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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

(Mark One)

x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2011

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

Commission File Number: 333-165928 - 01

EDGEN MURRAY II, L.P.

(Exact name of registrant as specified in its charter)


Delaware		20-8864225
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

18444 Highland Road Baton Rouge, LA		70809
(Address of principal executive offices)		(Zip Code)

Registrant’s telephone number, including area code: (225) 756-9868

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x

INDEX


PART I - FINANCIAL INFORMATION		1

Item 1.	UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS	1

Item 2.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	24

Item 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	33

Item 4.	CONTROLS AND PROCEDURES	34

PART II - OTHER INFORMATION		35

Item 1.	LEGAL PROCEEDINGS	35

Item 1A.	RISK FACTORS	35

Item 2.	UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS	35

Item 3.	DEFAULTS UPON SENIOR SECURITIES	35

Item 4.	(REMOVED AND RESERVED)	35

Item 5.	OTHER INFORMATION	35

Item 6.	EXHIBITS	35

SIGNATURES		36

EXHIBIT INDEX		36

PART I - FINANCIAL INFORMATION

Item 1.

UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Edgen Murray II, L.P. and subsidiaries

Unaudited condensed consolidated balance sheets

At September 30, 2011 and December 31, 2010

(In thousands)


	September 30, 2011			December 31, 2010
ASSETS
CURRENT ASSETS:
Cash and cash equivalents	$	11,906		$	62,478
Accounts receivable—net of allowance for doubtful accounts of $1,587 and $1,725, respectively		156,517			104,831
Inventory		179,918			128,482
Income tax receivable		1,352			19,595
Prepaid expenses and other current assets		7,608			6,039
Deferred tax asset—net		177			35
Asset held for sale		—			5,224

Total current assets		357,478			326,684
PROPERTY, PLANT, AND EQUIPMENT—NET		46,263			49,287
GOODWILL		23,058			22,912
OTHER INTANGIBLE ASSETS—NET		29,353			40,766
OTHER ASSETS		337			812
DEFERRED TAX ASSET—NET		819			38
DEFERRED FINANCING COSTS		12,182			12,678
INVESTMENT IN UNCONSOLIDATED AFFILIATE		12,272			10,843

TOTAL ASSETS	$	481,762		$	464,020


LIABILITIES AND DEFICIT
CURRENT LIABILITIES:
Managed cash overdrafts	$	2,830		$	2
Accounts payable		109,975			68,812
Accrued expenses and other current liabilities		11,838			10,140
Income taxes payable		4,586			2,046
Deferred revenue		2,342			2,304
Accrued interest payable		12,154			26,340
Deferred tax liability—net		794			38
Current portion of long-term debt and capital lease		351			318

Total current liabilities		144,870			110,000
DEFERRED TAX LIABILITY—NET		4,682			5,470
OTHER LONG-TERM LIABILITIES		787			319
LONG-TERM DEBT AND CAPITAL LEASE		479,833			479,493

Total liabilities		630,172			595,282

COMMITMENTS AND CONTINGENCIES
DEFICIT:
General partner		1			1
Limited partners		(123,508	)		(105,774	)
Accumulated other comprehensive loss		(25,171	)		(25,531	)

Total partners’ deficit		(148,678	)		(131,304	)
Non-controlling interest		268			42

Total deficit		(148,410	)		(131,262	)

TOTAL LIABILITIES AND DEFICIT	$	481,762		$	464,020

See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.

Edgen Murray II, L.P. and subsidiaries

Unaudited condensed consolidated statements of operations

For the three and nine months ended September 30, 2011 and 2010

(In thousands)


	Three months ended September 30,						Nine months ended September 30,
	2011			2010			2011			2010
SALES	$	244,838		$	174,217		$	652,949		$	454,418
OPERATING EXPENSES:
Cost of sales (exclusive of depreciation and amortization shown below)		207,904			149,199			553,052			386,906
Selling, general and administrative expense, net of service fee income		20,780			15,350			55,422			50,519
Depreciation and amortization expense		5,296			5,082			15,891			15,057
Impairment of goodwill		—			—			—			62,805

Total operating expenses		233,980			169,631			624,365			515,287

INCOME (LOSS) FROM OPERATIONS		10,858			4,586			28,584			(60,869	)
OTHER INCOME (EXPENSE):
Equity in earnings of unconsolidated affiliate		1,220			460			2,645			460
Other income (expense) - net		(97	)		534			1,453			243
Interest expense - net		(15,051	)		(16,076	)		(47,516	)		(48,153	)

LOSS BEFORE INCOME TAX EXPENSE (BENEFIT)		(3,070	)		(10,496	)		(14,834	)		(108,319	)
INCOME TAX EXPENSE (BENEFIT)		1,193			(5,632	)		3,315			(21,086	)

NET LOSS		(4,263	)		(4,864	)		(18,149	)		(87,233	)
NET INCOME ATTRIBUTABLE TO NON-CONTROLLING INTEREST		166			14			226			30

NET LOSS AVAILABLE TO COMMON PARTNERSHIP INTERESTS	$	(4,429	)	$	(4,878	)	$	(18,375	)	$	(87,263	)

See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.

Edgen Murray II, L.P. and subsidiaries

Unaudited condensed consolidated statements of (deficit) capital and comprehensive income (loss)

For the nine months ended September 30, 2011 and 2010

(In thousands, except unit data)


	Number of units
	Common general partnership interest		Common limited partnership interests			Common partnership interests			Accumulated other comprehensive income (loss)			Total partners’ deficit			Non-controlling interest		Total deficit
Balances as of January 1, 2010		1		209,598		$	(8,310	)	$	(21,469	)	$	(29,779	)	$	—	$	(29,779	)
Net (loss) income		—		—			(87,263	)		—			(87,263	)		30		(87,233	)
Other comprehensive income (loss):
Foreign translation adjustments		—		—			—			(2,400	)		(2,400	)		—		(2,400	)

Comprehensive (loss) income		—		—			—			—			(89,663	)		30		(89,633	)
Contributions to non-controlling interest		—		—			—			—			—			16		16
Forfeiture of non-vested restricted units		—		(355	)		—			—			—			—		—
Issuance of restricted common units		—		250			—			—			—			—		—
Amortization of restricted common units		—		—			461			—			461			—		461
Amortization of unit options		—		—			131			—			131			—		131

Balances as of September 30, 2010		1		209,493		$	(94,981	)	$	(23,869	)	$	(118,850	)	$	46	$	(118,804	)


Balances as of January 1, 2011		1		209,493		$	(105,773	)	$	(25,531	)	$	(131,304	)	$	42	$	(131,262	)
Net (loss) income		—		—			(18,375	)		—			(18,375	)		226		(18,149	)
Other comprehensive income (loss):
Foreign translation adjustments		—		—			—			360			360			—		360

Comprehensive (loss) income		—		—			—			—			(18,015	)		226		(17,789	)
Amortization of restricted common units		—		—			21			—			21			—		21
Amortization of unit options		—		—			620			—			620			—		620

Balances as of September 30, 2011		1		209,493		$	(123,507	)	$	(25,171	)	$	(148,678	)	$	268	$	(148,410	)

See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.

Edgen Murray II, L.P. and subsidiaries

Unaudited condensed consolidated statements of cash flows

For the nine months ended September 30, 2011 and 2010

(In thousands)


	Nine months ended September 30,
	2011			2010
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss	$	(18,149	)	$	(87,233	)
Adjustments to reconcile net loss to net cash (used in) provided by operating activities:
Depreciation and amortization		15,891			15,057
Amortization of deferred financing costs		1,817			2,726
Impairment of goodwill		—			62,805
Equity in earnings of unconsolidated affiliate		(2,645	)		(460	)
Distributions received from unconsolidated affiliate		835			—
Amortization of discount on long-term debt		547			483
Unit-based compensation expense		641			593
Allowance for doubtful accounts		27			141
Provision for inventory allowances and writedowns		876			1,370
Deferred income tax benefit		(1,086	)		(4,031	)
Loss on foreign currency transactions		657			1,732
Unrealized (gain) loss on derivative instruments		639			(364	)
Gain on sale of property, plant, and equipment		(994	)		(287	)
Changes in operating assets and liabilities:
Accounts receivable		(52,102	)		8,761
Inventory		(52,471	)		(13,799	)
Income tax receivable		18,235			4,043
Prepaid expenses and other current assets		(932	)		1,853
Accounts payable		43,557			14,252
Accrued expenses, other current liabilities, and deferred revenue		(13,365	)		(5,609	)
Income tax payable		2,713			(1,388	)
Other		251			1,050

Net cash (used in) provided by operating activities		(55,058	)		1,695

CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of PetroSteel business-net of cash acquired		—			(4,000	)
Purchases of property, plant, and equipment		(2,410	)		(9,575	)
Investment in unconsolidated affiliate		—			(10,000	)
Proceeds from the sale of property, plant, and equipment		6,276			325

Net cash provided by (used in) investing activities		3,866			(23,250	)

CASH FLOWS FROM FINANCING ACTIVITIES:
Deferred financing costs		(1,309	)		(1,097	)
Principal payments on long-term debt and capital lease		(297	)		(4,221	)
Proceeds from Asset Based Loan Facility (“ABL Facility”)		56,412			12,538
Payments to ABL Facility		(56,412	)		(12,538	)
Managed cash overdraft		2,848			(27	)

Net cash provided by (used in) financing activities		1,242			(5,345	)

Effect of exchange rate changes on cash and cash equivalents		(622	)		(183	)

NET CHANGE IN CASH AND CASH EQUIVALENTS		(50,572	)		(27,083	)
CASH AND CASH EQUIVALENTS - beginning of period		62,478			65,733

CASH AND CASH EQUIVALENTS - end of period	$	11,906		$	38,650

See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.

Edgen Murray II, L.P. and subsidiaries

Notes to unaudited condensed consolidated financial statements

(In thousands, except per unit data and number of units)

1. General information

Description of Operations—Edgen Murray II, L.P. (“EM II LP”), through its subsidiaries, has operations in the United States, Canada, Brazil, the United Kingdom (“U.K.”), Singapore, India, the United Arab Emirates (“UAE”), and Saudi Arabia, and sales representative offices in Australia, China, France, and Indonesia. The Company is headquartered in Baton Rouge, Louisiana. References to the “Company” include EM II LP and its subsidiaries.

The Company is a global distributor of specialty steel products primarily to the oil and gas, power, petrochemical, mining, and civil construction markets. The Company’s product catalog consists of pipe, plate, valves and sections, including highly-engineered prime carbon and alloy steel pipe, pipe components, valves and high-grade structural sections and plate. These items are often designed to operate in severe conditions, including high pressure, load bearing, compression and extreme temperature environments, and to withstand the effects of corrosive or abrasive materials. The Company’s customers include engineering, procurement and construction firms, equipment fabricators, multi-national and national major integrated oil and natural gas companies, independent oil and natural gas companies, natural gas transmission and distribution companies, petrochemical companies, mining companies, oil sands developers, hydrocarbon, nuclear and renewable power generation companies, utilities, civil construction contractors and municipal and transportation authorities.

Organization—EM II LP is a Delaware limited partnership formed on April 3, 2007, by Jefferies Capital Partners IV L.P., Jefferies Employee Partners IV LLC, and JCP Partners IV LLC (collectively, “Fund IV”) to acquire the common shares of the operating subsidiaries of Edgen/Murray, L.P., the Company’s predecessor, which was formed on November 22, 2005 by ING Furman Selz Investors III, LP, ING Barings U.S. Leveraged Equity Plan LLC, ING Barings Global Leveraged Equity Plan Ltd. (collectively, “Fund III”) and certain members of Edgen Murray Corporation (“EMC”) management. On May 11, 2007, EM II LP, including institutional investors and existing management, acquired the common shares of EMC and Pipe Acquisition Limited (“PAL”), the principal assets of Edgen/Murray, L.P. The formation of EM II LP, the acquisition of the assets of Edgen/Murray, L.P. and the related financing transactions are referred to as the “Recapitalization Transaction”. Jefferies Capital Partners (“JCP”) has controlled EM II LP and its predecessor, Edgen/Murray L.P., since the acquisition of Edgen Corporation on February 1, 2005.

Basis of presentation—The condensed consolidated financial statements and the related notes to the financial statements are presented in accordance with accounting principles generally accepted in the United States of America (“generally accepted accounting principles” or “GAAP”) and pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) for interim reporting. Certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations. These unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company’s most recent Annual Report on Form 10-K for the year ended December 31, 2010 filed with the SEC and other financial information filed with the SEC.

The condensed consolidated financial statements include the accounts of EM II LP and its wholly-owned subsidiaries. EM II LP’s subsidiary, Edgen Murray FZE (“EM FZE”), has a consolidated 70% ownership in a Bahraini joint venture which operates in Saudi Arabia. The remaining 30% ownership is presented as non-controlling interest in the condensed consolidated financial statements of EM II LP.

The Company accounts for its 14.5% investment in Bourland and Leverich Holdings LLC and Subsidiary (“B&L”), a distributor of oil country tubular goods, under the equity method in accordance with ASC Topic 323, Investments—Equity Method and Joint Ventures, which requires the use of the equity method of accounting unless the investor’s interest is “so minor” that the investor may have virtually no influence over operating and financial policies. The Company’s investment in B&L is included in investment in unconsolidated affiliate on the condensed consolidated balance sheets. Earnings on this investment are recorded in equity in earnings of unconsolidated affiliate in the condensed consolidated statements of operations. Any intra-entity profit or loss has been eliminated for all periods presented.

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

•

provisions for uncollectible receivables and client claims and recoveries of costs from vendors and others;

•

recoverability of inventories and application of lower of cost or market accounting;

•

provisions for income taxes and related valuation allowances and tax uncertainties;

•

recoverability of goodwill;

•

recoverability of other intangibles and long-lived assets and related estimated lives;

•

accruals for estimated liabilities, including litigation and insurance accruals; and

•

valuation of equity-based compensation.

Actual results could differ from those estimates, and the foregoing interim results are not necessarily indicative of the results of operations to be expected for other interim periods or for the full fiscal year ending December 31, 2011. In the opinion of our management, the condensed consolidated financial statements reflect all adjustments, including those of a normal recurring nature, necessary to present fairly the results of the reported interim periods. Dollar amounts contained in these condensed consolidated financial statements are in thousands, except per unit and number of unit data.

The condensed consolidated balance sheet at December 31, 2010 and the condensed consolidated statement of cash flows for the nine months ended September 30, 2010 have been adjusted to conform to the presentation of long-term debt and capital lease at September 30, 2011 and for the nine months ended September 30, 2011, respectively.

2. Recent accounting pronouncements

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

In October 2009, FASB issued ASU 2009-13, Revenue Recognition (Topic 605), Multiple Deliverable Revenue Arrangements – A Consensus of the FASB Emerging Issues Task Force which provides guidance on whether multiple deliverables exist, how the deliverables should be separated and how the consideration should be allocated to one or more units of accounting. This update establishes a selling price hierarchy for determining the selling price of a deliverable. The selling price used for each deliverable will be based on vendor-specific objective evidence, if available, third-party evidence if vendor-specific objective evidence is not available, or estimated selling price if neither vendor-specific or third-party evidence is available. The Company has applied this guidance prospectively for revenue arrangements entered into or materially modified after January 1, 2011. The adoption of this new guidance did not have a material impact on the Company’s financial position, results of operations or cash flows.

In May 2011, the FASB issued ASU No. 2011-04, Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in US GAAP and IFRSs. This update was issued as a result of the joint effort of the FASB and the International Accounting Standards Board to develop a single, converged fair value framework and provides guidance around measurement and some enhanced disclosure requirements. The guidance and disclosure requirements, which are to be applied prospectively, are effective for the Company for interim and annual periods beginning after December 15, 2011. The Company does not expect that the adoption of this guidance will have a material impact on its fair value measurement financial disclosures or its financial position, results of operations or cash flows.

In June 2011, the FASB issued ASU No. 2011-05, Comprehensive Income (Topic 220), Presentation of Comprehensive Income. This update is intended to increase the prominence of other comprehensive income in the financial statements by requiring public companies to present comprehensive income either as a single statement detailing the components of net income and total net income, the components of other comprehensive income and total other comprehensive income, and a total for comprehensive income or using a two statement approach including both a statement of income and a statement of comprehensive income. The option to present other comprehensive income in the statement of changes in equity has been eliminated. The amendments in this update, which should be applied retrospectively, are effective for public companies for fiscal years, and interim periods beginning after December 15, 2011. The Company is in the process of determining if it will present other comprehensive income in a single continuous statement of comprehensive income or in two separate but consecutive statements.

In September 2011, the FASB issued ASU No. 2011-08, Intangibles—Goodwill and Other (Topic 350): Testing Goodwill for Impairment. This update allows an entity, when conducting its annual or interim goodwill impairment analysis, to first assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If, after conducting this assessment, an entity determines that it is more likely than not that the fair value of a reporting unit exceeds its carrying amount, then performing the two-step goodwill impairment test is unnecessary. The amendments in this update are effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011 and early adoption is permitted. The Company’s early adoption of this guidance on September 30, 2011 did not have a material impact on its financial position, results of operations or cash flows.

3. Supplemental condensed consolidated statements of cash flows information


	Nine months ended September 30,
	2011		2010
Interest paid	$	59,170	$	35,661
Income taxes paid		1,676		1,541
Income tax refunds received		18,375		21,272
Non-cash investing and financing activities:
Purchases of property, plant and equipment included in accounts payable		100		3,944

4. Property, plant, and equipment-net


	September 30,			December 31,
	2011			2010
Land and land improvements	$	11,188		$	11,191
Building		39,680			35,429
Equipment and computers		28,024			28,639
Leasehold improvements		5,898			4,631
Construction in progress		29			90

		84,819			79,980
Less accumulated depreciation		(38,556	)		(30,693	)

Property, plant and equipment - net	$	46,263		$	49,287


	Three months ended				Nine months ended
	September 30,				September 30,
	2011		2010		2011		2010
Depreciation expense	$	1,369	$	1,236	$	4,137	$	3,569

The Company is party to a capital lease of land, an office building and two warehouses in Newbridge, Scotland. At September 30, 2011 and December 31, 2010, the carrying value of the leased fixed assets included in property, plant and equipment was $15,585 and $16,089, respectively.

5. Intangible assets


	Gross carrying value				Accumulated amortization						Net carrying value
	September 30, 2011		December 31, 2010		September 30, 2011			December 31, 2010			September 30, 2011		December 31, 2010
Intangible assets subject to amortization:
Customer relationships	$	82,259	$	81,941	$	(70,240	)	$	(61,198	)	$	12,019	$	20,743
Noncompete agreements		22,010		22,011		(16,144	)		(13,409	)		5,866		8,602
Sales backlog		9,606		9,580		(9,606	)		(9,580	)		—		—
Intangible assets not subject to amortization:
Tradenames		11,454		11,407		—			—			11,454		11,407
Trademarks		14		14		—			—			14		14

	$	125,343	$	124,953	$	(95,990	)	$	(84,187	)	$	29,353	$	40,766

The gross carrying value and accumulated amortization of intangible assets increased $390 and $69, respectively, at September 30, 2011 compared to December 31, 2010 due to the effect of foreign currency translation.


	Three months ended September 30,				Nine months ended September 30,
	2011		2010		2011		2010
Amortization expense	$	3,907	$	3,846	$	11,734	$	11,488

The Company’s scheduled amortization expense associated with intangible assets is expected to be:


Years Ending December 31:
2011 (remaining)	$	3,895
2012		11,850
2013		1,808
2014		332
2015		—
Thereafter		—

	$	17,885

6. Goodwill

Goodwill represents the excess of the purchase price of an acquired business over the portion of the purchase price assigned to the assets acquired and liabilities assumed in the transaction. Goodwill is not amortized, but is subject to annual impairment testing at the beginning of each fiscal year, and more frequently if circumstances indicate that it is probable that the fair value of goodwill is below its carrying amount. Fair value is determined using discounted cash flows and guideline company multiples. Significant estimates used in calculating fair value include estimates of future cash flows, future short-term and long-term growth rates, weighted-average cost of capital and guideline company multiples for each of the reporting units.

The following tables present changes to goodwill during the nine months ended September 30, 2011 and the gross carrying value and accumulated impairment losses associated with goodwill at the dates indicated:


	General
	Company
Goodwill at December 31, 2010	$	22,912
Effects of foreign currency translation		146

Goodwill at September 30, 2011	$	23,058


	September 30,			December 31,
	2011			2010
Acquired goodwill	$	34,825		$	90,674
Accumulated impairment losses		(6,956	)		(62,805	)
Effects of foreign currency translation		(4,811	)		(4,957	)

	$	23,058		$	22,912

The decrease in acquired goodwill and accumulated impairment losses reflected in the table above are due to the removal of the goodwill associated with the Company’s Western Hemisphere segment, which was fully written off in 2010. Subsequent to 2010, the goodwill presented relates only to goodwill attributed to the Company’s General Company segment.

7. Investment in unconsolidated affiliate

On August 19, 2010, EM II LP’s subsidiary, EMC, invested $10,000 in exchange for 14.5% of the common equity in B&L, a distributor of oil country tubular goods. The Company accounts for the B&L investment under the equity method of accounting.

At September 30, 2011 and December 31, 2010, the investment in B&L was $12,272 and $10,843, respectively. Equity in the earnings of B&L for the three and nine months ended September 30, 2011 was $1,220 and $2,645, respectively. Equity in the earnings of B&L for the period August 19, 2010, the date of EMC’s investment in B&L, through September 30, 2010 was $460.

8. Credit arrangements, long-term debt and capital lease

Credit arrangements, long-term debt and capital lease consisted of the following:


	September 30, 2011			December 31, 2010
$465,000 12.25% EMC Senior Secured Notes, net of discount of $3,161 and $3,708 at September 30, 2011 and December 31, 2010; due January 15, 2015	$	461,839		$	461,292
$195,000 ABL Facility, due May 11, 2014		—			—
$15,000, EM FZE Facility, due May 31, 2012		—			—
Capital lease		18,345			18,519

Total long-term debt and capital lease		480,184			479,811
Less: current portion		(351	)		(318	)

Long-term debt and capital lease, less current portion	$	479,833		$	479,493

EMC Senior Secured Notes—On December 23, 2009, EMC issued $465,000 aggregate principal amount of 12.25% Senior Secured Notes (the “EMC Senior Secured Notes”) with an original issue discount of $4,376. Interest accrues on the EMC Senior Secured Notes at a rate of 12.25% semi-annually and is payable in arrears on each January 15 and July 15, commencing on July 15, 2010.

EMC may redeem some or all of the EMC 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 set forth in the terms of the EMC Senior Secured Notes, and accrued and unpaid interest as of the redemption date. The applicable premium is calculated as the greater of:

(1)

1.0% of the principal amount of the EMC Senior Secured Notes; or

(2)

the excess of:

(a)

the present value at the redemption date of (i) the redemption price of the EMC Senior Secured Notes at January 15, 2013 plus (ii) all required interest payments due on the EMC Senior Secured Notes 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; or

(b)

the principal amount of the EMC Senior Secured Notes, if greater.

On or after January 15, 2013, EMC may at its option, redeem some or all of the EMC 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, EMC may redeem up to 35% of the aggregate original principal amounts of the EMC Senior Secured 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 the EMC Senior Secured Notes also contain certain change in control and sale of asset provisions under which the holders of the EMC Senior Secured Notes have the right to require EMC to repurchase all or any part of the EMC Senior Secured 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 the EMC Senior Secured Notes contains various covenants that limit the Company’s discretion in the operation of its business. Among other things, it limits the Company’s ability and the ability of its 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 the Company’s ability to pay dividends or make certain other restricted payments and its ability or the ability of its 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. At September 30, 2011, the Company was in compliance with the affirmative and negative covenants applicable under the EMC Senior Secured Notes.

The EMC 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 the EMC Senior Secured Notes.

The EMC Senior Secured Notes and related guarantees are secured by:

•

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 ABL Facility), including material real property, fixtures and equipment, intellectual property (including certain intellectual property located outside of the United States; provided that the perfection of the security interest in intellectual property assets is limited to those that may be perfected by the making of a filing in the United States and Canada) and capital stock of EM II LP‘s direct restricted subsidiaries (which, in the case of non-U.S. subsidiaries is limited to 65% of the voting stock of each first-tier non-U.S. subsidiary of EM II LP (or such other percentage to the extent necessary not to require the filing with the SEC (or any other governmental agency) of separate financial statements of any such first-tier non-U.S. subsidiary)) now owned or hereafter acquired; and

•

second-priority liens and security interests, subject to permitted liens (including first-priority liens securing our ABL 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 Company’s ABL Facility. As a result of such lien subordination, the EMC Senior Secured Notes are effectively subordinated to the Company’s ABL Facility to the extent of the value of such assets.

ABL Facility—On September 2, 2011, the Company entered into a sixth amendment (the “Sixth Amendment) to the ABL Facility among JPMorgan Chase Bank, N.A. and other financial institutions party thereto, EMC, EM Europe, Edgen Murray Canada Inc. (“EM Canada”) and Edgen Murray Pte. Ltd. (“EM Pte”). The Sixth Amendment extended the maturity date of the ABL Facility from May 11, 2012 to May 11, 2014 and increased the aggregate amount available under the ABL Facility from $175,000 to $195,000 (subject to an increase by the Company of up to $25,000 for a total of $220,000), of which:

•

EMC may utilize up to $180,000 ($25,000 of which can only be used for letters of credit) less any amounts utilized under the sublimits of EM Canada and EM Europe;

•

EM Europe may utilize up to $60,000;

•

EM Canada may utilize up to $10,000; and

•

EM Pte may utilize up to $15,000

Actual credit availability under the ABL Facility for each entity is calculated based on a percentage of eligible trade accounts receivable and inventories, subject to adjustments and sublimits as defined by the ABL Facility (“Borrowing Base”). The entities may utilize the ABL Facility for borrowings as well as for the issuance of bank guarantees, letters of credit, and other permitted indebtedness. The ABL 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 ABL Facility utilized by EM Europe. The ABL Facility is guaranteed by EM II LP. 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.

The ABL Facility contains financial, affirmative and negative covenants. At September 30, 2011, the Company was in compliance with the financial, affirmative and negative covenants applicable under the ABL Facility.

At September 30, 2011 and December 31, 2010, there were no cash borrowings under the ABL Facility and outstanding letters of credit totaled $47,733 and $22,136, respectively. At September 30, 2011, borrowing availability under the ABL Facility, net of reserves, was as follows (based on the value of the Company’s Borrowing Base on that date):


	EMC			EM Canada			EM Europe			EM Pte			Total
Total availability	$	117,825		$	1,871		$	22,931		$	10,000	(b)	$	152,627
Less utilization and reserves		(44,625	)(a)		(75	)		(3,058	)		(3,159	)		(50,917	)

Net availability	$	73,200		$	1,796		$	19,873		$	6,841		$	101,710

(a)	Includes a letter of credit in the amount of $12,000 which supports the local credit facility of EM FZE.

(b)	Subsequent to September 30, 2011, the total availability to EM Pte under the ABL Facility increased to $15,000 in connection with its fulfillment of certain conditions precedent associated with the Sixth Amendment to the ABL Facility.

EM FZE local facility—EM FZE has a local credit facility under which it has the ability to borrow up to the lesser of $15,000 or the amount secured by a letter of credit. At September 30, 2011 and December 31, 2010, EM FZE had the ability to borrow up to $12,000 because the facility was fully secured by a letter of credit issued by EMC. EM FZE may utilize the local facility for borrowings, foreign currency exchange contracts, letters of credit, bank guarantees and other permitted indebtedness.

This facility is primarily used to support the trade activity of EM FZE. Borrowings on the local facility are charged interest at the prevailing London Interbank Offered Rate, plus a margin of 2%. At September 30, 2011 and December 31, 2010, there was approximately $5,782 and $861, respectively, in letters of credit and bank guarantees issued under the local facility. Availability under the local credit facility was $6,218 and $11,139 at September 30, 2011 and December 31, 2010, respectively.

9. Income taxes

EM II LP is a Delaware limited partnership and is not directly subject to U.S. income taxes. However, its subsidiaries operate as corporations or similar entities in various tax jurisdictions throughout the world. Accordingly, current and deferred corporate income taxes have been provided for in the condensed consolidated financial statements of EM II LP.

The following table sets forth the Company’s income tax expense (benefit):


	Three months ended September 30,						Nine months ended September 30,
	2011			2010			2011			2010
Loss before income tax expense (benefit)	$	(3,070	)	$	(10,496	)	$	(14,834	)	$	(108,319	)
Income tax expense (benefit)		1,193			(5,632	)		3,315			(21,086	)
Effective tax rate		38.9	%		53.7	%		22.3	%		19.5	%

The income tax expense for the three and nine months ended September 30, 2011 reflects taxable income from non-U.S. operations at an estimated annual effective tax rate of approximately 25.1%. In accordance with ASC Topic 740, Income Taxes, a full valuation allowance has been established against any tax benefits related to taxable losses generated by the Company’s U.S. operations. As a result, any tax benefits from the Company’s U.S. operations were excluded in deriving the Company’s estimated

annual effective tax rate. For the three and nine months ended September 30, 2010, the income tax benefit reflects the taxable loss at an estimated annual effective tax rate which was composed of 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 United Kingdom, Singapore and UAE.

At September 30, 2011 and December 31, 2010, a valuation allowance of $22,701 and $11,492, respectively, was recorded against deferred tax assets and net operating loss carryforwards. The 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 (“NOLs”) during the respective carryforward periods. Additionally, statutory restrictions limit the ability to recover the NOLs via a carryback claim. The NOLs are scheduled to expire beginning in 2024 through 2031.

The following is a summary of activity related to uncertain tax positions:


Balance, January 1, 2011	$	1,046
Increase in existing uncertain tax position		861
Effects of foreign currency translation		(12	)

Balance, September 30, 2011	$	1,895

The uncertain tax position recognized by the Company at September 30, 2011 relates to tax years for which a tax return has not yet been filed with the relevant tax authority. Accordingly, no interest and/or penalties have been recorded related to this uncertain tax position. If the Company and its subsidiaries incur any penalties on underpayment of taxes, the amounts would be included in other current liabilities on the condensed consolidated balance sheet and other income (expense), net on the condensed consolidated statement of operations. The interest related to this reserve would be accrued at the Internal Revenue Service or other tax jurisdiction applicable rate and included in accrued interest payable on the Company’s condensed consolidated balance sheet and included in interest expense – net on the condensed consolidated statement of operations.

The Company, as a reporting entity and not a taxpaying entity, is not subject to the general statute of limitations period for assessment of tax. The Company’s subsidiaries have open tax years as follows:


Jurisdiction	Tax years open for assessment
Federal		2007 - 2010
Various States		2005 - 2010
Various Foreign		2004 - 2010

10. Commitments and contingencies

Operating leases—Through its subsidiaries, the Company leases various properties, warehouses, equipment, vehicles and office space under operating leases with remaining terms ranging from one to nine years with various renewal options of up to 20 years. Substantially all leases require payment of taxes, insurance and maintenance costs in addition to rental payments. Total rental expense for all operating leases was $1,364 and $1,047 for the three months ended September 30, 2011 and 2010, respectively, and $3,761 and $2,935 for the nine months ended September 30, 2011 and 2010, respectively.

Employment agreements—In the ordinary course of business, the Company has entered into employment agreements with certain executives. Among other things, the employment agreements provide for minimum salary levels, incentive bonuses, and other compensation. Employment agreement terms also include payments to the executive in the event of termination of employment. The payments, among other things, may include cash severance, continuation of medical and other insurance benefits, and acceleration of the vesting of certain equity-based awards, depending on, among other factors, the circumstances surrounding termination.

Legal proceedings—The Company is involved in various claims, lawsuits, and proceedings arising in the ordinary course of business. While there are uncertainties inherent in the ultimate outcome of such matters and it is impossible to presently determine the ultimate costs that may be incurred, management believes the resolution of such uncertainties and the incurrence of such costs will not have a material effect on the Company’s condensed consolidated financial position, results of operations and/or cash flows.

On April 1, 2011, a customer notified the Company that it intends to pursue its remedies under the warranty provisions contained in the customer’s purchase order contract due to certain alleged manufacturing defects with products sold by the Company. The Company has evaluated the information provided by the customer and believes it has various defenses to the customer’s potential claim. Should this claim result in the recording of a liability, the Company believes the range of loss would be approximately $0 to $1,500. The Company has not accrued an amount related to this matter as of September 30, 2011.

Related to this claim, the customer has withheld payment of certain receivables due to the Company in the amount of approximately $955. Although the Company believes that these receivables will be collected upon resolution of the matter, due to the uncertainty of collectability as a result of the outstanding warranty claim, the Company fully reserved for these receivables in the three months ended September 30, 2011.

The Company believes amounts paid to the customer, if any, will be recoverable from the original supplier of the products and believes the ultimate resolution of these matters will not have a material effect on the condensed consolidated financial statements. There can be no assurance that the Company’s losses related to the claim will not exceed the Company’s estimated range of loss, that the Company will be able to recover any or all of the receivables owed to it by the customer, or that the Company will be able to recover any amounts from the original supplier of the products related to these matters.

11. Segment and geographic area information

Since January 1, 2008, the Company has managed its operations in two geographic markets – the Western Hemisphere and the Eastern Hemisphere. Effective January 1, 2011, the Company aligned its finance and accounting function to support these two geographic markets and concluded that each of the two geographic markets meets the definition of a reportable segment based on the financial information used by the Company’s chief operating decision maker, the Company’s Chief Executive Officer. Within each geographical market, the Company’s operations have similar characteristics, products, types of customers, purchasing and distribution methods and regulatory environments. Prior to January 1, 2011, the Company had four reportable segments which were primarily determined based upon the geographic locations of the Company’s operations.

The Western Hemisphere distributes specialty steel pipe, pipe components, valves, high-grade structural sections and plates for use in environments that are highly corrosive, abrasive, extremely high or low temperature and/or involve high pressures. The Western Hemisphere also distributes valves and actuation packages. The Western Hemisphere is headquartered in Houston, Texas, and markets products to customers primarily in the United States, Canada, and Latin America.

The Eastern Hemisphere distributes high-grade steel tubes, plates and sections to primarily the offshore oil and gas industry. The Eastern Hemisphere’s primary operations are located in Newbridge (Scotland), Singapore, and Dubai (United Arab Emirates (UAE)). The Eastern Hemisphere also markets products through divisional offices in Darlington (England), London (England), Mumbai (India), and Gurgaon (India), and has representative offices in Perth (Australia), Shanghai (China), Paris (France) and Jakarta (Indonesia). A Bahraini joint venture operates in Saudi Arabia and serves the Saudi market.

Certain expenses of EM II LP, other non-trading expenses, and certain assets and liabilities, such as certain intangible assets, are not allocated to the segments, but are included in General Company expenses.

The accounting policies of the reportable segments are the same as those of the Company. The Company evaluates performance based on Company-wide income or loss from operations before income taxes not including nonrecurring gains or losses and discontinued operations. The Company accounts for sales between segments at a margin agreed to between segment management.

The following table presents the financial information for each reportable segment. The prior period segment financial information has been recast to conform with the Company’s change in segments effective January 1, 2011.


	Three months ended September 30,						Nine months ended September 30,
	2011			2010			2011			2010
Sales:
Western Hemisphere	$	168,588		$	113,035		$	415,015		$	284,142
Eastern Hemisphere		82,337			62,101			248,353			172,715
Intersegment sales		(6,087	)		(919	)		(10,419	)		(2,439	)

	$	244,838		$	174,217		$	652,949		$	454,418

Intersegment sales:
Western Hemisphere	$	4,745		$	268		$	6,774		$	1,250
Eastern Hemisphere		1,342			651			3,645			1,189

	$	6,087		$	919		$	10,419		$	2,439

Income (loss) from operations:
Western Hemisphere	$	6,458		$	2,069		$	12,836		$	(58,693	)
Eastern Hemisphere		8,550			6,866			27,200			16,614
General Company		(4,150	)		(4,349	)		(11,452	)		(18,790	)

	$	10,858		$	4,586		$	28,584		$	(60,869	)


	September 30, 2011		December 31, 2010
Total assets:
Western Hemisphere	$	260,991	$	243,579
Eastern Hemisphere		181,755		176,138
General Company		39,016		44,303

	$	481,762	$	464,020

12. Derivatives and other financial instruments

The Company is exposed to global market risks including the effect of changes in interest rates and foreign currency exchange rates. These risks are closely monitored and evaluated by management, including the Chief Financial Officer, the Treasurer and respective local accounting management for all Company locations. Upon the evaluation of certain risk positions, the Company will from time to time enter into derivative financial instruments to manage the exposures related to changes in interest rates and foreign currency exchange rates. The Company enters into derivative financial instruments, including derivatives designated as accounting hedges and/or those utilized as economic hedges, for risk management purposes only and does not enter into any derivative financial instruments for speculative purposes.

By using derivative and/or hedging instruments to manage its risk exposure, the Company is subject, from time to time, to credit risk on those derivative instruments. Credit risk arises from the potential failure of the counterparty to perform under the terms of the derivative and/or hedging instrument. The Company limits this risk by entering into derivative instruments with counterparties which are banks with high credit ratings assigned by international credit rating agencies.

At September 30, 2011 and December 31, 2010, there were no designated forward contracts outstanding or deferred gains or losses in other comprehensive income. The total notional amount of outstanding forward contracts not designated as hedging instruments at September 30, 2011 and December 31, 2010 was $43,890 and $27,738, respectively. The following table discloses the recognized gains and losses on the Company’s condensed consolidated balance sheets associated with forward contracts not designated as hedging instruments:


	September 30, 2011			December 31, 2010
Derivatives not designated as hedging instruments:	Unrealized Gain (Loss)
Classified in prepaid expenses and other current assets	$	165		$	264
Classified in accrued expenses and other current liabilities		(804	)		(88	)

	$	(639	)	$	176

The following table discloses the impact on the Company’s condensed consolidated statements of operations of derivative instruments not designated as hedging instruments:


Derivatives not designated as	Location of loss (gain)	Three months ended September 30,					Nine months ended September 30,
hedging instruments:	recognized in operations	2011		2010			2011		2010
Interest rates swaps and collar	Other income (expense) -net	$	—	$	(190	)	$	—	$	—
Forward contracts	Selling, general and administrative expense, net of service fee income		1,208		(1,384	)		1,193		(566	)

		$	1,208	$	(1,574	)	$	1,193	$	(566	)

At September 30, 2011 and December 31, 2010, the cumulative effect of currency translation adjustments was a loss of $25,171 and $25,531, respectively, and is included within total deficit on the condensed consolidated balance sheets. Currency translation adjustments are the result of the translation of the Company’s foreign subsidiaries’ financial statements that have a functional currency other than the U.S. Dollar.

13. Fair value measurements and financial instruments

The Company follows the provisions of ASC 820, Fair Value Measurements and Disclosures (“ASC 820”) for financial assets and liabilities that are measured and reported at fair value on a recurring basis. ASC 820 establishes a hierarchy for inputs used in measuring fair value.

ASC 820 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (exit price). ASC 820 classifies the inputs used to measure fair value into the following hierarchy:

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

Level 2: Quoted prices included in Level 1, such as quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets and liabilities in markets that are not active; or other inputs that are observable and can be corroborated by observable market data.

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

The Company endeavors to utilize the best available information in measuring fair value. Financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurements.

The Company’s financial assets and financial liabilities that were accounted for at fair value on a recurring basis as of September 30, 2011 and December 31, 2010 are shown in the table below.


	At September 30, 2011										At December 31, 2010
	Level 1		Level 2			Level 3		Total			Level 1		Level 2			Level 3		Total
Financial assets:
Forward contracts	$	—	$	165		$	—	$	165		$	—	$	264		$	—	$	264
Asset held for sale		—		—			—		—			5,224		—			—		5,224

Total financial assets	$	—	$	165		$	—	$	165		$	5,224	$	264		$	—	$	5,488

Financial liabilities:
Forward contracts	$	—	$	(804	)	$	—	$	(804	)	$	—	$	(88	)	$	—	$	(88	)

Total financial liabilities	$	—	$	(804	)	$	—	$	(804	)	$	—	$	(88	)	$	—	$	(88	)

Forward contracts: The foreign currency exchange contracts are valued using broker quotations or market transactions in either the listed or over-the counter markets. Management performs procedures to validate the information obtained from the broker quotations in calculating the ultimate fair values. As such, these derivative instruments are classified within Level 2.

Asset held for sale: Asset held for sale is recorded at the lower of the net carrying value less costs to sell or fair market value. As of December 31, 2010, asset held for sale relates to the Company’s Singapore facility which was subsequently sold in January 2011 for $6,329 on which the Company recognized a gain of $980 in the nine months ended September 30, 2011.

The comparison of carrying value and fair value of the EMC Senior Secured Notes is presented below:


	At September 30, 2011				At December 31, 2010
	Carrying Value		Estimated Fair Value		Carrying Value		Estimated Fair Value
EMC Senior Secured Notes	$	461,839	$	409,200	$	461,292	$	406,875

The fair value of the EMC Senior Secured Notes, excluding unamortized discount, has been estimated based upon market quotes approximating the fair value at the condensed consolidated balance sheet date. The fair value amount shown is not necessarily indicative of the amount that the Company would realize upon disposition, nor does it indicate the Company’s intent or ability to dispose of the financial instrument.

The Company believes that the carrying amount of other financial assets and liabilities approximates their fair values.

14. Related-party transactions

In connection with the Recapitalization Transaction, an employee pension fund of the ultimate parent company of a customer of EM II LP purchased approximately 14%, on a fully-diluted ownership basis, of the EM II LP common limited partnership units. There was no direct or indirect investment in the Company prior to May 11, 2007. For the three and nine months ended September 30, 2011, the Company had sales to that customer of $12,182 and $34,638, respectively. For the three and nine months ended September 30, 2010, sales to the customer were $2,915 and $12,002, respectively. At September 30, 2011 and December 31, 2010, the Company had $12,572 and $5,917, respectively, of accounts receivable from this customer included in its condensed consolidated balance sheets.

The Company made payments to JCP for reimbursement of certain expenses incurred while monitoring its investment in EM II LP as follows:


	Three months ended September 30,				Nine months ended September 30,
	2011		2010		2011		2010
Payments to JCP	$	46	$	—	$	64	$	60

B&L acquired the assets of Bourland & Leverich Holding Company and its subsidiaries on August 19, 2010. In connection with the acquisition, EMC invested $10,000 in exchange for 14.5% of the common equity in B&L. The president and chief executive officer of EMC, who is also the chairman and director of EM II LP, serves as non-executive chairman of the board of directors of B&L. B&L is controlled by JCP. In addition, certain JCP employees, who serve as directors of the general partner of EM II LP, serve on the board of directors of B&L.

EMC entered into a service fee agreement with B&L to provide certain general and administrative services including, but not limited to, information technology support services, legal, treasury, tax, financial reporting and other administrative services, for a $2,000 annual fee and reimbursement of administrative expenses. Selling, general, and administrative expense, net of service fee income, on the condensed consolidated statement of operations includes $500 and $1,500 for the three and nine months ended September 30, 2011, respectively, and $236 for the three and nine months ended September 30, 2010. Reimbursable administrative expenses paid by the Company on behalf of B&L, which are reimbursed by B&L, were $210 and $424 in the three and nine months ended September 30, 2011, respectively.

In the normal course of business, the Company purchased $62 of products from B&L during the nine months ended September 30, 2011. There were no purchases of product from B&L made by the Company in the three months ended September 30, 2011 and the period August 19, 2010, the date on which EMC invested in B&L, to September 30, 2010. At September 30, 2011, the Company had a $203 account receivable from B&L included in accounts receivable on its condensed consolidated balance sheet. There was no account receivable from B&L at December 31, 2010.

In August 2010, B&L granted equity awards to the Company’s chief executive officer, who serves as a board member of B&L, and to certain Company employees. The equity awards include 800 Class A restricted units, 1,206 Class A unit options, and 1,041.55 Class B units all of which vest over a five year period. Selling, general and administrative expense, net of service fee income for the three and nine months ended September 30, 2011, include $127 and $381, respectively, of compensation expense related to the B&L equity awards.

15. Subsequent event

The Company evaluated for subsequent events through the date these condensed consolidated financial statements and the related notes to the financial statements were issued and concluded that there were no significant subsequent events requiring recognition or disclosure.

16. Condensed Consolidating Financial Information

In connection with the issuance of the EMC Senior Secured Notes by EMC, a 100%-owned U.S. subsidiary of EM II LP (“Issuer” in the tables below) which excludes EMC’s non-U.S. subsidiary, Edgen Murray Canada (“EM Canada”), EM II LP (“Parent” in the tables below) issued a full and unconditional guarantee of the EMC Senior Secured Notes. EMC is EM II LP’s only U.S. subsidiary. EM II LP’s non-U.S. subsidiaries, including EMGH Limited and its subsidiaries, and EMC’s non-U.S. subsidiary, EM Canada, have not issued guarantees for the EMC Senior Secured Notes and are referred to as the Non-guarantor subsidiaries in the condensed consolidating financial information presented below.

The following tables present the condensed consolidating financial information for Parent, Issuer and the Non-guarantor subsidiaries as of September 30, 2011 and December 31, 2010 and for the three and nine months ended September 30, 2011 and 2010. The principal eliminating entries eliminate investment in subsidiaries, intercompany balances and intercompany sales and expenses.

Condensed consolidating balance sheets


	September 30, 2011
	Parent			Issuer			Non-guarantor subsidiaries		Elimination and consolidation entries			Consolidated
ASSETS:
Cash and cash equivalents	$	—		$	—		$	11,906	$	—		$	11,906
Accounts receivable—net		—			93,567			62,950		—			156,517
Intercompany accounts receivable		—			8,340			97		(8,437	)		—
Inventory		—			109,634			70,284		—			179,918
Income tax receivable		—			1,164			188		—			1,352
Prepaid expenses and other current assets		—			4,492			3,116		—			7,608
Affiliated interest receivable		—			2,254			—		(2,254	)		—
Deferred tax asset—net		—			—			177		—			177
Asset held for sale		—			—			—		—			—

Total current assets		—			219,451			148,718		(10,691	)		357,478
Property, plant and equipment, net		—			10,042			36,221		—			46,263
Distributions in excess of earnings and investment in subsidiaries		(145,623	)		609			—		145,014			—
Goodwill		—			—			23,058		—			23,058
Other intangible assets, net		—			13,404			15,949		—			29,353
Other assets		—			12,368			970		—			13,338
Intercompany long-term notes receivable		—			84,855			—		(84,855	)		—
Investment in unconsolidated affiliate		—			12,272			—		—			12,272

Total assets	$	(145,623	)	$	353,001		$	224,916	$	49,468		$	481,762

LIABILITIES AND (DEFICIT) CAPITAL:
Accounts payable	$	—		$	72,005		$	37,970	$	—		$	109,975
Intercompany accounts payable		—			7			5,661		(5,668	)		—
Other current liabilities		—			25,657			11,476		(2,238	)		34,895

Total current liabilities		—			97,669			55,107		(7,906	)		144,870
Deferred tax liability, net		—			932			3,750		—			4,682
Other long-term liabilities		2,787			110			677		(2,787	)		787
Long-term debt and capital lease		—			461,839			102,849		(84,855	)		479,833

Total liabilities		2,787			560,550			162,383		(95,548	)		630,172

Total (deficit) capital		(148,410	)		(207,549	)		62,533		145,016			(148,410	)

Total liabilities and (deficit) capital	$	(145,623	)	$	353,001		$	224,916	$	49,468		$	481,762


	December 31, 2010
	Parent			Issuer			Non-guarantor subsidiaries		Elimination and consolidation entries			Consolidated
ASSETS:
Cash and cash equivalents	$	—		$	32,408		$	30,070	$	—		$	62,478
Accounts receivable—net		—			51,486			53,345		—			104,831
Intercompany accounts receivable		—			4,953			462		(5,415	)		—
Inventory		—			76,045			52,437		—			128,482
Income tax receivable		—			19,417			178		—			19,595
Prepaid expenses and other current assets		—			3,525			2,514		—			6,039
Affiliated interest receivable		—			5,456			—		(5,456	)		—
Deferred tax asset—net		—			—			35		—			35
Asset held for sale		—			—			5,224		—			5,224

Total current assets		—			193,290			144,265		(10,871	)		326,684
Property, plant and equipment, net		—			11,928			37,359		—			49,287
Distributions in excess of earnings and investment in subsidiaries		(128,539	)		2,110			—		126,429			—
Goodwill		—			—			22,912		—			22,912
Other intangible assets, net		—			19,617			21,149		—			40,766
Other assets		—			12,333			1,195		—			13,528
Intercompany long-term notes receivable		—			95,855			—		(95,855	)		—
Investment in unconsolidated affiliate		—			10,843			—		—			10,843

Total assets	$	(128,539	)	$	345,976		$	226,880	$	19,703		$	464,020

LIABILITIES AND (DEFICIT) CAPITAL:
Accounts payable	$	—		$	29,292		$	39,520	$	—		$	68,812
Intercompany accounts payable		—			—			3,618		(3,618	)		—
Other current liabilities		—			35,622			10,772		(5,206	)		41,188

Total current liabilities		—			64,914			53,910		(8,824	)		110,000
Deferred tax liability, net		—			—			5,470		—			5,470
Other long-term liabilities		2,723			167			152		(2,723	)		319
Long-term debt and capital lease		—			461,292			114,298		(96,097	)		479,493

Total liabilities		2,723			526,373			173,830		(107,644	)		595,282

Total (deficit) capital		(131,262	)		(180,397	)		53,050		127,347			(131,262	)

Total liabilities and (deficit) capital	$	(128,539	)	$	345,976		$	226,880	$	19,703		$	464,020

Condensed consolidating statements of operations


	For the three months ended September 30, 2011
	Parent			Issuer			Non-guarantor subsidiaries			Elimination and consolidation entries			Consolidated
SALES	$	—		$	162,706		$	88,219		$	(6,087	)	$	244,838
OPERATING EXPENSES:
Cost of sales (exclusive of depreciation and amortization shown below)		—			142,007			71,984			(6,087	)		207,904
Selling, general and administrative expense, net of service fee income		46			13,856			6,878			—			20,780
Depreciation and amortization expense		—			2,771			2,525			—			5,296

Total operating expenses.		46			158,634			81,387			(6,087	)		233,980

(LOSS) INCOME FROM OPERATIONS		(46	)		4,072			6,832			—			10,858
OTHER INCOME (EXPENSE):
Equity in earnings of unconsolidated affiliate		—			1,220			—			—			1,220
Other income (expense)—net		—			278			(366	)		(9	)		(97	)
Interest expense—net		—			(11,622	)		(3,429	)		—			(15,051	)
Equity in (losses) earnings of subsidiaries		(4,217	)		(91	)		—			4,308			—

(LOSS) INCOME BEFORE INCOME TAX EXPENSE		(4,263	)		(6,143	)		3,037			4,299			(3,070	)
INCOME TAX EXPENSE (BENEFIT)		—			849			344			—			1,193

NET (LOSS) INCOME		(4,263	)		(6,992	)		2,693			4,299			(4,263	)
NET INCOME ATTRIBUTABLE TO NON-CONTROLLING INTEREST		166			—			—			—			166

NET (LOSS) INCOME AVAILABLE TO COMMON PARTNERSHIP INTERESTS	$	(4,429	)	$	(6,992	)	$	2,693		$	4,299		$	(4,429	)


	For the three months ended September 30, 2010
	Parent			Issuer			Non-guarantor subsidiaries			Elimination and consolidation entries			Consolidated
SALES	$	—		$	110,480		$	64,656		$	(919	)	$	174,217
OPERATING EXPENSES:
Cost of sales (exclusive of depreciation and amortization shown below)		—			97,081			53,037			(919	)		149,199
Selling, general and administrative expense, net of service fee income		8			10,450			4,892			—			15,350
Depreciation and amortization expense		—			2,843			2,239			—			5,082
Impairment of goodwill		—			—			—			—			—

Total operating expenses		8			110,374			60,168			(919	)		169,631

(LOSS) INCOME FROM OPERATIONS		(8	)		106			4,488			—			4,586
OTHER INCOME (EXPENSE):
Equity in earnings of unconsolidated affiliate		—			460			—			—			460
Other income (expense)—net		—			206			328			—			534
Interest expense—net		—			(12,349	)		(3,727	)		—			(16,076	)
Equity in (losses) earnings of subsidiaries		(4,856	)		(112	)		—			4,968			—

(LOSS) INCOME BEFORE INCOME TAX BENEFIT		(4,864	)		(11,689	)		1,089			4,968			(10,496	)
INCOME TAX BENEFIT		—			(4,911	)		(721	)		—			(5,632	)

NET (LOSS) INCOME		(4,864	)		(6,778	)		1,810			4,968			(4,864	)
NET INCOME ATTRIBUTABLE TO NON-CONTROLLING INTEREST		14			—			—			—			14

NET (LOSS) INCOME AVAILABLE TO COMMON PARTNERSHIP INTERESTS	$	(4,878	)	$	(6,778	)	$	1,810		$	4,968		$	(4,878	)


	For the nine months ended September 30, 2011
	Parent			Issuer			Non-guarantor subsidiaries			Elimination and consolidation entries			Consolidated
SALES	$	—		$	399,080		$	264,288		$	(10,419	)	$	652,949
OPERATING EXPENSES:
Cost of sales (exclusive of depreciation and amortization shown below)		—			347,599			215,872			(10,419	)		553,052
Selling, general and administrative expense, net of service fee income		64			36,138			19,220			—			55,422
Depreciation and amortization expense		—			8,348			7,543			—			15,891

Total operating expenses		64			392,085			242,635			(10,419	)		624,365

(LOSS) INCOME FROM OPERATIONS		(64	)		6,995			21,653			—			28,584
OTHER INCOME (EXPENSE):
Equity in earnings of unconsolidated affiliate		—			2,645			—			—			2,645
Other income (expense)—net		—			1,069			393			(9	)		1,453
Interest expense—net		—			(36,771	)		(10,745	)		—			(47,516	)
Equity in (losses) earnings of subsidiaries		(18,085	)		(572	)		—			18,657			—

(LOSS) INCOME BEFORE INCOME TAX EXPENSE		(18,149	)		(26,634	)		11,301			18,648			(14,834	)
INCOME TAX EXPENSE		—			945			2,370			—			3,315

NET (LOSS) INCOME		(18,149	)		(27,579	)		8,931			18,648			(18,149	)
NET INCOME ATTRIBUTABLE TO NON-CONTROLLING INTEREST		226			—			—			—			226

NET (LOSS) INCOME AVAILABLE TO COMMON PARTNERSHIP INTERESTS	$	(18,375	)	$	(27,579	)	$	8,931		$	18,648		$	(18,375	)


	For the nine months ended September 30, 2010
	Parent			Issuer			Non-guarantor subsidiaries			Elimination and consolidation entries			Consolidated
SALES	$	—		$	277,174		$	179,683		$	(2,439	)	$	454,418
OPERATING EXPENSES:
Cost of sales (exclusive of depreciation and amortization shown below)		—			244,232			145,113			(2,439	)		386,906
Selling, general and administrative expense, net of service fee income		25			32,742			17,752			—			50,519
Depreciation and amortization expense		—			8,510			6,547			—			15,057
Impairment of goodwill		—			54,539			8,266			—			62,805

Total operating expenses		25			340,023			177,678			(2,439	)		515,287

(LOSS) INCOME FROM OPERATIONS		(25	)		(62,849	)		2,005			—			(60,869	)
OTHER INCOME (EXPENSE):
Equity in earnings of unconsolidated affiliate		—			460			—			—			460
Other income (expense)—net		—			452			(209	)		—			243
Interest expense—net		—			(36,982	)		(11,171	)		—			(48,153	)
Equity in (losses) earnings of subsidiaries		(87,208	)		(1,687	)		—			88,895			—

(LOSS) INCOME BEFORE INCOME TAX BENEFIT		(87,233	)		(100,606	)		(9,375	)		88,895			(108,319	)
INCOME TAX BENEFIT		—			(19,988	)		(1,098	)		—			(21,086	)

NET (LOSS) INCOME		(87,233	)		(80,618	)		(8,277	)		88,895			(87,233	)
NET INCOME ATTRIBUTABLE TO NON-CONTROLLING INTEREST		30			—			—			—			30

NET (LOSS) INCOME AVAILABLE TO COMMON PARTNERSHIP INTERESTS	$	(87,263	)	$	(80,618	)	$	(8,277	)	$	88,895		$	(87,263	)

Condensed consolidating statements of cash flows


	For the nine months ended September 30, 2011
	Parent		Issuer			Non-guarantor subsidiaries			Elimination and consolidation entries		Consolidated
Net cash used in operating activities	$	—	$	(44,928	)	$	(10,130	)	$	—	$	(55,058	)

Cash flows from investing activities:
Purchases of property, plant, and equipment		—		(316	)		(2,094	)		—		(2,410	)
Proceeds from sale of property, plant, and equipment		—		—			6,276			—		6,276

Net cash (used in) provided by investing activities		—		(316	)		4,182			—		3,866

Cash flows from financing activities:
Deferred financing costs		—		(765	)		(544	)		—		(1,309	)
Principal payments of long-term debt and capital lease		—		—			(297	)		—		(297	)
Proceeds from ABL Facility		—		56,412			—			—		56,412
Payments to ABL Facility		—		(56,412	)		—			—		(56,412	)
Proceeds (payments) for intercompany loans		—		11,000			(11,000	)		—		—
Managed cash overdraft		—		2,510			338			—		2,848

Net cash provided by (used in) financing activities		—		12,745			(11,503	)		—		1,242

Effect of exchange rate changes on cash		—		91			(713	)		—		(622	)

Net change in cash and cash equivalents		—		(32,408	)		(18,164	)		—		(50,572	)
Cash and cash equivalents at beginning period		—		32,408			30,070			—		62,478

Cash and cash equivalents at end of period	$	—	$	—		$	11,906		$	—	$	11,906


	For the nine months ended September 30, 2010
	Parent		Issuer			Non-guarantor subsidiaries			Elimination and consolidation entries			Consolidated
Net cash provided by (used in) operating activities	$	—	$	1,012		$	1,683		$	(1,000	)	$	1,695

Cash flows from investing activities:
Purchase of PetroSteel business—net of cash acquired		—		(4,000	)		—			—			(4,000	)
Purchases of property, plant, and equipment		—		(316	)		(9,259	)		—			(9,575	)
Investment in unconsolidated affiliate		—		(10,000	)		—			—			(10,000	)
Proceeds from sale of property, plant, and equipment		—		215			110			—			325

Net cash used in investing activities		—		(14,101	)		(9,149	)		—			(23,250	)

Cash flows from financing activities:
Deferred financing costs		—		(1,097	)		—			—			(1,097	)
Principal payments of long-term debt and capital lease		—		(4,000	)		(1,221	)		1,000			(4,221	)
Proceeds from ABL Facility		—		12,538			—			—			12,538
Payments to ABL Facility		—		(12,538	)		—			—			(12,538	)
Proceeds (payments) for intercompany loans		—		5,000			(5,000	)		—			—
Managed cash overdraft		—		(190	)		163			—			(27	)

Net cash (used in) provided by financing activities		—		(287	)		(6,058	)		1,000			(5,345	)

Effect of exchange rate changes on cash		—		(53	)		(130	)		—			(183	)

Net change in cash and cash equivalents		—		(13,429	)		(13,654	)		—			(27,083	)
Cash and cash equivalents at beginning period		—		29,860			35,873			—			65,733

Cash and cash equivalents at end of period	$	—	$	16,431		$	22,219		$	—		$	38,650

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

Certain statements and information in this Quarterly Report on Form 10-Q (Form 10- Q) including, but not limited to statements regarding our liquidity and cash flow, may constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. The words “believe,” “expect,” “anticipate,” “plan,” “intend,” “foresee,” “should,” “would,” “could” or other similar expressions are intended to identify forward-looking statements, which are generally not historical in nature. However, the absence of these words does not mean that the statements are not forward-looking. These forward-looking statements are based on our current expectations and beliefs concerning future developments and their potential effect on us. While management believes that these forward-looking statements are reasonable as and when made, there can be no assurance that future developments affecting us will be those that we anticipate. All comments concerning our expectations for future sales and operating results are based on our forecasts for our existing operations and do not include the potential impact of any future acquisitions. Our forward-looking statements involve significant risks and uncertainties (some of which are beyond our control) and assumptions that could cause actual results to differ materially from our historical experience and from present expectations or projections. Important factors that could cause actual results to differ materially from those in the forward-looking statements include, but are not limited to:

•

continued slow global economic recovery;

•

volatility in the global energy infrastructure market;

•

changes in supply, demand, prices and other market conditions for our products and services;

•

the ability of our suppliers to meet our production and supply needs;

•

delays in customer deliveries due to major shipping disruptions;

•

the ability of our customers to obtain financing to fund their projects;

•

changes in the nature of the individual markets in which our customers operate;

•

worldwide rates of oil and natural gas production and investment in refining capacity;

•

unexpected adjustments and cancellations to our sales backlog as a result of unfavorable changes in economic conditions or otherwise;

•

our dependence on the oil and gas industry and on few significant customers and vendors and our ability to maintain good relationships with our customers and vendors;

•

the impact of natural disasters;

•

potential professional liability, product liability, warranty and other potential claims, which may not be covered by insurance sufficiently or at all;

•

changes in environmental, healthcare and workplace safety factors and laws and regulations that could increase our costs and liabilities and affect the demand for our services;

•

the limitation or modification of the Price-Anderson Act’s indemnification authority;

•

our dependence on technology in our operations and the possible impact of system and information technology outages and other disruptions;

•

changes in the estimates and assumptions we use to prepare our condensed consolidated financial statements;

•

our ability to effectively pass through costs to our customers;

•

changes in our liquidity position and/or our ability to maintain or increase our letters of credit or other means of credit support;

•

our ability to obtain waivers or amendments with our lenders or to collateralize letters of credit upon non-compliance with covenants in our credit facility;

•

our indebtedness, which could adversely affect our financial condition and impair our ability to fulfill our obligations under the EMC Senior Secured Notes, the ABL Facility, and other agreements governing our indebtedness;

•

the impact of adverse credit markets and the availability of adequate financing and additional capital on commercially reasonable terms;

•

outcomes of unasserted claims, pending and future litigation and regulatory actions;

•

downgrades of our debt securities by rating agencies;

•

foreign currency fluctuations;

•

loss of key management;

•

our ability to successfully identify, integrate and complete acquisitions;

•

a determination to write-off a significant amount of intangible assets, goodwill and/or long-lived assets;

•

war, armed conflict and terrorist attacks in the countries in which we operate; and

•

changes in the political and economic conditions of the foreign countries where we operate.

Other factors that could cause our actual results to differ from our projected results are described in (1) Part II, Item 1A and elsewhere in this Form 10-Q, (2) our Annual Report on Form 10-K for the year ending December 31, 2010, and (3) our reports filed from time to time with the SEC.

Readers are cautioned not to place undue reliance on forward-looking statements, which speak only as of the date hereof. We undertake no obligation to publicly update or revise any forward-looking statements after the date they are made, whether as a result of new information, future events or otherwise.

Item 2.

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

The following discussion should be read in conjunction with our condensed consolidated financial statements and the related notes to the financial statements included elsewhere in this report, and the audited consolidated financial statements and accompanying notes in our Annual Report on Form 10-K for the year ending December 31, 2010. The following discussion and analysis of our financial condition and results of operations contains forward-looking statements within the meaning of the federal securities laws. See “Cautionary Statement Regarding Forward-Looking Statements” above.

Overview

General

We are a global distributor of specialty steel products primarily to the oil and gas, power, petrochemical, mining, and civil construction markets. Our product catalog consists of pipe, plate, valves and sections, including highly-engineered prime carbon and alloy steel pipe, pipe components, valves and high-grade structural sections and plate. These items are often designed to operate in severe conditions, including high pressure, load bearing, compression and extreme temperature environments, and to withstand the effects of corrosive or abrasive materials. We stock and distribute inventory and offer distribution direct from the manufacturer. Currently, we support our customers through a global network of facilities located on five continents.

Principal factors affecting our business

Our business is cyclical and substantially dependent upon conditions in the energy industry and, in particular, capital expenditures by customers in the oil and natural gas exploration and production, gathering and transmission, crude oil refining and the energy processing and power generation industries. The 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 and civil infrastructure supply and demand. These views are influenced by numerous factors, including, among others, changes in global economic conditions, changes in oil and natural gas prices, availability of adequate financing on commercially reasonable terms, increasing rates of oil and natural gas production in non-traditional geographies and investment in refining capacity.

In addition to demand driven factors, our business is also affected by changes in the cost of steel. Fluctuations in the costs of the products we supply are largely driven by changes in the cost of raw materials used in steel-making, changes in the condition of the general economy, changes in product inventories held by our customers, our vendors and other distributors and prevailing steel prices around the world. 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 profit margins.

Our 10 largest customers and 10 largest vendors represented the following percentages of our sales and product purchases for the three and nine months ended September 30, 2011 and 2010:


	Three months ended September 30,						Nine months ended September 30,
	2011			2010			2011			2010
Top 10 customers as a percentage of sales		34	%		35	%		33	%		25	%
Top 10 vendors as a percentage of product purchases		59	%		53	%		53	%		43	%

No one customer accounted for more than 10% of our sales in any of the periods presented. During the three and nine months ended September 30, 2011, our largest vendor accounted for approximately 13% and 11%, respectively, of our purchases. Our largest vendor accounted for approximately 12% and 9%, respectively, of our purchases in the prior year comparable periods.

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


	Three months ended September 30,						Nine months ended September 30,
	2011			2010			2011			2010
Percentage of sales derived from the oil & gas industry		85	%		84	%		85	%		71	%

Reportable segments

Since January 1, 2008, we have managed our operations in two geographic markets—the Western Hemisphere and the Eastern Hemisphere. Effective January 1, 2011, we aligned our financial and accounting functions to support these two geographic markets and concluded that each of the two geographic markets meets the definition of a reportable segment based on the financial information used by our chief operating decision maker, our Chief Executive Officer. Prior to January 1, 2011, we presented four reportable segments which were determined primarily based upon the geographic locations of our operations.

Our Western Hemisphere operations are headquartered in Houston, Texas and operate through a regional and branch network of locations in the United States, Canada and Latin America. Fourteen of our Western Hemisphere locations stock inventory for distribution. 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. Five locations in the Eastern Hemisphere stock inventory.

We include operating expenses of our non-trading entities, including EM II LP, EMGH Limited, Edgen Murray Cayman Corporation and Pipe Acquisition Limited, in General Company expenses. Edgen Murray Cayman Corporation was dissolved on August 23, 2011.

Effects of currency fluctuations

Our U.K. entity has a functional currency of the U.K. pound. As of September 30, 2011 and December 31, 2010, approximately 20% and 21%, respectively, of our total assets were held by our U.K. entity. For the three and nine months ended September 30, 2011, approximately 15% and 23%, respectively, of our sales were attributable to our U.K. entity. As a result, a material change in the value of the U.K. pound relative to the U.S. dollar could significantly impact our condensed consolidated financial position, results of operations and/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.

From time to time, we also enter into purchase and sales commitments that are denominated in a currency, primarily the Euro and US Dollar, which are other than the functional currency of our operating entities. Currency fluctuations can create volatility in financial position, results of operations and cash flows from period to period. Our practices include entering into foreign currency exchange contracts in an effort to minimize foreign currency exposure related to certain forecasted purchases and sales transactions. We do not use derivative financial instruments for speculative purposes.

Revenue sources

We are primarily a distributor/reseller of our suppliers’ manufactured products. 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.

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

Pricing

Pricing for our products significantly impacts our results of operations. Generally, as pricing increases, so do our sales. Our pricing usually increases when the cost of our materials 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 cost of sales 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 vendors.

Our cost of sales is influenced significantly by the prices we pay our vendors 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 vendors or earned incentives from our vendors. Generally, we are able to pass on cost increases to our customers. However, during certain periods when we 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 product costs are reduced by vendor discounts and purchase incentives. Payment for our products is typically due to our vendors within 30 to 60 days of delivery.

Selling, general and administrative expense, net of service fee income, includes sales and administrative employee compensation and benefit costs, as well as travel expenses for sales representatives, information technology infrastructure and communication costs, office rent and supplies, professional services and other general expenses. Selling, general and administrative expense, net of service fee income, also include costs for warehouse personnel and benefits, supplies, equipment maintenance and rental and contract storage and distribution expenses. Selling, general and administrative expense are presented net of service fee income from B&L, an unconsolidated affiliate, for support services provided by the Company related to information technology, legal, treasury, tax, financial reporting and other administrative expenses.

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, capital leases, and picking and lifting equipment.

Interest expense, net, includes interest on our 12.25% Secured Senior Notes due 2015 that were issued by EMC on December 23, 2009 (the “EMC 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 our ABL Facility for letters of credit and bank guarantees issued in support of our normal business operations.

Results of operations

Overview

In spite of continued political and economic uncertainties within the global marketplace during the first three quarters of 2011, capital spending in energy markets improved relative to the first three quarters of 2010. Higher oil prices and the increased availability of financing through most of the first nine months of 2011 spurred both international and domestic oil companies to increase spending on offshore and onshore oil and gas opportunities, particularly the gathering and storage systems associated with the development of onshore natural gas and oil shale plays and offshore oil and gas reserves. As a result, our total sales increased approximately 44% for the nine months ended September 30, 2011 compared to the nine months ended September 30, 2010. The increase in sales was generated from both our Western Hemisphere and Eastern Hemisphere segments and was primarily driven by new project and maintenance spending in the offshore upstream and downstream energy markets. We recorded higher sales order bookings during the first nine months of 2011 compared to the comparable period in 2010 and increased our sales backlog from September 30, 2010 to September 30, 2011 as shown below:


(in millions)	September 30, 2011		December 31, 2010		September 30, 2010
Sales backlog (end of period)	$	412	$	210	$	168

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

Our sales backlog represents management’s estimate of potential future revenues that we expect may result from contracts currently awarded to us by our customers. Backlog is determined by the amount of unshipped third party customer orders and may be revised upward or downward, or cancelled by our customers in certain instances. There can be no assurance that the backlog amounts presented will ultimately be realized as revenue, or that we will earn a profit on any of our backlog of orders. Further, because of the project nature of our business, sales orders and sales backlog can vary materially from quarter to quarter.

Sales volume increases in the first nine months of 2011 continued to be the primary contributor to improved sales in both our Western and Eastern Hemisphere segments. Sales prices for many of our products have modestly increased in the first nine months of 2011 compared to the first nine months of 2010 despite very competitive market conditions. Gross profit has increased as compared to the first nine months of 2010 and is attributable mainly to higher sales volumes and our ability to achieve higher gross margins on certain of our products. Selling, general and administrative expense, net of service fee income for the nine months ended September 30, 2011, was higher when compared to the same period in 2010 due to (i) increased staffing to support our sales growth and international sales office expansions, (ii) compensation adjustments, (iii) higher employee related variable expenses, and (iv) the reserve for an uncollectible receivable associated with an outstanding customer warranty claim. This increase was partially offset by a decrease in our realized and unrealized losses on foreign currency transactions.

Cash on hand at September 30, 2011 was $11.9 million, a decrease from our cash position of $62.5 million at December 31, 2010. The decrease is primarily the result of cash used in operating activities associated with working capital requirements to support our increased sales volume, partially offset by cash proceeds from the sale of property, plant and equipment.

Three months ended September 30, 2011 compared to three months ended September 30, 2010

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


	Three months ended September 30,
(millions, except percentages)	2011			2010			% Change
Sales
Western Hemisphere	$	168.6		$	113.0			49	%
Eastern Hemisphere		82.3			62.1			33	%
Eliminations		(6.1	)		(0.9	)		NM

Total	$	244.8		$	174.2			41	%

Income (loss) from operations
Western Hemisphere	$	6.5		$	2.1			210	%
Eastern Hemisphere		8.6		$	6.9			25	%
General Company		(4.2	)	$	(4.4	)		5	%

Total	$	10.9		$	4.6			137	%

Income (loss) from operations as a % of sales
Western Hemisphere		3.9	%		1.9	%
Eastern Hemisphere		10.4	%		11.1	%
Total		4.5	%		2.6	%

Sales

Consolidated—For the three months ended September 30, 2011, consolidated sales increased $70.6 million, or 41%, to $244.8 million compared to $174.2 million for the three months ended September 30, 2010. The increased sales were driven by sales volume increases primarily in the upstream and downstream energy markets as a result of increased customer spending for onshore and offshore oil and gas infrastructure and refinery projects.

Western Hemisphere—For the three months ended September 30, 2011, sales from the Western Hemisphere increased $55.6 million, or 49%, to $168.6 million compared to $113.0 million for the three months ended September 30, 2010. The sales increase in the Western Hemisphere was driven by a slight increase in prices and a significant increase in sales volume, particularly those products provided to customers in (i) our upstream energy markets for projects related to exploration and production and offshore jack-up rigs, (ii) our downstream energy markets for refinery and storage projects and (iii) our civil markets for projects related to domestic construction.

Eastern Hemisphere—For the three months ended September 30, 2011, sales from the Eastern Hemisphere increased $20.2 million, or 33%, to $82.3 million compared to $62.1 million for the three months ended September 30, 2010. The sales increase in the Eastern Hemisphere was driven by price increases and a favorable product sales mix, partially offset by a sales volume decrease. Foreign currency exchange rates had a favorable impact on sales of $1.2 million for the period.

Income (loss) from operations

Consolidated— For the three months ended September 30, 2011, consolidated income from operations increased $6.3 million to income from operations of $10.9 million compared to income from operations of $4.6 million for the three months ended September 30, 2010. The increase in consolidated income from operations is primarily attributable to a shift in product sales mix and increased gross margins. For the three months ended September 30, 2011, selling, general and administrative expense, net of service fee income was $5.4 million higher when compared to the three months ended September 30, 2010 due mainly to increased staffing and other expenses to support our sales growth and the expansion of our international offices, 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 three months ended September 30, 2011, income from operations for the Western Hemisphere increased $4.4 million to $6.5 million compared to $2.1 million for the three months ended September 30, 2010. The increase in

income from operations was driven primarily by gross profit from improved product sales mix and higher profit margins, partially offset by higher selling, general and administrative expenses due mainly to increased staffing 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 three months ended September 30, 2011, income from operations for the Eastern Hemisphere increased $1.7 million to $8.6 million compared to $6.9 million for the three months ended September 30, 2010. The 25% increase in income from operations was driven primarily by gross profit from increased sales prices, offset slightly by an unfavorable product sales mix. This increase in income from operations was partially offset by higher selling, general and administrative expenses due to increases in staffing and other expenses to support our sales growth and expansion of our international offices and higher unrealized and realized losses on foreign currency transactions.

General Company—The $4.2 million loss from operations for General Company for the three months ended September 30, 2011 remained relatively flat compared to the $4.4 million loss from operations for the three 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 $0.5 million and $0.2 million for the three months ended September 30, 2011 and 2010, respectively.

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,
(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

Income (loss) from operations as a % of sales
Western Hemisphere		3.1	%		-20.7	%
Eastern Hemisphere		11.0	%		9.6	%
Total		4.4	%		-13.4	%

Sales

Consolidated—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 gas infrastructure, 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.

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 and a favorable product mix. 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. 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. 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, 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, offset slightly by an unfavorable product sales mix. Excluding realized and unrealized losses from foreign currency transactions, selling, general and administrative expenses increased 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.

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 three 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 three and nine months ended September 30, 2011 and 2010.


	Three months ended September 30,
	2011			2010			% Change
Equity in earnings of unconsolidated affiliate	$	1.2		$	0.5			NM
Interest expense—net		(15.1	)		(16.1	)		-6.2	%
Income tax expense (benefit)		1.2			(5.6	)		NM

	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	)		-1.5	%
Income tax expense (benefit)		3.3			(21.1	)		NM

Equity in earnings of unconsolidated affiliate

Equity in earnings of unconsolidated affiliate of $1.2 million and $2.6 million for the three and nine months ended September 30, 2011, respectively, reflects income from our 14.5% ownership interest in B&L. Income from the B&L investment for the period August 19, 2010 through September 30, 2010 was $0.5 million. EMC’s investment in B&L was made on August 19, 2010.

Interest expense, net

Interest expense - net for the three and nine months ended September 30, 2011 was $15.1 million and $47.5 million, respectively. Interest expense - net, includes interest on the EMC 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 our ABL Facility for letters of credit and bank guarantees issued in support of our normal business operations. The slight decrease in interest expense – net for the three and nine months ended September 30, 2011 when compared to the prior year comparable periods is due to reduced amortization of deferred financing costs.

Income tax expense (benefit)

Income tax expense was $1.2 million for the three months ended September 30, 2011 compared to an income tax benefit of $5.6 million for the three months ended September 30, 2010. For the nine months ended September 30, 2011, income tax expense was $3.3 million compared to an income tax benefit of $21.1 million for the nine months ended September 30, 2010. In accordance with ASC 740, Income Taxes, 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 three and 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 United Kingdom, Singapore and UAE.

At September 30, 2011 and December 31, 2010, a valuation allowance of $22.7 million and $11.5 million, respectively, 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 (“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.

Liquidity and Capital Resources

We finance our operations principally through cash flows generated from operations and from borrowings under our ABL Facility. Our primary cash requirements are for routine operating expenses, debt service, working capital and capital expenditures. In addition, we may require capital to fund strategic business acquisitions or investments. Our primary source of acquisition funds has historically been the issuance of debt securities, preferred and common equity and cash on hand.

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. Additionally, provisions of our ABL Facility and the indenture governing the EMC 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.

At September 30, 2011 our total indebtedness, including capital leases, was $480.2 million. Included within our total indebtedness is $465.0 million aggregate principal amount of EMC Senior Secured Notes. Total cash interest payments required under the EMC Senior Secured Notes is approximately $57.0 million on an annual basis. The indenture governing the EMC Senior Secured Notes contains various covenants that limit our discretion in the operation of our business. It, among other things, 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.

On September 2, 2011, we entered into a Sixth Amendment to the ABL Facility among JPMorgan Chase Bank, N.A. and other financial institutions party thereto, EMC, EM Europe, EM Canada and EM Pte. The Sixth Amendment extended the maturity date of the ABL Facility from May 11, 2012 to May 11, 2014 and increased the aggregate amount available under the ABL 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:

•

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

•

EM Europe may utilize up to $60.0 million;

•

EM Canada may utilize up to $10.0 million; and

•

EM Pte may utilize up to $15.0 million

Actual credit availability under the ABL Facility for each subsidiary fluctuates because it is subject to a borrowing base limitation that is calculated based on a percentage of eligible trade accounts receivable and inventories, the balances of which fluctuate, and is subject to discretionary reserves and revaluation adjustments imposed by the administrative agent and other limitations. Additionally, the fixed charge coverage ratio of the ABL Facility, as described below, could limit our ability to utilize our full borrowing availability by requiring that we maintain a fixed charge coverage ratio greater than or equal to 1.25 to 1.00 if we fail to maintain an aggregate borrowing base availability above $27.0 million, or the sum of EMC and EM Canada availability above $16.5 million. As a result of these limitations, our borrowing availability at any one point in time may not reflect our borrowing availability at any subsequent point in time.

Subject to sub-limits, the subsidiaries may utilize the ABL Facility for borrowings as well as for the issuance of bank guarantees and letters of credit as defined by the ABL Facility.

As of September 30, 2011, there was no outstanding balance for cash borrowings under the ABL Facility. Outstanding letters of credit and guarantees under the ABL Facility as of September 30, 2011 totaled $47.7 million. During the nine months ended September 30, 2011, our maximum utilization under the ABL Facility was $69.3 million. At September 30, 2011, borrowing availability under the ABL Facility, net of reserves, was as follows (based on the value of the Company’s borrowing base on that date):


	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 ABL Facility increased to $15.0 million in connection with its fulfillment of certain conditions precedent associated with the Sixth Amendment to the ABL Facility.

The ABL Facility contains a minimum fixed charge coverage ratio covenant of not less than 1.25 to 1.00 that applies if our aggregate borrowing 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 ABL 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 our ABL 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 our ABL Facility fixed charge coverage ratio exceeded 1.25 to 1.00. Although the ABL Facility fixed charge coverage ratio covenant was not applicable because our aggregate borrowing availability was above the applicable thresholds, there can be no assurance that our borrowing availability will not fall below one of the applicable

thresholds in the future. Our borrowing availability could decline if the value of our borrowing base declines, the administrative agent under the ABL Facility imposes reserves in its discretion, our borrowings under the ABL Facility increase or for other reasons. In addition, the agents under the ABL Facility are entitled to conduct borrowing base field audits and inventory appraisals periodically, which may result in a lower borrowing base valuation. Our failure to comply with the ABL minimum fixed charge coverage ratio at a time when it is applicable would be an event of default under the ABL Facility, which could result in a default under and acceleration of our other indebtedness.

We believe that the inclusion of the ABL fixed charge coverage ratio calculation provides useful information to investors about our compliance with the minimum fixed charge coverage ratio covenant in our ABL Facility. The ABL 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 lesser of $15.0 million or 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 our ABL Facility. EM FZE may utilize the local facility for borrowings, foreign currency exchange contracts, letters of credit, 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 under the EM FZE Facility. At September 30, 2011, there was approximately $5.8 million in letters of credit and bank guarantees issued under the local facility. Availability under the local credit facility was $6.2 million at September 30, 2011.

As of September 30, 2011, we believe our cash flows from operations, available cash and available borrowings under our ABL Facility and the EM FZE Facility will be adequate to meet our liquidity needs for at least the next twelve months. As of September 30, 2011, total availability under both our ABL Facility and EM FZE Facility was $107.9 million. 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 ABL Facility 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, including the ABL Facility and the indenture governing the EMC Senior Secured Notes, 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.

We were in compliance with all applicable financial, affirmative and negative covenants under our ABL Facility and the EMC Senior Secured Notes during the nine months ended September 30, 2011.

Statement of cash flows data


	Nine months ended September 30,
(dollars in millions)	2011			2010
Cash flows provided by (used in) operating activities	$	(55.1	)	$	1.7
Cash flows provided by (used in) investing activities		3.9			(23.3	)
Cash flows provided by (used in) financing activities		1.2			(5.3	)
Effect of exchange rate changes on cash and cash equivalents		(0.6	)		(0.2	)

Net change in cash and cash equivalents		(50.6	)		(27.1	)
Cash and cash equivalents - beginning of period		62.5			65.7

Cash and cash equivalents - end of period	$	11.9		$	38.6

Operating activities. Net cash outflows from operating activities were $55.1 million for the nine months ended September 30, 2011 compared to net cash inflows of $1.7 million for the nine months ended September 30, 2010. The cash used in operations for the nine months ended September 30, 2011 reflects cash used for working capital requirements to support increased sales activity and interest paid of $59.2 million primarily associated with our EMC Senior Secured Notes. These cash outflows were partially offset by federal and state income tax refunds of $18.4 million received during the nine months ended September 30, 2011.

Investing activities. Net cash provided by investing activities were $3.9 million for the nine months ended September 30, 2011 compared to net cash outflows of $23.3 million for the nine months ended September 30, 2010. Net cash inflows for the nine months ended September 30, 2011 reflect cash proceeds of $6.3 million from the sale of our former Singapore sales and distribution facility in January 2011. Net cash outflows of $23.3 million for the nine months ended September 30, 2010 include EMC’s $10.0 million investment in unconsolidated affiliate, cash outflow of $9.6 million primarily related to the construction of the new Singapore sales and distribution facility and a $4.0 million cash payment for the final purchase price adjustment for the purchase of the businesses of Petro Steel International, L.P. and Petro Steel International, LLC.

Financing activities. Net cash provided by financing activities were $1.2 million during the nine months ended September 30, 2011 compared to net cash outflows of $5.3 million for the nine months ended September 30, 2010. The net cash outflow in the nine months ended September 30, 2010 includes payments on long-term debt and capital lease of approximately $4.2 million. Payments on long-term debt and capital lease were negligible in the nine months ended September 30, 2011.

Off-Balance Sheet Transactions

In the normal course of business, we are a party to certain off-balance sheet arrangements. These arrangements include guarantees and financial instruments with off-balance sheet risk, such as bank letters of credit. No liabilities related to these arrangements are reflected in our condensed consolidated balance sheet, and we do not expect any material adverse effects on our financial condition, results of operations or cash flows to result from these off-balance sheet arrangements.

As of September 30, 2011 and December 31, 2010, we had $53.5 million and $23.0 million of letters of credit and bank guarantees outstanding, respectively.

As of September 30, 2011 and December 31, 2010, the Company had issued payment guarantees with a maximum aggregate potential obligation for future payments (undiscounted) of $30.9 million and $16.9 million, respectively, to third parties to secure payment performance by certain Edgen Murray entities. The outstanding aggregate value of guaranteed commitments at September 30, 2011 and December 31, 2010, were $27.0 million and $14.9 million, respectively.

At September 30, 2011 and December 31, 2010, the Company had bank guarantees of $0.5 million and $1.0 million, which have been cash collateralized and included in prepaid expenses and other assets on the condensed consolidated balance sheets.

Commitments and contractual obligations

Our commitments and contractual obligations principally include obligations associated with our outstanding indebtedness and future minimum operating lease obligations. These contractual obligations are summarized and discussed more fully in Management’s Discussion and Analysis of Financial Condition and Results of Operations in Item 7 of Part II of our Annual Report on Form 10-K for the year ended December 31, 2010 filed with the SEC.

There have been no material changes to our commitments and contractual obligations during the nine months ended September 30, 2011.

Critical Accounting Policies

Item 7 of Part II of our Annual Report on Form 10-K for the year ending December 31, 2010 addresses the accounting policies and related estimates that we believe are the most critical to understanding our condensed consolidated financial statements, financial condition and results of operations and those that require management judgment and assumptions, or involve uncertainties.

Recent Accounting Pronouncements

For a discussion of recent accounting pronouncements and the effect they could have on our condensed consolidated financial statements, refer to Note 2 —Part I, Item 1 — Financial Statements within this report.

Item 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

In the normal course of operations, we are exposed to market risks arising from adverse changes in interest rates on our variable rate debt and foreign exchange rate risk related to our foreign operations and foreign currency transactions. Market risk is defined for these purposes as the potential change in the fair value of financial assets or liabilities resulting from an adverse movement in interest rates or foreign exchange rates. These market risks are discussed more fully in Management’s Discussion and Analysis of Financial Condition and Results of Operations in Item 7 of Part II of our Annual Report on Form 10-K for the year ending December 31, 2010 filed with the SEC. These market risks have not materially changed since the Annual Report on Form 10-K for the year ending December 31, 2010 was filed with the SEC. For a further discussion of the Company’s derivative instruments and their fair values, see Notes 12 and 13 to the condensed consolidated financial statements included in this report.

Item 4.

CONTROLS AND PROCEDURES

a)	Evaluation of Disclosure Controls and Procedures

As of the end of the period covered by this report, our management carried out an evaluation, under the supervision and with the participation of our President and Chief Executive Officer and our Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act), pursuant to Exchange Act Rule 13a-15. Based upon that evaluation, our President and Chief Executive Officer along with our Chief Financial Officer concluded that the Company’s disclosure controls and procedures as of September 30, 2011 are effective in ensuring that information required to be disclosed in the reports we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the rules and forms of the SEC, and that such information is accumulated and communicated to our management, including our President and Chief Executive Officer and our Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosures.

b)	Changes in Internal Control Over Financial Reporting

There have been no changes in our internal controls over financial reporting during the three months ended September 30, 2011 that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.

PART II - OTHER INFORMATION

Item 1.

LEGAL PROCEEDINGS

The Company is involved in various claims, lawsuits, and proceedings arising in the ordinary course of business. While there are uncertainties inherent in the ultimate outcome of such matters and it is impossible to presently determine the ultimate costs that may be incurred, management believes the resolution of such uncertainties and the incurrence of such costs will not have a material effect on the Company’s condensed consolidated financial position, results of operations or cash flows. For information regarding the Company’s pending or threatened litigation, see Note 10, “Commitments and contingencies” to the condensed consolidated financial statements within Part I, Item 1 of this report.

Item 1A.

RISK FACTORS

In addition to the cautionary information included in this report, you should carefully consider the factors discussed in Item 1A to Part I, “Risk Factors” in our Annual Report on Form 10-K for the year ending December 31, 2010 filed with the SEC on March 24, 2011, which could materially adversely affect our business, financial condition and/or results of operations. The risks described in this report are not the only risks facing the Company. Additional risks and uncertainties not currently known to the Company or that the Company currently deems to be immaterial also may materially adversely affect the Company’s business, financial condition and/or operating results.

Item 2.

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

None.

Item 3.

DEFAULTS UPON SENIOR SECURITIES

None.

Item 4.

(REMOVED AND RESERVED)

Item 5.

OTHER INFORMATION

None.

Item 6.

EXHIBITS

Exhibits filed as Part of this Report are listed in the Exhibit Index.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


	EDGEN MURRAY II, L.P.

Dated: November 14, 2011	/s/	Daniel J. O’Leary
		Daniel J. O’Leary
		Chief Executive Officer and President

Dated: November 14, 2011	/s/	David L. Laxton, III
		David L. Laxton, III
		Chief Financial Officer

EXHIBIT

INDEX


Exhibit		Title

10.1		Sixth Amendment to Credit Agreement, dated as of September 2, 2011, by and among Edgen Murray Corporation, Edgen Murray Canada Inc., Edgen Murray Limited, Edgen Murray Pte. Ltd., the Loan Parties thereto, JPMorgan Chase Bank, N.A., JPMorgan Chase Bank, N.A. Toronto Branch, J.P. Morgan Europe Limited, The Hong Kong and Shanghai Banking Corporation Limited and the Lender Party thereto (incorporated by reference to Exhibit 10.1 to the Company’s Form 8-K filed on September 7, 2011 (SEC File No. 333-165928-01.

10.2		Severance Agreement and Release dated August 24, 2011 between Edgen Murray II, L.P. and Mr. Michael F.A. Craig.

31.1		Certification of Principal Executive Officer Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 302 Of The Sarbanes-Oxley Act of 2002.

31.2		Certification of Principal Financial Officer Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 302 Of The Sarbanes-Oxley Act of 2002.

32		Certification Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

101.1		The following materials from Edgen Murray II L.P.’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2011, formatted in XBRL (eXtensible Business Reporting Language): (i) the Condensed Consolidated Balance Sheet, (ii) the Condensed Consolidated Statements of Operations, (iii) the Condensed Consolidated Statements of Partners’ (Deficit) Capital and Comprehensive Income (Loss), (iv) the Condensed Consolidated Statements of Cash Flows, (v) the Notes to Condensed Consolidated Financial Statements, tagged as blocks of text, and (vi) document and entity information. In accordance with Rule 406T of Regulation S-T, the XBRL related information in Exhibit 101 to this Quarterly Report on Form 10-Q shall not be deemed to be “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, or otherwise subject to the liability of that section, and shall not be part of any registration statement or other document filed under the Securities Act of 1933 or the Securities Exchange Act of 1934, except as shall be expressly set forth by specific reference in such filing.

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company

Edgen Murray II, L.P. 10-Q