MRC (MRC) - 2022 Q2 - Quarterly Report

PART I – FINANCIAL INFORMATION This section provides an overview of the company's financial performance and position, including unaudited statements and management's analysis ITEM 1. FINANCIAL STATEMENTS (UNAUDITED) This section presents MRC Global Inc.'s unaudited condensed consolidated financial statements, including balance sheets, statements of operations, comprehensive income, stockholders' equity, and cash flows, along with detailed notes CONDENSED CONSOLIDATED BALANCE SHEETS Total assets and liabilities increased from December 31, 2021, to June 30, 2022, primarily due to higher accounts receivable and inventories | Metric | June 30, 2022 (in millions) | December 31, 2021 (in millions) | | :-------------------------------- | :--------------------------- | :----------------------------- | | Total Assets | $1,864 | $1,671 | | Current Assets | $1,101 | $899 | | Accounts receivable, net | $489 | $379 | | Inventories, net | $555 | $453 | | Total Current Liabilities | $549 | $436 | | Long-term debt, net | $353 | $295 | | Total Stockholders' Equity | $347 | $323 | CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS Sales and net income grew substantially for the three and six months ended June 30, 2022, reflecting improved operational performance and profitability | Metric | Three Months Ended June 30, 2022 (in millions) | Three Months Ended June 30, 2021 (in millions) | Six Months Ended June 30, 2022 (in millions) | Six Months Ended June 30, 2021 (in millions) | | :--------------------------------------- | :------------------------------------------- | :------------------------------------------- | :------------------------------------------- | :------------------------------------------- | | Sales | $848 | $686 | $1,590 | $1,295 | | Gross profit | $151 | $112 | $287 | $215 | | Operating income | $31 | $10 | $60 | $13 | | Net income | $14 | $4 | $30 | $1 | | Basic earnings (loss) per common share | $0.10 | $(0.02) | $0.22 | $(0.13) | | Diluted earnings (loss) per common share | $0.09 | $(0.02) | $0.21 | $(0.13) | CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) Comprehensive income increased for the three and six months ended June 30, 2022, driven by higher net income, despite negative foreign currency translation adjustments | Metric | Three Months Ended June 30, 2022 (in millions) | Three Months Ended June 30, 2021 (in millions) | Six Months Ended June 30, 2022 (in millions) | Six Months Ended June 30, 2021 (in millions) | | :------------------------------------ | :------------------------------------------- | :------------------------------------------- | :------------------------------------------- | :------------------------------------------- | | Net income | $14 | $4 | $30 | $1 | | Foreign currency translation adjustments | $(6) | $1 | $(4) | $0 | | Comprehensive income | $11 | $7 | $32 | $4 | CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY Stockholders' equity increased to $347 million at June 30, 2022, from $323 million at December 31, 2021, primarily due to net income and equity-based compensation | Metric | June 30, 2022 (in millions) | December 31, 2021 (in millions) | | :-------------------------- | :-------------------------- | :---------------------------- | | Total Stockholders' Equity | $347 | $323 | | Retained (Deficit) | $(801) | $(819) | | Additional Paid-in Capital | $1,751 | $1,747 |\ | Accumulated Other Comprehensive Loss | $(229) | $(231) | CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS Net cash used in operating activities was $63 million for the six months ended June 30, 2022, primarily due to increased working capital for inventory, a shift from $47 million provided in the prior year | Metric | Six Months Ended June 30, 2022 (in millions) | Six Months Ended June 30, 2021 (in millions) | | :------------------------------------ | :------------------------------------------- | :------------------------------------------- | | Net cash (used in) provided by operating activities | $(63) | $47 | | Net cash used in investing activities | $(7) | $(2) | | Net cash provided by (used in) financing activities | $45 | $(101) | | Net decrease in cash and cash equivalents | $(25) | $(56) | | Cash -- end of period | $21 | $63 | NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS These notes provide detailed information on the company's business operations, accounting policies, and specific financial statement line items, including revenue, inventory, debt, and segment performance NOTE 1 – BACKGROUND AND BASIS OF PRESENTATION MRC Global Inc. is a global distributor of pipe, valves, fittings (PVF), and infrastructure products and services to energy and industrial sectors, with interim financial statements prepared under Rule 10-01 of Regulation S-X - MRC Global Inc. is a holding company and global distributor of pipe, valves, fittings (PVF) and infrastructure products and services[16] - The company serves gas utilities, downstream, industrial and energy transition, upstream production, and midstream pipeline sectors[21] - The adoption of ASU 2020-06 on January 1, 2022, did not have a material impact on the consolidated financial statements[20] NOTE 2 – REVENUE RECOGNITION Revenue is primarily recognized upon shipment or delivery, with contract assets of $13 million and deferred revenue of $5 million at June 30, 2022, showing strong growth in U.S. and Canada segments | Metric | June 30, 2022 (in millions) | December 31, 2021 (in millions) | | :-------------------- | :-------------------------- | :---------------------------- | | Contract asset balance | $13 | $12 | | Deferred revenue balance | $5 | $4 | | Segment | 3 Months Ended June 30, 2022 (in millions) | 3 Months Ended June 30, 2021 (in millions) | % Change | | :------------ | :--------------------------------------- | :--------------------------------------- | :------- | | U.S. | $717 | $558 | 28% | | Canada | $40 | $30 | 33% | | International | $91 | $98 | (7)% | | Segment | 6 Months Ended June 30, 2022 (in millions) | 6 Months Ended June 30, 2021 (in millions) | % Change | | :------------ | :--------------------------------------- | :--------------------------------------- | :------- | | U.S. | $1,335 | $1,042 | 28% | | Canada | $83 | $62 | 34% | | International | $172 | $191 | (10)% | NOTE 3 – INVENTORIES Total inventories, net, increased to $555 million at June 30, 2022, from $453 million at December 31, 2021, with the LIFO method reducing net income during rising inventory costs | Metric | June 30, 2022 (in millions) | December 31, 2021 (in millions) | | :------------------------------------ | :-------------------------- | :---------------------------- | | Inventories, net | $555 | $453 | | Less: Excess of average cost over LIFO cost (LIFO reserve) | $(239) | $(213) | - The LIFO method reduces net income during periods of rising inventory costs (inflationary periods)[32] NOTE 4 – LEASES The company primarily uses operating leases for facilities, with lease expense of $20 million and cash paid for leases of $21 million for the six months ended June 30, 2022 | Metric | 6 Months Ended June 30, 2022 (in millions) | 6 Months Ended June 30, 2021 (in millions) | | :------------------------------------ | :------------------------------------------- | :------------------------------------------- | | Operating lease expense | $20 | $19 | | Cash paid for leases | $21 | $19 | | Metric | June 30, 2022 | | :-------------------------------- | :------------ | | Weighted-average remaining lease term (years) | 13 | | Weighted-average discount rate | 6.7% | NOTE 5 – LONG-TERM DEBT Long-term debt, net, increased to $353 million at June 30, 2022, from $295 million at December 31, 2021, primarily due to increased Global ABL Facility borrowings, with $529 million in excess availability | Metric | June 30, 2022 (in millions) | December 31, 2021 (in millions) | | :-------------------------- | :-------------------------- | :---------------------------- | | Long-term debt, net | $353 | $295 | | Senior Secured Term Loan B | $297 | $297 | | Global ABL Facility | $59 | $0 | - Excess Availability under the Global ABL Facility was $529 million as of June 30, 2022[40] | Metric | June 30, 2022 | December 31, 2021 | | :------------------------ | :------------ | :---------------- | | Weighted average interest rate | 5.32% | 5.41% | NOTE 6 – REDEEMABLE PREFERRED STOCK The company has 363,000 shares of Series A Convertible Perpetual Preferred Stock outstanding, paying 6.50% cumulative dividends, classified as temporary equity due to a potential repurchase obligation - 363,000 shares of Series A Convertible Perpetual Preferred Stock are issued and outstanding, with a stated value of $1,000 per share[42] - Holders are entitled to cumulative dividends payable quarterly in cash at a rate of 6.50% per annum[42] - The Preferred Stock is classified as temporary equity because a fundamental change could require redemption, an event not solely within the company's control[44] NOTE 7 – STOCKHOLDERS' EQUITY Stockholders' equity increased to $347 million at June 30, 2022, with over 1.5 million equity awards granted, and accumulated other comprehensive loss at $(229) million, primarily from currency translation adjustments | Metric | June 30, 2022 (in millions) | December 31, 2021 (in millions) | | :------------------------------------ | :-------------------------- | :---------------------------- | | Total Stockholders' Equity | $347 | $323 | | Accumulated other comprehensive loss | $(229) | $(231) | - In 2022, 90,015 shares of restricted stock, 423,896 performance share unit awards, and 1,006,519 shares of restricted stock units were granted[45] | Metric | 3 Months Ended June 30, 2022 | 3 Months Ended June 30, 2021 | 6 Months Ended June 30, 2022 | 6 Months Ended June 30, 2021 | | :--------------------------------------- | :--------------------------- | :--------------------------- | :--------------------------- | :--------------------------- | | Basic earnings (loss) per common share | $0.10 | $(0.02) | $0.22 | $(0.13) | | Diluted earnings (loss) per common share | $0.09 | $(0.02) | $0.21 | $(0.13) | NOTE 8 – SEGMENT INFORMATION The company operates in three reportable segments: U.S., Canada, and International, with the U.S. segment showing significant growth, while International sales decreased due to foreign currency weakening - The company's business is comprised of three operating and reportable segments: U.S., Canada, and International[48] | Segment | 3 Months Ended June 30, 2022 (in millions) | 3 Months Ended June 30, 2021 (in millions) | % Change | | :------------ | :--------------------------------------- | :--------------------------------------- | :------- | | U.S. Sales | $717 | $558 | 28% | | Canada Sales | $40 | $30 | 33% | | International Sales | $91 | $98 | (7)% | | U.S. Operating Income | $30 | $7 | N/M | | Canada Operating Income | $(1) | $0 | N/M | | International Operating Income | $2 | $3 | (33)% | | Product Line | 3 Months Ended June 30, 2022 (in millions) | 3 Months Ended June 30, 2021 (in millions) | | :------------------------------------ | :------------------------------------------- | :------------------------------------------- | | Total carbon pipe, fittings and flanges | $248 | $188 | | Valves, automation, measurement and instrumentation | $280 | $243 | | Gas products | $198 | $162 | NOTE 9 – FAIR VALUE MEASUREMENTS The company uses derivative financial instruments, including an interest rate swap with a notional amount of $250 million, and foreign exchange forward contracts, to manage market risks - The company uses derivative financial instruments to manage exposure to interest rate risk and foreign currency fluctuations[52] - An interest rate swap with a notional amount of $250 million is designated as an effective cash flow hedge[53][54] | Metric | June 30, 2022 (in millions) | December 31, 2021 (in millions) | | :-------------------------- | :-------------------------- | :---------------------------- | | Fair value of interest rate swap | $0 | $(7) (liability) | | Fair value of debt | $348 | $296 | NOTE 10 – COMMITMENTS AND CONTINGENCIES The company is a defendant in approximately 552 asbestos lawsuits, substantially covered by third-party insurance, and other legal claims are not expected to materially affect financial statements - As of June 30, 2022, the company is named a defendant in approximately 552 lawsuits involving 1,117 asbestos claims[57] - Applicable third-party insurance substantially covers these asbestos claims[57] - The likelihood that the ultimate disposition of any legal proceedings or product claims will have a material adverse effect on consolidated financial statements is remote[57][58][60] ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This section provides management's perspective on the company's financial condition and operational results, highlighting revenue growth, improved profitability, key business drivers, market trends, supply chain challenges, and liquidity Cautionary Note Regarding Forward-Looking Statements This section advises against undue reliance on forward-looking statements, as they involve known and unknown risks and uncertainties that could cause actual results to differ materially - Forward-looking statements are subject to business risks and uncertainties that could cause actual results to differ materially[64] - Key risks include decreases in capital and other expenditure levels, U.S. and international economic conditions, decreases in oil and natural gas prices, and unexpected supply shortages[65] - The company undertakes no obligation to publicly update or revise any forward-looking statement, except as required by law[67] Overview MRC Global is a leading global distributor of pipe, valves, fittings (PVF) and infrastructure products, offering over 250,000 SKUs to approximately 10,000 customers across diversified energy, industrial, and gas utility end-markets - MRC Global is the leading global distributor of pipe, valves, fittings (PVF) and other infrastructure products and services[68] - The company offers over 250,000 SKUs from more than 10,000 suppliers and serves approximately 10,000 customers through 205 service locations globally[68] - Key end-markets include gas utilities, downstream, industrial and energy transition, upstream production, and midstream pipeline sectors[70] Key Drivers of Our Business Revenue is primarily driven by PVF sales to energy, industrial, and gas utility customers, dependent on their maintenance and capital expenditures, influenced by energy infrastructure, commodity prices, and economic conditions - Revenue is predominantly derived from the sale of PVF and other supplies to energy, industrial and gas utility customers globally[71] - Business performance is dependent on customer maintenance and expansionary operating and capital expenditures[71] - Key influencing factors include energy infrastructure integrity, oil and natural gas demand and prices, economic conditions, inventory levels, and steel prices, availability, supply and demand[74] Recent Trends and Outlook The company experienced a 14% sequential revenue increase in Q2 2022, leading to an improved double-digit percentage revenue growth outlook for 2022, with strong growth across all key sectors - Revenue increased 14% sequentially from Q1 2022 to Q2 2022, outperforming initial expectations[72] - The company expects double-digit percentage revenue improvement in 2022 compared to 2021[72] | Sector | H1 2022 Sales Growth (YoY) | % of Total Revenue (H1 2022) | | :------------------------------------ | :------------------------- | :--------------------------- | | Gas utilities | 22% | 37% | | Downstream, industrial & energy transition | 26% | 31% | | Upstream production | 24% | ~21% (from 336M/1590M) | | Midstream pipeline | 14% | ~11% (from 184M/1590M) | Russia-Ukraine War The Russia-Ukraine war has led to commodity price spikes and supply constraints, and while MRC Global has no direct operations in the conflict regions, it anticipates benefiting from new LNG infrastructure projects in the U.S. and Europe - The Russia-Ukraine war has spurred a commodity price spike, supply constraints, and policy changes for energy security[81] - The company has no operations or sales in Ukraine, Belarus, or Russia[81] - New LNG infrastructure projects in the U.S. and Europe could benefit the midstream pipeline and DIET sectors[82] Supply Chain and Labor The company faces extended lead-times and logistics disruptions, exacerbated by COVID-19 lockdowns, experiencing inflation in transportation and product costs, and labor constraints increasing SG&A expenses - Extended lead-times and logistics disruptions are expected to continue for the foreseeable future[83] - The company is experiencing significant increases in transportation costs and inflation for certain product categories[83][84] - Labor constraints are impacting the company globally, leading to increased selling, general and administrative expenses[86] COVID-19 Pandemic The company monitors the COVID-19 pandemic and has operational plans, including isolation protocols and alternative staffing, to manage potential outbreaks and ensure business continuity and employee safety - The company continues to monitor the COVID-19 pandemic as cases and hospitalizations have recently increased[87] - Plans are in place to isolate potentially infected employees and staff facilities with employees from other locations or supply product from other facilities in case of an outbreak[87] Backlog Total backlog significantly increased to $746 million at June 30, 2022, from $394 million at June 30, 2021, reflecting strong growth across all segments, with most expected to be realized as revenue within twelve months | Segment | June 30, 2022 (in millions) | December 31, 2021 (in millions) | June 30, 2021 (in millions) | | :------------ | :-------------------------- | :------------------------------ | :-------------------------- | | U.S. | $526 | $350 | $257 | | Canada | $54 | $35 | $13 | | International | $166 | $135 | $124 | | Total | $746 | $520 | $394 | - Substantially all of the sales in the backlog are expected to be realized as revenue within twelve months[88] Key Industry Indicators Key industry indicators for the three and six months ended June 30, 2022, showed significant improvements, with average rig counts, crude oil and natural gas prices, and U.S. well permits and completions all substantially higher | Metric | 3 Months Ended June 30, 2022 | 3 Months Ended June 30, 2021 | % Change (YoY) | | :------------------------------------ | :--------------------------- | :--------------------------- | :------------- | | Average Rig Count (Total) | 1,642 | 1,256 | 30.7% | | WTI crude oil (per barrel) | $108.83 | $66.19 | 64.4% | | Brent crude oil (per barrel) | $113.84 | $68.98 | 65.0% | | Natural gas ($/MMBtu) | $7.50 | $2.95 | 154.2% | | Average Monthly U.S. Well Permits | 3,499 | 1,885 | 85.6% | | U.S. Wells Completed | 2,862 | 2,328 | 22.9% | Results of Operations The company's results of operations for the three and six months ended June 30, 2022, demonstrate strong financial performance, characterized by significant sales growth, improved gross profit margins, and increased operating and net income Three Months Ended June 30, 2022 Compared to the Three Months Ended June 30, 2021 Consolidated sales increased 24% to $848 million, driven by strong U.S. growth, with Canada sales up 33%, International sales down 7%, gross profit margin at 17.8%, operating income at $31 million, and net income at $14 million | Metric | June 30, 2022 (in millions) | June 30, 2021 (in millions) | $ Change | % Change | | :--------------------------------------- | :-------------------------- | :-------------------------- | :------- | :------- | | Consolidated Sales | $848 | $686 | $162 | 24% | | U.S. Sales | $717 | $558 | $159 | 28% | | Canada Sales | $40 | $30 | $10 | 33% | | International Sales | $91 | $98 | $(7) | (7)% | | Gross profit | $151 (17.8% of sales) | $112 (16.3% of sales) | $39 | 35% | | Operating income | $31 | $10 | $21 | N/M | | Net income | $14 | $4 | $10 | N/M | | Adjusted EBITDA | $65 (7.7% of sales) | $36 (5.2% of sales) | $29 | 81% | - U.S. sales increase was driven by renewable biofuel projects, turnaround project and maintenance spending, integrity upgrade programs, smart meter programs, and increased well completions[93] - International sales decrease was primarily due to the weakening of foreign currencies relative to the U.S. dollar, unfavorably impacting sales by $10 million[95] Six Months Ended June 30, 2022 Compared to the Six Months Ended June 30, 2021 Consolidated sales increased 23% to $1,590 million, with U.S. sales up 28%, Canada sales up 34%, International sales down 10%, gross profit margin at 18.1%, operating income at $60 million, and net income at $30 million | Metric | June 30, 2022 (in millions) | June 30, 2021 (in millions) | $ Change | % Change | | :--------------------------------------- | :-------------------------- | :-------------------------- | :------- | :------- | | Consolidated Sales | $1,590 | $1,295 | $295 | 23% | | U.S. Sales | $1,335 | $1,042 | $293 | 28% | | Canada Sales | $83 | $62 | $21 | 34% | | International Sales | $172 | $191 | $(19) | (10)% | | Gross profit | $287 (18.1% of sales) | $215 (16.6% of sales) | $72 | 33% | | Operating income | $60 | $13 | $47 | N/M | | Net income | $30 | $1 | $29 | N/M | | Adjusted EBITDA | $113 (7.1% of sales) | $60 (4.6% of sales) | $53 | 88% | - U.S. sales increase was driven by the full implementation of a new customer contract in gas utilities, increased renewable biofuels projects, and higher customer spending for well completions[111] - International sales decrease was primarily due to the weakening of foreign currencies relative to the U.S. dollar, unfavorably impacting sales by $15 million[113] Liquidity and Capital Resources Total liquidity was $550 million at June 30, 2022, including cash and $529 million in excess availability under the $750 million Global ABL Facility, with sufficient liquidity expected for the foreseeable future - Total liquidity, consisting of cash on hand and amounts available under the Global ABL Facility, was $550 million as of June 30, 2022[128] - The outstanding balance on the Senior Secured Term Loan B was $297 million as of June 30, 2022[126] - The Global ABL Facility has $750 million in commitments, with $59 million borrowings outstanding and $529 million of Excess Availability as of June 30, 2022[127] - The company was in compliance with the covenants contained in its various credit facilities as of and during the six months ended June 30, 2022[129] Cash Flows Net cash used in operating activities was $63 million for the six months ended June 30, 2022, primarily due to increased working capital for inventory, a shift from $47 million provided in the prior year | Metric | Six Months Ended June 30, 2022 (in millions) | Six Months Ended June 30, 2021 (in millions) | | :------------------------------------ | :------------------------------------------- | :------------------------------------------- | | Net cash (used in) provided by operating activities | $(63) | $47 | | Net cash provided by (used in) financing activities | $45 | $(101) | - The change in operating cash flows was primarily the result of an increase in working capital due to inventory purchases and other expenses to support growing market activity[133] - Net cash provided by financing activities in H1 2022 was primarily due to net proceeds from revolving credit facilities of $60 million[135] Critical Accounting Policies Financial statement preparation requires management judgments, estimates, and assumptions for uncertain matters, with critical accounting policies detailed in the Annual Report on Form 10-K for the fiscal year ended December 31, 2021 - Financial statements require management judgments, estimates, and assumptions about highly uncertain matters[136] - Critical accounting policies are described in the Annual Report on Form 10-K for the fiscal year ended December 31, 2021[137] ITEM 3. 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 its market risk policies or instruments since December 31, 2021 - The company is primarily exposed to market risk associated with unfavorable movements in interest rates, foreign currencies, and steel price volatility[138] - There have been no material changes to market risk policies or market risk sensitive instruments and positions since December 31, 2021[138] ITEM 4. CONTROLS AND PROCEDURES The CEO and CFO concluded that disclosure controls and procedures were effective as of June 30, 2022, with no material changes in internal control over financial reporting during Q2 2022 - The company's disclosure controls and procedures were effective as of June 30, 2022[139] - No material changes in internal control over financial reporting occurred during the second quarter of 2022[140] PART II – OTHER INFORMATION This section provides additional information not covered in the financial statements, including legal proceedings, risk factors, and exhibits ITEM 1. LEGAL PROCEEDINGS The company is involved in various legal proceedings, including asbestos and product claims, with management believing their ultimate disposition will not materially affect financial condition, results of operations, or cash flows, and asbestos claims substantially covered by insurance - The company is subject to various claims and legal proceedings incidental to its businesses, including asbestos and product liability claims[143][144] - Management believes the ultimate disposition of these claims is not expected to have a material adverse effect on financial condition, results of operations, or cash flows[143][144] - Information regarding asbestos cases and other claims is detailed in Note 10 – Commitments and Contingencies[145] ITEM 1A. RISK FACTORS This section refers to significant factors that could materially adversely affect the company's business, financial condition, or operating results, as described in this Form 10-Q and the Annual Report on Form 10-K - Significant risk factors are described in Part I, Item 2 of this Form 10-Q and in Part I, Item 1A of the Annual Report on Form 10-K for the year ended December 31, 2021[146] ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS There were no unregistered sales of equity securities or use of proceeds to report for the period ITEM 3. DEFAULTS UPON SENIOR SECURITIES There were no defaults upon senior securities to report for the period ITEM 4. MINING SAFETY DISCLOSURES There were no mining safety disclosures to report for the period ITEM 5. OTHER INFORMATION There is no other information to report for the period ITEM 6. EXHIBITS This section lists all exhibits filed with the Form 10-Q, including corporate governance documents, CEO and CFO certifications, and financial information in iXBRL format - Exhibits include corporate governance documents, certifications of the CEO and CFO, and financial information in iXBRL format[152]