UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
þ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For The Fiscal Year Ended December 31, 2013
OR
¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Commission File Number: 000-5465
______________
STEEL PARTNERS HOLDINGS L.P.
(Exact name of registrant as specified in its charter)
Delaware | 13-3727655 |
(State of Incorporation) | (I.R.S. Employer Identification No.) |
590 Madison Avenue, 32nd Floor | |
New York, New York | 10022 |
(Address of principal executive offices) | (Zip Code) |
Registrant’s telephone number, including area code: (212) 520-2300
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange on | |
Title of each class | 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 ý
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 ý
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 ý 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) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ý No ¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K 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. ý
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer | o | Non-accelerated filer | o | |
Accelerated filer | þ | Smaller reporting company | o | |
Indicate by check mark whether the registrant is a shell company (as defined by Rule 12b-2 of the Exchange Act). Yes o No þ
The aggregate market value of our common units held by non-affiliates of registrant as of June 28, 2013 was approximately $271.5 million.
On March 7, 2014, there were 30,794,072 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.
STEEL PARTNERS HOLDINGS L.P.
TABLE OF CONTENTS
PART I | ||
Item 1. | ||
Item 1A. | ||
Item 1B. | ||
Item 2. | ||
Item 3. | ||
Item 4. | ||
PART II | ||
Item 5. | ||
Item 6. | ||
Item 7. | ||
Item 7A. | ||
Item 8. | ||
Item 9. | ||
Item 9A. | ||
Item 9B. | ||
PART III | ||
Item 10. | ||
Item 11. | ||
Item 12. | ||
Item 13. | ||
Item 14. | ||
PART IV | ||
Item 15. | ||
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 (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “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.
Who We Are
Steel Partners Holdings L.P. ("SPLP" or the "Company") is a global diversified holding company that engages in multiple businesses, including diversified industrial products, energy, defense, supply chain management and logistics, banking, food products and services, oilfield services, sports, training, education, and the entertainment and lifestyle industries.
Each of our companies has its own management team with significant experience and proven success in their industries. Our subsidiary, SP Corporate Services LLC (“SP Corporate”), provides certain executive and corporate management services to us and some of our companies. We work with our businesses to increase corporate value over the long term for our unitholders and all stakeholders by implementing our unique strategy discussed in more detail below.
Our History
SPLP is a limited partnership formed in the State of Delaware on December 16, 2008. SPLP is the successor through a merger on December 31, 2008 with WebFinancial Corporation ("Webfinancial"), a Delaware corporation that was incorporated in 1997. Webfinancial acquired WebBank in 1998.
In December 2008, in order to preserve an investment strategy that successfully served both the company and its investors since its inception, Steel Partners restructured its business. The result was the creation of Steel Partners Holdings L.P., a limited partnership formed in the State of Delaware in December 2008.
Effective July 15, 2009, the Company completed an exchange transaction in which we acquired the limited partnership interest of Steel Partners II, L.P. (“SPII”) pursuant to which we acquired net assets of $454,300 that were held by SPII, consisting of holdings in a variety of companies, in exchange for our common units which were distributed to certain former indirect investors in SPII (the “Exchange Transaction”). As a result, we became a global diversified holding company, with partners' capital of $367,100 as of July 15, 2009, which has increased to $616,582 as of December 31, 2013. Since July 15, 2009, we have concentrated our holdings into a select number of businesses.
On April 10, 2012, after fulfilling stringent regulatory and financial reporting requirements, the company became listed on the New York Stock Exchange (NYSE: SPLP).
Our Structure
SPLP is managed by SP General Services LLC (the “Manager”), pursuant to the terms of an amended and restated management agreement (the “Management Agreement”) discussed in further detail in the section entitled “Executive Compensation - The Management Agreement.” From its founding in 1990, the Manager and its affiliates have focused on increasing value for investors in the entities it has managed, including SPLP and SPII.
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Our wholly-owned subsidiary, Steel Partners Holdings GP Inc., formerly known as Web LLC and Steel Partners Holdings GP LLC, or the “General Partner”, is our general partner. The General Partner converted from a limited liability company to a corporation on September 21, 2010. The General Partner has a board of directors (the “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 Chairman of the Board of Directors.
Our 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. 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 are reducing our companies' operational costs, and enhancing 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 Partners Corporate 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.
The following table presents the composition of our operating segments, which include the operations of our consolidated subsidiaries, as well as income or loss from equity method investments and other investments.
Diversified Industrial | Energy | Financial Services | Corporate and Other |
Handy & Harman Ltd. ("HNH") (1) | Steel Excel Inc. ("Steel Excel")(1) | WebBank (1) | SPH Services, Inc. ("SPH Services") (1) |
SL Industries, Inc. ("SLI") (2) | BNS Holding, Inc. ("BNS") (1), (3) | DGT Holdings Corp. ("DGT") (1) | |
JPS Industries, Inc. ("JPS") (2) | BNS Holdings Liquidating Trust ("BNS Liquidating Trust") (1), (3) | ||
ModusLink Global Solutions, Inc. (2) | |||
CoSine Communications, Inc. ("CoSine")(2) | |||
Fox & Hound Acquisition Corp. ("Fox & Hound") (2) | |||
SPII Liquidating Trust (2) | |||
Other Investments (4) | |||
(1) | Consolidated subsidiary |
(2) | Equity method investment |
(3) | The operations of BNS are included in the Energy segment through June 30, 2012. The results of the BNS Liquidating Trust are included in the Corporate and Other segment beginning July 1, 2012. |
(4) | Other investments classified in the Corporate and Other segment include various investments in available-for-sale securities in the Computer Software and Services, Aerospace/Defense, and Restaurant industries. |
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Our Businesses - Consolidated Subsidiaries
Handy & Harman Ltd.
SPLP's Ownership Interest
SPLP has an ownership interest of approximately 54.9% as of December 31, 2013 in HNH. (NASDAQ (CM): HNH), formerly known as WHX Corporation, a Delaware corporation. On May 7, 2010, our ownership interest in HNH exceeded 50%, and as a result, HNH became a controlled subsidiary of SPLP and is consolidated from that date. Four of our representatives serve on HNH's eight-member board of directors, one of whom serves as Chairman. Our representatives also serve as the Executive Chairman (Principal Executive Officer), Chief Financial Officer (Principal Accounting Officer), Chief Legal Officer and as various Vice Presidents of HNH.
Description of Business
HNH is a diversified manufacturer of engineered niche industrial products with leading market positions in many of the markets it serves. Through its wholly-owned subsidiaries, HNH focuses on high margin products and innovative technology and serves customers across a wide range of end markets. HNH sells its products and services through direct sales forces, distributors and manufacturer's representatives. It serves a diverse customer base, including the construction, electronics, telecommunications, transportation, utility, medical, semiconductor, aerospace, aviation, military electronics and food industries. HNH owns Handy & Harman Group Ltd. ("H&H Group"), which owns Handy & Harman ("H&H") and Bairnco Corporation ("Bairnco"). HNH manages its group of businesses on a decentralized basis with operations principally in North America. For the years ended December 31, 2013, 2012 and 2011, HNH generated net sales of $655,224, $579,528 and $579,764, respectively, which comprised 81%, 81% and 93% of SPLP's consolidated revenues, respectively.
HNH Products and Product Mix
Joining Materials
HNH's 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 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 metal inventories that are not subject to fixed price contracts. HNH believes that the business unit that comprises the Joining Materials business is the North American market leader in many of the markets that it serves.
Tubing
HNH's Tubing business manufactures a wide variety of steel tubing products. HNH believes that its Tubing business manufactures the world's longest continuous seamless stainless steel tubing coils, in excess of 5,000 feet, serving the petrochemical infrastructure and shipbuilding markets. In addition, HNH also believes it is the number one supplier of small diameter (less than 3 mm) coil tubing to industry leading specifications serving the aerospace, defense and semiconductor fabrication markets. This unit also manufactures welded carbon steel tubing in coiled and straight lengths with a primary focus on products for the automotive, heating, ventilation and cooling (HVAC), and oil and gas industries. In addition to producing bulk tubing, it produces value added fabrications for several of these industries.
Building Materials
HNH's Building Materials business manufactures and supplies products primarily to the commercial construction and building industries. It manufactures fasteners 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. HNH believes that its 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
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sales for the segment are for the commercial construction repair and replacement market. The Building Materials business was formerly known as the Engineered Materials business.
Arlon Electronic Materials
HNH's Arlon Electronic Materials business provides high performance materials for the printed circuit board ("PCB") industry and silicone rubber-based insulation materials used in a broad range of industrial, military/aerospace, consumer and commercial markets. It also supplies high technology circuit substrate laminate materials to the PCB industry. Products are marketed principally to original equipment manufacturers, distributors and PCB manufacturers globally. Arlon also manufactures a line of market leading silicone rubber materials used in a broad range of military, consumer, industrial and commercial products.
Kasco Blades and Route Repair Services
HNH's Kasco Blades and Route Repair Services 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. Kasco also provides wood cutting blade products for the pallet manufacturing, pallet recycler and portable saw mill industries in North America.
Business Strategy
HNH's business strategy is to enhance the growth and profitability of the HNH business units and to build upon their strengths through internal growth and strategic acquisitions. HNH expects to continue to focus on high margin products and innovative technology. HNH also will continue to evaluate, from time to time, the sale of certain businesses and assets, as well as strategic and opportunistic acquisitions.
HNH uses a set of tools and processes called the HNH Business System to drive operational and sales efficiencies across each of its business units. The HNH Business System is designed to drive strategy deployment and sales and marketing based on lean principles. HNH pursues a number of ongoing strategic initiatives intended to improve its performance, including objectives relating to manufacturing improvement, idea generation, product development and global sourcing of materials and services. HNH utilizes lean tools and philosophies in operations and commercialization activities to increase sales, improve business processes, and reduce and eliminate waste, coupled with the tools targeted at variation reduction.
Customers
HNH is diversified across industrial markets and customers. HNH sells to customers in the construction, electronics, telecommunications, transportation, utility, medical, semiconductor, aerospace, aviation, military electronics and food industries.
No customer accounted for more than 5% of HNH's consolidated net sales in 2013, 2012 or 2011. HNH's15 largest customers accounted for approximately 26% of consolidated HNH net sales in 2013.
Foreign Revenue
The following table presents HNH revenue for the periods indicated:
Revenue | |||||||||||
Year Ended December 31, | |||||||||||
2013 | 2012 | 2011 | |||||||||
U.S. | $ | 590,479 | $ | 512,470 | $ | 505,583 | |||||
Foreign (a) | 64,745 | 67,058 | 74,181 | ||||||||
$ | 655,224 | $ | 579,528 | $ | 579,764 | ||||||
(a) | Foreign revenue is based on the country in which the legal subsidiary generating the revenue is domiciled. |
Raw Materials
Besides precious metals, the raw materials used in the operations of the Joining Materials, Tubing, Building Materials and Kasco operations consist principally of stainless, galvanized and carbon steel, copper, tin, nickel alloys, a variety of high-
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performance alloys and various plastic compositions. HNH purchases all such raw materials at open market prices from domestic and foreign suppliers. HNH has 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. The raw materials used by HNH in its non-precious metal products are generally readily available from more than one source.
The essential raw materials used in the Arlon business are silicone rubber, fiberglass cloths, non-woven glass mats, pigments, copper foils, various plastic films, special release liners, various solvents, Teflon™ or PTFE dispersion, skive PTFE film, polyimide resin, epoxy resins, other thermoset resins, ceramic fillers, as well as various chemicals. Generally, these materials are each available from several qualified suppliers. There are, however, several raw materials used in products that are purchased from chemical companies that are proprietary in nature. Other raw materials are purchased from a single approved vendor on a "sole source" basis, although alternative sources could be developed in the future if necessary. However, the qualification procedure for new suppliers can take several months or longer and could therefore interrupt production if the primary raw material source became unexpectedly unavailable. Current suppliers are located in the United States, Asia and Europe.
Capital Investments
HNH believes that in order to be and remain competitive, its businesses must continuously strive to improve productivity and product quality, and control and/or reduce manufacturing costs. Accordingly, HNH expects to continue to incur capital investments that reduce overall manufacturing costs, improve the quality of products produced and broaden the array of products offered to the industries HNH serves, as well as replace equipment as necessary to maintain compliance with environmental, health and safety laws and regulations. HNH's capital expenditures for 2013, 2012 and 2011 for continuing operations were $16,200, $20,300 and $12,000, respectively. HNH anticipates funding its capital expenditures in 2013 from funds generated by operations and borrowed funds. HNH anticipates its capital expenditures to be in the range between $18,000 and $23,000 per year for the next several years.
HNH requires significant amounts of electricity and natural gas to operate its facilities and is subject to price changes in these commodities. A shortage of electricity 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.
Employees
As of December 31, 2013 HNH employed 1,836 employees worldwide. Of these employees, 351 were sales employees, 484 were office employees, 132 were covered by collective bargaining agreements, and 869 were non-union operating employees.
Competition
There are many companies, both domestic and foreign, which manufacture products of the type HNH manufactures. Some of these competitors are larger than HNH and have financial resources greater than it does. 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. Competition is based on quality, technology, service and price, and in some industries, new product introduction. HNH may not be able to compete successfully, and competition may have a negative impact on its business, operating results or financial condition by reducing volume of products sold and/or selling prices, and accordingly reducing revenues and profits.
In its served markets, HNH competes against large, as well as smaller-sized private and public companies. This results in intense competition in a number of markets in which it operates. Significant competition could in turn lead to lower prices, lower levels of shipments and/or higher costs in some markets that could have a negative effect on results of operations.
Sales Channels
HNH distributes products to customers through its sales personnel, outside sales representatives and distributors in North and South America, Europe, Australia, Asia and several other international markets.
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Patents and Trademarks
HNH owns patents and registered trademarks under which certain of its products are sold. In addition, HNH owns a number of U.S. and foreign mechanical patents related to certain of its products, as well as a number of design patents. HNH does not believe that the loss of any or all of these patents or trademarks would have a material adverse effect on its businesses. HNH's patents have remaining durations ranging from less-than-one year to 18 years, with expiration dates occurring in 2014 through 2032.
Environmental Regulation
HNH is subject to laws and regulations relating to the protection of the environment. HNH does not presently anticipate that compliance with currently applicable environmental regulations and controls will significantly change its competitive position, capital spending or earnings during 2014. HNH believes it is in compliance with all orders and decrees it has consented to with environmental regulatory agencies. Please see "Item 1A - Risk Factors," "Item 3 - Legal Proceedings" and Note 21 - "Commitments and Contingencies" to the SPLP consolidated financial statements included in "Item 8 - Financial Statements and Supplementary Data."
Steel Excel Inc.
Our Ownership Interest
We have an ownership interest of approximately 55.1% as of December 31, 2013 in Steel Excel, a Delaware corporation formerly known as ADPT Corporation (OTC: SXCL.PK). On May 31, 2012, our ownership percentage exceeded 50%, and Steel Excel became a majority-owned subsidiary and is consolidated from that date forward (see Note 3 - "Acquisitions" to the SPLP financial statements located elsewhere in this Form 10-K). Three of our representatives serve on Steel Excel's six-member board of directors, one of whom serves as Chairman and another of whom serves as the Chief Executive Officer. Our representatives also serve as Chief Financial Officer and General Counsel. Steel Excel is part of our Energy segment. Energy segment revenues totaled $120,029, $92,834 and $32,984 for the years ended December 31, 2013, 2012 and 2011, respectively, which comprised 15%, 13% and 5% of SPLP's consolidated revenues, respectively.
Description of Business
Through its wholly-owned subsidiary Steel Energy Ltd. ("Steel Energy"), Steel Excel’s Energy business
provides drilling and production services to the oil and gas industry. Through its wholly-owned subsidiary Steel Sports Inc., Steel Excel’s Sports business provides event-based sports services and other health-related services. The Company also
continues to identify business acquisition opportunities in other unrelated industries.
Sales
Steel Excel relies primarily on its local operations to sell and market its services. Because they have conducted business together over several years, the members of its 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 Steel Excel to better address customer needs. Steel Excel has two customers, that make up 10% or more of its net revenues, and its top 15 customers made up 81% and 89% of its net revenues for the year ended December 31, 2013 and during the seven month period owned by SPLP in 2012, respectively.
Government Regulation
Steel Excel's businesses are subject to multiple federal, state, and local laws and regulations pertaining to worker safety, the handling of hazardous materials, transportation standards, and the environment. Among the various environmental laws Steel Excel is subject to, 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. Steel Excel's businesses could be required to obtain permits for the discharge of wastewater or stormwater. 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 Comprehensive Environmental Response, Compensation and Liability Act, as amended, and comparable state
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laws (“CERCLA” or “Superfund”) 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 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, Steel Excel may incur CERCLA liability for cleanup costs and be subject to related third-party claims. Steel Excel 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, Steel Excel could be required to clean up contaminated property (including contaminated groundwater) or to perform remedial activities to prevent future contamination.
Steel Excel's businesses are also subject to the Clean Air Act, as amended, and comparable state laws and regulations that restrict the emission of air pollutants and impose various monitoring and reporting requirements. These laws and regulations may require Steel Excel 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 Steel Excel's business, any new restrictions on emissions that are imposed could result in increased compliance costs for, or additional operating restrictions on, its customers and, which could have an adverse effect on its business.
Steel Excel is also subject to the Occupational Safety and Health Act, as amended, (“OSHA”) and comparable state laws that 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. Steel Excel believes they are in substantial compliance with OSHA and comparable state law requirements, including general industry standards, recordkeeping requirements, and monitoring of occupational exposure to regulated substances.
Steel Excel cannot predict the level of enforcement or the interpretation of existing laws and regulations by enforcement agencies in the future, or the substance of future court rulings or permitting requirements. In addition, Steel Excel cannot predict what additional laws and regulations may be put in place in the future, or the effect of those laws and regulations on its business and financial condition. Steel Excel believes it is in substantial compliance with applicable environmental laws and regulations. While Steel Excel does not believe that the cost of compliance is material to our business or financial condition, it is possible that substantial costs for compliance or penalties for non-compliance may be incurred in the future.
Competition
Steel Excel's business operates in a highly competitive industry that is influenced by price, capacity, reputation, and experience. With oil and natural gas prices and drilling activities at high levels, service companies are ordering new equipment to expand their capacity as they are seeing increased demand for their services and attractive returns on investment. To be successful, Steel Excel must provide services that meet the specific needs of oil and gas exploration and production companies at competitive prices. In addition, we need to maintain a safe work environment and a well-trained work force to remain competitive.
Steel Excel's 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 Steel Excel's competitors as well. Demand for services in the industry as a whole fluctuates with the supply and demand for oil and natural gas. In general, the need for Steel Excel's services increases when demand exceeds supply. The oil and gas exploration and production companies attempt to take advantage of a higher-priced environment when demand exceeds supply, which leads to an increased need for Steel Excel's services. Conversely, as supply equals or exceeds demand, the oil and gas exploration and production companies will cut back on their production resulting in a decline in their well servicing needs.
The market for the Steel Excel's Sports business’ baseball facility services and soccer camps and leagues is very fragmented, and its competitors are primarily small local or regional operations. The market for its strength and conditioning services is fragmented, and its competitors vary from large national providers of such services to local providers of comparable or other niche services. The baseball facility services and soccer camps and leagues are affected by seasonal factors, with business volume declining from late autumn through early spring as a result of colder temperatures and fewer daylight hours. In
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addition, inclement weather during peak seasons can have an adverse effect on the business since fields may not be available to reschedule any cancelled events. In 2013, Steel Excel completed the construction of an indoor baseball facility to enable it to provide year-round baseball services to partially mitigate the revenue declines experienced in non-peak months and during periods of inclement weather.
Employees
As of December 31, 2013, Steel Excel had 819 employees, of which 763 were full-time employees and 56 were part-time employees. All of Steel Excel's employees are located in the United States. Steel Excel also hires additional full-time and part-time employees during peak seasonal periods. None of Steel Excel's employees are covered by collective bargaining agreements. Steel Excel considers its employee relations to be satisfactory.
WebBank
Our Ownership Interest
SPLP's wholly owned subsidiary, WebFinancial Holding Corporation, conducts financial operations through its wholly-owned subsidiary, WebBank (“WebBank”). WebBank is part of our Financial Services segment. For the years ended December 31, 2013, 2012 and 2011 the Financial Services segment had revenues of $28,185, $21,155 and $14,921, respectively, which comprised 4%, 3% and 2% of SPLP's consolidated revenues, respectively.
Description of Business
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, whose deposits are insured by the FDIC, generates commercial and consumer loans.
WebBank continues to evaluate its different business lines and consider various alternatives to maximize the aggregate value of its businesses and increase value, including seeking acquisitions and/or merger transactions, as well as product line extensions, additions and/or divestitures.
Sales
WebBank generates revenue through a combination of interest income and non-interest income. Interest income is primarily derived from interest and origination fees earned on loans and investments. Non-interest income is primarily derived from minimum activity fee income on contractual lending arrangements, premiums on the sale of loans, and loan servicing fees. For the years ended December 31, 2013, 2012 and 2011, two contractual lending programs accounted for 46%, 56% and 58%, respectively, of WebBank's total revenue.
Government Regulation
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.
Competition
WebBank competes with a broad range of banks across its various lines of business.
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Employees
As of December 31, 2013, WebBank had 34 employees.
BNS Liquidating Trust
Our Ownership Interest
We have an ownership interest of approximately 84.9% as of December 31, 2013 in BNS Liquidating Trust (previously BNS Holding, Inc.). In June 2012, BNS, in accordance with its shareholder approval plan, distributed its assets and commenced its liquidation. See "Description of Business" section below for additional details.
Description of Business
BNS was a holding company whose operations ceased as of June 1, 2012 due to the sale of Sun Well Service, Inc. ("Sun Well") to Steel Excel on May 31, 2012 (see Note 3 - "Acquisitions" to the SPLP consolidated financial statements found elsewhere in this Form 10-K). BNS' results include the operations of Sun Well (originally acquired by BNS on February 2, 2011) through the date of sale to Steel Excel. On June 18, 2012, BNS completed a distribution to its shareholders, pursuant to shareholder approval, and distributed cash of approximately $10,300 to its minority shareholders and 2,027,500 shares of Steel Excel common stock to its majority shareholder, but no further distributions are anticipated. In June 2012, BNS formed a liquidating trust, the BNS Liquidating Trust, assigned its assets and liabilities to the Trust and initiated its dissolution. The Trust is owned by the BNS former shareholders in the same proportion as their former ownership in BNS.
Employees
The BNS had no employees as of December 31, 2013.
DGT Holdings Corp.
Our Ownership Interest
We have an ownership interest of approximately 76.6% as of December 31, 2013 in DGT (OTC: DGTC.OB), a New York corporation. On July 5, 2011, our ownership interest in DGT exceeded 50%, and as a result, DGT became a controlled subsidiary of SPLP and is consolidated from that date. Two of our representatives serve on DGT's five-member board of directors, one of which serves as DGT's President, Chief Executive Officer and Chief Financial Officer, and one is Chairman.
Description of Business
DGT's operations currently consist of a real estate business from rental buildings retained from the sale of its Power Conversion business on August 16, 2012 and the sale of its Medical Systems Group on November 3, 2011 (for additional information, see Note 4 - "Discontinued Operations" to the SPLP financial statements found elsewhere in this Form 10-K). Continuing operations consist of the real estate business, investments, and general and administrative expenses.
Employees
As of December 31, 2013, DGT had no employees.
SPH Services, Inc.
Our Ownership Interest
SPH Services, Inc. (“SPH Services”) is our wholly-owned subsidiary. Three of our representatives serve as members, including Chairman, of the board of directors of SPH Services. These representatives also serve as SPH Services' Chief Executive Officer, President, Secretary, Chief Financial Officer and Treasurer.
Description of Business
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SPH Services which commenced operations on January 1, 2012. It was created to consolidate the executive and corporate functions of SPLP and certain of our affiliates, including SP Corporate and Steel Partners LLC, to provide legal, tax, accounting, treasury, consulting, auditing, administration, compliance, environmental health and safety, human resources, marketing, investor relations and similar services, to other affiliated companies. In connection with the formation of SPH Services, we acquired SP Corporate and Steel Partners LLC, our former manager, as well as certain assets from HNH.
SP Corporate has management services agreements with HNH, Steel Excel, WebBank, BNS, DGT and other related companies. Services provided to SPLP and its consolidated subsidiaries for the twelve months ended December 31, 2013 and 2012 are eliminated in consolidation. For additional information on these service agreements see Note 13 - "Related Party Transactions" to the SPLP consolidated financial statements found elsewhere in this Form 10-K.
By consolidating corporate overhead and back office functions, SPLP believes it will achieve cost savings over time for its affiliated companies while delivering more efficient and effective services. As a result of the synergies associated with SP Corporate's specialization and capabilities across a broad range of corporate and executive functions that are provided to SPLP and other companies, SP Corporate believes that it will be able to create high value business partnerships by delivering higher quality services and more efficient transaction processing which will result in significant cost savings that can be achieved through standardization, clear processes and procedures, the elimination of non-value adding activities and economies of scale.
Employees
As of December 31, 2013, SPH Services had 56 employees.
Our Business - Equity Method Investments
Associated Companies
Associated companies are investments in operating companies in which we own between 20% and 50% of the outstanding equity and have the ability to exercise significant influence, but not control, over the investee. As such, the investments in these operating companies are accounted for under the equity method of accounting (see Note 2 - "Summary of Significant Accounting Policies" - to the SPLP financial statements found elsewhere in this Form 10-K). The investments in associated companies are classified as Long-term investments in the Consolidated Balance Sheets (see Note 5 - "Investments" to the SPLP financial statements found elsewhere in this Form 10-K).
Accounted for at fair value, as of December 31, 2013:
SL Industries, Inc.
We have an ownership interest of approximately 24.1% as of December 31, 2013 in SLI (AMEX:SLI), a New Jersey corporation. SLI designs, manufactures and markets power electronics, motion control, power protection, power quality electromagnetic and specialized communication equipment. SLI's products are used in a variety of medical, commercial and military aerospace, computer, datacom, industrial, telecom, transportation, utility, rail and highway equipment applications. Two of our representatives serve on SLI's five-member board of directors, one of whom serves as Chairman.
JPS Industries, Inc.
We have an ownership interest of approximately 39.3% as of December 31, 2013 in JPS (OTC: JPST.PK), a Delaware corporation. JPS is a major U.S. manufacturer of extruded urethanes, ethylene vinyl acetates and mechanically formed glass and aramid substrate materials for specialty applications in a wide expanse of markets requiring highly engineered components. JPS’s products are used in a wide range of applications including: printed electronic circuit boards; advanced composite materials; civilian and military aerospace components; filtration and insulation products; specialty commercial construction substrates; high performance glass laminates for security and transportation applications; photovoltaic solar modules; paint protection films; plasma display screens; medical, automotive and industrial components; and soft body armor for civilian and military applications.
During the second quarter of 2013, JPS stockholders elected 2 members of SPLP's management team to their board to serve 1-year terms, one of which will serve as chairman. As a result of the foregoing events, the investment in JPS, which was previously classified as an available-for-sale security in 2012, was reclassified to an associated company as of June 30, 2013.
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SPLP elected the fair value option to account for JPS in order to more appropriately reflect the value of JPS in its financial statements and records any unrealized gains and losses in earnings.
ModusLink Global Solutions, Inc.
We have an ownership interest of approximately 27.1% as of December 31, 2013 in MLNK (NASDAQ: MLNK), a Delaware corporation. MLNK provides supply chain and logistics services to companies in consumer electronics, communications, computing, medical devices, software, luxury goods and retail. In March 2013, pursuant to an agreement between the Company and MLNK, SPLP purchased 7,500,000 shares of MLNK common stock for $4.00 per share. This investment, plus the 6,481,185 MLNK shares already owned by the Company and its subsidiaries, gave the Company a 27.1% ownership interest in MLNK common stock. Accordingly the investment, which was previously classified as an available-for-sale security, was reclassified to an associated company as of March 12, 2013. Two members of SPLP's management team serve on the five-member MLNK board of directors, one of whom serves as chairman.
Fox & Hound Restaurant Group
We have an indirect ownership interest of approximately 50.0% as of December 31, 2013 in Fox & Hound Restaurant Group, a Delaware corporation (“Fox & Hound”). Fox & Hound is a privately held owner and operator of a chain of approximately 130 company-owned and 14 franchised social destination casual dining and entertainment-based restaurants in 32 states. Two of our representatives serve on Fox & Hound's four-member board of directors. During the third quarter of 2013, due to the current and projected operating performance of Fox & Hound, the Company wrote its investment down to zero. On December 15, 2013, Fox & Hound filed voluntary petitions for relief under chapter 11 of title 11 of the United States Code in the United States Bankruptcy Court for the District of Delaware. The Bankruptcy Court has approved a plan to sell the assets of Fox & Hound. The sale is expected to close on or about March 12, 2014. It is not expected that the Company will receive a distribution at the conclusion of the chapter 11 process.
Other
The Company has an investment in a Japanese real estate partnership. In the second quarter of 2013, the Company reclassified this investment to an associated company.
Accounted for under the traditional equity method as of December 31, 2013:
CoSine Communications, Inc.
We have an ownership interest of approximately 48.6% as of December 31, 2013 in CoSine (OTC: COSN.PK), a Delaware corporation. Two of our representatives serve on CoSine's four-member board of directors, one of whom serves as the Chief Executive Officer and Chief Financial Officer. CoSine is currently in the business of seeking to acquire one or more business operations.
Other
In the first quarter of 2013, Steel Excel made an investment in a fitness equipment company. The investment was a 40% membership interest for a cash price of $4,000. In the third quarter of 2013, Steel Excel made an investment of approximately $5,200 for a 44.7% voting interest in iGo, Inc. ("iGo"), a mobile device accessories provider company.
SP II Liquidating Trust
The Company's investment in each series of the SPII Liquidating Trust is accounted for at fair value under the equity method (see Note 2 - "Summary of Significant Accounting Policies" and Note 13 - “Related Party Transactions” to the SPLP financial statements found elsewhere in this Form 10-K). The purpose of the SPII Liquidating Trust is to effect the orderly liquidation of certain assets previously held by SPII. SPLP's financial position, financial performance and cash flows will be affected to the extent SPII Liquidating Trust's results in realized or unrealized gains (losses) and by distributions it makes in each reporting period. These investments are classified as Long-term investments in the Consolidated Balance Sheets and the gains (losses) are recorded in Loss from other investments - related party in the Consolidated Statements of Operations (see Note 5 - "Investments" to the SPLP financial statements found elsewhere in this Form 10-K).
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Our Common Units
Our common units are quoted on the New York Stock Exchange (NYSE) under the symbol "SPLP".
Other Information
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 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 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 units could decline, and you may lose all or part of your investment.
Risks Related to Our Structure
Our revenue, net income and cash flow are highly variable, which may prevent us from achieving steady earnings growth on a quarterly basis and may cause the price of the common units to be volatile.
Our revenue, net income and cash flow are highly variable. We may experience fluctuations in our results from quarter to quarter due to a number of factors, including changes in the values of our various operations, changes in our operating expenses, changes in asset values, changes in the competitive environment, and general economic and market conditions. Such fluctuations may lead to volatility in the trading price of the common units and cause our results for a particular period not to be indicative of our future performance. It may be difficult for us to achieve steady growth in net income and cash flow on a quarterly basis, which could lead to volatility in the price of our common units.
As our revenue, net income and cash flow are highly variable from period to period, we do not expect to provide any guidance. The lack of guidance may affect the expectations of analysts and could cause increased volatility in the price of the common units. Many of our operating companies are small cap and micro cap companies that are thinly traded and may trade at prices that do not reflect their intrinsic value. Such prices may affect the price at which our common units trade. In addition, some of our holdings are private companies for which there is no trading market.
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 by us as a result of their actions or failures to act.
If we are dissolved, unitholders may not realize the value that may otherwise be realized over time.
We may be dissolved at the election of the Board of Directors by a majority of the directors. If we are dissolved, unitholders may not realize the value that may otherwise be realized over time.
Our Partnership Agreement contains certain limitations on the voting rights of 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
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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 SPH Services, which may be different from the decisions we would make. Companies in which we have interests but we do not control may make decisions that do not serve our interests and those of our unitholders.
The boards of directors and officers of our respective businesses, including directors and officers associated with our Manager and SPH Services, have fiduciary duties to their 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 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, 2013 Mr. Lichtenstein directly owned approximately 5% of our outstanding common units. In addition, affiliates of our Manager beneficially own approximately 26% of our outstanding 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.
Certain members of our management team may be involved in other business activities that may involve conflicts of interest.
Certain individual members of our management team 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.
We, as a diversified holding company, may have substantial limitations on our ability to sell interests in the underlying operating companies.
We accumulate significant positions in underlying operating companies and have a significant role in the management of various underlying operating companies. As a result, we may face significant legal and market restrictions on selling our interests in the underlying operating companies. For example, employees of the Manager and SPH Services may also serve as managers or members of the board of directors of the underlying operating companies, and, thus, may receive material and confidential information concerning the operating companies that would preclude us, under federal securities laws, from trading securities of the relevant operating company. Some privately held businesses may be subject to shareholders agreements which may limit our ability to sell our interests in such companies. In addition, we may be limited in our ability to sell securities in an underlying operating company in light of the size of our ownership interest and the absence of liquidity in the market to absorb our ownership interest, or, alternatively, may be required to sell our ownership interest at a discounted and unfavorable price.
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Being classified as an “investment company” would subject us to numerous restrictions and requirements that would be inconsistent with the manner in which we operate our business, and could have a material adverse effect on our business and operations.
We plan to continue to conduct our business and operations in such a manner as not to be deemed an investment company under the Investment Company Act of 1940, as amended (the “Investment Company Act”).
Investment companies are subject to extensive, restrictive and potentially adverse regulations relating to, among other things, operating methods, management, capital structure, dividends and transactions with affiliates. An entity may generally be deemed to be an investment company for purposes of the Investment Company Act if (a) it is or holds itself out as being engaged primarily in the business of investing, reinvesting or trading in securities; or (b) absent an applicable exemption, it owns investment securities having a value exceeding 40% of certain assets (the “40% Test”). As a result of the Exchange Transaction, on July 14, 2009, we could no longer definitively conclude that we passed the 40% Test or were able to rely on any exception from the definition of an investment company.
The Company has taken actions, including liquidating certain of our assets and acquiring additional interests in existing or new subsidiaries or controlled companies, to comply with the 40% Test, or a relevant exception. Also, since the Company operates as a diversified holding company engaged in a variety of operating businesses, we do not believe we are primarily engaged in an investment company type business, nor do we propose to primarily engage in such a business. Our intent to operate as a diversified holding company, and comply with the 40% test, may limit our ability to make certain investments, compel us to divest certain holdings, or to take or forego certain actions that could otherwise be beneficial to us.
If we were deemed to be an investment company under the Investment Company Act, we may need to further adjust our business strategy and assets, including divesting certain desirable assets immediately to fall outside of the definition or within an exemption, to register as an investment company (and subject to the aforementioned restrictions and requirements) or to cease operations.
Risks Related to Our 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. and they present certain risks not typically associated with U.S. operations, including risks relating to currency exchange matters, 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.
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 its, or licenses to use others', brand names, proprietary technology and manufacturing techniques. These businesses rely on a combination of patents, trademarks, 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 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.
If our businesses are unable to continue the technological innovation and successful commercial introduction of new products and services, their financial condition, business and results of operations could be materially adversely affected.
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The industries in which our businesses operate experience periodic technological changes and ongoing product improvements. Their results of operations depend significantly on the development of commercially viable new products, product upgrades and their ability to integrate new technologies. Our future growth will depend on their ability to gauge the direction of, and effectively respond to, the technological progress in key end-use markets and upon their ability to successfully develop new generations of products. Our businesses must make ongoing capital investments and may need to seek better educated and trained workers, who may not be available in sufficient numbers. Failure to effectively respond to technological developments may result in reduced sales and sunk developmental costs.
We are dependent on digital technologies to conduct our daily operations and maintain confidential information.
The Company relies on information technology systems to both manage its daily operations and to secure its intellectual property. A failure in or breach of operational or informational security systems or infrastructure, or those of our third party vendors and other service providers, as a result of information system failures or cyber attack, could disrupt business, result in the disclosure or misuse of confidential or proprietary information, including customer and vendor lists, damage our reputation and investor confidence, increase security and remediation costs and cause losses, including potential lawsuits, all of which could have a material adverse effect on our businesses, financial condition and results of operations.
We do not have long-term contracts with all of our customers and clients, the loss of which could materially adversely affect our financial condition, business and results of operations.
Our businesses are based primarily upon individual orders and sales with our customers and clients and not long-term supply contracts. As such, our customers and clients could cease using services or buying products at any time and for any reason and we will have no recourse in the event a customer or client no longer wants to use our businesses' services or purchase products from us. If a significant number of our customers or clients elect not to use such services or purchase products, it could materially adversely affect our financial condition, business and results of operations. Some of our businesses also have significant exposure to certain key customers, the loss of which could negatively impact our financial condition, business and results of operations.
Our businesses are and may be subject to federal, state and foreign environmental laws and regulations that expose them to potential financial liability. Complying with applicable environmental laws requires significant resources, and if our businesses fail to comply, they could be subject to substantial liability.
Some of the facilities and operations of our businesses are, and may be, subject to a variety of federal, state and foreign environmental laws and regulations, including laws and regulations pertaining to the handling, storage and transportation of raw materials, products and wastes, and hazardous materials and wastes, which require and will continue to require significant expenditures to remain in compliance with such laws and regulations. Any material violations of these laws can lead to substantial liability, revocations of discharge permits, fines or penalties, which could negatively impact our financial condition, business and results of operations.
Some of our businesses are subject to certain risks associated with the movement of businesses offshore.
Some of our businesses are potentially at risk of losing business to competitors operating in lower cost countries. An additional risk is the movement offshore of some of our businesses' customers, leading them to procure products or services from more closely located companies. Either of these factors could negatively impact our financial condition, business and results of operations.
Our business strategy includes acquisitions which entail numerous risks.
Our business strategy and the strategy of our businesses includes acquisitions and 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. Any future acquisitions may also result in material changes in the composition of our assets and liabilities or the assets and liabilities of our businesses and if unsuccessful could reduce the value of our common units. In addition, once found, acquisitions entail further risks, including unanticipated costs and liabilities of the acquired businesses that could materially adversely affect our results of operations; difficulties in assimilating acquired businesses; negative effects on existing business relationships with suppliers and customers and losing key employees of the acquired businesses.
HNH sponsors a defined benefit pension plan which could subject it to substantial cash funding requirements in the future.
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HNH's ongoing operating cash flow requirements include arranging for the funding of the minimum requirements of the WHX Corporation Pension Plan ("WHX Pension Plan"). The performance of the financial markets and interest rates impact defined benefit pension plan expense and funding obligations. Significant changes in market interest rates, decreases in the fair value of plan assets, investment losses on plan assets and changes in discount rates may increase funding obligations and adversely impact our financial statements. Required future contributions are determined based upon assumptions regarding such matters 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 Liquidity and Capital Resources section of this Form 10-K for additional information.
WebBank operates in a highly regulated environment. Recent and ongoing legislative and regulatory actions may significantly affect our liquidity or financial condition.
On July 21, 2010, President Barack Obama signed the Dodd-Frank Act into law. The Dodd-Frank Act is intended primarily to overhaul the financial regulatory framework following the global financial crisis 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. While many of the provisions in the Dodd-Frank Act are aimed at financial institutions significantly larger than ours, the amount and complexity of regulations has increased our regulatory compliance burden and therefore has increased the Bank’s regulatory risk.
The Dodd-Frank Act also required the Government Accountability Officer (“GAO”) to conduct a study, within 18 months of the enactment, of the various exemptions in the Bank Holding Company Act for certain types of depository institutions, including industrial banks such as WebBank. SPLP relies on this exemption to avoid regulation as a bank holding company. The GAO completed its study in January, 2012. It is not clear, what impact, if any, the GAO study would have on the continued availability of this exemption.
In addition, 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 owning equity in or sponsoring any private equity or hedge fund. The Volcker Rule became effective July 21, 2012. The implementing regulations for the Volcker Rule were finalized by various regulatory agencies on December 10, 2013, although the Federal Reserve extended the conformance period until July 21, 2015. Under the regulations, we (and our affiliates) are restricted from engaging in proprietary trading, investing in third party hedge or private equity funds or sponsoring new funds unless our activities qualify for specified exemption under the rule or satisfy certain requirements under the rule. While we are a banking entity under the Volcker Rule, we do not expect the Volcker Rule to have a material impact on our business
Furthermore, under the Dodd-Frank Act, 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, even if doing so may adversely affect SPLP’s ability to meet its other obligations. Currently, WebBank meets or exceeds all such requirements.
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 will be enacted and, if enacted, the effect that it would have on our business, financial condition or results of operations.
Increased volatility in raw materials costs and availability may continue to reduce revenues and profitability in our diversified industrial businesses.
Certain of our Diversified Industrial operations are subject to risks associated with increased volatility in raw material prices and availability of key raw materials. If the price for raw materials continues to increase and our operations are not able to pass these price increases to their customers, or are unable to obtain key raw materials, our results of operations may be negatively impacted.
Our energy segment is highly dependent on the activity level of the North American oil and gas industry. Our markets may be adversely affected by industry conditions that are beyond our control.
The level of oil and natural gas exploration and production activity in the United States is volatile. Reduced discovery
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rates of new oil and natural gas reserves, or a decrease in the development rate of reserves in our market areas, weakness in oil and natural gas prices, or our customers' perceptions that oil and 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.
We and our businesses operate in highly competitive markets.
We operate in a variety of competitive industries and market sectors. Many of our competitors and the competitors of our businesses are substantially larger and have considerably greater financial, technical and marketing resources than we do. Some competitors may have a lower cost of funds than we or our businesses do and access to financing sources that may not be available to us or our businesses. In addition, some of our competitors and the competitors of our businesses may have higher risk tolerances or different risk assessments, which could allow them to consider a wider variety of business opportunities than we or our businesses can.
Risks Related to Our Manager
We depend on Warren G. Lichtenstein, the Chairman and Chief Executive Officer of the Manager and Jack Howard, the President of the Manager, the loss of whose 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 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.
The interests of our Manager may not be aligned with our interests or those of our unitholders.
Our Manager receives an annual Management Fee at a rate of 1.5% of total partner's capital, payable on the first day of each quarter, subject to quarterly adjustment. Our Manager is entitled to receive a Management Fee regardless of our net income. In addition, our Manager was granted certain incentive units which may be classified into Class C common units of SPLP. The Manager may consider entering into or recommending riskier transactions that represent a potential higher reward in order for the Manager's units to be profitable. Any such riskier investment decisions or recommendations, if unsuccessful, could result in losses to us and a decline in the value of the common units.
We cannot determine the amount of the Management Fee that will be paid over time with any certainty.
The Management Fee is calculated by reference in part to our total partner's capital. Our total partner's 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 units. Changes in our total partner's 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 partner's capital, remains the same, the Management Fee will increase as a percentage of our net income.
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.
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Risks Related to our Common Units
We may issue additional common units in the future without the consent of unitholders and at a discount to the market price of such common units. In particular, sales of significant amounts of the common units may cause the price of the common units to decline.
Under the terms of the Partnership Agreement, additional common 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 units. Sales of significant amounts of the common units in the public market or the perception that such sales of significant amounts may occur could adversely affect its market price. Moreover, the perceived risk of any potential dilution could cause common unit holders to attempt to sell their common units and investors to “short” the common units, a practice in which an investor sells common units that he or she does not own at prevailing market prices, hoping to purchase common units later at a lower price to cover the sale. Any event that would cause the number of common units being offered for sale to increase would likely cause the common units' market price to further decline. These sales might also make it more difficult for us to sell additional common units in the future at a time and price that we deem appropriate.
Risks Related to Taxation
All statutory references in this section are to the Internal Revenue Code of 1986, as amended, or the “Code.”
Our 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.
It is anticipated that we will be treated, for U.S. federal income tax purposes, as a partnership and not a publicly traded partnership taxable as a corporation. Our 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. We do not anticipate making any cash distributions or paying any cash dividends. Accordingly, our 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.
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. However, the Qualifying Income Exception will not apply if we register, or are required to register, as an investment company under the Investment Company Act.
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, unless the corporation is an investment company for tax purposes and the partners are treated as diversifying their interests. 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 unitholders would not be allowed to deduct their share of losses of SPLP and (iii) distributions to our 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 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
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to preserve the uniformity of our common units. In some circumstances, such revisions could have a material adverse impact on some or all unitholders. In addition, we formed a subsidiary partnership, to which we contributed certain of our assets ("the “Subsidiary Partnership”). To preserve the uniformity of common units, we (but not the Subsidiary Partnership) will make 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 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 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 IRS. 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”). We may borrow money. 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 or if the tax-exempt organization's partnership interest itself is debt-financed.
Item 1B. Unresolved Staff Comments
None.
Item 2. Properties
All dollars used in this discussion are in thousands.
HNH
As of December 31, 2013, HNH had 23 active operating plants in the United States, Canada, China, United Kingdom, Germany, France, Poland and Mexico, with a total area of approximately 1,558,653 square feet, including warehouse, office, sales, service and laboratory space. HNH also owns or leases sales, service, office and warehouse facilities at 8 other locations in the United States, which have a total area of approximately 249,158 square feet, and owns or leases 5 non-operating locations with a total area of approximately 321,150 square feet. Manufacturing facilities are located in: Camden and Bear, Delaware; Evansville, Indiana; Agawam, Massachusetts; Middlesex, New Jersey; Arden, North Carolina; Rancho Cucamonga, California; St. Louis, Missouri; Cudahy, Wisconsin; Itasca, Illinois; Warwick, Rhode Island; Toronto and Montreal, Canada; Matamoros, Mexico; Gwent, Wales, United Kingdom; Pansdorf, Germany; Riberac, France; Gliwice, Poland; and Suzhou, People's Republic of China. All plants are owned except for the Middlesex, Arden, Rancho Cucamonga, Montreal, Gliwice and two of the Suzhou plants, which are leased.
HNH 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.
Steel Excel
Steel Excel's Energy business owns four buildings in Williston, ND, including one that serves as its headquarters and operations hub in the Bakken basin along with separate buildings with office and shop space. The Energy business also leases shop space in Colorado to support the local operation under an arrangement that expires in 2014. The Energy business also
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leases shop space and office space 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 Excel's Sports business has a lease for office space in Hermosa Beach, CA, that expires in November, 2014, which serves as its headquarters. Steel Excel's Sports business has a lease for approximately 27.9 acres of land in Yaphank, NY, for its baseball services operation that expires in December 2016. Under this lease Steel Excel has two extension options and a right of first refusal to purchase the parcel. The Sports business also has a lease for 2,300 square feet for its CrossFit® facility in Hermosa Beach, CA, that expires in July 2015 and a lease for 9,940 square feet for its CrossFit® facility in Torrance, CA, that expires in March 2023. Steel Excel believes that its facilities are adequate to meet its needs.
BNS
As of December 31, 2013, BNS did not own or lease any properties.
DGT
As discussed elsewhere in this Form 10-K, on August 16, 2012 DGT completed the sale of its RFI Corporation ("RFI") subsidiary. DGT continues to own 55,000 square feet of manufacturing and office property in Bay Shore, New York, which is currently held for sale. In addition, as discussed elsewhere in this Form 10-K, on November 3, 2011 DGT completed the sale of Villa Sistemi Medicali S.p.A. ("Villa"), its former Italian subsidiary. DGT continues to own 67,000 square feet of design and manufacturing space in Milan, Italy and currently leases the building to the buyer of Villa.
WebBank
As of December 31, 2013, WebBank leases 8,000 square feet of office space headquartered in Salt Lake City, Utah. The term of the lease expires in March 2017. WebBank also leases office space in New Jersey through March 2014. WebBank believes that these facilities are adequate for its current needs and that suitable additional space will be available as required.
SPH Services
As of December 31, 2013, SPH Services leases 20,764 square feet of office space headquartered in New York City, New York. The term of the lease expires in June 2015. SPH Services also leases office space in Los Gatos, California through March 2014, which is renewable each year.
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Item 3. Legal Proceedings
The information set forth under Note 21 - "Commitments and Contingencies" of our Notes to Consolidated Financial Statements, included in Part II, Item 8, Financial Statements, of this Report, is incorporated herein by reference. For an additional discussion of certain risks associated with legal proceedings, see the section entitled Part I, Item 1A, Risk Factors, of this Report.
Item 4. Mine Safety Disclosures
Not applicable.
PART II
Item 5. Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Market Information
As of December 31, 2013, we had 31,129,065 common units issued and outstanding. Beginning on April 10, 2012, our common units, no par value, are quoted on the NYSE under the symbol “SPLP”. The following table sets forth the information on the high and low sales prices of our common units during 2013 and 2012.
Fiscal year ending December 31, 2013 | High | Low | ||||||
First Quarter | $ | 13.62 | $ | 11.51 | ||||
Second Quarter | $ | 13.77 | $ | 12.90 | ||||
Third Quarter | $ | 15.47 | $ | 13.80 | ||||
Fourth Quarter | $ | 17.59 | $ | 14.88 | ||||
Fiscal year ending December 31, 2012 | High | Low | ||||||
First Quarter (a) | $ | 12.85 | $ | 11.69 | ||||
Second Quarter | $ | 13.50 | $ | 10.67 | ||||
Third Quarter | $ | 11.59 | $ | 10.15 | ||||
Fourth Quarter | $ | 12.50 | $ | 11.15 | ||||
(a) Our common units were quoted on the over-the-counter market on the Pink Sheets until April 10, 2012.
Holders
As of December 31, 2013, there were approximately 159 unitholders of record.
Distributions
In connection with the Exchange Transaction, we agreed to distribute to the holders of our common units the Target Distribution, subject to certain limitations, during the period from July 16, 2009 to the Final Distribution Date. On April 6, 2011, we distributed to our unitholders of record as of March 25, 2011, approximately $29,868 (net of approximately $3,229 to treasury units), or $1.18 per common unit, representing the final required distribution in full satisfaction of the Target Distribution.
We may, at our option, make further distributions to the unitholders although we currently have no plan to make any distributions in excess of the Target Distribution.
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Unit Performance Graph
The following graph compares the cumulative total return provided to unitholders on our common units since the common units began trading on April 19, 2011, relative to the cumulative total returns of the Russell 2000 index, and a customized peer group of seven companies that includes: Blackstone Group L.P., Leucadia National Corporation, Apollo Investment Corporation, Compass Diversified Holdings LLC, Gladstone Capital Corporation, Knights Capital Group, Inc. and Main Street Capital Corporation. An investment of $100 (with reinvestment of all dividends) is assumed to have been made in our common units, in the peer group, and the index on April 19, 2011 and its relative performance is tracked through December 31, 2013. We did not declare or pay any dividends during the comparison period.
4/19/2011 | 12/31/2011 | 12/31/2012 | 12/31/2013 | ||||||||||||
Steel Partners Holdings L.P. | $ | 100 | $ | 74.92 | $ | 73.30 | $ | 110.16 | |||||||
Russell 2000 Index | $ | 100 | $ | 90.96 | $ | 105.83 | $ | 146.91 | |||||||
Peer Group | $ | 100 | $ | 76.44 | $ | 82.25 | $ | 130.01 | |||||||
The unit price performance included in this graph is not necessarily indicative of future 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 24, 2013, the Board of Directors of the general partner of the Company approved the repurchase of up to an aggregate of $5,000 of the Company's common units (the “Repurchase Program”). 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 has entered into a Stock Purchase Plan which will continue through March 26, 2014. The Repurchase Program has no termination date.
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(a) | (b) | (c) | (d) | |
Period | Total Number of Shares (or Units) Purchased | Average Price Paid per Share (or Unit) | Total Number of Shares (or Units) Purchased as part of Publicly Announced Plans or Programs | Maximum Number (or Approximate Dollar Value) of Shares (or Units) that May Yet Be Purchased Under the Plans or Programs |
October 1, 2013 through October 31, 2013 | — | — | — | $— |
November 1, 2013 through November 30, 2013 (1) | 124,938 | $16.18 | — | — |
December 1, 2013 through December 31, 2013 (2) | 190,412 | $17.41 | 6,015 | 4,894 |
Total | 315,350 | 6,015 | $4,894 | |
(1) All units were purchased by DGT, an affiliate of the Company, in open market transactions for its own account.
(2) 184,397 units were purchased by DGT, an affiliate of the Company, in open market transactions for its own account. 6,015 units were purchased by the Company under the aforementioned 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, 2013, 2012 and 2011 have 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 and for the fiscal year ended December 31, 2010 and as of December 31, 2009 and the periods from January 1, 2009 to July 15, 2009 and July 16, 2009 to December 31, 2009 have been derived from our audited consolidated financial statements at those dates and for those periods, not contained in this Annual Report on Form 10-K.
SPLP entered into the Exchange Transaction pursuant to which SPII became a wholly-owned subsidiary of SPLP on July 15, 2009, subject to no further conditions. The Exchange Transaction is accounted for as a transaction between entities under common control and as such SPII’s accounts are consolidated with SPLP for all periods presented. The operations of SPLP prior to taking into account the assets acquired as a result of the Exchange Transaction (the “Pre-Exchange Operations”), together with the operations related to the assets acquired as a result of the acquisition of SPII as of July 15, 2009 are accounted for and presented on an operating company basis of accounting, in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”). These operations are presented in the consolidated financial statements as “Diversified Industrial, Energy, Financial Services and Other”.
SPLP accounted for the consolidation of SPII in the consolidated financial statements as “Investment Operations” on the basis of the specialized U.S. GAAP prescribed in Accounting Standards Codification ("ASC") 946, “Financial Services – Investment Companies” through July 15, 2009. After July 15, 2009, the date which SPII became a subsidiary of SPLP, SPLP accounts for the assets it acquired as part of the Exchange Transaction in accordance with its accounting policies as an operating company, and therefore it does not report Investment Operations in its consolidated financial statements after July 15, 2009.
The table below presents discontinued operations as follows:
• | The year ended December 31, 2013 includes the operations of HNH's businesses: Continental Industries ("Continental"), Canfield Metal Coating Corporation ("CMCC") and Indiana Tube de Mexico, S. De R.L. de C.V. ("ITM") through their respective sale dates, as well as one of Steel Excel's sports businesses. |
• | The year ended December 31, 2012 includes the aforementioned HNH operations, as well as DGT's RFI subsidiary and DGT's Villa subsidiary through their respective sale dates. |
• | The year ended December 31, 2011 includes the aforementioned HNH operations, as well as DGT's RFI and Villa subsidiaries. |
• | The year ended December 31, 2010 includes the aforementioned HNH discontinued operations (from May 7, 2010 through December 31, 2010) as well as the gain on sale of BNS' former subsidiary, Collins Industries, Inc. ("Collins"), which was sold on February 18, 2010. |
• | The year ended December 2009 includes the operations of Collins. |
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Year Ended December 31, | July 16, 2009 to December 31, | January 1, 2009 to July 15, | |||||||||||||||||||||
2013 | 2012 | 2011 | 2010 | 2009 | 2009 | ||||||||||||||||||
STATEMENTS OF OPERATIONS DATA (a) | |||||||||||||||||||||||
Revenues: | |||||||||||||||||||||||
Diversified Industrial, Energy, Financial Services and Corporate and Other | $ | 805,174 | $ | 711,586 | $ | 624,184 | $ | 371,748 | $ | 14,424 | $ | 2,225 | |||||||||||
Investment Operations | — | — | — | — | — | (51,681 | ) | ||||||||||||||||
Total revenues | $ | 805,174 | $ | 711,586 | $ | 624,184 | $ | 371,748 | $ | 14,424 | $ | (49,456 | ) | ||||||||||
Net income (loss) from continuing operations | $ | 44,985 | $ | 52,437 | $ | 78,651 | $ | 16,733 | $ | (4,254 | ) | $ | (57,527 | ) | |||||||||
(Loss) Income from discontinued operations | (165 | ) | 11,328 | 2,626 | 29,713 | 1,177 | — | ||||||||||||||||
Net income (loss) | 44,820 | 63,765 | 81,277 | 46,446 | (3,077 | ) | (57,527 | ) | |||||||||||||||
Net income attributable to redeemable partners' capital | — | — | — | — | — | 54,064 | |||||||||||||||||
Less: Net income attributable to non-controlling interests: | (25,360 | ) | (22,747 | ) | (45,808 | ) | (14,699 | ) | (442 | ) | — | ||||||||||||
Net income (loss) attributable to common unitholders | $ | 19,460 | $ | 41,018 | $ | 35,469 | $ | 31,747 | $ | (3,519 | ) | $ | (3,463 | ) | |||||||||
Net income (loss) per common unit - basic: | |||||||||||||||||||||||
Net income (loss) from continuing operations | $ | 0.63 | $ | 1.17 | $ | 1.35 | $ | 0.65 | $ | (0.16 | ) | $ | (1.59 | ) | |||||||||
Net income from discontinued operations | 0.02 | 0.21 | 0.06 | 0.61 | 0.02 | — | |||||||||||||||||
Net income (loss) attributable to common unitholders | $ | 0.65 | $ | 1.38 | $ | 1.41 | $ | 1.26 | $ | (0.14 | ) | $ | (1.59 | ) | |||||||||
Basic weighted average common units outstanding | 29,912,993 | 29,748,746 | 25,232,985 | 25,234,827 | 25,219,420 | 2,183,366 | |||||||||||||||||
Net income (loss) per common unit - diluted: | |||||||||||||||||||||||
Net income (loss) from continuing operations | $ | 0.61 | $ | 1.17 | $ | 0.94 | $ | 0.60 | $ | (0.16 | ) | $ | (1.59 | ) | |||||||||
Net income from discontinued operations | 0.02 | 0.21 | 0.05 | 0.56 | 0.02 | — | |||||||||||||||||
Net income (loss) attributable to common unitholders | $ | 0.63 | $ | 1.38 | $ | 0.99 | $ | 1.16 | $ | (0.14 | ) | $ | (1.59 | ) | |||||||||
Diluted weighted average common units outstanding | 30,798,113 | 29,774,527 | 29,669,582 | 27,482,804 | 25,219,420 | 2,183,366 | |||||||||||||||||
(a) Statement of operations data includes the consolidation of the results of acquired entities from their respective acquisition dates: the acquisition of HNH effective May 7, 2010, the acquisition of SWH, Inc. ("SWH") by BNS on February 2, 2011, the acquisition of DGT on July 5, 2011 and the acquisition of Steel Excel on May 31, 2012.
December 31, | |||||||||||||||||||
2013 | 2012 | 2011 | 2010 | 2009 | |||||||||||||||
BALANCE SHEET DATA | (In thousands, except per unit data) | ||||||||||||||||||
Diversified Industrial, Energy, Financial Services and Corporate and Other: | |||||||||||||||||||
Cash and cash equivalents | $ | 203,980 | $ | 198,027 | $ | 127,027 | $ | 180,684 | $ | 114,247 | |||||||||
Marketable securities | 178,485 | 199,128 | — | — | — | ||||||||||||||
Long-term investments | 295,440 | 199,865 | 320,891 | 235,142 | 321,163 | ||||||||||||||
Total assets | 1,521,590 | 1,378,359 | 1,129,843 | 1,091,865 | 731,903 | ||||||||||||||
Long-term debt | 223,355 | 140,065 | 130,955 | 91,984 | — | ||||||||||||||
SPLP Partners’ capital | 616,582 | 527,344 | 415,797 | 405,732 | 416,913 | ||||||||||||||
SPLP Partners’ capital per common unit | $ | 19.81 | $ | 17.13 | $ | 16.51 | $ | 16.07 | $ | 16.53 | |||||||||
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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, 2013, 2012 and 2011. 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 units and share amounts.
Overview
Steel Partners Holdings L.P. ("SPLP" or the "Company") is a global diversified holding company that engages in multiple businesses, including diversified industrial products, energy, defense, supply chain management and logistics, banking, food products and services, oilfield services, sports, training, education, and the entertainment and lifestyle industries.
Segment Information
The following table presents the composition of our segments, which include the operations of our consolidated subsidiaries, as well as income or loss from equity method investments and other investments. Our segments are managed separately and offer different products and services.
Diversified Industrial | Energy | Financial Services | Corporate |
Handy & Harman Ltd. ("HNH") (1) | Steel Excel Inc. ("Steel Excel")(1) | WebBank (1) | SPH Services, Inc. ("SPH Services") (1) |
SL Industries, Inc. ("SLI") (2) | BNS Holding, Inc. ("BNS") (1), (3) | DGT Holdings Corp. ("DGT") (1) | |
JPS Industries, Inc. ("JPS") (2) | BNS Holdings Liquidating Trust ("BNS Liquidating Trust") (1), (3) | ||
ModusLink Global Solutions, Inc. (2) | |||
CoSine Communications, Inc. ("CoSine")(2) | |||
Fox & Hound Acquisition Corp. ("Fox & Hound") (2) | |||
SPII Liquidating Trust (2) | |||
Other Investments (4) | |||
(1) | Consolidated subsidiary |
(2) | Equity method investment |
(3) | The operations of BNS are included in the Energy segment through June 30, 2012. The results of the BNS Liquidating Trust are included in the Corporate and Other segment beginning July 1, 2012. |
(4) | Other investments classified in Corporate and Other include various investments in available-for-sale securities in the Computer Software and Services, Aerospace/Defense, and Restaurant industries. |
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RESULTS OF OPERATIONS
The following is a summary of SPLP’s consolidated operating results by segment:
Year Ended December 31, | |||||||||||
2013 | 2012 | 2011 | |||||||||
Revenue: | |||||||||||
Diversified industrial | $ | 655,224 | $ | 579,528 | $ | 579,764 | |||||
Energy | 120,029 | 92,834 | 32,984 | ||||||||
Financial services | 28,185 | 21,155 | 14,921 | ||||||||
Corporate and other | 1,736 | 18,069 | (3,485 | ) | |||||||
Total Revenue | $ | 805,174 | $ | 711,586 | $ | 624,184 | |||||
Net income (loss) by segment: | |||||||||||
Diversified industrial | $ | 62,278 | $ | 39,903 | $ | 46,981 | |||||
Energy | 12,641 | 25,034 | 6,558 | ||||||||
Financial services | 17,668 | 12,913 | 6,165 | ||||||||
Corporate | (37,358 | ) | (8,580 | ) | (46,021 | ) | |||||
Net income from continuing operations before income taxes | 55,229 | 69,270 | 13,683 | ||||||||
Income tax provision (benefit) | 10,244 | 16,833 | (64,968 | ) | |||||||
Net income from continuing operations | 44,985 | 52,437 | 78,651 | ||||||||
(Loss) Income from discontinued operations | (165 | ) | 11,328 | 2,626 | |||||||
Net income attributable to noncontrolling interests in consolidated entities | (25,360 | ) | (22,747 | ) | (45,808 | ) | |||||
Net income attributable to common unitholders | 19,460 | 41,018 | 35,469 | ||||||||
Other comprehensive income (loss) | 59,446 | (6,125 | ) | (19,499 | ) | ||||||
Comprehensive income attributable to common unitholders | $ | 78,906 | $ | 34,893 | $ | 15,970 | |||||
Diversified Industrial Segment
Our Diversified Industrial segment consists of the operations of HNH, a diversified holding company that owns a variety of manufacturing operations encompassing joining materials, tubing, engineered materials, electronic materials and cutting replacement products and services businesses. In addition, the segment results include income or loss from equity method investments held by SPLP. The following presents a summary of the Diversified Industrial segment operating results as reported in our consolidated financial statements:
Year Ended December 31, | |||||||||||
2013 | 2012 | 2011 | |||||||||
Net Sales | $ | 655,224 | $ | 579,528 | $ | 579,764 | |||||
Cost of sales | 471,476 | 410,620 | 422,679 | ||||||||
Gross profit | 183,748 | 168,908 | 157,085 | ||||||||
Selling, general and administrative expenses | 131,891 | 117,549 | 104,673 | ||||||||
Restructuring and impairment charges | — | — | 460 | ||||||||
Interest expense, net | 8,636 | 14,166 | 11,926 | ||||||||
Derivative activity (income) loss | (1,195 | ) | (1,353 | ) | 397 | ||||||
Other expense, net | 395 | 439 | 1,360 | ||||||||
Net income from continuing operations before income taxes | 44,021 | 38,107 | 38,269 | ||||||||
Income (loss) from associated companies: | |||||||||||
JPS | 9,204 | — | — | ||||||||
SLI | 9,053 | 1,796 | (1,310 | ) | |||||||
DGT | — | — | 213 | ||||||||
API Group PLC | — | — | 9,809 | ||||||||
Total Segment Income | $ | 62,278 | $ | 39,903 | $ | 46,981 | |||||
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Comparison of the Years ended December 31, 2013 and 2012
Net sales for the year ended December 31, 2013 increased by $75,696, or 13.1% when compared to 2012. Value added sales, defined as net sales less revenue from the direct purchase and resale of precious metals, increased by $95,400 on higher volume, primarily from HNH's Joining Materials group, including the acquisition of Wolverine Joining, the Tubing group and the Building Materials group, and were partially offset by the impact of lower average precious metal prices of approximately $19,800, principally due to silver. The average silver market price was approximately $23.79 per troy ounce in 2013, as compared to $31.22 per troy ounce in 2012. The acquisition of Wolverine Joining provided incremental net sales of approximately $39,800 in the year ended December 31, 2013 and the December 31, 2012 acquisition of Hickman provided incremental net sales of $17,100 in 2013.
Gross profit for the year ended December 31, 2013 increased by $14,840, or 8.8%, when compared to 2012, and, as a percentage of net sales, decreased to 28.0% as compared to 29.1% in the same period in 2012. The decrease of approximately 1.1% was due to unfavorable product mix and reduced profit generated on the material portion of HNH's products in the Joining Materials group, due principally to lower precious metal prices, and unfavorable production variances in the Arlon group, which were partially offset by favorable product mix in the Tubing group and increased sales of higher-margin branded fasteners in the Building Materials group. The acquisition of Wolverine Joining provided incremental gross profit of approximately $3,600 during the year ended December 31, 2013, and the acquisition of Hickman provided incremental gross profit of approximately $7,500 in 2013.
Selling, general and administrative ("SG&A") expenses increased by $14,342, or 12.2%, for the year ended December 31, 2013, compared to 2012. SG&A as a percentage of net sales decreased slightly driven by effective cost control on higher sales volume and an insurance reimbursement of $1,100 received for previously incurred environmental remediation costs, which were partially offset by higher business development costs, including acquisition fees and integration costs related to HNH's acquisition of Wolverine Joining, as compared to 2012. Also, the lower average precious metal prices had a negative impact on SG&A as a percentage of net sales, as compared to the prior year.
Interest expense decreased by $5,530, or 39.0%, for the year ended December 31, 2013, compared to 2012. Interest expense for the year ended December 31, 2013 included a loss associated with the redemption of HNH's Subordinated Notes, including the redemption premium and the write-off of remaining deferred finance costs and unamortized debt discounts. This loss was offset by a lower average interest rate in the year ended December 31, 2013, principally due to HNH's debt refinancing in the fourth quarter of 2012, which resulted in the write-off of $1,100 in prior debt issuance costs in that period, and the redemption of the Subordinated Notes.
Derivative activity income was $1,195 for the year ended December 31, 2013, and was a loss of $1,353 in the same period of 2012. Of the gain in 2013, approximately $1,988 was attributable to precious metal contracts, partially offset by a loss of $793 on the embedded derivative features of HNH's Subordinated Notes and related warrants. Of the income in 2012, approximately $522 was attributable to precious metal contracts and approximately $831 was attributable to embedded derivative features of HNH's Subordinated Notes and related warrants.
Comparison of the Years ended December 31, 2012 and 2011
Net sales for the year ended December 31, 2012 were relatively flat compared to the year ended December 31, 2011. Value added sales for the year ended December 31, 2012 increased $11,100 driven by higher demand for HNH's products, primarily in the Engineered Materials group. Lower average precious metal prices, principally silver, had a negative effect of approximately $11,400 on net sales for the year ended December 31, 2012. The average silver price was approximately $31.22 per troy ounce in 2012, as compared to $35.40 per troy ounce for the year ended December 31, 2011.
Gross profit for the year ended December 31, 2012 increased by $11,823, or 7.5%, when compared to 2011, and, as a percentage of net sales, increased to 29.1% as compared to 27.1%, respectively. The gross margin improvement of 2.0% for the year ended December 31, 2012, was principally due to favorable product mix, effective cost control and improved operating efficiency at HNH's manufacturing plants, across all of its segments.
Selling, general and administrative ("SG&A") expenses increased by $12,876, or 12.3%, for the year ended December 31, 2012, compared to 2011. SG&A as a percentage of net sales was 2.2% higher for the year ended December 31, 2012. The increase in SG&A as a percentage of net sales in 2012 was primarily due to higher selling and promotion costs related to product sales of the Engineered Materials group, higher 2012 restricted stock awards, higher self-insured employee medical and workers' compensation insurance claim costs compared to 2011, as well as costs associated with HNH's business
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development activities in 2012, which resulted in the Inmet and Hickman acquisitions. Also, the lower average precious metal prices had a negative impact on SG&A as a percentage of net sales, as compared to the prior year.
Interest expense increased by $2,240, or 18.8%, for the year ended December 31, 2012, compared to 2011. As a result of certain Subordinated Note repurchases during both 2012 and 2011, interest expense included a $1,400 loss for the year ended December 31, 2012 and a $200 gain in the year ended December 31, 2011 related to such repurchases. In addition, HNH wrote-off $1,100 in prior debt issuance costs based on HNH's fourth quarter of 2012 debt refinancing. These unfavorable impacts on interest expense were partially offset by a lower average amount of borrowings outstanding and lower average interest rates on outstanding debt in 2012.
Derivative activity income was $1,353 for the year ended December 31, 2012, and was a loss of $397 in the same period of 2011. Of the income in 2012, approximately $522 was attributable to precious metal contracts and approximately $831 was attributable to embedded derivative features of HNH's Subordinated Notes and related warrants. Of the loss in 2011, approximately $839 was attributable to a gain on the embedded derivative features of HNH's Subordinated Notes and approximately $1,236 was attributable to a loss on precious metal contracts. The gain related to precious metal derivative contracts for the year ended December 31, 2012 resulted principally from an average silver price decrease during the year. While decreasing the use of hedging contracts with brokers, HNH has entered into more fixed-price sales agreements with its customers; thereby hedging silver prices in that manner.
Energy Segment
SPLP's Energy segment consists of its consolidated subsidiaries Steel Excel, which was acquired on May 31, 2012, and BNS. The results of BNS for the years ended December 31, 2012 and 2011 include the results of Sun Well prior to its sale to Steel Excel. Steel Excel provides drilling and production services to the oil and gas industry. Through its wholly-owned subsidiary Steel Sports Inc., Steel Excel focuses on providing event-based sports and entertainment services and other health-related services, including baseball facility services, baseball and soccer camps and leagues, and strength and conditioning services. Steel Excel also continues to identify other new business acquisition opportunities. The operations of Steel Sports are not considered material to SPLP and are included in the Energy segment. The following presents a summary of the Energy segment operating results on a pro forma basis:
Year Ended December 31, | |||||||||||
2013 | 2012 | 2011 | |||||||||
(Historical) | (Pro Forma) | (Pro Forma) | |||||||||
Revenue: | |||||||||||
Steel Excel (a) | $ | 120,029 | $ | 103,444 | $ | 49,771 | |||||
BNS (Historical) (b) | — | 20,432 | 32,984 | ||||||||
Total Revenue | $ | 120,029 | $ | 123,876 | $ | 82,755 | |||||
Net income from continuing operations before income taxes: | |||||||||||
Steel Excel (a) | $ | 13,504 | $ | 11,181 | $ | 5,832 | |||||
BNS (Historical) (b) | — | 3,678 | 6,558 | ||||||||
(Loss) Income of associated companies (c) | (863 | ) | 13,139 | — | |||||||
Total segment income | $ | 12,641 | $ | 27,998 | $ | 12,390 | |||||
(a) Steel Excel's reported revenue and net income from continuing operations before income taxes, included in SPLP's consolidated financial statements was $72,402 and $8,217 for the last seven months of year ended December 31, 2012.
(b) Includes five months and eleven months of Sun Well's operating results in 2012 and 2011, respectively.
(c) In 2013 represents Steel Excel's investments in a sports business and iGo. The amount in 2012 represents equity method income related to SPLP's investment in Steel Excel, prior to acquiring a majority interest on May 31, 2012. During 2011, SPLP's equity method income or losses from its investment in Steel Excel are classified in the Corporate and other segment, as Steel Excel did not have any significant operations at that time.
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Financial Services Segment
The Financial Services segment, for financial reporting purposes, consists of our consolidated and wholly-owned subsidiary, WebFinancial Holding Corporation, which conducts financial operations through its wholly-owned subsidiary, WebBank (which operates in niche banking markets), and WF Asset Corp (which consists of a portfolio of investments). WebBank provides commercial and consumer loans and services. WebBank's deposits are insured by the FDIC up to the current limits, and the bank is examined and regulated by the FDIC and UDFI.
The following presents a summary of the Financial Services segment operating results as reported in our consolidated financial statements:
Year Ended December 31, | |||||||||||
2013 | 2012 | 2011 | |||||||||
Revenue: | |||||||||||
Interest income (including fees) | $ | 18,898 | $ | 16,051 | $ | 10,749 | |||||
Non-interest income | 9,287 | 5,104 | 4,172 | ||||||||
28,185 | 21,155 | 14,921 | |||||||||
Costs and expenses: | |||||||||||
Interest | 496 | 957 | 941 | ||||||||
(Recovery of) provision for loan losses | (80 | ) | (416 | ) | 8 | ||||||
Selling, general and administrative expenses | 9,933 | 7,700 | 6,763 | ||||||||
Asset impairment charge | 168 | 1 | 1,044 | ||||||||
10,517 | 8,242 | 8,756 | |||||||||
Total segment income | $ | 17,668 | $ | 12,913 | $ | 6,165 | |||||
Net Interest Income, Margin and Interest Rate Spreads
Net interest income is the difference between interest earned on interest-bearing 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.
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Year Ended December 31, | ||||||||||||||||||||||||||
2013 | 2012 | 2011 | ||||||||||||||||||||||||
Average | Interest | Average | Interest | Average | Interest | |||||||||||||||||||||
Outstanding | Earned/ | Yield/ | Outstanding | Earned/ | Yield/ | Outstanding | Earned/ | Yield/ | ||||||||||||||||||
Balance | Paid | Rate | Balance | Paid | Rate | Balance | Paid | Rate | ||||||||||||||||||
Interest Earning Assets: | ||||||||||||||||||||||||||
Loans Receivable | $ | 62,110 | $ | 18,704 | 30.1 | % | $ | 45,377 | $ | 15,822 | 34.8 | % | $ | 39,666 | $ | 10,598 | 26.7 | % | ||||||||
Mortgaged-Backed Security | 58 | — | 0.1 | % | — | — | — | 1 | — | — | ||||||||||||||||
Available for Sale Investments | 577 | 13 | 2.3 | % | 523 | 16 | 3.1 | % | 507 | 19 | — | |||||||||||||||
Fed Funds Sold | 692 | 1 | 0.1 | % | 1,634 | 2 | 0.1 | % | 1,438 | 2 | — | |||||||||||||||
Interest Bearing Deposits in other Banks | 73,345 | 180 | 0.3 | % | 83,127 | 209 | 0.3 | % | 52,916 | 130 | — | |||||||||||||||
Total Interest-Earning Assets | 136,782 | 18,898 | 13.8 | % | 130,661 | 16,049 | 11.4 | % | 94,528 | 10,749 | 11.7 | % | ||||||||||||||
Non Interest-Earning Assets | 1,286 | 1,240 | 865 | |||||||||||||||||||||||
Total Assets | $ | 138,068 | $ | 131,901 | $ | 95,393 | ||||||||||||||||||||
Interest-Bearing Liabilities: | ||||||||||||||||||||||||||
Money Market Accounts | $ | 29,312 | 62 | 0.2 | % | $ | 13,789 | 57 | 0.4 | % | $ | 8,902 | 31 | 0.3 | % | |||||||||||
Time Deposits | 72,754 | 434 | 0.6 | % | 70,677 | 900 | 1.3 | % | 61,476 | 910 | 1.5 | % | ||||||||||||||
Other Borrowings | — | — | — | — | — | — | — | — | — | |||||||||||||||||
Total Interest-Bearing Liabilities | 102,066 | 496 | 0.5 | % | 84,466 | 957 | 1.3 | % | 70,378 | 941 | 1.5 | % | ||||||||||||||
Other Non Interest-Bearing Liabilities | 3,347 | 18,887 | 3,148 | |||||||||||||||||||||||
Total Liabilities | 105,413 | 103,353 | 73,526 | |||||||||||||||||||||||
Shareholder's Equity | 32,655 | 28,548 | 21,867 | |||||||||||||||||||||||
Total Liabilities & Shareholder's Equity | $ | 138,068 | $ | 131,901 | $ | 95,393 | ||||||||||||||||||||
Net Interest Income | $ | 18,402 | $ | 15,092 | $ | 9,808 | ||||||||||||||||||||
Spread on Average Interest-Bearing Funds | 13.3 | % | 11.2 | % | 10.1 | % | ||||||||||||||||||||
Net Interest Margin | 13.5 | % | 11.6 | % | 13.9 | % | ||||||||||||||||||||
Return on Assets | 8.2 | % | 6.2 | % | 7.5 | % | ||||||||||||||||||||
Return on Equity | 29.5 | % | 24.4 | % | 28.3 | % | ||||||||||||||||||||
Equity to Assets | 23.2 | % | 21.5 | % | 26.4 | % | ||||||||||||||||||||
WebBank has 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 held for sale and are typically sold after origination. As part of these arrangements WebBank earns origination fees that are recorded in interest income, and which increase WebBank's yield on loans.
Interest Income
Interest income increased by $2,847, or 17.7%, in the year ended December 31, 2013, compared to 2012 due primarily to two new lending programs with favorable rates.
Interest income increased by $5,302, or 49.3%, in the year ended December 31, 2012, compared to 2011. The increases were due primarily to two new lending programs with favorable rates. The programs began in the third quarter of 2012.
Interest Expense
Interest expense represents interest accrued on WebBank depositor accounts.
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Interest expense decreased $461, or 48.2%, for the twelve months ended December 31, 2013, compared to 2012, primarily due to a decrease in interest rates.
Interest expense increased $16, or 1.7%, for the twelve months ended December 31, 2012, compared to 2011, due to increased deposits to fund asset growth.
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.
Year Ended December 31, | |||||||||||||||||||||||||||||
2013 vs 2012 | 2012 vs 2011 | 2011 vs. 2010 | |||||||||||||||||||||||||||
Increase/ | Increase/ | Total | Increase/ | Increase/ | Total | Increase/ | Increase/ | Total | |||||||||||||||||||||
Rate/Volume | (Decrease) | (Decrease) | Increase/ | (Decrease) | (Decrease) | Increase/ | (Decrease) | (Decrease) | Increase/ | ||||||||||||||||||||
Due to Volume | Due to Rate | (Decrease) | Due to Volume | Due to Rate | (Decrease) | Due to Volume | Due to Rate | (Decrease) | |||||||||||||||||||||
Interest Earning Assets: | |||||||||||||||||||||||||||||
Loans Receivable | $ | 4,572 | $ | (1,691 | ) | $ | 2,881 | $ | 1,675 | $ | 3,549 | $ | 5,224 | $ | 917 | $ | 1,702 | $ | 2,619 | ||||||||||
Available For Sale Investments | 5 | (8 | ) | (3 | ) | — | — | — | 19 | — | 19 | ||||||||||||||||||
Fed Funds Sold | (1 | ) | 1 | — | — | — | — | (5 | ) | (1 | ) | (6 | ) | ||||||||||||||||
Interest Bearing Deposits in other Banks | (24 | ) | (5 | ) | (29 | ) | 75 | 1 | 76 | 60 | 2 | 62 | |||||||||||||||||
Total Interest-Earning Assets | 4,552 | (1,703 | ) | 2,849 | 1,750 | 3,550 | 5,300 | 991 | 1,703 | 2,694 | |||||||||||||||||||
Interest-Bearing Liabilities: | |||||||||||||||||||||||||||||
Money Market Accounts | 10 | (5 | ) | 5 | 19 | 6 | 25 | 9 | (1 | ) | 8 | ||||||||||||||||||
Time Deposits | 27 | (493 | ) | (466 | ) | (139 | ) | 130 | (9 | ) | 216 | (79 | ) | 137 | |||||||||||||||
Total Interest-Bearing Liabilities | 37 | (498 | ) | (461 | ) | (120 | ) | 136 | 16 | 225 | (80 | ) | 145 | ||||||||||||||||
Net Effect on Net Interest Income | $ | 4,515 | $ | (1,205 | ) | $ | 3,310 | $ | 1,870 | $ | 3,414 | $ | 5,284 | $ | 766 | $ | 1,783 | $ | 2,549 | ||||||||||
Noninterest Income
Noninterest income increased $4,183, or 82.0% for the year ended December 31, 2013, compared to 2012, due primarily to increased fee income from a new lending program.
Noninterest income increased $932, or 22.3% for the year ended December 31, 2012, compared to 2011, due primarily to increased fee income from a new lending program.
(Recovery of) Provision for Loan Losses
At December 31, 2013, WebBank had an estimated $2,564 of impaired loans, of which $2,121 is guaranteed by the USDA or SBA, and an allowance for loan losses of $424. At December 31, 2012 WebBank had an estimated $2,915 of impaired loans, of which $2,328 was guaranteed by USDA or SBA, and an allowance for loan losses of $284.
The (recovery of) provision for loan losses is primarily related to WebBank's portfolio of local real estate loans. WebBank routinely obtains appraisals on underlying collateral of nonperforming loans and records a provision for losses if the value of the collateral declines below the value of the loans. WebBank was able to recover previously charged off loans and workout or sell nonperforming loans resulting in net benefit in the provision for loan losses of $80 and $416 for the years ended December 31, 2013 and 2012, respectively. WebBank recorded a provision for loan losses of $8 for the year ended December 31, 2011.
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Selling General and Administrative Expenses
The increase in SG&A expenses of $2,233, or 29.0%, for the year ended December 31, 2013, compared to the year ended December 31, 2012, was due primarily to higher personnel expense in 2013, partially offset by a benefit in the reserve for off balance sheet credit exposures of $175, lower professional fees and lower other miscellaneous costs.
The increase in SG&A expenses of $937, or 13.9%, for the year ended December 31, 2012, compared to the year ended December 31, 2011, was due to higher personnel expense in 2012, partially offset by a benefit in the reserve for off balance sheet credit exposures of $440 and lower professional fees and other costs in 2012.
Balance Sheet Analysis
Loan Portfolio
As of December 31, 2013, net loans accounted for 44% of WebBank's total assets compared to 49% at the end of 2012. The following table presents WebBank's loans outstanding by type of loan as of December 31, 2013 and the five most recent year-ends.
As of December 31, | |||||||||||||||||||||||||||||
2013 | 2012 | 2011 | 2010 | 2009 | |||||||||||||||||||||||||
Amount | % | Amount | % | Amount | % | Amount | % | Amount | % | ||||||||||||||||||||
Real Estate Loans: | |||||||||||||||||||||||||||||
Construction | $ | — | — | $ | — | — | $ | — | — | $ | 988 | 3.3 | % | $ | 3,646 | 10.2 | % | ||||||||||||
Commercial - Owner Occupied | 4,671 | 6.1 | % | 6,724 | 9.8 | % | 8,340 | 18.8 | % | 9,546 | 31.9 | % | 10,425 | 29.3 | % | ||||||||||||||
Commercial - Other | 242 | 0.3 | % | 318 | 0.5 | % | 300 | 0.7 | % | 276 | 0.9 | % | 2,273 | 6.4 | % | ||||||||||||||
Total Real Estate Loans | 4,913 | 6.4 | % | 7,042 | 10.3 | % | 8,640 | 19.5 | % | 10,810 | 36.1 | % | 16,344 | 45.9 | % | ||||||||||||||
Commercial and Industrial: | 46,702 | 60.9 | % | 9,832 | 14.4 | % | 4,344 | 9.8 | % | 6,219 | 20.8 | % | 9,340 | 26.2 | % | ||||||||||||||
Total Commercial and Industrial | 46,702 | 60.9 | % | 9,832 | 14.4 | % | 4,344 | 9.8 | % | 6,219 | 20.8 | % | 9,340 | 26.2 | % | ||||||||||||||
Consumer: | |||||||||||||||||||||||||||||
Credit Cards | — | — | — | — | — | — | — | — | 517 | 1.5 | % | ||||||||||||||||||
Total Consumer | — | — | — | — | — | — | — | — | 517 | 1.5 | % | ||||||||||||||||||
Loans Held for Sale: | 25,125 | 32.7 | % | 51,505 | 75.3 | % | 31,363 | 70.7 | % | 12,903 | 43.1 | % | 9,404 | 26.4 | % | ||||||||||||||
Total Loans | 76,740 | 100 | % | 68,379 | 100 | % | 44,347 | 100 | % | 29,932 | 100 | % | 35,605 | 100 | % | ||||||||||||||
Less: | |||||||||||||||||||||||||||||
Deferred Fees and Discounts | — | 21 | (56 | ) | (64 | ) | (188 | ) | |||||||||||||||||||||
Allowance for Loan Losses | (424 | ) | (285 | ) | (529 | ) | (1,541 | ) | (2,193 | ) | |||||||||||||||||||
Total Loans Receivable, Net | $ | 76,316 | $ | 68,115 | $ | 43,762 | $ | 28,327 | $ | 33,224 | |||||||||||||||||||
The following table includes a maturity profile for the loans that were outstanding at December 31, 2013, substantially all of which have floating or adjustable interest rates:
Due During Years Ending December 31, | Real Estate | Commercial & Industrial | Loans Held for Sale | ||||||||
2014 | $ | 197 | $ | 1,462 | $ | 25,125 | |||||
2015-2019 | 1,098 | 26,198 | — | ||||||||
2020 and following | 3,618 | 19,042 | — | ||||||||
Total | $ | 4,913 | $ | 46,702 | $ | 25,125 | |||||
Nonperforming Lending Related Asset
Total nonaccrual loans at December 31, 2013 increased by $270 from December 31, 2012. The increase included $255 for commercial owner occupied loans and $15 for commercial and industrial loans.
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December 31, | |||||||||||||||||||
2013 | 2012 | 2011 | 2010 | 2009 | |||||||||||||||
Non-Accruing Loans: | |||||||||||||||||||
Commercial Real Estate - Construction | $ | — | $ | — | $ | — | $ | 988 | $ | 3,131 | |||||||||
Commercial Real Estate - Owner Occupied | 403 | 147 | 914 | 207 | 705 | ||||||||||||||
Commercial Real Estate - Other | — | — | — | — | 213 | ||||||||||||||
Commercial and Industrial | 109 | 94 | 97 | 419 | 610 | ||||||||||||||
Other | — | — | — | — | 114 | ||||||||||||||
Total | 512 | 241 | 1,011 | 1,614 | 4,773 | ||||||||||||||
Accruing Loans Delinquent: | |||||||||||||||||||
90 Days or More | — | 2,581 | — | — | 401 | ||||||||||||||
Total | — | 2,581 | — | — | 401 | ||||||||||||||
Restructured Loans: | |||||||||||||||||||
Commercial Real Estate - Owner Occupied | — | — | 1 | 18 | — | ||||||||||||||
Commercial and Industrial | — | — | — | 7 | — | ||||||||||||||
Total | — | — | 1 | 25 | — | ||||||||||||||
Foreclosed Assets: | |||||||||||||||||||
Commercial Real Estate - Construction | — | — | — | — | 232 | ||||||||||||||
Commercial Real Estate - Owner Occupied | 149 | 68 | 333 | 38 | 170 | ||||||||||||||
Commercial and Industrial | — | — | — | 53 | — | ||||||||||||||
Other | — | — | — | — | 257 | ||||||||||||||
Total | 149 | 68 | 333 | 91 | 659 | ||||||||||||||
Total Non-Performing Assets | $ | 661 | $ | 2,890 | $ | 1,345 | $ | 1,730 | $ | 5,833 | |||||||||
Total as a Percentage of Total Assets | 0.4 | % | 2.1 | % | 1.1 | % | 2.0 | % | 8.9 | % | |||||||||
Summary of Loan Loss Experience
The methodologies used to estimate the Allowance for Loan and Lease Losses ("ALLL") depend upon the impairment status and portfolio segment of the loan. For the commercial and commercial real estate segments, a comprehensive loan grading system is used to assign loss given default grades to each loan. The credit quality indicators discussed subsequently are based on this grading system. Loss given default grades are based on both financial and statistical models and loan officers’ judgment. Groupings of these grades are created for each loan class and calculate historic loss rates ranging from the previous 36 months.
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 the portfolio segments. The following table summarizes activity in WebBank's allowance for loan and lease losses for the periods indicated:
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December 31, | |||||||||||||||||||
2013 | 2012 | 2011 | 2010 | 2009 | |||||||||||||||
Balance at Beginning of Period | $ | 283 | $ | 529 | $ | 1,541 | $ | 2,193 | $ | 2,302 | |||||||||
Charge Offs: | |||||||||||||||||||
Commercial Real Estate - Construction | — | — | (440 | ) | (80 | ) | (4,350 | ) | |||||||||||
Commercial Real Estate - Owner Occupied | — | (1 | ) | (422 | ) | (482 | ) | (500 | ) | ||||||||||
Commercial Real Estate - Other | — | — | — | (268 | ) | (545 | ) | ||||||||||||
Commercial and Industrial | (63 | ) | — | (727 | ) | (714 | ) | (1,379 | ) | ||||||||||
Other | — | — | — | — | — | ||||||||||||||
Total Charge Offs | (63 | ) | (1 | ) | (1,589 | ) | (1,544 | ) | (6,774 | ) | |||||||||
Recoveries: | |||||||||||||||||||
Commercial Real Estate - Construction | — | — | 466 | 961 | — | ||||||||||||||
Commercial Real Estate - Owner Occupied | 23 | 47 | 27 | 2 | — | ||||||||||||||