XNYS:EDG Quarterly Report 10-Q Filing - 3/31/2012

Effective Date 3/31/2012

XNYS:EDG (): Fair Value Estimate
Premium
XNYS:EDG (): Consider Buying
Premium
XNYS:EDG (): Consider Selling
Premium
XNYS:EDG (): Fair Value Uncertainty
Premium
XNYS:EDG (): Economic Moat
Premium
XNYS:EDG (): Stewardship
Premium
 


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549

FORM 10-Q

(Mark One)
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended March 31, 2012
 
OR
 
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
Commission File Number: 001-35513
EDGEN GROUP INC.
(Exact name of registrant as specified in its charter)

Delaware
38-3860801
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
   
18444 Highland Road
Baton Rouge, LA
70809
(Address of principal executive offices)
(Zip Code)
 
Registrant’s telephone number, including area code: (225) 756-9868

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ¨    No  x
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes   x    No  ¨
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
 
Large accelerated filer
¨
Accelerated filer
o
       
Non-accelerated filer
x
Smaller reporting company
¨
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No   x
 
The number of shares outstanding of our common stock at May 2, 2012 is shown below:
 
Class
 
Number of shares outstanding
Class A common stock, $0.0001 par value
 
17,985,905
Class B common stock, $0.0001 par value
 
24,343,138
 


 
 

 
 
TABLE OF CONTENTS
 
PART I - FINANCIAL INFORMATION
1
     
Item 1.
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1
     
Item 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
17
     
Item 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
29
     
Item 4.
CONTROLS AND PROCEDURES
29
   
PART II - OTHER INFORMATION
30
     
Item 1.
LEGAL PROCEEDINGS
30
     
Item 1A.
RISK FACTORS
30
     
Item 2.
UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
30
     
Item 3.
DEFAULTS UPON SENIOR SECURITIES
30
     
Item 4.
MINE SAFETY DISCLOSURES
30
     
Item 5.
OTHER INFORMATION
30
     
Item 6.
EXHIBITS
30
   
SIGNATURES
31
   
EXHIBIT INDEX
31
 
 
 

 
 
PART I. FINANCIAL INFORMATION
 
Item 1. Financial Statements
 
EDGEN MURRAY II, L.P. (PREDECESSOR)
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
 
   
March 31, 2012
   
December 31, 2011
 
ASSETS
           
CURRENT ASSETS:
           
Cash and cash equivalents
  $ 13,205     $ 26,218  
Accounts receivable - net of allowance for doubtful accounts of $1,890 and $1,739, respectively
    203,019       198,663  
Inventory
    209,974       196,004  
Income tax receivable
    975       1,209  
Prepaid expenses and other current assets
    9,336       8,616  
Deferred tax asset - net
    213       209  
Total current assets
    436,722       430,919  
PROPERTY, PLANT AND EQUIPMENT - NET
    45,282       45,510  
GOODWILL
    23,667       22,965  
OTHER INTANGIBLE ASSETS - NET
    22,558       25,447  
OTHER ASSETS
    2,101       503  
DEFERRED TAX ASSET - NET
    1,155       1,044  
DEFERRED FINANCING COSTS
    10,652       11,489  
INVESTMENT IN UNCONSOLIDATED AFFILIATE
    13,455       13,180  
TOTAL ASSETS
  $ 555,592     $ 551,057  
                 
LIABILITIES AND DEFICIT
               
CURRENT LIABILITIES:
               
Managed cash overdrafts
  $ 688     $ 112  
Accounts payable
    135,811       147,202  
Accrued expenses and other current liabilities
    11,557       15,848  
Income taxes payable
    4,737       4,307  
Deferred revenue
    2,819       5,139  
Accrued interest payable
    12,244       26,443  
Deferred tax liability - net
    1,100       991  
Current portion of long term debt and capital lease
    378       358  
Total current liabilities
    169,334       200,400  
DEFERRED TAX LIABILITY - NET
    4,046       4,544  
OTHER LONG TERM LIABILITIES
    1,270       783  
LONG TERM DEBT AND CAPITAL LEASE
    535,622       500,383  
Total liabilities
  $ 710,272     $ 706,110  
COMMITMENTS AND CONTINGENCIES
               
DEFICIT:
               
General partner
  $ 1     $ 1  
Limited partners
    (132,012 )     (129,736 )
Accumulated other comprehensive loss
    (23,010 )     (25,648 )
Total partners' deficit
    (155,021 )     (155,383 )
Non-controlling interest
    341       330  
Total deficit
    (154,680 )     (155,053 )
TOTAL LIABILITIES AND DEFICIT
  $ 555,592     $ 551,057  
 
See accompanying notes to unaudited condensed consolidated financial statements.
 
 
1

 
 
EDGEN MURRAY II, L.P. (PREDECESSOR)
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands)

   
Three months ended March 31,
 
   
2012
   
2011
 
SALES
  $ 277,676     $ 185,562  
OPERATING EXPENSES:
               
     Cost of sales (exclusive of depreciation and amortization shown below)
    240,227       158,868  
     Selling, general and administrative expense - net of service fee income
    18,773       16,349  
     Depreciation and amortization expense
    4,576       5,292  
Total operating expenses
    263,576       180,509  
INCOME FROM OPERATIONS
    14,100       5,053  
OTHER INCOME (EXPENSE):
               
     Equity in earnings of unconsolidated affiliate
    1,200       432  
     Other income - net
    104       1,173  
     Interest expense - net
    (16,579 )     (16,120 )
LOSS BEFORE INCOME TAX EXPENSE
    (1,175 )     (9,462 )
INCOME TAX EXPENSE
    1,304       556  
NET LOSS
    (2,479 )     (10,018 )
NET INCOME ATTRIBUTABLE TO NON-CONTROLLING INTEREST
    11       6  
NET LOSS AVAILABLE TO COMMON PARTNERSHIP INTERESTS
  $ (2,490 )   $ (10,024 )
 
See accompanying notes to unaudited condensed consolidated financial statements.
 
 
2

 
 
EDGEN MURRAY II, L.P. (PREDECESSOR)
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(In thousands)
 
   
Three months ended March 31,
 
   
2012
   
2011
 
NET LOSS
  $ (2,479 )   $ (10,018 )
OTHER COMPREHENSIVE INCOME:
               
     Foreign currency translation adjustments
    2,638       3,066  
COMPREHENSIVE INCOME (LOSS)
    159       (6,952 )
COMPREHENSIVE INCOME ATTRIBUTABLE TO NON-CONTROLLING INTEREST
    11       6  
COMPREHENSIVE INCOME (LOSS) ATTRIBUTABLE TO COMMON PARTNERSHIP INTERESTS
  $ 148     $ (6,958 )
 
See accompanying notes to unaudited condensed consolidated financial statements.
 
 
3

 
 
EDGEN MURRAY II, L.P. (PREDECESSOR)
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF DEFICIT
(In thousands, except unit data)
 
   
Number of units
                               
   
Common general partnership interest
   
Common limited partnership interests
   
Common partnership interests
   
Accumulated other comprehensive loss
   
Total partners' deficit
   
Non-controlling interest
   
Total deficit
 
Balances at January 1, 2011
    1       209,493     $ (105,773 )   $ (25,531 )   $ (131,304 )   $ 42     $ (131,262 )
Net income (loss)
    -       -       (10,024 )     -       (10,024 )     6       (10,018 )
Other comprehensive income
    -       -       -       3,066       3,066       -       3,066  
Amortization of restricted common units
    -       -       8       -       8       -       8  
Amortization of unit options
    -       -       206       -       206       -       206  
Balances at March 31, 2011
    1       209,493     $ (115,583 )   $ (22,465 )   $ (138,048 )   $ 48     $ (138,000 )
                                                         
Balances at January 1, 2012
    1       209,493     $ (129,735 )   $ (25,648 )   $ (155,383 )   $ 330     $ (155,053 )
Net income (loss)
    -       -       (2,490 )     -       (2,490 )     11       (2,479 )
Other comprehensive income
    -       -       -       2,638       2,638       -       2,638  
Amortization of restricted common units
    -       -       8       -       8       -       8  
Amortization of unit options
    -       -       206       -       206       -       206  
Balances at March 31, 2012
    1       209,493     $ (132,011 )   $ (23,010 )   $ (155,021 )   $ 341     $ (154,680 )
 
See accompanying notes to unaudited condensed consolidated financial statements.
 
 
4

 
 
EDGEN MURRAY II, L.P. (PREDECESSOR)
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 (In thousands)
 
   
Three months ended March 31,
 
   
2012
   
2011
 
CASH FLOWS FROM OPERATING ACTIVITIES:
           
Net loss
  $ (2,479 )   $ (10,018 )
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
               
Depreciation and amortization
    4,576       5,292  
Amortization of deferred financing costs
    858       939  
Equity in earnings of unconsolidated affiliate
    (1,200 )     (432 )
Distributions received from unconsolidated affiliate
    798       -  
Amortization of discount on long term debt
    200       177  
Unit-based compensation expense
    214       214  
Allowance for doubtful accounts
    138       (212 )
Provision for inventory allowances and writedowns
    375       125  
Deferred income tax benefit
    (605 )     (441 )
(Gain) loss on foreign currency transactions
    29       (235 )
Unrealized (gain) loss on derivative instruments
    22       (265 )
Gain on sale of property, plant and equipment
    (35 )     (977 )
Changes in operating assets and liabilities:
               
Accounts receivable
    (3,871 )     (13,771 )
Inventory
    (13,047 )     (2,945 )
Income tax receivable
    244       525  
Prepaid expenses and other current assets
    (1,983 )     (1,230 )
Accounts payable
    (11,889 )     29,302  
Accrued expenses, other current liabilities and deferred revenue
    (20,901 )     (14,913 )
Income tax payable
    365       956  
Other
    128       25  
Net cash used in operating activities
    (48,063 )     (7,884 )
CASH FLOWS FROM INVESTING ACTIVITIES:
               
Purchases of property, plant and equipment
    (795 )     (315 )
Proceeds from the sale of property, plant and equipment
    37       6,208  
Net cash provided by (used in) investing activities
    (758 )     5,893  
CASH FLOWS FROM FINANCING ACTIVITIES:
               
Principal payments on long term debt and capital lease
    (88 )     (135 )
Proceeds from EM revolving credit facility
    138,865       222  
Payments to EM revolving credit facility
    (104,319 )     (222 )
Managed cash overdraft
    579       10  
Net cash provided by (used in) financing activities
    35,037       (125 )
Effect of exchange rate changes on cash and cash equivalents
    771       844  
NET CHANGE IN CASH AND CASH EQUIVALENTS
    (13,013 )     (1,272 )
CASH AND CASH EQUIVALENTS - beginning of period
    26,218       62,478  
CASH AND CASH EQUIVALENTS - end of period
  $ 13,205     $ 61,206  
 
See accompanying notes to unaudited condensed consolidated financial statements.
 
 
5

 
 
EDGEN MURRAY II, L.P. (PREDECESSOR)
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except unit data)

References to “we,” “us” and “our” are intended to mean Edgen Group Inc. (“Edgen Group”) and its consolidated subsidiaries, as well as its accounting predecessor, Edgen Murray II, L.P. and its consolidated subsidiaries (“EM I II LP”). The financial statements and related notes presented within this Quarterly Report on Form 10-Q (“Form 10-Q”)reflect the account balances of our accounting predecessor, EM II LP, to whose business we have succeeded on May 2, 2012.

1. Organization, Basis of Presentation and General Accounting Matters
 
Formation and Organization
We are a publicly traded Delaware corporation. Our Class A common stock is listed on the New York Stock Exchange  under the symbol “EDG.” We were formed in December 2011 to serve as the issuer of an initial public offering (“IPO”) and the ultimate parent company of our operating subsidiaries, Edgen Murray Corporation and its subsidiaries (“EMC”) and Bourland & Leverich Supply Co. LLC (“B&L”). We own and control these operating subsidiaries through our 42% economic interest and our 100% voting managing member interest in our consolidated subsidiary, EDG Holdco LLC (“EDG LLC”), which owns 100% of, and controls, EMC and B&L.
 
Description of Operations
We are a leading global distributor of specialty products to the energy sector, including steel pipe, valves, quenched and tempered and high yield heavy plate and related components and primarily serve customers that operate in the upstream, midstream and downstream end-markets for oil and natural gas as well as the power generation, civil construction and mining market segments. We have operations in the U.S., Canada, Brazil, the U.K., Singapore, India, France, the United Arab Emirates (“UAE”) and Saudi Arabia and sales representative offices in Australia, China, South Korea and Indonesia. Our headquarters are located in Baton Rouge, Louisiana. Prior to the reorganization described below (the “Reorganization”), our predecessor managed its business in two reportable segments: Western Hemisphere and Eastern Hemisphere.  
 
Initial Public Offering and Reorganization
On May 2, 2012, we completed an IPO of 15,000,000 shares of Class A common stock at an initial offering price of $11.00 per share, which generated net proceeds of approximately $150.4 million after deducting underwriting discounts, expenses and transaction costs. We used these net proceeds to purchase membership units of EDG LLC and EDG LLC repaid certain indebtedness of its subsidiaries, EMC and B&L.

Immediately prior to the consummation of the IPO, we were party to a series of transactions which we refer to as the Reorganization. These transactions consisted of, among other things, the following:

 
(1)
Our formation of EDG LLC;
 
(2)
The contribution by EM II LP of all of the equity interests of EMGH Limited (“EMGH”) to EMC, thereby making EMGH a wholly owned subsidiary of EMC;
 
(3)
The redemption of EMC’s ownership interest in Bourland & Leverich Holdings LLC (“B&L Holdings”) for an equivalent ownership interest in B&L, B&L Holdings’ operating subsidiary;
 
(4)
The contribution by EM II LP of all of the shares of capital stock of EMC and all of EM II LP’s liabilities to EDG LLC in exchange for 30% of EDG LLC and 12,615,230 shares of our Class B common stock;
 
(5)
The contribution by B&L Holdings of all of the membership units of B&L (other than those held by EMC) and all of B&L Holdings’ liabilities (other than those separately assumed by B&L) to EDG LLC in exchange for 28% of EDG LLC and 11,727,908 shares of our Class B common stock; and
 
(6)
The exchange of (i) all of the restricted units of EM II LP and B&L Holdings; and (ii) all of the options to purchase units of EM II LP and B&L Holdings for 2,985,905 and 1,723,981 restricted shares of our Class A common stock and options to purchase our Class A common stock, respectively.

As a result of the Reorganization and the IPO, we are the parent holding company of the historical businesses of EM II LP and B&L Holdings and have consolidated the results of these businesses with our own. The Reorganization has been accounted for as a transaction between entities under common control, as we, EM II LP, B&L Holdings, EDG LLC, EM II LP and B&L have been since August 2010, and continue to be, under the collective common control of affiliates of Jefferies Capital Partners (“JCP”).

 
6

 
 
Please see Note 15 Subsequent Event, for additional information related to various agreements we entered into in connection with the Reorganization and IPO.

Basis of Presentation
The condensed consolidated financial statements and notes are presented in accordance with accounting principles generally accepted in the United States of America (“generally accepted accounting principles” or “GAAP”) and pursuant to the rules and regulations of the United States Securities and Exchange Commission (“SEC”) for interim reporting.

We did not own any assets prior to the Reorganization and the IPO on May 2, 2012. The financial statements and related notes presented within this Form 10-Q reflect the account balances of our accounting predecessor, EM II LP, to whose business we have succeeded. Because the Reorganization and the IPO occurred subsequent to March 31, 2012, our financial statements do not yet reflect the impact of these transactions. Furthermore, our financial statements do not include any amounts related to the historical business of B&L which became a subsidiary of ours in connection with the Reorganization and the IPO. Beginning in the second quarter of 2012 and as required by GAAP for common control transactions, all assets and liabilities transferred as part of the Reorganization will be recorded in our financial statements at carryover basis and all financial information presented for periods prior to our IPO will reflect the Reorganization as if it had occurred on August 19, 2010, the date that EM II LP and B&L Holdings came under the common control of JCP.

In the opinion of our management, these condensed consolidated financial statements reflect all adjustments, including those of a normal recurring nature, necessary to present fairly the results of the reported interim periods. Although we believe the disclosures in these financial statements are adequate and make the information presented not misleading, certain information and footnote disclosures normally included in annual financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to the rules and regulations of the SEC.

These unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the EM II LP 2011 Form 10-K (“2011 Form 10-K”) filed with the SEC on February 29, 2012 and the audited consolidated financial statements and notes thereto included in the Edgen Group Inc. Prospectus filed with the SEC on April 27, 2012.

Use of Estimates
The preparation of our condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect (i) the reported amounts of assets and liabilities; (ii) the disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements; and (iii) the reported amounts of revenues and expenses during the reporting period. Areas requiring significant estimates by our management include the following:

 
provisions for uncollectible receivables;
 
recoverability of inventories and application of lower of cost or market accounting;
 
recoverability of goodwill and other indefinite-lived intangible assets;
 
recoverability of other intangibles and long-lived assets and related estimated lives;
 
valuation of unit-based compensation; and
 
provisions for income taxes and related valuation allowances and tax uncertainties.

Actual results could differ from those estimates, and the foregoing interim results are not necessarily indicative of the results of operations to be expected for other interim periods or for the full year ending December 31, 2012.

2. Recent Accounting Pronouncements
From time to time, new accounting pronouncements are issued by FASB or other standard setting bodies. Updates to the Accounting Standard Codification (“ASC”) are communicated through the issuance of an Accounting Standards Update (“ASU”).

Recently Issued
Currently, no recently issued accounting pronouncements that will be adopted by us are expected to have a material impact on our financial position, results of operations and/or cash flows.

 
7

 
 
Recently Adopted
In June 2011, the FASB issued ASU No. 2011-05, Comprehensive Income (Topic 220): Presentation of Comprehensive Income. This update is intended to increase the prominence of other comprehensive income in the financial statements by eliminating one of the presentation options provided by current GAAP and requiring an entity to present total comprehensive income, the components of net income and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. We adopted this guidance at December 31, 2011 and chose to present other comprehensive income within a separate statement of comprehensive income. The effect of this amended guidance has been retrospectively applied to all periods presented.

3. Supplemental Cash Flow Information
 
   
Three months ended
March 31,
 
   
2012
   
2011
 
Interest paid
  $ 29,791     $ 29,184  
Income taxes paid
    1,552       295  
Income tax refunds received
    210       829  
                 
Non-cash investing and financing activities:
               
Purchases of property, plant and equipment included in accounts payable
  $ 175     $ 53  
Distributions from unconsolidated affiliate
 
127
      -  

4. Property, Plant and Equipment
The historical costs of our property, plant and equipment and related accumulated depreciation balances were as follows at the dates indicated:
 
   
March 31,
2012
   
December 31,
2011
 
             
Land and land improvements
  $ 11,346     $ 11,188  
Building
    37,634       37,012  
Equipment and computers
    28,560       28,188  
Leasehold improvements
    6,056       6,000  
Construction in progress
    130       163  
Property, plant and equipment - gross
    83,726       82,551  
Less accumulated depreciation
    (38,444 )     (37,041 )
Property, plant and equipment - net
  $ 45,282     $ 45,510  
                 
   
Three months ended March 31,
 
      2012       2011  
Depreciation expense
  $ 1,283     $ 1,395  
 
We are party to a capital lease of land, an office building and two warehouses in Newbridge, Scotland. At March 31, 2012 and December 31, 2011, the carrying value of the leased fixed assets included in property, plant and equipment was $15,581 and $15,320, respectively.

 
8

 
 
5. Intangible Assets
The following table summarizes our intangible assets at the dates indicated:
 
   
Gross carrying value
   
Accumulated amortization
   
Net carrying value
 
   
March 31,
2012
   
December 31, 2011
   
March 31,
2012
   
December 31, 2011
   
March 31,
2012
   
December 31, 2011
 
Intangible assets subject to amortization:
                                   
Customer relationships
  $ 83,574     $ 82,057     $ (76,722 )   $ (73,004 )   $ 6,852     $ 9,053  
Noncompete agreements
    22,011       22,011       (17,967 )     (17,055 )     4,044       4,956  
Sales backlog
    9,717       9,589       (9,717 )     (9,589 )     -       -  
Intangible assets not subject to amortization:
                                         
Tradenames
    11,648       11,424       -       -       11,648       11,424  
Trademarks
    14       14       -       -       14       14  
Total intangible assets
  $ 126,964     $ 125,095     $ (104,406 )   $ (99,648 )   $ 22,558     $ 25,447  
 
The gross carrying value and accumulated amortization of our intangible assets increased $1,869 and $1,472, respectively, at March 31, 2012 compared to December 31, 2011 due to the effect of foreign currency translation.

   
Three months ended
March 31,
 
   
2012
   
2011
 
Amortization expense
  $ 3,286     $ 3,897  
 
Our scheduled amortization expense associated with intangible assets is expected to be:
 
Years ending December 31:
     
     2012 (remaining)
  $ 8,755  
     2013
    1,808  
     2014
    333  
     2015
    -  
     2016
    -  
     Thereafter
    -  
          Total
  $ 10,896  

6. Goodwill
The following table presents changes to goodwill and the gross carrying value and accumulated impairment losses associated with goodwill at the dates indicated. At March 31, 2012, all of our goodwill is included within the General Company segment.
 
   
Gross
   
Accumulated impairment
   
Effects of foreign currency
   
Net
 
Balance at December 31, 2011
  $ 90,674     $ (62,805 )   $ (4,904 )   $ 22,965  
Effects of foreign currency
    -       -       702       702  
Balance at March 31, 2012
  $ 90,674     $ (62,805 )   $ (4,202 )   $ 23,667  
 
7. Investment in Unconsolidated Affiliate
On August 19, 2010, we invested $10,000 in exchange for 14.5% of the common equity in B&L Holdings. At March 31, 2012 and December 31, 2011, our investment in B&L Holdings was $13,455 and $13,180, respectively. Equity in the earnings of B&L Holdings for the three months ended March 31, 2012 and 2011 was $1,200 and $432, respectively.

As stated in Note 1, subsequent to the Reorganization, we control B&L and will consolidate the results of B&L in our future financial statements.
 
 
9

 
 
8. Debt Obligations
Our credit arrangements, long term debt and capital lease consisted of the following at the dates indicated:
 
             
   
March 31, 2012
   
December 31, 2011
 
             
$465,000 12.25% EMC senior secured notes, net of discount of $2,768 and $2,968 at March 31, 2012 and December 31, 2011, respectively; due January 15, 2015
  $ 462,232     $ 462,032  
$195,000 EM revolving credit facility; due May 11, 2014
    55,115       20,523  
$15,000 EM FZE facility
    -       -  
Capital lease
    18,653       18,186  
     Total long term debt and capital lease
    536,000       500,741  
Less: current portion 
    (378 )     (358 )
     Long term debt and capital lease, less current portion
  $ 535,622     $ 500,383  
 
Other than disclosed below, there have been no significant changes in the terms or amounts of our consolidated debt obligations since those reported in the 2011 Form 10-K.

Revolving Credit Facilities
At March 31, 2012, utilization under our revolving credit facility (the “EM revolving credit facility”) and the facility available to our subsidiary in Dubai, Edgen Murray FZE (the “EM FZE facility”) was as follows:
 
   
EM revolving credit facility
     
EM FZE
   
Total revolving
credit
 
   
EMC
   
EM Canada
   
EM Europe
   
EM Pte
   
Total
   
facility
   
facilities
 
 Total availability
  $ 140,857     $ 3,396     $ 35,747     $ 15,000     $ 195,000     $ 5,000     $ 200,000  
 Less: cash borrowings
    (48,111 )     -       (4,004 )     (3,000 )     (55,115 )     -       (55,115 )
 Less: trade finance instruments
    (21,841 )(a)     -       (2,202 )     (1,328 )     (25,371 )     (1,612 )     (26,983 )
 Less: reserves
    (2,787 )     (75 )     (1,538 )     -       (4,400 )     -       (4,400 )
 Net availability
  $ 68,118     $ 3,321     $ 28,003     $ 10,672     $ 110,114     $ 3,388     $ 113,502  

(a) Includes a letter of credit in the amount of $5,000 that expires on January 31, 2013, which supports the EM FZE facility.

Our weighted average interest rate paid for cash borrowings under the EM revolving credit facility and EM FZE facility was 4.4% and 2.3%, respectively, during the three months ended March 31, 2012.

On May 2, 2012, we used a portion of the net proceeds from the IPO to repay $23,758 outstanding under the EM revolving facility. Additionally, on April 10, 2012, we entered into a seventh amendment to the EM revolving credit facility in connection with the IPO. See Note 15 for more information on this subsequent event.
 
Third-Party Guarantees
In the normal course of business, we may provide performance guarantees directly to third parties on behalf of our subsidiaries.
 
At March 31, 2012 and December 31, 2011, we had issued payment guarantees with a maximum aggregate potential obligation for future payments (undiscounted) of $27,253 and $30,663, respectively, to third parties to secure payment performance by certain of our subsidiaries. The outstanding aggregate values of guaranteed commitments at March 31, 2012 and December 31, 2011 were $23,614 and $27,386, respectively, for which no commitment extended beyond one year.
 
At March 31, 2012 and December 31, 2011, we had bank guarantees of $835 and $675, respectively, which have been cash collateralized and included in prepaid expenses and other assets on our consolidated balance sheets.

 
10

 
 
9. Income Taxes
EM II LP, our accounting predecessor, is a Delaware limited partnership and is not directly subject to U.S. income taxes; however, our subsidiaries operate as corporations or similar entities in various tax jurisdictions throughout the world. Accordingly, we have provided for current and deferred corporate income taxes in our condensed consolidated financial statements. The following table sets forth our income tax expense for the periods indicated:

   
Three months ended March 31,
 
   
2012
   
2011
 
Loss before income tax expense
  $ (1,175 )   $ (9,462 )
Income tax expense
    1,304       556  
Effective tax rate
    (111 )%     (6 )%

The income tax expense for the three months ended March 31, 2012 at an effective tax rate of (111)% reflects taxable income from non-U.S. operations at an estimated annual effective tax rate of approximately 21% and no tax benefit for any losses generated by our U.S. operations as a valuation allowance has been established against any tax benefits related to taxable losses.

At March 31, 2012 and December 31, 2011, a valuation allowance of $27,456 and $24,299, respectively, was recorded against deferred tax assets and net operating loss (“NOL”) carryforwards. The NOLs are scheduled to expire beginning in 2024 through 2031.

The following is a summary of activity related to uncertain tax positions:
 
Balance at January 1, 2012
  $ 1,939  
Gross increases for tax positions taken in prior year
    258  
Settlement of uncertain tax position with tax authorities
    -  
Lapse of statute of limitations related to uncertain tax positions
    -  
Foreign currency translation
    33  
Balance at March 31, 2012
  $ 2,230  
 
We, as a reporting entity and not a taxpaying entity, are not subject to the general statute of limitations period for assessment of tax. Our subsidiaries have open tax years as follows:
 
Jurisdiction
 
Tax years open for assessment
Federal
 
2008 - 2011
Various states
 
2005 - 2011
Various foreign
 
2007 - 2011
 
To the extent amended returns are filed with respect to pre-2008 tax year ends, these years would be subject to limited examination by the Internal Revenue Service.

10. Commitments and Contingencies

Operating Leases
Through our subsidiaries, we lease various properties, warehouses, equipment, vehicles and office space under operating leases with remaining terms ranging from one to nine years with various renewal options of up to 20 years. In addition to rental payments, substantially all leases require payment of taxes, insurance and maintenance costs. Total rental expense for all operating leases is as follows:
 
   
Three months ended
March 31,
 
   
2012
   
2011
 
Operating lease rental expense
  $ 1,201     $ 1,204  
 
Employment Agreements
In the ordinary course of business, we have entered into employment agreements with certain executives. Among other things, the employment agreements provide for minimum salary levels, incentive bonuses and other compensation. Employment agreement terms also include payments to the executives in the event of termination of employment. The payments, among other things, may include cash severance, continuation of medical and other insurance benefits and acceleration of the vesting of certain equity-based awards, depending on, among other factors, the circumstances surrounding termination.

 
11

 
 
Legal Proceedings
We are involved in various claims, lawsuits and proceedings arising in the ordinary course of business. Although we attempt to collect from our suppliers any amounts paid to our customers arising from warranty claims and lawsuits, there can be no assurance that we will be able to recover from our suppliers, in every instance, any or all of the amounts claimed by our customers. While there are uncertainties inherent in the ultimate outcome of such matters and it is impossible to presently determine the ultimate costs that may be incurred, we believe the resolution of such uncertainties and the incurrence of such costs will not have a material effect on our condensed consolidated financial position, results of operations and/or cash flows.

During the three months ended March 31, 2012, we agreed to separate settlements with the customer and supplier involved in a warranty claim previously disclosed in the 2011 Form 10-K. As a result of these settlements, we recorded net expense of approximately $219 and reversed a $955 reserve against an amount owed to us by the customer involved in this claim.

11. Segment Information
We report our financial results under two reportable segments: Western Hemisphere and Eastern Hemisphere. Certain expenses, other non-trading expenses and certain assets and liabilities, such as certain intangible assets, are not allocated to the segments, but are included in General Company expenses.
 
The following tables present the financial information for each reportable segment:

   
Three months ended March 31,
 
   
2012
   
2011
 
Sales:
           
Western Hemisphere
  $ 180,664     $ 115,000  
Eastern Hemisphere
    98,714       72,877  
Intersegment sales
    (1,702 )     (2,315 )
    $ 277,676     $ 185,562  
Intersegment sales:
               
Western Hemisphere
  $ 634     $ 1,041  
Eastern Hemisphere
    1,068       1,274  
    $ 1,702     $ 2,315  
Income (loss) from operations:
               
Western Hemisphere
  $ 6,625     $ 849  
Eastern Hemisphere
    11,979       7,564  
General Company
    (4,504 )     (3,360 )
    $ 14,100     $ 5,053  
                 
Total assets:
 
March 31, 2012
   
December 31, 2011
 
Western Hemisphere
  $ 310,227     $ 292,853  
Eastern Hemisphere
    209,096       221,077  
General Company
    36,269       37,127  
    $ 555,592     $ 551,057  

12. Derivatives and Other Financial Instruments
In the normal course of business, we are exposed to certain risks, including changes in interest rates and foreign currency rates.  We enter into derivative financial instruments to manage certain exposures to these risks. Our derivative policy requires that only known firm commitments are hedged and does not allow us to enter into any derivative instruments for trading or other speculative purposes.

 
12

 

Currency Exchange Rate Risk
Transactions hedged by us include forecasted purchase commitments. At March 31, 2012 and December 31, 2011, there were no outstanding derivatives designated as hedges. The total notional amount of outstanding forward contracts not designated as hedging instruments at March 31, 2012 and December 31, 2011 was $42,766 and $56,005, respectively.

The following table provides a balance sheet overview of our derivative assets and liabilities at the dates indicated (n/a is defined as not applicable):
 
   
Asset derivatives
   
Liability derivatives
 
   
March 31, 2012
   
December 31, 2011
   
March 31, 2012
   
December 31, 2011
 
   
Balance sheet location
 
Fair value
 
Balance sheet location
 
Fair value
 
Balance sheet location
 
Fair value
 
Balance sheet location
 
Fair value
 
Derivatives designated as hedging instruments:
                                                               
Forward contracts
    n/a     $ -       n/a     $ -       n/a     $ -       n/a     $ -  
                                                                 
Derivatives not designated as hedging instruments:
                                                               
Forward contracts
 
Prepaid expenses and other current assets
  $ 274    
Prepaid expenses and other current assets
  $ 241    
Accrued expenses and other current liabilities
  $ (252 )  
Accrued expenses and other current liabilities
  $ (738 )
 
The following table discloses the impact of derivative instruments not designated as hedging instruments on our condensed consolidated statements of operations:
 
     
Recognized gain (loss) in income
 
Derivatives not designated
Location of gain (loss)
 
Three months ended March 31,
 
as hedging instruments:
 recognized in income
 
2012
   
2011
 
Forward contracts
Selling, general and administrative expense
  $ 344     $ (13 )

At March 31, 2012 and December 31, 2011, the cumulative effect of currency translation adjustments was a loss of $23,010 and $25,648, respectively, and is the sole component of  accumulated other comprehensive loss on the condensed consolidated balance sheets. Currency translation adjustments are the result of the translation of our foreign subsidiaries’ financial statements that have a functional currency other than the U.S. dollar.

Interest Rate Risk
Our variable interest rate risk is limited to cash borrowings under our credit facilities which are subject to interest rates that fluctuate with market rates. This risk is partially mitigated due to the short term nature of these borrowings. There were no interest rate derivatives outstanding at March 31, 2012 and December 31, 2011.

Credit Risk
By using derivative instruments to manage our risk exposure, we are subject to credit risk on those derivative instruments. Credit risk arises from the potential failure of the counterparty to perform under the terms of the derivative instrument. We attempt to limit this risk by entering into derivative instruments with bank counterparties with high credit ratings assigned by international credit rating agencies.

13. Fair Value Measurements and Financial Instruments
We classify financial assets and liabilities that are measured and reported at fair value on a recurring basis using a hierarchy based on the inputs used in measuring fair value. GAAP defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (exit price). We classify the inputs used to measure fair value into the following hierarchy:

Level 1: Inputs based on quoted market prices in active markets for identical assets or liabilities at the measurement date.

Level 2: Quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets and liabilities in markets that are not active or other inputs that are observable and can be corroborated by observable market data.

 
13

 
 
Level 3: Inputs reflect management’s best estimates and assumptions of what market participants would use in pricing the asset or liability at the measurement date. The inputs are unobservable in the market and significant to the valuation of the instruments.

Our financial assets and liabilities that were accounted for at fair value on a recurring basis at March 31, 2012 and December 31, 2011 are as follows:
 
   
March 31, 2012
   
December 31, 2011
 
   
Level 1
   
Level 2
   
Level 3
   
Total
   
Level 1
   
Level 2
   
Level 3
   
Total
 
Financial assets:
                                               
    Forward contracts
  $ -     $ 274     $ -     $ 274     $ -     $ 241     $ -     $ 241  
Financial liabilities:
                                                               
    Forward contracts
  $ -     $ (252 )   $ -     $ (252 )   $ -     $ (738 )   $ -     $ (738 )
 
Forward contracts are valued using broker quotations or market transactions in either the listed or over-the counter markets. Management performs procedures to validate the information obtained from the broker quotations in calculating the ultimate fair values. As such, these derivative instruments are classified within Level 2.

The comparison of carrying value and estimated fair value of the EMC senior secured notes is presented below:

   
March 31, 2012
   
December 31, 2011
 
   
Carrying value
 
Fair value
   
Carrying value
   
Fair value
 
EMC senior secured notes
  $ 462,232     $ 470,813     $ 462,032     $ 404,550  

The fair value of the EMC senior secured notes, excluding unamortized discount, has been estimated based upon market quotes approximating the fair value at the condensed consolidated balance sheets dates.

The fair value amounts shown are not necessarily indicative of the amount that we would realize upon disposition, nor do they indicate our intent or ability to dispose of the financial instrument. We believe that the carrying amounts of our other financial assets and liabilities approximate their fair values due to their short term nature.

14. Related-Party Transactions
At March 31, 2012, an employee pension fund of the ultimate parent company of one of our customers owned approximately 14%, on a fully diluted ownership basis, of EM II LP's common units. For the three months ended March 31, 2012 and 2011, we had sales to that customer of $13,443 and $4,642, respectively. We had $16,280 and $10,585 of accounts receivable due from this customer included in accounts receivable on our condensed consolidated balance sheets at March 31, 2012 and December 31, 2011, respectively.

Transactions with JCP
We made payments to JCP for reimbursement of certain expenses incurred while monitoring its investment in us as follows:
 
   
Three months ended
March 31,
 
   
2012
   
2011
 
Payments to JCP
  $ -     $ 44  
 
Transactions with B&L Holdings
During the three months ended March 31, 2012 and 2011, our President and Chief Executive Officer served as non-executive chairman of the board of directors of B&L Holdings. B&L Holdings is controlled by JCP. In addition, certain JCP employees, who serve as directors of our board, serve on the board of directors of B&L Holdings.
 
 
14

 
 
EMC entered into a service fee agreement with B&L Holdings to provide certain general and administrative services, including, but not limited to, information technology support services, legal, treasury, tax, financial reporting and other administrative services, for a $2,000 annual fee and reimbursement of expenses. Selling, general and administrative expense on the condensed consolidated statements of operations includes $500 of this service fee for the three months ended March 31, 2012 and 2011. Reimbursable administrative expenses paid by us on behalf of B&L Holdings, which are reimbursed by B&L Holdings, were $273 and $24 in the three months ended March 31, 2012 and 2011, respectively.

There were no product purchases from, or sales to, B&L Holdings made by us in the three months ended March 31, 2012 and 2011.

At March 31, 2012 and December 31, 2011, we had $156 and $4, respectively, due from B&L Holdings included in accounts receivable on our condensed consolidated balance sheets.

In August 2010, B&L Holdings granted equity awards to our Chief Executive Officer and to certain of our employees. Selling, general and administrative expense for the three months ended March 31, 2012 and 2011 includes $127 of compensation expense related to the B&L Holdings equity awards.

15. Subsequent Events
As stated in Note 1, we entered into various agreements in connection with the IPO and the Reorganization.  These agreements include the following:

Amendment to EM revolving credit facility
On April 10, 2012, we entered into a seventh amendment (“Seventh Amendment”) to the EM revolving credit facility among JPMorgan Chase Bank, N.A. and other financial institutions party thereto, EMC, Edgen Murray Europe Limited, Edgen Murray Canada, Inc. (“EM Canada”) and Edgen Murray Pte. Ltd. (“EM Pte”). The Seventh Amendment permits EM Pte to incur $10.0 million of additional indebtedness secured by a warehouse facility owned by EM Pte in Singapore and increases the unused line fee payable to the Singapore administrative agent and the Singapore collateral agent under the EM revolving credit facility from 0.50% to 0.65%. Additionally, the Seventh Amendment (i) permitted us to effect certain restructuring transactions to facilitate the IPO; (ii) released EM II LP from its obligations under the EM revolving credit facility; and (iii) provided for certain other conforming and definitional changes.

Amendment to BL revolving credit facility
On May 2, 2012, we entered into an amendment and restatement (“BL Amendment”) of the BL revolving credit facility among Regions Bank and other financial institutions party thereto. The BL Amendment (i) permitted us to effect certain restructuring transactions to facilitate the IPO; (ii) released B&L Holdings from its obligations under the BL revolving credit facility; and (iii) provided for certain other conforming and definitional changes.
 
Exchange Agreements
In connection with the Reorganization, we and EDG LLC entered into an Exchange Agreement with each of EM II LP and B&L Holdings which, subject to certain limitations, and subject to the terms specified in the Exchange Agreement, will allow EM II LP and B&L Holdings to exchange their membership units of EDG LLC, together with their shares of our Class B common stock, for shares of our Class A common stock on a one-for-one basis, or, at our election, cash, as provided in the applicable Exchange Agreement. We refer to EM II LP’s and B&L Holdings’ right to exchange their EDG LLC membership units and shares of Class B common stock for shares of Class A common stock as the Exchange Rights. Subsequent to the Reorganization, EM II LP and B&L Holdings beneficially own 12,615,230 and 11,727,908, respectively, of EDG LLC membership units and shares of our Class B common stock. There have been no exercises of Exchange Rights since the IPO.
 
Tax Receivable Agreements (“TRA”)
In connection with the Reorganization, we entered into a TRA with each of EM II LP and B&L Holdings that will provide for the payment by us to EM II LP and B&L Holdings of 85% of the amount of the cash savings, if any, in U.S. federal, state and local income tax that we actually realize as a result of increased depreciation and amortization deductions available to us as a result of the exercise of the Exchange Rights discussed above. We will retain the remaining 15% of cash savings, if any, in income tax that we realize. The term of the TRA commenced upon completion of the IPO and will continue until all such tax benefits have been utilized or have expired. Since there have been no exercises of Exchange Rights, there is currently no impact to our financial statements from the TRA.

See Note 1 regarding the IPO and the Reorganization.

 
15

 
 
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q contains “forward-looking statements” within the meaning of the federal securities laws. Statements that are not historical facts, including statements about our beliefs and expectations, are forward-looking statements. Forward-looking statements include statements preceded by, followed by or that include the words “may,” “could,” “would,” “should,” “believe,” “expect,” “anticipate,” “plan,” “estimate,” “target,” “project,” “intend,” “can,” “continue,” “potential,” “predicts,” “will” and the negative of these terms or other comparable terminology. These statements include, among others, statements regarding our expected business outlook, anticipated financial and operating results, our business strategy and means to implement the strategy, our objectives, industry trends, the impact of our initial public offering, the likelihood of our success in expanding our business, financing plans, budgets, working capital needs and sources of liquidity.

Forward-looking statements are only predictions and are not guarantees of performance. You should not put undue reliance on our forward-looking statements. These statements are based on our management’s beliefs and assumptions, which, in turn, are based on currently available information. These assumptions could prove inaccurate. Important factors that could cause actual results to differ materially from those in the forward-looking statements include, but are not limited to, those described in more detail under the section, Risk Factors, included in our Registration Statement on Form S-1 filed with the SEC on April 24, 2012; and (2) other announcements we make from time to time. Readers are cautioned not to place undue reliance on forward-looking statements, which speak only as of the date hereof. We undertake no obligation to publicly update or revise any forward-looking statements after the date they are made, whether as a result of new information, future events or otherwise.
 
 
16

 
 
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our condensed consolidated financial statements and the related notes to the financial statements included elsewhere in this Form 10-Q, and the audited consolidated financial statements and accompanying notes included in our prospectus filed with the SEC on April 27, 2012. The discussion and financial information provided herein does not give effect to the IPO or the Reorganization unless specifically stated. The IPO and the Reorganization had a significant impact on our financial position and will cause our financial results in future periods to be materially different from those that have been reflected in the historical financial statements of our predecessor, Edgen Murray II, L.P (EM II LP). The following discussion and analysis of our financial condition and results of operations contains forward-looking statements within the meaning of the federal securities laws.  See “Cautionary Statement Regarding Forward-Looking Statements”.

Overview of Business

General
We are a leading global distributor of our suppliers’ manufactured products and earn revenue from the sale of specialty products to the energy sector. We primarily serve customers that operate in the Upstream, Midstream and Downstream end-markets for oil and natural gas. We also serve power generation, civil construction and mining applications (which we collectively refer to as Other), which have a similar need for our technical expertise in specialized steel and specialty steel products. Prior to the IPO and the Reorganization, our predecessor, EM II LP, managed its business in two reportable segments: Western Hemisphere and Eastern Hemisphere.
 
Our sales are predominantly derived from the sale of specialty steel products which are primarily used by the energy sector for new infrastructure and maintenance, repair and operations (MRO). As a result, our business is cyclical and substantially dependent upon conditions in the energy industry and, in particular, the willingness by our customers to make capital expenditures for the exploration and production, gathering and transmission, refining and processing of oil and natural gas.

The factors affecting our business, as well as our revenue sources, pricing, and our principal costs and expenses, have not changed from those disclosed in the 2011 Form 10-K.

Customer and Supplier Concentration
Our ten largest customers and ten largest suppliers represented the following percentages of our sales and product purchases for the three months ended March 31, 2012 and 2011:
 
 
 
Three months ended
March 31,
 
   
2012
   
2011
 
Top 10 customers as a percentage of sales
    37 %     35 %
Top 10 suppliers as a percentage of product purchases
    59 %     44 %
 
No one customer accounted for more than 10% of our sales in any of the periods presented. During the three months ended March 31, 2012, our largest supplier accounted for approximately 13% of our purchases. No one supplier accounted for more than 10% of our product purchases during the three months ended March 31, 2011.

The oil and natural gas industry continues to comprise the majority of our business. During the three months ended March 31, 2012 and 2011, we derived the following percentage of our sales from customers in the oil and natural gas industry:
 
   
Three months ended
March 31,
 
   
2012
   
2011
 
Percentage of sales derived from the oil and natural gas industry
    87 %     88 %
 
During the three months ended March 31, 2012 and 2011, approximately 37% and 42%, respectively, of our sales originated from subsidiaries outside of the U.S. in currencies including, among others, the pound sterling, euro and U.S. dollar. As a result, a material change in the value of these currencies could significantly impact our consolidated financial position, results of operations and/or cash flows.
 
 
17

 
 
Sales Backlog
The table below presents our sales backlog at the dates indicated:
 
(In millions)
 
March 31,
2012
   
December 31,
2011
 
March 31,
2011
 
Sales backlog
  $ 356     $ 353     $ 312  
 
Sales backlog at March 31, 2012 is comprised primarily of sales orders related to (1) the construction of offshore high performance multi-purpose platform, or jack-up, oil rigs; (2) oil and natural gas gathering and storage systems; and (3) other offshore exploration and production infrastructure. Sales backlog also includes orders related to offshore renewable energy projects, refinery upgrades and turnarounds and civil infrastructure projects.

Our sales backlog represents our estimate of potential future revenues that may result from contracts/orders currently awarded to us by our customers. Sales backlog is determined by the amount of unshipped third party customer purchase orders and may be revised upward or downward, or cancelled by our customers in certain instances. There can be no assurance that sales backlog will ultimately be realized as revenue or that we will earn a profit on any of our sales backlog. Realization of revenue from sales backlog is dependent on, among other things, our ability to fulfill purchase orders and transfer title to customers, which in turn is dependent on a number of factors, including our ability to obtain product from our suppliers. Further, because of the project nature of our business, sales orders and sales backlog can vary materially from quarter to quarter.

Results of Operations (Predecessor)
 
The amounts presented within this results of operations section reflect the account balances of our accounting predecessor, EM II LP, to whose business we have succeeded. Because the Reorganization and the IPO occured subsequent to March 31, 2012, our financial statements do not yet relect the impact of these transactions. Furthermore, our financial statements do not include any amounts related to the historical business of B&L which became a subsidiary of ours in connection with the Reorganization and the IPO.
 
Three Months Ended March 31, 2012 Compared to Three Months Ended March 31, 2011
The following tables compare sales and income (loss) from operations for the three months ended March 31, 2012 and 2011. The period-to-period comparisons of financial results are not necessarily indicative of future results. We define “NM” as not meaningful.
 
   
Three months ended March 31,
 
(millions, except percentages)
 
2012
   
2011
   
$ Change
   
% Change
 
Sales
                       
Western Hemisphere
  $ 180.7     $ 115.0     $ 65.7       57 %
Eastern Hemisphere
    98.7       72.9       25.8       35 %
Eliminations
    (1.7 )     (2.3 )     0.6    
NM
 
Total
  $ 277.7     $ 185.6     $ 92.1       50 %
                                 
Income (loss) from operations
                               
Western Hemisphere
  $ 6.6     $ 0.9     $ 5.7    
NM
 
Eastern Hemisphere
    12.0       7.6       4.4       58 %
General Company
    (4.5 )     (3.4 )     (1.1 )     32 %
Total
  $ 14.1     $ 5.1     $ 9.0       176 %
 
Sales
Consolidated
For the three months ended March 31, 2012, sales increased $92.1 million, or 50%, to $277.7 million compared to $185.6 million for the three months ended March 31, 2011. All sales growth during the period was organic. We particularly experienced sales growth in the Upstream and Midstream energy markets as a result of worldwide oil and natural gas drilling activity. Volume, and to a lesser extent, product sales mix and sales price each had a favorable impact on our sales during the three months ended March 31, 2012 compared to 2011. The largest portion of our increased sales came from our Western Hemisphere operations as a result of our products related to oil and natural gas gathering systems and offshore oil and natural gas exploration and production.
 
Western Hemisphere
For the three months ended March 31, 2012, sales from the Western Hemisphere increased $65.7 million, or 57%, to $180.7 million compared to $115.0 million for the three months ended March 31, 2011. Sales increased across all of our market segments, most notably the Midstream and Upstream energy markets. Sales were driven by our products related to oil and natural gas gathering systems and offshore oil and natural gas exploration and production, particularly the construction of offshore high performance multi-purpose platform oil rigs.
 
 
18

 
 
Eastern Hemisphere
For the three months ended March 31, 2012, sales from the Eastern Hemisphere increased $25.8 million, or 35%, to $98.7 million compared to $72.9 million for the three months ended March 31, 2011. Sales increases in 2012 were driven by higher sales volumes and an improved product sales mix due to customer expenditures related to offshore oil and natural gas exploration and production, particularly in the Asia/Pacific region.

Income (Loss) from Operations
Consolidated
For the three months ended March 31, 2012, income from operations increased $9.0 million, or 176%, to $14.1 million compared to $5.1 million for the three months ended March 31, 2011. The increase in income from operations is primarily attributable to increased sales volumes, partially offset by a slight decrease in gross margins and higher selling, general and administrative expense.

Western Hemisphere
For the three months ended March 31, 2012, income from operations for the Western Hemisphere increased $5.7 million to $6.6 million compared to $0.9 million for the three months ended March 31, 2011. The increase in income from operations is due primarily to increases in our Upstream, Midstream and Other market segments, driven by higher sales volumes and prices, partially offset by higher selling, general and administrative expense due mainly to increased staffing to support our sales growth and higher employee related variable expenses.

Eastern Hemisphere
For the three months ended March 31, 2012, income from operations for the Eastern Hemisphere increased $4.4 million to $12.0 million compared to $7.6 million for the three months ended March 31, 2011. The 58% increase in income from operations was driven primarily by gross profit from increased sales driven by higher volumes and sales prices. This increase in income from operations was partially offset by higher selling, general and administrative expenses due to increases in staffing and other expenses to support our sales growth and expansion of our international offices and higher unrealized and realized losses on foreign currency transactions.

General Company
For the three months ended March 31, 2012, loss from operations for General Company increased $1.1 million, or 32%, to $4.5 million compared to $3.4 million for the three months ended March 31, 2011. General Company expenses primarily consist of corporate overhead expenses and amortization expense related to acquired and identified intangible assets from the Eastern Hemisphere, partially offset by service fee income of $0.5 million for the three months ended March 31, 2012 and 2011, respectively.

Other Income (Expense)
The following tables display our equity in earnings of unconsolidated affiliate, interest expense–net and income tax expense for the three months ended March 31, 2012 and 2011.
 
   
Three months ended March 31,
 
(In millions, except percentages)
 
2012
   
2011
   
$ Change
   
% Change
 
Equity in earnings of unconsolidated affiliate
  $ 1.2     $ 0.4     $ 0.8       200 %
Interest expense-net
    (16.6 )     (16.1 )     (0.5 )     3 %
Income tax expense
    1.3       0.6       0.7       117 %
 
Equity in Earnings of Unconsolidated Affiliate
Equity in earnings of unconsolidated affiliate of $1.2 million and $0.4 million for the three months ended March 31, 2012 and 2011, respectively, reflects income from our 14.5% ownership interest in B&L Holdings.
 
Interest ExpenseNet
Interest expense–net for the three months ended March 31, 2012 and 2011 was $16.6 million and $16.1 million, respectively. Interest expense–net includes interest on the EMC senior secured notes, amortization of deferred financing costs and original issue discount, interest associated with a capital lease in the U.K and interest expense related to borrowings and fees associated with the utilization of our EM revolving credit facility for trade finance instruments issued in support of our normal business operations. The increase in interest expense–net for the three months ended March 31, 2012 when compared to the prior year comparable period is due to increased borrowings under the EM revolving credit facility during the period to support increased working capital requirements.
 
 
19

 
 
Income Tax Expense
Income tax expense was $1.3 million at an estimated annual effective tax rate of approximately 21% for the three months ended March 31, 2012 compared to an income tax expense of $0.6 million at an estimated annual effective tax rate of approximately 20% for the three months ended March 31, 2011. A valuation allowance has been established against any tax benefits related to taxable losses generated by our U.S. operations. As a result, any tax benefits from our U.S. operations were excluded in deriving our estimated annual effective tax rate.

At March 31, 2012, a valuation allowance of $27.5 million was recorded against deferred tax assets and net operating loss (“NOLs”) carryforwards associated with our U.S. operations, an increase of $3.2 million from the valuation allowance of $24.3 million at December 31, 2011. Our estimated future U.S. taxable income may limit our ability to recover the net deferred tax assets and also limit our ability to utilize the NOLs via a carryback claim. The NOLs are scheduled to expire beginning in 2024 through 2031.

Liquidity and Capital Resources
 
Overview
At March 31, 2012 we had $13.2 million of unrestricted cash on hand and $113.5 million of combined available credit under our revolving credit facility (the EM revolving credit facility) and the facility available to our subsidiary, Edgen Murray FZE, (the EM FZE facility). Our primary cash requirements, in addition to normal operating expenses and debt service, are for working capital, capital expenditures and business acquisitions. We expect to finance our operations through cash flows generated from operations and from borrowings under our credit facilities. We expect to finance any business acquisitions through a combination of cash on hand, the use of operating cash flows, borrowings under our credit facilities, proceeds from divestitures and the issuance of additional debt and equity securities. Our debt service requirements are expected to be funded by operating cash flows or refinancing arrangements, but may also be funded through the issuance of additional equity securities.

Our ability to make payments on and to refinance our indebtedness and to fund planned capital expenditures depends on our ability to generate cash in the future, which, to a certain extent, is subject to general economic, financial, competitive, legislative, regulatory and other factors that are beyond our control. Our cash flows are primarily dependent on sales of our products to our customers at profit margins sufficient to cover fixed and variable expenses as well as our ability to successfully collect receivables from our customers on a timely basis. Additionally, provisions of certain of our indebtedness, as well as the laws of the jurisdictions in which our companies are organized, restrict our ability to pay dividends or make certain other restricted payments.  

Based on current market conditions, we believe that we will have sufficient liquidity, cash flow from operations and access to capital markets to fund future recurring operating and investing activities and to service our indebtedness. We cannot provide assurance that if our business declines we would be able to generate sufficient cash flows from operations or that future borrowings will be available to us under our credit facilities in an amount sufficient to enable us to service our indebtedness or to fund our other liquidity needs. If we are unable to generate sufficient cash flow from operations in the future to service our indebtedness and to meet our other commitments and liquidity needs, we will be required to adopt one or more alternatives, such as refinancing or restructuring our indebtedness, selling material assets or operations or raising additional debt or equity capital. We cannot provide assurance that any of these actions could be accomplished on a timely basis or on satisfactory terms, if at all, or that these actions would enable us to continue to satisfy our capital requirements. In addition, our existing or future debt agreements may contain provisions prohibiting us from pursuing any of these alternatives. Our failure to comply with these provisions could result in, among other things, an event of default which, if not cured or waived, could result in the acceleration of all of our debt.

Long Term Debt
At March 31, 2012 our total indebtedness, including capital leases, was $536.0 million. Other than as discussed below, there have been no significant changes in the terms or amounts of our debt obligations since reported in the 2011 Form 10-K.

Revolving Credit Facilities
At March 31, 2012, utilization under the EM revolving credit facility and the EM FZE facility was as follows:
 
 
20

 
   
EM revolving credit facility
   
EM FZE
   
Total revolving
credit
 
(In millions)
 
EMC
   
EM Canada
   
EM Europe
   
EM Pte
   
Total
   
facility
   
facilities
 
Total availability
  $ 140.9     $ 3.4     $ 35.7     $ 15.0     $ 195.0     $ 5.0     $ 200.0  
Less: cash borrowings
    (48.1 )     -       (4.0 )     (3.0 )     (55.1 )     -       (55.1 )
Less: trade finance instruments
    (21.9 )(a)     -       (2.2 )     (1.3 )     (25.4 )     (1.6 )     (27.0 )
Less: reserves
    (2.8 )     (0.1 )     (1.5 )     -       (4.4 )     -       (4.4 )
Net availability
  $ 68.1     $ 3.3     $ 28.0     $ 10.7     $ 110.1     $ 3.4     $ 113.5  
 
(a)
Includes a letter of credit in the amount of $5.0 million that expires January 31, 2013 which supports the EM FZE facility.
 
On May 2, 2012, we used a portion of the net proceeds from the IPO to repay $23.8 million outstanding under the EM revolving credit facility.

Debt Restrictions and Covenants
We were in compliance with all applicable financial, affirmative and negative covenants under our EM revolving credit facility and the EMC senior secured notes during the three months ended March 31, 2012.
 
Statements of Cash Flows Data
The following table highlights the significant period to period variances in our cash flow amounts:
 
   
Three months ended March 31,
 
(In millions)
 
2012
   
2011
 
Cash flows provided by (used in) operating activities
  $ (48.0 )   $ (7.9 )
Cash flows provided by (used in) investing activities
    (0.8 )     5.9  
Cash flows provided by (used in) financing activities
    35.0       (0.1 )
Effect of exchange rate changes on cash and cash equivalents
    0.8       0.8  
Net change in cash and cash equivalents
    (13.0 )     (1.3 )
Cash and cash equivalents-beginning of period
    26.2       62.5  
Cash and cash equivalents-end of period
  $ 13.2     $ 61.2  
 
Operating Activities­
Net cash outflows from operating activities were $48.0 million for the three months ended March 31, 2012 compared to net cash outflows of $7.9 million for the three months ended March 31, 2011. The cash used in operations for the three months ended March 31, 2012 reflects cash used for working capital requirements to support increased sales volumes and interest paid of $29.8 million primarily associated with our EMC senior secured notes.

Investing Activities
Net cash used in investing activities was $0.8 million for the three months ended March 31, 2012 compared to net cash inflows of $5.9 million for the three months ended March 31, 2011. Net cash outflows for the three months ended March 31, 2012 include $0.8 million of purchases of plant, property and equipment. Net cash inflows of $5.9 million for the three months ended March 31, 2011 reflect cash proceeds of $6.3 million from the sale of our former Singapore sales and distribution facility in January 2011.

Financing Activities
Net cash provided by financing activities was $35.0 million during the three months ended March 31, 2012 compared to net cash outflows of $0.1 million for the three months ended March 31, 2011. The net cash inflow for the three months ended March 31, 2012 is due to net borrowings on the EM revolving credit facility.
 
Off-Balance Sheet Transactions
In the normal course of business, we are a party to certain off-balance sheet arrangements. These arrangements include guarantees and financial instruments with off-balance sheet risk, such as bank letters of credit, bank guarantees and payment guarantees. No liabilities related to these arrangements are reflected in our condensed consolidated balance sheets, and we do not expect any material adverse effect on our financial condition, results of operations and/or cash flows to result from these off-balance sheet arrangements.

At March 31, 2012 and December 31, 2011, we had $27.0 million and $42.8 million, respectively, of trade finance instruments outstanding.

At March 31, 2012 and December 31, 2011, we had issued payment guarantees with a maximum aggregate potential obligation for future payments (undiscounted) of $27.3 million and $30.7 million, respectively, to third parties to secure payment performance by certain subsidiaries. The outstanding aggregate values of guaranteed commitments at March 31, 2012 and December 31, 2011, were $23.6 million and $27.4 million, respectively.

At March 31, 2012 and December 31, 2011, we had bank guarantees of $0.8 million and $0.7 million, respectively, which have been cash collateralized and included in prepaid expenses and other assets on the condensed consolidated balance sheets.

Pro Forma Information for IPO and Reorganization of Edgen Group Inc.
As stated in Note 1 of  Notes to Unaudited Condensed Consolidated Financial Statements, on May 2, 2012, we completed an IPO of 15,000,000 shares of Class A common stock at an initial offering price of $11.00 per share. In connection with the IPO, we completed the Reorganization.
 
21

 
Included below is Edgen Group’s pro forma condensed combined statements of operations for the three months ended March 31, 2012 and 2011 and the pro forma condensed combined balance sheet at March 31, 2012. These tables present the pro forma adjustments used to derive the non-GAAP pro forma financial information included in this report.
 
EDGEN GROUP INC.
UNAUDITED PRO FORMA CONDENSED BALANCE SHEET
At March 31, 2012
 
(in thousands)
 
EM II LP Historical
   
B&L Holdings Historical
   
Pro Forma Adjustments
     
Edgen Group Pro Forma
 
ASSETS
                         
CURRENT ASSETS:
                         
Cash and cash equivalents
  $ 13,205     $ 41     $ 150,363  
(a)
  $ 15,411  
                      (139,001 )
(b)
       
                      (321 )
(c)
       
                      (8,876 )
(d)
       
Accounts receivable
    203,019       69,595       -         272,614  
Inventory
    209,974       155,459       -         365,433  
Prepaid expenses and other current assets
    10,524       206       (156 )
(e)
    8,441  
                      (2,133 )
(f)
       
Total current assets
    436,722       225,301       (124 )       661,899  
PROPERTY, PLANT, AND EQUIPMENT - NET
    45,282       1,095       -         46,377  
GOODWILL
    23,667       -       -         23,667  
OTHER INTANGIBLE ASSETS - NET
    22,558       142,984       -         165,542  
OTHER ASSETS
    13,908       8,176       (4,936 )
(f)
    17,148  
INVESTMENT IN UNCONSOLIDATED AFFILIATE
    13,455       -       (13,455 )
(g)
    -  
TOTAL ASSETS
  $ 555,592     $ 377,556     $ (18,515 )     $ 914,633  
                                   
LIABILITIES AND DEFICIT
    .                            
CURRENT LIABILITIES:
                                 
Managed cash overdrafts
  $ 688     $ 15,325     $ -       $ 16,013  
Accounts payable
    135,811       98,356       (156 )
(e)
    234,011  
Accrued expenses and other current liabilities
    11,557       4,517       -         16,074  
Income taxes payable
    4,737       -       -         4,737  
Deferred revenue
    2,819       -       -         2,819  
Accrued interest payable
    12,244       209       (66 )
(c)
    12,387  
Deferred tax liability - net
    1,100       -       -         1,100  
Current portion of long-term debt and capital lease
    378       10,039       (10,039 )
(b)
    378  
Total current liabilities
    169,334       128,446       (10,261 )       287,519  
DEFERRED TAX LIABILITY - NET
    4,046       -       -         4,046  
OTHER LONG-TERM LIABILITIES
    1,270       -       -         1,270  
LONG-TERM DEBT AND CAPITAL LEASE
    535,622       155,353       (128,962 )
(b)
    562,940  
                      (255 )
(c)
       
                      1,182  
(h)
       
TOTAL LIABILITIES
  $ 710,272     $ 283,799     $ (138,296 )     $ 855,775  
COMMITMENTS AND CONTINGENCIES
                                 
EQUITY (DEFICIT):
                                 
Predecessor equity
  $ (132,011 )   $ 93,757     $ 51,709  
(i)
  $ -  
                      (13,455 )
(g)
       
Common stock - Class A
    -       -       2  
(a)
    2  
Common stock - Class B
    -       -       2  
(a)
    2  
Additional paid in capital
    -       -       150,359  
(a)
    150,359  
Retained deficit
    -       -       (21,718 )
(i)
    (28,911 )
                      (3,728 )
(d)
       
                      (2,969 )
(f)
       
                      (496 )
(h)
       
Accumulated other comprehensive loss
    (23,010 )     -       13,346  
(j)
    (9,664 )
Non-controlling interest
    341       -       (29,991 )
(i)
    (52,930 )
                      (5,148 )
(d)
       
                      (4,100 )
(f)
       
                      (686 )
(h)
       
                      (13,346 )
(j)
       
Total equity (deficit)
    (154,680 )     93,757       119,781         58,858  
TOTAL LIABILITIES AND EQUITY (DEFICIT)
  $ 555,592     $ 377,556     $ (18,515 )     $ 914,633  
 
22

 
 
EDGEN GROUP INC.
UNAUDITED PRO FORMA CONDENSED STATEMENT OF OPERATIONS
For the three months ended March 31, 2012
 
(in thousands)
 
EM II LP Historical
   
B&L Holdings Historical
   
Pro Forma Adjustments
     
Edgen Group Pro Forma
 
                           
SALES
  $ 277,676     $ 228,155     $ -       $ 505,831  
OPERATING EXPENSES:
                                 
Cost of sales (exclusive of depreciation and amortization shown below)
    240,227       207,191       -         447,418  
Selling, general and administrative expense, net of service fee income
    18,773       4,255       (40 )
(k)
    23,008  
                      20  
(k)
       
Depreciation and amortization expense
    4,576       3,663       -         8,239  
Total operating expenses
    263,576       215,109       (20 )       478,665  
INCOME FROM OPERATIONS
    14,100       13,046       20         27,166  
OTHER INCOME (EXPENSE):
                                 
Equity in earnings of unconsolidated affiliate
    1,200       -       (1,200 )
(g)
    -  
Other income - net
    104       201       -         305  
Interest expense - net
    (16,579 )     (5,467 )     3,619  
(l)