MRC Global recently announced its third quarter 2015 results. The company's sales were $1.071 billion for the third quarter of 2015, which were 34% lower than the third quarter of 2014 and 11% lower than the second quarter of 2015.
The decline was driven by reduced activity across all sectors but particularly upstream. Sales also were negatively impacted by the strengthening of the U.S. dollar, which reduced reported sales by $44 million, or 3% from the third quarter last year.
Net income available to common stockholders, which is net income less dividends attributable to preferred stockholders, for the third quarter of 2015 was $10.0 million, or $0.10 per diluted share, compared to $50.1 million, or $0.49 per diluted share for the third quarter of 2014.
Andrew Lane, MRC Global's chairman, president and chief executive officer stated: “The third quarter results reflect the continued decline in spending by our customers in response to the current oil and gas commodity price environment. I'm pleased with our performance in this difficult market. We are focused on what we can control: winning and retaining customers, controlling costs and strengthening our balance sheet.
“We continue to have an excellent track record of contract renewals. This quarter we added a new five-year contract with Phillips 66, a new three-year contract with our largest Canadian customer and we also recently won our largest alloy pipe, fitting and flange order in Norway to date. We have controlled our operating cost structure by reducing SG&A 15% in the first nine months of 2015 compared to the same period last year. Finally, as a result of generating strong operating cash flows of $481 million for the first nine months of the year, combined with our recent preferred stock offering, we have reduced total debt by $790 million this year, bringing the net debt balance to $631 million at the end of the third quarter. Our balance sheet is strong and we are well positioned for the future.”
MRC Global’s third quarter 2015 gross profit was $185.2 million, or 17.3% of sales, a decline from third quarter 2014 gross profit of $278.0 million, or 17.2% of sales. Gross profit for the third quarter 2015 and 2014 reflected a benefit of $15.0 million and a charge of $3.9 million, respectively, in cost of sales relating to the use of the last-in, first out (LIFO) method of inventory cost accounting.
Selling, general and administrative (SG&A) expenses were $142.0 million, or 13.3% of sales, for the third quarter of 2015 compared to $184.8 million, or 11.4% of sales, for the same period of 2014. SG&A expenses were reduced by 23% vs. the third quarter of 2014, primarily due to the cost reduction measures. A favorable impact on expenses from a stronger U.S. dollar of $10.1 million also benefitted the quarter. SG&A expenses for the third quarter of 2015 included $0.7 million of severance and restructuring charges. The third quarter of 2014 included $8.3 million of pre-tax charges related to the cancellation of executive employment agreements and severance and restructuring charges.
Adjusted EBITDA was $51.3 million in the third quarter of 2015 compared to $132.3 million for the same period in 2014. The effective tax rate in the third quarter 2015 was 54.9%.The increase in the effective tax rate was the result of a higher expected tax rate for the full year of 42.6% due primarily to changes in our international segment including lower than previously forecasted pre-tax profits, pre-tax losses in certain jurisdictions with no corresponding tax benefit and the recognition of a valuation allowance for certain deferred tax assets during the third quarter.
Sales by segment
U.S. sales in the third quarter of 2015 were $865.4 million, down $339.8 million or 28.2% from the same quarter in 2014. The decrease reflected a $227 million decrease in the upstream sector, a $96 million decrease in the midstream sector and a modest decrease in the downstream sector. The decreases were attributable to reduced customer spending.
Canadian sales in the third quarter of 2015 were $69.4 million, down $91.8 million or 56.9% from the same quarter in 2014. The decrease in Canadian sales reflected an $81 million decrease in the upstream business due to a significant decline in customer spending. Sales were negatively impacted by $14 million as a result of a stronger U.S. dollar.
International sales in the third quarter of 2015 were $136.4 million, down $115.3 million or 45.8% from the same period in 2014. The decrease was due primarily to lower project activity and deferral of maintenance, repair and operations expenditures particularly in Europe, Norway and Australia. Sales were negatively impacted by $30 million due to the strengthening of the U.S. dollar.
Sales by sector
Upstream sales in the third quarter of 2015 decreased 49.7% from the third quarter of 2014 to $378.8 million, or 35% of total sales. The decline in upstream sales was across all segments and was a result of reduced customer activity. U.S. upstream sales declined 47% in the third quarter of 2015 from the third quarter 2014 as compared to a 55% decline in the average U.S. rig count over the same period.
Midstream sales in the third quarter of 2015 decreased 22.0% from the third quarter of 2014 to $370.0 million, or 35% of total sales. Sales to transmission customers were down 38% while sales to gas utility customers were up by 9% over the same quarter in 2014.
Downstream sales in the third quarter of 2015 decreased 17.5% from the third quarter of 2014 to $322.4 million, or 30% of total sales. The decline in the downstream sector was primarily in the International segment as a result of lower sales in Europe, Australia and Singapore. Sales in the U.S. were down 6.4%. A stronger U.S. dollar was responsible for 3.6% of the sales decline.
During the third quarter, the company reduced debt by $184 million to total debt outstanding of $664 million at Sept. 30, 2015. The debt repayment was funded by $203.8 million of cash provided by operations during the third quarter of 2015 and benefitted from a planned reduction in working capital. In addition, cash balances were $32.9 million at Sept. 30, 2015 compared to $25.1 million at the end of 2014. Debt, net of cash, was $631 million at Sept. 30, 2015.
Share repurchase program
In November 2015, the board of directors authorized a share repurchase program for common stock of up to $100 million. The program is scheduled to expire on Dec. 31, 2017. The shares may be repurchased at management's discretion in the open market. Depending on market conditions and other factors, these repurchases may be commenced or suspended from time to time without prior notice.
Lane commented: “Our focus throughout this year has been on repositioning the balance sheet. We now look to capitalize on our strong financial position through opportunistic share repurchases. The authorization reflects the board's confidence in MRC Global's ability to sustain and improve upon our position.”