MRC (MRC) - 2020 Q1 - Quarterly Report

PART I – FINANCIAL INFORMATION Financial Statements (Unaudited) Unaudited Q1 2020 financial statements show decreased assets and equity, with sales and net income declining but operating cash flow improving significantly Condensed Consolidated Balance Sheets As of March 31, 2020, total assets decreased slightly to $2,301 million, while total liabilities increased, leading to a decline in stockholders' equity Condensed Consolidated Balance Sheet Highlights (in millions) | Account | March 31, 2020 | December 31, 2019 | | :--- | :--- | :--- | | Total Current Assets | $1,219 | $1,218 | | Total Assets | $2,301 | $2,325 | | Total Current Liabilities | $518 | $486 | | Long-Term Debt, net | $517 | $547 | | Total Liabilities | $1,336 | $1,328 | | Total Stockholders' Equity | $617 | $642 | Condensed Consolidated Statements of Operations For Q1 2020, sales decreased 18% to $794 million, leading to lower gross profit and a significant drop in net income attributable to common stockholders Q1 2020 vs. Q1 2019 Statement of Operations (in millions, except per share data) | Metric | Q1 2020 | Q1 2019 | | :--- | :--- | :--- | | Sales | $794 | $970 | | Gross Profit | $148 | $174 | | Operating Income | $22 | $35 | | Net Income | $9 | $18 | | Net Income Attributable to Common Stockholders | $3 | $12 | | Diluted EPS | $0.04 | $0.14 | Condensed Consolidated Statements of Comprehensive Income The company reported a comprehensive loss of $18 million for Q1 2020, primarily due to a $21 million loss from foreign currency translation adjustments Comprehensive Income (Loss) (in millions) | Component | Q1 2020 | Q1 2019 | | :--- | :--- | :--- | | Net Income | $9 | $18 | | Foreign currency translation adjustments | $(21) | $3 | | Comprehensive (Loss) Income | $(18) | $19 | Condensed Consolidated Statements of Stockholders' Equity Total stockholders' equity decreased by $25 million in Q1 2020, mainly due to comprehensive loss and preferred stock dividends, partially offset by net income - Key changes in stockholders' equity for Q1 2020 included a $9 million increase from net income, a $21 million decrease from foreign currency translation, and a $6 million decrease from preferred stock dividends[12] Condensed Consolidated Statements of Cash Flows Net cash provided by operating activities significantly improved to $37 million in Q1 2020, driven by better working capital management, despite net cash used in financing activities Cash Flow Summary (in millions) | Activity | Q1 2020 | Q1 2019 | | :--- | :--- | :--- | | Net cash provided by (used in) operations | $37 | $(40) | | Net cash used in investing activities | $(2) | $(2) | | Net cash (used in) provided by financing activities | $(36) | $26 | | Decrease in cash | $(1) | $(16) | Notes to the Condensed Consolidated Financial Statements Notes detail business operations, accounting policies, and financial components, including revenue disaggregation, credit loss standard adoption, and goodwill impairment assessment - The company is a global distributor of pipe, valves, and fittings (PVF) to the upstream, midstream, gas utilities, and downstream sectors of the energy industry[15] - A qualitative assessment as of March 31, 2020, concluded that goodwill and indefinite-lived intangible assets were not impaired, despite reduced forecasts and a decline in market capitalization due to the COVID-19 pandemic[22][23] Disaggregated Revenue by Sector (in millions) | Sector | Q1 2020 | Q1 2019 | | :--- | :--- | :--- | | Upstream production | $222 | $312 | | Midstream pipeline | $119 | $147 | | Gas utilities | $202 | $214 | | Downstream & industrial | $251 | $297 | | Total | $794 | $970 | Long-Term Debt Components (in millions) | Debt Instrument | March 31, 2020 | December 31, 2019 | | :--- | :--- | :--- | | Senior Secured Term Loan B, net | $386 | $390 | | Global ABL Facility | $135 | $161 | | Total | $521 | $551 | Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) MD&A discusses the Q1 2020 business downturn due to COVID-19 and oil prices, detailing sales declines, cost-reduction measures, and maintained liquidity Recent Trends and Outlook The outlook worsened due to COVID-19 and oil price collapse, leading to expected sharp revenue declines and comprehensive cost-cutting measures, despite essential business operations - Due to the COVID-19 pandemic and collapse in oil prices, customer spending is expected to decrease significantly, with analysts forecasting up to a 50% reduction in the U.S[72] - The company has implemented several cost-reduction measures, including a voluntary early retirement program, an involuntary reduction in force, a freeze on hiring and compensation, and an indefinite suspension of the company's 401(k) match[73][74][79] - Backlog decreased to $479 million as of March 31, 2020, down from $509 million at year-end 2019 and $636 million a year prior, indicating weakening future demand[81] Results of Operations Q1 2020 consolidated sales fell 18% to $794 million across all segments, resulting in lower operating income and a 75% decrease in net income attributable to common stockholders Sales by Segment (in millions) | Segment | Q1 2020 | Q1 2019 | % Change | | :--- | :--- | :--- | :--- | | U.S. | $638 | $779 | (18%) | | Canada | $50 | $68 | (26%) | | International | $106 | $123 | (14%) | | Consolidated | $794 | $970 | (18%) | - The 18% decrease in U.S. sales was driven by declines in all sectors, particularly a $67 million drop in the upstream production sector due to reduced customer spending and lower rig counts[85] - SG&A expenses decreased by $13 million to $126 million, primarily due to lower employee-related costs, but this was partially offset by a $4 million increase in bad debt expense[90] Key Profitability Metrics (in millions) | Metric | Q1 2020 | Q1 2019 | | :--- | :--- | :--- | | Gross Profit | $148 | $174 | | Operating Income | $22 | $35 | | Adjusted EBITDA | $34 | $56 | | Net Income | $9 | $18 | Liquidity and Capital Resources As of March 31, 2020, the company had $465 million in liquidity, with Moody's downgrading its credit rating in April 2020 due to market conditions - Total liquidity as of March 31, 2020, was $465 million, comprising $437 million of excess availability on the Global ABL Facility and $28 million of cash on hand[101] - In April 2020, Moody's Investor Services downgraded the company's credit rating to B2 from B1 due to softening product demand from the COVID-19 pandemic and low oil and gas prices[103] Quantitative and Qualitative Disclosures About Market Risk No material changes occurred to the company's market risk exposures related to interest rates, foreign currencies, and steel price volatility since the 2019 Annual Report - There have been no material changes to the company's market risk exposures related to interest rates, foreign currencies, and steel price volatility as described in the 2019 Annual Report on Form 10-K[112] Controls and Procedures The CEO and CFO concluded that disclosure controls and procedures were effective as of March 31, 2020, with no material changes to internal control over financial reporting - The CEO and CFO concluded that disclosure controls and procedures were effective as of March 31, 2020[113] - No changes occurred during Q1 2020 that have materially affected, or are reasonably likely to materially affect, the company's internal control over financial reporting[114] PART II – OTHER INFORMATION Legal Proceedings The company is subject to various legal claims, including asbestos-related lawsuits, but management expects no material adverse effect on financial condition or operations - The company states that there are no pending legal proceedings expected to have a material effect on its business or financial condition[117] - Information regarding asbestos cases is referenced in Note 10 to the financial statements, which indicates that insurance should cover a substantial majority of existing and future claims[119][57] Risk Factors The company refers readers to its 2019 Annual Report on Form 10-K and the MD&A section for significant factors that could adversely affect the business - The company refers to the risk factors detailed in its 2019 Annual Report on Form 10-K and the MD&A section of this Q1 2020 report[120] Other Information An April 2020 inventory appraisal led to a lower valuation, but lenders agreed to mitigate the impact, preserving approximately $58 million of liquidity - An April 2020 inventory appraisal resulted in a lower valuation, which would typically reduce borrowing availability under the Global ABL Facility[125] - Lenders agreed to use only half of the relevant percentage decrease from the appraisal to calculate the borrowing base, which had the effect of preserving approximately $58 million of liquidity as of March 31, 2020[125] Exhibits This section lists exhibits filed with the Form 10-Q, including corporate governance documents, credit facility letters, and CEO/CFO certifications - Exhibits filed include a Consent Fee Letter and consent memorandum related to the Global ABL Facility, as well as required CEO/CFO certifications[127]