MRC (MRC) - 2023 Q3 - Quarterly Report

PART I – FINANCIAL INFORMATION Financial Statements (Unaudited) The unaudited condensed consolidated financial statements for the period ended September 30, 2023, show an increase in total assets to $1.96 billion, with sales growing 6% to $2.64 billion and net income increasing by 72% to $93 million, while operating cash flow significantly improved to $92 million from a $30 million use of cash in the prior-year period, driven by better working capital management and profitability Condensed Consolidated Balance Sheets Balance Sheet Summary (in millions) | Balance Sheet Items | Sep 30, 2023 | Dec 31, 2022 | | :--- | :--- | :--- | | Total Current Assets | $1,225 | $1,142 | | Inventories, net | $620 | $578 | | Total Assets | $1,958 | $1,895 | | Total Current Liabilities | $590 | $564 | | Long-term debt, net | $300 | $337 | | Total Liabilities | $1,181 | $1,161 | | Total Stockholders' Equity | $463 | $386 | Condensed Consolidated Statements of Operations Statement of Operations Summary (in millions, except per share data) | Metric | Q3 2023 | Q3 2022 | YTD 2023 | YTD 2022 | | :--- | :--- | :--- | :--- | :--- | | Sales | $888 | $904 | $2,644 | $2,494 | | Gross Profit | $183 | $165 | $537 | $452 | | Operating Income | $57 | $45 | $159 | $105 | | Net Income | $35 | $24 | $93 | $54 | | Diluted EPS | $0.33 | $0.21 | $0.88 | $0.42 | Condensed Consolidated Statements of Cash Flows Cash Flow Summary - Nine Months Ended Sep 30 (in millions) | Cash Flow Category | 2023 | 2022 | | :--- | :--- | :--- | | Net cash provided by (used in) operations | $92 | $(30) | | Net cash used in investing activities | $(12) | $(10) | | Net cash (used in) provided by financing activities | $(58) | $24 | | Increase (decrease) in cash | $22 | $(16) | - The significant improvement in operating cash flow was primarily due to a $45 million increase in inventory in 2023 versus a $197 million increase in 2022, and a $20 million increase in accounts receivable versus a $159 million increase in 2022, reflecting more efficient working capital management[14] Notes to the Condensed Consolidated Financial Statements - The company operates as a global distributor of pipe, valves, and fittings (PVF) and infrastructure products to the gas utilities, downstream/industrial/energy transition, and production/transmission infrastructure sectors[15][19] Disaggregated Revenue by Sector - Nine Months Ended Sep 30 (in millions) | Sector | 2023 | 2022 | | :--- | :--- | :--- | | Gas Utilities | $944 | $944 | | Downstream, Industrial & Energy Transition | $802 | $761 | | Production & Transmission Infrastructure | $898 | $789 | | Total | $2,644 | $2,494 | - The company uses the last-in, first-out (LIFO) method for its U.S. inventories. The LIFO reserve was $276 million as of September 30, 2023, compared to $279 million at year-end 2022[29] - As of September 30, 2023, the company had $303 million in total long-term debt, consisting of a Senior Secured Term Loan B ($293 million net) and borrowings under its Global ABL Facility ($10 million)[36] - The company is a defendant in approximately 548 lawsuits involving asbestos claims. Management believes that applicable third-party insurance will substantially cover these claims and the ultimate disposition is unlikely to have a material adverse effect[58] Management's Discussion and Analysis of Financial Condition and Results of Operations Management reports a 2% decrease in Q3 2023 revenue year-over-year, primarily due to reduced activity in the U.S. Gas Utilities sector as customers reduce inventory, however, for the first nine months of 2023, revenue grew 6% to $2.64 billion, driven by the Production & Transmission Infrastructure (PTI) and Downstream, Industrial and Energy Transition (DIET) sectors, with Q3 Adjusted EBITDA at $70 million, down from $82 million in Q3 2022, while YTD Adjusted EBITDA rose slightly to $202 million, and the company maintains strong liquidity of $748 million and plans to refinance its Term Loan maturing in 2024 Recent Trends and Outlook - Gas Utilities: Sales were flat YTD. Near-term weakness is expected as key customers reduce their inventory levels due to improved supply chain certainty. Long-term drivers remain positive due to infrastructure integrity programs[74][76] - DIET: Grew 5% YTD. Expected to deliver strong growth driven by energy transition projects (e.g., biofuels), LNG projects, and MRO activities. The Inflation Reduction Act is a positive catalyst[78][79] - PTI: Grew 14% YTD. This sector is the most cyclical and benefits from oil prices that support drilling and completion activity[80] - Supply Chain: Lead times and transportation costs have largely returned to pre-pandemic levels. Product inflation has eased. The company has been able to reduce its own inventory levels from the peak in Q2 2023[84][86] Results of Operations Q3 2023 vs Q3 2022 Performance (in millions) | Metric | Q3 2023 | Q3 2022 | $ Change | % Change | | :--- | :--- | :--- | :--- | :--- | | Sales | $888 | $904 | $(16) | (2)% | | Gross Profit | $183 | $165 | $18 | 11% | | Operating Income | $57 | $45 | $12 | 27% | | Net Income | $35 | $24 | $11 | 46% | | Adjusted EBITDA | $70 | $82 | $(12) | (15)% | - The 2% decrease in Q3 sales was driven by a $44 million decline in the U.S. Gas Utilities sector, partially offset by a $20 million increase in U.S. PTI sales[93][94] - Gross profit margin improved from 18.3% to 20.6% in Q3, largely due to a $4 million LIFO benefit in 2023 versus a $24 million LIFO expense in 2022[97] YTD 2023 vs YTD 2022 Performance (in millions) | Metric | YTD 2023 | YTD 2022 | $ Change | % Change | | :--- | :--- | :--- | :--- | :--- | | Sales | $2,644 | $2,494 | $150 | 6% | | Gross Profit | $537 | $452 | $85 | 19% | | Operating Income | $159 | $105 | $54 | 51% | | Net Income | $93 | $54 | $39 | 72% | | Adjusted EBITDA | $202 | $195 | $7 | 4% | - The 6% increase in YTD sales was driven by a $109 million (5%) increase in the U.S. segment, led by PTI and DIET sectors, and a $43 million (16%) increase in the International segment[113][114][116] Liquidity and Capital Resources - As of September 30, 2023, the company had total liquidity of $748 million, consisting of $52 million in cash and $696 million of excess availability under its Global ABL Facility[133][136] - The company postponed a refinancing of its Term Loan in April 2023 after the holder of its Preferred Stock filed a lawsuit to prevent it, claiming a right to consent. The lawsuit was dismissed without prejudice[134] - The company anticipates repaying or refinancing its Term Loan before its maturity in September 2024. It expects financing terms to be less favorable than the current agreement, resulting in a higher cost of capital[135] - On September 21, 2023, S&P Global Ratings downgraded the company's issuer credit rating from B to B- with a developing outlook[137] Quantitative and Qualitative Disclosures About Market Risk The company is primarily exposed to market risks from interest rates, foreign currencies, and steel price volatility, with no material changes to market risk policies or instruments since the 2022 Annual Report on Form 10-K - The company's primary market risks are associated with unfavorable movements in interest rates, foreign currencies, and steel price volatility[146] - No material changes to market risk policies or sensitive instruments were reported compared to the fiscal year ended December 31, 2022[146] Controls and Procedures As of September 30, 2023, the CEO and CFO concluded that the company's disclosure controls and procedures were effective, with no material changes to the internal control over financial reporting during the third quarter of 2023 - The Chief Executive Officer and Chief Financial Officer concluded that as of September 30, 2023, the company's disclosure controls and procedures were effective[147] - No changes occurred in the third quarter of 2023 that have materially affected, or are reasonably likely to materially affect, the company's internal control over financial reporting[148] PART II – OTHER INFORMATION Legal Proceedings The company is subject to various claims incidental to its business, including product claims and asbestos litigation, none of which are expected to have a material effect on its financial condition, and a legal proceeding initiated by the holder of the company's Preferred Stock to prevent a debt refinancing was dismissed without prejudice - The company faces various legal claims, including product liability and asbestos cases, but management believes none are likely to have a material adverse effect on the business[151][152][153] - In April 2023, the holder of the Company's Preferred Stock brought a proceeding to obtain a temporary restraining order to prevent the Company from refinancing its Term Loan; this proceeding was dismissed without prejudice[154] Risk Factors A new risk factor has been added concerning shareholder activism, noting that responding to activist campaigns, such as the one publicly reported by Engine Capital LP in October 2023, can be costly, time-consuming, and disruptive to business operations and strategy execution - A new risk factor was added regarding the potential negative effects of shareholder activism on the company's business, operations, and share price[156] - In October 2023, it was reported that Engine Capital LP had published a letter with its opinions on actions the company should take. Responding to such activism could be costly, divert management's attention, and impair strategic execution[157][158] Other Information On November 3, 2023, the Board of Directors adopted amended and restated bylaws, with amendments addressing the SEC's universal proxy rules, reserving the white proxy card for the Board's exclusive use, and enhancing disclosure requirements for stockholder nominations and proposals - On November 3, 2023, the Board adopted amended and restated bylaws[162] - Key amendments include addressing universal proxy rules, reserving the white proxy card for the Board, and enhancing disclosure requirements for stockholder nominations and proposals[164] Exhibits This section lists the exhibits filed with the Form 10-Q, including the Amended and Restated Bylaws, an Executive Compensation Clawback Policy, and required CEO/CFO certifications - Filed exhibits include the Amended and Restated Bylaws (Exhibit 3.2), the Executive Compensation Clawback Policy (Exhibit 10.1), and CEO/CFO certifications (Exhibits 31.1, 31.2, 32)[165]