MRC 20140930 10-Q

 

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, 2014

 

 

 

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.)

 

 

2 Houston Center, 909 Fannin Street, Suite 3100

Houston, Texas

77010

(Address of Principal Executive Offices)

(Zip Code)

 

(877) 294-7574
(Registrant’s Telephone Number, including Area Code)

________________

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes [ X]      No  [   ]

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes [X]    No [   ]

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes [   ]   No  [X]

 

The Company’s common stock is traded on the New York Stock Exchange under the symbol “MRC”.   There were 102,064,907 shares of the registrant’s common stock  (excluding 242,223 unvested restricted shares), par value $0.01 per share, issued and outstanding as of October 31, 2014.

 

 


 

Table Of Contents

 

INDEX TO QUARTERLY REPORT ON FORM 10-Q

 

 

 

 

Page

PART I – FINANCIAL INFORMATION

 

 

 

ITEM 1

financial statements (UNAUDITED)

 

 

 

 

Condensed Consolidated Balance Sheets – September 30, 2014 and December 312013

 

 

 

 

Condensed Consolidated Statements of INCOME – Three and Nine MONTHS

 

 

ended September 30, 2014 AND september 30, 2013

 

 

 

 

Condensed Consolidated Statements of cOMPREHENSIVE INCOME – Three

 

 

and nine  months Ended september 30, 2014 AND  september 30, 2013

 

 

 

 

Condensed CONSOLIDATED STATEMENTS OF cash flows – nine MONTHS ENDEd  september 30, 2014 and september 30, 2013

 

 

 

 

 

 

 

Notes to the Condensed Consolidated Financial Statements – september 30, 2014

 

 

 

ITEM 2.

management’s discussion and analysis of financial condition and

 

 

results of operations

12 

 

 

 

ITEM 3.

quantitative and qualitative disclosures about market risk

26 

 

 

 

ITEM 4.

controls and procedures

26 

 

 

 

PART II – OTHER INFORMATION

 

 

 

ITEM 1.

LEGAL PROCEEDINGS

27 

 

 

 

ITEM 1a.

RISK FACTORS

27 

 

 

 

ITEM 2.

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

27 

 

 

 

ITEM 3.

Defaults Upon Senior Securities

28 

 

 

 

ITEM 4.

MINING SAFETY DISCLOSURES

28 

 

 

 

ITEM 5.

other information

28 

 

 

 

ITEM 6.

Exhibits

29 

 

 

 

 

 


 

Table Of Contents

 

CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)

 

MRC GLOBAL INC.

 

 

 

 

 

 

 

September 30,

 

December 31,

 

2014

 

2013

 

 

 

 

 

(In thousands, except per share amounts)

Assets

 

 

 

Current assets:

 

 

 

Cash

$                 31,130

 

$                 25,188

Accounts receivable, net

1,089,507 

 

812,147 

Inventories, net

1,080,857 

 

971,567 

Other current assets

48,553 

 

37,091 

Total current assets

2,250,047 

 

1,845,993 

 

 

 

 

Other assets

29,037 

 

30,473 

 

 

 

 

Property, plant and equipment, net

116,421 

 

118,923 

 

 

 

 

Intangible assets:

 

 

 

Goodwill, net

834,336 

 

632,284 

Other intangible assets, net

739,338 

 

708,009 

 

 

 

 

 

$            3,969,179

 

$            3,335,682

 

 

 

 

Liabilities and stockholders' equity

 

 

 

Current liabilities:

 

 

 

Trade accounts payable

$               617,369

 

$               550,393

Accrued expenses and other current liabilities

173,030 

 

124,925 

Deferred income taxes

77,812 

 

78,844 

Current portion of long-term debt

7,935 

 

7,935 

Total current liabilities

876,146 

 

762,097 

 

 

 

 

Long-term obligations:

 

 

 

Long-term debt, net

1,408,998 

 

978,899 

Deferred income taxes

234,388 

 

241,116 

Other liabilities

24,413 

 

15,302 

 

 

 

 

Commitments and contingencies

 

 

 

 

 

 

 

Stockholders' equity:

 

 

 

Common stock, $0.01 par value per share: 500,000 shares authorized, 102,064 and 101,913 issued and outstanding, respectively

1,020 

 

1,019 

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

 -

 

 -

Additional paid-in capital

1,653,702 

 

1,644,406 

Retained deficit

(153,781)

 

(266,735)

Accumulated other comprehensive loss

(75,707)

 

(40,422)

 

1,425,234 

 

1,338,268 

 

$            3,969,179

 

$            3,335,682

See notes to condensed consolidated financial statements.

 

 

 

 

 

 

 

 

 

 

 

 

 

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CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

 

MRC GLOBAL INC.

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Nine Months Ended

 

September 30,

 

September 30,

 

September 30,

 

September 30,

 

2014

 

2013

 

2014

 

2013

 

 

 

 

 

 

 

 

 

(In thousands, except per share amounts)

Sales

$            1,618,146

 

$            1,313,711

 

$          4,421,120

 

$          3,886,589

Cost of sales

1,340,103 

 

1,075,418 

 

3,651,523 

 

3,157,792 

Gross profit

278,043 

 

238,293 

 

769,597 

 

728,797 

 

 

 

 

 

 

 

 

Selling, general and administrative expenses

184,842 

 

160,910 

 

541,518 

 

475,642 

Operating income

93,201 

 

77,383 

 

228,079 

 

253,155 

 

 

 

 

 

 

 

 

Other income (expense):

 

 

 

 

 

 

 

Interest expense

(14,925)

 

(15,463)

 

(45,436)

 

(45,988)

Change in fair value of derivative instruments

2,593 

 

(1,828)

 

(1,667)

 

589 

Other, net

(4,677)

 

(87)

 

(7,961)

 

(13,471)

Income before income taxes

76,192 

 

60,005 

 

173,015 

 

194,285 

Income tax expense

26,058 

 

21,248 

 

60,061 

 

65,493 

Net income

$                 50,134

 

$                 38,757

 

$             112,954

 

$             128,792

 

 

 

 

 

 

 

 

Basic earnings per common share

$                     0.49

 

$                     0.38

 

$                   1.11

 

$                   1.27

Diluted earnings per common share

$                     0.49

 

$                     0.38

 

$                   1.10

 

$                   1.26

Weighted-average common shares, basic

102,035 

 

101,715 

 

101,982 

 

101,673 

Weighted-average common shares, diluted

102,860 

 

102,393 

 

102,875 

 

102,455 

 

See notes to condensed consolidated financial statements.

 

 

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CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)

 

MRC GLOBAL INC.

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Nine Months Ended

 

September 30,

 

September 30,

 

September 30,

 

September 30,

 

2014

 

2013

 

2014

 

2013

 

 

 

 

 

 

 

 

 

(In thousands)

Net income

$           50,134

 

$           38,757

 

$         112,954

 

$         128,792

 

 

 

 

 

 

 

 

Other comprehensive income (loss) -

 

 

 

 

 

 

 

  Foreign currency translation adjustments

(44,415)

 

12,113 

 

(35,285)

 

(9,258)

Comprehensive income

$             5,719

 

$           50,870

 

$           77,669

 

$         119,534

 

 

 

 

 

 

 

 

 

See notes to condensed consolidated financial statements.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

 

MRC GLOBAL INC.

 

 

 

 

 

 

 

 

 

Nine Months Ended

 

September 30,

 

September 30,

 

2014

 

2013

 

 

 

 

Operating activities

(In thousands)

Net income

$              112,954

 

$              128,792

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

 

 

 

Depreciation and amortization

17,075 

 

16,782 

Amortization of intangibles

53,209 

 

39,128 

Equity-based compensation expense

7,468 

 

8,602 

Deferred income tax benefit

(25,178)

 

(16,747)

Amortization of debt issuance costs

3,822 

 

4,376 

Increase (decrease) in LIFO reserve

5,907 

 

(21,247)

Change in fair value of derivative instruments

1,667 

 

(589)

Provision for uncollectible accounts

941 

 

(355)

Foreign currency losses

1,798 

 

11,993 

Other non-cash items

1,318 

 

(133)

Changes in operating assets and liabilities:

 

 

 

Accounts receivable

(226,789)

 

(25,448)

Inventories

(83,186)

 

48,026 

Income taxes payable

17,179 

 

(815)

Other current assets

(6,632)

 

(11,961)

Accounts payable

38,397 

 

64,849 

Accrued expenses and other current liabilities

11,414 

 

(3,878)

Net cash (used in) provided by operations

(68,636)

 

241,375 

 

 

 

 

Investing activities

 

 

 

Purchases of property, plant and equipment

(10,051)

 

(14,902)

Proceeds from the disposition of property, plant and equipment

1,231 

 

4,025 

Acquisitions, net of cash acquired

(346,992)

 

(21,909)

Other investment and notes receivable transactions

1,342 

 

(2,116)

Net cash used in investing activities

(354,470)

 

(34,902)

 

 

 

 

Financing activities

 

 

 

Payments on revolving credit facilities

(1,148,750)

 

(1,534,095)

Proceeds from revolving credit facilities

1,585,509 

 

1,328,296 

Payments on long-term obligations

(5,951)

 

(4,875)

Debt issuance costs paid

(3,606)

 

(189)

Proceeds from exercise of stock options

2,145 

 

2,230 

Tax benefit on stock options

186 

 

302 

Other financing activities

 -

 

(6)

Net cash provided by (used in) financing activities

429,533 

 

(208,337)

 

 

 

 

Increase (decrease) in cash

6,427 

 

(1,864)

Effect of foreign exchange rate on cash

(485)

 

(1,787)

Cash -- beginning of period

25,188 

 

37,090 

Cash -- end of period

$                31,130

 

$                33,439

 

 

 

 

Supplemental disclosures of cash flow information:

 

 

 

Cash paid for interest

$                42,891

 

$                41,566

Cash paid for income taxes

$                67,706

 

$                82,589

See notes to condensed consolidated financial statements.

 

 

 

 

 

 

 

 

 

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NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

MRC GLOBAL INC.

 

NOTE 1 – BACKGROUND AND BASIS OF PRESENTATION

 

Business Operations: MRC Global Inc. is a holding company headquartered in Houston, Texas. Our wholly owned subsidiaries are global distributors of pipe, valves, fittings (“PVF”) and related products and services across each of the upstream (exploration, production and extraction of underground oil and gas), midstream (gathering and transmission of oil and gas, gas utilities, and the storage and distribution of oil and gas) and downstream (crude oil refining, petrochemical processing and general industrials) sectors. We have branches in principal industrial, hydrocarbon producing and refining areas throughout the United States, Canada, Europe, Asia, Australasia, the Middle East and Kazakhstan. Our products are obtained from a broad range of suppliers.

 

Basis of Presentation:  We have prepared our unaudited condensed consolidated financial statements in accordance with Rule 10-01 of Regulation S-X for interim financial statements.  These statements do not include all information and footnotes that generally accepted accounting principles require for complete annual financial statements. However, the information in these statements reflects all normal recurring adjustments which are, in our opinion, necessary for a fair presentation of the results for the interim periods. The results of operations for the nine months ended September 30, 2014 are not necessarily indicative of the results that will be realized for the fiscal year ending December 31, 2014.  We have derived our condensed consolidated balance sheet as of December 31, 2013 from the audited consolidated financial statements for the year ended December 31, 2013.  You should read these condensed consolidated financial statements in conjunction with the consolidated financial statements and notes thereto for the year ended December 31, 2013.

 

The consolidated financial statements include the accounts of MRC Global Inc. and its wholly owned and majority owned subsidiaries (collectively referred to as the “Company” or by such terms as “we,” “our” or “us”). All material intercompany balances and transactions have been eliminated in consolidation.

 

NOTE 2 – TRANSACTIONS

 

In January 2014, we completed the acquisition of Stream AS (“Stream”).  Headquartered in Norway, Stream AS (now known as MRC Global Norway AS) is the leading pipe, valve and fittings distributor and provider of flow control products, solutions and services to the offshore oil and gas industry on the Norwegian Continental Shelf. The purchase price for this acquisition was $260 million including the assumption of certain tax obligations and pension liabilities. 

 

In January 2014, we sold our progressive cavity pump (“PCP”) distribution and servicing business to Europump Systems, Inc., our primary supplier of PCP pumps. We recorded a pre-tax charge of $6.2 million associated with the termination of a related profit sharing agreement during the first quarter of 2014.

 

In May 2014, we completed the acquisition of MSD Engineering Pte. Limited (“MSD”).  Located in Singapore, MSD is a major distributor and regional service provider of valve and valve automation solutions to customers in Singapore, Brunei, China, Malaysia, Indonesia, Thailand, Vietnam and Taiwan. 

 

In June 2014, we completed the acquisition of Metron Holding AS, the parent company of Hypteck AS (“Hypteck”).  Headquartered in Norway, Hypteck is a Norwegian provider of instrumentation and process control products to the offshore, marine and onshore industries with a focus on the Norwegian Continental Shelf.  The company also provides instrumentation and process and control system solutions to capital offshore projects around the world. 

 

The purchase price for the MSD and Hypteck acquisitions totaled $102.2 million.  The Hypteck purchase price is subject to an earnout provision which could result in additional contingent consideration of up to $8 million. Because we recently consummated the three acquisitions described above, we have not yet finalized the determination of the fair values of certain tangible and intangible assets acquired and liabilities assumed.   The amounts currently recorded are based on estimates and are subject to change once the valuation procedures have been completed. 

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NOTE 3 – INVENTORIES

 

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

 

 

 

 

 

September 30,

 

December 31,

 

2014

 

2013

Finished goods inventory at average cost:

 

 

 

Energy carbon steel tubular products

$         430,847

 

$        362,449

Valves, fittings, flanges and all other products

810,884 

 

763,119 

 

1,241,731 

 

1,125,568 

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

(136,709)

 

(130,802)

Less: Other inventory reserves

(24,165)

 

(23,199)

 

$      1,080,857

 

$        971,567

 

 

 

 

 

NOTE 4 – LONG-TERM DEBT

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

 

 

 

 

 

 

September 30,

 

December 31,

 

2014

 

2013

Senior Secured Term Loan B, net of discount of $3,884 and $4,457

$          781,681

 

$           787,059

Global ABL Facility

631,703 

 

199,630 

Other

3,549 

 

145 

 

1,416,933 

 

986,834 

Less: Current portion

7,935 

 

7,935 

 

$       1,408,998

 

$           978,899

Senior Secured Term Loan B:  We have a $793.5 million seven-year Senior Secured Term Loan B (the “Term Loan”) the principal amount of which amortizes in equal quarterly installments of 1% per year with the balance payable in November 2019 when the facility matures.    Subject to securing additional lender commitments, the Term Loan allows for incremental increases in facility size above $793.5 million up to an aggregate of $200 million, plus an additional amount such that the Company’s senior secured leverage ratio (as defined under the Term Loan) would not exceed 3.50 to 1.00.  McJunkin Red Man Corporation is the borrower under this facility, which is guaranteed by MRC Global Inc. as well as all of its wholly owned U.S. subsidiaries.  In addition, it is secured by a second lien on the assets securing our Global ABL Facility (which includes accounts receivable, inventory and related assets) and a first lien on substantially all of the other assets of MRC Global Inc. and those of its U.S. subsidiaries, as well as a pledge of all of the capital stock of our domestic subsidiaries and 65% of the capital stock of first tier, non-U.S. subsidiaries.  We are required to repay the Term Loan with certain asset sales and insurance proceeds,  certain debt proceeds and 50% of excess cash flow (reducing to 25% if our senior secured leverage ratio is no more than 2.75 to 1.00 and 0% if our senior secured leverage ratio is no more than 2.50 to 1.00).  In addition, the Term Loan contains a number of customary restrictive covenants.

The interest rate for the Term Loan, including the amortization of original issue discount, was 5.09% as of September 30, 2014 and December 31, 2013.    

Global ABL Facility:  In July 2014, we amended our revolving credit facility.  We have a $1.05 billion multi-currency global asset-based revolving credit facility (the “Global ABL Facility”) that matures in July 2019. This facility is comprised of $977 million in revolver commitments in the United States, $30 million in Norway, $20 million in Canada, $5 million in the United Kingdom, $10 million in Australia, $4 million in the Netherlands and $4 million in Belgium. It contains an accordion feature that allows us to increase the principal amount of the facility by up to $300  million, subject to securing additional lender commitments.

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

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guarantees the obligations of our other non-U.S. borrower subsidiaries under the Global ABL Facility. Outstanding obligations are generally secured by a first priority security interest in accounts receivable, inventory and related assets. 

The interest rate for the Global ABL Facility was 2.13% and 2.12% as of September 30, 2014 and December 31, 2013, respectively.    Availability under our Global ABL Facility was $276.2 million as of September 30, 2014.

 

Stream Facility:  In conjunction with the acquisition of Stream, we assumed a credit facility, denominated in Norwegian Krone, comprised of subfacilities for revolving credit of $28 million, guarantees of $33  million and foreign exchange of $2 million. Subsequent to the close of the acquisition, this facility was amended and currently consists of a guarantee facility of $28 million, an overdraft facility of $10 million and a foreign exchange facility of $2 million.  These facilities are secured by standby letters of credit drawn against our Global ABL Facility and have no financial maintenance covenants.

 

 

NOTE 5 – STOCKHOLDERS’ EQUITY

Stock Options and Restricted Stock

Our 2011 Omnibus Incentive Plan has 3,250,000 shares reserved for issuance pursuant to the plan.  The plan permits the issuance of stock options, stock appreciation rights, restricted stock, restricted stock units, performance shares, performance units and other stock-based and cash-based awards.  Since the adoption of the 2011 Omnibus Incentive Plan, the Company’s Board of Directors has periodically granted stock options and restricted stock to directors and employees, but no other types of awards have been granted under the plan.  Options and stock appreciation rights may not be granted at prices less than their fair market value on the date of the grant, nor for a term exceeding ten years. For employees, vesting generally occurs ratably over a three to five year period on the anniversaries of the date specified in the employees’ respective stock option and restricted stock agreements, subject to accelerated vesting under certain circumstances set forth in the agreements. Vesting for directors generally occurs on the one-year  anniversary of the grant date.  In February 2014,  421,405 stock options and 157,800 shares of restricted stock were granted to employees. In the second quarter of 2014, 1,187 stock options previously granted were declined, and 36,704 shares of restricted stock were granted to members of the Board of Directors.  In the third quarter of 2014, 1,020 shares of restricted stock were granted to an employeeTo date, 2,506,412 shares have been granted to management, members of our Board of Directors and key employees under this plan.  We expense the fair value of the stock option grants on a straight-line basis over the vesting period. A Black-Scholes option-pricing model is used to estimate the fair value of the stock options.

 

Accumulated Other Comprehensive Loss 

 

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

 

 

 

 

 

 

 

 

 

 

September 30,

 

December 31,

 

2014

 

2013

 

 

 

 

Currency translation adjustments

$         (75,458)

 

$         (40,173)

Pension related adjustments

(249)

 

(249)

Accumulated other comprehensive loss

$         (75,707)

 

$         (40,422)

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Earnings per Share

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Nine Months Ended

 

September 30,

 

September 30,

 

September 30,

 

September 30,

 

2014

 

2013

 

2014

 

2013

 

 

 

 

 

 

 

 

Net income

$            50,134

 

$            38,757

 

$          112,954

 

$          128,792

 

 

 

 

 

 

 

 

Average basic shares outstanding

102,035 

 

101,715 

 

101,982 

 

101,673 

Effect of dilutive securities

825 

 

678 

 

893 

 

782 

Average diluted shares outstanding

102,860 

 

102,393 

 

102,875 

 

102,455 

 

 

 

 

 

 

 

 

Net income per share:

 

 

 

 

 

 

 

  Basic

$                0.49

 

$                0.38

 

$                1.11

 

$                1.27

  Diluted

$                0.49

 

$                0.38

 

$                1.10

 

$                1.26

 

Stock options and shares of restricted stock are disregarded in this calculation if they are determined to be anti-dilutive.  For the three months ended September 30, 2014 and 2013, we had approximately 1.1 million and 1.2 million anti-dilutive stock options, respectively.  For the nine months ended September 30, 2014 and 2013, we had approximately 1.0 million and 0.6 million anti-dilutive stock options, respectively.  There was no anti-dilutive restricted stock for the three and nine months ended September 30, 2014 and 2013.

 

NOTE 6 – SEGMENT INFORMATION

We operate as three business segments, U.S., Canada and International. Our International segment consists of our operations outside of the U.S. and Canada, principally Europe, Asia,  Australasia and the Middle East. These segments represent our business of selling PVF and related products and services to the energy and industrial sectors, across each of the upstream (exploration, production and extraction of underground oil and gas), midstream (gathering and transmission of oil and gas, gas utilities, and the storage and distribution of oil and gas) and downstream (crude oil refining, petrochemical processing and general industrials) sectors. 

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

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Nine Months Ended

 

September 30,

 

September 30,

 

September 30,

 

September 30,

 

2014

 

2013

 

2014

 

2013

Sales

 

 

 

 

 

 

 

U.S.

$           1,205.2

 

$         1,015.0

 

$          3,268.7

 

$          2,955.8

Canada

161.2 

 

162.1 

 

477.5 

 

520.1 

International

251.7 

 

136.6 

 

674.9 

 

410.7 

Sales

$           1,618.1

 

$         1,313.7

 

$          4,421.1

 

$          3,886.6

 

 

 

 

 

 

 

 

Operating income

 

 

 

 

 

 

 

U.S.

$                76.2

 

$              72.9

 

$             194.8

 

$             229.8

Canada

7.7 

 

3.2 

 

20.5 

 

14.6 

International

9.3 

 

1.3 

 

12.8 

 

8.8 

Operating income

93.2 

 

77.4 

 

228.1 

 

253.2 

 

 

 

 

 

 

 

 

Interest expense

(14.9)

 

(15.5)

 

(45.4)

 

(46.0)

Other, net

(2.1)

 

(1.9)

 

(9.6)

 

(12.9)

Income before income taxes

$                76.2

 

$              60.0

 

$             173.1

 

$             194.3

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30,

 

December 31,

 

 

 

 

 

2014

 

2013

Total assets

 

 

 

 

 

 

 

U.S.

 

 

 

 

$          3,164.0

 

$          2,732.3

Canada

 

 

 

 

196.4 

 

204.7 

International

 

 

 

 

608.8 

 

398.7 

Total assets

 

 

 

 

$          3,969.2

 

$          3,335.7

 

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

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

September 30,

 

September 30,

 

September 30,

 

September 30,

Type

 

2014

 

2013

 

2014

 

2013

Energy carbon steel tubular products:

 

 

 

 

 

 

 

 

Line pipe

 

$         323,149

 

$           278,460

 

$          818,509

 

$          771,230

Oil country tubular goods (OCTG)

 

148,093 

 

105,500 

 

412,223 

 

345,139 

 

 

$         471,242

 

$           383,960

 

$       1,230,732

 

$       1,116,369

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Valves, fittings, flanges and other products:

 

 

 

 

 

 

 

 

Valves and specialty products

 

$         530,536

 

$           355,726

 

$       1,449,248

 

$       1,071,205

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

 

330,444 

 

286,732 

 

929,349 

 

869,995 

Other

 

285,924 

 

287,293 

 

811,791 

 

829,020 

 

 

$      1,146,904

 

$           929,751

 

$       3,190,388

 

$       2,770,220

 

 

 

 

 

 

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NOTE 7 – FAIR VALUE MEASUREMENTS

From time to time, we use derivative financial instruments to help manage our exposure to interest rate risk and fluctuations in foreign currencies. All of our derivative instruments are freestanding and, accordingly, changes in their fair market value are recorded in earnings.  As of September 30, 2014, we do not have any interest rate swap agreements. Foreign exchange forward contracts and options are reported at fair value utilizing Level 2 inputs, as the fair value is based on broker quotes for the same or similar derivative instruments. The total notional amount of our forward foreign exchange contracts and options was approximately $56.6 million and $331.3 million at September 30, 2014 and December 31, 2013, respectively.  We had approximatey  $1.1 million and $4.6 million recorded as assets on our consolidated balance sheets as of September 30, 2014 and December 31, 2013, respectively.

With the exception of long-term debt, the fair values of our financial instruments, including cash and cash equivalents, accounts receivable, trade accounts payable and accrued liabilities approximate carrying value.  The carrying value of our debt was $1.417 billion and $0.987 billion at September 30, 2014 and December 31, 2013, respectively.  We estimate the fair value of the Term Loan using Level 2 inputs, or quoted market prices.  The fair value of our debt was $1.418 billion and $0.997 billion at September 30, 2014 and December 31, 2013, respectively. 

 

NOTE 8 – COMMITMENTS AND CONTINGENCIES

Litigation

Asbestos Claims.    We are one of many defendants in lawsuits that plaintiffs have brought seeking damages for personal injuries that exposure to asbestos allegedly caused. Plaintiffs and their family members have brought these lawsuits against a large volume of defendant entities as a result of the defendants’ manufacture, distribution, supply or other involvement with asbestos, asbestos containing-products or equipment or activities that allegedly caused plaintiffs to be exposed to asbestos.  These plaintiffs typically assert exposure to asbestos as a consequence of third-party manufactured products that our McJunkin Red Man Corporation subsidiary purportedly distributed.  As of September 30, 2014, we are named a defendant in approximately 402  lawsuits involving approximately 1,047 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 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 consolidated financial statements is remote.

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

Weatherford Claim.  In addition to PVF, our Canadian subsidiary, Midfield Supply (“Midfield”), now known as MRC Canada ULC, also distributed progressive cavity pumps and related equipment (“PCPs”) under a distribution agreement with Weatherford Canada Partnership (“Weatherford”) within a certain geographical area located in southern Alberta, Canada.  In late 2005 and early 2006, Midfield hired new employees, including former Weatherford employees, as part of Midfield’s desire to expand its PVF business into northern Alberta.  Shortly thereafter, many of

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these employees left Midfield and formed a PCP manufacturing, distribution and service company named Europump Systems Inc. (“Europump”) in 2006.  The distribution agreement with Weatherford expired in 2006.  Midfield supplied Europump with PVF products that Europump distributed along with PCP pumps.  In April 2007, Midfield purchased Europump’s distribution branches and began distributing and servicing Europump PCPs.

Pursuant to a complaint that Weatherford filed on April 11, 2006 in the Court of Queen’s Bench of Alberta, Judicial Bench of Edmonton (Action No. 060304628), Weatherford sued Europump, three of Europump’s part suppliers, Midfield, certain current and former employees of Midfield, and other related entities, asserting a host of claims including breach of contract, breach of fiduciary duty, misappropriation of confidential information related to the PCPs, unlawful interference with economic relations and conspiracy.  The Company denies these allegations and contends that Midfield’s expansion and subsequent growth was the result of fair competition. 

From 2006 through 2012, the case focused largely on Weatherford’s questioning of defense witnesses.  In 2013, the defendants began substantive questioning of Weatherford and its witnesses.  Discovery is ongoing and expected to last through early 2015

Due to ongoing discovery, and the limited information available related to any claimed damages, we cannot reasonably estimate potential loss at this time.  The Company believes Weatherford’s claims are without merit and intends to defend them vigorously.

 

Customer Contracts

 

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

 

Purchase Commitments

We have purchase obligations consisting primarily of inventory purchases made in the normal course of business to meet operating needs. While our vendors often allow us to cancel these purchase orders without penalty, in certain cases, cancellations may subject us to cancellation fees or penalties depending on the terms of the contract.

 

 

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

 

You should read the following discussion and analysis of our financial condition and results of operations in conjunction with our financial statements and related notes included elsewhere in this report. This discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions. As used in this Form 10-Q, 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.  All references throughout this section (and elsewhere in this report) to amounts available for borrowing under various credit facilities refer to amounts actually available for borrowing after giving effect to any borrowing base limitations that the facility imposes.  

Cautionary Note Regarding Forward-Looking Statements

Management’s Discussion and Analysis of Financial Condition and Results of Operations (as well as other sections of this Quarterly Report on Form 10-Q) contain forward-looking statements 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 oil and natural gas prices;

decreases in oil and natural gas industry expenditure levels, which may result from decreased oil and natural gas prices or other factors;

increased usage of alternative fuels, which may negatively affect oil and natural gas industry expenditure levels;

U.S. and international general economic conditions;

our ability to compete successfully with other companies in our industry;

the risk that manufacturers of the products we distribute will sell a substantial amount of goods directly to end users in the industry sectors we serve;

unexpected supply shortages;

cost increases by our suppliers;

our lack of long-term contracts with most of our suppliers;

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

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

increases in steel prices, which we may be unable to pass along to our customers which could significantly lower our profit;

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

changes in our customer and product mix;

risks related to our customers’ creditworthiness;

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

our significant indebtedness;

changes in our credit profile;

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

the success of our acquisition strategies;

a decline in demand for certain of the products we distribute if import restrictions on these products are lifted;

environmental, health and safety laws and regulations and the interpretation or implementation thereof;

the sufficiency of our insurance policies to cover losses, including liabilities arising from litigation;

product liability claims against us;

pending or future asbestos-related claims against us;

the potential loss of key personnel;

interruption in the proper functioning of our information systems;

loss of third-party transportation providers;

potential inability to obtain necessary capital;

risks related to adverse weather events or natural disasters;

impairment of our goodwill or other intangible assets;

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

risks associated with international instability and geopolitical developments;

exposure to U.S. and international laws and regulations, including the Foreign Corrupt Practices Act and the U.K. Bribery Act and other economic sanctions programs;

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

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

the occurrence of cybersecurity incidents.

Undue reliance should not be placed on our forward-looking statements. Although forward-looking statements reflect our good faith beliefs, reliance should not be placed on forward-looking statements because they involve known and unknown risks, uncertainties and other factors, which may cause our actual results, performance or achievements to differ materially from anticipated future results, performance or achievements expressed or implied by such forward-looking statements. We undertake no obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future events, changed circumstances or otherwise, except to the extent law requires.

Overview

We are the largest global industrial distributor, based on sales, of pipe, valves, and fittings (“PVF”) and related products and services to the energy industry and hold a leading position in our industry across each of the upstream (exploration, production and extraction of underground oil and natural gas), midstream (gathering and transmission of oil and natural gas, natural gas utilities and the storage and distribution of oil and natural gas) and downstream (crude oil refining, petrochemical and chemical, processing and general industrials) sectors. Our business is segregated into three geographical segments, consisting of our U.S., Canadian and International operations. We serve our customers in over 400 service locations. We offer a wide array of PVF and oilfield supplies encompassing a complete line of products from our global network of suppliers to our more than 19,000 customers. We are diversified by geography, the industry sectors we serve and the products we sell. We seek to provide best-in-class service to our customers by satisfying the most complex, multi-site needs of many of the largest companies in the energy and industrial sectors as their primary PVF supplier. We believe the critical role we play in our customers’ supply chain, together with our extensive product offering, broad global presence, customer-linked scalable information systems and efficient distribution capabilities, serve to solidify our long-standing customer relationships and drive our growth. As a result, we have an average relationship of over 20 years with our 25 largest customers.

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Key Drivers of Our Business

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

Oil and Natural Gas Prices. Sales of PVF and related products to the oil and natural gas industry constitute a significant portion of our sales. As a result, we depend upon the oil and natural gas industry and its ability and willingness to make maintenance and capital expenditures to explore for, produce and process oil and natural gas and refined products. Oil and natural gas prices, both current and projected, along with the costs necessary to produce oil and gas, impact other drivers of our business, including E&P spending, additions and maintenance to pipeline mileage, refinery utilization and petrochemical and other industrial processing activity.

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

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

•  Steel Prices, Availability and Supply and Demand. Fluctuations in steel prices can lead to volatility in the pricing of the products we distribute, especially carbon steel tubular products, which can influence the buying patterns of our customers. A majority of the products we distribute contain various types of steel. The worldwide supply and demand for these products, or other steel products that we do not supply, impacts the pricing and availability of our products and, ultimately, our sales and operating profitability.

Recent Trends and Outlook

During the first nine months of 2014, the average oil price of West Texas Intermediate (“WTI”) increased to $99.97 from $98.15 per barrel in the first nine months of 2013 although prices have declined more recently and were  $78.77 per barrel as of November 3, 2014A continued and sustained reduction in oil prices could negatively impact demand for our products, especially in the upstream and midstream sectors.  U.S drilling activity and wells completed increased 5% during the first nine months of 2014 as compared to the same period of 2013. Natural gas prices increased to an average price of $4.57/Mcf (Henry Hub) for the first nine months of 2014 compared to $3.69/Mcf (Henry Hub) for the first nine months of 2013.  As of November 3, 2014, the natural gas price was $3.82/Mcf (Henry Hub).   Rig activity continues to be heavily weighted toward oil relative to natural gas, with oil drilling representing 82% of the total U.S. rig count during the first nine months of 2014 compared to 78% for the same time period in 2013.  

The third quarter is typically our strongest quarter, and we experienced an 8% increase in sales sequentially from the second quarter of 2014.  Customer activity was strong throughout the third quarter and we remain encouraged by continued growth in our sales and backlog.

 

Internationally, we completed the $260 million acquisition of Stream AS (“Stream”) in January 2014.    Headquartered in Norway, Stream (now known as MRC Global Norway AS) is the leading PVF distributor and provider of flow

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control products, solutions and services to the offshore and oil and gas industry on the Norwegian Continental Shelf (“NCS”), the world’s largest offshore sector.  The Stream acquisition provides a platform for growth in offshore production applications where our major customers have been very active.  We also completed the acquisitions of MSD Engineering Pte. Limited (“MSD”) headquartered in Singapore and Metron Holding AS, the parent company of Hypteck AS (“Hypteck”)  headquartered in Norway.  Each of these acquisitions expands our global footprint in distributing valves, automation, instrumentation and process control products.  Elsewhere within our International business, our European operations continue to perform well, as have our growing operations in Singapore, Kazakhstan and the Middle East; however, challenging economic conditions in Australia persist and have had a negative impact on our profitability in the region.

 

In January 2014, we terminated a profit sharing agreement with respect to certain oilfield supply and service stores in western Canada.  This profit sharing agreement required us to make annual profit sharing payments to Europump Systems, Inc. (“Europump”) related to PVF sales in the heavy oil region of Canada.  In conjunction with the termination of this agreement, we sold our progressive cavity pump (“PCP”) distribution and servicing business to Europump, our primary supplier of PCP pumps. We believe this divestiture will allow us to focus on our core business of supplying PVF products and services to the energy and industrial markets.  We expect the impact of this divestiture to be a reduction in sales of approximately $82 million in 2014, including approximately $58 million through the first nine months of 2014; however, through the elimination of costs associated with the business, including the profit sharing payments to Europump, we expect the impact of the sale will have an accretive impact on profitability going forward.  We recorded a pre-tax charge of $6.2 million, or $5.0 million after tax, associated with the termination of the profit sharing agreement during the first quarter of 2014.

We determine backlog by the amount of unshipped customer orders, either specific or general in nature (including orders held under pipe programs), which the customer may revise or cancel in certain instances.  At September 30, 2014, total backlog was $1.254 billion, including $882 million in our U.S. segment, $74 million in our Canadian segment and $297 million in our International segment.  At December 31, 2013, total backlog was $758 million, including $470 million in our U.S. segment, $90 million in our Canadian segment and $198 million in our International segment. At September 30, 2013, total backlog was $739 million, including $419 million in our U.S. segment, $107 million in our Canadian segment and $213 million in our International segment.  The increase in U.S. backlog is being driven by project activity that we expect to be delivered in late 2014 and 2015.  Approximately $129 million of the increase in our International backlog is acquisition related.  There can be no assurance that the backlog amounts will ultimately be realized as revenue or that we will earn a profit on the backlog of orders, but we expect that a substantial majority of sales in our backlog will be realized in the next twelve months.

Beginning in the second quarter of 2014, we have undertaken a number of initiatives to reduce operating costs,   including a voluntary early retirement program and selective personnel reductions.  In addition, we have closed our corporate office in Tulsa, Oklahoma and a corporate office in Sydney, Australia. As a result of actions taken to date, we have reduced headcount by approximately 230 people and anticipate annual savings of over $17 million per year going forward.  As a result of these efforts, we have incurred $7.5 million of pre-tax charges, including $2.6 million in the third quarter, for severance and other associated expensesWhile we don’t anticipate significant additional charges, we continue to look for opportunities to generate efficiencies and reduce our operating cost structure.

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The following table shows key industry indicators for the three and nine months ended September 30, 2014 and 2013:

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Nine Months Ended

 

September 30,

 

September 30,

 

September 30,

 

September 30,

 

2014

 

2013

 

2014

 

2013

Average Rig Count (1):

 

 

 

 

 

 

 

United States

1,903 

 

1,770 

 

1,845 

 

1,763 

Canada

386 

 

350 

 

370 

 

344 

International

1,348 

 

1,285 

 

1,344 

 

1,288 

Total

3,637 

 

3,405 

 

3,559 

 

3,395 

 

 

 

 

 

 

 

 

Average Commodity Prices (2):

 

 

 

 

 

 

 

WTI crude oil (per barrel)

$           97.87

 

$         105.83

 

$       99.97

 

$           98.15

Brent crude oil (per barrel)

$         101.90

 

$         110.23

 

$     106.56

 

$         108.33

Natural gas ($/Mcf)

$             3.96

 

$             3.55

 

$         4.57

 

$             3.69

 

 

 

 

 

 

 

 

Wells Completed (1)

9,566 

 

9,075 

 

27,988 

 

26,620 

Average Monthly U.S. Well Permits (3)

6,479 

 

5,854 

 

6,493 

 

5,906 

3:2:1 Crack Spread (4)

$           18.29

 

$           17.57

 

$       20.66

 

$           25.22

_______________________

 

 

 

 

 

 

 

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

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

 

 

 

 

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

 

 

 

 

 

 

 

(4) Source- Bloomberg

 

 

 

 

 

 

 

 

Results of Operations

Three Months Ended September 30, 2014 Compared to the Three Months Ended September 30, 2013

The breakdown of our sales by sector for the three months ended September 30, 2014 and 2013 was as follows (in millions):

 

 

 

 

 

 

 

 

 

Three Months Ended

 

September 30, 2014

 

September 30, 2013

Upstream

$            753.1

 

47% 

 

$            588.1

 

45% 

Midstream

474.3 

 

29% 

 

377.3 

 

29% 

Downstream and other industrials

390.7 

 

24% 

 

348.3 

 

26% 

 

$         1,618.1

 

100% 

 

$         1,313.7

 

100% 

 

 

 

 

 

 

 

 

 

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For the three months ended September 30, 2014 and 2013, the following table summarizes our results of operations (in millions):

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

 

 

September 30,

 

September 30,

 

 

 

 

 

2014

 

2013

 

$ Change

 

% Change

Sales:

 

 

 

 

 

 

 

U.S.

$         1,205.2

 

$         1,015.0

 

$       190.2

 

18.7% 

Canada

161.2 

 

162.1 

 

(0.9)

 

(0.6%)

International

251.7 

 

136.6 

 

115.1 

 

84.3% 

Consolidated

$         1,618.1

 

$         1,313.7

 

$       304.4

 

23.2% 

 

 

 

 

 

 

 

 

Operating income:

 

 

 

 

 

 

 

U.S.

$              76.2

 

$              72.9

 

$           3.3

 

4.5% 

Canada

7.7 

 

3.2 

 

4.5 

 

140.6% 

International

9.3 

 

1.3 

 

8.0 

 

615.4% 

Consolidated

93.2 

 

77.4 

 

15.8 

 

20.4% 

 

 

 

 

 

 

 

 

Interest expense

(14.9)

 

(15.5)

 

0.6 

 

(3.9%)

Other  income (expense)

(2.1)

 

(1.9)

 

(0.2)

 

10.5% 

Income tax expense

(26.1)

 

(21.2)

 

(4.9)

 

23.1% 

Net income

$              50.1

 

$              38.8

 

$         11.3

 

29.1% 

 

 

 

 

 

 

 

 

Adjusted Gross Profit (1)

$            307.7

 

$            251.3

 

$         56.4

 

22.4% 

Adjusted EBITDA (1)

$            132.3

 

$              96.4

 

$         35.9

 

37.2% 

 

(1)

Adjusted Gross Profit and Adjusted EBITDA are non-GAAP financial measures. For a reconciliation of these measures to an equivalent GAAP measure, see pages 18-20 herein.

Sales.    Sales include the revenue recognized from the sale of the products we distribute, the services we provide to customers and freight billings to customers, less cash discounts taken by customers in return for their early payment of our invoices to them. Our sales were $1,618.1 million for the three months ended September 30, 2014 as compared to $1,313.7 million for the three months ended September 30, 2013.  

U.S. Segment—Our U.S. sales increased to $1,205.2 million for the three months ended September 30, 2014 from $1,015.0 million for the three months ended September 30, 2013. This $190.2 million, or 18.7%,  increase reflected growth across substantially all major product lines responsive to growth in customer capital spending, increases in rig count and well completions and market share gains

Canadian Segment—Our Canadian sales decreased to $161.2 million for the three months ended September 30, 2014 from $162.1 million for the three months ended September 30, 2013.  The divestiture of our Canadian PCP business negatively impacted sales by $20.4 million, and the negative impact on sales of the decline of the Canadian dollar relative to the U.S. dollar was $7.6 million.  After adjusting for these items, the Canadian business was up 20.2%, which was also due to growth in customer spending.

International Segment—Our International sales increased to $251.7 million for the three months ended September 30, 2014 from $136.6 million for the same period in 2013.   The increase of $115.1 million was primarily the result of the acquisitions of Stream, Flangefitt Stainless Ltd. (“Flangefitt”), MSD and Hypteck which added $92.3 million in revenue for the third quarter of 2014.  Organically, international sales increased $22.8 million driven by growth in the European business. 

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Gross Profit.    Our gross profit was $278.0 million  (17.2% of sales) for the three months ended September 30, 2014 as compared to $238.3 million  (18.1% of sales) for the three months ended September 30, 2013. The 90 basis point decline in gross profit percentage largely reflected the impact of our last-in, first-out (“LIFO”) inventory costing methodology.  LIFO resulted in an increase in cost of sales of $3.9 million for the three months ended September 30, 2014 compared to a reduction in cost of sales of $5.7 million during the same period of 2013.        

 

Certain purchasing costs and warehousing activities (including receiving, inspection and stocking costs), as well as general warehousing expenses, are included in selling, general and administrative expenses and not in cost of sales.  As such, our gross profit may not be comparable to others that may include these expenses as a component of cost of sales.  Purchasing and warehousing costs approximated $11.4 million and $9.2 million for the three months ended September 30, 2014 and 2013, respectively.

Adjusted Gross Profit.    Adjusted Gross Profit increased to $307.7  (19.0% of sales) for the three months ended September 30, 2014 from $251.3 million  (19.1% of sales) for the three months ended September 30, 2013,  an increase of $56.4 million. Adjusted Gross Profit is a non-GAAP financial measure. We define Adjusted Gross Profit as sales, less cost of sales, plus depreciation and amortization, plus amortization of intangibles, and plus or minus the impact of our LIFO inventory costing methodology. We present Adjusted Gross Profit because we believe it is a useful indicator of our operating performance without regard to items, such as amortization of intangibles, that can vary substantially from company to company depending upon the nature and extent of acquisitions. Similarly, the impact of the LIFO inventory costing method can cause results to vary substantially from company to company depending upon whether they elect to utilize LIFO and depending upon which method they may elect. We use Adjusted Gross Profit as a key performance indicator in managing our business. We believe that gross profit is the financial measure calculated and presented in accordance with U.S. generally accepted accounting principles that is most directly comparable to Adjusted Gross Profit.

The following table reconciles Adjusted Gross Profit with gross profit, as derived from our financial statements (in millions):

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

September 30,

 

Percentage

 

September 30,

 

Percentage

 

2014

 

of Revenue

 

2013

 

of Revenue

Gross profit, as reported

$            278.0

 

17.2% 

 

$            238.3

 

18.1% 

Depreciation and amortization

6.5 

 

0.4% 

 

5.6 

 

0.4% 

Amortization of intangibles

19.3 

 

1.2% 

 

13.1 

 

1.0% 

Increase (decrease) in LIFO reserve

3.9 

 

0.2% 

 

(5.7)

 

(0.4%)

Adjusted Gross Profit

$            307.7

 

19.0% 

 

$            251.3

 

19.1% 

 

Selling, General and Administrative (“SG&A”) Expenses.    Costs such as salaries, wages, employee benefits, rent, utilities, communications, insurance, fuel and taxes (other than state and federal income taxes) that are necessary to operate our branch and corporate operations are included in SG&A.  Also contained in this category are certain items that are nonoperational in nature, including certain costs of acquiring and integrating other businesses.  Our SG&A expenses were $184.8 million for the three months ended September 30, 2014 as compared to $160.9 million for the three months ended September 30, 2013SG&A increased $20.8 million as a result of our acquired businesses.  The remainder of the increase was driven by  $2.6 million of severance and related charges associated with our cost reduction initiatives and $5.7 million of charges related to the cancellation of certain executive employment agreements, $2.5 million of which represented the accelerated recognition of equity-based compensation expense associated with previously issued awards.

 

Operating Income.    Operating income was $93.2 million for the three months ended September 30, 2014, as compared to $77.4 million for the three months ended September 30, 2013, an increase of $15.8 million.

U.S. SegmentOperating income for our U.S. segment increased to $76.2 million for the three months ended September 30, 2014 from $72.9 million for the three months ended September 30, 2013The increase in operating income was the result of an increase in our sales offset by higher SG&A expenses, including $0.9 million of severance and related charges and $5.7 million of charges related to the cancellation of certain executive employment agreements

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Canadian SegmentOperating income for our Canadian segment increased to $7.7 million for the three months ended September 30, 2014 from $3.2 million for the three months ended September 30, 2013.  The increase of $4.5 million reflected the improved profitability resulting from the divestiture of our PCP business offset by $0.3 million of severance and related charges

International SegmentOperating income for our International segment increased to $9.3 million for the three months ended September 30, 2014 from $1.3 million for the three months ended September 30, 2013The increase of $8.0 million was the result of the increase in sales that we experienced offset by $1.4 million of severance and related charges

Interest Expense.    Our interest expense was $14.9 million for the three months ended September 30, 2014 as compared to $15.5 million for the three months ended September 30, 2013.  This represented a modest decrease of $0.6 million resulting from lower interest rates offset by higher average debt levels.

Other expense, net. Our other expense was $2.1 million for the three months ended September 30, 2014 compared to $1.9 million for the three months ended September 30, 2013.  The current quarter included foreign currency losses of  $4.9 million and a $2.6 million gain on the change in the fair value of derivatives as compared to  a foreign currency gain of $1.4 million and $1.8 million loss on the change of fair value of derivatives in the third quarter of 2013.

Income Tax Expense.    Our income tax expense was $26.1 million for the three months ended September 30, 2014 as compared to $21.2 million for the three months ended September 30, 2013.  Our effective tax rates were 34.2% and  35.4% for the three months ended September 30, 2014 and 2013, respectively. Our rates generally differ from the U.S. federal statutory rate of 35% as a result of state income taxes and differing foreign income tax rates.      

Net Income.    Our net income was $50.1 million for the three months ended September 30, 2014 as compared to $38.8 million for the three months ended September 30, 2013,  an increase of $11.3 million.

Adjusted EBITDA.    We define Adjusted EBITDA as net income plus interest, income taxes, depreciation and amortization, amortization of intangibles and certain other expenses (such as gains/losses on the early extinguishment of debt, changes in the fair value of derivative instruments and goodwill impairment) and plus or minus the impact of our LIFO inventory costing methodology. Adjusted EBITDA, a non-GAAP financial measure, was $132.3 million (8.2% of sales) for the three months ended September 30, 2014, as compared to $96.4 million (7.3% of sales) for the three months ended September 30, 2013.  

We believe Adjusted EBITDA provides investors a helpful measure for comparing our operating performance with the performance of other companies that have different financing and capital structures or tax rates. We believe that net income is the financial measure calculated and presented in accordance with U.S. generally accepted accounting principles that is most directly comparable to Adjusted EBITDA.

 

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

 

 

 

 

 

 

Three Months Ended

 

September 30,

 

September 30,

 

2014

 

2013

Net income

$               50.1

 

$               38.8

Income tax expense

26.1 

 

21.2 

Interest expense

14.9 

 

15.5 

Depreciation and amortization

6.5 

 

5.6 

Amortization of intangibles

19.3 

 

13.1 

Increase (decrease) in LIFO reserve

3.9 

 

(5.7)

Change in fair value of derivative instruments

(2.6)

 

1.8 

Equity-based compensation expense

3.4 

 

4.0 

Severance and related charges

2.6 

 

0.8 

Cancellation of executive employment agreements (cash portion)

3.2 

 

 -

Insurance charge

 -

 

2.0 

Foreign currency (gains) losses

4.9 

 

(1.4)

Other expense

 -

 

0.7 

Adjusted EBITDA

$             132.3

 

$               96.4

 

 

 

 

 

Nine Months Ended September 30, 2014 Compared to the Nine Months Ended September 30, 2013 

The breakdown of our sales by sector for the nine months ended September 30, 2014 and 2013 was as follows (in millions):

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended

 

September 30, 2014

 

September 30, 2013

Upstream

$         2,088.0

 

47% 

 

$         1,708.9

 

44% 

Midstream

1,201.7 

 

27% 

 

1,098.8 

 

28% 

Downstream and other industrials

1,131.4 

 

26% 

 

1,078.9 

 

28% 

 

$         4,421.1

 

100% 

 

$         3,886.6

 

100% 

 

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For the nine months ended September 30, 2014 and 2013, the following table summarizes our results of operations (in millions):

 

 

 

 

 

 

 

 

 

 

Nine Months Ended

 

 

 

 

 

September 30,

 

September 30,

 

 

 

 

 

2014

 

2013

 

$ Change

 

% Change

Sales:

 

 

 

 

 

 

 

U.S.

$         3,268.7

 

$         2,955.8

 

$       312.9

 

10.6% 

Canada

477.5 

 

520.1 

 

(42.6)

 

(8.2%)

International

674.9 

 

410.7 

 

264.2 

 

64.3% 

Consolidated

$         4,421.1

 

$         3,886.6

 

$       534.5

 

13.8% 

 

 

 

 

 

 

 

 

Operating income:

 

 

 

 

 

 

 

U.S.

$            194.8

 

$            229.8

 

$        (35.0)

 

(15.2%)

Canada

20.5 

 

14.6 

 

5.9 

 

40.4% 

International

12.8 

 

8.8 

 

4.0 

 

45.5% 

Consolidated

228.1 

 

253.2 

 

(25.1)

 

(9.9%)

 

 

 

 

 

 

 

 

Interest expense

(45.4)

 

(46.0)

 

0.6 

 

(1.3%)

Other expense

(9.6)

 

(12.9)

 

3.3 

 

(25.6%)

Income tax expense

(60.1)

 

(65.5)

 

5.4 

 

(8.2%)

Net income

$            113.0

 

$            128.8

 

$        (15.8)

 

(12.3%)

 

 

 

 

 

 

 

 

Adjusted Gross Profit (1)

$            845.8

 

$            763.5

 

$         82.3

 

10.8% 

Adjusted EBITDA (1)

$            322.5

 

$            299.2

 

$         23.3

 

7.8% 

(1)

Adjusted Gross Profit and Adjusted EBITDA are non-GAAP financial measures. For a reconciliation of these measures to an equivalent GAAP measure, see pages 22-24 herein.

Sales.    Our sales increased 13.8% to $4,421.1 million for the nine months ended September 30, 2014 as compared to $3,886.6 million for the nine months ended September 30, 2013.  

U.S. Segment—Our U.S. sales increased to $3,268.7 million for the nine months ended September 30, 2014 from $2,955.8 million for the nine months ended September 30, 2013. This $312.9 million, or 10.6%,  increase reflected growth across substantially all major product lines responsive to growth in customer capital spending,  increases in rig count and well completions and market share gains.

Canadian Segment—Our Canadian sales decreased to $477.5 million for the nine months ended September 30, 2014 from $520.1 million for the nine months ended September 30, 2013. The divestiture of our PCP business negatively impacted sales by $57.9 million, and the negative impact on sales of the decline of the Canadian dollar relative to the U.S. dollar was $32.9  million.  After adjusting for these items, Canadian sales were up 11%, which was also due to an increase in customer spending.

International Segment—Our International sales increased to $674.9 million for the nine months ended September 30, 2014 from $410.7 million for the same period in 2013. The increase was primarily the result of the acquisitions of Stream, Flangefitt, MSD and Hypteck which added $235.5 million in revenue for the nine months of 2014. Organically, international sales increased $28.8 million driven by growth in the European business.   

Gross Profit.    Our gross profit was $769.6 million (17.4% of sales) for the nine months ended September 30, 2014 as compared to $728.8 million (18.8% of sales) for the nine months ended September 30, 2013. The 140 basis point decline in gross profit percentage reflected the impact of deflation on our line pipe product group as well as our LIFO

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inventory costing methodology.  LIFO resulted in an increase in cost of sales of $5.9 million for the nine months ended September 30, 2014 compared to a reduction in cost of sales of $21.2 million during the same period of 2013. 

 

Certain purchasing costs and warehousing activities (including receiving, inspection and stocking costs), as well as general warehousing expenses, are included in selling, general and administrative expenses and not in cost of sales.  As such, our gross profit may not be comparable to others that may include these expenses as a component of cost of sales.  Purchasing and warehousing costs approximated $34.7 million and $27.9 million for the nine months ended September 30, 2014 and 2013, respectively.

Adjusted Gross Profit.    Adjusted Gross Profit increased to $845.8 million (19.1% of sales) for the nine months ended September 30, 2014 from $763.5 million (19.7% of sales) for the nine months ended September 30, 2013, an increase of $82.3 million. Adjusted Gross Profit is a non-GAAP financial measure. We define Adjusted Gross Profit as sales, less cost of sales, plus depreciation and amortization, plus amortization of intangibles, and plus or minus the impact of our LIFO inventory costing methodology. We present Adjusted Gross Profit because we believe it is a useful indicator of our operating performance without regard to items, such as amortization of intangibles, that can vary substantially from company to company depending upon the nature and extent of acquisitions. Similarly, the impact of the LIFO inventory costing method can cause results to vary substantially from company to company depending upon whether they elect to utilize LIFO and depending upon which method they may elect. We use Adjusted Gross Profit as a key performance indicator in managing our business. We believe that gross profit is the financial measure calculated and presented in accordance with U.S. generally accepted accounting principles that is most directly comparable to Adjusted Gross Profit.

The following table reconciles Adjusted Gross Profit with gross profit, as derived from our financial statements (in millions):

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended

 

September 30,

 

Percentage

 

September 30,

 

Percentage

 

2014

 

of Revenue

 

2013

 

of Revenue

Gross profit, as reported

$            769.6

 

17.4% 

 

$            728.8

 

18.8% 

Depreciation and amortization

17.1 

 

0.4% 

 

16.8 

 

0.4% 

Amortization of intangibles

53.2 

 

1.2% 

 

39.1 

 

1.0% 

Increase (decrease) in LIFO reserve

5.9 

 

0.1% 

 

(21.2)

 

(0.5%)

Adjusted Gross Profit

$            845.8

 

19.1% 

 

$            763.5

 

19.6% 

 

 

 

 

 

 

 

 

 

Selling, General and Administrative (“SG&A”) Expenses.   Our SG&A expenses were $541.5 million for the nine months ended September 30, 2014 as compared to $475.6 million for the nine months ended September 30, 2013.  Approximately $57.2 million of this $65.9 million increase was as a result of our acquired businesses.  The remainder of the increase was driven by higher personnel costs resulting from increased business activity levels and $7.5 million of severance and related charges associated with our cost reduction initiatives and $5.7 million of charges related to the cancellation of certain executive employment agreements, $2.5 million of which represented the accelerated recognition of equity-based compensation expense associated with previously issued awards.      

 

Operating Income.    Operating income was $228.1 million for the nine months ended September 30, 2014, as compared to $253.2 million for the nine months ended September 30, 2013, a decrease of $25.1 million.

U.S. SegmentOperating income for our U.S. segment decreased to $194.8 million for the nine months ended September 30, 2014 from $229.8 million for the nine months ended September 30, 2013.  This decline in operating income was a result of the decline in gross profit, including the impact of our LIFO inventory costing methodology, as well as the increase in SG&A expenses, including $4.1 million of severance and related charges and $5.7 million of charges related to the cancellation of certain executive employment agreements.

Canadian SegmentOperating income for our Canadian segment increased to $20.5 million for the nine months ended September 30, 2014 from $14.6 million for the nine months ended September 30, 2013.  The increase of $5.9 million reflected the improved profitability resulting from the divestiture of our PCP business offset by $0.6 million of severance and related charges

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International SegmentOperating income for our International segment increased to $12.8 million for the nine months ended September 30, 2014 from $8.8 million for the nine months ended September 30, 2013.  The increase of $4.0 million was the result of the increase in sales that we experienced offset by $2.8 million of severance and related charges.   

Interest Expense.    Our interest expense was $45.4 million for the nine months ended September 30, 2014 as compared to $46.0 million for the nine months ended September 30, 2013.

Other expense, net. Our other expense decreased to $9.6 million for the nine months ended September 30, 2014 from $12.9 million for the nine months ended September 30, 2013.  The expenses for the first nine months of 2014 included a $6.2 million charge related to the divestiture of the Canadian PCP business, $1.7 million in expense related to the change in the fair value of derivative instruments, and  $1.8 million of foreign currency losses.  The expenses for the first nine months of 2013 included $12.0 million in losses on foreign currency translations offset by $0.6 million in income related to the change in the fair value of derivative instruments.

Income Tax Expense.    Our income tax expense was $60.1 million for the nine months ended September 30, 2014 as compared to $65.5 million for the nine months ended September 30, 2013.  Our effective tax rates were 34.7% and 33.7% for the nine months ended September 30, 2014 and 2013, respectively.  Our rates generally differ from the U.S. federal statutory rate of 35% as a result of state income taxes and differing foreign income tax rates.    

Net Income.    Our net income was $113.0 million for the nine months ended September 30, 2014 as compared to $128.8 million for the nine months ended September 30, 2013, a decrease of $1