UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For The Fiscal Year Ended December 31, 2017
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
Commission File Number: 001-35493
______________
STEEL PARTNERS HOLDINGS L.P.
(Exact name of registrant as specified in its charter)
Delaware
(State of Incorporation)
590 Madison Avenue, 32nd Floor
New York, New York
(Address of principal executive offices)
13-3727655
(I.R.S. Employer Identification No.)
10022
(Zip Code)
Registrant's telephone number, including area code: (212) 520-2300
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Name of each exchange on
which registered
Common units, $0 par
New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
Common Units, no par value
Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes
No
Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the
Act. Yes
No
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
No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any,
every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter)
during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes
No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter)
is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a
smaller reporting company, or emerging growth company. See the definitions of "large accelerated filer," and "accelerated filer,"
"smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer
Non-accelerated filer
(Do not check if a smaller reporting company)
Accelerated filer
Smaller reporting company
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition
period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange
Act.
Indicate by check mark whether the registrant is a shell company (as defined by Rule 12b-2 of the Exchange Act). Yes
No
The aggregate market value of our common units held by non-affiliates of registrant as of June 30, 2017 totaled
approximately $234.2 million based on the then-closing unit price.
On March 6, 2018, there were 26,296,341 common units outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
The information required by Items 10, 11, 12, 13 and 14 of Part III will be incorporated by reference to certain portions
of a definitive proxy statement, which will be filed by the Registrant within 120 days after the close of its fiscal year.
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STEEL PARTNERS HOLDINGS L.P.
TABLE OF CONTENTS
Business
Risk Factors
Item 1A.
Item 1B. Unresolved Staff Comments
Item 2.
Properties
Legal Proceedings
PART I
Item 1.
Item 3.
Item 4.
PART II
Item 5.
Item 6.
Item 7.
Item 8.
Item 9.
Mine Safety Disclosures
Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of
Equity Securities
Selected Financial Data
Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Financial Statements and Supplementary Data
Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
Controls and Procedures
Item 9A.
Item 9B. Other Information
PART III
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
PART IV
Directors, Executive Officers and Corporate Governance
Executive Compensation
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters
Certain Relationships and Related Transactions, and Director Independence
Principal Accounting Fees and Services
Item 15.
Exhibits, Financial Statement Schedules
Item 16.
Form 10-K Summary
SIGNATURES
1
As used in this Form 10-K, unless the context otherwise requires the terms "we," "us," "our," "SPLP" and the "Company"
refer to Steel Partners Holdings L.P., a Delaware limited partnership.
PART I
FORWARD-LOOKING STATEMENTS
This report includes "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as
amended ("Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as amended ("Exchange Act"), including, in
particular, forward-looking statements under the headings "Item 7 - Management's Discussion and Analysis of Financial Condition
and Results of Operations" and "Item 8 - Financial Statements and Supplementary Data." These statements appear in a number of
places in this report and include statements regarding the Company's intent, belief or current expectations with respect to (i) its
financing plans, (ii) trends affecting its financial condition or results of operations, and (iii) the impact of competition. The words
"expect," "anticipate," "intend," "plan," "believe," "seek," "estimate," and similar expressions are intended to identify such forward-
looking statements; however, this report also contains other forward-looking statements in addition to historical information.
Item 1. Business
All monetary amounts used in this discussion are in thousands unless otherwise indicated.
The Company
SPLP is a diversified global holding company that owns and operates businesses and has significant interests in leading
companies in various industries, including diversified industrial products, energy, defense, supply chain management and logistics,
banking and youth sports. SPLP operates through the following segments: Diversified Industrial, Energy, Financial Services, and
Corporate and Other. Each of our companies has its own management team with significant experience in their industries. Our
subsidiary, Steel Services Ltd (''Steel Services''), through management services agreements, provides services to us and some of
our companies which include assignment of C-Level management personnel, legal, tax, accounting, treasury, consulting, auditing,
administrative, compliance, environmental health and safety, human resources, marketing, investor relations, operating group
management and other similar services. We work with our businesses to increase corporate value over the long term for all
stakeholders by implementing our unique strategy discussed in more detail below.
SPLP is managed by SP General Services LLC ("Manager"), pursuant to the terms of an amended and restated management
agreement ("Management Agreement") discussed in further detail in Note 19 – "Related Party Transactions" to the SPLP consolidated
financial statements found elsewhere in this Form 10-K. From its founding in 1990, the Manager and its affiliates have focused on
increasing value for investors in the entities it has managed. Our wholly-owned subsidiary, Steel Partners Holdings GP Inc. ("General
Partner"), is our general partner. The General Partner has a board of directors ("Board of Directors"). The Board of Directors is
currently comprised of seven members, five of whom are elected annually by our unitholders and two of whom are appointed by
the Manager. Warren G. Lichtenstein, the Executive Chairman of our Manager, serves as the Executive Chairman of the Board of
Directors.
Products and Product Mix
Diversified Industrial Segment
Our Diversified Industrial segment is comprised of manufacturers of engineered niche industrial products, with leading
market positions in many of the markets they serve. The businesses in this segment distribute products to customers through their
sales personnel, outside sales representatives and distributors in North and South America, Europe, Australia, Asia and several other
international markets. Below is additional information related to the businesses within the Diversified Industrial segment.
Joining Materials - The Joining Materials business primarily fabricates precious metals and their alloys into brazing alloys.
Brazing alloys are used to join similar and dissimilar metals, as well as specialty metals and some ceramics, with strong, hermetic
joints. The Joining Materials business offers these metal joining products in a wide variety of alloys, including gold, silver, palladium,
copper, nickel, aluminum and tin. These brazing alloys are fabricated into a variety of engineered forms and are used in many
industries, including electrical, appliance, transportation, construction and general industrial, where dissimilar material and metal
joining applications are required. Operating income from precious metal products is principally derived from the "value-added" of
processing and fabricating and not from the direct purchase and resale of precious metals. The Joining Materials business enters
into commodity futures and forward contracts to mitigate the impact of price fluctuations on its precious and certain non-precious
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metal inventories that are not subject to fixed price contracts. We believe that the business unit that comprises our Joining Materials
business is the North American market leader in many of the markets that it serves.
Tubing - The Tubing business manufactures a wide variety of stainless and low carbon steel tubing products. The Tubing
business manufactures some of the world's longest continuous seamless stainless steel tubing coils, up to 6,000 feet, serving primarily
the petrochemical and oil & gas infrastructure markets. In addition, it is a top supplier of precision, small diameter (less than 3 mm)
coil tubing to industry leading specifications serving the aerospace, defense and health care markets. The Tubing business is also
a leading manufacturer of mechanical and fluid-carrying welded low carbon tubing used for diverse industries, including the
automotive, heavy truck, heating, cooling and oil & gas markets. Products are delivered in continuous lengths from 2 inches to
30,000 feet in coil, cut or spool packaging styles.
Building Materials - The Building Materials business manufactures and supplies products primarily to the commercial
construction and building industries. It manufactures fasteners, adhesives and fastening systems for the U.S. commercial low-slope
roofing industry, which are sold to building and roofing material wholesalers, roofing contractors and private label roofing system
manufacturers, and a line of engineered specialty fasteners for the building products industry for fastening applications in the
remodeling and construction of homes, decking and landscaping. We believe that our primary business unit in the Building Materials
business is the market leader in fasteners and accessories for commercial low-slope roofing applications and that the majority of
the net sales for our Building Materials business are for the commercial construction repair and replacement market.
Performance Materials - The Performance Materials business manufactures sheet and mechanically formed glass, quartz,
carbon and aramid materials for specialty applications in a wide expanse of markets requiring highly engineered components. Its
products are used in a wide range of advanced composite applications, such as civilian and military aerospace components, printed
electronic circuit boards, automotive and industrial components, and substrates for civilian and military armor applications.
Electrical Products - The Electrical Products business designs, manufactures and markets power electronics, motion control,
power protection, power quality electromagnetic equipment, and custom gears and gearboxes used in a variety of medical,
commercial and military aerospace, computer, datacom, industrial, architectural and entertainment lighting, and telecom
applications. Its products are generally incorporated into larger systems to improve operating performance, safety, reliability and
efficiency. The reported operations of the Electrical Products business are comprised of the operations of SL Industries, Inc. ("SLI")
and those of the former Electromagnetic Enterprise division ("EME") of Hamilton Sundstrand Corporation, which were acquired
on June 1, 2016 and September 30, 2016, respectively.
Kasco Blades and Route Repair Services ("Kasco") - The Kasco business provides meat-room blade products, repair
services and resale products for the meat and deli departments of supermarkets, restaurants, meat and fish processing plants, and
for distributors of electrical saws and cutting equipment, principally in North America and Europe. The Kasco business also provides
cutting blades for bakeries, in addition to wood cutting blade products for the pallet manufacturing, pallet recycler and portable
saw mill industries in North America.
Foils, Films, Laminates and Holographics - Through our subsidiary WebFinancial Holding Corporation ("WFHC"), we
own approximately 91.2% of API Group plc ("API") as of December 31, 2017. API, our Packaging business, manufactures and
distributes foils, films and laminates used to enhance the visual appeal of products and packaging. API's laminates and foils businesses
produce carton board laminates and foils for the packaging of consumer goods as well as the food and confectionery, tobacco, health
and beauty, personal care, greeting cards, books, magazines, footwear and sports goods and office and promotional products
industries. API's holographics business manufactures holographic products for use on premium branded goods in various industries.
Energy Segment
Our Energy segment provides drilling and production services to the oil & gas industry and owns a youth sports business.
Its parent company, Steel Excel Inc. ("Steel Excel") also has equity method and other investments in a number of businesses. Below
is additional information related to the consolidated businesses within the Energy segment.
Steel Energy - The Energy business provides completion, re-completion and production services to exploration and
production companies in the oil & gas business. The services provided include well completion and recompletion, well maintenance
and workover, snubbing, flow testing, down hole pumping, plug and abandonment, and rental of auxiliary equipment, logging and
perforating wireline services.
Steel Sports - Steel Sports is a social impact organization that strives to provide a first-class youth sports experience
emphasizing positive experiences and instilling the core values of discipline, teamwork, safety, respect and integrity.
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Financial Services Segment
WebBank - Through our subsidiary WFHC, we own approximately 91.2% of WebBank. WebBank is a Utah chartered
industrial bank subject to comprehensive regulation, examination and supervision of the Federal Deposit Insurance Corporation
("FDIC") and the State of Utah Department of Financial Institutions ("UDFI"). WebBank is not considered a "bank" for Bank
Holding Company Act purposes and, as such, SPLP is not regulated as a bank holding company. WebBank's deposits are insured
by the FDIC. WebBank engages in a full range of banking activities including originating loans, issuing credit cards and taking
deposits that are federally insured. WebBank originates and funds consumer and small business loans through lending programs
with unaffiliated companies that market and service the programs ("Marketing Partners"), where the Marketing Partners subsequently
purchase the loans (or interests in the loans) that are originated by WebBank. WebBank also has private-label financing programs
that are branded for a specific retailer, manufacturer, dealer channel, proprietary network or bank card program. WebBank participates
in syndicated commercial and industrial as well as asset-based credit facilities and asset-based securitizations through relationships
with other financial institutions.
Corporate and Other
Corporate and Other consists of several consolidated subsidiaries, equity method and other investments, and cash and cash
equivalents. Steel Services has management services agreements with both our consolidated subsidiaries and other related companies.
For additional information on these service agreements see Note 19 - "Related Party Transactions" to the SPLP consolidated financial
statements found elsewhere in this Form 10-K.
Business Strategy
We continuously evaluate the retention and disposition of existing operations and investigate possible acquisitions of new
businesses, often focusing on businesses that are selling substantially below intrinsic value. We consider possible synergies and
economies of scale in operating and/or making determinations to acquire or dispose of companies. We seek additional means to
reduce costs and to encourage integration of operations and the building of business relationships among our companies, consistent
with our desire that our unitholders benefit from the diversified holding company structure.
We strive to enhance the business operations of our companies and increase long-term value for unitholders and stakeholders
through balance sheet improvements, strategic allocation of capital and operational and growth initiatives. We use a set of tools and
processes called the Steel Business System to drive operational and commercial efficiencies across each of our businesses. The Steel
Business System utilizes a strategy deployment process to execute strategic initiatives for each of our businesses to improve their
performance, including objectives relating to manufacturing improvement, idea generation, product development, and global
sourcing of materials and services.
Our operational initiatives include creating efficiencies through consolidated purchasing and materials sourcing provided
by the Steel Partners Purchasing Council, which arranges shared purchasing programs and is reducing costs for, and providing
other benefits to, a number of our companies. We strive to reduce our companies' operational costs, and enhance growth and
profitability, through the implementation of Steel Partners Operational Excellence Programs, which include the deployment of
Lean Manufacturing, Design for Six Sigma, Six Sigma and Strategy Deployment. We are focused on reducing corporate overhead
of our companies by centralizing certain administrative and corporate services through Steel Services that provides management,
consulting and advisory services.
Generally, we seek to actively acquire and maintain control over our companies through our ability to influence their
policies. Depending on the size of our ownership interests in any given company, this may be achieved by obtaining board
representation and overseeing and providing assistance to the existing management team. We generally view our companies as
long-term holdings, and we expect to realize value by operating them with a view towards fostering growth and maximizing their
value rather than through the sale of ownership interests. The securities of some of the companies in which we have interests are
traded on national securities exchanges, while others are privately held or not actively traded.
Customers
The businesses within the Diversified Industrial segment are diversified across industrial markets and customers. The
Joining Materials, Tubing, Building Materials, Performance Materials, Electrical Products, Kasco and Packaging businesses sell
to customers in the construction, electrical, electronics, transportation, power control, utility, medical, oil & gas exploration,
aerospace and defense, consumer products, packaging and food industries. No customer accounted for more than 10% of the
4
Diversified Industrial segment's consolidated net sales in 2017, 2016 or 2015. The Diversified Industrial segment's 15 largest
customers accounted for approximately 28% of consolidated Diversified Industrial segment net sales in 2017.
The Energy segment primarily provides its services to customers' extraction and production operations in North Dakota
and Montana in the Bakken basin, Colorado and Wyoming in the Niobrara basin, Texas in the Permian basin and New Mexico in
the San Juan basin. It relies primarily on its local operations to sell and market its services. In 2017, Steel Excel had two customers
that made up 25% of its net revenue, and its top 15 customers made up 70%, 75% and 76% of its net revenue for the years ended
December 31, 2017, 2016 and 2015, respectively.
In the Financial Services segment, WebBank earns interest income primarily from interest and fees earned on loans and
investments, and it earns non-interest income primarily from origination fees earned on loans, fee income on contractual lending
arrangements, premiums on the sale of loans and loan servicing fees. For the years ended December 31, 2017, 2016 and 2015, the
two highest grossing contractual lending programs accounted for 40%, 47% and 46%, respectively, of WebBank's total revenue.
Raw Materials
The raw materials used by the businesses within the Diversified Industrial segment are as follows:
Besides precious metals, the raw materials used in the Joining Materials, Tubing, Building Materials, Electrical Products,
and Kasco businesses consist principally of stainless, galvanized silicon and carbon steel, aluminum, copper, tin, nickel alloys, a
variety of high-performance alloys, permanent magnets, electronic and electrical components and various plastic compositions.
The raw materials used in the operations of the Performance Materials business consist principally of fiberglass, quartz and aramid
yarns. The raw materials used in the Packaging business consist principally of board, PET film, organic solvents, aluminum, resins,
pigments and adhesives. Raw materials are generally purchased at open market prices from domestic and foreign suppliers. The
Diversified Industrial segment businesses have not experienced any significant problem in obtaining the necessary quantities of
raw materials. Prices and availability, particularly of raw materials purchased from foreign suppliers, are affected by world market
conditions and government policies. Other than the precious metals used in the Joining Materials business, the raw materials used
by these businesses are generally readily available from more than one source.
The businesses in our Diversified Industrial segment also require significant amounts of electricity, oil & natural gas to
operate their facilities, and they are subject to price changes in these commodities. A shortage of electricity, oil or natural gas, or
a government allocation of supplies resulting in a general reduction in supplies, could increase costs of production and could cause
some curtailment of production.
Capital Investments
SPLP believes that in order to be and remain competitive, its businesses must continuously strive to increase revenue,
improve productivity and product quality, and control and/or reduce manufacturing costs. Accordingly, SPLP expects to continue
to make capital investments that reduce overall manufacturing costs, improve the quality of products produced and services provided
and broaden the array of products offered to the industries it serves, as well as replace equipment as necessary to maintain compliance
with environmental, health and safety laws and regulations. SPLP's capital expenditures for 2017, 2016 and 2015 for continuing
operations were $54,737, $34,183 and $23,252, respectively. SPLP anticipates funding its capital expenditures in 2018 from funds
generated by operations and borrowed funds.
Employment
As of December 31, 2017, the Company employed approximately 4,800 employees worldwide. Of these employees, 780
were covered by collective bargaining agreements, all in the Diversified Industrial segment. The Energy segment also hires
additional full-time and part-time employees during peak seasonal periods.
Competition
There are many companies, larger and smaller, domestic and foreign, which manufacture products or provide services of
the type offered by our businesses. Some of these competitors are larger and have financial resources greater than our subsidiaries.
Some of these competitors enjoy certain other competitive advantages, including greater name recognition, greater financial,
technical, marketing and other resources, a larger installed base of customers and well-established relationships with current and
potential customers.
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Competition in the Diversified Industrial segment is based on quality, technology, service, reputation, price, and in some
industries, new product introduction.
The Energy business operates in a highly competitive industry that is influenced by price, capacity, reputation and
experience. In times of high demand, capacity, reputation and experience are major competitive forces. In times of low demand,
service providers will compete on price to attract customers. In addition, they need to maintain a safe work environment and a well-
trained work force to remain competitive. Energy services are affected by seasonal factors, such as inclement weather, fewer daylight
hours and holidays during the winter months. Heavy snow, ice, wind or rain can make it difficult to operate and to move equipment
between work sites, which can reduce its ability to provide services and generate revenues. These seasonal factors affect competitors
as well. Because they have conducted business together over several years, the members of our local operations have established
strong working relationships with certain of their clients. These strong client relationships provide a better understanding of region-
specific issues and enable us to better address customer needs. The market for Steel Sports' baseball facility services and soccer
camps and leagues is very fragmented, and its competitors are primarily small local or regional operations.
WebBank competes with a broad range of banks, both larger and smaller, across its various lines of business.
Regulation
Certain of our business are subject to various regulations relating to protection of the environment, worker safety, the
handling of hazardous materials, transportation standards and banking. The Company does not presently anticipate that compliance
with currently applicable environmental regulations and controls will significantly change its competitive position, capital spending
or earnings during 2018. SPLP believes its subsidiaries are in compliance with all orders and decrees it has consented to with
environmental regulatory agencies. These regulations are discussed in more detail below. Also, please see "Item 1A - Risk Factors,"
"Item 3 - Legal Proceedings" and Note 18 - "Commitments and Contingencies" to the SPLP consolidated financial statements found
elsewhere in this Form 10-K.
• The Comprehensive Environmental Response, Compensation and Liability Act, as amended, and comparable state laws
("CERCLA") impose liability without regard to fault or the legality of the original conduct on certain defined parties, including
current and prior owners or operators of a site where a release of hazardous substances occurred and entities that disposed of or
arranged for the disposition of the hazardous substances found at the site. Under CERCLA, these parties may be subject to joint
and several liability for the costs of cleaning up the hazardous substances that were released into the environment and for damages
to natural resources. Further, claims may be filed for personal injury and property damages allegedly caused by the release of
hazardous substances and other pollutants. We may encounter materials that are considered hazardous substances in the course
of our operations. As a result, our businesses may incur CERCLA liability for cleanup costs and be subject to related third-party
claims. We also may be subject to the requirements of the Resource Conservation and Recovery Act, as amended, and comparable
state statutes ("RCRA") related to solid wastes. Under CERCLA or RCRA, our subsidiaries could be required to clean up
contaminated property (including contaminated groundwater) or to perform remedial activities to prevent future contamination.
• The Clean Water Act established the basic structure for regulating discharges of pollutants into the waters of the United States
and quality standards for surface waters. In addition, the Oil Pollution Act of 1990 imposed a multitude of requirements on
responsible parties related to the prevention of oil spills and liability for damages resulting from such spills in the waters of the
United States. These and comparable state laws provide for administrative, civil, and criminal penalties for unauthorized
discharges and impose stringent requirements for spill prevention and response planning, as well as considerable potential
liability for the costs of removal and damages in connection with unauthorized discharges.
• The Clean Air Act, as amended, and comparable state laws and regulations restrict the emission of air pollutants and impose
various monitoring and reporting requirements. These laws and regulations may require our subsidiaries to obtain approvals or
permits for construction, modification, or operation of certain projects or facilities and may require use of emission controls.
Various scientific studies suggest that emissions of greenhouse gases, including, among others, carbon dioxide and methane,
contribute to global warming. While it is not possible to predict how legislation or new regulations that may be adopted to
address greenhouse gas emissions would impact the Company's businesses, any new restrictions on emissions that are imposed
could result in increased compliance costs for, or additional operating restrictions on, the Company and its customers, which
could have an adverse effect on the Company's business.
• The Occupational Safety and Health Act, as amended, and comparable state laws ("OSHA") regulate the protection of employee
health and safety. OSHA's hazard communication standard requires that information about hazardous materials used or produced
in its operations be maintained and provided to employees and state and local government authorities.
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WebBank is subject to regulatory capital requirements administered by the FDIC. Under capital adequacy guidelines and
the regulatory framework for prompt corrective action, WebBank must meet specific capital guidelines that involve quantitative
measures of WebBank's assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting practices.
WebBank's capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk
weightings and other factors. Failure to meet minimum capital requirements can initiate certain actions by regulators that, if
undertaken, could have a direct material adverse effect on WebBank's financial statements. In addition, federal banking laws and
regulations generally would prohibit WebBank from making any capital distribution (including payment of a dividend) if WebBank
would be under-capitalized thereafter. Undercapitalized depository institutions are subject to growth limitations and must submit
a capital restoration plan, which must be guaranteed by the institution's holding company. In addition, an undercapitalized institution
is subject to increased monitoring and greater regulatory approval requirements. Currently, WebBank meets or exceeds all applicable
regulatory capital requirements.
WebBank is also subject to legal requirements in connection with the consumer and business lending programs that it
originates. These include disclosure requirements, prohibitions on certain activities, and a broad prohibition on engaging in unfair,
deceptive or abusive acts or practices. These requirements are enforced by WebBank's regulators, the FDIC and the UDFI, as well
as through private litigation.
Other Information
The amounts of revenue, earnings before taxes and identifiable assets attributable to the aforementioned business segments
and additional information regarding SPLP's investments are included in Note 20 - "Segment Information" and Note 9 - "Investments"
to the SPLP consolidated financial statements found elsewhere in this Form 10-K.
Our common units are quoted on the New York Stock Exchange under the symbol "SPLP". Our business address is 590
Madison Avenue, 32nd Floor, New York, New York 10022, and our telephone number is (212) 520-2300. Our website is
www.steelpartners.com. The information contained in, or that can be accessed through, the website is not part of this Form 10-K.
This Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and all amendments to those reports, are available
to you free of charge through our website as soon as reasonably practicable after those materials have been electronically filed with,
or furnished to, the U.S. Securities and Exchange Commission ("SEC").
Item 1A. Risk Factors
Our business is subject to a number of risks. You should carefully consider the following risk factors, together with all of
the other information included or incorporated by reference in this report, before you decide whether to purchase our common or
preferred units. These factors are not intended to represent a complete list of the general or specific risks that may affect us. It should
be recognized that other risks may be significant, presently or in the future, and the risks set forth below may affect us to a greater
extent than indicated. If any of the following risks occur, our business, financial condition and results of operations could be
materially adversely affected. In such case, the trading price of our common and preferred units could decline, and you may lose
all or part of your investment.
Risks Related to Our Business
Certain of the Company's subsidiaries sponsor defined benefit pension plans which could subject the Company to
substantial cash funding requirements in the future.
The Company's ongoing operating cash flow requirements include arranging for the funding of the minimum requirements
of its subsidiaries' defined benefit pension plans. As a result of the Company during 2017 acquiring the remaining shares of Handy
& Harman Ltd. ("HNH") that it did not already own, the Company is now jointly and severally liable with Handy & Harman for
that subsidiary's underfunded pension liabilities. The performance of the financial markets and interest rates, as well as health care
trends and associated mortality rates, impact our defined benefit pension plan expense and funding obligations. Significant changes
in these factors, including adverse changes in discount rates, investment losses on plan assets and increases in participant life
expectancy, may increase our funding obligations and adversely impact our financial condition. Required future contributions are
estimated based upon assumptions such as discount rates on future obligations, assumed rates of return on plan assets and legislative
changes. Actual future pension costs and required funding obligations will be affected by changes in the factors and assumptions
described in the previous sentence, as well as other changes such as any plan termination or other acceleration events. See the
"Liquidity and Capital Resources" section of this Form 10-K for additional information.
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We could incur significant costs, including remediation costs, as a result of complying with environmental laws or
failing to comply with other extensive regulations, including banking regulations, that our businesses are subject to.
Our businesses are subject to extensive regulation by U.S. and non-U.S. governmental and self-regulatory entities at the
federal, state and local levels, including laws related to anti-corruption, environmental matters, banking, health and safety, import
laws and export control and economic sanctions, and the sale of products and services to government entities. Some of these laws
and regulations pertain to the handling, storage and transportation of raw materials, products and wastes, and hazardous materials
and wastes. Compliance with such requirements may make it necessary for us to retrofit existing facilities with additional pollution-
control equipment, undertake new measures in connection with the storage, transportation, treatment and disposal of by-products
and wastes or take other steps, which may be at a substantial cost to our subsidiaries. Although our subsidiaries maintain insurance
coverage for certain environmental matters, they could incur substantial costs, including cleanup costs, fines or sanctions, and third-
party claims for property damage or personal injury, as a result of violations of, or liabilities under, environmental laws. Any material
violations of these laws can lead to substantial liability, revocations of discharge permits, fines or penalties, and any new laws,
regulations and enforcement policies could become more stringent and significantly increase our compliance costs or limit our
future business opportunities, negatively impacting our financial condition, business and results of operations.
In addition, the consumer and business lending programs offered by WebBank are subject to extensive legal requirements
at the federal and state levels, described in more detail below. If WebBank or its programs do not comply with these laws, it may
be subject to claims for damages, fines or penalties, and may face regulatory examination and enforcement action, and some
violations could result in an underlying loan being found invalid or unenforceable, or subject to payment defenses.
Many of the customers in our Energy segment utilize hydraulic fracturing services, which is the process of creating or
expanding cracks, or fractures, in formations underground where water, sand and other additives are pumped under high pressure
into the formation. Although our Energy segment is not a provider of hydraulic fracturing services, many of its services complement
the hydraulic fracturing process. Fracturing regulations vary widely because they are regulated at the state level. States continue to
evaluate fracturing activities and their impact on the environment. Legislation for broader federal regulation of hydraulic fracturing
operations and the reporting and public disclosure of chemicals used in the fracturing process could be enacted. Additionally, the
United States Environmental Protection Agency has asserted federal regulatory authority over certain hydraulic fracturing activities
involving diesel fuel under the Safe Drinking Water Act. Our Energy segment's customers' operations could be adversely affected
if additional regulation or permitting requirements were to be required for hydraulic fracturing activities, which could have an
adverse effect on our results of operations.
These are not the only regulations that our businesses must comply with. Failure to comply with these or any other
regulations could result in civil and criminal, monetary and non-monetary penalties, damage to our reputation, disruptions to our
business, limitations on our ability to manufacture, import, export and sell products and services, disbarment from selling to certain
federal agencies, damage to our reputation and loss of customers and could cause us to incur significant legal and investigatory
fees. Compliance with these and other regulations may also require us to incur significant expenses. The products and operations
of our businesses are also often subject to the rules of industrial standards bodies such as the International Organization for
Standardization (ISO), and failure to comply with these rules could result in withdrawal of certifications needed to sell our products
and services and otherwise adversely impact our financial condition.
WebBank operates in a highly regulated environment and its lending programs are subject to extensive federal and
state regulation. Ongoing legislative and regulatory actions may significantly affect our liquidity or financial condition.
The consumer and business lending programs offered by WebBank are subject to extensive legal requirements at the federal
and state levels. Among the laws that may be applicable to some or all of the programs offered by WebBank are:
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the Federal Truth-in-Lending Act and Regulation Z promulgated thereunder, which require certain disclosures to borrowers
regarding the terms of their loans;
the Dodd-Frank Wall Street Reform and Consumer Protection Act ("Dodd-Frank Act"), the Federal Trade Commission Act and
state laws that prohibit unfair, deceptive, or abusive acts or practices;
the Federal Equal Credit Opportunity Act and Regulation B promulgated thereunder, which prohibit discrimination in the
extension of credit on the basis of age, race, color, sex, religion, marital status, national origin, receipt of public assistance or
the exercise of any right under the Consumer Credit Protection Act;
the Fair Credit Reporting Act, which governs the use of credit reports and the reporting of information to credit bureaus, and
imposes restrictions on the marketing of credit products through prescreened solicitations based on credit report information;
the Servicemembers Civil Relief Act and the Military Lending Act, which impose rate limitations and other requirements in
connection with the credit obligations of active duty military personnel and certain of their dependents;
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federal and state laws relating to privacy and the safeguarding of personally identifiable consumer information and data breach
notification;
the Bank Secrecy Act, which relates to compliance with anti-money laundering, customer due diligence and record-keeping
policies and procedures; and
laws governing the permissibility of the interest rates and fees that are charged to borrowers.
The Dodd-Frank Act, which was signed into law in 2010, is intended primarily to overhaul the financial regulatory
framework and impacts all financial institutions, including WebBank. The Dodd-Frank Act, among other things, established the
Bureau of Consumer Financial Protection and Financial Stability Oversight Council, consolidated certain federal bank regulators
and imposed increased corporate governance and executive compensation requirements. The amount and complexity of this and
other regulations has increased WebBank's regulatory compliance burden and therefore has increased its regulatory risk.
If WebBank or its programs do not comply with these laws, it may be subject to claims for damages, fines or penalties,
and may face regulatory scrutiny. In addition, some violations could result in an underlying loan being found invalid or unenforceable,
or subject to payment defenses. Any of these violations could result in the imposition of liability on WebBank, although WebBank
may have indemnification rights for certain claims. In addition, there could be limitations on WebBank's ongoing or future business.
WebBank offers lending programs through relationships with Marketing Partners. WebBank and its Marketing Partners
are subject to supervision by the FDIC and the UDFI. The authority of the FDIC and the UDFI includes the ability to examine
WebBank, the Marketing Partners and the programs. The FDIC and UDFI also may bring enforcement actions against WebBank
and its Marketing Partners if they detect any violations of law. These enforcement actions could result in monetary liability on
WebBank, increased compliance obligations or limitations on its ongoing and future business.
The U.S. Congress and state legislatures and federal and state regulatory authorities continually review banking laws,
regulations and policies for possible changes. We cannot predict whether additional legislation or regulations will be enacted and,
if enacted, the effect that it would have on our business, financial condition or results of operations.
Future cash flows from operations or through financings may not be sufficient to enable the Company to meet its
obligations, and this would likely have a material adverse effect on its businesses, financial condition and results of operations,
and credit market volatility may affect our ability to refinance our existing debt, borrow funds under our existing lines of credit
or incur additional debt.
There can be no assurances that the Company or its subsidiaries will continue to have access to their lines of credit if their
financial performance does not satisfy the financial covenants set forth in the applicable financing agreements. If the Company or
its subsidiaries do not meet certain of its financial covenants, and if they are unable to secure necessary waivers or other amendments
from the respective lenders on terms acceptable to management, their ability to access available lines of credit could be limited,
their debt obligations could be accelerated by the respective lenders and liquidity could be adversely affected.
If the Company's or its subsidiaries' cash needs are significantly greater than anticipated or they do not materially meet
their business plans, or there are unanticipated downturns in the markets for the Company's and its subsidiaries' products and services,
the Company or its subsidiaries may be required to seek additional or alternative financing sources. Future disruption and volatility
in credit market conditions could have a material adverse impact on the Company's ability or that of its subsidiaries to refinance
debt when it comes due on terms similar to our current credit facilities, or to draw upon existing lines of credit or incur additional
debt if needed. There can be no assurance therefore that such financing will be available or available on acceptable terms. The
inability to generate sufficient cash flows from operations or through financings could impair the Company's or its subsidiaries'
liquidity and would likely have a material adverse effect on their businesses, financial condition and results of operations.
Our businesses rely, and may rely, on their intellectual property and licenses to use others' intellectual property, for
competitive advantage. If our businesses are unable to protect their intellectual property, are unable to obtain or retain licenses
to use others' intellectual property, or if they infringe upon or are alleged to have infringed upon others' intellectual property,
it could have a material adverse effect on their financial condition, business and results of operations.
The success of each of our businesses depends in part on the trademarks and patents that they own, or their licenses to use
others', brand names, proprietary technology and manufacturing techniques. In addition to trademark and patent protection, these
businesses rely on copyrights, trade secrets, confidentiality procedures and contractual provisions to protect their intellectual property
rights. The steps they have taken to protect their intellectual property rights may not prevent third parties from using their intellectual
property without their authorization or independently developing intellectual property that is similar. In addition, the laws of foreign
countries may not protect our businesses' intellectual property rights effectively. Stopping unauthorized use of proprietary
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information and intellectual property, and defending claims of unauthorized use of others' proprietary information or intellectual
property, may be difficult, time-consuming and costly and could subject our businesses to significant liability for damages and
invalidate their property rights. Such unauthorized use could reduce or eliminate any competitive advantage our businesses have
developed, cause them to lose sales or otherwise harm their business.
We conduct operations or own interests in companies with operations outside of the U.S., which may expose us to
additional risks not typically associated with companies that operate solely in the U.S.
We have operations or own interests in securities of companies with operations located outside the U.S. These holdings
have additional risks, including risks relating to currency exchange, less developed or efficient financial markets than in the U.S.,
absence of uniform accounting, auditing and financial reporting standards, differences in the legal and regulatory environment,
different publicly available information in respect of companies in non-U.S. markets, economic and political risks, and possible
imposition of non-U.S. taxes. There can be no assurance that adverse developments with respect to such risks will not adversely
affect our assets that are held in certain countries or the returns from these assets.
A significant disruption in, or breach in security of, our information technology systems could adversely affect our
business.
We rely on information technology systems, some of which are managed by third parties, to process, transmit and store
electronic information, and to manage or support a variety of critical business processes and activities. We also collect and store
sensitive data, including confidential business information and personal data. These systems may be susceptible to damage,
disruptions or shutdowns due to attacks by computer hackers, computer viruses, employee error or malfeasance, power outages,
hardware failures, telecommunication or utility failures, catastrophes or other unforeseen events. Upgrading our information
technology systems is costly and subject to delay, and there is no assurance new systems will provide the benefits expected. In
addition, security breaches of our systems could result in the misappropriation or unauthorized disclosure of confidential information
or personal data belonging to us or to our employees, partners, customers or suppliers. Any such events could disrupt our operations,
delay production and shipments, result in defective products or services, damage customer relationships and our reputation and
result in legal claims or proceedings, liability or penalties under privacy laws, each of which could adversely affect our business
and our financial condition. State and federal laws may also require us to provide notice to affected individuals if their personal
data is the subject of a breach in security, which would impose costs and could lead to additional liability and negative publicity.
WebBank's status as lender of the loans it offers, and the ability of assignees to collect interest, may be challenged, and
these challenges could negatively impact WebBank's ongoing and future business.
WebBank's business includes lending programs with Marketing Partners, where the Marketing Partners provide origination
servicing for the loans and subsequently purchase the loans (or interests in the loans) that are originated by WebBank. There have
been litigation and regulatory actions which have challenged lending arrangements where a bank has made a loan and then sold
and assigned it to an entity that is engaged in assisting with the origination and servicing of the loan. Some of these cases have
alleged that the marketing and servicing entity should be viewed as the "true creditor" of the loans originated through the lending
program, and the bank should be disregarded. If this type of challenge is successful, state law interest rate limitations and other
requirements that apply to non-bank lenders would then be applicable, instead of the federal interest rate laws that govern bank
lenders. Other cases have relied on the claim that even if a bank originated a loan based on the federal interest rate laws, an assignee
of a bank is not permitted to rely on the federal law and is instead subject to state law limitations. Certain of these challenges have
been brought or threatened in programs involving WebBank. Such cases or regulatory actions, if successfully brought against
WebBank or its Marketing Partners or others could negatively impact WebBank's ongoing and future business. WebBank continues
to structure its programs, and to exercise control over these programs, to address these risks, although there can be no assurance
that additional cases or regulatory actions will not be brought in the future.
The Volcker Rule, which is part of the Dodd-Frank Act, restricts SPLP's flexibility to do business.
The Dodd-Frank Act added a new Section 13 to the Bank Holding Company Act, the so-called "Volcker Rule," which
generally restricts certain banking entities (including affiliates of depository institutions) from engaging in proprietary trading
activities and acquiring or retaining ownership interests in, or sponsoring, any private equity or hedge fund (collectively, "covered
funds"). Under the implementing regulations, WebBank (and its affiliates) are restricted from engaging in proprietary trading, or
investing in or sponsoring covered funds, unless their activities qualify for a specific exemption under the rule or satisfy certain
requirements under the rule. Because SPLP controls WebBank, each of SPLP and all its subsidiaries, as well as its controlled entities,
are banking entities under the Volcker Rule and therefore subject to these regulations, and therefore are restricted from doing business
to the extent necessary to comply with them.
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WebBank is subject to capital requirements, and SPLP could be called upon by the FDIC to infuse additional capital
into WebBank to the extent that WebBank fails to satisfy its capital requirements.
In July 2013, the Federal Reserve Board, the Office of the Comptroller of the Currency and the FDIC issued rules that
implemented the Basel III changes to the international regulatory capital framework and revised the U.S. risk-based and leverage
capital requirements for U.S. banking organizations in order to strengthen identified areas of weakness in capital rules and to address
relevant provisions of the Dodd-Frank Act.
Effective January 1, 2015 for WebBank, FDIC regulations implementing the Basel III Accord modified WebBank's
minimum capital requirements by defining what constitutes capital for regulatory capital purposes and adding a 4.5% Common
Equity Tier 1 ratio and increased the Tier 1 capital ratio requirement from 4% to 6%. FDIC regulations also require WebBank to
comply with a total capital ratio of 8% and a leverage ratio of 4%. Additionally, a Capital Conservation Buffer (composed solely
of common equity Tier 1 capital) equal to 2.5% above the new regulatory minimum capital requirements began to be phased in
starting January 1, 2016 and will be fully implemented on January 1, 2019. The Capital Conservation Buffer is on top of the minimum
risk-weighted capital ratios and will have the effect of increasing those ratios by 2.5% each when fully phased in. A failure of
WebBank to maintain the aggregate minimum capital required by the Capital Conservation Buffer will impair its ability to make
certain distributions (including dividends and stock repurchases) and discretionary bonus payments to executive officers. A failure
of WebBank to maintain capital as required by the FDIC's minimum capital requirements would subject WebBank to the FDIC's
prompt corrective action regime, which may further impair WebBank's ability to make payments or distributions and may require
a capital restoration plan or other corrective regulatory measures.
Federal banking agencies jointly issued a proposed rule on September 27, 2017 that would simplify the treatment of certain
assets and deductions for institutions such as WebBank that are not subject to the so-called "advanced approaches" capital rule. The
proposed rule would adjust the deduction thresholds for certain mortgage servicing assets, deferred tax assets, investments in the
capital of unconsolidated financial institutions, and minority interests. While the banking agencies consider comments on the
proposed rule, the banking agencies adopted a rule on November 21, 2017, that provides interim relief to non-advanced approaches
banking organizations by extending the regulatory capital transition periods effective in 2017 for certain items, including regulatory
capital deductions, risk weights and certain minority interest limitations.
The Company currently cannot predict the specific impact and long-term effects that Basel III and its implementation in
the U.S. will have on WebBank and the banking industry more generally. Furthermore, the Dodd-Frank Act codified a longstanding
policy that all companies that directly or indirectly control an FDIC-insured bank are required to serve as a source of financial
strength for such institution. As a result, SPLP could be called upon by the FDIC to infuse additional capital into WebBank to the
extent that WebBank fails to satisfy its capital requirements, including at times that SPLP might not otherwise be inclined to provide
it and even if doing so may adversely affect SPLP's ability to meet its other obligations, which include limitations on capital
contributions to WebBank specified in the Company's senior secured revolving credit facility.
WebBank's lending programs depend on relationships with Marketing Partners.
WebBank offers its lending programs with Marketing Partners. If those Marketing Partners do not provide origination
services or other services to WebBank, or provide those services in a faulty manner, that may negatively impact WebBank's ongoing
and future business. In addition, if the Marketing Partners or other third parties do not purchase the loans (or interests in loans) that
are originated by WebBank, then WebBank may need to retain those loans (or interests in loans) and that may negatively impact
its ongoing and future business. Marketing Partners may rely on outside sources of capital to meet their obligations. Market conditions
and other factors may affect the availability of capital for Marketing Partners. The availability of capital may also affect the volume
of loans that can be originated through WebBank's lending programs. In recent periods, the availability of capital has been more
limited for several of WebBank's Marketing Partners, resulting in a decrease in loan volume and a negative impact on WebBank's
business.
Economic downturns could disrupt and materially harm our businesses.
Negative trends in the general economy could cause a downturn in the markets for our products and services. A significant
portion of our revenues in the Diversified Industrial segment are received from customers in transportation, oil & gas exploration,
and construction-related industries, which have experienced significant financial downturns in the past. These industries are cyclical
and demand for their products tends to fluctuate due to changes in national and global economic conditions, availability of credit
and other factors. A worsening of customer demand in these industries would adversely affect our revenues, profitability, operating
results and cash flows. In our Energy segment, the level of oil & natural gas exploration and production activity in the U.S. has
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declined in recent periods in light of the decline in the price of oil. Reduced discovery rates of new oil & natural gas reserves, or a
decrease in the development rate of reserves in our market areas, weakness in oil & natural gas prices, or our customers' perceptions
that oil & natural gas prices will decrease in the future, could result in a reduction in the utilization of our equipment and result in
lower revenues or rates for the services of our Energy segment. Our customers' willingness to undertake these activities depends
largely upon prevailing industry conditions that are influenced by many factors over which we have no control. Our Financial
Services segment could be impacted by tightening of the credit markets and other general economic declines that could result in a
decrease in lending and demand for consumer loans. We may also experience a slowdown if some customers experience difficulty
in obtaining adequate financing due to tightness in the credit markets. Furthermore, the financial stability of our customers or
suppliers may be compromised, which could result in additional bad debts for us or non-performance by suppliers. Our assets may
also be impaired or subject to write-down or write-off as a result of these conditions. These adverse effects would likely be exacerbated
if global economic conditions worsen, resulting in wide-ranging, adverse and prolonged effects on general business conditions, and
materially and adversely affect our operations, financial results and liquidity.
Our business strategy includes acquisitions, and acquisitions entail numerous risks, including the risk of management
diversion and increased costs and expenses, all of which could negatively affect the Company's profitability.
Our business strategy includes, among other things, strategic acquisitions, as well as potential opportunistic acquisitions.
This element of our strategy entails several risks, including the diversion of management's attention from other business concerns
and the need to finance such acquisitions with additional equity and/or debt.
In addition, once completed, acquisitions entail further risks, including: unanticipated costs and liabilities of the acquired
businesses, including environmental liabilities, that could materially adversely affect our results of operations; difficulties in
assimilating acquired businesses, preventing the expected benefits from the transaction from being realized or achieved within the
anticipating time frame; negative effects on existing business relationships with suppliers and customers; and losing key employees
of the acquired businesses. If our acquisition strategy is not successful or if acquisitions are not well integrated into our existing
operations, the Company's profitability could be negatively affected.
Our subsidiaries do not have long-term contracts with all of their customers, the loss of which customers could materially
adversely affect our financial condition, business and results of operations.
Our businesses are based primarily upon individual orders, sales and service agreements with customers and not long-
term contracts. As such, these customers could cease buying products or using our services at any time and for any reason, and we
will have no recourse in the event a customer no longer wants to purchase products from us or use our services. If a significant
number of our customers elect not to purchase products or use our services, or we have to make price concessions in order to retain
certain customers, it could materially adversely affect our financial condition, business and results of operations.
We may sustain losses in our investment portfolio, which could have an adverse effect on our results of operations,
financial condition and liquidity.
A portion of our assets consists of investments in available-for-sale securities, which are adjusted to fair value each period,
as well as other investments. An adverse change in economic conditions may result in a decline in the value of these investments.
Such declines in value of available-for-sale securities will be recognized as losses upon the sale of such securities or if such declines
are deemed to be other than temporary. Any adverse changes in the financial markets and resulting declines in value of our investments
may result in additional impairment charges and could have an adverse effect on our results of operations, financial condition and
liquidity.
Litigation or compliance failures could adversely affect our profitability.
The nature of our businesses expose us to various litigation matters. We contest these matters vigorously and make insurance
claims where appropriate. However, litigation is inherently costly and unpredictable, making it difficult to accurately estimate the
outcome of any litigation. These lawsuits may include claims for compensatory damages, punitive and consequential damages and/
or injunctive relief. The defense of these lawsuits may divert our management's attention, we may incur significant expenses in
defending these lawsuits, and we may be required to pay damage awards or settlements or become subject to equitable remedies
that could adversely affect our operations and financial condition. Moreover, any insurance or indemnification rights that we may
have may be insufficient or unavailable to protect us against such losses. In addition, developments in legal proceedings in any
given period may require us to adjust the loss contingency estimates that we have recorded in our consolidated financial statements,
record estimates or reserves for liabilities or assets previously not susceptible of reasonable estimates or pay cash settlements or
judgments. Any of these developments could adversely affect our financial condition in any particular period. Although we make
12
accruals as we believe warranted, the amounts that we accrue could vary significantly from any amounts we actually pay due to
the inherent uncertainties in the estimation process.
Our internal controls over financial reporting may not be effective, and our independent auditors may not be able to
certify as to their effectiveness, which could have a significant and adverse effect on our business and reputation.
We are subject to the requirements of Section 404 of the Sarbanes-Oxley Act of 2002 and the rules and regulations of the
SEC thereunder ("Section 404"). Section 404 requires us to report on the design and effectiveness of our internal controls over
financial reporting. Section 404 also requires an independent registered public accounting firm to test our internal controls over
financial reporting and report on the effectiveness of such controls. There can be no assurance that our auditors will issue an
unqualified report attesting to our internal controls over financial reporting. As a result, there could be a negative reaction in the
financial markets due to a loss of confidence in the reliability of our consolidated financial statements or our consolidated financial
statements could change.
Any failure to maintain or implement new or improved controls, or any difficulties we encounter in their implementation,
could result in significant deficiencies or material weaknesses, and cause us to fail to meet our periodic reporting obligations, or
result in material misstatements in our consolidated financial statements. We may also be required to incur costs to improve our
internal control system and hire additional personnel. This could negatively impact our results of operations.
Risks Related to Our Structure
The unitholders have limited recourse to maintain actions against the General Partner, the Board of Directors, our
officers and the Manager.
The Limited Partnership Agreement of SPLP, or the "Partnership Agreement," contains broad indemnification and
exculpation provisions that limit the right of a unitholder to maintain an action against the General Partner, the Board of Directors,
our officers and the Manager, or to recover losses or costs incurred due to action or inaction by these parties which have a negative
effect on the Company.
Our Partnership Agreement contains certain provisions that may limit the voting rights of some unitholders.
Our Partnership Agreement contains specific provisions that are intended to comply with regulatory limitations on the
ownership of our securities as a result of our ownership of WebBank. Under the Partnership Agreement, a person or group that
acquires beneficial ownership of 10% or more of the common units without the prior approval of the Board of Directors may lose
voting rights with respect to all of its common units in excess of 9.9%.
We may have conflicts of interest with the minority shareholders of our businesses and decisions may need to be made
by disinterested directors, without the participation of directors or officers associated with the Manager and the Company. These
decisions may be different from the decisions we would make, and may or may not be in the best interests of our unitholders.
Because we own less than 100% of certain affiliates, and we may engage in transactions with these affiliates from time to
time, the boards of directors and officers of those businesses, including directors and officers associated with our Manager and the
Company, have fiduciary duties to their respective shareholders. As a result, they may make decisions that are in the best interests
of their shareholders generally but which are not necessarily in the best interest of our unitholders. In dealings with us, the directors
and officers of our businesses may have conflicts of interest and decisions may have to be made without their participation. Such
decisions may be different from the decisions we would make and may not be in the best interests of our common and preferred
unitholders, which may have an adverse effect on our business and results of operations.
There are certain interlocking relationships among us and certain affiliates of Warren G. Lichtenstein, our Executive
Chairman, which may present potential conflicts of interest.
Warren G. Lichtenstein, our Executive Chairman and a substantial unitholder, is the Chief Executive Officer of our Manager.
As of December 31, 2017, Mr. Lichtenstein directly owned approximately 6.1% of our outstanding common units. In addition,
affiliates of our Manager beneficially own approximately 51.4% of our outstanding common units, although Mr. Lichtenstein
disclaims beneficial ownership of any common units not directly held by him. We have entered into transactions and/or agreements
with these entities. There can be no assurance that such entities will not have interests in conflict with our own.
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Certain members of our management team may be involved in other business activities that may involve conflicts of
interest, possibly diverting their attention from the Company's operations.
Certain individual members of our management team, including Warren G. Lichtenstein, our Executive Chairman, and
Jack L. Howard, our President, may from time to time be involved in the management of other businesses, including those owned
or controlled by our Manager and its affiliates. Accordingly, these individuals may focus a portion of their time and attention on
managing these other businesses. Conflicts may arise in the future between our interests and the interests of the other entities and
business activities in which such individuals are involved.
Risks Related to Our Manager
We depend on Warren G. Lichtenstein, the Chairman and Chief Executive Officer of the Manager, and Jack L. Howard,
the President of the Manager, in running our businesses. The loss of their services could have a material adverse effect on our
business, results and financial condition.
Our success depends on the efforts, skills, reputation and business contacts of Warren G. Lichtenstein, the Chairman and
Chief Executive Officer of the Manager and Jack L. Howard, the President of the Manager. While the key members of the Manager
have worked for the Manager and its affiliates for many years, our Manager does not have any employment agreements with any
of the key members of its management team, and their continued service is not guaranteed. The loss of the services of Mr. Lichtenstein
or Mr. Howard could have a material adverse effect on our asset value, revenues, net income and cash flows and could harm our
ability to maintain or grow our existing operations or pursue additional opportunities in the future.
We cannot determine the amount of the Management Fee that will be paid or Class C partnership units that will be
issued over time with any certainty.
The Manager receives a fee ("Management Fee") at an annual rate of 1.5% of total partners' capital. Our total partners'
capital will be impacted by the performance of our businesses and other businesses we may acquire in the future, as well as the
issuance of additional common or preferred units. Changes in our total partners' capital and in the resulting Management Fee could
be significant, resulting in a material adverse effect on our results of operations. In addition, if our performance declines, assuming
our total partners' capital remains the same, the Management Fee will increase as a percentage of our net income. In addition, SPH
SPV-I LLC ("SPH SPV"), an affiliate of the Manager, holds partnership profits interests in the form of incentive units which entitle
the holder generally to share in 15% of the increase in the equity value of the Company, as calculated for the twenty trading days
prior to each year end. The incentive units' share of such appreciation is reflected by classifying a portion of the incentive units as
Class C units of the Company. For 2017, 461,442 Class C units were issued to SPH SPV. The issuance of such Class C units will
result in dilution to existing limited partners' holdings in the Company.
Our Manager's liability is limited under the Management Agreement, and we have agreed to indemnify our Manager
against certain liabilities. Such indemnification may incentivize our Manager to take unnecessary risks with respect to actions
for which it will be indemnified.
Under the Management Agreement, our Manager, its members, officers, employees, affiliates, agents and legal
representatives are not liable for, and we have agreed to indemnify such persons from, any loss or expense, including without
limitations, any judgment, settlement, reasonable attorneys' fees and other costs and expenses incurred in connection with the defense
of any actual or threatened proceeding, other than losses resulting from willful misconduct or gross negligence in the performance
of such indemnified person's obligations and duties. Such indemnification may incentivize our Manager to take unnecessary risks
with respect to actions for which it will be indemnified.
Risks Related to our Common and Preferred Units
We may issue additional common or preferred units, or other series of units, in the future without the consent of
unitholders and at a discount to the market price of such units. In particular, sales of significant amounts of the common or
preferred units may cause the respective prices of the units to decline.
Under the terms of the Partnership Agreement, additional common or preferred units, or additional series of units, may be
issued without the consent of unitholders at a discount to the market price. In addition, other classes of securities may be issued
with rights that are senior to or which otherwise have preferential rights to the rights of the common and preferred units. Sales of
significant amounts of the common or preferred units in the public market or the perception that such sales of significant amounts
may occur could adversely affect their respective market prices. Moreover, the perceived risk of any potential dilution could cause
14
common or preferred unitholders to attempt to sell their units and investors to "short" the common or preferred units, a practice in
which an investor sells units that he or she does not own at prevailing market prices, hoping to purchase units later at a lower price
to cover the sale. Any event that would cause the number of common or preferred units being offered for sale to increase would
likely cause the respective units' market price to further decline. These sales might also make it more difficult for us to sell additional
common or preferred units in the future at a time and price that we deem appropriate.
Transfer restrictions contained in the Company's Partnership Agreement and other factors could hinder the development
of an active market for our common or preferred units.
There can be no assurance as to the volume of our common or preferred units or the degree of price volatility for our
common and preferred units traded on the New York Stock Exchange. There are transfer restrictions contained in the Company's
Partnership Agreement to help protect net operating tax loss carryforwards of certain of the Company's corporate subsidiaries and
other portfolio companies. The transfer restrictions will expire on February 7, 2020, and they could hinder development of an active
market for our common and preferred units.
Risks Related to Taxation
All statutory references in this section are to the Internal Revenue Code of 1986, as amended, or the "Code."
Our common unitholders may be subject to U.S. federal, state and other income tax on their share of our taxable income,
regardless of whether they receive any cash distributions from us.
The Company operates, for U.S. federal income tax purposes, as a partnership and not a publicly traded partnership taxable
as a corporation. Our common unitholders will be subject to U.S. federal, state, local and possibly, in some cases, foreign income
tax on their allocable share of our taxable income, whether or not they receive cash distributions from us. Any future determination
to declare dividends on the Company's common units will remain at the discretion of the Board of Directors. Accordingly, our
common unitholders may be required to make tax payments in connection with their ownership of common units that significantly
exceed their cash distributions in any given year.
Newly enacted U.S. government tax reform could have a negative impact on the results of future operations.
On December 22, 2017, the U.S. Tax Cuts and Jobs Act ("Tax Cuts and Jobs Act") was enacted which contained substantial
changes to the Code, some of which could have an adverse effect on our business. Among other things, the Tax Cuts and Jobs Act
(i) reduces the U.S. corporate income tax rate from 35% to 21% beginning in 2018, (ii) generally will limit annual deductions for
interest expense to no more than 30% of our "adjusted taxable income," plus 100% of our business interest income for the year (iii)
will permit a taxpayer to offset only 80% (rather than 100%) of its taxable income with any U.S. net operating losses ("NOLs")
generated after 2017, and (iv) imposes a transition tax on deemed repatriated earnings of our foreign subsidiaries. With the enactment
of the Tax Cuts and Jobs Act, our financial results for 2017 included an income tax provision of approximately $58,717 resulting
from the transition tax and the revaluation of our U.S. deferred tax assets and liabilities to reflect the recently enacted 21% federal
corporate tax rate effective January 1, 2018. The U.S. Department of Treasury has broad authority to issue regulations and
interpretative guidance that may significantly impact how we will apply the law and impact our results of operations in the period
issued. As additional regulatory guidance is issued by the applicable taxing authorities, as accounting treatment is clarified, as we
perform additional analysis on the application of the law, and as we refine estimates in calculating the effect, our final analysis,
which will be recorded in the period completed, may be different from our current provisional amounts, which could materially
affect our tax obligations and effective tax rate.
Our tax treatment is not assured. If we are taxed as a corporation, it could adversely impact our results of operations.
A partnership is not a taxable entity, and distributions by a partnership to a partner are generally not taxable to the partnership
or the partner unless the amount of cash distributed to such partner exceeds the partner's adjusted basis in its partnership interest.
Section 7704 provides that generally publicly traded partnerships are taxed as corporations. However, an exception, referred to as
the "Qualifying Income Exception," exists with respect to publicly traded partnerships of which 90 percent or more of the gross
income for every taxable year consists of "qualifying income" as defined in the Code. We expect that we will meet the Qualifying
Income Exception.
If the Qualifying Income Exception is not available to us, then we will be treated as a corporation instead of a partnership.
In that event, the deemed incorporation of SPLP should be tax-free. If we were taxed as a corporation, (i) our net income would be
taxed at corporate income tax rates, thereby substantially reducing our profitability, (ii) our common unitholders would not be
15
allowed to deduct their share of losses of SPLP and (iii) distributions to our common unitholders, other than liquidating distributions,
would constitute dividends to the extent of our current or accumulated earnings and profits, and would be taxable as such.
Our structure involves complex provisions of U.S. federal income tax law for which no clear precedent or authority
may be available.
The U.S. federal income tax treatment of our common unitholders depends in some instances on interpretations of complex
provisions of U.S. federal income tax law for which no clear precedent or authority may be available. Our Partnership Agreement
permits our General Partner to modify it from time to time, including the allocation of items of income, gain, loss and deduction
(including unrealized gain and unrealized loss to the extent allowable under U.S. federal income tax law), without the consent of
our unitholders, to address certain changes in U.S. federal income tax regulations, legislation or interpretation or to preserve the
uniformity of our common units. In some circumstances, such revisions could have a material adverse impact on some or all common
unitholders. In addition, we formed a subsidiary partnership, to which we contributed certain of our assets ("Subsidiary Partnership").
To preserve the uniformity of common units, we (but not the Subsidiary Partnership) made an election permitted under Section
754, and we will adopt the remedial allocation method under Section 704(c) with respect to items of income, gain, loss and deduction
attributable to assets contributed to us (which we will contribute to the Subsidiary Partnership), to account for any difference between
the tax basis and fair market value of such assets at the time of contribution, or attributable to the "book-up" or "book-down" of
our assets prior to their contribution to the Subsidiary Partnership, or while they were held by the Subsidiary Partnership, to account
for the difference between the tax basis and fair market value of such assets at the time of a mark-to-market event. We intend
generally to make allocations under Section 704(c) to our common unitholders in accordance with their respective percentage
interests. However, built-in gain or built-in loss in existence and allocable to the assets we contributed to the Subsidiary Partnership,
when recognized, will be allocated to our common unitholders as of the contribution date. We intend to prepare our tax returns on
the basis that buyers of common units from such unitholders will not inherit such unitholders' built-in gains or built-in losses as of
that date as a result of the election under Section 754. However, it is not clear whether this position will be upheld if challenged by
the Internal Revenue Service. While we believe it represents the right result, there is no law directly on point.
Tax-exempt entities face unique tax issues from owning common units that may result in adverse tax consequences to
them.
A holder of common units that is a tax-exempt organization may be subject to U.S. federal income taxation to the extent
that its allocable share of our income consists of unrelated business taxable income ("UBTI"). A tax-exempt partner of a partnership
may be treated as earning UBTI if the partnership regularly engages in a trade or business that is unrelated to the exempt function
of the tax-exempt partner, if the partnership derives income from debt-financed property (as we may borrow money) or if the tax-
exempt organization's partnership interest itself is debt-financed.
Our subsidiaries may not be able to fully utilize their tax benefits, which could result in increased cash payments for
taxes in future periods.
NOLs may be carried forward to offset federal and state taxable income in future years and reduce the amount of cash paid
for income taxes otherwise payable on such taxable income, subject to certain limits and adjustments. If fully utilized, our subsidiaries'
NOLs and other carryforwards could provide them with significant tax savings in future periods. Their ability to utilize these tax
benefits in future years will depend upon their ability to generate sufficient taxable income and to comply with the rules relating to
the preservation and use of NOLs, as well as potential future changes in tax laws. The potential benefit of the NOLs and other
carryforwards may be limited or permanently lost as a result of the following:
•
•
•
the inability to generate sufficient taxable income in future years to use such benefits before they expire;
a change in control of our subsidiaries that would trigger limitations on the amount taxable income in future years that may be
offset by NOLs and other carryforwards that existed prior to the change in control; and
examinations and audits by the Internal Revenue Service and other taxing authorities could reduce the amount of NOLs and
other credit carryforwards that are available for future years.
Certain of our subsidiaries maintain valuation allowances against their NOLs and other carryforwards due to uncertainty
regarding their ability to generate sufficient taxable income in future periods. Their inability to utilize the NOLs and other
carryforwards could result in increased cash payments for taxes in future periods.
Item 1B. Unresolved Staff Comments
None.
16
Item 2. Properties
Diversified Industrial Segment
As of December 31, 2017, the Diversified Industrial segment had 30 active operating plants in the United States, Canada,
China, United Kingdom, France, Singapore, and Mexico, with a total area of approximately 3,065,885 square feet, including
warehouse, office, sales, service and laboratory space. The Diversified Industrial segment also owns or leases sales, service, office
and warehouse facilities at 26 other locations in the United States, United Kingdom, Canada, Germany, Singapore and China which
have a total area of approximately 637,084 square feet, and owns or leases 6 non-operating locations with a total area of approximately
736,708 square feet. Manufacturing facilities are located in: Camden, Delaware; Addison, Illinois; Evansville and Osgood, Indiana;
Agawam and Billerica, Massachusetts; Rockford and Montevideo, Minnesota; Arden and Statesville, North Carolina; Anderson,
South Carolina; Kenosha and Cudahy, Wisconsin; Warwick, Rhode Island; Lawrence, Kansas; Rahway, New Jersey; Toronto,
Canada; Matamoros, Mexicali and Tecate, Mexico; Welham Green, Gwent, Poynton, and Livingston, United Kingdom; Riberac,
France; and Xianghe and Suzhou, China. The following plants are leased: both Tecate plants, Addison, Rahway, Kenosha, Arden,
Rockford, one of two Matamoros plants, Mexicali, Xianghe, and Suzhou plants. The other plants are owned. The Diversified
Industrial segment considers its manufacturing plants and service facilities to be well maintained and efficiently equipped, and
therefore suitable for the work being done. The productive capacity and extent of utilization of its facilities is dependent in some
cases on general business conditions and in other cases on the seasonality of the utilization of its products. Capacity can be expanded
at some locations. The Rahway, New Jersey plant was sold in January 2017, and is being leased back to API until its expected
closure in the third quarter of 2018.
Energy Segment
The Energy business owns 3 buildings in Williston, North Dakota, including one that serves as its headquarters and
operations hub in the Bakken basin along with separate buildings with office and shop space, and 3 buildings in Farmington, New
Mexico which serve as office and shop space. The Energy business also owns office and shop space in Texas that serves as its
operations hub in the Permian basin. The Energy business leases shop space and office space in other locations under month-to-
month arrangements on an as-needed basis, and owns and leases housing for temporary living arrangements for certain of its
employees.
Steel Sports has a lease for approximately 27.9 acres of land in Yaphank, New York, for its baseball services operation
that expires in December 2021. Under this lease, Steel Sports has one extension option and a right of first refusal to purchase the
parcel. Steel Sports also has a lease for office space in Cedar Knolls, New Jersey, that expires in February 2019, which serves as
the headquarters for its youth soccer operation, and also has leases in various states for small administrative offices to support the
soccer operation.
Financial Services
As of December 31, 2017, WebBank leases 23,476 square feet of office space headquartered in Salt Lake City, Utah. The
term of the lease expires in March 2023. WebBank also leases office space in New Jersey through March 2020. WebBank believes
that these facilities are adequate for its current needs and that suitable additional space will be available as required.
Corporate and Other
As of December 31, 2017, Steel Services leases 15,660 square feet of office space headquartered in New York, New York.
The term of the lease expires in December 2025. In July 2017, Steel Services leased 3,082 square feet of office space in Hermosa
Beach, California through July 2022.
Item 3. Legal Proceedings
The information set forth under Note 18 - "Commitments and Contingencies" to Consolidated Financial Statements,
included in Part II, Item 8, Financial Statements and Supplementary Data, of this Report, is incorporated herein by reference. For
an additional discussion of certain risks associated with legal proceedings, see also Part I, Item 1A, Risk Factors, of this Report.
Item 4. Mine Safety Disclosures
Not applicable.
17
PART II
Item 5. Market for the Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
All monetary amounts in this section are in thousands, except for common unit and per common unit data.
Market Information
As of December 31, 2017, we had 26,348,420 common units issued and outstanding. Our common units, no par value, are
quoted on the New York Stock Exchange under the symbol "SPLP." The following table sets forth the information on the high and
low sales prices of our common units during 2017 and 2016:
Fiscal year ending December 31, 2017
High
Low
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
Fiscal year ending December 31, 2016
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
Holders
$
$
$
$
$
$
$
$
19.95
19.39
18.95
20.10
16.49
15.86
15.42
16.20
$
$
$
$
$
$
$
$
15.20
18.00
17.95
18.05
12.86
14.00
14.25
13.70
Low
High
As of December 31, 2017, there were approximately 98 unitholders of record.
Unit Performance Graph
The following graph compares the cumulative total unitholder return on our common units with the cumulative total return
of the Russell 2000 Index and a customized peer group of six companies that includes: Apollo Investment Corporation, Compass
Diversified Holdings, Gladstone Capital Corporation, HC2 Holdings, Inc., Main Street Capital Corporation and Triangle Capital
Corporation. Our peer group was revised as of December 31, 2017 to reflect peer issuers with similar market capitalizations, in
addition to similar company profiles. The graph and table assume that $100 was invested on December 31, 2012 in each of our
common units, the Russell 2000 Index and the peer group, and that all dividends were reinvested. We declared a one-time cash
dividend of $0.15 per common unit on December 22, 2016.
18
Steel Partners Holdings L.P.
Russell 2000 Index
New Peer Group
Old Peer Group
12/31/2012
12/31/2013
12/31/2014
12/31/2015
12/31/2016
12/31/2017
$
$
$
$
100.00
100.00
100.00
100.00
$
$
$
$
147.16
138.82
118.69
159.89
$
$
$
$
149.79
145.62
111.96
158.91
$
$
$
$
138.93
139.19
107.49
145.10
$
$
$
$
132.73
168.85
135.90
162.02
$
$
$
$
167.41
193.58
141.13
198.09
The common unit price performance included in this graph is not necessarily indicative of future common unit price
performance. The performance graph shall not be deemed to be incorporated by reference by means of any general statement
incorporating by reference this Form 10-K into any filing under the Securities Act or the Exchange Act, except to the extent that
we specifically incorporate such information by reference, and shall not otherwise be deemed filed under such acts.
Issuer Purchases of Equity Securities
On December 7, 2016, the Board of Directors of the general partner of the Company approved the repurchase of up to
2,000,000 of the Company's common units ("Repurchase Program"). The Repurchase Program supersedes and cancels, to the extent
any amounts remain available, all previously approved repurchase programs. Any purchases made under the Repurchase Program
will be made from time to time on the open market at prevailing market prices or in negotiated transactions off the market, in
compliance with applicable laws and regulations. In connection with the Repurchase Program, the Company may enter into a stock
purchase plan. The Repurchase Program has no termination date. During the fourth quarter ended December 31, 2017, the Company
purchased 150,295 units, and there remains approximately 1,690,320 units that may yet be purchased under the Repurchase Program.
Item 6. Selected Financial Data
The following table contains our selected historical consolidated financial data, which should be read in conjunction with
our consolidated financial statements and the related notes thereto, and "Management's Discussion and Analysis of Financial
Condition and Results of Operations" contained in this Annual Report on Form 10-K. The selected financial data as of and for the
years ended December 31, 2017, 2016 and for the year ended December 31, 2015 has been derived from our audited consolidated
financial statements at those dates and for those periods, contained elsewhere in this Annual Report on Form 10-K. The historical
selected financial data as of December 31, 2015 and as of and for the years ended December 31, 2014 and 2013 has been derived
from our audited consolidated financial statements adjusted for discontinued operations at those dates and for those periods, not
contained in this Annual Report on Form 10-K.
19
CONSOLIDATED STATEMENT OF OPERATIONS DATA (a)
(in thousands, except common unit and per common unit data)
Revenue
Net income (loss) from continuing operations
Income from discontinued operations
Net income (loss)
Net (income) loss attributable to noncontrolling interests in consolidated entities
Net (loss) income attributable to common unitholders
Net (loss) income per common unit - basic:
Net (loss) income from continuing operations
Net income from discontinued operations
Net (loss) income attributable to common unitholders
Year Ended December 31,
2017
2016
$ 1,372,027
$ 1,163,549
$
6,012
$
2,571
—
6,012
(6,028)
(16) $
— $
—
— $
$
$
$
—
2,571
4,059
6,630
0.25
—
0.25
2015
965,059
70,311
86,257
156,568
(19,833)
136,735
2.97
2.03
5.00
$
$
$
$
$
$
$
$
$
$
2014
2013
847,263
$
719,378
(17,572) $
38,374
10,304
(7,268)
6,446
44,820
(287)
(25,360)
(7,555) $
19,460
(0.48) $
0.21
(0.27) $
0.51
0.14
0.65
Basic weighted-average common units outstanding
26,053,098
26,353,714
27,317,974
28,710,220
29,912,993
Net (loss) income per common unit - diluted:
Net (loss) income from continuing operations
Net income from discontinued operations
Net (loss) income attributable to common unitholders
$
$
— $
—
— $
0.25
—
0.25
$
$
2.96
2.02
4.98
$
$
(0.48) $
0.21
(0.27) $
0.49
0.14
0.63
Diluted weighted-average common units outstanding
26,053,098
26,486,209
27,442,308
28,710,220
30,798,113
(a) Statement of operations data includes the consolidation of the results of acquired entities, or their operating assets, from their respective
acquisition dates: primarily, Wolverine Joining Technologies, LLC in April 2013, Black Hawk Energy Services, Inc. in December 2013, JPS
Industries, Inc. ("JPS") on July 2, 2015, CoSine Communications, Inc. ("CoSine") and API on January 20, 2015 and April 17, 2015, respectively,
SLI on June 1, 2016, EME on September 30, 2016, Hazen Paper Company ("Hazen") and Amsterdam Metallized Products B.V. ("AMP") on
July 27, 2016 and December 1, 2016, respectively, and Basin Well Logging Wireline Services, Inc. ("Basin") in May 2017.
BALANCE SHEET DATA
(in thousands, except per common unit data)
Cash and cash equivalents
Marketable securities
Long-term investments
Total assets
Long-term debt (a)
SPLP Partners' capital
SPLP Partners' capital per common unit
Dividends declared per common unit
December 31,
2017
2016
2015
2014
2013
$
418,755
$
450,128
$
185,852
$
188,983
$
203,980
58,313
236,144
53,650
120,066
80,842
167,214
138,457
311,951
178,485
295,440
2,164,040
1,967,115
1,684,773
1,490,497
1,522,245
412,584
546,103
20.73
—
330,126
548,741
20.98
0.15
235,913
558,034
20.95
—
295,707
494,859
17.95
—
223,355
616,582
19.81
—
(a) Excludes the current portion of long-term debt, which totaled $459, $62,928, $2,176, $19,592 and $26,033 at December 31, 2017, 2016, 2015,
2014 and 2013, respectively.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis of our financial condition and results of operations should be read in conjunction
with our consolidated financial statements and related notes thereto that are available elsewhere in this Annual Report on Form
10-K. The following is a discussion and analysis of SPLP's consolidated results of operations for the years ended December 31,
2017, 2016 and 2015. In addition to historical consolidated financial information, the following discussion contains forward-looking
statements that reflect our plans, estimates and beliefs. Our actual results could differ materially from those discussed in the forward-
looking statements. Factors that could cause or contribute to these differences include those discussed below and elsewhere in this
Annual Report on Form 10-K, particularly in "Risk Factors" in Item 1A. All monetary amounts used in this discussion are in
thousands except common unit, per common unit, share and per share amounts.
Business Segments
SPLP operates through the following segments: Diversified Industrial, Energy, Financial Services, and Corporate and
Other, which are managed separately and offer different products and services. For a more complete description of the Company's
segments, see "Item 1 - Business - The Company" found elsewhere in this Form 10-K.
Recent Developments
Below is a summary of recent developments that impacted the Company. For additional information on the acquisitions
described below, see Note 3 - "Acquisitions" to the SPLP consolidated financial statements found elsewhere in this Form 10-K.
20
• The Company completed separate tender offers to purchase all of the outstanding shares of Steel Excel and HNH common
stock not already owned by SPLP or its affiliates, issuing a total of approximately 7,900,000 SPLP preferred units with a
liquidation value of approximately $198,500 as purchase consideration.
• On November 14, 2017, the Company entered into a new five-year, $600,000 revolving credit facility. The new credit facility
consolidates a number of the Company's existing credit facilities into one combined, revolving credit facility covering
substantially all of the Company's subsidiaries, with the exception of WebBank.
• On May 19, 2017, the Company acquired an 80% interest in Basin for approximately $5,100. Basin provides wireline services
to major oil & gas exploration and production companies in the U.S. and specializes in cased-hole wireline logging and
perforating services for exploration and production companies with wells in New Mexico, Texas, Utah, Arizona and Colorado.
• On December 15, 2017, the Company purchased 35,000 shares of Steel Connect, Inc. ("STCN") (formerly ModusLink Global
Solutions, Inc.) convertible preferred stock for $35,000, increasing the Company's interest in STCN's outstanding shares to
approximately 46%.
• The Company recorded tax benefits of approximately $44,681 during 2017 associated with the reversal of its deferred tax
valuation allowances at certain subsidiaries.
• On December 22, 2017, the Tax Cuts and Jobs Act was enacted, which reduces the U.S. corporate income tax rate from 35%
to 21% beginning in 2018 and imposes a transition tax on deemed repatriated earnings of our foreign subsidiaries. Our financial
results for 2017 included an income tax provision of approximately $58,717 resulting from the transition tax and the revaluation
of our U.S. deferred tax assets and liabilities to reflect the recently enacted 21% federal corporate tax rate.
• On February 16, 2018, the Company completed the acquisition of Dunmore Corporation in the U.S., and the share purchase
of Dunmore Europe GmbH in Germany (collectively, "Dunmore") for a purchase price of $66,000, subject to a working capital
adjustment and an earn-out based on future earnings during the period from January 1, 2018 through December 31, 2019. In
no case shall the purchase price, including the potential earn-out, exceed $80,000. Dunmore is a global provider of specialty
coated, laminated and metallized films for the aircraft, spacecraft, photovoltaic, graphic arts, packaging, insulation, surfacing
and fashion industries.
RESULTS OF OPERATIONS
Comparison of the Years Ended December 31, 2017 and 2016
Revenue
Cost of goods sold
Selling, general and administrative expenses
Interest expense
Goodwill impairment charges
Asset impairment charges
All other expense (income), net
Total costs and expenses
Income from continuing operations before income taxes and equity method income
Income tax provision
Income of associated companies and other investments held at fair value, net of taxes
Net income
Net (income) loss attributable to noncontrolling interests in consolidated entities
Net (loss) income attributable to common unitholders
Revenue
Year Ended December 31,
2017
2016
$
1,372,027
$
1,163,549
958,490
337,719
22,804
—
2,028
10,563
1,331,604
40,423
51,299
(16,888)
6,012
(6,028)
$
(16) $
815,576
282,298
11,052
24,254
17,259
(9,328)
1,141,111
22,438
23,952
(4,085)
2,571
4,059
6,630
Revenue in 2017 increased $208,478, or 17.9%, when compared to 2016. Excluding growth from the acquisitions of SLI
(including EME), Hazen and AMP in the Diversified Industrial segment, and Basin in the Energy segment totaling 12.9% and a
negative foreign exchange impact of (0.8)%, revenue increased by 5.7%. The net revenue increase of 5.7% was due to increases
across all of our segments.
Cost of Goods Sold
Cost of goods sold in 2017 increased $142,914, or 17.5%, when compared to 2016 primarily due to the impact of our
recent acquisitions and higher sales volume discussed above. Cost of goods sold in 2016 was negatively impacted by higher duties
21
paid on certain imports, amortization related to the fair value adjustment to acquisition-date inventories associated with the SLI
(including EME) acquisition and certain inventory write-downs due to the planned closure of two facilities from the Diversified
Industrial segment.
Selling, General and Administrative Expenses
Selling, general and administrative expenses ("SG&A") in 2017 increased $55,421, or 19.6%, when compared to 2016
primarily due to the Company's recent acquisitions, higher personnel costs at WebBank to support the increase in their business,
as well as pension obligations and severance charges recorded as a result of the planned closure of API's Rahway facility. The
increase in the Corporate and Other segment was primarily due to higher non-cash incentive unit expense recorded in 2017. No
incentive unit expense was recorded in 2016.
Interest Expense
Interest expense for the years ended December 31, 2017 and 2016 was $22,804 and $11,052, respectively. The higher
interest expense was primarily due to higher borrowing levels in 2017, primarily to fund the Company's acquisitions made during
2016, and interest expense from the SPLP preferred units, which are classified as liabilities, issued in 2017.
Goodwill Impairment Charges
The Company recognized goodwill impairment charges of $24,254 in 2016. The 2016 impairment charge related to the
Diversified Industrial segment and resulted from a decline in market conditions and lower demand for certain product lines in the
performance materials business.
Asset Impairment Charges
The asset impairment charge of $2,028 in 2017 is primarily due to recognizing an other-than-temporary decline in the fair
value of one of Steel Excel's investments. The asset impairment charges of $17,259 in 2016 were primarily due to the planned
closure of two facilities within the Diversified Industrial segment and an other-than-temporary decline in the fair value of certain
marketable securities and other investments.
All Other Expense (Income), Net
All other expense (income), net was unfavorable by $19,891 in 2017, when compared to 2016, primarily due to net losses,
as compared to net gains in 2016 on investment activity, and higher finance interest expense and higher provisions for loan losses
recorded in 2017.
Income Taxes
As a limited partnership, we are generally not responsible for federal and state income taxes, and our profits and losses
are passed directly to our limited partners for inclusion in their respective income tax returns. The Company's tax provision represents
the income tax expense or benefit of its consolidated corporate subsidiaries. For the year ended December 31, 2017, a tax provision
of $51,299 was recorded, as compared to $23,952 in 2016. The Company recorded an income tax provision of approximately
$58,717 resulting from the transition tax and the revaluation of our U.S. deferred tax assets and liabilities to reflect the recently
enacted 21% federal corporate tax rate under the Tax Cuts and Jobs Act. The Company also recorded tax benefits of approximately
$44,681 during 2017 associated with the reversal of its deferred tax valuation allowances at certain subsidiaries. The remaining
increase in tax expense was driven primarily by the increase in income from continuing operations and the mix of taxable income
between the partnership and its consolidated corporate subsidiaries.
Income of Associated Companies and Other Investments Held At Fair Value, Net of Taxes
Income of associated companies and other investments held at fair value, net of taxes in 2017 increased by $12,803,
compared to 2016. The year-over-year change represents the impact of unrealized mark-to-market adjustments for various
investments that are accounted for at fair value. For the details of each of these investments and the related mark-to-market
adjustments in both periods, see Note 9 - "Investments" to the SPLP consolidated financial statements found elsewhere in this Form
10-K.
22
Segment Analysis
Revenue:
Diversified industrial
Energy
Financial services
Total revenue
Net income (loss) by segment:
Diversified industrial
Energy
Financial services
Corporate and other
Net income from continuing operations before income taxes
Income tax provision
Net income
Net (income) loss attributable to noncontrolling interests in consolidated entities
Net (loss) income attributable to common unitholders
Diversified Industrial
Year Ended December 31,
2017
2016
$
1,156,187
$
998,556
$
$
$
$
135,461
80,379
1,372,027
50,104
(21,514)
41,328
(12,607)
57,311
51,299
6,012
(6,028)
$
(16) $
93,995
70,998
1,163,549
19,175
(11,459)
42,518
(23,711)
26,523
23,952
2,571
4,059
6,630
Net sales in 2017 increased by $157,631, or 15.8%, when compared to 2016. The change in net sales reflects approximately
$139,702 in incremental sales associated with the SLI (including EME), Hazen and AMP acquisitions, partially offset by a decrease
of $9,148 due to the unfavorable impact of foreign currency exchange rates. Excluding the impact of acquisitions and foreign
currency exchange rates, net sales increased by approximately $27,077 due primarily to higher sales volume from the building
materials business driven by increased demand for roofing products, as well as growth from international shipments, higher demand
driven by the medical and defense industries from the electrical products business, as well as higher sales volume from the joining
materials business driven by higher demand from the oil & gas exploration, appliance and electrical markets, as compared to 2016.
The packaging business sales also increased due primarily to higher foil sales volume in Europe, partially offset by the April 2016
divestiture of its security holographics business. The Kasco business also had higher sales volume driven by higher demand from
North America and Europe. These increases were partially offset by lower volume from the tubing business driven by its fabricated
metal tubing product line for the medical industry, which was divested during the first quarter of 2017, as well as lower demand
for steel tubing products from ship building and oil & gas markets. The performance materials business sales volume also decreased
in 2017, as compared to 2016, due primarily to the October 2016 divestiture of the equipment, inventories and certain customer
information of JPS' former Slater, South Carolina operating facility.
Segment operating income in 2017 increased by $30,929, or 161.3%, when compared to 2016. The increase was primarily
due to higher gross profit of $52,070, partially offset by an increase in SG&A of $37,859, an increase in interest expense of $5,382,
lower other income of $3,841, and lower equity method investment income of $8,078, as well as prior year 2016 goodwill and asset
impairment charges totaling $35,711 discussed above. The higher gross profit was primarily driven by approximately $37,412 in
incremental gross profit from the SLI (including EME), Hazen and AMP acquisitions, as well as higher sales volume driven by the
building materials, joining materials and electrical products businesses. Gross profit margin also improved in the performance
materials, joining materials and electrical products businesses due primarily to favorable product mix and lower manufacturing
costs, partially offset by the tubing business due to lower sales volume. The impairment charges in 2016 were due to the closure of
JPS' Slater, South Carolina operating facility in the performance materials business during 2016 and the closure of our Gliwice,
Poland operating facility in the joining materials business during 2016. The higher SG&A was driven primarily by the SLI (including
EME), Hazen and AMP acquisitions, which contributed incremental SG&A of approximately $29,696, and pension obligations and
severance charges due to the planned closure of API's Rahway facility. The higher interest expense in 2017 was primarily due to
higher borrowing levels incurred to finance the Diversified Industrial segment's acquisitions made during 2016. The decrease in
other income was due to the non-recurrence of the gain on sale of API's security holographics business, which was sold in the second
quarter of 2016. The decrease in equity method investment income from the 2016 period was due to the financial results of SLI
before it was acquired on June 1, 2016, and became a consolidated subsidiary.
Energy
In 2017, net revenue increased $41,466, or 44.1%, when compared to 2016. The increase in net revenue reflects incremental
sales of approximately $10,767 from the acquisition of Basin in May 2017. In addition, the demand for services continued to improve
in-line with the increase in the North American oil & gas drilling rig count. The Energy segment's results of operations going forward
23
will be dependent on the price of oil in the future, the resulting well production and drilling rig count in the basins in which it
operates, and the Energy segment's ability to return to the pricing and service levels of the past as oil prices increase.
Segment operating loss in 2017 increased $10,055, or 87.7%, as compared to 2016, due to higher SG&A of $2,030, lower
income from equity method investments of $9,351 and a decrease in income related to investment activity of $8,082, partially offset
by an increase in gross profit of $4,111 and $5,174 lower impairment charges related to marketable securities, as compared to 2016.
The increase in gross profit was primarily driven by higher sales volume and the impact of the Basin acquisition, as compared to
2016. The increase in SG&A was primarily due to the Basin acquisition, as well as non-recurrence of a litigation settlement received,
net of associated fees, in 2016, partially offset by a decrease in corporate overhead costs in 2017.
Financial Services
Revenue in 2017 increased $9,381, or 13.2%, when compared to 2016. The revenue growth is primarily due to increased
volume in lending programs and an increase in interest income due to a larger outstanding loan balance.
Segment operating income in 2017 decreased $1,190, or 2.8%, as compared to 2016. The higher revenue was more than
offset by higher costs and expenses including higher SG&A of $3,610 driven by higher personnel expenses due to growth in the
number of WebBank's programs, supporting new initiatives, and the continued expansion of WebBank's compliance and oversight
group to meet increasing regulatory expectations. In addition, finance interest expense and the provision for loan losses increased
$2,090 and $4,865, respectively, in the year ended December 31, 2017, as compared to 2016. The higher finance interest expense
was due to a larger deposit balance to support loan growth and an increase in interest rates, and the higher provision expense was
to support growth of consumer and small/medium business loans held to maturity.
Net Interest Income, Margin and Interest Rate Spreads
Net interest income is the difference between interest earned on interest-earning assets and interest incurred on interest-
bearing liabilities. By its nature, net interest income is especially vulnerable to changes in the mix and amounts of interest-earning
assets and interest-bearing liabilities. In addition, changes in the interest rates and yields associated with these assets and liabilities
can significantly impact net interest income. The following table summarizes the average balances, the amount of interest earned
or incurred and the applicable yields for interest-earning assets and the costs of interest-bearing liabilities that generate net interest
income. For purposes of calculating the yields in these schedules, the average loan balances also include the principal amounts of
nonaccrual and restructured loans. However, interest received on nonaccrual loans is included in income only to the extent that cash
payments have been received and not applied to principal reductions. In addition, interest on restructured loans is generally accrued
at reduced rates.
24
Year Ended December 31,
2017
2016
2015
Average
Interest
Average
Interest
Average
Interest
Outstanding
Earned/ Yield/ Outstanding
Earned/ Yield/ Outstanding
Earned/ Yield/
Balance
Paid
Rate
Balance
Paid
Rate
Balance
Paid
Rate
$
225,740 $
28,396
12.6% $
213,034 $
27,203
12.8% $
197,467 $
28,128
14.2%
19,677
812
1,879
218,700
466,808
15,361
482,169
84,244
290,734
374,978
9,930
384,908
97,261
$
$
614
17
15
2,231
31,273
3.1%
2.1%
0.8%
1.0%
6.7%
8,055
575
902
130,428
352,994
6,140
323
13
2
721
28,262
4.0%
2.3%
0.2%
0.6%
8.0%
999
574
589
55,076
254,705
2,978
30
12
1
148
3.0%
2.1%
0.2%
0.3%
28,319
11.1%
$
359,134
$
257,683
407
0.5% $
4,280
4,687
1.5%
1.3%
67,883
206,176
274,059
8,349
282,408
76,726
123
0.2% $
2,474
2,597
1.2%
1.0%
68,861
133,592
202,453
6,339
208,792
48,891
82
1,372
1,454
0.1%
1.0%
0.7%
$
482,169
$
359,134
$
257,683
$
26,586
$
25,665
$
26,865
5.4%
5.7%
5.7%
28.3%
20.2%
7.1%
7.3%
8.1%
38.0%
21.4%
10.4%
10.5%
12.2%
64.3%
19.0%
Interest-earning assets:
Loans receivable
Held-to-maturity securities
Available-for-sale investments
Federal funds sold
Interest bearing deposits
Total interest-earning assets
Non interest-earning assets
Total assets
Interest-bearing liabilities:
Money market accounts
Time deposits
Total interest-bearing liabilities
Other non interest-bearing liabilities
Total liabilities
Shareholder's equity
Total liabilities and shareholder's equity
Net interest income
Spread on average interest-bearing funds
Net interest margin
Return on assets
Return on equity
Equity to assets
WebBank has several lending arrangements with companies where it originates credit card and other loans for consumers
and small businesses. These loans are classified as held for sale and are typically sold after origination.
The following table presents the effects of changing rates and volumes on WebBank's net interest income for the periods
indicated. The rate column shows the effects attributable to changes in rate (changes in rate multiplied by prior volume). The volume
column shows the effects attributable to changes in volume (changes in volume multiplied by prior rate). The total column represents
the sum of the prior columns. For purposes of this table, changes attributable to both rate and volume, which cannot be segregated,
have been allocated proportionately, based on the changes due to rate and the changes due to volume.
2017 vs 2016
Increase/(Decrease)
Year Ended December 31,
2016 vs 2015
Increase/(Decrease)
2015 vs 2014
Increase/(Decrease)
Due to
Volume
Due to
Rate
Total
Due to
Volume
Due to
Rate
Total
Due to
Volume
Due to
Rate
Total
$
1,591 $
(399) $
1,192
$
2,950 $
(3,875) $
(925) $
14,612 $
943 $
15,555
344
5
4
670
2,614
36
1,164
1,200
(53)
(1)
9
842
398
247
643
890
291
4
13
1,512
3,012
283
1,807
2,090
280
—
1
321
3,552
(1)
841
840
13
1
—
252
(3,609)
2
258
260
293
1
1
573
(57)
1
1,099
1,100
2
—
—
(110)
14,504
57
363
420
28
(3)
—
65
1,033
(61)
457
396
30
(3)
—
(45)
15,537
(4)
820
816
$
1,414 $
(492) $
922
$
2,712 $
(3,869) $
(1,157) $
14,084 $
637 $
14,721
Earning assets:
Loans receivable
Held-to-maturity securities
Available-for-sale investments
Federal funds sold
Interest bearing deposits
Total earning assets
Money market accounts
Time deposits
Total funds
Net variance
Balance Sheet Analysis
Loan Portfolio
25
As of December 31, 2017, net loans accounted for 43% of WebBank's total assets compared to 33% at the end of 2016.
The following table presents WebBank's loans outstanding by type of loan as of December 31, 2017 and the five most recent year-
ends.
2017
2016
2015
2014
2013
Amount
%
Amount
%
Amount
%
Amount
%
Amount
%
As of December 31,
Real estate loans:
Commercial - owner
occupied
Commercial - other
Total real estate loans
Commercial and industrial
Consumer loans
Loans held for sale
Total loans
Less:
Deferred fees and discounts
Allowance for loan losses
Total loans receivable, net
0.4% $
1,542
0.7% $
1,650
1.4% $
4,671
$
272
296
568
84,726
53,238
136,773
275,305
—
(5,237)
0.1% $
0.1%
0.2%
30.8%
19.3%
49.7%
604
266
870
50,564
22,805
80,692
0.2%
0.6%
32.6%
14.7%
52.1%
100.0%
154,931
100.0%
—
(1,483)
281
1,823
66,253
—
159,592
227,668
(15)
(630)
0.1%
0.8%
29.1%
—%
70.1%
264
1,914
75,706
—
40,886
0.2%
1.6%
63.9%
—%
34.5%
100.0%
118,506
100.0%
(20)
(557)
242
4,913
46,702
—
25,125
76,740
—
(424)
$ 270,068
$ 153,448
$ 227,023
$ 117,929
$
76,316
6.1%
0.3%
6.4%
60.9%
—%
32.7%
100.0%
The following table includes a maturity profile for the loans that were outstanding at December 31, 2017. Substantially
all of the real estate loans and commercial and industrial loans have floating or adjustable interest rates:
Due During Years Ending December 31,
2018
2019-2023
2024 and following
Total
Nonperforming Lending Related Assets
Real Estate
Commercial
& Industrial
Consumer
Loans Held
for Sale
$
$
20
$
62,483
$
22,372
$
136,773
548
—
21,947
296
30,866
—
—
—
568
$
84,726
$
53,238
$
136,773
Total nonaccrual loans were $0 at December 31, 2017 and 2016.
2017
2016
2015
2014
2013
As of December 31,
Non-accruing loans:
Commercial real estate - owner occupied
$
— $
— $
341
$
374
$
Commercial real estate - other
Commercial and industrial
Other
Total
Accruing loans delinquent:
90 days or more
Total
Foreclosed assets:
Commercial real estate - owner occupied
Total
Total non-performing assets
Total as a percentage of total assets
Summary of Loan Loss Experience
—
—
—
—
2,658
2,658
—
—
$
2,658
$
—
—
—
—
3
3
—
—
3
—
2
—
343
—
—
11
11
$
354
$
—
16
—
390
52
52
111
111
553
$
403
—
109
—
512
—
—
149
149
661
0.4%
—%
0.1%
0.2%
0.4%
The methodologies used to estimate the allowance for loan losses ("ALLL") depend upon the impairment status and
portfolio segment of the loan. Loan groupings are created for each loan class and are then graded against historical and industry
loss rates. After applying historic loss experience, as described above, we review the quantitatively derived level of ALLL for each
segment using qualitative criteria. We track various risk factors that influence our judgment regarding the level of the ALLL across
26
the portfolio segments. The following table summarizes activity in WebBank's allowance for loan and lease losses for the periods
indicated:
Balance at beginning of period
Charge offs:
Commercial real estate - owner occupied
Commercial real estate - other
Commercial and industrial
Other
Total charge offs
Recoveries:
Commercial real estate - owner occupied
Commercial real estate - other
Commercial and industrial
Other
Total recoveries
Net recoveries (charge offs)
Additions charged to operations
Balance at end of period
As of December 31,
2017
2016
2015
2014
2013
$
1,483
$
630
$
557
$
424
$
285
—
—
(933)
(1,214)
(2,147)
17
—
142
103
262
(1,885)
5,639
5,237
$
—
—
—
—
—
14
35
30
—
79
79
774
1,483
$
$
—
—
—
—
—
25
44
54
—
123
123
(50)
630
$
—
—
(3)
—
(3)
65
40
81
—
186
183
(50)
557
$
—
—
(64)
—
(64)
23
44
216
—
283
219
(80)
424
Ratio of net charge offs during the period to average loans
outstanding during the period
0.8%
— %
(0.1)%
(0.2)%
(0.4)%
The distribution of WebBank's allowance for losses on loans at the dates indicated is summarized as follows:
As of December 31,
2017
2016
2015
2014
2013
% of
Loans in
Each
Category
of Total
Loans
Amount
% of
Loans in
Each
Category
of Total
Loans
% of
Loans in
Each
Category
of Total
Loans
Amount
% of
Loans in
Each
Category
of Total
Loans
Amount
Amount
% of
Loans in
Each
Category
of Total
Loans
Amount
Commercial real estate - owner
occupied
$
Commercial real estate - other
Commercial and industrial
Other consumer loans
Loans held for sale
Total loans
Corporate and Other
6
7
2,800
2,424
—
0.1% $
0.1%
30.8%
19.3%
49.7%
22
7
880
574
—
0.4% $
0.2%
32.6%
14.7%
52.1%
$
5,237
100.0% $
1,483
100.0% $
39
9
582
—
—
630
0.7% $
0.1%
29.1%
—%
70.1%
64
12
481
—
—
1.4% $
0.2%
63.9%
—
34.5%
100.0% $
557
100.0% $
77
28
319
—
—
424
6.1%
0.3%
60.9%
—%
32.7%
100.0%
Segment operating loss declined $11,104 in 2017, as compared to 2016, primarily due to higher income of $29,983 from
equity method and other investments held at fair value, partially offset by higher SG&A of $11,922 and higher interest expense of
$6,493, primarily due to interest expense recorded on the SPLP preferred units issued in 2017. The higher SG&A was primarily
due to non-cash incentive unit expense of $9,021 recorded in 2017. There was no incentive unit expense recorded in 2016.
27
Comparison of the Years Ended December 31, 2016 and 2015
Revenue
Cost of goods sold
Selling, general and administrative expenses
Interest expense
Goodwill impairment charges
Asset impairment charges
All other income, net
Total costs and expenses
Income from continuing operations before income taxes and equity method income (loss)
Income tax provision (benefit)
(Income) loss of associated companies and other investments held at fair value, net of taxes
Net income from continuing operations
Income from discontinued operations
Net income
Net loss (income) attributable to noncontrolling interests in consolidated entities
Net income attributable to common unitholders
Revenue
Year Ended December 31,
2016
2015
$ 1,163,549
$
965,059
815,576
282,298
11,052
24,254
17,259
(9,328)
1,141,111
22,438
23,952
(4,085)
2,571
—
2,571
4,059
6,630
$
$
670,047
230,199
8,862
19,571
68,092
(55,081)
941,690
23,369
(78,719)
31,777
70,311
86,257
156,568
(19,833)
136,735
Revenue in 2016 increased $198,490, or 20.6%, when compared to 2015. Excluding growth from the acquisitions of SLI
(including EME), JPS and API of 24.7% and other activity of 0.6%, primarily due to higher silver prices, revenues declined 4.7%.
The revenue decrease of 4.7% was primarily due to decreases in the Energy and Diversified Industrial segments, partially offset by
an increase in the Financial Services segment.
Cost of Goods Sold
Cost of goods sold in 2016 increased $145,529, or 21.7%, when compared to 2015 primarily due to an increase in the
Diversified Industrial segment, which increased due to the acquisitions of SLI (including EME), JPS and API, as well as from higher
duties paid on certain imports, amortization related to the fair value adjustment to acquisition-date inventories associated with the
SLI (including EME) acquisition, and certain inventory write-downs due to the planned closure of two facilities within the Diversified
Industrial segment. This increase was partially offset by a decrease in the Energy segment due to lower revenue.
Selling, General and Administrative Expenses
SG&A in 2016 increased $52,099, or 22.6%, when compared to 2015 primarily due to the acquisitions of SLI (including
EME), JPS and API and higher personnel costs at WebBank to support the increase in their business. These SG&A increases were
partially offset by a net decrease in the Energy segment due to the receipt of a litigation settlement in 2016, net of higher corporate
overhead and legal fees, as well as a decrease in the Corporate and Other segment due to lower corporate employee costs and lower
professional fees.
Interest Expense
Interest expense for the years ended December 31, 2016 and 2015 was $11,052 and $8,862, respectively. The higher interest
expense was primarily due to higher borrowing levels in 2016, primarily to fund the 2016 acquisitions discussed above.
Goodwill Impairment Charges
The Company recognized goodwill impairment charges of $24,254 and $19,571 in 2016 and 2015, respectively. The 2016
impairment charge related to the Diversified Industrial segment and resulted from a decline in market conditions and lower demand
for certain product lines in the performance materials business. The 2015 impairment charge related to the Energy segment and
resulted from the adverse effects the decline in energy prices had on the oil services industry and the projected future results of
operations of the Energy segment.
Asset Impairment Charges
28
The asset impairment charges in 2016 are primarily due to the planned closure of two facilities within the Diversified
Industrial segment, and an other-than-temporary decline in the fair value of certain marketable securities and other investments.
The asset impairment charges in 2015 primarily relate to other-than-temporary impairments recorded on certain marketable securities
and the impairment of a building from the Corporate and Other segment.
All Other Income, Net
All other income, net decreased $45,753 in 2016, when compared to 2015, due to lower gains from investment activity,
higher finance interest expense and higher provisions for loan losses recorded in the 2016 period. The lower gains on investment
activity recorded in the 2016 period was primarily due to lower investment income recorded by Steel Excel, the non-recurrence of
a gain on the sale of an available-for-sale security recorded in 2015 of approximately $25,400 and a gain on our investment in
CoSine recorded in 2015 of approximately $6,900 resulting from the re-measurement of our investment upon the acquisition of a
majority interest in CoSine in January 2015.
Income Taxes
For the year ended December 31, 2016, a tax provision of $23,952 from continuing operations was recorded. The increase
in the effective tax rate in 2016, compared to 2015, was primarily due to the reversal of a deferred tax valuation allowance at
WebFinancial Holding LLC (formerly CoSine) in 2015 of approximately $111,881. For additional information see Note 15 - "Income
Taxes" and Note 7 - "Goodwill and Other Intangible Assets, Net" to the SPLP financial statements found elsewhere in this Form
10-K.
Income (Loss) of Associated Companies and Other Investments Held At Fair Value, Net of Taxes
The income (loss) of associated companies and other investments held at fair value, net of taxes in 2016 decreased by
$35,862, compared to 2015. The year-over-year change represents the impact of unrealized mark-to-market adjustments for various
investments that are accounted for at fair value. For the details of each of these investments and the related mark-to-market adjustments
in both periods, see Note 9 - "Investments" to the SPLP consolidated financial statements found elsewhere in this Form 10-K.
Income from Discontinued Operations
Income from discontinued operations for the year ended December 31, 2015 represents the gain on sale of the Company's
former Arlon, LLC ("Arlon") business. For additional information on the Arlon disposition, see Note 4 - "Divestitures and Asset
Impairment Charges" to the SPLP consolidated financial statements found elsewhere in this Form 10-K.
Segment Analysis
Revenue:
Diversified industrial
Energy
Financial services
Total revenue
Net income (loss) by segment:
Diversified industrial
Energy
Financial services
Corporate and other
Net income (loss) from continuing operations before income taxes
Income tax provision (benefit)
Net income from continuing operations
Income from discontinued operations
Net loss (income) attributable to noncontrolling interests in consolidated entities
Net income attributable to common unitholders
Diversified Industrial
29
Year Ended December 31,
2016
2015
$
998,556
$
93,995
70,998
$ 1,163,549
$
19,175
(11,459)
42,518
(23,711)
26,523
23,952
2,571
—
4,059
6,630
$
$
$
$
763,009
132,620
69,430
965,059
42,281
(95,112)
46,314
(1,891)
(8,408)
(78,719)
70,311
86,257
(19,833)
136,735
Net sales in 2016 increased by $235,547, or 30.9%, when compared to 2015. The change in net sales reflects approximately
$239,000 in incremental sales associated with the SLI (including EME), JPS and API acquisitions, as well as an increase of $5,400
as a result of higher average silver prices. Excluding the impact of the SLI (including EME), JPS and API acquisitions and the
change in silver prices, net sales decreased by approximately $8,700 due to lower volume of $6,200, primarily from the performance
materials business, partially offset by growth from the building materials business, and lower revenue of approximately $2,500 at
API due to the negative impact of foreign exchange rates. The average silver market price was approximately $17.11 per troy ounce
in 2016, as compared to $15.70 per troy ounce in 2015.
Segment operating income in 2016 decreased by $23,106, or 54.6%, when compared to 2015, primarily due to the goodwill
and asset impairment charges recorded in 2016 of $35,711 discussed above, of which $1,400 unfavorably impacted gross profit, as
well as higher SG&A of $59,522, principally due to the segment's recent acquisitions. These declines in segment operating income
were partially offset by higher gross profit of $62,322 and higher income of $9,330 recorded from equity method investments. The
higher gross profit and SG&A in 2016 were primarily driven by the SLI (including EME), JPS and API acquisitions. Gross profit
was also favorably impacted by an increase of approximately $2,800 from its building materials business due to higher sales volume,
partially offset by its joining materials business due to lower sales volume.
Energy
Weakness in the oil services industry had an adverse effect on the results of operations of the Company's Energy segment
in 2016. The decline in energy prices that began in late 2014, particularly the significant decline in oil prices, has resulted in the
Energy segment's customers, the oil & gas exploration and production companies ("E&P Companies"), cutting back on their capital
expenditures, which resulted in reduced drilling, completion and work over activity. In addition, the E&P Companies sought price
concessions from their service providers to offset their drop in revenue. Such actions on the part of the E&P Companies had an
adverse effect on the operations of the Energy segment in 2016. Steel Excel undertook certain actions and instituted cost-reduction
measures in an effort to mitigate these adverse effects.
In 2016, net revenue decreased $38,625, or 29.1%, when compared to 2015. The decrease in net revenue in 2016 was
primarily due to a decrease of approximately $36,100 in Steel Energy's business due to the decline in rig utilization and the decline
in prices that resulted from the adverse effects the decline in energy prices had on the oil services industry. Net revenue from Steel
Sports' businesses decreased by $2,600 in 2016, when compared to 2015.
Segment operating loss in 2016 decreased $83,653, or 88.0%, when compared to 2015. Significant changes in the 2016
period were lower impairment charges of $52,579 related to marketable securities, lower goodwill impairment charges of $19,571,
lower SG&A of $3,438, due to the receipt of a litigation settlement, net of higher corporate overhead costs, and higher income from
equity method investments of $26,046. These changes were partially offset by a decrease in gross profit of $11,105 and lower gains
on sales of investments of $7,787 in the year ended December 31, 2016, when compared to 2015. The decrease in gross profit was
primarily due to the decline in revenue in the energy business.
Financial Services
Revenue in 2016 increased $1,568, or 2.3%, when compared to 2015. The net increase was due to higher non-interest
income of approximately $1,700 in 2016, compared to 2015, as a result of the restructuring of programs, which created a gain on
sale of certain loans, partially offset by lower interest income of approximately $200 in 2016, compared to 2015, due to declines
in a number of WebBank's key programs caused by capital market disruptions and the restructuring of some arrangements.
Segment operating income in 2016 decreased $3,802, or 8.2%, when compared to 2015. The higher revenue was more
than offset by higher costs and expenses including higher SG&A of $3,401 driven by higher personnel expenses due to growth in
the number of WebBank's programs, supporting new initiatives, and the continued expansion of WebBank's compliance and oversight
group to meet increasing regulatory expectations. In addition, finance interest expense and the provision for loan losses increased
$1,145 and $824, respectively, in the year ended December 31, 2016, when compared to 2015. The higher finance interest expense
was due to a larger deposit balance to support loan growth and an increase in interest rates, and the increase in the provision for
loan losses was due to the addition of a loan portfolio of held-to-maturity consumer loans.
Corporate and Other
Segment operating loss increased $21,820 in 2016, when compared to 2015, primarily as a result of higher net investment
gains of $36,355 recorded in the 2015 period. The gains in 2015 were primarily due to a gain on the sale of an available-for-sale
30
security of approximately $25,400 and a gain on our investment in CoSine of approximately $6,900 resulting from the re-
measurement of our investment upon the acquisition of a majority interest in CoSine in January 2015. This reduction to segment
operating income was partially offset by the non-recurrence of $6,913 of impairment charges recorded in 2015, which included a
charge of $1,400 to adjust an asset held for sale to its net realizable value and a charge of approximately $5,500 related to an other-
than-temporary decline in an available-for-sale security, and lower SG&A as a result of lower corporate employee costs and lower
professional fees in 2016, compared to 2015.
DISCUSSION OF CONSOLIDATED CASH FLOWS
The following table provides a summary of the Company's consolidated cash flows for the years ended December 31,
2017, 2016 and 2015:
Net cash (used in) provided by operating activities
Net cash (used in) provided by investing activities
Net cash provided by (used in) financing activities
Change in period
Cash Flows from Operating Activities
Year Ended December 31,
2017
2016
2015
$
$
(15,770) $
195,477
$
(172,617)
155,889
(160,502)
230,571
(32,498) $
265,546
$
(13,840)
64,539
(53,105)
(2,406)
Net cash used in operating activities for the year ended December 31, 2017 was $15,770. Net income of $6,012 was
impacted by certain non-cash items and a net unfavorable change of $139,967 relating to certain operating assets and liabilities.
The net change in operating assets and liabilities was primarily due to an increase of $56,081 in loans held for sale due to the timing
of loan originations, which can vary significantly from period-to-period since these loans are typically sold after origination, as
well as the level of activity at WebBank, an increase of $22,842 in trade and other receivables due to timing of receipts, an increase
in inventories of $21,683 due primarily to a higher first quarter 2018 sales forecast, an increase in prepaid expenses and other current
assets of $4,621, a decrease of $34,740 in accounts payable, accrued and other current liabilities due primarily to higher pension
contributions and timing of payments.
Net cash provided by operating activities for the year ended December 31, 2016 was $195,477. Net income of $2,571 was
impacted by certain non-cash items and a net favorable change of $71,225 relating to certain operating assets and liabilities. The
net change in operating assets and liabilities was primarily due to a decrease of $78,900 in loans held for sale due to the timing of
loan originations and the level of activity at WebBank. This decrease was partially offset by an increase of $11,747 in trade and
other receivables due to the timing of receipts and an increase in prepaid expenses and other current assets of $8,246.
Net cash used in operating activities for the year ended December 31, 2015 was $13,840. Net income from continuing
operations of $70,311 was impacted by certain non-cash items and a net unfavorable change of $111,262 relating to certain operating
assets and liabilities. Of this change, $118,706 was from an increase in loans held for sale, $21,591 was from a decrease in accounts
payable, accrued and other current liabilities and $666 was from an increase in prepaid expenses and other current assets. These
unfavorable changes were partially offset by a $17,167 decrease in trade and other receivables and a $12,534 decrease in inventories.
Net cash used in operating activities was also impacted by $2,254 of cash used in operating activities of discontinued operations.
Cash Flows from Investing Activities
Net cash used in investing activities for the year ended December 31, 2017 was $172,617. Significant items included
purchases of property, plant and equipment of $54,737, an increase in loan originations, net of collections, of $93,390, net payments
related to investment activities of $26,690, as well as the purchase of STCN convertible preferred stock for $35,000, partially offset
by proceeds from sale of assets of $42,204, principally proceeds from sales of loans by WebBank.
Net cash used in investing activities for the year ended December 31, 2016 was $160,502. Significant items included net
cash paid for the acquisitions of SLI (including EME), Hazen, and AMP, which totaled an aggregate of $200,137, purchases of
property, plant and equipment of $34,183, an increase in loan originations, net of collections, of $26,895, and investments in STCN
of $2,440, partially offset by net proceeds from sales of investments of $61,641 and proceeds from sale of assets of $32,247,
principally sales of loans by WebBank and the sale of API's security holographics business.
Net cash provided by investing activities for the year ended December 31, 2015 was $64,539. Significant items included
proceeds received from the sale of Arlon of $155,517, net proceeds from sales of investments of $42,623 and proceeds from the
31
sale of other assets of $10,657. Cash flows from investing activities were used for purchases of property, plant and equipment of
$23,252, acquisitions of $116,135, primarily the API and JPS acquisitions, and additional investments in associated companies,
primarily STCN, of $7,607.
Cash Flows from Financing Activities
Net cash provided by financing activities for the year ended December 31, 2017 was $155,889, including net revolver
borrowings of $67,864, and a net increase in WebBank's deposits of $145,395. These increases were partially offset by domestic
term loan repayments of $47,993, cash used to purchase the Company's common units of $5,188, as well as payment of financing-
related fees of $5,663.
Net cash provided by financing activities for the year ended December 31, 2016 was $230,571, including net revolver
borrowings of $146,648, primarily to fund the acquisitions of SLI and EME, proceeds from term loans of $9,217, primarily to fund
API's Hazen acquisition, and a net increase in WebBank's deposits of $113,432. These increases were partially offset by cash used
to purchase the Company's common units of $7,297 and subsidiaries' purchases of their common stock of $20,956.
Net cash used in financing activities for the year ended December 31, 2015 was $53,105, including net revolver payments
of $66,368, repayments of domestic term loans of $38,519, subsidiaries' purchases of the Company's common units of $17,323,
purchases of the Company's common units of $1,917 and subsidiaries' purchases of their common stock of $17,031, partially offset
by a net increase in WebBank's deposits of $87,312.
LIQUIDITY AND CAPITAL RESOURCES
SPLP (excluding its operating subsidiaries, "Holding Company") is a global diversified holding company whose assets
principally consist of the stock of its direct subsidiaries and cash and cash equivalents. SPLP strives to enhance the liquidity and
business operations of its businesses and increase long-term value for unitholders and stakeholders through balance sheet
improvements, strategic allocation of capital, and operational and growth initiatives, which are further described in Item 1 -
"Business - Business Strategy".
On November 14, 2017, the Company, through certain consolidated subsidiaries (collectively, "Borrowers"), and the
Guarantors, as defined in the credit agreement, entered into a new five-year, $600,000 revolving credit facility ("Credit Agreement").
The Credit Agreement consolidated a number of the Company's existing credit facilities into one combined, revolving credit facility
covering substantially all of the Company's subsidiaries, with the exception of WebBank. The Credit Agreement includes a $55,000
subfacility for swing line loans and a $50,000 subfacility for standby letters of credit. The Credit Agreement also permits, under
certain circumstances, an increase in the aggregate principal amount of revolving credit commitments by up to $150,000. The
Company's availability under the Credit Agreement is based upon earnings and certain covenants as described in the Credit
Agreement. Borrowings under the Credit Agreement are collateralized by substantially all the assets of the Borrowers and the
Guarantors and a pledge of all of the issued and outstanding shares of capital stock of each of the Borrowers' and Guarantors'
subsidiaries, and are fully guaranteed by the Guarantors. Borrowings bear interest, at the Borrowers' option, at annual rates of
either the Base Rate or the Euro-Rate, each as defined in the Credit Agreement, plus an applicable margin, as set forth in the Credit
Agreement. The Credit Agreement is subject to certain mandatory prepayment provisions and restrictive and financial covenants.
The Holding Company and its operating businesses believe that they have access to adequate resources to meet their
needs for normal operating costs, capital expenditures, pension payments, debt obligations and working capital for their existing
business for at least the next twelve months. These resources include cash and cash equivalents, investments, cash provided by
operating activities and unused lines of credit. The Holding Company and its operating businesses' ability to satisfy their debt
service obligations, to fund planned capital expenditures and required pension payments, and to make acquisitions will depend
upon their future operating performance, which will be affected by prevailing economic conditions in the markets in which they
operate, as well as financial, business and other factors, some of which are beyond their control. There can be no assurances that
the Holding Company and its operating businesses will continue to have access to their lines of credit if their financial performance
does not satisfy the financial covenants set forth in their respective financing agreements, which could also result in the acceleration
of their debt obligations by their respective lenders, adversely affecting liquidity.
Management is utilizing the following strategies to continue to enhance liquidity: (1) continuing to implement
improvements using the Steel Business System throughout all the Company's operations to increase sales and operating efficiencies,
(2) supporting profitable sales growth both internally and potentially through acquisitions and (3) evaluating from time to time
and as appropriate, strategic alternatives with respect to its businesses and/or assets. The Company continues to examine all of its
32
options and strategies, including acquisitions, divestitures and other corporate transactions, to increase cash flow and stakeholder
value.
As of December 31, 2017, the Company's working capital was $513,689, as compared to working capital of $449,745
as of December 31, 2016. As of December 31, 2017, the availability under the Credit Agreement was approximately $71,400. The
Company and its subsidiaries have ongoing commitments as noted in the table below. These commitments include funding of the
minimum requirements of its subsidiaries' pension plans. The Company expects to have required minimum contributions to the
WHX Corporation Pension Plan of $24,900, $28,800, $33,500, $29,200, $28,400 and $36,700 in 2018, 2019, 2020, 2021, 2022
and for the five years thereafter, respectively. The Company does not currently expect to make any future minimum contributions
for the WHX Pension Plan II. For JPS' pension plan, the Company expects to have required minimum contributions of $7,300,
$4,600, $2,300, $2,200, $3,700 and $6,500 in 2018, 2019, 2020, 2021, 2022 and for the five years thereafter, respectively. Required
future pension contributions are estimated based upon assumptions such as discount rates on future obligations, assumed rates of
return on plan assets and legislative changes. Actual future pension costs and required funding obligations will be affected by
changes in the factors and assumptions described in the previous sentence, as well as other changes such as any plan termination
or other acceleration events.
WebBank manages its liquidity to provide adequate funds to meet anticipated financial obligations, such as certificate of
deposit maturities and to fund customer credit needs. WebBank had $286,454 and $277,054 in cash at the Federal Reserve Bank
and in its Federal Funds account at its correspondent banks at December 31, 2017 and 2016, respectively. WebBank had $30,000
and $17,400 in lines of credit from its correspondent banks at December 31, 2017 and 2016, respectively, and had $59,514 and
$33,826 available from the Federal Reserve discount window at December 31, 2017 and 2016, respectively. WebBank had a total
of $375,968 and $328,280 in cash, lines of credit and access to the Federal Reserve Bank discount window at December 31, 2017
and 2016, respectively, which represents approximately 59.8% and 70.7%, respectively, of WebBank's total assets.
Contractual Commitments and Contingencies
Our consolidated contractual obligations as of December 31, 2017 are identified in the table below:
Debt obligations (1)
Estimated interest expense (1), (2)
Deposits (3)
Operating lease obligations
Capital lease obligations
Minimum pension contributions (4)
Preferred unit liability(5)
Total
Payments Due By Period
Less Than 1
Year
1 - 3 Years
3 - 5 Years
Thereafter
Total
$
2,083
$
4,432
$
408,152
$
— $
14,454
305,207
10,153
1,858
33,138
—
28,823
205,793
12,174
2,246
71,076
40,000
27,344
—
8,489
2,246
65,376
—
—
—
14,608
1,872
44,138
—
414,667
70,621
511,000
45,424
8,222
213,728
40,000
$
366,893
$
364,544
$
511,607
$
60,618
$
1,303,662
(1) Assumes repayment of the $406,981 balance outstanding on SPLP's secured revolving credit facility on its November 14, 2022 contractual
maturity date. The outstanding balance on SPLP's Credit Agreement will fluctuate before maturity, and the repayment dates and amounts
may differ.
(2) Estimated interest expense does not include non-cash amortization of debt issuance costs, which is included in interest expense in the
Company's consolidated financial statements. The interest rates used to estimate future interest expense were based on interest rates at
December 31, 2017. As the majority of the Company's long-term debt bears interest at variable rates, any future interest rate fluctuations
will impact future cash payments.
(3) Excludes interest.
(4) Represents total expected required minimum pension plan contributions to the WHX Corporation Pension Plan, the JPS Pension Plan and
API's pension plan in the United Kingdom for 2018, 2019, 2020, 2021, 2022 and for the five years thereafter. Actual future pension costs
and required funding obligations will be affected by changes in the factors and assumptions described elsewhere in this Annual Report on
Form 10-K, as well as other changes such as any plan termination or other acceleration events.
(5) Represents redemption of 1,600,000 6.0% Series A preferred units, no par value ("SPLP Preferred Units") on the third anniversary of the
original issuance date of the SPLP Preferred Units (February 7, 2020) at a redemption price equal to the liquidation preference value of $25
per unit, in cash. In addition to the amount in the table above, the limited partnership agreement also specifies that if the SPLP Preferred
Units are not redeemed earlier, then on the ninth anniversary of the original issuance date (February 7, 2026), the remaining SPLP Preferred
Units will be redeemed. The redemption price will be $25 per unit in cash or in common units or a combination thereof, at the sole discretion
of the Company's Board of Directors. Upon redemption, the holders of the SPLP Preferred Units will also receive any accumulated and
unpaid distributions as of the redemption date. The SPLP Preferred Units entitle the holders to a cumulative quarterly cash or in-kind (or a
combination thereof) distribution, if and when declared at the discretion of the Company's Board of Directors.
Environmental Liabilities
33
Certain of the Company's facilities are subject to environmental remediation obligations. The Company has estimated its
liability to remediate these sites, and has recorded $10,949 at December 31, 2017. For further discussion regarding these
commitments, among others, see Note 18 - "Commitments and Contingencies" to the Company's consolidated financial statements
found elsewhere in this Form 10-K.
Deposits
Deposits at WebBank at December 31, 2017 and 2016 were as follows:
Current
Long-term
Total
2017
2016
305,207
205,793
511,000
$
$
196,944
168,661
365,605
$
$
The increase in deposits at December 31, 2017 compared with 2016 is due to WebBank's asset growth. The average
original maturity for time deposits at December 31, 2017 was 27 months compared with 30 months at December 31, 2016.
The following table details the maturity of time deposits as of December 31, 2017:
Certificate of deposits less than $100
Certificate of deposits of $100 or more
Total certificates of deposits
Off-Balance Sheet Risk
< 3 Months
3 to 6 Months
Maturity
6 to 12
Months
> 12 Months
Total
$
$
31,975
9,919
41,894
$
$
38,044
5,148
43,192
$
$
81,000
25,442
106,442
$
$
205,793
—
205,793
$
$
356,812
40,509
397,321
It is not the Company's usual business practice to enter into off-balance sheet arrangements such as guarantees on loans
and financial commitments, indemnification arrangements and retained interests in assets transferred to an unconsolidated entity
for securitization purposes. SPLP uses the same credit policy in making commitments and conditional obligations as it does for
on-balance sheet instruments.
WebBank is a party to financial instruments with off-balance sheet risk. In the normal course of business, these financial
instruments include commitments to extend credit in the form of loans as part of WebBank's lending arrangements with Marketing
Partners. Those instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized
on the Company's consolidated balance sheets. The contract amounts of those instruments reflect the extent of involvement
WebBank has in particular classes of financial instruments.
At December 31, 2017 and 2016, WebBank's undisbursed commitments under these instruments totaled $148,529 and
$184,784, respectively. Commitments to extend credit are agreements to lend to a borrower who meets the lending criteria
established by WebBank through one of WebBank's lending agreements with Marketing Partners, provided there is no violation
of any condition established in the contract with the counterparty to the lending arrangement. Commitments generally have fixed
expiration dates or other termination clauses and may require payment of a fee, and in some cases are subject to ongoing adjustment
by WebBank. Since certain of the commitments are expected to expire without the credit being extended, the total commitment
amounts do not necessarily represent future cash requirements. WebBank evaluates each prospective borrower's credit worthiness
on a case-by-case basis. The amount of collateral obtained if deemed necessary by WebBank upon extension of credit is based on
management's credit evaluation of the borrower and WebBank's Marketing Partner.
WebBank's exposure to credit loss in the event of nonperformance by the other party to the financial instrument for
commitments to extend credit is represented by the contractual amount of those instruments. WebBank uses the same credit policy
in making commitments and conditional obligations as it does for on-balance sheet instruments.
WebBank estimates an allowance for potential losses on off-balance sheet contingent credit exposures related to the
guaranteed amount of its Small Business Administration ("SBA") and United States Department of Agriculture ("USDA") loans
and whether or not the SBA/USDA honors the guarantee. WebBank determines the allowance for these contingent credit exposures
based on historical experience and portfolio analysis. The allowance is included with other liabilities on the Company's consolidated
balance sheets, with any related increases or decreases in the reserve included in SG&A in the Company's consolidated statements
34
of operations. WebBank's allowance for credit losses on off-balance sheet contingent credit exposures was not significant as of
December 31, 2017 and 2016.
Critical Accounting Policies
The Company's discussion and analysis of financial condition and results of operations is based upon its consolidated
financial statements, which have been prepared in conformity with accounting principles generally accepted in the United States
of America ("U.S. GAAP"). Preparation of these financial statements requires the Company to make estimates and judgments that
affect the reported amounts of assets, liabilities, revenues, expenses and related disclosure of contingent assets and liabilities.
Estimates are based on historical experience, expected future cash flows and various other assumptions that are believed to be
reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets
and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates.
Note 2 to the Company's consolidated financial statements, included elsewhere in this Annual Report on Form 10-K,
includes a summary of the significant accounting policies and methods used in the preparation of the consolidated financial
statements. The following is a discussion of the critical accounting policies and methods used by the Company.
Goodwill and Other Intangible Assets, Net
Goodwill, which is not amortized, represents the difference between the purchase price and the fair value of identifiable
net assets acquired in a business combination. We review goodwill for impairment indicators throughout the year and test for
impairment annually in the fourth quarter. An entity can choose between two testing approaches:
a. Step 0 or Qualitative approach - An entity may assess qualitative factors to determine whether it is more likely than
not (that is, a likelihood of more than 50 percent) that the fair value of a reporting unit is less than its carrying amount, including
goodwill. In evaluating whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount, an
entity shall assess relevant events and circumstances. Examples of such events and circumstances would include pertinent
macroeconomic conditions, industry and market considerations, overall financial performance and other factors.
An entity has an unconditional option to bypass this qualitative assessment for any reporting unit in any period and
proceed directly to performing the first step of the goodwill impairment test. An entity may resume performing the qualitative
assessment in any subsequent period.
b. Step 1 or Quantitative approach - The fair value of a reporting unit is calculated and compared with its carrying amount.
There are several methods that may be used to estimate a reporting unit's fair value, including market quotations, asset and liability
fair values and other valuation techniques, including, but not limited to, discounted projected future net earnings or net cash flows
and multiples of earnings. If the fair value of a reporting unit exceeds its carrying amount, there is no indication of impairment,
and further testing is not required. If the carrying amount of a reporting unit exceeds its fair value, then a second step of testing is
required ("Step 2"). The second step of the goodwill impairment test compares the implied fair value of the reporting unit's goodwill
with the carrying amount of that goodwill.
For 2017, the Company utilized a qualitative approach for all of its reporting units to assess its goodwill as of its most
recent assessment date. Based on this assessment, the Company does not believe that any of its reporting units are at risk of failing
Step 1 of the goodwill impairment test. For 2016, the Company utilized a qualitative approach for all of its reporting units except
for one reporting unit within its Diversified Industrial segment. As a result of the assessment, a goodwill impairment of $24,254
was recorded in the year ended December 31, 2016. This impairment resulted from a decline in market conditions and lower
demand for certain product lines of the performance materials business. In 2015, the Company utilized a quantitative approach,
and recorded a goodwill impairment of approximately $19,571 in our Energy segment, resulting from the adverse effects of a
decline in energy prices.
Other intangible assets with indefinite lives are not amortized, while other intangible assets with finite lives are amortized
over their estimated useful lives. Intangible assets with finite lives are reviewed for impairment when events or changes in
circumstances indicate that the carrying amount may not be recoverable (see "Long-Lived Asset Testing" below).
Intangible assets with indefinite lives, which are only within the Diversified Industrial segment, are tested for impairment
at least annually, or when events or changes in circumstances indicate that it is more likely than not that the asset is impaired.
Companies can use the same two testing approaches for indefinite lived intangibles as for goodwill. For 2017, 2016, and 2015,
the Company utilized a qualitative approach to assess its intangible assets with indefinite lives as of December 31, and the results
indicated no impairment in any of these years.
35
Long-Lived Asset Testing
The Company estimates the depreciable lives of property, plant and equipment, and reviews long-lived assets for
impairment whenever events, or changes in circumstances, indicate the carrying amount of such assets may not be recoverable.
If the carrying values of the long-lived assets exceed the sum of the undiscounted cash flows, an impairment charge is recognized
in the amount by which the carrying values exceeds their fair values. The Company performs such assessments at the lowest level
for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities, which is generally at the
plant level or the reporting unit level, depending on the level of interdependencies in the Company's operations.
The Company considers various factors in determining whether an impairment test is necessary, including among other
things: a significant or prolonged deterioration in operating results and projected cash flows; significant changes in the extent or
manner in which assets are used; technological advances with respect to assets which would potentially render them obsolete; the
Company's strategy and capital planning; and the economic climate in the markets it serves. When estimating future cash flows
and if necessary, fair value, the Company makes judgments as to the expected utilization of assets and estimated future cash flows
related to those assets. The Company considers historical and anticipated future results, general economic and market conditions,
the impact of planned business and operational strategies and other information available at the time the estimates are made. The
Company believes these estimates are reasonable; however, changes in circumstances or conditions could have a significant impact
on its estimates, which might result in material impairment charges in the future.
Pension and Other Post-Retirement Benefit Costs
Some of the Company's subsidiaries maintain qualified and non-qualified pension and other post-retirement benefit plans.
The Company recorded pension expense of $5,169 for the year ended December 31, 2017, and, at December 31, 2017, the Company
had recorded pension liabilities totaling $268,233. Pension benefits are generally based on years of service and the amount of
compensation earned during the participants' employment. However, the qualified pension benefits have been frozen for all
participants.
The pension and other post-retirement benefit costs are developed from actuarial valuations. Inherent in these valuations
are key assumptions, including discount and mortality rates and expected long-term rates of return on plan assets. Material changes
in pension and other post-retirement benefit costs may occur in the future due to changes in these assumptions, changes in the
number of plan participants, changes in the level of benefits provided, changes to the level of contributions to these plans and
other factors.
Actuarial assumptions for its pension and other post-retirement benefit plans are determined each year to calculate liability
information as of December 31, and pension and other post-retirement benefit expense or income for the following year. The
discount rate assumption is derived from the rate of return on high-quality bonds.
The various pension plan assets are diversified as to type of assets, investment strategies employed and number of
investment managers used. Investments may include equities, fixed income, cash equivalents, convertible securities and private
investment funds. Derivatives may be used as part of the investment strategy. The transfer of assets may be directed between
investment managers in order to rebalance the portfolio in accordance with asset allocation guidelines established by the Company's
subsidiaries. The private investment funds, or the investment funds they are invested in, own marketable and non-marketable
securities and other investment instruments. Such investments are valued by the private investment funds, underlying investment
managers or the underlying investment funds at fair value, as described in their respective financial statements and offering
memorandums. These values are utilized in quantifying the value of the assets of its pension plans, which are then used in the
determination of the unfunded pension liabilities on the Company's consolidated balance sheets. Because of the inherent uncertainty
of valuation of some of the pension plans' investments in private investment funds and the nature of some of the underlying
investments held by the investment funds, the recorded value may differ from the value that would have been used had a ready
market existed for some of these investments for which market quotations are not readily available. Management uses judgment
to make assumptions on which its employee benefit liabilities and expenses are based. The effect of a 1% change in two key
assumptions for the pension plans sponsored by the Company's subsidiaries would not be material to the Company.
Loans Receivable, Including Loans Held for Sale
WebBank's loan activities include several lending arrangements with companies where it originates private label credit
card and other loans for consumers and small businesses. These loans are classified as Loans receivable and are typically sold
after origination. As part of these arrangements, WebBank earns origination fees that are recorded in non-interest income. Fees
36
earned from these lending arrangements are recorded as fee income. WebBank also purchases participations in commercial and
industrial loans through loan syndications. Loans that management has the intent and ability to hold for the foreseeable future, or
until maturity or pay-off, generally are reported at their outstanding unpaid principal balances adjusted for charge-offs, the allowance
for loan losses and any deferred fees or costs on originated loans. Interest income is accrued on the unpaid principal balance. Loan
origination fees, net of certain direct origination costs, are deferred and recognized as an adjustment of the related loan yield over
the estimated life of the loan.
Loans held for sale are carried at the lower of cost or estimated market value in the aggregate. A valuation allowance is
recorded when cost exceeds fair value based on our determination at the time of reclassification and periodically thereafter. Gains
and losses are recorded in noninterest income based on the difference between sales proceeds and carrying value and impairments
from reductions in carrying value.
Loans are reported as past due when either principal or interest is due and unpaid for a period of 30 days or more. The
accrual of interest on loans is discontinued at the time the loan is 90 days delinquent unless the loan is well-secured and in process
of collection. In all cases, loans are placed on nonaccrual or charged-off at an earlier date if collection of principal or interest is
considered doubtful.
All interest accrued but not collected for loans that are placed on nonaccrual or charged off is reversed against interest
income. The interest on these loans is accounted for on the cash-basis or cost-recovery method until qualifying for return to accrual.
Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future
payments are reasonably assured.
Loan Impairment and Allowance for Loan Losses
A loan is considered impaired when, based on current information and events, it is probable that WebBank will be unable
to collect all amounts due according to the contractual terms of the loan agreement, including scheduled interest payments. When
a loan has been identified as being impaired, the amount of impairment is measured based on the present value of expected future
cash flows discounted at the loan's effective interest rate or, when appropriate, the loan's observable fair value or the fair value of
the collateral (less any selling costs) if the loan is collateral-dependent. If the measurement of the impaired loan is less than the
recorded investment in the loan (including accrued interest, net of deferred loan fees or costs and unamortized premium or discount),
an impairment is recognized by creating or adjusting an existing allocation of the allowance for loan losses, or by charging down
the loan to its value determined in accordance with U.S. GAAP.
The allowance for loan losses is established as losses are estimated to have occurred through a provision for loan losses
charged to earnings. Loan losses are charged against the allowance when the uncollectability of a loan or receivable balance is
confirmed. Subsequent recoveries, if any, are credited to the allowance. The allowance for loan losses is evaluated on a regular
basis and is based upon a periodic review of the collectability of the amounts due in light of historical experience, the nature and
volume of the loan portfolio, adverse situations that may affect the borrower's ability to repay, estimated value of any underlying
collateral and prevailing economic conditions. This evaluation is inherently subjective as it requires estimates that are susceptible
to significant revision as more information becomes available. The allowance consists of specific and general components. The
specific component relates to loans that are classified as doubtful, substandard or loss. For such loans that are classified as impaired,
an allowance is established when the discounted cash flows (or collateral value or observable market price) of the impaired loan
is lower than the carrying value of that loan. The general component covers non-classified loans and is based on historical loss
experience and is adjusted for qualitative factors to cover uncertainties that could affect the estimate of probable losses. The
allowance for loan losses is increased by charges to income and decreased by charge-offs (net of recoveries). The periodic evaluation
of the adequacy of the allowance is based on WebBank's past loss experience, known and inherent risks in the portfolio, adverse
situations that may affect the debtor's ability to repay, the estimated value of any underlying collateral and current economic
conditions.
Marketable Securities and Long-Term Investments
Marketable securities are classified as available-for-sale and consist of short-term deposits, corporate debt and equity
instruments, and mutual funds. The Company classifies its Marketable securities as current assets based on the nature of the
securities and their availability for use in current operations. Long-term investments consist of available-for-sale securities and
equity method investments. Held-to-maturity securities are classified in Other non-current assets. SPLP determines the appropriate
classifications of its investments at the acquisition date and re-evaluates the classifications at each balance sheet date.
• Available-for-sale securities are reported at fair value, with unrealized gains and losses recognized in Accumulated other
comprehensive loss as a separate component of Partners' capital.
37
• Associated companies represent equity method investments in companies where our ownership is between 20% and 50% of
the outstanding equity, and the Company has the ability to exercise influence, but not control, over the investee. For equity
method investments where the fair value option has been elected, unrealized gains and losses are reported in the Company's
consolidated statements of operations as part of Income (loss) of associated companies and other investments held at fair value.
For the equity method investments where the fair value option has not been elected, SPLP records the investment at cost and
subsequently increases or decreases the investment by its proportionate share of the net income or losses and other comprehensive
income of the investee.
• Held-to-maturity securities are recorded at amortized cost, adjusted for the amortization or accretion of premiums or discounts.
Dividend and interest income is recognized when earned. Realized gains and losses on available-for-sale securities are
included in earnings and are derived using the specific-identification method. Commission expense is recorded as a reduction of
sales proceeds on investment sales. Commission expense on purchases is included in the cost of investments on the Company's
consolidated balance sheets.
Other Than Temporary Impairment
If the Company believes a decline in the market value of any available-for-sale, equity method or held-to-maturity security
below cost is other than temporary, a loss is charged to earnings, which establishes a new cost basis for the security. Impairment
losses are included in Asset impairment charges in the Company's consolidated statements of operations. SPLP's determination
of whether a security is other than temporarily impaired incorporates both quantitative and qualitative information. The Company
considers a number of factors including, but not limited to, the length of time and the extent to which the fair value has been less
than cost, the length of time expected for recovery, the financial condition of the issuer, the reason for the decline in fair value,
changes in fair value subsequent to the balance sheet date, the ability and intent to hold investments to maturity, and other factors
specific to the individual investment. Specifically, for held-to-maturity securities, the Company considers whether it plans to sell
the security or it is more-likely-than-not that it will be required to sell the security before recovery of its amortized cost. The credit
component of an other-than-temporary impairment loss is recognized in earnings and the non-credit component is recognized in
Accumulated other comprehensive loss in situations where the Company does not intend to sell the security and it is more likely-
than-not that the Company will not be required to sell the security prior to recovery. If there is an other-than-temporary impairment
in the fair value of any individual security classified as held-to-maturity, the Company writes down the security to fair value with
a corresponding credit loss portion charged to earnings, and the non-credit portion being charged to Accumulated other
comprehensive loss. SPLP's assessment involves a high degree of judgment, and accordingly, actual results may differ materially
from those estimates and judgments. Based on their respective balances as of December 31, 2017, we estimate that in the event
of a 10% adverse change in the fair values of our marketable securities and long-term investments, the fair values would decrease
by approximately $5,831 and $23,614, respectively. For additional information on other-than-temporary impairments recorded on
available-for-sale securities, see Note 9 - "Investments" to the SPLP consolidated financial statements found elsewhere in this
Form 10-K.
Income Taxes
As a limited partnership, we are generally not responsible for federal and state income taxes, and our profits and losses
are passed directly to our limited partners for inclusion in their respective income tax returns. Our subsidiaries that are corporate
subsidiaries are subject to federal and state income taxes. The table in Note 15 - "Income Taxes" to the SPLP consolidated financial
statements, found elsewhere in this Form 10-K, reconciles a hypothetical calculation of federal income taxes based on the federal
statutory rate applied to the income or loss from continuing operations before income taxes, equity method income (loss) and
investments held at fair value. The tax effect of income passed through to common unitholders is subtracted from the hypothetical
calculation.
Our subsidiaries that are subject to income taxes use the liability method of accounting for such taxes. Under the liability
method, deferred tax assets and deferred tax liabilities are recognized for the future tax consequences attributable to differences
between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss
and tax credit carryforwards. Deferred tax assets and deferred tax liabilities are measured using enacted tax rates expected to apply
to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred
tax assets and deferred tax liabilities of a change in tax rates is recognized in income in the period that includes the enactment
date. Our subsidiaries and associated companies evaluate the recoverability of deferred tax assets and establish a valuation allowance
when it is more likely than not that some portion of the deferred tax assets will not be realized.
With respect to the Tax Cuts and Jobs Act, which was enacted in December 2017, the SEC has stated that a company
may record provisional amounts during a measurement period for specific income tax effects of the Tax Cuts and Jobs Act for
which the accounting is incomplete, but a reasonable estimate can be determined. When unable to determine a reasonable estimate
38
for any income tax effects, the company may report provisional amounts in the first reporting period in which a reasonable estimate
can be determined. The Company has recorded an impact of the tax effects of the Tax Cuts and Jobs Act, relying on reasonable
estimates where the accounting is incomplete as of December 31, 2017. As guidance and technical corrections are issued in the
upcoming quarters, the Company will record updates to its original provisional estimates if needed.
When tax returns are filed, it is highly certain that most positions taken would be sustained upon examination by the
taxing authorities, while others are subject to uncertainty about the merits of the position taken or the amount of the position that
would be ultimately sustained. The benefit of a tax position is recognized in the financial statements in the period during which,
based on all available evidence, management believes it is more likely than not that the position will be sustained upon examination,
including the resolution of appeals or litigation processes, if any. Tax positions taken are not offset or aggregated with other
positions. Tax positions that meet the more-likely-than-not recognition threshold are measured as the largest amount of tax benefit
that is more than 50% likely of being realized upon settlement with the applicable taxing authority. The portion of the benefits
associated with tax positions taken that exceeds the amount measured as described above is reflected as a liability for unrecognized
tax benefits in the accompanying balance sheet, along with any associated interest and penalties that would be payable to the taxing
authorities upon examination.
Environmental Remediation
The facilities and operations of the Company's subsidiaries are subject to extensive environmental laws and regulations
imposed by federal, state, foreign and local authorities relating to the protection of the environment. Accruals for losses associated
with environmental remediation obligations are recorded when such losses are probable and reasonably estimable, which is a
critical accounting estimate. Accruals for estimated losses from environmental remediation obligations generally are recognized
no later than completion of the remedial feasibility study. Such accruals are adjusted as further information develops or
circumstances change. Costs of future expenditures for environmental remediation obligations are not discounted to their present
value. Recoveries of environmental remediation costs from other parties are recorded as assets when their receipt is deemed
probable. Reserves may not be adequate to cover the ultimate costs of remediation, including discovery of additional contaminants
or the imposition of additional cleanup obligations, which could result in significant additional costs, unfavorably impacting the
Company's financial position and results of operations.
New or Recently Adopted Accounting Pronouncements
For a discussion of the Company's new or recently adopted accounting pronouncements, see Note 2 - "Summary of
Significant Accounting Policies" to the SPLP consolidated financial statements found elsewhere in this Form 10-K .
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
In this "Quantitative and Qualitative Disclosure About Market Risk" section, all dollar amounts are in thousands.
Market risk is the risk of loss arising from adverse changes in market rates and prices, such as interest rates, foreign currency
exchange rates and commodity prices. Our significant market risks are primarily associated with interest rates, equity prices and,
to a lesser extent, derivatives. The following sections address the significant market risks associated with our business activities.
SPLP's quantitative and qualitative disclosures about market risk include forward-looking statements with respect to
management's opinion about the risk associated with the Company's financial instruments. These statements are based on certain
assumptions with respect to market prices, interest rates and other industry-specific risk factors. To the extent these assumptions
prove to be inaccurate, future outcomes may differ materially from those discussed herein.
Risks Relating to Investments
The Company's investments are primarily classified as marketable securities or long-term investments and are primarily
recorded on the Company's balance sheets at fair value. These investments are subject to equity price risk. The Company evaluates
its investments for impairment on a quarterly basis.
At December 31, 2017, marketable securities aggregated approximately $58,313, which includes mutual funds and
corporate equities that are reported at fair value. In addition, financial instrument obligations aggregated $15,629 at December 31,
2017. A change in the equity price of these securities would result in a change in value of such securities in future periods.
39
Included in the Company's Long-term investments are available-for-sale equity securities and certain associated company
investments which are both subject to equity price risk.
• The available-for-sale securities are recorded on the Company's balance sheets at an aggregate fair value of $141,694 (see Note
9 - "Investments" to the SPLP consolidated financial statements found elsewhere in this Form 10-K). A change in the price of
these securities would result in a change in value of such securities in future periods and would impact our results in future
periods.
• The Company's associated company investments as of December 31, 2017 and 2016 include its investment in Aviat Networks,
Inc. and in STCN. The Company has elected the fair value option for such investments. At December 31, 2017, the investments
are carried at a total fair value of $55,443 (see Note 9 - "Investments" to the SPLP consolidated financial statements found
elsewhere in this Form 10-K). A change in the equity price of our investment in these securities would result in a change in value
of such securities and would impact our results in future periods.
Risks Relating to Interest Rates
The fair value of cash and cash equivalents, trade and other receivables, trade payables and short-term borrowings
approximate their carrying values and are relatively insensitive to changes in interest rates due to the short-term maturities of these
instruments or the variable nature of the associated interest rates.
Credit Facilities and Pension Obligations
At December 31, 2017, the Company's long-term debt obligations were comprised primarily of variable rate instruments.
Accordingly, the fair value of such instruments may be relatively sensitive to effects of interest rate fluctuations. An increase or
decrease in interest expense from a 1% change in interest rates would be approximately $4,100 on an annual basis based on total
variable-interest debt outstanding as of December 31, 2017. In addition, the fair value of such instruments is also affected by
investors' assessments of the risks associated with industries in which the Company operates, as well as its overall creditworthiness
and ability to satisfy such obligations upon their maturity.
A reduction in long-term interest rates could materially increase the Company's cash funding obligations to its pension
and other post-retirement benefit plans.
WebBank
WebBank derives a portion of its income from the excess of interest collected over interest paid. The rates of interest
WebBank earns on assets and pays on liabilities generally are established contractually for a period of time. Market interest rates
change over time. Accordingly, WebBank's results of operations, like those of most financial institutions, are impacted by changes
in interest rates and the interest rate sensitivity of its assets and liabilities.
WebBank monitors and measures its exposure to changes in interest rates in order to comply with applicable government
regulations and risk policies established by WebBank's board of directors and in order to preserve shareholder value. In monitoring
interest rate risk, WebBank analyzes assets and liabilities based on characteristics including size, coupon rate, repricing frequency,
maturity date and likelihood of prepayment.
WebBank currently focuses held-to-maturity lending efforts toward originating competitively priced adjustable-rate or
fixed-rate loan products with short to intermediate terms to maturity, generally 7 years or less. This theoretically allows WebBank
to maintain a portfolio of loans that will have relatively little sensitivity to changes in the level of interest rates, while providing a
reasonable spread over the cost of liabilities used to fund the loans.
The principal objective of WebBank's asset/liability management is to manage the sensitivity of Market Value of Equity
("MVE") to changing interest rates. Asset/liability management is governed by policies reviewed and approved annually by
WebBank's board of directors. WebBank's board of directors has delegated the responsibility to oversee the administration of these
policies to WebBank's asset/liability committee, or "ALCO." The interest rate risk strategy currently deployed by ALCO is to
primarily use "natural" balance sheet hedging (as opposed to derivative hedging). ALCO fine tunes the overall MVE sensitivity by
recommending lending and deposit strategies. WebBank then executes the recommended strategy by increasing or decreasing the
duration of the loan and deposit products, resulting in the appropriate level of market risk that WebBank's board of directors wants
to maintain.
40
WebBank measures interest rate sensitivity as the difference between amounts of interest earning assets and interest bearing
liabilities that mature or reprice within a given period of time. The difference provides an indication of the extent to which an
institution's interest rate spread will be affected by changes in interest rates. If the amount of interest rate sensitive assets exceeds
the amount of interest rate sensitive liabilities, then the bank is considered to be asset sensitive. If the amount of interest rate sensitive
liabilities exceeds the amount of interest rate sensitive assets, then the bank is considered to be liability sensitive. In a rising interest
rate environment, an institution that is asset sensitive would be in a better position than an institution that is liability sensitive because
the yield on its assets would increase at a faster pace than the cost of its interest bearing liabilities. During a period of falling interest
rates, however, an institution that is asset sensitive would tend to have its assets reprice at a faster rate than its liabilities, which
would tend to reduce the growth in its net interest income. The opposite is true if the institution is liability sensitive.
WebBank's board of directors and relevant government regulations establish limits on the level of acceptable interest rate
risk at WebBank to which management adheres. There can be no assurance, however, that, in the event of an adverse change in
interest rates, WebBank's efforts to limit interest rate risk will be successful.
Risks Relating to Commodity Prices
In the normal course of business, our operations are exposed to market risk or price fluctuations related to the purchase of
electricity, natural gas, fuel and petroleum-based commodities, including adhesives, and other products, such as yarns, precious
metals, electronic and electrical components, steel products and certain non-ferrous metals used as raw materials. The Company is
also exposed to the effects of price fluctuations on the value of its commodity inventories, in particular, its precious metal inventory.
The raw materials and energy which we use are largely commodities, subject to price volatility caused by changes in global supply
and demand and governmental controls.
The Company's market risk strategy has generally been to obtain competitive prices for its products and services, sourced
from more than one vendor, and allow operating results to reflect market price movements dictated by supply and demand. The
Company enters into commodity futures and forward contracts to mitigate the impact of price fluctuations on its precious and certain
non-precious metal inventories that are not subject to fixed price contracts. The Company's hedging strategy is designed to protect
it against normal volatility; therefore, abnormal price changes in these commodities or markets could negatively impact the
Company's earnings. Certain of these derivatives are not designated as accounting hedges under Accounting Standards Codification
Subtopic 815-10, Derivatives and Hedging. As of December 31, 2017, the Company had entered into forward contracts, with
settlement dates through January 2018, for silver with a total value of $2,300, for gold with a total value of $1,000, for copper with
a total value of $900 and for tin with a total value of $500. There were no futures contracts outstanding at December 31, 2017.
To the extent that we have not mitigated our exposure to rising raw material and energy prices, we may not be able to
increase our prices to our customers to offset such potential raw material or energy price increases, which could have a material
adverse effect on our results of operations and operating cash flows.
Risks Relating to Foreign Currency Exchange
The Company, primarily through its Diversified Industrial segment subsidiaries, manufactures and sells its products in a
number of countries throughout the world and, as a result, is exposed to movements in foreign currency exchange rates. The
Company's major foreign currency exposures involve the markets in Asia, Europe, Canada and Mexico. The Company is subject
to the risk of price fluctuations related to anticipated revenues and operating costs, firm commitments for capital expenditures and
existing assets or liabilities denominated in currencies other than the U.S. dollar. The Company has not generally used derivative
instruments to manage these specific risks; however, API enters into foreign currency forward contracts to hedge certain of its
receivables and payables denominated in other currencies. In addition, API enters into foreign currency forward contracts to hedge
the value of certain of its future sales denominated in Euros and the value of certain of its future purchases denominated in U.S.
dollars.
41
Item 8. Financial Statements and Supplementary Data
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Reports of Independent Registered Public Accounting Firm
Consolidated Financial Statements:
Consolidated Balance Sheets as of December 31, 2017 and 2016
Consolidated Statements of Operations for the years ended December 31, 2017, 2016 and 2015
Consolidated Statements of Comprehensive Income (Loss) for the years ended December 31, 2017, 2016 and 2015
Consolidated Statements of Changes in Capital for the years ended December 31, 2017, 2016 and 2015
Consolidated Statements of Cash Flows for the years ended December 31, 2017, 2016 and 2015
Notes to Consolidated Financial Statements
Page
43
45
46
47
48
49
50
42
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Unitholders
Steel Partners Holdings L.P.
New York, New York
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of Steel Partners Holdings L.P. (the "Company") and subsidiaries
as of December 31, 2017 and 2016, the related consolidated statements of operations, comprehensive income (loss), changes in
capital, and cash flows for each of the three years in the period ended December 31, 2017, and the related notes (collectively referred
to as the "consolidated financial statements"). In our opinion, the consolidated financial statements present fairly, in all material
respects, the financial position of the Company and subsidiaries at December 31, 2017 and 2016, and the results of their operations
and their cash flows for each of the three years in the period ended December 31, 2017, in conformity with accounting principles
generally accepted in the United States of America.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States)
("PCAOB"), the Company's internal control over financial reporting as of December 31, 2017, based on criteria established in
Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission
("COSO") and our report dated March 8, 2018 expressed an unqualified opinion thereon.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an
opinion on the Company's consolidated financial statements based on our audits. We are a public accounting firm registered with
the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws
and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether
due to error or fraud.
Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements,
whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a
test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included
evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall
presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ BDO USA, LLP
We have served as the Company's auditor since 2013.
New York, New York
March 8, 2018
43
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Unitholders
Steel Partners Holdings L.P.
New York, New York
Opinion on Internal Control over Financial Reporting
We have audited Steel Partners Holdings L.P.'s (the "Company's") internal control over financial reporting as of December 31, 2017,
based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations
of the Treadway Commission (the "COSO criteria"). In our opinion, the Company maintained, in all material respects, effective
internal control over financial reporting as of December 31, 2017, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States)
("PCAOB"), the consolidated balance sheets of the Company and subsidiaries as of December 31, 2017 and 2016, the related
consolidated statements of operations, comprehensive income (loss), changes in capital, and cash flows for each of the three years
in the period ended December 31, 2017, and the related notes and our report dated March 8, 2018 expressed an unqualified opinion
thereon.
Basis for Opinion
The Company's management is responsible for maintaining effective internal control over financial reporting and for its assessment
of the effectiveness of internal control over financial reporting, included in the accompanying "Item 9A, Management's Report on
Internal Control over Financial Reporting". Our responsibility is to express an opinion on the Company's internal control over
financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent
with respect to the Company in accordance with U.S. federal securities laws and the applicable rules and regulations of the Securities
and Exchange Commission and the PCAOB.
We conducted our audit of internal control over financial reporting in accordance with the standards of the PCAOB. Those standards
require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial
reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial
reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of
internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary
in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control over Financial Reporting
A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability
of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted
accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain
to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets
of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable
assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that
could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections
of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes
in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ BDO USA, LLP
New York, New York
March 8, 2018
44
STEEL PARTNERS HOLDINGS L.P.
Consolidated Balance Sheets
(in thousands, except common units)
ASSETS
Current assets:
Cash and cash equivalents
Restricted cash
Marketable securities
Trade and other receivables - net of allowance for doubtful accounts of $3,633 and $3,040, respectively
Receivables from related parties
Loans receivable, including loans held for sale of $136,773 and $80,692, respectively, net
Inventories, net
Prepaid expenses and other current assets
Assets held for sale
Total current assets
Long-term loans receivable, net
Goodwill
Other intangible assets, net
Deferred tax assets
Other non-current assets
Property, plant and equipment, net
Long-term investments
Total Assets
LIABILITIES AND CAPITAL
Current liabilities:
Accounts payable
Accrued liabilities
Financial instruments
Deposits
Payables to related parties
Short-term debt
Current portion of long-term debt
Other current liabilities
Liabilities of discontinued operations
Total current liabilities
Long-term deposits
Long-term debt
Preferred unit liability
Accrued pension liabilities
Deferred tax liabilities
Other non-current liabilities
Total Liabilities
Commitments and Contingencies
Capital:
Partners' capital common units: 26,348,420 and 26,152,976 issued and outstanding (after deducting
10,868,367 and 10,558,687 units held in treasury, at cost of $170,858 and $164,900), respectively
Accumulated other comprehensive loss
Total Partners' Capital
Noncontrolling interests in consolidated entities
Total Capital
Total Liabilities and Capital
December 31, 2017
December 31, 2016
$
418,755
$
15,629
58,313
188,487
355
182,242
142,635
19,597
2,549
1,028,562
87,826
170,115
199,317
109,011
61,074
271,991
236,144
450,128
12,640
53,650
162,883
328
91,260
119,205
17,638
7,779
915,511
62,188
167,423
227,212
182,605
30,698
261,412
120,066
$
$
2,164,040
$
1,967,115
105,221
$
74,118
15,629
305,207
1,563
1,624
459
10,602
450
514,873
205,793
412,584
176,512
268,233
3,007
16,002
89,308
81,509
12,640
196,944
1,066
1,385
62,928
19,536
450
465,766
168,661
330,126
—
284,901
3,729
9,674
1,597,004
1,262,857
652,270
(106,167)
546,103
20,933
567,036
617,502
(68,761)
548,741
155,517
704,258
$
2,164,040
$
1,967,115
See accompanying Notes to Consolidated Financial Statements
45
STEEL PARTNERS HOLDINGS L.P.
Consolidated Statements of Operations
(in thousands, except common units and per common unit data)
Revenue:
Diversified industrial net sales
Energy net revenue
Financial services revenue
Total revenue
Costs and expenses:
Cost of goods sold
Selling, general and administrative expenses
Goodwill impairment charges
Asset impairment charges
Finance interest expense
Provision for (recovery of) loan losses
Interest expense
Realized and unrealized loss (gain) on derivatives
Other expense (income), net
Total costs and expenses
Income from continuing operations before income taxes, equity method income (loss) and other
investments held at fair value
Income tax provision (benefit)
(Income) loss of associated companies and other investments held at fair value, net of taxes
Net income from continuing operations
Discontinued operations:
Income from discontinued operations, net of taxes
Gain on sale of discontinued operations, net of taxes
Income from discontinued operations
Net income
Net (income) loss attributable to noncontrolling interests in consolidated entities:
Continuing operations
Discontinued operations
Net (income) loss attributable to noncontrolling interests in consolidated entities
Net (loss) income attributable to common unitholders
Net (loss) income per common unit - basic
Net (loss) income from continuing operations
Net income from discontinued operations
Net (loss) income attributable to common unitholders
Net (loss) income per common unit - diluted
Net (loss) income from continuing operations
Net income from discontinued operations
Net (loss) income attributable to common unitholders
Weighted-average number of common units outstanding - basic
Weighted-average number of common units outstanding - diluted
Year Ended December 31,
2017
2016
2015
$
1,156,187
$
998,556
$
135,461
80,379
93,995
70,998
1,372,027
1,163,549
958,490
337,719
—
2,028
4,685
5,639
22,804
145
94
815,576
282,298
24,254
17,259
2,595
774
11,052
(148)
(12,549)
1,331,604
1,141,111
40,423
51,299
(16,888)
6,012
—
—
—
6,012
(6,028)
—
(6,028)
(16) $
— $
—
— $
— $
—
— $
$
$
$
$
$
22,438
23,952
(4,085)
2,571
—
—
—
2,571
4,059
—
4,059
6,630
0.25
—
0.25
0.25
—
0.25
$
$
$
$
$
763,009
132,620
69,430
965,059
670,047
230,199
19,571
68,092
1,450
(50)
8,862
(588)
(55,893)
941,690
23,369
(78,719)
31,777
70,311
565
85,692
86,257
156,568
10,875
(30,708)
(19,833)
136,735
2.97
2.03
5.00
2.96
2.02
4.98
26,053,098
26,053,098
26,353,714
26,486,209
27,317,974
27,442,308
See accompanying Notes to Consolidated Financial Statements
46
STEEL PARTNERS HOLDINGS L.P.
Consolidated Statements of Comprehensive Income (Loss)
(in thousands)
Net income
Other comprehensive income (loss), net of tax:
Gross unrealized gains (losses) on available-for-sale securities
Reclassification of unrealized losses (gains) on available-for-sale securities (a)
Gross unrealized gains (losses) on derivative financial instruments
Currency translation adjustments
Changes in pension liabilities and other post-retirement benefit obligations
Other comprehensive income (loss)
Comprehensive income (loss)
Comprehensive (income) loss attributable to noncontrolling interests
Comprehensive income (loss) attributable to common unitholders
Tax provision (benefit) on gross unrealized gains and losses on available-for-sale securities
Tax provision (benefit) on reclassification of unrealized gains and losses on available-for-sale securities
Tax (benefit) provision on currency translation adjustments
Tax benefit on changes in pension liabilities and other post-retirement benefit obligations
Year Ended December 31,
2017
2016
2015
$
6,012
$
2,571
$
156,568
27,689
908
624
5,444
(6,452)
28,213
34,225
(8,300)
25,925
33,624
329
$
$
$
(249) $
13,413
(62)
(1,158)
(11,431)
(18,813)
(18,051)
(15,480)
7,617
(7,863) $
1,757
$
(36) $
113
$
(2,346) $
(6,676) $
(31,321)
4,932
(1,757)
(3,950)
(25,839)
(57,935)
98,633
(17,032)
81,601
(17,514)
19,416
(235)
(15,429)
$
$
$
$
$
(a) For the year ended December 31, 2017, pre-tax net unrealized holding gains of $790 and losses of $2,028 were reclassified to Other expense (income), net and
Asset impairment charges, respectively. For the year ended December 31, 2016, pre-tax net unrealized holding gains of $4,298 and losses of $4,200 were
reclassified to Other expense (income), net and Asset impairment charges, respectively. For the year ended December 31, 2015, pre-tax net unrealized holding
losses of $54,011 were reclassified to Other expense (income), net and Asset impairment charges, and unrealized holding gains of $29,663 were reclassified to
Other expense (income), net.
See accompanying Notes to Consolidated Financial Statements
47
STEEL PARTNERS HOLDINGS L.P.
Consolidated Statements of Changes in Capital
(in thousands, except common units and treasury units)
Steel Partners Holdings L.P. Common Unitholders
Common
Treasury Units
Partners'
Accumulated
Other
Comprehensive
Units
Units
Dollars
Capital
Income (Loss)
Total
Partners'
Capital
Noncontrolling
Interests in
Consolidated
Entities
Total
Capital
Balance at December 31, 2014
36,530,249
(8,964,049)
$ (138,363)
$
492,054
$
2,805
$
494,859
$
169,247
$
664,106
Net income
Unrealized (loss) gain on available-
for-sale securities
Unrealized losses on derivative
financial instruments
Currency translation adjustments
Changes in pension liabilities and
post-retirement benefit
obligations
Acquisition of CoSine
Units issued and vesting of
restricted units
Equity compensation - subsidiaries
Subsidiaries' purchases of the
Company's common units
Purchases of SPLP common units
Subsidiaries' purchases of their
common stock
Purchases of subsidiary shares from
noncontrolling interests
Other, net
—
—
—
—
—
—
157,664
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
(983,175)
(108,000)
(17,323)
(1,917)
—
—
—
—
—
—
136,735
—
136,735
19,833
156,568
—
—
—
—
—
2,281
4,628
(17,323)
(1,917)
(7,885)
3,583
146
(32,487)
(32,487)
6,098
(26,389)
(1,415)
(2,966)
(1,415)
(2,966)
(342)
(984)
(1,757)
(3,950)
(18,266)
(18,266)
—
—
—
—
—
—
(1,939)
—
—
2,281
4,628
(17,323)
(1,917)
(7,885)
1,644
146
(7,573)
12,841
(25,839)
12,841
—
2,531
—
—
2,281
7,159
(17,323)
(1,917)
(17,703)
(25,588)
(1,737)
117
(93)
263
Balance at December 31, 2015
36,687,913
(10,055,224)
(157,603)
612,302
(54,268)
558,034
182,328
740,362
Net income (loss)
Dividends declared
Unrealized gains on available-for-
sale securities
Unrealized losses on derivative
financial instruments
Currency translation adjustments
Changes in pension liabilities and
post-retirement benefit
obligations
Equity compensation - restricted
units
Equity compensation - subsidiaries
Purchases of SPLP common units
Subsidiaries' purchases of their
common stock
Other, net
—
—
—
—
—
—
23,750
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
(503,463)
(7,297)
—
—
—
—
6,630
(3,923)
—
—
—
—
375
1,949
(7,297)
13,573
(6,107)
—
—
6,630
(3,923)
(4,059)
—
2,571
(3,923)
11,877
11,877
1,474
13,351
(1,055)
(9,952)
(1,055)
(9,952)
(103)
(1,479)
(1,158)
(11,431)
(15,363)
(15,363)
(3,450)
(18,813)
—
—
—
—
—
375
1,949
(7,297)
13,573
(6,107)
—
1,067
—
375
3,016
(7,297)
(25,972)
(12,399)
5,711
(396)
155,517
704,258
Balance at December 31, 2016
36,711,663
(10,558,687)
(164,900)
617,502
(68,761)
548,741
Net (loss) income
Unrealized gains on available-for-
sale securities
Unrealized gains on derivative
financial instruments
Currency translation adjustments
Changes in pension liabilities and
post-retirement benefit
obligations
Equity compensation - incentive
units and vesting of restricted
units
Equity compensation - subsidiaries
Purchases of SPLP common units
Purchases of subsidiary shares from
noncontrolling interests
Other, net
—
—
—
—
—
505,124
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
(16)
—
—
—
—
9,635
580
(309,680)
(5,958)
(5,958)
—
(16)
6,028
6,012
27,786
27,786
569
4,512
569
4,512
(6,926)
(6,926)
—
—
—
9,635
580
(5,958)
811
55
932
474
—
317
—
28,597
624
5,444
(6,452)
9,635
897
(5,958)
—
—
—
—
30,736
(209)
(63,347)
(32,611)
(144,476)
(177,087)
—
(209)
1,275
1,066
Balance at December 31, 2017
37,216,787
(10,868,367)
$ (170,858)
$
652,270
$
(106,167)
$
546,103
$
20,933
$
567,036
See accompanying Notes to Consolidated Financial Statements
48
STEEL PARTNERS HOLDINGS L.P.
Consolidated Statements of Cash Flows
(in thousands)
Cash flows from operating activities:
Net income
Net income from discontinued operations
Adjustments to reconcile net income to net cash (used in) provided by operating activities:
Net investment gains
Provision for (recovery of) loan losses
(Income) loss of associated companies and other investments held at fair value, net of taxes
Deferred income taxes
Income tax benefit from release of deferred tax valuation allowance
Depreciation and amortization
Equity-based compensation
Loss on extinguishment of debt
Goodwill impairment charges
Asset impairment charges
Other
Net change in operating assets and liabilities:
Trade and other receivables
Inventories
Prepaid expenses and other current assets
Accounts payable, accrued and other current liabilities
Net (increase) decrease in loans held for sale
Net cash (used in) provided by operating activities of continuing operations
Net cash used in operating activities of discontinued operations
Net cash (used in) provided by operating activities
Cash flows from investing activities:
Purchases of investments
Proceeds from sales of investments
Proceeds from maturities of marketable securities
Loan originations, net of collections
Purchases of property, plant and equipment
Reclassification of restricted cash
Proceeds from sale of assets
Acquisitions, net of cash acquired
Investments in associated companies
Proceeds from sales of discontinued operations
Net cash provided by investing activities of discontinued operations
Other
Net cash (used in) provided by investing activities
Cash flows from financing activities:
Net revolver borrowings (repayments)
Net repayments of term loans - domestic
Proceeds from term loans
Net (repayments) borrowings of term loans - foreign
Subsidiaries' purchases of the Company's common units
Proceeds from equipment lease financing
Purchases of the Company's common units
Subsidiaries' purchases of their common stock
Purchase of subsidiary shares from noncontrolling interests
Deferred finance charges
Common unit dividend payment
Net increase in deposits
Other
Net cash provided by (used in) financing activities
Net change for the period
Effect of exchange rate changes on cash and cash equivalents
Cash and cash equivalents at beginning of period
Cash and cash equivalents at end of period
Year Ended December 31,
2016
2015
2017
$
$
6,012
—
$
2,571
—
156,568
(86,257)
—
5,639
(16,888)
86,928
(48,598)
71,936
11,477
673
—
2,028
4,990
(22,842)
(21,683)
(4,621)
(34,740)
(56,081)
(15,770)
—
(15,770)
(56,160)
10,978
18,492
(93,390)
(54,737)
(2,989)
42,204
(2,008)
(35,000)
—
—
(7)
(172,617)
67,864
(47,993)
—
(979)
—
6,688
(5,188)
—
(2,086)
(5,663)
(3,923)
145,395
1,774
155,889
(32,498)
1,125
450,128
418,755
$
—
774
(4,085)
13,059
(1,327)
70,546
3,844
—
24,254
18,668
(4,052)
(11,747)
7,676
(8,246)
4,642
78,900
195,477
—
195,477
(27,503)
83,457
5,687
(26,895)
(34,183)
8,999
32,247
(200,137)
(2,440)
—
—
266
(160,502)
146,648
(8,299)
9,217
(315)
—
—
(7,297)
(20,956)
—
(747)
—
113,432
(1,112)
230,571
265,546
(1,270)
185,852
450,128
$
(32,267)
(50)
31,777
8,259
(111,881)
48,560
9,203
—
19,571
68,092
(11,899)
17,167
12,534
(666)
(21,591)
(118,706)
(11,586)
(2,254)
(13,840)
(44,304)
86,559
368
2,168
(23,252)
66
10,657
(116,135)
(7,607)
155,517
25
477
64,539
(66,368)
(38,519)
4,566
240
(17,323)
—
(1,917)
(17,031)
(93)
(477)
—
87,312
(3,495)
(53,105)
(2,406)
(725)
188,983
185,852
$
See accompanying Notes to Consolidated Financial Statements
49
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
All amounts used in the Notes to Consolidated Financial Statements are in thousands, except common and preferred units, per
common unit, share and per share data.
1. NATURE OF THE BUSINESS AND BASIS OF PRESENTATION
Nature of the Business
Steel Partners Holdings L.P. ("SPLP" or "Company") is a diversified global holding company that engages in multiple
businesses through consolidated subsidiaries and other interests. It owns and operates businesses and has significant interests in
companies in various industries, including diversified industrial products, energy, defense, supply chain management and logistics,
banking and youth sports.
The Company works with its businesses to increase corporate value for all stakeholders by utilizing Steel Partners
Operational Excellence programs, the Steel Partners Purchasing Council, Steel Partners Corporate Services, balance sheet
improvements, capital allocation policies and growth initiatives. All of the Company's programs are focused on helping SPLP
companies strengthen their competitive advantage and increase their profitability, while enabling them to achieve operational
excellence and enhanced customer satisfaction.
Steel Partners Holdings GP Inc. ("SPH GP"), a Delaware corporation, is the general partner of SPLP and is wholly-owned
by SPLP. The Company is managed by SP General Services LLC ("Manager"), pursuant to the terms of an amended and restated
management agreement ("Management Agreement") discussed in further detail in Note 19 - "Related Party Transactions."
Basis of Presentation
Significant inter-company accounts and transactions have been eliminated in consolidation. Certain prior period amounts
in the Company's consolidated statements of cash flows have been reclassified to conform to the comparable 2017 presentation.
During 2015, one of the Company's subsidiaries, Steel Excel Inc. ("Steel Excel"), identified an error related to the manner
in which the provision for income taxes had reflected the tax effects related to unrealized gains and losses on available for sale
securities during 2014 and 2013. As a result, the Company recorded an adjustment to correct the error in the first quarter of 2015
to its tax provision of approximately $3,500, which is included in the Company's consolidated statements of operations for the
year ended December 31, 2015.
The consolidated financial statements include the accounts of the Company and its majority or wholly-owned subsidiaries,
which include the following:
BNS Holdings Liquidating Trust ("BNS Liquidating Trust")
DGT Holdings Corp. ("DGT")
Handy & Harman Ltd. ("HNH") (a)
Steel Services Ltd ("Steel Services")
Steel Excel (a)
WebFinancial Holding Corporation ("WFHC") (b)
Ownership as of December 31,
2017
2016
84.9%
100.0%
100.0%
100.0%
100.0%
91.2%
84.9%
100.0%
69.9%
100.0%
64.2%
91.2%
(a) During 2017, the Company completed tender offers to purchase all of the outstanding shares of common stock of HNH and Steel Excel not
already owned by the Company or any of its affiliates. As a result, the Company owns 100% of the stock of HNH and Steel Excel as of
December 31, 2017. See Note 14 - "Capital and Accumulated Other Comprehensive Loss" for additional information.
(b) WFHC owns 100% of WebBank and 100% of WebFinancial Holding LLC ("WFH LLC") (formerly known as CoSine Communications, Inc.
("CoSine")), which operates through its subsidiary API Group plc ("API").
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates in Preparation of Consolidated Financial Statements
The Company's consolidated financial statements are prepared in accordance with accounting principles generally
accepted in the United States of America ("U.S. GAAP"). The preparation of the consolidated financial statements in conformity
with U.S. GAAP requires management to make estimates and assumptions that affect the reported amount of assets and liabilities
50
at the date of the financial statements and the reported amount of revenues, expenses, unrealized gains and losses during the
reporting period. The more significant estimates include: (1) the valuation allowances of accounts receivable, loans receivable and
inventory; (2) the valuation of goodwill, indefinite-lived intangible assets, long-lived assets and associated companies; (3) deferred
tax assets; (4) effect of the recently-enacted Tax Cuts and Jobs Act; (5) environmental liabilities; (6) fair value of derivatives; (7)
post-employment benefit liabilities; (8) estimates and assumptions used in the determination of fair value of certain securities,
such as whether declines in value of securities are other than temporary; and (9) estimates of loan losses. Actual results may differ
from the estimates used in preparing the consolidated financial statements; and, due to substantial holdings in and/or restrictions
on certain investments, the value that may be realized could differ from the estimated fair value.
Cash and Cash Equivalents
Cash and cash equivalents include cash and deposits in depository institutions, financial institutions and banks. Cash at
December 31, 2017 and 2016 also includes $286,454 and $277,054, respectively, of WebBank cash at the Federal Reserve Bank
and in its Federal Funds account at its correspondent banks. The Company considers all highly liquid debt instruments with
maturities of three months or less when purchased to be cash equivalents. Cash and cash equivalents include qualifying money
market funds and exclude amounts where availability is restricted by loan agreements or other contractual provisions. Cash
equivalents are stated at cost, which approximates market value. There is a significant concentration of cash that, during the periods
presented, exceeded the federal deposit insurance limits and exposed the Company to credit risk. SPLP does not anticipate any
losses due to this concentration of cash at December 31, 2017.
Restricted Cash
Restricted cash at December 31, 2017 and 2016 primarily represents cash collateral for certain short sales of corporate
securities (see Note 12 - "Financial Instruments" for additional information).
Marketable Securities and Long-Term Investments
Marketable securities are classified as available-for-sale and consist of short-term deposits, corporate debt and equity
instruments, and mutual funds. The Company classifies its marketable securities as current assets based on the nature of the
securities and their availability for use in current operations. Long-term investments consist of available-for-sale securities and
equity method investments. Held-to-maturity securities are classified in Other non-current assets. SPLP determines the appropriate
classifications of its investments at the acquisition date and re-evaluates the classifications at each balance sheet date.
• Available-for-sale securities are reported at fair value, with unrealized gains and losses recognized in Accumulated other
comprehensive loss ("AOCI") as a separate component of SPLP's Partners' capital.
• Associated companies represent equity method investments in companies where our ownership is between 20% and 50% of
the outstanding equity and the Company has the ability to exercise influence, but not control, over the investee. For equity
method investments where the fair value option has been elected, unrealized gains and losses are reported in the Company's
consolidated statements of operations as part of Income (loss) of associated companies and other investments held at fair value.
For the equity method investments where the fair value option has not been elected, SPLP records the investment at cost and
subsequently increases or decreases the investment by its proportionate share of the net income or losses and other comprehensive
income of the investee.
• Held-to-maturity securities are recorded at amortized cost, adjusted for the amortization or accretion of premiums or discounts.
Dividend and interest income is recognized when earned. Realized gains and losses on available-for-sale securities are
included in earnings and are derived using the specific-identification method. Commission expense is recorded as a reduction of
sales proceeds on investment sales. Commission expense on purchases is included in the cost of investments on the Company's
consolidated balance sheets.
Other Than Temporary Impairment
If the Company believes a decline in the market value of any available-for-sale, equity method or held-to-maturity security
below cost is other than temporary, a loss is charged to earnings, which establishes a new cost basis for the security. Impairment
losses are included in Asset impairment charges in the Company's consolidated statements of operations. SPLP's determination
of whether a security is other than temporarily impaired incorporates both quantitative and qualitative information. The Company
considers a number of factors including, but not limited to, the length of time and the extent to which the fair value has been less
than cost, the length of time expected for recovery, the financial condition of the issuer, the reason for the decline in fair value,
51
changes in fair value subsequent to the balance sheet date, the ability and intent to hold investments to maturity, and other factors
specific to the individual investment.
Specifically, for held-to-maturity securities, the Company considers whether it plans to sell the security or it is more-
likely-than-not that it will be required to sell the security before recovery of its amortized cost. The credit component of an other-
than-temporary impairment loss is recognized in earnings and the non-credit component is recognized in AOCI in situations where
the Company does not intend to sell the security and it is more likely-than-not that the Company will not be required to sell the
security prior to recovery. If there is an other-than-temporary impairment in the fair value of any individual security classified as
held-to-maturity, the Company writes down the security to fair value with a corresponding credit loss portion charged to earnings,
and the non-credit portion being charged to AOCI. SPLP's assessment involves a high degree of judgment and accordingly, actual
results may differ materially from those estimates and judgments.
Trade Accounts Receivable and Allowance for Doubtful Accounts
The Company recognizes bad debt expense through an allowance account using estimates based primarily on
management's evaluation of the financial condition of the customer, historical experience, credit quality, whether any amounts are
currently past due, the length of time accounts may be past due, previous loss history and management's determination of a
customer's current ability to pay its obligations. Trade accounts receivable balances are charged off against the allowance when it
is determined that the receivables will not be recovered, and payments subsequently received on such receivables are credited to
recovery of accounts written off. The Company believes that the credit risk with respect to trade accounts receivable is limited
due to this credit evaluation process. As of December 31, 2017, the top 10 of the Company's largest customer balances accounted
for 19% of the Company's trade receivables.
Loans Receivable, Including Loans Held for Sale
WebBank's loan activities include several lending arrangements with companies where it originates private label credit
card and other loans for consumers and small businesses. These loans are classified as Loans receivable and are typically sold
after origination. As part of these arrangements, WebBank earns origination fees that are recorded in non-interest income. Fees
earned from these lending arrangements are recorded as fee income. WebBank also purchases participations in commercial and
industrial loans through loan syndications. Loans that management has the intent and ability to hold for the foreseeable future or
until maturity or pay-off generally are reported at their outstanding unpaid principal balances adjusted for charge-offs, the allowance
for loan losses, and any deferred fees or costs on originated loans. Interest income is accrued on the unpaid principal balance. Loan
origination fees, net of certain direct origination costs, are deferred and recognized as an adjustment of the related loan yield over
the estimated life of the loan.
Loans held for sale are carried at the lower of cost or estimated market value in the aggregate. A valuation allowance is
recorded when cost exceeds fair value based on our determination at the time of reclassification and periodically thereafter. Gains
and losses are recorded in noninterest income based on the difference between sales proceeds and carrying value and impairments
from reductions in carrying value.
Loans are reported as past due when either principal or interest is due and unpaid for a period of 30 days or more. The
accrual of interest on loans is discontinued at the time the loan is 90 days delinquent unless the loan is well-secured and in process
of collection. In all cases, loans are placed on nonaccrual or charged-off at an earlier date if collection of principal or interest is
considered doubtful.
All interest accrued but not collected for loans that are placed on nonaccrual or charged off is reversed against interest
income. The interest on these loans is accounted for on the cash-basis or cost-recovery method, until qualifying for return to accrual.
Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future
payments are reasonably assured.
Loan Impairment and Allowance for Loan Losses
A loan is considered impaired when, based on current information and events, it is probable that WebBank will be unable
to collect all amounts due according to the contractual terms of the loan agreement, including scheduled interest payments. When
a loan has been identified as being impaired, the amount of impairment is measured based on the present value of expected future
cash flows discounted at the loan's effective interest rate or, when appropriate, the loan's observable fair value or the fair value of
the collateral (less any selling costs) if the loan is collateral-dependent. If the measurement of the impaired loan is less than the
recorded investment in the loan (including accrued interest, net of deferred loan fees or costs and unamortized premium or discount),
52
an impairment is recognized by creating or adjusting an existing allocation of the allowance for loan losses, or by charging down
the loan to its value determined in accordance with U.S. GAAP.
The allowance for loan losses is established as losses are estimated to have occurred through a provision for loan losses
charged to earnings. Loan losses are charged against the allowance when the uncollectability of a loan or receivable balance is
confirmed. Subsequent recoveries, if any, are credited to the allowance. The allowance for loan losses is evaluated on a regular
basis and is based upon a periodic review of the collectability of the amounts due in light of historical experience, the nature and
volume of the loan portfolio, adverse situations that may affect the borrower's ability to repay, estimated value of any underlying
collateral and prevailing economic conditions. This evaluation is inherently subjective as it requires estimates that are susceptible
to significant revision as more information becomes available. The allowance consists of specific and general components. The
specific component relates to loans that are classified as doubtful, substandard, or loss. For such loans that are classified as impaired,
an allowance is established when the discounted cash flows (or collateral value or observable market price) of the impaired loan
is lower than the carrying value of that loan. The general component covers non-classified loans and is based on historical loss
experience and is adjusted for qualitative factors to cover uncertainties that could affect the estimate of probable losses. The
allowance for loan losses is increased by charges to income and decreased by charge-offs (net of recoveries). The periodic evaluation
of the adequacy of the allowance is based on WebBank's past loss experience, known and inherent risks in the portfolio, adverse
situations that may affect the debtor's ability to repay, the estimated value of any underlying collateral and current economic
conditions.
Inventories
Inventories are generally stated at the lower of cost (determined by the first-in, first-out method or average cost method)
or market. Cost is determined by the last-in, first-out ("LIFO") method for certain precious metal inventory held in the U.S., and
remaining precious metal inventory is primarily carried at fair value. For precious metal inventory, no segregation among raw
materials, work in process and finished products is practicable. For other inventory, the cost of work in process and finished goods
comprises the cost of raw materials, direct labor and overhead costs attributable to the production of inventory.
Non-precious metal inventories are evaluated for estimated excess and obsolescence based upon assumptions about future
demand and market conditions, and are adjusted accordingly. If actual market conditions are less favorable than those projected,
future write-downs may be required.
Goodwill and Other Intangible Assets, Net
Goodwill, which is not amortized, represents the difference between the purchase price and the fair value of identifiable
net assets acquired in a business combination. Goodwill is reviewed for impairment indicators throughout the year and tested for
impairment annually in the fourth quarter. An entity can choose between two testing approaches:
a. Step 0 or Qualitative approach - An entity may assess qualitative factors to determine whether it is more likely than
not (that is, a likelihood of more than 50 percent) that the fair value of a reporting unit is less than its carrying amount, including
goodwill. In evaluating whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount, an
entity should assess relevant events and circumstances. Examples of such events and circumstances would include pertinent
macroeconomic conditions, industry and market considerations, overall financial performance and other factors.
An entity has an unconditional option to bypass this qualitative assessment for any reporting unit in any period and proceed
directly to performing the first step of the goodwill impairment test. An entity may resume performing the qualitative assessment
in any subsequent period.
b. Step 1 or Quantitative approach - The fair value of a reporting unit is calculated and compared with its carrying amount.
There are several methods that may be used to estimate a reporting unit's fair value, including market quotations, asset and liability
fair values and other valuation techniques, including, but not limited to, discounted projected future net earnings or net cash flows
and multiples of earnings. If the fair value of a reporting unit exceeds its carrying amount, there is no indication of impairment
and further testing is not required. If the carrying amount of a reporting unit exceeds its fair value, then a second step of testing is
required ("Step 2"). The second step of the goodwill impairment test compares the implied fair value of the reporting unit's goodwill
with the carrying amount of that goodwill.
For 2017, the Company utilized a qualitative approach for all of its reporting units to assess goodwill as of its most recent
assessment date, and there were no goodwill impairment charges recorded as a result of the assessment. For 2016, the Company
utilized a qualitative approach for all of its reporting units, except for one reporting unit within its Diversified Industrial segment.
53
As a result of the assessment, a goodwill impairment of $24,254 was recorded in the year ended December 31, 2016. This impairment
resulted from a decline in market conditions and lower demand for certain product lines of the performance materials business.
In 2015, the Company utilized a quantitative approach to assess goodwill, and recorded a goodwill impairment of approximately
$19,571 in the Energy segment, resulting from the adverse effects the decline in energy prices had on the oil services industry.
Other intangible assets with indefinite lives are not amortized, while other intangible assets with finite lives are amortized
over their estimated useful lives. Intangible assets with finite lives are reviewed for impairment when events or changes in
circumstances indicate that the carrying amount may not be recoverable (see "Long-Lived Asset Testing" below).
Intangible assets with indefinite lives, which are only within the Diversified Industrial segment, are tested for impairment
at least annually, or when events or changes in circumstances indicate that it is more likely than not that the asset is impaired.
Companies can use the same two testing approaches for indefinite-lived intangibles as for goodwill. For 2017, 2016, and 2015,
the Company utilized a qualitative approach to assess its intangible assets with indefinite lives, and the results indicated no
impairment in any of the years.
Derivatives
The Company uses various hedging and swap instruments to reduce the impact of changes in precious metal prices,
interest costs on variable interest debt and the effect of foreign currency fluctuations. In accordance with Accounting Standards
Codification ("ASC") 815, Derivatives and Hedging, these instruments are recorded as either fair value hedges, economic hedges,
cash flow hedges or derivatives with no hedging designation.
Precious Metals
The Company's precious metal and commodity inventories are subject to market price fluctuations. The Company enters
into commodity futures and forward contracts to mitigate the impact of price fluctuations on its precious and certain non-precious
metal inventories that are not subject to fixed price contracts.
Fair Value Hedges. The fair values of these derivatives are recognized as derivative assets and liabilities on the Company's
consolidated balance sheets. The net change in fair value of the derivative assets and liabilities, and the change in the fair value
of the underlying hedged inventory, are recognized in the Company's consolidated statements of operations, and such amounts
principally offset each other due to the effectiveness of the hedges. The fair value hedges are associated primarily with the Company's
precious metal inventory carried at fair value.
Economic Hedges. As these derivatives are not designated as accounting hedges under ASC 815, they are accounted for
as derivatives with no hedge designation. The derivatives are marked to market, and both realized and unrealized gains and losses
are recorded in current period earnings in the Company's consolidated statements of operations. The economic hedges are associated
primarily with the Company's precious metal inventory valued using the LIFO method.
Interest Rate Swaps
The Company has entered into interest rate swap agreements in the past in order to economically hedge a portion of its
debt, which was subject to variable interest rates. As these derivatives were not designated as accounting hedges under U.S. GAAP,
they are accounted for as derivatives with no hedge designation. The Company recorded the gains and losses both from the mark-
to-market adjustments and net settlements in interest expense in its consolidated statements of operations as the hedges were
intended to offset interest rate movements.
Foreign Currency Forward Contracts
API enters into foreign currency forward contracts to hedge certain of its receivables and payables denominated in other
currencies. In addition, API enters into foreign currency forward contracts to hedge the value of certain of its future sales denominated
in Euros and the value of its future purchases denominated in USD. These hedges have settlement dates ranging through December
2018. The forward contracts that are used to hedge the risk of foreign exchange movement on its receivables and payables are
accounted for as fair value hedges under ASC 815. The fair values of these derivatives are recognized as derivative assets and
liabilities on the Company's consolidated balance sheets. The net change in fair value of the derivative assets and liabilities are
recognized in the Company's consolidated statements of operations. The forward contracts that are used to hedge the value of API's
future sales and purchases are accounted for as cash flow hedges in accordance with ASC 815. These hedges are fully effective
54
and accordingly, the changes in fair value are recorded in AOCI and, at maturity, any gain or loss on the forward contract is
reclassified from AOCI into the Company's consolidated statements of operations.
WebBank - Derivative Financial Instruments
WebBank's derivative financial instruments represent on-going economic interests in loans made after they are sold. These
derivatives are carried at fair value on a gross basis in Other non-current assets on the Company's consolidated balance sheet.
Gains and losses resulting from changes in fair value of these derivative instruments are accounted for in the Company's consolidated
statements of operations in Financial services revenue. Fair value represents the estimated amounts that WebBank would receive
or pay to terminate the contracts at the reporting date based on a discounted cash flow model for the same or similar instruments.
WebBank does not enter into derivative contracts for speculative or trading purposes.
Property, Plant and Equipment, Net
Property, plant and equipment is recorded at cost. Depreciation of property, plant and equipment is recorded principally
on the straight line method over the estimated useful lives of the assets, which range is as follows: machinery & equipment 3 to
15 years and buildings and improvements 10 to 30 years. Leasehold improvements are amortized over the shorter of the terms of
the related leases or the estimated useful lives of the improvements. Interest cost is capitalized for qualifying assets during the
assets' acquisition period. Maintenance and repairs are charged to expense and renewals and betterments are capitalized. Gain or
loss on dispositions is recorded in Other expense (income), net.
Long-Lived Asset Testing
The Company estimates the depreciable lives of property, plant and equipment, and reviews long-lived assets for
impairment whenever events, or changes in circumstances, indicate the carrying amount of such assets may not be recoverable.
The Company performs such assessments at the lowest level for which identifiable cash flows are largely independent of the cash
flows of other assets and liabilities, which is generally at the plant level, operating company level or the reporting unit level,
dependent on the level of interdependencies in the Company's operations. Impairment losses are recorded on long-lived assets
when indicators of impairment are present and the undiscounted cash flows estimated to be generated by those assets are less than
the assets' carrying amounts. The impairment loss is measured by comparing the fair value of the asset to its carrying amount.
The Company considers various factors in determining whether an impairment test is necessary, including among other
things: a significant or prolonged deterioration in operating results and projected cash flows; significant changes in the extent or
manner in which assets are used; technological advances with respect to assets which would potentially render them obsolete; the
Company's strategy and capital planning; and the economic climate in the markets it serves. When estimating future cash flows
and if necessary, fair value, the Company makes judgments as to the expected utilization of assets and estimated future cash flows
related to those assets. The Company considers historical and anticipated future results, general economic and market conditions,
the impact of planned business and operational strategies and other information available at the time the estimates are made. The
Company believes these estimates are reasonable; however, changes in circumstances or conditions could have a significant impact
on its estimates, which might result in material impairment charges in the future.
Business Combinations
When the Company acquires a business, it allocates the purchase price to the assets acquired, liabilities assumed and any
noncontrolling interests based on their fair values at the acquisition date. Significant judgment may be used to determine these
fair values including the use of appraisals, discounted cash flow models, market value for similar purchases, or other methods
applicable to the circumstances. The assumptions and judgments made by the Company when recording business combinations
will have an impact on reported results of operations in the future.
Revenue Recognition
Diversified Industrial and Energy Segments
Revenue in our Diversified Industrial and Energy segments is recognized when the title and risk of loss has passed to the
customer, the service has been provided to the customer, the price is fixed or determinable and collection is reasonably assured.
This condition is normally met when product has been shipped or the service performed. An allowance is provided for estimated
returns and discounts based on experience. Revenue is reported net of any sales tax collected. Cash received from customers prior
to shipment of goods, or otherwise not yet earned, is recorded as deferred revenue. Rental revenues are derived from the rental of
55
certain equipment to the food industry where customers prepay for the rental period - usually 3 to 6 month periods. For prepaid
rental contracts, sales revenue is recognized on a straight-line basis over the term of the contract. Service revenues are generated
primarily by Steel Excel's energy and sports businesses and by the repair and maintenance work performed on equipment used at
mass merchants, supermarkets and restaurants in the Diversified Industrial segment. The Company records all shipping and handling
fees billed to customers as revenue, and related costs are charged principally to cost of goods sold, when incurred.
The Company has also entered into rebate agreements with certain customers. These programs are typically structured
to incentivize the customers to increase their annual purchases from the Company. The rebates are usually calculated as a percentage
of the purchase amount, and such percentages may increase as the customer's level of purchases rise. Rebates are recorded as a
reduction of net sales in the Company's consolidated statements of operations and are accounted for on an accrual basis. As of
December 31, 2017 and 2016, accrued rebates payable totaled $8,300 and $7,400, respectively, and are included in Accrued
liabilities on the Company's consolidated balance sheets.
Financial Services Segment
WebBank generates revenue through a combination of interest income and non-interest income. Interest income is derived
from interest and fees earned on loans and investments. Interest income is accrued on the unpaid principal balance, including
amortization of premiums and accretion of discounts. Loan origination fees, net of certain direct origination costs, are deferred
and recognized as an adjustment of the related loan yield over the estimated life of the loan. Non-interest income is primarily
derived from origination fees earned on loans, fee income on contractual lending arrangements, premiums on the sale of loans,
and loan servicing fees.
Concentration of Revenue
No single customer accounted for 5% or more of the Company's consolidated revenues in 2017, 2016 or 2015. In 2017,
2016 and 2015, the 10 largest customers accounted for approximately 18%, 19% and 24%, respectively, of the Company's
consolidated revenues.
Fair Value Measurements
The Company measures certain assets and liabilities at fair value (see Note 17 - "Fair Value Measurements"). Fair value
is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants
at the measurement date. Fair values of assets and liabilities are determined based on a three-level measurement input hierarchy.
Level 1 inputs are quoted prices in active markets for identical assets or liabilities as of the measurement date. Level 2 inputs are
other than quoted market prices that are observable, either directly or indirectly, for an asset or liability. Level 2 inputs can include
quoted prices in active markets for similar assets or liabilities, quoted prices in a market that is not active for identical assets or
liabilities, or other inputs that can be corroborated by observable market data. Level 3 inputs are unobservable for the asset or
liability when there is little, if any, market activity for the asset or liability. Level 3 inputs are based on the best information available,
and may include data developed by the Company.
Stock-Based Compensation
The Company accounts for stock options and restricted stock units granted to employees and non-employee directors as
compensation expense, which is recognized in exchange for the services received. The compensation expense is based on the fair
value of the equity instruments on the grant-date and is recognized as an expense over the service period of the recipients.
Income Taxes
SPLP and certain of its subsidiaries, as limited partnerships, are generally not responsible for federal and state income
taxes and their profits and losses are passed directly to their partners for inclusion in their respective income tax returns. SPLP's
subsidiaries that are corporate entities are subject to federal and state income taxes and file corporate income tax returns.
SPLP's subsidiaries that are subject to income taxes use the liability method of accounting for such taxes. Under the
liability method, deferred tax assets and deferred tax liabilities are recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases, and
operating loss and tax credit carryforwards. Deferred tax assets and deferred tax liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The
effect on deferred tax assets and deferred tax liabilities of a change in tax rates is recognized in income in the period that includes
56
the enactment date. Such subsidiaries evaluate the recoverability of deferred tax assets and establish a valuation allowance when
it is more likely than not that some portion of the deferred tax assets will not be realized.
When tax returns are filed, it is highly certain that most positions taken would be sustained upon examination by the
taxing authorities, while others are subject to uncertainty about the merits of the position taken or the amount of the position that
would be ultimately sustained. The benefit of a tax position is recognized in the Company's consolidated financial statements in
the period during which, based on all available evidence, management believes it is more likely than not that the position will be
sustained upon examination, including the resolution of appeals or litigation processes, if any. Tax positions taken are not offset
or aggregated with other positions. Tax positions that meet the more-likely-than-not recognition threshold are measured as the
largest amount of tax benefit that is more than 50% likely of being realized upon settlement with the applicable taxing authority.
The portion of the benefits associated with tax positions taken that exceeds the amount measured as described above is provided
for and reflected as a liability for unrecognized tax benefits on the Company's consolidated balance sheets, along with any associated
interest and penalties that would be payable to the taxing authorities upon examination.
SPLP's policy is to record estimated interest and penalties related to the underpayment of income taxes as income tax
expense in its consolidated statements of operations.
The Company does not release income tax effects from AOCI until the underlying asset or liability to which the income
tax relates has been derecognized from the balance sheet or otherwise terminated.
Foreign Currency Translation
Assets and liabilities of SPLP's foreign subsidiaries are translated at current exchange rates and related revenues and
expenses are translated at average rates of exchange in effect during the year. Resulting cumulative translation adjustments are
recorded as a separate component of other comprehensive income (loss). Gains and losses arising from transactions denominated
in a currency other than the functional currency of the reporting entity are included in earnings.
Legal Contingencies
The Company provides for legal contingencies when the liability is probable and the amount of the associated loss is
reasonably estimable. The Company regularly monitors the progress of legal contingencies and revises the amounts recorded in
the period in which a change in estimate occurs.
Environmental Liabilities
The Company accrues for losses associated with environmental remediation obligations when such losses are probable
and reasonably estimable. Accruals for estimated losses from environmental remediation obligations generally are recognized no
later than completion of the remedial feasibility study.
Such accruals are adjusted as further information develops or circumstances change. Costs of future expenditures for
environmental remediation obligations are not discounted to their present value. Recoveries of environmental remediation costs
from other parties are recorded as assets when their receipt is deemed probable.
New or Recently Adopted Accounting Standards
In May 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No.
2014-09, Revenue from Contracts with Customers (Topic 606), and has since issued several additional amendments thereto
(collectively referred to herein as "ASC 606"), which became effective for the Company on January 1, 2018. The core principle
of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an
amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services, and the
guidance defines a five-step process to achieve this core principle. ASC 606 also requires additional disclosure about the nature,
amount, timing and uncertainty of revenues and cash flows arising from customer contracts, including significant judgments and
changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract. ASC 606 may be applied either (i)
retrospectively, reflecting the application of the standard in each prior reporting period presented with an election for certain
specified practical expedients (retrospective method), or (ii) retrospectively with the cumulative effect of initially applying ASC
606 recognized in Partners' capital at the date of adoption, with additional disclosure requirements (modified retrospective method).
The Company will adopt ASC 606 in the first quarter of 2018 using the modified retrospective method and will present the
cumulative effect of applying the standard to all contracts not completed as of the adoption date.
57
The Company has substantially completed its evaluation of the effect that the adoption of ASC 606 will have on its
financial statements. The Company has determined that the primary change to its accounting policies for certain of its business
units upon adopting ASC 606 will relate to the timing of when revenue is recognized. While revenue from most contracts will
continue to be recognized at a point in time, revenue from other contracts (for example, contracts for sale of custom manufactured
goods that do not have an alternative use and for which the Company has an enforceable right to payment) will be required to be
recognized over time. For contracts that are required to be recognized over time, the Company will accelerate revenue recognition
throughout the production process, whereas previously the Company did not recognize revenue until the product shipped or reached
its destination, based on the transfer of risks and title.
Upon adoption of ASC 606, the Company expects the net impact will be less than $500 as an increase to Partners' capital.
Additionally, the ongoing impacts of ASC 606 adoption to the costs to acquire and fulfill its customer contracts are currently
anticipated to be immaterial. The Company will apply the practical expedient of expensing contract costs when incurred if the
amortization period of the asset that it would have recognized is one year or less. Currently, the Company's accounting policy is
to expense contract costs as they are incurred.
The Company is still evaluating the impacts of the adoption of ASC 606 on its financial statement disclosures. The
Company will expand its consolidated financial statement disclosures to comply with ASC 606. The new standard requires a
change in the presentation of the Company's sales return reserve on the balance sheet, which the Company currently records net.
The new standard also requires the Company to record a refund liability and a corresponding asset for the Company's right to
recover products from customers upon settling the refund liability to account for the transfer of products with a right of return.
However, these changes will not have a material impact on the Company's financial condition, results of operations or cash flows,
other than additional disclosure requirements.
In July 2015, the FASB issued ASU No. 2015-11, Inventory (Topic 330): Simplifying the Measurement of Inventory, which
requires an entity to measure inventory at the lower of cost and net realizable value. Net realizable value is the estimated selling
prices in the ordinary course of business, less reasonably predictable costs of completion, disposal and transportation. The
amendments do not apply to inventory that is measured using the LIFO cost method. On January 1, 2017, the Company began
applying the inventory measurement provisions of the new ASU, and such provisions did not have and are not expected to have
a material impact on the Company's consolidated financial statements.
In January 2016, the FASB issued ASU No. 2016-01, Financial Instruments—Overall (Subtopic 825-10), which eliminates
the requirement to classify equity securities with readily determinable market values as either available-for-sale securities or trading
securities, and requires that equity investments, other than those accounted for under the traditional equity method of accounting,
be measured at their fair value with changes in fair value recognized in net income or loss. Equity investments that do not have
readily determinable market values may be measured at cost, subject to an assessment for impairment. ASU No. 2016-01 also
requires enhanced disclosures about such equity investments. ASU No. 2016-01 is effective for fiscal years beginning after
December 15, 2017, including interim periods within those fiscal years, with early adoption prohibited. Upon adoption, a reporting
entity should apply the provisions of ASU No. 2016-01 by means of a cumulative effect adjustment to the balance sheet as of the
beginning of the fiscal year of adoption. ASU No. 2016-01 will also impact the Company's consolidated statement of operations
for amounts related to unrealized gains and losses on available-for-sale securities, which are currently reported in the Company's
consolidated statement of comprehensive income. Upon adoption of ASU 2016-01, the Company expects to have a significant
cumulative effect reclassification adjustment to its balance sheet, based on the amount of the accumulated unrealized gain on
available-for-sale securities in AOCI within Partners' capital as of December 31, 2017 of $91,078, which substantially represents
the expected cumulative effect adjustment. See Note 14 - "Capital and Accumulated Other Comprehensive Loss".
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842). The new standard establishes a right-of-use
("ROU") model that requires a lessee to record a ROU asset and a lease liability, measured on a discounted basis, on the balance
sheet for all leases with terms longer than 12 months. Leases will be classified as either finance or operating, with classification
affecting the pattern of expense recognition in the statement of operations. A modified retrospective transition approach is required
for capital and operating leases existing at the date of adoption, with certain practical expedients available. The Company is
currently evaluating the potential impact of this new guidance, which is effective for the Company's 2019 fiscal year.
In March 2016, the FASB issued ASU No. 2016-09, Compensation-Stock Compensation (Topic 718): Improvements to
Employee Share-Based Payment Accounting. This new standard simplifies the accounting for share-based payment transactions,
including the income tax consequences, classification of awards as either equity or liabilities, and classification in the statement
of cash flows, among other things. The new standard was effective for the Company's 2017 fiscal year, and the Company adopted
its provisions as of January 1, 2017. The impacts of certain amendments in ASU No. 2016-09, such as those related to the treatment
58
of tax windfalls from stock-based compensation that are included in net operating loss carryforwards and elections made for
accounting for forfeitures, are required to be adopted on a modified retrospective basis through a cumulative-effect adjustment to
partners' capital. Upon adoption, on January 1, 2017, the Company recorded a deferred tax asset of approximately $4,600 and a
corresponding valuation allowance resulting in no net impact on Partners' capital. In addition, the Company elected to continue
to estimate forfeitures under its current policy, therefore, there was no modified retrospective adjustment required for accounting
for forfeitures upon adoption. The other provisions of ASU No. 2016-09, such as classification of certain items in the statement
of cash flows, are being applied in 2017, with reclassification of prior period amounts where applicable.
In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of
Credit Losses on Financial Instruments. The new standard changes the impairment model for most financial assets that are measured
at amortized cost and certain other instruments, including trade receivables, from an incurred loss model to an expected loss model
and adds certain new required disclosures. Under the expected loss model, entities will recognize estimated credit losses to be
incurred over the entire contractual term of the instrument rather than delaying recognition of credit losses until it is probable the
loss has been incurred. The new standard is effective for the Company's 2020 fiscal year with early adoption permitted for all
entities in fiscal years beginning after December 15, 2018. The Company is currently evaluating the potential impact of this new
guidance.
In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain
Cash Receipts and Cash Payments. This new standard provides guidance to help decrease diversity in practice in how certain cash
receipts and cash payments are classified in the statement of cash flows. The amendments in ASU No. 2016-15 provide guidance
on eight specific cash flow issues. The new standard is effective for the Company's 2018 fiscal year. The Company is currently
evaluating the potential impact of this new guidance.
In November 2016, the FASB issued ASU No. 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash. This new
standard provides guidance on the classification of restricted cash in the statement of cash flows. The amendments in ASU No.
2016-18 are effective for the Company's 2018 fiscal year. The Company is currently evaluating the potential impact of this new
guidance.
In January 2017, the FASB issued ASU No. 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a
Business. This new standard provides guidance to help determine more clearly what is a business acquisition, as opposed to an
asset acquisition. The amendments provide a screen to help determine when a set of components is a business by reducing the
number of transactions in an acquisition that need to be evaluated. The new standard states that to classify the acquisition of assets
as a business, there must be an input and a substantive process that jointly contribute to the ability to create outputs, with outputs
being defined as the key elements of the business. If all of the fair value of the assets acquired are concentrated in a single asset
group, this would not qualify as a business. The amendments in ASU No. 2017-01 are effective for the Company's 2018 fiscal
year. The Company is currently evaluating the potential impact of this new guidance.
In January 2017, the FASB issued ASU No. 2017-04, Intangibles-Goodwill and Other (Topic 350): Simplifying the Test
for Goodwill Impairment. This new standard simplifies subsequent measurements of goodwill by eliminating Step 2 from the
goodwill impairment test. Instead, entities will perform their interim or annual goodwill impairment testing by comparing the fair
value of a reporting unit with its carrying amount and recognizing an impairment charge based on the amount that the carrying
amount exceeds the reporting unit's fair value. The loss recognized should not exceed the total goodwill allocated to the reporting
unit. The amendments in ASU No. 2017-04 are effective for the Company's 2020 fiscal year. The Company is currently evaluating
the potential impact of this new guidance.
In March 2017, the FASB issued ASU No. 2017-07, Compensation-Retirement Benefits (Topic 715): Improving the
Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost. This new standard requires the components
of net benefit cost to be disaggregated within the statement of operations, with service cost being included in the same line item
as other compensation costs, and any other components being presented outside of operating income. The amendments in ASU
No. 2017-07 are effective for the Company's 2018 fiscal year. The Company is currently evaluating the potential impact of this
guidance, but it does not currently expect that there will be any material impact on the Company's consolidated financial statements.
In May 2017, the FASB issued ASU No. 2017-09, Compensation-Stock Compensation (Topic 718): Scope of Modification
Accounting. This new standard provides guidance about which changes to the terms or conditions of a share-based payment award
require an entity to apply modification accounting. The standard states that entities should account for the effects of a modification
unless the fair value of the modified award is the same as the fair value of the original award, the vesting conditions do not change,
and the classification as an equity instrument or a liability instrument is the same. The amendments in ASU No. 2017-09 are
effective for the Company's 2018 fiscal year. The Company is currently evaluating the potential impact of this new guidance.
59
In August 2017, the FASB issued ASU No. 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to
Accounting for Hedging Activities. This new standard was created to refine and expand hedge accounting for both financial and
commodity risk in order to simplify the current application of hedge accounting guidance in current U.S. GAAP. This new standard
creates more transparency around how hedging results are presented, both in the notes and on the face of the financial statements.
The amendments in ASU No. 2017-12 are effective for the Company's 2019 fiscal year. The Company is currently evaluating the
potential impact of this new guidance.
In February 2018, the FASB issued ASU No. 2018-02, Income Statement - Reporting Comprehensive Income (Topic 220):
Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income. The new standard provides financial
statement preparers with an option to reclassify stranded tax effects within AOCI to retained earnings in each period in which the
effect of the change in the U.S. federal corporate income tax rate in the Tax Cuts and Jobs Act is recorded. The amendments in
ASU No. 2018-02 are effective for the Company's 2019 fiscal year. The Company is currently evaluating the potential impact of
this new guidance.
3. ACQUISITIONS
2017 Acquisition
Steel Excel Acquisition of Basin Well
On May 19, 2017, Steel Excel acquired an 80% interest in Basin Well Logging Wireline Services, Inc. ("Basin") located
in Farmington, New Mexico for approximately $5,100. Basin provides wireline services to major oil & gas exploration and
production companies in the U.S. and specializes in cased-hole wireline logging and perforating services for exploration and
production companies with wells in New Mexico, Texas, Utah, Arizona and Colorado. In connection with the Basin acquisition,
which was not material to SPLP's operations, goodwill totaling approximately $758 was recorded on a preliminary basis.
2016 Acquisitions
HNH's Acquisition of EME
On September 30, 2016, SL Montevideo Technology, Inc. ("SMTI"), a subsidiary of SL Industries, Inc. ("SLI") (which
was acquired by HNH in June 2016 as discussed further below), entered into an asset purchase agreement ("Purchase Agreement")
with Hamilton Sundstrand Corporation ("Hamilton"). Pursuant to the Purchase Agreement, SMTI acquired from Hamilton certain
assets of its Electromagnetic Enterprise division ("EME") used or useful in the design, development, manufacture, marketing,
service, distribution, repair, and sale of electric motors, starters and generators for certain commercial applications, including for
use in commercial hybrid electric vehicles and refrigeration and in the aerospace and defense sectors. The acquisition of EME
expands SLI's product portfolio and diversifies its customer base. SMTI purchased the acquired net assets for approximately
$60,329 in cash and assumption of certain ordinary course business liabilities, subject to adjustments related to working capital
at closing and quality of earnings of the acquired business for the period of January 1, 2016 to June 30, 2016, each as provided
for in the Purchase Agreement, including a reduction of approximately $2,200 received during the year ended December 31, 2017.
The Purchase Agreement includes a guarantee by Hamilton of a minimum level of product purchases from SMTI by an affiliate
of Hamilton for calendar years 2017, 2018, and 2019, in exchange for compliance by SMTI with certain operating covenants. The
transaction was financed with additional borrowings under HNH's senior secured revolving credit facility. The following table
summarizes the amounts of the assets acquired and liabilities assumed at the acquisition date:
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Assets:
Trade and other receivables
Inventories
Prepaid expenses and other current assets
Property, plant and equipment
Goodwill
Other intangible assets
Total assets acquired
Liabilities:
Accounts payable
Accrued liabilities
Total liabilities assumed
Net assets acquired
Amount
4,249
3,047
265
2,321
30,994
28,370
69,246
6,036
2,881
8,917
60,329
$
$
The goodwill of $30,994 arising from the acquisition consists largely of the synergies expected from combining the
operations of SLI and EME. The goodwill is assigned to the Company's Diversified Industrial segment and is expected to be
deductible for income tax purposes. Other intangibles consist of customer relationships of approximately $27,200 and customer
order backlog of $1,200. The customer order backlog was amortized based on the expected period over which the orders were
fulfilled of four months. The customer relationships have been assigned a useful life of 15 years based on the limited turnover and
long-standing relationships EME has with its existing customer base. The acquired customer relationships were valued using an
excess earnings approach, and significant assumptions used in the valuation included the customer attrition rate assumed and the
expected level of future sales. The amount of net sales and operating income of the acquired business included in the Company's
consolidated statements of operations for the year ended December 31, 2017 were approximately $55,700 and $5,700, respectively.
The amount of net sales and operating loss of the acquired business included in the Company's consolidated statements of operations
for the year ended December 31, 2016 were approximately $15,900 and $100, respectively. EME's results of operations are reported
within the Company's Diversified Industrial segment.
API's Acquisitions of AMP and Hazen
On December 1, 2016, API acquired the manufacturing assets and business of Amsterdam Metallized Products B.V.
("AMP") in the Netherlands for approximately $7,800. AMP is a global provider of packaging technologies for brand
enhancement. The acquisition, which is not material to SPLP's operations, is part of API's strategy to further strengthen its brand
enhancement mission of utilizing high-end material substrates for luxury packaging and other niche markets, adding new products
to API's offerings and providing an entry point into new packaging sectors. In connection with the AMP acquisition, the Company
has recorded inventory, property, plant and equipment, other intangible assets (primarily customer relationships) and goodwill
totaling approximately $1,500, $1,900, $1,400 and $3,000, respectively.
On July 27, 2016, API acquired Hazen Paper Company's ("Hazen") lamination facility and business in Osgood, Indiana
for approximately $14,000. The acquisition, which is not material to SPLP's operations, is part of API's strategy to focus on brand
enhancement solutions for the packaging market, and it enables API to provide a combined foils and laminate offering to customers
in the U.S., while giving broader coverage for its global customers. In connection with the Hazen acquisition, the Company has
recorded inventories, property, plant and equipment, other intangible assets (primarily customer relationships) and goodwill totaling
approximately $1,000, $6,200, $2,700 and $4,100, respectively.
HNH's Acquisition of SLI
On April 6, 2016, HNH entered into a definitive merger agreement with SLI, pursuant to which it commenced a cash
tender offer to purchase all the outstanding shares of SLI's common stock, at a purchase price of $40.00 per share in cash ("Offer").
SLI designs, manufactures and markets power electronics, motion control, power protection, power quality electromagnetic
equipment, and custom gears and gearboxes used in a variety of medical, commercial and military aerospace, computer, datacom,
industrial, architectural and entertainment lighting, and telecom applications. Consummation of the Offer was subject to certain
conditions, including the tender of a number of shares that constituted at least (1) a majority of SLI's outstanding shares and (2)
60% of SLI's outstanding shares not owned by HNH or any of its affiliates, as well as other customary conditions. SPLP beneficially
owned approximately 25.1% of SLI's outstanding shares at the time of the Offer.
On June 1, 2016, the conditions noted above, as well as all other conditions to the Offer were satisfied, and HNH
successfully completed its tender offer through a wholly-owned subsidiary. Pursuant to the terms of the merger agreement, the
61
wholly-owned subsidiary merged with and into SLI, with SLI being the surviving corporation ("SLI Merger"). Upon completion
of the SLI Merger, SLI became a wholly-owned subsidiary of HNH.
The total merger consideration was approximately $161,985, excluding related transaction fees and expenses. The merger
consideration represents the aggregate cash merger consideration of approximately $122,191 paid by HNH to non-affiliates and
the fair value of SPLP's previously held interest in SLI of approximately $39,794, which represented the Company's previously
held equity interest at a value of $40.00 per share. The funds necessary to consummate the Offer, the SLI Merger and to pay related
fees and expenses were financed with additional borrowings under HNH's senior secured revolving credit facility. The following
table summarizes the amounts of the assets acquired and liabilities assumed at the acquisition date:
Assets:
Cash and cash equivalents
Trade and other receivables
Inventories
Prepaid expenses and other current assets
Property, plant and equipment
Goodwill
Other intangible assets
Other non-current assets
Total assets acquired
Liabilities:
Accounts payable
Accrued liabilities
Long-term debt
Deferred tax liabilities
Other non-current liabilities
Total liabilities assumed
Net assets acquired
$
Amount
4,985
32,680
24,295
8,258
23,950
54,231
92,326
257
240,982
18,433
21,306
9,500
23,567
6,191
78,997
$
161,985
The goodwill of $54,231 arising from the acquisition consists largely of the synergies expected from combining the
operations of HNH and SLI. The goodwill is assigned to the Company's Diversified Industrial segment and is not expected to be
deductible for income tax purposes. Other intangibles consist primarily of acquired trade names of approximately $14,700, customer
relationships of approximately $59,900, developed technology and patents of approximately $10,700 and customer order backlog
of approximately $6,900. The customer order backlog was amortized based on the expected period over which the orders were
fulfilled, ranging from two to eight months. The remaining intangible assets have been assigned useful lives ranging from 10 to
15 years based on the long operating history, broad market recognition and continued demand for the associated brands, and the
limited turnover and long-standing relationships SLI has with its existing customer base. The valuations of acquired trade names,
developed technology and patents were performed utilizing a relief from royalty method, and significant assumptions used in the
valuation included the royalty rate assumed and the expected level of future sales, as well as the rate of technical obsolescence for
the developed technology and patents. The acquired customer relationships were valued using an excess earnings approach, and
significant assumptions used in the valuation included the customer attrition rate assumed and the expected level of future sales.
Included in accrued liabilities and other non-current liabilities above was a total of $10,900 for existing and contingent liabilities
relating to SLI's environmental matters, which are further discussed in Note 18 - "Commitments and Contingencies."
The amount of net sales and operating income of the acquired business included in the Company's consolidated statements
of operations for the year ended December 31, 2017 were approximately $198,600 and $17,700, respectively. The amount of net
sales and operating loss of the acquired business included in the Company's consolidated statements of operations for the year
ended December 31, 2016 was approximately $112,700 and $1,800, respectively, which includes $1,900 of expenses associated
with the amortization of the fair value adjustment to acquisition-date inventories and also $1,900 of expenses associated with the
acceleration of SLI's previously outstanding stock-based compensation awards, which became fully vested on the date of acquisition
pursuant to the terms of the merger agreement, and which are included in Selling, general and administrative expenses ("SG&A")
in the Company's 2016 consolidated statements of operations. SLI's results of operations are reported within the Company's
Diversified Industrial segment.
2015 Acquisitions
HNH's Acquisition of JPS
62
Effective July 2, 2015, HNH completed the acquisition of JPS Industries, Inc. ("JPS") pursuant to an agreement and plan
of merger, dated as of May 31, 2015. JPS is a manufacturer of mechanically formed glass, quartz and aramid substrate materials
for specialty applications in a wide expanse of markets requiring highly engineered components. At the effective time of the Merger
(as defined below), the acquisition subsidiary was merged with and into JPS ("Merger"), with JPS being the surviving corporation
in the Merger, and each outstanding share of JPS common stock (other than shares held by HNH and its affiliates), including SPH
Group Holdings, a significant stockholder of JPS, was converted into the right to receive $11.00 in cash. The total merger
consideration was $114,493 which represents the aggregate cash merger consideration of $70,255 and the fair value of SPLP's
previously held interest in JPS of $44,238. The cash consideration was funded primarily by HNH and SPH Group Holdings. SPH
Group Holding's funding of the aggregate merger consideration totaled approximately $4,510, with the remainder funded by HNH,
financed through additional borrowings under HNH's senior secured revolving credit facility.
As a result of the closing of the Merger, JPS was indirectly owned by both HNH and SPH Group Holdings. Following
the expiration of the 20-day period provided in Section 262(d)(2) of the Delaware General Corporation Law for JPS stockholders
to exercise appraisal rights in connection with the Merger, and in accordance with an exchange agreement, dated as of May 31,
2015, by and between HNH and SPH Group Holdings, on July 31, 2015, HNH exchanged 1,429,407 shares of HNH's common
stock with a value of $48,700 for all shares of JPS common stock held by SPH Group Holdings. As a result of the exchange, HNH
owns 100% of JPS. The following table summarizes the assets acquired and liabilities assumed at the acquisition date:
Assets:
Cash and cash equivalents
Trade and other receivables
Inventories
Prepaid expenses and other current assets
Property, plant and equipment
Goodwill
Other intangible assets
Deferred tax assets
Other non-current assets
Total assets acquired
Liabilities:
Accounts payable
Accrued liabilities
Long-term debt
Accrued pension liabilities
Other non-current liabilities
Total liabilities assumed
Net assets acquired
Amount
22
21,201
27,126
4,961
45,384
32,162
9,120
19,788
3,112
162,876
10,674
5,838
1,500
30,367
4
48,383
114,493
$
$
The goodwill of $32,162 arising from the acquisition was assigned to SPLP's Diversified Industrial segment, of which
$24,100 was not expected to be deductible for income tax purposes. Other intangible assets consist primarily of acquired trade
names of approximately $4,300, customer relationships of approximately $3,100, and developed technology of approximately
$1,700. These intangible assets have been assigned useful lives ranging from 10 to 15 years based on the long operating history,
broad market recognition and continued demand for the associated brands, and the limited turnover and longstanding relationships
JPS has with its existing customer base. The valuations of acquired trade names and developed technology were performed utilizing
a relief from royalty method, and significant assumptions used in the valuation included the royalty rate assumed and the expected
level of future sales, as well as the rate of technical obsolescence for the developed technology. The acquired customer relationships
were valued using an excess earnings approach, and significant assumptions used in the valuation included the customer attrition
rate assumed and the expected level of future sales.
The amount of net sales and operating income of the acquired business included in the Company's consolidated statements
of operations for the year ended December 31, 2017 were approximately $94,900 and $5,000, respectively. The amount of net
sales and operating loss of the acquired business included in the Company's consolidated statements of operations for the year
ended December 31, 2016 were approximately $101,600 and $32,100, respectively. The operating loss in 2016 reflects a goodwill
impairment charge of $24,254 (see Note 7 - "Goodwill and Other Intangible Assets, Net") and an asset impairment charge of
$7,900 (see Note 4 - "Divestitures and Asset Impairment Charges"). The amount of net sales and operating loss of the acquired
business included in the Company's consolidated statements of operations for the year ended December 31, 2015 were
63
approximately $59,500 and $2,200, which included $3,400 of nonrecurring expense related to the fair value adjustment to
acquisition-date inventories. The results of operations of JPS are reported within the Company's Diversified Industrial segment.
CoSine Acquisition
On January 20, 2015 ("CoSine Acquisition Date"), the Company entered into a contribution agreement ("Contribution
Agreement") with CoSine. Pursuant to the Contribution Agreement, the Company contributed (i) 24,807,203 ordinary shares of
API and (ii) 445,456 shares of common stock of Nathan's Famous, Inc. ("Nathan's") to CoSine in exchange for 16,500,000 shares
of newly issued CoSine common stock and 12,761 shares of newly issued 7.5% series B non-voting preferred stock, which increased
SPLP's ownership of CoSine to approximately 80%. Prior to obtaining a controlling interest, SPLP owned approximately 48% of
the outstanding shares of CoSine, and its investment was accounted for under the equity method. As a result of the above transaction,
CoSine became a majority-owned controlled subsidiary and is consolidated with SPLP from the CoSine Acquisition Date. Prior
to CoSine's Acquisition of API discussed below, CoSine was included in the Corporate and Other segment. Beginning in the second
quarter of 2015, CoSine is included in the Diversified Industrial segment.
The Contribution Agreement was the first step in a plan for a wholly-owned United Kingdom ("UK") subsidiary of CoSine
("BidCo") to make an offer, which commenced on February 4, 2015, to acquire all of the issued and to be issued shares in API for
60 pence in cash per API share not already owned by BidCo. As a result of the offer, BidCo owned approximately 98% of API as
of March 31, 2015; however, CoSine did not obtain control over the operations of API until April 17, 2015 (see the "CoSine's
Acquisition of API" section below).
As of the CoSine Acquisition Date, the fair value of the Company's previously held equity interest and the noncontrolling
interest in CoSine were valued at approximately $2.51 per share. Accordingly, the Company remeasured its previously held equity
interest to a fair value of approximately $12,011, resulting in an investment gain, which was recorded in the first quarter of 2015,
of approximately $6,900 and is included in Other income, net in the Company's consolidated statements of operations.
The consideration paid to acquire the controlling interest in CoSine was $66,239, which was comprised of $12,011 related
to the fair value of the previously held common equity of CoSine, $22,823 for the fair value of the API shares transferred to CoSine
and $31,405 for the fair value of the Nathan's shares transferred to CoSine. The following table summarizes the preliminary
estimates of the fair values of the assets acquired and liabilities assumed as of the CoSine Acquisition Date as well as the fair value
of the noncontrolling interest in CoSine:
Assets:
Cash and cash equivalents
Prepaid expenses and other current assets
Long-term investments
Goodwill
Total assets acquired
Liabilities:
Accounts payable
Accrued liabilities
Total liabilities assumed
Fair value of noncontrolling interest
Net assets acquired
CoSine's Acquisition of API
Amount
17,614
7
54,228
8,295
80,144
280
783
1,063
12,842
66,239
$
$
As discussed above, CoSine obtained control over the operations of API on April 17, 2015 ("API Acquisition Date"), at
which time API became a majority-owned subsidiary of CoSine. API is a manufacturer and distributor of foils, films and laminates
used to enhance the visual appeal of products and packaging. API is headquartered in Cheshire, England. The fair value of the
consideration paid consisted of the fair value of the previously held common equity of API of $22,861 and the cash paid of $47,866
for the additional API equity acquired, for total consideration of $70,727. The following table summarizes the fair values of the
assets acquired and liabilities assumed as of the API Acquisition Date:
64
Assets:
Cash and cash equivalents
Trade and other receivables
Inventories
Prepaid expenses and other current assets
Property, plant and equipment
Goodwill
Other intangible assets
Other non-current assets
Total assets acquired
Liabilities:
Accounts payable
Accrued liabilities
Short-term debt
Long-term debt
Accrued pension liabilities
Deferred tax liabilities
Total liabilities assumed
Net assets acquired
Amount
5,424
24,160
22,900
4,838
42,238
14,456
22,749
4,816
141,581
24,556
7,028
2,104
22,784
11,791
2,591
70,854
70,727
$
$
All of the goodwill is assigned to SPLP's Diversified Industrial segment and is not expected to be deductible for income
tax purposes. Other intangible assets consist primarily of acquired trade names of approximately $5,200 and customer relationships
of $17,700. The trade names have been assigned a 10 year useful life based on the long operating history, broad market recognition
and continued demand for the associated brands, and customer relationships have been assigned a 7 year life based on the expected
turnover of API's existing customer base. The valuation of acquired trade names was performed utilizing a relief from royalty
method, and significant assumptions used in the valuation include the royalty rate assumed and the expected level of future sales.
The acquired customer relationships were valued using an excess earnings approach, and significant assumptions used in the
valuation include the customer attrition rate assumed and the expected level of future sales.
HNH Acquisition of ITW Polymers Sealants North America Inc. ("ITW")
On March 31, 2015, HNH, through its indirect subsidiary, OMG, Inc. ("OMG"), acquired certain assets and assumed
certain liabilities of ITW, which are used in the business of manufacturing two-component polyurethane adhesive for the roofing
industry for a cash purchase price of $27,400, reflecting a final working capital adjustment of $400. The assets acquired and
liabilities assumed primarily included net working capital of inventories and accrued liabilities; property, plant and equipment;
and intangible assets, primarily developed technology, valued at $1,700, $100 and $4,400, respectively. In connection with the
ITW acquisition, the Company has recorded goodwill totaling approximately $21,268, which is expected to be deductible for
income tax purposes.
Pro Forma Disclosures
Unaudited pro forma revenue and net income from continuing operations attributable to common unitholders of the
combined entities is presented below as if JPS and API had both been acquired January 1, 2014, and SLI and EME had both been
acquired January 1, 2015.
Revenue
Net income from continuing operations attributable to common unitholders
Net income from continuing operations per common unit - basic
Net income from continuing operations per common unit - diluted
Year Ended December 31,
2016
2015
$
1,296,850
$
1,357,820
1,211
0.12
0.12
70,308
2.96
2.95
This unaudited pro forma data is presented for informational purposes only and does not purport to be indicative of the
results of future operations or of the results that would have occurred had the JPS and API acquisitions taken place on January 1,
2014 and the SLI and EME acquisitions taken place on January 1, 2015. The information is based on historical financial information
with respect to the acquisitions and does not include operational or other changes which might have been effected by the Company.
65
The unaudited pro forma earnings for all periods were adjusted to reflect incremental depreciation and amortization expense based
on the fair value adjustments for the acquired property, plant and equipment and intangible assets, which are principally amortized
using the double-declining balance method for customer relationships and the straight line method for other intangibles, over
periods principally ranging from 10 to 15 years, except for the customer order backlog, which is amortized over periods ranging
from two to eight months. The unaudited proforma earnings were also adjusted to reflect incremental interest expense on the
borrowings made to finance the acquisitions.
The 2016 unaudited pro forma earnings exclude a total of $9,200 of acquisition-related costs incurred by HNH, SLI and
EME during the year ended December 31, 2016. Of these costs that were excluded from 2016 pro forma expenses, an expense of
$1,900 from the amortization of the fair value adjustment to acquisition-date inventories and an expense of $1,900 associated with
the acceleration of SLI's previously outstanding stock-based compensation awards were reflected in 2015 and reduced the 2015
unaudited pro forma earnings. The 2015 unaudited pro forma earnings also reflect adjustments to exclude $8,572 of acquisition-
related costs incurred by HNH, JPS, SLI and API in 2015 and $4,375 of nonrecurring expense related to JPS's and API's amortization
of the fair value adjustment to acquisition-date inventories.
4. DIVESTITURES AND ASSET IMPAIRMENT CHARGES
Discontinued operations in 2015 include the operations of Arlon, LLC ("Arlon"), a manufacturer of high performance
materials for the printed circuit board industry and silicone rubber-based materials, which was part of SPLP's Diversified Industrial
segment. On December 18, 2014, HNH entered into a contract to sell its Arlon business for $157,000 in cash, less transaction fees,
subject to a final working capital adjustment and certain potential reductions as provided in the stock purchase agreement, which
are reflected in proceeds from sales of discontinued operations in the Company's consolidated statements of cash flows for the
year ended December 31, 2015. The closing occurred in January 2015.
Total revenue
Net income from operations
Net loss from operations after taxes and noncontrolling interests
Gain on sale of discontinued operations after taxes and noncontrolling interests
Divestitures
Year Ended December 31,
2015
$
5,952
565
(1,111)
56,659
In the second quarter of 2017, API sold a facility in Salford, UK for approximately $5,000 and recorded a gain on sale
of approximately $450, which is recorded in Other (income) expenses, net in the Company's consolidated statements of operations.
Also, in the first quarter of 2017, API sold a facility in Rahway, N.J. for approximately $7,500 and recorded a gain on sale of
approximately $200, which is recorded in Other (income) expenses, net in the Company's consolidated statements of operations.
In January 2017, HNH sold its Micro-Tube Fabricators, Inc. business ("MTF") for approximately $2,500 and recorded a
loss on sale of $400, which is included in Other (income) expenses, net in the Company's consolidated statements of operations.
MTF specialized in the production of precision fabricated tubular components produced for medical device, aerospace, aircraft,
automotive and electronic applications, and it was included in the Company's Diversified Industrial segment. The price was paid
$2,000 in cash at closing and a $500 subordinated promissory note to HNH bearing 5% interest annually, which has been fully
collected. In addition, HNH may receive up to $1,000 of additional contingent consideration if certain sales volume milestones
are met between the sale date and December 31, 2019. In 2017, the Company earned $755 of additional contingent consideration.
The operations of MTF were not significant to the Company's consolidated financial statements.
In October 2016, HNH subsidiary, JPS, sold the equipment and certain customer information, as well as related inventories,
of its Slater, South Carolina facility for $3,500. The operations of this facility were not significant to the consolidated financial
statements of the Company.
In April 2016, API sold its security holographics business for approximately $8,000 and recorded a gain of approximately
$2,800, which is recorded in Other income, net in the Company's consolidated statements of operations. API's security holographics
business created custom optical security solutions to protect secure documents and premium products against counterfeit and fraud
and it was included in the Company's Diversified Industrial segment. The sale was part of API's strategy to focus on its decorative
holographic offerings for the packaging market. The operations of this business were not significant to the consolidated financial
statements of SPLP.
66
Asset Impairment Charges
2017
During 2017, Steel Excel recorded a non-cash impairment charge of $2,028 related to an other-than-temporary impairment
of a certain investment.
2016
In connection with its continued integration of JPS, the Company approved the closure of JPS' Slater, South Carolina
operating facility during the second quarter of 2016 and recorded impairment charges totaling approximately $7,900 associated
with the planned closure, including write-downs of $6,600 to property, plant and equipment and $400 to intangible assets, as well
as a $900 inventory write-down, which was recorded in Cost of goods sold in the Company's consolidated statements of operations.
Due to improved operational productivity and available capacity at Lucas-Milhaupt facilities, the Company approved the
closure of its Lucas-Milhaupt Gliwice, Poland operating facility as part of its continual focus to optimize infrastructure costs.
During the third quarter of 2016, the Company recorded asset impairment charges totaling $3,557, primarily due to write-downs
of $1,500 to property, plant, and equipment and $500 to inventories associated with the planned closure. The inventory write-down
was recorded in Cost of goods sold in the Company's consolidated statements of operations.
In addition, during 2016, Steel Excel recorded non-cash asset impairment charges of $7,202 related to other-than-temporary
impairments on certain investments.
2015
Asset impairment charges in 2015 are comprised of a non-cash asset impairment charge of $1,398 recorded by the Company
related to certain unused, real property located in Norristown, Pennsylvania to reflect its current market value, a non-cash impairment
charge of $1,316 recorded by DGT related to real property to reflect its current market value, and other-than-temporary impairments
of investments of $65,378.
67
5. LOANS RECEIVABLE, INCLUDING LOANS HELD FOR SALE
Major classification of WebBank's loans receivable, including loans held for sale at December 31, 2017 and 2016 are as
follows:
December 31,
2017
%
136,773
Total
Current
Non-current
December 31,
2016
$
80,692
December 31,
2017
December 31,
2016
December 31,
2017
December 31,
2016
%
$
136,773
$
80,692
$
— $
—
$
$
Loans held for sale
Commercial real estate loans
Commercial and industrial
Consumer loans
Total loans
Less:
568
1% $
84,726
53,238
61%
38%
138,532
100%
870
50,564
22,805
74,239
1%
68%
31%
100%
Allowance for loan losses
(5,237)
Total loans receivable, net
$
133,295
$
(1,483)
72,756
Loans receivable, including loans
held for sale (a)
20
28,315
22,371
50,706
(5,237)
45,469
43
3,059
8,949
12,051
(1,483)
10,568
548
$
56,411
30,867
87,826
—
87,826
827
47,505
13,856
62,188
—
62,188
$
182,242
$
91,260
$
87,826
$
62,188
(a) The carrying value is considered to be representative of fair value because the rates of interest are not significantly different from market
interest rates for instruments with similar maturities. The fair value of loans receivable, including loans held for sale, net was $270,068 and
$153,488 at December 31, 2017 and 2016, respectively.
Commercial and industrial loans include unamortized premiums of $1 and unaccreted discounts of $507 at December 31,
2017 and unamortized premiums of $2 and unaccreted discounts of $418 at December 31, 2016. Loans with a carrying value of
approximately $57,436 and $47,237 were pledged as collateral for potential borrowings at December 31, 2017 and 2016,
respectively. WebBank serviced $3,125 and $3,535 in loans for others at December 31, 2017 and 2016, respectively.
Allowance for Loan Losses
The allowance for loan losses ("ALLL") represents an estimate of probable and estimable losses inherent in the loan
portfolio as of the balance sheet date. Losses are charged to the ALLL when incurred. Generally, commercial loans are charged
off or charged down at the point at which they are determined to be uncollectible in whole or in part, or when 180 days past due
unless the loan is well secured and in the process of collection. The amount of the ALLL is established by analyzing the portfolio
at least quarterly and a provision for or reduction of loan losses is recorded so that the ALLL is at an appropriate level at the balance
sheet date. The methodologies used to estimate the ALLL depend upon the impairment status and portfolio segment of the loan.
Loan groupings are created for each loan class, and are then graded against historical and industry loss rates.
After applying historic loss experience, the quantitatively derived level of ALLL is reviewed for each segment using
qualitative criteria. Various risk factors are tracked that influence judgment regarding the level of the ALLL across the portfolio
segments. Primary qualitative factors that may be reflected in the quantitative models include:
• Asset quality trends
• Risk management and loan administration practices
• Portfolio management and controls
• Effect of changes in the nature and volume of the portfolio
• Changes in lending policies and underwriting policies
• Existence and effect of any portfolio concentrations
• National economic business conditions and other macroeconomic adjustments
• Regional and local economic and business conditions
• Data availability and applicability
•
• Value of underlying collateral
Industry monitoring
Changes in these factors are reviewed to ensure that changes in the level of the ALLL are consistent with changes in these
factors. The magnitude of the impact of each of these factors on the qualitative assessment of the ALLL changes from quarter to
quarter according to the extent these factors are already reflected in historic loss rates and according to the extent these factors
diverge from one another. Also considered is the uncertainty inherent in the estimation process when evaluating the ALLL. Changes
in the ALLL are summarized as follows:
68
December 31, 2014
Charge-offs
Recoveries
Provision
December 31, 2015
Charge-offs
Recoveries
Provision
December 31, 2016
Charge-offs
Recoveries
Provision
December 31, 2017
Commercial
Real Estate
Loans
Commercial
& Industrial
Consumer
Loans
Total
$
481
$
— $
$
76
—
69
(97)
48
—
49
(68)
29
—
17
$
(33)
13
$
—
54
47
582
—
30
268
880
—
—
—
—
—
—
574
574
(933)
142
2,711
2,800
$
(1,214)
103
2,961
2,424
$
557
—
123
(50)
630
—
79
774
1,483
(2,147)
262
5,639
5,237
The ALLL and outstanding loan balances according to the Company's impairment method are summarized as follows:
December 31, 2017
Allowance for loan losses:
Individually evaluated for impairment
Collectively evaluated for impairment
Total
Outstanding loan balances:
Individually evaluated for impairment
Collectively evaluated for impairment
Total
December 31, 2016
Allowance for loan losses:
Individually evaluated for impairment
Collectively evaluated for impairment
Total
Outstanding loan balances:
Individually evaluated for impairment
Collectively evaluated for impairment
Total
Nonaccrual and Past Due Loans
Commercial
Real Estate
Loans
Commercial
& Industrial
Consumer
Loans
Total
$
$
$
$
1
12
13
16
552
568
$
$
$
$
38
2,762
2,800
41
84,685
84,726
$
$
$
$
$
2,424
2,424
39
5,198
5,237
— $
53,238
53,238
$
57
138,475
138,532
Commercial
Real Estate
Loans
Commercial
& Industrial
Consumer
Loans
Total
$
$
$
$
7
22
29
17
853
870
$
$
$
$
46
834
880
54
50,510
50,564
$
$
$
$
— $
574
574
$
— $
22,805
22,805
$
53
1,430
1,483
71
74,168
74,239
Commercial and Industrial loans past due 90 days or more and still accruing interest were $2,551 and $0 at December 31,
2017 and 2016, respectively. Consumer loans past due 90 days or more and still accruing interest were $107 and $3 at December 31,
2017 and 2016, respectively. The Company did not have any nonaccrual loans at December 31, 2017 and 2016.
Past due loans (accruing and nonaccruing) are summarized as follows:
69
December 31, 2017
Current
30-89 Days
Past Due
90+ Days
Past Due
Total
Past Due
Total Loans
Recorded
Investment
In Accruing
Loans 90+
Days Past
Due
Nonaccrual
Loans
That Are
Current (a)
Commercial real estate loans
$
568
$
— $
— $
— $
568
$
— $
Commercial and industrial
Consumer loans
Total loans
81,101
52,521
1,074
610
2,551
107
3,625
717
84,726
53,238
2,551
107
$
134,190
$
1,684
$
2,658
$
4,342
$
138,532
$
2,658
$
—
—
—
—
(a) Represents nonaccrual loans that are not past due more than 30 days; however, full payment of principal and interest is still not expected.
December 31, 2016
Commercial real estate loans
Commercial and industrial
Consumer loans
Total loans
Current
30-89 Days
Past Due
90+ Days
Past Due
Total
Past Due
Total Loans
Recorded
Investment
In Accruing
Loans 90+
Days Past
Due
Nonaccrual
Loans
That Are
Current (b)
$
$
870
$
— $
— $
— $
870
$
— $
50,564
22,745
74,179
$
—
57
57
$
—
3
3
$
—
60
60
$
50,564
22,805
74,239
$
—
3
3
$
—
—
—
—
(b) Represents nonaccrual loans that are not past due more than 30 days; however, full payment of principal and interest is still not expected.
Credit Quality Indicators
In addition to the past due and nonaccrual criteria, loans are analyzed using a loan grading system. Generally, internal
grades are assigned to loans based on the performance of the loans, financial/statistical models and loan officer judgment. For
consumer loans and some commercial and industrial loans, the primary credit quality indicator is payment status. Reviews and
grading of loans with unpaid principal balances of $100 or more is performed once per year. Grades follow definitions of Pass,
Special Mention, Substandard, and Doubtful which are consistent with published definitions of regulatory risk classifications. The
definitions of Pass, Special Mention, Substandard, and Doubtful are summarized as follows:
• Pass: An asset in this category is a higher quality asset and does not fit any of the other categories described below. The
likelihood of loss is considered remote.
• Special Mention: An asset in this category has a specific weakness or problem but does not currently present a significant risk
of loss or default as to any material term of the loan or financing agreement.
• Substandard: An asset in this category has a developing or currently minor weakness or weaknesses that could result in loss
or default if deficiencies are not corrected or adverse conditions arise.
• Doubtful: An asset in this category has an existing weakness or weaknesses that have developed into a serious risk of significant
loss or default with regard to a material term of the financing agreement.
Outstanding loan balances (accruing and nonaccruing) categorized by these credit quality indicators are summarized as
follows:
December 31, 2017
Commercial real estate loans
Commercial and industrial
Consumer loans
Total loans
December 31, 2016
Commercial real estate loans
Commercial and industrial
Consumer loans
Total loans
Impaired Loans
Non -
Graded
Pass
Special
Mention
Sub-
standard
Doubtful
Total
Loans
$
— $
552
$
— $
25,082
53,238
56,286
—
3,317
—
$ 78,320
$ 56,838
$
3,317
$
16
41
—
57
$
$
— $
568
—
—
84,726
53,238
— $ 138,532
Non -
Graded
Pass
Special
Mention
Sub-
standard
Doubtful
Total
Loans
$
— $
853
$
— $
—
45,931
22,805
—
4,579
—
$ 22,805
$ 46,784
$
4,579
$
17
54
—
71
$
$
— $
870
—
—
50,564
22,805
— $ 74,239
70
Loans are considered impaired when, based on current information and events, it is probable that WebBank will be unable
to collect all amounts due according to the contractual terms of the loan agreement, including scheduled interest payments. When
loans are impaired, an estimate of the amount of the balance that is impaired is made and a specific reserve is assigned to the loan
based on the estimated present value of the loan's future cash flows discounted at the loan's effective interest rate, the observable
market price of the loan, or the fair value of the loan's underlying collateral less the cost to sell. When the impairment is based on
the fair value of the loan's underlying collateral, the portion of the balance that is impaired is charged off, such that these loans do
not have a specific reserve in the ALLL. Payments received on impaired loans that are accruing are recognized in interest income,
according to the contractual loan agreement. WebBank recognized $4, $78, and $86 on impaired loans for the years ended
December 31, 2017, 2016, and 2015, respectively. Payments received on impaired loans that are on nonaccrual are not recognized
in interest income, but are applied as a reduction to the principal outstanding. Payments are recognized when cash is received.
Information on impaired loans is summarized as follows:
December 31, 2017
Commercial real estate loans
Commercial and industrial
Total loans
December 31, 2016
Commercial real estate loans
Commercial and industrial
Total loans
6. INVENTORIES, NET
Recorded Investment
Unpaid
Principal
Balance
With No
Allowance
With
Allowance
Total
Recorded
Investment
Related
Allowance
Average
Recorded
Investment
$
$
16
41
57
$
$
— $
3
3
$
16
38
54
$
$
16
41
57
$
$
1
38
39
$
$
16
14
30
Recorded investment
Unpaid
Principal
Balance
With No
Allowance
With
Allowance
Total
Recorded
Investment
Related
Allowance
Average
Recorded
Investment
$
$
17
54
71
$
$
— $
8
8
$
17
46
63
$
$
17
54
71
$
$
7
46
53
$
$
655
3,274
3,929
A summary of inventories, net is as follows:
Finished products
In-process
Raw materials
Fine and fabricated precious metal in various stages of completion
LIFO reserve
Total
Fine and Fabricated Precious Metal Inventory
December 31, 2017
December 31, 2016
$
$
49,053
$
25,037
53,015
16,757
143,862
(1,227)
142,635
$
42,824
19,160
42,881
15,019
119,884
(679)
119,205
In order to produce certain of its products, the Company purchases, maintains and utilizes precious metal inventory. The
Company records certain precious metal inventory at the lower of LIFO cost or market, with any adjustments recorded through
Cost of goods sold. Remaining precious metal inventory is accounted for primarily at fair value.
During the third quarter of 2017, the Company began obtaining certain precious metals under a $29,500 fee consignment
agreement with the Bank of Nova Scotia ("ScotiaBank"). As of December 31, 2017, the Company had approximately $8,100 of
silver under consignment with ScotiaBank, which is recorded at fair value in Inventories, net with a corresponding liability for
the same amount included in Accrued liabilities on the Company's consolidated balance sheet. Fees charged under the consignment
agreement are recorded in Interest expense in the Company's consolidated statements of operations.
71
Supplemental inventory information:
Precious metals stated at LIFO cost
Precious metals stated under non-LIFO cost methods, primarily at fair value
Market value per ounce:
Silver
Gold
Palladium
December 31, 2017
December 31, 2016
$
4,897
$
10,633
17.01
1,296.50
1,056.00
5,001
9,339
16.05
1,159.10
676.00
7. GOODWILL AND OTHER INTANGIBLE ASSETS, NET
A reconciliation of the change in the carrying value of goodwill is as follows:
Diversified
Industrial
Energy
Corporate and
Other
Total
Balance at December 31, 2016:
Gross goodwill
Accumulated impairments
Net goodwill
Acquisitions (a)
Currency translation adjustment
Other adjustments
Balance at December 31, 2017:
Gross goodwill
Accumulated impairments
Net goodwill
$
191,596
$
(24,254)
167,342
—
1,504
430
193,530
(24,254)
64,790
$
(64,790)
—
758
—
—
65,548
(64,790)
$
169,276
$
758
$
81
—
81
—
—
—
81
—
81
(a) Goodwill from acquisitions relates to the Basin acquisition. For additional information, see Note 3 - "Acquisitions."
Balance at December 31, 2015:
Gross goodwill
Accumulated impairments
Net goodwill
Acquisitions (b)
Impairment
Currency translation adjustment
Other adjustments
Balance at December 31, 2016:
Gross goodwill
Accumulated impairments
Net goodwill
Diversified
Industrial
Energy
Corporate and
Other
$
101,772
$
—
101,772
92,177
(24,254)
(2,508)
155
191,596
(24,254)
64,790
$
(64,790)
—
—
—
—
—
64,790
(64,790)
$
167,342
$
— $
81
—
81
—
—
—
—
81
—
81
$
$
$
$
256,467
(89,044)
167,423
758
1,504
430
259,159
(89,044)
170,115
Total
166,643
(64,790)
101,853
92,177
(24,254)
(2,508)
155
256,467
(89,044)
167,423
(b) Goodwill from acquisitions relates to HNH's acquisition of SLI and SLI's acquisition of EME, as well as API's acquisitions of Hazen and
AMP. For additional information, see Note 3 - "Acquisitions."
In 2016, the Company recorded a goodwill impairment charge of $24,254 related to the performance materials business
within its Diversified Industrial segment, resulting from a decline in market conditions and lower demand for certain of JPS'
product lines. The fair value of the reporting unit used in determining the goodwill impairment charge was based on valuations
using a combination of the income and market approaches. See Note 17 - "Fair Value Measurements" for further discussion of
these valuation methodologies.
In connection with its annual goodwill impairment tests and the adverse effects of developments in the oil services industry,
the Company recognized impairment charges of $19,571 in 2015. The goodwill impairment charges related to the goodwill
associated with its Energy segment, resulting from the adverse effects the decline in energy prices had on the oil services industry.
A summary of other intangible assets is as follows:
72
Customer relationships
$
222,277
$
80,952
$
141,325
$
220,890
$
57,978
$
December 31, 2017
December 31, 2016
Gross
Carrying
Amount
Accumulated
Amortization
Net
Gross
Carrying
Amount
Accumulated
Amortization
Trademarks, trade names and brand names
Developed technology, patents and patent
applications
Other
Total
52,356
28,239
16,131
14,996
11,756
11,982
37,360
16,483
4,149
51,717
27,947
16,652
11,682
9,332
11,002
$
319,003
$
119,686
$
199,317
$
317,206
$
89,994
$
227,212
Net
162,912
40,035
18,615
5,650
Trademarks with indefinite lives as of December 31, 2017 and 2016 were $8,020. Amortization expense related to
intangible assets was $29,743, $31,358 and $16,258 for the years ended December 31, 2017, 2016 and 2015, respectively. The
increase in amortization expense during 2016 was principally due to the Company's acquisitions as discussed in Note 3 -
"Acquisitions." The estimated amortization expense for each of the five succeeding years and thereafter is as follows:
2018
2019
2020
2021
2022
Thereafter
Total
Trademarks,
Trade Names
and Brand
Names
Developed
Technology,
Patents and
Patent
Applications
Customer
Relationships
$
20,730
$
17,241
16,125
14,523
11,242
61,464
$
2,808
2,484
2,484
2,484
2,478
16,602
$
2,410
2,410
1,998
1,878
1,849
5,938
Other
Total
$
805
760
730
723
209
922
26,753
22,895
21,337
19,608
15,778
84,926
$
141,325
$
29,340
$
16,483
$
4,149
$
191,297
8. PROPERTY, PLANT AND EQUIPMENT, NET
A summary of property, plant and equipment, net is as follows:
Land
Buildings and improvements
Machinery, equipment and other
Construction in progress
Accumulated depreciation
Property, plant and equipment, net
December 31, 2017
December 31, 2016
$
$
18,674
$
74,662
352,276
17,178
462,790
(190,799)
271,991
$
16,859
71,154
302,658
22,936
413,607
(152,195)
261,412
Depreciation expense was $42,193, $39,188 and $32,302 for the years ended December 31, 2017, 2016 and 2015,
respectively.
9. INVESTMENTS
Short-Term Investments
Marketable Securities
The Company's short-term investments primarily consist of its marketable securities portfolio held by its subsidiary, Steel
Excel. These marketable securities as of December 31, 2017 and 2016 were classified as available-for-sale securities. The
classification of marketable securities as a current asset is based on the intended holding period and realizability of the investment.
The Company's portfolio of marketable securities at December 31, 2017 and 2016 was as follows:
73
December 31, 2017
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Cost
Fair value
Cost
December 31, 2016
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Fair value
Available-for-sale securities
Short-term deposits
Mutual funds
Corporate securities
Corporate obligations
Total marketable securities
Amounts classified as cash equivalents
Amounts classified as marketable
securities
$
35,834
$
— $
— $
35,834
$
73,270
$
— $
— $
12,077
32,311
—
80,222
(35,834)
4,675
11,893
—
16,568
—
—
(2,643)
—
16,752
41,561
—
11,997
17,516
17,232
(2,643)
94,147
120,015
—
(35,834)
(73,270)
2,279
4,586
734
7,599
—
—
(586)
(108)
(694)
—
73,270
14,276
21,516
17,858
126,920
(73,270)
$
44,388
$
16,568
$
(2,643) $
58,313
$
46,745
$
7,599
$
(694) $
53,650
Proceeds from sales of marketable securities were $16,596, $60,600 and $43,300 in 2017, 2016 and 2015, respectively.
The Company determines gains and losses from sales of marketable securities based on specific identification of the securities
sold. Gross realized gains and losses from sales of marketable securities, all of which are reported as a component of Other income,
net in the Company's consolidated statements of operations, were as follows:
Gross realized gains
Gross realized losses
Realized gains, net
Year Ended December 31,
2017
2016
2015
$
$
637
(545)
92
$
$
4,771
(1,483)
3,288
$
$
12,053
(6,806)
5,247
The fair value of the Company's marketable securities with unrealized losses at December 31, 2017, and the duration of
time that such losses had been unrealized, were as follows:
Less than 12 Months
12 Months or Greater
Total
Fair Value
Gross
Unrealized
Losses
Fair Value
Gross
Unrealized
Losses
Fair Value
Gross
Unrealized
Losses
Corporate securities
Total
$
$
5,801
5,801
$
$
(2,558) $
(2,558) $
398
398
$
$
(85) $
(85) $
6,199
6,199
$
$
(2,643)
(2,643)
The fair value of the Company's marketable securities with unrealized losses at December 31, 2016, and the duration of
time that such losses had been unrealized, were as follows:
Corporate securities
Corporate obligations
Total
Less than 12 Months
12 Months or Greater
Total
Fair Value
$
$
2,316
12,481
14,797
$
$
Gross
Unrealized
Losses
Fair Value
Gross
Unrealized
Losses
Fair Value
Gross
Unrealized
Losses
(384) $
(108)
(492) $
662
—
662
$
$
(202) $
—
(202) $
2,978
12,481
15,459
$
$
(586)
(108)
(694)
The gross unrealized losses primarily related to losses on corporate securities and corporate obligations, which primarily
consist of investments in equity and debt securities of publicly-traded entities. Based on Steel Excel's evaluation of such securities,
it determined that certain unrealized losses represented other-than-temporary impairments. This determination was based on several
factors, including adverse changes in the market conditions and economic environments in which the entities operate. Steel Excel
recognized asset impairment charges of approximately $2,028 and $4,200 for the years ended December 31, 2017 and 2016,
respectively. The Company determined that there was no indication of other-than-temporary impairments on its other investments
with unrealized losses as of December 31, 2017. This determination was based on several factors, including the length of time and
extent to which fair value has been less than the cost basis, the financial condition and near-term prospects of the entity, and the
intent and ability to hold the corporate securities for a period of time sufficient to allow for any anticipated recovery in market
value.
The Company did not hold any marketable securities with contractual maturities as of December 31, 2017.
74
Long-Term Investments
The following table summarizes the Company's long-term investments as of December 31, 2017 and 2016. All equity-
method investment income and losses, as well as income from other investments where the fair value option has been elected, is
recorded in (Income) loss of associated companies and other investments held at fair value, net of taxes in the Company's
consolidated statements of operations.
Ownership %
December 31,
Long-Term Investments
Balance
(Income) Loss Recorded in Statements
of Operations
December 31,
Year Ended December 31,
2017
2016
2017
2016
2017
2016
2015
$
131,307
$
75,608
$
— $
— $
(4,449)
4,350
(614)
—
19
—
19
(870)
—
—
—
524
$
1,656
Corporate securities (a)
Steel Connect ("STCN") convertible notes(b)
STCN preferred stock(c)
STCN warrants
Equity method investments:
Carried at fair value:
STCN common stock
Aviat Networks, Inc. ("Aviat")
Other
SL Industries, Inc. (d)
JPS Industries, Inc.(d)
API Technologies Corp. ("API Tech")
Other investments at fair value - related party (e)
Long-term investments carried at fair value
Carried at cost:
Other equity method investments carried at cost (f)
Total
10,387
35,000
—
45,275
10,168
1,223
—
—
—
30.4%
12.7%
43.8%
100.0%
100.0%
—%
32.9%
12.7%
43.8%
100.0%
100.0%
—%
26,547
9,269
1,223
—
—
—
(15,700)
(899)
—
—
—
—
—
13,575
(3,094)
708
(8,078)
—
(7,089)
—
16,743
4,682
232
7,083
(5,831)
8,576
(361)
—
233,360
—
117,016
2,784
236,144
3,050
120,066
$
$
306
(16,888) $
$
239
(4,085) $
3,446
31,777
(a) Represents available-for-sale securities at December 31, 2017 and 2016. Cost basis totaled $12,250 at both December 31, 2017 and 2016
and gross unrealized gains totaled $119,057 and $63,358 at December 31, 2017 and 2016, respectively. The year ended December 31, 2015
includes income from available-for-sale securities for which the fair value option was elected.
(b) Represents investment in STCN convertible notes. Cost basis totaled $8,903 and $3,480 at December 31, 2017 and 2016, respectively, and
gross unrealized gains totaled $1,484 and $870 at December 31, 2017 and 2016, respectively. Changes in fair value are recorded in the
Company's consolidated statements of operations as the Company elected the fair value option to account for this investment.
(c) Represents investment in STCN preferred stock. On December 15, 2017, the Company entered into a Preferred Stock Purchase Agreement
pursuant to which STCN issued Series C convertible voting preferred stock for an aggregate purchase consideration of $35,000. Each share
of preferred stock can be converted into shares of STCN's common stock at an initial conversion price equal to $1.96 per share, subject to
appropriate adjustments for any stock dividend, stock split, stock combination, reclassification or similar transaction, among other things.
The convertible preferred shares, if converted as of December 31, 2017, when combined with the common shares owned by the Company,
would result in the Company having a direct interest of approximately 46% of STCN's outstanding shares.
(d) SL Industries, Inc. was acquired during 2016. JPS Industries, Inc. was acquired during 2015. Prior to these dates, each was accounted for as
a long-term investment of the Company.
(e) Represents income from the SPII liquidating trusts, which were all fully liquidated by December 31, 2015.
(f) Represents Steel Excel's investment in iGo, Inc. ("iGo") of 45.0% and a 50% investment in API Optix s.r.o ("API Optix"), a joint venture
investment held by API. For 2015, amounts recorded in the Company's consolidated statements of operations also include equity method
income or loss from WFH LLC (formerly CoSine).
The Company had no proceeds from sales of available-for-sale securities classified in long-term investments for the years
ended December 31, 2017 and 2016. Proceeds from the sales of available-for-sale securities classified in long-term investments
were $33,582 for the year ended December 31, 2015. The Company had gross realized gains of $27,275 and gross realized losses
of $56 related to the sales of these available-for-sale securities, all of which are reported as a component of Other income, net in
the Company's consolidated statements of operations for the for the year ended December 31, 2015.
Also, in 2015 Cosine received a special dividend of approximately $5,500 which is included in Other income, net in the
Company's consolidated statements of operations for the year ended December 31, 2015. As a result, management determined
there to be an other-than-temporary impairment in the stock price and recorded an impairment charge of approximately $5,500.
Equity Method Investments
75
The Company's investments in associated companies are accounted for under the equity method of accounting (see Note
2 - "Summary of Significant Accounting Policies" for additional information). Associated companies are included in either the
Diversified Industrial, Energy or Corporate and Other segments. Certain associated companies have a fiscal year end that differs
from December 31. Additional information for each of SPLP's investments in associated companies that have impacted the
Company's consolidated statements of operations during 2017, 2016 or 2015 is as follows:
Equity Method, Carried At Fair Value:
• STCN (formerly ModusLink Global Solutions, Inc.) provides supply chain and logistics services to companies in the consumer
electronics, communications, computing, software, storage and retail industries. STCN had issued the Company warrants to
purchase an additional 2,000,000 shares at $5.00 per share. Such warrants were terminated in 2017.
• Aviat is a global provider of microwave networking solutions. Prior to being classified as an equity method investment in
January 2015, the investment in Aviat was accounted for as an available-for-sale security, and upon the change in classification
the Company recognized a loss of approximately $2,800 that had previously been included as a component of AOCI.
• The Other investment represents the Company's investment in a Japanese real estate partnership.
• SLI and JPS, which were previously classified as equity method investments, were acquired by HNH in 2016 and 2015,
respectively (see Note 3 - "Acquisitions" for additional information), and therefore are now consolidated subsidiaries.
• API Tech is a designer and manufacturer of high performance systems, subsystems, modules, and components. In April 2016,
API Tech consummated a merger pursuant to which holders of its common stock received $2.00 for each share held. Upon
consummation of the merger, Steel Excel received $22,900 for its investment in API Tech, and Steel Excel no longer had an
investment in API Tech.
Equity Method, Carried at Cost:
• Steel Excel has an investment in iGo, a provider of accessories for mobile devices. The investment is being accounted for under
the traditional equity method. Based on the closing market price of iGo's publicly-traded shares, the value of the investment
in iGo was approximately $3,400 and $3,700 at December 31, 2017 and 2016, respectively.
• API has a 50% joint venture in API Optix with IQ Structures s.r.o. API Optix provides development and origination services
in the field of micro and nano-scale surface relief technology. The investment, based in Prague, Czech Republic, is being
accounted for under the equity method as an associated company.
The below summary balance sheet and income statement amounts include results for associated companies for the periods
in which they were accounted for as an associated company, or the nearest practicable twelve-month period corresponding to the
Company's fiscal year.
Summary of balance sheet amounts:
Current assets
Non-current assets
Total assets
Current liabilities
Non-current liabilities
Total liabilities
Equity
Total liabilities and equity
Summary income statement amounts:
Revenue
Gross profit
Loss from continuing operations
Net loss after noncontrolling interests
Other Investments
December 31,
2017
2016
$
$
$
$
$
$
$
257,846
23,452
281,298
149,155
69,172
218,327
62,971
281,298
$
317,014
28,169
345,183
200,966
67,483
268,449
76,734
345,183
Year Ended December 31,
2016
2015
2017
$
436,620
$
541,540
$
36,365
(24,409)
(25,827)
43,589
(48,801)
(50,007)
780,040
119,148
(20,471)
(16,371)
76
In 2016, Steel Excel fully-impaired a promissory note and recognized an impairment charge of $3,000. Steel Excel
previously held a $25,000 cost-method investment in a limited partnership that co-invested with other private investment funds
in a public company. Upon liquidation, the Company recognized a gain on the non-monetary exchange of approximately $9,300
based on the fair value of the shares received of $34,300. The shares of common stock of the public company investee received
are reported with the Company's marketable securities and are classified as "available-for-sale" securities at December 31, 2016.
WebBank had $32,816 and $11,558 of held-to-maturity securities at December 31, 2017 and 2016. WebBank records
these securities at amortized cost, and they are included in Other non-current assets on the Company's consolidated balance sheets.
The dollar value of these securities with expected maturities between one and five years is $8,580, five through ten years is $22,552
and after ten years in $1,684. Actual maturities may differ from expected or contractual maturities because borrowers may have
the right to call or prepay obligations with or without call or prepayment penalties. The securities are collateralized by unsecured
consumer loans. These securities had an estimated fair value of $32,842 and $11,556 at December 31, 2017 and 2016, respectively.
10. DEPOSITS
A summary of WebBank deposits is as follows:
Time deposits year of maturity:
2017
2018
2019
2020
Total time deposits
Money market deposits
Total deposits (a)
Current
Long-term
Total deposits
December 31, 2017
December 31, 2016
$
$
$
$
— $
191,528
115,819
89,974
397,321
113,679
511,000
305,207
205,793
511,000
$
$
$
105,155
110,812
57,848
—
273,815
91,790
365,605
196,944
168,661
365,605
(a) All time deposits accounts are under $250. The carrying value is considered to be representative of fair value because the rates of interest
are not significantly different from market interest rates for instruments with similar maturities. The fair value of Deposits was $511,473 and
$365,178 at December 31, 2017 and 2016, respectively.
11. LONG-TERM DEBT
Debt consists of the following:
Short term debt:
API - foreign
HNH - foreign
Short-term debt
Long-term debt:
SPLP revolving facility
HNH revolving facilities
HNH other debt - domestic
HNH foreign loan facilities
Steel Excel term loan, net of unamortized debt issuance costs
API term loans
API revolving facilities
Subtotal
Less portion due within one year
Long-term debt
Total debt
December 31, 2017
December 31, 2016
$
$
$
913
711
1,624
406,981
—
6,062
—
—
—
—
413,043
459
412,584
414,667
$
832
553
1,385
58,651
267,224
6,493
1,019
36,195
11,142
12,330
393,054
62,928
330,126
394,439
Long-term debt as of December 31, 2017 matures in each of the next five years as follows:
Long-term debt
$
413,043
$
459
$
459
$
3,973
$
101
$
408,051
$
—
Total
2018
2019
2020
2021
2022
Thereafter
77
SPLP Revolving Credit Facility
On November 14, 2017, SPH Group Holdings, Steel Excel, API Americas Inc., HNH and Cedar 2015 Limited (collectively,
the "Borrowers"), each a direct or indirect subsidiary of the Company, entered into a credit agreement ("Credit Agreement") that
consolidates a number of the Company's existing credit facilities into one combined, revolving credit facility covering substantially
all of the Company's subsidiaries, with the exception of WebBank. The Credit Agreement provides for a revolving credit facility
in an aggregate principal amount not to exceed $600,000, which includes a $55,000 subfacility for swing line loans and a $50,000
subfacility for standby letters of credit. The Credit Agreement also permits the Borrowers, under certain circumstances, to increase
the aggregate principal amount of revolving credit commitments under the Credit Agreement by up to $150,000. Borrowings under
the Credit Agreement bear interest, at the Borrower's option, at annual rates of either the Base Rate or the Euro-Rate, as defined,
plus an applicable margin as set forth in the Credit Agreement (1.0% and 2.00%, respectively, for Base Rate and Euro-Rate
borrowings at December 31, 2017), and the Credit Agreement provides for a commitment fee to be paid on unused borrowings.
The weighted average interest rate on the Credit Agreement was 3.52% at December 31, 2017. At December 31, 2017, letters of
credit totaling $10,636 had been issued under the Credit Agreement, including $3,488 of the letters of credit guaranteeing various
insurance activities, and $6,256 for environmental and other matters. The Credit Agreement permits SPLP, the parent, to fund the
dividends on its preferred units and its routine corporate expenses. The Company's total availability under the Credit Agreement,
which is based upon earnings and certain covenants as described in the Credit Agreement, was approximately $71,400 as of
December 31, 2017.
The Credit Agreement will expire with all amounts outstanding due and payable, on November 14, 2022. The Credit
Agreement is guaranteed by substantially all existing and thereafter acquired assets of the Borrowers and the Guarantors, as defined
in the agreement, and a pledge of all of the issued and outstanding shares of capital stock of each of the Borrowers' and Guarantors'
subsidiaries, and is fully guaranteed by the Guarantors. The Credit Agreement is subject to certain mandatory prepayment provisions
and restrictive and financial covenants, which include a maximum ratio limit on Total Leverage and a minimum ratio limit on
Interest Coverage, as defined. The Company was in compliance with all debt covenants at December 31, 2017.
SPLP's prior credit facility provided for a revolving credit facility with borrowing availability of up to $105,000. Amounts
outstanding under the prior credit facility bore interest at SPLP's option at either LIBOR or the Base Rate, as defined, plus an
applicable margin under the loan agreement, and required a commitment fee to be paid on unused borrowings. Any amounts
outstanding under the prior credit facility were paid in full on October 23, 2017.
HNH Debt
Senior Credit Facility
As part of SPLP's new Credit Agreement, HNH paid all amounts outstanding under their prior senior credit facility on
November 14, 2017. HNH's prior senior credit facility, as amended, consisted of a revolving credit facility in an aggregate principal
amount not to exceed $400,000, a $20,000 sublimit for the issuance of letters of credit and a $20,000 sublimit for the issuance of
swing loans. Borrowings under the Senior Credit Facility bore interest at HNH's option, at either LIBOR or the Base Rate, as
defined, plus an applicable margin as set forth in the loan agreement. In addition, HNH was required to pay commitment fees per
annum on the daily unused amount of the revolving loans.
Master Lease Agreement
During the year ended December 31, 2016, HNH entered into a master lease agreement with TD Equipment Finance,
Inc. ("TD Equipment"), which establishes the general terms and conditions for a $10,000 credit facility under which HNH may
lease equipment and other property from TD Equipment pursuant to the terms of individual lease schedules. As of December 31,
2017, $6,596 was outstanding under the master lease agreement, which is included in Other non-current liabilities on the Company's
consolidated balance sheet. As of December 31, 2016, no leases had been entered into under the master lease agreement.
Steel Excel Loans
As part of SPLP's new Credit Agreement, Steel Excel paid all amounts outstanding under their prior credit agreement on
November 14, 2017. Steel Excel's prior credit agreement provided for a borrowing capacity of $105,000 consisting of a $95,000
secured term loan and up to $10,000 in revolving loans, subject to a borrowing base of 85% of the eligible trade receivables.
Borrowings under the prior credit agreement bore interest at annual rates of either (i) the Base Rate plus an applicable margin or
78
(ii) LIBOR plus an applicable margin. The applicable margin for both Base Rate and LIBOR was determined based on the leverage
ratio calculated in accordance with the prior credit agreement.
API Long-Term Debt Facilities
Term Loans
As part of SPLP's new Credit Agreement, API paid all amounts outstanding on their term loans on November 14, 2017.
API's prior term loans principally bore interest at LIBOR plus 3.00%.
Revolving Facilities
As part of SPLP's new Credit Agreement, API paid all amounts outstanding under their prior credit facilities in the UK
and U.S. API's prior credit facility in the UK was a multi-currency revolving agreement of £13,500 (approximately $16,500) that
bore interest at LIBOR plus a margin of between 1.50% and 2.40%. The prior credit facility in the U.S. bore interest at LIBOR
plus 3.00%.
12. FINANCIAL INSTRUMENTS
At December 31, 2017 and 2016, financial instrument liabilities and related restricted cash consisted of $15,629 and
$12,640, respectively, of short sales of corporate securities. Activity is summarized below for financial instrument liabilities and
related restricted cash:
Balance, beginning of period
Settlement of short sales of corporate securities
Short sales of corporate securities
Net investment losses
Balance of financial instrument liabilities and related restricted cash, end of period
Short Sales of Corporate Securities
Year Ended December 31,
2017
2016
12,640
$
(94)
165
2,918
15,629
$
21,639
(9,229)
170
60
12,640
$
$
From time to time, Steel Excel enters into short sale transactions on certain corporate securities in which Steel Excel
receives proceeds from the sale of such securities and incurs obligations to deliver such securities at a later date. Upon initially
entering into such short sale transactions, Steel Excel recognizes a liability equal to the fair value of the obligation, with a comparable
amount of cash and cash equivalents reclassified as restricted cash. Subsequent changes in the fair value of such obligations,
determined based on the closing market price of the securities, are recognized currently as gains or losses, with a comparable
adjustment made between unrestricted and restricted cash.
Foreign Currency Forward Contracts
API enters into foreign currency forward contracts to hedge certain of its receivables and payables denominated in other
currencies. In addition, API enters into foreign currency forward contracts to hedge the value of certain of its future sales denominated
in Euros and the value of its future purchases denominated in USD. These hedges have settlement dates ranging through December
2018. The forward contracts that are used to hedge the risk of foreign exchange movement on its receivables and payables are
accounted for as fair value hedges. At December 31, 2017, there was a contract in place to buy Sterling and sell Euros in the amount
of €10,000 .The fair values of these derivatives are recognized as derivative assets and liabilities on the Company's consolidated
balance sheets. The net change in fair value of the derivative assets and liabilities are recognized in the Company's consolidated
statements of operations. The forward contracts that are used to hedge the value of API's future sales and purchases are accounted
for as cash flow hedges. At December 31, 2017, there were contracts in place to hedge the value of future sales denominated in
Euros in the amount of €20,175 and the value of future purchases denominated in USD in the amount of $4,875. These hedges
are fully effective, and, accordingly the changes in fair value are recorded in AOCI and, at maturity, any gain or loss on the forward
contract is reclassified from AOCI into the Company's consolidated statements of operations. For additional information on the
Company's accounting policy related to foreign forward currency contracts, see Note 2 - "Summary of Significant Accounting
Policies."
WebBank - Derivative Financial Instruments
79
WebBank's derivative financial instruments represent on-going economic interests in loans made after they are sold. These
derivatives are carried at fair value on a gross basis in Other non-current assets on the Company's consolidated balance sheet at
December 31, 2017 and are classified within Level 3 in the fair value hierarchy (see Note 17 - "Fair Value Measurements"). At
December 31, 2017, derivatives outstanding mature within 3 to 5 years. Gains and losses resulting from changes in fair value of
derivative instruments are accounted for in the Company's consolidated statements of operations in Financial services revenue.
Fair value represents the estimated amounts that WebBank would receive or pay to terminate the contracts at the reporting date
based on a discounted cash flow model for the same or similar instruments. WebBank does not enter into derivative contracts for
speculative or trading purposes.
Call and Put Options
For the year ended December 31, 2017, the Company sold call options for proceeds of approximately $230 and purchased
put options totaling $783 related to an exchange traded index fund. The options are traded in active markets, and accordingly, the
Company records the fair value of the options through the use of quoted prices and records any changes in fair value in the
consolidated statements of operations in Other (income) expenses, net. These derivative financial instruments are classified within
Level 1 in the fair value hierarchy.
Precious Metal and Commodity Inventories
As of December 31, 2017, the Company had the following outstanding forward contracts with settlement dates ranging
through January 2018. There were no futures contracts outstanding at December 31, 2017.
Commodity
Amount
Notional Value
Silver
Gold
Copper
Tin
137,157 ounces
800 ounces
275,000 pounds
25 metric tons
$
$
$
$
2,294
1,032
858
482
Of the total forward contracts outstanding, 17,157 ounces of silver and substantially all the copper contracts are designated
and accounted for as fair value hedges and are associated primarily with the Company's precious metal inventory carried at fair
value. The remaining outstanding forward contracts for silver, and all the contracts for gold and tin, are accounted for as economic
hedges. For additional information on the Company's accounting policy related to these fair value hedges, see Note 2 - "Summary
of Significant Accounting Policies."
The forward contracts were made with a counterparty rated A+ by Standard & Poors. Accordingly, the Company has
determined that there is minimal credit risk of default. The Company estimates the fair value of its derivative contracts through
the use of market quotes or with the assistance of brokers when market information is not available. The Company maintains
collateral on account with the third-party broker. Such collateral consists of both cash that varies in amount depending on the value
of open contracts, as well as ounces of precious metal held on account by the broker.
The fair value and carrying amount of derivative instruments on the Company's consolidated balance sheets and the effect
of derivative instruments in the Company's consolidated statements of operations is shown in the tables below:
Derivative
Balance Sheet Location
2017
2016
December 31,
Commodity contracts (a), (b)
Commodity contracts (c)
Foreign exchange forward contracts (a), (d)
Foreign exchange forward contracts (a), (b)
Economic interest in loans (c)
Call options
Put options
Total derivatives
Accrued liabilities
(Accrued liabilities)/Prepaid expenses and other
current assets
Prepaid expenses and other current assets/
(Accrued liabilities)/
Accrued liabilities
Other non-current assets
Other current liabilities
Prepaid expenses and other current assets
$
$
(49) $
(78)
166
(188)
13,126
(258)
3
12,722
$
(111)
3
(872)
(76)
6,162
—
—
5,106
80
Year Ended December 31,
2017
2016
2015
Derivative
Statements of Operations Location
Gain (Loss)
Gain (Loss)
Gain (Loss)
Commodity contracts (a), (b)
Commodity contracts (c)
Commodity contracts (c)
Interest rate swap agreements (c)
Foreign exchange forward contracts (a), (d)
Foreign exchange forward contracts (a), b)
Economic interest in loans (c)
Call options
Put options
Total derivatives
Cost of goods sold
Cost of goods sold
Realized and unrealized (loss) gain on derivatives
Interest expense
Revenue/Cost of goods sold
Other (expenses) income, net
Revenue
Other expenses, net
Other expenses, net
$
(435) $
(1,520) $
1,467
(61)
(145)
—
(1,357)
(339)
8,902
(28)
(780)
(257)
148
—
(1,404)
(700)
7,148
—
—
246
588
(77)
2,063
21
—
—
—
$
5,757
$
3,415
$
4,308
(a)
(b)
(c)
(d)
Designated as hedging instruments.
Fair value hedge.
Economic hedge.
Cash flow hedge.
Financial Instruments with Off-Balance Sheet Risk
WebBank is a party to financial instruments with off-balance sheet risk. In the normal course of business, these financial
instruments include commitments to extend credit in the form of loans as part of WebBank's lending arrangements. Those
instruments involve to varying degrees, elements of credit and interest rate risk in excess of the amount recognized on the
consolidated balance sheet. The contract amounts of those instruments reflect the extent of involvement WebBank has in particular
classes of financial instruments.
At December 31, 2017 and 2016, WebBank's undisbursed loan commitments totaled $148,529 and $184,784, respectively.
Commitments to extend credit are agreements to lend to a borrower who meets the lending criteria through one of WebBank's
lending agreements, provided there is no violation of any condition established in the contract with the counterparty to the lending
arrangement.
Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since
certain of the commitments are expected to expire without the credit being extended, the total commitment amounts do not
necessarily represent future cash requirements. WebBank evaluates each prospective borrower's credit worthiness on a case-by-
case basis. The amount of collateral obtained, if deemed necessary by WebBank upon extension of credit, is based on management's
credit evaluation of the borrower and WebBank's counterparty.
WebBank's exposure to credit loss in the event of nonperformance by the other party to the financial instrument for
commitments to extend credit is represented by the contractual amount of those instruments. WebBank uses the same credit policy
in making commitments and conditional obligations as it does for on-balance sheet instruments.
WebBank estimates an allowance for potential losses on off-balance sheet contingent credit exposures related to the
guaranteed amount of its Small Business Administration ("SBA") and United States Department of Agriculture ("USDA") loans
and whether or not the SBA/USDA honors the guarantee. WebBank determines the allowance for these contingent credit exposures
based on historical experience and portfolio analysis. The allowance is included in Other non-current liabilities on the Company's
consolidated balance sheets, with any related increases or decreases in the reserve included in SG&A in the Company's consolidated
statements of operations. The allowance was $188 at both December 31, 2017 and 2016.
13. PENSION AND OTHER POST-RETIREMENT BENEFITS
HNH maintains several qualified and non-qualified pension plans and other post-retirement benefit plans. API maintains
a pension plan in the United Kingdom ("API Plan") and a pension plan in the U.S. which is not significant. HNH's and API's
significant pension, health care benefit and defined contribution plans are discussed below. The Company's other pension and post-
retirement benefit plans are not significant individually or in the aggregate.
Qualified Pension Plans - HNH
81
HNH sponsors a defined benefit pension plan, the WHX Pension Plan, covering many of H&H's employees and certain
employees of H&H's former subsidiary, Wheeling-Pittsburgh Corporation ("WPC"). The WHX Pension Plan was established in
May 1998 as a result of the merger of the former H&H plans, which covered substantially all H&H employees, and the WPC
plan. The WPC plan, covering most United Steel Workers of America-represented employees of WPC, was created pursuant to a
collective bargaining agreement ratified on August 12, 1997. Prior to that date, benefits were provided through a defined contribution
plan, the Wheeling-Pittsburgh Steel Corporation Retirement Security Plan ("RSP Plan"). The assets of the RSP Plan were merged
into the WPC plan as of December 1, 1997. Under the terms of the WHX Pension Plan, the benefit formula and provisions for the
WPC and H&H participants continued as they were designed under each of the respective plans prior to the merger.
The qualified pension benefits under the WHX Pension Plan were frozen as of December 31, 2005 and April 30, 2006
for hourly and salaried non-bargaining participants, respectively, with the exception of a single operating unit. In 2011, the benefits
were frozen for the remainder of the participants. WPC employees ceased to be active participants in the WHX Pension Plan
effective July 31, 2003, and as a result, such employees no longer accrue benefits under the WHX Pension Plan.
JPS sponsors a defined benefit pension plan ("JPS Pension Plan"), which was assumed in connection with HNH's JPS
acquisition. Under the JPS Pension Plan, substantially all JPS employees who were employed prior to April 1, 2005 have benefits.
The JPS Pension Plan was frozen effective December 31, 2005. Employees no longer earned additional benefits after that date.
Benefits earned prior to December 31, 2005 will be paid out to eligible participants following retirement. The JPS Pension Plan
was "unfrozen" for employees who were active employees on or after June 1, 2012. This new benefit, calculated based on years
of service and a capped average salary, will be added to the amount of any pre-2005 benefit. The JPS Pension Plan was again
frozen for all future accruals effective December 31, 2015, although unvested participants may still vest in accrued but unvested
benefits.
Some of the Company's foreign subsidiaries provide retirement benefits for their employees through defined contribution
plans or otherwise provide retirement benefits for employees consistent with local practices. The foreign plans are not significant
in the aggregate and, therefore, are not included in the following disclosures.
Pension benefits under the WHX Pension Plan are based on years of service and the amount of compensation earned
during the participants' employment. However, as noted above, the qualified pension benefits have been frozen for all participants.
Pension benefits for the WPC bargained participants include both defined benefit and defined contribution features, since
the plan includes the account balances from the RSP Plan. The gross benefit, before offsets, is calculated based on years of service
and the benefit multiplier under the plan. The net defined benefit pension plan benefit is the gross amount offset for the benefits
payable from the RSP Plan and benefits payable by the Pension Benefit Guaranty Corporation from previously terminated
plans. Individual employee accounts established under the RSP Plan are maintained until retirement. Upon retirement, participants
who are eligible for the WHX Pension Plan and maintain RSP Plan account balances will normally receive benefits from the WHX
Pension Plan. When these participants become eligible for benefits under the WHX Pension Plan, their vested balances in the RSP
Plan become assets of the WHX Pension Plan. Although these RSP Plan assets cannot be used to fund any of the net benefit that
is the basis for determining the defined benefit plan's net benefit obligation at the end of the year, the Company has included the
amount of the RSP Plan accounts of $14,800 and $13,100 on a gross-basis as both assets and liabilities of the plan as of December 31,
2017 and 2016, respectively.
On December 30, 2016, the WHX Pension Plan was split into two plans by spinning off certain plan participants with
smaller benefit obligations (which in the aggregate were equal to approximately 3.0% of the assets of the WHX Pension Plan),
and assets equal thereto, to a new separate plan, the WHX Pension Plan II. The benefits of participants under the WHX Pension
Plan II are equal to their accrued benefits under the benefit formula that was applicable to each participant under the WHX Pension
Plan at the time of the plan spin-off. The total benefit liabilities of the two plans after the spin-off were equal to the benefit liabilities
of the WHX Pension Plan immediately before the spin-off, and under the applicable spin-off rules, the WHX Pension Plan II is
considered fully funded.
Certain current and retired employees of HNH are covered by a qualified post-retirement medical benefit plan, which
provides benefits for medical expenses and prescription drugs. Contributions from a majority of the participants are required, and
for those retirees and spouses, HNH's payments are capped.
Actuarial losses for the WHX Pension Plan are being amortized over the average future lifetime of the participants, which
is expected to be approximately 19 years, and for the JPS Plan, 16 years. The Company believes that use of the future lifetime of
the participants is appropriate because the plans are inactive.
82
API Plan
The API Plan is a defined benefit pension plan providing benefits based on final pensionable earnings, as defined in the
API Plan, funded by the payment of contributions to a separately administered trust fund. Benefits under the API Plan were frozen
and the plan was closed to new participants in December 2008.
Certain employees of API's Rahway, New Jersey plant participate in a multiemployer pension plan. For the year ended
December 31, 2017, API recorded a one-time charge of $4,300 related to pension obligations associated with the closure of the
Rahway, New Jersey plant, which charge is not included in the table below.
The following table presents the components of pension expense and other post-retirement benefit (income) expense for
the HNH and API benefit plans:
Service cost
Interest cost
Expected return on plan assets
Amortization of prior service cost
Amortization of actuarial loss
Settlement/Curtailment
Total
Pension Benefits
Other Post-Retirement Benefits
2017
2016
2015
2017
2016
2015
— $
— $
54
$
— $
— $
21,910
(25,969)
—
9,228
—
5,169
$
23,438
(29,356)
—
8,320
14
2,416
$
24,870
(29,253)
—
6,229
—
1,900
33
—
(103)
48
—
35
—
(103)
47
—
$
(22) $
(21) $
—
46
—
(103)
37
—
(20)
$
$
Actuarial assumptions used to develop the components of pension expense and other post-retirement benefit (income)
expense were as follows:
Discount rates:
WHX Pension Plan
WHX Pension Plan II
JPS Pension Plan
API Pension Plan
Other post-retirement benefit plans
HNH expected return on assets
API expected return on assets
Rate of compensation increase
Health care cost trend rate - initial
Health care cost trend rate - ultimate
Year ultimate reached
Pension Benefits
Other Post-Retirement Benefits
2017
2016
2015
2017
2016
2015
3.84%
3.64%
3.81%
2.65%
N/A
6.50%
3.87%
N/A
N/A
N/A
N/A
4.01%
—%
3.93%
3.80%
N/A
7.00%
4.84%
N/A
N/A
N/A
N/A
3.70%
—%
4.00%
3.70%
N/A
7.00%
4.61%
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
3.74%
3.89%
3.55%
N/A
N/A
N/A
6.25%
5.00%
2022
N/A
N/A
N/A
6.50%
5.00%
2022
N/A
N/A
N/A
6.75%
5.00%
2022
HNH's pension expense in 2016 was favorably impacted by a change in the manner by which the interest cost component
of net periodic pension expense was determined; specifically, by utilizing the "spot rate approach," which provides a more precise
measurement of interest cost. The impact of this change was to reduce annual pension expense in 2016 by approximately $4,800.
The Company also utilized the "spot rate approach" in 2017 and expects to utilize this method in future periods.
The measurement date for plan obligations is December 31. The discount rate is the rate at which the plans' obligations
could be effectively settled and is based on high quality bond yields as of the measurement date.
Summarized below is a reconciliation of the funded status for HNH's and API's qualified defined benefit pension plans
and other post-retirement benefit plan:
83
HNH Plans
API Plan
Pension Benefits
Pension Benefits
Other Post-Retirement
Benefits
2017
2016
2017
2016
2017
2016
Change in benefit obligation:
Benefit obligation at January 1
$
597,405
$
613,394
$
136,564
$
139,039
$
1,152
$
1,213
Interest cost
Actuarial loss (gain)
Participant contributions
Benefits paid
Impact of foreign exchange rate
Benefit obligation at December 31
Change in plan assets:
Fair value of plan assets at January 1
Actual returns on plan assets
Participant contributions
Benefits paid
Company contributions
Impact of foreign exchange rate
Fair value of plan assets at December 31
Funded status
Accumulated benefit obligation ("ABO") for
qualified defined benefit pension plans:
ABO at January 1
ABO at December 31
Amounts recognized on the consolidated balance
sheets:
Current liability
Non-current liability
Total
$
$
$
$
$
$
$
18,183
27,324
—
18,507
7,970
—
(41,718)
(42,466)
$
$
—
601,194
331,872
24,239
—
(41,718)
35,426
—
$
$
—
597,405
347,921
9,903
—
(42,466)
16,514
—
349,819
331,872
$
$
3,730
4,204
—
(5,338)
12,846
152,006
118,327
15,261
—
(5,338)
901
11,483
140,634
$
$
4,763
26,058
—
(6,812)
(26,484)
136,564
129,235
18,540
—
(6,797)
959
(23,610)
118,327
33
(107)
—
(75)
—
35
(3)
2
(95)
—
1,003
$
1,152
— $
—
—
(75)
75
—
—
—
—
2
(95)
93
—
—
(1,152)
(251,375) $
(265,533) $
(11,372) $
(18,237) $
(1,003) $
597,405
601,194
$
$
613,394
597,405
$
$
136,564
152,006
$
$
139,039
136,564
$
$
1,152
1,003
$
$
1,213
1,152
— $
— $
— $
— $
(251,375)
(265,533)
(11,372)
(18,237)
(105) $
(898)
(251,375) $
(265,533) $
(11,372) $
(18,237) $
(1,003) $
(107)
(1,045)
(1,152)
The weighted average assumptions used in the valuations at December 31 were as follows:
Discount rates:
WHX Pension Plan
WHX Pension Plan II
JPS Pension Plan
API Pension Plan
Other post-retirement benefit plans
Health care cost trend rate - initial
Health care cost trend rate - ultimate
Year ultimate reached
Pension Benefits
Other Post-Retirement
Benefits
2017
2016
2017
2016
3.45%
3.33%
3.40%
2.50%
N/A
N/A
N/A
N/A
3.84%
3.64%
3.81%
2.65%
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
3.39%
6.50%
5.00%
2024
N/A
N/A
N/A
N/A
3.74%
6.25%
5.00%
2022
The effect of a 1% increase (decrease) in health care cost trend rates on benefit expense and on other post-retirement
benefit obligations is not significant.
Pretax amounts included in Accumulated other comprehensive loss at December 31, 2017 and 2016 were as follows:
Prior service credit
Net actuarial loss
Accumulated other comprehensive loss (income)
HNH Plans
API Plan
Pension Benefits
Pension Benefits
Other Post-Retirement
Benefits
2017
2016
2017
2016
2017
2016
$
$
— $
— $
— $
— $
(1,093) $
254,599
239,493
254,599
$
239,493
$
7,083
7,083
12,514
615
$
12,514
$
(478) $
(1,196)
770
(426)
84
The pretax amount of actuarial losses and prior service credit included in Accumulated other comprehensive loss at
December 31, 2017 that is expected to be recognized in net periodic benefit cost in 2018 is $10,154.
Other pretax changes in plan assets and benefit obligations recognized in comprehensive (loss) income are as follows:
HNH Plans
API Plan
Pension Benefits
Pension Benefits
Other Post-Retirement
Benefits
2017
2016
2015
2017
2016
2015
2017
2016
2015
Current year actuarial (loss) gain
Amortization of actuarial loss
Amortization of prior service credit
$(24,333) $(21,517) $(48,505) $ 6,339
$(13,156) $
(903) $
107
$
9,228
—
8,320
—
6,229
—
—
—
—
—
—
—
48
(103)
3
47
(103)
Total recognized in comprehensive (loss) income
$(15,105) $(13,197) $(42,276) $ 6,339
$(13,156) $
(903) $
52
$
(53) $
$
(159)
37
(103)
(225)
The actuarial losses in 2017 in the HNH Plans occurred principally because the discount rate used to measure benefit
obligations at the end of the fiscal year decreased from the prior fiscal year-end. In 2016 and 2015, the actuarial losses occurred
principally because the investment returns on the assets of the pension plans were lower than actuarial assumptions.
Benefit obligations were in excess of plan assets for each of the pension plans and the other post-retirement benefit plan
at both December 31, 2017 and 2016. Additional information for the plans with accumulated benefit obligations in excess of plan
assets:
Projected benefit obligation
Accumulated benefit obligation
Fair value of plan assets
HNH Plans
API Plan
Pension Benefits
Pension Benefits
Other Post-Retirement
Benefits
2017
2016
2017
2016
2017
2016
$
$
$
601,194
601,194
349,819
$
$
$
597,405
597,405
331,872
$
$
$
152,006
152,006
140,634
$
$
$
136,564
136,564
118,327
$
$
$
1,003
1,003
$
$
— $
1,152
1,152
—
In determining the expected long-term rate of return on plan assets, the Company evaluated input from various investment
professionals. In addition, the Company considered its historical compound returns, as well as the Company's forward-looking
expectations. The Company determines its actuarial assumptions for its pension and other post-retirement benefit plans each year
to calculate liability information as of December 31, and pension and other post-retirement benefit expense or income for the
following year. The discount rate assumption is derived from the rate of return on high-quality bonds as of December 31 of each
year.
The Company's investment policy is to maximize the total rate of return with a view to long-term funding objectives of
the pension plans to ensure that funds are available to meet benefit obligations when due. Pension plan assets are diversified to
the extent necessary to minimize risk and to achieve an optimal balance between risk and return. There are no target allocations. The
HNH Plans' assets are diversified as to type of assets, investment strategies employed and number of investment managers
used. Investments may include equities, fixed income, cash equivalents, convertible securities, and private investment
funds. Derivatives may be used as part of the investment strategy. The Company may direct the transfer of assets between investment
managers in order to rebalance the portfolio in accordance with asset allocation guidelines established by the Company.
The fair value of pension investments is defined by reference to one of three categories (Level 1, Level 2 or Level 3)
based on the reliability of inputs, as such terms are defined in Note 2 - "Summary of Significant Accounting Policies." HNH's
pension plans assets at December 31, 2017 and 2016, by asset category, are as follows:
85
Fair Value Measurements as of December 31, 2017:
Asset Class
Equity securities:
U.S. mid-cap
U.S. large-cap
U.S. small-cap
International large-cap
Fixed income securities
Mortgage backed securities
U.S. Government debt securities
Corporate bonds and loans
Convertible promissory notes
Stock warrants
Private company common stock
Subtotal
Pension assets measured at net asset value (1)
Hedge funds: (2)
Equity long/short
Event driven
Value driven
Private equity - asset based lending - maritime (3)
Funds of funds - long-term capital growth (4)
Common trust funds: (2)
Other
Insurance separate account (5)
Total pension assets measured at net asset value
Cash and cash equivalents
Net receivables
Total pension assets
Fair Value Measurements as of December 31, 2016:
Asset Class
Equity securities:
U.S. mid-cap
U.S. large-cap
Convertible promissory notes
Stock warrants
Subtotal
Pension assets measured at net asset value (1)
Hedge funds: (2)
Equity long/short
Event driven
Value driven
Funds of funds - long-term capital growth (4)
Common trust funds: (2)
Other
Insurance separate account (5)
Total pension assets measured at net asset value
Cash and cash equivalents
Net receivables
Total pension assets
Assets at Fair Value as of December 31, 2017
Level 1
Level 2
Level 3
Total
$
28,715
$
— $
— $
66,076
3,214
1,188
2,217
—
—
—
—
—
—
—
—
—
—
10,682
14,001
35,033
—
—
—
$
101,410
$
59,716
$
—
—
—
—
—
—
—
4,202
193
1,050
5,445
28,715
66,076
3,214
1,188
2,217
10,682
14,001
35,033
4,202
193
1,050
166,571
45,147
49,757
19,960
8,466
12,517
3
15,009
150,859
28,397
3,992
$
349,819
Assets at Fair Value as of December 31, 2016
Level 1
Level 2
Level 3
Total
— $
— $
$
$
22,560
$
34,256
—
—
—
—
—
56,816
$
— $
—
3,500
875
4,375
22,560
34,256
3,500
875
61,191
6,832
47,771
17,648
8,325
78
14,391
95,045
175,435
201
$
331,872
(1) Certain investments that are measured at fair value using the net asset value per share (or its equivalent) practical expedient have not been
classified in the fair value hierarchy.
(2) Hedge funds and common trust funds are comprised of shares or units in commingled funds that may not be publicly traded. The underlying
assets in these funds are primarily publicly traded equity securities and fixed income securities.
(3) The limited partnership is a direct lending private debt fund which serves as an alternative source of liquidity for the shipping industry.
86
(4) The limited partnership operates as a fund of funds. The underlying assets in this fund are generally expected to be illiquid. The limited
partnership's investment strategy is to seek above-average rates of return and long-term capital growth by investing in a broad range of
investments, including, but not limited to, global distressed corporate securities, activist equities, value equities, post-reorganizational
equities, municipal bonds, high yield bonds, leveraged loans, unsecured debt, collateralized debt obligations, mortgage-backed securities,
commercial mortgage-backed securities, direct lending and sovereign debt.
(5) The JPS Pension Plan holds a deposit administration group annuity contract with an immediate participation guarantee from Transamerica
Life Insurance Company ("TFLIC"). The TFLIC contract unconditionally guarantees benefits to certain salaried JPS Pension Plan participants
earned through June 30, 1984 in the pension plan of a predecessor employer. The assets deposited under the contract are held in a separate
custodial account ("TFLIC Assets"). If the TFLIC Assets decrease to the level of the trigger point (as defined in the contract), which represents
the guaranteed benefit obligation representing the accumulated plan benefits as of June 30, 1984, TFLIC has the right to cause annuities to
be purchased for the individuals covered by these contract agreements. Since the TFLIC Assets have remained in excess of the trigger point,
no annuities have been purchased for the individuals covered by these contract arrangements.
API's pension plans' assets at December 31, 2017 and 2016 by asset category, are as follows:
Fair Value Measurements as of December 31, 2017:
Asset Class
Equities
Bonds
Property
Liability-driven instrument (1)
Private markets
Cash and cash equivalents
Total pension assets
Fair Value Measurements as of December 31, 2016:
Asset Class
Equities
Bonds
Property
Liability-driven instrument (1)
Hedge funds (2)
Cash and cash equivalents
Total pension assets
Assets at Fair Value as of December 31, 2017
Level 1
Level 2
Level 3
Total
$
67,634
$
— $
— $
—
—
—
—
448
14,568
13,159
30,980
—
—
—
—
—
13,845
—
67,634
14,568
13,159
30,980
13,845
448
$
68,082
$
58,707
$
13,845
$
140,634
Assets at Fair Value as of December 31, 2016
Level 1
Level 2
Level 3
Total
$
55,889
$
— $
— $
—
—
—
—
70
12,805
15,087
27,016
7,460
—
—
—
—
—
—
55,889
12,805
15,087
27,016
7,460
70
$
55,959
$
62,368
$
— $
118,327
(1) Represents investments in pooled funds. This is a method of investing whereby a portfolio of assets is built with the objective of moving
in-line with liabilities. The assets are typically derivative instruments based on government bonds or instruments called swaps which are
exposed to the same liability sensitivities (interest rates and inflation) as the pension liabilities.
(2) Hedge Funds are pooled investment vehicles that may invest in a wide-range of underlying asset classes, including but not limited to equities
and various fixed-income securities as well as alternative investments. These funds have an objective to produce positive returns in all
market conditions. Hedge Funds will typically make extensive use of derivatives and may employ leverage to achieve their objective.
There were no assets for which fair value was determined using significant unobservable inputs (Level 3) during 2015
for the HNH Plans. During 2017 and 2016, changes in the HNH Plans' Level 3 assets were as follows:
Changes in Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
Year Ended December 31, 2017
Beginning balance as of January 1, 2017
Transfers into Level 3
Transfers out of Level 3
Gains or losses included in changes in net assets
Purchases, issuances, sales and settlements
Purchases
Issuances
Sales
Settlements
Convertible
Promissory
Notes
Stock
Warrants
Private
Company
Common
Stock
Total
$
3,500
$
875
$
— $
4,375
—
—
702
—
—
—
—
—
—
—
—
—
193
—
(875)
—
—
175
875
—
—
—
—
—
877
875
193
—
(875)
5,445
Ending balance as of December 31, 2017
$
4,202
$
193
$
1,050
$
87
Changes in Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
Year Ended December 31, 2016
Beginning balance as of January 1, 2016
Transfers into Level 3
Transfers out of Level 3
Gains or losses included in changes in net assets
Purchases, issuances, sales and settlements
Purchases
Issuances
Sales
Settlements
Convertible
Promissory
Notes
Stock
Warrants
Total
$
— $
— $
—
—
—
3,500
—
—
—
—
—
—
—
875
—
—
—
—
—
—
—
—
4,375
—
—
—
Ending balance as of December 31, 2016
$
3,500
$
875
$
4,375
The Company's policy is to recognize transfers in and transfers out of Level 3 as of the date of the event or change in
circumstances that caused the transfer.
There were no assets for which fair value was determined using significant unobservable inputs (Level 3) during 2015
and 2016 for the API Plan. In 2017, changes in the API Plan's Level 3 net assets consisted of transfers in of $13,395 and a gain of
$450.
The following tables present the category, fair value, unfunded commitments, redemption frequency and redemption
notice period of those assets for which fair value was estimated using the net asset value per share (or its equivalents), as well as
plan assets which have redemption notice periods, as of December 31, 2017 and 2016:
Class Name
Hedge funds
Hedge funds
Hedge funds
Hedge funds
Hedge funds
Fund of funds
Hedge funds
Hedge funds
Description
Global long short feeder fund
US long small cap value hedge fund
International equity long/short hedge fund
Multi-strategy hedge fund
Value driven hedge fund
Long-term capital growth
Equity long/short hedge funds
Event driven hedge funds
Common trust funds
Collective equity investment funds
Insurance separate account
Insurance separate account
Private equity
Private equity
Private equity
Asset-based lending-maritime
Value oriented partnership investment fund
Opportunistic long/short private investment
fund
Offshore feeder fund
Pan-Asia equity long/short
Fair Value
December 31,
2017
Unfunded
Commitments
Redemption
Frequency
Redemption
Notice Period
$
$
$
$
$
$
$
$
$
$
$
$
$
$
11,416
10,003
11,504
1,756
19,960
12,517
10,468
49,757
3
15,009
8,466
$
$
$
$
$
$
$
$
$
$
$
— $
— $
— $
—
Monthly (1)
— Quarterly (2)
90 days
90 days
— Quarterly (3)
90 days (3)
3,250
—
23,958
—
—
—
—
1,444
12,500
3,000
3,000
(4)
(5)
(6)
(7)
Monthly
Daily
(8)
(9)
(10)
(11)
(12)
(4)
6 months
95 days
60 days
90 days
0-2 days
(8)
(9)
(10)
(11)
(12)
(1) 3 year lock up and 5% redemption fee if under 3 years. Annual limited redemption of 10% per shareholder in any twelve month period,
subject to 30 days' notice.
(2) Maximum withdrawal is 25%. Can withdraw 100% over 4 consecutive calendar quarters in 25% increments.
(3) Redemptions are subject to (i) a rolling thirty-six month holding period and (ii) a one-quarter investor level gate. There is a holdback of
10% upon complete distribution until completion of the audit of the fund for that year, without interest.
(4) Limited partnership formed in 2017. Commitment of $5,000, no right to withdraw. The fund has a four years duration with the option for
two additional 1 year extensions.
(5) 5 year staggered lockup period. One-third of the investment on each of December 31, 2020, 2021 and 2022.
(6) Each capital commitment is subject to a commitment period of 3 years during which capital may be drawn-down, subject to two 1-year
extensions. During the commitment period, no withdrawals are permitted. Once permitted, withdrawals of available liquidity in underlying
investment vehicles is permitted quarterly. The fund-of-funds will not invest in any fund or investment vehicle that has an initial lock-up
period of more than 5 years. Upon complete redemption, a holdback of up to 10% is withheld and paid after the fund's financial statement
audit.
(7) Redeemable annually subject to 3 years rolling, staggered lock up period. Upon complete redemption, a holdback of up to 10% is withheld
and paid after the fund's financial statement audit.
88
(8) Except for benefit payments to participants and beneficiaries and related expenses, withdrawals are restricted for substantially all of the
assets in the account, as defined in the contract. However, a suspension or transfer can be requested with 30 days' notice. When funds are
exhausted either by benefit payments, purchase of annuity contracts or transfer, the related contract terminates.
(9) Entered into an agreement effective December 15, 2016 with a commitment of $10,000. The agreement contains a commitment period of
3 years, subject to an extension of up to one additional year. Voluntary withdrawals are not permitted. Complete distributions will be made
after 8 years, subject to an extension of an additional 2 years.
(10) Entered into an agreement effective September 8, 2016 for a commitment of $12,500 to a limited partnership private equity fund. Capital
has not been called as of December 31, 2017. Voluntary withdrawals will not be permitted. Complete distributions will be made after 10
years, subject to an extension of an additional one year. The agreement provided for loans to the fund, and as of December 31, 2017, a
$3,000 loan receivable was outstanding from the fund. Per the loan agreement, a loan exists until the partnership issues a drawdown notice.
Upon issuance of a drawdown notice, a capital contribution to the partnership will be deemed to be made and deemed to have repaid the
loan to the extent of the capital contribution.
(11) During 2017, the WHX and JPS plans committed $5,000 to a fund which had a capital call for $2,000 due January 1, 2018, funded on
December 29, 2017 and recorded as cash as of December 31, 2017. This fund's objective is generating returns on its long and short positions
in companies undergoing change.
(12) During 2017, the WHX and JPS plans committed $5,000 to a fund which had a capital call for $2,000 due January 1, 2018, funded on
December 29, 2017 and recorded as cash as of December 31, 2017. The fund's investment focus is on companies with substantial exposure
in the Asian-Pacific region.
In addition to those on the table above, HNH has an additional unfunded commitment at December 31, 2017 totaling
$10,000 for a separately managed investment account which will have an all-cap value strategy.
Class Name
Hedge funds
Fund of funds
Hedge funds
Hedge funds
Description
Value driven hedge fund
Long-term capital growth
Equity long/short hedge funds
Event driven hedge funds
Common trust funds
Collective equity investment funds
Insurance separate account
Insurance separate account
Private equity
Private equity
Asset-based lending-maritime
Value oriented partnership investment fund
Fair Value
December 31,
2016
Unfunded
Commitments
Redemption
Frequency
Redemption
Notice Period
$
$
$
$
$
$
$
$
17,648
8,325
6,832
47,771
78
14,391
$
$
$
$
$
$
—
27,022
6,250
—
—
—
— $
— $
10,000
12,500
(1)
(2)
(3)
Monthly
Daily
(4)
(5)
(6)
6 months
95 days
60 days
90 days
0-2 days
(4)
(5)
(6)
(1) 5 year staggered lockup period. One-third of the investment on each of December 31, 2020, 2021 and 2022.
(2) Each capital commitment is subject to a commitment period of 3 years during which capital may be drawn-down, subject to two one-year
extensions. During the commitment period, no withdrawals are permitted. Once permitted, withdrawals of available liquidity in underlying
investment vehicles is permitted quarterly. The fund-of-funds will not invest in any fund or investment vehicle that has an initial lock-up
period of more than 5 years. Upon complete redemption, a holdback of up to 10% is withheld and paid after the fund's financial statement
audit.
(3) Redeemable annually subject to 3 years rolling, staggered lock up period. Upon complete redemption, a holdback of up to 10% is withheld
and paid after the fund's financial statement audit.
(4) Except for benefit payments to participants and beneficiaries and related expenses, withdrawals are restricted for substantially all of the
assets in the account, as defined in the contract. However, a suspension or transfer can be requested with 30 days' notice. When funds are
exhausted either by benefit payments, purchase of annuity contracts or transfer, the related contract terminates.
(5) Entered into an agreement effective December 15, 2016 with a commitment of $10,000. Capital had not been called as of December 31,
2016. The agreement contains a commitment period of 3 years, subject to an extension of up to one additional year. Voluntary withdrawals
are not permitted. Complete distributions will be made after 8 years, subject to an extension of an additional 2 years.
(6) Entered into an agreement effective September 8, 2016 with a commitment of $12,500. Capital has not been called as of December 31,
2016. Voluntary withdrawals are not permitted. Complete distributions will be made after 10 years, subject to an extension of an additional
one year.
In addition to those on the table above, HNH had an additional unfunded commitment at December 31, 2016 which totaled
$20,000 for a separately managed investment account which will have a U.S. mid/large-cap equity strategy.
Contributions
Employer contributions consist of funds paid from employer assets into a qualified pension trust account. HNH's funding
policy is to contribute annually an amount that satisfies the minimum funding standards of the Employee Retirement Income
Security Act. API's funding policy is to contribute monthly an amount that satisfies the API Plan's provisions to meet the level of
assets needed to pay benefits in accordance with the statutory funding objectives required in the U.K.
89
HNH expects to have required minimum annual contributions for 2018, 2019, 2020, 2021, 2022, and for the five years
thereafter of $32,200, $33,400, $35,800, $31,400, $32,100 and $43,200, respectively. API expects to have required minimum
annual contributions of $938 for 2018, 2019, 2020, 2021 and 2022, and $938 for the five years thereafter. Required future pension
contributions are estimated based upon assumptions such as discount rates on future obligations, assumed rates of return on plan
assets and legislative changes. Actual future pension costs and required funding obligations will be affected by changes in the
factors and assumptions described in the previous sentence, as well as other changes such as any plan termination or other
acceleration events.
Benefit Payments
Estimated future benefit payments for the benefit plans over the next ten years are as follows:
Years
2018
2019
2020
2021
2022
2023-2027
401(k) Plans
Pension Benefits
Other Post-
Retirement
HNH Plans
API Plan
Benefits
$
43,539
$
43,117
42,528
41,824
41,108
191,272
$
5,037
5,291
5,532
6,363
6,711
40,024
105
91
75
73
71
323
Certain employees participate in a SPLP sponsored savings plan which qualifies under Section 401(k) of the Internal
Revenue Code. SPLP presently makes a contribution to match 50% of the first 6% of the employee's contribution. The charge to
expense for SPLP's matching contributions totaled $290, $250 and $283 for the years ended December 31, 2017, 2016 and 2015,
respectively.
In addition, certain employees participate in a HNH sponsored savings plan which qualifies under Section 401(k) of the
Internal Revenue Code. This savings plan allows eligible employees to contribute from 1% to 75% of their income on a pretax
basis. HNH presently makes a contribution to match 50% of the first 6% of the employee's contribution. The charge to expense
for HNH's matching contributions amounted to $2,200 in 2017, $2,200 in 2016 and $1,900 in 2015.
14. CAPITAL AND ACCUMULATED OTHER COMPREHENSIVE LOSS
As of December 31, 2017, the Company had 26,348,420 Class A units (regular common units) outstanding.
Common Unit Repurchase Program
On December 7, 2016, the Board of Directors of the general partner of the Company approved the repurchase of up to
2,000,000 of the Company's common units ("Repurchase Program"). The Repurchase Program supersedes and cancels, to the
extent any amounts remain available, all previously approved repurchase programs. Any purchases made under the Repurchase
Program will be made from time to time on the open market at prevailing market prices or in negotiated transactions off the market,
in compliance with applicable laws and regulations. In connection with the Repurchase Program, the Company may enter into a
stock purchase plan. The Repurchase Program has no termination date. During 2017, the Company purchased 309,680 common
units for an aggregate price of approximately $5,958.
Common Unit Dividend
On January 13, 2017, the Company paid dividends of approximately $3,923 to common unitholders of record as of January
3, 2017, excluding a consolidated affiliate. This amount was included in Accrued liabilities on the Company's consolidated balance
sheet as of December 31, 2016. This special one-time cash dividend of $0.15 per common unit was declared on December 22,
2016. Any future determination to declare dividends on its common units will remain at the discretion of the Company's board of
directors and will be dependent upon a number of factors, including the Company's results of operations, cash flows, financial
position and capital requirements, among others.
Preferred Units
90
The 6.0% Series A preferred units, no par value ("SPLP Preferred Units"), which were issued during 2017 in connection
with the Steel Excel and HNH transactions discussed below, entitle the holders to a cumulative quarterly cash or in-kind (or a
combination thereof) distribution, The Company paid cash distributions of approximately $4,700 to preferred unitholders for the
year ended December 31, 2017. The SPLP Preferred Units have a term of nine years and are redeemable at any time at the Company's
option at the liquidation value, plus any accrued and unpaid distributions (payable in cash or SPLP common units, or a combination
of both, at the Company's discretion). If redeemed in common units, the number of common units to be issued will be equal to the
liquidation value per unit divided by the volume weighted-average price of the common units for 60 days prior to the redemption.
In addition, the holders can require the Company to repurchase up to 1,600,000 of the SPLP Preferred Units, in cash on a pro rata
basis, on the third anniversary of the original issuance date, reduced by any preferred units called for redemption by the Company,
in cash on a pro rata basis, prior to that time.
The SPLP Preferred Units have no voting rights, except that holders of the preferred units have certain voting rights in
limited circumstances relating to the election of directors following the failure to pay six quarterly distributions. The SPLP Preferred
Units are recorded as a non-current liability, including accrued interest expense, on the Company's consolidated balance sheet as
of December 31, 2017 because they have an unconditional obligation to be redeemed for cash or by issuing a variable number of
SPLP common units for a monetary value that is fixed and known at inception. Because the SPLP Preferred Units are classified
as a liability, distributions thereon are recorded as a component of Interest expense in the Company's consolidated statement of
operations.
Steel Excel Transaction
On December 23, 2016, the Company entered into an Amended Agreement and Plan of Merger with a subsidiary of the
Company and Steel Excel to make a tender offer to purchase any and all of the outstanding shares of common stock of Steel Excel
not already owned by the Company or any of its affiliates. In exchange for each share of Steel Excel common stock, the Company
offered 0.712 SPLP Preferred Units. The offer commenced on January 9, 2017 and expired on February 6, 2017. As a result of the
completion of the offer, the Company issued approximately 2,500,000 SPLP Preferred Units with a fair value and liquidation value
of $25.00 per SPLP Preferred Unit, or approximately $63,500, to Steel Excel shareholders and paid approximately $2,100 in cash
for any remaining unvested restricted shares of Steel Excel. As a result, the Company now owns 100% of Steel Excel.
HNH Transaction
On June 26, 2017, the Company entered into an Agreement and Plan of Merger with a subsidiary of the Company and
HNH to make a tender offer to purchase any and all of the outstanding shares of common stock of HNH not already owned by the
Company or any of its affiliates. In exchange for each share of HNH common stock, the Company offered 1.484 SPLP Preferred
Units. The offer expired on October 12, 2017, and as a result of the completion of the offer, the Company issued approximately
5,400,000 SPLP Preferred Units with a fair value of approximately $112,000 and liquidation value of approximately $135,000 to
HNH shareholders. The Company now owns 100% of HNH.
For both the Steel Excel and HNH transactions, in accordance with the accounting standard on consolidation, changes
in a parent's ownership interest where the parent retains a controlling financial interest in its subsidiary were accounted for as
equity transactions. The carrying amount of the noncontrolling interests in Steel Excel and in HNH were eliminated to reflect the
change in SPLP's ownership interest in each subsidiary, and the difference between the fair value of the consideration paid and
the amount by which the noncontrolling interest was adjusted was recognized in Partners' capital.
WFHC Ownership Change
In December 2015, the Company and its CoSine and WFHC subsidiaries entered into a series of transactions that impacted
SPLP's ownership interest in both entities. Prior to these transactions SPLP owned 100% of WFHC and 80.6% of CoSine.
• On December 17, 2015, WFHC issued a combination of common and preferred stock to SPLP in exchange for SPLP's existing
common stock of WFHC.
• On December 28, 2015, CoSine completed a reverse-forward stock split in which CoSine stockholders holding fewer than
80,000 shares had their shares canceled and converted into a right to receive a cash payment for all of their outstanding shares
based on the effective date of the stock split. As a result of the reverse forward split, the noncontrolling interest ownership
percentage decreased from 19.4% to 11.9% at that time.
• On December 31, 2015, WFHC issued new common and preferred shares to all of the previous holders of CoSine common
and preferred equity, including the noncontrolling interest holders. As a result, CoSine was merged with and into WFH LLC,
which is 100% owned by WFHC, and SPLP's ownership interest in WFHC decreased from 100% to 90.7% at that time. In
91
accordance with the accounting standard on consolidation, a change in a parent's ownership interest while the parent retains a
controlling financial interest in its subsidiary is accounted for as an equity transaction. SPLP accounted for its decrease in
ownership by recording a noncontrolling interest amount representing the carrying amount of the noncontrolling shareholders'
ownership in the new consolidated equity of WFHC at December 31, 2015. The recording of the noncontrolling interest's
carrying amount in the consolidated equity of WFHC was recorded as an equity transaction, resulting in a decrease in Partners'
capital.
DGT Ownership Increase
On October 28, 2015, DGT shareholders approved an amendment to DGT's certificate of incorporation in order to complete
a 1-for-100,000 reverse stock split of DGT's common stock. No fractional shares were issued and shareholders owning fewer than
100,000 shares of common stock had their shares canceled and converted into the right to receive $18.30, resulting in a payable
to shareholders of approximately $8,500 at December 31, 2015. After the reverse stock split, SPLP owned 100% of DGT's common
stock. In accordance with the accounting standard on consolidation, a change in a parent's ownership interest while the parent
retains a controlling financial interest in its subsidiary is accounted for as an equity transaction. As a result, SPLP accounted for
its increase in ownership by adjusting the carrying amount of its noncontrolling interest in DGT. The difference between the
consideration paid to the noncontrolling interest holders by DGT and the amount by which the carrying value of the noncontrolling
interest was adjusted has been recognized in Partners' capital.
Accumulated Other Comprehensive Loss
Changes, net of tax, in Accumulated other comprehensive loss are as follows:
Balance at beginning of period
Other comprehensive income (loss), net of tax - before reclassifications (a)
Reclassification adjustments, net of tax (b)
Net other comprehensive income (loss) attributable to common
unitholders (c)
Acquisition of AOCI from noncontrolling interests
Balance at end of period
Year Ended December 31, 2017
Unrealized
gain on
available-
for-sale
securities
Unrealized
loss on
derivative
financial
instruments
Cumulative
translation
adjustments
Change in
net pension
and other
benefit
obligations
$
62,527
$
(2,470)
$
(19,548)
$
26,878
908
27,786
765
569
—
569
—
4,512
—
4,512
(3,223)
(109,270 ) $
(6,926)
—
(6,926)
(60,889)
Total
(68,761)
25,033
908
25,941
(63,347)
$
91,078
$
(1,901)
$
(18,259) $
(177,085) $
(106,167)
(a) Net of tax benefit of approximately $31,029.
(b) Net of tax benefit of approximately $329.
(c) Does not include the net unrealized gain on available-for sale securities of $811, the gain on derivative financial instruments of $55, cumulative
translation adjustment gains of $932 and gains from the change in net pension and other post-retirement benefit obligations of $474, which
are attributable to noncontrolling interests.
Incentive Unit Expense
Effective January 1, 2012, SPLP issued to the Manager partnership profits interests in the form of incentive units, a portion
of which will be classified as Class C common units of SPLP upon the attainment of certain specified performance goals by SPLP
which are determined as of the last day of each fiscal year. If the performance goals are not met for a fiscal year, no portion of the
incentive units will be classified as Class C common units for that year. The number of outstanding incentive units is equal to
100% of the common units outstanding, including common units held by non-wholly-owned subsidiaries. The performance goals
and expense related to the classification of a portion of the incentive units as Class C units is measured on an annual basis, but is
accrued on a quarterly basis. Accordingly, the expense accrued is adjusted to reflect the fair value of the Class C common units
on each interim calculation date. In the event the cumulative incentive unit expense calculated quarterly or for the full year is an
amount less than the total previously accrued, the Company would record a negative incentive unit expense in the quarter when
such over accrual is determined. The expense is recorded in SG&A in the Company's consolidated statements of
operations. Incentive unit expense of $9,021 was recorded for the year ended December 31, 2017. There was no incentive unit
expense recorded in 2016 or 2015.
Subsidiary Purchases of the Company's Common Units
92
During the year ended December 31, 2015, two subsidiaries of the Company purchased 983,175 of the Company's common
units at a total cost of $17,323. The purchases of these units are reflected as treasury unit purchases in the Company's consolidated
financial statements.
15. INCOME TAXES
Details of the Company's tax provision (benefit) are as follows:
Income from continuing operations, before income taxes, equity method income (loss) and
investments held at fair value:
Domestic
Foreign
Total
Income taxes:
Current:
Federal
State
Foreign
Total income taxes, current
Deferred:
Federal
State
Foreign
Total income taxes, deferred
Income tax provision (benefit)
Year Ended December 31,
2017
2016
2015
$
$
$
$
$
$
34,971
5,452
40,423
4,263
4,872
2,953
12,088
44,592
(4,093)
(1,288)
39,211
$
$
$
19,778
2,660
22,438
1,798
6,459
3,148
11,405
13,625
(598)
(480)
12,547
$
51,299
$
23,952
$
22,107
1,262
23,369
20,220
5,841
995
27,056
(105,928)
1,530
(1,377)
(105,775)
(78,719)
The following is a reconciliation of the income tax provision (benefit) computed at the federal statutory rate to the provision
for income taxes:
Income from continuing operations, before income taxes, equity method income (loss) and
investments held at fair value:
Federal income tax provision at statutory rate
Loss passed through to common unitholders (a)
State income taxes, net of federal effect
Change in valuation allowance
Foreign tax rate differences
Uncertain tax positions
Repatriation tax
Deferred tax rate change due to newly-enacted U.S. tax law
Permanent differences and other (b)
Income tax provision (benefit)
Year Ended December 31,
2017
2016
2015
$
$
$
$
40,423
14,147
10,385
24,532
5,344
(48,598)
(1,202)
124
2,165
69,992
(1,058)
$
$
22,438
7,853
2,122
9,975
4,128
(1,327)
43
(465)
—
—
11,598
23,369
8,179
7,177
15,356
4,277
(91,052)
(235)
(440)
—
—
(6,625)
$
51,299
$
23,952
$
(78,719)
(a) Represents taxes at statutory rate on losses for which no tax benefit is recognizable by SPLP and certain of its subsidiaries which are taxed
as pass-through entities. Such losses are allocable directly to SPLP's unitholders and taxed when realized.
(b) Amounts in 2016 and 2015 include the tax effect of the non-deductible portion of the goodwill impairments recorded in the fourth quarters
of 2016 and 2015 (see Note 7 - "Goodwill and Other Intangible Assets, Net").
The Tax Cuts and Jobs Act ("the Act") was enacted on December 22, 2017. The income tax effects of changes in tax laws
are recognized in the period when enacted. The Act provides for numerous significant tax law changes and modifications with
varying effective dates, which include reducing the U.S. federal corporate income tax rate from 35% to 21%, creating a territorial
tax system (with a one-time mandatory repatriation tax on previously deferred foreign earnings), broadening the tax base, and
allowing for immediate capital expensing of certain qualified property acquired and placed in service after September 27, 2017
and before January 1, 2023.
93
In response to the enactment of the Act in late 2017, the SEC issued Staff Accounting Bulletin No. 118 ("SAB 118") to
address situations where the accounting is incomplete for certain income tax effects of the Act upon issuance of an entity's financial
statements for the reporting period in which the Act was enacted. Under SAB 118, a company may record provisional amounts
during a measurement period for specific income tax effects of the Act for which the accounting is incomplete but a reasonable
estimate can be determined, and when unable to determine a reasonable estimate for any income tax effects, report provisional
amounts in the first reporting period in which a reasonable estimate can be determined. The Company has recorded the impact of
the tax effects of the Act, relying on reasonable estimates where the accounting is incomplete as of December 31, 2017. As guidance
and technical corrections are issued in the upcoming quarters, the Company will record updates to its original provisional estimates.
The Company remeasured certain U.S. deferred tax assets and liabilities based on the rates at which they are expected to
reverse in the future, which is generally 21%. However, the Company is still analyzing certain aspects of the Act and refining its
calculations, which could potentially affect the measurement of these balances or potentially give rise to new deferred tax amounts.
The provisional amount recorded related to the remeasurement of deferred tax balances was a net tax expense of $56,552.
The Act includes a transition tax on the deemed distribution of previously untaxed accumulated and current earnings and
profits ("E&P") of certain foreign subsidiaries. The Company recorded a provisional amount for the one-time mandatory repatriation
tax liability of $2,165. The Company has not yet finalized its calculation of the total post-1986 E&P and non-U.S. income taxes
paid on such earnings for these foreign subsidiaries. Further, the transition tax is based on the amount of those earnings that are
held in cash and other specified illiquid assets. This amount may change when the calculation of post-1986 net accumulated foreign
E&P previously deferred from U.S. federal taxation and the amounts held in cash or other specified illiquid assets are finalized,
and is subject to further refinement if further guidance is issued by federal and state taxing authorities.
It is likely that additional guidance will be issued providing further clarification on the application of the Act. It is also
reasonable to expect that global taxing authorities will be reviewing their current legislation for potential modifications in reaction
to the implementation of the Act. This additional guidance, along with the potential for additional global tax legislation changes,
may affect deductions and income inclusions for the Company.
Deferred income taxes result from temporary differences in the financial basis and tax basis of assets and liabilities. The
amounts shown on the following table represent the tax effect of temporary differences between the consolidated tax return basis
of assets and liabilities and the corresponding basis for financial reporting, as well as tax credit and operating loss carryforwards.
94
Deferred Tax Assets:
Operating loss carryforwards (a)
Postretirement and postemployment employee benefits
Tax credit carryforwards
Accrued costs
Investment impairments and unrealized losses
Inventories
Environmental costs
Impairment of long-lived assets
Capital loss
Other
Gross deferred tax assets(c)
Deferred Tax Liabilities:
Intangible assets
Fixed assets
Unremitted foreign earnings
Unrealized gain on investment
Other
Gross deferred tax liabilities(c)
Valuation allowance (b) (c)
Net deferred tax assets
Classified on the Company's consolidated balance sheets as follows:
Deferred tax assets
Deferred tax liabilities
December 31,
2017
2016
$
118,594
$
70,151
13,412
4,151
7,325
2,468
2,297
2,122
7,968
5,109
233,597
(33,376)
(28,468)
—
(22,403)
(2,208)
(86,455)
(41,138)
106,004
$
109,011
3,007
106,004
$
$
$
$
$
187,880
108,571
46,517
9,600
19,244
4,109
3,042
3,245
8,543
11,995
402,746
(52,149)
(39,898)
(181)
—
(5,479)
(97,707)
(126,163)
178,876
182,605
3,729
178,876
(a) The ability for certain subsidiaries to utilize net operating losses and other credit carryforwards may be subject to limitation upon changes
in control.
(b) Certain subsidiaries of the Company establish valuation allowances when they determine, based on their assessment, that it is more likely
than not that certain deferred tax assets will not be fully realized. This assessment is based on, but not limited to, historical operating results,
uncertainty in projections of taxable income, and other uncertainties that may be specific to a particular business.
(c) The Tax Cuts and Jobs Act of 2017 was enacted in December of 2017 and reduced the U.S. Federal income tax rate significantly. The
Company's 2017 deferred tax balances have been reduced to reflect the lower tax rate enacted by the Act, which affects the comparability
of the 2017 and 2016 columns.
During 2017, 2016 and 2015, the Company changed its judgment about the realizability of its deferred tax assets at certain
subsidiaries. In accordance with U.S. GAAP, the effect of a change in the beginning-of-the-year balance of a valuation allowance
that results from a change in circumstances that causes a change in judgment about the realizability of the related deferred tax
asset in future years should be included in income from continuing operations in the period of the change. In 2017, 2016 and 2015,
the Company recorded tax benefits in continuing operations of approximately $44,681, $1,327 and $111,881 associated with the
reversal of its deferred tax valuation allowances at certain subsidiaries.
HNH
At December 31, 2017, HNH has U.S. federal NOLs of approximately $32,373 that expire between 2020 and 2031, and
state NOLs of approximately $8,697 that expire generally between 2020 and 2031. HNH maintains nearly a full valuation allowance
against the deferred tax assets related to the state NOLs. The federal NOLs were acquired by HNH as a result of the JPS acquisition
in 2015. The utilization of the JPS NOLs is subject to certain annual limitations under the ownership change rules of Section 382
of the Internal Revenue Code. There are also federal and state tax credit carryforwards of $4,481, of which a $2,600 federal tax
credit does not expire.
Steel Excel
At December 31, 2017, Steel Excel had federal NOLs of approximately $192,500 that expire in 2022 through 2037, and
state NOLs of approximately $152,800 that will expire in 2018 through 2037. Steel Excel also has federal research and development
credit carryforwards of approximately $30,300 that expire in 2018 through 2029, and state research and development credit
95
carryforwards of approximately $17,700 that do not expire. Steel Excel has a valuation allowance to reserve its net deferred tax
assets at December 31, 2017 and 2016. Upon the adoption of the provisions of ASU No. 2016-09 on January 1, 2017 (see Note 2
- "Summary of Significant Accounting Policies"), a tax benefit of $4,600 associated with the NOLs related to deductions for stock-
based compensation was recognized as a deferred tax asset through a cumulative-effect adjustment to Partners' capital. Concurrent
with the recognition of the deferred tax asset and in accordance with ASU No. 2016-09, a full valuation allowance for the deferred
tax asset was recognized through a cumulative-effect adjustment to Partners' capital, resulting in no net impact to the Company's
consolidated financial statements.
As of December 31, 2016, Steel Excel had previously established a valuation allowance to reserve its net deferred tax
assets, based on its assessment that it is more likely than not that such benefit was not realizable. At December 31, 2017, a valuation
allowance was released against substantially all of Steel Excel's federal deferred tax assets (except for certain federal NOLs of a
subsidiary company subject to limitations and the realized capital losses) as Steel Excel concluded such assets were fully realizable.
This assessment was primarily based on the restructuring of several business units that enabled operational efficiencies resulting
in a more likely than not assertion to realize the majority of Steel Excel's federal deferred tax assets. The Company will continue
to monitor the likelihood that Steel Excel will be able to recover the deferred tax assets in the future. This determination includes
objectively verifiable positive evidence that outweighs potential negative evidence.
WFHC
As discussed in Note 14 - "Capital and Accumulated Other Comprehensive Loss" WFHC and Cosine entered into a series
of transactions whereby CoSine was merged with and into WFH LLC, a newly formed wholly-owned subsidiary of WFHC, which
is disregarded for income tax purposes. This merger was a tax-free transaction which was completed and declared effective on
December 31, 2015. WFHC is also the parent company of WebBank. The transaction was characterized as a reverse acquisition
for federal income tax purposes. As a result, WFHC elected to file a consolidated federal income tax return, which included
WebBank and the newly merged CoSine business ("WFHC U.S. Consolidated Group"), with CoSine considered to be the parent
of the consolidated federal group. Accordingly, the tax attributes acquired in the merger can be utilized against the taxable income
of the affiliated group, generally without limitation.
At December 31, 2017, the WFHC U.S. Consolidated Group had federal NOLs of approximately of $251,810 that expire
between 2021 and 2033, and state NOLs of approximately $51,366 that expire between 2021 and 2024, as well as various federal
and state tax credit carryforwards of $7,563. As noted above, for the year ended December 31, 2015, the Company recorded tax
benefits in continuing operations of approximately $111,881 associated with the reversal of its deferred tax valuation allowances.
Such amount was attributable against the deferred tax asset related to the aforementioned federal NOLs. During the first quarter
of 2016, the Company revised its calculation of the expected benefit to be derived from the realizability of federal deferred tax
assets of the WFHC U.S. Consolidated Group and recorded an additional tax benefit in continuing operations of approximately
$4,182. However, the Company continues to maintain a full valuation allowance (approximately $10,662) against the deferred tax
assets related to the state NOLs and tax credit carryforwards given its judgment about the realizability of the associated deferred
tax assets.
API
As of December 31, 2017, API had approximately $3,199 of non-U.S. NOLs that do not expire. A valuation allowance
to reserve the associated deferred tax assets from the NOLs exists at December 31, 2017. In addition, U.S. subsidiaries of API had
approximately $6,040 of federal NOLs that are scheduled to expire between 2022 and 2035 and are subject to certain annual
limitations under the change of ownership rules of Internal Revenue Section 382. API has a valuation allowance to reserve the
entire amount of the deferred tax assets associated with the federal NOLs at December 31, 2017.
Unrecognized Tax Benefits
U.S. GAAP provides that the tax effects from an uncertain tax position can be recognized in the financial statements only
if the position is more likely than not of being sustained on audit, based on the technical merits of the position. The change in the
amount of unrecognized tax benefits for 2017 and 2016 was as follows:
96
Balance at December 31, 2015
Additions for tax positions related to current year
Additions for tax positions acquired
Additions due to interest accrued
Payments
Reductions due to lapsed statute of limitations
Balance at December 31, 2016
Additions for tax positions related to current year
Additions for tax positions acquired
Additions due to interest accrued
Payments
Reductions due to lapsed statute of limitations
Balance at December 31, 2017
$
$
$
29,072
175
1,114
148
—
(1,115)
29,394
32,564
—
120
—
(1,350)
60,728
The Company recognizes interest and penalties related to uncertain tax positions in its income tax expense.
HNH Unrecognized Tax Benefits
At December 31, 2017 and 2016, HNH had $3,394 and $2,581, respectively, of unrecognized tax benefits recorded, all
of which, net of federal benefit for state taxes, would affect the Company's effective tax rate if recognized. Of this amount, HNH
has offset approximately $648 and $300 against certain related deferred tax assets in the same jurisdiction as of December 31,
2017 and 2016, respectively. As of December 31, 2017 and 2016, approximately $299 and $300 of interest related to uncertain
tax positions was accrued. No penalties were accrued. It is reasonably possible that the total amount of unrecognized tax benefits
will decrease by as much as $708 during the next year as a result of the lapse of the applicable statutes of limitations in certain
taxing jurisdictions.
HNH is generally no longer subject to federal, state or local income tax examinations by tax authorities for any year prior
to 2013, except as noted below. However, NOLs generated in prior years are subject to examination and potential adjustment by
the Internal Revenue Service ("IRS") upon their utilization in future years' tax returns. HNH is currently under examination by
the IRS for the years 2014 and 2015, which remains on-going. HNH has not been notified of any material adjustments to taxable
income as a result of this examination. In addition, HNH is under examination for the pre-acquisition years 2015 and short-period
2016 for SLI, which is a subsidiary that HNH acquired on June 1, 2016. This examination began in early 2018 with only a preliminary
meeting being held with the IRS. HNH is currently under examination by the State of New York for 2012 to 2013, which is on-
going. HNH has not been notified of any material adjustments as a result of this examination. HNH underwent an examination by
the State of New York for 2009 to 2011, which resulted in an assessment of $100 paid in January 2016.
Steel Excel Unrecognized Tax Benefits
Steel Excel's total gross unrecognized tax benefits were $55,326 and $26,813 at December 31, 2017 and 2016, respectively,
of which $36,800, if recognized, would affect the provision for income taxes. The increase in unrecognized tax benefits in 2017
is primarily related to certain tax credits from prior years that may not be sustained on a more-likely-than- not basis. In 2017, Steel
Excel reversed approximately $700 of reserves upon the expiration of the statutes of limitation with the applicable taxing authorities.
As of December 31, 2017, it is reasonably possible that unrecognized tax benefits may decrease by $700 in the next 12 months
due to the expiration of the statutes of limitation. Steel Excel recognizes interest and penalties related to uncertain tax positions
in its income tax provision in its consolidated statements of operations. For 2017, 2016 and 2015, the amount of such interest and
penalties recognized was immaterial.
Steel Excel is subject to U.S. federal income tax as well as income taxes in various domestic states and foreign jurisdictions
in which they operate or formerly operated in. As of December 31, 2017, fiscal years 1999 onward remain open to examination
by the U.S. taxing authorities. Steel Excel is currently under income tax examination by the State of New York for the tax years
2013 and 2014, and by the State of Montana for tax years 2013, 2014, and 2015. Steel Excel is not currently under tax examination
in any foreign jurisdictions.
WFHC Unrecognized Tax Benefits
At December 31, 2017, WFHC had unrecognized tax benefits of $2,008 in connection with certain filing positions in
states in which its WebBank subsidiary currently operates. WFHC is subject to U.S. income taxes, as well as various taxes in other
97
state and local jurisdictions. With few exceptions, WFHC is no longer subject to U.S. federal, state, local, or non-U.S. income tax
examinations by taxing authorities for years before December 31, 2013.
Other Subsidiaries
SPLP's other subsidiaries file federal tax returns and as applicable state, local and foreign tax returns in various jurisdictions.
Federal tax returns for all other consolidated subsidiaries remain open and subject to examination by the IRS for all tax years after
2013. In addition, NOLs generated in prior years are subject to examination and potential adjustment by the IRS upon their
utilization in future years' tax returns. State income tax returns for most jurisdictions remain open generally for all tax years after
2013.
16. NET (LOSS) INCOME PER COMMON UNIT
The following data was used in computing net (loss) income per common unit shown in the Company's consolidated
statements of operations:
Net income from continuing operations
Net (income) loss from continuing operations attributable to noncontrolling interests in consolidated
entities
Net (loss) income from continuing operations attributable to common unitholders
Net income from discontinued operations
Net income from discontinued operations attributable to noncontrolling interests in consolidated entities
Net income from discontinued operations attributable to common unitholders
Net (loss) income attributable to common unitholders
Net (loss) income per common unit - basic:
Net (loss) income from continuing operations
Net income from discontinued operations
Net (loss) income attributable to common unitholders
Net (loss) income per common unit – diluted:
Net (loss) income from continuing operations
Net income from discontinued operations
Net (loss) income attributable to common unitholders
Weighted-average common units outstanding - basic
Incentive units
Unvested restricted units
Denominator for net income per common unit - diluted (a)
Year Ended December 31,
2017
2016
2015
$
6,012
$
2,571
$
70,311
(6,028)
(16)
—
—
—
4,059
6,630
—
—
—
(16) $
6,630
— $
—
— $
— $
—
— $
0.25
—
0.25
0.25
—
0.25
$
$
$
$
$
10,875
81,186
86,257
(30,708)
55,549
136,735
2.97
2.03
5.00
2.96
2.02
4.98
26,053,098
26,353,714
27,317,974
—
—
—
132,495
112,127
12,207
26,053,098
26,486,209
27,442,308
$
$
$
$
$
(a) For the year ended December 31, 2017, the diluted (loss) income per unit calculation was based on the basic weighted-average units only
since the impact of 307,448 incentive units, 4,738,844 of SPLP Preferred Units and 39,634 of unvested restricted stock units, would have
been anti-dilutive.
17. FAIR VALUE MEASUREMENTS
Financial assets and liabilities measured at fair value on a recurring basis in the Company's consolidated financial
statements as of December 31, 2017 and 2016 are summarized by type of inputs applicable to the fair value measurements as
follows:
98
December 31, 2017
Assets:
Marketable securities (a)
Long-term investments (a)
Investments in certain funds
Precious metal and commodity inventories recorded at fair value
Economic interests in loans
Foreign currency forward exchange contracts
Warrants
Long put options
Total
Liabilities:
Financial instrument obligations
Commodity contracts on precious metal and commodity inventories
Foreign currency forward exchange contracts
Short call options
Total
December 31, 2016
Assets:
Marketable securities (a)
Long-term investments (a)
Investments in certain funds
Precious metal and commodity inventories recorded at fair value
Economic interests in loans
Foreign currency forward exchange contracts
Total
Liabilities:
Financial instrument obligations
Interest rate swap agreements
Foreign currency forward exchange contracts
Total
Level 1
Level 2
Level 3
Total
$
44,371
$
1,988
$
11,954
$
221,750
—
10,993
—
—
—
3
10,387
—
—
—
166
—
—
1,223
407
—
13,126
—
206
—
58,313
233,360
407
10,993
13,126
166
206
3
$
$
$
$
$
$
$
277,117
$
12,541
$
26,916
$
316,574
15,629
$
— $
— $
15,629
—
—
258
127
188
—
—
—
—
127
188
258
15,887
$
315
$
— $
16,202
Level 1
Level 2
Level 3
Total
25,498
$
111,424
—
10,143
—
—
3,994
4,350
—
—
—
92
$
24,158
$
1,242
469
—
6,162
—
53,650
117,016
469
10,143
6,162
92
147,065
$
8,436
$
32,031
$
187,532
12,640
$
— $
— $
—
—
12,640
$
108
1,040
1,148
—
—
$
— $
12,640
108
1,040
13,788
(a) For additional detail of the marketable securities and long-term investments see Note 9 - "Investments."
There were no transfers of securities among the various measurement input levels during the year ended December 31,
2017.
The fair value of the Company's financial instruments, such as cash and cash equivalents, trade and other receivables and
accounts payable, approximate carrying value due to the short-term maturities of these assets and liabilities. Carrying cost
approximates fair value for long-term debt which has variable interest rates.
The precious metal and commodity inventories associated with the Company's fair value hedges (see Note 12 - "Financial
Instruments") are reported at fair value. Fair values of these inventories are based on quoted market prices on commodity exchanges
and are considered Level 1 measurements. The derivative instruments that the Company purchases in connection with its precious
metal and commodity inventories, specifically commodity futures and forward contracts, are also valued at fair value. The futures
contracts are Level 1 measurements since they are traded on a commodity exchange. The forward contracts are entered into with
a counterparty and are considered Level 2 measurements.
Interest rate swap agreements were considered Level 2 measurements as the inputs were observable at commonly quoted
intervals. These agreements expired in February 2016.
Following is a summary of changes in financial assets measured using Level 3 inputs:
99
Assets
Balance at December 31, 2014
$
2,163
$
9,623
$
2,199
$
34,421
$
Purchases
Sales and cash collections
Realized gain on sale
Unrealized gains
Unrealized losses
Balance at December 31, 2015
Sales and cash collections
Unrealized gains
Unrealized losses
Balance at December 31, 2016
Sales and cash collections
Realized loss on sale
Unrealized gains
Unrealized losses
Balance at December 31, 2017
Long-Term Investments
Investments
in Associated
Companies
(a)
Other
Investments -
Related Party
(a)
STCN
Warrants (a)
Marketable
Securities and
Other (b)
Total
—
—
—
(232)
—
(9,985)
—
484
(122)
—
—
—
—
5,183
(2,953)
8
—
48,406
5,183
(12,938)
8
484
(1,656)
(8,679)
(10,689)
$
1,931
$
— $
543
$
27,980
$
—
—
(708)
1,223
—
—
—
—
—
—
—
—
—
—
—
—
—
—
(524)
19
—
—
—
(19)
(8,848)
11,657
—
30,789
(19,404)
309
13,999
—
30,454
(8,848)
11,657
(1,232)
32,031
(19,404)
309
13,999
(19)
$
1,223
$
— $
— $
25,693
$
26,916
(a) Unrealized losses are recorded in Income (loss) of associated companies and other investments held at fair value, net of taxes in the Company's
consolidated statements of operations.
(b) Realized gains and losses on sale are recorded in Other income, net or Revenue in the Company's consolidated statements of operations.
Long-Term Investments - Valuation Techniques
The Company estimates the value of one of its investments in an associated company primarily using a discounted cash
flow method adjusted for additional information related to debt covenants, solvency issues and other related matters. The STCN
warrants were valued using the Black-Scholes option pricing model.
Marketable Securities and Other - Valuation Techniques
The Company uses the net asset value included in quarterly statements it receives in arrears from a venture capital fund
to determine the fair value of such fund and determines the fair value of certain corporate securities and corporate obligations by
incorporating and reviewing prices provided by third-party pricing services based on the specific features of the underlying
securities. The fair value of the derivatives held by WebBank (see Note 12 - "Financial Instruments") represent the estimated
amounts that WebBank would receive or pay to terminate the contracts at the reporting date and is based on discounted cash flows
analyses that consider credit, performance and prepayment. Unobservable inputs used in the discounted cash flow analyses are: a
constant prepayment rate of 7.35% to 31.03%, a constant default rate of 1.02% to 19.46% and a discount rate of 1.24% to 27.76%.
Assets Measured at Fair Value on a Nonrecurring Basis
The Company's non-financial assets and liabilities measured at fair value on a non-recurring basis include goodwill and
other intangible assets, any assets and liabilities acquired in a business combination, or its long-lived assets written down to fair
value. To measure fair value for such assets and liabilities, the Company uses techniques including an income approach, a market
approach and/or appraisals (Level 3 inputs). The income approach is based on a discounted cash flow analysis and calculates the
fair value by estimating the after-tax cash flows attributable to an asset or liability and then discounting the after-tax cash flows
to a present value using a risk-adjusted discount rate. Assumptions used in the discounted cash flow analysis ("DCF") require the
exercise of significant judgment, including judgment about appropriate discount rates and terminal values, growth rates and the
amount and timing of expected future cash flows. The discount rates, which are intended to reflect the risks inherent in future cash
flow projections, used in the DCF are based on estimates of the weighted-average cost of capital of a market participant. Such
estimates are derived from analysis of peer companies and consider the industry weighted-average return on debt and equity from
a market participant perspective. A market approach values a business by considering the prices at which shares of capital stock,
or related underlying assets, of reasonably comparable companies are trading in the public market or the transaction price at which
similar companies have been acquired. If comparable companies are not available, the market approach is not used.
100
Long-lived assets consisting of land and buildings used in previously operating businesses and currently unused, which
total $6,300 and $10,393 as of December 31, 2017 and December 31, 2016, respectively, are carried at the lower of cost or fair
value less cost to sell and are included in Other non-current assets on the Company's consolidated balance sheets. A reduction in
the carrying value of such long-lived assets is recorded as an asset impairment charge in the Company's consolidated statements
of operations.
18. COMMITMENTS AND CONTINGENCIES
Operating Lease Commitments
The Company has certain facilities under non-cancelable operating lease arrangements. Rent expense recognized in the
Company's consolidated statements of operations for the years ended December 31, 2017, 2016 and 2015 was $17,895, $15,335
and $10,026, respectively. Future minimum operating lease and rental commitments under non-cancelable operating leases for
SPLP consolidated operations are as follows:
Payments due by period
2018
2019
2020
2021
2022
Thereafter
Total
Environmental and Litigation Matters
Amount
10,153
6,789
5,385
4,596
3,893
14,608
45,424
$
$
As discussed in more detail below, certain of the Company's subsidiaries have been designated as potentially responsible
parties ("PRPs") by federal and state agencies with respect to certain sites with which they may have had direct or indirect
involvement and as defendants in certain litigation matters. The environmental claims are in various stages of administrative or
judicial proceedings and include demands for recovery of past governmental costs and for future investigations and remedial
actions. In many cases, the dollar amounts of the claims have not been specified and, with respect to a number of the PRP claims,
have been asserted against a number of other entities for the same cost recovery or other relief as was asserted against certain of
the Company's subsidiaries. The Company accrues costs associated with environmental and litigation matters on an undiscounted
basis, when they become probable and reasonably estimable. As of December 31, 2017, on a consolidated basis, the Company has
accrued liabilities of $10,949, which represent the current estimate of the probable cleanup liabilities, including remediation costs
and litigation reserves. Expenses relating to these costs, and any recoveries, are included in SG&A in the Company's consolidated
statements of operations. In addition, the Company has insurance coverage available for several of these matters and believes that
excess insurance coverage may be available as well. Estimates of the Company's liability for remediation of a particular site and
the method and ultimate cost of remediation require a number of assumptions that are inherently difficult to make, and the ultimate
outcome may be materially different from current estimates.
Environmental Matters
Certain HNH subsidiaries have existing and contingent liabilities relating to environmental matters, including costs of
remediation, capital expenditures, and potential fines and penalties relating to possible violations of national and state environmental
laws. Those subsidiaries have remediation expenses on an ongoing basis, although such costs are continually being readjusted
based upon the emergence of new techniques and alternative methods. HNH recorded current liabilities of approximately $9,200
related to estimated environmental remediation costs as of December 31, 2017. HNH may have insurance coverage available for
certain of these matters.
Included among these liabilities, certain HNH subsidiaries have been identified as PRPs under the Comprehensive
Environmental Response, Compensation and Liability Act ("CERCLA") or similar state statutes at sites and are parties to
administrative consent orders in connection with certain properties. Those subsidiaries may be subject to joint and several liabilities
imposed by CERCLA on PRPs. Due to the technical and regulatory complexity of remedial activities and the difficulties attendant
in identifying PRPs and allocating or determining liability among them, the subsidiaries are unable to reasonably estimate the
ultimate cost of compliance with such laws.
101
Based upon information currently available, the HNH subsidiaries do not expect that their respective environmental costs,
including the incurrence of additional fines and penalties, if any, will have a material adverse effect on them or that the resolution
of these environmental matters will have a material adverse effect on the financial position, results of operations or cash flows of
such subsidiaries or the Company, but there can be no such assurances. The Company anticipates that the subsidiaries will pay
any such amounts out of their respective working capital, although there is no assurance that they will have sufficient funds to pay
them. In the event that a HNH subsidiary is unable to fund its liabilities, claims could be made against its respective parent companies
for payment of such liabilities.
The sites where certain HNH subsidiaries have environmental liabilities include the following:
HNH has been working with the Connecticut Department of Energy and Environmental Protection ("CTDEEP") with
respect to its obligations under a 1989 consent order that applies to a property in Connecticut that HNH sold in 2003 ("Sold Parcel")
and an adjacent parcel ("Adjacent Parcel") that together comprise the site of a former HNH manufacturing facility. The remaining
remediation, monitoring and regulatory administrative costs for the Sold Parcel are expected to approximate $100. With respect
to the Adjacent Parcel, an ecological risk assessment has been completed and the results, along with proposed clean up goals, were
submitted in the second quarter of 2016 to the CTDEEP for their review and approval. The next phase will be a physical investigation
of the upland portion of the parcel. A work plan was submitted in the third quarter of 2017 to the CTDEEP for review and approval.
The CTDEEP has not completed their review and approval, but the work is expected to start in the first half of 2018 and is estimated
to cost approximately $306. Investigation of the wetlands portion is expected to start in the second quarter of 2018, pending
regulatory approvals and setting goals for the entire parcel. The total remediation costs for the Adjacent Parcel cannot be reasonably
estimated at this time. Based on the current stage of the investigation at this time, the Company estimates that it is reasonably
possible that it may incur aggregate losses over a period of several years, above its accrued liability, in a range of $2,000 to $6,000.
Due to the uncertainties, there can be no assurance that the resolution of this matter will not be material to the financial position,
results of operations or cash flows of the Company.
In 1986, Handy & Harman Electronic Materials Corporation ("HHEM"), a subsidiary of HNH, entered into an
administrative consent order ("ACO") with the New Jersey Department of Environmental Protection ("NJDEP") with regard to
certain property that it purchased in 1984 in New Jersey. The ACO involves investigation and remediation activities to be performed
with regard to soil and groundwater contamination. HHEM is actively remediating the property and is continuing to investigate
effective methods for achieving compliance with the ACO. HHEM anticipates entering into discussions with the NJDEP to address
that agency's potential natural resource damage claims, the timing and ultimate scope and cost of which cannot be estimated at
this time. Pursuant to a settlement agreement with the former owner/operator of the site, the responsibility for site investigation
and remediation costs, as well as any other costs, as defined in the settlement agreement, related to or arising from environmental
contamination on the property (collectively, "Costs") are contractually allocated 75% to the former owner/operator and 25% jointly
to HHEM and HNH, all after having the first $1,000 paid by the former owner/operator. As of December 31, 2017, total investigation
and remediation costs of approximately $6,600 and $2,100 have been expended by the former owner/operator and HHEM,
respectively, in accordance with the settlement agreement. Additionally, HHEM has been reimbursed indirectly through insurance
coverage for a portion of the Costs for which HHEM is responsible. While the primary insurance reimbursement ceased, HHEM
believes that there is additional excess insurance coverage, which it is currently pursuing. HHEM anticipates that there will be
additional remediation expenses to be incurred once a final remediation plan is agreed upon. There is no assurance that the former
owner/operator or guarantors will continue to timely reimburse HHEM for expenditures and/or will be financially capable of
fulfilling their obligations under the settlement agreement and the guaranties. There is no assurance that there will be any additional
insurance reimbursement. Based on the current stage of the investigation at this site at this time, the Company estimates that it is
reasonably possible that it may incur aggregate losses over a period of years, above its current accrued liability for this site, in a
range of $100 to $4,000, of which it expects to pay a 25% share. The final costs cannot be reasonably estimated at this time, and
accordingly, there can be no assurance that the resolution of this matter will not be material to the financial position, results of
operations or cash flows of HHEM, HNH or the Company.
SLI may incur environmental costs in the future as a result of the past activities of its former subsidiary, SL Surface
Technologies, Inc. ("SurfTech"), at sites located in Pennsauken, New Jersey ("Pennsauken Site"), in Camden, New Jersey ("Camden
Site") and at its former subsidiary, SGL Printed Circuits in Wayne, New Jersey ("Wayne Site"). At the Pennsauken Site, SLI reached
an agreement with both the U.S. Department of Justice and the U.S. Environmental Protection Agency ("EPA") related to its
liability and entered into a Consent Decree which governs the agreement. SLI agreed to perform remediation of the SurfTech site,
which is complete, and to pay a fixed sum for the EPA's past oversight costs. The fixed sum was to be paid in installments, and a
final payment of $2,100 was made in June of 2017. Separate from the Consent Decree with the United States, in December 2012,
the NJDEP made a settlement demand of $1,800 for past and future cleanup and removal costs and natural resource damages
("NRD"). Although SLI and its counsel believe that it has meritorious defenses to any claim for reimbursement of past cost and
NRD damages, to avoid the time and expense of litigating the matter, SLI offered to pay approximately $300 to fully resolve the
102
claim presented by the State of New Jersey. On June 29, 2015, the Company's legal counsel received a letter from New Jersey's
Deputy Attorney General rejecting the Company's counter offer, but stated that the matter was open for further negotiations. On
September 18, 2017, the Company received another letter from the Office of the Attorney General for the State of New Jersey
("New Jersey AG") wherein the New Jersey AG reiterated NJDEP's original settlement demand of $1,800 for SLI's alleged past
costs and NRD related to the Pennsauken Site. In November 2017, NJDEP indicated that in addition to the original settlement
demand, SLI would be responsible to NJDEP for its 10% cost payments to the EPA for the on-going remediation of the impacted
groundwater aquifers. Since November, there have been no additional discussions or communications with NJDEP. SLI believes
it may have defenses to the various claims and intends to assert all legal and procedural defenses available to it to make sure all
costs attributed to SLI have been properly identified and substantiated. Although the final scope and cost of this claim cannot be
estimated at this time, we estimate that it is reasonably possible that we may incur an aggregate loss, above our current accrued
liability for this site, in a range of $300 to $1,800. There can be no assurance that there will not be potential additional costs
associated with the site, which cannot be reasonably estimated at this time. Accordingly, there can be no assurance that the resolution
of this matter will not be material to the financial position, results of operations or cash flows of SLI, HNH or the Company.
SLI reported soil contamination and a groundwater contamination in 2003 from the SurfTech site located in Camden,
New Jersey. Substantial investigation and remediation work has been completed under the direction of the Licensed Site
Remediation Professional ("LSRP") for the site. Additional soil excavation, slab removal and chemical treatment is expected to
be initiated during the first half of 2018. Construction of an asphalt cap is expected in the second half of 2018 and post remediation
groundwater monitoring conducted thereafter. SLI's environmental consultants also implemented an interim bio-remediation pilot
study to assess biological treatment of on-site contaminated groundwater. Subsequent groundwater monitoring to assess the bio-
remediation effectiveness was completed and consistent decreases in target contaminants concentrations in groundwater were
observed. In December 2014, a report was submitted to the NJDEP stating sufficient information was obtained from the pilot study
to complete the full-scale groundwater remedy design. A full-scale groundwater bioremediation will be implemented during the
fourth quarter of 2018 following the soil remediation mentioned above. A reserve of $2,800 has been established for anticipated
costs at this site, but there can be no assurance that there will not be potential additional costs associated with the site which cannot
be reasonably estimated at this time. Accordingly, there can be no assurance that the resolution of this matter will not be material
to the financial position, results of operations or cash flows of SLI, HNH or the Company.
SLI is currently participating in environmental assessment and cleanup at a commercial facility located in Wayne, New
Jersey. Contaminated soil and groundwater has undergone remediation with the NJDEP and LSRP oversight, but contaminants of
concern ("COCs") in groundwater and surface water, which extend off-site, remain above applicable NJDEP remediation standards.
SLI's LSRP completed a supplemental groundwater remedial action approved by the NJDEP, and a report was filed with the NJDEP
in March 2015. SLI's consultants have developed cost estimates for supplemental remedial injections, soil excavation, and additional
tests and remedial activities. The LSRP prepared a Remedial Investigation Report, which was sent to the NJDEP in May 2016.
Off-site access to the adjacent property has been negotiated and monitoring wells have been installed. Results of the initial samples
detected COCs above NJDEP standards. A reserve of approximately $1,300 has been established for anticipated costs, but there
can be no assurance that there will not be potential additional costs associated with the site, which cannot be reasonably estimated
at this time. Accordingly, there can be no assurance that the resolution of this matter will not be material to the financial position,
results of operations or cash flows of SLI, HNH or the Company.
BNS LLC, a wholly-owned subsidiary of the BNS Liquidating Trust, has been named as a PRP at one previously disclosed
site and a then-subsidiary of BNS ("BNS Sub") has been identified as a PRP at another previously disclosed site. Based upon
information currently available, BNS Liquidating Trust and BNS Sub do not expect that their respective environmental costs or
that the resolution of these environmental matters will have a material adverse effect on the financial position, results of operations
or cash flows of the Company, but there can be no such assurances.
Litigation Matters
BNS Litigation Matters
BNS Sub has been named as a defendant in approximately 1,390 alleged asbestos-related toxic-tort claims as of
December 31, 2017. The claims were filed over a period beginning 1994 through December 31, 2017. In many cases these claims
involved more than 100 defendants. Of the claims filed, approximately 1,340 were dismissed, settled or granted summary judgment
and closed as of December 31, 2017. Of the claims settled, the average settlement was less than $3. There remained approximately
50 pending asbestos claims as of December 31, 2017. There can be no assurance that the number of future claims and the related
costs of defense, settlements or judgments will be consistent with the experience to date of existing claims.
103
BNS Sub has insurance policies covering asbestos-related claims for years beginning 1974 through 1988 with estimated
aggregate coverage limits of $183,000, with $1,543 at December 31, 2017 and 2016, respectively, in estimated remaining self-
insurance retention (deductible). There is secondary evidence of coverage from 1970 to 1973 although there is no assurance that
the insurers will recognize that the coverage was in place. Policies issued for BNS Sub beginning in 1989 contained exclusions
related to asbestos. Under certain circumstances, some of the settled claims may be reopened. Also, there may be a significant
delay in receipt of notification by BNS Sub of the entry of a dismissal or settlement of a claim or the filing of a new claim. BNS
Sub believes it has significant defenses to any liability for toxic-tort claims on the merits. None of these toxic-tort claims has gone
to trial and, therefore, there can be no assurance that these defenses will prevail.
BNS Sub annually receives retroactive billings or credits from its insurance carriers for any increase or decrease in claims
accruals as claims are filed, settled or dismissed, or as estimates of the ultimate settlement and defense costs for the then-existing
claims are revised. As of both December 31, 2017 and 2016, BNS Sub has accrued $1,349 relating to the open and active claims
against BNS Sub. This accrual represents the Company's best estimate of the likely costs to settle these claims by BNS Sub beyond
the amounts accrued by the insurance carriers and previously funded, through the retroactive billings by BNS Sub.
There can be no assurance that the number of future claims and the related costs of defense, settlements or judgments
will be consistent with the experience to date of existing claims, and that BNS Sub will not need to increase significantly its
estimated liability for the costs to settle these claims to an amount that could have a material effect on the consolidated financial
statements.
Other Litigation Matters
In the ordinary course of our business, we are subject to periodic lawsuits, investigations, claims and proceedings,
including, but not limited to, contractual disputes, employment, environmental, health and safety matters, as well as claims
associated with our historical acquisitions and divestitures. There is insurance coverage available for many of the foregoing actions.
Although we cannot predict with certainty the ultimate resolution of lawsuits, investigations, claims and proceedings asserted
against us, we do not believe any currently pending legal proceeding to which we are a party will have a material adverse effect
on our business, prospects, financial condition, cash flows, results of operations or liquidity.
19. RELATED PARTY TRANSACTIONS
Management Agreement with SP General Services LLC
SPLP is managed by the Manager, pursuant to the terms of the Management Agreement, which receives a fee at an annual
rate of 1.5% of total Partners' capital ("Management Fee"), payable on the first day of each quarter and subject to quarterly
adjustment. In addition, SPLP may issue to the Manager partnership profits interests in the form of incentive units, which will be
classified as Class C common units of SPLP, upon the attainment of certain specified performance goals by SPLP, which are
determined as of the last day of each fiscal year (see Note 14 - "Capital and Accumulated Other Comprehensive Loss" for additional
information on the incentive units).
The Management Agreement is automatically renewed each December 31 for successive one-year terms unless otherwise
determined at least 60 days prior to each renewal date by a majority of the independent directors. The Management Fee was $8,987,
$8,583 and $8,150 for the years ended December 31, 2017, 2016 and 2015, respectively. The Management Fee is included in
SG&A in the Company's consolidated statements of operations. Unpaid amounts for management fees included in Payables to
related parties on the Company's consolidated balance sheets were $487 and $0 at December 31, 2017 and 2016, respectively.
SPLP will bear (or reimburse the Manager with respect to) all its reasonable costs and expenses of the managed entities,
the Manager, SPH GP or their affiliates, including but not limited to: legal, tax, accounting, auditing, consulting, administrative,
compliance, investor relations costs related to being a public entity rendered for SPLP or SPH GP, as well as expenses incurred
by the Manager and SPH GP which are reasonably necessary for the performance by the Manager of its duties and functions under
the Management Agreement and certain other expenses incurred by managers, officers, employees and agents of the Manager or
its affiliates on behalf of SPLP. Reimbursable expenses incurred by the Manager in connection with its provision of services under
the Management Agreement were approximately $4,708, $4,222 and $2,906 during the years ended December 31, 2017, 2016 and
2015, respectively. Unpaid amounts for reimbursable expenses were approximately $881 and $1,031 at December 31, 2017 and
2016, respectively, and are included in Payables to related parties on the Company's consolidated balance sheets.
Corporate Services
104
Steel Services, through Management Services Agreements with its subsidiaries and portfolio companies, provides services,
which include assignment of C-Level management personnel, legal, tax, accounting, treasury, consulting, auditing, administrative,
compliance, environmental health and safety, human resources, marketing, investor relations, operating group management and
other similar services. In addition to its servicing agreements with SPLP and its consolidated subsidiaries, Steel Services has
management services agreements with other companies considered to be related parties, including, NOVT Corporation, Ore
Holdings, Inc., J. Howard Inc., Steel Partners, Ltd., iGo, STCN and Aerojet Rocketdyne Holdings, Inc. In total, Steel Services will
charge approximately $2,720 annually to these companies. All amounts billed under these service agreements are classified as a
reduction within SG&A.
Mutual Securities
Pursuant to the Management Agreement, the Manager is responsible for selecting executing brokers. Securities
transactions for SPLP are allocated to brokers on the basis of reliability and best price and execution. The Manager has selected
Mutual Securities, Inc. as an introducing broker and may direct a substantial portion of the managed entities' trades to such firm,
among others. An officer of the Manager and SPH GP is affiliated with Mutual Securities, Inc. The commissions paid by SPLP to
Mutual Securities, Inc. were not significant in any period.
Other
At December 31, 2017 and 2016, several related parties and consolidated subsidiaries had deposits totaling $2,438 and
$2,786, respectively, at WebBank. Approximately $357 and $718 of these deposits, including interest which was not significant,
have been eliminated in consolidation as of December 31, 2017 and 2016, respectively.
20. SEGMENT INFORMATION
SPLP operates through the following segments: Diversified Industrial, Energy, Financial Services, and Corporate and
Other, which are managed separately and offer different products and services. For a more complete description of the Company's
segments, see Item 1 - "Business - The Company" found elsewhere in this Form 10-K.
Steel Services charged the Diversified Industrial, Energy and Financial Services segments approximately $12,000, $8,150
and $4,700 for the year ended December 31, 2017. For the years ended December 31, 2016 and 2015, Steel Services charged the
Diversified Industrial, Energy and Financial services segments $11,751, $8,150 and $4,700 and $10,200, $8,150 and $3,167,
respectively, for these services. These amounts are eliminated in consolidation.
Segment information is presented below:
Revenue:
Diversified industrial
Energy
Financial services
Total
Income (loss) from continuing operations before income taxes:
Diversified industrial
Energy
Financial services
Corporate and other
Income (loss) from continuing operations before income taxes
Income tax provision (benefit)
Net income from continuing operations
Income (loss) from equity method investments and other investments held at fair value, net of taxes:
Diversified industrial
Energy
Corporate and other
Total
Year Ended December 31,
2017
2016
2015
$
1,156,187
$
998,556
$
$
$
135,461
80,379
1,372,027
50,104
(21,514)
41,328
(12,607)
57,311
51,299
6,012
$
— $
593
16,295
93,995
70,998
1,163,549
19,175
(11,459)
42,518
(23,711)
26,523
23,952
2,571
8,078
9,944
(13,937)
$
$
$
$
16,888
$
4,085
$
$
$
$
$
$
763,009
132,620
69,430
965,059
42,281
(95,112)
46,314
(1,891)
(8,408)
(78,719)
70,311
(1,252)
(16,102)
(14,423)
(31,777)
105
Diversified industrial
Energy
Financial services
Corporate and other
Total
Diversified industrial
Energy
Financial services
Corporate and other
Total
Diversified industrial
Energy
Financial services
Corporate and other
Total
Year ended December 31, 2017
Interest
Expense (a)
Capital
Expenditures
Depreciation
and
Amortization
13,471
$
40,374
$
1,421
4,685
7,912
13,468
834
61
50,741
20,735
294
166
27,489
$
54,737
$
71,936
Year ended December 31, 2016
Interest
Expense (a)
Capital
Expenditures
Depreciation
and
Amortization
8,089
1,544
2,595
1,419
$
27,953
$
5,082
102
1,046
50,100
20,076
274
96
13,647
$
34,183
$
70,546
Year ended December 31, 2015
Interest
Expense (a)
Capital
Expenditures
Depreciation
and
Amortization
5,238
2,455
1,450
1,169
$
17,212
$
4,785
1,153
102
27,340
20,629
170
421
10,312
$
23,252
$
48,560
$
$
$
$
$
$
(a) Interest expense includes Finance interest expense of $4,685, $2,595 and $1,450 for the years ended December 31, 2017, 2016 and 2015,
respectively.
Identifiable Assets Employed:
Diversified industrial
Energy
Financial services
Corporate and other
Segment total
Discontinued operations
Total
December 31,
2017
2016
$
$
1,070,874
$
1,072,147
416,460
612,378
61,779
2,161,491
2,549
2,164,040
$
299,480
456,811
130,898
1,959,336
7,779
1,967,115
The following table presents geographic revenue and long-lived asset information as of and for the year ended
December 31. Foreign revenue is based on the country in which the legal subsidiary generating the revenue is domiciled. Long-
lived assets in 2017 and 2016 consist of property, plant and equipment, plus approximately $6,300 and $10,393, respectively, of
land and buildings from previously operating businesses and other non-operating assets that are carried at the lower of cost or fair
value less cost to sell and are included in Other non-current assets on the Company's consolidated balance sheets as of December 31,
2017 and 2016, respectively. Neither revenue nor long-lived assets from any single foreign country were material to the consolidated
financial statements of the Company.
Geographic information:
United States
Foreign
Total
21. REGULATORY MATTERS
WebBank
2017
2016
2015
Revenue
Long-lived
Assets
Revenue
Long-lived
Assets
Revenue
Long-lived
Assets
$ 1,149,792
222,235
$ 1,372,027
$
$
239,834
38,457
$
983,380
180,169
$ 241,324
30,481
278,291
$ 1,163,549
$ 271,805
$
$
824,363
140,696
965,059
$
$
215,619
47,083
262,702
106
WebBank is subject to various regulatory capital requirements administered by federal banking agencies. Failure to meet
minimum capital requirements can initiate certain actions by regulators that, if undertaken, could have a direct material effect on
WebBank's financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action,
WebBank must meet specific capital guidelines that involve quantitative measures of its assets, liabilities, and certain off-balance
sheet items as calculated under regulatory accounting practices. WebBank's capital amounts and classification are also subject to
qualitative judgments by the regulators about components, risk weightings, and other factors.
In July 2013, the FDIC approved the final rules implementing the Basel Committee on Banking Supervision's capital
guidelines for U.S. banks ("Basel III"). Under the final rules, which began for WebBank on January 1, 2015 and are subject to a
phase-in period through January 1, 2019, minimum requirements will increase for both the quantity and quality of capital held by
WebBank. The rules include a new common equity Tier 1 capital to risk-weighted assets ratio ("CET1 Ratio") of 4.5% and a capital
conservation buffer of 2.5% of risk-weighted assets, which when fully phased-in, effectively results in a minimum CET1 Ratio
of 7.0%. Basel III raises the minimum ratio of Tier 1 capital to risk-weighted assets from 4.0% to 6.0% (which, with the capital
conservation buffer, effectively results in a minimum Tier 1 capital ratio of 8.5% when fully phased-in), effectively results in a
minimum total capital to risk-weighted assets ratio of 10.5% (with the capital conservation buffer fully phased-in), and requires
a minimum leverage ratio of 4.0%. Basel III also makes changes to risk weights for certain assets and off-balance-sheet exposures.
WebBank expects that its capital ratios under Basel III will continue to exceed the well capitalized minimum capital requirements
and such amounts are disclosed in the table below:
Actual
For Capital Adequacy
Purposes
Minimum Capital
Adequacy With Capital
Buffer
To Be Well Capitalized
Under Prompt
Corrective Provisions
Amount of Capital Required
As of December 31, 2017
Amount
Ratio
Amount
Ratio
Amount
Ratio
Amount
Ratio
Total Capital
(to risk-weighted assets)
$ 111,102
28.90% $
30,710
8.00% $
35,509
9.25% $
38,388
10.00%
Tier 1 Capital
(to risk-weighted assets)
$ 106,296
27.70% $
23,033
6.00% $
27,831
7.25% $
30,710
8.00%
Common Equity Tier 1 Capital
(to risk-weighted assets)
$ 106,296
27.70% $
17,275
4.50% $
22,073
5.75% $
24,952
6.50%
Tier 1 Capital
(to average assets)
As of December 31, 2016
Total Capital
(to risk-weighted assets)
Tier 1 Capital
(to risk-weighted assets)
Common Equity Tier 1 Capital
(to risk-weighted assets)
Tier 1 Capital
(to average assets)
$ 106,296
19.00% $
22,398
4.00%
n/a
n/a
$
27,998
5.00%
$
$
$
$
90,369
33.90% $
21,320
8.00% $
22,985
8.63% $
26,649
10.00%
88,698
33.30% $
15,990
6.00% $
17,655
6.63% $
21,320
8.00%
88,698
33.30% $
11,992
4.50% $
13,658
5.13% $
17,322
6.50%
88,698
22.20% $
15,956
4.00%
n/a
n/a
$
19,944
5.00%
22. SUPPLEMENTAL CASH FLOW INFORMATION
A summary of supplemental cash flow information for each of the three years ending December 31, 2017 is presented in
the following table:
107
Cash paid during the period for:
Interest
Taxes
Non-cash investing activities:
Reclassification of investment in associated company to cost of an acquisition
Reclassification of investment in associated company to investment in consolidated subsidiaries
Reclassification of available-for-sale securities to equity method investment
Partnership interest exchanged for marketable securities
Sales of marketable securities not settled
Securities delivered in exchange for settlement of financial instrument obligations
Exchange of debt securities for equity securities
Non-cash financing activities:
Common unit dividend declared and not paid
Repurchase of common stock by subsidiary not paid
$
$
$
Issuance of SPLP Preferred Units to purchase subsidiary shares from noncontrolling interests
198,817
Year Ended December 31,
2017
2016
2015
22,029
$
11,900
$
19,774
12,078
— $
39,794
$
—
—
—
—
—
3,317
— $
—
—
—
—
—
9,155
—
3,923
$
—
—
9,213
24,221
66,239
48,748
10,857
25,000
23,229
76
—
—
(8,557)
—
23. OTHER INCOME, NET
Other income, net consists of the following:
Investment income
Realized gains on sale of marketable securities, net
Realized losses on financial instrument obligations
Realized gain on non-monetary exchange
Other, net
Total
Year Ended December 31,
2017
2016
2015
$
$
(1,191) $
(3,739) $
(790)
2,918
—
(843)
(3,288)
60
—
(5,582)
(12,763)
(32,466)
477
(9,268)
(1,873)
94
$
(12,549) $
(55,893)
24. PARENT COMPANY CONDENSED FINANCIAL INFORMATION
As discussed in Note 11 - "Long-Term Debt", the Company entered into a Credit Agreement with PNC Bank that
consolidates a number of the Company's existing credit facilities into one combined, revolving credit facility covering substantially
all of the Company's subsidiaries, with the exception of WebBank. Substantially all of the net assets of the Company's subsidiaries
are restricted by the terms of the Credit Agreement, which does not permit cash transfers to SPLP if the net leverage ratio exceeds
a specified amount, unless approved by the bank syndicate. As these subsidiaries' restricted net assets represent a significant portion
of the Company's consolidated total assets, the Company is presenting the following parent company financial information. The
SPLP parent company condensed financial information is prepared on the same basis of accounting as the SPLP consolidated
financial statements, except that the SPLP subsidiaries are accounted for under the equity method of accounting. SPLP is a holding
company with minimal assets or operations, and majority of its subsidiaries are 100% owned.
108
STEEL PARTNERS HOLDINGS L.P. (PARENT ONLY)
Balance Sheets
(in thousands, except common units)
ASSETS
Current assets:
Cash and cash equivalents
Prepaid expenses and other current assets
Total current assets
Other non-current assets
Investments in subsidiaries
Total Assets
LIABILITIES AND CAPITAL
Current liabilities:
Accrued liabilities
Dividends payable
Intercompany payable
Total current liabilities
Preferred unit liability
Total Liabilities
Commitments and Contingencies
Capital:
Partners' capital common units: 26,348,420 and 26,152,976 issued and outstanding (after deducting 10,868,367 and
10,558,687 held in treasury, at cost of $170,858 and $164,900), respectively
Accumulated other comprehensive loss
Total Partners' Capital
Noncontrolling interests in consolidated entities
Total Capital
Total Liabilities and Capital
December 31,
2017
December 31,
2016
$
$
$
64
$
103
167
2,385
759,365
761,917
$
769
$
—
17,600
18,369
176,512
194,881
652,270
(106,167)
546,103
20,933
567,036
$
761,917
$
71
204
275
144
710,057
710,476
—
4,063
2,155
6,218
—
6,218
617,502
(68,761)
548,741
155,517
704,258
710,476
109
STEEL PARTNERS HOLDINGS L.P. (PARENT ONLY)
Statements of Operations and Comprehensive Income (Loss)
(in thousands)
Equity income of subsidiaries
Selling, general and administrative expenses
Interest expense
Other income
Net income
Net (income) loss attributable to noncontrolling interests in subsidiaries:
Continuing operations
Discontinued operations
Net (income) loss attributable to noncontrolling interests in subsidiaries
Net (loss) income attributable to common unitholders
Net income
Other comprehensive income (loss), net of tax:
Gross unrealized gains (losses) on available-for-sale securities
Reclassification of unrealized losses (gains) on available-for-sale securities
Gross unrealized losses (gains) on derivative financial instruments
Currency translation adjustments
Changes in pension liabilities and other post-retirement benefit obligations
Other comprehensive income (loss)
Comprehensive income (loss)
Comprehensive (income) loss attributable to noncontrolling interests
Comprehensive income (loss) attributable to common unitholders
STEEL PARTNERS HOLDINGS L.P. (PARENT ONLY)
Statements of Cash Flows
(in thousands)
Cash flows from operating activities:
Net income
Adjustments to reconcile net income to net cash (used in) provided by operating activities:
Equity income of subsidiaries
Amortization of preferred unit issuance costs
Equity-based compensation
Prepaid expenses and other current assets
Accounts payable, accrued and other current liabilities
Net cash (used in) provided by operating activities
Cash flows from investing activities:
Intercompany advances
Purchases of the Company's common units
Purchase of subsidiary shares from noncontrolling interests
Deferred finance charges
Common unit dividend payment
Net cash provided by (used in) financing activities
Net change for the period
Cash and cash equivalents at beginning of period
Cash and cash equivalents at end of period
110
Year Ended December 31,
2017
2016
2015
$
23,195
$
2,246
$
158,169
$
$
(10,730)
(6,453)
—
6,012
(6,028)
—
(6,028)
(16) $
(1,417)
—
1,742
2,571
4,059
—
4,059
6,630
6,012
$
2,571
$
$
27,689
908
624
5,444
(6,452)
28,213
34,225
(8,300)
13,413
(62)
(1,158)
(11,431)
(18,813)
(18,051)
(15,480)
7,617
$
25,925
$
(7,863) $
(1,601)
—
—
156,568
10,875
(30,708)
(19,833)
136,735
156,568
(31,321)
4,932
(1,757)
(3,950)
(25,839)
(57,935)
98,633
(17,032)
81,601
Year Ended December 31,
2016
2015
2017
$
6,012
$
2,571
$
156,568
(23,195)
237
9,635
268
1,370
(5,673)
19,507
(5,188)
(2,086)
(2,644)
(3,923)
5,666
(2,246)
—
375
(124)
—
576
6,735
(7,297)
—
—
—
(562)
(7)
71
64
$
14
57
71
$
$
(158,169)
—
2,281
10
(1,853)
(1,163)
354
(1,917)
—
—
—
(1,563)
(2,726)
2,783
57
25. QUARTERLY FINANCIAL DATA (unaudited)
Net (Loss) Income From
Continuing Operations
Attributable to Common
Unitholders
Net (Loss) Income
Attributable to Common
Unitholders
Net (Loss)
Income From
Continuing
Operations
Per Common
Unit Basic
Per Common
Unit Diluted
Net (Loss)
Income
Attributable
to Common
Unitholders
Per Common
Unit Basic
Per Common
Unit Diluted
Quarter
Revenue
2017
First
Second
Third
Fourth (a)
2016 (b)
First
Second
Third
Fourth (c)
$
323,319
$
(3,098) $
(0.16) $
(0.16) $
(4,082) $
(0.16) $
$
$
358,391
355,040
335,277
1,372,027
246,793
281,402
316,849
318,505
$
$
$
1,163,549
$
15,718
10,905
(17,513)
6,012
$
2,344
9,859
13,069
(22,701)
2,571
0.43
0.27
(0.55)
$
0.07
0.35
0.41
(0.59)
0.41
0.27
(0.55)
0.07
0.35
0.41
(0.59)
$
$
$
11,253
7,013
(14,200)
(16)
$
1,962
9,209
10,832
(15,373)
6,630
0.43
0.27
(0.55)
$
0.07
0.35
0.41
(0.59)
(0.16)
0.41
0.27
(0.55)
0.07
0.35
0.41
(0.59)
(a) The Company recorded asset impairment charges of approximately $2,028 in the fourth quarter of 2017, primarily related to an other-than-
temporary impairment on a certain available-for-sale security (see Note 4 - "Divestitures and Asset Impairment Charges"). In addition, the
Tax Cuts and Jobs Act was enacted in the fourth quarter of 2017, and in connection therewith, the Company recorded income tax expense of
$56,552 from the remeasurement of deferred tax balances, as well as a repatriation tax expense of $2,165. During 2017, the Company recorded
an income tax benefit of $44,681 associated with the reversal of its deferred tax valuation allowances at certain subsidiaries, which primarily
impacted the fourth quarter. (see Note 15 - "Income Taxes")
(b) The Company recorded asset impairment charges of approximately $1,470, $7,000, $3,057 and $5,732 in the first, second, third and fourth
quarters of 2016, respectively. These charges were primarily related to other-than-temporary impairments on certain available-for-sale securities
(see Note 4 - "Divestitures and Asset Impairment Charges").
(c) The Company recorded goodwill impairment charges of $24,254 in the fourth quarter of 2016 (see Note 7 - "Goodwill and Other Intangible
Assets, Net").
26. SUBSEQUENT EVENTS
On February 16, 2018, the Company completed the acquisition of Dunmore Corporation in the U.S., and the share purchase
of Dunmore Europe GmbH in Germany (collectively, "Dunmore") for a purchase price of $66,000, subject to a working capital
adjustment and an earn-out based on future earnings during the period from January 1, 2018 through December 31, 2019, each as
provided in the purchase agreement. In no case shall the purchase price, including the potential earn-out, exceed $80,000. Dunmore
is a global provider of specialty coated, laminated and metallized films for the aircraft, spacecraft, photovoltaic, graphic arts,
packaging, insulation, surfacing and fashion industries. Dunmore will report into API, which is part of the Company's Diversified
Industrial segment.
111
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A. Controls and Procedures
Disclosure Controls and Procedures
As required by Rule 13a-15(b) under the Exchange Act, we conducted an evaluation under the supervision and with the
participation of our management, including the Principal Executive Officer and the Chief Financial Officer, of the effectiveness of
our disclosure controls and procedures as of the end of the period covered by this report. Based on that evaluation, the Principal
Executive Officer and the Chief Financial Officer concluded that as of December 31, 2017 our disclosure controls and procedures
are effective in ensuring that all information required to be disclosed in reports that we file or submit under the Exchange Act is
recorded, processed, summarized and reported within the time periods specified in the SEC rules and forms and that such information
is accumulated and communicated to our management, including our Principal Executive Officer and Chief Financial Officer, in a
manner that allows timely decisions regarding required disclosure.
Management's Report on Internal Control Over Financial Reporting
Management of the Company is responsible for establishing and maintaining adequate internal control over financial
reporting, as such term is defined in Rule 13a-15(f) under the Exchange Act. Our internal control over financial reporting is a process
designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of the Company's
consolidated financial statements for external reporting purposes in accordance with U.S. GAAP.
Under the supervision and with the participation of the Company's management, including the Company's Principal
Executive Officer and the Chief Financial Officer, the Company conducted an evaluation of the effectiveness of the internal control
over financial reporting of the Company as referred to above as of December 31, 2017 as required by Rule 13a-15(c) under the
Exchange Act. In making this assessment, the Company used the criteria set forth in the framework in Internal Control - Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on its evaluation under the
framework in Internal Control - Integrated Framework (2013), management concluded that the Company's internal control over
financial reporting was effective as of December 31, 2017.
BDO USA, LLP, the independent registered public accounting firm who audited the Company's 2017 consolidated financial
statements included in this Annual Report on Form 10-K, has issued a report on the effectiveness of the Company's internal control
over financial reporting as of December 31, 2017, which is included herein.
Changes in Internal Control over Financial Reporting
No change in internal control over financial reporting occurred during the quarter ended December 31, 2017 that has
materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting.
Inherent Limitations Over Controls
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also,
projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because
of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Item 9B. Other Information
None.
112
Item 10. Directors, Executive Officers and Corporate Governance
PART III
The Company's definitive proxy statement which will be filed with the SEC pursuant to Registration 14A within 120 days
of the end of the Company's fiscal year is incorporated herein by reference.
Item 11. Executive Compensation
The Company's definitive proxy statement which will be filed with the SEC pursuant to Registration 14A within 120 days
of the end of the Company's fiscal year is incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The Company's definitive proxy statement which will be filed with the SEC pursuant to Registration 14A within 120 days
of the end of the Company's fiscal year is incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions, and Director Independence
The Company's definitive proxy statement which will be filed with the SEC pursuant to Registration 14A within 120 days
of the end of the Company's fiscal year is incorporated herein by reference.
Item 14. Principal Accounting Fees and Services
The Company's definitive proxy statement which will be filed with the SEC pursuant to Registration 14A within 120 days
of the end of the Company's fiscal year is incorporated herein by reference.
Item 15. Exhibits, Financial Statement Schedules
PART IV
(a) Financial Statements - The following financial statements of Steel Partners Holdings L.P., and subsidiaries, are included in Part
II, Item 8 of this report:
Consolidated Balance Sheets as of December 31, 2017 and 2016
Consolidated Statements of Operations for the years ended December 31, 2017, 2016 and 2015
Consolidated Statements of Comprehensive Income (Loss) for the years ended December 31, 2017, 2016 and 2015
Consolidated Statements of Changes in Capital for the years ended December 31, 2017, 2016 and 2015
Consolidated Statements of Cash Flows for the years ended December 31, 2017, 2016 and 2015
Notes to Consolidated Financial Statements
(b) Exhibits - The following documents are filed as exhibits hereto:
Exhibit No. Description
2.1
2.2
2.3
2.4
Share Acquisition Agreement, dated as of April 30, 2012, by and among Steel Excel Inc., BNS Holding, Inc.,
SWH, Inc. and SPH Group Holdings LLC (incorporated by reference to Exhibit 2.1 of Steel Partners Holdings
L.P.'s Current Report on Form 8-K, filed June 6, 2012).
Asset Purchase Agreement between F&H Acquisition Corp. and Cerberus Business Finance, LLC (incorporated
by reference to Exhibit 2.1 of Steel Partners Holdings L.P.'s Current Report on Form 8-K, filed March 14, 2014).
Stock Purchase Agreement, dated December 18, 2014, by and among Handy & Harman Group Ltd., Bairnco
Corporation and Rogers Corporation (incorporated by reference to Exhibit 2.1 to Steel Partners Holdings L.P.'s
Current Report on Form 8-K, filed January 27, 2015).
Amendment No. 1 to Stock Purchase Agreement, dated January 22, 2015, by and among Handy & Harman Group
Ltd., Bairnco, LLC and Rogers Corporation (incorporated by reference to Exhibit 2.2 to Steel Partners Holdings
L.P.'s Current Report on Form 8-K, filed January 27, 2015).
113
2.5
2.6
2.7
2.8
2.9
2.10
3.1
3.2
3.3
3.4
3.5
4.1
10.1
10.2
10.3
10.4
10.5
10.6
10.7
Agreement and Plan of Merger, dated as of May 31, 2015, by and among Handy & Harman Ltd., Handy & Harman
Group, Ltd., HNH Group Acquisition LLC, HNH Group Acquisition Sub LLC and JPS Industries, Inc.
(incorporated by reference to Exhibit 2.1 to Steel Partners Holdings L.P.'s Current Report on Form 8-K, filed June
1, 2015).
Agreement and Plan of Merger, dated as of April 6, 2016, by and among Handy & Harman Ltd., Handy & Harman
Group Ltd., SLI Acquisition Co. and SL Industries, Inc. (incorporated by reference to Exhibit 2.1 to the Current
Report on Form 8-K filed by Handy & Harman Ltd. with the Securities and Exchange Commission on April 7,
2016).
Agreement and Plan of Merger, dated as of December 7, 2016, by and among Steel Partners Holdings L.P., SPH
Acquisition Co. and Steel Excel Inc. (incorporated by reference to Exhibit 2.1 to Steel Partners Holdings L.P.'s
Current Report on Form 8-K, filed December 9, 2016).
First Amendment to Agreement and Plan of Merger, dated as of December 23, 2016, by and among Steel Partners
Holdings L.P., SPH Acquisition Co. and Steel Excel Inc. (incorporated by reference to Exhibit 2.1 to Steel Partners
Holdings L.P.'s Current Report on Form 8-K, filed December 27, 2016).
Agreement and Plan of Merger, dated as of June 26, 2017, by and among Steel Partners Holdings L.P., Handy
Acquisition Co. and Handy & Harman Ltd. (incorporated by reference to Exhibit 2.1 to Steel Partners Holdings
L.P.'s Current Report on Form 8-K filed on June 26, 2017).
Agreement and Plan of Merger, dated December 15, 2017, by and among ModusLink Global Solutions, Inc.,
MLGS Merger Company, Inc., IWCO Direct Holdings Inc., CSC Shareholder Services, LLC (solely in its capacity
as representative), and the stockholders of IWCO Direct Holdings Inc.*** (incorporated by reference to Exhibit
2.1 to Steel Partners Holdings L.P.'s Current Report on Form 8-K, filed December 19, 2017).
Certificate of Limited Partnership (incorporated by reference to Exhibit 3.1 to Steel Partners Holdings L.P.'s
Registration Statement on Form 10 filed December 15, 2011).
Amendment to the Certificate of Limited Partnership, dated April 2, 2009 (incorporated by reference to Exhibit
3.2 to Steel Partners Holdings L.P.'s Registration Statement on Form 10 filed December 15, 2011).
Amendment to the Certificate of Limited Partnership, dated January 20, 2010 (incorporated by reference to Exhibit
3.3 to Steel Partners Holdings L.P.'s Registration Statement on Form 10 filed December 15, 2011).
Amendment to the Certificate of Limited Partnership, dated October 15, 2010 (incorporated by reference to Exhibit
3.4 to Steel Partners Holdings L.P.'s Registration Statement on Form 10 filed December 15, 2011).
Seventh Amended and Restated Agreement of Limited Partnership of Steel Partners Holdings L.P., dated as of
October 12, 2017 (incorporated by reference to Exhibit 3.1 to Steel Partners Holdings L.P.'s Current Report on
Form 8-K filed on October 12, 2017).
Certificate of Designations, Preferences and Rights of Series C Convertible Preferred Stock of ModusLink Global
Solutions, Inc. filed with the Secretary of State of the State of Delaware on December 15, 2017(incorporated by
reference to Exhibit 4.1 to Steel Partners Holdings L.P.'s Current Report on Form 8-K, filed December 19, 2017).
Management Services Agreement by and between SP Corporate Services LLC and Handy & Harman Ltd. and
Handy & Harman Group Ltd., dated as of January 1, 2012 (incorporated by reference to Exhibit 10.10 to Amendment
No. 1 of Steel Partners Holdings L.P.'s Registration Statement on Form 10 filed January 20, 2012).
First Amendment to Management Services Agreement between Handy & Harman Ltd., Handy & Harman Group
Ltd. and SP Corporate Services LLC (incorporated by reference to Exhibit 10.1 to Steel Partners Holdings L.P.'s
Current Report on Form 8-K filed April 2, 2013).
Amended and restated Management Services Agreement by and between SPH Services, Inc. and Handy & Harman
Ltd. and Handy & Harman Group Ltd., dated as of February 23, 2016 (incorporated by reference to Exhibit 10.1
to Steel Partners Holdings L.P.'s Current Report on Form 8-K/A, filed February 25, 2016).
Credit Agreement, dated as of October 23, 2013, by and among SPH Group Holdings LLC, Steel Partners Holdings
L.P., the lenders thereunder and PNC Bank, National Association, in its capacity as administrative agent for the
lenders thereunder (incorporated by reference to Exhibit 99.1 to Steel Partners Holdings L.P.'s Current Report on
Form 8-K, filed October 28, 2013).
First Amendment, dated as of December 15, 2014, to the Credit Agreement. dated as of October 13, 2013 by and
among SPH Group Holdings LLC, Steel Partners Holdings L.P., the lenders thereunder and PNC Bank, National
Association, in its capacity as administrative agent for the lenders thereunder (incorporated by reference to Exhibit
4.1 to Steel Partners Holdings L.P.'s Current Report on Form 8-K, filed December 15, 2014).
Second Amendment, dated as of March 27, 2015, to the Credit Agreement, dated as of October 23, 2013, by and
among SPH Group Holdings LLC, Steel Partners Holdings L.P., the lenders thereunder and PNC Bank, National
Association, in its capacity as administrative agent for the lenders thereunder (incorporated by reference to Exhibit
99.1 to Steel Partners Holdings L.P.'s Current Report on Form 8-K filed March 30, 2015).
Third Amendment, dated as of September 28, 2015, to the Credit Agreement, dated as of October 23, 2013, by
and among SPH Group Holdings LLC, Steel Partners Holdings L.P., the lenders thereunder and PNC Bank, National
Association, in its capacity as administrative agent for the lenders thereunder (incorporated by reference to Exhibit
99.1 to Steel Partners Holdings L.P.'s Current Report on Form 8-K, filed September 29, 2015).
114
10.8
10.9
10.10
10.11
10.12
10.13
10.14
10.15
10.16**
10.17
10.18
Credit Agreement, dated as of November 14, 2017, among Handy & Harman Group Ltd., SPH Group Holdings
LLC, Steel Excel Inc., API Americas Inc. and Cedar 2015 Limited as Borrowers, PNC Bank, National
Association, in its capacity as administrative agent, the lenders party thereto, and certain of the Borrowers'
affiliates in their capacities as guarantors (incorporated by reference to Exhibit 10.1 to Steel Partners Holdings
L.P.'s Current Report on Form 8-K, filed November 16, 2017).
Amended and restated Management Services Agreement by and between SPH Services, Inc. and Handy & Harman
Ltd. and Handy & Harman Group Ltd., dated as of February 23, 2016 (incorporated by reference to Exhibit 10.1
to Steel Partners Holdings L.P.'s Current Report on Form 8-K/A, filed February 25, 2016).
Management Services Agreement between SP Corporate Services LLC and iGo, Inc. effective October 1, 2013.
(incorporated by reference to Exhibit 10.3 to Steel Partners Holdings L.P.'s Current Report on Form 8-K, filed
October 15, 2013).
Amended and Restated Management Services Agreement between SP Corporate Services LLC and Steel Excel
Inc. (incorporated by reference to Exhibit 10.1 to Steel Partners Holdings L.P.'s Current Report on Form 8-K, filed
January 14, 2014).
Amendment No. 1 to Amended and Restated Management Services Agreement between SP Corporate Services
LLC and Steel Excel Inc. (incorporated by reference to Exhibit 10.2 to Steel Partners Holdings L.P.'s Current
Report on Form 8-K, filed January 14, 2014).
Amendment No. 2 to Amended and Restated Management Services Agreement between SP Corporate Services
LLC and Steel Excel Inc. (incorporated by reference to Exhibit 10.3 to Steel Partners Holdings L.P.'s Current
Report on Form 8-K, filed January 14, 2014).
Amendment No. 3 to the Amended and Restated Management Services Agreement between Steel Excel Inc. and
SP Corporate Services LLC, dated as of January 1, 2014 (incorporated by reference to Exhibit 10.1 to Steel Partners
Holdings L.P.'s Quarterly Report on Form 10-Q, filed November 6, 2014).
Sixth Amended and Restated Management Agreement by and between SP Corporate Services LLC and SP General
Services LLC, effective as of January 1, 2015 (incorporated by reference to Exhibit 10.1 to Steel Partners Holdings
L.P.'s Current Report on Form 8-K, filed January 13, 2015).
Incentive Unit Agreement by and between Steel Partners Holdings L.P. and SPH SPV-I LLC, effective as of May
11, 2012 (incorporated by reference to Exhibit 10.2 to Steel Partners Holdings L.P.'s Current Report on Form 8-
K, filed January 13, 2015).
Exchange Agreement, dated as of May 31, 2015, by and between Handy & Harman Group, Ltd. and SPH Group
Holdings LLC (incorporated by reference to Exhibit 10.1 to Steel Partners Holdings L.P.'s Current Report on Form
8-K, filed June 1, 2015).
Preferred Stock Purchase Agreement dated as of December 15, 2017, by and between ModusLink Global Solutions,
Inc. and SPH Group Holdings LLC. (incorporated by reference to Exhibit 10.1 to Steel Partners Holdings L.P.'s
Current Report on Form 8-K, filed December 19, 2017).
10.19**
Employment Agreement, dated as of June 29, 2010, between SL Industries, Inc. and William Fejes, Jr. (incorporated
by reference to Exhibit 10.1 of SL Industries, Inc.'s Quarterly Report on Form 10-Q, filed August 2, 2010).
21*
24*
31.1*
31.2*
32.1*
32.2*
99.1
99.2
99.3
99.4
99.5
Subsidiaries of Steel Partners Holdings L.P.
Power of Attorney (included in the signature page)
Certification by the Principal Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
Certification by the Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
Certification by the Principal Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section
906 of the Sarbanes-Oxley Act of 2002.
Certification by the Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section
906 of the Sarbanes-Oxley Act of 2002.
Financial Statements of SL Industries, Inc. for the three years ended December 31, 2015 (incorporated by reference
to Exhibit 99.1 of Steel Partners Holdings L.P.'s Form 10-K/A filed March 23, 2016).
Financial Statements of SL Industries, Inc. for the three months ended March 31, 2016 and 2015 (incorporated by
reference to Exhibit 99.2 of Steel Partners Holdings L.P.'s Form 8-K/A filed August 16, 2016).
Financial Statements of JPS Industries, Inc. for the years ended November 1, 2014 and November 2, 2013
(incorporated by reference to Exhibit 99.3 of Steel Partners Holdings L.P.'s Form 10-K filed March 16, 2015).
Financial Statements of JPS Industries, Inc. for the six months ended May 2, 2015 and May 3, 2014 (incorporated
by reference to Exhibit 99.2 of Steel Partners Holdings L.P.'s Form 8-K/A filed September 3, 2015).
Financial Statements of ModusLink Global Solutions, Inc. for the three years ended July 31, 2017 (incorporated
by reference to ModusLink Global Solutions, Inc's Annual Report on Form 10-K filed October 16, 2017).
Exhibit
101.INS*
XBRL Instance Document
115
Exhibit
101.SCH*
Exhibit
101.CAL*
Exhibit
101.DEF*
Exhibit
101.LAB*
Exhibit
101.PRE*
XBRL Taxonomy Extension Schema
XBRL Taxonomy Extension Calculation Linkbase
XBRL Taxonomy Extension Definition Linkbase
XBRL Taxonomy Extension Label Linkbase
XBRL Taxonomy Extension Presentation Linkbase
* Filed herewith
** Management contract or compensatory plan or arrangement
*** Schedules and exhibits have been omitted pursuant to Item 601 (b)(2) of Regulation S-K. The Company hereby agrees to
furnish supplementary copies of any of the omitted schedules or exhibits upon request by the Securities and Exchange
Commission.
Item 16. Form 10-K Summary
None.
116
Pursuant to the requirements of Section 13 or 15(d) 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.
SIGNATURES
Dated:
March 8, 2018
STEEL PARTNERS HOLDINGS L.P.
By:
By:
Steel Partners Holdings GP Inc.
Its General Partner
/s/ Warren G. Lichtenstein
Warren G. Lichtenstein
Executive Chairman
POWER OF ATTORNEY
Steel Partners Holdings L.P. and each of the undersigned do hereby appoint Warren G. Lichtenstein and Douglas B.
Woodworth, and each of them severally, its or his true and lawful attorney to execute on behalf of Steel Partners Holdings L.P. and
the undersigned any and all amendments to this Annual Report on Form 10-K and to file the same with all exhibits thereto and other
documents in connection therewith, with the Securities and Exchange Commission; each of such attorneys shall have the power to
act hereunder with or without the other.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following
persons in the capacities indicated with respect to Steel Partners Holdings GP Inc., the general partner of Steel Partners Holdings
L.P., and on behalf of the registrant and on the dates indicated below by the following persons in the capacities and on the dates
indicated.
By:
By:
By:
By:
By:
By:
By:
By:
/s/ Warren G. Lichtenstein
Warren G. Lichtenstein, Executive Chairman
(Principal Executive Officer)
/s/ Douglas B. Woodworth
Douglas B. Woodworth, Chief Financial Officer
(Principal Accounting Officer)
/s/ Jack L. Howard
Jack L. Howard, Director
/s/ John P. McNiff
John P. McNiff, Director
/s/ Joseph L. Mullen
Joseph L. Mullen, Director
/s/ General Richard I. Neal
General Richard I. Neal, Director
/s/ Lon Rosen
Lon Rosen, Director
/s/ Allan R. Tessler
Allan R. Tessler, Director
117
March 8, 2018
Date
March 8, 2018
Date
March 8, 2018
Date
March 8, 2018
Date
March 8, 2018
Date
March 8, 2018
Date
March 8, 2018
Date
March 8, 2018
Date
Schedule of Subsidiaries
(as of December 31, 2017) (1)
EXHIBIT 21
STEEL PARTNERS HOLDINGS GP INC., a Delaware corporation.
SPH GROUP LLC, a Delaware limited liability company.
SPH GROUP HOLDINGS LLC, a Delaware limited liability company.
STEEL SERVICES LTD, a Delaware corporation.
WEBFINANCIAL HOLDING CORPORATION, a Delaware corporation.
DGT HOLDINGS CORP., a Delaware corporation.
HANDY & HARMAN LTD., a Delaware corporation.
STEEL EXCEL INC., a Delaware corporation.
WEBFINANCIAL HOLDING CORPORATION SUBSIDIARIES
WEBBANK HOLDING CORP., a Delaware corporation.
WEBBANK, a Utah chartered industrial bank.
WEBFINANCIAL HOLDING LLC, a Delaware limited liability company.
API GROUP plc, a corporation organized under the laws of England and Wales.
API (USA) HOLDINGS LIMITED, a Delaware corporation.
SXCL ACQUISITION CORP., a Delaware corporation
DGT HOLDINGS CORP. SUBSIDIARIES
DM IMAGING CORP., a Delaware corporation.
VILLA IMMOBILIARE SRL, a corporation organized under the laws of Italy.
HANDY & HARMAN LTD. SUBSIDIARIES
HANDY & HARMAN GROUP, LTD., a Delaware corporation (“HHG”).
HANDY & HARMAN, a New York corporation (“HANDY & HARMAN”), a direct subsidiary of HHG.
BAIRNCO LLC, a Delaware limited liability company (“BAIRNCO”), a direct subsidiary of HHG.
HANDY & HARMAN HOLDING CORPORATION, a Delaware corporation, a direct subsidiary of HHG.
JPS INDUSTRIES HOLDINGS LLC. a Delaware corporation, a direct subsidiary of HHG.
SL INDUSTRIES, INC., a Delaware corporation, a direct subsidiary of HHG.
HANDY & HARMAN OF CANADA, LIMITED, a corporation organized under the laws of the Province of Ontario, Canada.
HANDY & HARMAN INTERNATIONAL, LTD., a Delaware corporation.
HANDY & HARMAN NETHERLANDS, BV., a corporation organized under the laws of the Netherlands.
HANDYTUBE CORPORATION, a Delaware corporation (formerly known as Camdel Metals Corporation).
INDIANA TUBE CORPORATION, a Delaware corporation.
LUCAS-MILHAUPT, INC., a Wisconsin corporation.
LUCAS-MILHAUPT BRAZING MATERIALS (SUZHOU) CO. LTD., a corporation organized under the laws of China.
LUCAS-MILHAUPT HONG KONG LIMITED, a corporation organized under the laws of Hong Kong.
LUCAS MILHAUPT RIBERAC SA, a corporation organized under the laws of France.
LUCAS-MILHAUPT WARWICK LLC, a Delaware limited liability company.
OMG, INC., a Delaware corporation (formerly known as Olympic Manufacturing Group, Inc.)
ATLANTIC SERVICE CO. LTD., a corporation organized under the laws of Canada.
ATLANTIC SERVICE CO. (UK) LTD., a corporation organized under the laws of United Kingdom.
BERTRAM & GRAF GMBH, a corporation organized under the laws of Germany.
KASCO LLC, a Delaware limited liability company.
KASCO ENSAMBLY S.A. DE C.V., a corporation organized under the laws of Mexico.
KASCO MEXICO LLC, a Delaware Limited Liability Company.
JPS INDUSTRIES HOLDINGS LLC, a Delaware limited liability company
JPS COMPOSITE MATERIALS CORPORATION, a Delaware corporation.
CEDRO DE MEXICO, S.A. DE C.V., a corporation organized under the laws of Mexico.
DAVALL GEARS LTD., a corporation organized under the laws of United Kingdom.
INDUSTRIAS SL, S.A. DE C.V., a corporation organized under the laws of Mexico.
MTE CORPORATION, a Wisconsin corporation.
SL DELAWARE HOLDINGS, INC., a Delaware corporation.
SL MONTEVIDEO TECHNOLOGY, INC., a Minnesota corporation.
SL POWER ELECTRONICS CORPORATION, a Delaware corporation.
SL XIANGHE POWER ELECTRONICS CORPORATION, a corporation organized under the laws of China.
TPE DE MEXICO, S. DE R.L. DE C.V., a corporation organized under the laws of Mexico.
STEEL ENERGY SERVICES LTD., a Delaware corporation.
STEEL EXCEL INC. SUBSIDIARIES (2)
SUN WELL SERVICE, INC., a North Dakota corporation
ROGUE PRESSURE SERVICES LTD., a Delaware corporation.
BLACK HAWK ENERGY SERVICES, INC., a New Mexico corporation.
BASIN WELL LOGGING WIRELINE SERVICES, INC., a New Mexico corporation.
STEEL SPORTS INC., a Delaware corporation.
BASEBALL HEAVEN INC., a Delaware corporation.
UK ELITE SOCCER INC., a New Jersey Corporation - 80% owned
1001 HERMOSA AVENUE LLC, a Delaware limited liability company.
________________________
(1) This list omits subsidiaries which, considered in the aggregate, would not constitute a significant subsidiary.
(2) Other than Handy & Harman Ltd. and its subsidiaries.
EXHIBIT 31.1
PRINCIPAL EXECUTIVE OFFICER CERTIFICATION
I, Warren G. Lichtenstein, certify that:
1.
I have reviewed this Annual Report on Form 10-K for the year ended December 31, 2017 of Steel Partners Holdings L.P.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading
with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all
material respects the financial condition, results of operations and cash flows of the Registrant as of, and for, the periods
presented in this report;
4. The Registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as
defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the Registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed
under our supervision, to ensure that material information relating to the Registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be
designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c) Evaluated the effectiveness of the Registrant’s disclosure controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this
report based on such evaluation; and
d) Disclosed in this report any change in the Registrant’s internal control over financial reporting that occurred during the
Registrant’s most recent fiscal quarter (the Registrant’s fourth fiscal quarter in the case of an annual report) that has
materially affected, or is reasonably likely to materially affect, the Registrant’s internal control over financial reporting;
and
5. The Registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over
financial reporting, to the Registrant’s auditors and the audit committee of the Registrant’s board of directors (or persons
performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting
which are reasonably likely to adversely affect the Registrant’s ability to record, process, summarize and report financial
information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the
Registrant’s internal control over financial reporting.
Date:
March 8, 2018
/s/ Warren G. Lichtenstein
Warren G. Lichtenstein
Executive Chairman of Steel Partners
Holdings GP Inc.
EXHIBIT 31.2
I, Douglas B. Woodworth, certify that:
CHIEF FINANCIAL OFFICER CERTIFICATION
1.
I have reviewed this Annual Report on Form 10-K for the year ended December 31, 2017 of Steel Partners Holdings L.P.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading
with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all
material respects the financial condition, results of operations and cash flows of the Registrant as of, and for, the periods
presented in this report;
4. The Registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as
defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the Registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed
under our supervision, to ensure that material information relating to the Registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be
designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c) Evaluated the effectiveness of the Registrant’s disclosure controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this
report based on such evaluation; and
d) Disclosed in this report any change in the Registrant’s internal control over financial reporting that occurred during the
Registrant’s most recent fiscal quarter (the Registrant’s fourth fiscal quarter in the case of an annual report) that has
materially affected, or is reasonably likely to materially affect, the Registrant’s internal control over financial reporting;
and
5. The Registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over
financial reporting, to the Registrant’s auditors and the audit committee of the Registrant’s board of directors (or persons
performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting
which are reasonably likely to adversely affect the Registrant’s ability to record, process, summarize and report financial
information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the
Registrant’s internal control over financial reporting.
Date:
March 8, 2018
/s/ Douglas B. Woodworth
Douglas B. Woodworth
Chief Financial Officer of Steel Partners
Holdings GP Inc.
EXHIBIT 32.1
Certification of the Principal Executive Officer
Pursuant to 18 U.S.C. Section 1350,
As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
In connection with the Annual Report of Steel Partners Holdings L.P. (the “Partnership”) on Form 10-K for the year ended
December 31, 2017 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Warren G.
Lichtenstein, Executive Chairman of Steel Partners Holdings GP Inc., the general partner of the Partnership, certify, pursuant to
18 U.S.C. Section §1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations
of the Partnership.
Date:
March 8, 2018
/s/ Warren G. Lichtenstein
Warren G. Lichtenstein
Executive Chairman
of Steel Partners Holdings GP Inc.
* The foregoing certification is being furnished solely pursuant to 18 U.S.C. Section 1350 and is not being filed as part of the
Report or as a separate disclosure document.
EXHIBIT 32.2
Certification of the Chief Financial Officer
Pursuant to 18 U.S.C. Section 1350,
As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
In connection with the Annual Report of Steel Partners Holdings L.P. (the “Partnership”) on Form 10-K for the year
ended December 31, 2017 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Douglas
B. Woodworth, Chief Financial Officer of Steel Partners Holdings GP Inc., the general partner of the Partnership, certify, pursuant
to 18 U.S.C. Section §1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations
of the Partnership.
Date:
March 8, 2018
/s/ Douglas B. Woodworth
Douglas B. Woodworth
Chief Financial Officer
of Steel Partners Holdings GP Inc.
* The foregoing certification is being furnished solely pursuant to 18 U.S.C. Section 1350 and is not being filed as part of the
Report or as a separate disclosure document.