UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
__________________________________________
FORM
(Mark One)
| | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
| FOR THE QUARTERLY PERIOD ENDED | ||
| 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:
MRC GLOBAL INC.
(Exact name of registrant as specified in its charter)
| | |
| (State or Other Jurisdiction of | (I.R.S. Employer Identification No.) |
| Fulbright Tower | |
| (Address of Principal Executive Offices) | (Zip Code) |
(
(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 |
| | | |
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.
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).
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):
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
There were
INDEX TO QUARTERLY REPORT ON FORM 10-Q
| Page |
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| PART I – FINANCIAL INFORMATION |
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| ITEM 1. |
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| Condensed Consolidated Balance Sheets – JUNE 30, 2020 AND DECEMBER 31, 2019 |
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| Condensed CONSOLIDATED STATEMENTS OF cash flows – SIX MONTHS ENDEd JUNE 30, 2020 AND JUNE 30, 2019 |
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| Notes to the Condensed Consolidated Financial Statements – JUNE 30, 2020 |
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| ITEM 2. |
management’s discussion and analysis of financial condition and results of operations |
16 |
| ITEM 3. |
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| ITEM 4. |
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| PART II – OTHER INFORMATION |
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| ITEM 1. |
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| ITEM 1a. |
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| ITEM 2. |
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| ITEM 3. |
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| ITEM 4. |
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| ITEM 5. |
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| ITEM 6. |
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CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
MRC GLOBAL INC.
(in millions, except per share amounts)
| June 30, | December 31, | |||||||
| 2020 | 2019 | |||||||
| Assets | ||||||||
| Current assets: | ||||||||
| Cash | $ | $ | ||||||
| Accounts receivable, net | ||||||||
| Inventories, net | ||||||||
| Other current assets | ||||||||
| Total current assets | ||||||||
| Long-term assets: | ||||||||
| Operating lease assets | ||||||||
| Property, plant and equipment, net | ||||||||
| Other assets | ||||||||
| Intangible assets: | ||||||||
| Goodwill, net | ||||||||
| Other intangible assets, net | ||||||||
| $ | $ | |||||||
| Liabilities and stockholders' equity | ||||||||
| Current liabilities: | ||||||||
| Trade accounts payable | $ | $ | ||||||
| Accrued expenses and other current liabilities | ||||||||
| Operating lease liabilities | ||||||||
| Current portion of long-term debt | ||||||||
| Total current liabilities | ||||||||
| Long-term liabilities: | ||||||||
| Long-term debt, net | ||||||||
| Operating lease liabilities | ||||||||
| Deferred income taxes | ||||||||
| Other liabilities | ||||||||
| Commitments and contingencies | ||||||||
| % Series A Convertible Perpetual Preferred Stock, $ par value; authorized shares; shares issued and outstanding | ||||||||
| Stockholders' equity: | ||||||||
| Common stock, $ par value per share: million shares authorized, and issued, respectively | ||||||||
| Additional paid-in capital | ||||||||
| Retained deficit | ( | ) | ( | ) | ||||
| Less: Treasury stock at cost: shares | ( | ) | ( | ) | ||||
| Accumulated other comprehensive loss | ( | ) | ( | ) | ||||
| $ | $ | |||||||
| 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 |
Six Months Ended |
|||||||||||||||
| June 30, |
June 30, |
June 30, |
June 30, |
|||||||||||||
| 2020 |
2019 |
2020 |
2019 |
|||||||||||||
| Sales |
$ | $ | $ | $ | ||||||||||||
| Cost of sales |
||||||||||||||||
| Gross profit |
||||||||||||||||
| Selling, general and administrative expenses |
||||||||||||||||
| Goodwill and intangible asset impairment | ||||||||||||||||
| Operating (loss) income |
( |
) | ( |
) | ||||||||||||
| Other (expense) income: |
||||||||||||||||
| Interest expense |
( |
) | ( |
) | ( |
) | ( |
) | ||||||||
| Other, net |
( |
) | ( |
) | ||||||||||||
| (Loss) income before income taxes |
( |
) | ( |
) | ||||||||||||
| Income tax (benefit) expense |
( |
) | ( |
) | ||||||||||||
| Net (loss) income |
( |
) | ( |
) | ||||||||||||
| Series A preferred stock dividends |
||||||||||||||||
| Net (loss) income attributable to common stockholders |
$ | ( |
) | $ | $ | ( |
) | $ | ||||||||
| Basic (loss) income per common share |
$ | ( |
) | $ | $ | ( |
) | $ | ||||||||
| Diluted (loss) income per common share |
$ | ( |
) | $ | $ | ( |
) | $ | ||||||||
| Weighted-average common shares, basic |
||||||||||||||||
| Weighted-average common shares, diluted |
||||||||||||||||
See notes to condensed consolidated financial statements.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
MRC GLOBAL INC.
(in millions)
| Three Months Ended |
Six Months Ended |
|||||||||||||||
| June 30, |
June 30, |
June 30, |
June 30, |
|||||||||||||
| 2020 |
2019 |
2020 |
2019 |
|||||||||||||
| Net (loss) income |
$ | ( |
) | $ | $ | ( |
) | $ | ||||||||
| Other comprehensive income (loss) |
||||||||||||||||
| Foreign currency translation adjustments |
( |
) | ||||||||||||||
| Hedge accounting adjustments, net of tax |
( |
) | ( |
) | ( |
) | ||||||||||
| Total other comprehensive income (loss), net of tax |
( |
) | ( |
) | ( |
) | ||||||||||
| Comprehensive (loss) income |
$ | ( |
) | $ | $ | ( |
) | $ | ||||||||
See notes to condensed consolidated financial statements.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (UNAUDITED)
MRC GLOBAL INC.
(in millions)
| Six Months Ended June 30, 2020 | ||||||||||||||||||||||||||||||||
| Accumulated | ||||||||||||||||||||||||||||||||
| Additional | Other | Total | ||||||||||||||||||||||||||||||
| Common Stock | Paid-in | Retained | Treasury Stock | Comprehensive | Stockholders' | |||||||||||||||||||||||||||
| Shares | Amount | Capital | (Deficit) | Shares | Amount | (Loss) | Equity | |||||||||||||||||||||||||
| Balance at December 31, 2019 | $ | $ | $ | ( | ) | ( | ) | $ | ( | ) | $ | ( | ) | $ | ||||||||||||||||||
| Net income | - | - | ||||||||||||||||||||||||||||||
| Foreign currency translation | - | - | ( | ) | ( | ) | ||||||||||||||||||||||||||
| Hedge accounting adjustments | - | - | ( | ) | ( | ) | ||||||||||||||||||||||||||
| Shares withheld for taxes | - | ( | ) | - | ( | ) | ||||||||||||||||||||||||||
| Equity-based compensation expense | - | - | ||||||||||||||||||||||||||||||
| Dividends declared on preferred stock | - | ( | ) | - | ( | ) | ||||||||||||||||||||||||||
| Balance at March 31, 2020 | $ | $ | $ | ( | ) | ( | ) | $ | ( | ) | $ | ( | ) | $ | ||||||||||||||||||
| Net loss | - | ( | ) | - | ( | ) | ||||||||||||||||||||||||||
| Foreign currency translation | - | - | ||||||||||||||||||||||||||||||
| Equity-based compensation expense | - | - | ||||||||||||||||||||||||||||||
| Dividends declared on preferred stock | - | ( | ) | - | ( | ) | ||||||||||||||||||||||||||
| Balance at June 30, 2020 | $ | $ | $ | ( | ) | ( | ) | $ | ( | ) | $ | ( | ) | $ | ||||||||||||||||||
| Six Months Ended June 30, 2019 | ||||||||||||||||||||||||||||||||
| Accumulated | ||||||||||||||||||||||||||||||||
| Additional | Other | Total | ||||||||||||||||||||||||||||||
| Common Stock | Paid-in | Retained | Treasury Stock | Comprehensive | Stockholders' | |||||||||||||||||||||||||||
| Shares | Amount | Capital | (Deficit) | Shares | Amount | (Loss) | Equity | |||||||||||||||||||||||||
| Balance at December 31, 2018 | $ | $ | $ | ( | ) | ( | ) | $ | ( | ) | $ | ( | ) | $ | ||||||||||||||||||
| Net income | - | - | ||||||||||||||||||||||||||||||
| Foreign currency translation | - | - | ||||||||||||||||||||||||||||||
| Hedge accounting adjustments | - | - | ( | ) | ( | ) | ||||||||||||||||||||||||||
| Shares withheld for taxes | - | ( | ) | - | ( | ) | ||||||||||||||||||||||||||
| Equity-based compensation expense | - | - | ||||||||||||||||||||||||||||||
| Dividends declared on preferred stock | - | ( | ) | - | ( | ) | ||||||||||||||||||||||||||
| Purchase of common stock | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||
| Balance at March 31, 2019 | $ | $ | $ | ( | ) | ( | ) | $ | ( | ) | $ | ( | ) | $ | ||||||||||||||||||
| Net income | - | - | ||||||||||||||||||||||||||||||
| Foreign currency translation | - | - | ||||||||||||||||||||||||||||||
| Hedge accounting adjustments | - | - | ( | ) | ( | ) | ||||||||||||||||||||||||||
| Equity-based compensation expense | 1 | - | ||||||||||||||||||||||||||||||
| Dividends declared on preferred stock | - | ( | ) | - | ( | ) | ||||||||||||||||||||||||||
| Purchase of common stock | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||
| Balance at June 30, 2019 | $ | $ | $ | ( | ) | ( | ) | $ | ( | ) | $ | ( | ) | $ | ||||||||||||||||||
See notes to condensed consolidated financial statements.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
MRC GLOBAL INC.
(in millions)
| Six Months Ended |
||||||||
| June 30, |
June 30, |
|||||||
| 2020 |
2019 |
|||||||
| Operating activities |
||||||||
| Net (loss) income |
$ | ( |
) | $ | ||||
| Adjustments to reconcile net (loss) income to net cash provided by operations: |
||||||||
| Depreciation and amortization |
||||||||
| Amortization of intangibles |
||||||||
| Equity-based compensation expense |
||||||||
| Deferred income tax benefit |
( |
) | ( |
) | ||||
| Decrease in LIFO reserve |
( |
) | ( |
) | ||||
| Goodwill and intangible asset impairment | ||||||||
| Lease impairment and abandonment | ||||||||
| Inventory-related charges | ||||||||
| Provision for uncollectible accounts |
||||||||
| Other |
||||||||
| Changes in operating assets and liabilities: |
||||||||
| Accounts receivable |
( |
) | ||||||
| Inventories |
||||||||
| Other current assets |
( |
) | ||||||
| Accounts payable |
( |
) | ||||||
| Accrued expenses and other current liabilities |
( |
) | ( |
) | ||||
| Net cash provided by operations |
||||||||
| Investing activities |
||||||||
| Purchases of property, plant and equipment |
( |
) | ( |
) | ||||
| Other investing activities | ||||||||
| Net cash used in investing activities |
( |
) | ( |
) | ||||
| Financing activities |
||||||||
| Payments on revolving credit facilities |
( |
) | ( |
) | ||||
| Proceeds from revolving credit facilities |
||||||||
| Payments on long-term obligations |
( |
) | ( |
) | ||||
| Purchase of common stock |
( |
) | ||||||
| Dividends paid on preferred stock |
( |
) | ( |
) | ||||
| Repurchases of shares to satisfy tax withholdings |
( |
) | ( |
) | ||||
| Other |
||||||||
| Net cash used in financing activities |
( |
) | ( |
) | ||||
| Decrease in cash |
( |
) | ( |
) | ||||
| Effect of foreign exchange rate on cash |
( |
) | ||||||
| Cash -- beginning of period |
||||||||
| Cash -- end of period |
$ | $ | ||||||
| Supplemental disclosures of cash flow information: |
||||||||
| Cash paid for interest |
$ | $ | ||||||
| Cash paid for income taxes |
$ | $ | ||||||
| See notes to condensed consolidated financial statements. |
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
MRC GLOBAL INC.
NOTE 1 – BACKGROUND AND BASIS OF PRESENTATION
Business Operations: MRC Global Inc. is a holding company headquartered in Houston, Texas. Our wholly owned subsidiaries are global distributors of pipe, valves, fittings (“PVF”) and related infrastructure products and services across each of the upstream production (exploration, production and extraction of underground oil and gas), midstream pipeline (gathering and transmission of oil and gas), gas utilities (gas utilities and the storage and distribution of oil and gas) and downstream and industrial (crude oil refining and petrochemical and chemical 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 Caspian. We obtain products from a broad range of suppliers.
Basis of Presentation: We have prepared our unaudited condensed consolidated financial statements in accordance with Rule 10-01 of Regulation S-X for interim financial statements. These statements do not include all information and footnotes that generally accepted accounting principles require for complete annual financial statements. However, the information in these statements reflects all normal recurring adjustments which are, in our opinion, necessary for a fair presentation of the results for the interim periods. The results of operations for the three and six months ended June 30, 2020 are not necessarily indicative of the results that will be realized for the fiscal year ending December 31, 2020. We have derived our condensed consolidated balance sheet as of December 31, 2019 from the audited consolidated financial statements for the year ended December 31, 2019. You should read these condensed consolidated financial statements in conjunction with the audited consolidated financial statements and notes thereto for the year ended December 31, 2019.
The consolidated financial statements include the accounts of MRC Global Inc. and its wholly owned and majority owned subsidiaries (collectively referred to as the “Company” or by such terms as “we,” “our” or “us”). All material intercompany balances and transactions have been eliminated in consolidation.
Recent Issued Accounting Pronouncements: In March 2020, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2020-04, Reference Rate Reform (Topic 848) ("ASU 2020-04"), which provides optional expedients and exceptions for applying U.S. GAAP to contracts, hedging relationships, and other transactions affected by the discontinuation of the London Interbank Offered Rate ("LIBOR") or by another reference rate expected to be discontinued. The amendments are effective for all entities as of March 12, 2020 through December 31, 2022. We are currently evaluating the impacts of the the provisions of ASU 2020-04 on our consolidated financial statements.
In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes, an update intended to simplify various aspects related to accounting for income taxes. This guidance removes certain exceptions to the general principles in Topic 740 and clarifies and amends existing guidance to improve consistent application. This accounting standards update will be effective for annual and interim financial statement periods beginning after December 15, 2020, with early adoption permitted. We are currently evaluating the impact of this accounting standards update, but do not expect the adoption to materially impact our consolidated financial statements.
Adoption of New Accounting Standards: In June 2016, the FASB issued ASU 2016-13, Measurement of Credit Losses on Financial Instruments, which requires that an entity measure impairment of certain financial instruments, including trade receivables, based on expected losses rather than incurred losses. We adopted ASU 2016-13 on January 1, 2020. The adoption of this new standard resulted in the recognition of $
NOTE 2 – REVENUE RECOGNITION
Revenue is recognized when control of promised goods or services is transferred to our customers in an amount that reflects the consideration to which we expect to be entitled in exchange for those goods or services. Substantially all of our revenue is recognized 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. Returns are estimated and recorded as a reduction of revenue. Amounts received in advance of shipment are deferred and recognized when the performance obligations are satisfied. Sales taxes collected from customers and remitted to governmental authorities are accounted for on a net basis and, therefore, are excluded from sales in the accompanying consolidated statements of operations. Cost of sales includes the cost of inventory sold and related items, such as vendor rebates, inventory allowances and reserves and shipping and handling costs associated with inbound and outbound freight, as well as depreciation and amortization and amortization of intangible assets. In some cases, particularly with third-party pipe shipments, shipping and handling costs are considered separate performance obligations, and as such, the revenue and cost of sales are recorded when the performance obligation is fulfilled.
Our contracts with customers ordinarily involve performance obligations that are one year or less. Therefore, we have applied the optional exemption that permits the omission of information about our unfulfilled performance obligations as of the balance sheet dates.
Contract Balances: Variations in the timing of revenue recognition, invoicing and receipt of payment result in categories of assets and liabilities that include invoiced accounts receivable, uninvoiced accounts receivable, contract assets and deferred revenue (contract liabilities) on the consolidated balance sheets.
Generally, revenue recognition and invoicing occur simultaneously as we transfer control of promised goods or services to our customers. We consider contract assets to be accounts receivable when we have an unconditional right to consideration and only the passage of time is required before payment is due. In certain cases, particularly those involving customer-specific documentation requirements, invoicing is delayed until we are able to meet the documentation requirements. In these cases, we recognize a contract asset separate from accounts receivable until those requirements are met, and we are able to invoice the customer. Our contract asset balance associated with these requirements as of June 30, 2020 and December 31, 2019 was $
We record contract liabilities, or deferred revenue, when cash payments are received from customers in advance of our performance, including amounts which are refundable. The deferred revenue balance at June 30, 2020 and December 31, 2019 was $
Disaggregated Revenue: Our disaggregated revenue represents our business of selling PVF to the energy sector across each of the upstream production (exploration, production and extraction of underground oil and gas), midstream pipeline (gathering and transmission of oil and gas), gas utilities and downstream and industrial (crude oil refining and petrochemical and chemical processing and general industrials) sectors in each of our reportable segments. Each of our end markets and geographical reportable segments are impacted and influenced by varying factors, including macroeconomic environment, commodity prices, maintenance and capital spending and exploration and production activity. As such, we believe that this information is important in depicting the nature, amount, timing and uncertainty of our contracts with customers.
The following table presents our revenue disaggregated by revenue source (in millions):
| Three Months Ended | ||||||||||||||||
| June 30, | ||||||||||||||||
| U.S. | Canada | International | Total | |||||||||||||
| 2020: | ||||||||||||||||
| Upstream production | $ | $ | $ | $ | ||||||||||||
| Midstream pipeline | ||||||||||||||||
| Gas utilities | ||||||||||||||||
| Downstream & industrial | ||||||||||||||||
| $ | $ | $ | $ | |||||||||||||
| 2019: | ||||||||||||||||
| Upstream production | $ | $ | $ | $ | ||||||||||||
| Midstream pipeline | ||||||||||||||||
| Gas utilities | ||||||||||||||||
| Downstream & industrial | ||||||||||||||||
| $ | $ | $ | $ | |||||||||||||
| Six Months Ended | ||||||||||||||||
| June 30, | ||||||||||||||||
| U.S. | Canada | International | Total | |||||||||||||
| 2020: | ||||||||||||||||
| Upstream production | $ | $ | $ | $ | ||||||||||||
| Midstream pipeline | ||||||||||||||||
| Gas utilities | ||||||||||||||||
| Downstream & industrial | ||||||||||||||||
| $ | $ | $ | $ | |||||||||||||
| 2019: | ||||||||||||||||
| Upstream production | $ | $ | $ | $ | ||||||||||||
| Midstream pipeline | ||||||||||||||||
| Gas utilities | ||||||||||||||||
| Downstream & industrial | ||||||||||||||||
| $ | $ | $ | $ | |||||||||||||
NOTE 3 – INVENTORIES
The composition of our inventory is as follows (in millions):
| June 30, | December 31, | |||||||
| 2020 | 2019 | |||||||
| Finished goods inventory at average cost: | ||||||||
| Valves, automation, measurement and instrumentation | $ | $ | ||||||
| Carbon steel pipe, fittings and flanges | ||||||||
| All other products | ||||||||
| Less: Excess of average cost over LIFO cost (LIFO reserve) | ( | ) | ( | ) | ||||
| Less: Other inventory reserves | ( | ) | ( | ) | ||||
| $ | $ | |||||||
The Company uses the last-in, first-out (“LIFO”) method of valuing U.S. inventories. The use of the LIFO method has the effect of reducing net income during periods of rising inventory costs (inflationary periods) and increasing net income during periods of falling inventory costs (deflationary periods). Valuation of inventory under the LIFO method can be made only at the end of each year based on the inventory levels and costs at that time. Accordingly, interim LIFO calculations are based on management’s estimates of expected year-end inventory levels and costs and are subject to the final year-end LIFO inventory determination. Our inventory quantities are expected to be reduced for the current year, resulting in a liquidation of a LIFO inventory layer that was carried at a lower cost prevailing from a prior year, as compared with current costs in the current year (a “LIFO decrement”). A LIFO decrement results in the erosion of layers created in earlier years, and, therefore, a LIFO layer is not created for years that have decrements. For the three and six months ended June 30, 2020, the effect of this LIFO decrement decreased cost of sales by approximately $
In the second quarter of 2020, we incurred non-cash inventory-related charges totaling $
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 year to
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 $
The maturity of lease liabilities is as follows (in millions):
| Maturity of Operating Lease Liabilities | ||||
| Remainder of 2020 | $ | |||
| 2021 | ||||
| 2022 | ||||
| 2023 | ||||
| 2024 | ||||
| After 2024 | ||||
| Total lease payments | ||||
| Less: Interest | ( | ) | ||
| Present value of lease liabilities | $ |
Amounts maturing after 2024 include expected renewals for leases of regional distribution centers and certain corporate offices through dates up to 2048.
The term and discount rate associated with leases are as follows:
| June 30, | ||||
| Operating Lease Term and Discount Rate | 2020 | |||
| Weighted-average remaining lease term (years) | ||||
| Weighted-average discount rate | % | |||
During the second quarter of 2020, actions were taken to close a number of facilities as part of a broader plan to streamline operations and reduce costs. In connection with these closures, we incurred charges totaling $
NOTE 5 – GOODWILL AND INTANGIBLE ASSET IMPAIRMENT
We apply a fair value-based impairment test to the carrying value of goodwill and indefinite-lived intangible assets on an annual basis (as of October 1) and, if certain events or circumstances indicate that an impairment loss may have been incurred, on an interim basis.
In the first half of 2020, demand for oil and natural gas declined sharply as a result of the coronavirus disease 2019 (“COVID-19”) pandemic. This disruption in demand and the resulting decline in the price of oil has had a dramatic negative impact on our business. We experienced a significant reduction in sales beginning in April 2020 which continued throughout the second quarter. At this time, there remains ongoing uncertainty around the timing and extent of any recovery. We have taken a more pessimistic long-term outlook due to the significant reduction in the demand for oil, the implications of that demand destruction on the price of oil for an extended period of time and actions our customers have taken to curtail costs and reduce spending. As a result of these developments, we concluded that it was more likely than not the fair values of our U.S. and International reporting units were lower than their carrying values. Accordingly, we completed an interim goodwill impairment test as of April 30, 2020. This test resulted in a $
| U.S. | Canada | International | Total | |||||||||||||
| Balance at December 31, 2019 (1) | $ | $ | - | $ | $ | |||||||||||
| Impairment | ( | ) | - | ( | ) | ( | ) | |||||||||
| Foreign currency translation adjustments | - | - | ( | ) | ( | ) | ||||||||||
| Balance at June 30, 2020 | $ | $ | - | $ | - | $ | ||||||||||
| (1) | Net of prior years’ accumulated impairment of $ |
As a result of the same factors that necessitated an interim impairment test for goodwill, we completed an interim impairment test for our U.S. indefinite-lived tradename asset. This test resulted in an impairment charge of $
Our impairment methodology uses discounted cash flow and multiples of cash earnings valuation techniques, acquisition control premium and valuation comparisons to similar businesses to determine the fair value of a reporting unit. Each of these methods involves Level 3 unobservable market inputs and require us to make certain assumptions and estimates including future operating results, the extent and timing of future cash flows, working capital requirements, sales prices, profitability, discount rates, sales growth trends and cost trends. As of June 30, 2020, the discount rates utilized to value the reporting units were in a range from
NOTE 6 – LONG-TERM DEBT
The components of our long-term debt are as follows (in millions):
| June 30, | December 31, | |||||||
| 2020 | 2019 | |||||||
| Senior Secured Term Loan B, net of discount and issuance costs of $2 | $ | $ | ||||||
| Global ABL Facility | ||||||||
| Less: Current portion | ( | ) | ( | ) | ||||
| $ | $ | |||||||
Senior Secured Term Loan B: We have a Senior Secured Term Loan B (the “Term Loan”) with an original principal amount of $
In March 2020, we purchased and retired $
Global ABL Facility: We have an $
Interest on Borrowings: The interest rates on our borrowings outstanding at June 30, 2020 and December 31, 2019, including a floating to fixed interest rate swap and amortization of debt issuance costs, are as set forth below:
| June 30, | December 31, | |||||||
| 2020 | 2019 | |||||||
| Senior Secured Term Loan B | % | % | ||||||
| Global ABL Facility | % | % | ||||||
| Weighted average interest rate | % | % | ||||||
NOTE 7 – REDEEMABLE PREFERRED STOCK
Preferred Stock Issuance
In June 2015, we issued
The Preferred Stock is convertible at the option of the holders into shares of common stock at an initial conversion rate of
Holders of the Preferred Stock may, at their option, require the Company to repurchase their shares in the event of a fundamental change, as defined in the agreement. The repurchase price is based on the original $1,000 per share purchase price except in the case of a liquidation in which case they would receive the greater of $1,000 per share and the amount that would be received if they held common stock converted at the conversion rate in effect at the time of the fundamental change. Because this feature could require redemption as a result of the occurrence of an event not solely within the control of the Company, the Preferred Stock is classified as temporary equity on our balance sheet.
NOTE 8 – STOCKHOLDERS’ EQUITY
Share Repurchase Program
From time to time, the Company’s board of directors has authorized repurchase programs for shares of the Company’s common stock. As of June 30, 2020, there were remaining authorizations outstanding under these programs. There were
The following table summarizes the share repurchase activity:
| Three Months Ended | Six Months Ended | |||||||||||||||
| June 30, | June 30, | June 30, | June 30, | |||||||||||||
| 2020 | 2019 | 2020 | 2019 | |||||||||||||
| Number of shares acquired on the open market | ||||||||||||||||
| Average price per share | $ | $ | $ | $ | ||||||||||||
| Total cost of acquired shares (in millions) | $ | $ | $ | $ | ||||||||||||
Equity Compensation Plans
Our 2011 Omnibus Incentive Plan originally had
Accumulated Other Comprehensive Loss
Accumulated other comprehensive loss in the accompanying consolidated balance sheets consists of the following (in millions):
| June 30, | December 31, | |||||||
| 2020 | 2019 | |||||||
| Foreign currency translation adjustments | $ | ( | ) | $ | ( | ) | ||
| Hedge accounting adjustments | ( | ) | ( | ) | ||||
| Pension related adjustments | ( | ) | ( | ) | ||||
| Accumulated other comprehensive loss | $ | ( | ) | $ | ( | ) | ||
Earnings per Share
Earnings per share are calculated in the table below (in millions, except per share amounts):
| Three Months Ended | Six Months Ended | |||||||||||||||
| June 30, | June 30, | June 30, | June 30, | |||||||||||||
| 2020 | 2019 | 2020 | 2019 | |||||||||||||
| Net (loss) income | $ | ( | ) | $ | $ | ( | ) | $ | ||||||||
| Less: Dividends on Series A Preferred Stock | ||||||||||||||||
| Net (loss) income attributable to common stockholders | $ | ( | ) | $ | $ | ( | ) | $ | ||||||||
| Weighted average basic shares outstanding | ||||||||||||||||
| Effect of dilutive securities | ||||||||||||||||
| Weighted average diluted shares outstanding | ||||||||||||||||
| Net (loss) income per share: | ||||||||||||||||
| Basic | $ | ( | ) | $ | $ | ( | ) | $ | ||||||||
| Diluted | $ | ( | ) | $ | $ | ( | ) | $ | ||||||||
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 six months ended June 30, 2020 and 2019, all of the shares of the Preferred Stock were anti-dilutive. For the three and six months ended June 30, 2020, we had approximately
NOTE 9 – SEGMENT INFORMATION
Our business is comprised of 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 upstream production (exploration, production and extraction of underground oil and gas), midstream pipeline (gathering and transmission of oil and gas), gas utilities and downstream and industrial (crude oil refining and petrochemical and chemical processing and general industrials) sectors.
The following table presents financial information for each reportable segment (in millions):
| Three Months Ended | Six Months Ended | |||||||||||||||
| June 30, | June 30, | June 30, | June 30, | |||||||||||||
| 2020 | 2019 | 2020 | 2019 | |||||||||||||
| Sales | ||||||||||||||||
| U.S. | $ | $ | $ | $ | ||||||||||||
| Canada | ||||||||||||||||
| International | ||||||||||||||||
| Consolidated sales | $ | $ | $ | $ | ||||||||||||
| Operating (loss) income | ||||||||||||||||
| U.S. | $ | ( | ) | $ | $ | ( | ) | $ | ||||||||
| Canada | ( | ) | ( | ) | ||||||||||||
| International | ( | ) | ( | ) | ||||||||||||
| Total operating (loss) income | ( | ) | ( | ) | ||||||||||||
| Interest expense | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Other, net | ( | ) | ( | ) | ||||||||||||
| (Loss) income before income taxes | $ | ( | ) | $ | $ | ( | ) | $ | ||||||||
| June 30, | December 31, | |||||||
| 2020 | 2019 | |||||||
| Total assets | ||||||||
| U.S. | $ | $ | ||||||
| Canada | ||||||||
| International | ||||||||
| Total assets | $ | $ | ||||||
Our sales by product line are as follows (in millions):
| Three Months Ended | Six Months Ended | |||||||||||||||
| June 30, | June 30, | June 30, | June 30, | |||||||||||||
| Type | 2020 | 2019 | 2020 | 2019 | ||||||||||||
| Line pipe | $ | $ | $ | $ | ||||||||||||
| Carbon fittings and flanges | ||||||||||||||||
| Total carbon pipe, fittings and flanges | ||||||||||||||||
| Valves, automation, measurement and instrumentation | ||||||||||||||||
| Gas products | ||||||||||||||||
| Stainless steel and alloy pipe and fittings | ||||||||||||||||
| General products | ||||||||||||||||
| $ | $ | $ | $ | |||||||||||||
NOTE 10 – 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 year interest rate swap that became effective on March 31, 2018, with a notional amount of $
We have 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 is recorded as an asset or liability, and the gain or loss on the derivative is recorded as a component of other comprehensive income. 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 is 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 a liability of $
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, have not been designated as hedges and, accordingly, changes in their fair market value are recorded in earnings. The total notional amount of our forward foreign exchange contracts and options was approximately $
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 $
NOTE 11 – 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 June 30, 2020, we are named a defendant in approximately
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.
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.
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 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; |
| • |
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; |
| • |
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; |
| • |
our significant indebtedness; |
| • |
the dependence on our subsidiaries for cash to meet our obligations; |
| • |
changes in our credit profile; |
| • |
a decline in demand for or adverse change in the value of certain of the products we distribute if tariffs and duties on these products are imposed or lifted; |
| • |
significant substitution of alternative fuels for oil and gas; |
| • |
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; |
| • |
adverse health events, such as a pandemic; |
| • |
interruption in the proper functioning of our information systems; |
| • |
the occurrence of cybersecurity incidents; |
| • |
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; |
| • |
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 associated with international instability and geopolitical developments, including armed conflicts and terrorism; |
| • |
risks relating to ongoing evaluations of internal controls required by Section 404 of the Sarbanes-Oxley Act; |
| • |
our intention not to pay dividends; and |
| • |
risks related to changing laws and regulations, including trade policies and tariffs. |
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 distributor of pipe, valves and fittings (“PVF”) and other infrastructure products and services to the energy industry, based on sales. We provide innovative supply chain solutions and technical product expertise to customers globally through our leading position across each of our diversified end-markets including the upstream production (exploration, production and extraction of underground oil and gas), midstream pipeline (gathering and transmission of oil and gas), gas utilities and downstream and industrial (crude oil refining and petrochemical and chemical processing and general industrials) sectors. We offer over 200,000 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 10,000 suppliers. With nearly 100 years of history, our approximate 2,850 employees serve over 13,000 customers through approximately 240 service locations including regional distribution centers, branches, corporate offices and third party pipe yards, where we often deploy pipe near customer locations. 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 sector as their primary PVF supplier. We believe the critical role we play in our customers’ supply chain, together with our extensive product and service offerings, 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 25 years with our 25 largest customers.
Key Drivers of Our Business
Our revenue is predominantly derived from the sale of PVF and other oilfield and industrial supplies to the energy sector globally. 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 production, midstream pipeline, gas utilities and downstream and industrial sectors of the industry. Long-term growth in spending has been driven by several factors, including demand growth for petroleum and petroleum derived products, 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 and petrochemical sectors. The outlook for future oil, natural gas, refined products and petrochemical PVF spending is influenced by numerous factors, including the following:
| ● |
Oil and Natural Gas Prices. Sales of PVF and related infrastructure products to the oil and natural gas industry constitute over 90% 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, 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 capital spending by customers, additions to and maintenance of pipelines, refinery utilization and petrochemical processing activity. |
| ● |
Economic Conditions. The demand for the products we distribute is dependent on the general economy, the energy sector and other factors. Changes in the general economy or in the energy sector (domestically or internationally) can cause 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 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 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, 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 six months of 2020, the average oil price of West Texas Intermediate (“WTI”) decreased to $36.58 per barrel from $57.39 per barrel in the first six months of 2019. Natural gas prices decreased to an average price of $1.80/MMBtu (Henry Hub) for the first six months of 2020 compared to $2.74/MMBtu (Henry Hub) for the first six months of 2019. North American drilling rig activity decreased 39% in the first six months of 2020 as compared to the first six months of 2019. U.S. well completions were down 36% in the first six months of 2020 compared to the same period in 2019.
The energy industry, and our business in turn, is cyclical in nature. In 2019, our customers demonstrated an increased focus on returns on invested capital, which drove a more disciplined approach to spending that continues to impact each of our business sectors. In the first half of 2020, demand for oil and natural gas declined sharply as a result of the coronavirus disease 2019 (“COVID-19”) pandemic. As various governments implemented COVID-19 isolation orders, transportation use declined, energy use declined and manufacturing declined. As a result, the need for oil consumption dropped dramatically. At the same time, the Organization of Petroleum Exporting Countries (“OPEC”) and other oil producing nations were initially unable to reach an agreement on oil production levels. This lack of agreement, between Saudi Arabia and Russia in particular, escalated concerns over the potential for oversupply of oil during a period of weakened demand thereby causing a significant, sustained decline in commodity prices. Major oil-producing nations did reduce oil production during the second quarter of 2020 to help offset the virus-related demand destruction but have recently announced their intention to start easing these cuts beginning in August 2020 due to current trends indicating a modest increase in oil demand. However, the expected level of oil demand in the near term is projected to be substantially lower than prior year levels. There remains significant uncertainty regarding the timing and extent of any recovery, including the possibility of a global recession or depression and any possible structural shift in the global economy and its demand for oil and natural gas as a result of changes in the way people work, travel and interact. As a result, spending plan estimates by sell-side research analysts indicate a decrease in oil and gas industry spending in 2020 of as much as 30% globally, including up to 50% in the U.S. upstream market. These reductions in spending directly impact both the upstream production and midstream pipeline components of our business. In addition, we have seen our customers in the downstream sector seek to defer turnarounds and routine maintenance and idle facilities in order to preserve liquidity and comply with COVID-19 related limitations on employee activities. Furthermore, approximately 80% of our business is concentrated in the U.S. market where the majority of industry spend reductions are occurring. Given these recent developments, the risk of resurgence of the COVID-19 virus and the continuing focus on capital discipline by oil and gas exploration and production operators, we experienced a sharp decline in sales during the second quarter of 2020 and expect the market to remain challenged until there is a step-change improvement related to COVID-19 concerns, improving the outlook for global oil demand.
Because of the challenging outlook for the remainder of 2020, we have taken a number of steps to further reduce our operating costs. These steps include the following:
| ● |
A voluntary early retirement program and an involuntary reduction in force to reduce headcount |
|
| ● |
Ongoing freezes on hiring and compensation increases |
|
| ● |
An indefinite suspension of the Company’s 401(k) matching contributions to its U.S. employees |
|
| ● |
Reductions in annual bonus incentive targets and resulting payouts for both executive management and eligible employees |
|
| ● | A 30% reduction in equity grants to non-executive directors |
| ● |
For eligible executives and employees, a reduction in the long-term incentive awards that the Company grants to them pursuant to the Company’s 2011 Omnibus Incentive Plan |
|
| ● |
Management and employee furloughs |
|
| ● |
Closure of certain branches and distribution centers where customer spending demand does not warrant continuation of those operations as we continue to adjust our distribution network as needed. |
|
| ● |
Continued cost reductions and efficiency efforts throughout the Company |
In addition to these efforts, we are actively managing our investment in working capital to an appropriate level, which can allow us to generate cash and reduce our indebtedness.
During the second quarter of 2020, we closed 11 branches and took other actions to reduce our costs associated with leased branches. As a result of these actions, we incurred charges totaling $15 million related to impairment of right of use assets, lease abandonment and charges associated with contractual obligations under lease agreements. Through these branch closures and other reductions in force, we reduced headcount by over 300 employees during the second quarter of 2020. In connection with these reductions, we incurred severance costs of $7 million during the quarter. We continue to take actions to further reduce operating costs and have plans to close additional facilities and further reduce headcount in the third quarter. Additional severance, restructuring and closure costs may be incurred to complete these actions.
During the COVID-19 pandemic crisis, we have continued to operate our business. Our video and audio conferencing and enterprise resource planning and other operational systems have enabled our office employees to work from home, performing their job functions with minimal disruption or impact on our internal control environment. We required our employees to work from home as a result of governmental isolation orders and, in many cases, in advance of those orders for the health and safety of our employees. We have limited employee travel to local deliveries of our products. Our warehouses and regional distribution centers have remained open. Under various isolation orders by national, state, provincial and local governments, we have been exempted as an “essential” business as the products we sell are necessary for the maintenance and functioning of the energy infrastructure. We have taken measures to safeguard the health and welfare of our employees, including (among other things) social distancing measures while at work, certain screening, providing personal protection equipment such as face masks and hand sanitizer and providing “deep” cleaning services at Company facilities. Currently, of our approximate 2,850 employees, we have 27 employees with current cases of COVID-19. If we were to develop a COVID-19 hotspot at one of our facilities, we have plans to isolate those in contact with the impacted employees and to either staff the facility with employees from other facilities or supply product to customers from other facilities. We monitor guidelines of the Center for Disease Control ("CDC") and other authorities on an ongoing basis, and as various governmental isolation orders evolve, we continue to review our operational plans to continue operating our business while addressing the health and safety of our employees and those with whom our business comes into contact.
As a distribution business, we have also closely monitored the ability of our suppliers and transportation providers to continue the functioning of our supply chain, particularly in cases where there are limited alternative sources of supply. While there have been some temporary interruptions of manufacturing for some of our products, especially those who manufacture product or components in China, South Korea and Italy, many of these manufacturers have now resumed production. We have not experienced significant delays by transportation providers. Our inventory position for most products has allowed us to continue supply to most customers with little interruption. In those instances where there is interruption, we are working with our customers to discuss the impact of the COVID-19 delay. We continue to monitor the situation and have ongoing dialogue with our customers regarding the status of impacted orders.
In recent years, the United States imposed tariffs on imports of some products that we distribute. Although these actions generally cause the price we pay for products to increase, we are generally able to leverage long-standing relationships with our suppliers and the volume of our purchases to receive market competitive pricing. In addition, our contracts with customers generally allow us to react quickly to price increases through mechanisms that enable us to pass those increases along to customers as they occur. Of course, the price increases that tariffs and quotas engender may be offset by the pricing impacts of lower demand that the COVID-19 pandemic has caused. These issues are dynamic and continue to evolve. To the extent our products are further impacted by higher prices caused by tariffs and quotas, the ultimate impact on our revenue and cost of sales, which is determined using the last-in, first-out (“LIFO”) inventory costing methodology, remains subject to uncertainty and volatility.
Effective January 31, 2020, the United Kingdom formally exited the European Union (“EU”). Following the exit, there is a transition period until December 31, 2020. During the transition period, the U.K.'s trading relationship with the EU will remain the same while the two sides negotiate a free trade deal. At the same time, many other aspects of the U.K.'s future relationship with the EU - including law enforcement, data sharing and security - will also be negotiated. If a trade agreement is timely completed, the U.K.'s new trading relationship with the EU can begin immediately after the transition. If not, there would be no trade agreement, which could negatively impact our business, including any commodity pricing, transfer pricing and other cross border issues. However, we have a physical presence in both the U.K. and EU member states that would allow us to continue to operate and to serve our customers as needed. In 2019, 2.4% of our revenue was derived from our U.K. business.
We determine backlog by the amount of unshipped customer orders, either specific or general in nature, which the customer may revise or cancel in certain instances. The table below details our backlog by segment (in millions):
| June 30, |
December 31, |
June 30, |
||||||||||
| 2020 |
2019 |
2019 |
||||||||||
| U.S. |
$ | 220 | $ | 301 | $ | 351 | ||||||
| Canada |
22 | 34 | 39 | |||||||||
| International |
150 | 174 | 188 | |||||||||
| $ | 392 | $ | 509 | $ | 578 | |||||||
Approximately 3% of our June 30, 2019 ending backlog was associated with two customers in our U.S. segment. In addition, approximately 2% of our ending backlog for June 30, 2019 was associated with one customer in our International segment. In each case, these were related to significant customer projects that were substantially completed before the end of 2019. Excluding these projects, our backlog as of June 30, 2020 had decreased 23% and 28% from December 31, 2019 and June 30, 2019, respectively. 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 substantially all of the sales in our backlog will be realized in the next twelve months.
The following table shows key industry indicators for the three and six months ended June 30, 2020 and 2019:
| Three Months Ended |
Six Months Ended |
|||||||||||||||
| June 30, |
June 30, |
June 30, |
June 30, |
|||||||||||||
| 2020 |
2019 |
2020 |
2019 |
|||||||||||||
| Average Rig Count (1): |
||||||||||||||||
| United States |
392 | 989 | 588 | 1,016 | ||||||||||||
| Canada |
25 | 82 | 110 | 132 | ||||||||||||
| Total North America |
417 | 1,071 | 698 | 1,148 | ||||||||||||
| International |
834 | 1,109 | 954 | 1,069 | ||||||||||||
| Total |
1,251 | 2,180 | 1,652 | 2,217 | ||||||||||||
| Average Commodity Prices (2): |
||||||||||||||||
| WTI crude oil (per barrel) |
$ | 27.96 | $ | 59.88 | $ | 36.58 | $ | 57.39 | ||||||||
| Brent crude oil (per barrel) |
$ | 29.70 | $ | 69.04 | $ | 40.23 | $ | 66.07 | ||||||||
| Natural gas ($/MMBtu) |
$ | 1.70 | $ | 2.57 | $ | 1.80 | $ | 2.74 | ||||||||
| Average Monthly U.S. Well Permits (3) |
1,441 | 4,887 | 1,844 | 5,363 | ||||||||||||
| U.S. Wells Completed (2) |
1,475 | 3,904 | 4,764 | 7,397 | ||||||||||||
| 3:2:1 Crack Spread (4) |
$ | 12.11 | $ | 21.73 | $ | 12.91 | $ | 19.39 | ||||||||
| _______________________ |
| (1) Source-Baker Hughes (www.bhge.com) (Total rig count includes oil, natural gas and other rigs.) |
| (2) Source-Department of Energy, EIA (www.eia.gov) (As revised) |
| (3) Source-Evercore ISI Research |
| (4) Source-Bloomberg |
Results of Operations
Three Months Ended June 30, 2020 Compared to the Three Months Ended June 30, 2019
The breakdown of our sales by sector for the three months ended June 30, 2020 and 2019 was as follows (in millions):
| Three Months Ended |
||||||||||||||||
| June 30, 2020 |
June 30, 2019 |
|||||||||||||||
| Upstream production |
$ | 134 | 22 | % | $ | 284 | 29 | % | ||||||||
| Midstream pipeline |
87 | 15 | % | 174 | 18 | % | ||||||||||
| Gas utilities |
205 | 34 | % | 247 | 25 | % | ||||||||||
| Downstream & industrial |
176 | 29 | % | 279 | 28 | % | ||||||||||
| $ | 602 | 100 | % | $ | 984 | 100 | % | |||||||||
For the three months ended June 30, 2020 and 2019, the following table summarizes our results of operations (in millions):
| Three Months Ended |
||||||||||||||||
| June 30, |
June 30, |
|||||||||||||||
| 2020 |
2019 |
$ Change |
% Change |
|||||||||||||
| Sales: |
||||||||||||||||
| U.S. |
$ | 474 | $ | 806 | $ | (332 | ) | (41 | )% | |||||||
| Canada |
28 | 58 | (30 | ) | (52 | )% | ||||||||||
| International |
100 | 120 | (20 | ) | (17 | )% | ||||||||||
| Consolidated |
$ | 602 | $ | 984 | $ | (382 | ) | (39 | )% | |||||||
| Operating (loss) income: |
||||||||||||||||
| U.S. | $ | (226 | ) | $ | 39 | $ | (265 | ) | N/M | |||||||
| Canada |
(2 | ) | - | (2 | ) | N/M |
||||||||||
| International | (61 | ) | 2 | (63 | ) | N/M | ||||||||||
| Consolidated | (289 | ) | 41 | (330 | ) | N/M | ||||||||||
| Interest expense |
(7 | ) | (10 | ) | 3 | (30 | )% | |||||||||
| Other, net |
(2 | ) | 1 | (3 | ) | N/M |
||||||||||
| Income tax benefit (expense) | 17 | (8 | ) | 25 | N/M | |||||||||||
| Net (loss) income | (281 | ) | 24 | (305 | ) | N/M | ||||||||||
| Series A preferred stock dividends |
6 | 6 | - | 0 | % | |||||||||||
| Net (loss) income attributable to common stockholders | $ | (287 | ) | $ | 18 | $ | (305 | ) | N/M | |||||||
| Gross profit |
$ | 79 | $ | 174 | $ | (95 | ) | (55 | )% | |||||||
| Adjusted Gross Profit (1) |
$ | 118 | $ | 190 | $ | (72 | ) | (38 | )% | |||||||
| Adjusted EBITDA (1) |
$ | 17 | $ | 60 | $ | (43 | ) | (72 | )% | |||||||
(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 were $602 million for the three months ended June 30, 2020 as compared to $984 million for the three months ended June 30, 2019, a decrease of $382 million, or 39%. The weakening of foreign currencies in areas where we operate relative to the U.S. dollar unfavorably impacted sales by $7 million, or 1%.
U.S. Segment—Our U.S. sales decreased to $474 million for the three months ended June 30, 2020 from $806 million for the three months ended June 30, 2019. This $332 million, or 41%, decrease reflected a $122 million decrease in the upstream production sector, a $79 million decrease in the midstream pipeline sector, a $44 million decrease in the gas utilities sector and an $87 million decrease in the downstream and industrial sector. The decline in the upstream production sector is a result of reduced customer spending and resulting lower activity levels, including a 62% corresponding reduction in well completions. The decline in the midstream pipeline sector is attributable to reduced customer spending as well as the timing of project activity. The decline in gas utilities was primarily due to pandemic restrictions as customers paused spending. All sectors were negatively impacted by the economic slowdown resulting from the COVID-19 pandemic in the second quarter of 2020.
Canada Segment—Our Canada sales decreased to $28 million for the three months ended June 30, 2020 from $58 million for the three months ended June 30, 2019, a decrease of $30 million, or 52%. The decline reflected a $23 million decrease in the upstream production sector which was adversely affected by the COVID-19 pandemic and associated reduced demand. In addition, the midstream pipeline sector declined $6 million as a result of non-recurring project work. The weakening of the Canadian dollar relative to the U.S. dollar unfavorably impacted sales by $1 million, or 2%.
International Segment—Our International sales decreased to $100 million for the three months ended June 30, 2020 from $120 million for the same period in 2019. The $20 million, or 17%, decrease is, in part, attributable to the 2019 completion of a multi-year project in Kazakhstan. In addition, the weakening of foreign currencies in areas where we operate relative to the U.S. dollar which unfavorably impacted sales by $6 million, or 5%.
Gross Profit. Our gross profit was $79 million (13.1% of sales) for the three months ended June 30, 2020 as compared to $174 million (17.7% of sales) for the three months ended June 30, 2019. As compared to average cost, our LIFO inventory costing methodology reduced cost of sales by $6 million for the second quarter of 2020 compared to $1 million in the second quarter of 2019. In addition, gross profit for the three months ended June 30, 2020 was negatively impacted by $34 million of inventory-related charges.
Adjusted Gross Profit. Adjusted Gross Profit decreased to $118 million (19.6% of sales) for the three months ended June 30, 2020 from $190 million (19.3% of sales) for the three months ended June 30, 2019, a decrease of $72 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, plus inventory-related charges 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, a non-GAAP financial measure, with gross profit, as derived from our financial statements (in millions):
| Three Months Ended |
||||||||||||||||
| June 30, |
Percentage |
June 30, |
Percentage |
|||||||||||||
| 2020 |
of Revenue* |
2019 |
of Revenue |
|||||||||||||
| Gross profit, as reported |
$ | 79 | 13.1 | % | $ | 174 | 17.7 | % | ||||||||
| Depreciation and amortization |
5 | 0.8 | % | 6 | 0.6 | % | ||||||||||
| Amortization of intangibles |
6 | 1.0 | % | 11 | 1.1 | % | ||||||||||
| Decrease in LIFO reserve |
(6 | ) | (1.0 | )% | (1 | ) | (0.1 | )% | ||||||||
| Inventory-related charges | 34 | 5.6 | % | - | 0.0 | % | ||||||||||
| Adjusted Gross Profit |
$ | 118 | 19.6 | % | $ | 190 | 19.3 | % | ||||||||
| * Does not foot due to rounding. | ||||||||||||||||
Selling, General and Administrative (“SG&A”) Expenses. Our SG&A expenses were $126 million for the three months ended June 30, 2020 as compared to $133 million for the three months ended June 30, 2019. The $7 million decrease in SG&A was driven by lower employee-related costs, including incentives and benefits, resulting from the decline in business activity. These lower personnel costs were partially offset by $15 million of expenses associated with facilities closures in the three months ended June 30, 2020, and $7 million of severance and restructuring charges. Excluding these charges, SG&A would have been $104 million. The weakening of foreign currencies in areas where we operate outside of the U.S. dollar favorably impacted SG&A by $2 million.
Goodwill and Intangible Asset Impairment. In the first half of 2020, demand for oil and natural gas declined sharply as a result of the COVID-19 pandemic. This disruption in demand and the resulting decline in the price of oil has had a dramatic negative impact on our business. We experienced a significant reduction in sales beginning in April 2020 which continued throughout the second quarter. At this time, there remains ongoing uncertainty around the timing and extent of any recovery. We have taken a more pessimistic long-term outlook due to the significant reduction in the demand for oil, the implications of that demand destruction on the price of oil for an extended period of time and actions our customers have taken to curtail costs and reduce spending. As a result of these developments, we concluded that it was more likely than not the fair values of our U.S. and International reporting units were lower than their carrying values. Accordingly, we completed an interim goodwill impairment test as of April 30, 2020. This test resulted in a $217 million goodwill impairment charge comprised of $177 million in our U.S. reporting unit and $40 million in our International reporting unit.
Operating(Loss) Income. Operating loss was $289 million for the three months ended June 30, 2020 as compared to operating income of $41 million for the three months ended June 30, 2019, a decline of $330 million.
U.S. Segment—Operating loss for our U.S. segment was $226 million for the three months ended June 30, 2020 compared to operating income of $39 million for the three months ended June 30, 2019, a $265 million decline. Operating loss for the second quarter of 2020 was impacted by $202 million of goodwill and intangible asset impairments, $19 million of inventory-related charges, $6 million of severance costs, and $2 million of costs associated with facility closures. Excluding these charges, operating income would have been $3 million, a decline of $36 million, which was driven by lower sales offset by a reduction in SG&A.
Canada Segment—Operating loss for our Canada segment was $2 million for the three months ended June 30, 2020 and 2019 as compared to $0 million for the three months ended June 30, 2019. The $2 million decline included $1 million of costs associated with facility closures.
International Segment—Operating loss for our international segment was $61 million for the three months ended June 30, 2020 as compared to operating income of $2 million for the three months ended June 30, 2019. The $63 million decline included $40 million of goodwill impairment charges, $14 million of inventory-related charges, $1 million of severance costs and $12 million of costs associated with facility closures. Excluding these charges, operating income would have been $6 million for the three months ended June 30, 2020.
Interest Expense. Our interest expense was $7 million and $10 million for the three months ended June 30, 2020 and 2019, respectively. The decrease in interest expense was attributable to lower average debt levels and interest rates during the second quarter of 2020 as compared to the second quarter of 2019.
Other, net. Our other expense was $2 million for the three months ended June 30, 2020 as compared to other income of $1 million for the three months ended June 30, 2019. Other expense in the second quarter of 2020 included $3 million of asset write-downs related to facility closures.
Income Tax (Benefit) Expense. Our income tax benefit was $17 million for the three months ended June 30, 2020 as compared to $8 million of expense for the three months ended June 30, 2019. We typically record income tax expense for interim periods based on estimated annual effective tax rates. However, due to the uncertainty in our industry and the effects of COVID-19, the income tax benefit for the three months ended June 30, 2020 was computed based on a year-to-date effective tax rate. We will return to utilizing an estimated annual effective tax rate when appropriate. Our effective tax rates were 6% and 25% for the three months ended June 30, 2020 and 2019, respectively. Our rates generally differ from the U.S. federal statutory rate of 21% as a result of state income taxes and differing foreign income tax rates. The effective tax rate for three months ended June 30, 2020 was lower primarily due to a non-tax deductible goodwill impairment charge during the quarter.
In response to COVID-19, President Donald Trump signed into law the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) on March 27, 2020. The CARES Act provides numerous tax provisions and other stimulus measures that do not materially impact the Company’s deferred tax liability and its year-to-date effective tax rate. Given the uncertain outlook, we will continue to evaluate any future tax impacts resulting from the CARES Act.
Net (Loss) Income. Our net loss was $281 million for the three months ended June 30, 2020 as compared to net income of $24 million for the three months ended June 30, 2019, respectively.
Adjusted EBITDA. Adjusted EBITDA, a non-GAAP financial measure, was $17 million (2.8% of sales) for the three months ended June 30, 2020 as compared to $60 million (6.1% of sales) for the three months ended June 30, 2019.
We define Adjusted EBITDA as net income plus interest, income taxes, depreciation and amortization, amortization of intangibles and certain other expenses, including non-cash expenses (such as equity-based compensation, severance and restructuring, changes in the fair value of derivative instruments and asset impairments, including intangible assets and inventory) and plus or minus the impact of our LIFO inventory costing methodology.
We believe Adjusted EBITDA provides investors a helpful measure for comparing our operating performance with the performance of other companies that may have different financing and capital structures or tax rates. We believe it is a useful indicator of our operating performance without regard to items, such as amortization of intangibles, which 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 EBITDA as a key performance indicator in managing our business. 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.
The following table reconciles Adjusted EBITDA, a non-GAAP financial measure, with net income, as derived from our financial statements (in millions):
| Three Months Ended |
||||||||
| June 30, |
June 30, |
|||||||
| 2020 |
2019 |
|||||||
| Net (loss) income |
$ | (281 | ) | $ | 24 | |||
| Income tax (benefit) expense |
(17 | ) | 8 | |||||
| Interest expense |
7 | 10 | ||||||
| Depreciation and amortization |
5 | 6 | ||||||
| Amortization of intangibles |
6 | 11 | ||||||
| Goodwill and intangible asset impairment | 242 | - | ||||||
| Inventory-related charges | 34 | - | ||||||
| Facility closures | 18 | - | ||||||
| Severance and restructuring | 7 | - | ||||||
| Decrease in LIFO reserve |
(6 | ) | (1 | ) | ||||
| Equity-based compensation expense |
3 | 3 | ||||||
| Foreign currency gains |
(1 | ) | (1 | ) | ||||
| Adjusted EBITDA |
$ | 17 | $ | 60 | ||||
Six Months Ended June 30, 2020 Compared to the Six Months Ended June 30, 2019
The breakdown of our sales by sector for the six months ended June 30, 2020 and 2019 was as follows (in millions):
| Six Months Ended |
||||||||||||||||
| June 30, 2020 |
June 30, 2019 |
|||||||||||||||
| Upstream production |
$ | 356 | 25 | % | $ | 596 | 31 | % | ||||||||
| Midstream pipeline |
206 | 15 | % | 321 | 16 | % | ||||||||||
| Gas utilities |
407 | 29 | % | 461 | 24 | % | ||||||||||
| Downstream & industrial |
427 | 31 | % | 576 | 29 | % | ||||||||||
| $ | 1,396 | 100 | % | $ | 1,954 | 100 | % | |||||||||
For the six months ended June 30, 2020 and 2019, the following table summarizes our results of operations (in millions):
| Six Months Ended |
||||||||||||||||
| June 30, |
June 30, |
|||||||||||||||
| 2020 |
2019 |
$ Change |
% Change |
|||||||||||||
| Sales: |
||||||||||||||||
| U.S. |
$ | 1,112 | $ | 1,585 | $ | (473 | ) | (30 | )% | |||||||
| Canada |
78 | 126 | (48 | ) | (38 | )% | ||||||||||
| International |
206 | 243 | (37 | ) | (15 | )% | ||||||||||
| Consolidated |
$ | 1,396 | $ | 1,954 | $ | (558 | ) | (29 | )% | |||||||
| Operating (loss) income: |
||||||||||||||||
| U.S. | $ | (208 | ) | $ | 71 | $ | (279 | ) | N/M | |||||||
| Canada |
(2 | ) | - | (2 | ) | N/M |
||||||||||
| International | (57 | ) | 5 | (62 | ) | N/M | ||||||||||
| Consolidated | (267 | ) | 76 | (343 | ) | N/M | ||||||||||
| Interest expense |
(15 | ) | (21 | ) | 6 | (29 | )% | |||||||||
| Other, net |
(2 | ) | 1 | (3 | ) | N/M |
||||||||||
| Income tax benefit (expense) | 12 | (14 | ) | 26 | N/M | |||||||||||
| Net (loss) income | (272 | ) | 42 | (314 | ) | N/M | ||||||||||
| Series A preferred stock dividends |
12 | 12 | - | 0 | % | |||||||||||
| Net (loss) income attributable to common stockholders | $ | (284 | ) | $ | 30 | $ | (314 | ) | N/M | |||||||
| Gross profit |
$ | 227 | $ | 348 | $ | (121 | ) | (35 | )% | |||||||
| Adjusted Gross Profit (1) |
$ | 275 | $ | 380 | $ | (105 | ) | (28 | )% | |||||||
| Adjusted EBITDA (1) |
$ | 51 | $ | 116 | $ | (65 | ) | (56 | )% | |||||||
(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 26-28 herein.
Sales. Our sales were $1,396 million for the six months ended June 30, 2020 as compared to $1,954 million for the six months ended June 30, 2019, a decrease of $558 million, or 29%. The weakening of foreign currencies in areas where we operate relative to the U.S. dollar unfavorably impacted sales by $13 million, or 1%.
U.S. Segment—Our U.S. sales decreased to $1,112 million for the six months ended June 30, 2020 from $1,585 million for the six months ended June 30, 2019. This $473 million, or 30%, decrease reflected a $189 million decrease in the upstream production sector, a $102 million decrease in the midstream pipeline sector, a $49 million decrease in the gas utilities sector and a $133 million decrease in the downstream and industrial sector. The decline in the upstream production sector is a result of reduced customer spending and resulting lower activity levels, including a 36% corresponding reduction in well completions. The decline in the midstream pipeline sector is attributable to reduced customer spending, as well as the timing of project activity. The decline in gas utilities was primarily due to pandemic restrictions as customers paused spending. All sectors were negatively impacted by the economic slowdown resulting from the COVID-19 pandemic which started in March 2020.
Canada Segment—Our Canada sales decreased to $78 million for the six months ended June 30, 2020 from $126 million for the six months ended June 30, 2019, a decrease of $48 million, or 38%. The decline reflected a $32 million decrease in the upstream production sector, which was adversely impacted by the COVID-19 pandemic and associated reduced demand. In addition, the midstream pipeline sector declined $8 million as a result of non-recurring project work.
International Segment—Our International sales decreased to $206 million for the six months ended June 30, 2020 from $243 million for the same period in 2019. The $37 million, or 15%, decrease is, in part, attributable to the 2019 completion of a multi-year project in Kazakhstan. In addition, the weakening of foreign currencies in areas where we operate relative to the U.S. dollar which unfavorably impacted sales by $12 million, or 5%.
Gross Profit. Our gross profit was $227 million (16.3% of sales) for the six months ended June 30, 2020 as compared to $348 million (17.8% of sales) for the six months ended June 30, 2019. As compared to average cost, our LIFO inventory costing methodology reduced cost of sales by $9 million for the first six months of 2020 compared to $1 million in the first six months of 2019. In addition, gross profit for the six months ended June 30, 2020 included $34 million of inventory-related charges.
Adjusted Gross Profit. Adjusted Gross Profit decreased to $275 million (19.7% of sales) for the six months ended June 30, 2020 from $380 million (19.4% of sales) for the six months ended June 30, 2019, a decrease of $105 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, plus inventory-related charges 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, a non-GAAP financial measure, with gross profit, as derived from our financial statements (in millions):
| Six Months Ended |
||||||||||||||||
| June 30, |
Percentage |
June 30, |
Percentage |
|||||||||||||
| 2020 |
of Revenue |
2019 |
of Revenue |
|||||||||||||
| Gross profit, as reported |
$ | 227 | 16.3 | % | $ | 348 | 17.8 | % | ||||||||
| Depreciation and amortization |
10 | 0.7 | % | 11 | 0.6 | % | ||||||||||
| Amortization of intangibles |
13 | 0.9 | % | 22 | 1.1 | % | ||||||||||
| Decrease in LIFO reserve |
(9 | ) | (0.6 | )% | (1 | ) | (0.1 | )% | ||||||||
| Inventory-related charges | 34 | 2.4 | % | - | 0.0 | % | ||||||||||
| Adjusted Gross Profit |
$ | 275 | 19.7 | % | $ | 380 | 19.4 | % | ||||||||
Selling, General and Administrative (“SG&A”) Expenses. Our SG&A expenses were $252 million for the six months ended June 30, 2020 as compared to $272 million for the six months ended June 30, 2019. The $20 million decrease in SG&A was driven by lower employee-related costs, including incentives and benefits, resulting from the decline in business activity. These lower personnel costs were partially offset by $15 million of expenses associated with facilities closures, and $7 million of severance and restructuring charges in the six months ended June 30, 2020. The weakening of foreign currencies in areas where we operate outside of the U.S. dollar favorably impacted SG&A by $3 million.
Goodwill and Intangible Asset Impairment. In the first half of 2020, demand for oil and natural gas declined sharply as a result of the COVID-19 pandemic. This disruption in demand and the resulting decline in the price of oil has had a dramatic negative impact on our business. We experienced a significant reduction in sales beginning in April 2020 which continued throughout the second quarter. At this time, there remains ongoing uncertainty around the timing and extent of any recovery. We have taken a more pessimistic long-term outlook due to the significant reduction in the demand for oil, the implications of that demand destruction on the price of oil for an extended period of time and actions our customers have taken to curtail costs and reduce spending. As a result of these developments, we concluded that it was more likely than not the fair values of our U.S. and International reporting units were lower than their carrying values. Accordingly, we completed an interim goodwill impairment test as of April 30, 2020. This test resulted in a $217 million goodwill impairment charge comprised of $177 million in our U.S. reporting unit and $40 million in our International reporting unit.
As a result of the same factors that necessitated an interim impairment test for goodwill, we completed an interim impairment test for our U.S. indefinite-lived tradename asset. This test resulted in an impairment charge of $25 million. The remaining balance of the indefinite-lived tradename was $107 million as of June 30, 2020. The U.S. tradename is our only indefinite-lived intangible asset.
U.S. Segment—Operating loss for our U.S. segment was $208 million for the six months ended June 30, 2020 compared to operating income of $71 million for the six months ended June 30, 2019. The $279 million decline in the first half of 2020 was impacted by $202 million of goodwill and intangible asset impairments, $19 million of inventory-related charges, $6 million of severance costs, and $2 million of costs associated with facility closures. Excluding these charges, operating income would have been $21 million, a decline of $50 million, which was driven by lower sales offset by a reduction in SG&A.
Canada Segment—Operating loss for our Canada segment was $2 million for the six months ended June 30, 2020 compared to operating income of $0 million for the six months ended June 30, 2019. The $2 million decline included $1 million of costs associated with facility closures.
International Segment—Operating loss for our international segment was $57 million for the six months ended June 30, 2020 as compared to operating income of $5 million for the six months ended June 30, 2019. The $62 million decline included $40 million of goodwill impairment charges, $14 million of inventory-related charges, $1 million of severance and $12 million of cost associated with facility closures. Excluding these charges, operating income would have been $10 million which was primarily attributable to cost reductions that occurred in the fourth quarter of 2019.
Interest Expense. Our interest expense was $15 million and $21 million for the six months ended June 30, 2020 and 2019, respectively. The decrease in interest expense was attributable to lower average debt levels and interest rates during the first six months of 2020 as compared to the first six months of 2019.
Other, net. Our other expense was $2 million for the six months ended June 30, 2020 and other income of $1 million for the six months ended June 30, 2019. Other expense in the first six months of 2020 included $3 million of asset write-downs related to facility closures.
Income Tax (Benefit) Expense. Our income tax benefit was $12 million for the six months ended June 30, 2020 as compared to $14 million expense for the six months ended June 30, 2019. We typically record income tax expense for interim periods based on estimated annual effective tax rates. However, due to the uncertainty in our industry and the effects of COVID-19, the income tax expense for the six months ended June 30, 2020 was computed based on a year-to-date effective tax rate. We will return to utilizing an estimated annual effective tax rate when appropriate. Our effective tax rates were 4% and 25% for the six months ended June 30, 2020 and 2019, respectively. Our rates generally differ from the U.S. federal statutory rate of 21% as a result of state income taxes and differing foreign income tax rates. The effective tax rate for the six months ended June 30, 2020 was lower primarily due to a non-tax deductible goodwill impairment charge during the quarter.
The CARES Act provides numerous tax provisions and other stimulus measures that do not materially impact the Company’s deferred tax liability and its year-to-date effective tax rate. Given the uncertain outlook, we will continue to evaluate any future tax impacts resulting from the CARES Act.
Net (Loss) Income. We had a net loss of $272 million and net income of $42 million for the six months ended June 30, 2020 and 2019, respectively.
Adjusted EBITDA. Adjusted EBITDA, a non-GAAP financial measure, was $51 million (3.7% of sales) for the six months ended June 30, 2020 as compared to $116 million (5.9% of sales) for the six months ended June 30, 2019.
We define Adjusted EBITDA as net income plus interest, income taxes, depreciation and amortization, amortization of intangibles and certain other expenses, including non-cash expenses (such as equity-based compensation, severance and restructuring, changes in the fair value of derivative instruments and asset impairments, including intangible assets and inventory) and plus or minus the impact of our LIFO inventory costing methodology.
We believe Adjusted EBITDA provides investors a helpful measure for comparing our operating performance with the performance of other companies that may have different financing and capital structures or tax rates. We believe it is a useful indicator of our operating performance without regard to items, such as amortization of intangibles, which 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 EBITDA as a key performance indicator in managing our business. 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.
The following table reconciles Adjusted EBITDA, a non-GAAP financial measure, with net income, as derived from our financial statements (in millions):
| Six Months Ended |
||||||||
| June 30, |
June 30, |
|||||||
| 2020 |
2019 |
|||||||
| Net (loss) income |
$ | (272 | ) | $ | 42 | |||
| Income tax (benefit) expense |
(12 | ) | 14 | |||||
| Interest expense |
15 | 21 | ||||||
| Depreciation and amortization |
10 | 11 | ||||||
| Amortization of intangibles |
13 | 22 | ||||||
| Goodwill and intangible asset impairment | 242 | - | ||||||
| Inventory-related charges | 34 | - | ||||||
| Facility closures | 18 | - | ||||||
| Severance and restructuring | 7 | - | ||||||
| Decrease in LIFO reserve |
(9 | ) | (1 | ) | ||||
| Equity-based compensation expense |
5 | 7 | ||||||
| Gain on early extinguishment of debt |
(1 | ) | - | |||||
| Foreign currency losses |
1 | - | ||||||
| Adjusted EBITDA |
$ | 51 | $ | 116 | ||||
Liquidity and Capital Resources
Our primary credit facilities consist of a Term Loan maturing in September 2024 with an original principal amount of $400 million and an $800 million Global ABL Facility. As of June 30, 2020, the outstanding balance on our Term Loan, net of original issue discount and issuance costs, was $385 million. On an annual basis, we are required to repay an amount equal to 50% of excess cash flow, as defined in the Term Loan agreement, reducing to 25% if the Company’s senior secured leverage ratio is no more than 2.75 to 1.00. No payment of excess cash flow is required if the Company’s senior secured leverage ratio is less than or equal to 2.50 to 1.00. For the current year, as a result of declining profitability and the generation of positive cash flow from working capital contraction, we will likely be required to make a repayment by April 2021 pursuant to this provision. Any such payment would be sourced from cash on hand and availability on our Global ABL Facility. As such, the payment would reduce overall liquidity.
The Global ABL Facility matures in September 2022 and provides $675 million in revolver commitments in the United States, $65 million in Canada, $18 million in Norway, $15 million in Australia, $13 million in the Netherlands, $7 million in the United Kingdom and $7 million in Belgium. The Global ABL Facility contains an accordion feature that allows us to increase the principal amount of the facility by up to $200 million, subject to securing additional lender commitments. 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. As of June 30, 2020, we had $89 million of borrowings outstanding and $411 million of Excess Availability, as defined under our Global ABL Facility. Including cash on hand of $19 million, total liquidity was $430 million.
Our primary sources of liquidity consist of cash generated from our operating activities, existing cash balances and borrowings under our Global ABL Facility. Our ability to generate sufficient cash flows from our operating activities will continue to be primarily dependent on our sales of products and services to our customers at margins sufficient to cover our fixed and variable expenses. As of June 30, 2020 and December 31, 2019, we had cash of $19 million and $32 million, respectively, substantially all of which was maintained in the accounts of our various foreign subsidiaries and, if transferred among countries or repatriated to the U.S., may be subject to additional tax liabilities, which would be recognized in our financial statements in the period during which the transfer decision was made.
Our credit ratings are below “investment grade” and, as such, could impact both our ability to raise new funds as well as the interest rates on our future borrowings. In the second quarter of 2020, Moody’s Investor Services and S&P Global Ratings downgraded our credit ratings, from B1 to B2 and B to B-, respectively, largely due to softening demand for our products due to the COVID-19 pandemic and the reduction in our customer’s spending outlook from unusually low oil and gas prices. Our existing obligations restrict our ability to incur additional debt. We were in compliance with the covenants contained in our various credit facilities as of and during the three months ended June 30, 2020 and, based on our current forecasts, we expect to remain in compliance. Our credit facilities contain provisions that address the potential need to transition away from LIBOR if LIBOR is discontinued or replaced.
We believe our sources of liquidity will be sufficient to satisfy the anticipated cash requirements associated with our existing operations for the foreseeable future. However, our future cash requirements could be higher than we currently expect as a result of various factors. Additionally, our ability to generate sufficient cash from our operating activities depends on our future performance, which is subject to general economic, political, financial, competitive and other factors beyond our control. We may, from time to time, seek to raise additional debt or equity financing or re-price or refinance existing debt in the public or private markets, based on market conditions. Any such capital markets activities would be subject to market conditions, reaching final agreement with lenders or investors, and other factors, and there can be no assurance that we would successfully consummate any such transactions.
Cash Flows
The following table sets forth our cash flows for the periods indicated below (in millions):
| Six Months Ended |
||||||||
| June 30, |
June 30, |
|||||||
| 2020 |
2019 |
|||||||
| Net cash provided by (used in) : |
||||||||
| Operating activities |
$ | 84 | $ | 8 | ||||
| Investing activities |
(5 | ) | (4 | ) | ||||
| Financing activities |
(90 | ) | (13 | ) | ||||
| Net decrease in cash and cash equivalents |
$ | (11 | ) | $ | (9 | ) | ||
Operating Activities
Net cash provided by operating activities was $84 million during the six months ended June 30, 2020 compared to $8 million during the six months ended June 30, 2019. The change in operating cash flows was primarily the result of lower working capital requirements due to declining sales in the first six months of 2020 as compared to the first six months of 2019. A reduction in working capital provided cash of $48 million in the first six months of 2020 compared to $75 million used to grow working capital in the first six months of 2019. In particular, accounts receivable provided $69 million of cash in the first six months of 2020 compared to utilizing $47 million in the first six months of 2019. In addition, inventory provided $41 million of cash in the first six months of 2020 as compared to $0 million in the same period of 2019. The accounts receivable and inventory increase in cash were offset by $51 million of cash utilized by a decrease in accounts payable in the first six months of 2020 as compared to $2 million cash provided in the first three months of 2019.
Investing Activities
Net cash used in investing activities was primarily comprised of capital expenditures totaling $5 million and $6 million for the six months ended June 30, 2020 and 2019, respectively.
Financing Activities
Net cash used in financing activities was $90 million for the six months ended June 30, 2020 compared to $13 million for the six months ended June 30, 2019. In the first six months of 2020, we had net payments under revolving credit facilities of $71 million as compared to net borrowing of $56 million in the first six months of 2019. We used $50 million in the first six months of 2019 to fund purchases of our common stock. We used $12 million to pay dividends on preferred stock for the six months ended June 30, 2020 and 2019. In addition, we repurchased and retired $3 million of our outstanding Term Loan in March 2020.
Critical Accounting Policies
The preparation of financial statements, in conformity with accounting principles generally accepted in the United States of America, requires management to make judgments, estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expense in the financial statements. Management bases its estimates on historical experience and other assumptions, which it believes are reasonable. If actual amounts are ultimately different from these estimates, the revisions are included in our results of operations for the period in which the actual amounts become known.
Accounting policies are considered critical when they require management to make assumptions about matters that are highly uncertain at the time the estimates are made and when there are different estimates that management reasonably could have made, which would have a material impact on the presentation of our financial condition, changes in our financial condition or results of operations. For a description of our critical accounting policies, see “Item 7: Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2019.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are primarily exposed to the market risk associated with unfavorable movements in interest rates, foreign currencies and steel price volatility. There have been no material changes to our market risk policies or our market risk sensitive instruments and positions as described in our Annual Report on Form 10-K for the fiscal year ended December 31, 2019.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of disclosure controls and procedures.
As of June 30, 2020, we have reviewed, under the direction of our Chief Executive Officer and Chief Financial Officer, the Company’s disclosure controls and procedures, as defined in Exchange Act Rule 13a-15(e). Based upon and as of the date of that review, the Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective to ensure that information required to be disclosed in the reports that the Company files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to the Company’s management, including the Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosures.
Changes in internal control over financial reporting.
There were no changes in our internal control over financial reporting that occurred during the second quarter of 2020 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Part II—other information
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, there are no pending legal proceedings that are likely to have a material effect on our business, financial condition, results of operations or cash flows, although it is possible that the resolution of certain actual, threatened or anticipated claims or proceedings could have a material adverse effect on our results of operations in the period of resolution.
Also, 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 recovery from the manufacturer for our expense. In the opinion of management, the ultimate disposition of these claims and proceedings is not expected to have a material adverse effect on our financial condition, results of operations or cash flows.
For information regarding asbestos cases in which we are a defendant and other claims and proceedings, see “Note 11-Commitments and Contingencies” to our unaudited condensed consolidated financial statements.
We are affected by risks specific to us as well as factors that affect all businesses operating in a global market. The significant factors known to us that could materially adversely affect our business, financial condition or operating results are described in Part I, Item 2 of this Quarterly Report on Form 10-Q and in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2019 under “Risk Factors”.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
| A summary of our purchases of MRC Global Inc. common stock during the second quarter of fiscal year 2020 is as follows: |
|||||||||
| Total Number of Shares Purchased (1) |
Average Price Paid per Share |
Total number of Shares Purchased as Part of Publicly Announced Plans or Programs |
Maximum Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs |
||||||
| Apr 1 - Apr 30 |
2,058 |
$ |
5.36 |
- | $ |
- |
|||
| May 1 - May 31 |
- |
$ |
- |
- |
$ |
- |
|||
| Jun 1 - Jun 30 |
- |
$ |
- |
- |
$ |
- |
|||
| 2,058 |
|||||||||
| (1) We purchased 2,058 shares in connection with funding employee income tax withholding obligations arising upon the lapse of restrictions on restricted shares. |
|||||||||
Item 3. Defaults Upon Senior Securities
None.
Item 4. MINING SAFETY DISCLOSURES
None.
None.
| Number |
Description |
|
| 3.1 |
||
| 3.2 |
||
| 3.3 |
||
| 10.1 | Consent Fee Letter dated April 26, 2020 between MRC Global (US) Inc. and Bank of America, N.A. (Incorporated by reference to Exhibit 10.1 to the Quarterly Report on Form 10-Q of MRC Global Inc. filed with the SEC on April 29, 2020, File No. 001-35479). | |
| 10.2 | Consent memorandum dated April 27, 2020 among MRC Global (US) Inc., and certain other subsidiaries of the Company, Bank of America, N.A., as administrative agent, and the banks that are a party thereto. (Incorporated by reference to Exhibit 10.2 to the Quarterly Report on Form 10-Q of MRC Global Inc. filed with the SEC on April 29, 2020, File No. 001-35479) | |
| 10.3 | Third Amendment to Employment Agreement, dated May 27, 2020, between MRC Global Inc. and Andrew Lane. | |
| 31.1* |
||
| 31.2* |
||
| 32** |
||
| 101* |
The following financial information from MRC Global Inc.’s Quarterly Report on Form 10-Q for the period ended June 30, 2020, formatted in Inline Extensible Business Reporting Language (iXBRL): (i) the Condensed Consolidated Balance Sheets at June 30, 2020 and December 31, 2019, (ii) the Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2020 and 2019, (iii) the Condensed Consolidated Statements of Comprehensive Income for the three and six months ended June 30, 2020 and 2019, (iv) the Condensed Statements of Stockholders’ Equity for the six months ended June 30, 2020 and 2019, (v) the Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2020 and 2019 and (vi) Notes to Condensed Consolidated Financial Statements. |
|
| 104 |
The cover page from the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2020 formatted in Inline XBRL. |
* Filed herewith.
** Furnished herewith.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Date: July 29, 2020
| MRC GLOBAL INC. |
|||
| By: /s/ Kelly Youngblood |
|||
| Kelly Youngblood |