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EDG > SEC Filings for EDG > Form 10-Q on 14-Nov-2013All Recent SEC Filings

Show all filings for EDGEN GROUP INC.

Form 10-Q for EDGEN GROUP INC.


14-Nov-2013

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the unaudited condensed consolidated/combined consolidated financial statements and the related notes contained herein as well as the audited combined consolidated financial statements and related notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2012.The following discussion and analysis of our financial condition and results of operations contains forward looking statements within the meaning of federal securities laws. See Cautionary Statement Regarding Forward-Looking Statements for a discussion of the risks, assumptions and uncertainties affecting these forward looking statements.

Overview of Business

We are a leading global distributor of specialty products to the energy sector, including steel pipe, valves, quenched and tempered and high yield heavy plate, and related components. We manage our business in two reportable segments: E&I and OCTG, while primarily focusing on serving customers that operate in the upstream (conventional and unconventional oil and natural gas exploration, drilling and production 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 end-markets, which have a similar need for specialized steel and specialty products. As of September 30, 2013, we had operations in eighteen countries and on five continents, with our corporate headquarters located in Baton Rouge, Louisiana.

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Our business is highly dependent on conditions in the energy industry and, in particular, our customers' willingness to make capital and operating expenditures for oil and natural gas infrastructure and exploration. We believe that worldwide demand for oil and natural gas and its impact on oil and natural gas prices are key indicators for our business, as our customers take those factors into consideration when making their capital and maintenance spending decisions. We also believe that the land-based rig count in North America is an additional key indicator, as it impacts business conditions related to our OCTG business.

Pending Merger Agreement with Sumitomo Corporation of America

On October 1, 2013, we entered into the Merger Agreement, under which Lochinvar will merge with and into Edgen Group Inc., with Edgen Group Inc. continuing as the surviving corporation and a subsidiary of Sumitomo. Pursuant to the Merger Agreement, at the effective time of the Merger, each issued and outstanding share of Class A common stock, including those shares issued upon consummation of the Exchange, will be converted into the right to receive the Merger Consideration, other than any shares of Class A common stock owned by Sumitomo or the Company or any of their subsidiaries and those shares of Class A common stock with respect to which appraisal rights under Delaware law are properly exercised and not withdrawn. In addition, each stock option, whether vested or unvested, that is outstanding immediately prior to the Merger will be cancelled in exchange for a cash payment equal to the excess, if any, of the Merger Consideration over the exercise price per share under such option multiplied by the number of shares of common stock subject to such option and each share of restricted Class A common stock, whether vested or unvested, that is outstanding immediately prior to the Merger will be cancelled in exchange for the Merger Consideration.


Also on October 1, 2013, the Majority Stockholders entered into the Exchange and Tax Receivable Termination Agreement, under which two tax receivable agreements dated May 2, 2012 will be terminated without any payment by the Company. Under the tax receivable agreements, the Company had previously agreed to make certain payments to the Majority Stockholders based upon the reduction of the Company's liability for U.S. federal, state and local and franchise taxes arising from adjustments to EDG LLC's basis in its assets and imputed interests.
Additionally, pursuant to the Exchange and Tax Receivable Termination Agreement, the Exchange will be effected. As a result, the Majority Stockholders will receive the same consideration in the Merger as all other stockholders and will forego the right to receive any payments under the tax receivable agreements.

In addition, the Majority Stockholders executed a written consent on October 1, 2013, adopting the Merger Agreement and approving the Merger. No further approval of the stockholders of the Company is required to adopt the Merger Agreement or approve the Merger.

We currently expect to complete the Merger prior to the end of 2013. Consummation of the merger is subject to satisfaction or waiver of certain customary closing conditions, including certain regulatory approvals.

Following our announcement of the Merger Agreement, a purported class action lawsuit challenging the Merger was filed on behalf of all of the Company's stockholders against the Company, our board of directors, Sumitomo, Lochinvar and Sumitomo Corporation. See Note 8 - Contingencies and Commitments to our condensed consolidated/combined consolidated financial statements included in this Form 10-Q for additional information.

Markets

E&I. Volume declines and price reductions have impacted the financial results of our E&I segment for the three and nine months ended September 30, 2013, which are primarily the result of short supplier lead times and continued project award delays, particularly from upstream offshore jack up rig construction. The overall rate of new sales orders received has slowly increased, as reflected in our sales backlog balance at September 30, 2013. See Sales Backlog for additional information.

OCTG. The supply of North American oil country tubular goods as a result of excess mill capacity and increased imports continued to outpace demand, resulting in poor pricing opportunities during the three and nine months ended September 30, 2013. In the short term, we do not expect significant price improvements until there is a better balance between demand, U.S. mill capacity and import levels.

On July 2, 2013, nine U.S. manufacturers of oil country tubular goods filed an anti-dumping trade case against nine foreign countries claiming they had been harmed by unfair trade practices. On August 16, 2013, the Commerce Department's International Trade Commission ("ITC") voted to move forward with a full and comprehensive investigation. A preliminary decision, originally due December 9, 2013, has been postponed to February 13, 2014 due to the recent government shutdown and the complexity of the case. Although the ultimate outcome of this case is unpredictable, a favorable ruling for the U.S. manufacturers could result in improved pricing for oil country tubular goods and a better balance between supply and demand.


Results of Operations

The following tables provide period-to-period comparisons of financial results and are not necessarily indicative of future results. "NM" means not meaningful.

Three months ended September 30, 2013 compared to three months ended September 30, 2012

Net sales

                                               Three months ended September 30,
(in millions, except percentages)                2013                     2012            $ Change       % Change
E&I                                        $          214.1         $          295.6     $    (81.5 )         (28% )
OCTG                                                  204.7                    239.2          (34.5 )         (14% )
Eliminations                                           (0.1 )                   (0.2 )          0.1             NM
Total net sales                            $          418.7         $          534.6     $   (115.9 )         (22% )

E&I. The decrease in net sales for the three months ended September 30, 2013 as compared to the same period in 2012 was primarily the result of lower sales volumes as well as a weak pricing environment in North America and strong competition in our EMEA and APAC regions. Sales volume declines were concentrated primarily within the midstream end market in North America and the upstream end market in our APAC region. Both end markets began the current three-months ended period with sales backlog levels significantly lower than the same period in 2012. These decreases were partially offset by the impact of the operating results of our 2012 acquisitions.

OCTG. For the three months ended September 30, 2013, OCTG net sales declined 14% from the same period in 2012. The net sales decline resulted primarily from depressed sales pricing caused by an oversupply of material and by an approximate 8% decline in average U.S. land-based drilling rig counts (as measured by Baker Hughes Incorporated at www.bakerhughes.com.)

Income (loss) from operations

                                              Three months ended September 30,
(in millions, except percentages)               2013                    2012            $ Change       % Change
E&I                                        $           7.1         $          19.4     $    (12.3 )         (63% )
OCTG                                                  10.3                    16.0           (5.7 )         (36% )
Corporate                                             (7.2 )                  (3.8 )         (3.4 )          89%
Total income (loss) from operations        $          10.2         $          31.6     $    (21.4 )         (68% )

E&I. The decrease in income from operations for the three months ended September 30, 2013 as compared to the same period in 2012 was due primarily to the decrease in net sales described above.

OCTG. The decrease in income from operations for the three months ended September 30, 2013 as compared to the same period in 2012 relates to the decrease in net sales described above.

Corporate. Corporate loss from operations increased during the three months ended September 30, 2013 as compared to the same period in 2012 primarily due to $2.3 million of costs incurred related to the pending Merger.

Other income (expense)

                                               Three months ended September 30,
(in millions, except percentages)                2013                     2012            $ Change       % Change
Other income (expense) - net               $            0.3         $           (0.4 )   $      0.7          (175% )
Loss on prepayment of debt                             (2.0 )                      -           (2.0 )           NM
Interest expense - net                                (14.6 )                  (18.3 )          3.7           (20% )
Income tax expense (benefit)                            0.5                      2.5           (2.0 )         (80% )

Loss on prepayment of debt

During the three months ended September 30, 2013, we incurred a loss related to an early repayment of the Seller Note.

Interest expense - net

The decrease in interest expense during the three months ended September 30, 2013 as compared to the same period in 2012 is primarily due to lower borrowing costs as a result of reduced indebtedness and lower interest rates as a result of debt refinancings completed during 2012.

Income tax expense (benefit)

Due to the organizational structure of our subsidiaries, some of which are pass-through entities for income tax purposes, and others which are corporations, the effective tax rate calculated from our condensed consolidated/combined consolidated financial statements is not indicative of our actual effective tax rate, which is a combination of the effective tax rates of our taxable subsidiaries, adjusted for our ownership percentage of each subsidiary.


The income tax expense for the three months ended September 30, 2013 reflects taxable income at an annualized estimated effective tax rate of approximately 17%. Prior to the IPO and Reorganization, we did not incur tax on the income earned by the subsidiary that comprises our OCTG segment because that subsidiary was a pass-through entity for income tax purposes. As a result of the Reorganization, we now incur tax expense as a result of our allocation of the OCTG segment's income. Additionally, we did not recognize a tax benefit for taxable losses generated in our E&I segment by our U.S. operations during the three months ended September 30, 2013 and 2012 due to a valuation allowance that has been established against any tax benefits related to these taxable losses. As a result, any tax benefits from our E&I segment's U.S. operations were excluded in deriving our estimated annual effective tax rate for the three months ended September 30, 2013.

Nine months ended September 30, 2013 compared to nine months ended September 30, 2012

Net sales

                                           Nine months ended September
                                                       30,
(in millions, except percentages)             2013             2012         $ Change       % Change
E&I                                        $    633.7       $    828.7     $   (195.0 )         (24% )
OCTG                                            623.0            708.5          (85.5 )         (12% )
Eliminations                                     (0.3 )           (0.2 )         (0.1 )           NM
Total net sales                            $  1,256.4       $  1,537.0     $   (280.6 )         (18% )

E&I. The decrease in net sales for the nine months ended September 30, 2013 as compared to the same period in 2012 was primarily the result of volume declines, concentrated primarily within the midstream and upstream end markets in North America and the upstream end market in our APAC region. Both the midstream and upstream end markets had significantly lower backlog levels entering 2013 as compared to the same period in 2012. Partially offsetting these decreases were increased sales volumes in the upstream end market in our EMEA region, which was positively impacted by our 2012 acquisitions as well as by organic growth resulting from strategic investments in personnel and locations.

OCTG. The decrease in net sales for the nine months ended September 30, 2013 as compared to the same period in 2012 was primarily related to sales price declines of approximately 10%. Despite an overall decrease of 11% in the average U.S. land-based drilling rig count (as measured by Baker Hughes Incorporated at www.bakerhughes.com) period over period, our volumes were down by only 3%. We attribute this, in part, to our success at renewing our key customer drilling programs.

Income (loss) from operations

                                                Nine months ended September 30,
(in millions, except percentages)                2013                     2012            $ Change       % Change
E&I                                        $           22.8         $           49.8     $    (27.0 )         (54% )
OCTG                                                   35.9                     42.4           (6.5 )         (15% )
Corporate                                             (15.5 )                  (11.1 )         (4.4 )          40%
Total income (loss) from operations        $           43.2         $           81.1     $    (37.9 )         (47% )

E&I. The decrease in income from operations for the nine months ended September 30, 2013 as compared to the same period in 2012 was due primarily to the decrease in net sales described above. In addition, selling, general and administrative ("SG&A") expenses increased as a result of current year expansions and our 2012 acquisitions, but were partially offset by a decrease in amortization expense quarter over quarter.

OCTG. The decrease in income from operations for the nine months ended September 30, 2013 as compared to the same period in 2012 was due to the decrease in net sales described above, partially offset by a $3.0 million 2012 SG&A charge associated with the acceleration of the vesting period for certain equity-based awards previously granted to segment employees that did not reoccur in the current year.

Corporate. Corporate loss from operations increased during the nine months ended September 30, 2013 as compared to the same period in 2012 primarily due to $2.3 million of costs incurred related to the pending Merger, as well as increased equity-based compensation expense.


Other income (expense)

                                                Nine months ended September 30,
(in millions, except percentages)                2013                     2012            $ Change      % Change
Other income (expense) - net               $           (1.8 )       $            0.1     $     (1.9 )     (1,900% )
Loss on prepayment of debt                             (3.7 )                  (17.0 )         13.3          (78% )
Interest expense - net                                (44.3 )                  (59.9 )         15.6          (26% )
Income tax expense (benefit)                            5.6                      3.7            1.9           51%

Other income (expense) - net

During the nine months ended September 30, 2013, we incurred a charge associated with B&L's cash redemption of EMC's interest in B&L. As part of the redemption, we became obligated under our tax receivable agreement with EM II LP to pay 85% of any realized cash tax savings that we may receive over the next fifteen years, which was estimated to be $2.3 million at September 30, 2013.

Loss on prepayment of debt

Loss on prepayment of debt for the nine months ended September 30, 2013 related to a partial prepayment of the Seller Note in January 2013 and a final repayment of the Seller Note in September 2013. Loss on prepayment of debt for the nine months ended September 30, 2012 related to our early repayment of the BL term loan debt and partial repayment of the Seller Note.

Interest expense - net

The decrease in interest expense during the nine months ended September 30, 2013 as compared to the same period in 2012 is primarily due to lower borrowing costs as a result of reduced indebtedness and lower interest rates as a result of debt refinancings completed during 2012.

Income tax expense (benefit)

Due to the organizational structure of our subsidiaries, some of which are pass-through entities for income tax purposes, and others which are corporations, the effective tax rate calculated from our condensed consolidated/combined consolidated financial statements is not indicative of our actual effective tax rate, which is a combination of the effective tax rates of our taxable subsidiaries, adjusted for our ownership percentage of each subsidiary.

The income tax expense for the nine months ended September 30, 2013 reflects taxable income at an annualized estimated effective tax rate of approximately 17%. Prior to the IPO and Reorganization, we did not incur tax on the income earned by the subsidiary that comprises our OCTG segment because that subsidiary was a pass-through entity for income tax purposes. As a result of the Reorganization, we now incur tax expense as a result of our allocation of the OCTG segment's income. Additionally, we did not recognize a tax benefit for taxable losses generated in our E&I segment by our U.S. operations during the nine months ended September 30, 2013 and 2012 due to a valuation allowance that has been established against any tax benefits related to these taxable losses. As a result, any tax benefits from our E&I segment's U.S. operations were excluded in deriving our estimated annual effective tax rate for the nine months ended September 30, 2013.

Non-GAAP Financial Measures

We define EBITDA as net income (loss), plus interest expense, provision for income taxes, depreciation and amortization expense. We define adjusted EBITDA as EBITDA plus loss on prepayment of debt, certain transaction costs, expense related to our obligation under our tax receivable agreement and equity-based compensation expense.

For the following reasons, we believe EBITDA and adjusted EBITDA represent an effective supplemental means by which to measure our operating performance: (a) management uses EBITDA and adjusted EBITDA 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 and (b) EBITDA and adjusted EBITDA enable us and our investors to evaluate and compare our results from operations in a more meaningful and consistent manner by excluding specific items which are not reflective of ongoing operating results, such as items related to capital structure, taxes and certain non-cash charges.

These Non-GAAP measures, as calculated by us, are not necessarily comparable to similarly titled measures reported by other companies. Additionally, because EBITDA and adjusted EBITDA do not account for certain items which may be material to a complete evaluation of our operating results, the measures have material limitations as analytical tools and are not considered by our management in isolation of, as an alternative to or superior to GAAP measures such as net income, operating income, net cash flow provided by operating activities or any other measure of financial performance or liquidity calculated and presented in accordance with GAAP.


We believe that the line item on our condensed consolidated/combined consolidated statements of operations entitled "net income (loss)" is the most directly comparable GAAP measure to EBITDA and adjusted EBITDA. A reconciliation of EBITDA and adjusted EBITDA to net income (loss) for the three and nine months ended September 30, 2013 and 2012 is shown below:

                                               Three months ended September 30,              Nine months ended September 30,
(in millions)                                    2013                    2012                 2013                     2012
Net income (loss)                           $          (6.6 )       $          10.4     $          (12.2 )       $            0.7
Income taxes expense (benefit)                          0.5                     2.5                  5.6                      3.7
Interest expense - net                                 14.6                    18.3                 44.3                     59.9
Depreciation and amortization expense                   6.0                     7.9                 19.7                     24.0
EBITDA                                      $          14.5         $          39.1     $           57.4         $           88.3
Loss on prepayment of debt (1)                          2.0                       -                  3.7                     17.0
Transaction costs (2)                                   2.3                     0.2                  2.3                      0.2
Charge associated with TRA obligation (3)                 -                       -                  2.3                        -
Equity-based compensation (4)                           0.8                     0.5                  2.5                      4.9
Adjusted EBITDA                             $          19.6         $          39.8     $           68.2         $          110.4

(1) Includes prepayment penalties and the expensing of previously deferred debt issuance costs and unamortized discounts associated with certain indebtedness repaid during the periods indicated.

(2) For 2013, represents costs incurred related to the pending Merger. For 2012, represents certain acquisition costs expensed during the periods indicated.

(3) Represents a non-cash charge associated with B&L's cash redemption of EMC's interest in B&L.

(4) Reflects non-cash compensation expense related to the issuance of equity-based awards, and which includes $3.0 million for the nine months ended September 30, 2012 related to equity-based compensation expense associated with the acceleration of the vesting period for certain equity-based awards previously granted to certain employees within our OCTG segment.

Sales Backlog

Our sales backlog within our E&I segment represents our estimate of potential future net sales that may result from contracts/orders currently awarded to us by our customers. Sales backlog is determined by the amount of unshipped third-party customer purchase orders and may be revised upward or downward, or canceled by our customers in certain instances. Realization of net sales from sales backlog is dependent on, among other things, our ability to fulfill purchase orders and transfer title to customers, which in turn is dependent on a number of factors, including our ability to obtain product from our suppliers. Further, because of the project nature of our business, sales orders and sales backlog can vary materially from quarter to quarter.

Within our OCTG segment, we do not aggregate our expected sales to track sales backlog, as there is generally a minimal interval between securing an order and sales recognition.

The table below presents our sales backlog at the end of each period indicated:

(in millions) September 30, 2013 December 31, 2012 September 30, 2012 E&I sales backlog $ 309 $ 248 $ 350

Sales backlog for our E&I segment is primarily composed of sales orders related to: (1) the construction of offshore high performance multi-purpose platform, or jack-up, oil rigs and other offshore exploration and production infrastructure;
(2) oil and natural gas gathering and storage systems; and (3) civil construction and mining. Additionally, due to the nature of the projects included in our sales backlog at September 30, 2013 as compared to the projects included in our sales backlog at September 30, 2012, we expect that the realization of net sales from these projects will occur over a longer period of time.


We view backlog as one indicator of short-term financial results, because our backlog generally ships to customers within twelve months of receiving an order. We do not consider backlog as a long-term indicator of our future growth. There can be no assurance that sales backlog will ultimately be realized as net sales or that we will earn a profit on any of our sales backlog.

Liquidity and Capital Resources

Overview

Typically, our principal sources of liquidity are our cash on hand, the collection of our accounts receivable and borrowings made under our Global Credit Agreement. As of September 30, 2013, we had $13.6 million of unrestricted cash and cash equivalents on hand, $183.9 million of borrowing availability under our Global Credit Agreement and $1.9 million of borrowing availability under our EM FZE facility. Typically, our primary cash requirements include normal operating expenses, debt service requirements, tax distributions to non-controlling interests and funding of working capital, capital expenditures . . .

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