MRC (MRC) - 2020 Q4 - Annual Report

PART I ITEM 1. BUSINESS MRC Global is the largest global distributor of PVF and infrastructure products to the energy industry, serving diverse sectors and focusing on strategic growth - MRC Global is the largest distributor of PVF and other infrastructure products to the energy industry, based on sales, serving approximately 12,000 customers globally through 230 service locations[14] - The company's business is cyclical and highly sensitive to global oil and natural gas prices and general economic conditions, with demand sharply declining in 2020 due to the COVID-19 pandemic[16][17] - Strategic objectives include increasing market share through global preferred supplier contracts, organic growth, enhancing product/service offerings, global expansion, technology investments, and working capital optimization[21] - The company operates in three geographical segments: U.S., Canada, and International, providing PVF and other infrastructure products to gas utilities, downstream & industrial, upstream production, and midstream pipeline sectors[30] - Safety is paramount, with a Total Recordable Incident Rate (TRIR) of 0.49 in 2020, significantly lower than the U.S. Bureau of Labor Statistics average of 3.7 for metal product wholesalers[31][32] - Key product types include Valves, Automation, Modification, Measurement and Instrumentation (VAMI), Carbon Steel Fittings and Flanges, Stainless Steel and Alloy Fittings, Flanges and Pipe, and Gas Products[33] - Services offered include digital transaction exchange, integrated supply services (procurement, warehousing, quality assurance, inventory management), and valve engineering and modification services[34][36][37][38] - The company sources from over 10,000 suppliers globally, with the top 25 suppliers accounting for approximately 42% of total purchases in 2020[39][41] - Sales and marketing efforts combine regional teams with a global accounts team, supported by specialized groups, including over 280 account managers and 600 customer service representatives[44][45][46] - The business experiences mild seasonal effects, with higher demand in August-October and lower demand in November-December and early in the year due to industry activity and winter weather[47] - The customer base is diverse, with approximately 12,000 customers, where the 25 largest customers represented approximately 56% of total sales in 2020, and the single largest customer accounted for about 7%[50][51] Backlog by Segment (in millions) | Year Ended December 31, | 2020 | 2019 | 2018 | | :---------------------- | :--- | :--- | :--- | | U.S. | $193 | $301 | $426 | | Canada | $13 | $34 | $35 | | International | $134 | $174 | $177 | | Total | $340 | $509 | $638 | - The company is the largest PVF distributor to the energy industry, competing with large national, regional, and local distributors, as well as direct sales from manufacturers, based on prompt local service, fulfillment capability, product/service breadth, price, and total customer costs[53] - As of December 31, 2020, MRC Global had approximately 2,600 employees across 17 countries, with 67% in the U.S., 27% in International, and 6% in Canada[55][56][57][58][59] - The company's culture is underpinned by core values including Customer Satisfaction, Teamwork, Safety Leadership, Financial Performance, Business Ethics, Employee Development, Operational Excellence, and Community/Charity Involvement[60][65] - Sustainability initiatives focus on creating an efficient supply chain to reduce emissions, minimizing waste through recycling programs, and selling low-emission valves (94% of valve sales in 2020) to help customers control methane and other emissions[67][68][69] - The company is subject to various environmental, health, and safety laws, with compliance costs historically not material, but non-compliance could result in fines, penalties, and remediation costs, while climate change regulations and a transition to alternative energy sources could also impact the business[70][71][73][74][75][76] ITEM 1A. RISK FACTORS The company faces significant risks from volatile energy prices, intense competition, supply chain issues, substantial indebtedness, operational disruptions, and international complexities - A large portion of revenue depends on capital and operating expenditures in the oil and natural gas industry, making the business highly sensitive to volatile oil and gas prices and general economic conditions[80][81][83][84] - Competition from large national, regional, and local distributors, as well as potential direct sales by manufacturers, could adversely affect revenue, earnings, and margins[85][86] - Risks include unexpected supply shortages, inability to pass on supplier cost increases (especially for steel products), and the lack of long-term contracts with most suppliers and many customers, leading to potential loss of significant customers or reduced purchase volumes[87][89][90][93][94][95] - Customer credit risks, particularly due to concentration in the energy industry, could result in losses if customers are unable to pay their debts[97][98] - Acquisitions involve numerous risks, including integration difficulties, failure to achieve objectives, strain on controls, and diversion of management attention[99][100] - Significant indebtedness ($383 million as of December 31, 2020) limits financial flexibility, requires substantial cash flow for debt service, and subjects the company to restrictive covenants[101][104] - The company is a holding company, dependent on subsidiaries' cash flow, which is subject to their earnings, debt terms, and legal/contractual restrictions on distributions[107][108][109] - Changes in credit profile could affect supplier relationships and payment terms, impacting liquidity[110] - A transition to alternative energy forms could reduce demand for oil and gas, adversely impacting sales and financial condition[114] - Exposure to strict environmental, health, and safety laws, including those related to greenhouse gas emissions and contamination, could lead to significant liabilities and increased costs[115][116][117][118][119] - Inadequate insurance coverage for potential liabilities, including litigation (e.g., asbestos-related lawsuits), product liability claims, and business interruptions, could have a material adverse effect[120][121][122][123][124] - Loss of key personnel, adverse health events (like pandemics), interruptions in information systems, and cybersecurity incidents pose significant operational risks[125][126][127][128][129][130] - Conducting business outside North America exposes the company to economic, legal, political, and regulatory risks, including currency fluctuations, restrictions on earnings repatriation, and compliance with anti-corruption laws (FCPA, UK Bribery Act) and trade controls[137][139][141][142][143][144][145] - Risks related to financial reporting include evaluations of internal controls under Sarbanes-Oxley Act Section 404, with potential loss of confidence if material weaknesses are reported[146][147] - The company does not currently intend to pay dividends to common stockholders in the foreseeable future, constrained by its holding company structure and credit agreements[148] ITEM 1B. UNRESOLVED STAFF COMMENTS There are no unresolved staff comments from the SEC ITEM 2. PROPERTIES MRC Global operates a global distribution network, primarily leasing facilities, with a hub-and-spoke model in North America and various branch and distribution centers internationally - North American operations include 7 distribution centers and 94 branch locations (85 in U.S., 9 in Canada), housing 13 valve and engineering service centers; less than 5% of branch locations are owned, and all distribution centers are leased[151] - International operations consist of 22 branch locations and 6 distribution centers (UK, Norway, Singapore, Netherlands, UAE, Australia), with 12 valve and engineering service centers; only the Brussels, Belgium location is owned, with others leased[152] - Principal executive office is in Houston, Texas, with corporate functions also in Charleston, West Virginia, and La Porte, Texas[153][154] ITEM 3. LEGAL PROCEEDINGS The company is involved in various legal proceedings, including asbestos-related claims substantially covered by insurance, and routine product claims, with no expected material adverse effect on financial statements - As of December 31, 2020, MRC Global is a defendant in approximately 578 lawsuits involving 1,153 asbestos-related claims[124][155] - No asbestos lawsuit has resulted in a judgment against the company to date; most have been settled, dismissed, or resolved, with applicable third-party insurance substantially covering these claims[124][155] - Management believes current accruals and associated estimates for pending and probable asbestos-related litigation over the next 15 years are adequate, relying on assumptions about consistent settlement payments, disease mix, dismissal rates, and insurance recoveries[124][155][253][254] - The company also faces routine product claims, where manufacturers are generally required to indemnify MRC Global, and management does not expect these or other pending legal proceedings to have a material adverse effect on consolidated financial statements[156][255][256] ITEM 4. MINE SAFETY DISCLOSURES This item is not applicable to the company EXECUTIVE OFFICERS OF THE REGISTRANT This section lists the executive officers of MRC Global Inc. as of February 12, 2021, including their respective titles and roles - Andrew R. Lane, President and CEO since September 2008, announced his intent to retire on December 31, 2021[160] - Kelly Youngblood serves as Executive Vice President and Chief Financial Officer since March 2020, bringing over 30 years of energy and finance expertise[161] - Daniel J. Churay is Executive Vice President – Corporate Affairs, General Counsel, Chief Human Resources Officer and Corporate Secretary since May 2012[162] - Grant Bates is Senior Vice President of Strategy, Corporate Development and E-commerce since April 2020[163] - John L. Bowhay is Senior Vice President of International Operations and Global Valves, Automation, Measurement and Instrumentation (VAMI)[164] - Rance Long serves as Senior Vice President of Business Development, globally[165] - Jack McCarthy serves as Senior Vice President of Supply Chain[166] - Karl W. Witt is Senior Vice President of North America Operations since April 2020[167] - Elton Bond has served as Senior Vice President and Chief Accounting Officer since May 2011[168] PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES The company's common stock is traded on the NYSE, with no common stock dividends declared in 2020 or 2019 due to credit facility restrictions, and no issuer share repurchases in 2020 - As of February 5, 2021, there were 135 holders of record of the Company's common stock, traded on the NYSE under the symbol 'MRC'[170][171] - The Board of Directors has not declared any dividends on common stock during 2020 or 2019 and currently has no intention to declare any, due to restrictions from credit facilities and preferred stock agreements[171][172][173] - No issuer purchases of securities were made in 2020[174] ITEM 6. SELECTED FINANCIAL DATA This section presents a five-year summary of selected financial data, highlighting significant declines in sales and a net loss in 2020, alongside improved cash and reduced debt Statement of Operations Data (in millions, except per share amounts) | Statement of Operations Data: | 2020 | 2019 | 2018 | 2017 | 2016 | | :---------------------------- | :--- | :--- | :--- | :--- | :--- | | Sales | $2,560 | $3,662 | $4,172 | $3,646 | $3,041 | | Cost of sales | $2,129 | $3,009 | $3,483 | $3,064 | $2,573 | | Gross profit | $431 | $653 | $689 | $582 | $468 | | Selling, general and administrative expenses | $449 | $550 | $562 | $536 | $524 | | Goodwill and intangible asset impairment | $242 | — | — | — | — | | Operating (loss) income | $(260) | $103 | $127 | $46 | $(56) | | Interest expense | $(28) | $(40) | $(38) | $(31) | $(35) | | Other, net | $5 | $3 | $6 | $(8) | — | | (Loss) income before income taxes | $(283) | $66 | $95 | $7 | $(91) | | Income tax (benefit) expense | $(9) | $27 | $21 | $(43) | $(8) | | Net (loss) income | $(274) | $39 | $74 | $50 | $(83) | | Series A preferred stock dividends | $24 | $24 | $24 | $24 | $24 | | Net (loss) income attributable to common stockholders | $(298) | $15 | $50 | $26 | $(107) | | (Loss) earnings per share amounts: | | | | | | | Basic | $(3.63) | $0.18 | $0.55 | $0.28 | $(1.10) | | Diluted | $(3.63) | $0.18 | $0.54 | $0.27 | $(1.10) | | Weighted-average shares, basic | 82.0 | 83.0 | 90.1 | 94.3 | 97.3 | | Weighted-average shares, diluted | 82.0 | 83.9 | 91.8 | 95.6 | 97.3 | | Dividends (common) | — | — | — | — | — | Balance Sheet Data (in millions) | Balance Sheet Data: | 2020 | 2019 | 2018 | 2017 | 2016 | | :------------------ | :--- | :--- | :--- | :--- | :--- | | Cash | $119 | $32 | $43 | $48 | $109 | | Working capital (1) | $567 | $732 | $896 | $756 | $684 | | Total assets | $1,781 | $2,325 | $2,434 | $2,340 | $2,164 | | Long-term debt (2) | $383 | $551 | $684 | $526 | $414 | | Redeemable preferred stock | $355 | $355 | $355 | $355 | $355 | | Stockholders' equity | $350 | $642 | $692 | $759 | $763 | Other Financial Data (in millions) | Other Financial Data: | 2020 | 2019 | 2018 | 2017 | 2016 | | :-------------------- | :--- | :--- | :--- | :--- | :--- | | Net cash flow: | | | | | | | Operating activities | $261 | $242 | $(11) | $(48) | $253 | | Investing activities | $19 | $(16) | $(14) | $(27) | $16 | | Financing activities | $(195) | $(238) | $24 | $9 | $(226) | ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This section analyzes MRC Global's financial condition and operations, detailing the impact of the COVID-19 pandemic on 2020 performance, cost reductions, cash flow, liquidity, and critical accounting estimates Cautionary Note Regarding Forward-Looking Statements This section cautions that forward-looking statements involve significant risks and uncertainties, including volatile energy prices and economic conditions, which could cause actual results to differ materially - Forward-looking statements are based on management's expectations and involve business risks and uncertainties that could cause actual results to differ materially[185][186] - Key risks include decreases in oil and natural gas prices, economic conditions, competition, supply shortages, cost increases, lack of long-term contracts, customer creditworthiness, acquisition challenges, significant indebtedness, and environmental regulations[188] - The company does not undertake to publicly update or revise any forward-looking statement, except as required by law[189] Overview MRC Global is the leading global distributor of PVF and infrastructure products to the energy industry, offering extensive SKUs and value-added solutions to approximately 12,000 customers - MRC Global is the largest distributor of PVF and other infrastructure products and services to the energy industry, based on sales[190] - The company serves diversified end-markets including gas utilities, downstream and industrial, upstream production, and midstream pipeline sectors[190][194] - It offers over 200,000 SKUs from a global network of over 10,000 suppliers to approximately 12,000 customers through about 230 service locations[190] - The company aims to be a primary PVF supplier, providing best-in-class service and a one-stop shop, maintaining an average relationship of over 25 years with its 25 largest customers[191] Key Drivers of Our Business Revenue is primarily driven by global energy sector expenditures, influenced by energy infrastructure integrity, volatile oil and natural gas prices, economic conditions, and steel market dynamics - Revenue is predominantly derived from PVF and other oilfield/industrial supplies to the energy sector, dependent on maintenance and expansionary expenditures by customers in gas utilities, downstream & industrial, upstream production, and midstream pipeline[192] - Key drivers include energy infrastructure integrity and modernization (gas utilities being stable and independent of commodity prices), oil and natural gas prices (impacting capital spending, pipelines, refinery utilization), and general economic conditions[195] - Manufacturer and distributor inventory levels, along with steel prices, availability, and supply/demand, influence product pricing and profitability[199] Recent Trends and Outlook The energy industry faced a sharp decline in 2020 due to COVID-19, leading to significant sales decreases and cost reductions for MRC Global, with a challenged outlook despite expected gas utility growth Key Industry Indicators (Year Ended December 31) | Indicator | 2020 | 2019 | 2018 | | :---------------------------- | :-------- | :-------- | :-------- | | Average Rig Count (Total North America) | 522 | 1,077 | 1,223 | | Average Rig Count (Total Worldwide) | 1,347 | 2,175 | 2,211 | | WTI crude oil (per barrel) | $39.16 | $56.98 | $65.23 | | Natural gas ($/Mcf) | $2.03 | $2.56 | $3.15 | | U.S. Wells Completed | 7,394 | 14,362 | 14,753 | - Global oil and gas industry spending decreased 32% in 2020, including approximately 45% in the U.S. upstream production market, directly impacting upstream production and midstream pipeline business components[197] - The gas utility sector, independent of oil and gas commodity prices, was initially impacted by COVID-19 delays but saw a modest rebound in H2 2020 and is expected to grow in 2021[200] - Cost reduction actions in 2020 included a voluntary early retirement program, involuntary headcount reduction (approx. 600 employees), hiring/compensation freezes, suspension of 401(k) matching, reductions in bonus targets and equity grants, management furloughs, and facility closures[201][202][206] - The company generated $261 million of cash from operations and reduced net debt by almost half to $264 million in 2020[201] Backlog by Segment (in millions) | Year Ended December 31, | 2020 | 2019 | 2018 | | :---------------------- | :--- | :--- | :--- | | U.S. | $193 | $301 | $426 | | Canada | $13 | $34 | $35 | | International | $134 | $174 | $177 | | Total | $340 | $509 | $638 | Results of Operations for the Years Ended December 31, 2020, 2019 and 2018 This section compares financial performance for 2020, 2019, and 2018, highlighting a significant decline in 2020 sales and a net loss due to the COVID-19 pandemic, reduced energy spending, and asset impairments Sales by Sector (in millions) | Sector | 2020 | % of Sales | 2019 | % of Sales | 2018 | % of Sales | | :---------------------- | :----- | :--------- | :----- | :--------- | :----- | :--------- | | Gas utilities | $832 | 33% | $857 | 24% | $844 | 20% | | Downstream & industrial | $786 | 31% | $1,105 | 30% | $1,209 | 29% | | Upstream production | $600 | 23% | $1,107 | 30% | $1,286 | 31% | | Midstream pipeline | $342 | 13% | $593 | 16% | $833 | 20% | | Total | $2,560 | 100% | $3,662 | 100% | $4,172 | 100% | Year Ended December 31, 2020 Compared to the Year Ended December 31, 2019 Consolidated sales decreased 30% to $2,560 million in 2020 due to COVID-19 and reduced energy spending, leading to a $260 million operating loss and a $298 million net loss, significantly impacted by asset impairments Consolidated Results of Operations (in millions) | Metric | 2020 | 2019 | $ Change | % Change | | :---------------------------------------- | :-------- | :-------- | :-------- | :------- | | Sales | $2,560 | $3,662 | $(1,102) | (30)% | | Operating (loss) income | $(260) | $103 | $(363) | N/M | | Interest expense | $(28) | $(40) | $12 | (30)% | | Other income | $5 | $3 | $2 | 67% | | Income tax benefit (expense) | $9 | $(27) | $36 | N/M | | Net (loss) income | $(274) | $39 | $(313) | N/M | | Net (loss) income attributable to common stockholders | $(298) | $15 | $(313) | N/M | | Gross Profit | $431 | $653 | $(222) | (34)% | | Adjusted Gross Profit (1) | $504 | $719 | $(215) | (30)% | | Adjusted EBITDA (1) | $97 | $201 | $(104) | (52)% | - Consolidated sales decreased by $1,102 million (30%) to $2,560 million, including a $6 million unfavorable impact from foreign currency weakening[213] - U.S. sales decreased $933 million (32%), with declines across all sectors: gas utilities (-$20 million), downstream & industrial (-$288 million), upstream production (-$394 million), and midstream pipeline (-$231 million), primarily due to the COVID-19 pandemic and reduced customer spending[214] - Canadian sales decreased $98 million (43%), mainly in the upstream production sector (-$73 million) and midstream pipeline (-$13 million), with a $1 million unfavorable impact from the Canadian dollar[215] - International sales decreased $71 million (15%), driven by reduced spending in upstream production (partly due to a multi-year project completion in Kazakhstan in 2019) and downstream & industrial sectors, with a $5 million unfavorable impact from foreign currencies[216] - Gross profit decreased $222 million (34%) to $431 million (16.8% of sales), primarily due to lower sales volumes; LIFO inventory costing reduced cost of sales by $19 million in 2020 (vs. $2 million in 2019), and inventory-related charges increased to $46 million (vs. $5 million in 2019)[217] - Selling, General and Administrative (SG&A) expenses decreased $101 million to $449 million (17.5% of sales), driven by lower employee-related costs, partially offset by $14 million in facility closure expenses and $14 million in severance/restructuring charges[219] - Operating income shifted from a $103 million profit in 2019 to a $260 million loss in 2020, a $363 million decline, largely due to $242 million in goodwill and intangible asset impairments[220][221][222][223] - Interest expense decreased $12 million (30%) to $28 million, due to lower average debt levels and interest rates[224] - Other income increased to $5 million, including a $5 million gain from a sale leaseback transaction[225] - Income tax shifted from a $27 million expense in 2019 to a $9 million benefit in 2020, with the effective tax rate decreasing from 41% to 3%, primarily due to a non-tax deductible goodwill impairment charge[226] - Net loss was $274 million in 2020, compared to net income of $39 million in 2019, reflecting the decline in income before taxes[227] - Adjusted EBITDA decreased $104 million (52%) to $97 million[228] Year Ended December 31, 2019 Compared to the Year Ended December 31, 2018 Discussion and analysis for fiscal year 2019 compared to fiscal year 2018 is incorporated by reference from the prior year's 10-K filing - Discussion and analysis for fiscal year 2019 compared to fiscal year 2018 is incorporated by reference from the prior year's 10-K filing[234] Financial Condition and Cash Flows In 2020, MRC Global generated strong operating cash flow from reduced working capital, increasing liquidity to $551 million, which is deemed sufficient for the next twelve months despite credit rating downgrades Cash Flows (in millions) | Net cash provided by (used in): | 2020 | 2019 | | :------------------------------ | :--- | :--- | | Operating activities | $261 | $242 | | Investing activities | $19 | $(16) | | Financing activities | $(195) | $(238) | | Net cash provided (used): | $85 | $(12) | - Net cash provided by operating activities increased to $261 million in 2020 (from $242 million in 2019), primarily due to lower working capital requirements from declining sales, generating $220 million cash from working capital (vs. $118 million in 2019)[236] - Net cash provided by investing activities was $19 million in 2020 (vs. $16 million used in 2019), including $29 million net proceeds from sale leaseback transactions[238] - Net cash used in financing activities was $195 million in 2020 (vs. $238 million in 2019), with $161 million in net payments on the Global ABL Facility and $24 million for preferred stock dividends[239] - Total liquidity (cash on hand + Global ABL Facility availability) was $551 million at December 31, 2020, with cash and cash equivalents at $119 million (up from $32 million in 2019)[244] - Credit ratings were downgraded in Q2 2020 (Moody's B1 to B2, S&P B to B-) due to softening demand and low oil/gas prices; the company was in compliance with credit facility covenants as of December 31, 2020[245] - The company expects its liquidity to be sufficient for the next twelve months but may seek additional debt or equity financing based on market conditions[246] Contractual Obligations, Commitments and Contingencies Contractual obligations totaled $1,160 million, including debt, leases, and purchase obligations, alongside legal contingencies like asbestos claims, which are substantially covered by insurance with no material adverse effects expected Contractual Obligations (in millions) as of December 31, 2020 | Obligation | Total | 2021 | 2022-2023 | 2024-2025 | More Than 5 Years | | :-------------------------- | :------ | :---- | :-------- | :-------- | :---------------- | | Long-term debt (1) | $383 | $4 | $8 | $371 | — | | Interest payments (2) | $44 | $12 | $24 | $8 | — | | Operating leases | $355 | $43 | $65 | $45 | $202 | | Purchase obligations (3) | $337 | $337 | — | — | — | | Other long-term liabilities | $41 | — | — | — | $41 | | Total | $1,160 | $396 | $97 | $424 | $243 | - The company was contingently liable for approximately $20 million in standby letters of credit, trade guarantees, and bid/performance/surety bonds at December 31, 2020, with no material amounts expected to be drawn[251] - Asbestos claims involve approximately 1,153 claims, with no judgments against the company to date, and are substantially covered by third-party insurance; management believes current accruals and estimates for the next 15 years are adequate[252][253][254] - Routine product claims are generally indemnified by manufacturers, and management does not expect any pending legal proceedings or off-balance sheet arrangements to have a material adverse effect[255][256] Critical Accounting Estimates Critical accounting estimates involve significant judgments for inventories, goodwill, intangible assets, and income taxes, with 2020 seeing substantial impairment charges due to the COVID-19 pandemic's impact on fair value estimates - U.S. inventories are valued at the lower of LIFO cost or market, with quarterly estimates for inflation and year-end balances; reserves for excess and obsolete inventories are based on historical usage, future demand, and market conditions[258][259][260] - Goodwill and intangible assets comprise 28% of total assets as of December 31, 2020; goodwill and indefinite-lived intangible assets are tested for impairment annually (October 1st) or more frequently if circumstances indicate impairment[261][269] - Impairment tests for goodwill and indefinite-lived intangible assets use discounted cash flow and market multiple valuation techniques, requiring significant assumptions and estimates regarding future operating results, cash flows, sales prices, profitability, discount rates, and growth trends[270][271][273][275] - In 2020, a $217 million goodwill impairment charge ($177 million in U.S., $40 million in International) and a $25 million U.S. indefinite-lived tradename impairment charge were recognized due to the sharp decline in oil and gas demand from the COVID-19 pandemic[274][276] - Income taxes are determined using the liability method, with deferred tax assets and liabilities recorded based on enacted tax laws; valuation allowances are established when it's more likely than not that deferred tax assets will not be realized, considering future taxable income and tax planning strategies[278][279][280][281] ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The company faces market risks from interest rates, foreign currency, and steel prices, managing these through an interest rate swap, forward foreign exchange contracts, and inventory level adjustments - All outstanding debt as of December 31, 2020, was at floating rates; a $250 million interest rate swap, maturing in March 2023, fixes a portion of variable interest rate exposure[283] - A 1% increase in the LIBOR rate would result in an approximate $1 million increase in annual interest expense[284] - Foreign currency exchange rate risk from non-U.S. operations is managed using forward foreign exchange contracts, with immaterial gains/losses in 2020 and 2019[285] - The business is sensitive to steel prices, especially for carbon steel line pipe, and manages this risk by controlling inventory levels[286] ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA This section includes audited consolidated financial statements and supplementary data, incorporating management's and the independent auditor's reports on internal control and financial statements - Includes Management's Report on Internal Control Over Financial Reporting and Reports of Ernst & Young LLP (Independent Registered Public Accounting Firm) on internal control and consolidated financial statements[287] - Audited Consolidated Financial Statements include Balance Sheets (2020, 2019), Statements of Operations (2020, 2019, 2018), Comprehensive Income (Loss) (2020, 2019, 2018), Stockholders' Equity (2020, 2019, 2018), Cash Flows (2020, 2019, 2018), and Notes to Consolidated Financial Statements[287] ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE There have been no changes in or disagreements with accountants on accounting and financial disclosure - No changes in or disagreements with accountants on accounting and financial disclosure[288] ITEM 9A. CONTROLS AND PROCEDURES Management concluded that disclosure controls and internal control over financial reporting were effective as of December 31, 2020, with no material changes during the quarter - Management concluded that disclosure controls and procedures were effective as of December 31, 2020[289] - The CEO and CFO provided certifications pursuant to Section 302 of the Sarbanes-Oxley Act[290] - Management's Report on Internal Control Over Financial Reporting concluded that internal control over financial reporting was effective as of December 31, 2020[291][320] - No material changes in internal control over financial reporting occurred during the quarter ended December 31, 2020[292] ITEM 9B. OTHER INFORMATION No other information is required to be disclosed - No other information to report[293] PART III ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE Information on directors, executive officers, and corporate governance is incorporated by reference from the 2021 Proxy Statement, with executive officer details also in Part I - Information on directors and nominees is incorporated by reference from the 2021 Proxy Statement[295] - Information on executive officers is presented at the end of Part I of this Annual Report[296] - The company has a Code of Ethics for Principal Executive and Senior Financial Officers, Corporate Governance Guidelines, and board committee charters, available on its website[298] ITEM 11. EXECUTIVE COMPENSATION Detailed information on executive compensation, including the Compensation Committee Report, is incorporated by reference from the 2021 Proxy Statement - Information on executive compensation is incorporated by reference from the 2021 Proxy Statement[299] - The Compensation Committee Report is furnished, not filed, and is not subject to the liabilities of Section 18 of the Exchange Act[299][300] ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS Information on security ownership and equity compensation plans, including outstanding awards and available shares, is incorporated by reference from the 2021 Proxy Statement - Information on security ownership of certain beneficial owners and management is incorporated by reference from the 2021 Proxy Statement[300] Equity Compensation Plan Information as of December 31, 2020 | Plan Category | Number of securities to be issued upon exercise of outstanding options, warrants and rights | Weighted-average exercise price of outstanding options, warrants and rights | Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a)) | | :-------------------------------------------------------------------------- | :------------------------------------------------------------------------ | :-------------------------------------------------------------------------- | :-------------------------------------------------------------------------------------------------------------------------------------- | | Equity compensation plans approved by security holders: Stock options, restricted stock awards, restricted stock unit awards, and performance share unit awards | 4,885,948 | $17.04 | 1,828,274 | | Equity compensation plans not approved by security holders | None | N/A | None | | Total | 4,885,948 | $17.04 | 1,828,274 | ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE Information on certain relationships, related transactions, and director independence is incorporated by reference from the 2021 Proxy Statement - Information on certain relationships, related transactions, and director independence is incorporated by reference from the 2021 Proxy Statement[303] ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES Information on principal accounting fees and services and the Audit Committee's pre-approval policy is incorporated by reference from the 2021 Proxy Statement - Information on principal accounting fees and services and the Audit Committee's pre-approval policy is incorporated by reference from the 2021 Proxy Statement[304] PART IV ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES This section lists financial statements, schedules, and a comprehensive array of exhibits filed as part of the 10-K, including organizational documents, agreements, and certifications - Financial statements are referenced from Item 8[306] - All financial statement schedules are omitted as not applicable, not required, or information is included in the financial statements or notes[305] - A list of exhibits is provided, including organizational documents, credit agreements, employment agreements, equity compensation plans, and certifications (e.g., CEO/CFO certifications, XBRL data)[307][308][309][310][311][312] ITEM 16. FORM 10-K SUMMARY No Form 10-K summary is included - No Form 10-K summary is provided[314] SIGNATURES This section contains the signatures of MRC Global Inc.'s authorized representatives, certifying the filing of the Annual Report on Form 10-K as of February 12, 2021 - The report is signed by Andrew R. Lane (President and CEO), Kelly Youngblood (EVP and CFO), Elton Bond (SVP and Chief Accounting Officer), and members of the Board of Directors[315][316] - The signing date for all individuals is February 12, 2021[315][316] MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING Management is responsible for internal control over financial reporting and concluded its effectiveness as of December 31, 2020, based on the COSO (2013) framework, acknowledging inherent limitations - Management is responsible for internal control over financial reporting, designed to provide reasonable assurance regarding financial reporting reliability[317][318] - Management concluded that internal control over financial reporting was effective as of December 31, 2020, based on the COSO (2013 framework)[320] - The report acknowledges inherent limitations of internal control, such as human diligence, judgment lapses, and circumvention by collusion or management override[319] REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM (Internal Control) Ernst & Young LLP issued an unqualified opinion on the effectiveness of MRC Global Inc.'s internal control over financial reporting as of December 31, 2020, and on the 2020 consolidated financial statements - Ernst & Young LLP issued an unqualified opinion on MRC Global Inc.'s internal control over financial reporting as of December 31, 2020, based on the COSO (2013 framework)[323] - The audit was conducted in accordance with PCAOB standards to obtain reasonable assurance about the effectiveness of internal control[326][327] - The firm also expressed an unqualified opinion on the company's 2020 consolidated financial statements[324] REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM (Financial Statements) Ernst & Young LLP issued an unqualified opinion on the consolidated financial statements for the three years ended December 31, 2020, identifying goodwill and intangible asset impairment assessment as a critical audit matter - Ernst & Young LLP issued an unqualified opinion on the consolidated financial statements for the three years ended December 31, 2020, confirming fair presentation in accordance with U.S. GAAP[330] - The audit was conducted in accordance with PCAOB standards[331][333] - A critical audit matter was the Goodwill and Indefinite-lived Intangible Asset Impairment Assessment, due to the complexity and judgmental nature of estimating fair value, particularly for revenue growth rates, discount rates, and projected EBITDA margins[336][337] - Audit procedures included assessing valuation methodologies, testing significant assumptions against industry trends, developing independent ranges for discount and royalty rates, and performing sensitivity analyses[338][339] NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1—SIGNIFICANT ACCOUNTING POLICIES This note details MRC Global's significant accounting policies, covering business operations, basis of presentation, key estimates for inventories, goodwill, intangible assets, income taxes, revenue recognition, and recently adopted and issued accounting standards - MRC Global Inc. is a holding company and global distributor of PVF and related infrastructure products and services to the energy sector, with operations in the U.S., Canada, Europe, Asia, Australasia, the Middle East, and Caspian[349] - Financial statements are prepared in conformity with U.S. GAAP, requiring significant estimates and assumptions for items like accounts receivable, LIFO inventory, goodwill, intangible assets, deferred taxes, and self-insurance[351][352] - U.S. inventories are valued at the lower of LIFO cost or market, while foreign inventories are valued at the lower of weighted-average cost or net realizable value; reserves for excess and obsolete inventories totaled $19 million at December 31, 2020[354][355] - Goodwill and indefinite-lived intangible assets are tested for impairment annually (October 1st) or more frequently, using discounted cash flow and market multiple valuation techniques, requiring estimates of future operating results, cash flows, and discount rates[360][361][362] - Revenue is recognized when control of goods or services transfers to customers, typically at shipment or delivery; most contracts have performance obligations of one year or less[379] - The company adopted ASU 2016-13 (Measurement of Credit Losses on Financial Instruments) on January 1, 2020, resulting in $1 million of incremental bad debt expense[385] - Recently issued accounting standards include ASU 2020-06 (simplifying convertible instruments and EPS), ASU 2020-04 (Reference Rate Reform for LIBOR transition), and ASU 2019-12 (simplifying income taxes), with impacts currently being evaluated[386][387][388] NOTE 2—REVENUE RECOGNITION Revenue is recognized upon transfer of control, typically at shipment, with contract balances including receivables and deferred revenue, and is disaggregated by end-market sector and geographic segment - Revenue is recognized when control of promised goods or services is transferred to customers, typically at shipment or delivery[389] - Contract assets (uninvoiced receivables) were $17 million at December 31, 2020, and deferred revenue (contract liabilities) was $6 million[390][391] Disaggregated Revenue by Segment and Sector (in millions) | Sector | U.S. | Canada | International | Total | | :---------------------- | :----- | :----- | :------------ | :------ | | 2020: | | | | | | Gas utilities | $821 | $11 | — | $832 | | Downstream & industrial | $566 | $15 | $205 | $786 | | Upstream production | $329 | $89 | $182 | $600 | | Midstream pipeline | $307 | $13 | $22 | $342 | | Total 2020 | $2,023 | $128 | $409 | $2,560 | | 2019: | | | | | | Gas utilities | $841 | $16 | — | $857 | | Downstream & industrial | $854 | $22 | $229 | $1,105 | | Upstream production | $723 | $162 | $222 | $1,107 | | Midstream pipeline | $538 | $26 | $29 | $593 | | Total 2019 | $2,956 | $226 | $480 | $3,662 | NOTE 3—ACCOUNTS RECEIVABLE The allowance for credit losses on accounts receivable decreased to $2 million in 2020, with net charge-offs of $4 million and immaterial sales returns and allowances Allowance for Credit Losses Rollforward (in millions) | Metric | 2020 | 2019 | 2018 | | :---------------- | :--- | :--- | :--- | | Beginning balance | $4 | $4 | $4 | | Net charge-offs | $(4) | $(2) | $(1) | | Provision | $2 | $2 | $1 | | Ending balance | $2 | $4 | $4 | - Sales returns and allowances approximated $1 million at December 31, 2020, 2019, and 2018, remaining immaterial[395] NOTE 4—INVENTORIES Inventory decreased to $509 million in 2020, with LIFO decrements reducing cost of sales and $46 million in non-cash charges for excess or obsolete products Inventory Composition (in millions) | Inventory Category | December 31, 2020 | December 31, 2019 | | :------------------------------------------------ | :---------------- | :---------------- | | Finished goods inventory at average cost: | | | | Valves, automation, measurement and instrumentation | $279 | $355 | | Carbon steel pipe, fittings and flanges | $156 | $268 | | All other products | $229 | $268 | | Subtotal | $664 | $891 | | Less: Excess of average cost over LIFO cost (LIFO reserve) | $(136) | $(155) | | Less: Other inventory reserves | $(19) | $(35) | | Total | $509 | $701 | - Inventory quantities were reduced in 2020 and 2019, resulting in LIFO decrements that decreased cost of sales by $29 million and $5 million, respectively[396] - Non-cash inventory-related charges totaled $46 million in 2020 (vs. $5 million in 2019) to reduce the carrying value of excess or obsolete products, including $28 million in U.S., $2 million in Canada, and $16 million in International (partly due to exiting Thailand business)[397] NOTE 5—PROPERTY, PLANT AND EQUIPMENT Net property, plant, and equipment decreased to $103 million in 2020, including land, buildings, machinery, and software, with $137 million in depreciation and amortization allowances Property, Plant and Equipment (in millions) | Category | Depreciable Life (in years) | 2020 | 2019 | | :-------------------------------- | :-------------------------- | :---- | :---- | | Land and improvements | — | $3 | $12 | | Building and building improvements | 40 | $45 | $70 | | Machinery and equipment | 3 to 10 | $134 | $155 | | Enterprise resource planning software | 10 | $56 | $56 | | Software in progress | — | $2 | — | | Subtotal | | $240 | $293 | | Allowances for depreciation and amortization | | $(137) | $(155) | | Total | | $103 | $138 | - Building and building improvements include $9 million of non-cash leasehold improvements (lease incentives) as of December 31, 2020[398] NOTE 6—GOODWILL AND OTHER INTANGIBLE ASSETS Goodwill decreased to $264 million in 2020 due to a $217 million impairment charge, and other intangible assets also saw a $25 million impairment, both driven by the COVID-19 pandemic Goodwill by Segment (in millions) | Segment | Goodwill at Dec 31, 2019 | Impairment | Effect of foreign currency translation | Goodwill at Dec 31, 2020 | | :------------ | :----------------------- | :--------- | :------------------------------------- | :----------------------- | | US | $441 | $(177) | — | $264 | | Canada | — | — | — | — | | International | $42 | $(40) | $(2) | — | | Total | $483 | $(217) | $(2) | $264 | - A $217 million goodwill impairment charge was recognized in 2020 ($177 million in U.S. and $40 million in International) due to the sharp decline in oil and natural gas demand and prices from the COVID-19 pandemic[402] Other Intangible Assets (in millions) | Category | Gross (2020) | Accumulated Amortization (2020) | Net Book Value (2020) | Gross (2019) | Accumulated Amortization (2019) | Net Book Value (2019) | | :------------------------ | :----------- | :------------------------------ | :-------------------- | :----------- | :------------------------------ | :-------------------- | | Customer base (1) | $418 | $(296) | $122 | $449 | $(300) | $149 | | Indefinite lived trade names (2) | $107 | — | $107 | $132 | — | $132 | | Total | $525 | $(296) | $229 | $581 | $(300) | $281 | - A $25 million impairment charge was recognized for the U.S. indefinite-lived tradename asset in 2020[405] - Amortization of intangible assets is estimated at $24 million for 2021[407] NOTE 7 – LEASES The company leases various facilities, primarily operating leases, with $14 million in facility closure charges and a $29 million sale and leaseback transaction in 2020 - Most leases are classified as operating leases, with lease expense recognized on a straight-line basis; leases with initial terms of 12 months or less are not recorded on the balance sheet[409] Maturity of Operating Lease Liabilities (in millions) | Year | Amount | | :---------- | :----- | | 2021 | $43 | | 2022 | $35 | | 2023 | $30 | | 2024 | $25 | | 2025 | $20 | | After 2025 | $202 | | Total lease payments | $355 | | Less: Interest | $(131) | | Present value of lease liabilities | $224 | Operating Lease Term and Discount Rate (December 31, 2020) | Metric | Value | | :-------------------------------- | :---- | | Weighted-average remaining lease term (years) | 13 | | Weighted-average discount rate | 6.8% | - In 2020, $14 million in charges were incurred for facility closures, related to impairments of right-of-use assets, lease abandonments, and contractual obligations[414] - A December 2020 sale and leaseback of facilities generated $29 million in net proceeds and a $5 million gain, resulting in $24 million of new ROU assets and operating lease liabilities[415] NOTE 8—LONG-TERM DEBT Long-term debt decreased to $383 million in 2020, primarily comprising a $400 million Senior Secured Term Loan B and no outstanding Global ABL Facility borrowings, with a mandatory $105 million repayment due in April 2021 Long-Term Debt Components (in millions) | Debt Component | December 31, 2020 | December 31, 2019 | | :---------------------------------- | :---------------- | :---------------- | | Senior Secured Term Loan B, net | $383 | $390 | | Global ABL Facility | — | $161 | | Subtotal | $383 | $551 | | Less: current portion | $4 | $4 | | Total Long-Term Debt, net | $379 | $547 | - The Senior Secured Term Loan B, with an original principal of $400 million, matures on September 22, 2024, and amortizes at 1% per year[416][419] - The Term Loan is secured by a first lien on most company assets (excluding ABL collateral) and a second lien on ABL collateral[420] - A mandatory repayment of approximately $105 million on the Term Loan is required by April 2021 due to excess cash flow generated in 2020, expected to be sourced from the Global ABL Facility[422] - The Global ABL Facility, maturing in September 2022, provides $800 million in revolver commitments across various jurisdictions, with no borrowings outstanding and $432 million of Excess Availability at December 31, 2020[243][428][434] Interest Rates on Borrowings | Debt Component | December 31, 2020 | December 31, 2019 | | :-------------------------- | :---------------- | :---------------- | | Senior Secured Term Loan B | 4.93% | 5.50% | | Global ABL Facility | —% | 3.47% | | Weighted average interest rate | 4.93% | 4.91% | Maturities of Long-Term Debt (in millions) | Year | Amount | | :-------- | :----- | | 2021 | $4 | | 2022 | $4 | | 2023 | $4 | | 2024 | $371 | | 2025 | — | | Thereafter | — | NOTE 9—DERIVATIVE FINANCIAL INSTRUMENTS The company uses derivative financial instruments, including a $250 million interest rate swap as a cash flow hedge and foreign exchange forward contracts, to manage interest rate and foreign currency risks - A five-year interest rate swap, effective March 2018 with a $250 million notional amount, is designated as an effective cash flow hedge; its fair value was a liability of $14 million at December 31, 2020 (vs. $9 million in 2019)[436] - Foreign exchange forward contracts are used to manage foreign exchange rate risks but are not designated as hedging instruments; their fair value was not material in 2020 and 2019[437][438] - The total notional amount of outstanding forward foreign exchange contracts was approximately $3 million at December 31, 2020 (vs. $21 million in 2019)[437] NOTE 10—INCOME TAXES The company reported a $9 million income tax benefit in 2020, with a 3% effective tax rate primarily due to a non-tax deductible goodwill impairment, and has net deferred tax liabilities of $66 million Income (Loss) Before Income Taxes (in millions) | Region | 2020 | 2019 | 2018 | | :------------ | :----- | :---- | :--- | | United States | $(216) | $86 | $95 | | Foreign | $(67) | $(20) | — | | Total | $(283) | $66 | $95 | Income Taxes (in millions) | Category | 2020 | 2019 | 2018 | | :------------ | :--- | :--- | :--- | | Current: | | | | | Federal | $8 | $22 | $21 | | State | $2 | $6 | $1 | | Foreign | $2 | $4 | $8 | | Subtotal | $12 | $32 | $30 | | Deferred: | | | | | Federal | $(20) | $(4) | $(6) | | State | — | — | $(1) | | Foreign | $(1) | $(1) | $(2) | | Subtotal | $(21) | $(5) | $(9) | | Income tax (benefit) expense | $(9) | $27 | $21 | - The effective tax rate was 3% in 2020 (vs. 41% in 2019), primarily due to a non-tax deductible goodwill impairment charge[440] Deferred Tax Assets and Liabilities (in millions) | Category | December 31, 2020 | December 31, 2019 | | :------------------------ | :---------------- | :---------------- | | Deferred tax assets: | | | | Allowance for credit losses | $1 | $1 | | Accruals and reserves | $17 | $20 | | Net operating loss and tax credit carryforwards | $68 | $58 | | Other | $2 | $1 | | Subtotal | $88 | $80 | | Valuation allowance | $(71) | $(64) | | Total assets | $17 | $16 | | Deferred tax liabilities: | | | | Inventory valuation | $(23) | $(29) | | Property, plant and equipment | $(10) | $(13) | | Intangible assets | $(50) | $(63) | | Total liabilities | $(83) | $(105) | | Net deferred tax liability | $(66) | $(89) | - The company had $17 million in state NOL carryforwards and $213 million in foreign NOL carryforwards (of which $170 million have no expiration), with full valuation allowances recorded against them[441] - Unrecognized tax benefits totaled $1 million at December 31, 2020 (vs. $4 million in 2019)[444] NOTE 11—REDEEMABLE PREFERRED STOCK The company issued $363 million in Series A Convertible Perpetual Preferred Stock in 2015, which carries a 6.50% cumulative dividend and is convertible or redeemable under specific conditions - Issued 363,000 shares of Series A Convertible Perpetual Preferred Stock in June 2015 for $363 million[445] - Preferred Stock ranks senior to common stock, pays a 6.50% cumulative cash dividend, and is convertible into common stock at an initial rate of 55.9284 shares per preferred share (conversion price $17.88)[445][446] - The company can redeem the preferred stock at 105% of par value from June 10, 2020, or convert it if common stock price meets certain thresholds[446] - Holders can require repurchase upon a fundamental change, leading to its classification as temporary equity[447] NOTE 12—STOCKHOLDERS' EQUITY As of December 31, 2020, the company had 106.3 million common shares outstanding, with no repurchases in 2020, and reported a $3.63 basic and diluted loss per share - As of December 31, 2020, 106,315,296 common shares were outstanding[341][450] - No share repurchase activity occurred in 2020; in 2019, 4,868,491 shares were repurchased for $75 million[451] Accumulated Other Comprehensive Loss (in millions) | Category | December 31, 2020 | December 31, 2019 | | :---------------------------- | :---------------- | :---------------- | | Currency translation adjustments | $(222) | $(224) | | Hedge accounting adjustments | $(11) | $(7) | | Other adjustments | $(1) | $(1) | | Accumulated other comprehensive loss | $(234) | $(232) | Earnings per Share (in millions, except per share amounts) | Metric | 2020 | 2019 | 2018 | | :---------------------------------------- | :----- | :---- | :--- | | Net (loss) income attributable to common stockholders | $(298) | $15 | $50 | | Average basic shares outstanding | 82.0 | 83.0 | 90.1 | | Effect of dilutive securities | — | 0.9 | 1.7 | | Average diluted shares outstanding | 82.0 | 83.9 | 91.8 | | Net (loss) income per share: | | | | | Basic | $(3.63) | $0.18 | $0.55 | | Diluted | $(3.63) | $0.18 | $0.54 | - For 2020, 2019, and 2018, all shares of Preferred Stock were anti-dilutive; approximately 3.6 million, 2.5 million, and 3.1 million anti-dilutive stock options, restricted stock units, and performance units existed for those r