UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 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 July 31, 2008

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE

ACT OF 1934

For the transition period from ___________________ to _____________

Commission File Number 333-134875

RATHGIBSON, INC.

(Exact name of registrant as specified in its charter)


Delaware	22-3683283
(State or other jurisdiction of incorporation or	(I.R.S. Employer Identification No.)
organization)

475 Half Day Road, Suite 210, Lincolnshire, Illinois	60069
(Address of principal executive offices)	(Zip Code)

(847) 276-2100
(Registrant’s telephone number, including area code)

N/A
(Former name, former address and former fiscal year, if changed since last report)

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 o No ý

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.


Large accelerated filer o	Accelerated filer o

Non-accelerated filer ý (Do not check if a smaller reporting company)	Smaller reporting company o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes o No ý

At September 12, 2008, 100 shares of Common Stock were outstanding.

Table of Contents

RATHGIBSON, INC.

TABLE OF CONTENTS

FOR THE QUARTERLY PERIOD ENDED JULY 31, 2008


				Page
PART I - FINANCIAL INFORMATION

	Item 1.	Financial Statements
		Condensed Consolidated Balance Sheets at July 31, 2008 and January 31,
			2008 (Unaudited)	3
		Condensed Consolidated Statements of Operations for the Three Months
			Ended July 31, 2008, the Period June 16, 2007 through July 31, 2007
			and the Period May 1, 2007 through June 15, 2007 (Unaudited)	4
		Condensed Consolidated Statements of Operations for the Six Months
			Ended July 31, 2008, the Period June 16, 2007 through July 31, 2007
			and the Period February 1, 2007 through June 15, 2007 (Unaudited)	5
		Condensed Consolidated Statements of Cash Flows for the Six Months
			Ended July 31, 2008, the Period June 16, 2007 through July 31, 2007
			and the Period February 1, 2007 through June 15, 2007 (Unaudited)	6
		Notes to Condensed Consolidated Financial Statements (Unaudited)		7

	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of
			Operations	37

	Item 3.	Quantitative and Qualitative Disclosures about Market Risk		50

	Item 4.	Controls and Procedures		51

	Item 4T.	Controls and Procedures		51

PART II - OTHER INFORMATION

	Item 1.	Legal Proceedings		51

	Item 1A.	Risk Factors		51

	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		52

	Item 3.	Defaults Upon Senior Securities		52

	Item 4.	Submission of Matters to a Vote of Securities Holders		52

	Item 5.	Other Information		52

	Item 6.	Exhibits		53

Table of Contents

PART I

Item 1. Financial Statements.

RATHGIBSON, INC. AND SUBSIDIARY

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except share and per share data)

(Unaudited)


						July 31,		January 31,
						2008		2008
Assets
Current assets:
	Cash				$	2,126	$	680
	Restricted cash					-		2,000
	Accounts receivable, net of reserves of $326 and $328 at July
		31, 2008 and January 31, 2008, respectively				53,671		54,754
	Inventories					84,307		65,597
	Prepaid expenses and other					2,881		2,524
	Refundable income taxes					659		3,419
	Deferred income taxes					1,255		1,438
				Total current assets		144,899		130,412

Property, plant and equipment, net						51,652		50,843

Goodwill						246,472		231,769
Other intangible assets, net						151,527		148,516
Deferred financing costs and other						678		383
				Total assets	$	595,228	$	561,923

Liabilities and Stockholder’s Equity
Current liabilities:
	Current installments of long-term debt				$	250	$	244
	Accounts payable					23,581		29,965
	Accrued expenses					20,478		17,757
	Income taxes payable					119		-
				Total current liabilities		44,428		47,996

Long-term debt, less current installments						274,122		248,045

Deferred income taxes						65,798		62,666

Stockholder’s equity:
	Common stock, $.01 par value; 260,000 shares authorized, 100 shares
			issued and outstanding			-		-
	Additional paid-in capital					214,306		208,175
	Accumulated deficit					(3,426)		(4,929)
				Total stockholder’s equity		210,880		203,246
				Total liabilities and stockholder’s equity	$	595,228	$	561,923

The accompanying notes are an integral part of these condensed consolidated financial statements.

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RATHGIBSON, INC. AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands)

(Unaudited)


				Successor				Predecessor
				Three		Period		Period
				Months		June 16,		May 1,
				Ended		2007 through		2007 through
				July 31,		July 31,		June 15,
				2008		2007		2007

Net sales			$	88,615	$	48,674	$	49,233
Cost of goods sold				69,715		41,957		37,265
		Gross profit		18,900		6,717		11,968

Operating expenses:
	Selling, general and administrative			7,594		3,024		14,961
	Amortization			2,860		4,320		788
				10,454		7,344		15,749
		Income (loss) from operations		8,446		(627)		(3,781)

Interest expense				6,221		3,353		3,353
		Income (loss) before income taxes		2,225		(3,980)		(7,134)

Income tax expense (benefit)				1,044		(712)		(1,193)
		Net income (loss)	$	1,181	$	(3,268)	$	(5,941)

The accompanying notes are an integral part of these condensed consolidated financial statements.

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RATHGIBSON, INC. AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands)

(Unaudited)


				Successor				Predecessor
				Six		Period		Period
				Months		June 16,		February 1,
				Ended		2007 through		2007 through
				July 31,		July 31,		June 15,
				2008		2007		2007

Net sales			$	175,038	$	48,674	$	138,239
Cost of goods sold				139,691		41,957		106,422
		Gross profit		35,347		6,717		31,817

Operating expenses:
	Selling, general and administrative			14,160		3,024		21,044
	Amortization			6,036		4,320		2,363
				20,196		7,344		23,407
		Income (loss) from operations		15,151		(627)		8,410

Interest expense				12,410		3,353		9,991
		Income (loss) before income taxes		2,741		(3,980)		(1,581)

Income tax expense (benefit)				1,238		(712)		930
		Net income (loss)	$	1,503	$	(3,268)	$	(2,511)

The accompanying notes are an integral part of these condensed consolidated financial statements.

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RATHGIBSON, INC. AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(Unaudited)


								Successor				Predecessor
								Six		Period		Period
								Months		June 16,		February 1,
								Ended		2007 through		2007 through
								July 31,		July 31,		June 15,
								2008		2007		2007
Cash flows from operating activities:
	Net income (loss)						$	1,503	$	(3,268)	$	(2,511)
	Adjustments to reconcile net income (loss) to net cash
		used in operating activities:
			Depreciation and amortization					9,266		5,030		4,551
			Net amortization of deferred debt expenses and
				bond premium				(563)		48		576
			Expensing of write-up of inventory					666		2,864		-
			Loss on disposal of property, plant
				and equipment				-		-		16
			Deferred income taxes					(524)		(2,479)		(1,846)
			Incentive unit expense					131		166		4,079
			Change in assets and liabilities, net of acquisition:
					Accounts receivable			2,769		274		(5,850)
					Inventories			(11,372)		1,568		(17,014)
					Other current and non-current assets			(510)		416		598
					Accounts payable			(6,747)		(5,839)		14,188
					Accrued expenses			854		2,708		(7,767)
					Income taxes			2,879		(2,579)		(202)
						Net cash used in operating activities		(1,648)		(1,091)		(11,182)

Cash flows from investing activities:
	Acquisition of property, plant and equipment							(5,297)		(912)		(2,269)
	Decrease in restricted cash							2,000		-		-
	Cash paid for acquisition, net of cash acquired							(20,136)		-		-
						Net cash used in investing activities		(23,433)		(912)		(2,269)

Cash flows from financing activities:
	Net proceeds from Revolving Credit Facility							26,851		4,941		12,324
	Payments on long-term debt							(121)		-		-
	Dividend							-		(3,800)		-
	Proceeds from parent company							-		1,962		-
	Payments of financing fees							(203)		(151)		(50)
						Net cash provided by financing activities		26,527		2,952		12,274

						Net increase (decrease) in cash		1,446		949		(1,177)

Cash at beginning of period								680		4,454		5,631
Cash at end of period							$	2,126	$	5,403	$	4,454

The accompanying notes are an integral part of these condensed consolidated financial statements.

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RATHGIBSON, INC. AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

July 31, 2008

(Unaudited)

(Dollars in thousands, except share data)

(1)

ORGANIZATION AND FINANCIAL STATEMENT PRESENTATION

RathGibson, Inc. (“RathGibson”) and its subsidiary (together with RathGibson, the “Company”) is one of the world’s leading specialty manufacturers of highly engineered premium stainless steel and alloy tubular products. The Company’s products are designed to meet customer specifications and are used in environments that require high-performance characteristics, such as exceptional strength and the ability to withstand highly corrosive materials, extreme temperatures or high-pressure. The Company sells over 1,000 products globally to diverse end-markets, including (i) chemical/petrochemical processing and power generation; (ii) energy; (iii) food, beverage and pharmaceuticals; and (iv) general commercial. The Company sells these products to value-added tubing distributors, original equipment manufacturers, or OEMs, and engineering firms that often recommend the Company’s products for projects on which they are engaged. The Company’s primary trade brands, Rath^TM, Gibson Tube^® and GTC^®, are recognized as industry leaders and the Company’s products have won numerous awards for quality and reliability from customers.

On June 15, 2007, RGCH Holdings Corp. (“RGCH Corp.”), the direct parent of RathGibson, and RGCH Holdings LLC (“RGCH LLC”), an indirect parent of RathGibson, completed the sale of 100% of RGCH Corp. to RG Tube Holdings LLC (“RG Tube”), an affiliate of DLJ Merchant Banking Partners IV, L.P. and affiliated investment funds (“DLJ Funds”) and certain members of RathGibson’s senior management who exchanged a portion of their equity interest in RGCH LLC for equity interest in RG Tube in lieu of cash (referred to as the “DLJ Acquisition”). The aggregate purchase price was $211,834, including a contingent payment of $3,376 made by RG Tube in the second quarter of fiscal 2008. The contingent payment was equal to Adjusted Net Income (as defined in the stock purchase agreement) for the period May 1, 2007 through June 15, 2007, up to a maximum contingent payment of $4,000. The DLJ Acquisition was financed through a combination of debt and equity. In connection with the DLJ Acquisition, RGCH Corp. issued $115,000 of 13.5% pay-in-kind notes (“PIK Notes”) due on June 15, 2015. The Company, however, is not a party to any agreement related to the PIK Notes and does not have any obligations (including any guarantee obligations) in respect of the PIK Notes and accordingly, the debt and related interest are not recognized in the accompanying financial statements. In addition, the Company entered into a second amendment to its senior secured revolving credit facility (“Revolving Credit Facility”) for which the borrowing capacity was increased by $20,000 to $80,000, subject to borrowing base availability. The contingent payment of $3,376 made by RG Tube was financed by a dividend of $3,800 from RathGibson in the period June 16, 2007 through July 31, 2007. In connection with the DLJ Acquisition, the Company recorded (i) $4,844 of fees and related charges for the termination of its management agreement with Castle Harlan, Inc. (“Castle Harlan”), a private equity investment firm which managed Castle Harlan Partners IV, L.P. (“CHP IV”), a private equity investment fund affiliated with RGCH LLC, which was settled at closing (Note 12); (ii) $2,973 of compensation expense relating to employee bonuses, of which $2,000 and $973 was settled at closing and in the third quarter of fiscal 2008, respectively; and (iii) $3,989 of non-cash incentive unit expense (Note 11). The foregoing transactions were recorded as selling, general and administrative expenses within the Consolidated Statements of Operations for the period May 1, 2007 through June 15, 2007 and the period February 1, 2007 through June 15, 2007.

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RATHGIBSON, INC. AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

July 31, 2008

(Unaudited)

(Dollars in thousands, except share data)

The following table summarizes the purchase price allocation in the DLJ Acquisition:


Current assets		$	153,527
Property, plant and equipment			46,224
Goodwill			231,769
Other intangible assets			153,000
Deferred financing costs and other			342
	Total assets acquired		584,862
Current liabilities			(57,936)
Long-term debt			(251,868)
Deferred income tax liability			(63,224)
	Total liabilities assumed		(373,028)
	Purchase price paid	$	211,834

Approximately $32,600 of the goodwill recorded as part of the DLJ Acquisition will be deductible for income tax purposes.

The results for the six months ended July 31, 2008 include the Company’s results after the DLJ Acquisition (Successor). The results for the six months ended July 31, 2007 include the Company’s results through June 15, 2007 (Predecessor) and after the DLJ Acquisition (Successor). The DLJ Acquisition was accounted for using the purchase method of accounting and accordingly, the results of operations for periods subsequent to the consummation of the DLJ Acquisition will not necessarily be comparable to prior periods.

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, the condensed consolidated financial statements do not include all of the information and notes required by GAAP for complete financial statements. In the opinion of management, all adjustments, consisting of normal recurring adjustments, considered necessary for a fair presentation of financial position, results of operations and cash flows for the periods presented have been made. Interim results are not necessarily indicative of results that may be expected for any other interim period or for the fiscal year ending January 31, 2009. For further information, refer to the audited consolidated financial statements and notes included in the Company’s Annual Report on Form 10-K for the fiscal year ended January 31, 2008.

The balance sheet at January 31, 2008 has been derived from the audited financial statements at that date but does not include all of the information and notes required by GAAP for complete financial statements.

(2)

PRINCIPLES OF CONSOLIDATION

All significant intercompany balances and transactions have been eliminated in consolidation.

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RATHGIBSON, INC. AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

July 31, 2008

(Unaudited)

(Dollars in thousands, except share data)

(3)

RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

In May 2008, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 162, “The Hierarchy of Generally Accepted Accounting Principles” (“SFAS 162”). SFAS 162 identifies the sources of accounting principles and the framework for selecting the principles used in the preparation of financial statements. SFAS 162 is effective 60 days following the Securities and Exchange Commission’s approval of the Public Company Accounting Oversight Board amendments to AU Section 411, “The Meaning of Present Fairly in Conformity with Generally Accepted Accounting Principles.” The adoption of SFAS 162 will not have a material impact on the Company’s consolidated financial position and results of operations.

In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities, an amendment of FASB Statement No. 133” (“SFAS 161”). SFAS 161 establishes the disclosure requirements for derivative instruments and for hedging activities with the intent to provide financial statement users with an enhanced understanding of the entity’s use of derivative instruments, the accounting of derivative instruments and related hedged items under SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities,” and its related interpretations, and the effects of these instruments on the entity’s financial position, results of operations and cash flows. SFAS 161 is effective for financial statements issued for fiscal years beginning after November 15, 2008. The Company is assessing the impact the adoption of SFAS 161 will have on the Company’s consolidated financial position and results of operations for fiscal 2010.

In December 2007, the FASB issued SFAS No. 141R, “Business Combinations,” (“SFAS 141R”) to create greater consistency in the accounting and financial reporting of business combinations. SFAS 141R requires a company to recognize the assets acquired, the liabilities assumed and any noncontrolling interest in the acquired entity to be measured at their fair values as of the acquisition date. SFAS 141R also requires companies to recognize the fair value of assets acquired, the liabilities assumed and any noncontrolling interest in acquisitions of less than a one hundred percent interest when the acquisition constitutes a change in control of the acquired entity. In addition, SFAS 141R requires that acquisition-related costs and restructuring costs be recognized separately from the business combination and expensed as incurred. SFAS 141R is effective for business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. The Company is assessing the impact the adoption of SFAS 141R will have on the Company’s consolidated financial position and results of operations for fiscal 2010.

In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities” (“SFAS 159”). SFAS 159 permits entities to choose to measure many financial instruments and certain other items at fair value and establishes presentation and disclosure requirements designed to facilitate comparisons between entities that choose different measurement attributes for similar types of assets and liabilities. SFAS 159 is effective for financial statements issued for fiscal years beginning after November 15, 2007. The adoption of SFAS 159 did not have a material impact on the Company’s consolidated financial position and results of operations for the three and six months ended July 31, 2008.

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RATHGIBSON, INC. AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

July 31, 2008

(Unaudited)

(Dollars in thousands, except share data)

In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurement” (“SFAS 157”). SFAS 157 defines fair value, establishes a framework for measuring fair value in GAAP and expands disclosures related to the use of fair value measurements. SFAS 157 applies under other accounting pronouncements that require or permit fair value measurement. SFAS 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007. In February 2008, the FASB issued Statement of Financial Position No. 157-2 (“FSP 157-2”) which delays the effective date of SFAS 157 for nonfinancial assets and nonfinancial liabilities, except for items that are recognized or disclosed at fair value on a recurring basis (at least annually). FSP 157-2 defers the effective date of FAS 157 pertaining to nonfinancial assets and nonfinancial liabilities until fiscal years beginning after November 15, 2008. The adoption of SFAS 157 pertaining to financial assets and financial liabilities did not have a material impact on the Company’s consolidated financial position and results of operations for the three and six months ended July 31, 2008. The Company does not expect the adoption of SFAS 157 pertaining to nonfinancial assets and nonfinancial liabilities will have a material impact on the Company’s consolidated financial position and results of operations for fiscal 2010.

(4)

BUSINESS COMBINATIONS

On February 27, 2008, RathGibson entered into an asset purchase agreement with Mid-South Control Line, Inc. (“Mid-South”) and the stockholders of Mid-South providing for the acquisition by RathGibson of substantially all of the assets and the assumption of certain liabilities of Mid-South, in exchange for an aggregate purchase price of approximately $26,136 (net of cash acquired of $1,098). The foregoing transaction is referred to as the “Mid-South Acquisition.” Certain stockholders of Mid-South received equity interests in RG Tube of $6,000 in lieu of cash purchase consideration. Additionally, RG Tube and the Company agreed to reduce its cash payment to the stockholders of Mid-South by $6,000, which was recorded by the Company as an equity contribution from RG Tube. Mid-South is a distributor of stainless steel and nickel alloy tubing and accessories to the United States and international oil and gas industry, a significant portion of which is purchased from the Company’s New Jersey segment. This transaction was financed with the funds available from the Company’s Revolving Credit Facility. The results of Mid-South’s operations have been included in the consolidated financial statements since the date of such acquisition.

The Mid-South Acquisition was accounted for under the purchase method of accounting and in accordance with SFAS No. 141, “Business Combinations.” The Company allocated the purchase price on a preliminary basis to the tangible assets, liabilities and identifiable intangible assets. Each was recorded at their respective estimated fair values based on information currently available. The excess of cost over the currently estimated aggregate fair values was recorded to goodwill. The following table summarizes the preliminary purchase price allocation in the Mid-South Acquisition:


Current assets		$	14,827
Machinery and equipment			292
Goodwill			14,703
Other intangible assets			8,662
Other assets			23
	Total assets acquired		38,507
Current liabilities			(8,532)
Deferred income tax liability			(3,839)
	Total liabilities assumed		(12,371)
	Purchase price paid, net of cash acquired	$	26,136

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RATHGIBSON, INC. AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

July 31, 2008

(Unaudited)

(Dollars in thousands, except share data)

Approximately $20,700 of goodwill will be deductible for income tax purposes. At July 31, 2008, the allocation of the purchase price has been made on a preliminary basis and the Company is awaiting finalization of valuations of the estimated fair value of the assets acquired and liabilities assumed. These valuations are expected to be completed during fiscal 2009. The ultimate value assigned to the tangible and intangible assets and liabilities may vary significantly from the preliminary estimates. Significant judgments involved in the final valuation of the tangible and intangible assets and liabilities will include estimates of market values, future cash flows and useful lives.

The unaudited pro forma financial information in the table below summarizes the consolidated results of operations for the three months ended July 31, 2007 and the six months ended July 31, 2008 and 2007 as if the Mid-South Acquisition had occurred on February 1, 2008 and 2007. The unaudited pro forma financial information is presented for informational purposes only and is not indicative of the results of operations that would have been achieved if the Mid-South Acquisition had taken place at February 1, 2008 or 2007. The unaudited pro forma financial information includes the elimination of intersegment sales and profits, purchase accounting adjustments on historical Mid-South inventory, amortization of acquired intangible assets, adjustments to interest expense and related tax effects. The unaudited pro forma financial information does not include pro forma adjustments relating to costs of integration or post-integration cost reductions that may be incurred or realized by the Company in excess of actual amounts incurred or realized.


		Three
		Months
		Ended		Six Months Ended
		July 31		July 31,
		2007		2008		2007

Net sales	$	103,400	$	177,444	$	196,943
Net income (loss)		(8,937)		1,877		(6,013)

(5)

INVENTORIES

Inventories consist of the following:


			July 31,		January 31,
			2008		2008

Raw materials		$	55,831	$	46,147
Work in process			7,036		6,186
Finished goods			21,440		13,264
	Total inventories	$	84,307	$	65,597

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RATHGIBSON, INC. AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

July 31, 2008

(Unaudited)

(Dollars in thousands, except share data)

(6)

PROPERTY, PLANT AND EQUIPMENT, NET

Property, plant and equipment, net consist of the following:


			July 31,		January 31,
			2008		2008

Leasehold improvements		$	2,099	$	1,620
Machinery and equipment			51,816		42,994
Office equipment, furniture and other			1,238		926
Construction in progress			3,381		8,955
			58,534		54,495
Less accumulated depreciation			(6,882)		(3,652)
	Total property, plant and equipment, net	$	51,652	$	50,843

Depreciation expense for the three months ended July 31, 2008, the period June 16, 2007 through July 31, 2007 and the period May 1, 2007 through June 15, 2007 was $1,736, $710 and $757, respectively. Depreciation expense for the six months ended July 31, 2008, the period June 16, 2007 through July 31, 2007 and the period February 1, 2007 through June 15, 2007 was $3,230, $710 and $2,188, respectively.

(7)

GOODWILL AND OTHER INTANGIBLE ASSETS

In connection with each of the DLJ Acquisition and Mid-South Acquisition, the Company recorded the excess purchase price over their respective fair values of the identifiable assets and liabilities to goodwill (Notes 1 and 4).

The gross carrying amount and accumulated amortization of the Company’s intangible assets, other than goodwill, are as follows:


			July 31, 2008						January 31, 2008
			Gross				Net		Gross				Net
			Carrying		Accumulated		Book		Carrying		Accumulated		Book
			Amount		Amortization		Value		Amount		Amortization		Value

Customer lists		$	132,662	$	10,135	$	122,527	$	124,000	$	4,484	$	119,516
Tradenames			29,000		-		29,000		29,000		-		29,000
	Total intangibles	$	161,662	$	10,135	$	151,527	$	153,000	$	4,484	$	148,516

The Company recorded intangible assets, other than goodwill, in connection with the DLJ Acquisition and Mid-South Acquisition (Notes 1 and 4).

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RATHGIBSON, INC. AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

July 31, 2008

(Unaudited)

(Dollars in thousands, except share data)

The Company recorded backlog of $5,200 and $385 in connection with the DLJ Acquisition and Mid-South Acquisition, respectively. The DLJ Acquisition backlog was fully amortized in the period June 16, 2007 through January 31, 2008. The Mid-South Acquisition backlog was fully amortized in the first quarter of fiscal 2009.

Amortization expense consists of the following:


			Successor				Predecessor
			Three		Period		Period
			Months		June 16,		May 1,
			Ended		2007 through		2007 through
			July 31,		July 31,		June 15,
			2008		2007		2007

Intangibles		$	2,860	$	758	$	788
Backlog			-		3,562		-
	Total amortization expense	$	2,860	$	4,320	$	788


			Successor				Predecessor
			Six		Period		Period
			Months		June 16,		February 1,
			Ended		2007 through		2007 through
			July 31,		July 31,		June 15,
			2008		2007		2007

Intangibles		$	5,651	$	758	$	2,363
Backlog			385		3,562		-
	Total amortization expense	$	6,036	$	4,320	$	2,363

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RATHGIBSON, INC. AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

July 31, 2008

(Unaudited)

(Dollars in thousands, except share data)

The estimated future amortization expense of intangible assets at July 31, 2008 is as follows:


Fiscal years ending January 31,
	2009 (remaining six months)	$	5,722
	2010		11,324
	2011		10,888
	2012		10,485
	2013		10,055

(8)

ACCRUED EXPENSES

Accrued expenses consist of the following:


			July 31,		January 31,
			2008		2008

Accrued compensation		$	3,707	$	4,315
Interest payable			10,421		10,385
Customer advances			3,168		-
Other			3,182		3,057
	Total accrued expenses	$	20,478	$	17,757

(9)

LONG-TERM DEBT

A summary of the Company’s long-term debt is as follows:


			July 31,		January 31,
			2008		2008

Revolving Credit Facility		$	62,670	$	35,819
Senior Notes			209,838		210,485
IRB			1,864		1,985
	Total long-term debt		274,372		248,289
Less current installments			(250)		(244)
	Total long-term debt, less current installments	$	274,122	$	248,045

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RATHGIBSON, INC. AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

July 31, 2008

(Unaudited)

(Dollars in thousands, except share data)

On February 7, 2006, RathGibson entered into a five-year, $90,000 senior secured Revolving Credit Facility, as amended. Concurrently with the closing of the DLJ Acquisition, the Company entered into a second amendment to the Revolving Credit Facility for which the borrowing capacity was increased by $20,000 to a total of $80,000, subject to borrowing base availability. On April 8, 2008, Company entered into a fifth amendment to its Revolving Credit Facility for which the borrowing capacity was increased by $10,000 to $90,000, subject to borrowing base availability, and the interest rate charged on the borrowings under the Revolving Credit Facility was increased to prime plus 1.25% or LIBOR plus 2.25%. There were no material changes to the covenants as a result of these amendments. Borrowings under the Revolving Credit Facility bear interest payable at various dates with floating rates of either (i) prime plus 1.25% (6.25% at July 31, 2008) or (ii) LIBOR plus 2.25% (4.71% at July 31, 2008). At July 31, 2008, the Company had $27,330 available under the Revolving Credit Facility after giving effect to its borrowing base requirements. Borrowings under the Revolving Credit Facility are collateralized by substantially all assets of the Company. The Revolving Credit Facility contains various covenants customary to similar credit facilities. The Company was in compliance with all such covenants at July 31, 2008.

On February 7, 2006, RathGibson issued $200,000 aggregate principal amount of senior notes (“Senior Notes”) due February 15, 2014. These notes bear interest at 11.25% per annum payable in semi-annual installments on February 15 and August 15 each year commencing August 15, 2006. The indenture governing the Senior Notes contains covenants that, among other things, restrict the Company’s ability to incur or guarantee additional debt, pay dividends and make distributions, make certain investments, repurchase stock, incur liens, enter into certain transactions with affiliates, enter into certain sale and leaseback transactions, merge or consolidate, and transfer or sell assets. The Company was in compliance with all such covenants at July 31, 2008.

In connection with the purchase accounting for the DLJ Acquisition, the Company adjusted the fair value of its Senior Notes to $211,250. The bond premium associated with this adjustment is amortized into interest expense over the remaining term of the Senior Notes using the interest method. Amortization of this bond premium amounted to $328 and $149 for the three months ended July 31, 2008 and the period June 16, 2007 through July 31, 2007, respectively. Amortization of this bond premium amounted to $647 for the six months ended July 31, 2008. The unamortized bond premium included in the Senior Notes was $9,838 and $10,485 at July 31, 2008 and January 31, 2008, respectively.

On December 14, 2007, Greenville Tube Company (“Greenville”), a wholly-owned subsidiary of RathGibson, closed on a $2,000 industrial development revenue bond (“IRB”) with the City of Clarksville, Arkansas, due December 30, 2014. The proceeds were used to finance the acquisition and installation of machinery and equipment for a degreasing system and a bench automation project (“IRB Equipment”). RathGibson is a guarantor of the obligation. The IRB requires monthly payments of $29 with interest payable at 5.32%. In connection with the IRB, the Company entered into a third amendment to its Revolving Credit Facility for which the IRB Equipment was released from collateral under the Revolving Credit Facility and permitted Greenville and RathGibson, as guarantor, to enter into the IRB.

(10)

INCOME TAXES

The effective tax rate and resulting income tax expense used in this interim period is based on the Company’s projections for the remainder of fiscal 2009 and the estimated tax provision to tax return adjustments recorded in the three and six months ended July 31, 2008 which related to the anticipated filing of the Company’s income tax returns for the period February 1, 2007 through June 15, 2007 and the period June 16, 2007 through January 31, 2008. The tax provision to tax return adjustments were not material to fiscal 2008 or the three and six months ended July 31, 2008. To the extent that actual results differ from the projections for the remainder of fiscal 2009 or changes to the tax provision to tax return adjustments related to the filing of the Company’s income tax returns, the effective income tax rate and resulting income tax expense may change.

Table of Contents

RATHGIBSON, INC. AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

July 31, 2008

(Unaudited)

(Dollars in thousands, except share data)

(11)

EQUITY BASED COMPENSATION

Successor - RG Tube has allocated certain of its Class B units for incentive based grants primarily to executives and key employees of the Company. The incentive units primarily vest based on the following: (i) 33% vest ratably over certain specified periods of continuing employment; and (ii) 67% vest on the achievement of certain performance-based targets. Vesting of certain units may be accelerated upon a change of control.

A summary of incentive unit activity during the six months ended July 31, 2008 is presented below:


				Weighted
				Average
	Number of		Weighted	Remaining
	Incentive		Average	Period
	Awards		Fair Value	(Years)

Outstanding at February 1, 2008	154,978	$	16.33
Granted	55,393		16.88
Forfeited	(1,558)		16.41
Repurchased	(2,756)		16.41
Outstanding at July 31, 2008	206,057		16.54	4.2

Vested at July 31, 2008	32,309		16.46

Although the incentive units are issued by RG Tube, the incentive units relate to the employment of executives and key employees of the Company; accordingly, the expense is recognized in the Company’s condensed consolidated financial statements. Incentive unit expense recognized within the condensed consolidated statements of operations amounted to $70 and $166 for the three months ended July 31, 2008 and the period June 16, 2007 through July 31, 2007, respectively. Incentive unit expense recognized within the condensed consolidated statements of operations amounted to $131 for the six months ended July 31, 2008. At July 31, 2008, total unrecognized incentive unit cost was approximately $1,000.

Predecessor - Prior to the DLJ Acquisition, RGCH LLC allocated certain of its Class B units for incentive based grants to executives and key employees of the Company. The incentive units primarily vested based on the following: (i) 25% vested ratably over certain specified periods of continuing employment; (ii) 35% vested on the achievement of certain performance-based targets established annually by the board of directors; and (iii) 40% vested upon the occurrence of a change of control or a public equity offering given the achievement of specified target internal rates of return by CHP IV and its affiliates. Vesting of units may be accelerated upon a change of control.

No incentive units were granted or forfeited during the period May 1, 2007 through June 15, 2007 and the period February 1, 2007 through June 15, 2007. In connection with the DLJ Acquisition, 70,278 nonvested incentive units became vested. Accordingly, the Company recognized incentive unit expense of $3,989 during the period May 1, 2007 through June 15, 2007 and the period February 1, 2007 through June 15, 2007. 79,295 incentive units were purchased in connection with the DLJ Acquisition.

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RATHGIBSON, INC. AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

July 31, 2008

(Unaudited)

(Dollars in thousands, except share data)

Although the incentive units were issued by RGCH LLC, the incentive units related to the employment of executives and key employees of the Company; accordingly, the expense was recognized in the Company’s condensed consolidated financial statements. Incentive unit expense recognized within the condensed consolidated statements of operations amounted to $4,019 and $4,079 for the period May 1, 2007 through June 15, 2007 and the period February 1, 2007 through June 15, 2007, respectively.

(12)

ADVISORY AND MANAGEMENT FEES

The Company entered into an advisory services agreement, as amended, with DLJ Merchant Banking, Inc. (“DLJMB”), an affiliate of DLJ Funds, under which DLJMB acts as a financial advisor with respect to the following services: (i) assisting in analyzing operations and historical performance; (ii) analyzing future prospects; (iii) assisting with respect to future proposals for tender offers, acquisitions, sales, mergers, financings, exchange offers, recapitalizations, restructurings or other similar transactions; and (iv) assisting in strategic planning. The advisory services agreement is for an initial term expiring June 15, 2012 and is subject to renewal for consecutive one-year terms unless terminated by DLJMB or the Company, RGCH Corp. or RG Tube with 30 days notice prior to the expiration of the initial term or any annual renewal. For services rendered, annual advisory fees of $900 and $100 are payable to DLJMB and certain consultants for DLJMB who also serve as directors of RG Tube, respectively, in equal quarterly installments on the first business day of each calendar quarter. During the three and six months ended July 31, 2008, the Company recorded an expense of $250 and $500, respectively, to selling, general and administrative expenses within the condensed consolidated statements of operations.

The Company entered into a management agreement with Castle Harlan, as manager, under which Castle Harlan provided business and organizational strategy, financial and investment management, advisory, merchant and investment banking services to the Company, RGCH Corp. or RGCH LLC. The management agreement was terminated as a result of the DLJ Acquisition. During the period May 1, 2007 through June 15, 2007, the Company recorded an expense of $5,088 (including $4,844 of fees and charges related to the termination of the management agreement) to selling, general and administrative expenses within the condensed consolidated statements of operations. During the period February 1, 2007 through June 15, 2007, the Company recorded an expense of $5,577 (including $4,844 of fees and charges related to the termination of the management agreement) to selling, general and administrative expenses within the condensed consolidated statements of operations.

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RATHGIBSON, INC. AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

July 31, 2008

(Unaudited)

(Dollars in thousands, except share data)

(13)

SUPPLEMENTAL CASH FLOW INFORMATION

The following table presents supplemental cash flow information for the respective periods:


				Successor				Predecessor
				Six		Period		Period
				Months		June 16,		February 1,
				Ended		2007 through		2007 through
				July 31,		July 31,		June 15,
				2008		2007		2007
Cash paid (received) during the period for:
	Interest		$	12,987	$	408	$	12,281
	Income taxes			(1,085)		4,346		2,978

Non-cash investing activities:
	Additions to property, plant and equipment
		in accounts payable		129		-		183

Non-cash investing and financing activity:
	Equity contribution from RG Tube in lieu of cash
		payment to stockholders of Mid-South (Note 4)		6,000		-		-

(14)

SEGMENT REPORTING

The Company is primarily a manufacturer of highly engineered premium stainless steel and alloy tubular products. The Company has determined it has four reportable segments, Wisconsin, New Jersey, Louisiana and Arkansas, due to the historical economic characteristics of each business. The accounting practices for each segment are the same as those described in the Critical Accounting Policies. Straight tubing products are manufactured primarily in the Wisconsin (welded) and Arkansas (seamless) plants and coiled tubing products are manufactured primarily in the New Jersey plant. The Company’s Louisiana segment is primarily a distribution facility where a significant portion of its products are purchased from the New Jersey segment. The Wisconsin segment includes corporate expenses and assets such as certain general and administrative expenses, depreciation and interest expense.

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RATHGIBSON, INC. AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

July 31, 2008

(Unaudited)

(Dollars in thousands, except share data)

Information about each segment is summarized as follows:


				Successor
						New
				Wisconsin		Jersey		Louisiana		Arkansas		Total
Three months ended July 31, 2008:
Net sales from external customers
	Chemical/petrochemical processing
		and power generation products	$	23,573	$	2,158	$	-	$	4,773	$	30,504
	Energy products			-		7,432		13,182		351		20,965
	Food, beverage and
		pharmaceutical products		10,156		508		-		-		10,664
	General commercial products			12,203		5,177		-		9,102		26,482
				45,932		15,275		13,182		14,226		88,615
Intersegment net sales				1,142		7,435		-		43		8,620
Income from operations				3,008		1,382		1,006		3,086		8,482
Interest expense (income)				6,227		-		-		(6)		6,221
Income tax expense				59		-		-		1,002		1,061
Depreciation and amortization				2,175		1,472		220		729		4,596
Capital expenditures				959		539		10		1,000		2,508


				Successor
						New
				Wisconsin		Jersey		Louisiana		Arkansas		Total
Period June 16, 2007 through July 31, 2007:
Net sales from external customers
	Chemical/petrochemical processing
		and power generation products	$	21,189	$	1,134	$	-	$	1,417	$	23,740
	Energy products			-		6,660		-		365		7,025
	Food, beverage and
		pharmaceutical products		5,046		512		-		76		5,634
	General commercial products			4,995		3,142		-		4,138		12,275
				31,230		11,448		-		5,996		48,674
Intersegment net sales				1,433		-		-		-		1,433
Income (loss) from operations				(1,258)		100		-		531		(627)
Interest expense (income)				3,391		-		-		(38)		3,353
Income tax expense (benefit)				(923)		-		-		211		(712)
Depreciation and amortization				3,303		971		-		756		5,030
Capital expenditures				523		375		-		14		912

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RATHGIBSON, INC. AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

July 31, 2008

(Unaudited)

(Dollars in thousands, except share data)


				Predecessor
						New
				Wisconsin		Jersey		Louisiana		Arkansas		Total
Period May 1, 2007 through June 15, 2007:
Net sales from external customers
	Chemical/petrochemical processing
		and power generation products	$	19,783	$	1,113	$	-	$	1,482	$	22,378
	Energy products			-		7,100		-		391		7,491
	Food, beverage and
		pharmaceutical products		5,215		433		-		173		5,821
	General commercial products			6,114		2,653		-		4,776		13,543
				31,112		11,299		-		6,822		49,233
Intersegment net sales				51		(9)		-		-		42
Income (loss) from operations				(7,228)		1,177		-		2,270		(3,781)
Interest expense (income)				3,379		-		-		(26)		3,353
Income tax expense (benefit)				(1,930)		-		-		737		(1,193)
Depreciation and amortization				752		613		-		180		1,545
Capital expenditures				(73)		342		-		30		299


				Successor
						New
				Wisconsin		Jersey		Louisiana		Arkansas		Total
Six months ended July 31, 2008:
Net sales from external customers
	Chemical/petrochemical processing
		and power generation products	$	49,494	$	3,818	$	-	$	9,063	$	62,375
	Energy products			-		14,229		20,935		869		36,033
	Food, beverage and
		pharmaceutical products		22,068		1,871		-		-		23,939
	General commercial products			25,059		10,326		-		17,306		52,691
				96,621		30,244		20,935		27,238		175,038
Intersegment net sales				2,959		12,598		-		115		15,672
Income from operations				5,456		3,326		473		6,391		15,646
Interest expense (income)				12,413		-		-		(3)		12,410
Income tax expense (benefit)				(755)		-		-		2,178		1,423
Depreciation and amortization				4,178		2,905		752		1,431		9,266
Capital expenditures				2,731		1,155		13		1,398		5,297

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RATHGIBSON, INC. AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

July 31, 2008

(Unaudited)

(Dollars in thousands, except share data)


				Successor
						New
				Wisconsin		Jersey		Louisiana		Arkansas		Total
Period June 16, 2007 through July 31, 2007:
Net sales from external customers
	Chemical/petrochemical processing
		and power generation products	$	21,189	$	1,134	$	-	$	1,417	$	23,740
	Energy products			-		6,660		-		365		7,025
	Food, beverage and
		pharmaceutical products		5,046		512		-		76		5,634
	General commercial products			4,995		3,142		-		4,138		12,275
				31,230		11,448		-		5,996		48,674
Intersegment net sales				1,433		-		-		-		1,433
Income (loss) from operations				(1,258)		100		-		531		(627)
Interest expense (income)				3,391		-		-		(38)		3,353
Income tax expense (benefit)				(923)		-		-		211		(712)
Depreciation and amortization				3,303		971		-		756		5,030
Capital expenditures				523		375		-		14		912


				Predecessor
						New
				Wisconsin		Jersey		Louisiana		Arkansas		Total
Period February 1, 2007 through June 15, 2007:
Net sales from external customers
	Chemical/petrochemical processing
		and power generation products	$	50,655	$	3,059	$	-	$	4,813	$	58,527
	Energy products			-		21,332		-		1,118		22,450
	Food, beverage and
		pharmaceutical products		14,481		1,709		-		418		16,608
	General commercial products			19,821		8,067		-		12,766		40,654
				84,957		34,167		-		19,115		138,239
Intersegment net sales				273		34		-		-		307
Income (loss) from operations				(927)		3,163		-		6,174		8,410
Interest expense (income)				10,062		-		-		(71)		9,991
Income tax expense (benefit)				(1,276)		-		-		2,206		930
Depreciation and amortization				2,165		1,832		-		554		4,551
Capital expenditures				664		965		-		640		2,269

Table of Contents

RATHGIBSON, INC. AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

July 31, 2008

(Unaudited)

(Dollars in thousands, except share data)

The following tables present a reconciliation of income (loss) from operations from the reportable segment totals to the Company’s consolidated totals:


				Successor				Predecessor
				Three		Period		Period
				Months		June 16,		May 1,
				Ended		2007 through		2007 through
				July 31,		July 31,		June 15,
				2008		2007		2007

Total income (loss) from operations
	for reportable segments		$	8,482	$	(627)	$	(3,781)
Elimination of intersegment profits				(36)		-		-
		Consolidated income (loss) from operations	$	8,446	$	(627)	$	(3,781)


				Successor				Predecessor
				Six		Period		Period
				Months		June 16,		February 1,
				Ended		2007 through		2007 through
				July 31,		July 31,		June 15,
				2008		2007		2007

Total income (loss) from operations
	for reportable segments		$	15,646	$	(627)	$	8,410
Elimination of intersegment profits				(495)		-		-
		Consolidated income (loss) from operations	$	15,151	$	(627)	$	8,410

The following tables present a reconciliation of income tax expense (benefit) from the reportable segment totals to the Company’s consolidated totals:


				Successor				Predecessor
				Three		Period		Period
				Months		June 16,		May 1,
				Ended		2007 through		2007 through
				July 31,		July 31,		June 15,
				2008		2007		2007

Total income tax expense (benefit)
	for reportable segments		$	1,061	$	(712)	$	(1,193)
Income tax benefit from elimination of intersegment
	profits			(17)		-		-
		Consolidated income tax expense (benefit)	$	1,044	$	(712)	$	(1,193)

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RATHGIBSON, INC. AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

July 31, 2008

(Unaudited)

(Dollars in thousands, except share data)


				Successor				Predecessor
				Six		Period		Period
				Months		June 16,		February 1,
				Ended		2007 through		2007 through
				July 31,		July 31,		June 15,
				2008		2007		2007

Total income tax expense (benefit)
	for reportable segments		$	1,423	$	(712)	$	930
Income tax benefit from elimination of intersegment
	profits			(185)		-		-
		Consolidated income tax expense (benefit)	$	1,238	$	(712)	$	930

The following table presents segment identifiable asset information:


				July 31,		January 31,
				2008		2008
Total assets:
	Wisconsin		$	563,510	$	533,727
	New Jersey			121,556		118,378
	Louisiana			40,557		-
	Intersegment eliminations			(147,408)		(108,834)
				578,215		543,271
	Arkansas			117,456		118,009
	Intersegment eliminations			(100,443)		(99,357)
		Total assets	$	595,228	$	561,923

The following table presents segment goodwill information:


				July 31,		January 31,
				2008		2008
Goodwill:
	Wisconsin		$	156,624	$	156,624
	New Jersey			26,933		26,933
	Louisiana			14,703		-
	Arkansas			48,212		48,212
		Total goodwill	$	246,472	$	231,769

Goodwill recorded in connection with the Mid-South Acquisition is a preliminary balance and is expected to change once the Company obtains third party appraisals and valuation studies on inventories, property, plant and equipment and intangible assets.

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RATHGIBSON, INC. AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

July 31, 2008

(Unaudited)

(Dollars in thousands, except share data)

(15)

SUPPLEMENTAL GUARANTOR FINANCIAL INFORMATION

On February 7, 2006, RathGibson issued its Senior Notes. Greenville has fully and unconditionally guaranteed on a joint and several basis RathGibson’s obligations to pay principal, premium and interest relative to the Senior Notes.

The following supplemental guarantor financial information presents: (i) condensed consolidating balance sheets at July 31, 2008 and January 31, 2008; (ii) condensed consolidating statements of operations for the three months ended July 31, 2008, the period June 16, 2007 through July 31, 2007, the period May 1, 2007 through June 15, 2007, the six months ended July 31, 2008, the period June 16, 2007 through July 31, 2007 and the period February 1, 2007 through June 15, 2007; and (iii) condensed consolidating statements of cash flows for the six months ended July 31, 2008, the period June 16, 2007 through July 31, 2007 and the period February 1, 2007 through June 15, 2007.

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RATHGIBSON, INC. AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

July 31, 2008

(Unaudited)

(Dollars in thousands, except share data)

Condensed Consolidating Balance Sheet

At July 31, 2008


				Successor
				RathGibson		Greenville		Eliminations		Consolidated
Assets
Current assets:
	Cash		$	1,724	$	402	$	-	$	2,126
	Accounts receivable, net			46,520		7,151		-		53,671
	Intercompany account and note receivable			61		972		(1,033)		-
	Inventories			62,064		22,289		(46)		84,307
	Prepaid expenses and other			2,316		565		-		2,881
	Refundable income taxes			2,355		64		(1,760)		659
	Deferred income taxes			1,022		233		-		1,255
		Total current assets		116,062		31,676		(2,839)		144,899

Property, plant and equipment, net				44,695		6,957		-		51,652

Goodwill				198,260		48,212		-		246,472
Other intangible assets, net				120,957		30,570		-		151,527
Deferred financing costs and other				637		41		-		678
Investment in subsidiary				97,604		-		(97,604)		-
		Total assets	$	578,215	$	117,456	$	(100,443)	$	595,228

Liabilities and Stockholder’s Equity
Current liabilities:
	Current installments of long-term debt		$	-	$	250	$	-	$	250
	Accounts payable			20,735		2,846		-		23,581
	Intercompany account and note payable			972		61		(1,033)		-
	Accrued expenses			19,639		839		-		20,478
	Income taxes payable			1,136		759		(1,776)		119
		Total current liabilities		42,482		4,755		(2,809)		44,428

Long-term debt, less current installments				272,508		1,614		-		274,122

Deferred income taxes				52,315		13,483		-		65,798

Mandatorily redeemable preferred stock				-		2,100		(2,100)		-

Stockholder’s equity:
	Common stock			-		1		(1)		-
	Additional paid-in capital			214,306		87,041		(87,041)		214,306
	Retained earnings (accumulated deficit)			(3,396)		8,462		(8,492)		(3,426)
		Total stockholder’s equity		210,910		95,504		(95,534)		210,880
		Total liabilities and stockholder’s equity	$	578,215	$	117,456	$	(100,443)	$	595,228

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RATHGIBSON, INC. AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

July 31, 2008

(Unaudited)

(Dollars in thousands, except share data)

Condensed Consolidating Balance Sheet

At January 31, 2008


				Successor
				RathGibson		Greenville		Eliminations		Consolidated
Assets
Current assets:
	Cash		$	237	$	443	$	-	$	680
	Restricted cash			-		2,000		-		2,000
	Accounts receivable, net			48,541		6,213		-		54,754
	Intercompany account and note receivable			181		2,415		(2,596)		-
	Inventories			45,182		20,415		-		65,597
	Prepaid expenses and other			2,131		393		-		2,524
	Refundable income taxes			6,781		11		(3,373)		3,419
	Deferred income taxes			1,325		113		-		1,438
		Total current assets		104,378		32,003		(5,969)		130,412

Property, plant and equipment, net				44,855		5,988		-		50,843

Goodwill				183,557		48,212		-		231,769
Other intangible assets, net				116,776		31,740		-		148,516
Deferred financing costs and other				317		66		-		383
Investment in subsidiary				93,388		-		(93,388)		-
		Total assets	$	543,271	$	118,009	$	(99,357)	$	561,923

Liabilities and Stockholder’s Equity
Current liabilities:
	Current installments of long-term debt		$	-	$	244	$	-	$	244
	Accounts payable			25,963		4,002		-		29,965
	Intercompany account and note payable			2,415		181		(2,596)		-
	Accrued expenses			16,490		1,267		-		17,757
	Income taxes payable			-		3,373		(3,373)		-
		Total current liabilities		44,868		9,067		(5,969)		47,966

Long-term debt, less current installments				246,304		1,741		-		248,045

Deferred income taxes				48,853		13,813		-		62,666

Mandatorily redeemable preferred stock				-		2,100		(2,100)		-

Stockholder’s equity:
	Common stock			-		1		(1)		-
	Additional paid-in capital			208,175		87,041		(87,041)		208,175
	Retained earnings (accumulated deficit)			(4,929)		4,246		(4,246)		(4,929)
		Total stockholder’s equity		203,246		91,288		(91,288)		203,246
		Total liabilities and stockholder’s equity	$	543,271	$	118,009	$	(99,357)	$	561,923

Table of Contents

RATHGIBSON, INC. AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

July 31, 2008

(Unaudited)

(Dollars in thousands, except share data)

Condensed Consolidating Statement of Operations

For the Three Months Ended July 31, 2008


					Successor
					RathGibson		Greenville		Eliminations		Consolidated

Net sales				$	74,804	$	14,269	$	(458)	$	88,615
Cost of goods sold					60,083		10,073		(441)		69,715
		Gross profit			14,721		4,196		(17)		18,900

Operating expenses:
	Selling, general and administrative				7,069		525		-		7,594
	Amortization				2,275		585		-		2,860
					9,344		1,110		-		10,454
		Income from operations			5,377		3,086		(17)		8,446

Interest expense (income)					6,227		(6)		-		6,221
		Income (loss) before equity in earnings of
			subsidiary and income taxes		(850)		3,092		(17)		2,225

Equity in earnings of subsidiary					(2,090)		-		2,090		-
		Income before income taxes			1,240		3,092		(2,107)		2,225

Income tax expense					48		1,002		(6)		1,044
		Net income		$	1,192	$	2,090	$	(2,101)	$	1,181

Table of Contents

RATHGIBSON, INC. AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

July 31, 2008

(Unaudited)

(Dollars in thousands, except share data)

Condensed Consolidating Statement of Operations

For the Period June 16, 2007 through July 31, 2007


					Successor
					RathGibson		Greenville		Eliminations		Consolidated

Net sales				$	43,413	$	5,996	$	(735)	$	48,674
Cost of goods sold					38,380		4,312		(735)		41,957
		Gross profit			5,033		1,684		-		6,717

Operating expenses:
	Selling, general and administrative				2,566		458		-		3,024
	Amortization				3,625		695		-		4,320
					6,191		1,153		-		7,344
		Income (loss) from operations			(1,158)		531		-		(627)

Interest expense (income)					3,391		(38)		-		3,353
		Income (loss) before equity in earnings of
			subsidiary and income taxes		(4,549)		569		-		(3,980)

Equity in earnings of subsidiary					(358)		-		358		-
		Income (loss) before income taxes			(4,191)		569		(358)		(3,980)

Income tax expense (benefit)					(923)		211		-		(712)
		Net income (loss)		$	(3,268)	$	358	$	(358)	$	(3,268)

Table of Contents

RATHGIBSON, INC. AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

July 31, 2008

(Unaudited)

(Dollars in thousands, except share data)

Condensed Consolidating Statement of Operations

For the Period May 1, 2007 through June 15, 2007


					Predecessor
					RathGibson		Greenville		Eliminations		Consolidated

Net sales				$	42,462	$	6,822	$	(51)	$	49,233
Cost of goods sold					33,381		3,935		(51)		37,265
		Gross profit			9,081		2,887		-		11,968

Operating expenses:
	Selling, general and administrative				14,465		496		-		14,961
	Amortization				667		121		-		788
					15,132		617		-		15,749
		Income (loss) from operations			(6,051)		2,270		-		(3,781)

Interest expense (income)					3,379		(26)		-		3,353
		Income (loss) before equity in earnings of
			subsidiary and income taxes		(9,430)		2,296		-		(7,134)

Equity in earnings of subsidiary					(1,559)		-		1,559		-
		Income (loss) before income taxes			(7,871)		2,296		(1,559)		(7,134)

Income tax expense (benefit)					(1,930)		737		-		(1,193)
		Net income (loss)		$	(5,941)	$	1,559	$	(1,559)	$	(5,941)

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RATHGIBSON, INC. AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

July 31, 2008

(Unaudited)

(Dollars in thousands, except share data)

Condensed Consolidating Statement of Operations

For the Six Months Ended July 31, 2008


					Successor
					RathGibson		Greenville		Eliminations		Consolidated

Net sales				$	149,731	$	27,353	$	(2,046)	$	175,038
Cost of goods sold					123,165		18,526		(2,000)		139,691
		Gross profit			26,566		8,827		(46)		35,347

Operating expenses:
	Selling, general and administrative				12,894		1,266		-		14,160
	Amortization				4,866		1,170		-		6,036
					17,760		2,436		-		20,196
		Income from operations			8,806		6,391		(46)		15,151

Interest expense (income)					12,413		(3)		-		12,410
		Income (loss) before equity in earnings of
			subsidiary and income taxes		(3,607)		6,394		(46)		2,741

Equity in earnings of subsidiary					(4,216)		-		4,216		-
		Income before income taxes			609		6,394		(4,262)		2,741

Income tax expense (benefit)					(924)		2,178		(16)		1,238
		Net income		$	1,533	$	4,216	$	(4,246)	$	1,503

Table of Contents

RATHGIBSON, INC. AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

July 31, 2008

(Unaudited)

(Dollars in thousands, except share data)

Condensed Consolidating Statement of Operations

For the Period June 16, 2007 through July 31, 2007


					Successor
					RathGibson		Greenville		Eliminations		Consolidated

Net sales				$	43,413	$	5,996	$	(735)	$	48,674
Cost of goods sold					38,380		4,312		(735)		41,957
		Gross profit			5,033		1,684		-		6,717

Operating expenses:
	Selling, general and administrative				2,566		458		-		3,024
	Amortization				3,625		695		-		4,320
					6,191		1,153		-		7,344
		Income (loss) from operations			(1,158)		531		-		(627)

Interest expense (income)					3,391		(38)		-		3,353
		Income (loss) before equity in earnings of
			subsidiary and income taxes		(4,549)		569		-		(3,980)

Equity in earnings of subsidiary					(358)		-		358		-
		Income (loss) before income taxes			(4,191)		569		(358)		(3,980)

Income tax expense (benefit)					(923)		211		-		(712)
		Net income (loss)		$	(3,268)	$	358	$	(358)	$	(3,268)

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RATHGIBSON, INC. AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

July 31, 2008

(Unaudited)

(Dollars in thousands, except share data)

Condensed Consolidating Statement of Operations

For the Period February 1, 2007 through June 15, 2007


					Predecessor
					RathGibson		Greenville		Eliminations		Consolidated

Net sales				$	119,245	$	19,115	$	(121)	$	138,239
Cost of goods sold					95,384		11,159		(121)		106,422
		Gross profit			23,861		7,956		-		31,817

Operating expenses:
	Selling, general and administrative				19,625		1,419		-		21,044
	Amortization				2,000		363		-		2,363
					21,625		1,782		-		23,407
		Income from operations			2,236		6,174		-		8,410

Interest expense (income)					10,062		(71)		-		9,991
		Income (loss) before equity in earnings of
			subsidiary and income taxes		(7,826)		6,245		-		(1,581)

Equity in earnings of subsidiary					(4,039)		-		4,039		-
		Income (loss) before income taxes			(3,787)		6,245		(4,039)		(1,581)

Income tax expense (benefit)					(1,276)		2,206		-		930
		Net income (loss)		$	(2,511)	$	4,039	$	(4,039)	$	(2,511)

Table of Contents

RATHGIBSON, INC. AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

July 31, 2008

(Unaudited)

(Dollars in thousands, except share data)

Condensed Consolidating Statement of Cash Flows

For the Six Months Ended July 31, 2008


										Successor
										RathGibson		Greenville		Eliminations		Consolidated

Cash flows from operating activities:
	Net income								$	1,533	$	4,216	$	(4,246)	$	1,503
	Adjustments to reconcile net income to net cash
		used in (provided by) operating activities:
			Depreciation and amortization							7,835		1,431		-		9,266
			Net amortization of deferred debt expenses and
				bond premium						(566)		3		-		(563)
			Expensing of write-up of inventory							666		-		-		666
			Deferred income taxes							(74)		(450)		-		(524)
			Incentive unit expense							131		-		-		131
			Equity in earnings of subsidiary							(4,216)		-		4,216		-
			Change in assets and liabilities, net of acquisition:
					Accounts receivable					3,707		(938)		-		2,769
					Intercompany account receivable and payable					127		(127)		-		-
					Inventories					(9,544)		(1,874)		46		(11,372)
					Other current and non-current assets					(338)		(172)		-		(510)
					Accounts payable					(5,759)		(988)		-		(6,747)
					Accrued expenses					1,282		(428)		-		854
					Income taxes					5,562		(2,667)		(16)		2,879
						Net cash provided by
							(used in) operating activities			346		(1,994)		-		(1,648)

Cash flows from investing activities:
	Acquisition of property, plant and equipment									(3,899)		(1,398)		-		(5,297)
	Decrease in restricted cash									-		2,000		-		2,000
	Intercompany note receivable									-		1,450		(1,450)		-
	Cash paid for acquisition, net of cash acquired									(20,136)		-		-		(20,136)
						Net cash provided by
							(used in) investing activities			(24,035)		2,052		(1,450)		(23,433)

Cash flows from financing activities:
	Net proceeds from Revolving Credit Facility									26,851		-		-		26,851
	Payments on long-term debt									-		(121)		-		(121)
	Intercompany note payable									(1,450)		-		1,450		-
	Payments (refunds) of financing fees									(225)		22		-		(203)
						Net cash provided by
								(used in) financing activities		25,176		(99)		1,450		26,527

						Net increase (decrease) in cash				1,487		(41)		-		1,446

Cash at beginning of period										237		443		-		680
Cash at end of period									$	1,724		402	$	-	$	2,126

Table of Contents

RATHGIBSON, INC. AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

July 31, 2008

(Unaudited)

(Dollars in thousands, except share data)

Condensed Consolidating Statement of Cash Flows

For the Period June 16, 2007 through July 31, 2007


									Successor
									RathGibson		Greenville		Eliminations		Consolidated

Cash flows from operating activities:
	Net income (loss)							$	(3,268)	$	358	$	(358)	$	(3,268)
	Adjustments to reconcile net income (loss) to net cash
		provided by (used in) operating activities:
			Depreciation and amortization						4,274		756		-		5,030
			Net amortization of deferred debt expenses and
				bond premium					48		-		-		48
			Expensing of write-up of inventory						2,579		285		-		2,864
			Deferred income taxes						(2,163)		(316)		-		(2,479)
			Incentive unit expense						166		-		-		166
			Equity in earnings of subsidiary						(358)		-		358		-
			Change in assets and liabilities:
					Accounts receivable				(69)		343		-		274
					Intercompany account receivable and payable				(500)		500		-		-
					Inventories				3,505		(1,937)		-		1,568
					Other current and non-current assets				452		(36)		-		416
					Accounts payable				(7,401)		1,562		-		(5,839)
					Accrued expenses				2,612		96		-		2,708
					Income taxes				(2,279)		(300)		-		(2,579)
						Net cash provided by (used in)
							operating activities		(2,402)		1,311		-		(1,091)

Cash flows from investing activities:
	Acquisition of property, plant and equipment								(898)		(14)		-		(912)
	Intercompany note receivable								-		(662)		662		-
						Net cash used in investing activities			(898)		(676)		662		(912)

Cash flows from financing activities:
	Net proceeds from Revolving Credit Facility								4,941		-		-		4,941
	Dividend								(3,800)		-		-		(3,800)
	Proceeds from parent company								1,962		-		-		1,962
	Intercompany note payable								662		-		(662)		-
	Payments of financing fees								(151)		-		-		(151)
						Net cash provided by financing activities			3,614		-		(662)		2,952

						Net increase in cash			314		635		-		949

Cash at beginning of period									3,848		606		-		4,454
Cash at end of period								$	4,162	$	1,241	$	-	$	5,403

Table of Contents

RATHGIBSON, INC. AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

July 31, 2008

(Unaudited)

(Dollars in thousands, except share data)

Condensed Consolidating Statement of Cash Flows

For the Period February 1, 2007 through June 15, 2007


								Predecessor
								RathGibson		Greenville		Eliminations		Consolidated

Cash flows from operating activities:
	Net income (loss)						$	(2,511)	$	4,039	$	(4,039)	$	(2,511)
	Adjustments to reconcile net income (loss) to net cash
		provided by (used in) operating activities:
			Depreciation and amortization					3,997		554		-		4,551
			Amortization of deferred debt expenses					576		-		-		576
			Loss on disposal of property, plant and equipment					-		16		-		16
			Deferred income taxes					(1,541)		(305)		-		(1,846)
			Incentive unit expense					4,079		-		-		4,079
			Equity in earnings of subsidiary					(4,039)		-		4,039		-
			Change in assets and liabilities:
				Accounts receivable				(3,666)		(2,184)		-		(5,850)
				Intercompany account receivable and payable				(8)		8		-		-
				Inventories				(17,846)		832		-		(17,014)
				Other current and non-current assets				316		282		-		598
				Accounts payable				15,547		(1,359)		-		14,188
				Accrued expenses				(7,249)		(518)		-		(7,767)
				Income taxes				(1,403)		1,201		-		(202)
					Net cash provided by (used in)
						operating activities		(13,748)		2,566		-		(11,182)

Cash flows from investing activities:
	Acquisition of property, plant and equipment							(1,629)		(640)		-		(2,269)
	Intercompany note receivable							-		(1,525)		1,525		-
					Net cash used in investing activities			(1,629)		(2,165)		1,525		(2,269)

Cash flows from financing activities:
	Net proceeds from Revolving Credit Facility							12,324		-		-		12,324
	Intercompany note payable							1,525		-		(1,525)		-
	Payments of financing fees							(50)		-		-		(50)
					Net cash provided by financing activities			13,799		-		(1,525)		12,274

					Net increase (decrease) in cash			(1,578)		401		-		(1,177)

Cash at beginning of period								5,426		205		-		5,631
Cash at end of period							$	3,848	$	606	$	-	$	4,454

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RATHGIBSON, INC. AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

July 31, 2008

(Unaudited)

(Dollars in thousands, except share data)

(16)

SUBSEQUENT EVENT

On August 6, 2008, the Company announced the departure of its chairman and chief executive officer effective as of August 6, 2008. The Company will record approximately $1,260 in severance costs in the third quarter of fiscal 2009 which will be paid pursuant to terms of the employment agreement, as amended.

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

The following discussion and analysis of financial condition and results of operations has been derived from, and should be read in conjunction with, the unaudited condensed consolidated financial statements, including the notes thereto, contained herein . See the discussion of Successor and Predecessor under Note 1 to the unaudited condensed consolidated financial statements. Future results could differ materially from those discussed below. See the discussion under “Forward Looking Statements.”

Forward-Looking Statements

This Quarterly Report on Form 10-Q contains “forward-looking statements” within the meaning of the “safe-harbor” provisions of the Private Securities Litigation Reform Act of 1995. These statements may be identified by the use of forward-looking terminology such as “anticipate,” “believe,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “might,” “plan,” “potential,” “predict,” or “should,” or the negative thereof or other variations thereon or comparable terminology.

The Company has based these forward-looking statements on current expectations, assumptions, estimates and projections. While the Company believes these expectations, assumptions, estimates and projections are reasonable, such forward-looking statements are only predictions and involve known and unknown risks and uncertainties, many of which are beyond the Company’s control. These and other important factors may cause actual results, performance or achievements to differ materially from any future results, performance or achievements expressed or implied by these forward-looking statements. Some of the key factors that could cause actual results, performance or achievements to differ from the Company’s expectations include:

competitive pressures and trends in the industry;

liquidity and capital resources;

fluctuations in the price and/or supply of steel and other raw materials;

general economic conditions;

legal proceedings and regulatory matters;

ability to identify acquisition opportunities and effectively and cost efficiently integrate acquisitions that the Company consummates;

technological changes; and

those other risks and uncertainties discussed under Item 1A to the Company’s Annual Report on Form 10-K for the fiscal year ended January 31, 2008.

Given these risks and uncertainties, you are cautioned not to place undue reliance on such forward-looking statements. The forward-looking statements included in this Quarterly Report on Form 10-Q are made only as of the date hereof.

Executive Summary

The Company is one of the world’s leading specialty manufacturers of highly engineered premium stainless steel and alloy tubular products. The Company’s products are designed to meet customer specifications and are used in environments that require high-performance characteristics, such as exceptional strength and the ability to withstand highly corrosive materials, extreme temperatures or high-pressure. The Company sells over 1,000 products globally to diverse end-markets, including (i) chemical/petrochemical processing and power generation; (ii) energy; (iii) food, beverage and pharmaceuticals; and (iv) general commercial.

Table of Contents

The Company’s highlights for the three and six months ended July 31, 2008 included the following:

the acquisition of Mid-South on February 27, 2008;

the amendment to the Revolving Credit Facility increasing the borrowing capacity by $10.0 million to $90.0 million;

decrease in net sales of 9.5% to $88.6 million for the second quarter of fiscal 2009, as compared to $97.9 million in total for the periods May 1, 2007 through June 15, 2007 ($49.2 million) and June 16, 2007 through July 31, 2007 ($48.7 million); decrease in net sales of 6.4% to $175.0 million for the six months ended July 31, 2008, as compared to $186.9 million in total for the periods February 1, 2007 through June 15, 2007 ($138.2 million) and June 16, 2007 through July 31, 2007 ($48.7 million);

decrease in gross profit of 8.3% to $35.4 million for the six months ended July 31, 2008, as compared to $38.5 million in total for the periods February 1, 2007 through June 15, 2007 ($31.8 million) and June 16, 2007 through July 31, 2007 ($6.7 million);

increase in gross profit margin for the second quarter of fiscal 2009 to 21.3% from 19.1% in total for the periods May 1, 2007 through June 15, 2007 (24.3%) and June 16, 2007 through July 31, 2007 (13.8%); and

Adjusted EBITDA₍₁₎decrease of 22.5% to $13.1 million for the second quarter of fiscal 2009, as compared to $16.8 million in total for the periods May 1, 2007 through June 15, 2007 ($9.5 million) and June 16, 2007 through July 31, 2007 ($7.3 million); Adjusted EBITDA₍₁₎decrease of 21.7% to $25.1 million for the six months ended July 31, 2008, as compared to $32.0 million in total for the periods February 1, 2007 through June 15, 2007 ($24.7 million) and June 16, 2007 through July 31, 2007 ($7.3 million).

(1)

As used herein, ‘‘Adjusted EBITDA’’ represents net income plus (i) income tax expense (benefit); (ii) interest expense; (iii) depreciation and amortization; and (iv) other expenses associated with the DLJ Acquisition and Mid-South Acquisition as shown below (in thousands):


				Successor				Predecessor
				Three		Period		Period
				Months		June 16,		May 1,
				Ended		2007 through		2007 through
				July 31,		July 31,		June 15,
				2008		2007		2007

Net income (loss)			$	1,181	$	(3,268)	$	(5,941)
	Income tax expense (benefit)			1,044		(712)		(1,193)
	Interest expense			6,221		3,353		3,353
	Depreciation and amortization			4,596		5,030		1,545
EBITDA				13,042		4,403		(2,236)
	Expensing of write-up of inventory			-		2,864		-
	Equity compensation expense			-		-		3,989
	Fees and charges-termination of
		management agreement		-		-		4,844
	Compensation expense			-		-		2,962
Adjusted EBITDA			$	13,042	$	7,267	$	9,559

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				Successor				Predecessor
				Six		Period		Period
				Months		June 16,		February 1,
				Ended		2007 through		2007 through
				July 31,		July 31,		June 15,
				2008		2007		2007

Net income (loss)			$	1,503	$	(3,268)	$	(2,511)
	Income tax expense (benefit)			1,238		(712)		930
	Interest expense			12,410		3,353		9,991
	Depreciation and amortization			9,266		5,030		4,551
EBITDA				24,417		4,403		12,961
	Expensing of write-up of inventory			666		2,864		-
	Equity compensation expense			-		-		3,989
	Fees and charges-termination of
		management agreement		-		-		4,844
	Compensation expense			-		-		2,962
Adjusted EBITDA			$	25,083	$	7,267	$	24,756

The Company has included information concerning Adjusted EBITDA in this Quarterly Report on Form 10-Q because the Company believes that such information is used by certain investors, securities analysts and others as one measure of performance and historical ability to service debt. In addition, the Company uses Adjusted EBITDA when interpreting operating trends and results of operations of the business. Executive compensation is based, in part, on the Company’s Adjusted EBITDA performance measured against targets. Adjusted EBITDA is also used by the Company and others in the industry to evaluate proposed capital expenditures and to evaluate and to price potential acquisition candidates. Adjusted EBITDA is a non-GAAP financial measure and should not be considered as an alternative to, or more meaningful than, net income, income from operations, cash flows from operations or other traditional indications of a company’s operating performance or liquidity.

The use of Adjusted EBITDA has limitations as an analytical tool, and you should not consider this measure in isolation, or as a substitute for analysis of the Company’s results as reported under GAAP. Some of these limitations are:

Adjusted EBITDA does not reflect the Company’s current cash expenditure requirements, or future requirements, for capital expenditures or contractual commitments;

Adjusted EBITDA does not reflect changes in, or cash requirements for, the Company’s working capital needs;

Adjusted EBITDA does not reflect the significant interest expense, or the cash requirements necessary to service interest or principal payments on the Company’s debt; and

although depreciation and amortization are non-cash charges, the assets being depreciated and amortized often will have to be replaced in the future, and Adjusted EBITDA does not reflect any cash requirements for such replacement.

Because of these limitations, Adjusted EBITDA should not be considered as discretionary cash available to the Company to reinvest in the growth of its business or as a measure of cash that will be available to the Company to meet its obligations. You should compensate for these limitations by relying primarily on the Company’s GAAP results and using Adjusted EBITDA only supplementally.

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The following tables set forth selected financial data (i) as a percentage of net sales; and (ii) the percentage change in dollars in those reported items from the comparable period:


			Successor				Predecessor		Total*
			Three		Period		Period		Three
			Months		June 16,		May 1,		Months
			Ended		2007 through		2007 through		Ended
			July 31,		July 31,		June 15,		July 31,		%
			2008		2007		2007		2007		Change

Net sales			100.0	%	100.0	%	100.0	%	100.0	%	(9.5)	%
Cost of good sold			78.7		86.2		75.7		80.9		(12.0)
		Gross profit	21.3		13.8		24.3		19.1		1.2

Operating expenses:
	Selling, general and administrative		8.6		6.2		30.4		18.4		(57.8)
	Amortization		3.2		8.9		1.6		5.2		(44.0)
			11.8		15.1		32.0		23.6		(54.7)
		Income (loss) from operations	9.5		(1.3)		(7.7)		(4.5)		(291.6)

Interest expense			7.0		6.9		6.8		6.8		(7.2)
		Income (loss) before income taxes	2.5		(8.2)		(14.5)		(11.3)		(120.0)

Income tax expense (benefit)			1.2		(1.5)		(2.4)		(1.9)		(154.8)
		Net income (loss)	1.3	%	(6.7)	%	(12.1)	%	(9.4)	%	(112.8)


			Successor				Predecessor		Total*
			Six		Period		Period		Six
			Months		June 16,		February 1,		Months
			Ended		2007 through		2007 through		Ended
			July 31,		July 31,		June 15,		July 31,		%
			2008		2007		2007		2007		Change

Net sales			100.0	%	100.0	%	100.0	%	100.0	%	(6.4)	%
Cost of good sold			79.8		86.2		77.0		79.4		(5.9)
		Gross profit	20.2		13.8		23.0		20.6		(8.3)

Operating expenses:
	Selling, general and administrative		8.1		6.2		15.2		12.9		(41.2)
	Amortization		3.4		8.9		1.7		3.6		(9.7)
			11.5		15.1		16.9		16.5		(34.3)
		Income (loss) from operations	8.7		(1.3)		6.1		4.1		94.7

Interest expense			7.1		6.9		7.2		7.1		(7.0)
		Income (loss) before income taxes	1.6		(8.2)		(1.1)		(3.0)		(149.3)

Income tax expense (benefit)			.7		(1.5)		.7		.1		467.9
		Net income (loss)	.9	%	(6.7)	%	(1.8)	%	(3.1)	%	(126.0)

Used for comparative purposes

Selected Factors that Affect Operating Results

The Company’s business, financial condition and results of operations are significantly influenced by (i) overall demand for the Company’s products; (ii) costs of stainless steel and other raw materials; and (iii) oil and gas production and exploration.

Overall demand for stainless steel, specialty alloy and titanium tubing products had been robust during fiscal 2007 and the first half of fiscal 2008, driven by continued growth in general economic conditions and strong demand for high performance materials for chemical/petrochemical processing, power generation, energy and other applications.

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During the second half of fiscal 2008, sharply declining prices encouraged customers to delay purchases which the Company believes caused volume of shipments to decline. Furthermore, demand for tubing used in the installation of ethanol plants has declined significantly and contributed to increased competitive pressures for heat exchanger and general commercial products.

The following table presents the Company’s sales volumes and raw material cost indices:


	Three Months Ended		Six Months Ended
	July 31,		July 31,
	2008	2007	2008	2007

Feet shipped (millions)	33.8	36.3	66.6	74.6

Stainless steel price index*	200.6	245.0	197.5	237.2

* Source CRU International

Stainless steel prices have historically been dependent on supply and demand and costs of raw materials such as chrome, nickel, molybdenum and titanium. While the Company is able to pass through changes in the cost of raw materials to customers, significant changes can lead customers to temporarily delay purchases, substitute materials and/or cancel capital projects. The specialty steel industry has experienced significant changes in the cost of raw materials such as nickel, molybdenum and titanium over the last several years.

In products containing nickel and titanium, the Company has experienced continued softness, beginning in the second half of fiscal 2008, which the Company believes is attributable to customers depleting existing inventories and assessing whether the rapid change in price levels will continue.

Fluctuations in Quarterly Results of Operations

Quarterly results may be materially affected by the timing of acquisitions, the timing and magnitude of costs related to such acquisitions, variations in costs of products sold, the mix of products sold and general economic conditions. Results for any quarter may not be indicative of the results for any subsequent fiscal quarter or for a full fiscal year. There is generally no significant seasonality in demand for the Company’s products or operations as a whole.

Results of Operations – Three Months Ended July 31, 2008 as Compared to the Periods May 1, 2007 through June 15, 2007 and June 16, 2007 through July 31, 2007

Net Sales

Overall - For the second quarter of fiscal 2009, net sales decreased $9.3 million, or 9.5%, to $88.6 million, as compared to $97.9 million in total for the periods May 1, 2007 through June 15, 2007 ($49.2 million) and June 16, 2007 through July 31, 2007 ($48.7 million). This decrease in overall sales was primarily due to (i) decreases in the sales volume of heat exchanger, nickel and sub-sea umbilical products ($7.1 million), offset by increases in the sales volume of high purity/electropolished and general commercial products ($3.2 million) and incremental sales from the acquisition of Mid-South on February 27, 2008 ($5.6 million); and (ii) decreases in the average selling price of heat exchanger, nickel, high purity/electropolished and general commercial products ($12.6 million), offset by an increase in the average selling price of sub-sea umbilical products ($2.1 million).

Total feet shipped during the second quarter of fiscal 2009 decreased by 6.8% to 33.8 million feet, as compared to 36.3 million feet in total for the periods May 1, 2007 through June 15, 2007 (18.7 million feet) and June 16, 2007 through July 31, 2007 (17.6 million feet). This decrease in total feet shipped was primarily due to decreases in the sales volume of heat exchanger, nickel and beverage coil products, offset by an increase in the sales volume of general commercial products and incremental footage from the acquisition of Mid-South.

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Chemical/Petrochemical Processing and Power Generation Products - For the second quarter of fiscal 2009, net sales of chemical/petrochemical processing and power generation products decreased $15.6 million, or 33.9%, to $30.5 million, as compared to $46.1 million in total for the periods May 1, 2007 through June 15, 2007 ($22.4 million) and June 16, 2007 through July 31, 2007 ($23.7 million). This decrease in sales was primarily due to decreases in the sales volume and average selling price of heat exchanger and nickel products which the Company believes was due to lower demand for stainless steel and nickel alloy tubing in heat exchanger applications, increased concern about the slowing general manufacturing economy and lower material cost market values as compared to the same period in fiscal 2008.

Feet shipped of chemical/petrochemical processing and power generation products during the second quarter of fiscal 2009 decreased by 19.5% to 8.7 million feet, as compared to 10.8 million feet in total for the periods May 1, 2007 through June 15, 2007 (5.2 million feet) and June 16, 2007 through July 31, 2007 (5.6 million feet). This decrease was primarily due to decreases in the sales volume of heat exchanger and nickel products including lower sales volume for applications in ethanol and desalination plants.

Energy Products - For the second quarter of fiscal 2009, net sales of energy products increased $6.4 million, or 44.4%, to $20.9 million, as compared to $14.5 million in total for the periods May 1, 2007 through June 15, 2007 ($7.5 million) and June 16, 2007 through July 31, 2007 ($7.0 million). The increase in sales was primarily due to (i) incremental sales from the acquisition of Mid-South ($5.6 million); and (ii) an increase in the average selling price of sub-sea umbilical products ($2.1 million), offset by a decrease in the sales volume of sub-sea umbilical products ($1.4 million).

Feet shipped of energy products during the second quarter of fiscal 2009 increased by 2.1% to 10.5 million feet, as compared to 10.3 million feet in total for the periods May 1, 2007 through June 15, 2007 (5.6 million feet) and June 16, 2007 through July 31, 2007 (4.7 million feet). This increase was primarily due to incremental footage from the acquisition of Mid-South.

Food, Beverage and Pharmaceutical Products - For the second quarter of fiscal 2009, net sales of food, beverage and pharmaceutical products decreased $.8 million, or 6.9%, to $10.7 million, as compared to $11.5 million in total for the periods May 1, 2007 through June 15, 2007 ($5.8 million) and June 16, 2007 through July 31, 2007 ($5.7 million). This decrease in sales was primarily due to a decrease in the average selling price of high purity/electropolished products due to lower material cost market values, offset by an increase in the demand for these products.

Feet shipped of food, beverage and pharmaceuticals products during the second quarter of fiscal 2009 decreased by 28.0% to 2.7 million feet, as compared to 3.8 million feet in total for the periods May 1, 2007 through June 15, 2007 (1.8 million feet) and June 16, 2007 through July 31, 2007 (2.0 million feet). This decrease in feet shipped was primarily due to a decrease in the sales volume of beverage coil products.

General Commercial Products - For the second quarter of fiscal 2009, net sales of general commercial products increased $.7 million, or 2.6%, to $26.5 million, as compared to $25.8 million in total for the periods May 1, 2007 through June 15, 2007 ($13.5 million) and June 16, 2007 through July 31, 2007 ($12.3 million). This increase in sales was primarily due to an increase in the sales volume of general commercial products ($1.9 million), offset by a decrease in the average selling price of these products ($1.2 million).

Feet shipped of general commercial products during the second quarter of fiscal 2009 increased by 4.2% to 11.9 million feet, as compared to 11.4 million feet in total for the periods May 1, 2007 through June 15, 2007 (6.1 million feet) and June 16, 2007 through July 31, 2007 (5.3 million feet). This increase in feet shipped was primarily due to increases in the sales volume of substantially all of the general commercial products.

Gross Profit

Cost of goods sold consists of manufacturing costs (primarily material, labor, consumables, utilities, maintenance, occupancy and depreciation), inbound freight charges, shipping and handling costs, certain purchasing costs, receiving costs and warehousing costs (which include internal transfer costs). The Company’s gross profit margins may not be comparable to the gross profit margins of other entities due to the classification of certain costs.

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Gross profit for the second quarter of fiscal 2009 was $18.9 million, an increase of $.2 million, or 1.2%, as compared to $18.7 million in total for the periods May 1, 2007 through June 15, 2007 ($12.0 million) and June 16, 2007 through July 31, 2007 ($6.7 million). The increase in gross profit was primarily due to incremental profit of $2.0 million from the acquisition of Mid-South, offset by a reduction in net sales of the Company and non-recurring, non-cash purchase accounting adjustments of $2.9 million recorded in the period June 16, 2007 through July 31, 2007. In accordance with the purchase method of accounting under GAAP, certain inventories were valued at fair value in connection with the DLJ Acquisition, which were $6.0 million greater than their historical cost. $2.9 million of the purchase accounting adjustment was expensed in cost of goods sold within the condensed consolidated statements of operations during the period June 16, 2007 through July 31, 2007 as the associated inventories were sold.

Gross profit margin for the second quarter of fiscal 2009 increased to 21.3% from 19.1% in total for the periods May 1, 2007 through June 15, 2007 (24.3%) and June 16, 2007 through July 31, 2007 (13.8%). The increase in gross profit margin was primarily due to non-recurring, non-cash purchase accounting adjustments of $2.9 million recorded in the period June 16, 2007 through July 31, 2007, offset by the acquisition of Mid-South and reduction in selling prices due to a decline in the market value of nickel and the lagging effect of replacement inventory cost as compared to a positive effect on gross profit margin in the same period in fiscal 2008.

Gross profit per foot shipped for the second quarter of fiscal 2009 amounted to $.56/foot, as compared to $.51/foot ($.59/foot excluding non-recurring, non-cash purchase accounting adjustments amounting to $.08/foot) in total for the periods May 1, 2007 through June 15, 2007 ($.64/foot) and June 16, 2007 through July 31, 2007 ($.38/foot).

Operating Expenses

Selling, general and administrative expense consists primarily of management, administrative and sales compensation, benefits, travel, communications, occupancy and insurance expenses, legal and professional fees.

Selling, general and administrative expenses decreased $10.3 million, or 57.8%, to $7.6 million in the second quarter of fiscal 2009, as compared to $17.9 million in total for the periods May 1, 2007 through June 15, 2007 ($14.9 million) and June 16, 2007 through July 31, 2007 ($3.0 million). This decrease in selling, general and administrative expense was primarily due to $11.8 million in non-recurring acquisition related expenses recorded in connection with the DLJ Acquisition and a decrease in annual advisory and management fees of $.2 million. During the period May 1, 2007 through June 15, 2007, the Company recorded the following non-recurring acquisition related expenses: (i) $4.8 million of fees and related charges for the termination of the Company’s management agreement with Castle Harlan; (ii) $3.0 million of compensation expense relating to employee bonuses; and (iii) $4.0 million of non-cash incentive unit expense. This decrease was offset by (i) an increase in salaries and wages amounting to $.4 million as a result of increases in annual employee compensation and the number of employees; and (ii) the acquisition of Mid-South ($.9 million).

Amortization expense decreased $2.2 million, or 44.0%, to $2.9 million in the second quarter of fiscal 2009, as compared to $5.1 million in total for the periods May 1, 2007 through June 15, 2007 ($.8 million) and June 16, 2007 through July 31, 2007 ($4.3 million). The decrease in amortization expense results from the non-recurring amortization of $3.6 million recorded in the period June 16, 2007 through July 31, 2007 related to an intangible asset-backlog recorded in connection with the DLJ Acquisition purchase accounting, offset by an increase in amortization due to the acquisition of Mid-South.

Interest Expense

Interest expense for the second quarter of fiscal 2009 decreased $.5 million, or 7.2%, to $6.2 million, as compared to $6.7 million in total for the periods May 1, 2007 through June 15, 2007 ($3.4 million) and June 16, 2007 through July 31, 2007 ($3.3 million). The decrease in interest expense was primarily due to (i) the elimination of $8.6 million of deferred financing costs in connection with the purchase accounting for the DLJ Acquisition and the corresponding decrease in amortization recorded to interest expense for the period; (ii) an increase of $.2 million in the amortization of the bond premium recorded in connection with the purchase accounting for the DLJ Acquisition; and (iii) the reduction in the weighted average interest rates on the Company’s Revolving Credit Facility. These decreases were offset by an increased principal amount of indebtedness for the period.

The Company’s credit agreements assessed interest at a weighted average rate of 9.8% and 10.4% at July 31, 2008 and January 31, 2008, respectively.

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Income Tax Expense

Income tax expense amounted to $1.0 million in the second quarter of fiscal 2009, as compared to an income tax benefit of $1.9 million in total for the periods May 1, 2007 through June 15, 2007 ($1.2 million) and June 16, 2007 through July 31, 2007 ($.7 million). These tax provisions reflect effective tax rates of 46.9% for the second quarter of fiscal 2009, as compared to 17.1% in total for the periods May 1, 2007 through June 15, 2007 (16.7%) and June 16, 2007 through July 31, 2007 (17.8%). The increase in the effective tax rate is primarily due to estimated tax provision to tax return adjustments recorded in the second quarter of fiscal 2009 related to the anticipated filing of the Company’s income tax returns for the period February 1, 2007 through June 15, 2007 and the period June 16, 2007 through January 31, 2008, offset by the non-deductibility of incentive unit expense amounting to $4.0 million in the period May 1, 2007 through June 15, 2007 and the relationship between the amount of permanent income tax differences and the projected loss before income taxes for fiscal 2008. The difference between the actual effective tax rates and the U.S. federal statutory rate is principally due to (i) state income tax provisions; (ii) a deduction for domestic production activity; and (iii) non-deductible incentive unit expense.

Results of Operations – Six Months Ended July 31, 2008 as Compared to the Periods February 1, 2007 through June 15, 2007 and June 16, 2007 through July 31, 2007

Net Sales

Overall - For the six months ended July 31, 2008, net sales decreased $11.9 million, or 6.4%, to $175.0 million, as compared to $186.9 million in total for the periods February 1, 2007 through June 15, 2007 ($138.2 million) and June 16, 2007 through July 31, 2007 ($48.7 million). This decrease in overall sales was primarily due to (i) decreases in the sales volume of heat exchanger, nickel, pressure coil, encapsulated wire and sub-sea umbilical products ($20.2 million), offset by increases in the sales volume of high purity/electropolished and general commercial products ($6.4 million) and incremental sales from the acquisition of Mid-South on February 27, 2008 ($8.2 million); and (ii) decreases in the average selling price of heat exchanger, nickel, high purity/electropolished and general commercial products ($11.0 million), offset by increases in the average selling price of pressure coil and sub-sea umbilical products ($5.1 million).

Total feet shipped during the six months ended July 31, 2008 decreased by 10.8% to 66.6 million feet, as compared to 74.6 million feet in total for the periods February 1, 2007 through June 15, 2007 (57.0 million feet) and June 16, 2007 through July 31, 2007 (17.6 million feet). This decrease in total feet shipped was primarily due to decreases in the sales volume of heat exchanger, nickel, pressure coil, encapsulated wire and beverage coil products, offset by incremental footage from the acquisition of Mid-South.

Chemical/Petrochemical Processing and Power Generation Products - For the six months ended July 31, 2008, net sales of chemical/petrochemical processing and power generation products decreased $19.8 million, or 24.2%, to $62.4 million, as compared to $82.2 million in total for the periods February 1, 2007 through June 15, 2007 ($58.5 million) and June 16, 2007 through July 31, 2007 ($23.7 million). This decrease in sales was primarily due to decreases in the sales volume and average selling price of heat exchanger and nickel products which the Company believes was due to the destocking of distribution channel inventories which followed the declining trend of nickel prices during the second half of fiscal 2008, increased concern about the slowing general manufacturing economy and lower material cost market values as compared to the same period in fiscal 2008.

Feet shipped of chemical/petrochemical processing and power generation products during the six months ended July 31, 2008 decreased by 19.9% to 16.7 million feet, as compared to 20.8 million feet in total for the periods February 1, 2007 through June 15, 2007 (15.2 million feet) and June 16, 2007 through July 31, 2007 (5.6 million feet). This decrease was primarily due to decreases in the sales volume of heat exchanger and nickel products including lower sales volume for applications in ethanol and desalination plants.

Energy Products - For the six months ended July 31, 2008, net sales of energy products increased $6.5 million, or 22.2%, to $36.0 million, as compared to $29.5 million in total for the periods February 1, 2007 through June 15, 2007 ($22.5 million) and June 16, 2007 through July 31, 2007 ($7.0 million). The increase in sales was primarily due to (i) incremental sales from the acquisition of Mid-South ($8.2 million); and (ii) increases in the average selling price of pressure coil and sub-sea umbilical products ($5.2 million), offset by decreases in the sales volume of pressure coil, encapsulated wire and sub-sea umbilical products ($7.2 million).

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Feet shipped of energy products during the six months ended July 31, 2008 decreased by 16.8% to 17.2 million feet, as compared to 20.7 million feet in total for the periods February 1, 2007 through June 15, 2007 (16.0 million feet) and June 16, 2007 through July 31, 2007 (4.7 million feet). This decrease was primarily due a decrease in the sales volume of substantially all of the energy products, offset by incremental footage from the acquisition of Mid-South.

Food, Beverage and Pharmaceutical Products - For the six months ended July 31, 2008, net sales of food, beverage and pharmaceutical products increased $1.6 million, or 7.6%, to $23.9 million, as compared to $22.3 million in total for the periods February 1, 2007 through June 15, 2007 ($16.6 million) and June 16, 2007 through July 31, 2007 ($5.7 million). This increase in sales was primarily due to an increase in the demand for high purity/electropolished products particularly for sanitary condenser applications, offset by a decrease in the average selling price of these products due mostly to lower material cost market values.

Feet shipped of food, beverage and pharmaceuticals products during the six months ended July 31, 2008 decreased by 5.8% to 8.5 million feet, as compared to 9.0 million feet in total for the periods February 1, 2007 through June 15, 2007 (7.0 million feet) and June 16, 2007 through July 31, 2007 (2.0 million feet). This decrease in feet shipped was primarily due to a decrease in the sales volume of beverage coil products.

General Commercial Products - For the six months ended July 31, 2008, net sales of general commercial products decreased $.2 million, or .4%, to $52.7 million, as compared to $52.9 million in total for the periods February 1, 2007 through June 15, 2007 ($40.6 million) and June 16, 2007 through July 31, 2007 ($12.3 million). This decrease in sales was primarily due to a decrease in the average selling price of general commercial products, offset by an increase in the sales volume of these products.

Feet shipped of general commercial products during the six months ended July 31, 2008 increased by .3% to 24.2 million feet, as compared to 24.1 million feet in total for the periods February 1, 2007 through June 15, 2007 (18.8 million feet) and June 16, 2007 through July 31, 2007 (5.3 million feet). This increase in feet shipped was primarily due to increases in the sales volume of substantially all of the general commercial products.

Gross Profit

Gross profit for the six months ended July 31, 2008 was $35.4 million, a decrease of $3.1 million, or 8.3%, as compared to $38.5 million in total for the periods February 1, 2007 through June 15, 2007 ($31.8 million) and June 16, 2007 through July 31, 2007 ($6.7 million). The decrease in gross profit was primarily due to a reduction in net sales of the Company, offset by incremental profit of $2.1 million from the acquisition of Mid-South and a $2.2 million decrease in non-recurring, non-cash purchase accounting adjustments to $.7 million in the six months ended July 31, 2008, as compared to $2.9 million in the period June 16, 2007 through July 31, 2007. In accordance with the purchase method of accounting under GAAP, certain inventories were valued at fair value in connection with the Mid-South Acquisition and DLJ Acquisition, which were $.7 million and $6.0 million, respectively, greater than their historical cost. $.7 million and $2.9 million of the purchase accounting adjustment was expensed in cost of goods sold within the condensed consolidated statements of operations during the six months ended July 31, 2008 and the period June 16, 2007 through July 31, 2007, respectively, as the associated inventories were sold.

Gross profit margin for the six months ended July 31, 2008 decreased to 20.2% from 20.6% in total for the periods February 1, 2007 through June 15, 2007 (23.0%) and June 16, 2007 through July 31, 2007 (13.8%). The decrease in gross profit margin was primarily due to the acquisition of Mid-South and reduction in selling prices due to a decline in the market value of nickel and the lagging effect of replacement inventory cost as compared to a positive effect on gross profit margin in the same period in fiscal 2008, offset by a $2.2 million decrease in non-recurring, non-cash purchase accounting adjustments to $.7 million in the six months ended July 31, 2008, as compared to $2.9 million in the period June 16, 2007 through July 31, 2007.

Gross profit per foot shipped for the six months ended July 31, 2008 amounted to $.53/foot ($.54/foot excluding a non-recurring, non-cash purchase accounting adjustment amounting to $.01/foot), as compared to $.52/foot ($.55/foot excluding non-recurring, non-cash purchase accounting adjustments amounting to $.03/foot) in total for the periods February 1, 2007 through June 15, 2007 ($.56/foot) and June 16, 2007 through July 31, 2007 ($.38/foot).

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Operating Expenses

Selling, general and administrative expenses decreased $9.8 million, or 41.2%, to $14.2 million in the six months ended July 31, 2008, as compared to $24.0 million in total for the periods February 1, 2007 through June 15, 2007 ($21.0 million) and June 16, 2007 through July 31, 2007 ($3.0 million). This decrease in selling, general and administrative expense was primarily due to $11.8 million in non-recurring acquisition related expenses recorded in connection with the DLJ Acquisition and a decrease in annual advisory and management fees of $.4 million. During the period May 1, 2007 through June 15, 2007, the Company recorded the following non-recurring acquisition related expenses: (i) $4.8 million of fees and related charges for the termination of the Company’s management agreement with Castle Harlan; (ii) $3.0 million of compensation expense relating to employee bonuses; and (iii) $4.0 million of non-cash incentive unit expense. This decrease was offset by (i) an increase in salaries and wages amounting to $.5 million as a result of increases in annual employee compensation and the number of employees; and (ii) the acquisition of Mid-South ($1.4 million).

Amortization expense decreased $.6 million, or 9.7%, to $6.1 million in the six months ended July 31, 2008, as compared to $6.7 million in total for the periods February 1, 2007 through June 15, 2007 ($2.4 million) and June 16, 2007 through July 31, 2007 ($4.3 million). The decrease in amortization expense results from a $3.2 million decrease in non-recurring, intangible asset-backlog amortization to $.4 million in the six months ended July 31, 2008, as compared to $3.6 million in the period June 16, 2007 through July 31, 2007, offset by an increase in amortization expense due to the allocation of the purchase price for each of the DLJ Acquisition and Mid-South Acquisition to intangible assets and the corresponding higher amount of amortization expense for the period.

Interest Expense

Interest expense for the six months ended July 31, 2008 decreased $.9 million, or 7.0%, to $12.4 million, as compared to $13.3 million in total for the periods February 1, 2007 through June 15, 2007 ($10.0 million) and June 16, 2007 through July 31, 2007 ($3.3 million). The decrease in interest expense was primarily due to (i) the elimination of $8.6 million of deferred financing costs in connection with the purchase accounting for the DLJ Acquisition and the corresponding decrease in amortization recorded to interest expense for the period; (ii) an increase of $.5 million in the amortization of the bond premium recorded in connection with the purchase accounting for the DLJ Acquisition; and (iii) the reduction in the weighted average interest rates on the Company’s Revolving Credit Facility. These decreases were offset by an increased principal amount of indebtedness for the period.

The Company’s credit agreements assessed interest at a weighted average rate of 9.8% and 10.4% at July 31, 2008 and January 31, 2008, respectively.

Income Tax Expense

Income tax expense amounted to $1.2 million in the six months ended July 31, 2008, as compared to $.2 million in total for the periods February 1, 2007 through June 15, 2007 ($.9 million of income tax expense) and June 16, 2007 through July 31, 2007 ($.7 million of income tax benefit). These tax provisions reflect effective tax rates of 45.2% for the six months ended July 31, 2008, as compared to -3.9% in total for the periods February 1, 2007 through June 15, 2007 (-58.8%) and June 16, 2007 through July 31, 2007 (17.8%). The increase in the effective tax rate is primarily due to estimated tax provision to tax return adjustments recorded in the six months ended July 31, 2008 related to the anticipated filing of the Company’s income tax returns for the period February 1, 2007 through June 15, 2007 and the period June 16, 2007 through January 31, 2008, offset by the non-deductibility of incentive unit expense amounting to $4.0 million in the period May 1, 2007 through June 15, 2007 and the relationship between the amount of permanent income tax differences and the projected loss before income taxes for fiscal 2008. The difference between the actual effective tax rates and the U.S. federal statutory rate is principally due to (i) state income tax provisions; (ii) a deduction for domestic production activity; and (iii) non-deductible incentive unit expense.

Sales Order Backlog

The Company’s sales order backlog was $71.8 million at July 31, 2008 compared to $49.4 million at January 31, 2008. The increase in the Company’s sales order backlog was primarily due to the acquisition of Mid-South and growth in sales order bookings related to the Company’s international business. Management believes that approximately 80% of the sales order backlog will be fulfilled during the remainder of the current fiscal year. There is no seasonality with respect to the Company’s sales order backlog.

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Liquidity and Capital Resources

Overview

The Company’s principal liquidity requirements are to service debt and meet working capital and capital expenditure needs.

The Company expects that cash generated from operating activities and availability under its Revolving Credit Facility will be the principal sources of liquidity. The Company’s ability to make payments on and to refinance its indebtedness, including the Revolving Credit Facility and Senior Notes, and to fund working capital needs, planned capital expenditures and future acquisitions, will depend on the Company’s ability to generate cash in the future. This, to a certain extent, is subject to general economic, financial, competitive and other factors that are beyond the Company’s control. Based on the current level of operations, the Company believes the cash flow from operations and available borrowings under the Revolving Credit Facility will be adequate to meet liquidity needs for at least the next twelve months. Additionally, the Company does not expect to pay dividends to RGCH Corp. for the foreseeable future to service the interest requirements on RGCH Corp.’s PIK Notes.

Debt and Other Obligations

On February 7, 2006, the Company entered into a $90.0 million Revolving Credit Facility, as amended, that matures on February 7, 2011. Concurrently with the closing of the DLJ Acquisition, the Company entered into a second amendment to the Revolving Credit Facility for which the borrowing capacity was increased by $20.0 million to a total of $80.0 million, subject to borrowing base availability. On April 8, 2008, the Company entered into a fifth amendment to its Revolving Credit Facility for which the borrowing capacity was increased by $10.0 million to $90.0 million, subject to borrowing base availability and the interest rate charged on the borrowings under the Revolving Credit Facility was increased to prime plus 1.25% or LIBOR plus 2.25%. Borrowings under the Revolving Credit Facility bear interest payable at various dates with floating rates of either (i) prime plus 1.25% (6.25% at July 31, 2008) or (ii) LIBOR plus 2.25% (4.71% at July 31, 2008). At July 31, 2008, the Company had $62.7 million outstanding and $27.3 million available under the Revolving Credit Facility after giving effect to its borrowing base requirements. The Revolving Credit Facility contains various covenants that, among other things, restrict the Company’s ability to incur or guarantee debt, pay dividends, make certain investments, repurchase stocks, incur liens, enter into certain transactions with affiliates, enter into certain sales and leaseback transactions and transfer or sell assets. The Company was in compliance with all such covenants at July 31, 2008.

On February 7, 2006, the Company issued $200.0 million aggregate principal amount of Senior Notes due February 15, 2014. These notes bear interest at 11.25% per annum payable in semi-annual installments on February 15 and August 15 each year commencing August 15, 2006. The indenture governing the Senior Notes contains covenants that, among other things, restrict the Company’s ability to incur or guarantee additional debt, pay dividends and make distributions, make certain investments, repurchase stock, incur liens, enter into certain transactions with affiliates, enter into certain sale and leaseback transactions, merge or consolidate, and transfer or sell assets. The Company was in compliance with all such covenants at July 31, 2008.

On December 14, 2007, Greenville closed on a $2.0 million IRB with the City of Clarksville, Arkansas, due December 30, 2014. The proceeds were used to finance the IRB Equipment. RathGibson is a guarantor of the obligation. The IRB requires monthly payments of less than $.1 million with interest payable at 5.32%. In connection with the IRB, the Company entered into a third amendment to its Revolving Credit Facility for which the IRB Equipment was released from collateral under the Revolving Credit Facility and permitted Greenville and RathGibson, as guarantor, to enter into the IRB.

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On June 15, 2007, the Company, together with RGCH Corp. and RG Tube, entered into an advisory services agreement, as amended, with DLJMB, an affiliate of DLJ Funds, under which DLJMB acts as a financial advisor with respect to the following services: (i) assisting in analyzing operations and historical performance; (ii) analyzing future prospects; (iii) assisting with respect to future proposals for tender offers, acquisitions, sales, mergers, financings, exchange offers, recapitalizations, restructurings or other similar transactions; and (iv) assisting in strategic planning. The advisory services agreement is for an initial term expiring June 15, 2012 and is subject to renewal for consecutive one-year terms unless terminated by DLJMB or the Company, RGCH Corp. or RG Tube with 30 days notice prior to the expiration of the initial term or any annual renewal. For services rendered, annual advisory fees of $.9 million and $.1 million are payable to DLJMB and certain consultants for DLJMB who also serve as directors of RG Tube, respectively, in equal quarterly installments on the first business day of each calendar quarter. For any debt or equity financing or refinancing consummated during the term of this agreement, the Company has an obligation to pay an advisory fee not to exceed the greater of $.5 million or one percent of the aggregate transaction value. During the three months ended July 31, 2008 and the period June 16, 2007 through July 31, 2007, $.2 million and $.1 million, respectively of annual advisory fees was amortized to selling, general and administrative expenses within the condensed consolidated statements of operations. During the six months ended July 31, 2008 and the period June 16, 2007 through July 31, 2007, $.5 million and $.1 million, respectively of annual advisory fees was amortized to selling, general and administrative expenses within the condensed consolidated statements of operations.

On February 7, 2006, the Company entered into a management agreement with Castle Harlan, as manager, under which Castle Harlan provided business and organizational strategy, financial and investment management, advisory, merchant and investment banking services to the Company, RGCH Corp. or RGCH LLC. The management agreement was terminated as a result of the DLJ Acquisition. During the period May 1, 2007 through June 15, 2007, $.3 million of management fees was amortized to selling, general and administrative expenses within the condensed consolidated statements of operations. During the period February 1, 2007 through June 15, 2007, $.8 million of management fees was amortized to selling, general and administrative expenses within the condensed consolidated statements of operations.

Working Capital

At July 31, 2008, the Company had working capital of $100.5 million, an increase of $18.1 million from $82.4 million at January 31, 2008.

Cash Flows

Cash increased $1.4 million in the six months ended June 30, 2008, ending the period at $2.1 million. Cash decreased $1.2 million in the period February 1, 2007 through June 15, 2007 and increased $1.0 million in the period June 16, 2007 through July 31, 2007, and in total for both periods decreased $.2 million, ending the period at $5.4 million. The increase in the generation of cash in the six months ended July 31, 2008, as compared to the same period in fiscal 2008, is primarily due to the following:

Operating Activities - The Company used cash for operating activities of $1.7 million in the six months ended June 30, 2008, as compared to $12.2 million in total for the periods February 1, 2007 through June 15, 2007 ($11.2 million) and June 16, 2007 through July 31, 2007 ($1.0 million). The decrease in the use of cash flows from operating activities was primarily due to a reduction working capital needs.

Investing Activities - The Company used cash for investing activities of $23.4 million in the six months ended June 30, 2008, as compared to $3.2 million in total for the periods February 1, 2007 through June 15, 2007 ($2.3 million) and June 16, 2007 through July 31, 2007 ($.9 million). Capital expenditures to replace and upgrade existing equipment and install new equipment to provide additional operating efficiencies amounted $5.3 million in the six months ended June 30, 2008, as compared $3.2 million in total for the periods February 1, 2007 through June 15, 2007 ($2.3 million) and June 16, 2007 through July 31, 2007 ($.9 million). In the six months ended June 30, 2008, the Company used cash of $20.1 million, net of cash acquired, to acquire Mid-South.

The Company expects capital expenditures for the remainder of fiscal 2009 to be approximately $4.0 million, primarily relating to the purchase of new equipment for the purpose of reducing manufacturing costs, increasing productive capacity and maintenance.

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Financing Activities - Financing activities provided cash of $26.5 million in the six months ended June 30, 2008, as compared to $15.2 million in total for the periods February 1, 2007 through June 15, 2007 ($12.3 million) and June 16, 2007 through July 31, 2007 ($2.9 million). Net principal proceeds from the Revolving Credit Facility of $26.8 million in the six months ended June 30, 2008 were used primarily to fund the acquisition of Mid-South and working capital requirements. Net principal proceeds from the Revolving Credit Facility of $17.3 million in total for the periods February 1, 2007 through June 15, 2007 ($12.3 million) and June 16, 2007 through July 31, 2007 ($5.0 million) were used primarily to fund working capital requirements. In the period June 16, 2007 through July 31, 2007, the Company paid a dividend of $3.8 million, which was used to finance the contingent payment of $3.4 million made by RG Tube in connection with the DLJ Acquisition.

Off-balance Sheet Arrangements

At July 31, 2008, the Company did not have any off-balance sheet arrangements.

Critical Accounting Policies

The preparation of the condensed consolidated financial statements in conformity with GAAP requires management to make judgments, estimates and assumptions that affect: (i) the reported amounts of assets and liabilities at the date of the condensed consolidated financial statements; (ii) the disclosures 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. The Company bases its estimates on historical experience and other assumptions that are believed to be reasonable under circumstances, the results of which form the basis for the Company’s judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. The Company’s actual results may differ from these estimates under different circumstances or conditions. If actual amounts are ultimately different from these estimates, the revisions are included in the Company’s results of operations for the period in which the actual amounts become known.

The Company believes the following critical accounting policies represent the more significant judgments and estimates used in preparing the condensed consolidated financial statements. There have been no material changes made to the Company’s critical accounting policies and estimates during the periods presented in the condensed consolidated financial statements.

Accounts Receivable

Accounts receivables consist of amounts billed and currently due from customers. The Company extends credit to customers in the normal course of business and generally does not require collateral to support its accounts receivable balances. The Company maintains a reserve for estimated losses resulting from the inability or unwillingness of customers to make required payments. The reserve for estimated losses is based on the Company’s historical experience, existing economic conditions and any specific customer collection issues the Company has identified.

Long-Lived Assets

The Company accounts for the impairment or disposal of long-lived assets in accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” which requires long-lived assets, such as property, plant and equipment and amortizable intangible assets other than goodwill and indefinite-lived intangible assets, which are tested separately for impairment, to be evaluated for impairment whenever events or changes in circumstances indicate that the carrying value may not be recoverable. When evaluating long-lived and amortizable assets for potential impairment, the Company first compares the carrying value of the asset to the asset’s estimated future cash flows (undiscounted and without interest charges). If the estimated future cash flows are less than the carrying value of the asset, the Company calculates an impairment loss. The impairment loss calculation compares the carrying value of the asset to the asset’s estimated fair value, which may be based on estimated future cash flows (discounted and with interest charges). The Company recognizes an impairment loss if the amount of the asset’s carrying value exceeds the asset’s estimated fair value. If the Company recognizes an impairment loss, the adjusted carrying amount becomes its new cost basis.

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Goodwill and Other Intangible Assets

The Company evaluates goodwill for impairment at least annually, or more frequently if events or circumstances indicate that the assets may be impaired, by applying a fair value based test and, if impairment occurs, the amount of impaired goodwill is written off immediately. The provisions of SFAS No. 142, “Goodwill and Other Intangible Assets,” require that a two-step impairment test be performed annually or whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. The first step of the test for impairment compares the book value of the Company’s reporting unit to its estimated fair value. The second step of the goodwill impairment test, which is only required when the net book value of the reporting unit exceeds the fair value, compares the implied fair value of goodwill to its book value to determine the amount of the impairment required. The Company evaluated its goodwill at January 31, 2008, and determined that there was no impairment of goodwill.

The Company evaluates tradenames for impairment at least annually, or more frequently if events or circumstances indicate that the assets may be impaired, by applying a fair value based test and, if impairment occurs, the amount of impaired tradenames is written off immediately. The Company evaluated its tradenames at January 31, 2008 and determined that there were no impairment of tradenames.

Amortizable intangible assets consist primarily of customer lists. Subsequent to the DLJ Acquisition, amortizable intangible assets are amortized principally by an accelerated method over their estimated useful lives of 15 years. Prior to the DLJ Acquisition, amortizable intangible assets were amortized principally by the straight-line method over their estimated useful lives of 15 years. The Company may evaluate customer lists for impairment if events or circumstances indicate that the assets may be impaired, by applying a fair value based test and, if impairment occurs, the amount of impaired customer lists is written off immediately.

Goodwill and other intangible assets recorded in connection with the Mid-South Acquisition are preliminary balances and are expected to change once the Company obtains third party appraisals and valuation studies on inventories, property, plant and equipment and intangible assets. These appraisals and valuation studies are expected to be completed during fiscal 2009.

Income Taxes

Deferred income taxes are provided using the asset and liability method, whereby deferred income taxes are recognized for temporary differences between the reported amounts of assets and liabilities herein and their income tax basis and for net operating loss and tax credit carryforwards. Deferred income tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred income tax assets will not be realized. Deferred income tax assets and liabilities are computed using the income tax rates in effect in the years in which the temporary differences are expected to reverse.

Revenue Recognition

Revenues are recognized when persuasive evidence of a selling arrangement exists, delivery has occurred, the Company’s price to the customer is fixed or determinable and collectibility is reasonably assured. These criteria are generally satisfied upon shipment of product.

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

Credit Risk

The Company provides credit in the normal course of business to its customers, which are primarily value-added tubing distributors, OEMs, and engineering firms. The Company performs ongoing credit evaluations of its customers, maintains reserves for potential credit losses and generally does not require collateral to support its accounts receivable balances. The Company’s two largest customers accounted for approximately 19% of the Company’s nets sales in fiscal 2008 and 30% of the Company’s accounts receivable at January 31, 2008. Accordingly, a bankruptcy or a significant deterioration in the financial condition of any of these significant customers could have a material adverse effect on the Company’s financial condition and results of operations due to a reduction in purchases, a longer collection cycle or an inability to collect accounts receivable.

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Commodity Price Risk

The Company purchases certain raw materials such as stainless steel, nickel alloys, titanium, argon and hydrogen that are subject to price volatility caused by unpredictable factors. Stainless steel, principally 304L grade and 316L grade, is the primary raw material the Company uses to manufacture products. Stainless steel prices have historically been dependent on supply and demand and costs of raw materials such as chrome, nickel, molybdenum and titanium. Where possible, the Company employs fixed price raw material purchase contracts. Historically, the Company has been able to pass along increases in raw material costs to its customers, and the Company expects to continue to pass along such costs to customers. While the Company is able to pass through changes in the cost of raw materials to its customers, significant and sudden changes can lead customers to reduce or delay purchases, substitute materials and/or cancel capital projects, which may have an adverse effect on the Company’s results of operations and financial condition due to changes in sales volume and the lagging effect of replacement inventory cost. The Company has not, in the past, used derivatives to manage commodity price risk.

Interest Rate Risk

Changes in interest rates can potentially impact the Company’s profitability and its ability to realize assets and satisfy liabilities. Interest rate risk is resident primarily in the Company’s Revolving Credit Facility, which typically has variable interest rates based on Prime or LIBOR rates. Assuming no other change in financial structure, an increase of 100 basis points in the Company’s variable interest rate would decrease pre-tax earnings for fiscal 2009 by approximately $.4 million. This amount is determined by considering the impact of a 1% increase in interest rates on the average debt estimated to be outstanding in fiscal 2009.

Item 4. Controls and Procedures.

Not applicable.

Item 4T. Controls and Procedures.

Evaluation of Disclosure Controls and Procedures

Under the supervision and with the participation of management, including the Company’s principal executive officer and principal financial officer, the Company has evaluated the effectiveness of the design and operation of its disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of the end of the period covered by this report, and based on their evaluation, the principal executive officer and principal financial officer have concluded that these controls and procedures are effective.

Changes in Internal Control over Financial Reporting

There were no changes in the Company’s internal control over financial reporting (as defined in Rule 13a-15(f) of the Exchange Act) during the second quarter of fiscal 2009 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II

Item 1. Legal Proceedings.

During the second quarter of fiscal 2009, there were no material changes to the Company’s previously disclosed legal proceedings. In addition, the Company is involved in various claims and legal actions that arise in the ordinary course of business. The Company does not believe that the ultimate resolution of any of these actions will have a material adverse effect on the Company’s financial position, results of operations, liquidity or capital resources.

Item 1A. Risk Factors.

There have been no material changes from the risk factors previously disclosed under Item 1A to the Company’s Annual Report on Form 10-K for the fiscal year ended January 31, 2008.

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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

None

Item 3. Defaults Upon Senior Securities.

None

Item 4. Submission of Matters to a Vote of Security Holders.

None

Item 5. Other Information.

None

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Item 6. Exhibits.


	Exhibit Number		Description

	31.1*		Rule 13a-14(a)/15d-14(a) Certifications.
	31.2*		Rule 13a-14(a)/15d-14(a) Certifications.

* Filed herewith.

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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.


	Date: September 12, 2008

	/s/ Barry C. Nuss

	Barry C. Nuss
	Chief Financial Officer
	(Authorized Signatory and
		Principal Financial and Accounting Officer)

RathGibson Inc 10-Q