ITEM 7.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should read the following discussion and analysis of our financial condition and results of operations in conjunction with our financial statements and related notes included elsewhere in this report. This discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of a number of factors, including, but not limited to, those set forth under “Cautionary Note Regarding Forward-Looking Statements” and “Item 1A—Risk Factors” and elsewhere in this report.
Cautionary Note Regarding Forward-Looking Statements
Management’s Discussion and Analysis of Financial Condition and Results of Operations (as well as other sections of this Annual Report on Form 10-K) contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Forward-looking statements include those preceded by, followed by or including the words “will”, “expect”, “intended”, “anticipated”, “believe”, “project”, “forecast”, “propose”, “plan”, “estimate”, “enable”, and similar expressions, including, for example, statements about our business strategy, our industry, our future profitability, growth in the industry sectors we serve, our expectations, beliefs, plans, strategies, objectives, prospects and assumptions, and estimates and projections of future activity and trends in the energy, industrial and gas utilities industry. These forward-looking statements are not guarantees of future performance. These statements are based on management’s expectations that involve a number of business risks and uncertainties, any of which could cause actual results to differ materially from those expressed in or implied by the forward-looking statements. These statements involve known and unknown risks, uncertainties and other factors, most of which are difficult to predict and many of which are beyond our control, including the factors described under “Item 1A. Risk Factors,” that may cause our actual results and performance to be materially different from any future results or performance expressed or implied by these forward-looking statements. Such risks and uncertainties include, among other things:
decreases in capital and other expenditure levels in the industries that we serve;
U.S. and international general economic conditions;
global geopolitical events;
decreases in oil and natural gas prices;
unexpected supply shortages;
loss of third-party transportation providers;
cost increases by our suppliers and transportation providers;
increases in steel prices, which we may be unable to pass along to our customers which could significantly lower our profit;
our lack of long-term contracts with most of our suppliers;
suppliers’ price reductions of products that we sell, which could cause the value of our inventory to decline;
decreases in steel prices, which could significantly lower our profit;
an increase in the price of goods sold if tariffs are imposed or a decline in demand for certain of the products we distribute if tariffs and duties on these products are lifted;
holding more inventory than can be sold in a commercial time frame;
significant substitution of renewables and low-carbon fuels for oil and gas, impacting demand for our products;
risks related to adverse weather events or natural disasters;
environmental, health and safety laws and regulations and the interpretation or implementation thereof;
changes in our customer and product mix;
the risk that manufacturers of the products we distribute will sell a substantial amount of goods directly to end users in the industry sectors we serve;
failure to operate our business in an efficient or optimized manner;
our ability to compete successfully with other companies in our industry
our lack of long-term contracts with many of our customers and our lack of contracts with customers that require minimum purchase volumes;
inability to attract and retain our team members or the potential loss of key personnel;
adverse health events, such as a pandemic;
interruption in the proper functioning of our information systems;
the occurrence of cybersecurity incidents;
risks related to our customers’ creditworthiness;
the success of our acquisition strategies;
the potential adverse effects associated with integrating acquisitions into our business and whether these acquisitions will yield their intended benefits;
impairment of our goodwill or other intangible assets;
adverse changes in political or economic conditions in the countries in which we operate;
our significant indebtedness;
the dependence on our subsidiaries for cash to meet our parent company's obligations;
changes in our credit profile;
potential inability to obtain necessary capital;
the potential share price volatility and costs incurred in response to any shareholder activism campaigns;
the sufficiency of our insurance policies to cover losses, including liabilities arising from litigation;
product liability claims against us;
pending or future asbestos-related claims against us;
exposure to U.S. and international laws and regulations, regulating corruption, limiting imports or exports or imposing economic sanctions;
risks relating to ongoing evaluations of internal controls required by Section 404 of the Sarbanes-Oxley Act and a material weakness related to our inventory cycle count control if it remains unremediated; and
risks related to changing laws and regulations including trade policies and tariffs.
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Undue reliance should not be placed on our forward-looking statements. Although forward-looking statements reflect our good faith beliefs, reliance should not be placed on forward-looking statements because they involve known and unknown risks, uncertainties and other factors, which may cause our actual results, performance or achievements to differ materially from anticipated future results, performance or achievements expressed or implied by such forward-looking statements. We undertake no obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future events, changed circumstances or otherwise, except to the extent law requires.
Overview
We are the leading global distributor of pipe, valves, fittings ("PVF") and other infrastructure products and services to diversified energy, industrial and gas utility sectors. We provide innovative supply chain solutions, technical product expertise and a robust digital platform to customers globally through our leading position across each of our diversified end-markets including the following sectors:
Gas Utilities: gas utilities (storage and distribution of natural gas)
DIET: downstream, industrial and energy transition (crude oil refining, petrochemical and chemical processing, general industrials and energy transition projects)
PTI: production and transmission infrastructure (exploration, production, extraction, gathering, processing and transmission of oil and gas)
We offer approximately 200,000 SKUs, including an extensive array of PVF, oilfield supply, valve automation and modification, measurement, instrumentation and other general and specialty products from our global network of over 7,100 suppliers. With over 100 years of history, our over 2,600 team members serve over 8,300 customers through 197 service locations including regional distribution centers, service centers, corporate offices and third-party pipe yards, where we often deploy pipe near customer locations.
Our customers use the PVF and other infrastructure products that we supply in mission critical process applications that require us to provide a high degree of product knowledge, technical expertise and comprehensive value-added services to our customers. We seek to provide best-in-class service and a one-stop shop for customers by satisfying the most complex, multi- site needs of many of the largest companies in the energy, industrial and gas utilities sectors as their primary PVF supplier. We believe the critical role we play in our customers' supply chain, together with our extensive product and service offerings, broad global presence, customer-linked scalable information systems and efficient distribution capabilities, serve to solidify our long-standing customer relationships and drive our growth. As a result, we have an average relationship of approximately 35 years with our 25 largest customers.
Key Drivers of Our Business
We derive our revenue predominantly from the sale of PVF and other supplies to gas utility, energy, and industrial customers globally. Our business is dependent upon both the current conditions and future prospects in these industries and, in particular, our customers' maintenance and expansionary operating and capital expenditures. The outlook for PVF spending is influenced by numerous factors, including the following:
Gas Utility and Energy Infrastructure Integrity and Modernization. Ongoing maintenance and upgrading of existing energy facilities, pipelines and other infrastructure equipment is a meaningful driver for business across the sectors we serve. This is particularly true for the Gas Utilities sector. Activity with customers in this sector is driven by upgrades and replacement of existing infrastructure as well as new residential and commercial development. Continual maintenance of an aging network of pipelines and local distribution networks is a critical requirement for these customers irrespective of broader economic conditions. As a result, this business tends to be more stable over time than our traditional oilfield-dependent businesses and moves independently of commodity prices.
Oil and Natural Gas Demand and Prices. Sales of PVF and infrastructure products to the oil and natural gas industry constitute a significant portion of our sales. As a result, we depend upon the maintenance and capital expenditures of oil and natural gas companies to explore for, produce and process oil, natural gas and refined products. Demand for oil and natural gas, current and projected commodity prices and the costs necessary to produce oil and gas impact customer capital spending, additions to and maintenance of pipelines, refinery utilization and petrochemical processing activity. Additionally, as these participants rebalance their capital investment away from traditional, carbon-based energy toward alternative sources, we expect to continue to supply them and enhance our product and service offerings to support their changing requirements, including in areas such as carbon capture utilization and storage, biofuels, offshore wind and hydrogen processing.
Economic Conditions. Changes in the general economy or in the energy sector (domestically or internationally) can cause demand for fuels, feedstocks and petroleum-derived products to vary, thereby causing demand for the products we distribute to materially change.
Manufacturer and Distributor Inventory Levels of PVF and Related Products. Manufacturer and distributor inventory levels of PVF and related products can change significantly from period to period. Increased inventory levels by manufacturers or other distributors can cause an oversupply of PVF and related products in the industry sectors we serve and reduce the prices that we are able to charge for the products we distribute. Reduced prices, in turn, would likely reduce our profitability. Conversely, decreased manufacturer inventory levels may ultimately lead to increased demand for our products and often result in increased revenue, higher PVF pricing and improved profitability.
Steel Prices, Availability and Supply and Demand. Fluctuations in steel prices can lead to volatility in the pricing of the products we distribute, especially carbon steel line pipe products, which can influence the buying patterns of our customers. A majority of the products we distribute contain various types of steel. The worldwide supply and demand for these products and other steel products that we do not supply, impact the pricing and availability of our products and, ultimately, our sales and operating profitability. Additionally, supply chain disruptions with key manufacturers or in markets in which we source products can impact the availability of inventory we require to support our customers. Furthermore, logistical challenges, including inflation and availability of freight providers and containers for shipping can also significantly impact our profitability and inventory lead-times. These constraints can also present an opportunity, as our supply chain expertise allows us to meet customer expectations when the competition may not.
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MRC Global Sale of Canada Business
On March 14, 2025, the Company completed its sale of its Canadian operations to EMCO Corporation, and we plan to use the proceeds for reduction of debt. As a result of the expected sale, a pre-tax, non-cash loss on discontinued operations of approximately $22 million was recorded in the fourth quarter of 2024. The historical results of the Canada segment have been reflected as discontinued operations in our audited consolidated financial statements for all periods prior to the definitive agreement. Assets and liabilities associated with the Canada segment are classified as assets and liabilities of discontinued operations in our audited Consolidated Balance Sheets as of December 31, 2024 and 2023. Additional disclosures regarding the sale of our Canada operations are provided in Note 2 of the Notes to the Consolidated Financial Statements included in Item 8 of this Form 10-K.
Recent Trends and Outlook
In January 2025, a new U.S. President took office for the second time, and a new U.S. Congress was seated. The new President has executed a number of executive orders that terminate U.S. participation in the Paris Climate Agreement and purport to support U.S. oil and gas producers, reduce U.S. focus on alternative energy sources and lessen the regulatory burden on businesses. The President and his party have also announced an aggressive policy agenda to raise tariffs on imported goods, maintain and enhance expiring tax code changes that are due to expire in 2025, including a series of reduced tax rates, modify the relationships between the U.S. and other countries, cancel or modify trade treaties and remake relationships with other countries. Until specific laws are passed, executive actions are taken, or federal regulatory action is enacted, it is unclear what impact these policies will have on our business. While at first impression these policies could decrease the regulatory and tax burden on our business and the businesses of our U.S. customers, increase oil and gas production in the U.S. and, as a result, increase our U.S. business activity and the sales of products from our U.S. suppliers, it is not clear that all impacts will be . Oil and gas producers have generally remained disciplined in their capital expenditures and have generally not increased production beyond their ability to fund their expenditures from prudent borrowings and cash flow from operations. In addition, it is unclear how potential U.S. government actions will impact financial support for carbon capture and utilization projects that many companies, including oil and gas producers, participate or how tariffs may impact the cost of our new purchases of inventory for our customers. The President has imposed significant tariffs on steel products, which have taken effect in mid-March 2025. A significant portion of the products that we sell are made from steel. In addition, the President has announced significant tariffs on products from China, Canada and Mexico. A portion of the products that we sell are sourced from China, including certain valve sub-assemblies that are finished in the U.S. The tariffs on products from Canada and Mexico have a lesser direct impact on our business as they do not represent a significant portion of the products that we purchase from those countries for resale to our customers. The short-term impacts of tariffs on our business depends upon whether we can pass price increases to cover the tariffs to our customers. Longer-term, if tariffs significantly raise the price of infrastructure buildouts to our customers, our customers may or projects, demand for our products. Even so, a significant portion of our U.S. inventory and products are domestically made but some products, such as valves, often have a significant portion of non-U.S. components, and we do import some valve and other products. However, in the of specifics on some policies and the rapidly changing tariff landscape and given the government's generally supportive stance for the oil and gas industry, we are cautiously that these policies will be supportive of our business.
We continue to support our customers in the gas utilities sector and traditional energy markets along with other industrial end markets and the rapidly evolving energy transition. For the year ended 2024, 69% of our revenue was derived from our Gas Utilities and DIET sectors, with the remainder in the PTI sector.
Gas Utilities
Gas Utilities continues to be our largest sector, making up 37% of our total Company revenue, with an 8% decrease in revenue compared to 2023. Although the long-term growth fundamentals of this sector remain intact, several key gas utilities customers have been focused on reducing their own product inventory levels due to more certainty in the supply chain and associated lead times. Higher interest rates and inflation in construction costs have also caused customers to delay project activity. Although we have experienced lower sales activity in this sector compared to prior year, the long-term market drivers remain positive due to distribution integrity upgrade programs as well as new home construction in certain U.S. states. The majority of the work we perform with our gas utility customers are multi-year programs where they continually evaluate, monitor and implement measures to improve their pipeline distribution networks, ensuring the safety and the integrity of their system. As of 2023, which is the most recently available information, the Pipeline and Hazardous Materials Safety Administration ("PHMSA") estimates approximately 35% of the gas distribution main and service line miles are over 40 years old or of unknown origin. This infrastructure requires continuous replacement and maintenance as these gas distribution networks continue to age. We supply many of the replacement products including valves, line pipe, smart meters, risers and other gas products. A large percentage of the line pipe we sell is sold to our gas utilities customers for line replacement and new sections of their distribution network. As our gas utility customers connect new homes and businesses to their gas distribution network, the growth in the housing market creates new revenue for our business to supply the related infrastructure products. While new housing market starts have with interest rate increases, we do not anticipate this to have a significant impact as customers will generally reallocate their budgets toward upgrade projects. Some of our customers in this sector support both gas and electric distribution, and certain customers have announced allocating a higher proportion of their capital budget to electric distribution. However, based on market fundamentals, the need for natural gas to fuel new electric generation facilities and new market share , we expect the Gas Utilities sector to continue to have steady growth in the coming years. Additionally, due to its reduced dependency on energy demand and commodity prices this sector is less than the others.
Downstream, Industrial and Energy Transition (DIET)
DIET generated 32% of our total Company revenue for 2024 and decreased 7% from 2023. We expect this sector to deliver strong growth in the coming years driven by increased customer activity levels related to maintenance, repair and operations ("MRO") activities, project turnaround activity in refineries and chemical plants and new energy transition related projects. This sector has a significant amount of project activity, which can create substantial variability between quarters.
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The energy transition portion of our business is a small portion of our DIET business today, but it is expected to have meaningful growth in the coming years. The outlook for energy transition projects is supported by government incentives and policies such as those in the Inflation Reduction Act of 2022; however, the impact of the new presidential administration on these incentives and policies is unclear. Many of our customers have made commitments to net zero emissions to address climate change. Our customer base represents many of the primary leaders in the energy transition movement, and they are positioned to lead the effort to decarbonize through nearer-term efforts such as renewable or biodiesel refineries and offshore wind power generation as well as longer-term efforts such as carbon capture and storage and hydrogen. However, as U.S. government support may wane for these projects, we are monitoring our customers plans for and the pace of development of these projects.
Production and Transmission Infrastructure (PTI)
The PTI sector of our business, which consists of the traditional upstream and midstream oil and gas markets, is the most cyclical, and in 2024 this sector represented 31% of our company revenues. The PTI sector revenue decreased 9% in 2024 compared to 2023. During 2024, Brent crude oil price averaged $80.52 per barrel and West Texas Intermediate ("WTI") oil prices averaged $76.63 per barrel. Although, oil prices have recently declined from earlier highs seen in the last few years, OPEC+ production cuts have maintained prices at levels that support continued growth in drilling and completion activity by our customers. Natural gas prices also drive customer activity, and have experienced recent volatility and declines, and if prices remain low, it could negatively impact our business.
Recent industry reports have signaled potential risk in oil prices and projected lower customer spending levels in 2025, due to current supply and demand projections. However, larger public exploration and production companies are expected to drive a higher percentage of the activity in 2024, which bodes well for our Company as our revenue for these sectors is driven primarily from this customer base. We also expect our larger public customers will remain disciplined and consistent with their commitments to their budgets, maintaining returns to their shareholders and operating within their cash flow requirements. Additionally, we believe the recent announcements by several of our large customers related to acquisitions of smaller peers could bode well for us in the coming years due to our current relationships with the acquiring companies.
To the extent completion activity and related production increase, this could have the impact of improving our revenue opportunities in our PTI sector. New well completions and higher production levels drive the need for additional surface equipment and gathering and processing infrastructure, benefitting this sector's revenue. The majority of the revenue in this sector is driven by large independents and major exploration and productions companies, which are expected to strongly influence the increase in capital spending in the coming years for this sector. This group of customers make up the majority of our sales within the PTI sector.
Supply Chain and Labor
Inflation for the majority of our products has eased during 2024. If the U.S. imposes wide-spread tariffs on our products, prices for products will likely increase, and we would seek to pass these increases on to our customers. Wide-spread tariffs could also re-ignite inflation. To the extent further pricing fluctuations impact our products, the effect on our revenue and cost of goods sold, which is determined using the last-in first-out ("LIFO") inventory costing methodology, remains subject to uncertainty and volatility. However, our supply chain expertise, relationships with our key suppliers and inventory position has allowed us to manage the supply chain for both inflationary and deflationary pressures. In addition, our contracts with customers generally allow us to pass price increases along to customers within a reasonable time after they occur.
Many customers, especially in our Gas Utilities sector, are focused on reducing their own product inventory levels due to more certainty in the supply chain and associated lead times. We have also been able to reduce our inventory levels due to this normalization in supply chain. We expect that these customers will begin to normalize their purchasing patterns in 2025.
There has been little impact to our supply chain directly from the conflict in Ukraine. However, geopolitical conflicts could have the potential to further constrain the global supply chain and impact the availability of component parts, particularly valves and meters.
Occasionally, the United States imposes tariffs on imports of some products that we distribute. Although these actions generally cause the price we pay for products to increase, we are generally able to leverage long-standing relationships with our suppliers and the volume of our purchases to receive market competitive pricing. In addition, our contracts with customers generally allow us to react quickly to price increases through mechanisms that enable us to pass those increases along to customers as they occur. These issues are dynamic and continue to evolve. To the extent our products are further impacted by pricing fluctuations caused by tariffs and quotas, the ultimate impact on our revenue and cost of sales, which is determined using the last-in, first-out ("LIFO") inventory costing methodology, remains subject to uncertainty and volatility.
Although improving, we are being impacted by labor constraints as lower unemployment rates have created increased competition among companies to attract and retain personnel, which has increased our selling, general and administrative expense. We have experienced some easing in labor market competition, but competition has remained. We proactively monitor market trends in the areas where we have operations and, due to our efficient sourcing practices, have experienced little to no disruption supporting our customers.
Longer Term Outlook
We play a critical role in supporting our customers and the energy industry during the energy transition and throughout the cycles. The U.S. Energy Information Administration's ("EIA") Reference Case published in its "International Energy Outlook 2023" that world energy consumption will increase by nearly 34% between 2022 and 2050. Additionally, the EIA projects that between 2022 and 2050 renewable energy consumption will grow by 118%, natural gas consumption will grow by 29%, and hydrocarbon-based liquids consumption will grow by 23%.
In 2023, the EIA published a Reference Case for the U.S. in its "Annual Energy Outlook 2023". In this reference case, the EIA projects that U.S. annual production of oil will grow by 11% from 2022 to 2050 and U.S. natural gas annual production will grow by almost 24% in the same period. The EIA also projects in its Reference Case that the U.S. will become a net exporter of these products over this period. This projected increase in oil and gas to meet the rise in international energy demand continues to provide a robust market for our existing goods and services. Additionally, we expect our longer-term growth to be heavily influenced by the rising demand for energy transition projects. Our existing traditional energy customer base is expected to reallocate increasing amounts of their future capital expenditures to fund many of these projects. We are well positioned for this future growth given our strong customer relationships and previous energy transition project experience.
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Backlog
We determine backlog by the amount of unshipped customer orders, which the customer may revise or cancel in certain instances. The table below details our backlog by segment (in millions):
Year Ended December 31,
International
Our backlog as of December 31, 2024 decreased by $105 million, or 16%, when compared to December 31, 2023. This decrease was primarily driven by lower project activity and delayed timing of project orders in our PTI and Gas Utilities sectors within the U.S. segment, and partially offset by an increase in backlog within the International segment primarily driven by projects in Norway. Backlog as of December 31, 2023 decreased by $34 million, or 5%, when compared to December 31, 2022. This decrease was primarily driven by a decrease in the U.S. segment due to reduced projects as a result of destocking by our Gas Utilities sector, and partially offset by an increase within our International segment primarily driven by projects in Norway. There can be no assurance that the backlog amounts will ultimately be realized as revenue or that we will earn a profit on the backlog of orders, but we expect that substantially all of the sales in our backlog will be realized within 12 months.
Key Industry Indicators
The following table sets forth key industry indicators for the years ended December 31, 2024, 2023 and 2022:
Year Ended December 31,
Average Rig Count (1):
United States
International
Total Worldwide
Average Commodity Prices (2):
WTI crude oil (per barrel)
Brent crude oil (per barrel)
Henry Hub natural gas ($/MMBtu)
U.S. Wells Completed (2)
3:2:1 Crack Spread (3)
Source-Baker Hughes ( www.bakerhughes.com ) (Total rig count includes oil, natural gas and other rigs.)
Source-Department of Energy, EIA (www.eia.gov) (As revised)
Source-Bloomberg
Results of Operations for the Years Ended December 31, 2024, 2023 and 2022
MRC Global’s fiscal years are the same as calendar years. When used in this Management’s Discussion and Analysis of Financial Condition and Results of Operations, a reference to a year means the year ended December 31 of the specified year.
The breakdown of our sales by sector for 2024, 2023 and 2022 was as follows (in millions):
Year Ended December 31,
Gas Utilities
DIET
PTI
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Year Ended December 31, 2024 Compared to the Year Ended December 31, 2023
For 2024 and 2023, the following table summarizes our results of operations (in millions):
Year Ended December 31,
$ Change
% Change
Sales:
International
Consolidated
Operating income (loss):
International
Corporate and other (1)
Consolidated
Interest expense
Other, net
Income from continuing operations before income taxes
Income tax expense
Net income from continuing operations
Loss from discontinued operations, net of tax
Net income
Series A preferred stock dividends
Loss on repurchase and retirement of preferred stock
Net income attributable to common stockholders
Gross Profit
Adjusted Gross Profit (2)
Adjusted EBITDA (2)
The balances included in corporate and other represent the operating activity previously identified in our Canada segment that do not meet the criteria for discontinued operations. Additional disclosures regarding the sale of certain assets and assumed liabilities within our Canada operations are provided in Note 2 of the Notes to the Consolidated Financial Statements included in Item 8 of this Form 10-K.
Adjusted Gross Profit and Adjusted EBITDA are non-GAAP financial measures. For a reconciliation of these measures to an equivalent GAAP measure, see pages 26-27 herein.
Sales . Sales reflect consideration we are entitled to for goods and services when control of those goods and services is transferred to our customers. Our sales were $3,011 million for 2024, as compared to $3,266 million for 2023, a decrease of $255 million, or 8%. The decrease included an unfavorable impact of less than $1 million from the weakening of foreign currencies in areas where we operate relative to the U.S. dollar.
U.S. Segment— Our U.S. sales decreased to $2,530 million for 2024 from $2,845 million for 2023. This $315 million, or 11%, decrease was driven by a $135 million decrease in the PTI sector, a $93 million decrease in the Gas Utilities sector, and an $87 million decrease in DIET sector sales.
International Segment —Our International sales increased $60 million to $481 million for 2024 from $421 million for 2023. The 14% increase is driven by the PTI and DIET sectors.
Gross Profit . Our gross profit was $620 million (20.6% of sales) for 2024, as compared to $670 million (20.5% of sales) for 2023. The $50 million decrease was primarily attributable to reduced sales. As compared to average cost, our last-in first-out ("LIFO") inventory costing methodology decreased cost of sales by $2 million in 2024 compared to a $2 million increase in cost of sales in 2023.
Adjusted Gross Profit . Adjusted Gross Profit decreased to $659 million (21.9% of sales) for 2024 from $712 million (21.8% of sales) for 2023, a decrease of $53 million. The decrease was primarily due to reduced sales. Adjusted Gross Profit is a non-GAAP financial measure. We define Adjusted Gross Profit as sales, less cost of sales, plus depreciation and amortization, plus amortization of intangibles, plus inventory-related charges incremental to normal operations, plus transaction costs associated with acquisitions and plus or minus the impact of our LIFO inventory costing methodology. We present Adjusted Gross Profit because we believe it is a useful indicator of our operating performance without regard to items, such as amortization of intangibles that can vary substantially from company to company depending upon the nature and extent of acquisitions. Similarly, the impact of the LIFO inventory costing method can cause results to vary substantially from company to company depending upon whether they elect to utilize LIFO and depending upon which method they may elect. We use Adjusted Gross Profit as a key performance indicator in managing our business. We believe that gross profit is the financial measure calculated and presented in accordance with U.S. generally accepted accounting principles that is most directly comparable to Adjusted Gross Profit.
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The following table reconciles gross profit, as derived from our consolidated financial statements, with Adjusted Gross Profit, a non-GAAP financial measure (in millions):
Year Ended December 31,
Percentage
Percentage
of Revenue*
of Revenue
Gross profit, as reported
Depreciation and amortization
Amortization of intangibles
(Decrease) increase in LIFO reserve
Transaction costs
Adjusted Gross Profit
*Does not foot due to rounding
Selling, General and Administrative (“SG&A”) Expenses . Costs such as salaries, wages, employee benefits, rent, utilities, communications, insurance, fuel and taxes (other than state and federal income taxes) that are necessary to operate our service center and corporate operations are included in SG&A. Our SG&A expenses were $485 million (16.1% of sales) for 2024, as compared to $482 million (14.8% of sales) for 2023. The $3 million increase in SG&A was primarily driven by higher legal and consulting costs associated with shareholder activism response.
Operating Income . Operating income was $135 million for 2024, as compared to $188 million income for 2023, a decrease of $53 million due to the decrease in revenues and the increase in SG&A expenses.
U.S. Segment— Our U.S. segment had operating income of $108 million for 2024 as compared to operating income of $174 million for 2023. The $66 million decrease was primarily attributable to lower sales across all sectors.
International Segment —Our International segment had operating income of $31 million for 2024 as compared to operating income of $21 million in 2023. The $10 million increase in operating income was primarily attributable to higher revenues.
Corporate and other —We had an operating loss of $4 million for 2024 as compared to an operating loss of $7 million in 2023. The $3 million decrease in operating loss was primarily attributable to lower corporate overhead allocation expenses.
Interest Expense . Our interest expense was $26 million for 2024, as compared to $32 million expense for 2023. The decrease of $6 million was primarily due to lower interest expense as a result of paying off a prior term loan in the second quarter of 2024.
Other, net. Our other expense was $4 million for 2024, as compared to other expense of $2 million for 2023. Other expense primarily related to foreign exchange losses.
Income Tax Expense . Our income tax expense was $27 million for 2024, as compared to an expense of $39 million for 2023. Our effective tax rates were 26% and 25% for 2024 and 2023, respectively. Our rates generally differ from the U.S. federal statutory rates of 21% as a result of state income taxes, non-deductible expenses and differing foreign income tax rates. The effective tax rate for 2024 was unfavorably impacted by foreign currency gains.
Net Income from Continuing Operations . Our net income from continuing operations was $78 million for 2024, as compared to net income from continuing operations of $115 million for 2023, a decrease of $37 million due to lower revenues.
Loss on Repurchase and Retirement of Preferred Stock . In 2024, we repurchased the Series A Preferred Stock for a total payment of $361 million resulting in a total loss of $9 million related to the repurchase and retirement of the Preferred Stock on the consolidated statement of operations.
Loss from Discontinued Operations, net of tax . Our loss from discontinued operations, net of tax, was $23 million for 2024 as compared to a loss of $1 million for 2023. The increase in loss of $22 million was primarily attributable to the loss recognized on the discontinued operation being classified as held for sale of approximately $22 million. Additional disclosures regarding the sale of certain assets and liabilities within our Canada operations are provided in Note 2 of the Notes to the Consolidated Financial Statements included in Item 8 of this Form 10-K.
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Adjusted EBITDA . Adjusted EBITDA, a non-GAAP financial measure, was $202 million for 2024, as compared to $251 million for 2023. Our Adjusted EBITDA decreased $49 million over that period primarily due to decreased revenue.
We define Adjusted EBITDA as net income from continuing operations plus interest, income taxes, depreciation and amortization, amortization of intangibles and certain other expenses, including non-cash expenses such as equity-based compensation, severance and restructuring, changes in the fair value of derivative instruments, long-lived asset impairments (including goodwill and intangible assets), inventory-related charges incremental to normal operations and plus or minus the impact of our LIFO inventory costing methodology.
We believe Adjusted EBITDA provides investors a helpful measure for comparing our operating performance with the performance of other companies that may have different financing and capital structures or tax rates. We believe it is a useful indicator of our operating performance without regard to items, such as amortization of intangibles, which can vary substantially from company to company depending upon the nature and extent of acquisitions. Similarly, the impact of the LIFO inventory costing method can cause results to vary substantially from company to company depending upon whether they elect to utilize LIFO and depending upon which method they may elect. We use Adjusted EBITDA as a key performance indicator in managing our business. We believe that net income is the financial measure calculated and presented in accordance with U.S. generally accepted accounting principles that is most directly comparable to Adjusted EBITDA.
The following table reconciles net income from continuing operations, as derived from our consolidated financial statements, with Adjusted EBITDA, a non-GAAP financial measure (in millions):
Year Ended December 31,
Net income
Loss from discontinued operations, net of tax
Net income from continuing operations
Income tax expense
Interest expense
Depreciation and amortization
Amortization of intangibles
Transaction costs
Facility closures
Severance and restructuring
Non-recurring IT related professional fees
(Decrease) increase in LIFO reserve
Equity-based compensation expense
Non-recurring other legal and consulting costs
Activism response legal and consulting costs
Write off of debt issuance costs
Customer settlement
Asset disposal
Foreign currency losses
Adjusted EBITDA
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Year Ended December 31, 2023 Compared to the Year Ended December 31, 2022
For 2023 and 2022, the following table summarizes our results of operations (in millions):
Year Ended December 31,
$ Change
% Change
Sales:
International
Consolidated
Operating income (loss):
International
Corporate and other (1)
Consolidated
Interest expense
Other, net
Income from continuing operations before income taxes
Income tax expense
Net income from continuing operations
(Loss) income from discontinued operations, net of tax
Net income
Series A preferred stock dividends
Net income attributable to common stockholders
Gross Profit
Adjusted Gross Profit (2)
Adjusted EBITDA (2)
The balances included in corporate and other represent the operating activity previously identified in our Canada segment that do not meet the criteria for discontinued operations. Additional disclosures regarding the sale of certain assets and assumed liabilities within our Canada operations are provided in Note 2 of the Notes to the Consolidated Financial Statements included in Item 8 of this Form 10-K.
Adjusted Gross Profit and Adjusted EBITDA are non-GAAP financial measures. For a reconciliation of these measures to an equivalent GAAP measure, see pages 29-30 herein.
Sales. Our sales were $3,266 million for 2023, as compared to $3,197 million for 2022, an increase of $69 million, or 2%. The increase included an unfavorable impact of $7 million from the weakening of foreign currencies in areas where we operate relative to the U.S. dollar.
U.S. Segment —Our U.S. sales increased to $2,845 million for 2023 from $2,823 million for 2022. This $22 million, or 1%, increase was driven by a $47 million and a $32 million increase in PTI and DIET sector sales, respectively, partially offset by a $57 million decline in the Gas Utilities sector.
International Segment —Our International sales increased $47 million to $421 million for 2023 from $374 million for 2022. The 13% increase is primarily driven by the DIET and PTI sectors.
Gross Profit. Our gross profit was $670 million (20.5% of sales) for 2023, as compared to $584 million (18.3% of sales) for 2022. The $86 million increase was primarily attributable to our LIFO inventory costing methodology. As compared to average cost, our LIFO inventory costing methodology resulted in a $2 million increase in cost of sales in 2023 compared to a $66 million increase in cost of sales in 2022. Additionally, the increase in gross profit was driven by improved margins on gas products and valves, automation, measurement and instrumentation sales, along with specific high-margin line pipe sales.
Adjusted Gross Profit. Adjusted Gross Profit increased to $712 million (21.8% of sales) for 2023 from $689 million (21.6% of sales) for 2022, an increase of $23 million. The increase was primarily due to improved margins on gas products and valves, automation, measurement and instrumentation sales, along with specific high-margin line pipe sales. Adjusted Gross Profit is a non-GAAP financial measure. We define Adjusted Gross Profit as sales, less cost of sales, plus depreciation and amortization, plus amortization of intangibles, plus inventory-related charges incremental to normal operations, plus transaction costs associated with acquisitions and plus or minus the impact of our LIFO inventory costing methodology. We present Adjusted Gross Profit because we believe it is a useful indicator of our operating performance without regard to items, such as amortization of intangibles that can vary substantially from company to company depending upon the nature and extent of acquisitions. Similarly, the impact of the LIFO inventory costing method can cause results to vary substantially from company to company depending upon whether they elect to utilize LIFO and depending upon which method they may elect. We use Adjusted Gross Profit as a key performance indicator in managing our business. We believe that gross profit is the financial measure calculated and presented in accordance with U.S. generally accepted accounting principles that is most directly comparable to Adjusted Gross Profit.
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The following table reconciles gross profit, as derived from our consolidated financial statements, with Adjusted Gross Profit, a non-GAAP financial measure (in millions):
Year Ended December 31,
Percentage
Percentage
of Revenue
of Revenue*
Gross profit, as reported
Depreciation and amortization
Amortization of intangibles
Increase in LIFO reserve
Adjusted Gross Profit
*Does not foot due to rounding
SG&A Expenses. Our SG&A expenses were $482 million ( 14.8% of sales) for 2023 , as compared to $449 million (14.0% of sales) for 2022 . The $33 million increase in SG&A was driven by higher employee-related costs.
Operating Income. Operating income was $188 million for 2023 , as compared to $135 million income for 2022 , an increase of $53 million due to higher revenues.
U.S. Segment —Our U.S. segment had operating income of $174 million for 2023 as compared to operating income of $127 million for 2022. The $47 million increase was attributable to higher revenues and improved gross profit percentage due to product mix.
International Segment —Our International segment had operating income of $21 million in 2023 as compared to operating income of $14 million in 2022. The $7 million increase in operating income was primarily attributable to higher revenues.
Corporate and other —We had an operating loss of $7 million for 2023 as compared to an operating loss of $6 million in 2022 related to corporate and other activity. The $1 million increase in operating loss was primarily attributable to higher corporate overhead allocation expenses.
Interest Expense. Our interest expense was $32 million for 2023, as compared to $24 million expense for 2022. The increase of $8 million was primarily due to higher benchmark interest rates.
Other, net. Our other expense was $2 million for 2023, as compared to other expense of $6 million for 2022. The decrease in other expense was primarily related to foreign exchange rate impacts following the completion of an intercompany debt restructuring project.
Income Tax Expense. Our income tax expense of $39 million for 2023, as compared to an expense of $35 million for 2022. Our effective tax rates were 25% and 33% for 2023 and 2022, respectively. Our rates generally differ from the U.S. federal statutory rates of 21% as a result of state income taxes, non-deductible expenses and differing foreign income tax rates. The effective tax rate for 2023 was favorably impacted by a net reduction in valuation allowance provision.
Net Income from Continuing Operations. Our net income from continuing operations was $115 million for 2023, as compared to net income from continuing operations of $70 million for 2022, an increase of $45 million due to higher revenues and improved margins.
(Loss) income from Discontinued Operations, net of tax. Our loss from discontinued operations, net of tax, was $1 million for 2023, as compared to income of $5 million for 2022. The decrease of $6 million was primarily attributable to decreased revenues. Additional disclosures regarding the sale of certain assets and liabilities within our Canada operations are provided in Note 2 of the Notes to the Consolidated Financial Statements included in Item 8 of this Form 10-K.
Adjusted EBITDA. Adjusted EBITDA, a non-GAAP financial measure, was $251 million for 2023, as compared to $255 million for 2022. Our Adjusted EBITDA decreased $4 million over that period primarily due to increased SG&A expenses.
We define Adjusted EBITDA as net income from continuing operations plus interest, income taxes, depreciation and amortization, amortization of intangibles and certain other expenses, including non-cash expenses such as equity-based compensation, severance and restructuring, changes in the fair value of derivative instruments, long-lived asset impairments (including goodwill and intangible assets), inventory-related charges incremental to normal operations and plus or minus the impact of our LIFO inventory costing methodology.
We believe Adjusted EBITDA provides investors a helpful measure for comparing our operating performance with the performance of other companies that may have different financing and capital structures or tax rates. We believe it is a useful indicator of our operating performance without regard to items, such as amortization of intangibles, which can vary substantially from company to company depending upon the nature and extent of acquisitions. Similarly, the impact of the LIFO inventory costing method can cause results to vary substantially from company to company depending upon whether they elect to utilize LIFO and depending upon which method they may elect. We use Adjusted EBITDA as a key performance indicator in managing our business. We believe that net income is the financial measure calculated and presented in accordance with U.S. generally accepted accounting principles that is most directly comparable to Adjusted EBITDA.
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The following table reconciles net income from continuing operations, as derived from our consolidated financial statements, with Adjusted EBITDA, a non-GAAP financial measure (in millions):
Year Ended December 31,
Net income
Loss (income) from discontinued operations, net of tax
Net income from continuing operations
Income tax expense
Interest expense
Depreciation and amortization
Amortization of intangibles
Severance and restructuring
Non-recurring IT related professional fees
Increase in LIFO reserve
Equity-based compensation expense
Activism response legal and consulting costs
Customer settlement
Asset disposal
Foreign currency losses
Adjusted EBITDA
Financial Condition and Cash Flows
Cash Flows
The following table sets forth our cash flows for the periods indicated below (in millions):
Year Ended December 31,
Net cash provided by (used in):
Operating activities from continuing operations
Operating activities from discontinued operations
Operating activities
Investing activities from continuing operations
Investing activities from discontinued operations
Investing activities
Financing activities from continuing operations
Financing activities from discontinued operations
Financing activities
Net (decrease) increase in cash and cash equivalents
Operating Activities
Net cash provided by operating activities from continuing operations was $268 million in 2024 compared to $177 million provided by operating activities from continuing operations in 2023. Net cash provided by operating activities from discontinued operations was $8 million in 2024 compared to $4 million provided by operating activities from discontinued operations in 2023. Net cash provided by operating activities was $276 million in 2024 compared to $181 million provided by operating activities in 2023. The change in operating cash flows was primarily the result of a more efficient use of our working capital as we reduced inventory purchasing, improved collections on our receivables and managed our payables.
Investing Activities
Net cash used in investing activities from continuing operations was $27 million in 2024 compared to $13 million used in 2023. Net cash used in investing activities from discontinued operations was less than $1 million in 2024 and 2023. Net cash used in investing activities was $27 million in 2024 compared to $14 million used in 2023. Purchases of property, plant and equipment utilized cash of $28 million in 2024, primarily related to the replacement of our U.S. enterprise resource planning system, compared to $14 million in 2023.
Financing Activities
Net cash used in financing activities was $314 million in 2024, compared to net cash used in financing activities of $67 million in 2023. In 2024, net cash used in financing activities from continuing operations is primarily due to the repurchase of the Company's preferred stock of $365 million, payments on debt obligations related to the a prior term loan of $295 million and $23 million to fund dividends on our preferred stock. These payments were offset by net proceeds from a new term loan of $348 million and from revolving credit facilities of $35 million. In 2023, net cash used in financing activities from continuing operations of $67 million was primarily due to $24 million to fund dividends on our preferred stock and a mandatory principal payment on our prior term loan of $3 million, offset by net borrowings under our Global ABL Facility totaling $35 million.
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Liquidity and Capital Resources
Our primary credit facilities consist of a $750 million global asset-based lending facility ("Global ABL Facility") and a senior secured term loan "B" facility ("Term Loan") maturing in October 2031 with an original principal amount of $350 million.
Global ABL Facility
In November 2024, the Company amended and renewed our Global ABL Facility. The Global ABL Facility now matures in November 2029. The Global ABL Facility is comprised of $705 million in revolver commitments in the United States, which includes a $30 million sub-limit for Canada, $12 million in Norway, $10 million in Australia, $10.5 million in the Netherlands, $7.5 million in the United Kingdom and $5 million in Belgium. The Global ABL Facility contains an accordion feature that allows us to increase the principal amount of the facility by up to $250 million, subject to securing additional lender commitments.
Under the Global ABL Facility, U.S. borrowings bear interest at Term SOFR plus a margin varying between 1.25% and 1.75% based on our fixed charge coverage ratio. Canadian borrowings under the facility bear interest at the Canadian Dollar Bankers' Acceptances Rate ("BA Rate") plus a margin varying between 1.25% and 1.75% based on our fixed charge coverage ratio. Borrowings under our foreign borrower subsidiaries bear interest at a benchmark rate, which varies based on the currency in which such borrowings are made, plus a margin varying between 1.25% and 1.75% based on our fixed charge coverage ratio. Availability is dependent on a borrowing base comprised of a percentage of eligible accounts receivable and inventory values, which is subject to redetermination from time to time. As of December 31, 2024, we had $43 million borrowings outstanding and $460 million of Excess Availability (as defined under our Global ABL Facility).
Prior Term Loan
The Company had a prior senior secured term loan "B" (the "Prior Term Loan"), which was set to mature in September 2024 with an original principal amount of $400 million. In May 2024, the Company repaid the Prior Term Loan in its entirety. The outstanding principal balance on the Prior Term Loan at the date of repayment was $292 million. The Company used $216 million of borrowings from our Global ABL Facility and $76 million cash to repay the Prior Term Loan prior to its maturity.
New Term Loan and Preferred Stock Repurchase
In October 2024, the Company entered into a new $350 million term loan "B" (the "Term Loan") with a term of seven years. The proceeds from the new Term Loan, cash on hand and borrowings from the Company's Global ABL Facility were used to repurchase all 363,000 shares of the Company's 6.50% Series A Convertible Perpetual Preferred Stock (the "Preferred Stock") from Mario Investments, LLC, the sole holder of the Preferred Stock. On October 29, 2024, the Company repurchased the Preferred Stock for a total payment of $361 million, representing approximately 99.5% of the liquidation preference of the preferred stock, and paid the holder accrued dividends of $4 million. We recognized a total loss of $9 million related to the repurchase and retirement of the Preferred Stock on the consolidated statement of operations for the year ended December 31, 2024. The Preferred Stock was then retired. Additional disclosures regarding the Term Loan and the repurchase of Preferred Stock are provided in Note 10 and Note 13, respectively, of the Notes to the Consolidated Financial Statements included in Item 8 of this Form 10-K.
Our primary sources of liquidity consist of cash generated from our operating activities, existing cash balances and borrowings under our existing Global ABL Facility. On December 31, 2024, our total liquidity, consisting of cash on hand and amounts available under our Global ABL Facility, was $523 million. Our ability to generate sufficient cash flows from our operating activities is primarily dependent on our sales of products to our customers at profits sufficient to cover our fixed and variable expenses. As of December 31, 2024 and 2023, we had cash and cash equivalents of $63 million and $131 million, respectively. As of December 31, 2024 and 2023, $63 million and $43 million of our cash and cash equivalents were maintained in the accounts of our various foreign subsidiaries and, if those amounts were transferred among countries or repatriated to the U.S., those amounts may be subject to additional tax liabilities, which would be recognized in our financial statements in the period during which the transfer decision was made. During 2024, we did not have any cash repatriated from our subsidiaries.
Our credit ratings are below “investment grade” and, as such, could impact both our ability to raise new funds as well as the interest rates on our future borrowings. On October 15, 2024, Moody's upgraded the Company's corporate family rating to 'B1' from 'B2' with a stable outlook. Moody's based its ratings upgrade, in part, on the Company's moderate leverage and ample interest coverage, modest capital spending requirements and solid operating performance. Moody's affirmed the outlook as 'stable' based on their view that the Company's performance will remain strong and continue to generate positive free cash flow, and the Company's credit metrics will remain robust. In addition, S&P affirmed the Company's issuer-credit rating of 'B' with a stable outlook. Our existing obligations restrict our ability to incur additional debt under certain circumstances. We were in compliance with the covenants contained in our various credit facilities as of and during the year ended December 31, 2024 and, based on our current forecasts, we expect to remain in compliance.
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We believe our sources of liquidity will be sufficient to satisfy the anticipated cash requirements associated with our existing operations for the foreseeable future. However, our future cash requirements could be higher than we currently expect as a result of various factors. Additionally, our ability to generate sufficient cash from our operating activities depends on our future performance, which is subject to general economic, political, financial, competitive and other factors beyond our control. We may, from time to time, seek to raise additional debt or equity financing or re-price or refinance existing debt in the public or private markets, based on market conditions. Any such capital markets activities would be subject to market conditions, reaching final agreement with lenders or investors, and other factors, and there can be no assurance that we would successfully consummate any such transactions.
Contractual Obligations, Commitments and Contingencies
Contractual Obligations
The following table summarizes our minimum payment obligations as of December 31, 2024 relating to debt, interest payments, operating leases, finance leases, purchase obligations and other long-term liabilities for the periods indicated (in millions):
More Than
Total
5 Years
Debt obligations (1)
Interest payments (2)
Operating leases
Finance leases
Purchase obligations (3)
Other long-term liabilities
Total
Debt is based on contractual maturities outstanding at December 31, 2024.
Interest payments are based on interest rates in effect at December 31, 2024 and assume contractual amortization payments.
Purchase obligations reflect our commitments to purchase PVF products in the ordinary course of business. While our vendors often allow us to cancel these purchase orders without penalty, in certain cases cancellations may subject us to cancellation fees or penalties, depending on the terms of the contract.
We expect to fund any future acquisitions primarily from (i) borrowings, either the unused portion of our facilities or new debt issuances, (ii) cash provided by operations or (iii) the issuance of additional equity in connection with the acquisitions.
Other Commitments
In the normal course of business with customers, vendors and others, we are contingently liable for performance under standby letters of credit and bid, performance and surety bonds. We were contingently liable for approximately $30 million of standby letters of credit, trade guarantees that banks issue and bid, and performance and surety bonds at December 31, 2024. Management does not expect any material amounts to be drawn on these instruments.
Legal Proceedings
Asbestos Claims. We are one of many defendants in lawsuits that plaintiffs have brought seeking damages for personal injuries that exposure to asbestos allegedly caused. Plaintiffs and their family members have brought these lawsuits against a large volume of defendant entities as a result of the various defendants’ manufacture, distribution, supply or other involvement with asbestos, asbestos-containing products or equipment or activities that allegedly caused plaintiffs to be exposed to asbestos. These plaintiffs typically assert exposure to asbestos as a consequence of third-party manufactured products that the Company’s subsidiary, MRC Global (US) Inc., purportedly distributed. As of December 31, 2024, we are a named in approximately 495 lawsuits involving approximately 1,060 . No asbestos lawsuit has resulted in a judgment us to date, with the majority being settled, or otherwise resolved. Applicable third-party insurance has substantially covered these , and insurance should continue to cover a substantial majority of existing and anticipated future . Accordingly, we have recorded a liability for our estimate of the most likely settlement of asserted and a related receivable from insurers for our estimated recovery, to the extent we believe that the amounts of recovery are probable.
We annually conduct analyses of our asbestos-related litigation to estimate the adequacy of the reserve for pending and probable asbestos-related claims. Given these estimated reserves and existing insurance coverage that has been available to cover substantial portions of these claims, we believe that our current accruals and associated estimates relating to pending and probable asbestos-related litigation likely to be asserted over the next 15 years are currently adequate. This belief, however, relies on a number of assumptions, including:
That our future settlement payments, disease mix and dismissal rates will be materially consistent with historic experience;
That future incidences of asbestos-related diseases in the U.S. will be materially consistent with current public health estimates;
That the rates at which future asbestos-related mesothelioma incidences result in compensable claims filings against us will be materially consistent with its historic experience;
That insurance recoveries for settlement payments and defense costs will be materially consistent with historic experience;
That legal standards (and the interpretation of these standards) applicable to asbestos litigation will not change in material respects;
That there are no materially negative developments in the claims pending against us; and
That key co-defendants in current and future claims remain solvent.
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If any of these assumptions prove to be materially different in light of future developments, liabilities related to asbestos-related litigation may be materially different than amounts accrued or estimated. Further, while we anticipate that additional claims will be filed in the future, we are unable to predict with any certainty the number, timing and magnitude of such future claims. In addition, applicable insurance policies are subject to overall caps on limits, which coverage may exhaust the amount available from insurers under those limits. In those cases, the Company is seeking indemnity payments from responsive excess insurance policies, but other insurers may not be solvent or may not make payments under the policies without contesting their liability. In our opinion, there are no pending legal proceedings that are likely to have a material adverse effect on our consolidated financial statements.
Other Legal Claims and Proceedings. From time to time, we have been subject to various claims and involved in legal proceedings incidental to the nature of our businesses. We maintain insurance coverage to reduce financial risk associated with certain of these claims and proceedings. It is not possible to predict the outcome of these claims and proceedings. However, in our opinion, there are no pending legal proceedings that are likely to have a material adverse effect on our consolidated financial statements. See also “Note 18—Commitments and Contingencies” to the audited consolidated financial statements as of December 31, 2024.
Off-Balance Sheet Arrangements
We do not have any material “off-balance sheet arrangements” as SEC rules and regulations define that term.
Critical Accounting Policies and Estimates
We prepare our consolidated financial statements in accordance with U.S. generally accepted accounting principles. To apply these principles, management must make judgments and assumptions and develop estimates based on the best available information at the time. Actual results may differ based on the accuracy of the information utilized and subsequent events. The notes to our audited financial statements included elsewhere in this report describe our accounting policies. These critical accounting policies could materially affect the amounts recorded in our financial statements. We believe the following describes significant judgments and estimates used in the preparation of our consolidated financial statements:
Inventories: Our U.S. inventories, totaling $335 million and $411 million at December 31, 2024 and 2023, respectively, were valued at the lower of cost (principally using the LIFO method) or market. We record an estimate each quarter, if necessary, for the expected annual effect of inflation (using period to date inflation rates) and estimated year-end inventory balances. These estimates are adjusted to actual results determined at year-end. Our inventories that are held outside of the U.S., totaling $80 million and $100 million at December 31, 2024 and 2023, respectively, were valued at the lower of weighted-average cost or net realizable value.
Under the LIFO inventory valuation method, changes in the cost of inventory are recognized in cost of sales in the current period even though these costs may have been incurred at significantly different values. Because the Company values most of its inventory using the LIFO inventory costing methodology, a rise in inventory costs has a negative effect on operating results, while, conversely, a fall in inventory costs results in a benefit to operating results.
We determine reserves for inventory based on historical usage of inventory on-hand, assumptions about future demand and market conditions. Customers rely on the company to stock specialized items for certain projects and other needs. Therefore, the estimated carrying value of inventory depends upon demand driven by oil and gas spending activity, which in turn depends on oil and gas prices, the general outlook for economic growth worldwide, political stability in major oil and gas producing areas, and the potential obsolescence of various inventory items we sell.
Income Taxes: We account for our income taxes under the liability method using currently enacted tax laws and rates. Under this method, deferred tax assets and liabilities are recorded for differences between the financial reporting and tax bases of assets and liabilities using the tax rate expected to be in effect when the taxes will actually be paid, or refunds received. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in earnings in the period that includes the enactment date. A valuation allowance to reduce deferred tax assets is established when it is more likely than not that some portion or all of the deferred tax assets will not be realized.
In determining the need for valuation allowances and our ability to utilize our deferred tax assets, we consider and make judgments regarding all the available positive and negative evidence, including the timing of the reversal of deferred tax liabilities, estimated future taxable income, ongoing, prudent and feasible tax planning strategies and recent financial results of operations. The amount of valuation allowances, however, could be adjusted in the future if objective negative evidence in the form of cumulative losses is no longer present in certain jurisdictions and additional weight may be given to subjective evidence such as our projections for growth.
Our tax provision is based upon our expected taxable income and statutory rates in effect in each country in which we operate. We are subject to the jurisdiction of numerous domestic and foreign tax authorities, as well as to tax agreements and treaties among these governments. Determination of taxable income in any jurisdiction requires the interpretation of the related tax laws and regulations and the use of estimates and assumptions regarding significant future events such as the amount, timing and character of deductions, permissible revenue recognition methods under the tax law and the sources and character of income and tax credits. Changes in tax laws, regulations, agreements and treaties, foreign currency exchange restrictions or our level of operations or profitability in each taxing jurisdiction could have an impact on the amount of income taxes we provide during any given year.
A tax benefit from an uncertain tax position may be recognized when it is more likely than not that the position will be sustained upon examination, including any related appeals or litigation processes, on the basis of the technical merits. We adjust these liabilities when our judgment changes as a result of the evaluation of new information not previously available. Because of the complexity of some of these uncertainties, the ultimate resolution may result in a payment that is materially different from our current estimate of the tax liabilities. These differences will be reflected as increases or decreases to income tax expense in the period in which the new information is available.
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