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As filed with the Securities and Exchange Commission on December 29, 2011

Registration No. 333-            

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

 

 

Form S-1

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

 

 

EDGEN GROUP INC.

(Exact name of registrant as specified in its charter)

 

 

 

Delaware   5051   38-3860801

(State or Other Jurisdiction of

Incorporation or Organization)

 

(Primary Standard Industrial

Classification Code Number)

 

(I.R.S. Employer

Identification No.)

18444 Highland Road

Baton Rouge, Louisiana 70809

(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)

 

 

Daniel J. O’Leary

Chairman, President and Chief Executive Officer

18444 Highland Road

Baton Rouge, Louisiana 70809

(225) 756-9868

(Name, address including zip code, and telephone number, including area code, of agent for service)

 

 

With copies to:

 

Carmen J. Romano, Esq.

Eric S. Siegel, Esq.

Dechert LLP

Cira Centre

2929 Arch Street

Philadelphia, Pennsylvania 19104

(215) 994-4000

 

Marc D. Jaffe, Esq.

William N. Finnegan IV, Esq.

Divakar Gupta, Esq.

Latham & Watkins LLP

811 Main Street, Suite 3700

Houston, Texas 77002

(713) 546-5400

 

 

Approximate date of commencement of proposed sale to the public: As soon as practicable after the effective date of this Registration Statement.

If any of the securities being registered on this Form are being offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933 check the following box:  ¨

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

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   ¨
Non-accelerated filer   x  (Do not check if a smaller reporting company)    Smaller reporting company   ¨

 

 

CALCULATION OF REGISTRATION FEE

 

 

TITLE OF EACH CLASS OF

SECURITIES TO BE REGISTERED

  

PROPOSED
MAXIMUM
AGGREGATE

OFFERING PRICE (1)(2)

  

AMOUNT OF

REGISTRATION FEE

Class A Common Stock, par value $0.0001 per share

  

$100,000,000

  

$11,460.00

 

 

(1) 

Includes shares of Class A common stock issuable upon exercise of the underwriters’ option to purchase additional shares of Class A common stock to cover over-allotments.

(2) 

Estimated solely for the purpose of calculating the registration fee pursuant to Rule 457(o) under the Securities Act of 1933.

 

 

The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until this Registration Statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine.

 

 

 


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The information in this preliminary prospectus is not complete and may be changed. We may not sell the securities described herein until the registration statement related to such securities filed with the Securities and Exchange Commission is declared effective. This preliminary prospectus is not an offer to sell the securities described herein and we are not soliciting an offer to buy such securities in any state where such offer or sale is not permitted.

 

SUBJECT TO COMPLETION, DATED DECEMBER 29, 2011

 

PRELIMINARY PROSPECTUS

LOGO

Class A Common Stock

This is the initial public offering of the Class A common stock of Edgen Group Inc. We are offering                  shares of Class A common stock and the selling stockholders identified in this prospectus are offering an additional                  shares of Class A common stock. We will not receive any of the proceeds from the shares of Class A common stock sold by the selling stockholders. We expect the initial public offering price to be between $         and $         per share.

Following this offering, we will have two classes of authorized common stock, Class A common stock and Class B common stock. Each share of Class A common stock will be entitled to one vote per share. Each share of Class B common stock will be entitled to one vote per share and will have no economic rights. Outstanding shares of Class B common stock will represent approximately     % of the voting power of our outstanding capital stock following this offering, all of which will be held by Edgen Holdings LLC, an entity controlled by affiliates of Jefferies Capital Partners.

Prior to this offering, there has been no public market for our Class A common stock. We have applied to list our Class A common stock on the New York Stock Exchange under the symbol “EDG.”

Investing in our Class A common stock involves a high degree of risk. See “Risk Factors” beginning on page 18 of this prospectus.

Neither the Securities and Exchange Commission nor any other regulatory body or commission has approved or disapproved these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

 

     Per Share      Total  

Public offering price

   $                    $                

Underwriting discounts and commissions

   $         $     

Proceeds to Edgen Group Inc. (before expenses)

   $         $     

Proceeds to the selling stockholders (before expenses)

   $         $     

The selling stockholders identified herein have granted the underwriters a 30-day option to purchase up to an additional                  shares of Class A common stock at the public offering price, less the underwriting discounts and commissions, to cover over-allotments, if any.

The underwriters expect to deliver the shares on or about                     , 2012.

 

Jefferies   Morgan Stanley    Citigroup

                    , 2012


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LOGO


Table of Contents

TABLE OF CONTENTS

 

 

 

ABOUT THIS PROSPECTUS

     ii   

SPECIAL NOTE REGARDING INDUSTRY AND MARKET DATA

     ii   

PROSPECTUS SUMMARY

     1   

THE OFFERING

     11   

SUMMARY HISTORICAL CONSOLIDATED AND UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION

     13   

RISK FACTORS

     18   

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

     37   

USE OF PROCEEDS

     38   

DIVIDEND POLICY

     39   

CAPITALIZATION

     40   

DILUTION

     41   

SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA

     43   

UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION

     45   

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

     52   

BUSINESS

     84   

THE REORGANIZATION

     103   

MANAGEMENT

     106   

PRINCIPAL AND SELLING STOCKHOLDERS

     120   

CERTAIN RELATIONSHIPS AND RELATED PERSON TRANSACTIONS

     123   

DESCRIPTION OF OUR CAPITAL STOCK

     126   

SHARES ELIGIBLE FOR FUTURE SALE

     130   

MATERIAL U.S. FEDERAL TAX CONSIDERATIONS FOR NON-UNITED STATES HOLDERS

     131   

UNDERWRITING

     134   

LEGAL MATTERS

     139   

EXPERTS

     139   

WHERE YOU CAN FIND MORE INFORMATION

     140   

INDEX TO FINANCIAL STATEMENTS

     F-1   

 

 

 

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ABOUT THIS PROSPECTUS

All information in this prospectus assumes that the underwriters do not exercise their 30-day option to purchase additional shares of Class A common stock from certain of our stockholders, unless otherwise indicated.

You should rely only on the information contained in this prospectus or to which we have referred you, including any free writing prospectus prepared by or on behalf of us. Neither we, nor the selling stockholders have authorized anyone to provide you with information that is different. If anyone provides you with different or inconsistent information, you should not rely on it. This prospectus may only be used where it is legal to sell the securities described herein. You should assume that the information appearing in this prospectus is accurate only as of the date on the front cover of this prospectus. Our business, financial condition, results of operations and prospects may have changed since that date. You should not, under any circumstances, construe the delivery of this prospectus or any sale made hereunder to imply that the information in this prospectus is correct as of any date subsequent to the date on the front cover of this prospectus.

For investors outside the U.S.: Neither we, the selling stockholders, nor any of the underwriters have done anything that would permit this offering or possession or distribution of this prospectus in any jurisdiction where action for that purpose is required, other than in the U.S. You are required to inform yourselves about and to observe any restrictions relating to this offering and the distribution of this prospectus outside of the U.S.

SPECIAL NOTE REGARDING INDUSTRY AND MARKET DATA

This prospectus contains estimates regarding market data which are based on our internal estimates, independent industry publications, reports by market research firms and/or other published independent sources. In each case, we believe those estimates are reasonable and reliable but have not independently verified the accuracy of any such third party information. However, market data is subject to change and cannot always be verified with complete certainty due to limits on the availability and reliability of raw data, the voluntary nature of the data gathering process and other limitations and uncertainties inherent in any statistical survey of market data.

 

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PROSPECTUS SUMMARY

The following summary highlights information contained elsewhere in this prospectus and does not contain all of the information you should consider before investing in our common stock. You should read carefully the following summary together with the rest of this prospectus, including the consolidated financial statements of our predecessor Edgen Murray II, L.P., or EM II LP, and of Bourland & Leverich Holdings LLC, or B&L, and the combined financial statements of B&L’s predecessor, Bourland & Leverich Holding Company, or B&L Predecessor, and related notes to those statements, our unaudited pro forma condensed combined financial information and related notes and the section entitled “Risk Factors.” Some of the statements in the following summary are forward-looking statements. See “Special note regarding forward-looking statements.”

Edgen Group Inc., or Edgen Group, was incorporated in December 2011. Prior to the effectiveness of the registration statement of which this prospectus forms a part, Edgen Group will become the holding company for our operating subsidiaries, including EM II LP and B&L, in a transaction we refer to as the Reorganization, and, as our new parent holding company, will serve as the issuer in this offering. See “The Reorganization.” We expect that the Reorganization and, in particular, the integration of B&L into our business, will significantly increase our size and materially change our operations. As a result, except in circumstances where the context indicates otherwise, we have described our business throughout this prospectus assuming that the Reorganization, including the integration of B&L into our existing business, has already occurred.

Unless we state otherwise, “the Company,” “we,” “us,” “our” and similar terms, refer to Edgen Group and, where appropriate, its direct and indirect wholly-owned subsidiaries, and assume and give effect to the Reorganization, including the integration of EM II LP and B&L into our operations. Unless otherwise noted, when we present historical financial information in this prospectus, such financial information represents the consolidated financial statements of our predecessor, EM II LP and its consolidated subsidiaries, as well as their predecessors, or B&L Predecessor and its consolidated subsidiaries, as well as their predecessors, as applicable. When we present financial information on a pro forma basis, such financial information assumes and gives effect to the Reorganization, among other things. See “Unaudited Pro Forma Condensed Combined Financial Information.”

Our Company

We are a leading global distributor of specialty products to the energy sector, including highly engineered steel pipe, valves, quenched and tempered and high yield heavy plate and related components. We primarily serve customers that operate in the upstream (conventional and unconventional exploration, drilling and production of oil and natural gas in both onshore and offshore environments), midstream (gathering, processing, fractionation, transportation and storage of oil and natural gas) and downstream (refining and petrochemical applications) end-markets for oil and natural gas. We also serve power generation, civil construction and mining applications, which have a similar need for our technical expertise in specialized steel and specialty products. Our customers in all of these end-markets increasingly demand our products in the build-out and maintenance of infrastructure that is required when the extraction, handling and treatment of energy resources becomes more complex and technically challenging. We source and distribute premium quality, highly engineered and mission critical steel components from our global network of more than 800 suppliers. We have sales and distribution operations in 14 countries serving over 1,800 customers who rely on our supplier relationships, procurement ability, stocking and logistical support for the timely provision of our products around the world. For the nine months ended September 30, 2011, we achieved pro forma sales of $1.2 billion, pro forma net loss of $3.6 million and pro forma earnings before interest, taxes, depreciation and amortization, or EBITDA, of $91.0 million.

 

 

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Our Market

Our business is driven largely by global demand for energy, in particular by the levels of upstream, midstream and downstream oil and natural gas related activity, with over 90% of our pro forma sales derived from customers operating within the energy sector. As demand increases for energy, our customers typically increase their capital spending on infrastructure, which results in increased demand for our specialty products. Recently, capital expenditures in our end-markets have substantially increased, driven in large part by significant drilling activity in unconventional resource developments, new onshore and offshore drilling rig construction, maintenance and expansion of oil and natural gas gathering and transmission networks and continued investment in maintenance and construction of downstream facilities, including refineries. We believe the following factors in particular will continue to support spending in the end-markets we serve, and, in turn, drive demand for our specialized steel products:

 

  n  

Increasing global demand for energy. It is anticipated that global energy consumption will continue to increase and that additional oil and natural gas production will be required to meet this demand. Growth in global energy consumption is being driven, in part, by the continued development and industrialization of countries not part of the Organisation for Economic Co-operation and Development, or OECD. As a supplier of specialized products to companies across the global energy supply chain, we expect to benefit from these demand trends.

 

  n  

Continued requirement for additional oil and natural gas drilling activity. The oil and natural gas industry is investing significantly in the development of previously underexploited resources of oil and natural gas to meet existing, and anticipated growth in, global demand for energy. In particular, the development of onshore unconventional resources, such as the U.S. shales, Canadian oil sands and Australian coalbed methane, or CBM, and global deepwater drilling activity in areas such as West Africa and offshore Brazil, have led to significant additional drilling activity. We believe that such activity will support increased demand for our products and services.

 

  n  

Continued investment in oil and natural gas gathering and transmission capacity. Many of the world’s oil and natural gas-producing regions experiencing growth in drilling activity lack sufficient pipeline, processing, fractionation, treatment or storage infrastructure. We expect that as production from new oil and natural gas developments increases, additional investments in oil and natural gas gathering and transmission capacity will be required. At the same time, many existing transmission networks are aging, necessitating increased maintenance and repair. We believe that we will benefit from increased demand for many of the specialized components that are needed for the construction and maintenance of these transmission systems.

 

  n  

Continued and expected increases in downstream refining activity. The continued industrialization of emerging economies such as those of China and India, as well as the recovery of the global economy, is expected to result in increased demand for refined petroleum and petrochemical products. This increased demand should in turn result in increasing downstream activity and investment, particularly in the refining sector. Because these refineries require the use of products that are designed to withstand extreme temperatures and pressures and corrosive conditions, we expect to benefit from anticipated future demand from this end-market for our specialized steel products.

 

  n  

Growing global investment in power generation capacity. Substantial new electricity generation capacity will be required as developing economies experience rapid population growth and industrialization. Additionally, many developed economies continue to enact regulations that promote cleaner sources of energy and the retirement or refurbishment of older power generation capacity. This increased regulation tends to drive the construction of new power generation sources or capital expenditures to refurbish older power generation sources. We believe that the increased global demand for electricity and the focus on developing cleaner sources of energy will drive demand for our specialty products.

 

  n  

Increased focus on environmental and safety standards. Many of our key markets have been subject to increased regulation relating to environmental and safety issues. As a result, owners and operators of oil and natural gas extraction, processing and transmission infrastructure are facing stricter environmental and safety regulation as they manage and build infrastructure. Future environmental and safety compliance could require the use of more specialized products and higher rates of maintenance, repair and replacement to ensure the integrity of our customers’ facilities. We believe that such laws and regulations will drive

 

 

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greater spending on maintenance, repair and operations, or MRO, by our customers and increased demand for our specialty products. Similarly, we believe heightened regulations, safety requirements and technical specifications in the civil construction and mining sectors will lead to higher project spending on products we distribute to these end-markets.

Our Business

We believe we are an essential link between our customers and suppliers. Our customers often operate in remote geographical locations and severe environments that require materials capable of meeting exacting standards for temperature, pressure, corrosion and abrasion. We deliver value to our customers around the world by providing:

 

  n  

Access to a broad range of high quality products from multiple supplier sources;

 

  n  

Coordination and quality control of logistics, staged delivery, fabrication and additional services;

 

  n  

Understanding of supplier pricing, capacity and deliveries;

 

  n  

Ability to bundle specialized offerings across multiple suppliers to create complete material packages;

 

  n  

On-hand inventory of specialty products to reduce our customers’ need to maintain large stocks of replacement products; and

 

  n  

Capitalization necessary to manage multi-million dollar supply orders.

Many of the products we distribute require specialized production to exacting technical and quality standards. We have established global supply channels with a premier network of suppliers to address our customers’ demands. As our suppliers increasingly focus on their core production competencies rather than on sales, marketing and logistics, we are able to deliver numerous benefits, including:

 

  n  

Aggressive marketing of our suppliers’ product offerings;

 

  n  

Deep knowledge of customer spending plans and material requirements;

 

  n  

Aggregation of numerous orders to create the critical volume required to make the production of a specific product economically viable;

 

  n  

Expertise and market knowledge to facilitate the development and sale of new products; and

 

  n  

Delivery of value-added services to end users, including coordination of logistics, fabrication and additional services.

We have observed a trend by our customers and suppliers toward increased reliance on distributors as both groups seek to find new ways to reduce costs while maintaining product quality and service levels. Furthermore, we believe that the proliferation of new technologies within the upstream, midstream and downstream end-markets of the energy industry and the increased specialization of products needed to build and implement these technologies will continue to drive demand for our products and services. We believe we are well suited to continue to benefit from these trends of specialization by suppliers and improved internal efficiencies implemented by end users.

Our customers include engineering, procurement and construction firms, equipment fabricators, multi-national and national integrated oil and natural gas companies, independent oil and natural gas exploration and production companies, onshore and offshore drilling contractors, oil and natural gas transmission and distribution companies, petrochemical companies, mining companies, oil sands developers, hydrocarbon, nuclear and renewable power generation companies, public utilities, civil construction contractors and municipal and transportation authorities. Our sales to these customers generally fall into the following three categories:

 

  n  

Project. Project orders relate to our customers’ capital expenditures for various planned projects across the upstream, midstream and downstream end-markets of the energy sector, such as transmission infrastructure build-out and rig construction and refurbishment. For these orders, we serve as a

 

 

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provider of global inventory logistics, delivering high quality, technically specific products in accordance with our customers’ project timelines. For many customers, we stage material and manage simultaneous product deliveries to multiple site locations. These orders tend to involve larger volumes that are delivered over longer timeframes and can lead to future MRO business. In addition, projects are often divided into different phases, and the initial project orders can also lead to subsequent project orders. Project orders constituted 35% of our pro forma sales for the nine months ended September 30, 2011.

 

  n  

Drilling Program. Drilling program orders relate to the delivery of surface casing and production tubulars for the onshore upstream market and require close consultation with our customers with regard to product specifications and delivery timing. Similar to our role in Project orders, we serve as an inventory logistics provider for our customers, delivering products in accordance with their drilling plans, often for multiple drilling rigs or site locations. We generally leverage our technical expertise to act as a liaison between customers and suppliers as they design new products that meet specific technical requirements. Drilling program orders constituted 46% of our pro forma sales for the nine months ended September 30, 2011.

 

  n  

Maintenance, Repair and Operations Order Fulfillment. MRO orders typically relate to the replacement of existing products that have reached their service limits or are being replaced due to regulatory requirements. Replacement orders are influenced by both product design and regulatory requirements. These orders tend to be consistent in nature and can be driven by customer relationships developed by fulfillment of Project orders. Often, the fulfillment of these MRO orders is critical to our customers’ ongoing operations, and the prompt receipt of the required component is of significant value to them. We maintain an inventory of specialty products in order to provide timely delivery of these products from our stocking locations around the world. Fulfillment of MRO orders constituted 19% of our pro forma sales for the nine months ended September 30, 2011.

Our Operating Segments

After the Reorganization and this offering, we will deliver our specialty products through two operating segments:

Energy and Infrastructure Products, or E&I. The E&I Segment serves customers in the Americas, Europe/Middle East/Africa, or EMEA, and Asia Pacific, or APAC, regions, distributing highly engineered pipe, plate, valves and related components to upstream, midstream, downstream and select power generation, civil construction and mining customers across more than 35 global locations. This operating segment provides project and MRO order fulfillment capabilities from stocking locations throughout the world. For the nine months ended September 30, 2011, our E&I Segment represented 54% of our pro forma sales and 49% of our pro forma EBITDA. Our E&I Segment is branded under the “Edgen Murray” name.

Oil Country Tubular Goods, or OCTG. The OCTG Segment is a leading provider of premium oil country tubular goods to the upstream conventional and unconventional onshore drilling markets in the U.S. We deliver products through nine customer sales and service locations, including our Pampa, Texas operating center, and over 50 third-party owned distribution facilities. For the nine months ended September 30, 2011, our OCTG Segment represented 46% of our pro forma sales and 51% of our pro forma EBITDA. Our OCTG Segment is branded under the “Bourland & Leverich” name.

Our Competitive Strengths

We consider the following to be our principal competitive strengths:

Broad Scale with Global Distribution Capabilities. As one of the largest global purchasers of specialty steel products for the energy infrastructure market, we use our scale to aggregate demand for the benefit of both our customers and our suppliers. We are able to secure volume pricing and production priority from our suppliers, often for specialty products for which no individual customer has enough demand to justify a timely production

 

 

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run, and thereby meet the specific product and delivery needs of our customers. In addition, we locate our global distribution facilities in close proximity to the major upstream, midstream and downstream energy end-markets we serve, including in the U.S., U.K., Singapore and Dubai. The benefits of our global presence include the ability to serve as a single global source of supply for our customers and participation in infrastructure investment activities in multiple regions around the world, increasing our growth opportunities and reducing our relative exposure to any one geographic market.

Diversified and Stable Customer Base. We have a diversified customer base of over 1,800 active customers in more than 50 countries with operations in the upstream, midstream and downstream energy end-markets, as well as in power generation, civil construction and mining. Our top ten customers, with each of whom we have had a relationship for more than nine years, accounted for 35% of our pro forma sales for the nine months ended September 30, 2011, yet no single customer represented more than 9% of our pro forma sales over the same period. We believe this diversification affords us a measure of protection in the event of a downturn in any specific region or market, or from the loss of individual customers. In addition, we tend to receive a base level of MRO sales from our large, longstanding customers, which provides additional stability to our sales during periods of limited infrastructure expansion.

Strategic and Longstanding Supplier Relationships. We have longstanding, strong relationships with leading suppliers across all of our product lines. While we are able to source almost all of our products from multiple suppliers, our scale allows us to be one of the largest, if not the largest, customer to each of our key suppliers. As a large customer, we provide our suppliers with a stable and significant source of demand. In addition, our market knowledge and insight into our customers’ capital expenditure plans enable us to aggregate multiple orders of a specialty product into volumes appropriate for a production run. We believe that these differentiating factors enhance our ability to obtain product allocations, timely delivery and competitive pricing on our orders from our suppliers. We believe that obtaining these same benefits from suppliers would be difficult for others, including our customers.

Focus on Premium Products. Our product portfolio is composed primarily of premium quality, specialty steel products and components. These types of products often are available from only a select number of suppliers, have limited production schedules and require technical expertise to sell. Our emphasis on the procurement and distribution of highly engineered products that in many cases are not widely available is the foundation of our ability to deliver value to our customers.

Sophisticated Material Sourcing and Logistical Expertise. Many of our customers rely on us to source products for them, as they lack the supplier relationships, resources, volume and/or logistical capabilities to complete procurement and delivery independently or on a cost-effective basis. We believe our professionals have the expertise necessary to manage the coordinated delivery of purchased product to multiple, often remote operating sites according to specific schedules. They also have the knowledge, experience, training and technical expertise in their products to provide valuable advisory support to our customers regarding selection of the most appropriate product to meet their specific needs.

Capitalization and Cash Flow to Maintain Necessary Inventory Levels. Our size affords us the ability to maintain inventory levels necessary to meet the unexpected MRO needs of our customers in the geographies in which they operate. Such requests are often less price sensitive than longer lead-time Project and Drilling program orders. Our scale and wherewithal to support large projects also enable us to participate in Project order proposals otherwise inaccessible to smaller competitors. Many of our regional competitors have comparatively smaller balance sheets and resources and have limited cash flow, which limits their capacity to carry the appropriate inventory levels to meet certain customers’ needs.

Asset-Light Business Model. We maintain an asset-light business model to maximize our profitability and operational flexibility. Our model results in high operating leverage, as evidenced by our $2.3 million in pro forma sales per employee for the year ended December 31, 2010. Our OCTG Segment operates one facility

 

 

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while leveraging the storage and transportation capabilities of over 50 trusted third party service providers to serve customers in the U.S. Our E&I Segment serves over 1,500 global customers through 24 distribution facilities strategically located throughout the world. We often enter new geographic areas of energy infrastructure development in conjunction with service to existing clients and working with third party service providers. In doing so, we are able to efficiently and quickly introduce our specialty products and technical expertise into new regions of high demand with minimal capital investment.

Experienced and Incentivized Management Team. Our senior managers have significant industry experience, averaging over 25 years, across upstream, midstream and downstream energy end-markets in the diverse geographies we serve and in the manufacture of the products we distribute. The compensation of our senior managers is tied to financial performance measures, which we believe aligns their interests with those of our stockholders. Following completion of this offering and as a result of the Reorganization, our management and employees would own approximately         % of our Class A common stock in the aggregate, assuming all such persons exchange their limited partnership units in EM II LP for shares of our Class A common stock.

Our Business Strategies

Our goal is to be the leading distributor of specialty steel products to the global energy sector. We intend to achieve this goal through the following strategies:

Expand Business with Existing Customers. We strive to introduce our customers to the entirety of our product portfolio on a global basis. Our experienced and knowledgeable sales force is trained to capture additional share of our customers’ overall spending on specialty steel products. Opportunities to expand business with our customers include capitalizing on new product sales and cross-selling opportunities across all of a customer’s operations in different end-markets and geographies, further penetration of existing customers’ Projects, Drilling programs and MRO supply requirements and leveraging our platform to address our customers’ global needs.

We believe our proven ability to deliver our specialized products to address complex customer needs in a timely fashion differentiates us from our competitors and facilitates our ability to drive additional business with our current customer base.

Grow Business in Select New and Existing Markets. We intend to exploit opportunities for profit and margin expansion within our existing core markets, as well as in new geographies and end-markets. We expect to capitalize on the increasing demand for energy by leveraging our suite of capabilities and reputation as a market leader to drive new customer acquisitions. We plan to achieve this goal in part by selectively enhancing our presence in geographies where significant investments in energy infrastructure are being made. Notably, we believe our specialty product offering positions us well to take advantage of the development of previously underexploited unconventional onshore and deepwater offshore resources. We also plan to expand our presence in new end-markets outside of oil and natural gas that are characterized by difficult operating environments and have similar demand for our technical expertise and highly engineered specialty products.

We also plan to selectively expand our global footprint through our asset-light model in order to maximize our ability to meet evolving customer needs. We believe our platform is highly flexible, as we are able to rapidly address areas of new demand through the addition of satellite offices, representative offices and third party stocking facilities. These means of expansion require minimal capital investment, while enabling us to deliver our full suite of capabilities. We use our asset-light profile to quickly adjust our geographic priorities according to changes in secular demand trends in our target markets.

Continue to Pursue Strategic Acquisitions and Investments. We intend to continue to grow our business through selective acquisitions, joint ventures and other strategic investments. Our proven ability to identify and integrate significant and bolt-on opportunities has been a critical factor in the creation of the existing Edgen

 

 

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Group. Between 2005 and 2009, we executed five acquisitions for a total consideration of approximately $360.0 million. These acquisitions, coupled with the consolidation of B&L which will occur in connection with the Reorganization, have facilitated the growth of Edgen Group from predecessor sales of $322.3 million for the year ended 2005 to pro forma sales of $1.2 billion for the nine months ended September 30, 2011. We apply a strict set of evaluation criteria to ensure that all investments are consistent with our strategic priorities. We anticipate that our investments will expand our product offering, customer base, supplier relationships, and in certain instances, our end-market exposure.

Formation of Edgen Group and the Reorganization

Edgen Group was incorporated in December 2011 in Delaware and is the issuer in this offering. In connection with the completion of this offering:

 

  n  

Edgen Group will become our new parent holding company and will be controlled by Edgen Holdings LLC, or Edgen Holdings, which will control us through its ownership of all of the Class B common stock of Edgen Group. Edgen Holdings, in turn, will be controlled by affiliates of JCP.

 

  n  

Approximately     % of the partnership interests of EM II LP will be owned by JCP and other existing investors in EM II LP, which we refer to collectively as the Continuing Holders, and     % will be owned by Edgen Group. The general partner of EM II LP will become Edgen GP LLC, or New GP, a newly formed limited liability company wholly-owned by Edgen Group.

 

  n  

The Continuing Holders will have a right, which we refer to as the Exchange Right, to exchange their limited partnership units in EM II LP and the shares of Class B common stock of Edgen Group held by Edgen Holdings for cash or, if Edgen Group so elects, Class A common stock of Edgen Group and, in both cases, payments under a tax receivable agreement.

 

  n  

B&L will become wholly owned by EM II LP.

 

  n  

EMGH Limited will become a subsidiary of Edgen Murray Corporation, or EMC.

The holders of limited partnership units of EM II LP will incur U.S. federal, state and local income taxes on their proportionate share of any taxable income of EM II LP. Net profits and net losses of EM II LP will generally be allocated to its limited partners pro rata in accordance with the percentages of their unit ownership. The limited partnership agreement of EM II LP will provide for cash distributions to the holders of limited partnership units of EM II LP if we determine that the taxable income of EM II LP will give rise to taxable income for its limited partners. In accordance with the limited partnership agreement of EM II LP, we intend to cause EM II LP to make cash distributions to the limited partners of EM II LP, including Edgen Group, for purposes of funding their tax obligations in respect of the income of EM II LP that is allocated to them. Generally, these tax distributions will be computed based on our estimate of the taxable income of EM II LP allocable to such limited partner multiplied by an assumed tax rate equal to the highest effective marginal combined U.S. federal, state and local income tax rate prescribed for an individual or corporate resident in New York, New York (taking into account the nondeductibility of certain expenses and the character of our income).

 

 

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The following diagram illustrates our summary organizational structure after the completion of the Reorganization and this offering:

Summary Organizational Structure

LOGO

 

 

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Jefferies & Company, Inc.

Jefferies & Company, Inc. is participating as an underwriter in this offering and will be entitled to underwriting discounts and commissions with respect to the stock purchased by it in this offering. See “Underwriting—Commission and Expenses.” The parent company of Jefferies & Company, Inc. is Jefferies Group, Inc., or Jefferies Group. Mr. Brian P. Friedman, who is a director of Jefferies Group and Chairman of the Executive Committee of Jefferies & Company, Inc., is the President of the general partner of Fund IV and one of the managing members of JCP. Jefferies Group directly or indirectly has made a substantial investment in and has a substantial, non-voting economic interest in JCP and Fund IV and also serves as a lender to one of the funds comprising Fund IV. In addition, Jefferies Group employs and provides office space for JCP’s employees, for which JCP reimburses Jefferies Group on an annual basis. Mr. James L. Luikart is the Executive Vice President of the general partner of Fund IV, one of the managing members of JCP and one of our directors, and Mr. Nicholas Daraviras is a Managing Director of JCP and one of our directors. See “Certain Relationships and Related Person Transactions” and “Underwriting—Affiliations and Conflicts of Interest.”

Risk Factors

An investment in our Class A common stock involves a high degree of risk. You should carefully consider, among other things, the following risks as well as those more fully described in the “Risk Factors” section beginning on page 18 of this prospectus and all of the other information set forth in this prospectus, before deciding to invest in our Class A common stock:

 

  n  

Volatility in the global energy infrastructure market, and, in particular, a significant decline in oil and natural gas prices and refining margins, has in the past reduced, and could in the future reduce, the demand for our products, which could cause our sales and margins to decrease.

 

  n  

The prices we pay and charge for steel products, and the availability of steel products generally, may fluctuate due to a number of factors beyond our control, which could materially and adversely affect the value of our inventory, business, financial condition, results of operations and liquidity.

 

  n  

Our business is sensitive to economic downturns and adverse credit market conditions, which could adversely affect our business, financial condition, results of operations and liquidity.

 

  n  

We may experience unexpected supply shortages.

 

  n  

We maintain an inventory of products for which we do not have firm customer orders. As a result, if prices or sales volumes decline, our profit margins and results of operations could be adversely affected.

 

  n  

Our ten largest customers account for a substantial portion of our sales and profits, and the loss of these customers could result in materially decreased sales and profits.

 

  n  

We rely on our steel suppliers to meet the required specifications for the steel we purchase from them, and we may have unreimbursed losses arising from our suppliers’ failure to meet such specifications.

 

  n  

Loss of key suppliers or reduced product availability could decrease our sales volumes and overall profitability.

 

  n  

Loss of third-party transportation providers upon which we depend or conditions negatively affecting the transportation industry could increase our costs and disrupt our operations.

 

  n  

Our global operations, in particular those in emerging markets, are subject to various risks which could have a material adverse effect on our business, results of operations and financial condition.

 

  n  

Concentration of ownership among our existing executives, directors and principal stockholders may prevent new investors from influencing significant corporate decisions.

 

 

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Company Information

Edgen Group Inc. is incorporated as a Delaware corporation and maintains its principal executive offices at 18444 Highland Road, Baton Rouge, Louisiana 70809. Our telephone number is (225) 756-9868. We maintain a web site at www.            .com. Our web site and the information contained thereon or connected thereto is not incorporated into this prospectus or the registration statement of which this prospectus forms a part and is provided as an inactive textual reference. You should not rely on any such information in making your decision whether to purchase our securities.

Certain Trademarks

This prospectus includes trademarks, such as “Edgen Murray,” “Bourland & Leverich” and the Edgen Group logo, which are protected under applicable intellectual property laws and are our property and/or the property of our subsidiaries. This prospectus also contains trademarks, service marks, copyrights and trade names of other companies, which are the property of their respective owners. Solely for convenience, our trademarks and tradenames referred to in this prospectus may appear without the ® or symbols, but such references are not intended to indicate, in any way, that we will not assert, to the fullest extent under applicable law, our rights to these trademarks and tradenames.

 

 

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THE OFFERING

 

Class A common stock offered by us

                     shares.

 

Class A common stock offered by the selling stockholders

                     shares.

 

Class A common stock to be outstanding immediately after this offering

                     shares (assuming no exercise of the underwriters’ over-allotment option).

 

Class B common stock to be outstanding immediately after this offering

                     shares.

Selling Stockholders

See “Principal and Selling Stockholders” for information regarding the selling stockholders who are participating in this offering.

Over-Allotment Option

The selling stockholders have granted to the underwriters an option for a period of 30 days after the date of this prospectus to purchase up to                  additional shares of our common stock to cover over-allotments, if any. The information presented in this prospectus assumes that the underwriters do not exercise their over-allotment option.

Use of Proceeds

We estimate that the net proceeds we will receive from this offering will be approximately $             million, after deducting the estimated underwriting discounts and commissions and the estimated offering fees and expenses payable by us and assuming an initial public offering price of $             per share, which is the mid-point of the price range set forth on the cover page of this prospectus. We intend to use such net proceeds to purchase additional limited partnership interests in EM II LP which will be used to repay certain amounts outstanding under B&L’s term loan and revolving credit facility and a note payable issued to the former owner of B&L Predecessor and to redeem a portion of EMC’s senior secured notes. Jefferies & Company, Inc. is a holder of a portion of EMC’s senior secured notes, and Jefferies Finance LLC, an affiliate of Jefferies & Company, Inc., is the administrative agent and a lender under B&L’s term loan facility. As a result, Jefferies & Company, Inc. and its affiliates will receive approximately $         million of the net proceeds from this offering used to redeem a portion of EMC’s senior secured notes and to repay B&L’s term loan, or more than     % of the net proceeds of this offering. Due to such redemption and repayment, this offering will be conducted in accordance with Rule 5121 of the Financial Industry Regulatory Authority, Inc. This rule requires, among other things, that a “qualified independent underwriter” has participated in the preparation of, and has exercised the usual standards of “due diligence” with respect to, the registration statement and this prospectus.            has agreed to act as qualified independent underwriter for the offering and to undertake the legal responsibilities and liabilities of an underwriter under the Securities Act of 1933, as amended, or the Securities Act, specifically including those inherent in Section 11 of the Securities Act. See “Underwriting—Affiliations and Conflicts of Interest.” We will not receive any of the proceeds from the sale of our shares by the selling stockholders, a group which includes certain of our officers and directors and affiliates of Jefferies & Company, Inc., which is an underwriter in this offering. See “Underwriting—Relationships.”

 

 

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Risk Factors

Investing in our Class A common stock involves a high degree of risk. You should carefully read this entire prospectus, including the more detailed information set forth under the caption “Risk Factors,” the historical consolidated financial statements of our predecessor EM II LP as well as those of B&L and B&L Predecessor, and the related notes thereto, and the unaudited pro forma condensed combined financial information included elsewhere in this prospectus, before investing in our Class A common stock.

Lock-up Agreements

Our directors, executive officers and substantially all of the holders of our outstanding common stock have agreed with the underwriters, subject to limited exceptions, not to sell, transfer or dispose of any of our shares for a period of 180 days after the date of this prospectus. See the information under the caption “Underwriting— No Sales of Similar Securities” for additional information.

Proposed New York Stock Exchange symbol

We have applied to list our Class A common stock on the NYSE under the symbol “EDG.” Our Class A common stock will not be listed on any other exchange or traded on any other automated quotation system. Our Class B common stock will not be listed on any exchange or traded on any automated quotation system.

Shares Outstanding

The number of shares of our common stock to be outstanding following this offering is based on              shares of our common stock outstanding on a pro forma basis after giving effect to the Reorganization, but excludes                  shares of Class A common stock reserved for issuance under our equity incentive plans, of which options to purchase                  shares will be outstanding after the Reorganization at a weighted average exercise price of $             per share and                      shares of Class A common stock reserved for issuance upon the exercise of the Exchange Right by Edgen Holdings and the Continuing Holders.

Unless otherwise stated, information in this prospectus (except for the historical financial statements) assumes:

 

  n  

the completion of the Reorganization;

 

  n  

that our amended and restated certificate of incorporation, which we will file in connection with the completion of this offering, is in effect;

 

  n  

no exercise of any options to acquire shares of our Class A common stock; and

 

  n  

no exercise of the underwriters’ over-allotment option.

 

 

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SUMMARY HISTORICAL CONSOLIDATED AND UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION

The following tables present certain summary historical consolidated financial data and other data of our predecessor EM II LP for each of the years ended December 31, 2010, 2009 and 2008 and for the nine months ended September 30, 2011 and 2010, and certain pro forma combined financial information of Edgen Group for the fiscal year ended December 31, 2010 and the nine months ended September 30, 2011. The data set forth below should be read in conjunction with the sections entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Capitalization,” “Selected Historical Consolidated Financial Data” and “Unaudited Pro Forma Condensed Combined Financial Information,” each of which is contained elsewhere in this prospectus, and the consolidated financial statements of EM II LP, the consolidated financial statements of B&L and the combined financial statements of B&L Predecessor, each of which is contained elsewhere in this prospectus.

The Reorganization will be consummated concurrently with the completion of this offering, and as a result, our future results of operations will include the results of operations of B&L. We have determined that after the Reorganization, EM II LP will be our predecessor and, as a result, have included summary historical consolidated financial data of EM II LP. The summary historical consolidated statement of operations and other financial data of EM II LP for the years ended December 31, 2010, 2009 and 2008 and the nine months ended September 30, 2011 and the summary historical consolidated balance sheet data of EM II LP as of December 31, 2010 and 2009 and as of September 30, 2011 are derived from the audited consolidated financial statements of EM II LP included elsewhere in this prospectus. The summary historical consolidated statement of operations and other financial data of EM II LP for the nine months ended September 30, 2010 are derived from the unaudited consolidated financial statements of EM II LP included elsewhere in this prospectus. The summary historical consolidated balance sheet data of EM II LP as of December 31, 2008 are derived from the audited consolidated financial statements of EM II LP that are not included in this prospectus.

The summary unaudited pro forma financial data have been prepared to give effect to the Reorganization and this offering and the application of net proceeds therefrom as if they occurred on January 1, 2010. Assumptions underlying the pro forma adjustments are described in the section entitled “Unaudited Pro Forma Condensed Combined Financial Information” contained elsewhere in this prospectus. The pro forma adjustments are based upon available information and certain assumptions that we believe are reasonable. Please see “Unaudited Pro Forma Condensed Combined Financial Information — Notes to the Unaudited Pro Forma Condensed Combined Financial Information” for a more detailed discussion of how pro forma adjustments are presented in our unaudited pro forma condensed combined financial information. The summary unaudited pro forma financial data are provided for informational purposes only. The summary unaudited pro forma financial data do not purport to represent what our results of operations actually would have been if the Reorganization and this offering, and the application of the net proceeds therefrom had occurred at any date, nor do such data purport to project the results of operations for any future period.

 

 

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EDGEN GROUP INC.

SUMMARY UNAUDITED PRO FORMA FINANCIAL DATA

 

 

 

     PRO FORMA
NINE MONTHS ENDED
SEPTEMBER 30,
    PRO FORMA
YEAR ENDED
DECEMBER 31,
 
      2011     2010  
     (1)     (1)  

Statement of Operations (in thousands)

    

Sales

   $ 1,199,282      $ 1,255,149   

Gross profit (exclusive of depreciation and amortization)

     155,766        166,632   

Income (loss) from operations

     62,388        (12,738

Net loss

     (3,587     (62,341

BASIC AND DILUTED EARNINGS PER SHARE:

    

Net loss

     (3,587     (62,341

Number of public shares used in denominator

    

Basic and diluted earnings per share—public

    
     PRO FORMA AS OF
SEPTEMBER 30, 2011
       
     (1)        

Balance Sheet Data (in thousands)

    

Cash and cash equivalents

   $       

Working capital

    

Property, plant and equipment—net

    

Total assets

    

Long term debt and capital leases

    

Total deficit

    
     PRO FORMA
NINE MONTHS ENDED
SEPTEMBER 30,
    PRO FORMA
YEAR ENDED
DECEMBER 31,
 
      2011     2010  
     (1)     (1)  

Other Financial Data (in thousands)

    

EBITDA

   $ 91,026      $ 22,910   

Adjusted EBITDA

     91,117        86,268   
     PRO FORMA
NINE MONTHS ENDED
SEPTEMBER 30,
    PRO FORMA
YEAR ENDED
DECEMBER 31,
 
      2011     2010  
     (1)     (1)  

Reconciliation of GAAP pro forma net income (loss) to non-GAAP pro forma EBITDA and non-GAAP pro forma Adjusted EBITDA

    

NET INCOME (LOSS)

   $ (3,587   $ (62,341

Income tax expense (benefit)

     3,315        (22,125

Interest expense—net

     64,517        72,525   

Depreciation and amortization expense

     26,781        34,851   
  

 

 

   

 

 

 

EBITDA

   $ 91,026      $ 22,910   
  

 

 

   

 

 

 

Impairment of goodwill (2)

            62,805   

Equity—based compensation (3)

     1,948        1,350   

Other (income) expense (4)

     (1,857     (797
  

 

 

   

 

 

 

ADJUSTED EBITDA

   $ 91,117      $ 86,268   
  

 

 

   

 

 

 

 

 

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(1) 

The pro forma statement of operations, balance sheet and other financial data give effect to the Reorganization and the issuance of                  shares of our Class A common stock at an issuance price of $         per share, the midpoint of the price range set forth on the cover page of this prospectus. We intend to use the net proceeds from this offering to purchase additional limited partnership interests in EM II LP which will be used by EM II LP to repay certain outstanding indebtedness. For a detailed presentation of this unaudited pro forma statement of operations and balance sheet data, including a description of the transactions and assumptions underlying the pro forma adjustments giving rise to these results, see “Unaudited Pro Forma Condensed Combined Financial Information” elsewhere in this prospectus.

(2) 

The year ended December 31, 2010 includes an impairment charge to goodwill of $62.8 million as a result of the fair value of certain of our predecessor’s reporting units falling below the carrying value.

(3) 

Includes non-cash compensation expense related to the issuance of equity-based awards.

(4) 

Other (income) expense primarily includes unrealized currency exchange gains and losses on cash balances denominated in foreign currencies and other miscellaneous items.

We use EBITDA and Adjusted EBITDA in our business operations to, among other things, evaluate the performance of our operating segments, develop budgets and measure our performance against those budgets, determine employee bonuses and evaluate our cash flows in terms of cash needs. We find these measures to be useful tools to assist us in evaluating financial performance because it eliminates items related to capital structure, taxes and certain non-cash charges. Our non-GAAP financial measures are not considered as alternatives to GAAP measures such as net income, operating income, net cash flows provided by operating activities or any other measure of financial performance calculated and presented in accordance with GAAP. Our non-GAAP financial measures may not be comparable to similarly-titled measures of other companies because they may not calculate such measures in the same manner as we do. We define EBITDA as net income or loss, plus interest expense, provision for income taxes, depreciation, amortization and accretion expense. We define Adjusted EBITDA as net income or loss minus equity earnings from unconsolidated affiliates, plus distributions received from unconsolidated affiliates, interest expense, provision for income taxes, depreciation, amortization and accretion expense, transaction costs, strategic inventory liquidation sales and inventory lower of cost or market adjustments, loss on prepayment of debt, impairment of goodwill, equity based compensation and unrealized foreign currency exchange gains and losses.

EBITDA and Adjusted EBITDA are commonly used as supplemental financial measures by management and external users of our financial statements, such as investors, commercial banks, research analysts and rating agencies, to assess: (1) our financial performance without regard to financing methods, capital structures or historical cost basis and other items that we do not believe are indicative of our core operating performance and (2) our ability to generate cash sufficient to pay interest and support our indebtedness. Since EBITDA and Adjusted EBITDA exclude some, but not all, items that affect net income or loss and because these measures may vary among other companies, the EBITDA and Adjusted EBITDA data presented in this prospectus may not be comparable to similarly titled measures of other companies. The GAAP measure most directly comparable to EBITDA and Adjusted EBITDA is net income (loss). The tables set forth above and below provide reconciliations of these non-GAAP financial measure to their most directly comparable financial measure calculated and presented in accordance with GAAP.

 

 

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EDGEN MURRAY II, L.P. (OUR PREDECESSOR)

SUMMARY FINANCIAL DATA

 

 

 

    YEAR ENDED
DECEMBER 31,
    NINE MONTHS ENDED
SEPTEMBER 30,
 
     2010     2009     2008     2011     2010  

Statement of Operations (in thousands)

         

Sales

  $ 627,713      $ 773,323      $ 1,265,615      $ 652,949      $ 454,418   

Gross profit (exclusive of depreciation and amortization)

    90,906        100,728        267,675        99,897        67,512   

Income (loss) from operations

    (57,424     9,899        154,293        28,584        (60,869

Net income (loss)

    (98,288     (20,889     73,227        (18,149     (87,233
    DECEMBER 31,     SEPTEMBER 30,  
     2010     2009     2008     2011     2010  

Balance Sheet Data (in thousands)

         

Cash and cash equivalents

  $ 62,478      $ 65,733      $ 41,708      $ 11,906      $ 38,650   

Working capital

    216,684        262,745        309,569        212,608        220,517   

Property, plant and equipment—net

    49,287        43,342        42,703        46,263        52,019   

Total assets

    464,020        563,460        742,086        481,762        476,364   

Long term debt and capital leases

    479,811        483,503        518,013        480,184        478,488   

Total deficit

    (131,262     (29,779     (36,539     (148,410     (118,804
    YEAR ENDED
DECEMBER 31,
    NINE MONTHS ENDED
SEPTEMBER 30,
 
     2010     2009     2008     2011     2010  

Other Financial Data (in thousands)

         

EBITDA

  $ (35,936   $ 23,959      $ 175,950      $ 48,573      $ (45,109

Adjusted EBITDA

    26,661        70,564        183,494        45,861        17,586   

Reconciliation of GAAP net income (loss) to non-GAAP EBITDA and non-GAAP Adjusted EBITDA

         

NET INCOME (LOSS)

  $ (98,288   $ (20,889   $ 73,227      $ (18,149   $ (87,233

Income tax expense (benefit)

    (22,125     (22,373     35,124        3,315        (21,086

Interest expense—net

    64,208        47,085        45,040        47,516        48,153   

Depreciation and amortization expense

    20,269        20,136        22,559        15,891        15,057   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

EBITDA

  $ (35,936   $ 23,959      $ 175,950      $ 48,573      $ (45,109
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Strategic inventory liquidation sales (1)

           12,656                        

Lower of cost or market adjustments to inventory (2)

           22,469        4,456                 

Transaction costs (3)

           3,339               364          

Equity in earnings of unconsolidated affiliate (4)

    (1,029                   (2,645     (460

Loss on prepayment of debt (5)

           7,523                        

Impairment of goodwill (6)

    62,805                             62,805   

Equity based compensation (7)

    1,011        2,065        2,186        1,022        593   

Other (income) expense (8)

    (190     (1,447     902        (1,453     (243
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

ADJUSTED EBITDA

  $ 26,661      $ 70,564      $ 183,494      $ 45,861      $ 17,586   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

 

(1) 

The year ended December 31, 2009 includes a loss of $12.7 million due to strategic inventory liquidation (at prices below cost) of inventory primarily related to products for the North American midstream oil and natural gas market.

(2) 

The years ended December 31, 2009 and 2008 include an inventory write-down of $22.5 million and $4.5 million, respectively, related to selling prices falling below our predecessor’s average cost of inventory in some of the markets it served.

(3) 

Transaction costs for the year ended December 31, 2009 includes $3.3 million of accumulated registration costs expensed during the period and $0.4 million for the nine months ended September 30, 2011 associated with this offering.

(4) 

Represents adjustment for the equity in earnings as a result of our predecessor’s 14.5% ownership in B&L.-

 

 

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(5) 

Includes prepayment penalties and the expensing of previously deferred debt issuance costs as a result of the repayment of term loans during the year ended December 31, 2009.

(6) 

The year ended December 31, 2010 includes a goodwill impairment charge of $62.8 million as a result of the fair value of certain of our predecessor’s reporting units falling below the carrying value.

(7)

Includes non-cash compensation expense related to the issuance of equity based awards.

(8) 

Other (income) expense primarily includes unrealized currency exchange gains and losses on cash balances denominated in foreign currencies and other miscellaneous items.

 

 

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RISK FACTORS

An investment in our Class A common stock involves a significant degree of risk, including the risks described below. You should carefully consider the following risk factors and the other information in this prospectus before deciding to invest in our Class A common stock. Any of the following risks could materially and adversely affect our business, financial condition or results of operations. In such case, the trading price of our common stock could decline and you may lose all or part of your original investment.

Risks relating to our business

Volatility in the global energy infrastructure market, and, in particular, a significant decline in oil and natural gas prices and refining margins, has in the past reduced, and could in the future reduce, the demand for our products, which could cause our sales and margins to decrease.

Proceeds from the sale of products to the global energy infrastructure market constitute a significant portion of our sales. As a result, we depend upon the global energy infrastructure market, and in particular the oil and natural gas industry, and upon the ability and willingness of industry participants to make capital expenditures to explore for, develop and produce, transport, process and refine oil and natural gas. The industry’s willingness to make these expenditures depends largely upon the availability of attractive drilling prospects, regulatory requirements and limitations, the prevailing view of future oil and natural gas prices, refinery margins and general economic conditions. As we experienced in 2009, 2010 and continuing into 2011, volatile oil and natural gas prices can lead to variable capital expenditures and infrastructure project spending by industry participants, which in turn can affect the demand for our products. Further sustained decreases in capital expenditures in the oil and natural gas industry could have a material adverse effect on our business, financial condition and results of operations. Many factors affect the supply of and demand for oil and natural gas and refined products, thereby affecting our sales and margins, including:

 

  n  

the level of U.S. and worldwide oil and natural gas production;

 

  n  

the level of U.S. and worldwide supplies of, and demand for, oil, natural gas and refined products;

 

  n  

the discovery rates of new oil and natural gas resources;

 

  n  

the expected cost of delivery of oil, natural gas and refined products;

 

  n  

the availability of attractive oil and natural gas fields for production, which may be affected by governmental action or environmental policy, which may restrict exploration and development prospects;

 

  n  

U.S. and worldwide refinery utilization rates;

 

  n  

the amount of capital available for development and maintenance of infrastructure related to oil, gas and refined products;

 

  n  

changes in the cost or availability of transportation infrastructure and pipeline capacity;

 

  n  

levels of oil and natural gas exploration activity;

 

  n  

national, governmental and other political requirements, including the ability of the Organization of the Petroleum Exporting Countries to set and maintain production levels and pricing;

 

  n  

the impact of political instability, terrorist activities, piracy or armed hostilities involving one or more oil and natural gas producing nations;

 

  n  

pricing and other actions taken by competitors that impact the market;

 

  n  

the failure by industry participants to implement planned capital projects successfully or to realize the benefits expected for those projects;

 

  n  

the cost of, and relative political momentum in respect of, developing alternative energy sources;

 

  n  

U.S. and non-U.S. governmental laws and regulations, especially anti-bribery law enforcement in underdeveloped nations, environmental and safety laws and regulations (including mandated changes in fuel consumption and specifications), trade laws, commodities and derivatives trading regulations and tax policies;

 

  n  

technological advances in the oil and natural gas industry;

 

  n  

natural disasters, including hurricanes, tsunamis, earthquakes and other weather-related events; and

 

  n  

the overall global economic environment.

 

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Oil and natural gas prices and processing and refining margins have been and are expected to remain volatile. This volatility may cause our customers to change their strategies and capital expenditure levels. We are experiencing, have experienced in the past and may experience in the future, significant fluctuations in our business, financial condition and results of operations, based on these changes. In particular, such continued volatility in the oil, natural gas and refined products margins and markets more generally could materially and adversely affect our business, consolidated financial condition, results of operations and liquidity.

The prices we pay and charge for steel products, and the availability of steel products generally, may fluctuate due to a number of factors beyond our control, which could materially and adversely affect the value of our inventory, business, financial condition, results of operations and liquidity.

We purchase large quantities of steel products from our suppliers for distribution to our customers. The steel industry as a whole is cyclical and at times pricing and availability of these products change depending on many factors outside of our control, such as general global economic conditions, competition, consolidation of steel producers, cost and availability of raw materials necessary to produce steel (such as iron ore, coking coal and steel scrap), production levels, labor costs, freight and shipping costs, natural disasters, political instability, import duties, tariffs and other trade restrictions, currency fluctuations and surcharges imposed by our suppliers.

We seek to maintain our profit margins by attempting to increase the prices we charge for our products in response to increases in the prices we pay for them. However, demand for our products, the actions of our competitors, our contracts with certain of our customers and other factors largely out of our control will influence whether, and to what extent, we can pass any such steel cost increases and surcharges on to our customers. We may be unable to pass increased supply costs on to our customers because a portion of our sales are derived from stocking program arrangements, contracts and MRO arrangements which provide certain customers time limited price protection, which may obligate us to sell products at a set price for a specific period or because of general competitive conditions. If we are unable to pass on higher costs and surcharges to our customers, or if we are unable to do so in a timely manner, our business, financial condition, results of operations and liquidity could be materially and adversely affected.

Alternatively, if the price of steel decreases significantly or if demand for our products decreases because of increased customer, manufacturer or distributor inventory levels of specialty steel pipe, pipe components, high yield structural steel products and valves, we may be required to reduce the prices we charge for our products to remain competitive. These factors may affect our gross profit and cash flow and may also require us to write-down the value of inventory on hand that we purchased prior to the steel price decreases, which could materially and adversely affect our business, financial condition, results of operations and liquidity. For example, on a pro forma basis, we had inventory write-downs of $0.3 million and $61.7 million for the years ended December 31, 2010 and 2009, respectively, related to selling prices falling below the average cost of inventory in some of the markets we serve, including the U.S. and the Middle East. Although neither our predecessor nor B&L had any inventory write-downs during the nine months ended September 30, 2011, there can be no assurances such write-downs will not occur in the future.

Our business could also be negatively impacted by the importation of lower-cost specialty steel products into the U.S. market. An increase in the level of imported lower-cost products could adversely affect our business to the extent that we then have higher-cost products in inventory or if prices and margins are driven down by increased supplies of such products. These events could also have a material adverse effect on our profit margins and results of operations. These risks may be heightened if recently imposed tariffs on certain imported competing products and OCTG are reduced, eliminated or allowed to expire.

In addition, the domestic metals production industry has experienced consolidation in recent years. Further consolidation could result in a decrease in the number of our major suppliers or a decrease in the number of alternative supply sources available to us, which could make it more likely that termination of one or more of our relationships with major suppliers would result in a material adverse effect on our business, financial condition, results of operations or cash flows. Consolidation could also result in price increases for the products that we purchase. Such price increases could have a material adverse effect on our business, financial condition, results of operations or cash flows if we were not able to pass these price increases on to our customers.

 

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We may experience unexpected supply shortages.

We distribute products from a wide variety of vendors and suppliers. In the future we may have difficulty obtaining the products we need from suppliers and manufacturers as a result of unexpected demand or production difficulties. Also, products may not be available to us in quantities sufficient to meet customer demand. Failure to fulfill customer orders in a timely manner could have an adverse effect on our relationships with these customers. Our inability to obtain products from suppliers and manufacturers in sufficient quantities to meet demand could have a material adverse effect on our business, results of operations and financial condition.

We maintain an inventory of products for which we do not have firm customer orders. As a result, if prices or sales volumes decline, our profit margins and results of operations could be adversely affected.

Our profitability, margins and cash flows may be negatively affected if we are unable to sell our inventory in a timely manner. Because we maintain substantial inventories of specialty steel products for which we do not have firm customer orders, there is a risk that we will be unable to sell our existing inventory at the volumes and prices we expect. For example, the value of our inventory could decline if the prices we are able to charge our customers decline. In that case, we may experience reduced margins or losses as we dispose of higher-cost products at reduced market prices. For instance, during the fiscal year ended December 31, 2009, our predecessor incurred losses of $12.7 million due to strategic inventory liquidation (at prices below cost) of inventory related primarily to products for the North American midstream oil and natural gas market. Although neither our predecessor nor B&L incurred significant losses related to inventory liquidation during the nine months ended September 30, 2011, there can be no assurance that such losses will not occur in the future.

Our ten largest customers account for a substantial portion of our sales and profits, and the loss of these customers could result in materially decreased sales and profits.

Our ten largest customers accounted for approximately 35% of our pro forma sales for the nine months ended September 30, 2011. We may lose a customer for any number of reasons, including as a result of a merger or acquisition, the selection of another provider of specialty steel products, business failure or bankruptcy of the customer, or dissatisfaction with our performance. Consistent with industry practice, we do not have long-term contracts with most of our major customers. Our customers with whom we do not have long-term contracts have the ability to terminate their relationships with us at any time. Moreover, to the extent we have long-term

contracts with our major customers, these contracts generally may be discontinued with 30 days notice by either party, are not exclusive and do not require minimum levels of purchases. Loss of these customers could adversely affect our business, results of operations and cash flow.

Our business is sensitive to economic downturns and adverse credit market conditions, which could adversely affect our business, financial condition, results of operations and liquidity.

Aspects of our business, including demand for and availability of our products, are dependent on, among other things, the state of the global economy and adverse conditions in the global credit markets. Our business has been affected in the past and may be affected in the future by the following:

 

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our customers may reduce or eliminate capital expenditures as a result of reduced demand from their customers;

 

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our customers may not be able to obtain sufficient funding at a reasonable cost or at all as a result of tightening credit markets, which may result in delayed or cancelled projects or maintenance expenditures;

 

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our customers may not be able to pay us in a timely manner, or at all, as a result of declines in their cash flows or available credit;

 

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we may experience supply shortages for certain products if our suppliers reduce production as a result of reduced demand for their products or as a result of limitations on their ability to access credit for their operations;

 

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we may experience tighter credit terms from our suppliers, which could increase our working capital needs and potentially reduce our liquidity; and

 

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the value of our inventory could decline if the sales prices we are able to charge our customers decline.

As a result of these and other effects, economic downturns such as the one we recently experienced have, and could in the future, materially and adversely affect our business, financial condition, results of operations and liquidity.

 

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In addition, market disruptions, such as the recent global economic recession, could adversely affect the creditworthiness of lenders under our debt facilities. Any reduced credit availability under our revolving credit facilities could require us to seek other forms of liquidity through financing in the future and the availability of such financing will depend on market conditions prevailing at that time.

We rely on our suppliers to meet the required specifications for the products we purchase from them, and we may have unreimbursed losses arising from our suppliers’ failure to meet such specifications.

We rely on our suppliers to provide mill certifications that attest to the specifications and physical and chemical properties of the steel products that we purchase from them for resale. We generally do not undertake independent testing of any such steel but rely on our customers or assigned third-party inspection services to notify us of any products that do not conform to the specifications certified by the mill or equipment fabricators. We may be subject to customer claims and other damages if products purchased from our suppliers are deemed to not meet customer specifications. These damages could exceed any amounts that we are able to recover from our suppliers or under our insurance policies. Failure to provide products that meet our customer’s specifications would adversely affect our relationship with such customer, which could negatively impact our business and results of operations.

Loss of key suppliers could decrease our sales volumes and overall profitability.

For the nine months ended September 30, 2011, our ten largest suppliers accounted for approximately 66% of our pro forma purchases and our single largest supplier accounted for approximately 26% of our pro forma purchases. Consistent with industry practice, we do not have long-term contracts with most of our suppliers. Therefore, most of our suppliers have the ability to terminate their relationships with us or reduce their planned allocations of product to us at any time. The loss of any of these suppliers due to merger or acquisition, business failure, bankruptcy or other reason could put us at a competitive disadvantage by decreasing the availability or increasing the prices, or both, of products we distribute, which in turn could result in a decrease in our sales volumes and overall profitability.

Loss of third-party transportation providers upon which we depend, failure of such third-party transportation providers to deliver high quality service or conditions negatively affecting the transportation industry could increase our costs and disrupt our operations.

We depend upon third-party transportation providers for delivery of products to our customers. Shortages of transportation vessels, transportation disruptions or other adverse conditions in the transportation industry due to shortages of truck drivers, strikes, slowdowns, piracy, terrorism, disruptions in rail service, closures of shipping routes, unavailability of ports and port service for other reasons, increases in fuel prices and adverse weather conditions could increase our costs and disrupt our operations and our ability to deliver products to our customers on a timely basis. We cannot predict whether or to what extent any of these factors would affect our costs or otherwise harm our business. In addition, the failure of our third-party transportation providers to provide high quality customer service when delivering product to our customers would adversely affect our reputation and our relationship with our customers and could negatively impact our business and results of operations.

Significant competition from a number of companies could reduce our market share and have an adverse effect on our selling prices, sales volumes and results of operations.

We operate in a highly competitive industry and compete against a number of other market participants, some of which have significantly greater financial, technological and marketing resources than we do. We compete primarily on the basis of pricing, availability of specialty products and customer service. We may be unable to compete successfully with respect to these or other competitive factors. If we fail to compete effectively, we could lose market share to our competitors. Moreover, our competitors’ actions could have an adverse effect on our selling prices and sales volume. To compete for customers, we may elect to lower selling prices or offer increased services at a higher cost to us, each of which could reduce our sales, margins and earnings. There can be no assurance that we will be able to compete successfully in the future, and our failure to do so could adversely affect our business, results of operations and financial condition.

Loss of key management or sales and customer service personnel could harm our business.

Our future success depends to a significant extent on the skills, experience and efforts of management. While we have not experienced problems in the past attracting and retaining members of our management team, the loss of any or all of these individuals could materially and adversely affect our business. We do not carry key-man life

 

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insurance on any member of management other than a policy inherited by us for our Chief Operating Officer, Craig S. Kiefer. We must continue to develop and retain a core group of individuals if we are to realize our goal of continued expansion and growth. We cannot assure you that we will be able to do so in the future.

Because of the specialized nature of our products and services, generally only highly qualified and trained sales and customer service personnel have the necessary skills to market our products and provide product support to our customers. Such employees develop relationships with our customers that could be damaged or lost if these employees are not retained. We face intense competition for the hiring of these professionals. Any failure on our part to hire, train and retain a sufficient number of qualified sales and customer service personnel could materially and adversely affect our business. In particular, our efforts to continue expansion internationally will be dependent on our ability to continue to hire and train a skilled and knowledgeable sales force to attract customers in these markets. In addition, a significant increase in the wages paid by competing employers could result in a reduction of our skilled labor force, increases in the wage rates that we must pay, or both. The actual occurrence of any of these events could appreciably increase our cost structure and, as a result, materially impair our growth potential and our results of operations.

The development of alternatives to steel product distributors in the supply chain in the industries in which we operate could cause a decrease in our sales and results of operations and limit our ability to grow our business.

If our customers were to acquire or develop the capability and desire to purchase products directly from our suppliers in a competitive fashion, it would likely reduce our sales volume and overall profitability. Our suppliers also could expand their own local sales forces, marketing capabilities and inventory stocking capabilities and sell more products directly to our customers. Likewise, customers could purchase from our suppliers directly in situations where large orders are being placed and where inventory and logistics support planning are not necessary in connection with the delivery of the products. These and other actions that remove us from, limit our role in, or reduce the value that our services provide in the distribution chain could materially and adversely affect our business, financial condition and results of operations.

Our customers that are pursuing unconventional or offshore oil and natural gas resources, or that are using new drilling and extraction technologies, such as horizontal drilling and hydraulic fracturing, could face regulatory, political and economic challenges that may result in increased costs and additional operating restrictions or delays as well as adversely affect our business and operating results.

The pursuit of unconventional oil and natural gas resources, the expansion of offshore drilling and exploration, as well as new drilling and extraction technologies, including hydraulic fracturing and horizontal drilling, have received significant regulatory and political focus. Hydraulic fracturing is an essential technology for the development and production of unconventional oil and natural gas resources. The hydraulic fracturing process in the U.S. is typically subject to state and local regulation, and has been exempt from federal regulation since 2005 pursuant to the federal Safe Drinking Water Act (except when the fracturing fluids or propping agents contain diesel fuels). Public concerns have been raised regarding the potential impact of hydraulic fracturing on drinking water. Two companion bills, known collectively as the Fracturing Responsibility and Awareness of Chemicals Act, or FRAC Act, have been introduced before the U.S. Congress that would repeal the Safe Drinking Water Act exemption and otherwise restrict hydraulic fracturing. If enacted, the FRAC Act could result in additional regulatory burdens such as permitting, construction, financial assurance, monitoring, recordkeeping and plugging and abandonment requirements. The FRAC Act also proposes requiring the disclosure of chemical constituents used in the hydraulic fracturing process to state or federal regulatory authorities, who would then make such information publicly available. Several states have enacted similar chemical disclosure regulations. The availability of this information could make it easier for third parties to initiate legal proceedings based on allegations that specific chemicals used in the hydraulic fracturing process could adversely affect groundwater.

The United States Environmental Protection Agency, or the EPA, is conducting a comprehensive study of the potential environmental impacts of hydraulic fracturing activities, and a committee of the House of Representatives is also conducting an investigation of hydraulic fracturing practices. In August and November 2011, the United States Department of Energy Shale Gas Subcommittee, or DOE, issued two reports on measures that can be taken to reduce the potential environmental impacts of shale gas production. The results of the DOE and EPA studies and House investigation could lead to restrictions on hydraulic fracturing. The EPA is currently working on new interpretive guidance for Safe Drinking Water Act permits that would be required with respect to the oil and natural

 

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gas wells that use fracturing fluids or propping agents containing diesel fuels. The EPA has proposed regulations under the federal Clean Air Act in July 2011 regarding certain criteria and hazardous air pollutant emissions from the hydraulic fracturing of oil and natural gas wells and, in October 2011, announced its intention to propose regulations by 2014 under the federal Clean Water Act to regulate wastewater discharges from hydraulic fracturing and other gas production. In addition, various state and local governments, as well as the United States Department of Interior and certain river basin commissions have taken steps to increase regulatory oversight of hydraulic fracturing through additional permit requirements, operational restrictions, disclosure obligations and temporary or permanent bans on hydraulic fracturing in certain local jurisdictions or in environmentally sensitive areas such as watersheds. Any future federal, state or local laws or regulations imposing reporting obligations on, or otherwise limiting, the hydraulic fracturing process could make it more difficult to complete oil and natural gas wells in certain formations. Any decrease in drilling activity resulting from the increased regulatory restrictions and costs associated with hydraulic fracturing, or any permanent, temporary or regional prohibition of the uses of this technology, could adversely affect demand for our products and our results of operations.

In addition to regulatory challenges facing hydraulic fracturing, the process of extracting hydrocarbons from shale formations requires access to water, chemicals and proppants. If any of these necessary components of the fracturing process is in short supply in a particular operating area or in general, the pace of drilling could be slowed, which could reduce demand for the products we distribute.

Another source of oil and natural gas resources facing increased regulation is offshore drilling and exploration. The April 2010 Deepwater Horizon accident in the Gulf of Mexico and its aftermath resulted in increased public scrutiny, including a moratorium on offshore drilling in the U.S. While the moratorium has been lifted, there has been a delay in resuming operations related to drilling offshore in areas impacted by the moratorium and we cannot assure you that operations related to drilling offshore in such areas will reach the same levels that existed prior to the moratorium or that a future moratorium may not arise. In addition, this event has resulted in new and proposed legislation and regulation in the U.S. of the offshore oil and natural gas industry, which may result in substantial increases in costs or delays in drilling or other operations in U.S. waters, oil and natural gas projects potentially becoming less economically viable and reduced demand for our products and services. Other countries in which we operate may also consider moratoriums or increase regulation with respect to offshore drilling. If future moratoriums or increased regulations on offshore drilling or contracting services operations arose in the U.S. or other countries, our customers could be required to cease their offshore drilling activities or face higher operating costs in those areas. These events and any other regulatory and political challenges with respect to unconventional oil and natural gas resources and new drilling and extraction technologies could reduce demand for our products and services and materially and adversely affect our business and operating results.

Changes in the payment terms we receive from our suppliers could have a material adverse effect on our liquidity.

The payment terms we receive from our suppliers are dependent on several factors, including, but not limited to, our payment history with the supplier, the supplier’s credit granting policies, contractual provisions, our credit profile, industry conditions, global economic conditions, our recent operating results, financial position and cash flows and the supplier’s ability to obtain credit insurance on amounts that we owe them. Adverse changes in any of these factors, certain of which may not be wholly in our control, may induce our suppliers to shorten the payment terms of their invoices. For example, as a result of the worldwide economic recession and its impact on steel demand and prices, some of our suppliers have experienced a reduction in trade credit insurance available to them for sales to foreign accounts. This reduction in trade credit insurance has resulted in certain suppliers reducing the available credit they grant to us and/or requiring other forms of credit support, including letters of credit and payment guarantees under the revolving credit facility available to EMC and certain of EM II LP’s non-U.S. subsidiaries, which we refer to as the EM revolving credit facility. Providing this credit support decreases availability under this revolving credit facility. Since we incur costs for trade finance instruments under our revolving credit facilities, this trend has increased our borrowing costs, although not significantly. Given the large amounts and volume of our purchases from suppliers, a change in payment terms may have a material adverse effect on our liquidity and our ability to make payments to our suppliers, and consequently may have a material adverse effect on our business, results of operations and financial condition.

 

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We are a holding company with no revenue generating operations of our own. We depend on the performance of our subsidiaries and their ability to make distributions to us.

We are a holding company with no business operations, sources of income or assets of our own other than our ownership interests in our subsidiaries. Because all of our operations are conducted by our subsidiaries, our cash flow and our ability to repay debt that we currently have and that we may incur after this offering and our ability to pay dividends to our stockholders are dependent upon cash dividends and distributions or other transfers from our subsidiaries. Payment of dividends, distributions, loans or advances by our subsidiaries to us are subject to restrictions imposed by our revolving credit agreements and the indenture governing EMC’s senior secured notes. Our revolving credit agreements also limit our ability to allocate cash flow or resources among certain subsidiaries. See “Management’s Discussion and Analysis of Financial Conditions and Results of Operations—Liquidity and Capital Resources—Debt.” In addition, payments or distributions from our subsidiaries could be subject to restrictions on dividends or repatriation of earnings, monetary transfer restrictions and foreign currency exchange regulations in the jurisdictions in which our subsidiaries operate. In particular, EMGH Limited, our principal U.K. subsidiary, may under English law only pay dividends out of distributable profits.

Our subsidiaries are separate and distinct legal entities. Any right that we have to receive any assets of or distributions from any of our subsidiaries upon the bankruptcy, dissolution, liquidation or reorganization of any such subsidiary, or to realize proceeds from the sale of their assets, will be junior to the claims of that subsidiary’s creditors, including trade creditors and holders of debt issued by that subsidiary.

Risks generally associated with acquisitions, including identifying and integrating future acquisitions, could adversely affect our growth strategy.

A key element of our growth strategy has been, and is expected to be, the pursuit of acquisitions of other businesses that either expand or complement our global platform. However, we cannot assure you that we will be able to consummate future acquisitions because of uncertainty in respect of competition for such acquisitions or, availability of financial resources or regulatory approval, amongst other reasons. Additionally, we cannot assure you that we will be able to identify additional acquisitions or that we would realize any anticipated benefits from such acquisitions. Integrating businesses involves a number of risks, including the possibility that management may be distracted from regular business concerns by the need to integrate operations, unforeseen difficulties in integrating operations and systems, problems concerning assimilating and retaining the employees of the acquired business, accounting issues that arise in connection with the acquisition, including amortization of acquired assets, challenges in retaining customers, assumption of known or unknown material liabilities or regulatory non-compliance issues and potentially adverse short-term effects on cash flow or operating results. Acquired businesses may require a greater amount of capital, infrastructure or other spending than we anticipate. In addition, we may incur debt to finance future acquisitions, which could increase our leverage. Further, we may face additional risks to the extent that we make acquisitions of international companies or involving international operations, including, among other things, compliance with foreign regulatory requirements, political risks, difficulties in enforcement of third-party contractual obligations and integration of international operations with our domestic operations. We cannot assure you that we will be successful in consummating future acquisitions on favorable terms, if at all. If we are unable to successfully complete and integrate strategic acquisitions in a timely manner, our growth strategy could be adversely impacted.

Our global operations, in particular those in emerging markets, are subject to various risks which could have a material adverse effect on our business, results of operations and financial condition.

Our business is subject to certain risks associated with doing business globally, particularly in emerging markets. Our sales outside of North America represented approximately 20% of our pro forma sales for the nine months ended September 30, 2011. One of our growth strategies is to pursue opportunities for our business in a variety of geographies outside the U.S., which could be adversely affected by the risks set forth below. Our operations are subject to risks associated with the political, regulatory and economic conditions of the countries in which we operate, such as:

 

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the burden of complying with multiple and possibly conflicting laws and any unexpected changes in regulatory requirements, including those disrupting purchasing and distribution capabilities;

 

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foreign currency exchange controls, import and export restrictions and tariffs, including restrictions promulgated by the Office of Foreign Assets Control of the U.S. Department of the Treasury, and other trade protection regulations and measures;

 

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  n  

political risks, including risks of loss due to civil disturbances, acts of terrorism, acts of war, piracy, guerilla activities and insurrection;

 

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unstable economic, financial and market conditions and increased expenses as a result of inflation, or higher interest rates;

 

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difficulties in enforcement of third-party contractual obligations and collecting receivables through foreign legal systems;

 

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foreign governmental regulations that favor or require the awarding of contracts to local contractors or by regulations requiring foreign contractors to employ citizens of, or purchase supplies from, a particular jurisdiction;

 

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difficulty in staffing and managing international operations and the application of foreign labor regulations;

 

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workforce uncertainty in countries where labor unrest is more common than in the U.S.;

 

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differing local product preferences and product requirements;

 

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fluctuations in currency exchange rates to the extent that our assets or liabilities are denominated in a currency other than the functional currency of the country where we operate;

 

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potentially adverse tax consequences from changes in tax laws, requirements relating to withholding taxes on remittances and other payments by subsidiaries and restrictions on our ability to repatriate dividends from our subsidiaries;

 

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exposure to liabilities under anti-corruption and anti-money laundering laws and regulations, including the U.S. Foreign Corrupt Practices Act, or FCPA, the U.K. Bribery Act 2010 and similar laws and regulations in other jurisdictions; and

 

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enhanced costs associated with complying with increasing governmental regulation of anti-corruption and anti-money laundering.

Any one of these factors could materially adversely affect our sales of products or services to global customers or harm our reputation, which could materially adversely affect our business, results of operations and financial condition.

Exchange rate fluctuations could adversely affect our results of operations and financial position.

In the ordinary course of our business, we enter into purchase and sales commitments that are denominated in currencies that differ from the functional currency used by our operating subsidiaries. Currency exchange rate fluctuations can create volatility in our consolidated financial position, results of operations and/or cash flows. Although we may enter into foreign exchange agreements with financial institutions in order to reduce our exposure to fluctuations in currency exchange rates, these transactions, if entered into, will not eliminate that risk entirely. To the extent that we are unable to match sales received in foreign currencies with expenses paid in the same currency, exchange rate fluctuations could have a negative impact on our consolidated financial position, results of operations and/or cash flows. Additionally, because our consolidated financial results are reported in U.S. dollars, if we generate net sales or earnings within entities whose functional currency is not the U.S. dollar, the translation of such amounts into U.S. dollars can result in an increase or decrease in the amount of our net sales or earnings. With respect to our potential exposure to foreign currency fluctuations and devaluations, for the nine months ended September 30, 2011, approximately 22% of our pro forma 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 decrease in the value of these currencies relative to the U.S. dollar may have a negative impact on our reported sales, net income and cash flows. Any currency controls implemented by local monetary authorities in countries where we currently operate could adversely affect our business, financial condition and results of operations.

Due to the global nature of our business, we could be adversely affected by violations of the FCPA, similar anti-bribery laws in other jurisdictions in which we operate, and various international trade and export laws.

The global nature of our business creates various domestic and local regulatory challenges. FCPA, and similar anti-bribery laws in other jurisdictions generally prohibit U.S.-based companies and their intermediaries from making improper payments to non-U.S. officials for the purpose of obtaining or retaining business. The U.K. Bribery Act 2010 prohibits certain entities from making improper payments to governmental officials and to commercial entities. Our policies mandate compliance with these anti-bribery laws. We operate in many parts of the world that experience corruption by government officials to some degree and, in certain circumstances, compliance with anti-bribery laws may conflict with local customs and practices. Our global operations require us to import and export to and from myriad countries, which geographically stretches our compliance obligations. To help ensure compliance, our anti-

 

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bribery policy and training on a global basis provide our employees with procedures, guidelines and information about anti-bribery obligations and compliance. Further, we require our partners, subcontractors, agents and others who work for us or on our behalf to comply with anti-bribery laws. We also have procedures and controls in place designed to ensure internal and external compliance. However, such anti-bribery policy, training, internal controls and procedures will not always protect us from reckless, criminal, or unintentional acts committed by our employees, agents or other persons associated with us. If we are found to be in violation of the FCPA, the U.K. Bribery Act 2010 or other anti-bribery laws (either due to acts or inadvertence of our employees, or due to the acts or inadvertence of others), we could suffer criminal or civil penalties or other sanctions, which could have a material adverse effect on our business.

Hurricanes or other adverse weather events could negatively affect our local economies or disrupt our operations, which could have an adverse effect on our business or results of operations.

Our geographic market areas in the southeastern U.S. and APAC are susceptible to tropical storms, or, in more severe cases, hurricanes and typhoons, respectively. Such weather events can disrupt our operations or those of our customers or suppliers, result in damage to our properties and negatively affect the local economies in which we operate. Additionally, we may experience communication disruptions with our customers, suppliers and employees. In 2008 and 2005, Hurricanes Gustav, Ike, Katrina and Rita struck the Gulf Coast of Louisiana, Mississippi, Alabama and Texas and caused extensive and catastrophic physical damage to those market areas. As a result of Hurricanes Katrina and Rita, our Louisiana and Texas locations sustained minor physical damage and were closed for a number of days to secure our employees. Our sales order backlog and shipments experienced a temporary decline immediately following the hurricanes.

We cannot predict whether, or to what extent, damage caused by future hurricanes and tropical storms will affect our operations or the economies in those market areas. Such weather events could result in a disruption of our purchasing and distribution capabilities, an interruption of our business that exceeds our insurance coverage, our inability to collect from customers, the inability of our suppliers to provide product, the inability of third-party transportation providers to deliver product and increased operating costs. Our business or results of operations may be adversely affected by these and other negative effects of hurricanes or other adverse weather events.

We rely on our information technology systems to manage numerous aspects of our business and customer and supplier relationships, and a disruption of these systems could adversely affect our business, financial condition and results of operations.

We depend on our information technology, or IT, systems to manage numerous aspects of our business transactions and provide analytical information to management. Our IT systems allow us to efficiently purchase products from our suppliers, provide procurement and logistics services, ship products to our customers on a timely basis, maintain cost-effective operations and provide superior service to our customers. Our IT systems are an essential component of our business and growth strategies, and a disruption to our IT systems could significantly limit our ability to manage and operate our business efficiently. These systems are vulnerable to, among other things, damage and interruption from power loss, including as a result of natural disasters, computer system and network failures, loss of telecommunications services, operator negligence, loss of data, security breaches and computer viruses. Any such disruption could adversely affect our competitive position and thereby our business, financial condition and results of operations.

Our operations and those of our customers are subject to environmental laws and regulations. Liabilities or claims with respect to environmental matters could materially and adversely affect our business.

Our operations and those of our customers are subject to extensive and frequently changing federal, state, local and foreign laws and regulations relating to the protection of human health and the environment, including those limiting the discharge and release of pollutants into the environment and those regulating the transport, use, treatment, storage, disposal and remediation of, and exposure to, hazardous materials, substances and wastes. Failure to comply with environmental laws and regulations may trigger a variety of administrative, civil and criminal enforcement measures, including the assessment of fines and penalties, imposition of remedial requirements and the issuance of orders enjoining future operations or imposing additional compliance requirements on such operations. In addition, certain environmental laws can impose strict, joint and several liability without regard to fault on responsible parties, including past and present owners and operators of sites, related to cleaning up sites at which hazardous wastes or materials were disposed or released even if the disposals or releases were in compliance with applicable law at the time of those actions.

 

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Our customers operate primarily in the upstream, midstream and downstream end-markets for oil and natural gas, each of which is highly regulated due to high level of perceived environmental risk. Liability under environmental laws and regulations could result in cancellation of or reduction in future oil and natural gas related activity. Future events, such as the discovery of currently unknown contamination or other matters, spills caused by future pipeline ruptures, changes in existing environmental laws and regulations or their interpretation and more vigorous enforcement policies by regulatory agencies, may give rise to additional expenditures or liabilities for our operations or those of our customers, which could impair our operations and adversely affect our business and results of operations.

In addition, various current and likely future federal, state, local and foreign laws and regulations could regulate climate change and the emission of greenhouse gases, particularly carbon dioxide and methane. Future climate change regulation could reduce demand for the use of fossil fuels, which could adversely impact the operations of our customers. We cannot predict the impact that such regulation may have, or that climate change may otherwise have, on our business.

Increased regulatory focus on worker safety and health, including pipeline safety, could subject us and our customers to significant liabilities and compliance expenditures.

Companies undertaking oil and natural gas extraction, processing and transmission infrastructure across the upstream, midstream and downstream end-markets are facing increasingly strict safety requirements as they manage and build infrastructure. As a result, our operations and those of our customers are subject to increasingly strict federal, state, local and foreign laws and regulations governing worker safety and employee health, including pipeline safety and exposure to hazardous materials. Future environmental and safety compliance could require the use of more specialized products and higher rates of maintenance, repair and replacement to ensure the integrity of our customers’ facilities. The Pipeline Inspection, Protection, Enforcement and Safety Act has established a regulatory framework that mandates comprehensive testing and replacement programs for transmission lines across the U.S. Pipeline safety is subject to state regulation as well as by the Pipeline and Hazardous Materials Safety Administration of the United States Department of Transportation, which, among other things, regulates natural gas and hazardous liquid pipelines. The Pipeline Safety, Regulatory Certainty and Job Creation Act of 2011 bill that would further enhance federal regulation of pipeline safety passed Congress by unanimous consent in December 2011. From time to time, administrative or judicial proceedings or investigations may be brought by private parties or government agencies, or stricter enforcement could arise, with respect to pipeline safety and employee health matters. Such proceedings or investigations, stricter enforcement or increased regulation of pipeline safety could result in fines or costs or a disruption of our operations and those of our customers, all of which could adversely affect our business and results of operations.

We could be subject to personal injury, property damage, product liability, warranty, environmental and other claims involving allegedly defective products that we distribute.

The products we distribute are often used in potentially hazardous applications that could result in death, personal injury, property damage, environmental damage, loss of production, punitive damages and consequential damages. Actual or claimed defects in the products we distribute may result in our being named as a defendant in lawsuits asserting potentially large claims despite our not having manufactured the products alleged to have been defective. We may offer warranty terms that exceed those of the supplier, or we and the supplier may be financially unable to cover the losses and damages caused by any defective products that it manufactured and we distributed. Finally, the third-party supplier may be in a jurisdiction where it is impossible to enforce our rights to obtain contribution in the event of a claim against us.

We may not have adequate insurance for potential liabilities.

In the ordinary course of business, we may be subject to various product and non-product related claims, laws and administrative proceedings seeking damages or other remedies arising out of our commercial operations. We maintain insurance to cover our potential exposure for most claims and losses. However, our insurance coverage is subject to various exclusions, self-retentions and deductibles, may be inadequate or unavailable to protect us fully, and may be canceled or otherwise terminated by the insurer. Furthermore, we face the following additional risks under our insurance coverage:

 

  n  

we may not be able to continue to obtain insurance coverage on commercially reasonable terms, or at all;

 

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  n  

we may be faced with types of liabilities that are not covered under our insurance policies, such as damages from environmental contamination or terrorist attacks, and that exceed any amounts we may have reserved for such liabilities;

 

  n  

the amount of any liabilities that we may face may exceed our policy limits and any amounts we may have reserved for such liabilities; and

 

  n  

we may incur losses resulting from interruption of our business that may not be fully covered under our insurance policies.

Even a partially uninsured claim of significant size, if successful, could materially and adversely affect our business, financial condition, results of operations and liquidity. However, even if we successfully defend ourselves against any such claim, we could be forced to spend a substantial amount of money in litigation expenses, our management could be required to spend valuable time in the defense against these claims and our reputation could suffer, any of which could harm our business and financial condition.

Our internal controls over financial reporting may not be effective, which could have a significant and adverse effect on our business and reputation.

We are evaluating our internal controls over financial reporting in order to allow management to report on the design and operational effectiveness of our internal controls over financial reporting, as required by Section 404 of the Sarbanes-Oxley Act of 2002, as amended, and rules and regulations of the Securities and Exchange Commission, or SEC, thereunder, which we refer to as Section 404. We are in the process of documenting and initiating tests of our internal control procedures in order to satisfy the requirements of Section 404, which requires annual management assessments of the effectiveness of our internal controls over financial reporting. During the course of our testing, we may identify deficiencies which we may not be able to remediate in time to meet the deadline imposed by the Sarbanes-Oxley Act for compliance with the requirements of Section 404. We are required to comply with the requirements of Section 404 for our fiscal year ending December 31, 2013. In addition, if we fail to achieve and maintain the adequacy of our internal controls over financial reporting, as such standards are modified, supplemented or amended from time to time, we may not be able to ensure that we can conclude on an ongoing basis that we have effective internal controls over financial reporting in accordance with Section 404. We cannot be certain as to the timing of completion of our evaluation, testing and any remediation actions or the impact of the same on our operations. If we are not able to implement the requirements of Section 404 in a timely manner or with adequate compliance we may be subject to sanctions or investigation by regulatory authorities, such as the SEC. As a result, there could be a negative reaction in the financial markets due to a loss of confidence in the reliability of our financial statements. In addition, we may be required to incur costs in improving our internal control system and the hiring of additional personnel. Any such action could adversely affect our results of operations.

We may incur asset impairment charges for goodwill and other indefinite lived intangible assets, which would result in lower reported net income (or higher net losses).

Under accounting principles generally accepted in the U.S., we are required to evaluate our goodwill and other indefinite lived intangible assets for impairment at least annually, and additionally whenever a triggering event occurs that indicates the carrying value may not be recoverable.

During 2010, we performed an interim goodwill impairment analysis that indicated the book value of goodwill for our predecessor’s Americas and United Arab Emirates (UAE) reporting units exceeded their estimated fair value. As a result, our predecessor recorded an impairment charge of $62.8 million, which is reflected in its statement of operations for the year ended December 31, 2010. As of September 30, 2011, there was no goodwill balance remaining at our predecessor’s Americas and UAE reporting units after this impairment charge and a total of $22.9 million of goodwill remained in our predecessor’s U.K. and Singapore reporting units. In connection with the performance of the interim goodwill impairment analysis, tradenames and trademarks were also tested for impairment and no impairment was recorded by our predecessor as the fair value of the tradenames and trademarks exceeded their carrying value at the review date. As of September 30, 2011, the book value of tradenames and trademarks on our pro forma balance sheet was $21.5 million and there were no impairment charges recorded by our predecessor or B&L during the nine months ended September 30, 2011.

In assessing the recoverability of our goodwill and other indefinite lived intangible assets, we must make assumptions regarding estimated future cash flows and other factors to determine the fair value of the respective assets. Any

 

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significant changes to any of these assumptions or factors could have a material impact on the results of our goodwill impairment analysis. If goodwill is determined to be impaired for any of our reporting units now or in the future, a non-cash charge would be required. Any such charge would result in lower reported net income (or higher net losses)

Risks related to our existing indebtedness

We may not be able to generate sufficient cash to service all of our indebtedness.

Our ability to make payments on our indebtedness depends on our ability to generate cash in the future. Subsequent to the Reorganization, we expect that EMC’s senior secured notes, our revolving credit facilities and our other outstanding indebtedness will account for significant cash interest expense in fiscal 2012 and subsequent years. Accordingly, we will have to generate significant cash flow from operations solely to meet our debt service requirements. If we do not generate sufficient cash flow to meet our debt service and working capital requirements, we may need to seek additional financing; however, this insufficient cash flow may make it more difficult for us to obtain financing on terms that are acceptable to us, or at all. Furthermore, our equity sponsors have no obligation to provide us with debt or equity financing and we therefore may be unable to generate sufficient cash to service all of our indebtedness.

We may need additional capital in the future and it may not be available on acceptable terms.

We may require additional capital in the future to do the following:

 

  n  

fund our operations;

 

  n  

finance investments in equipment and infrastructure needed to maintain and expand our distribution capabilities;

 

  n  

enhance and expand the range of products and services we offer;

 

  n  

respond to potential strategic opportunities, such as investments, acquisitions and expansion; and

 

  n  

service or refinance our indebtedness.

Because of our high level of outstanding indebtedness, additional financing may not be available on terms favorable to us, or at all. The terms of available financing may restrict our financial and operating flexibility. If adequate funds are not available on acceptable terms, we may be forced to reduce our operations or delay, limit or abandon expansion opportunities. Moreover, even if we are able to continue our operations, the failure to obtain additional financing could adversely affect our ability to compete.

Some of our indebtedness is subject to floating interest rates, which would result in our interest expense increasing if interest rates rise.

Indebtedness under our revolving credit facilities and otherwise is and may be in the future subject to floating interest rates. Changes in economic conditions could result in higher interest rates, thereby increasing our interest expense and reducing funds available for operations or other purposes. Accordingly, we may experience a negative impact on earnings and/or cash flows as a result of interest rate fluctuation. The actual impact would depend on the amount of floating rate debt outstanding, which fluctuates from time to time. As of September 30, 2011, there were $23.3 million of cash borrowings outstanding under B&L’s revolving credit facility, which we refer to as the BL revolving credit facility, and no cash borrowings outstanding under the EM revolving credit facility. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Debt.”

Notwithstanding our current indebtedness levels and restrictive covenants in the agreements governing our indebtedness, we may still be able to incur substantial additional debt, which could exacerbate the risks described above.

We may be able to incur additional debt in the future. Although the agreements governing our existing debt, including the credit agreements for the revolving credit facilities and the indenture governing EMC’s senior secured notes, contain restrictions on our ability to incur indebtedness, those restrictions are subject to a number of exceptions which permit us to incur substantial debt. In addition, if we are able to designate some of our restricted subsidiaries under the indenture governing EMC’s senior secured notes as unrestricted subsidiaries, those unrestricted subsidiaries would be permitted to incur debt outside of the limitations specified in the indenture. Adding new debt to current debt levels or making otherwise restricted payments could intensify the related risks that we and our subsidiaries now face. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Debt.”

 

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Restrictive covenants in the agreements governing our current or future indebtedness could restrict our operating flexibility.

The indenture governing EMC’s senior secured notes and the credit agreements governing our revolving credit facilities contain affirmative and negative covenants that limit our ability and the ability of our subsidiaries to take certain actions. These restrictions may limit our ability to operate our business and may prohibit or limit our ability to enhance our operations or take advantage of potential business opportunities as they arise. The credit agreements governing our revolving credit facilities require us, under certain circumstances, to maintain specified financial ratios including fixed charge coverage ratios and satisfy other financial conditions. Our indenture and the credit agreements governing our revolving credit facilities restrict, among other things, our ability and the ability of certain of our subsidiaries to:

 

  n  

incur or guarantee additional debt and issue preferred stock;

 

  n  

pay dividends or make other distributions, or repurchase capital stock or subordinated debt;

 

  n  

make certain investments and loans;

 

  n  

create liens;

 

  n  

engage in sale and leaseback transactions;

 

  n  

make material changes in the nature or conduct of our business;

 

  n  

create restrictions on the payment of dividends and other amounts to us from our subsidiaries;

 

  n  

enter into agreements restricting the ability of a subsidiary to make or repay loans to, transfer property to, or guarantee indebtedness of, us or any of our subsidiaries;

 

  n  

merge or consolidate with or into other companies;

 

  n  

make capital expenditures;

 

  n  

transfer or sell assets; and

 

  n  

engage in transactions with affiliates.

The breach of any of these covenants by us or the failure by us to meet any of these ratios or conditions could result in a default under any or all of such indebtedness. Furthermore, if we or certain of our subsidiaries experience a specified change of control, a default may occur under the indenture governing EMC’s senior secured notes and the credit agreements governing our revolving credit facilities. If a default occurs under any such indebtedness, all of the outstanding obligations thereunder could become immediately due and payable, which could result in a cross-default under certain of our other outstanding indebtedness and could lead to an acceleration of obligations related to EMC’s senior secured notes and other outstanding indebtedness. Our ability to comply with the provisions of the indenture governing EMC’s senior secured notes, the credit agreements governing our revolving credit facilities and other debt agreements governing other indebtedness we may incur in the future can be affected by events beyond our control and may make it difficult or impossible for us to comply. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Debt.”

Credit availability under our revolving credit facilities is subject to a borrowing base limitation that fluctuates from time to time and is subject to redetermination.

Our credit availability under our revolving credit facilities could decline if the values of our borrowing bases (which are calculated based on a percentage of eligible inventory and eligible trade accounts receivable, as defined in each of the credit agreements governing the EM revolving credit facility and the BL revolving credit facility) decline, the applicable administrative agents impose reserves in their discretion, our utilization under our revolving credit facilities increases, or for other reasons. The value of one or both of our revolving credit facilities’ borrowing bases could decline if the value of their respective eligible inventory or accounts receivable declines due to economic or market conditions, working capital practices, or otherwise. In addition, the administrative agents under the revolving credit facilities are entitled to conduct borrowing base field audits and inventory appraisals at least annually, which may result in a lower borrowing base valuation for one or both of our facilities. If our credit availability is less than our utilization under either of the revolving credit facilities, we would be required to repay borrowings and/or cash collateralize outstanding trade finance instruments sufficient to eliminate the deficit.

Furthermore, full credit availability could be limited by the requirement to maintain the fixed charge coverage ratio at or above 1.10 to 1.00 under the BL revolving credit facility, and, under certain circumstances, 1.25 to 1.00 under the EM revolving credit facility because any additional utilization would increase cash interest expense and, all

 

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else being equal, decrease our fixed charge coverage ratios. The fixed charge coverage ratio under the EM revolving credit facility could be applicable if the aggregate availability falls below certain thresholds. As of the nine months ended September 30, 2011, the fixed charge coverage ratio under the EM revolving credit facility exceeded the required minimum fixed charge coverage ratio of 1.25 to 1.00 and the fixed charge coverage ratio under the BL revolving credit facility exceeded the required minimum fixed charge coverage ratio of 1.10 to 1.00. Although the EM revolving credit facility’s fixed charge coverage ratio covenant was not applicable because EM’s aggregate availability was above the applicable threshold, there can be no assurance that our aggregate availability will not fall below one of the applicable thresholds in the future. Our failure to satisfy the minimum fixed charge coverage ratios under our revolving credit facilities at a time when they are applicable would be an event of default under each of the applicable revolving credit facilities, in which case either of the administrative agents or the requisite lenders may accelerate the maturity of our revolving credit facilities and/or terminate the lending commitments thereunder and which could result in a default under and acceleration of certain of our other indebtedness. Our operations are funded, in part, from borrowings under the revolving credit facilities and are supported with trade finance instruments issued from our revolving credit facilities. If we are unable to continue utilizing the revolving credit facilities and if we cannot obtain alternate credit sources or trade finance support at commercially reasonable rates, or if we are required to repay debt under the revolving credit facilities or any other facility, we may not be able to continue our operations without substantial disruptions, or at all, buy or hold inventory, expand into new markets or take on new projects that require capital expenditures.

Risks relating to our Class A common stock and this offering

Concentration of ownership among our existing executives, directors and principal stockholders may prevent new investors from influencing significant corporate decisions.

After giving effect to the Reorganization and this offering, funds controlled by affiliates of JCP will beneficially own approximately 100% of our outstanding Class B common stock and will hold approximately         % of the voting power of our outstanding capital stock through their control of Edgen Holdings. In addition, assuming the exercise in full of the Exchange Right by all stockholders entitled thereto for shares of Class A common stock, our executives, directors and other existing investors in EM II LP will beneficially own, in the aggregate, approximately         % of our outstanding Class A common stock, and will have the ability to exchange their limited partnership units in EM II LP for              shares of our Class A common stock in the aggregate following the completion of this offering pursuant to the Exchange Right. Furthermore, JCP will be entitled to have a representative attend meetings of our board of directors as a non-voting observer so long as certain ownership thresholds are met. Accordingly, JCP, initially, and, following the exercise of the Exchange Right, our officers, directors and other existing investors in EM II LP will be able to elect all of the members of our board of directors and thereby control our management and affairs, including matters relating to acquisitions, dispositions, borrowings, issuances of common stock or other securities, and the declaration and payment of dividends. In addition, JCP alone, initially, and, following the exercise of the Exchange Right, together with these other existing investors in EM II LP will be able to determine the outcome of all matters requiring stockholder approval and will be able to cause or prevent a change of control of our company or a change in the composition of our board of directors and could preclude any unsolicited acquisition of our company. We cannot assure you that the interests of JCP or these other existing investors in EM II LP will not conflict with your interests. The concentration of ownership could deprive our Class A common stockholders of an opportunity to receive a premium for their shares as part of a sale of our company and might ultimately affect the market price of our Class A common stock. For additional information regarding the share ownership of, and our relationships with, these certain stockholders, you should read the information under the headings “Principal and Selling Stockholders” and “Certain Relationships and Related Person Transactions.”

No public market existed for our Class A common stock prior to the offering and there can be no assurance that an active trading market will develop for the Class A common stock on the NYSE.

Prior to this offering, there has been no public market for our Class A common stock, and you could not buy or sell the Class A common stock publicly. We have applied to have the Class A common stock quoted on the NYSE. There can be no assurance that an active trading market will develop for our Class A common stock on the NYSE. The absence of an active trading market on the NYSE could adversely affect the market price of our Class A common stock. The underwriters will determine the offer price by negotiation, and this price may not be the price at which the shares offered hereby will trade due to the fact that the offer price may be based on factors that may not be indicative of future performance.

 

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Market volatility may cause the price of our Class A common stock and the value of your investment to decline, and you may not be able to resell your Class A common stock at or above the initial public offering price.

Our share price is likely to be volatile. The initial public offering price may not be indicative of prices that will subsequently prevail in the market. Therefore, if you purchase shares of Class A common stock in this offering, you may not be able to resell your shares at or above the initial public offering price. In addition to other risk factors described in this section, the following factors may have a significant impact on the market price of our Class A common stock:

 

  n  

our operating and financial performance and prospects;

 

  n  

our quarterly or annual earnings or those of other companies in our industry;

 

  n  

the public’s reaction to our press releases, our other public announcements and our filings with the SEC;

 

  n  

changes in, or failure to meet, earnings estimates or recommendations by research analysts who track our Class A common stock or the stock of other companies in our industry;

 

  n  

the failure of research analysts to cover our Class A common stock;

 

  n  

strategic actions by us, our customers or our competitors, such as acquisitions or restructurings;

 

  n  

new laws or regulations or new interpretations of existing laws or regulations applicable to our business;

 

  n  

changes in accounting standards, policies, guidance, interpretations or principles;

 

  n  

material litigations or government investigations;

 

  n  

changes in general conditions in the U.S. and global economies or financial markets, including those resulting from war, incidents of terrorism or responses to such events;

 

  n  

changes in the oil and natural gas industry and other markets in which we operate;

 

  n  

adverse events with respect to our customers and suppliers or our relationships with them;

 

  n  

our inability to implement our business plan and execute our growth strategies;

 

  n  

our failure to pay our indebtedness when it becomes due or other defaults under our debt agreements;

 

  n  

issuances of debt securities or restructuring of our indebtedness;

 

  n  

changes in key personnel;

 

  n  

sales of common stock by us or members of our management team;

 

  n  

termination of lock-up agreements with our management team and principal stockholders;

 

  n  

the granting or exercise of employee stock options;

 

  n  

volume of trading in our common stock;

 

  n  

the realization of any risks described under “Risk Factors;” and

 

  n  

other events or factors, many of which are beyond our control.

In addition, in the past two years, the stock market has experienced significant price and volume fluctuations. This volatility has had a significant impact on the market price of securities issued by many companies, including companies in our industry. The changes frequently appear to occur without regard to the operating performance of the affected companies. Hence, the price of our Class A common stock could fluctuate based upon factors that have little or nothing to do with our company, and these fluctuations could materially reduce our share price and cause you to lose all or part of your investment. Further, in the past, market fluctuations and price declines in a company’s stock have led to securities class action litigations. If such a suit were to arise, it could have a substantial cost and divert our resources regardless of the outcome.

Investors purchasing our Class A common stock will suffer immediate and substantial dilution.

The initial public offering price for our Class A common stock will be substantially higher than the equivalent net tangible book value per share of our Class A common stock immediately after this offering. If you purchase shares of Class A common stock in this offering, you will incur substantial and immediate dilution in the net tangible book value of your investment. Net tangible book value per share represents the amount of total tangible assets less total liabilities, divided by the number of shares of Class A common stock then outstanding. See “Dilution” for a calculation of the extent to which your investment will be diluted.

 

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Shares of Class A common stock eligible for public sale after this offering could adversely affect the price of our Class A common stock.

The market price for our Class A common stock could decline as a result of sales by our existing stockholders or management of Class A common stock, including shares issuable to such persons as a result of their contractual exchange rights, in the public market after this offering, or the perceptions that these sales could occur. These sales could materially impair our future ability to raise capital through offerings of our Class A common stock. The lock-up agreements relating to our stockholders provide that they may not dispose of shares of Class A common stock for 180 days following the date of this prospectus. For more information on our principal stockholders, their lock-up agreements and their shares of common stock eligible for future sale, see “Principal and Selling Stockholders,” “The Reorganization,” “Shares Eligible for Future Sale” and “Underwriting.”

Future sales and issuances of our Class A common stock or rights to purchase Class A common stock, including pursuant to our equity incentive plans and the Exchange Right, could result in additional dilution of the percentage ownership of our stockholders and could cause our stock price to decline.

We expect that we may need additional capital in the future to execute our business plan. To the extent we raise additional capital by issuing equity securities, our stockholders may experience substantial dilution. We may sell common stock, convertible securities or other equity securities in one or more transactions at prices and in a manner we determine from time to time. If we sell common stock, convertible securities or other equity securities in subsequent transactions, investors may be materially diluted. New investors in such subsequent transactions could gain rights, preferences and privileges senior to those of holders of our common stock, including shares of common stock sold in this offering.

Pursuant to our equity incentive plans, our board of directors is authorized to grant stock options to our employees, directors and consultants. The number of shares available for future grant under our equity incentive plans will be                  as of the completion of this offering and will automatically increase on January 1 of each year starting January 1, 2013 by an amount equal to the lesser of     % of our capital stock outstanding as of December 31 of the preceding calendar year or                  shares, subject to the ability of our board of directors to take action to reduce the size of such increase in any given year. Moreover, pursuant to the Exchange Right, existing EM II LP investors will have the right to acquire                  additional shares of our Class A common stock in the aggregate following the consummation of this offering. Future option grants and issuances of common stock under our equity incentive plans may have an adverse effect on the market price of our common stock.

We do not intend to pay dividends in the foreseeable future.

For the foreseeable future, we intend to retain any earnings to finance the development and expansion of our business, and we do not anticipate paying any cash dividends on our Class A common stock. Under the agreements governing our outstanding indebtedness, we are generally prohibited from paying dividends or distributions on our stock. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Debt” and “Dividend Policy.”

We will incur increased costs as a result of being a public company.

As a public company, we will incur significant legal, accounting and other expenses. The Sarbanes-Oxley Act of 2002 and related rules of the SEC and the NYSE regulate corporate governance practices of public companies. We expect that compliance with these public company requirements will increase our costs and make some activities more time consuming. For example, we will create new board committees and adopt new internal controls and disclosure controls and procedures. In addition, we will incur additional expenses associated with our SEC reporting requirements. We also expect that it could be difficult and will be significantly more expensive to obtain directors’ and officers’ liability insurance, and we may be required to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage. As a result, it may be more difficult for us to attract and retain qualified persons to serve on our board of directors or as officers. Advocacy efforts by stockholders and third parties may also prompt even more changes in governance and reporting requirements. We cannot predict or estimate the amount of additional costs we may incur or the timing of such costs.

 

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Some provisions of our charter documents and Delaware law may have anti-takeover effects that could discourage an acquisition of us by others, even if an acquisition would be beneficial to our stockholders and may prevent attempts by our stockholders to replace or remove our current management.

Provisions in our amended and restated certificate of incorporation and amended and restated bylaws, as well as provisions of Delaware law, could make it more difficult for a third party to acquire us or increase the cost of acquiring us, even if doing so would benefit our stockholders or remove our current management. These provisions include:

 

  n  

authorizing the issuance of “blank check” preferred stock, the terms of which may be established and shares of which may be issued without stockholder approval;

 

  n  

limiting the removal of directors by the stockholders once JCP ceases to beneficially own a majority of our voting power;

 

  n  

creating a staggered board of directors;

 

  n  

prohibiting stockholder action by written consent once JCP ceases to beneficially own a majority of our voting power, thereby requiring all stockholder actions to be taken at a meeting of stockholders;

 

  n  

reflecting two classes of common stock as discussed above;

 

  n  

eliminating the ability of stockholders to call a special meeting of stockholders once JCP ceases to beneficially own a majority of our voting power; and

 

  n  

establishing advance notice requirements for nominations for election to the board of directors or for proposing matters that can be acted upon at stockholder meetings.

These provisions may frustrate or prevent any attempts by our stockholders to replace or remove our current management by making it more difficult for stockholders to replace members of our board of directors, which is responsible for appointing the members of our management. We are also subject to certain anti-takeover provisions under Delaware law which may discourage, delay or prevent someone from acquiring us or merging with us whether or not it is desired by or beneficial to our stockholders. Under Delaware law, a corporation may not, in general, engage in a business combination with any holder of 15% or more of its capital stock unless the holder has held the stock for three years or, among other things, the board of directors has approved the transaction. Any provision of our certificate of incorporation or bylaws or Delaware law that has the effect of delaying or deterring a change in control could limit the opportunity for our stockholders to receive a premium for their shares of our common stock, and could also affect the price that some investors are willing to pay for our common stock.

We will be a “controlled company” within the meaning of the NYSE rules and, as a result, will qualify for and will rely on exemptions from certain corporate governance requirements.

Upon completion of this offering we will be a “controlled company” within the meaning of the NYSE corporate governance standards. Under the NYSE rules, a company of which more than 50% of the voting power for the election of directors is held by a person or group of persons acting together is a “controlled company” and may elect not to comply with certain NYSE corporate governance requirements, including the requirements that:

 

  n  

a majority of the board of directors consist of independent directors;

 

  n  

the nominating and corporate governance committee be composed entirely of independent directors with a written charter addressing the committee’s purpose and responsibilities;

 

  n  

the compensation committee be composed entirely of independent directors with a written charter addressing the committee’s purpose and responsibilities; and

 

  n  

there be an annual performance evaluation of the nominating and corporate governance and compensation committees.

Following this offering, we intend to elect to be treated as a controlled company and utilize these exemptions, including the exemption for a board of directors composed of a majority of independent directors. In addition, although we will have adopted charters for our audit, nominating and corporate governance and compensation committees and intend to conduct annual performance evaluations for these committees, none of these committees will be composed entirely of independent directors immediately following the completion of this offering. We will rely on the phase-in rules of the SEC and the NYSE with respect to the independence of our audit committee. These

 

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rules permit us to have an audit committee that has one member that is independent by the date that our Class A common stock first trades on the NYSE, a majority of members that are independent within 90 days of the effectiveness of the registration statement of which this prospectus forms a part, or the effective date, and all members that are independent within one year of the effective date. Accordingly, you may not have the same protections afforded to stockholders of companies that are subject to all of the NYSE corporate governance requirements.

If securities or industry analysts do not publish research or publish inaccurate or unfavorable research about our business, our stock price and trading volume could decline.

The trading market for our Class A common stock will depend in part on the research and reports that securities or industry analysts publish about us or our business. Securities and industry analysts do not currently, and may never, publish research on our company. If no securities or industry analysts commence coverage of our company, the trading price for our stock would likely be negatively impacted. In the event securities or industry analysts initiate coverage, if one or more of the analysts who cover us downgrade our stock or publish inaccurate or unfavorable research about our business, our stock price would likely decline. If one or more of these analysts cease coverage of our company or fail to publish reports on us regularly, demand for our stock could decrease, which might cause our stock price and trading volume to decline.

The financial statements presented in this prospectus may not give you an accurate indication of what our future results of operations are likely to be.

Because of the Reorganization and this initial public offering, the historical financial statements included in this prospectus may not represent an accurate picture of what our future performance will be. Our limited combined operating history may make it difficult to forecast our future operating results and financial condition. In particular, because of the significance of the Reorganization, the financial statements for periods prior to the Reorganization are not comparable with those after the Reorganization, and the lack of comparable data may make it difficult to evaluate our results of operations and future prospects. Pro forma financial information is presented with respect to the twelve months ended December 31, 2010 and the nine months ended September 30, 2011 that assumes that the Reorganization and the initial public offering closed on January 1, 2010 as opposed to the actual closing date of this offering. However, this pro forma financial information may not give you an accurate indication of what our actual results would have been if the Reorganization and initial public offering had been completed at the beginning of the period presented or of what our future results of operations and financial condition are likely to be.

We will be required to pay the Continuing Holders for most of the benefits relating to any additional tax depreciation or amortization deductions we may claim as a result of the tax basis step-up we receive in connection with this offering and subsequent sales of our Class A common stock.

As described in “The Reorganization,” Edgen Group intends to enter into a tax receivable agreement with the Continuing Holders that will provide for the payment by Edgen Group to the Continuing Holders of         % of the amount of cash savings, if any, in U.S. federal, state and local income tax that we actually realize as a result of increases in tax basis and as a result of certain other tax benefits arising from our entering into the tax receivable agreement and making payments under that agreement.

While the actual amount and timing of payments under the tax receivable agreement will depend upon a number of factors, including the amount and timing of taxable income we generate in the future, the value of our individual assets, the portion of our payments under the tax receivable agreement constituting imputed interest and increases in the tax basis of our assets resulting in payments to the Continuing Holders, we expect that the payments that may be made to the Continuing Holders will be substantial. Assuming no material changes in the relevant tax law and that we earn significant taxable income to realize the full tax benefit of the increased amortization of our assets, we expect that future payments to the Continuing Holders in respect of the tax receivable agreement to aggregate $         million and range from approximately $         million to $         million per year over the next      years. We may need to incur debt to finance payments under the tax receivable agreement to the extent our cash resources are insufficient to meet our obligations under the tax receivable agreement as a result of timing discrepancies or otherwise. Edgen Group will be a holding company and, as such, will be dependent upon distributions from its subsidiaries to pay its taxes, expenses and other costs.

 

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A tax authority may challenge all or part of the tax basis increases discussed above and a court could sustain such a challenge. In that event, we may be required to pay additional taxes and possibly penalties and interest to one or more tax authorities and future payments to the Continuing Holders under the tax receivable agreement would cease or diminish. In addition, the Continuing Holders will not reimburse us for any payments previously made if such basis increases or other benefits were later not allowed. As a result, in such circumstances we could make payments to the Continuing Holders under the tax receivable agreement in excess of our actual cash tax savings.

 

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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This prospectus 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 Reorganization, including the consolidation of B&L with us, 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. Forward-looking statements are subject to known and unknown risks, uncertainties and assumptions that are difficult to predict or quantify. Therefore, actual results could differ materially and adversely from these forward-looking statements as a result of a wide variety of factors, including all the risks discussed in “Risk Factors” and elsewhere in this prospectus. The following factors, among others, could cause our actual results and performance to differ materially from the results and the performance projected in, or implied by, the forward looking statements:

 

  n  

supply, demand, prices and other market conditions for steel and other commodities;

 

  n  

the timing and extent of changes in commodity prices, including the cost of energy and raw materials;

 

  n  

the effects of competition in our business lines;

 

  n  

the condition of the commodities markets generally, which will be affected by interest rates, foreign currency fluctuations and general economic conditions;

 

  n  

the ability of our counterparties to satisfy their financial commitments;

 

  n  

tariffs and other government regulations relating to our products and services;

 

  n  

adverse developments in our relationship with our key employees;

 

  n  

operational factors affecting the ongoing commercial operations of our facilities, including catastrophic weather-related damage, regulatory approvals, permit issues, unscheduled blackouts, outages or repairs, unanticipated changes in fuel costs or availability of fuel emission credits or workforce issues;

 

  n  

our ability to operate our business efficiently, manage capital expenditures and costs (including general and administrative expenses) tightly and generate earnings and cash flow;

 

  n  

our ability to pass through increases in our costs to our customers;

 

  n  

restrictive covenants in our indebtedness that may adversely affect our operational flexibility;

 

  n  

general political conditions and developments in the U.S. and in foreign countries whose affairs affect supply, demand and markets for our products;

 

  n  

conditions in the U.S. and international economies;

 

  n  

our ability to obtain adequate levels of insurance coverage;

 

  n  

future asset impairment charges;

 

  n  

adequate protection of our intellectual property;

 

  n  

the impact of federal, state and local tax rules;

 

  n  

U.S. and non-U.S. governmental regulation, especially environmental and safety laws and regulations;

 

  n  

our ability to retain key employees; and

 

  n  

the costs of being a public company, including Sarbanes-Oxley compliance.

Accordingly, we urge you to read this prospectus completely and with the understanding that actual future results may be materially different from what we plan or expect. In addition, these forward-looking statements present our estimates and assumptions only as of the date of this prospectus. Except for our ongoing obligation to disclose material information as required by federal securities laws, we do not intend to update you concerning any future revisions to any forward-looking statements to reflect events or circumstances occurring after the date of this prospectus.

 

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USE OF PROCEEDS

We estimate that our net proceeds from this offering will be approximately $        million, after deducting the underwriting discounts and commissions and the estimated fees and expenses of this offering (assuming an initial public offering price of $         per share, the midpoint of the price range set forth on the cover page of this prospectus). We will not receive any of the proceeds from the sale of our common stock by the selling stockholders, a group which includes certain of our officers and directors and affiliates of Jefferies & Company, Inc., an underwriter in this offering.

We intend to use all of the net proceeds to us from this offering to purchase additional limited partnership units in our consolidated subsidiary, EM II LP, which will be used by EM II LP to repay certain indebtedness of its consolidated subsidiaries, B&L and EMC. We expect to repay:

 

 

$         of the amount outstanding under B&L’s term loan, which we refer to as the BL term loan. As of September 30, 2011, $118.8 million was outstanding under the BL term loan and the weighted average interest rate paid during the nine months ended September 30, 2011 was 11.0%. The BL term loan matures on August 19, 2015 and is prepayable at any time, subject to the payment of a make-whole prepayment penalty.

 

 

$         of the amount outstanding under the BL revolving credit facility, which matures on August 19, 2014 and on which the weighted average interest rate paid during the nine months ended September 30, 2011 was 4.25%. As of September 30, 2011, $23.3 million was outstanding under the BL revolving credit facility.

 

 

$         of the amount outstanding under the note payable to the former owner of B&L Predecessor, or Seller Note. The Seller Note bears interest at a compounding rate of 8.0% per annum and matures on August 19, 2019. As of September 30, 2011, $50.0 million was outstanding under the Seller Note.

 

 

$         of EMC’s senior secured notes. As of September 30, 2011, the entire $465 million aggregate principal amount of EMC’s senior secured notes was outstanding. Pursuant to the terms of the indenture governing EMC’s senior secured notes, at any time prior to January 15, 2013, EMC may on any one or more occasions redeem up to 35% of the original aggregate principal amount of its notes at a redemption price of 112.25% of the principal amount, plus accrued and unpaid interest to the applicable redemption date, with the net cash proceeds of one or more qualified equity offerings of EMC or a holding company parent of EMC. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Debt.”

We expect to use the remaining estimated net proceeds from this offering for other general corporate purposes, which may include funding of working capital and funding of acquisitions. We have no current commitments or agreements with respect to any acquisitions, and there can be no assurance of whether we will pursue or consummate any acquisition, or if we were to consummate an acquisition, the terms thereof.

Jefferies & Company, Inc. served as an initial purchaser of EMC’s senior secured notes and currently holds approximately $         aggregate principal amount of the notes. Jefferies Finance LLC, an affiliate of Jefferies & Company, Inc., serves as the lead arranger and a lender under the BL term loan. See “Underwriting— Affiliations and Conflicts of Interest.” As a result, Jefferies & Company, Inc. or its affiliates will receive approximately $         million of the net proceeds to us from this offering. As a result, this offering will be conducted in accordance with Rule 5121 of the Financial Industry Regulatory Authority. See “Underwriting—Affiliations and Conflicts of Interest.”

 

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DIVIDEND POLICY

We have not declared or paid any cash dividends on our Class A common stock, although in the future we may do so. Any such future determination relating to our dividend policy will be made at the discretion of our board of directors, subject to Delaware law, and will depend on then existing conditions, including our financial condition, results of operations, contractual restrictions, capital requirements, business prospects and other factors our board of directors may deem relevant.

Our ability to declare and pay dividends is restricted by covenants in our revolving credit agreements and the indenture governing EMC’s senior secured notes. Our ability to declare and pay dividends is also dependent upon cash dividends and distributions or other transfers from our subsidiaries to us because we are a holding company with no business operations, sources of income or assets of our own other than our ownership interests in our subsidiaries. Payment of dividends, distributions, loans or advances by our subsidiaries to us are subject to restrictions imposed by the debt instruments of our subsidiaries. In addition, payments or distributions from our subsidiaries could be subject to restrictions on dividends or repatriation of earnings, monetary transfer restrictions and foreign currency exchange regulations in the jurisdictions in which our subsidiaries operate. See “Risk Factors – Risks related to our existing indebtedness – Restrictive covenants in the agreements governing our current or future indebtedness could restrict our operating flexibility.” As a result, you should not rely on an investment in our Class A common stock if you require dividend income. You will need to sell your Class A common stock to realize a return on your investment, and you may not be able to sell your shares at or above the price you paid for them.

 

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CAPITALIZATION

The following table sets forth our cash and capitalization as of September 30, 2011 on a:

 

  n  

historical basis, with respect to our predecessor, EM II LP;

 

  n  

pro forma basis giving effect to the Reorganization, including the consolidation of B&L and the issuance of                  shares of our Class B common stock to Edgen Holdings; and

 

  n  

pro forma as adjusted basis giving further effect to the issuance of                  shares of our Class A common stock at an issuance price of $         per share, the midpoint of the price range set forth on the cover page of this prospectus, the proceeds of which will be used by us to purchase additional limited partnership units in EM II LP, and used by EM II LP to repay certain outstanding indebtedness of our subsidiaries.

This table is derived from, and should be read together with, the historical consolidated financial statements of EM II LP and our unaudited pro forma condensed combined financial information included elsewhere in this prospectus. You should also read this table in conjunction with “Use of Proceeds,” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included elsewhere in this prospectus.

 

 

 

    AS OF SEPTEMBER 30, 2011  
    PREDECESSOR
ACTUAL
    PRO FORMA
FOR EFFECTS
OF REORGANIZATION 
    PRO FORMA AS
ADJUSTED FOR  FURTHER
EFFECT OF THIS
OFFERING AND USE

OF PROCEEDS 
 
    (in thousands except par value)  

Cash and cash equivalents

  $ 11,906      $ 51      $                
 

 

 

   

 

 

   

 

 

 

EM II LP

     

$465,000 12.25% EMC’s senior secured notes

  $ 461,839      $ 461,839      $                    

$195,000 EM revolving credit facility

                    

$15,000 EM FZE revolving credit facility

                    

Capital Lease

    18,345        18,345     

B&L

     

$125,000 BL term loan

           118,750     

$75,000 BL revolving credit facility

           23,250     

Seller Note

           48,493     

Equity

     

General partner

    1       

Limited partners

    (123,508    

Accumulated other comprehensive loss

    (25,171     (25,171  

Member’s interest

          

Common Stock—Class A, par value $0.0001 per share,              shares authorized; no shares issued and outstanding actual;              shares issued and outstanding pro forma;              shares issued and outstanding pro forma as adjusted for this offering

               

Common Stock—Class B, par value $0.0001 per share,              shares authorized; no shares issued and outstanding actual;              shares issued and outstanding pro forma and pro forma as adjusted for this offering;

     

Additional paid in capital

               

Retained earnings

          

Noncontrolling interest

    268       
 

 

 

   

 

 

   

 

 

 

Total Capitalization

  $ 331,774      $                       $                    
 

 

 

   

 

 

   

 

 

 

 

 

 

 

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DILUTION

If you invest in our Class A common stock, your interest will be diluted immediately to the extent of the difference between the initial public offering price per share of Class A common stock and the pro forma as adjusted net tangible book value per share immediately after this offering. Net tangible book value per share represents the total tangible assets less total liabilities divided by the number of shares of Class A common stock outstanding as of September 30, 2011. The number of shares of common stock outstanding after this offering of              is based on the number of shares outstanding as of September 30, 2011 after giving effect to the Reorganization and the exchange by Edgen Holdings and all Continuing Holders of their EM II LP limited partnership units for              shares in the aggregate of our Class A common stock and excludes                  shares issuable upon exercise of currently outstanding options to purchase our Class A common stock.

As of September 30, 2011, the net tangible book value of our predecessor EM II LP was a deficit of approximately $148.4 million. After giving effect to the Reorganization and the exchange by Edgen Holdings and all Continuing Holders of their EM II LP limited partnership units for              shares in the aggregate of our Class A common stock, our net tangible book value as of September 30, 2011 after giving effect to Reorganization would have been approximately $        million, or $         per share. After giving further effect to the sale by us of approximately              shares in this offering at an assumed public offering price per share of $        (the midpoint of the price range set forth on the cover page of this prospectus) and the application of the expected net proceeds therefrom our pro forma as adjusted net tangible book value as of September 30, 2011 could have been approximately $        , or $        per share. This would represent an immediate increase in net tangible book value of $        per share to existing stockholders and an immediate dilution of $        per share to investors purchasing our Class A common stock in this offering. The following table illustrates this dilution:

 

 

 

     PER SHARE  

Assumed initial public offering price

   $                

Net tangible book value as of September 30, 2011 after giving effect to the Reorganization

   $     

Increase in net tangible book value attributable to this offering

   $     
  

 

 

 

Pro forma as adjusted net tangible book value after giving effect to the Reorganization and this offering

   $     

Dilution per share to new investors

   $     
  

 

 

 

 

 

A $1.00 increase or decrease in the assumed initial public offering price of $        per share would increase or decrease our pro forma as adjusted net tangible book value per share after this offering by $        per share and would increase or decrease the dilution in pro forma as adjusted net tangible book value per share to investors in this offering by $        per share. This calculation assumes that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and reflects the deduction of the estimated underwriting discounts and commissions and estimated fees and expenses of this offering.

The following table shows, on the pro forma as adjusted basis described above as of September 30, 2011, the differences in the number of shares of Class A common stock purchased from us, the total cash consideration paid and the average price per share paid by our existing stockholders and by new investors (assuming an initial public offering price per share of $        per share, which is the midpoint of the price range set forth on the cover page of this prospectus).

 

 

 

     SHARES PURCHASED     TOTAL CONSIDERATION     AVERAGE PRICE
PER SHARE
 
(millions)    NUMBER    PERCENT     AMOUNT    PERCENT    

Existing stockholders

                           $                

New investors

                           $     
  

 

  

 

 

   

 

  

 

 

   

 

 

 

Total

        100        100  
  

 

  

 

 

   

 

  

 

 

   

 

 

 

 

 

 

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If the underwriters exercise their over-allotment option in full, the following will occur:

 

  n  

the pro forma as adjusted percentage of our shares held by existing stockholders will decrease to approximately     % of the total number of pro forma as adjusted shares outstanding immediately after this offering; and

 

  n  

the pro forma as adjusted number of our shares held by investors in this offering will increase to         , or approximately     %, of the total pro forma as adjusted number of shares outstanding immediately after this offering.

The dilution information above is for illustrative purposes only. Our net tangible book value following the completion of this offering is subject to adjustment based on the actual initial public offering price of our shares and other terms of this offering determined at pricing.

 

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SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA

The following tables present certain selected historical consolidated financial data and other data of our predecessor EM II LP, for each of the years ended December 31, 2010, 2009, 2008, 2007 and 2006, and for the nine months ended September 30, 2011 and 2010. The data set forth below should be read in conjunction with the sections entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Capitalization,” and “Unaudited Pro Forma Condensed Combined Financial Information,” each of which is contained elsewhere in this prospectus, and the consolidated financial statements of EM II LP which are contained elsewhere in this prospectus.

The Reorganization will be consummated concurrently with this offering, and as a result, our future results of operations will include the results of operations of B&L. We have determined that after the Reorganization, EM II LP will be our predecessor and have included summary historical consolidated financial data of EM II LP as a result. The summary historical consolidated statement of operations and other financial data of EM II LP for the years ended December 31, 2010, 2009 and 2008 and the nine months ended September 30, 2011 and the summary historical consolidated balance sheet data of EM II LP as of December 31, 2010 and 2009 and as of September 30, 2011 are derived from the audited consolidated financial statements of EM II LP included elsewhere in this prospectus. The summary historical consolidated statement of operations and other financial data of EM II LP for the nine months ended September 30, 2010 are derived from the unaudited consolidated financial statements of EM II LP included elsewhere in this prospectus. The summary historical consolidated statement of operations and other financial data of EM II LP for the years ended December 31, 2007 and 2006 and the historical consolidated balance sheet data of EM II LP as of December 31, 2008, 2007 and 2006 are derived from the audited consolidated financial statements of EM II LP that are not included in this prospectus.

 

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EM II LP (PREDECESSOR)

SELECTED FINANCIAL DATA

 

 

 

     Year ended December 31,     Nine months ended September 30,  
Statement of Operations (in thousands)    2010     2009     2008     2007     2006     2011     2010  

Sales

   $ 627,713      $ 773,323      $ 1,265,615      $ 917,657      $ 686,937      $ 652,949      $ 454,418   

Gross profit (exclusive of deprecation and amortization)

     90,906        100,728        267,675        168,935        138,193        99,897        67,512   

Income (loss) from operations

     (57,424     9,899        154,293        78,055        56,850        28,584        (60,869

Net income (loss)

     (98,288     (20,889     73,227        2,915        23,482        (18,149     (87,233
     December 31,     September 30,  
Balance Sheet data (in thousands)    2010     2009     2008     2007     2006     2011     2010  

Cash and cash equivalents

   $ 62,478      $ 65,733      $ 41,708      $ 48,457      $ 15,858      $ 11,906      $ 38,650   

Working capital

     216,684        262,745        309,569        296,190        189,384        212,608        220,517   

Property, plant, and equipment—net

     49,287        43,342        42,703        43,530        41,116        46,263        52,019   

Total assets

     464,020        563,460        742,086        709,554        545,760        481,762        476,364   

Long term debt and capital leases

     479,811        483,503        518,013        575,856        286,546        480,184        478,488   

Preferred partnership unit interest included in total capital (deficit)

                                 55,067                 

Total capital (deficit)

     (131,262     (29,779     (36,539     (68,486     98,174        (148,410     (118,804
     Year ended December 31,     Nine months ended September 30,  
Other Financial data (in thousands)    2010     2009     2008     2007     2006     2011     2010  

EBITDA

   $ (35,936   $ 23,959      $ 175,950      $ 72,416      $ 91,246      $ 48,573      $ (45,109

Adjusted EBITDA

     26,661        70,564        183,494        109,751        78,643        45,861        17,586   

Reconciliation of GAAP net income (loss) to non-GAAP EBITDA and non- GAAP Adjusted EBITDA

              

NET INCOME (LOSS)

   $ (98,288   $ (20,889   $ 73,227      $ 2,915      $ 23,482      $ (18,149   $ (87,233

Income tax expense (benefit)

     (22,125     (22,373     35,124        (1,370     12,891        3,315        (21,086

Interest expense—net

     64,208        47,085        45,040        48,301        33,822        47,516        48,153   

Depreciation and amortization expense

     20,269        20,136        22,559        22,570        21,051        15,891        15,057   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

EBITDA

   $ (35,936   $ 23,959      $ 175,950      $ 72,416      $ 91,246      $ 48,573      $ (45,109
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Strategic inventory liquidation sales (1)

            12,656                                      

Lower of cost or market adjustments to inventory (2)

            22,469        4,456                               

Transaction costs (3)

            3,339               6,164               364          

Equity in earnings of unconsolidated affiliate (4)

     (1,029                                 (2,645     (460

Loss on prepayment of debt (5)

            7,523               31,385                        

Impairment of goodwill (6)

     62,805                                           62,805   

Equity based compensation (7)

     1,011        2,065        2,186        2,962        742        1,022        593   

Other (income) expense (8)

     (190     (1,447     902        (3,176     (13,345     (1,453     (243
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

ADJUSTED EBITDA

   $ 26,661      $ 70,564      $ 183,494      $ 109,751      $
78,643
  
  $ 45,861      $ 17,586   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

 

(1) The year ended December 31, 2009 includes a loss of $12.7 million due to strategic inventory liquidation (at prices below cost) of non-core inventory primarily related to products for the North American midstream oil and natural gas market.
(2) The years ended December 31, 2009 and 2008 include inventory write-downs of $22.5 million and $4.5 million, respectively, related to selling prices falling below our predecessor’s average cost of inventory in some of the markets it serves
(3) Transaction costs for the years ended December 31, 2007 and 2009 includes $3.7 million and $3.3 million, respectively, of accumulated registration costs expensed during the periods. Transaction costs for the year ended December 31, 2007 also include non-recurring expenses of $2.5 million related to the Recapitalization Transaction.
(4) Represents adjustment for the equity in earnings as a result of our predecessor’s 14.5% ownership in B&L.
(5) Includes prepayment penalties and the expensing of previously deferred debt issuance costs of $7.5 million in 2009 related to the prepayment of our 2007 term loan and $31.4 million in 2007 related to the prepayment of our 2005 senior notes.
(6) The year ended December 31, 2010 includes a goodwill impairment charge of $62.8 million as a result of the fair value of certain of our predecessor’s reporting units falling below the carrying value.
(7) Includes non-cash compensation expense related to the issuance of equity based awards.
(8) Other (income) expense primarily includes unrealized currency exchange gains and losses on cash balances denominated in foreign currencies and other miscellaneous items. For the year ended December 31, 2006 other (income) expense also includes a $13.2 million foreign exchange gain on U.S. denominated debt held at our predecessor’s U.K. subsidiary with a functional currency of U.K. pounds.

 

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UNAUDITED PRO FORMA CONDENSED COMBINED

FINANCIAL INFORMATION

The following unaudited pro forma condensed combined financial information of Edgen Group consists of our unaudited pro forma condensed combined statements of operations for the year ended December 31, 2010 and for the nine months ended September 30, 2011 and the unaudited pro forma condensed combined balance sheet at September 30, 2011.

The information presented for 2011 has been derived from the audited consolidated financial statements of EM II LP and B&L. The information presented for 2010 has been derived from the audited consolidated financial statements of EM II LP and B&L and the combined financial statements of B&L Predecessor, which is the accounting predecessor of B&L. Each of these audited financial statements is set forth elsewhere in this prospectus.

EM II LP is considered to be our predecessor for accounting purposes and its consolidated financial statements are our historical consolidated financial statements for periods prior to this offering. Edgen Group is a holding company that will manage its consolidated subsidiaries, EM II LP and B&L, after the Reorganization, but has no business operations or material assets other than its ownership interest in its subsidiaries.

The unaudited pro forma condensed combined statements of operations for the nine months ended September 30, 2011 and for the year ended December 31, 2010 assume the pro forma transactions noted herein occurred as of January 1, 2010. The unaudited pro forma condensed combined balance sheet presents the financial effects of the pro forma transactions noted herein as if they had occurred on September 30, 2011. The unaudited pro forma condensed combined financial information has been prepared to give effect to the following transactions:

The Reorganization

In connection with this offering, Edgen Group will become our new parent holding company in a transaction we refer to as the “Reorganization.” See Note 1 to this unaudited pro forma condensed combined financial information.

Initial Public Offering and Use of Offering Proceeds

In connection with this offering, we will issue              shares of our Class A common stock at an assumed initial public offering price of $         per share, the midpoint of the price range set forth on the cover page of this prospectus, the proceeds of which will be used by us for the purchase of additional limited partnership units in EM II LP, and used by EM II LP to repay certain outstanding indebtedness of its subsidiaries, EMC and B&L. See Note 1 to this unaudited pro forma condensed combined financial information.

The adjustments were prepared in conformity with Article 11 of Regulation S-X and are based upon currently available information and certain estimates and assumptions management believes provide a reasonable basis for presenting the significant effects of the transactions as contemplated.

The unaudited pro forma condensed combined financial information should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the consolidated financial statements of each of EM II LP, B&L and B&L Predecessor and related notes thereto, each of which is set forth elsewhere in this prospectus. The unaudited pro forma condensed combined financial information is for informational purposes only and is not intended to represent or be indicative of the results of operations or financial position that we would have reported had this offering been completed on the dates indicated and should not be taken as representative of our future consolidated results of operations or financial position.

 

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EDGEN GROUP

UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS

For the Nine Months Ended September 30, 2011

 

 

 

(IN THOUSANDS)    EM II LP
Historical
    B&L
Historical
    Pro Forma
Adjustments
    Edgen Group
Pro Forma
 

SALES

   $ 652,949      $ 546,395      $ (62 )(a)    $ 1,199,282   

OPERATING EXPENSES:

        

Cost of sales (exclusive of depreciation and amortization shown below)

     553,052        490,526        (62 )(a)      1,043,516   

Selling, general and administrative expense, net of service fee income

     55,422        11,539        (364 )(c)      66,597   

Depreciation and amortization expense

     15,891        10,890          26,781   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     624,365        512,955        (426     1,136,894   
  

 

 

   

 

 

   

 

 

   

 

 

 

INCOME FROM OPERATIONS

     28,584        33,440        364        62,388   

OTHER INCOME (EXPENSE):

        

Equity in earnings of unconsolidated affiliate

     2,645               (2,645 )(b)        

Other income—net

     1,453        404          1,857   

Interest expense—net

     (47,516     (17,001                  (g)      (64,517
  

 

 

   

 

 

   

 

 

   

 

 

 

INCOME (LOSS) BEFORE INCOME TAX EXPENSE (BENEFIT)

     (14,834     16,843        (2,281     (272

INCOME TAX EXPENSE (BENEFIT)

     3,315            (j)      3,315   
  

 

 

   

 

 

   

 

 

   

 

 

 

NET INCOME (LOSS)

     (18,149     16,843        (2,281     (3,587

NET INCOME ATTRIBUTABLE TO NON-CONTROLLING INTEREST

     226                       (h)      226   
  

 

 

   

 

 

   

 

 

   

 

 

 

NET INCOME (LOSS) AVAILABLE TO COMMON STOCK

   $ (18,375   $ 16,843      $ (2,281   $ (3,813
  

 

 

   

 

 

   

 

 

   

 

 

 

BASIC AND DILUTED EARNINGS PER SHARE:

        

Net loss

         $ (3,813

Number of public shares used in denominator

                      (i)   

Basic and diluted earnings per share—public

        

 

 

 

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EDGEN GROUP

UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS

For the Year Ended December 31, 2010

 

 

 

(IN THOUSANDS)    EM II LP
HISTORICAL
    B&L HISTORICAL     B&L PREDECESSOR
HISTORICAL
    PRO FORMA
ADJUSTMENTS
    EDGEN GROUP PRO
FORMA
 

SALES

   $ 627,713      $ 239,673      $ 491,617      $ (1,058 )(a)    $ 1,255,149   
           (102,796 )(f)   

OPERATING EXPENSES:

          

Cost of sales (exclusive of depreciation and amortization shown below)

     536,807        212,572        428,902       
(1,058
)(a) 
    1,088,517   
           (88,706 )(f)   

Selling, general and administrative expense, net of service fee income

     65,256        7,039        12,510        (2,533 )(f)      81,714   
           907 (e)   
           (1,465 )(c)   

Depreciation and amortization expense

     20,269        5,274        164        (43 )(f)      34,851   
           9,187 (d)   

Impairment of goodwill

     62,805                        62,805   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     685,137        224,885        441,576        (83,711     1,267,887   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

INCOME (LOSS) FROM OPERATIONS

     (57,424     14,788        50,041        (20,143     (12,738

OTHER INCOME (EXPENSE):

          

Equity in earnings of unconsolidated affiliate

     1,029                      (1,029 )(b)        

Other income—net

     190        161        1,951        (1,505 )(f)      797   

Interest expense—net

     (64,208     (8,456     (1,091     1,230 (f)      (72,525
             (g)   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

INCOME (LOSS) BEFORE INCOME TAX EXPENSE (BENEFIT)

     (120,413     6,493        50,901        (21,447     (84,466

INCOME TAX EXPENSE (BENEFIT)

     (22,125           (j)      (22,125
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

NET INCOME (LOSS)

     (98,288     6,493        50,901        (21,447     (62,341

NET INCOME ATTRIBUTABLE TO NON-CONTROLLING INTEREST

     14              (h)      14   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

NET INCOME (LOSS) AVAILABLE TO COMMON STOCK

   $ (98,302   $ 6,493      $ 50,901      $ (21,447   $ (62,355
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

BASIC AND DILUTED EARNINGS PER SHARE:

          

Net loss

           $ (62,355

Number of public shares used in denominator

             (i)   

Basic and diluted earnings per share—public

          

 

 

 

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EDGEN GROUP

UNAUDITED PRO FORMA CONDENSED BALANCE SHEET

At September 30, 2011

 

 

 

(IN THOUSANDS)   EM II LP
HISTORICAL
    B&L HISTORICAL     PRO FORMA
ADJUSTMENTS
    EDGEN GROUP PRO
FORMA
 

ASSETS

       

CURRENT ASSETS:

       

Cash and cash equivalents

  $ 11,906      $ 51          (i)    $ 11,957   
          (g)   

Accounts receivable

    156,517        48,052          204,569   

Inventory

    179,918        135,118          315,036   

Prepaid expenses and other current assets

    9,137        367        (203 )(a)      9,301   
          (g)   
 

 

 

   

 

 

   

 

 

   

 

 

 
    357,478        183,588        (203     540,863   

PROPERTY, PLANT, AND EQUIPMENT—NET

    46,263        1,151          47,414   

GOODWILL

    23,058                 23,058   

OTHER INTANGIBLE ASSETS—NET

    29,353        150,195          179,548   

OTHER ASSETS

    13,338        9,460          (g)      22,798   

INVESTMENT IN UNCONSOLIDATED AFFILIATE

    12,272               (12,272 )(b)        
 

 

 

   

 

 

   

 

 

   

 

 

 

TOTAL ASSETS

  $ 481,762      $ 344,394      $ (12,475   $ 813,681   
 

 

 

   

 

 

   

 

 

   

 

 

 

LIABILITIES AND CAPITAL (DEFICIT)

       

CURRENT LIABILITIES:

       

Managed cash overdrafts

  $ 2,830      $ 7,175        $ 10,005   

Accounts payable

    109,975        57,657        (203 )(a)      167,429   

Accrued expenses and other current liabilities

    11,838        4,806          16,644   

Income taxes payable

    4,586                 4,586   

Deferred revenue

    2,342                 2,342   

Accrued interest payable

    12,154        562          12,716   

Deferred tax liability—net

    794                 794   

Current portion of long-term debt and capital lease

    351        9,375          (g)      9,726   
 

 

 

   

 

 

   

 

 

   

 

 

 
    144,870        79,575        (203     224,242   

DEFERRED TAX LIABILITY—NET

    4,682                 4,682   

OTHER LONG-TERM LIABILITIES

    787                 787   

LONG-TERM DEBT AND CAPITAL LEASE

    479,833        181,118          (g)      660,951   
 

 

 

   

 

 

   

 

 

   

 

 

 
    630,172        260,693        (203     890,662   
 

 

 

   

 

 

   

 

 

   

 

 

 

COMMITMENTS AND CONTINGENCIES

       

CAPITAL (DEFICIT):

       

General partner

    1        34,912          (i)      34,913   

Limited partners

    (123,508     48,789        (12,272 )(b)      (86,991
          (i)   

Common stock—Class A, par value $0.0001 per share,                  shares authorized;                  shares issued and outstanding pro forma

                    (i)        

Common stock—Class B, par value $0.0001 per share,                  shares authorized; no shares issued and outstanding actual;                 shares issued and outstanding pro forma and pro forma as adjusted for this offering.

          (i)        

Additional paid in capital

                    (i)        

Retained earnings

                           

Accumulated other comprehensive loss

    (25,171                   (25,171

Noncontrolling interest

    268                 (h)      268   
 

 

 

   

 

 

   

 

 

   

 

 

 

Total capital (deficit)

    (148,410     83,701        (12,272     (76,981
 

 

 

   

 

 

   

 

 

   

 

 

 

TOTAL LIABILITIES AND CAPITAL (DEFICIT)

  $ 481,762      $ 344,394      $ (12,475   $ 813,681   
 

 

 

   

 

 

   

 

 

   

 

 

 

 

 

 

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EDGEN GROUP

NOTES TO UNAUDITED PRO FORMA CONDENSED

COMBINED FINANCIAL INFORMATION

1. Basis of Presentation, the Reorganization, Offering, and Use of Proceeds.

The historical financial information is derived from the historical consolidated financial statements of EM II LP, our accounting predecessor, and B&L, and the historical combined financial statements of B&L Predecessor, B&L’s accounting predecessor. The unaudited pro forma condensed combined statements of operations for the nine months ended September 30, 2011 and for the year ended December 31, 2010 assume the pro forma transactions noted herein occurred on January 1, 2010. The unaudited pro forma condensed combined balance sheet presents the financial effects of the pro forma transactions noted herein as if they had occurred on September 30, 2011.

The pro forma financial statements reflect the following significant transactions:

The Reorganization

In connection with this offering, Edgen Group will become the new parent holding company of our predecessor, EM II LP, and B&L, and will be controlled by Edgen Holdings, which will hold all of our Class B common stock. Edgen Holdings, in turn, will be controlled by affiliates of JCP. The limited partnership units of EM II LP will be owned     % by certain existing investors in EM II LP, which we refer to as the Continuing Holders, and     % by Edgen Group. The general partner of EM II LP will become Edgen GP LLC, and will be wholly-owned by Edgen Group. The Continuing Holders will have the right to exchange their limited partnership units in EM II LP and shares of the Class B common stock of Edgen Group held by Edgen Holdings for cash or, if we so elect, the Class A common stock of Edgen Group and, in both cases, payments under a tax receivable agreement. In addition, B&L will become wholly owned by EM II LP and EMGH Limited will become a subsidiary of EMC. These transactions will result in our consolidation of EM II LP and B&L and the recognition of noncontrolling interest for the percentage of EM II LP partnership units that we will not own. This reorganization transaction will be accounted for as a transaction between entities under common control, as the entities involved in the transaction are all under the common control of affiliates of JCP.

Initial Public Offering and Use of Offering Proceeds

Assuming the issuance of                      shares at an assumed initial public offering price of $                     per share, the midpoint of the price range set forth on the cover page of this prospectus, we expect that our net proceeds from the initial public offering of our Class A common stock will be approximately $                     million, after deducting the estimated underwriting discounts and commissions, and the estimated fees and expenses associated with this offering. We intend to use these net proceeds for the purchase of additional limited partnership units in EM II LP, which will be used by EM II LP to repay the following outstanding indebtedness of its subsidiaries, EMC and B&L:

BL term loan. The BL term loan was issued by B&L on August 19, 2010 under a credit agreement and had an outstanding balance of $118.8 million as of September 30, 2011 and matures August 19, 2015. The BL term loan accrues interest at LIBOR, plus 9.0% for LIBOR loans, and prime plus 8.0% for base rate loans and the weighted average interest rate paid on the BL term loan during the nine months ended September 30, 2011 was 11.0%. We will use the proceeds from this offering to repay $                     of the outstanding balance as well as accrued interest of $                     and a prepayment penalty of $                     at September 30, 2011.

BL revolving credit facility. As of September 30, 2011, there was $23.3 million in outstanding cash borrowings under the BL revolving credit facility and there were no outstanding bank guarantees or letters of credit. The BL revolving credit facility matures August 19, 2014 and the weighted average interest rate paid on the BL revolving credit facility during the nine months ended September 30, 2011 was 4.25%. We will use the proceeds from this offering to repay $                     of the outstanding balance as well as accrued interest of $                     at September 30, 2011. There is no prepayment penalty associated with the repayment of this debt.

Seller Note. As of September 30, 2011, there was $50.0 million outstanding under a note payable to the former owner of B&L Predecessor which matures on August 19, 2019 and accrues interest at 8.0% annually. We will use

 

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the proceeds from this offering to repay $             of the principal balance as well as accrued interest of $             at September 30, 2011. There is no prepayment penalty associated with the repayment of the Seller Note.

EMC’s senior secured notes. As of September 30, 2011, we had outstanding $465.0 million of EMC’s senior secured notes which mature January 15, 2015 and accrue interest at 12.25% annually. We will use $             proceeds from this offering to repay $             of aggregate principal and $             accrued interest, and a prepayment penalty of $             as of September 30, 2011.

2. Pro Forma Adjustments and Assumptions.

 

On July 19, 2010, B&L was formed for the purpose of acquiring through its wholly owned subsidiary, Bourland & Leverich Supply Co. LLC, or B&L Supply, certain assets and working capital and other contractual liabilities of B&L Predecessor, which together comprised B&L Predecessor’s oil country tubular goods distribution business. We refer to this transaction as the B&L Acquisition.

The total purchase price of the B&L Acquisition was $278.5 million, which consisted of $220.4 million in cash (including a preliminary working capital adjustment of $18.2 million), a $50.0 million five-year subordinated note payable to the seller of B&L Predecessor, net of discount of $6.3 million, a final working capital adjustment of $13.4 million, and a balance due to B&L Predecessor of $1.0 million. The cash purchase price of $220.4 million, deferred financing costs of $12.0 million, and acquisition costs of $1.2 million were funded through cash proceeds from the issuance of a $125.0 million term loan, $65.0 million from the issuance of Class A Common Units, and $43.6 million in borrowings under the BL revolving credit facility.

The B&L Acquisition closed on August 19, 2010 and acquisition accounting was applied to record the assets and liabilities purchased by B&L at fair value. On this same date, EM II LP, through its wholly owned subsidiary, EMC, invested approximately $10.0 million for a 14.5% equity interest in B&L, that has been accounted for historically by EM II LP under the equity method. As a result of the Reorganization, we will own 100% of the equity interests in B&L and will consolidate the operations of B&L with our own. As this transaction will be accounted for as a reorganization of entities under common control, acquisition accounting will not be applied to the consolidation of B&L, and the assets and liabilities of B&L will be recorded in our accounting records at their carryover basis. Adjustments (a) through (f) below reflect the effects of the consolidation of B&L:

(a) Reflects the elimination of purchases and sales made between EM II LP and B&L and the elimination of non-trade receivables due to EM II LP from B&L for nominal expenditures paid by EM II LP on B&L’s behalf.

(b) Reflects the elimination of EM II LP’s equity in earnings of B&L and the elimination of EM II LP’s equity method investment in B&L.

(c) Reflects the transaction costs of $1.5 million for the year ended December 31, 2010 associated with the B&L Acquisition that are reflected in the historical financial statements of B&L and transaction costs of $0.4 million for the nine months ended September 30, 2011 associated with this offering that are reflected in the historical financial statements of EM II LP. These costs primarily include legal, accounting and valuation professional service fees.

(d) Reflects the incremental depreciation expense incurred as a result of the step up in basis of plant, property, and equipment as a result of the application of acquisition accounting on August 19, 2010, and the incremental amortization expense incurred as a result of the recognition of intangible assets. The pro forma adjustment of $9.2 million reflects such incremental depreciation and amortization expense that would have been incurred from January 1, 2010 through August 19, 2010, the date of the B&L Acquisition.

(e) Reflects the amortization of incremental equity based compensation expense associated with B&L equity awards (restricted units, unit options, and profits interest) that were awarded as part of the B&L Acquisition. The pro forma adjustment of $0.9 million reflects such incremental amortization expense that would have been incurred from January 1, 2010 through August 19, 2010, the date of the B&L Acquisition.

 

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(f) Reflects the removal of amounts related to B&L Predecessor for the period from October 1, 2009 to December 31, 2009 and the removal of amounts related to B&L Predecessor that were not part of the B&L Acquisition. B&L Predecessor’s fiscal year end was September 30, 2010. The amounts presented in the B&L Predecessor Historical column in our unaudited pro forma condensed combined statement of operations for the year ended December 31, 2010 include the period October 1, 2009 to August 19, 2010, the date of the B&L acquisition. Removal of the amounts related to the period from October 1, 2009 to December 31, 2009 is necessary to reflect the historical results of B&L and B&L Predecessor for the year ended December 31, 2010. Additionally, the pro forma adjustments reflect the removal of $1.2 million of interest expense included in B&L Predecessor’s historical financial statements related to a liability not assumed in the B&L Acquisition.

(g) Reflects the pro forma adjustments necessary to reflect the repayment of $             of the BL term loan, $             of the BL revolving credit facility, $             of the Seller Note and $             of EMC’s senior secured notes. In addition to the removal of total debt of $             million (includes accrued interest of $             million) that will be repaid at the time of this offering, the pro forma adjustments also include the removal of $             of interest expense associated with the BL term loan, the BL revolving credit facility, the Seller Note and EMC’s senior secured notes, the write off of any unamortized deferred debt issuance costs of $            , and the prepayment fee of $             and $             associated with early payment of EMC’s senior secured notes and the BL term loan, respectively.

(h) Reflects the pro forma adjustments necessary to present noncontrolling interest and income attributable to noncontrolling interest associated with ownership interest of EM II LP that will not be owned by us.

(i) Reflects the removal of the membership interests of B&L and the general partner and limited partnership units of EM II LP upon the issuance of                  of our shares of Class A common stock at an assumed initial public offering price of $         per share, the midpoint of the price range set forth on the cover page of this prospectus, net of estimated underwriting discounts and commissions, and estimated offering fees and expenses of $         and the issuance of                  of our Class B common stock to Edgen Holdings in connection with the Reorganization.

(j) Reflects the income tax adjustments necessary as a result of the above pro forma adjustments.

 

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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 together with the sections entitled “Summary Historical Consolidated and Unaudited Pro Forma Condensed Combined Financial Information,” “Selected Historical Consolidated Financial Data” and the consolidated financial statements and the notes to those statements included elsewhere in this prospectus. The discussion of the overview of our business, including principal factors affecting our business, and our outlook give effect to the Reorganization whereas the discussion of our financial condition and results of operations of our predecessor do not give effect to the Reorganization. The following discussion also contains forward-looking statements that involve risks and uncertainties. See “Forward-Looking Statements.” For additional information regarding some of the risks and uncertainties that affect our business and the industry in which we operate and that apply to an investment in our common stock, please see “Risk Factors” beginning on page 18.

Overview of Business

General

We are a leading global distributor of specialty products to the energy sector, including highly engineered 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. We also serve power generation, civil construction and mining applications, which have a similar need for our technical expertise in specialized steel and specialty products.

On August 19, 2010, the predecessor business of Bourland & Leverich, a leading distributor of oil country tubular goods was acquired by certain existing limited partners of EM II LP, including funds controlled by affiliates of JCP, and the management of Bourland & Leverich. In connection with this transaction, EMC invested approximately $10.0 million in exchange for a 14.5% ownership stake in B&L, the investment vehicle that carried out the acquisition of Bourland & Leverich. We refer to this transaction as the B&L Acquisition. B&L and our predecessor are under the common control of affiliates of JCP. Our predecessor has historically accounted for this investment under the equity method of accounting, but as a result of the Reorganization described below, we will own 100% of the equity interests in B&L and will consolidate the operations of B&L with our own for accounting purposes.

Our service platform consists of a worldwide network of 24 distribution facilities and 37 sales offices operating in 14 countries on 5 continents. We source and distribute premium quality, highly engineered and mission critical steel components from our global network of more than 800 suppliers. We serve a diversified customer base of over 1,800 customers who rely on our supplier relationships, technical expertise, stocking and logistical support for the timely provision of our products around the world.

We believe that we deliver value to our customers around the world by providing (1) access to a broad range of high quality products from multiple supplier sources; (2) coordination and quality control of logistics, staged delivery, fabrication and additional related services; (3) understanding of supplier pricing, capacity and deliveries; (4) ability to bundle specialized offerings across multiple suppliers to create complete material packages; (5) on-hand inventory of specialty products to reduce our customers’ need to maintain large stocks of replacement product; and (6) capitalization necessary to manage multi-million dollar supply orders.

Prior to the Reorganization, we managed our operations in two geographic markets and reported our results under two reportable segments: Western Hemisphere and Eastern Hemisphere. As a result of the Reorganization, our two reportable segments will now be the E&I Segment and OCTG Segment. See “Factors Affecting Comparability of Future Results and Historical Results—Change in reportable segments.”

Principal factors affecting our business

Our sales are predominantly derived from the sale of specialty steel products which are primarily used by the energy sector for capital expenditures and 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

 

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level of customers’ expenditures generally depends on prevailing views of future supply and demand for oil, natural gas, refined products, electric power, petrochemicals, and mined products. These views are influenced by numerous factors, including:

 

  n  

the level of U.S. and worldwide oil and natural gas production;

 

  n  

the level of U.S. and worldwide supplies of, and demand for, oil, natural gas and refined products;

 

  n  

the discovery rates of new oil and natural gas resources;

 

  n  

the expected cost of delivery of oil, natural gas and refined products;

 

  n  

the availability of attractive oil and natural gas fields for production, which may be affected by governmental action or environmental policy, which may restrict exploration and development prospects;

 

  n  

U.S. and worldwide refinery overcapacity or undercapacity and utilization rates;

 

  n  

the amount of capital available for development and maintenance of oil, gas and refined products infrastructure;

 

  n  

changes in the cost or availability of transportation infrastructure and pipeline capacity;

 

  n  

levels of oil and natural gas exploration activity;

 

  n  

national, governmental and other political requirements, including the ability of the Organization of the Petroleum Exporting Countries to set and maintain production levels and pricing;

 

  n  

the impact of political instability, terrorist activities, piracy or armed hostilities involving one or more oil and natural gas producing nations;

 

  n  

pricing and other actions taken by competitors that impact the market;

 

  n  

the failure by industry participants to implement planned capital projects successfully or to realize the benefits expected for those projects;

 

  n  

the cost of, and relative political momentum in respect of, developing alternative energy sources;

 

  n  

U.S. and non-U.S. governmental regulations, especially environmental and safety laws and regulations (including mandated changes in fuel consumption and specifications), trade laws, commodities and derivatives trading regulations and tax policies;

 

  n  

technological advances in the oil and natural gas industry;

 

  n  

natural disasters, including hurricanes, tsunamis, earthquakes and other weather-related events; and

 

  n  

the overall global economic environment.

Oil and natural gas prices and processing and refining margins have been volatile. This volatility may cause our customers to change their strategies and expenditure levels. As we experienced in 2009 and through most of 2010, volatile oil and natural gas prices led to decreased capital expenditures and infrastructure project spending by industry participants, which in turn affected demand for our products.

Further, we believe that demand for our products is also driven by the proliferation of new drilling and extraction technologies, including horizontal drilling and hydraulic fracturing and global deepwater offshore drilling, because these activities typically require more specialized and greater volumes of steel products. Additionally, companies undertaking oil and natural gas extraction, processing, and transmission infrastructure are facing increasingly stringent safety and environmental regulation. Future compliance with these regulations could require the use of more specialized products and higher rates of maintenance, repair and replacement, which should further increase demand for our products and services, particularly MRO services.

In addition to demand factors, our results of operations are also affected by changes in the cost of the products we supply. Fluctuations in these costs are largely driven by changes in the cost and availability of raw materials used in steel-making, changes in the condition of the general economy, changes in product inventories held by our customers, our suppliers, and other distributors, prevailing steel prices around the world, production levels, and tariffs and other trade restrictions. Our ability to pass on any increases in the cost of steel to our customers will have a direct impact on our profit margins. Alternatively, if the price of steel decreases significantly or if demand for our products decreases because of increased customer, manufacturer, and distributor inventory levels of specialty steel pipe, pipe components, high yield structural steel products and valves, we may be required to reduce the prices we

 

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charge for our products to remain competitive. Any reduction of our prices may affect our gross profit and cash flow. These effects may also require us to write-down the value of inventory on hand that we purchased prior to such steel price decreases. To meet our customers’ needs for an extensive product offering and short delivery times, we will need to continue to maintain adequate inventory levels. Our ability to obtain this inventory will depend, in part, on our relationships with suppliers.

A large part of our growth strategy is to continue expansion globally to capitalize on the increased investment in oil and natural gas exploration and production and related infrastructure around the world. As energy demand increases, particularly outside of North America, the oil and natural gas industry is making significant investments to meet this demand, as many of the international regions experiencing growth in exploration activity lack the pipeline, processing and treatment infrastructure that is necessary to transport oil and natural gas resources to end-markets. We believe we are well positioned to take advantage of this trend, but our success in these efforts will be dependent, in part, on our ability to continue to hire and train a skilled and knowledgeable sales force to attract customers in these markets.

In planning for our business, we continue to monitor the global economy, the availability of capital in the market for our customers, the demand for and prices of oil and natural gas, the active drilling rig count, the price and availability of steel and steel-making materials, lead times at our suppliers, and the impact of these factors on the capital spending plans and operations of our customers. The effects of these items, as well as demand for our products, the actions of our competitors and suppliers, and other factors largely out of our control will influence whether, and to what extent, we will be successful in improving our future gross profit and profit margins.

Revenue sources

We are a leading global distributor of specialty products to the energy sector, including highly engineered steel pipe, valves, quenched and tempered and high yield heavy plate, and related components. We often purchase these products in large quantities that are efficient for our suppliers to produce, and we subsequently resell these products in smaller quantities to meet our customers’ requirements. Additionally, we coordinate the sourcing of complex material requirements related to our customers’ large scale projects that often result in direct shipment of product from the supplier to our customers. Our sales to customers generally fall into the following three categories: (1) Project orders, which relate to our customers’ capital expenditures for various planned projects across the upstream, midstream and downstream end-markets of the energy sector, such as transmission infrastructure build-out and rig construction and refurbishment; (2) Drilling program orders, which relate to the delivery of surface casing and production tubulars for the onshore upstream market; and (3) MRO orders, which typically relate to the replacement of existing products that have reached their service limit, or are being replaced due to regulatory requirements. The gross margin we earn varies depending on the type of products we sell, the location and application in which our products are sold and whether our products are part of a larger Project, Drilling program or MRO order. Generally, we earn higher margins on products associated with offshore exploration and production projects, midstream transmission pipeline projects, and downstream refinery projects. Our gross margins tend to be lower for smaller onshore oil and natural gas gathering pipelines.

We generate substantially all of our sales, net of returns and allowances, from the sale of our products to third parties. We also generate a negligible component of our sales from a range of cutting and finishing services that we coordinate for our customers upon request. Generally, our fees for these services, as well as freight costs, are incorporated into our sales price. Our margins are generally reduced by sales discounts and incentives provided to our customers.

Typically, we sell our products to customers on a purchase order basis. Payments from our customers within North America are generally due within 30 days of the invoice date, while our customers outside of North America may have slightly longer payment terms. There is usually a time lag between the receipt of a purchase order and delivery of our products, particularly for Project orders. While a certain portion of our MRO orders may ship immediately after receipt of a purchase order based on the availability of the product in our inventory, the remaining MRO business and the majority of our Project business is recorded in backlog until the product is delivered and title has transferred to the customer. We do not record sales orders related to our Drilling program in backlog. In some cases, we enter into master services agreements with our customers. These master services agreements typically specify payment

 

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terms, establish standards of performance, and allocate certain operational risks through indemnity and related provisions. These master services agreements do not create an obligation on the part of our customers to purchase products from us and are generally supplemented by purchase orders that specify pricing, volume and other order-specific terms.

Pricing

Pricing for our products could significantly impact our results of operations. Generally, as pricing increases, so do our sales. Our pricing usually increases when the cost of our materials increases or when freight and shipping expense increases. If prices increase and we maintain the same gross profit percentage, we generate higher levels of gross profit dollars for the same operational efforts. Conversely, if pricing declines, we will typically generate lower levels of gross profit. Because changes in pricing do not necessarily lower our expense structure, the impact on our results of operations from changes in pricing may be greater than the effect of volume changes.

Principal costs and expenses

Our principal costs and expenses consist of the following: cost of sales (exclusive of depreciation and amortization); selling, general and administrative expense, net of service fee income; depreciation and amortization expense; and interest expense. Our most significant expense is cost of sales which consists primarily of the cost of our products at weighted average cost, plus inbound and outbound freight expense, outside processing expenses, physical inventory adjustments and inventory obsolescence charges, less earned incentives from suppliers.

Our cost of sales is influenced significantly by the prices we pay our suppliers to procure or manufacture the products we distribute to our customers. Changes in these costs may result, for example, from increases or decreases in raw material costs, changes in our relationships with suppliers, earned incentives from our suppliers, freight and shipping costs and tariffs and other trade restrictions. Generally, we are able to pass on cost increases to our customers. However, during certain periods when we, our suppliers, our customers, or our competitors have excess inventories, discounting occurs, and we are unable to realize full value for our stocked inventory products. Market conditions in the future may not permit us to fully pass through future cost increases or may force us to grant other concessions to customers. An inability to promptly pass through such increases and to compete with excess inventories may reduce our profitability, and there can be no assurance that we will be able to recover any of these increased costs. Our cost of sales is reduced by supplier discounts and purchase incentives. Payment for our products is typically due to our suppliers within 30 to 60 days of delivery.

Selling, general and administrative expense includes employee compensation (including discretionary compensation awards) and benefit costs, as well as travel expenses, information technology infrastructure and communications costs, office rent and supplies, professional services and other general expenses. Selling, general and administrative expense also includes compensation and benefit costs for yard and warehouse personnel, supplies, equipment maintenance and rental, and contract storage and distribution expenses. Historical selling, general and administrative expense are presented net of service fee income from B&L, an unconsolidated affiliate, for support services we have previously provided related to information technology, legal, treasury, tax, financial reporting and other administrative expenses. After the Reorganization, we will consolidate the results and operations of B&L and there will be no service fee income.

Depreciation and amortization expense consists of amortization of acquired intangible assets, including customer relationships and sales backlog, and the depreciation of property, plant, and equipment including leasehold improvements and capital leases.

Interest expense, net, includes interest on EMC’s senior secured notes, amortization of deferred financing costs and original issue discount, and interest expense related to borrowings, if any, and fees associated with the utilization of the EM revolving credit facility for letters of credit and bank guarantees issued in support of our normal business operations. After the Reorganization and this offering, we intend to use the net proceeds to us from this offering to purchase additional limited partnership units in EM II LP, which will be used by EM II LP to repay amounts outstanding under the BL term loan, the BL revolving credit facility and the Seller Note and to redeem a portion of EMC’s senior secured notes.

 

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Effects of currency fluctuations

In the ordinary course of our business, we enter into purchase and sales commitments that are denominated in currencies that differ from the functional currency used by our operating subsidiaries. Currency fluctuations can create volatility in our consolidated financial position, results of operations or cash flows. We enter into hedging transactions to manage the risk associated with foreign currency. Our derivative policy requires that only known firm commitments are hedged and that no trading in financial instruments is undertaken for speculative purposes. To the extent that we are unable to match sales received in foreign currencies with expenses paid in the same currency, exchange rate fluctuations could have a negative impact on our consolidated financial position, results of operations and/or cash flows.

For the nine months ended September 30, 2011, approximately 40% of our sales and 22% of our pro forma 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 relative to the U.S. dollar could significantly impact our consolidated financial position, results of operations or cash flows. The balance sheet amounts are translated into U.S. dollars at the exchange rate at the end of the month and the statement of operations amounts are translated at an average exchange rate for each month in the period.

Other than our U.K. subsidiary, there was no other material exposure to us at September 30, 2011 associated with subsidiaries who use a functional currency other than the U.S. dollar.

Outlook

We believe that global energy consumption will continue to increase in the long term and that additional oil and natural gas production will be required to meet this demand. We believe this increased energy consumption will result in increased exploration and production activities such as onshore and offshore drilling and production facilitated in part by the proliferation of new drilling and extraction technologies. This increased exploration and production activity should, in turn, lead to an increased need for new or improved infrastructure for the transmission, processing, and storage of oil and natural gas in the midstream end-market as well as additional capital expenditures associated with the build out and maintenance of global refining facilities and systems to deliver consumable energy products to the end-markets.

The planned capital spending of our customers is a primary indicator of our business. We believe that forecasted increases in global energy demand, driven by the continued development and industrialization of non-OECD countries, such as China, India and Brazil, will continue to increase investment in energy infrastructure by our customers. We expect this investment to increase demand for the specialty products that we supply.

We believe that continued high global oil prices and high natural gas prices that exist in certain global locations, as well as the arbitrage that exists between these areas and those of lower prices, will contribute to further energy-related investments by our customers.

Steel prices also have an impact on our gross profit and gross margins. High levels of steel inventory tend to drive prices down, which impacts the price for our specialty steel products. Excess steel mill capacity also negatively affects mills pricing power and our ability to command higher prices from our customers.

The addition of B&L to our business as a result of the Reorganization considerably increases our presence in the U.S., particularly in the unconventional resource plays. We believe our significant North American presence combined with our long established global footprint enables us to benefit from the expected increase in global capital spending on infrastructure associated with the anticipated increase in global energy consumption. We plan to use our considerable global presence and long standing relationships with our customers and suppliers to grow our business.

We also serve other select markets that have a similar need for our technical expertise and specialty products, including power generation, civil construction and mining applications. We have experienced recent success in growing these markets and expect continued growth as a result of increased demand as well as increased market share as we further penetrate these markets.

 

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Factors Affecting Comparability of Future Results and Historical Results

You should read the discussion of our financial condition and results of operations in conjunction with our historical financial statements, the unaudited condensed combined pro forma financial information, as well as the historical financial statements of B&L and B&L Predecessor, each of which is included elsewhere in this prospectus. Our future results could differ materially from our historical results due to a variety of factors, including the following:

Consolidation of B&L

After this offering, as a result of the Reorganization, we will own 100% of the equity interests in B&L and will consolidate the operations of B&L with our own for accounting purposes. B&L’s sales and total assets are approximately equal to our predecessor’s and the consolidation of B&L will substantially increase our sales and expenses as well as our total assets and total equity. Additionally, as a result of the Reorganization, our capital structure will change and we will become a U.S. corporation, rather than a limited partnership. We expect that the consolidation of B&L will significantly increase our domestic footprint and our percentage of sales to upstream markets.

Decrease in outstanding indebtedness

Historically, our predecessor’s consolidated indebtedness has included EMC’s senior secured notes and the EM revolving credit facility. B&L’s historical consolidated indebtedness as of September 30, 2011 includes the $118.8 million aggregate principal amount BL term loan, the BL revolving credit facility and the $50.0 million Seller Note. After this offering, we expect to reduce our overall debt and improve our overall leverage by repaying $         of B&L’s outstanding indebtedness and $         principal amount of EMC’s senior secured notes. This reduction in indebtedness is expected to decrease interest expense by approximately $         million per year assuming an interest rate of         % and amortization of debt issuance costs of $        .

Additional general and administrative expenses

We expect to incur incremental general and administrative expenses as a result of our consolidation of B&L and becoming a publicly traded entity. Although we have publicly traded debt, we believe our costs will increase as a result of the initial public offering of our common stock. These costs include fees associated with annual and quarterly reports to stockholders, tax returns and Schedule K-1 preparation and distribution, investor relations, registrar and transfer agent fees, incremental insurance costs and accounting and legal services.

Impact on gross profit and gross margin

The consolidation of B&L is expected to increase our total gross profit and lower our overall gross margin from historical levels as B&L typically earns a lower gross margin on sales of oil country tubular goods than the margins our predecessor has historically earned on sales of its energy and infrastructure products. If the rate of growth in energy and infrastructure products exceeds the growth in oil country tubular goods, we expect the impact to our gross margin will be mitigated.

Change in reportable segments.

Our predecessor has historically managed operations in two geographic markets, the Western Hemisphere and Eastern Hemisphere. The Western Hemisphere operations are headquartered in Houston, Texas and operate through a regional and branch network of locations in the U.S., Canada and Latin America. Our primary Eastern Hemisphere operations are in Newbridge (Scotland), Dubai (UAE) and Singapore, and operate through a regional and branch network of locations in Europe, Asia/Pacific, and the Middle East. The Results of Operations discussion that follows discusses our predecessor’s operations under these two segments. After this offering and our consolidation of B&L pursuant to the Reorganization, we plan to realign our segments and reports that our Chief Operating Decision Maker uses to evaluate our business and allocate resources. After this offering, we expect to deliver our specialty products through two reportable segments:

Energy and Infrastructure Products, or E&I. The E&I Segment serves customers in EMEA and APAC regions, distributing highly engineered 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. This operating segment provides project and MRO order fulfillment capabilities from state of the art warehouses throughout the world. For the nine months ended September 30, 2011, the E&I Segment represented 54% of our pro forma sales and 46% of our pro forma operating income.

 

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Oil Country Tubular Goods, or OCTG. The OCTG Segment provides premium oil country tubular goods to the upstream conventional and unconventional onshore drilling market in the U.S. We deliver products through nine customer sales and service locations, over 50 third-party owned distribution facilities and our Pampa, Texas operating center. For the nine months ended September 30, 2011, the OCTG Segment represented 46% of our pro forma sales and 54% of our pro forma operating income.

Our predecessor has historically included operating expenses of our non-trading entities, including EM II LP, EMGH Limited, or EMGH, Pipe Acquisition Limited and Bourland & Leverich Holdings LLC in General Company. After this offering, we will include these expenses in Corporate.

Results of Operations of our Predecessor

Overview

After experiencing record results in 2008, we, like others in our industry, were impacted by the global economic recession and the resulting unstable financial markets. Our business is highly dependent on the conditions in the energy industry and, in particular, the willingness by our customers to make capital expenditures for oil and gas infrastructure. Our business was challenged in 2009 and throughout most of 2010 as oil prices dropped significantly from 2008 levels and credit availability for many of our customers was unpredictable. These conditions negatively impacted our business as capital expenditures made by our customers for major projects were reduced and/or deferred and lower operating levels by our customers curtailed their maintenance and repair expenditures, which reduced our MRO sales. This overall reduction in global demand depressed steel prices and our profit margins were negatively affected as competitors significantly decreased their prices to reduce inventories and to seek any business opportunities that were available.

These operating conditions started to reverse in the latter half of 2010 as oil prices recovered and the availability of financing for our customers improved. We noted improving sales inquiries and new order bookings, but with significant volume fluctuations from month to month. We also experienced a product demand and sales mix shift from our higher gross margin products, including alloy pipe and components associated with downstream projects, and large diameter high yield carbon pipe generally associated with midstream energy infrastructure projects, to lower margin products, including smaller diameter carbon pipe, valve, and fitting products associated with midstream gathering lines. We believe this shift has, to a large extent, been driven by an increase in drilling and production activity related to unconventional resource developments in North America.

The improvement in operating conditions has continued in 2011, in spite of continued political and economic uncertainties within the global marketplace. Capital spending in energy markets has steadily continued to improve relative to 2010 and 2009 and, after dropping below $40 per barrel in 2009, in the third quarter of 2011 oil prices have climbed towards their 2008 records. We believe this increase in oil prices and the increased availability of financing has incentivized both international and domestic oil companies to increase spending on offshore and onshore oil and natural gas opportunities, particularly the gathering and storage systems associated with the development of onshore and offshore oil and natural gas resources. As a result, our total sales in 2011 have increased as compared to 2010, driven both by new project and MRO spending, particularly in the offshore upstream and downstream energy markets. As our business has recovered, we have continued to record higher sales order bookings and our backlog has increased as shown below:

 

 

 

(IN MILLIONS)

   SEPTEMBER 30,
2011
     DECEMBER 31,
2010
     DECEMBER 31,
2009
     DECEMBER 31,
2008
 

Sales backlog (end of period)

   $ 412       $ 210       $ 144       $ 328   

 

 

Sales backlog at September 30, 2011 is comprised primarily of sales orders related to (1) natural gas gathering and storage systems; (2) the construction of offshore high performance multi-purpose jack-up rigs; and (3) offshore exploration and production. Sales backlog also includes orders related to offshore renewable energy projects, refinery upgrades and turnarounds and civil infrastructure projects.

 

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Our sales backlog represents management’s estimate of potential future revenues that may result from contracts currently awarded to us by our customers. 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 backlog will ultimately be realized as revenue, or that we will earn a profit on any of our backlog. Realization of revenue from backlog is dependent on 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.

Our ten largest customers and ten largest suppliers represented the following percentages of our sales and product purchases for the nine months ended September 30, 2011 and 2010:

 

 

 

     NINE MONTHS ENDED SEPTEMBER 30,  
     2011     2010  

Top 10 customers as a percentage of sales

     33     25

Top 10 suppliers as a percentage of product purchases

     53     43

 

 

No one customer accounted for more than 10% of our sales in any of the periods presented. During the nine months ended September 30, 2011 and 2010, our largest supplier accounted for approximately and 11% and 9%, respectively, of our product purchases.

During the nine months ended September 30, 2011 and 2010, we derived the following percentage of our sales from customers in the oil and natural gas industry:

 

 

 

     NINE MONTHS ENDED SEPTEMBER 30,  
     2011     2010  

Percentage of sales derived from the oil & natural gas industry

     85     71

 

 

Nine months ended September 30, 2011 compared to Nine months ended September 30, 2010

The following tables compare sales and income (loss) from operations for the nine months ended September 30, 2011 and 2010. The period-to-period comparisons of financial results are not necessarily indicative of future results.

 

 

 

     NINE MONTHS ENDED SEPTEMBER 30,  

(IN MILLIONS, EXCEPT PERCENTAGES)

       2011             2010         % CHANGE  

Sales

      

Western Hemisphere

   $ 415.0      $ 284.1        46

Eastern Hemisphere

     248.4        172.7        44

Eliminations

     (10.4     (2.4     NM   
  

 

 

   

 

 

   

Total

   $ 653.0      $ 454.4        44
  

 

 

   

 

 

   

Income (loss) from operations

      

Western Hemisphere

   $ 12.9      $ (58.7     NM   

Eastern Hemisphere

     27.2        16.6        64

General Company

     (11.5     (18.8     39
  

 

 

   

 

 

   

Total

   $ 28.6      $ (60.9     NM   
  

 

 

   

 

 

   

 

 

 

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Sales

Consolidated. Sales increased to $653.0 million for the nine months ended September 30, 2011, compared to $454.4 million for the nine months ended September 30, 2010. The $198.6 million, or 44%, increase was driven mainly by sales volume increases in the upstream and downstream energy markets and was further enhanced through a modest increase in sales price for many of our products. Consistently high oil prices, relatively flat natural gas prices and the availability of financing have driven continued increased spending by our customers for onshore and offshore oil and natural gas infrastructure and capital expenditures, particularly around unconventional oil and gas reserves, as well as increased spending for refinery and storage projects.

Western Hemisphere. For the nine months ended September 30, 2011, sales from the Western Hemisphere increased $130.9 million, or 46%, to $415.0 million compared to $284.1 million for the nine months ended September 30, 2010 and were driven by both higher sales volumes and prices, as well as a more favorable product sales mix towards higher priced product associated with offshore oil and natural gas exploration and production.

Eastern Hemisphere. Sales from the Eastern Hemisphere increased $75.7 million, or 44%, to $248.4 million for the nine months ended September 30, 2011 compared to $172.7 million for the prior year period. Sales throughout the first nine months of 2011 benefitted from increased sales volumes due to activity around offshore oil and natural gas exploration and production in the North Sea and the African and Australian coasts, as well as increased sales prices. For the period, foreign currency exchange rates had a $4.7 million favorable impact on our sales.

Income (loss) from operations

Consolidated. For the nine months ended September 30, 2011, consolidated income from operations was $28.6 million, an increase of $89.5 million compared to a loss from operations of $60.9 million for the nine months ended September 30, 2010. Included in the $60.9 million loss from operations for the nine months ended September 30, 2010 was a $62.8 million pre-tax goodwill impairment charge related to a decrease in our operating forecasts due to the global economic recession. Excluding the impact of the goodwill impairment, the increase is the result of increased sales volumes, higher prices and a shift in product sales mix resulting in a larger percentage of our sales coming from higher margin products associated with offshore exploration and production activities. Selling, general and administrative expense, net of service fee income was higher by $4.9 million when compared to the nine months ended September 30, 2010. Excluding service fee income of $1.5 million and $0.2 million recognized in the three quarters of 2011 and 2010, respectively, and the effects of realized and unrealized losses on foreign currency transactions, selling, general and administrative expenses increased by $7.6 million in the nine months ended September 30, 2011 compared to the nine months ended September 30, 2010 mainly due to increased staffing and other expenses to support our sales growth and international office expansions, compensation adjustments, higher employee related variable expenses, and the reserve for an uncollectible receivable associated with an outstanding customer warranty claim.

Western Hemisphere. For the nine months ended September 30, 2011, income from operations for the Western Hemisphere was $12.9 million compared to a loss from operations of $58.7 million for the nine months ended September 30, 2010, representing an increase of $71.6 million. The loss from operations in the prior year period includes a pre-tax goodwill impairment charge of $55.8 million. Excluding the goodwill impairment charge, the increase in income from operations between periods was driven by gross profit from increased sales volumes, higher prices on certain products, and a more favorable product sales mix to higher margin products associated with offshore oil and natural gas exploration and production, partially offset by higher selling, general and administrative expenses in the current year due primarily to increases in staffing and other expenses to support our sales growth, compensation adjustments, higher employee related variable expenses, and the reserve for an uncollectible receivable associated with an outstanding customer warranty claim.

Eastern Hemisphere. For the nine months ended September 30, 2011, income from operations for the Eastern Hemisphere increased $10.6 million to $27.2 million compared to $16.6 million for the nine months ended September 30, 2010. The 64% increase in income from operations was driven primarily by gross profit from increased sales volumes from offshore upstream projects and maintenance and favorable selling prices. Excluding realized and unrealized losses from foreign currency transactions, selling, general and administrative expenses increased $2.8 million when compared to the nine months ended September 30, 2010 as a result of increases in staffing and other expenses to support our sales growth and the expansion of our international offices.

 

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General Company. For the nine months ended September 30, 2011, loss from operations for General Company decreased $7.3 million to $11.5 million compared to a loss from operations of $18.8 million for the nine months ended September 30, 2010. 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 $1.5 million and $0.2 million for the nine months ended September 30, 2011 and 2010, respectively. For the nine months ended September 30, 2010, General Company expenses include a $7.0 million goodwill impairment charge related to the Eastern Hemisphere segment. Goodwill and other intangibles are allocated to the Eastern Hemisphere segment for impairment testing purposes based on their relative fair values at their acquisition date, December 16, 2005. Excluding the effect of the prior period goodwill impairment charge for the nine months ended September 30, 2010 and the service fee income in the nine months ended September 30, 2011 and 2010, the loss from operations for General Company increased by $1.0 million due to increased staffing and variable employee related expenses.

Other income (expense)

The following tables display our equity in earnings of unconsolidated affiliate, interest expense, net, and income tax expense (benefit) for the nine months ended September 30, 2011 and 2010.

 

 

 

(IN MILLIONS)    NINE MONTHS ENDED SEPTEMBER 30,  
         2011             2010             % CHANGE      

Equity in earnings of unconsolidated affiliate

   $ 2.6      $ 0.5        NM   

Interest expense—net

     (47.5     (48.2     (2 )% 

Income tax expense (benefit)

     3.3        (21.1     NM   

 

 

Equity in earnings of unconsolidated affiliate

Equity in earnings of unconsolidated affiliate of $2.6 million and $0.5 million for the nine months ended September 30, 2011 and for the period August 19, 2010 through September 30, 2010, respectively, reflects income from our 14.5% ownership interest in B&L. EMC’s investment in B&L was made on August 19, 2010.

Interest expense—net

Interest expense—net for the nine months ended September 30, 2011 and September 30, 2010 was $47.5 million and $48.2 million, respectively. Interest expense—net, includes interest on the EMC’s senior secured notes, amortization of deferred financing costs and original issue discount, and interest expense related to borrowings, if any, and fees associated with the utilization of the EM revolving credit facility for letters of credit and bank guarantees issued in support of our normal business operations. The slight decrease in interest expense-net for nine months ended September 30, 2011 when compared to the prior year comparable period is due to reduced amortization of deferred financing costs.

Income tax expense (benefit)

Income tax expense was $3.3 million for the nine months ended September 30, 2011 compared to an income tax benefit of $21.1 million for the nine months ended September 30, 2010. A full 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 the Company’s estimated annual effective tax rate. For the nine months ended September 30, 2010, the income tax benefit reflects the taxable loss at an estimated annual effective tax rate which reflects operating losses in higher income tax jurisdictions primarily in the U.S., partially offset by taxable income in lower or no income tax jurisdictions including the U.K., Singapore and UAE.

At September 30, 2011, a valuation allowance of $22.7 million was recorded against deferred tax assets and net operating loss carryforwards. 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 net operating losses, or NOLs, during the respective carryforward periods. Additionally, statutory restrictions limit the ability to recover NOLs via a carryback claim. The NOLs are scheduled to expire beginning in 2024 through 2031.

 

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Year ended December 31, 2010 compared to the year ended December 31, 2009

The following table compares sales and income (loss) from operations for the year ended December 31, 2010 and 2009. The period-to-period comparisons of financial results are not necessarily indicative of future results.

 

 

 

     YEAR ENDED DECEMBER 31,  

(IN MILLIONS, EXCEPT PERCENTAGES)

   2010     2009     % CHANGE  

Sales

      

Western Hemisphere

   $ 397.9      $ 508.0        (22 )%

Eastern Hemisphere

     233.7        285.1        (18 )%

Eliminations

     (3.9 )     (19.8 )  
  

 

 

   

 

 

   

Total

   $ 627.7      $ 773.3        (19 )%
  

 

 

   

 

 

   

Income (loss) from operations

      

Western Hemisphere

   $ (56.9   $ 2.9        NM   

Eastern Hemisphere

     22.0        25.5        (14 )%

General Company

     (22.5 )     (18.5 )     22 %
  

 

 

   

 

 

   

Total

   $ (57.4   $ 9.9        NM   
  

 

 

   

 

 

   

 

 

Sales

Consolidated. For the year ended December 31, 2010, our consolidated sales decreased $145.6 million, or 19%, to $627.7 million compared to $773.3 million for the year ended December 31, 2009. The decrease in sales reflects the effects of the global economic downturn and the associated spending cuts by our customers in all segments of the energy industry, which impacted our results during the latter half of 2009 and throughout 2010. We believe that our customers focused on preserving cash during an uncertain economic recovery, which negatively affected both new project expenditures and routine maintenance and repair expenditures. Lower demand also negatively affected selling prices which also decreased overall sales. Sales for the year ended December 31, 2009 also reflect a strong order backlog at December 31, 2008 of approximately $328.0 million which drove sales volumes, higher gross profits and gross margins into the first half of 2009.

Western Hemisphere. For the year ended December 31, 2010, sales in our Western Hemisphere market decreased $110.1 million, or 22%, to $397.9 million compared to $508.0 for the year ended December 31, 2009. The decrease in Western Hemisphere sales was primarily the result of lower demand from our customers in the downstream market and from the absence of large natural gas transportation projects in the midstream market. Additionally, our sales mix shifted from higher gross margin products, including alloy pipe and components and large diameter high yield carbon pipe products associated with midstream energy infrastructure projects, to smaller diameter carbon pipe, valve, and fitting products which generally have lower selling prices and margins.

Eastern Hemisphere. For the year ended December 31, 2010, sales in our Eastern Hemisphere market decreased $51.4 million, or 18%, to $233.7 million compared to $285.1 million for the year ended December 31, 2009. This decrease is primarily the result of a decline in offshore oil and natural gas structure construction in the markets served by our Singapore office. We also experienced a significant drop in selling prices across the Eastern Hemisphere segment as excess market inventories and short mill lead times created a competitive pricing environment.

Income (loss) from operations

Consolidated. For the year ended December 31, 2010, our consolidated income (loss) from operations decreased $67.3 million to an operating loss of $57.4 million compared to operating income of $9.9 million for the year ended December 31, 2009. The decrease in operating income was primarily the result of a goodwill impairment charge of $62.8 million, before taxes, and to a lesser extent, lower gross profit resulting from reduced sales volumes and lower sales prices as described above. Gross margins for the year ended December 31, 2009 were adversely impacted by a sharp decline in product prices which resulted in significant inventory valuation write-downs during the period of $22.5 million. Selling, general and administrative expenses for the year ended December 31, 2009 included the write off of $3.3 million of expenses related to a financing that was not consummated. No similar charge occurred for the year ended December 31, 2010.

 

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Western Hemisphere. For the year ended December 31, 2010, income (loss) from operations for our Western Hemisphere market decreased $59.8 million to an operating loss of $56.9 million compared to operating income of $2.9 million for the year ended December 31, 2009. This decrease in operating income in 2010 was primarily the result of a goodwill impairment charge of $55.8 million, before taxes, and to a lesser extent, lower gross profit resulting from lower sales volume and prices.

Eastern Hemisphere. For the year ended December 31, 2010, income from operations for our Eastern Hemisphere market decreased $3.5 million, or 14%, to $22.0 million compared to $25.5 million for the year ended December 31, 2009. The decrease in income from operations between years was primarily the result of lower selling prices across all Eastern Hemisphere markets. In addition, income from operations for the year ended December 31, 2009 included significant inventory valuation write-downs resulting from a sharp decline in inventory prices in the Middle East. In 2010, market conditions in the Middle East improved significantly and no inventory valuation write-down was required.

General Company. General Company expenses normally consist of amortization expenses related to acquired and identified intangible assets and corporate overhead expenses. For the year ended December 31, 2010, operating loss for General Company increased $4.0 million, or 22%, to $22.5 million compared to $18.5 million for the year ended December 31, 2009. For the year ended December 31, 2010, General Company expenses include a $7.0 million goodwill impairment charge related to the Eastern Hemisphere UAE reporting unit. Goodwill and other intangibles are allocated to the Eastern Hemisphere reporting units for goodwill impairment testing purposes based on their relative fair values at acquisition date. For the year ended December 31, 2009, General Company expenses include the write off of $3.3 million of expenses related to a previously aborted initial public offering. Excluding the $7.0 million goodwill impairment charge and the write-off of expenses related to a financing that was not consummated, General Company expenses remained relatively consistent between periods.

Other income (expense)

The following table displays our equity in earnings of unconsolidated affiliate, interest expense, net, and income tax benefit for the years ended December 31, 2010 and 2009.

 

 

 

(IN MILLIONS)    YEAR ENDED DECEMBER 31,  
     2010     2009     % CHANGE  

Equity in earnings of unconsolidated affiliate

   $ 1.0      $        NM   

Interest expense—net

     (64.2 )     (47.1 )     36 %

Income tax benefit

     (22.1     (22.4 )     (1 %)

 

 

Equity in earnings of unconsolidated affiliate

On August 19, 2010, EM II LP’s subsidiary, EMC, invested $10.0 million in exchange for 14.5% of the common equity in B&L. The B&L investment is accounted for using the equity method of accounting. Income from the B&L investment for the period August 19, 2010 through December 31, 2010 was $1.0 million.

Interest expense—net

Interest expense—net, for the year ended December 31, 2010 increased $17.1 million, or 36%, to $64.2 million compared to $47.1 million for the year ended December 31, 2009. The overall increase in interest expense—net, for the year ended December 31, 2010 was primarily the result of higher period interest rates on our $465.0 million of EMC’s senior secured notes issued on December 23, 2009 compared to interest rates on the $500.0 million term loans outstanding during the year ended December 31, 2009.

Income tax expense (benefit)

Income tax benefit was $22.1 million for the year ended December 31, 2010, compared to income tax benefit of $22.4 million for the year ended December 31, 2009. The income tax benefit for the year ended December 31, 2010 reflects the pre-tax loss from operations at our estimated annual effective tax rate which is the result of operating losses and higher statutory income tax rates in our Western Hemisphere segment offset by taxable income and lower statutory income tax rates in our Eastern Hemisphere segment. In addition, for the year ended

 

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December 31, 2010, the estimated annual effective tax rate and income tax benefit reflect the impact of a goodwill impairment charge of $62.8 million for which $29.9 million was related to non-deductible goodwill and $9.0 million related to recording a valuation allowance against certain deferred tax assets.

At December 31, 2010, a valuation allowance of $11.5 million was recorded against deferred tax assets and net operating loss carryforwards as we believed it was more likely than not that the future income tax benefits would not be realized in subsequent periods. The estimated future U.S. taxable income will limit our ability to recover the net deferred tax assets and also limit the ability to utilize the NOLs during the respective carryforward periods. Additionally, statutory restrictions limit the ability to recover the NOLs via a carryback claim.

Year ended December 31, 2009 compared to the year ended December 31, 2008

The following tables compare sales and income (loss) from operations for the years ended December 31, 2008 and 2009. The period-to-period comparisons of financial results are not necessarily indicative of future results.

 

 

 

     YEAR ENDED DECEMBER 31,  

(IN MILLIONS, EXCEPT PERCENTAGES)

   2009     2008     % CHANGE  

Sales

      

Western Hemisphere

   $ 508.0      $ 859.4        (41 )%

Eastern Hemisphere

     285.1        425.4        (33 )%

Eliminations

     (19.8 )     (19.2 )  
  

 

 

   

 

 

   

Total

   $ 773.3      $ 1,265.6        (39 )%
  

 

 

   

 

 

   

Income (loss) from operations

      

Western Hemisphere

   $ 2.9      $ 115.3        (98 )%

Eastern Hemisphere

     25.5        56.5        (55 )%

General Company

     (18.5 )     (17.5 )     6 %
  

 

 

   

 

 

   

Total

   $ 9.9      $ 154.3        (94 )%
  

 

 

   

 

 

   

 

 

Sales

Consolidated. For the year ended December 31, 2009, our consolidated sales decreased 39% to $773.3 million from our record sales of $1,265.6 million for the year ended December 31, 2008. The decrease in sales reflects the overall economic slowdown and our customers’ reluctance to commit to capital expenditures because of uncertainties surrounding future oil and natural gas demand and prices. In addition to lower volumes, sales prices were also negatively impacted by excessive market and producer price reductions, particularly on commodity steel and natural gas transmission products.

Western Hemisphere. For the year ended December 31, 2009, sales in our Western Hemisphere segment decreased $351.4 million, or 41%, to $508.0 million from $859.4 million for the year ended December 31, 2008. The decrease in Western Hemisphere sales was primarily the result of reduced sales volume and lower selling prices to customers in the upstream oil and natural gas and natural gas transmission businesses and, to a lesser extent, a decline in MRO business.

Eastern Hemisphere. For the year ended December 31, 2009, sales in our Eastern Hemisphere segment decreased $140.3 million, or 33%, to $285.1 million compared to $425.4 million for the year ended December 31, 2008. This decrease was primarily the result of postponements and cancellation of offshore oil and natural gas structure construction and a severe drop in general construction demand in the Middle East. In addition, total Eastern Hemisphere sales were adversely affected by unfavorable foreign exchange rate movements between the U.S. dollar and the U.K. pound which resulted in a 16% decline in the U.S. dollar value of U.K. sales.

Income (loss) from operations

Consolidated. For the year ended December 31, 2009, our consolidated income from operations was $9.9 million, a decrease of $144.4 million, or 94%, compared to $154.3 million for the year ended December 31, 2008. The decrease was primarily the result of reduced sales volume and lower gross profit and margins, partially offset by a

 

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decrease in selling, general and administrative expenses. During the first half of the year ended December 31, 2009, we sold high cost inventory into a declining price market that significantly reduced our gross margins. Our year ended December 31, 2009 gross profit and margins also include inventory valuation write-downs of approximately $22.5 million; these write-downs occurred primarily in our Western Hemisphere segment in the first nine months of 2009. In the fourth quarter of 2009 we began to see inventory market values stabilize. Additionally, for the year ended December 31, 2009, we incurred losses of approximately $12.7 million due to certain strategic inventory liquidation sales at prices below our cost of certain products. For the year ended December 31, 2009, selling, general and administrative expenses were $20.1 million, or 22% lower compared to the year ended December 31, 2008. Included in selling, general and administrative expenses for the year ended December 31, 2009 are $3.3 million of initial public offering expenses. The reduction in selling, general and administrative expense reflects our highly variable cost structure with about 54% of our expenses being personnel-related. For the year ended December 31, 2009, we reduced our workforce by approximately 80 employees, or 15%. Further, throughout our workforce, employees have a significant portion of compensation tied to profitability. Because of lower profitability levels in 2009, our compensation expense declined.

Western Hemisphere. For the year ended December 31, 2009, income from operations for our Western Hemisphere segment decreased $112.4 million, or 98%, to an operating income of $2.9 million compared to $115.3 million for the year ended December 31, 2008. This decrease in income from operations was primarily the result of lower sales volume, inventory valuation adjustments and strategic inventory liquidation sales as described above, partially offset by a reduction in selling, general and administrative expenses.

Eastern Hemisphere. For the year ended December 31, 2009, income from operations for our Eastern Hemisphere segment decreased $31.0 million, or 55%, to $25.5 million compared to $56.5 million for the year ended December 31, 2008. This decrease in income from operations was primarily the result of lower sales volume, particularly in the Middle East market, and, to a lesser extent, lower gross margins as prices declined as a result of the global recession. The decrease in gross profit was partially offset by a reduction in selling, general and administrative expenses. For the year ended December 31, 2009, selling, general and administrative expenses in our Eastern Hemisphere segments decreased $9.5 million, or 32%, compared to the year ended December 31, 2008.

General Company. For the year ended December 31, 2009, operating loss for General Company increased $1.0 million, or 6%, to $18.5 million compared to the year ended December 31, 2008. General Company expenses primarily consist of amortization expenses related to identified intangible assets associated with our acquisition of Murray International Metals Ltd. in 2005. For the year ended December 31, 2009, operating loss for General Company also includes the write off of $3.3 million of expenses related to a financing that was not consummated.

Other income (expense)

The following table displays our loss on prepayment of debt, interest expense—net and income tax expense (benefit) for the years ended December 31, 2009 and 2008.

 

 

 

(IN MILLIONS)    YEAR ENDED DECEMBER 31,  
     2009     2008     % CHANGE  

Loss on prepayment of debt

   $ 7.5               NM   

Interest expense—net

     (47.1 )     (45.1 )     4 %

Income tax expense (benefit)

     (22.4     35.1        NM   

 

 

Loss on prepayment of debt

Loss on prepayment of debt of $7.5 million for the year ended December 31, 2009 was the result of the write-off of deferred financing costs as a result of the repayment of our first and second lien term loans on December 23, 2009 using the proceeds from the issuance of EMC’s senior secured notes.

Interest expense—net

Interest expense—net for the year ended December 31, 2009 increased $2.0 million, or 4%, to $47.1 million compared to the year ended December 31, 2008. The increase in interest expense—net was primarily the result of a

 

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$7.5 million deferred loss recognized on interest rate derivatives for which the underlying hedge no longer exists as a result of the repayment of our first and second lien term loans on December 23, 2009. The overall increase in interest expense, net was offset by lower period interest rates and reduced borrowings under the EM revolving credit facility.

Income tax expense (benefit)

Income tax benefit was $22.4 million for the year ended December 31, 2009, compared to income tax expense of $35.1 million for the year ended December 31, 2008. The income tax benefit for the year ended December 31, 2009 reflects the pre-tax loss from operations and includes the reversal of prior year tax provisions established with respect to foreign earnings repatriation to the U.K. In 2009, the U.K. changed its income tax laws and exempted foreign earnings repatriation from U.K. taxation. The income tax expense for the year ended December 31, 2008 reflects the taxable income generated from operations at an effective tax rate of approximately 32%.

Bourland & Leverich Holdings LLC and Subsidiary

On August 19, 2010, we purchased a 14.5% ownership interest in B&L, an unconsolidated affiliate accounted for under the equity method. B&L’s accounting policies are identical to ours and the factors affecting B&L’s business, including oil and natural gas prices, availability of financing for customers to fund capital expenditures and the level of oil and gas exploration and production, among others, are largely similar to ours. After this offering, as a result of the Reorganization, we will own 100% of the equity interests of B&L and will consolidate the results of operations of B&L with our own for accounting purposes. Due to the significance of B&L to our future operations, we have included below a discussion of the results of operations of B&L for the nine months ended September 30, 2011. These results are included in our historical consolidated financial statements only to the extent of our equity in earnings from our investment. We have not included results of B&L Predecessor, as the results would not be comparable due to (1) a difference in the December 31 fiscal year end adopted by B&L and B&L Predecessor’s September 30 fiscal year end and (2) acquisition accounting adjustments including, among others, (a) increased depreciation and amortization as a result of the recognition of intangible assets and the step-up in basis of existing fixed assets, (b) increased interest expense associated with indebtedness outstanding as a result of the B&L Acquisition, and (c) service fees paid by B&L to us for certain support services related to information technology, legal, treasury, tax, financial reporting, and other administrative expenses. These financial results are not necessarily indicative of future results we expect to achieve when we consolidate B&L subsequent to this offering. We have also included elsewhere in this prospectus unaudited pro forma condensed combined financial information giving effect to the Reorganization and this offering. You should read “Unaudited Pro Forma Condensed Combined Financial Information” in conjunction with your review of the following discussion.

B&L’s financial results for the nine months ended September 30, 2011 have benefited from sustained high levels of drilling activity driven by continuing oil and natural gas exploration in North America. We believe higher oil prices, steady natural gas prices and an increase in the availability of financing for capital expenditures through the first nine months of 2011 have incentivized domestic E&P companies to increase onshore U.S. drilling activity, particularly in unconventional resource developments. Although the average active onshore oil and gas rig count in the U.S. is still considerably lower than the high levels that were operating in 2008, it has continued to steadily increase since the first quarter of 2010, a quarter which witnessed the lowest average domestic oil and gas rig count levels in this recent recessionary period. Average active domestic onshore oil and gas rig count, as measured by Baker Hughes Incorporated, for the nine months ended September 30, 2011 was approximately 1,787 compared to approximately 1,496 for the year ended December 31, 2010, an increase of 19%. The steady improvement in the average onshore rig count in the U.S. has contributed to an increase in demand for B&L’s oil country tubular goods and translated into a pricing environment that has improved through the first half of 2011. More recently, prices are relatively stable despite the persistence of challenging market conditions, but remain significantly lower than pre-recessionary highs due to excess mill capacity and a competitive market environment. Gross profit for the nine months ended September 30, 2011 benefitted from increased levels of domestic onshore drilling activity.

 

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The following table reflects B&L’s results of operations for the nine months ended September 30, 2011.

 

 

 

     NINE MONTHS
ENDED
SEPTEMBER 30, 2011
 
(IN MILLIONS)       

Statement of Operations Data:

  

Sales

   $ 546.4   
  

 

 

 

Income from operations

     33.4   

Other income—net

     0.4   

Interest expense

     (17.0
  

 

 

 

Net income

   $ 16.8   
  

 

 

 

 

 

Sales

For the nine months ended September 30, 2011, B&L’s sales were $546.4 million. Sales in the period were the result of a high level of onshore drilling activity in the U.S., particularly in unconventional oil and natural gas resource developments. In the period, B&L sold approximately 296,000 tons of oil country tubular goods at an average selling price of approximately $1,846 per ton. During the nine months ended September 30, 2011, B&L’s top ten customers represented 63% of sales and two customers accounted for 19% and 12%, respectively, of sales. No other single customer accounted for more than 10% of sales during this period.

Income from operations

For the nine months ended September 30, 2011, B&L’s income from operations was $33.4 million. Income from operations was impacted by steel prices, which have increased substantially since the market downturn in 2009, but have remained relatively steady throughout 2011, and increased demand for oil country tubular goods as U.S. onshore drilling activity has increased. Income from operations also includes selling, general and administrative expense of $11.5 million, or 2% of sales for the period, of which approximately $7.4 million was attributable to employee related costs including salaries, employee benefits and travel expenses for sales staff, approximately $1.5 million was attributable to service fee income paid to EMC, and approximately $0.3 million was attributable to nonrecurring transaction costs. Also included in income from operations is depreciation and amortization expense of $10.9 million, nearly all of which relates to amortization of intangible asset customer relationships and noncompetition agreements recorded in connection with the B&L Acquisition.

Interest expense

Interest expense for the nine months ended September 30, 2011 was $17.0 million, resulting from interest incurred on B&L’s indebtedness during the period and amortization of deferred financing costs.

Quarterly Results of Operations of our Predecessor and B&L

The following tables present our predecessor’s unaudited quarterly results of operations for the eight quarters in the period ended September 30, 2011 and B&L’s unaudited quarterly results of operations for the four quarters in the period ended September 30, 2011. This information has been prepared on the same basis as the audited financial statements of our predecessor and B&L and includes all adjustments, consisting only of normal recurring adjustments, necessary for the fair presentation of the information for the quarters presented. You should read this information in conjunction with the audited consolidated financial statements of EM II LP, the audited consolidated financial statements of B&L, and the related notes thereto. The unaudited results of operations for any quarter are not necessarily indicative of results of operations for any future period.

 

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Our predecessor’s unaudited quarterly results of operations were as follows:

 

 

 

    THREE MONTHS ENDED  

STATEMENT OF
OPERATIONS
(IN THOUSANDS)

  SEPTEMBER 30,
2011
    JUNE 30,
2011
    MARCH 31,
2011
    DECEMBER 31,
2010
    SEPTEMBER 30,
2010
    JUNE 30,
2010
    MARCH 31,
2010
    DECEMBER 31,
2009
 

Sales

  $ 244,838      $ 222,549      $ 185,562      $ 173,295      $ 174,217      $ 135,711      $ 144,490      $ 170,586   

Gross profit (exclusive of depreciation and amortization)

    36,934        36,269        26,694        23,394        25,018        20,610        21,884        18,038   

Income (loss) from operations

    10,858        12,673        5,053        3,445        4,586        (66,190     735        (3,914

Net loss

    (4,263     (3,868     (10,018     (11,040     (4,864     (75,419     (6,965     (18,641

 

 

The global economic recession impacted our sales and income (loss) from operations in 2009 and through the first half of 2010 as oil prices dropped significantly from previous levels and credit availability for many of our customers was unpredictable. In the latter half of 2010, these operating conditions started to reverse as oil prices recovered and the availability of financing improved which led to increases in our sales and income (loss) from operations. The improvement in operating conditions continued in 2011 as capital spending in energy markets steadily improved. As a result, our sales have sequentially increased since the three months ended December 31, 2010. In the recent five quarters, income from operations has generally increased with slight fluctuations due mainly to variations in gross margin.

Selling, general and administrative expense, net of service fee income fluctuates from quarter to quarter primarily due to fluctuations in employee related variable expenses and the effects of realized and unrealized gains and losses from foreign currency transactions. Sequential increases in selling, general and administrative expense, net of service fee income since the three months ended December 31, 2010 have increased mainly due to staffing and other expenses to support our sales growth. As a percentage of sales, selling, general and administrative expense, net of service fee income has remained generally consistent through the second half of 2010 into 2011.

Equity in the earnings of unconsolidated affiliate, which represents our 14.5% investment in B&L, has sequentially increased since the date of our investment on August 19, 2010.

B&L’s unaudited quarterly results of operations were as follows:

 

 

 

     THREE MONTHS ENDED  

INCOME STATEMENT (IN THOUSANDS)

   SEPTEMBER 30,
2011
     JUNE 30,
2011
     MARCH 31,
2011
     DECEMBER 31,
2010
 

Sales

   $ 212,328       $ 192,619       $ 141,448       $ 160,554   

Gross profit (exclusive of depreciation and amortization)

     21,365         18,920         15,584         17,220   

Income from operations

     13,403         11,458         8,579         9,444   

Net income

     7,890         5,869         3,084         3,343   

 

 

B&L’s sales and income from operations are directly affected by the level of U.S. onshore oil and natural gas drilling. Increased domestic onshore rig count, higher oil prices, steady natural gas prices and an increase in the availability of financing for capital expenditures since those at the beginning of the fiscal year have led to a sequential increase in B&L’s sales and income from operations over the nine month period. Gross margin has remained consistent between quarters. Selling, general and administrative expenses have increased since the quarter ended March 31, 2011 due mainly to increases in staffing and other expenses to support sales growth. As a percentage of sales, selling, general and administrative expense has remained relatively consistent.

 

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Liquidity and Capital Resources

At September 30, 2011, our predecessor had $11.9 million of unrestricted cash on hand and $107.9 million of available credit under the EM revolving credit facility and the revolving credit facility of our consolidated subsidiary Edgen Murray FZE, or EM FZE. B&L had unrestricted cash on hand of $0.1 million and $51.8 million of availability under its revolving credit facility. On a pro forma basis, our cash on hand and available borrowing capacity under our revolving credit facilities was $12.0 million and $159.7 million, respectively, at September 30, 2011. Our primary cash requirements, in addition to normal operating expenses and debt service, are for working capital, capital expenditures, and business acquisitions. We have historically financed our operations through cash flows generated from operations and from borrowings under our revolving credit facilities, while our primary source of acquisition funds has historically been the issuance of debt securities and preferred and common equity. Our debt service requirements have historically been funded by operating cash flows and/or refinancing arrangements.

Our ability to make payments on and to refinance our indebtedness and to fund planned capital expenditures depend 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 our revolving credit facilities and the indenture governing EMC’s senior secured notes, 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.

We believe that we will continue to have adequate liquidity and capital resources 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 revolving 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 effected 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 adopting any of these alternatives. Our failure to comply with these provisions could result in an event of default which, if not cured or waived, could result in the acceleration of all of our debt.

Debt

At September 30, 2011, our predecessor’s total indebtedness, including capital leases, was $480.2 million and our indebtedness was $670.7 million on a pro forma basis before use of proceeds from this offering. Included within our total indebtedness is the following:

EMC’s senior secured notes. On December 23, 2009, EMC issued $465.0 million aggregate principal amount of 12.25% senior secured notes with an original issue discount of $4.4 million. Approximately $57.0 million of annual interest accrues on EMC’s senior secured notes at a rate of 12.25% and is payable in arrears on each January 15 and July 15, commencing on July 15, 2010.

We may redeem some or all of EMC’s senior secured notes at any time prior to January 15, 2013 at a redemption price equal to 100% of the principal plus an applicable premium and accrued and unpaid interest as of the redemption date. The applicable premium, with respect to any senior secured note on the redemption date, is calculated as the greater of:

 

  (1) 1.0% of the principal amount of the note; or

 

  (2) the excess of:

 

  (a) the present value at the redemption date of (i) the redemption price of the note at January 15, 2013 (such price as set forth in the table below) plus (ii) all required interest payments due on the note through January 15, 2013 (excluding accrued but unpaid interest to the redemption date), computed using a discount rate equal to the Treasury Rate as of such redemption date plus 50 basis points; over

 

  (b) the principal amount of the note.

 

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On or after January 15, 2013, we have the option to redeem some or all of EMC’s senior secured notes at the following redemption prices, plus accrued and unpaid interest to the date of redemption:

 

 

 

ON OR AFTER:

   PERCENTAGE  

January 15, 2013

     106.125

January 15, 2014 and thereafter

     100.000

 

 

In addition, at any time prior to January 15, 2013, we may redeem up to 35% of the aggregate original principal amounts of the notes issued under the indenture at a price equal to 112.25% of the principal amount, plus accrued and unpaid interest, to the date of redemption with the net cash proceeds of certain equity offerings. The terms of EMC’s senior secured notes also contain certain change in control and sale of asset provisions under which the holders of EMC’s senior secured notes have the right to require us to repurchase all or any part of the notes at an offer price in cash equal to 101% and 100%, respectively, of the principal amount, plus accrued and unpaid interest, to the date of the repurchase.

The indenture governing EMC’s senior secured notes contains various covenants that limit our discretion in the operation of our business. Among other things, it limits our ability and the ability of our subsidiaries to incur additional indebtedness, issue shares of preferred stock, incur liens, make certain investments and loans and enter into certain transactions with affiliates. It also places restrictions on our ability to pay dividends or make certain other restricted payments and our ability or the ability of our subsidiaries to merge or consolidate with any other person or sell, assign, transfer, convey or otherwise dispose of all or substantially all of their respective assets.

EMC’s senior secured notes are guaranteed on a senior secured basis by EM II LP and each of its existing and future U.S. subsidiaries that (1) is directly or indirectly 80% owned by EM II LP, (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 September 30, 2011, EMC is EM II LP’s only U.S. subsidiary, and, therefore, EM II LP is currently the only guarantor of EMC’s senior secured notes. EM II LP will be released from this guarantee as part of the Reorganization.

EMC’s senior secured notes and related guarantees are secured by:

 

  n  

first-priority liens and security interests, subject to permitted liens, in EMC’s and the guarantors’ principal U.S. assets (other than the working capital assets which collateralize the EM revolving credit facility), including material real property, fixtures and equipment, certain intellectual property and certain capital stock of EM II LP’s direct restricted subsidiaries now owned or hereafter acquired; and

 

  n  

second-priority liens and security interests, subject to permitted liens (including first-priority liens securing the EM revolving credit facility), in substantially all of EMC’s and the guarantors’ cash and cash equivalents, deposit and securities accounts, accounts receivable, inventory, other personal property relating to such inventory and accounts receivable and all proceeds there from, in each case now owned or acquired in the future.

Under an intercreditor agreement, the security interest in certain assets consisting of cash and cash equivalents, inventory, accounts receivable, and deposit and securities accounts is subordinated to a lien thereon that secures the EM revolving credit facility. As a result of such lien subordination, EMC’s senior secured notes are effectively subordinated to the revolving credit facility to the extent of the value of such assets.

EM revolving credit facility. On September 2, 2011, our predecessor entered into a sixth amendment to the EM revolving credit facility among JPMorgan Chase Bank, N.A. and other financial institutions party thereto, EMC, EM Europe, Edgen Murray Canada Inc., or EM Canada, and Edgen Murray Pte. Ltd., or EM Pte. The Sixth Amendment extended the maturity date of the EM revolving credit facility from May 11, 2012 to May 11, 2014 and increased the aggregate amount available under the EM revolving credit facility from $175.0 million to $195.0 million (subject to an increase by the Company of up to $25.0 million for a total of $220.0 million), of which:

 

  n  

EMC may utilize up to $180.0 million ($25.0 million of which can only be used for trade finance instruments) less any amounts utilized under the sublimits of EM Canada and EM Europe;

 

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  n  

EM Europe may utilize up to $60.0 million;

 

  n  

EM Canada may utilize up to $10.0 million; and

 

  n  

EM Pte may utilize up to $15.0 million.

Actual credit availability under the EM revolving credit facility for each subsidiary fluctuates because it is subject to a borrowing base, or Borrowing Base, limitation that is calculated based on a percentage of eligible trade accounts receivable and inventories, the balances of which fluctuate, subject to discretionary reserves, revaluation adjustments, and sublimits as defined by the EM revolving credit facility and imposed by the administrative agent. The subsidiaries may utilize the EM revolving credit facility for borrowings as well as for the issuance of various trade finance instruments, and other permitted indebtedness. The EM revolving credit facility is secured by a first priority security interest in all of the working capital assets, including trade accounts receivable and inventories, of EMC, EM Canada, EM Europe, EM Pte and each of the guarantors. Additionally, the common shares of EM Pte and EM FZE secure the portion of the EM revolving credit facility utilized by EM Europe. The EM revolving credit facility is guaranteed by EM II LP. EM II LP will be released from this guarantee as part of the Reorganization. Additionally, each of the EM Canada sub-facility, the EM Europe sub-facility and the EM Pte sub-facility is guaranteed by EMGH, PAL, EM Europe, EM Canada and EM Pte.

As of September 30, 2011, there was no outstanding balance for cash borrowings under the EM revolving credit facility. Trade finance instruments under the EM revolving credit facility as of September 30, 2011 totaled $47.7 million and reserves totaled $3.2 million. During the nine months ended September 30, 2011, our maximum utilization under the EM revolving credit facility was $69.3 million and our weighted average interest rate incurred for indebtedness under the EM revolving credit facility was 3.5%. Borrowings under our EM revolving credit facility incur interest rates and various base rates including Alternate Base Rate, Adjusted LIBOR, Banker’s Acceptance Rate, U.K. Base Rate, Canadian Prime Rate or Singapore Base Rate, plus, in each case, a percentage spread that varies from 0.5% to 3.0% based on the type of borrowing and our average credit availability.

At September 30, 2011, credit availability under the EM revolving credit facility, net of reserves, was as follows (based on the value of the Company’s borrowing base on that date):

 

(IN MILLIONS)

   EMC     EM Canada     EM Europe     EM Pte     Total  

Total availability

   $ 117.8      $ 1.9      $ 22.9      $ 10.0 (b)   $ 152.6   

Less utilization and reserves

     (44.6 )(a)     (0.1 )     (3.0 )     (3.2 )     (50.9 )
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net availability

   $ 73.2      $ 1.8      $ 19.9      $ 6.8      $ 101.7   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

 

(a) Includes a letter of credit in the amount of $12.0 million which supports the local credit facility of EM FZE.
(b) Subsequent to September 30, 2011, the total availability to EM Pte under the EM revolving credit facility increased to $15.0 million in connection with its fulfillment of certain conditions precedent associated with the Sixth Amendment.

The EM revolving credit facility contains a minimum fixed charge coverage ratio covenant of not less than 1.25 to 1.00 that applies if our aggregate availability is reduced below $27.0 million, or the sum of EMC and EM Canada availability is less than $16.5 million until the date that both aggregate availability is greater than $32.0 million and the sum of EMC and EM Canada availability is greater than $21.5 million for a consecutive ninety day period, and no default or event of default exists or has existed during the period. The EM revolving credit facility fixed charge coverage ratio is a ratio of our earnings before interest, depreciation and amortization, and income taxes, subject to certain adjustments and minus capital expenditures and cash taxes, to the sum of our cash interest expense, scheduled principal payments, cash management fees, dividends and distributions and cash earnout or similar payments, all as more specifically defined in the EM revolving credit facility. It is calculated as of the end of each of our fiscal quarters for the period of the previous four fiscal quarters. For the twelve months ended September 30, 2011 the EM revolving credit facility fixed charge coverage ratio exceeded 1.25 to 1.00. Although the EM revolving credit facility fixed charge coverage ratio covenant was not applicable because our aggregate availability was above the applicable thresholds, there can be no assurance that our aggregate availability will not fall below one of the applicable thresholds in the future. Our credit availability could decline if the value of our borrowing base declines, the administrative agent under the EM revolving credit facility imposes reserves in its discretion, our borrowings under the EM revolving credit facility increase or for other reasons. In addition, the agents under the EM revolving credit facility are entitled to conduct borrowing base field audits and inventory appraisals at least annually, which

 

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may result in a lower borrowing base valuation. Our failure to comply with the EM revolving credit facility minimum fixed charge coverage ratio at a time when it is applicable would be an event of default under the EM revolving credit facility, which could result in a default under and acceleration of our other indebtedness.

We believe that the inclusion of the EM revolving credit facility fixed charge coverage ratio calculation in this discussion provides useful information to investors about our compliance with the minimum fixed charge coverage ratio covenant in our EM revolving credit facility. The EM revolving credit facility fixed charge coverage ratio is not intended to represent a ratio of our fixed charges to cash provided by operating activities as defined by generally accepted accounting principles and should not be used as an alternative to cash flow as a measure of liquidity. Because not all companies use identical calculations, this fixed charge coverage ratio presentation may not be comparable to other similarly titled measures of other companies.

EM FZE has a credit facility with local lenders in Dubai under which it has the ability to borrow up to the amount it has secured by a letter of credit. At September 30, 2011, EM FZE had the ability to borrow up to $12.0 million because the facility was secured by a letter of credit in the amount of $12.0 million issued under the EM revolving credit facility. Subsequent to September 30, 2011, the letter of credit which secured the EM FZE facility was reduced to $5.0 million. EM FZE may utilize the local facility for borrowings, foreign currency exchange contracts, trade finance instruments such as letters of credit and bank guarantees, and other permitted indebtedness. This facility is primarily used to support the trade activity of EM FZE. As of September 30, 2011 there were no outstanding cash borrowings and there was approximately $5.8 million in trade finance instruments issued under the EM FZE Facility. Availability under the local credit facility was $6.2 million at September 30, 2011 and the weighted average interest rate paid for utilization of under the EM FZE facility was 2.03% during the nine months ended September 30, 2011.

BL revolving credit facility. After the Reorganization, we will be party to the BL revolving credit facility. On August 19, 2010, B&L Supply entered into the BL revolving credit facility with Regions Bank and RBS Business Capital, a division of RBS Asset Finance, Inc., as co-collateral agents. B&L may utilize the BL revolving credit facility for borrowings as well as for the issuance of trade finance instruments. As of September 30, 2011, there was $23.3 million in outstanding cash borrowings under the BL revolving credit facility and there were no outstanding bank guarantees or letters of credit. During the nine months ended September 30, 2011, B&L’s maximum utilization under the BL revolving credit facility was $62.5 million. During the nine months ended September 30, 2011, the weighted average interest rate incurred for indebtedness under the BL revolving credit facility was 4.25%. Interest on the BL revolving credit facility accrues at adjusted LIBOR, plus 3.0% to 3.5% for LIBOR loans, and Prime plus 2.0% to 2.5% for base rate loans.

Credit availability under the BL revolving credit facility as of September 30, 2011 was $51.8 million. Credit availability is defined as the lesser of (1) the revolving commitment of $75.0 million or (2) an availability amount based on a percentage of eligible trade accounts receivable and inventories, subject to adjustments and sublimits as defined by the BL revolving credit facility, or the BL Borrowing Base. The credit availability under the BL revolving credit facility could decline if the value of BL Borrowing Base declines, the administrative agent under the BL revolving credit facility imposes reserves in its discretion, B&L’s borrowings under the BL revolving credit facility increase or for other reasons. In addition, the agents under the BL revolving credit facility are entitled to conduct borrowing base field audits and inventory appraisals at least annually, which may result in a lower borrowing base valuation. The BL revolving credit facility also contains an unused line commitment fee calculated on a quarterly basis at a rate of 0.5%, 0.625%, and 0.75% based on the daily average excess of the lesser of the total revolving commitment over outstanding borrowings and utilization of availability for bank guarantees and letters of credit.

The BL revolving credit facility is secured by a first-priority security interest in all of the working capital assets of B&L, including trade accounts receivable and inventory and contains financial, affirmative, and negative covenants, including a consolidated fixed charge coverage ratio, as defined by the BL revolving credit facility, not to be less than a ratio of 1.10 to 1.00, and a limitation of capital expenditures not to exceed $3.5 million for the period August 19, 2010 through December 31, 2011 and $3.0 million in 2012 and thereafter. The BL revolving credit facility also provides for limitations, among others, on additional indebtedness, the making of distributions, certain investments loans, and advances, transactions with affiliates, mergers and the sale of assets.

 

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BL term loan. After the Reorganization and before giving effect to our use of the net proceeds from this offering, we will have outstanding the BL term loan, which was issued by B&L on August 19, 2010 under a credit agreement, or the BL term loan agreement. As of September 30, 2011, there is $118.8 million outstanding under the BL term loan. The BL term loan agreement requires quarterly principal payments which began December 31, 2010, of $1.6 million, or 0.0125%, of the original principal amount through September 30, 2011; $2.3 million, or 0.0188%, of the original principal amount through September 30, 2012; and $3.1 million, or 0.025%, of the original principal amount thereafter through the maturity date of August 19, 2015, at which time the remainder of the loan balance is due. Principal payments for the period January 1, 2011 to September 30, 2011 were $4.7 million.

Effective for the year ending December 31, 2011, the BL term loan agreement also requires potential mandatory annual principal prepayments from Excess Cash Flow, or the ECF Prepayment, as defined by the BL term loan agreement, based on audited financial statements of B&L’s wholly-owned subsidiary, B&L Supply, for the year ending December 31, 2011. Such mandatory prepayments are required to be paid within two business days after the issuance of B&L Supply’s audited financial statements, which must be submitted within 90 days after year-end. These mandatory prepayments will be deferred to the extent necessary for B&L Supply to maintain certain liquidity, or the Liquidity Test, as defined by the BL term loan agreement. Deferred amounts may be payable in future periods to the extent B&L Supply satisfies the Liquidity Test.

B&L can prepay the BL term loan at any point in time subject to a make-whole payment or prepayment fee as defined by the BL term loan agreement payable prior to the fourth anniversary of the BL term loan. The BL term loan also contains a mandatory prepayment with respect to additional debt issuance, which is subject to the same make-whole payment or prepayment fee. The ECF Prepayments are not subject to a make-whole payment or prepayment fee. There were no prepayments for the period January 1, 2011 to September 30, 2011.

Prior to August 19, 2012, B&L may at its option, redeem some or all of the BL term loan plus a make-whole amount calculated with respect to the amount repaid. The make-whole amount is defined as the present value of (1) the prepayment fee as of the second anniversary of the closing and (2) interest that would be required through August 19, 2012, assuming the adjusted LIBOR is the greater of the rate in effect on the date of determination or 2.0%. The present value is determined using a discount rate equal to the U.S. Treasury rate as of the date of determination plus 50 basis points. On or after August 19, 2012, a prepayment fee is paid as follows:

 

 

 

     PERCENTAGE  

On or prior:

  

August 19, 2013

     105.50

August 19, 2014

     102.75

 

 

The BL term loan agreement contains various covenants that limit B&L’s discretion, and will limit our discretion, in the operation of its business. Financial covenants include:

 

  (i) a maximum total leverage ratio, as defined by the BL term loan agreement, requiring a ratio of no more than 2.5 to 1.0 at September 30, 2011; 2.25 to 1.0 at December 31, 2011; and 2.0 to 1.0 at March 31, 2012 and thereafter;

 

  (ii) a minimum consolidated interest coverage ratio, as defined by the BL term loan agreement, requiring a minimum ratio of 3.25 to 1.0 through December 31, 2011, and 3.5 to 1.0 for the period March 31, 2012, and thereafter; and

 

  (iii) limitations on capital expenditures with maximum annual capital expenditures of $3.5 million for the year ending December 31, 2011, and $3.0 million for the years ending December 31, 2012 and thereafter.

The BL term loan agreement, among other things, also limits B&L’s ability, B&L Supply’s ability, and will limit our ability to:

 

  (i) incur additional indebtedness, incur liens, make certain investments and loans, enter into sale and leaseback transactions, make material changes in the nature or conduct of B&L’s business, and enter into certain transactions with affiliates;

 

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  (ii) pay dividends or make certain other restricted payments; and

 

  (iii) merge or consolidate with any other person or sell, assign, transfer, convey or otherwise dispose of all or substantially all of their respective assets.

At September 30, 2011, B&L was in compliance with the financial, affirmative, and negative covenants applicable under the BL term loan agreement.

Seller Note. After the Reorganization and prior to our use of proceeds from this offering, we will be party to the Seller Note. The carrying value of the Seller Note as of September 30, 2011 is $48.5 million, net of discount of $5.7 million. The Seller Note accrues interest at a base rate of 2.18% and a contingent interest rate of 5.82% for an aggregate interest rate of 8.0%. A portion of the accrued interest equal to 37.5% of the base rate is due annually on April 15 until maturity. The remaining portion of the accrued interest is added to the Seller Note principal balance to be paid at maturity. At September 30, 2011, cumulative interest added to the note payable to the former owner of B&L Predecessor was $4.2 million and is included in its carrying value.

Statement of Cash Flows Data

Net cash flows provided by operating activities are largely dependent on earnings from our business activities and are exposed to certain risks. Since we operate predominantly in the energy industry and provide our products to customers within this industry, reduced demand for oil and gas and reduced spending by our customers for the exploration, production, processing, transportation, storage, and refining of oil and natural gas, whether because of a decline in general economic conditions, reduced demand for our products, increased competition from our competitors, or adverse effects on relationships with our customers and suppliers could have a negative impact on our earnings and operating cash flows.

Our consolidated statements of cash flows are prepared using the indirect method. The indirect method derives net cash flows from operating activities by adjusting net income to remove (1) the effects of all deferrals of past operating cash receipts and payments, such as changes during the period in inventory, deferred income and similar transactions, (2) the effects of all accruals of expected future operating cash receipts and cash payments, such as changes during the period in receivables and payables, (3) other non-cash amounts such as depreciation, amortization, accretion, changes in the fair market value of derivative instruments, and equity in income from our unconsolidated affiliate (net cash flows provided by operating activities reflect the actual cash distributions we receive from our unconsolidated affiliate), and (4) the effects of all items classified as investing or financing cash flows, such as proceeds from asset sales and related transactions or extinguishment of debt. In general, the net effect of changes in operating accounts results from the timing of cash receipts from sales and cash payments for purchases and other expenses during each period. Increases or decreases in inventory are influenced by the demand and prices for our products. As a result of the worldwide economic recession and its impact on steel demand and prices, our suppliers have experienced a reduction in trade credit insurance available to them for sales to foreign accounts. This has resulted in our suppliers (1) reducing the available credit they grant to us and others and (2) requiring other forms of credit from us, such as trade finance instruments under the EM revolving credit facility which has decreased availability under the EM revolving credit facility. Since we incur costs for letters of credit under the EM revolving credit facility, this trend has increased our borrowing costs, although not significantly.

Cash used in investing activities primarily represents expenditures for additions to property, plant and equipment, business combinations and investments in our unconsolidated affiliate. Cash provided by or used in financing activities generally consists of borrowings and repayments of debt and fluctuations in our managed cash overdraft. Our borrowings and repayments of debt are influenced by changes in our credit availability, which is driven by the amount of eligible inventory and receivables we have at a given time, and changes in demand for our products.

 

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The following information highlights the significant year-to-year variances in our cash flow amounts:

 

 

 

     NINE MONTHS ENDED
SEPTEMBER 30,
 

(IN MILLIONS)

       2011