NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

MRC GLOBAL INC.

NOTE 1 – BACKGROUND AND BASIS OF PRESENTATION

Business Operations: MRC Global Inc. is a holding company headquartered in Houston, Texas. Our wholly owned subsidiaries are global distributors of pipe, valves, fittings (“PVF”) and relatedinfrastructure products and services across each of the upstream (exploration, production and extraction of underground oil and gas), midstream (gathering and transmission of oil and gas, gas utilities, and the storage and distribution of oil and gas) and downstream (crude oil refining and petrochemical and chemical processing and general industrials) sectors. following sectors:

We have branchesservice centers in principal industrial, chemical, gas distribution and hydrocarbon producing and refining areas throughout the United States, Canada, Europe, Asia, Australasia, and the Middle East and Caspian. OurEast. We obtain products are obtained from a broad range of suppliers.

Basis of Presentation: We have prepared our unaudited condensed consolidated financial statements in accordance with Rule 10-0110-01 of Regulation S-XS-X for interim financial statements. These statements do not include all information and footnotes that generally accepted accounting principles ("GAAP") require for complete annual financial statements. However, the information in these statements reflects all normal recurring adjustments which are, in our opinion, necessary for a fair presentation of the results for the interim periods. The results of operations for the three and nine months ended September 30, 20172022, are not necessarily indicative of the results that will be realized for the fiscal year ending December 31, 2017.2022. We have derived our condensed consolidated balance sheet as of December 31, 20162021, from the audited consolidated financial statements for the year ended December 31, 2016.2021. You should read these condensed consolidated financial statements in conjunction with the audited consolidated financial statements and notes thereto for the year ended December 31, 2016.2021.

The consolidated financial statements include the accounts of MRC Global Inc. and its wholly owned and majority owned subsidiaries (collectively referred to as the “Company” or by terms such terms as “we,” “our” or “us”). All material intercompany balances and transactions have been eliminated in consolidation.

Recent

Recently Issued Accounting Pronouncements:In May 2014, March 2020, theFinancial Accounting Standards Board (“FASB”)issued Accounting Standards Update ASU 2020-04,Reference Rate Reform (Topic 848) ("ASU 2020-04"), which provides optional expedients and exceptions for applying U.S. GAAP to contracts, hedging relationships and other transactions that the discontinuation of certain reference rates, including the London Interbank Offered Rate ("LIBOR"), impacts. The update was effective upon issuance and the expedients and exceptions may be applied prospectively to contract modifications and hedging relationships entered into or evaluated through December 31,2022. We are currently evaluating the impacts of the provisions of ASU 2020-04 on our consolidated financial statements; however, with respect to existing transactions, we do not believe the update will have a comprehensive new revenue recognition standard, which will supersede previous existing revenue recognition guidance. Thematerial impact.

Adoption of New Accounting Standards: In August 2020, the FASB issued Accounting Standards Update (“ASU”) also provides guidance on accounting for certain contract costs2020-06,Debt – Debt with Conversion and requires new disclosures. During 2016, the FASB issued additional clarificationOther Options and Derivative Hedging – Contracts in Entity’s Own Equity (Subtopic 815-40) ("ASU 2020-06"), which simplifies guidance on the new revenue recognitiontopics of convertible instruments, derivative contracts and earnings per share calculations. This accounting standard which also included certain scope improvements and practical expedients. The standard (including clarification guidance issued) is effective for fiscal periods beginning after December 15, 2017 and allows for either full retrospective or modified retrospective adoption.  We have completed a formal review of contracts with 36 of our largest customers, based on revenue, which represented 58% of 2016 revenue.  This review encompassed customers from a wide variety of end markets and geographies and involved inquiry of sales and operations personnel responsible for servicing these accounts in addition to review of the contracts.  The balance of our revenue is derived from thousands of customers withupdate, which we generally interact in a transactional relationship where goods are purchased from our branch locations.  Based on our analysis to date, we do not expect the guidance to have a material impact on the timing of our revenue recognition; however, our disclosures will be expanded to address the qualitative and quantitative requirements of the new standard.  We expect to finalize our analysis and related documentation and to adopt the standard in the first quarter of 2018 and have determined that we will utilize the modified retrospective transition method.  We are still assessing the impact of the standard on our internal control processes and information systems.  However, we do not currently believe that significant modifications of our systems will be required.

In February 2016, the FASB issued ASU 2016-02, Leases, which will replace the existing guidance in ASC 870, Leases.  This ASU requires a dual approach for lessee accounting under which a lessee would account for leases as finance leases or operating leases.  Both finance leases and operating leases will result in the lessee recognizing a right-of-use asset and a corresponding lease liability.  For finance leases, the lessee would recognize interest expense and amortization of the right-of-use asset, and for operating leases, the lessee would recognize a straight-line total lease expense.  This guidance is effective for annual and interim reporting periods of public entities beginning after December 15, 2018.  We are in the process of evaluating the effect of the adoption of ASU 2016-02 on our consolidated financial statements.

In October 2016, the FASB issued ASU No. 2016-16, Income Taxes (Topic 740). The guidance requires companies to recognize the income tax effects of intercompany sales and transfers of assets, other than inventory, in the income statement as income tax expense (or benefit) in the period in which the transfer occurs. The effective date will be the first quarter of fiscal year 2018, with early adoption permitted. The changes are required to be applied by means of a cumulative-effect adjustment recorded in retained earningsadopted as of the beginning of the fiscal year of adoption. We do January 1,2022, did not expect the adoption of ASU 2016-16 to have a material impact on our consolidated financial statements.

In January 2017, the FASB issued ASU No. 2017-04, Simplifying the Test for Goodwill Impairment. The amendments in ASU 2017-04 eliminate the current two-step approach used to test goodwill for impairment and require an entity to apply a one-step quantitative test and record the amount

NOTE 2 – REVENUE RECOGNITION

We recognize revenue when we transfer control of promised goods or services to our customers in an amount that reflects the consideration to which we expect to be entitled in exchange for those goods or services. We recognize substantially all of our revenue when products are shipped or delivered to our customers, and payment is due from our customers at the time of billing with a majority of our customers having 30-day terms. We estimate and record returns as a reduction of revenue. Amounts received in advance of shipment are deferred and recognized when the performance obligations are satisfied. Sales taxes collected from customers and remitted to governmental authorities are accounted for on a net basis and, therefore, we exclude these taxes from sales in the accompanying consolidated statements of operations. Cost of sales includes the cost of inventory sold and related items, such as vendor rebates, inventory allowances and reserves and shipping and handling costs associated with inbound and outbound freight, as well as depreciation and amortization of intangible assets. In May 2017,some cases, particularly with third-party pipe shipments, we consider shipping and handling costs to be separate performance obligations, and as such, we record the FASB issued ASU No. 2017-09,  Compensation – Stock Compensation (Topic 718) Scoperevenue and cost of Modification Accounting which clarifies modification accounting for share-based payment awards should not besales when the performance obligation is fulfilled.

Our contracts with customers ordinarily involve performance obligations that are one year or less. Therefore, we have applied if the fair value, vesting conditions, andoptional exemption that permits the classificationomission of information about our unfulfilled performance obligations as of the modified awardbalance sheet dates.

Contract Balances: Variations in the timing of revenue recognition, invoicing and receipt of payment result in categories of assets and liabilities that include invoiced accounts receivable, uninvoiced accounts receivable, contract assets and deferred revenue (contract liabilities) on the consolidated balance sheets.

Generally, revenue recognition and invoicing occur simultaneously as we transfer control of promised goods or services to our customers. We consider contract assets to be accounts receivable when we have an equity instrumentunconditional right to consideration and only the passage of time is required before payment is due. In certain cases, particularly those involving customer-specific documentation requirements, we delay invoicing until we are able to meet the documentation requirements. In these cases, we recognize a contract asset separate from accounts receivable until those requirements are met, and we are able to invoice the customer. Our contract asset balance associated with these requirements as of September 30, 2022, and December 31, 2021, was $17 million and $12 million, respectively. These contract asset balances are included within accounts receivable in the accompanying consolidated balance sheets.

We record contract liabilities, or deferred revenue, when we receive cash payments from customers in advance of our performance, including amounts that are refundable. The deferred revenue balance at September 30, 2022 and December 31, 2021 was $5 million and $4 million, respectively. During the three and nine months ended September 30, 2022, we recognized $0 million and $3 million of revenue that was deferred as a liability instrumentof December 31,2021. During the three and nine months ended September 30, 2021, we recognized $1 million and $6 million of revenue that was deferred as of December 31, 2020. Deferred revenue balances are included within accrued expenses and other current liabilities in the same before and immediately after the modification. This standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017. Adoption will be applied prospectively to awards modified on or after the adoption date. We do not expect the adoptionaccompanying consolidated balance sheets.

Disaggregated Revenue:

The following table presents our revenue disaggregated by revenue source (in millions):

NOTE 23 – INVENTORIES

The composition of our inventory is as follows (in millions):

In 2016, we experienced reductions in inventory quantities, resulting in a liquidation of a

The Company uses the last-in, first out-out (“LIFO”) inventory layer that was carried at a lower cost prevailing from a prior year, as compared with current costs (a “LIFO decrement”). Amethod of valuing U.S. inventories. The use of the LIFO decrement results in the erosion of layers created in earlier years, and, therefore, a LIFO layer is not created for years that have decrements. For the three and nine months ended September 30, 2016,method has the effect of thisreducing net income during periods of rising inventory costs (inflationary periods) and increasing net income during periods of falling inventory costs (deflationary periods). Valuation of inventory under the LIFO decrement decreased costmethod can be made only at the end of sales by approximatelyeach year based on the inventory levels and costs at that time. Accordingly, we base interim LIFO calculations on management’s estimates of expected year-end inventory levels and costs and these estimates are subject to the final year-end LIFO inventory determination. 

NOTE 4 – LEASES

We lease certain distribution centers, warehouses, office space, land and equipment. Substantially all of these leases are classified as operating leases. We recognize lease expense on a straight-line basis over the lease term. Leases with an initial term of 12 months or less are not recorded on the balance sheet.

Many of our facility leases include one or more options to renew, with renewal terms that can extend the lease term from one year to 15 years with a maximum lease term of 30 years, including renewals. The exercise of lease renewal options is at our sole discretion; therefore, renewals to extend the terms of most leases are not included in our right of use (“ROU”) assets and lease liabilities as they are not reasonably certain of exercise. In the case of our regional distribution centers and certain corporate offices, where the renewal is reasonably certain of exercise, we include the renewal period in our lease term. Leases with escalation adjustments based on an index, such as the consumer price index, are expensed based on current rates. Leases with specified escalation steps are expensed based on the total lease obligation ratably over the life of the lease. Leasehold improvements are depreciated over the expected lease term. Non-lease components, such as payment of real estate taxes, maintenance, insurance and other operating expenses, have been excluded from the determination of our lease liability.

As most of our leases do not provide an implicit rate, we use an incremental borrowing rate based on the information available at the commencement date in determining the present value of the lease payments using a portfolio approach. Our lease agreements do not contain any material residual value guarantees or material restrictive covenants.

Expense associated with our operating leases was $10 million and $30 million for the three and nine months ended September 30, 2022, and $9 million and $28 million for the three and nine months ended September 30, 2021, which we have classified in selling, general and administrative expenses. Cash paid for leases recognized as liabilities was $10 million and $31 million for the three and nine months ended September 30, 2022, and $8 million and $11$27 million respectively.  

Infor the third quarter of 2016, we incurred inventory-related charges totaling $45 million.  These charges reflected adjustments necessary to reduce the carrying value of certain products determined to be excess or obsolete to their estimated net realizable value based on our market outlook for certain products at that time.  This amount included $24 million in the International segment primarily related to a restructuring of our Australian businessthree and market conditions in Iraq.  Reserves for excess and obsolete inventory were increased in the U.S. and Canada by $16 million and $5 million, respectively.nine months ended September 30, 2021.

The maturity of lease liabilities is as follows (in millions):

Amounts maturing after 2026 include expected renewals for leases of regional distribution centers and certain corporate offices through dates up to 2048. Excluding optional renewals, our weighted-average remaining lease term is 7 years.

NOTE 35 – LONG-TERM DEBT

The components of our long-term debt are as follows (in millions):

Senior Secured Term Loan B:    In September 2017, the Company entered into We have a Refinancing Amendment and Successor Administrative Agent Agreement relating to the Term Loan Credit Agreement, dated as of November 9, 2012, by and among the Company, MRC Global (US) Inc., as the borrower, the other subsidiaries of the Company from time to time party thereto as guarantors, the several lenders from time to time party thereto, Bank of America, N.A., as administrative agent, and U.S. Bank National Association, as collateral trustee. Pursuant to the amendment, the parties thereto agreed to appoint JPMorgan Chase Bank, N.A. as the new administrative agent for the lenders.  As amended, the Term Loan Agreement provides for a $400 million seven-yearSenior Secured Term Loan B (the “Term Loan”) with an original principal amount of $400 million, which maturesamortizes in equal quarterly installments of 1% per year with the balance payable in September 2024.2024, when the facility matures. The Term Loan has an applicable interest rate margin of 300 basis points in the case of loans incurring interest based on LIBOR, and 200 basis points in the case of loans incurring interest based on the base rate. The Term Loan allows for incremental increases in facility size by up to an aggregate of $200 million, plus an additional amount such that the Company’s first lien leverage ratio (as defined under the Term Loan) would not exceed 4.00 to 1.00. MRC Global (US) Inc. is the borrower under this facility, which is guaranteed by MRC Global Inc. as well as all of its wholly owned U.S. subsidiaries.subsidiaries guarantees. In addition, itthe Term Loan is secured by a second lien on the assets securing our Global ABL Facility, defined below (which includes accounts receivable inventory and related assets)inventory) and a first lien on substantially all of the other assets of MRC Global Inc. and those of its U.S. subsidiaries as well as a pledge of all of the capital stock of our domestic subsidiaries and 65% of the capital stock of first tier, non-U.S. subsidiaries. In addition, the Term Loan contains a number of customary restrictive covenants. We are required to repay the Term Loan with the proceeds from certain asset sales and certain insurance proceeds, certain debt proceeds andproceeds. In addition, on an annual basis, we are required to repay an amount equal to 50% of excess cash flow, as defined in the Term Loan, (reducingreducing to 25% if our first lien leverage ratio is no more than 2.75 to 1.00 and 0%1.00. No payment of excess cash flow is required if our the first lien leverage ratio is no moreless than or equal 2.50 to 1.00).  In addition,1.00. The amount of cash used in the Term Loan contains a numberdetermination of customary restrictive covenants.the senior secured leverage ratio is limited to $75 million. 

The interest rate for the Term Loan, including the amortization of original issue discount and debt issuance costs, was 4.85%as of September 30, 2017 and 5.51% at December 31, 2016.

Global ABL Facility: In September 2017, 2021, the Company entered into a ThirdFourth Amended and Restated Loan, Security and Guarantee Agreement (the “Global ABL Facility”) by and among the Company, thecertain of its subsidiaries, of the Company from time to time party thereto as borrowers and guarantors, the severalits lenders from time to time party thereto and Bank of America, N.A. as administrative agent, security trustee and collateral agent.As part of the amendment, the multi-currency global asset-based revolving credit facility was re-sizedreduced to $800$750 million from $1.05 billion$800 million and the maturity was extended to September 2022 2026 from July 2019.  This facilitySeptember 2022. The Global ABL Facility is comprised of $675$705 million in revolver commitments in the United States, $65which includes a $30 million insub-limit for Canada, $18$12 million in Norway, $15$10 million in Australia, $13$10.5 million in the Netherlands, $7$7.5 million in the United Kingdom and $7$5 million in Belgium. ItThe Global ABL Facility contains an accordion feature that allows us to increase the principal amount of the facility by up to $200$250 million, subject to securing additional lender commitments. MRC Global Inc. and each of its current and future wholly owned material U.S. subsidiaries guarantee the obligations of our borrower subsidiaries under the Global ABL Facility. Additionally, each of our non-U.S. borrower subsidiaries guarantees the obligations of our other non-U.S. borrower subsidiaries under the Global ABL Facility. Outstanding obligations are generally secured by a first priority security interest in accounts receivable, inventory and related assets. U.S. borrowings under the facility bear interest at LIBOR 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, which is subject to redetermination from time to time. Excess Availability, as defined under our Global ABL Facility, was $489$612 million as of September 30, 2017.  

The interest rate for the Global ABL Facility was 4.92% as of September 30, 2017.  We had no borrowings on our Global ABL Facility at December 31, 2016.2022.

NOTE 4 – INCOME TAXES

In the first quarter of 2017, we adopted ASU 2016-09, Compensation - Stock CompensationInterest on Borrowings: The interest rates on our outstanding borrowings at September 30, 2022 and December 31, 2021, which simplified the accounting for taxes relatedincluding a floating to stock based compensation. Under the standard, excess tax benefits and certain tax deficienciesfixed interest rate swap, are no longer recorded in additional paid-in capital (“APIC”), and APIC pools are eliminated.  Instead, all excess tax benefits and tax deficiencies are recorded as income tax expense or benefit in the income statement.  In addition, excess tax benefits are presented as operating activities rather than financing activities in the statement of cash flows.    For the three and nine months

ended September 30, 2017, we recorded a tax benefit of $0 million and $2 million, respectively, related to the vesting of stock awards. The impacts of this standard are reflected in the consolidated financial statements on a prospective basis.

For interim periods, our income tax expense is computed based upon our estimated annual effective tax rate. Our effective tax rates for the three and nine months ended September 30, 2017 were 40% and 29%, respectively. The effective tax rates for the three and nine months ended September 30, 2016 were 5% and 12%, respectively.  Our rates generally differ from the U.S. federal statutory rate of 35% as a result of state income taxes and differing, generally lower, foreign income tax rates.  The effective tax rate for the nine months ended September 30, 2017 was lower than our U.S. federal statutory rate primarily due to the discrete impact of the implementation of ASU 2016-09 and a benefit related to foreign currency exchange losses.  Our 2016 effective tax rates were significantly lower than our U.S. federal statutory rate due to forecasted pre-tax losses across all segments including significant pre-tax losses in jurisdictions where there was no corresponding tax benefit.

NOTE 56 – REDEEMABLE PREFERRED STOCK

Preferred Stock Issuance

In June 2015, we issued 363,000 shares of Series A Convertible Perpetual Preferred Stock (the “Preferred Stock”) and received gross proceeds of $363 million. The Preferred Stock ranks senior to our common stock with respect to dividend rights and rights on liquidation, winding-up and dissolution. The Preferred Stock has a stated value of $1,000 per share, and holders of Preferred Stock are entitled to cumulative dividends payable quarterly in cash at a rate of 6.50% per annum. In June 2018, the holders of Preferred Stock designated one member to our board of directors. If we fail to declare and pay the quarterly dividend for an amount equal to six or more dividend periods, the holders of the Preferred Stock would be entitled to designate an additional member to our board of directors. Holders of Preferred Stock are entitled to vote together with the holders of the common stock as a single class, in each case, on an as-converted basis, except where law requires a separate class vote of the common stockholders is required by law.stockholders. Holders of Preferred Stock have certain limited special approval rights, including with respect to the issuance of pari passu or senior equity securities of the Company.

The Preferred Stock is convertible at the option of the holders into shares of common stock at an initial conversion rate of 55.9284 shares of common stock for each share of Preferred Stock, which represents an initial conversion price of $17.88 per share of common stock, subject to adjustment. On or after the fifth anniversary of the initial issuance of the Preferred Stock, theThe Company will havecurrently has the option to redeem, in whole but not in part, all the outstanding shares of Preferred Stock at par value, subject to certain redemption price adjustments on the basis of the date of the conversion.adjustments. We may elect to convert the Preferred Stock, in whole but not in part, into the relevant number of shares of common stock on or after the 54th month after the initial issuance of the Preferred Stock if the last reported sale price of the common stock has been at least 150% of the conversion price then in effect for a specified period. The conversion rate is subject to customary anti-dilution and other adjustments.

Holders of the Preferred Stock may, at their option, require the Company to repurchase their shares in the event of a fundamental change, as defined in the agreement. The repurchase price is based on the original $1,000$1,000 per share purchase price except in the case of a liquidation, in which case theythe holders would receive the greater of $1,000$1,000 per share and the amount that would be received if they held common stock converted at the conversion rate in effect at the time of the fundamental change. Because this feature could require redemption as a result of the occurrence of an event not solely within the control of the Company, the Preferred Stock is classified as temporary equity on our balance sheet.

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