XNYS:EDG Quarterly Report 10-Q Filing - 6/30/2012

Effective Date 6/30/2012

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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 June 30, 2012
 
OR
 
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

EDGEN GROUP INC.
EM HOLDINGS LLC
(Exact names of registrants as specified in their charters)

  Commission File Number   State of Incorporation   IRS Employer Identification No.  
  001-35513    Delaware   38-3860801  
  033-10003    Delaware   80-0800485  
 
18444 Highland Road
Baton Rouge, Louisiana 70809
(225) 756-9868
(Registrants' address of principal executive offices and telephone number) 

Indicate by check mark whether the registrants (1) have 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) have been subject to such filing requirements for the past 90 days.   Yes  x    No  o
 
Indicate by check mark whether the registrants have submitted electronically and posted on their 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 registrants were 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):
 
Edgen Group Inc. Large accelerated filer    o Accelerated filer    o Non-accelerated filer    x Smaller reporting company    o
EM Holdings LLC Large accelerated filer    o Accelerated filer    o Non-accelerated filer    x Smaller reporting company    o
 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act):
 
  Edgen Group Inc. Yes   o No   x  
  EM Holdings LLC Yes   o No   x  
 
The number of shares outstanding of Edgen Group Inc.’s common stock at July 23, 2012 is shown below:
 
  Class and Par Value   Number of Shares Outstanding  
  Class A common stock, $0.0001 par value   18,049,227  
  Class B common stock, $0.0001 par value   24,343,138  
 
All of the membership interests of EM Holdings LLC are indirectly owned by Edgen Group Inc. 

This combined Form 10-Q is filed separately by both Edgen Group Inc. and EM Holdings LLC. Information contained herein relating to any individual registrant is filed by such registrant solely on its own behalf. Each registrant makes no representation as to information relating exclusively to the other registrant.
 
EM Holdings LLC meets the conditions set forth in General Instruction H (1) (a) and (b) of Form 10-Q and is therefore filing this Form 10-Q with the reduced disclosure format permitted by General Instruction H (2).
 


 
 

 
 
TABLE OF CONTENTS
 
PART I - FINANCIAL INFORMATION
1
     
Item 1.
UNAUDITED CONDENSED CONSOLIDATED/COMBINED CONSOLIDATED FINANCIAL STATEMENTS
 
     
 
EDGEN GROUP INC.
1
 
EM HOLDINGS LLC
21
     
Item 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
44
     
Item 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
52
     
Item 4.
CONTROLS AND PROCEDURES
52
   
PART II - OTHER INFORMATION
53
     
Item 1.
LEGAL PROCEEDINGS
53
     
Item 1A.
RISK FACTORS
53
     
Item 2.
UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
53
     
Item 3.
DEFAULTS UPON SENIOR SECURITIES
53
     
Item 4.
MINE SAFETY DISCLOSURES
53
     
Item 5.
OTHER INFORMATION
53
     
Item 6.
EXHIBITS
53
   
SIGNATURES
54
   
EXHIBIT INDEX
54
 
 
 

 
 
PART I - FINANCIAL INFORMATION
 
Item 1. Financial Statements
EDGEN GROUP INC.
UNAUDITED CONDENSED CONSOLIDATED/COMBINED CONSOLIDATED BALANCE SHEETS
(In thousands)
 
   
June 30, 2012
   
December 31, 2011
 
ASSETS
           
CURRENT ASSETS:
           
Cash and cash equivalents
  $ 25,399     $ 26,269  
Accounts receivable - net of allowance for doubtful accounts of $2,385 and $2,056, respectively
    273,899       261,155  
Inventory
    411,834       339,371  
Prepaid expenses and other current assets
    9,488       10,443  
Total current assets
    720,620       637,238  
PROPERTY, PLANT AND EQUIPMENT - NET
    45,816       46,647  
GOODWILL
    23,208       22,965  
OTHER INTANGIBLE ASSETS - NET
    158,691       172,036  
OTHER ASSETS
    14,439       21,854  
TOTAL ASSETS
  $ 962,774     $ 900,740  
                 
LIABILITIES AND EQUITY (DEFICIT)
               
CURRENT LIABILITIES:
               
Managed cash overdrafts
  $ 7,501     $ 6,488  
Accounts payable
    217,799       223,428  
Accrued interest payable
    26,862       26,982  
Current portion of long term debt and capital lease
    380       19,244  
Accrued expenses and other current liabilities
    31,981       31,787  
Total current liabilities
    284,523       307,929  
DEFERRED TAX LIABILITY - NET
    3,701       4,544  
OTHER LONG TERM LIABILITIES
    1,322       783  
REVOLVING CREDIT FACILITIES
    92,500       37,523  
LONG TERM DEBT AND CAPITAL LEASE
    521,930       627,078  
Total liabilities
    903,976       977,857  
COMMITMENTS AND CONTINGENCIES
               
STOCKHOLDERS' EQUITY:
               
Class A common stock; 18,049,227 shares issued and outstanding at June 30, 2012
    2       -  
Class B common stock; 24,343,138 shares issued and outstanding at June 30, 2012
    2       -  
Additional paid in capital
    164,530       -  
Retained deficit
    (34,396 )     -  
Accumulated other comprehensive loss
    (10,552 )     -  
Total stockholders' equity
    119,586       -  
PREDECESSOR NET DEFICIT:
               
Net deficit
    -       (51,799 )
Accumulated other comprehensive loss
    -       (25,648 )
Total predecessor net deficit
    -       (77,447 )
NON-CONTROLLING INTEREST
    (60,788 )     330  
Total equity (deficit)
    58,798       (77,117 )
TOTAL LIABILITIES AND EQUITY (DEFICIT)
  $ 962,774     $ 900,740  
 
See accompanying notes to unaudited condensed consolidated/combined consolidated financial statements.
 
 
1

 
 
EDGEN GROUP INC.
UNAUDITED CONDENSED CONSOLIDATED/COMBINED CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands, except share data)
 
   
Three months ended June 30,
   
Six months ended June 30,
 
   
2012
   
2011
   
2012
   
2011
 
SALES
  $ 496,499     $ 415,106     $ 1,002,329     $ 742,116  
OPERATING EXPENSES:
                               
Cost of sales (exclusive of depreciation and amortization shown below)
    437,835       359,917       885,253       644,648  
Selling, general and administrative expense
    28,406       22,128       51,434       41,856  
Depreciation and amortization expense
    7,887       8,930       16,125       17,848  
Total operating expenses
    474,128       390,975       952,812       704,352  
INCOME FROM OPERATIONS
    22,371       24,131       49,517       37,764  
OTHER INCOME (EXPENSE):
                               
Other income - net
    167       504       472       1,786  
Loss on prepayment of debt
    (17,005 )     -       (17,005 )     -  
Interest expense - net
    (19,521 )     (22,060 )     (41,567 )     (43,785 )
INCOME (LOSS) BEFORE INCOME TAX EXPENSE (BENEFIT)
    (13,988 )     2,575       (8,583 )     (4,235 )
INCOME TAX EXPENSE (BENEFIT)
    (165 )     1,566       1,139       2,122  
NET INCOME (LOSS)
  $ (13,823 )   $ 1,009     $ (9,722 )   $ (6,357 )
                                 
NET INCOME (LOSS) ATTRIBUTABLE TO:
                               
Predecessor
  $ 768     $ 955     $ 4,858     $ (6,417 )
Non-controlling interest
    (8,517 )     54       (8,506 )     60  
Edgen Group Inc. (from date of initial public offering to June 30, 2012)
    (6,074 )     -       (6,074 )     -  
                                 
EDGEN GROUP INC. LOSS PER SHARE*:
                               
Basic and diluted
  $ (0.35 )           $ (0.35 )        
                                 
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING*:
                               
Basic and diluted
    17,213,423               17,213,423          


*Loss per share and weighted average common shares outstanding shown above are for the period from May 2, 2012 to June 30, 2012 (the period since the initial public offering and the Reorganization). See Note 1 and Note 10 for more information.
 

 
 
 
See accompanying notes to unaudited condensed consolidated/combined consolidated financial statements.
 
 
2

 
 
EDGEN GROUP INC.
UNAUDITED CONDENSED CONSOLIDATED/COMBINED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(In thousands)
 
   
Three months ended June 30,
   
Six months ended June 30,
 
   
2012
   
2011
   
2012
   
2011
 
NET INCOME (LOSS)
  $ (13,823 )   $ 1,009     $ (9,722 )   $ (6,357 )
OTHER COMPREHENSIVE INCOME (LOSS):
                               
Foreign currency translation adjustments
    (1,826 )     (213 )     812       2,853  
COMPREHENSIVE INCOME (LOSS)
  $ (15,649 )   $ 796     $ (8,910 )   $ (3,504 )
                                 
COMPREHENSIVE INCOME (LOSS) ATTRIBUTABLE TO:
                               
Predecessor
  $ 2,165     $ 742     $ 8,893     $ (3,564 )
Non-controlling interest
    (10,372 )     54       (10,361 )     60  
Edgen Group Inc. (from date of initial public offering to June 30, 2012)
    (7,442 )     -       (7,442 )     -  

 
See accompanying notes to unaudited condensed consolidated/combined consolidated financial statements.
 
 
3

 
EDGEN GROUP INC.
UNAUDITED CONDENSED CONSOLIDATED/COMBINED CONSOLIDATED STATEMENTS STOCKHOLDERS’ EQUITY (DEFICIT)
(In thousands, except unit data)
 
         
Edgen Group Inc.
   
Accumulated other
   
Non-
   
Total
stockholders'
 
   
Predecessor
   
Common stock
   
Additional
   
Retained
   
comprehensive
   
controlling
   
equity
 
   
net deficit
   
Class A
   
Class B
   
paid in capital
   
deficit
   
loss
   
interest
   
 (deficit)
 
Balances at December 31, 2010
  $ (44,841 )   $ -     $ -     $ -     $ -     $ (25,531 )   $ 42     $ (70,330 )
Net income (loss)
    (6,417 )     -       -       -       -       -       60       (6,357 )
Other comprehensive income
    -       -       -       -       -       2,853       -       2,853  
Unit-based compensation
    1,262       -       -       -       -       -       -       1,262  
Distributions to owners of Predecessor
    (4,952 )     -       -       -       -       -       -       (4,952 )
Balances at June 30, 2011
  $ (54,948 )   $ -     $ -     $ -     $ -     $ (22,678 )   $ 102     $ (77,524 )
                                                                 
Balances at December 31, 2011
  $ (51,799 )   $ -     $ -     $ -     $ -     $ (25,648 )   $ 330     $ (77,117 )
Net income
    4,858       -       -       -       -       -       11       4,869  
Other comprehensive income
    -       -       -       -       -       4,035       -       4,035  
Unit-based compensation
    922       -       -       -       -       -       -       922  
Distributions to owners of Predecessor
    (8,605 )     -       -       -       -       -       -       (8,605 )
Balances at May 2, 2012 (initial public offering date)
    (54,624 )     -       -       -       -       (21,613 )     341       (75,896 )
Reorganization transactions:
                                                               
Exchange of Predecessor unit-based compensation
    (11,498 )     -       -       11,498       -       -       -       -  
Allocation of Predecessor net deficit to equity accounts and issuance of Class B common stock
    66,122       -       2       279       (28,322 )     -       (38,328 )     (247 )
Allocation of Predecessor AOCL to non-controlling interest
    -       -       -       -       -       12,429       (12,429 )     -  
Initial public offering transaction:
                                                               
Net proceeds from issuance of 15,000,000 shares of Class A common stock from initial public offering
    -       2       -       149,286       -       -       -       149,288  
Balances after the initial public offering and the Reorganization
    -       2       2       161,063       (28,322 )     (9,184 )     (50,416 )     73,145  
Net loss
    -       -       -       -       (6,074 )     -       (8,517 )     (14,591 )
Other comprehensive loss
    -       -       -       -       -       (1,368 )     (1,855 )     (3,223 )
Equity-based compensation
    -       -       -       3,467       -       -       -       3,467  
Balances at June 30, 2012
  $ -     $ 2     $ 2     $ 164,530     $ (34,396 )   $ (10,552 )   $ (60,788 )   $ 58,798  
 

 
See accompanying notes to unaudited condensed consolidated/combined consolidated financial statements.
 
 
4

 
 
 
EDGEN GROUP INC.
UNAUDITED CONDENSED CONSOLIDATED/COMBINED CONSOLIDATED STATEMENTS OF CASH FLOWS
 (In thousands)

   
Six months ended June 30,
 
   
2012
   
2011
 
CASH FLOWS FROM OPERATING ACTIVITIES:
           
Net loss
  $ (9,722 )   $ (6,357 )
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
               
Depreciation and amortization
    16,125       17,848  
Amortization of deferred financing costs
    2,681       3,148  
Non-cash accrual of interest on Seller Note
    1,311       1,716  
Amortization of discount on long term debt
    638       584  
Equity-based compensation expense
    4,405       1,262  
Allowance for doubtful accounts
    243       (70 )
Provision for inventory allowances and writedowns
    750       500  
Loss on prepayment of debt
    17,005       -  
Deferred income tax benefit
    (1,100 )     (1,314 )
Loss (gain) on foreign currency transactions
    544       (202 )
Unrealized loss (gain) on derivative instruments
    444       (158 )
Loss (gain) on sale of property, plant and equipment
    28       (992 )
Changes in operating assets and liabilities:
               
Accounts receivable
    (13,900 )     (55,773 )
Inventory
    (72,719 )     (37,576 )
Income tax receivable
    (1,255 )     17,685  
Prepaid expenses and other current assets
    459       (935 )
Accounts payable
    (4,623 )     56,743  
Accrued expenses and other current liabilities
    (753 )     1,499  
Income tax payable
    426       2,992  
Other
    (351 )     (213 )
Net cash provided by (used in) operating activities
    (59,364 )     387  
CASH FLOWS FROM INVESTING ACTIVITIES:
               
Purchases of property, plant and equipment
    (2,031 )     (2,614 )
Proceeds from the sale of property, plant and equipment
    37       6,270  
Net cash provided by (used in) investing activities
    (1,994 )     3,656  
CASH FLOWS FROM FINANCING ACTIVITIES:
               
Gross proceeds from issuance of Class A common stock in initial public offering
    153,862       -  
Deferred initial public offering costs
    (4,574 )     -  
Repayment of BL term loan, including prepayment penalty of $8,876
    (125,322 )     -  
Repayment of portion of Seller Note
    (10,745 )     -  
Deferred financing costs
    (356 )     -  
Other principal payments on long term debt and capital lease
    (174 )     (3,343 )
Distributions to owners of Predecessor
    (8,605 )     (4,952 )
Proceeds from revolving credit facilities
    404,771       89,548  
Payments to revolving credit facilities
    (349,840 )     (98,548 )
Managed cash overdraft
    1,017       8,586  
Net cash provided by (used in) financing activities
    60,034       (8,709 )
Effect of exchange rate changes on cash and cash equivalents
    454       499  
NET CHANGE IN CASH AND CASH EQUIVALENTS
    (870 )     (4,167 )
CASH AND CASH EQUIVALENTS - beginning of period
    26,269       62,864  
CASH AND CASH EQUIVALENTS - end of period
  $ 25,399     $ 58,697  
 
 
See accompanying notes to unaudited condensed consolidated/combined consolidated financial statements.
 
 
5

 
 
EDGEN GROUP INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED/COMBINED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)

References to “we,” “us” and “our” mean Edgen Group Inc. (“Edgen Group”) and its consolidated subsidiaries.

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 in an initial public offering (“IPO”) and as the ultimate parent company of our operating subsidiaries, Edgen Murray Corporation (“EMC”) and its subsidiaries and Bourland & Leverich Supply Co. LLC (“B&L”). We own and control these operating subsidiaries through our approximately 42% economic interest in and our 100% voting control of our consolidated subsidiary, EDG Holdco LLC (“EDG LLC”), which indirectly owns 100% of, and controls, EMC and B&L.
 
Description of Operations
We are a leading global distributor to the energy sector of specialty products, including steel pipe, valves, quenched and tempered and high yield heavy plate and related components. We 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., France, the United Arab Emirates (“UAE”), Saudi Arabia, India and Singapore and sales representative offices in Australia, China, South Korea and Indonesia. Our headquarters are located in Baton Rouge, Louisiana. We manage our business in two reportable segments: Energy & Infrastructure (“E&I”) and Oil Country Tubular Goods (“OCTG”).
 
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 $149,288 after deducting underwriting discounts, expenses and transaction costs. We used these net proceeds to purchase membership units of EDG LLC, which EDG LLC used to repay 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 (the “Reorganization”). These transactions consisted of, among other things, the following:

 
(1)
Our formation of EDG LLC;
 
(2)
The contribution by Edgen Murray II, L.P. (“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 approximately 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 approximately 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 2,987,838 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 IPO and the Reorganization, 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, and B&L have been since July 2010, and continue to be, under the collective common control of affiliates of Jefferies Capital Partners (“JCP”).
 
Basis of Financial Statement Presentation
The condensed consolidated/combined consolidated financial statements and notes are presented in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and pursuant to the rules and regulations of the United States Securities and Exchange Commission (“SEC”) for interim reporting.
 
 
6

 
 
EDGEN GROUP INC., continued
 
We did not own any assets prior to the IPO and the Reorganization. As required by GAAP for common control transactions, all assets and liabilities transferred to us as part of the Reorganization were recorded in our financial statements at carryover basis.

For periods prior to the IPO and the Reorganization, the combined consolidated financial statements and related notes presented within this Form 10-Q reflect the Reorganization as if it had occurred on July 19, 2010, the date that EM II LP and B&L Holdings came under the common control of JCP. As such, the periods prior to the IPO reflect the combined assets, liabilities and operations of the historical businesses of EM II LP and B&L Holdings (collectively, the “Predecessor”). Because a single direct owner relationship did not exist among the owners of the Predecessor, the net deficit of the Predecessor is shown in lieu of partners’ or shareholders’ deficit for periods prior to the IPO.

For periods subsequent to the IPO and the Reorganization, our consolidated financial statements include our accounts and those of our majority-owned subsidiaries in which we have a controlling interest, after the elimination of intercompany accounts and transactions. We also consolidate other entities in which we possess a controlling financial interest or in which we have the power to direct the activities that most significantly affect the entities’ performance.

In the opinion of our management, these condensed consolidated/combined 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/combined consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in our Prospectus filed with the SEC on April 27, 2012.

Use of Estimates
The preparation of our condensed consolidated/combined 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/combined 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 equity-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.

Non-Controlling Interest
We record the portion of our consolidated subsidiaries that we do not own as non-controlling interest in the consolidated/combined consolidated financial statements. For periods prior to the IPO, non-controlling interest reflects the 30% interest we do not own in a consolidated Bahraini joint venture. In the period subsequent to the IPO, non-controlling interest also includes the combined interest of approximately 58% of EDG LLC that is owned by EM II LP and B&L Holdings. See Note 9 for more information related to non-controlling interest.

2. Recent Accounting Pronouncements
From time to time, new accounting pronouncements are issued by the 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 or cash flows.
 
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.
 
 
7

 
 
EDGEN GROUP INC., continued
 
3. Supplemental Cash Flow Information
 
   
Six months ended
June 30,
 
   
2012
   
2011
 
Interest paid
  $ 36,578     $ 38,475  
Income taxes paid
    4,075       762  
Income tax refunds received
    818       18,182  
Non-cash investing and financing activities:
               
Purchases of property, plant and equipment included in accounts payable
    64       58  

 
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:
 
   
June 30,
2012
   
December 31, 2011
 
             
Land and land improvements
  $ 11,510     $ 11,247  
Buildings
    38,004       37,803  
Equipment and computers
    29,050       28,594  
Leasehold improvements
    6,155       6,000  
Construction in progress
    745       163  
Property, plant and equipment - gross
    85,464       83,807  
Less: accumulated depreciation
    (39,648 )     (37,160 )
Property, plant and equipment - net
  $ 45,816     $ 46,647  

We are party to a capital lease of land, an office building and two warehouses in Newbridge, Scotland. At June 30, 2012 and December 31, 2011, the carrying value of the leased fixed assets included in property, plant and equipment was $15,075 and $15,320, respectively. Our depreciation expense for the periods indicated is presented below:
 
   
Three months ended June 30,
   
Six months ended June 30,
 
   
2012
   
2011
   
2012
   
2011
 
Depreciation expense
  $ 1,263     $ 1,394     $ 2,601     $ 2,809  
 
 
8

 
 
EDGEN GROUP INC., continued
 
5. Intangible Assets
The following table summarizes our intangible assets at the dates indicated by reportable segment:
 
   
Gross carrying value
   
Accumulated amortization
   
Net carrying value
 
   
June 30, 2012
   
December 31, 2011
   
June 30, 2012
   
December 31, 2011
   
June 30, 2012
   
December 31, 2011
 
E&I:
                                   
Intangible assets subject to amortization:
                                   
Customer relationships
  $ 82,581     $ 82,057     $ (77,915 )   $ (73,004 )   $ 4,666     $ 9,053  
Noncompete agreements
    22,011       22,011       (18,878 )     (17,055 )     3,133       4,956  
Sales backlog
    9,634       9,589       (9,634 )     (9,589 )     -       -  
Intangible assets not subject to amortization:
                                               
Tradenames
    11,501       11,424       -       -       11,501       11,424  
Trademarks
    14       14       -       -       14       14  
Total E&I
  $ 125,741     $ 125,095     $ (106,427 )   $ (99,648 )   $ 19,314     $ 25,447  
                                                 
OCTG:
                                               
Intangible assets subject to amortization:
                                               
Customer relationships
  $ 154,262     $ 154,262     $ (26,139 )   $ (19,127 )   $ 128,123     $ 135,135  
Noncompete agreements
    2,000       2,000       (746 )     (546 )     1,254       1,454  
Intangible assets not subject to amortization:
                                    -       -  
Tradenames
    10,000       10,000       -       -       10,000       10,000  
Total OCTG
  $ 166,262     $ 166,262     $ (26,885 )   $ (19,673 )   $ 139,377     $ 146,589  
Total intangible assets
  $ 292,003     $ 291,357     $ (133,312 )   $ (119,321 )   $ 158,691     $ 172,036  

Foreign currency translation adjustments had the following effects on our intangible assets at June 30, 2012:

Effects of foreign currency translation:
 
June 30, 2012
On gross carrying value
 
$ 646
 
On accumulated amortization
 
481
 

Our amortization expense for the periods indicated is presented below:
 
   
Three months ended June 30,
   
Six months ended June 30,
 
   
2012
   
2011
   
2012
   
2011
 
Amortization expense - E&I
  $ 3,012     $ 3,930     $ 6,298     $ 7,827  
Amortization expense - OCTG
    3,606       3,606       7,212       7,212  
Total amortization expense
  $ 6,618     $ 7,536     $ 13,510     $ 15,039  

Our scheduled amortization expense associated with intangible assets is expected to be:
 
Years ending December 31:
     
2012 (remaining)
  $ 12,869  
2013
    16,231  
2014
    14,756  
2015
    14,277  
2016
    14,023  
Thereafter
    65,020  
Total scheduled amortization expense
  $ 137,176  
 
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 June 30, 2012, all of our goodwill is included within the E&I 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
    -       -       243       243  
Balance at June 30, 2012
  $ 90,674     $ (62,805 )   $ (4,661 )   $ 23,208  
 
 
9

 
 
EDGEN GROUP INC., continued

7. Debt Obligations
Our credit arrangements, long term debt and capital lease consisted of the following at the dates indicated:
 
       
   
June 30,
2012
 
December 31,
2011
$465,000 12.25% EMC senior secured notes, net of discount of $2,561 and $2,968 at June 30, 2012 and December 31, 2011, respectively; due January 15, 2015
 
$ 462,439
 
$ 462,032
$195,000 EM revolving credit facility, due May 11, 2014
 
41,000
 
20,523
$125,000 BL term loan, due August 19, 2015
 
-
 
116,406
$75,000 BL revolving credit facility, due August 19, 2014
 
51,500
 
17,000
Seller Note, net of discount of $4,219 and $5,624 at June 30, 2012 and December 31, 2011, respectively; due August 19, 2019
 
41,669
 
49,698
Capital lease
 
18,202
 
18,186
Total debt and capital lease obligations
 
614,810
 
683,845
Less: current maturities of debt
 
(380)
 
(19,244)
         
Long term debt and capital lease
 
$ 614,430
 
$ 664,601

Other than as disclosed below, there have been no significant changes in the terms or amounts of our consolidated debt obligations since those reported in the Prospectus we filed with the SEC on April 27, 2012.

EMC Senior Secured Notes
In connection with the Reorganization, EM Holdings LLC (“EM Holdings”) replaced EM II LP as the parent guarantor of the EMC senior secured notes. The EMC senior secured notes are guaranteed on a senior secured basis by EM Holdings and each of its existing and future U.S. subsidiaries that (1) is directly or indirectly 80% owned by EM Holdings; (2) guarantees the indebtedness of EMC or any of the guarantors; and (3) is not directly or indirectly owned by any non-U.S. subsidiary. At June 30, 2012, EMC is EM Holdings’ only U.S. subsidiary not directly or indirectly owned by any non-U.S. subsidiary. EM Holdings is therefore currently the sole guarantor of the EMC senior secured notes.

EM Revolving Credit Facility
On April 10, 2012, we entered into a seventh amendment (“Seventh Amendment”) to the EM revolving credit facility. The Seventh Amendment permits Edgen Murray Pte. Ltd. (“EM Pte”) to incur up to $10,000 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 the Reorganization 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.

BL Revolving Credit Facility
On May 2, 2012, we amended and restated the BL revolving credit facility (“BL Amendment”). The BL Amendment (i) permitted us to effect the Reorganization 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.

Borrowings under our Revolving Credit Facilities
At June 30, 2012, utilization under our revolving credit facilities was as follows:
 
   
EM revolving credit facility
         
BL revolving
   
Total revolving
 
   
EMC
     
EM
Canada
   
EM
Europe
   
EM
Pte
   
Total
   
EM FZE
facility
   
credit
facility
   
credit
facilities
 
Total availability at June 30, 2012
  $ 146,897  
 
  $ 2,298     $ 30,212     $ 15,000     $ 194,407     $ 5,000     $ 75,000     $ 274,407  
Less: cash borrowings
    (41,000 )
 
    -       -       -       (41,000 )     -       (51,500 )     (92,500 )
Less: trade finance instruments
    (17,969 )
(a)
    -       (9,076 )     (5,432 )     (32,477 )     (1,796 )     -       (34,273 )
Less: reserves
    (1,504 )
 
    (77 )     (1,793 )     -       (3,374 )     -       -       (3,374 )
Net availability at June 30, 2012
  $ 86,424  
 
  $ 2,221     $ 19,343     $ 9,568     $ 117,556     $ 3,204     $ 23,500     $ 144,260  

(a) Includes a letter of credit in the amount of $5,000 that expires on June 14, 2013 and which supports the facility utilized by our subsidiary in Dubai, Edgen Murray FZE (the “EM FZE facility”).

Our weighted average interest rate paid for cash borrowings under our revolving credit facilities ranged between 4.5% to 4.7% during the three months ended June 30, 2012 and 2.3% to 4.6% during the six months ended June 30, 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.
 
 
10

 
 
EDGEN GROUP INC., continued
BL Term Loan
In August 2010, B&L Holdings issued a $125,000 aggregate principal amount term note (the “BL term loan”). The remaining principal balance of $104,498, accrued interest of $1,060 and a prepayment penalty of $8,876 were paid on May 2, 2012 with a portion of the net proceeds received from the IPO. In connection with this debt repayment, we expensed the remaining unamortized debt issuance costs of $6,916. The effect of the prepayment penalty and write off of unamortized debt issuance costs associated with the BL term loan are classified as loss on prepayment of debt within our consolidated statement of operations.

Seller Note
In August 2010, B&L Holdings issued a $50,000 note to the former owner of B&L’s predecessor business (the “Seller Note”). The fair value of the Seller Note was determined to be $43,750 with an original issue discount of $6,250. The Seller Note accrues interest at a base rate of 2.18% and a contingent rate of 5.82% for an aggregate interest rate of 8.0%, which compounds annually. A portion of the accrued interest equal to 37.5% of the base rate is due annually, while the remaining portion of accrued interest is added to the principal balance to be paid at maturity in August 2019. In connection with the Reorganization, B&L assumed B&L Holdings’ obligations under the Seller Note, and we used $11,000 of the IPO net proceeds to repay $10,745 of the principal balance and $255 of the accrued interest outstanding. In connection with this repayment, we expensed $1,173 of unamortized discount, which is classified as loss on prepayment of debt within our consolidated statement of operations. At June 30, 2012, the remaining principal, accrued interest and unamortized discount associated with the Seller Note were $39,255, $6,633 and $4,219, respectively.
 
Third Party Guarantees
In the normal course of business, we may provide performance guarantees directly to third parties on behalf of our subsidiaries.
 
At June 30, 2012 and December 31, 2011, we had the following outstanding guarantees:

   
June 30,
2012
   
December 31,
2011
 
Maximum potential obligations (undiscounted)
  $ 29,634     $ 30,663  
Guaranteed commitments outstanding
    25,737       27,386  
 
Additionally, at June 30, 2012 and December 31, 2011 we had the following bank guarantees which have been cash collateralized and included in prepaid expenses and other assets on our consolidated/combined consolidated balance sheets:

   
June 30,
2012
   
December 31,
2011
 
 Bank guarantees
  $ 889     $ 675  

8. Equity-Based Compensation
In connection with the IPO, we adopted the Edgen Group Inc. 2012 Omnibus Incentive Plan (“2012 Plan”), which allows us to grant equity-based compensation awards to certain officers, employees and directors providing services to us. Awards under the 2012 Plan may be granted in the form of restricted stock, stock options, stock appreciation rights, restricted stock units and other equity-based awards as deemed appropriate by our compensation committee. Up to 7,700,000 shares of our Class A common stock may be issued as awards under the 2012 Plan. After giving effect to the awards exchanged in connection with the Reorganization and those discussed below, an additional 2,926,792 shares may be issued subject to automatic annual increases in accordance with the terms of the 2012 Plan.

Exchange of Predecessor Unit-Based Compensation
In connection with the IPO and the Reorganization, all restricted units of EM II LP and B&L Holdings and all outstanding options to acquire the common partnership units of EM II LP and membership units of B&L Holdings were exchanged contemporaneously for a substantially equivalent value of restricted shares of our Class A common stock or options to acquire our Class A common stock, as applicable. The resulting restricted shares and stock options contain substantially identical terms, conditions and vesting schedules as the previously outstanding EM II LP and B&L Holdings unit-based awards. We accounted for these exchanges as a modification as required by GAAP. The modification did not result in any additional compensation expense as the fair value of the EM II LP and B&L Holdings unit-based awards immediately prior to their modification was substantially the same as the fair value of the newly issued equity-based awards immediately after the modification. Since this modification, we have continued to record compensation expense associated with these equity-based awards over the remaining vesting period.
 
 
11

 
 
EDGEN GROUP INC., continued

Equity-Based Compensation Activity
The following table presents the equity-based compensation expense that has been recorded within the consolidated/combined consolidated statements of operations for the three and six months ended June 30, 2012 and 2011. All amounts prior to the IPO relate to the unit-based compensation awards of our Predecessor.
 
   
Three months ended June 30,
   
Six months ended June 30,
 
Equity-based compensation expense by type:
 
2012
   
2011
   
2012
   
2011
 
Stock options
  $ 375     $ 374     $ 749     $ 718  
Restricted stock
    3,329       309       3,656       544  
Total equity-based compensation expense
    3,704       683       4,405       1,262  
Tax benefit recognized
    -       -       -       -  
Total equity-based compensation expense - net of tax
  $ 3,704     $ 683     $ 4,405     $ 1,262  

Stock Option Activity
A summary of stock option activity during the six months ended June 30, 2012 is presented below. As discussed above, in connection with the IPO and the Reorganization, all of the options to purchase units of EM II LP and B&L Holdings that were outstanding prior to the IPO and the Reorganization were exchanged for a substantially equivalent value of options to purchase shares of our Class A common stock. As such, the table below reflects the exchange on May 2, 2012 of 14,623 Predecessor options for 1,723,981 options to purchase our Class A common stock:
 
   
Number of options
   
Weighted-
average exercise
 
Weighted-average remaining contractual term
   
Predecessor
   
Edgen Group
   
price per share
 
(in years)
Outstanding - December 31, 2011
    14,923       -     $ 1,080    
Granted
    -       -       -    
Exercised
    -       -       -    
Forfeited
    (300 )     -       1,000    
Expired
    -       -       -    
Outstanding - May 2, 2012 (IPO date)
    14,623       -       1,082    
Exchange of Predecessor unit-based compensation
    (14,623 )     1,723,981       9.14    
Granted
    -       -       -    
Exercised
    -       -       -    
Forfeited
    -       -       -    
Expired
    -       -       -    
Outstanding - June 30, 2012
    -       1,723,981       9.14  
7.23
                           
Exercisable - June 30, 2012
    -       690,653       11.75  
6.25
 
At June 30, 2012, there was $2,440 of compensation expense associated with unvested stock options which we expect to recognize over a weighted average period of 1.54 years.

Restricted Stock Activity
The following table summarizes restricted stock activity during the six months ended June 30, 2012, including the exchange on May 2, 2012 of 4,139 Predecessor unvested restricted units for 783,013 unvested restricted shares of our Class A common stock:
 
   
Number of shares
   
Weighted-
average grant
 
   
Predecessor
   
Edgen Group
   
date fair value
 
Outstanding - December 31, 2011
    4,252       -     $ 1,271  
Granted
    -       -       -  
Vested
    (113 )     -       1,075  
Forfeited
    -       -       -  
Outstanding - May 2, 2012 (IPO date)
    4,139       -       1,222  
Exchange of Predecessor unit-based compensation
    (4,139 )     783,013       6.31  
Granted
    -       61,389       7.33  
Vested
    -       (533,085 )     6.72  
Forfeited
    -       -       -  
Outstanding - June 30, 2012
    -       311,317       5.82  
 
 
12

 
 
EDGEN GROUP INC., continued
In June 2012, we accelerated the vesting period of 533,085 shares of restricted stock previously awarded to employees in our OCTG operating segment, resulting in an additional $3,004 of compensation expense during the period. At June 30, 2012, there was $1,490 of compensation expense associated with the remaining unvested restricted stock which we expect to recognize over a weighted average period of 1.57 years.

9. Equity
Our amended and restated certificate of incorporation provides for two classes of common stock, Class A and Class B, as well as preferred stock, the rights, preferences and privileges of which will be designated by our board at the time of issuance. There are currently no shares of our preferred stock outstanding. We are authorized to issue 500,000,000 shares of our capital stock, all with a par value of $0.0001 per share. Of these shares, 435,656,862 shares are designated as Class A common stock, 24,343,138 shares are designated as Class B common stock and 40,000,000 shares are designated as preferred stock.

Class A and Class B Common Stock
Holders of our Class A common stock and holders of our Class B common stock are each entitled to one vote per share and will vote together as a single class on all matters submitted to a vote of stockholders except in limited circumstances outlined in our amended and restated certificate of incorporation.

Holders of our Class A common stock are entitled to receive dividends, if any are declared by our board, and, in the event of our liquidation, dissolution or winding up, will be entitled to receive ratably the assets available for distribution to our stockholders after payment of liabilities and payment of liquidation preference on any outstanding shares of our preferred stock. Holders of our Class B common stock have no economic rights to our assets or income. All of our Class B common stock is held by EM II LP and B&L Holdings.

The following table presents our common stock share activity since the IPO:
 
   
Common stock
 
   
Class A
   
Class B
 
Balance at May 2, 2012 (IPO date)
           
Class A shares issued in connection with the IPO
    15,000,000       -  
Class B shares issued to EM II LP and B&L Holdings in connection with the Reorganization
    -       24,343,138  
Class A restricted shares issued in connection with the Reorganization
    2,987,838       -  
Restricted common stock issued
    61,389       -  
Balance at June 30, 2012
    18,049,227       24,343,138  

Non-Controlling Interest
Non-controlling interest recorded in our consolidated financial statements subsequent to the IPO primarily relates to the approximately 58% combined ownership of EDG LLC by EM II LP and B&L Holdings.

As discussed in Note 1, a portion of the historical Predecessor net deficit was transferred to non-controlling interest as part of the Reorganization, representing the ownership by EM II LP and B&L Holdings of EDG LLC. Subsequent to the Reorganization, any changes to non-controlling interest are the result of (i) EM II LP’s and B&L Holdings’ proportional share of the comprehensive income or loss generated by EDG LLC, (ii) 30% of the income earned by our Bahraini joint venture and (iii) the exercise of Exchange Rights, if any, discussed below.

Exchange Rights
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 each Exchange Agreement,  allows 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 (subject to customary conversion rate adjustments for splits, stock dividends and reclassifications), or, at our election, cash, (“Exchange Rights”) as provided in the applicable Exchange Agreement. 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. As the Exchange Rights are exercised, our non-controlling interest will be reduced and our outstanding shares of Class A common stock will increase. There have been no exercises of Exchange Rights since the IPO.

 
13

 
 
EDGEN GROUP INC., continued
 
The following table presents our non-controlling interest at the dates indicated:
 
   
Non-controlling interest
 
   
Predecessor owners
   
Joint venture partner (1)
   
Total
non-controlling interest
 
Balance at December 31, 2011
  $ -     $ 330     $ 330  
Net income attributable to non-controlling interests
    -       11       11  
Balance at May 2, 2012 (IPO date)
    -       341       341  
Allocation of Predecessor net deficit to non-controlling interest (2)
    (38,328 )     -       (38,328 )
Allocation of Predecessor AOCL to non-controlling interest (2)
    (12,429 )     -       (12,429 )
Net income attributable to non-controlling interests
    (8,519 )     2       (8,517 )
Other comprehensive income attributable to non-controlling interests
    (1,855 )     -       (1,855 )
Balance at June 30, 2012
  $ (61,131 )   $ 343     $ (60,788 )
 
 
(1)
Represents the 30% interest we do not own in a consolidated Bahraini joint venture.
 
(2)
Net income attributable to non-controlling interests and other comprehensive income attributable to non-controlling interests associated with the Predecessor owners is calculated as the net income or loss and other comprehensive income or loss generated by EDG LLC during the period, multiplied by the weighted average non-controlling ownership percentage during the period. The weighted average non-controlling ownership percentage during the period was approximately 58%.

10. Earnings (Loss) per Share
We calculate basic earnings per share by dividing the earnings attributable to Edgen Group by the weighted average number of shares of common stock outstanding during each period, which includes Class A common stock issued in connection with equity offerings, restricted stock that has vested and shares that have been purchased through the exercise of vested stock options. Diluted earnings per share amounts include the dilutive effect of stock options (using the treasury stock method as prescribed by GAAP) and other stock awards granted to employees under the 2012 Plan, as well as the exchange of Class B common shares for Class A common shares via the exercise of the Exchange Rights. We adjust the numerator in our diluted earnings per share calculation for the income attributable to non-controlling interest of EDG LLC owned by the holders of our Class B common shares. As the Class B shares are exchanged, the amount of income allocated to Edgen Group will increase and the amount of income allocated to the non-controlling interest holders of EDG LLC will decrease.

The following table sets forth the computation of basic and diluted loss per share for the period from May 2, 2012 to June 30, 2012 (the period since the IPO and the Reorganization). Prior to the IPO and the Reorganization, all income or loss generated from our operations was allocated to the Predecessor. Because we historically operated as a series of related partnerships and limited liability companies, and there was no single capital structure upon which to calculate historical earnings per share information, we have not provided a calculation of basic and diluted earnings per share for periods prior to the IPO and the Reorganization.
 
 
Basic loss per share:
     
Numerator (in thousands):
     
Net loss attributable to Edgen Group Inc.
  $ (6,074 )
Denominator:
       
Class A shares
    17,213,423  
Basic weighted average common shares outstanding
    17,213,423  
         
Basic loss per share
  $ (0.35 )
         
Diluted loss per share:
       
Numerator (in thousands):
       
Net loss attributable to Edgen Group Inc.
  $ (6,074 )
Denominator:
       
Basic weighted average common shares outstanding
    17,213,423  
Class A unvested restricted shares
    -  
Class B shares
    -  
Class A options (vested and unvested)
    -  
Diluted weighted average common shares outstanding
    17,213,423  
         
Diluted loss per share
  $ (0.35 )
 
 
14

 
 
EDGEN GROUP INC., continued
 
Due to our net loss for the period, no potentially dilutive shares were included in our diluted loss per share calculation because they were all anti-dilutive. The table below presents the shares that were excluded from our dilutive loss per share calculation:
 
Class A unvested restricted shares
    311,317  
Class B shares
    24,343,138  
Class A options (vested and unvested)
    1,723,981  
Total anti-dilutive shares
    26,378,436  
 
11. Income Taxes
We are subject to U.S., federal, state and local income taxes. In addition, certain of our subsidiaries are subject to foreign income taxes based on the various jurisdictions in which they operate. We provide for current and deferred corporate income taxes in our consolidated/combined consolidated financial statements. Due to the organizational structure of our subsidiaries, some of which are pass-through entities for income tax purposes, and others which are corporations, the effective tax rate calculated from our consolidated/combined consolidated financial statements is not indicative of our actual effective tax rate, which is a combination of the effective tax rates of our taxable subsidiaries, adjusted for our ownership percentage of each subsidiary. Our consolidated annualized estimated effective tax rate for the year is approximately 17%. The following table presents our income tax expense (benefit) for the periods indicated:
 
   
Three months ended June 30,
   
Six months ended June 30,
 
   
2012
   
2011
   
2012
   
2011
 
Income (loss) before income tax expense (benefit)
  $ (13,988 )   $ 2,575     $ (8,583 )   $ (4,235 )
Income tax expense (benefit)
    (165 )     1,566       1,139       2,122  
Effective tax rate
    1 %     61 %     (13 %)     (50 %)
 
Prior to the IPO and the Reorganization, we did not incur tax on the income earned by the subsidiary that comprises our OCTG segment because that subsidiary was a pass-through entity for income tax purposes. As a result of the Reorganization, we now incur tax expense associated with this segment. Additionally, we did not recognize a tax benefit for taxable losses generated in our E&I segment by our U.S. operations during the six months ended June 30, 2012 and 2011 due to a valuation allowance that has been established against any tax benefits related to these taxable losses.

At June 30, 2012 and December 31, 2011, a valuation allowance of $30,079 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
    289  
Settlement of uncertain tax position with tax authorities
    -  
Lapse of statute of limitations related to uncertain tax positions
    -  
Foreign currency translation
    (6 )
Balance at June 30, 2012
  $ 2,222  
 
Our subsidiaries have open tax years as follows:
 
Jurisdiction
 
Tax years open for assessment
Federal
 
2008
- 2011
Various State
 
2005
- 2011
Various Foreign
 
2007
- 2011
 
 
15

 
 
EDGEN GROUP INC., continued
 
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.

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 taxes 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. We will retain the remaining 15% of cash savings, if any, in realized income tax savings. 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. Because there have been no exercises of Exchange Rights, the TRA has not impacted our financial statements.

12. 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 June 30,
   
Six months ended June 30,
 
   
2012
   
2011
   
2012
   
2011
 
Operating lease rental expense
  $ 1,217     $ 1,206     $ 2,430     $ 2,421  

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.
 
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 consolidated financial position, results of operations or cash flows.

During the six months ended June 30, 2012, we have agreed to certain settlements with customers and suppliers related to warranty claims that arose in the normal course of business. The net impact of these settlements to our consolidated statement of operations was approximately $400, all of which was recorded during the first quarter of 2012.

13. Segment Information
We have two reportable segments: E&I and OCTG. Certain overhead operating expenses of our non-trading entities, including EM Holdings, EDG LLC, and Edgen Group are not allocated to the segments, but are included in Corporate.

The E&I segment, which is branded under the “Edgen Murray” name, serves customers in the Americas, Europe/Middle East/Africa (“EMEA”) and Asia Pacific (“APAC”) regions distributing pipe, plate, valves and related components to upstream, midstream, downstream and select power generation, civil construction and mining customers across more than 30 global locations.

The OCTG segment, which is branded under the “Bourland & Leverich” name, provides oil country tubular goods to the upstream conventional and unconventional onshore drilling market in the U.S. through nine customer sales and service locations and over 50 third-party owned distribution facilities.

Our Chief Executive Officer evaluates segment performance based on income (loss) from continuing operations before income taxes. We account for sales between segments at an agreed margin between segment management.

 
16

 
 
EDGEN GROUP INC., continued
 
The following table presents the financial information for each reportable segment. The prior period information related to the combined results of the Predecessor has been recast to conform to our change in segments made in connection with the IPO and the Reorganization:
 
   
Three months ended June 30,
   
Six months ended June 30,
 
   
2012
   
2011
   
2012
   
2011
 
Sales:
                       
E&I
  $ 255,365     $ 222,549     $ 533,040     $ 408,111  
OCTG
    241,136       192,619       469,291       334,067  
Intersegment sales
    (2 )     (62 )     (2 )     (62 )
Total sales
  $ 496,499     $ 415,106     $ 1,002,329     $ 742,116  
                                 
Intersegment sales:
                               
E&I
  $ -     $ -     $ -     $ -  
OCTG
    2       62       2       62  
Total intersegment sales
  $ 2     $ 62     $ 2     $ 62  
                                 
Selling, general and administrative expense:
                               
E&I
  $ 17,663     $ 16,232     $ 33,224     $ 31,145  
OCTG
    7,088       3,335       10,843       6,214  
Corporate
    3,655       2,561       7,367       4,497  
Total selling, general and administrative expense
  $ 28,406     $ 22,128     $ 51,434     $ 41,856  
                                 
Depreciation and amortization:
                               
E&I
  $ 4,283     $ 5,303     $ 8,859     $ 10,593  
OCTG
    3,604       3,627       7,266       7,255  
Corporate
    -       -       -       -  
Total depreciation and amortization
  $ 7,887     $ 8,930     $ 16,125     $ 17,848  
                                 
Income (loss) from operations:
                               
E&I
  $ 13,142     $ 14,235     $ 30,454     $ 21,223  
OCTG
    12,884       12,457       26,430       21,038  
Corporate
    (3,655 )     (2,561 )     (7,367 )     (4,497 )
Total income (loss) from operations
  $ 22,371     $ 24,131     $ 49,517     $ 37,764  
 
   
June 30,
2012
   
December 31,
2011
                 
Assets:                                
E&I
  $ 574,166     $ 537,872                  
OCTG
    386,583       362,868                  
Corporate
    2,025       -                  
Total assets
  $ 962,774     $ 900,740                  

14. 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. We do not designate any of our outstanding derivatives as hedging instruments and as such, account for all of our derivatives using mark-to-market accounting.

Currency Exchange Rate Risk
Transactions hedged by us include forecasted purchase commitments. The total notional amount of outstanding forward contracts not designated as hedging instruments at June 30, 2012 and December 31, 2011 was $41,136 and $56,005, respectively.
 
 
17

 
 
EDGEN GROUP INC., continued
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
 
   
June 30, 2012
   
December 31, 2011
   
June 30, 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
 
Other
current
assets
    -    
Other
current
assets
    241    
Accrued
expenses
and other
current
liabilities
    (444 )  
Accrued
expenses
and other
current
liabilities
    (738 )

The following table discloses the impact of derivative instruments not designated as hedging instruments on our consolidated/combined consolidated statements of operations:
 
       
Recognized loss in income
 
Derivatives not designated as
     
Three months ended June 30,
 
Six months ended June 30,
 
 hedging instruments   Location of loss recognized in income  
2012
   
2011
   
2012
   
2011
 
Forward contracts
 
Selling, general and administrative expense
  $ (481 )   $ (2 )   $ (137 )   $ (15 )

At June 30, 2012 and December 31, 2011, the cumulative effect of currency translation adjustments was a loss of $24,836 and $25,648, respectively, and is the sole component of accumulated other comprehensive loss on the consolidated/combined consolidated balance sheets. Of this amount at June 30, 2012, $14,284 is allocated to non-controlling interest and the remaining $10,552 is classified within accumulated other comprehensive loss. 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 June 30, 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.

15. 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.
 
 
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.
 
 
18

 
 
EDGEN GROUP INC., continued
 
Our financial assets and liabilities that were accounted for at fair value on a recurring basis at June 30, 2012 and December 31, 2011 are as follows:
 
   
June 30, 2012
   
December 31, 2011
 
   
Level 1
   
Level 2
   
Level 3
   
Total
   
Level 1
   
Level 2
   
Level 3
   
Total
 
Financial assets:
                                               
Forward contracts
  $ -     $ -     $ -       -     $ -     $ 241     $ -       241  
Financial liabilities:
                                                               
Forward contracts
    -       (444 )     -       (444 )     -       (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 certain financial instruments are presented below:

   
June 30, 2012
   
December 31, 2011
 
   
Carrying value
 
Fair value
 
Carrying value
 
Fair value
 
EMC senior secured notes
  $ 462,439     $ 458,025     $ 462,032     $ 404,550  
BL term loan
    -       -       116,406       112,914  

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 dates indicated. The fair value of the BL term loan, which was fully repaid in connection with the IPO, was estimated based upon the most recent trades of the debt by participating banks in a secondary market.

The fair value amounts shown are not necessarily indicative of the amounts 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.

16. Related Party Transactions
An employee pension fund of the ultimate parent company of one of our customers owns on a fully-diluted ownership basis greater than 5% of our common shares. Sales to this customer for the three and six months ended June 30, 2012 and 2011 were as follows:

   
Three months ended June 30,
   
Six months ended June 30,
 
   
2012
   
2011
   
2012
   
2011
 
 Sales to related party
  $ 13,247     $ 17,814     $ 26,460     $ 22,456  

Accounts receivable due from this customer included in accounts receivable on our consolidated/combined consolidated balance sheets at June 30, 2012 and December 31, 2011 were as follows:
   
June 30,
2012
 
December 31,
2011
 
Accounts receivable from related party
  $ 7,311     $ 10,858  

Transactions with JCP
We made the following payments to JCP for reimbursement of certain expenses incurred while monitoring its investment in us:
 

   
Three months ended June 30,
   
Six months ended June 30,
 
   
2012
   
2011
   
2012
   
2011
 
Payments to JCP
  $ 11     $ 18     $ 11     $ 18  

Transactions with EM II LP and B&L Holdings
On June 14, 2012, we loaned our Class B shareholders, EM II LP and B&L Holdings, $106 and $24, respectively, under separate loan agreements. The loans are due on demand, but no later than December 31, 2012 and accrue interest at 3.0% per annum. We have classified these affiliated loans within prepaid and other current assets on our consolidated balance sheet.
 
 
19

 
 
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20

 
 
EM HOLDINGS LLC
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
 
   
June 30,
2012
   
December 31,
2011
 
ASSETS
           
CURRENT ASSETS:
           
Cash and cash equivalents
  $ 25,251     $ 26,218  
Accounts receivable - net of allowance for doubtful accounts of $1,985 and $1,739, respectively
    193,398       198,663  
Inventory
    247,496       196,004  
Prepaid expenses and other current assets
    7,472       10,034  
Total current assets
    473,617       430,919  
PROPERTY, PLANT AND EQUIPMENT - NET
    44,770       45,510  
GOODWILL
    23,208       22,965  
OTHER INTANGIBLE ASSETS - NET
    19,314       25,447  
OTHER ASSETS
    14,932       13,036  
INVESTMENT IN UNCONSOLIDATED AFFILIATE
    11,897       13,180  
TOTAL ASSETS
  $ 587,738     $ 551,057  
                 
LIABILITIES AND DEFICIT
               
CURRENT LIABILITIES:
               
Managed cash overdrafts
  $ 39     $ 112  
Accounts payable
    148,124       147,202  
Accrued interest payable
    26,451       26,443  
Current portion of long term debt and capital lease
    380       358  
Accrued expenses and other current liabilities
    26,793       26,285  
Total current liabilities
    201,787       200,400  
DEFERRED TAX LIABILITY - NET
    3,456       4,544  
OTHER LONG TERM LIABILITIES
    1,322       783  
REVOLVING CREDIT FACILITY
    41,000       20,523  
LONG TERM DEBT AND CAPITAL LEASE
    480,260       479,860  
Total liabilities
  $ 727,825     $ 706,110  
COMMITMENTS AND CONTINGENCIES
               
DEFICIT:
               
Member deficit
  $ (115,594 )   $ (129,735 )
Accumulated other comprehensive loss
    (24,836 )     (25,648 )
Total member deficit
    (140,430 )     (155,383 )
NON-CONTROLLING INTEREST
    343       330  
Total deficit
    (140,087 )     (155,053 )
TOTAL LIABILITIES AND DEFICIT
  $ 587,738     $ 551,057  
 
See accompanying notes to unaudited condensed consolidated financial statements.
 
 
21

 
 
EM HOLDINGS LLC
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands)
 
   
Three months ended June 30,
   
Six months ended June 30,
 
   
2012
   
2011
   
2012
   
2011
 
SALES
  $ 255,365     $ 222,549     $ 533,041     $ 408,111  
OPERATING EXPENSES:
                               
Cost of sales (exclusive of depreciation and amortization shown below)
    220,277       186,280       460,504       345,148  
Selling, general and administrative expense
    20,818       18,293       39,591       34,642  
Depreciation and amortization expense
    4,283