growth rate since 2016 for this sector is 12% and based on market fundamentals and new market share opportunities, we expect this area of our business to continue to have steady growth. Additionally, this sector has proven historically to be less sensitive to a scenario of economic slowdown due to its reduced dependency on energy demand and commodity prices.

 

 

Downstream, Industrial and Energy Transition (DIET)
DIET generated 30% of our total company revenue and grew 5% from the first nine months of 2022. Although lower than our original expectations, we continue to expect this sector to deliver strong growth in 2023 driven by increased customer activity levels related to new energy transition related projects, liquified natural gas ("LNG") projects, maintenance, repair and operations ("MRO") activities, and project turnaround activity in refineries and chemical plants. This sector has a significant amount of project activity, which can create substantial variability between quarters.

 

The energy transition portion of our business is growing rapidly, particularly for biofuel refinery projects. The outlook for energy transition projects in the coming years is robust as pressure to decarbonize the economy rises and government incentives and policy such as those in the Inflation Reduction Act of 2022 begin to support the development of carbon energy alternatives. Also, many of our customers have made commitments to net zero emissions to address climate change. Our customer base represents many of the primary leaders in the energy transition movement and is positioned to lead the effort to decarbonize through nearer-term efforts such as renewable or biodiesel refineries and offshore wind power generation as well as longer-term efforts such as carbon capture and storage and hydrogen. These types of projects require similar products that we currently provide today to these customers. We also sell low-emission valves, which represent 96% of the valves we currently sell. Low-emission valves restrict the release of methane and other greenhouse gases into the environment. We are well positioned to grow our energy transition business as we supply products for these projects through our long-standing customer relationships and our product and global supply chain expertise.


Production and Transmission Infrastructure (PTI)
The PTI sector of our business is the most cyclical, and in the first nine months of 2023 this sector represented 34% of our company revenues with a 14% increase from the nine months ended September 30, 2022. During the first nine months of 2023, Brent crude oil price averaged approximately $82 per barrel and West Texas Intermediate ("WTI") oil prices averaged approximately $77 per barrel. Recent OPEC+ production cuts have maintained prices at levels that support continued growth in drilling and completion activity by our customers. Natural gas prices also drive customer activity and have experienced recent volatility and declines, which if this remains sustainably low, could negatively impact our business. Additionally, the war between Israel and Hamas that began on October 7, 2023, may result in volatility in oil and gas prices.

 

To the extent completion activity and related production increases, this could improve our revenue opportunities in our PTI sector. New well completions and higher production levels drive the need for additional surface equipment and gathering and processing infrastructure, benefitting this sector's revenue. The majority of the revenue in this sector is driven by large independents and major exploration and production companies, which are expected to strongly influence the increase in capital spending this year and the coming years for this sector. This group of customers make up the majority of our sales within the PTI sector.

 

Russia-Ukraine War
On February 24, 2022, Russia invaded Ukraine, which has had several consequences to the broader economy, global attitudes toward energy security and the pace of the energy transition. Government actions to reduce dependency on Russian fuels through embargoes and encourage an end to the conflict through sanctions on Russia have spurred a commodity price spike, supply constraints and various policy changes to address energy security. While we have no operations or sales in Ukraine, Belarus or Russia, the conflict has impacted several macro energy trends.

 

As Europe looks to replace Russian natural gas with more stable sources, LNG with its related infrastructure, is being considered as an alternative to Russian gas supplies, with new projects being considered in the U.S. and Europe. To the extent new LNG infrastructure is built, our PTI and DIET sectors are well-positioned to benefit from this growth.


Supply Chain and Labor
Our strong inventory position has allowed us to navigate supply chain disruptions caused by the COVID-19 pandemic. For the majority of our products, lead times have returned to pre-pandemic levels. Transportation costs are also generally in-line with pre-pandemic rates.

 

Inflation for the majority of our products has eased and we do not expect to see significant increases for the rest of the year. To the extent further pricing fluctuations impact our products, the impact on our revenue and cost of goods sold, which is determined using the last-in, first-out ("LIFO") inventory costing methodology, remains subject to uncertainty and volatility. However, our supply chain expertise, relationships with our key suppliers and inventory position has allowed us to manage the supply chain for both inflationary and deflationary pressures. In addition, our contracts with customers generally allow us to pass price increases along to customers within a reasonable time after they occur.

 

Many customers are focused on reducing their own product inventory levels due to more certainty in the supply chain and associated lead times. We have also been able to reduce our inventory levels from the peak in early second quarter 2023, due to this normalization in supply chain. 

 

There has been little impact to our supply chain directly from the conflict in Ukraine. However, despite the relaxed COVID-19 restrictions in China, recent geopolitical conflicts could have the potential to further constrain the global supply chain and impact the availability of component parts, particularly for valves and meters.

 

Globally, we are being impacted by labor constraints as the post-pandemic recovery has lowered unemployment rates and created increased competition among companies to attract and retain personnel, which has increased our selling, general and administrative expense. We proactively monitor market trends in the areas where we have operations and, due to our efficient sourcing practices, have experienced little to no disruption supporting our customers.

 

 

Backlog

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

 

   

September 30,

   

December 31,

   

September 30,

 
   

2023

   

2022

   

2022

 

U.S.

  $ 473     $ 539     $ 576