UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
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þ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For The Fiscal Year Ended December 31, 2019
OR
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¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Commission File Number: 001-35493
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STEEL PARTNERS HOLDINGS L.P.
(Exact name of registrant as specified in its charter)
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Delaware | 13-3727655 |
(State of incorporation) | (I.R.S. Employer Identification No.) |
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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:
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Title of Each Class | Trading Symbols | Name of Each Exchange on which Registered |
Common units, $0 par | SPLP | New York Stock Exchange |
6.0% Series A Preferred Units | SPLP-PRA | 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 þ
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 þ
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 þ No ¨
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes þ No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.
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Large accelerated filer | o | | Accelerated filer | þ |
Non-accelerated filer | o | | Smaller reporting company | þ |
| | | Emerging growth company | o |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. 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 30, 2019 totaled approximately $150.9 million based on the then-closing unit price.
On February 26, 2020, there were 25,023,128 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
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PART I |
Item 1. | | |
Item 1A. | | |
Item 1B. | | |
Item 2. | | |
Item 3. | | |
Item 4. | | |
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PART II |
Item 5. | | |
Item 6. | | |
Item 7. | | |
Item 7A. | | |
Item 8. | | |
Item 9. | | |
Item 9A. | | |
Item 9B. | | |
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PART III |
Item 10. | | |
Item 11. | | |
Item 12. | | |
Item 13. | | |
Item 14. | | |
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PART IV |
Item 15. | | |
Item 16. | | |
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As used in this Form 10-K, unless the context otherwise requires, the terms "we," "us," "our," "SPLP" and the "Company" refer to Steel Partners Holdings L.P., a Delaware limited partnership.
PART I
FORWARD-LOOKING STATEMENTS
This report includes "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended ("Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as amended ("Exchange Act"), including, in particular, forward-looking statements under the headings "Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Item 8 - Financial Statements and Supplementary Data." These statements appear in a number of places in this report and include statements regarding the Company's intent, belief or current expectations with respect to (i) its financing plans, (ii) trends affecting its financial condition or results of operations, and (iii) the impact of competition. The words "expect," "anticipate," "intend," "plan," "believe," "seek," "estimate" and similar expressions are intended to identify such forward-looking statements; however, this report also contains other forward-looking statements in addition to historical information.
All monetary amounts used in this section are in thousands unless otherwise indicated.
Item 1. Business
The Company
SPLP is a diversified global holding company that owns and operates businesses and has significant interests in various companies, including diversified industrial products, energy, defense, supply chain management and logistics, direct marketing, banking and youth sports. SPLP operates through the following segments: Diversified Industrial, Energy, Financial Services, and Corporate and Other. Each of our companies has its own management team with significant experience in their industries. Our subsidiary, Steel Services Ltd ("Steel Services"), through management services agreements, provides services to us and some of our companies which include assignment of C-Level management personnel, legal, tax, accounting, treasury, consulting, auditing, administrative, compliance, environmental health and safety, human resources, marketing, investor relations, operating group management and other similar services. We work with our businesses to increase corporate value over the long term for all stakeholders by implementing our unique strategy discussed in more detail below.
SPLP is managed by SP General Services LLC ("Manager"), pursuant to the terms of an amended and restated management agreement ("Management Agreement") discussed in further detail in Note 21 – "Related Party Transactions" to the SPLP consolidated financial statements found elsewhere in this Form 10-K. From its founding in 1990, the Manager and its affiliates have focused on increasing value for investors in the entities it has managed. Our wholly-owned subsidiary, Steel Partners Holdings GP Inc. ("General Partner"), is our general partner. The General Partner has a board of directors ("Board of Directors"). The Board of Directors is currently comprised of nine members, seven of whom are elected annually by our unitholders and two of whom are appointed by the Manager. Warren G. Lichtenstein, the Executive Chairman of our Manager, serves as the Executive Chairman of the Board of Directors.
Products and Product Mix
Diversified Industrial Segment
The Diversified Industrial segment is comprised of manufacturers of engineered niche industrial products, with leading market positions in many of the markets they serve. The businesses in this segment distribute products to customers through their sales personnel, outside sales representatives and distributors in North and South America, Europe, Australia, Asia and several other international markets. Below is additional information related to the businesses within the Diversified Industrial segment.
Joining Materials - The Joining Materials business primarily fabricates precious metals and their alloys into brazing alloys. Brazing alloys are used to join similar and dissimilar metals, as well as specialty metals and some ceramics, with strong, hermetic joints. The Joining Materials business offers these metal joining products in a wide variety of alloys, including gold, silver, palladium, copper, nickel, aluminum and tin. These brazing alloys are fabricated into a variety of engineered forms and are used in many industries, including electrical, appliance, transportation, construction and general industrial, where dissimilar material and metal joining applications are required. Operating income from precious metal products is principally derived from the "value-added" of processing and fabricating and not from the direct purchase and resale of precious metals. The Joining Materials business enters into commodity futures and forward contracts to mitigate the impact of price fluctuations on its precious and certain non-precious
metal inventories that are not subject to fixed price contracts. We believe that our Joining Materials business is the North American market leader in many of the markets that it serves.
Tubing - The Tubing business manufactures a wide variety of stainless and low carbon steel tubing products. The Tubing business manufactures some of the world's longest continuous seamless stainless steel tubing coils, up to 6,000 feet, serving primarily the petrochemical and oil & gas infrastructure markets. In addition, it is a top supplier of precision, small diameter (less than 3 mm) coil tubing to industry leading specifications serving the aerospace, defense and health care markets. The Tubing business is also a leading manufacturer of mechanical and fluid-carrying welded low carbon tubing used for diverse industries, including the automotive, heavy truck, heating, cooling and oil & gas markets. Products are delivered in continuous lengths from 2 inches to 30,000 feet in coil, cut or spool packaging styles.
Building Materials - The Building Materials business manufactures and supplies products primarily to the commercial construction and building industries. It manufactures fasteners, adhesives and fastening systems for the U.S. commercial low-slope roofing industry, which are sold to building and roofing material wholesalers, roofing contractors and private label roofing system manufacturers, and a line of engineered specialty fasteners for the building products industry for fastening applications in the remodeling and construction of homes, decking and landscaping. We believe that our primary business unit in the Building Materials business is the market leader in fasteners and accessories for commercial low-slope roofing applications and that the majority of the net sales for our Building Materials business are for the commercial construction repair and replacement market.
Performance Materials - The Performance Materials business manufactures woven substrates of fiberglass, quartz, carbon and aramid materials for specialty applications in a wide expanse of markets requiring highly engineered components. Its products are used in a wide range of advanced composite applications, such as civilian and military aerospace components, printed electronic circuit boards, automotive and industrial components, and substrates for civilian and military armor applications.
Electrical Products - The Electrical Products business designs, manufactures and markets power electronics, motion control, power protection, power quality electromagnetic equipment, and custom ball-screws, gears and gearboxes used in a variety of medical, commercial and military aerospace, computer, datacom, industrial, specialty LED lighting, test & measurement, and telecom applications. Its products are generally incorporated into larger systems to improve operating performance, safety, reliability and efficiency.
Kasco Blades and Route Repair Services ("Kasco") - The Kasco business provides meat-room blade products, repair services and distributed products for the meat and deli departments of supermarkets, restaurants, meat and fish processing plants, and for distributors of electrical saws and cutting equipment, principally in North America and Europe. The Kasco business also provides cutting blades for bakeries, in addition to wood cutting blade products for the pallet manufacturing, pallet recycler and portable saw mill industries in North America.
Packaging - The Packaging business includes the operations of API Group Limited ("API") and Dunmore Corporation in the U.S. and Dunmore Europe GmbH in Germany (collectively, "Dunmore"). Dunmore was acquired in February 2018. Dunmore's performance films business manufactures and distributes coated, laminated and metallized films for engineered applications in the imaging, aerospace, insulation and solar photo-voltaic markets and also provides products for custom and special applications. API manufactures and distributes foils, films and laminates used to enhance the visual appeal of products and packaging. Packaging's laminates and foils businesses produce carton board laminates and foils for the packaging of consumer goods, as well as the food and confectionery, tobacco, health and beauty, personal care, greeting cards, books, magazines, footwear, sports goods, and office and promotional products industries. On January 31, 2020, the Company announced that API Group Limited and certain of its affiliates commenced administration proceedings in the United Kingdom. The purpose of the administration proceedings is to facilitate an orderly sale or wind-down of its United Kingdom operations. In the United States, API Americas Inc. voluntarily filed for Chapter 11 proceedings in Bankruptcy Court on February 2, 2020 in order to facilitate the sale or liquidation of its business in the U.S. The API entities are wholly-owned subsidiaries of the Company. The Company will deconsolidate the API entities on the previously noted filing dates as it no longer holds a controlling financial interest as of those dates.
Energy Segment
The Energy segment provides drilling and production services to the oil & gas industry and owns a youth sports business. Below is additional information related to the consolidated businesses within the Energy segment.
Steel Energy - The Energy business provides completion, re-completion and production services to exploration and production companies in the oil & gas business. The services provided include well completion and recompletion, well maintenance and workover, flow testing, down hole pumping, plug and abandonment, well logging and perforating wireline services.
Steel Sports - Steel Sports is a social impact company committed to creating a new standard in youth sports and coaching while forging the next generation of leaders. The organization that strives to provide a first-class youth sports experience emphasizing positive experiences and instilling the core values of teamwork, respect, integrity and commitment.
Financial Services Segment
Through our subsidiary WebFinancial Holding Corporation ("WFHC"), we own 100% of WebBank. WebBank is a Utah chartered industrial bank subject to comprehensive regulation, examination and supervision of the Federal Deposit Insurance Corporation ("FDIC") and the State of Utah Department of Financial Institutions ("UDFI"). WebBank is not considered a "bank" for Bank Holding Company Act purposes and, as such, SPLP is not regulated as a bank holding company. WebBank's deposits are insured by the FDIC. WebBank engages in a full range of banking activities including originating loans, issuing credit cards and taking deposits that are federally insured. WebBank originates and funds consumer and small business loans through lending programs with unaffiliated companies that market and service the programs ("Marketing Partners"), where the Marketing Partners subsequently purchase the loans (or interests in the loans) that are originated by WebBank. WebBank also has private-label financing programs that are branded for a specific retailer, manufacturer, dealer channel, proprietary network and bank card programs. WebBank participates in syndicated commercial and industrial as well as asset based credit facilities and asset based securitizations through relationships with other financial institutions. Through its subsidiary, National Partners PFco, LLC ("National Partners"), WebBank provides commercial premium finance solutions for national insurance brokerages, independent insurance agencies and insureds in key markets throughout the United States. National Partners was acquired in April 2019.
Corporate and Other Segment
The Corporate and Other segment consists of several consolidated subsidiaries, including Steel Services, equity method and other investments, and cash and cash equivalents. Its income or loss includes certain unallocated general corporate expenses. Steel Services has management services agreements with our consolidated subsidiaries and other related companies. For additional information on these service agreements see Note 21 - "Related Party Transactions" to the SPLP consolidated financial statements found elsewhere in this Form 10-K.
Business Strategy
We are focused on reducing costs, including but not limited to our corporate overhead, and the sale of non-core assets. We expect the savings and proceeds will be used to pay down debt and repurchase our units. We continuously evaluate the retention and disposition of existing operations, as well as investigate possible acquisitions. As 2020 unfolds, we expect to simplify our organizational structure and to focus on improving our free cash flow and our returns on invested capital
We strive to enhance the business operations of our companies and increase corporate value for unitholders and stakeholders through balance sheet improvements, strategic allocation of capital, and operational and growth initiatives. We use a set of tools and processes called the Steel Business System to drive operational and commercial efficiencies across each of our businesses. The Steel Business System utilizes a strategy deployment process to execute strategic initiatives for each of our businesses to improve their performance, including objectives relating to manufacturing improvement, idea generation, product development, and global sourcing of materials and services. Our operational initiatives include creating efficiencies through consolidated purchasing and materials sourcing provided by the Steel Partners Purchasing Council, which arranges shared purchasing programs and is reducing costs for, and providing other benefits to, a number of our companies. We are focused on reducing corporate overhead of our companies by centralizing certain administrative and corporate services through Steel Services, which provides management, consulting and advisory services.
Customers
The businesses within the Diversified Industrial segment are diversified across industrial markets and customers. Its businesses sell to customers in the construction, electrical, electronics, transportation, power control, utility, medical, oil and gas exploration, aerospace and defense, consumer products, packaging and food industries. No customer accounted for more than 10% of the Diversified Industrial segment's consolidated net sales in 2019 or 2018. The Diversified Industrial segment's 15 largest customers accounted for approximately 31% and 28% of consolidated Diversified Industrial segment net sales in 2019 and 2018, respectively.
The Energy segment primarily provides its services to customers' extraction and production operations in North Dakota and Montana in the Bakken basin, Colorado and Wyoming in the Niobrara basin, Texas in the Permian basin and New Mexico in the San Juan basin. It relies primarily on its local operations to sell and market its services. In 2019, the Energy segment had two
customers that made up 26% of its net revenue, and its top 15 customers made up 89% and 73% of its net revenue for the years ended December 31, 2019 and 2018, respectively.
In the Financial Services segment, WebBank earns interest income primarily from interest and fees earned on loans and investments, and it earns non-interest income primarily from origination fees earned on loans, fee income on contractual lending arrangements, premiums on the sale of loans and loan servicing fees. For the years ended December 31, 2019 and 2018, the two highest grossing contractual lending programs accounted for approximately 23% and 29%, respectively, of WebBank's total revenue.
Raw Materials
The raw materials used by the businesses within the Diversified Industrial segment are as follows:
In addition to precious metals, the raw materials used in the Joining Materials, Tubing, Building Materials, Electrical Products and Kasco businesses consist principally of stainless, silicon and carbon steel, aluminum, copper, tin, nickel alloys, a variety of high-performance alloys, permanent magnets, electronic and electrical components, chemicals and various plastic compositions. The raw materials used in the operations of the Performance Materials business consist principally of fiberglass, quartz and aramid yarns. The raw materials used in the Packaging business consist principally of board, PET film, organic solvents, aluminum, resins, pigments and adhesives. Raw materials are generally purchased at open market prices from domestic and foreign suppliers. The Diversified Industrial segment businesses have not experienced any significant problem in obtaining the necessary quantities of raw materials. Prices and availability, particularly of raw materials purchased from foreign suppliers, are affected by world market conditions and government policies. The raw materials used by these businesses are generally readily available from more than one source.
The businesses in our Diversified Industrial segment also require significant amounts of electricity, oil and natural gas to operate their facilities, and they are subject to price changes in these commodities. A shortage of electricity, oil or natural gas, or a government allocation of supplies resulting in a general reduction in supplies, could increase costs of production and could cause some curtailment of production.
Capital Investments
SPLP believes that in order to be and remain competitive, its businesses must continuously strive to increase revenue, improve productivity and product quality, and control and/or reduce manufacturing costs. Accordingly, SPLP expects to continue to make capital investments that reduce overall manufacturing costs, improve the quality of products produced and services provided and broaden the array of products offered to the industries it serves, as well as replace equipment as necessary to maintain compliance with environmental, health and safety laws and regulations. SPLP's capital expenditures for 2019 and 2018 were $43,024 and $47,085, respectively. SPLP anticipates funding its capital expenditures in 2020 from funds generated by operations and borrowed funds.
Employment
As of December 31, 2019, the Company employed approximately 5,000 employees worldwide. Of these employees, 665 were covered by collective bargaining agreements, all in the Diversified Industrial segment. The Energy segment also hires additional full-time and part-time employees during peak seasonal periods.
Competition
There are many companies, larger and smaller, domestic and foreign, which manufacture products or provide services of the type offered by our businesses. Some of these competitors are larger and have financial resources greater than our subsidiaries. Some of these competitors enjoy certain other competitive advantages, including greater name recognition, greater financial, technical, marketing and other resources, a larger installed base of customers and well-established relationships with current and potential customers.
Competition in the Diversified Industrial segment is based on quality, technology, performance, service, reputation, price, and in some industries, new product introduction.
The Energy business operates in a highly competitive industry that is influenced by price, capacity, reputation and experience. In times of high demand, capacity, reputation and experience are major competitive forces. In times of low demand, service providers will compete on price to attract customers. In addition, the Energy business needs to maintain a safe work environment and a well-trained work force to remain competitive. Energy services are affected by seasonal factors, such as inclement
weather, fewer daylight hours and holidays during the winter months. Heavy snow, ice, wind or rain can make it difficult to operate and to move equipment between work sites, which can reduce its ability to provide services and generate revenues. These seasonal factors affect competitors as well. Because they have conducted business together over several years, the members of our local operations have established strong working relationships with certain of their clients. These strong client relationships provide a better understanding of region-specific issues and enable us to better address customer needs. The market for Steel Sports' baseball facility services and soccer camps and leagues is very fragmented, and its competitors are primarily small local or regional operations.
WebBank competes with a broad range of banks, both larger and smaller, across its various lines of business.
Regulation
We are subject to many U.S. federal and state and foreign laws and regulations, including those related to environmental protection, labor, employment, worker health and safety, import and export, customs and tariffs, cybersecurity, intellectual property, privacy and protection of user data. WebBank is also subject to regulatory capital requirements administered by the FDIC and legal requirements in connection with the consumer and business lending programs that it originates.
These laws and regulations are constantly evolving and may be interpreted, applied, created or amended in a manner that could harm our businesses. We believe that we are in compliance in all material respects with all such laws and regulations and that we have obtained all material licenses and permits that are required for the operation of our businesses. For more information regarding regulatory risks, see the information in Part I, Item 1A, Risk Factors, of this Report.
Other Information
The amounts of revenue, earnings before interest and taxes, and identifiable assets attributable to the aforementioned business segments and additional information regarding SPLP's investments are included in Note 22 - "Segment Information" and Note 11 - "Investments" to the SPLP consolidated financial statements found elsewhere in this Form 10-K.
Our common units are quoted on the New York Stock Exchange under the symbol "SPLP." Our business address is 590 Madison Avenue, 32nd Floor, New York, New York 10022, and our telephone number is (212) 520-2300. Our website is www.steelpartners.com. The information contained in, or that can be accessed through, the website is not part of this Form 10-K. This Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and all amendments to those reports, are available to you free of charge through our website as soon as reasonably practicable after those materials have been electronically filed with, or furnished to, the U.S. Securities and Exchange Commission ("SEC").
Item 1A. Risk Factors
Our businesses are subject to a number of risks. You should carefully consider the following risk factors, together with all of the other information included or incorporated by reference in this report, before you decide whether to purchase our common or preferred units. These factors are not intended to represent a complete list of the general or specific risks that may affect us. It should be recognized that other risks may be significant, presently or in the future, and the risks set forth below may affect us to a greater extent than indicated. If any of the following risks occur, our business, financial condition and results of operations could be materially adversely affected. In such case, the trading price of our common and preferred units could decline, and you may lose all or part of your investment.
Risks Related to Our Business
Certain of the Company's subsidiaries sponsor defined benefit pension plans, which could subject the Company to substantial cash funding requirements in the future.
The Company's ongoing operating cash flow requirements include arranging for the funding of the minimum requirements of its subsidiaries' defined benefit pension plans. The Company is jointly and severally liable with Handy & Harman Ltd. and JPS Industries Holdings LLC for such subsidiaries' underfunded pension liabilities. The performance of the financial markets and interest rates (given the mix of investment assets in the plan), as well as health care trends and associated mortality rates, impact our defined benefit pension plan expense and funding obligations. Significant changes in these factors, including adverse changes in discount rates, investment losses on plan assets and increases in participant life expectancy, may increase our funding obligations and adversely impact our financial condition. Required future contributions are estimated based upon assumptions such as discount rates on future obligations, assumed rates of return on plan assets and legislative changes. Actual future pension costs and required funding obligations will be affected by changes in the factors and assumptions described in the previous sentence, as well as other changes such as any plan termination or other acceleration events. See the Part II, Item 7, "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Liquidity and Capital Resources" section of this annual report on Form 10-K for additional information.
We could incur significant costs, including remediation costs, as a result of complying with environmental laws or failing to comply with other extensive regulations, including banking regulations, to which our businesses are subject to.
Our businesses are subject to extensive regulation by U.S. and non-U.S. governmental and self-regulatory entities at the federal, state and local levels, including laws related to anti-corruption, environmental matters, privacy matters, banking, health and safety, import laws and export control and economic sanctions, and the sale of products and services to government entities. Some of these laws and regulations pertain to the handling, storage and transportation of raw materials, products and wastes, and hazardous materials and wastes. Compliance with such requirements may make it necessary for us to retrofit existing facilities with additional pollution-control equipment, undertake new measures in connection with the storage, transportation, treatment and disposal of by-products and wastes or to take other steps, which may be at a substantial cost to our subsidiaries. Although our subsidiaries maintain insurance coverage for certain environmental matters, they could incur substantial costs, including cleanup costs, fines or sanctions, and third-party claims for property damage or personal injury, as a result of violations of, or liabilities under, environmental laws. Any material violations of these laws can lead to substantial liability, revocations of discharge permits, fines or penalties, and any new laws, regulations and enforcement policies could become more stringent and significantly increase our compliance costs or limit our future business opportunities, negatively impacting our financial condition, business and results of operations.
In addition, the consumer and business lending programs offered by WebBank are subject to extensive legal requirements at the federal and state levels, described in more detail below. If WebBank or its programs do not comply with these laws, it may be subject to claims for damages, fines, penalties or other relief, and may face regulatory examination and enforcement action, and some violations could result in an underlying loan being found invalid or unenforceable, or subject to payment defenses.
Many of the customers in our Energy segment utilize hydraulic fracturing services, which is the process of creating or expanding cracks, or fractures, in formations underground where water, sand and other additives are pumped under high pressure into the formation. Although our Energy segment is not a provider of hydraulic fracturing services, many of its services complement the hydraulic fracturing process. Fracturing regulations vary widely because they are regulated at the state level. States continue to evaluate fracturing activities and their impact on the environment. Legislation for broader federal regulation of hydraulic fracturing operations and the reporting and public disclosure of chemicals used in the fracturing process could be enacted. Additionally, the United States Environmental Protection Agency has asserted federal regulatory authority over certain hydraulic fracturing activities involving diesel fuel under the Safe Drinking Water Act. Our Energy segment's customers' operations could be adversely affected if additional regulation or permitting requirements were to be required for hydraulic fracturing activities, which could have an adverse effect on our results of operations.
As discussed above, our businesses must comply with substantial additional regulations. Failure to comply with these or any other regulations could result in civil and criminal, monetary and non-monetary penalties, damage to our reputation, disruptions to our business, limitations on our ability to manufacture, import, export and sell products and services, disbarment from selling to certain federal agencies, damage to our reputation and loss of customers and could cause us to incur significant legal and investigatory fees. Compliance with these and other regulations may also require us to incur significant expenses. The products and operations of our businesses are also often subject to the rules of industrial standards bodies such as the International Organization for Standardization (ISO), and failure to comply with these rules could result in withdrawal of certifications needed to sell our products and services and otherwise adversely impact our financial condition.
WebBank operates in a highly regulated environment, and its lending programs are subject to extensive federal and state regulation. Ongoing legislative and regulatory actions may significantly affect our liquidity or financial condition.
The consumer and business lending programs offered by WebBank are subject to extensive legal requirements at the federal and state levels. Among the laws that may be applicable to some or all of the programs offered by WebBank are:
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• | the Federal Truth in Lending Act and Regulation Z promulgated thereunder, which require certain disclosures to borrowers regarding the terms of their loans; |
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• | the Dodd-Frank Wall Street Reform and Consumer Protection Act ("Dodd-Frank Act"), the Federal Trade Commission Act and state laws that prohibit unfair, deceptive, or abusive acts or practices; |
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• | the Federal Equal Credit Opportunity Act and Regulation B promulgated thereunder, which prohibit discrimination in the extension of credit on the basis of age, race, color, sex, religion, marital status, national origin, receipt of public assistance or the exercise of any right under the Consumer Credit Protection Act; |
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• | the Fair Credit Reporting Act, which governs the use of credit reports and the reporting of information to credit bureaus, and imposes restrictions on the marketing of credit products through prescreened solicitations based on credit report information; |
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• | the Electronic Fund Transaction Act and Regulation E promulgated thereunder, which requires certain disclosures and imposes certain requirements on banks that provide electronic transfers of funds for consumers; |
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• | the Servicemembers Civil Relief Act and the Military Lending Act, which impose rate limitations and other requirements in connection with the credit obligations of active duty military personnel and certain of their dependents; |
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• | federal and state laws relating to privacy and the safeguarding of personally identifiable consumer information and data breach notification; |
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• | the Bank Secrecy Act, which relates to compliance with anti-money laundering, customer due diligence and record-keeping policies and procedures; and |
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• | laws governing the permissibility of the interest rates and fees that are charged to borrowers. |
The Dodd-Frank Act, which was signed into law in 2010, is intended primarily to overhaul the financial regulatory framework and impacts all financial institutions, including WebBank. The Dodd-Frank Act, among other things, established the Consumer Financial Protection Bureau ("CFPB") and Financial Stability Oversight Council, consolidated certain federal bank regulators and imposed increased corporate governance and executive compensation requirements. The Economic Growth, Regulatory Relief, and Consumer Protection Act, which was signed into law in May 2018, amended the Dodd-Frank Act in some respects, but many of the requirements of the Dodd-Frank Act remain in effect. The extent and complexity of this regulatory framework and other regulations has increased WebBank's regulatory compliance burden and therefore has increased its regulatory risk.
If WebBank or its programs do not comply with these laws, it may be subject to claims for damages, fines, penalties or other relief, and may face regulatory scrutiny. In addition, some violations could result in an underlying loan being found invalid or unenforceable, or subject to payment defenses. Any of these violations could result in the imposition of liability on WebBank, although WebBank may have indemnification rights for certain claims. In addition, there could be limitations on WebBank's ongoing or future business.
WebBank offers lending programs through relationships with Marketing Partners. WebBank and its Marketing Partners are subject to supervision by the FDIC and the UDFI. The authority of the FDIC and the UDFI includes the ability to examine WebBank, the Marketing Partners and the programs. The FDIC and UDFI also may bring enforcement actions against WebBank and its Marketing Partners if they detect any violations of law. These enforcement actions could result in monetary liability on WebBank, increased compliance obligations or limitations on its ongoing and future business.
Other regulators, including the CFPB and the Federal Trade Commission ("FTC"), may bring investigations and enforcement actions against WebBank's Marketing Partners. In 2018, the FTC brought such an enforcement action against one of WebBank's Marketing Partners, which remains ongoing. In 2019, the FTC reached a settlement with another WebBank Marketing Partner, in which the Marketing Partner agreed to change certain practices and to pay $3,850 to the FTC as equitable monetary relief. These actions against Marketing Partners may increase WebBank's own regulators' scrutiny of WebBank's business and could result in an increased risk of investigations or claims being brought against WebBank.
The U.S. Congress and state legislatures and federal and state regulatory authorities continually review banking laws, regulations and policies for possible changes. We cannot predict whether additional legislation or regulations will be enacted and, if enacted, the effect that it would have on our business, financial condition or results of operations.
Future cash flows from operations or through financings may not be sufficient to enable the Company to meet its obligations under its senior credit facility, and this would likely have a material adverse effect on its businesses, financial condition and results of operations, and credit market volatility may affect our ability to refinance our existing debt, borrow funds under our existing lines of credit or incur additional debt.
As of December 31, 2019, the Company had $161,314 available under its senior credit facility and $399,755 outstanding in indebtedness under this credit facility. There can be no assurances that the Company or its subsidiaries will continue to have access to their lines of credit if their financial performance does not satisfy the financial covenants set forth in the applicable financing agreements. If the Company or its subsidiaries do not meet certain of its financial covenants, and if they are unable to secure necessary waivers or other amendments from the respective lenders on terms acceptable to management, their ability to access available lines of credit could be limited, their debt obligations could be accelerated by the respective lenders and liquidity could be adversely affected.
If the Company's or its subsidiaries' cash needs are significantly greater than anticipated or they do not materially meet their business plans, or there are unanticipated downturns in the markets for the Company's and its subsidiaries' products and services, the Company or its subsidiaries may be required to seek additional or alternative financing sources. Future disruption and volatility in credit market conditions could have a material adverse impact on the Company's ability or that of its subsidiaries to refinance debt when it comes due on terms similar to our current credit facilities, or to draw upon existing lines of credit or incur additional debt if needed. There can be no assurance therefore that any such financing will be available or available on acceptable terms. The inability to generate sufficient cash flows from operations or through financings could impair the Company's or its subsidiaries' liquidity and would likely have a material adverse effect on their businesses, financial condition and results of operations.
Our business strategy includes acquisitions, and acquisitions entail numerous risks, including the risk of management diversion and increased costs and expenses, all of which could negatively affect the Company's profitability.
Our business strategy includes, among other things, strategic acquisitions, as well as potential opportunistic acquisitions. This element of our strategy entails several risks, including the diversion of management's attention from other business concerns and the need to finance such acquisitions with additional equity and/or debt.
In addition, once completed, acquisitions entail further risks, including: unanticipated costs and liabilities of the acquired businesses, including environmental liabilities, that could materially adversely affect our results of operations; increased regulatory compliance relating to the acquired business; difficulties in assimilating acquired businesses, their personnel and their financial reporting systems, which would prevent the expected benefits from the transaction from being realized within the anticipating time frame; negative effects on existing business relationships with suppliers and customers; and loss of key employees of the acquired businesses. In addition, any future acquisitions could result in the incurrence of additional debt and related interest expense, contingent liabilities and amortization expense related to intangible assets, which could have a material adverse effect on our business, financial condition, operating results and cash flow, or the issuance of additional equity, which could dilute our unitholders' interests.
There can therefore be no assurance that we will be able to conclude any acquisition successfully or that any acquisition will achieve the anticipated synergies or other positive results. If our acquisition strategy is not successful or if acquisitions are not well integrated into our existing operations, the Company's profitability could be negatively affected.
We may sustain losses in our investment portfolio, which could have an adverse effect on our results of operations, financial condition and liquidity.
A portion of our assets consists of equity securities which are adjusted to fair value each period, as well as other investments. An adverse change in economic conditions or setbacks unique to such companies, their operations or business models may result in a decline in the value of these investments. Such declines in value are principally recognized in net income or loss in accordance with current accounting principles generally accepted in the United States of America ("U.S. GAAP"). Any adverse changes in the financial markets and declines in value of our investments may result in additional losses and could have an adverse effect on our results of operations, financial condition and liquidity.
Rising interest rates may negatively impact our investments and have an adverse effect on our business, financial condition, results of operations and cash flows.
Changes in interest rates could have an adverse impact on our business by increasing the cost of borrowing, affecting our interest costs and our ability to make new investments on favorable terms or at all. More generally, interest rate fluctuations and changes in credit spreads on floating rate loans may have a negative impact on our investments and investment opportunities and, accordingly, may have a material adverse effect on our rate of return on invested capital, our net investment income, our net asset value and the market price of our securities. In addition, an increase in interest rates may make it difficult or impossible to make payments on outstanding indebtedness. Any increase in interest rates could have a negative effect on our interest costs and investments, which could negatively impact our operating results, financial condition and cash flows.
As more fully described in Part II, Item 7A, Quantitative and Qualitative Disclosures About Market Risk, of this Report, WebBank derives a portion of its income from the excess of interest collected over interest paid. The rates of interest WebBank earns on assets and pays on liabilities generally are established contractually for a period of time. Market interest rates change over time. Accordingly, WebBank's results of operations, like those of most financial institutions, are impacted by changes in interest rates and the interest rate sensitivity of its assets and liabilities. WebBank monitors and measures its exposure to changes in interest rates in order to comply with applicable government regulations and to limit the risk that changing interest rates could have a negative impact on its results of operations. There can be no assurance, however, that, in the event of adverse changes in interest rates, WebBank's efforts to limit interest rate risk will be successful.
The interest rates of our credit facilities are principally priced using a spread over LIBOR.
LIBOR, the London Interbank Offered Rate, is the basic rate of interest used in lending between banks on the London interbank market and is widely used as a reference for setting the interest rate on loans globally. We typically use LIBOR as a reference rate in our credit facilities such that the interest due to our lenders is calculated using LIBOR. Most of our credit facilities contain a stated minimum value for LIBOR, and as of December 31, 2019, the Company had $404,200 in outstanding indebtedness tied to LIBOR.
In 2017, the United Kingdom's Financial Conduct Authority, which regulates LIBOR, announced that it intends to phase out LIBOR by the end of 2021. It is unclear if at that time whether or not LIBOR will cease to exist, or if new methods of calculating LIBOR will be established such that it continues to exist after 2021 or if replacement conventions will be developed. The U.S. Federal Reserve, in conjunction with the Alternative Reference Rates Committee, a steering committee comprised of large U.S. financial institutions, is considering replacing U.S. dollar LIBOR with a new index calculated by short-term repurchase agreements, backed by Treasury securities ("SOFR"). SOFR is observed and backward-looking, which stands in contrast with LIBOR under the current methodology, which is an estimated forward-looking rate and relies, to some degree, on the expert judgment of submitting panel members. Given that SOFR is a secured rate backed by government securities, it will be a rate that does not take into account bank credit risk (as is the case with LIBOR). Whether or not SOFR attains market traction as a LIBOR replacement tool remains in question. As such, the future of LIBOR is uncertain. At this time, due to a lack of consensus existing as to what rate or rates may become accepted alternatives to LIBOR, it is impossible to predict the effect of any such alternatives on our liquidity or interest expense. If LIBOR ceases to exist, we may need to renegotiate our credit agreements that utilize LIBOR as a factor in determining the interest rate to replace LIBOR with the new standard that is established. Additionally, these changes may have an adverse impact on the amount of interest earned on the Company's loan portfolio.
Our businesses rely, and may rely, on their intellectual property and licenses to use others' intellectual property for competitive advantage. If our businesses are unable to protect their intellectual property, are unable to obtain or retain licenses to use others' intellectual property, or if they infringe upon or are alleged to have infringed upon others' intellectual property, it could have a material adverse effect on their financial condition, business and results of operations.
The success of each of our businesses depends in part on the trademarks and patents that they own, or their licenses to use others', brand names, proprietary technology and manufacturing techniques. In addition to trademark and patent protection, these businesses rely on copyrights, trade secrets, confidentiality procedures and contractual provisions to protect their intellectual property rights. The steps they have taken to protect their intellectual property rights may not prevent third parties, including our competitors, 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. We cannot provide assurance that courts will always uphold our businesses' intellectual property rights or enforce the contractual arrangements that they have entered into to obtain and protect their proprietary technology. Such unauthorized use could reduce or eliminate any competitive advantage our businesses have developed, cause them to lose sales or otherwise harm their business.
We conduct business 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 conduct business and have operations or own interests in securities of companies with operations outside the U.S. These operations have additional risks, including risks relating to currency exchange, changes in tariffs, 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, public health crises (such as the ongoing coronavirus outbreak), and possible imposition of non-U.S. taxes. We may also be adversely affected by regulatory changes and economic conditions following "Brexit" (the United Kingdom's exit from the European Union ("E.U."), which took effect on January 31, 2020), including uncertainties as to its effect on trade laws, tariffs and taxes, which could create instability and volatility in the global financial and currency markets. 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.
We also face several risks inherent in conducting business internationally, including compliance with international and U.S. laws and regulations that apply to our international operations. These laws and regulations include data privacy requirements,
labor relations laws, tax laws, anti-competition regulations, import and trade restrictions, U.S. laws such as export control laws and the Foreign Corrupt Practices Act, and similar laws in other countries which also prohibit corrupt payments to governmental officials or certain payments or remunerations to customers. Given the high level of complexity of these laws, there is a risk that some provisions may be inadvertently breached. Also, we may be held liable for actions taken by our local partners. Violations of these laws and regulations could result in fines and penalties, criminal sanctions against us, our officers or our employees, administrative remedies, and prohibitions on the conduct of our business. Any such violations could include prohibitions on our ability to offer our products and services in one or more countries.
Recent and potential changes in U.S. trade policies and retaliatory responses from other countries may significantly increase the costs or limit supplies of materials and products used in our operations.
The federal government has created significant uncertainty about the future relationship between the United States and other countries with respect to trade policies, taxes, government regulations and tariffs. The current U.S. presidential administration has signaled support for implementing and, in some instances, has already proposed or taken action with respect to major changes to certain trade policies in an effort to encourage U.S. production, including tariffs on imports from China, Mexico, Canada and other countries. Theses new or increased tariffs or duties have been imposed on an array of imported materials and goods used in connection with our operations. Additionally, the federal government has threatened to impose further tariffs, duties and/or trade restrictions on imports. Foreign governments have responded by imposing or increasing tariffs, duties and/or trade restrictions on U.S. goods and may consider other measures. These trade conflicts and related escalating governmental actions that result in additional tariffs, duties and/or trade restrictions could increase our operating costs, cause disruptions or shortages in our supply chains and/or negatively impact the U.S., regional or local economies, and, individually or in the aggregate, materially and adversely affect our business and our consolidated financial results.
Litigation or compliance failures could adversely affect our profitability.
The nature of our businesses and our investment strategies expose us to various litigation matters. We contest these matters vigorously and make insurance claims where appropriate. However, litigation is inherently costly and unpredictable, making it difficult to accurately estimate the outcome of any litigation. These lawsuits may include claims for compensatory damages, punitive and consequential damages and/or injunctive relief. The defense of these lawsuits may divert our management's attention, we may incur significant expenses in defending these lawsuits, and we may be required to pay damage awards or settlements or become subject to equitable remedies that could adversely affect our operations and financial condition. Moreover, any insurance or indemnification rights that we may have may be insufficient or unavailable to protect us against such losses. In addition, developments in legal proceedings in any given period may require us to adjust the loss contingency estimates that we have recorded in our consolidated financial statements, record estimates or reserves for liabilities or assets previously not susceptible of reasonable estimates or pay cash settlements or judgments. Any of these developments could adversely affect our financial condition in any particular period. Although we make accruals as we believe warranted, the amounts that we accrue could vary significantly from any amounts we actually pay due to the inherent uncertainties in the estimation process. See the "Litigation Matters" included in Note 20 - "Commitments and Contingencies" to Consolidated Financial Statements, included in Part II, Item 8, Financial Statements and Supplementary Data, of this annual report on Form 10-K for additional information.
We may be required to record additional impairments and related charges or may be subject to litigation as a result of our packaging business' administration and bankruptcy proceedings.
As previously disclosed in our quarterly report on Form 10-Q for the quarterly period ended September 30, 2019, declines in the financial and operating results of our packaging business resulted in non-cash goodwill impairment charges. The packaging business continued to decline during the fourth quarter of 2019. API Group Limited and certain of its affiliates commenced administration proceedings in the United Kingdom on January 31, 2020, and API Americas Inc. commenced bankruptcy proceedings in the United States on February 2, 2020 (collectively, "Proceedings"). As a result of the Proceedings, we may be required to record further non-cash impairment and related charges in future periods, and our future operating results could be adversely impacted. Negative events or publicity associated with the Proceedings could also adversely affect relationships with our suppliers, service providers, customers, employees and other third parties, which in turn could adversely affect our operations and financial condition. In addition, we may be subject to increased litigation risks as a result of the Proceedings, including litigation by third-parties with respect to the treatment of their claims. The defense of any such litigation may divert our management's attention, and we may incur significant expenses in defending these lawsuits. It is not possible to predict the potential litigation that we may become party to, nor the final result of such litigation. The impact of any such litigation could be material.
A significant disruption in, or breach in security of, our technology systems could adversely affect our business.
We rely on information and operational technology systems in the conduct of our business to process, transmit and store electronic information, to manufacture our products and to manage or support a variety of critical business processes and activities. In some cases, we may rely upon third-party providers of hosting, support and other services to meet our information technology requirements. Our information and operational technology systems are subject to disruption, damage or failure from a variety of sources, including, without limitation, computer viruses, security breaches, cyber-attacks, natural disasters and defects in design. Cybersecurity incidents in particular are evolving and include, but are not limited to, use of malicious software, attempts to gain unauthorized access to data or control of automated production systems, and other security breaches that could lead to disruptions in systems, unauthorized release of confidential or otherwise protected information and the corruption of data. Various measures have been implemented to manage our risks related to technology systems and network disruptions. However, given the unpredictability of the timing, nature and scope of technology security incidents and disruptions, our businesses could potentially be subject to production downtimes, operational delays, the compromising of confidential or otherwise protected information, destruction or corruption of data, security breaches, theft, other manipulation or improper use of our systems and networks or financial losses from remedial actions, any of which could have a material adverse effect on our competitive position, financial condition, reputation or results of operations. We have experienced and expect to continue to experience actual or attempted cyber-attacks of our information technology systems or networks, yet none of these actual or attempted cyber-attacks has had a material effect on our operations or financial condition. Further, any failure by our hosting and support partners or other third-party service providers in the performance of their services could materially harm our business. While we maintain cybersecurity insurance coverage that we believe is adequate for our business, such coverage may not cover all potential costs and expenses associated with any security incidents that may occur in the future.
A breach of our information technology systems could also result in the misappropriation of intellectual property, business plans or trade secrets. Any failure of our systems or those of our third-party service providers could result in unauthorized access or acquisition of such proprietary information, and any actual or perceived security breach could cause significant damage to our reputation and adversely impact our relationships with our customers. Additionally, while our security systems are designed to maintain the physical security of our facilities and information systems, accidental or willful security breaches or other unauthorized access by third parties to our facilities or our information systems could lead to misappropriation of proprietary and confidential information.
If any person, including any of our employees or those with whom we share such information, negligently disregards or intentionally breaches our established controls with respect to our client, customer or employee data, or otherwise mismanages or misappropriates that data, we could be subject to significant monetary damages, litigation, regulatory enforcement actions, fines and/or criminal prosecution in one or more jurisdictions.
We take cybersecurity seriously and devote significant resources and tools to protect our systems, products and data and to prevent unwanted intrusions and disclosures, in compliance with applicable U.S. federal and state laws and non-U.S. laws and regulations addressing cybersecurity. However, these security and compliance efforts are costly to implement and may not be successful. There can be no assurance that we will be able to prevent, detect and adequately address or mitigate such cyber-attacks or security breaches. Any such breach could have a material adverse effect on our operations and our reputation and could cause irreparable damage to us or our systems, regardless of whether we or our third-party providers are able to adequately recover critical systems following a systems failure.
Current and proposed laws and regulations regarding the protection of personal data could result in increased risks of liability or increased cost to us or could limit our service offerings.
Some of our businesses collect and store personal data and any security breaches of our systems could result in the misappropriation or unauthorized disclosure of personal data belonging to us or to our employees, partners, customers or suppliers. The regulatory environment surrounding information security and privacy is increasingly demanding. We are subject to numerous U.S. federal and state laws and non-U.S. laws and regulations governing the privacy, security and protection of personal and confidential information of our customers and employees. In particular, the E.U. has adopted the General Data Protection Regulation, or GDPR, which contains numerous requirements for processing personal data of, and honoring the exercise of GDPR specific rights by, E.U.-based data subjects and provides for penalties up to the greater of €20,000 or 4% of worldwide gross revenue for violation. We are subject to the GDPR with respect to our E.U. operations and employees. Privacy laws such as the GDPR and similar laws and regulations are increasing in complexity and number, change frequently and sometimes conflict. In particular, as the E.U. states reframe their national legislation to harmonize with the GDPR, we will need to monitor compliance with all relevant E.U. member states' laws and regulations, including where permitted derogations from the GDPR are introduced. In addition, the state of California has recently enacted a comprehensive data privacy law that grants new rights to California residents, and additional
laws may be enacted in other states or at the U.S. federal level. The GDPR, any resultant changes in E.U. member states' national laws and regulations, and existing or new U.S. state or federal data privacy laws and regulations may increase our compliance obligations and may necessitate the review and implementation of policies and processes relating to our collection, security and use of data.
This increase in compliance obligations could also lead to an increase in compliance costs which may have an adverse impact on our business, financial condition and results of operations. Moreover, failure to comply with these data protection and privacy regulations and rules in various jurisdictions, or to resolve any serious privacy or security complaints, could subject us to regulatory sanctions, criminal prosecution or civil liability. Additionally, if we violate applicable laws, regulations or duties relating to the use, privacy or security of personal data, we could be subject to civil liability or criminal prosecution, be forced to alter our business practices and suffer reputational harm.
Labor disputes may have an adverse effect on the Company's business.
Some of our businesses are party to collective bargaining agreements with various labor unions in the United States and internationally. For more information, see Part I, Item 1, "Business - Employment." We may be subject to, among other things, strikes, work stoppages or work slowdowns as a result of disputes under these collective bargaining agreements and labor contracts or our potential inability to negotiate acceptable contracts with these unions. If the unionized workers in the United States or internationally were to engage in a strike, work stoppage or other slowdown; if other employees were to become unionized or if the terms and conditions in future labor agreements were renegotiated, our businesses could experience a significant disruption in their operations, which could cause them to be unable to deliver products to customers on a timely business. Such disruptions could also result in loss of business and higher ongoing labor costs.
Additionally, we believe some of our direct and indirect suppliers have unionized workforces. Strikes, work stoppages or slowdowns experienced by suppliers could result in slowdowns or closures of facilities where components of our products are manufactured or delivered. Any interruption in the production or delivery of these components could reduce sales, increase costs and have a material adverse effect on us.
Loss of essential employees or an inability to recruit and retain experienced personnel could have a significant negative impact on our business.
Our success is largely dependent on the skills, experience, and efforts of our management and other employees. The loss of the services of one or more members of our senior management or of numerous employees with essential skills could have a negative effect on our business, financial condition and results of operations. If we are not able to retain or attract talented, committed individuals to fill vacant positions when needs arise, it may adversely affect our ability to achieve our business objectives.
We may also face difficulty hiring and retaining experienced employees. Continued economic expansion and reductions in unemployment rates and the tightening of labor markets could increase the cost of operating any or all of our businesses or make it more difficult to recruit and retain those with appropriate skillsets. In a tight labor market, it may take longer to identify and hire additional employees, and such delays could, in turn, increase fees paid to recruiting firms or the amount of overtime paid to existing employees. A tightening labor market may also drive the cost of retaining employees with appropriate skillsets higher to the extent we face increased competition from employers willing or able to pay higher wages.
WebBank's status as lender of the loans it offers, and the ability of assignees to collect interest, may be challenged, and these challenges could negatively impact WebBank's ongoing and future business.
WebBank's business includes lending programs with Marketing Partners, where the Marketing Partners provide origination servicing for the loans and subsequently purchase the loans (or interests in the loans) that are originated by WebBank. There have been litigation and regulatory actions which have challenged lending arrangements where a bank has made a loan and then sold and assigned it to an entity that is engaged in assisting with the origination and servicing of the loan. Some of these cases have alleged that the marketing and servicing entity should be viewed as the "true creditor" of the loans originated through the lending program, and the bank should be disregarded. If this type of challenge is successful, state law interest rate limitations and other requirements that apply to non-bank lenders would then be applicable, instead of the federal interest rate laws that govern bank lenders. Other cases have relied on the claim that even if a bank originated a loan based on the federal interest rate laws, an assignee of a bank is not permitted to rely on the federal law and is instead subject to state law limitations. Certain of these challenges have been brought or threatened in programs involving WebBank, including a pending lawsuit against one of WebBank's Marketing Partners brought by the Administrator of the Uniform Consumer Credit Code in Colorado. WebBank has intervened in that litigation, which remains pending and is set for trial beginning in May 2020. Such cases or regulatory actions, if successfully brought against
WebBank or its Marketing Partners or others, could negatively impact WebBank's ongoing and future business. WebBank continues to structure its programs, and to exercise control over these programs, to address these risks, although there can be no assurance that additional cases or regulatory actions will not be brought in the future.
WebBank is subject to capital requirements, and SPLP could be called upon by the FDIC to infuse additional capital into WebBank to the extent that WebBank fails to satisfy its capital requirements.
In July 2013, the Federal Reserve Board, the Office of the Comptroller of the Currency and the FDIC issued rules that implemented the Basel III changes to the international regulatory capital framework and revised the U.S. risk-based and leverage capital requirements for U.S. banking organizations in order to strengthen identified areas of weakness in capital rules and to address relevant provisions of the Dodd-Frank Act.
Effective January 1, 2015 for WebBank, FDIC regulations implementing the Basel III Accord modified WebBank's minimum capital requirements by defining what constitutes capital for regulatory capital purposes and adding a 4.5% Common Equity Tier 1 ratio and increased the Tier 1 capital ratio requirement from 4% to 6%. FDIC regulations also require WebBank to comply with a total capital ratio of 8% and a leverage ratio of 4%. Additionally, a Capital Conservation Buffer (composed solely of common equity Tier 1 capital) equal to 2.5% above the new regulatory minimum capital requirements began to be phased in starting January 1, 2016 and has been fully implemented as of January 1, 2019. The Capital Conservation Buffer is on top of the minimum risk-weighted capital ratios and had the effect of increasing those ratios by 2.5% each. A failure of WebBank to maintain the aggregate minimum capital required by the Capital Conservation Buffer will impair its ability to make certain distributions (including dividends and stock repurchases) and discretionary bonus payments to executive officers. A failure of WebBank to maintain capital as required by the FDIC's minimum capital requirements would subject WebBank to the FDIC's prompt corrective action regime, which may further impair WebBank's ability to make payments or distributions and may require a capital restoration plan or other corrective regulatory measures.
Federal banking agencies jointly adopted a final rule on July 9, 2019 that simplified the treatment of certain assets and deductions for institutions such as WebBank that are not subject to the so-called "advanced approaches" capital rule. The final rule adjusted the deduction thresholds for certain mortgage servicing assets, deferred tax assets, investments in the capital of unconsolidated financial institutions and minority interests. Although the final rule is not fully effective until April 1, 2020, the banking agencies adopted a rule on November 21, 2017 (following a proposed rule on September 27, 2017, that proposed to simplify these capital requirements) that provided interim relief to non-advanced approaches banking organizations by extending the regulatory capital transition periods effective in 2017 for certain items, including regulatory capital deductions, risk weights and certain minority interest limitations.
The Company currently cannot predict the specific impact and long-term effects that Basel III and its implementation in the U.S. will have on WebBank and the banking industry more generally. Furthermore, the Dodd-Frank Act codified a longstanding policy that all companies that directly or indirectly control an FDIC-insured bank are required to serve as a source of financial strength for such institution. As a result, SPLP could be called upon by the FDIC to infuse additional capital into WebBank to the extent that WebBank fails to satisfy its capital requirements, including at times that SPLP might not otherwise be inclined to provide it and even if doing so may adversely affect SPLP's ability to meet its other obligations, which include limitations on capital contributions to WebBank specified in the Company's senior credit facility.
WebBank's lending programs depend on relationships with Marketing Partners.
WebBank offers its lending programs with Marketing Partners. For the years ended December 31, 2019 and 2018, the two highest grossing contractual lending programs accounted for approximately 23% and 29%, respectively, of WebBank's total revenue. If its Marketing Partners do not provide origination services or other services to WebBank, or provide those services in a faulty manner, that may negatively impact WebBank's ongoing and future business. In addition, if the Marketing Partners or other third parties do not purchase the loans (or interests in loans) that are originated by WebBank, then WebBank may need to retain those loans (or interests in loans) and that may negatively impact its ongoing and future business. Marketing Partners are also required to indemnify WebBank for certain liabilities that may arise from the lending programs. If Marketing Partners are unable or unwilling to satisfy their indemnification obligations, then WebBank would face increased risk from liability for claims made in private litigation or regulatory enforcement actions. Marketing Partners may rely on outside sources of capital to meet their obligations. Market conditions and other factors may affect the availability of capital for Marketing Partners. The availability of capital may also affect the volume of loans that can be originated through WebBank's lending programs. In recent periods, the availability of capital has been more limited for several of WebBank's Marketing Partners, resulting in a decrease in loan volume and a negative impact on WebBank's business.
Economic downturns could disrupt and materially harm our businesses.
Negative trends in the general economy, including rising interest rates and commodity prices, could cause a downturn in the markets for our products and services. A significant portion of our revenues in the Diversified Industrial segment are received from customers in transportation, oil and gas exploration, and construction-related industries, which have experienced significant financial downturns in the past. These industries are cyclical and demand for their products tends to fluctuate due to changes in national and global economic conditions, availability of credit and other factors. A worsening of customer demand in these industries would adversely affect our revenues, profitability, operating results and cash flows. In our Energy segment, the level of oil and natural gas exploration and production activity in the U.S. is affected by the price of oil. Reduced discovery 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. Our Financial Services segment could be impacted by tightening of the credit markets and other general economic declines that could result in a decrease in lending and demand for consumer loans. We may also experience a slowdown if some customers experience difficulty in obtaining adequate financing due to tightness in the credit markets. Furthermore, the financial stability of our customers or suppliers may be compromised, which could result in additional bad debts for us or non-performance by suppliers. Our assets may also be impaired or subject to write-down or write-off as a result of these conditions. These adverse effects would likely be exacerbated if global economic conditions worsen, resulting in wide-ranging, adverse and prolonged effects on general business conditions, and materially and adversely affect our operations, financial results and liquidity.
Our subsidiaries do not have long-term contracts with all of their customers, and the loss of customers with which we do not have long-term contracts could materially adversely affect our financial condition, business and results of operations.
Our businesses are based primarily upon individual orders, sales and service agreements with customers and not long-term contracts. As such, these customers could cease buying products or using our services at any time, for any reason, and with little or no notice, and we will have no recourse in the event a customer no longer wants to purchase products from us or use our services. If a significant number of our customers reduce, or elect not to purchase products or use our services, or we have to make price concessions in order to retain certain customers, it could materially adversely affect our financial condition, business and results of operations. In the event of termination, our subsidiaries' contracts sometimes provide for fees for winding down the products or services, but these fees may not be sufficient for us to maintain the revenues associated with the canceled contract or to compensate for the losses incurred in finding replacement sources of revenue.
Our internal controls over financial reporting may not be effective, and our independent registered public accounting firm may not be able to certify as to their effectiveness, which could have a significant and adverse effect on our business and reputation.
We are subject to the requirements of Section 404 of the Sarbanes-Oxley Act of 2002 and the rules and regulations of the SEC thereunder ("Section 404"). Section 404 requires our management to report on the design and effectiveness of our internal controls over financial reporting. To the extent that we remain an "accelerated filer," as defined under the rules of the SEC (with a public float of voting and non-voting common equity of $75,000 or more as of the last business day of the second quarter of our most recently completed fiscal year), Section 404 also requires an independent registered public accounting firm to test our internal controls over financial reporting and report on the effectiveness of such controls. There can be no assurance that our independent registered public accounting firm will issue an unqualified report attesting to our internal controls over financial reporting. As a result, there could be a negative reaction in the financial markets due to a loss of confidence in the reliability of our consolidated financial statements or our consolidated financial statements could change.
Any failure to maintain or implement new or improved controls, or any difficulties we encounter in their implementation, could result in significant deficiencies or material weaknesses, and cause us to fail to meet our periodic reporting obligations, or result in material misstatements in our consolidated financial statements. We may also be required to incur costs to improve our internal control system and hire additional personnel or remediate significant deficiencies or material weaknesses. This could negatively impact our results of operations.
Risks Related to Our Structure
The unitholders have limited recourse to maintain actions against the General Partner, the Board of Directors, our officers and the Manager.
The Limited Partnership Agreement of SPLP, or the "Partnership Agreement," contains broad indemnification and exculpation provisions that limit the right of a unitholder to maintain an action against the General Partner, the Board of Directors, our officers and the Manager, or to recover losses or costs incurred due to action or inaction by these parties which have a negative effect on the Company.
Our Partnership Agreement contains certain provisions that may limit the voting rights of some unitholders.
Our Partnership Agreement contains specific provisions that are intended to comply with regulatory limitations on the ownership of our securities as a result of our ownership of WebBank. Under the Partnership Agreement, a person or group that acquires beneficial ownership of 10% or more of the common units without the prior approval of the Board of Directors may lose voting rights with respect to all of its common units in excess of 9.9%.
We may have conflicts of interest with the minority shareholders of our businesses and decisions may need to be made by disinterested directors, without the participation of directors or officers associated with the Manager and the Company. These decisions may be different from the decisions we would make, and may or may not be in the best interests of our unitholders.
Because we own less than 100% of certain affiliates, and we may engage in transactions with these affiliates from time to time, the boards of directors and officers of those businesses, including directors and officers associated with our Manager and the Company, have fiduciary duties to their respective shareholders. As a result, they may make decisions that are in the best interests of their shareholders generally but which are not necessarily in the best interest of our unitholders. In dealings with us, the directors and officers of our businesses may have conflicts of interest and decisions may have to be made without their participation. Such decisions may be different from the decisions we would make and may not be in the best interests of our common and preferred unitholders, which may have an adverse effect on our business and results of operations.
There are certain interlocking relationships among us and certain affiliates of Warren G. Lichtenstein, our Executive Chairman, which may present potential conflicts of interest.
Warren G. Lichtenstein, our Executive Chairman and a substantial unitholder, is the Chief Executive Officer of our Manager. As of December 31, 2019, Mr. Lichtenstein directly owned approximately 3.4% of our outstanding common units. In addition, affiliates of our Manager, including Mr. Lichtenstein, beneficially own approximately 57.0% of our outstanding common units, although Mr. Lichtenstein disclaims beneficial ownership of any common units not directly held by him. We have entered into transactions and/or agreements with these entities. There can be no assurance that such entities will not have interests in conflict with our own, or that Mr. Lichtenstein will not have interests different than those of our unitholders.
Certain members of our management team may be involved in other business activities that may involve conflicts of interest, possibly diverting their attention from the Company's operations.
Certain individual members of our management team, including Warren G. Lichtenstein, our Executive Chairman, and Jack L. Howard, our President, may from time to time be involved in the management of other businesses, including those owned or controlled by our Manager and its affiliates. Accordingly, these individuals may focus a portion of their time and attention on managing these other businesses. Conflicts may arise in the future between our interests and the interests of the other entities and business activities in which such individuals are involved.
Risks Related to Our Manager
We depend on Warren G. Lichtenstein, the Chairman and Chief Executive Officer of the Manager, and Jack L. Howard, the President of the Manager, in running our businesses. The loss of their services could have a material adverse effect on our business, results and financial condition.
Our success depends on the efforts, skills, reputation and business contacts of Warren G. Lichtenstein, the Chairman and Chief Executive Officer of the Manager and Jack L. Howard, the President of the Manager. While the key members of the Manager have worked for the Manager and its affiliates for many years, our Manager does not have any employment agreements with any of the key members of its management team, and their continued service is not guaranteed. The loss of the services of Mr. Lichtenstein or Mr. Howard could have a material adverse effect on our asset values, revenues, net income and cash flows and could harm our ability to maintain or grow our existing operations or pursue additional opportunities in the future.
We cannot determine the amount of the Management Fee that will be paid or Class C partnership units that will be issued over time with any certainty.
The Manager receives a fee ("Management Fee") at an annual rate of 1.5% of total partners' capital. Our total partners' capital will be impacted by the performance of our businesses and other businesses we may acquire in the future, as well as the issuance of additional common or preferred units. Changes in our total partners' capital and in the resulting Management Fee could be significant, resulting in a material adverse effect on our results of operations. In addition, if our performance declines, assuming our total partners' capital remains the same, the Management Fee will increase as a percentage of our income. In addition, SPH SPV-I LLC, an affiliate of the Manager, holds partnership profits interests in the form of incentive units which entitle the holder generally to share in 15% of the increase in the equity value of the Company, as calculated for the twenty trading days prior to each year end. The incentive units' share of such appreciation is reflected by classifying a portion of the incentive units as Class C units of the Company. Any issuance of such Class C units will result in dilution to existing limited partners' holdings in the Company.
Our Manager's liability is limited under the Management Agreement, and we have agreed to indemnify our Manager against certain liabilities. Such indemnification may incentivize our Manager to take unnecessary risks with respect to actions for which it will be indemnified.
Under the Management Agreement, our Manager, its members, officers, employees, affiliates, agents and legal representatives are not liable for, and we have agreed to indemnify such persons from, any loss or expense, including without limitations, any judgment, settlement, reasonable attorneys' fees and other costs and expenses incurred in connection with the defense of any actual or threatened proceeding, other than losses resulting from willful misconduct or gross negligence in the performance of such indemnified person's obligations and duties. Such indemnification may incentivize our Manager to take unnecessary risks with respect to actions for which it will be indemnified.
Risks Related to our Common and Preferred Units
We may issue additional common or preferred units, or other series of units, in the future without the consent of unitholders and at a discount to the market price of such units. In particular, sales of significant amounts of the common or preferred units may cause the respective prices of the units to decline.
Under the terms of the Partnership Agreement, additional common or preferred units, or additional series of units, may be issued without the consent of unitholders at a discount to the market price. In addition, other classes of securities may be issued with rights that are senior to or which otherwise have preferential rights to the rights of the common and preferred units. Sales of significant amounts of the common or preferred units in the public market or the perception that such sales of significant amounts may occur could adversely affect their respective market prices. Moreover, the perceived risk of any potential dilution could cause common or preferred unitholders to attempt to sell their units and investors to "short" the common or preferred units, a practice in which an investor sells units that he or she does not own at prevailing market prices, hoping to purchase units later at a lower price to cover the sale. Any event that would cause the number of common or preferred units being offered for sale to increase would likely cause the respective units' market price to further decline. These sales might also make it more difficult for us to sell additional common or preferred units in the future at a time and price that we deem appropriate.
Transfer restrictions contained in the Company's Partnership Agreement and other factors could hinder the development of an active market for our common or preferred units.
There can be no assurance as to the volume of our common or preferred units or the degree of price volatility for our common and preferred units traded on the New York Stock Exchange. There are transfer restrictions contained in the Company's Partnership Agreement to help protect net operating tax loss carryforwards of certain of the Company's corporate subsidiaries and other portfolio companies. Unless renewed, the transfer restrictions will expire on February 7, 2023, and they could hinder development of an active market for our common and preferred units.
Risks Related to Taxation
All statutory references in this section are to the Internal Revenue Code of 1986, as amended, or the "Code."
Our common unitholders may be subject to U.S. federal, state and other income tax on their share of our taxable income, regardless of whether they receive any cash distributions from us.
The Company operates, for U.S. federal income tax purposes, as a partnership and not a publicly traded partnership taxable as a corporation. Our common unitholders will be subject to U.S. federal, state, local and possibly, in some cases, foreign income tax on their allocable share of our taxable income, whether or not they receive cash distributions from us. Any future determination
to declare dividends on the Company's common units will remain at the discretion of the Board of Directors of the General Partner and is separately determined regardless of the allocation of taxable income. Accordingly, our common unitholders may be required to make tax payments in connection with their ownership of common units that significantly exceed their cash distributions in any given year.
The Centralized Partnership Audit Regime may subject unitholders to IRS initiated tax adjustments for prior years on their personal tax returns.
For tax years beginning on or after January 1, 2018, the Company is subject to partnership audit rules enacted as part of the Bipartisan Budget Act of 2015 ("Centralized Partnership Audit Regime"). Under the Centralized Partnership Audit Regime, any Internal Revenue Service ("IRS") audit of the Company would be conducted at the Company level, and if the IRS determines an adjustment, the default rule is that the Company would pay an "imputed underpayment" including interest and penalties, if applicable. The Company may instead elect to make a "push-out" election, in which case the partners for the year that is under audit would be required to take into account the adjustments on their own personal income tax returns.
Newly enacted U.S. government tax reform could have a negative impact on the results of future operations.
On December 22, 2017, the U.S. Tax Cuts and Jobs Act ("Act") was enacted. The Act made substantial changes to the Code, some of which could have an adverse effect on our business. Among other things, the Act (i) reduces the U.S. corporate income tax rate from 35% to 21% beginning in 2018, (ii) generally will limit annual deductions for interest net expense to no more than 30% of our "adjusted taxable income," plus 100% of our business interest income for the year, and (iii) will permit a taxpayer to offset only 80% (rather than 100%) of its taxable income with any U.S. net operating losses ("NOLs") generated for taxable years beginning after 2017. The U.S. Department of the Treasury has broad authority to issue regulations and interpretative guidance that may significantly impact how we will apply the law and impact our results of operations in the period issued. While the U.S. Department of the Treasury has issued some proposed regulations since the enactment of the Act, additional guidance is likely forthcoming. The prospects of supplemental legislation or regulatory processes to address uncertainties that arise because of the Act, or evolving technical interpretations of the tax law, may cause our consolidated financial statements to be impacted, whether negatively or positively, in the future. We intend to continue analyzing the effects of the Act as subsequent guidance continues to emerge.
Our tax treatment is not assured. If we are taxed as a corporation, it could adversely impact our results of operations.
A partnership is not a taxable entity, and distributions by a partnership to a partner are generally not taxable to the partnership or the partner unless the amount of cash distributed to such partner exceeds the partner's adjusted basis in its partnership interest. Section 7704 provides that generally publicly traded partnerships are taxed as corporations. However, an exception, referred to as the "Qualifying Income Exception," exists with respect to publicly traded partnerships of which 90 percent or more of the gross income for every taxable year consists of "qualifying income" as defined in the Code. We expect that we will meet the Qualifying Income Exception.
If the Qualifying Income Exception is not available to us, then we will be treated as a corporation instead of a partnership. In that event, the deemed incorporation of SPLP should be tax-free. If we were taxed as a corporation, (i) our net income would be taxed at corporate income tax rates, thereby substantially reducing our profitability, (ii) our common unitholders would not be allowed to deduct their share of losses of SPLP and (iii) distributions to our common unitholders, other than liquidating distributions, would constitute dividends to the extent of our current or accumulated earnings and profits, and would be taxable as such.
Our structure involves complex provisions of U.S. federal income tax law for which no clear precedent or authority may be available.
The U.S. federal income tax treatment of our common unitholders depends in some instances on interpretations of complex provisions of U.S. federal income tax law for which no clear precedent or authority may be available. Our Partnership Agreement permits our General Partner to modify it from time to time, including the allocation of items of income, gain, loss and deduction (including unrealized gain and unrealized loss to the extent allowable under U.S. federal income tax law), without the consent of our unitholders, to address certain changes in U.S. federal income tax regulations, legislation or interpretation or to preserve the uniformity of our common units. In some circumstances, such revisions could have a material adverse impact on some or all common unitholders. In addition, we formed a subsidiary partnership, to which we contributed certain of our assets ("Subsidiary Partnership"). To preserve the uniformity of common units, we (but not the Subsidiary Partnership) made an election permitted under Section 754, and we will adopt the remedial allocation method under Section 704(c) with respect to items of income, gain, loss and deduction attributable to assets contributed to us (which we will contribute to the Subsidiary Partnership), to account for any difference between
the tax basis and fair market value of such assets at the time of contribution, or attributable to the "book-up" or "book-down" of our assets prior to their contribution to the Subsidiary Partnership, or while they were held by the Subsidiary Partnership, to account for the difference between the tax basis and fair market value of such assets at the time of a mark-to-market event. We intend generally to make allocations under Section 704(c) to our common unitholders in accordance with their respective percentage interests. However, built-in gain or built-in loss in existence and allocable to the assets we contributed to the Subsidiary Partnership, when recognized, will be allocated to our common unitholders as of the contribution date. We intend to prepare our tax returns on the basis that buyers of common units from such unitholders will not inherit such unitholders' built-in gains or built-in losses as of that date as a result of the election under Section 754. However, it is not clear whether this position will be upheld if challenged by the 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"). A tax-exempt partner of a partnership may be treated as earning UBTI if the partnership regularly engages in a trade or business that is unrelated to the exempt function of the tax-exempt partner, if the partnership derives income from debt-financed property (as we may borrow money) or if the tax-exempt organization's partnership interest itself is debt-financed.
Our subsidiaries may not be able to fully utilize their tax benefits, which could result in increased cash payments for taxes in future periods.
NOLs may be carried forward to offset federal and state taxable income in future years and reduce the amount of cash paid for income taxes otherwise payable on such taxable income, subject to certain limits and adjustments. If fully utilized, our subsidiaries' NOLs and other carryforwards could provide them with significant tax savings in future periods. Their ability to utilize these tax benefits in future years will depend upon their ability to generate sufficient taxable income and to comply with the rules relating to the preservation and use of NOLs, as well as potential future changes in tax laws. The potential benefit of the NOLs and other carryforwards may be limited or permanently lost as a result of the following:
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• | the inability to generate sufficient taxable income in future years to use such benefits before they expire as NOLs generated for taxable years ending on or before December 31, 2017 have a limited carryforward period; |
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• | a change in control of our subsidiaries that would trigger limitations on the amount of taxable income in future years that may be offset by NOLs and other carryforwards that existed prior to the change in control; and |
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• | examinations and audits by the IRS and other taxing authorities could reduce the amount of NOLs and other credit carryforwards that are available for future years. |
Certain of our subsidiaries maintain valuation allowances against their NOLs and other carryforwards due to uncertainty regarding their ability to generate sufficient taxable income in future periods. Their inability to utilize the NOLs and other carryforwards could result in increased cash payments for taxes in future periods.
Item 1B. Unresolved Staff Comments
None.
Item 2. Properties
Diversified Industrial Segment
As of December 31, 2019, the Diversified Industrial segment had 34 active operating plants in the United States, Canada, China, United Kingdom, Germany, France and Mexico, with a total area of approximately 3,237,005 square feet, including warehouse, office, sales, service and laboratory space. The Diversified Industrial segment also owns or leases sales, service, office and warehouse facilities at 26 other locations in the United States, United Kingdom, Canada, Germany, France, Italy, Poland, Netherlands, Singapore and China which have a total area of approximately 599,384 square feet, and owns or leases 4 non-operating locations with a total area of approximately 572,245 square feet. Manufacturing facilities are located in: Camden, Delaware; Brewster, New York; Bristol, Pennsylvania; Addison, Illinois; Evansville and Osgood, Indiana; Agawam and Billerica, Massachusetts; Rockford and Montevideo, Minnesota; Arden and Statesville, North Carolina; Anderson, South Carolina; Kenosha, Cudahy and Muskego, Wisconsin; Warwick, Rhode Island; Lawrence, Kansas; Toronto, Canada; Matamoros, Mexicali and Tecate, Mexico; Welham Green, Gwent, Poynton and Livingston, United Kingdom; Freiburg, Germany; Riberac, France; and Xianghe and Suzhou,
China. The following plants are leased: both Tecate plants, Addison, Kenosha, Muskego, Arden, Rockford, one of two Matamoros plants, Mexicali, Freiburg, Xianghe and Suzhou plants. The other plants are owned. The Diversified Industrial segment considers its manufacturing plants and service facilities to be well maintained and efficiently equipped, and therefore suitable for the work being done. The productive capacity and extent of utilization of its facilities is dependent in some cases on general business conditions and in other cases on the seasonality of the utilization of its products. Capacity can be expanded at some locations.
Energy Segment
As of December 31, 2019, the Energy business owns 3 buildings in Williston, North Dakota, including one that serves as operations hub in the Bakken basin along with separate buildings with office and shop space, 3 buildings in Farmington, New Mexico which serve as office and shop space, and a non-operating location in Arnegard, North Dakota. The Energy business also owns office and shop space in Texas that serves as its operations hub in the Permian basin. Steel Energy leases 4,740 square feet of office space headquartered in Johnstown, Colorado, and the Energy business leases shop space and office space in other locations under month-to-month arrangements on an as-needed basis, and owns and leases housing for temporary living arrangements for certain of its employees.
Steel Sports has a lease for approximately 28 acres of land in Yaphank, New York for its baseball services operation. Steel Sports also has a lease for office space in Cedar Knolls, New Jersey which serves as the headquarters for its youth soccer operation, and also has leases in various states for small administrative offices to support the soccer operation.
Financial Services Segment
As of December 31, 2019, WebBank leases 29,751 square feet of office space headquartered in Salt Lake City, Utah. WebBank also leases office space in Summit, New Jersey and Denver, Colorado. WebBank believes that these facilities are adequate for its current needs and that suitable additional space will be available as required.
Corporate and Other Segment
As of December 31, 2019, Steel Services leases 15,660 square feet of office space headquartered in New York, New York, leases 3,082 square feet of office space in Hermosa Beach, California, leases 3,230 square feet of office space in Schaumburg, Illinois and leases approximately 1,350 square feet of office space in Warwick, Rhode Island.
Item 3. Legal Proceedings
The information set forth under Note 20 - "Commitments and Contingencies" to Consolidated Financial Statements, included in Part II, Item 8, Financial Statements and Supplementary Data, of this Report, is incorporated herein by reference. For an additional discussion of certain risks associated with legal proceedings, see also Part I, Item 1A, Risk Factors, of this Report.
Item 4. Mine Safety Disclosures
Not applicable.
PART II
Item 5. Market for the Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
All monetary amounts in this section are in thousands, except for common unit and per common unit data.
Market Information
As of December 31, 2019, we had 25,023,128 common units issued and outstanding. Our common units, no par value, are quoted on the New York Stock Exchange under the symbol "SPLP."
Holders
As of December 31, 2019, there were approximately 91 unitholders of record.
Issuer Purchases of Equity Securities
The Board of Directors of Steel Partners Holdings GP Inc., the general partner of SPLP, has approved the repurchase of up to an aggregate of 3,000,000 of the Company's common units ("Repurchase Program"). The Repurchase Program supersedes and cancels, to the extent any amounts remain available, all previously approved repurchase programs. Any purchases made under the Repurchase Program will be made from time to time on the open market at prevailing market prices or in negotiated transactions off the market, in compliance with applicable laws and regulations. In connection with the Repurchase Program, the Company may enter into a stock purchase plan. The Repurchase Program has no termination date. During the year ended December 31, 2019, the Company purchased 505,336 units, for an aggregate price of approximately $6,721. There remain 910,823 units that may yet be purchased under the Repurchase Program.
Item 6. Selected Financial Data
The following table contains our selected historical consolidated financial data, which should be read in conjunction with our consolidated financial statements and the related notes thereto, and "Management's Discussion and Analysis of Financial Condition and Results of Operations" contained in this Annual Report on Form 10-K. The selected financial data as of and for the years ended December 31, 2019 and 2018 has been derived from our audited consolidated financial statements at those dates and for those periods, contained elsewhere in this Annual Report on Form 10-K. The historical selected financial data as of and for the years ended December 31, 2017, 2016 and 2015 has been derived from our audited consolidated financial statements adjusted for discontinued operations and other adjustments at those dates and for those periods, as applicable, not contained in this Annual Report on Form 10-K.
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CONSOLIDATED STATEMENT OF OPERATIONS DATA (a), (b) | | | Year Ended December 31, |
(in thousands, except common unit and per common unit data) | 2019 | | 2018 | | 2017 | | 2016 | | 2015 |
Revenue | $ | 1,561,771 |
| | $ | 1,584,614 |
| | $ | 1,372,027 |
| | $ | 1,163,549 |
| | $ | 965,059 |
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Net income (loss) from continuing operations | $ | 3,853 |
| | $ | (31,490 | ) | | $ | 6,012 |
| | $ | 2,571 |
| | $ | 70,311 |
|
Income from discontinued operations | — |
| | — |
| | — |
| | — |
| | 86,257 |
|
Net income (loss) | 3,853 |
| | (31,490 | ) | | 6,012 |
| | 2,571 |
| | 156,568 |
|
Net loss (income) attributable to noncontrolling interests in consolidated entities | 97 |
| | (1,114 | ) | | (6,028 | ) | | 4,059 |
| | (19,833 | ) |
Net income (loss) attributable to common unitholders | $ | 3,950 |
| | $ | (32,604 | ) | | $ | (16 | ) | | $ | 6,630 |
| | $ | 136,735 |
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Net income (loss) per common unit - basic: | | | | | | | | | |
Net income (loss) from continuing operations | $ | 0.16 |
| | $ | (1.25 | ) | | $ | — |
| | $ | 0.25 |
| | $ | 2.97 |
|
Net income from discontinued operations | — |
| | — |
| | — |
| | — |
| | 2.03 |
|
Net income (loss) attributable to common unitholders | $ | 0.16 |
| | $ | (1.25 | ) | | $ | — |
| | $ | 0.25 |
| | $ | 5.00 |
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Basic weighted-average common units outstanding | 24,964,643 |
| | 25,984,185 |
| | 26,053,098 |
| | 26,353,714 |
| | 27,317,974 |
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Net income (loss) per common unit - diluted: | | | | | | | | | |
Net income (loss) from continuing operations | $ | 0.16 |
| | $ | (1.25 | ) | | $ | — |
| | $ | 0.25 |
| | $ | 2.96 |
|
Net income from discontinued operations | — |
| | — |
| | — |
| | — |
| | 2.02 |
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Net income (loss) attributable to common unitholders | $ | 0.16 |
| | $ | (1.25 | ) | | $ | — |
| | $ | 0.25 |
| | $ | 4.98 |
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Diluted weighted-average common units outstanding | 24,965,209 |
| | 25,984,185 |
| | 26,053,098 |
| | 26,486,209 |
| | 27,442,308 |
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(a) | Statement of operations data includes the consolidation of the results of acquired entities, or their operating assets, from their respective acquisition dates: primarily, JPS Industries, Inc. on July 2, 2015, CoSine Communications, Inc. and API on January 20, 2015 and April 17, 2015, respectively, SL Industries, Inc. on June 1, 2016, Electromagnetic Enterprise division of Hamilton Sundstrand Corporation on September |
30, 2016, Hazen Paper Company and Amsterdam Metallized Products B.V. on July 27, 2016 and December 1, 2016, respectively, Basin Well Logging Wireline Services, Inc. in May 2017, Dunmore and PST Group, Inc. ("PST") on February 16, 2018 and June 1, 2018, respectively, and National Partners on April 1, 2019.
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(b) | Effective January 1, 2018 upon adoption of Accounting Standards Update No. 2016-01, unrealized gains or losses on equity securities are no longer recorded in Accumulated other comprehensive income (loss) on the consolidated balance sheet, but are instead recorded in Realized and unrealized (gains) losses on securities, net in the consolidated statement of operations. |
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BALANCE SHEET DATA | December 31, |
(in thousands, except per common unit data) | 2019 | | 2018 | | 2017 | | 2016 | | 2015 |
Cash and cash equivalents | $ | 148,348 |
| | $ | 334,884 |
| | $ | 418,755 |
| | $ | 450,128 |
| | $ | 185,852 |
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Marketable securities | 220 |
| | 1,439 |
| | 58,313 |
| | 53,650 |
| | 80,842 |
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Long-term investments | 275,836 |
| | 258,044 |
| | 236,144 |
| | 120,066 |
| | 167,214 |
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Total assets | 2,332,354 |
| | 2,356,059 |
| | 2,164,040 |
| | 1,967,115 |
| | 1,684,773 |
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Long-term debt (a) | 391,136 |
| | 478,096 |
| | 412,584 |
| | 330,126 |
| | 235,913 |
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SPLP Partners' capital (b) | 472,613 |
| | 488,787 |
| | 519,239 |
| | 548,741 |
| | 558,034 |
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SPLP Partners' capital per common unit | 18.89 |
| | 19.32 |
| | 19.71 |
| | 20.98 |
| | 20.95 |
|
Dividends declared per common unit | — |
| | — |
| | — |
| | 0.15 |
| | — |
|
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(a) | Excludes the current portion of long-term debt, which totaled $14,208, $799, $459, $62,928 and $2,176 at December 31, 2019, 2018, 2017, 2016 and 2015, respectively. |
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(b) | SPLP Partners' capital as of December 31, 2017 was revised as a result of a tax related adjustment recorded in 2019. For further details see Note 1 - "Nature of the Business and Basis of Presentation" to the Consolidated Financial Statements found elsewhere in this Form 10-K. |
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, 2019 and 2018. 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 Part I, Item 1A., Risk Factors. All monetary amounts used in this discussion are in thousands except common and preferred unit and per common and preferred unit amounts.
Business Segments
SPLP operates through the following segments: Diversified Industrial, Energy, Financial Services, and Corporate and Other, which are managed separately and offer different products and services. For a more complete description of the Company's segments, see Part I, Item 1., "Business - Products and Product Mix" found elsewhere in this Form 10-K.
Recent Developments
Following is a summary of recent developments that have impacted the Company in 2019 and early 2020. For additional discussion of these matters, please see the Company's Consolidated Financial Statements, included in Part II, Item 8., Financial Statements and Supplementary Data, of this Report.
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• | On February 6, 2020 ("Redemption Date"), the Company redeemed 1,600,000 preferred units at a price equal to $25 per unit, plus an amount of $0.22 per unit, equal to any accumulated and unpaid distributions up to, but excluding, the Redemption Date, for a total payment of approximately $40,400. |
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• | On January 31, 2020, the Company announced that API Group Limited and certain of its affiliates commenced administration proceedings in the United Kingdom. The purpose of the administration proceedings is to facilitate an orderly sale or wind-down of its United Kingdom operations. In the United States, API Americas Inc. voluntarily filed for Chapter 11 proceedings in Bankruptcy Court on February 2, 2020 in order to facilitate the sale or liquidation of its assets. The API entities are wholly-owned subsidiaries of the Company and are included in the Diversified Industrial segment. The Company will deconsolidate the API entities on the previously noted filing dates as it no longer holds a controlling financial interest as of those dates. |
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• | During the three months ended December 31, 2019, as a result of declines in market conditions and customer demand at API, the Company determined that the carrying value of API's long-lived assets, primarily machinery and equipment and buildings, exceeded their estimated market value by $26,514. Also, as described in Note 9 - "Goodwill and Other Intangible Assets, Net," found elsewhere in this Form 10-K, the Company fully impaired API's intangible assets of $3,078. The Company recorded these impairments in Asset Impairment Charges in the accompanying consolidated statement of operations, found elsewhere |
in this Form 10-K, for the year ended December 31, 2019. Further declines in market conditions, customer demand or other potential changes in operations at API in future periods may increase the risk that API's remaining long-lived assets, totaling approximately $12,053 in aggregate as of December 31, 2019, may not be recoverable and may potentially be impaired. Refer to Note 26 - "Subsequent Events," found elsewhere in this Form 10-K, for further discussion of API.
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• | As a result of declines in customer demand and the performance of the packaging business, which includes the operations of API and Dunmore and is included in the Diversified Industrial segment, the Company fully impaired the packaging business' goodwill and recorded a $41,853 charge in Goodwill impairment charges in the accompanying consolidated statements of operations, found elsewhere in this Form 10-K, during the quarterly period ended September 30, 2019. |
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• | During the second quarter of 2019, the Company became aware of a misstatement related to its January 2015 sale of Arlon, LLC, whereby the tax basis of Arlon, LLC at the time of sale was calculated incorrectly. The misstatement was discovered in connection with an IRS examination of the Company's 2015 income tax filing. The accompanying consolidated statements of changes in capital found elsewhere in this Form 10-K have been adjusted to decrease the opening balance of Partners' capital as of December 31, 2017 by approximately $26,864, with a corresponding increase to Accrued liabilities at December 31, 2018. The estimated liability of $26,864 is made up of federal tax and interest of $24,002, and state tax and interest of $2,862. The IRS audit was expanded to include 2016 and 2017, and all years were subsequently agreed and settled for federal tax purposes in late 2019. The Company settled the federal portion of the IRS audit for $21,782 in the fourth quarter of 2019, and recorded a benefit of $2,220 in Income tax provision in the accompanying consolidated statement of operations, found elsewhere in this Form 10-K, for the year ended December 31, 2019. Refer to Note 17 - "Income Taxes," found elsewhere in this Form 10-K, for further detail. |
| |
• | On July 9, 2019, the Company entered into a settlement of a stockholder class action, captioned Sciabacucchi v. DeMarco, et al. In the settlement, the defendants agreed to pay the plaintiff class $30,000, but denied that they engaged in any wrongdoing or committed any violation of law or breach of duty and stated that they believe they acted properly, in good faith, and in a manner consistent with their legal duties. The settlement was approved by the court on December 2, 2019. Our insurance carriers agreed to contribute an aggregate of $17,500 toward the settlement amount. The Company recorded a charge of $12,500 in Selling, general and administrative expenses in the consolidated statement of income for the twelve months ended December 31, 2019, found elsewhere in this Form 10-K, which consisted of the legal settlement of $30,000, reduced by $17,500 of insurance recoveries. The settlement was paid on December 17, 2019. The Company made a demand of an aggregate of $10,000 in further contributions from two insurance carriers, which the carriers declined, and we are pursuing claims in court to endeavor to recover this sum, although there can be no assurance as to the outcome of this litigation. |
| |
• | On April 1, 2019, the Company, through its subsidiary, WebBank, completed the acquisition of National Partners for consideration of $47,725, which includes assumed debt, including debt with a third-party that WebBank had a preexisting $10,000 participation, and is subject to a potential $1,800 earn-out based on future performance through June 30, 2020, as provided in the purchase agreement. National Partners provides commercial premium finance solutions for national insurance brokerages, independent insurance agencies and insureds in key markets throughout the United States. |
| |
• | On January 31, 2019, the Company entered into an amendment to its senior credit facility to allow the Company to (i) convert $200,000 of the revolving credit commitments into a term loan with quarterly amortization equating to 5.0% per annum, (ii) amend certain defined leverage ratios under the credit agreement, increasing allowable leverage by 0.25 "turns" on a permanent basis through the maturity of the credit agreement, (iii) eliminate certain previously allowed investments, which would have reduced collateral available to the Company's lenders and (iv) make certain administrative changes. |
| |
• | During the year ended December 31, 2019, the Company purchased 505,336 units, for an aggregate price of approximately $6,721 under the Repurchase Program. The Company has purchased 2,089,177 common units for an aggregate price of approximately $33,881 under the Repurchase Program, and there remain 910,823 units that may yet be purchased under the Repurchase Program. |
RESULTS OF OPERATIONS
Comparison of the Years Ended December 31, 2019 and 2018
|
| | | | | | | |
| Year Ended December 31, |
| 2019 | | 2018 |
Revenue | $ | 1,561,771 |
| | $ | 1,584,614 |
|
Cost of goods sold | 1,052,241 |
| | 1,109,978 |
|
Selling, general and administrative expenses | 356,803 |
| | 352,794 |
|
Goodwill impairment charges | 41,853 |
| | — |
|
Asset impairment charges | 30,506 |
| | 8,108 |
|
Interest expense | 41,409 |
| | 39,234 |
|
Realized and unrealized (gains) losses on securities, net | (47,315 | ) | | 62,586 |
|
All other expenses, net | 58,513 |
| | 21,336 |
|
Total costs and expenses | 1,534,010 |
| | 1,594,036 |
|
Income (loss) before income taxes and equity method investments | 27,761 |
| | (9,422 | ) |
Income tax provision | 15,865 |
| | 12,559 |
|
Loss of associated companies, net of taxes | 8,043 |
| | 9,509 |
|
Net income (loss) | 3,853 |
| | (31,490 | ) |
Net loss (income) attributable to noncontrolling interests in consolidated entities | 97 |
| | (1,114 | ) |
Net income (loss) attributable to common unitholders | $ | 3,950 |
| | $ | (32,604 | ) |
Revenue
Revenue in 2019 decreased $22,843, or 1.4%, as compared to 2018. Excluding growth from acquisitions of 1.1% and the effect of an increase in average silver prices in the Diversified Industrial segment of 0.1%, which were partially offset by the unfavorable impact from changes in foreign exchange rates of 0.2%, revenue decreased by 2.4%. The net revenue decrease of 2.4% was due to lower sales volume from our Diversified Industrial and Energy segments, partially offset by growth from the Financial Services segment. The acquisition growth was primarily due to the acquisitions of Dunmore (February 2018), PST (June 2018) and National Partners (April 2019).
Cost of Goods Sold
Cost of goods sold in 2019 decreased $57,737, or 5.2%, as compared to 2018, primarily due to decreases in the Diversified Industrial and Energy segments. The decreases in the Diversified Industrial and Energy segments were primarily due to lower sales volume, partially offset by the impact of the Dunmore and PST acquisitions.
Selling, General and Administrative Expenses
Selling, general and administrative expenses ("SG&A") in 2019 increased $4,009, or 1.1%, as compared to 2018, primarily due to the expense associated with a recent legal settlement in the Corporate and Other segment and higher personnel expenses to support growth initiatives and increasing regulatory compliance in the Financial Services segment, partially offset by decreases in the Diversified Industrial, excluding the Dunmore acquisition impact, and Energy segments due to lower sales volume and lower acquisition related costs.
Goodwill Impairment Charges
As a result of declines in customer demand and the performance of the packaging business during 2019, the Company recorded a $41,853 charge in the consolidated statements of operations for the year ended December 31, 2019, to fully impair the packaging business' goodwill. There were no goodwill impairment charges recorded during 2018.
Asset Impairment Charges
The asset impairment charges of $30,506 in 2019 were primarily associated with impairments of long-lived and intangible assets due to declines in the packaging business in the Company's Diversified Industrial segment. The impairment charges in 2018 of $8,108 were primarily associated with the loss of acquired customer relationships in the Company's packaging business.
Interest Expense
Interest expense for the years ended December 31, 2019 and 2018 was $41,409 and $39,234, respectively. The higher interest expense in 2019 was primarily due to higher borrowing levels due to the Company's recent acquisitions and legal settlement described above and in Note 20 - "Commitments and Contingencies" found elsewhere in this Form 10-K.
Realized and Unrealized (Gains) Losses on Securities, Net
Realized and unrealized (gains) losses on securities, net was a gain of $47,315 in 2019, as compared to a loss of $62,586 in 2018. The changes in realized and unrealized (gains) losses on securities over the respective periods are primarily due to mark-to-market adjustments on the Company's portfolio of securities, which are required to be recorded in earnings under U.S. GAAP.
All Other Expenses, Net
All other expenses, net were higher by $37,177 in 2019, as compared to 2018. The increase was primarily due to higher finance interest expense and a higher provision for loan losses, as compared to 2018.
Income Taxes
As a limited partnership, we are generally not responsible for federal and state income taxes, and our profits and losses are passed directly to our limited partners for inclusion in their respective income tax returns. The Company's tax provision represents the income tax expense or benefit of its consolidated corporate subsidiaries. For the year ended December 31, 2019, a tax provision of $15,865 was recorded, as compared to $12,559 in 2018. Significant losses incurred by a corporate subsidiary together with losses incurred by the limited partnership, a flow-through entity, for both of which no tax benefits have been recorded, resulted in an effective tax rate of 57.1% based on the consolidated income before income taxes and equity method investments of $27,761 in 2019. A similarly high consolidated effective tax rate was the case in 2018, driven primarily by the same factors.
Loss of Associated Companies, Net of Taxes
The Company incurred a loss from associated companies, net of taxes, of $8,043 in 2019, as compared to a loss of $9,509 in 2018. For the details of each of these investments and the related mark-to-market adjustments in both periods, see Note 11 - "Investments" to the SPLP consolidated financial statements found elsewhere in this Form 10-K.
Segment Analysis
|
| | | | | | | |
| Year Ended December 31, |
| 2019 | | 2018 |
Revenue: | | | |
Diversified industrial | $ | 1,226,365 |
| | $ | 1,286,665 |
|
Energy | 163,972 |
| | 175,950 |
|
Financial services | 171,434 |
| | 121,999 |
|
Total | $ | 1,561,771 |
| | $ | 1,584,614 |
|
Segment (loss) income before interest expense and income taxes: | | | |
Diversified industrial | $ | (20,430 | ) | | $ | 56,057 |
|
Energy | (1,850 | ) | | (9,012 | ) |
Financial services | 68,560 |
| | 54,544 |
|
Corporate and other | 14,847 |
| | (81,286 | ) |
Income before interest expense and income taxes | 61,127 |
| | 20,303 |
|
Interest expense | 41,409 |
| | 39,234 |
|
Income tax provision | 15,865 |
| | 12,559 |
|
Net income (loss) | $ | 3,853 |
| | $ | (31,490 | ) |
Segment depreciation and amortization: | | | |
Diversified industrial | $ | 54,141 |
| | $ | 59,582 |
|
Energy | 17,548 |
| | 20,214 |
|
Financial services | 423 |
| | 397 |
|
Corporate and other | 154 |
| | 130 |
|
Total depreciation and amortization | $ | 72,266 |
| | $ | 80,323 |
|
Loss of associated companies, net of taxes (included above): | | | |
Corporate and other | $ | (8,043 | ) | | $ | (9,509 | ) |
Total | $ | (8,043 | ) | | $ | (9,509 | ) |
Diversified Industrial
Net sales in 2019 decreased by $60,300, or 4.7%, as compared to 2018. The change in net sales reflects $14,323 in incremental sales associated with the Dunmore (February 2018) and PST (June 2018) acquisitions and an increase of $2,100 as a result of higher average silver prices, partially offset by the unfavorable impact from foreign exchange rates of $3,918. Excluding the acquisitions, foreign exchange rate impact and change in silver prices, net sales decreased by approximately $72,805, primarily due to lower sales volume from the packaging and electrical products businesses, partially offset by higher sales volume in the building materials business.
Segment operating income in 2019 decreased by $76,487, or 136.4%, as compared to 2018. The lower operating income was driven by $41,853 of goodwill impairment charges and $30,506 of asset impairment charges primarily associated with the packaging business and lower gross profit, as compared to the same period in 2018, primarily due to lower sales volume from the packaging and electrical products businesses, partially offset by higher operating income from the building materials business on higher sales volume and as well as lower acquisition related costs in 2019.
Energy
In 2019, net revenue decreased $11,978, or 6.8%, as compared to 2018. The decrease in net revenue was primarily due to the Company's exit from certain low margin operations, as well as the adverse effects that the decline in energy prices has had on the oil services industry.
Segment operating loss in 2019 decreased $7,162, or 79.5%, as compared to 2018. The reduction in operating loss was primarily due to higher gross profit and lower SG&A. The increase in gross profit was primarily the result of exiting low margin business that resulted in improved gross profit margin in 2019, as compared to 2018.
Financial Services
Revenue in 2019 increased $49,435, or 40.5%, as compared to 2018. The increase was due to higher interest income driven by larger outstanding loan receivable balances and increased volume in lending programs, as compared to 2018.
Segment operating income in 2019 increased $14,016, or 25.7%, as compared to 2018. The increase was due to the impact of the higher revenue discussed above, partially offset by higher expenses. SG&A increased primarily driven by higher personnel expenses to support growth initiatives and the continued expansion of WebBank's compliance and oversight group to meet increasing regulatory expectations. In addition, the provision for loan losses increased $24,315 and finance interest expense increased $5,991 in 2019, as compared to 2018. The higher provision for loan losses was to support growth of consumer and small business loans held to maturity, and the higher finance interest expense was due to a larger deposit balance to support loan growth and an increase in interest rates.
Net Interest Income, Margin and Interest Rate Spreads
Net interest income is the difference between interest earned on interest-earning assets and interest incurred on interest-bearing liabilities. By its nature, net interest income is especially vulnerable to changes in the mix and amounts of interest-earning assets and interest-bearing liabilities. In addition, changes in the interest rates and yields associated with these assets and liabilities can significantly impact net interest income. The following table summarizes the average balances, the amount of interest earned or incurred and the applicable yields for interest-earning assets and the costs of interest-bearing liabilities that generate net interest income. For purposes of calculating the yields in these schedules, the average loan balances also include the principal amounts of nonaccrual and restructured loans. However, interest received on nonaccrual loans is included in income only to the extent that cash payments have been received and not applied to principal reductions. In addition, interest on restructured loans is generally accrued at reduced rates.
|
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2019 | | 2018 |
| Average | Interest | | | Average | Interest | |
| Outstanding | Earned/ | Yield/ | | Outstanding | Earned/ | Yield/ |
| Balance | Paid | Rate | | Balance | Paid | Rate |
Interest-earning assets: | | | | | | | |
Loans receivable | $ | 637,226 |
| $ | 106,489 |
| 16.7 | % | | $ | 396,538 |
| $ | 59,234 |
| 14.9 | % |
Held-to-maturity securities | 50,024 |
| 2,031 |
| 4.1 | % | | 40,286 |
| 1,323 |
| 3.3 | % |
Available-for-sale investments | 2,925 |
| 56 |
| 1.9 | % | | 2,624 |
| 64 |
| 2.4 | % |
Federal funds sold | 13,222 |
| 274 |
| 2.1 | % | | 3,047 |
| 49 |
| 1.6 | % |
Interest bearing deposits | 162,252 |
| 3,204 |
| 2.0 | % | | 234,198 |
| 4,026 |
| 1.7 | % |
Total interest-earning assets | 865,649 |
| 112,054 |
| 12.9 | % | | 676,693 |
| 64,696 |
| 9.6 | % |
Non interest-earning assets | 19,549 |
| | | | 17,965 |
| | |
Total assets | $ | 885,198 |
| | | | $ | 694,658 |
| | |
Interest-bearing liabilities: | | | | | | | |
Savings accounts | $ | 169,651 |
| 2,902 |
| 1.7 | % | | $ | 99,809 |
| 1,062 |
| 1.1 | % |
Time deposits | 533,146 |
| 13,380 |
| 2.5 | % | | 460,201 |
| 9,226 |
| 2.0 | % |
Total interest-bearing liabilities | 702,797 |
| 16,282 |
| 2.3 | % | | 560,010 |
| 10,288 |
| 1.8 | % |
Other non interest-bearing liabilities | 23,913 |
| | | | 12,737 |
| | |
Total liabilities | 726,710 |
| | | | 572,747 |
| | |
Shareholder's equity | 158,488 |
| | | | 121,911 |
| | |
Total liabilities and shareholder's equity | $ | 885,198 |
| | | | $ | 694,658 |
| | |
Net interest income | | $ | 95,772 |
| | | | $ | 54,408 |
| |
Spread on average interest-bearing funds | | | 10.6 | % | | | | 7.7 | % |
Net interest margin | | | 11.1 | % | | | | 8.0 | % |
Return on assets | | | 5.7 | % | | | | 6.4 | % |
Return on equity | | | 31.6 | % | | | | 36.5 | % |
Equity to assets | | | 17.9 | % | | | | 17.5 | % |
WebBank has several lending arrangements with companies where it originates credit card and other loans for consumers and small businesses. These loans are classified as held for sale and are typically sold after origination.
The following table presents the effects of changing rates and volumes on WebBank's net interest income for the periods indicated. The rate column shows the effects attributable to changes in rate (changes in rate multiplied by prior volume). The volume column shows the effects attributable to changes in volume (changes in volume multiplied by prior rate). The total column represents the sum of the prior columns. For purposes of this table, changes attributable to both rate and volume, which cannot be segregated, have been allocated proportionately, based on the changes due to rate and the changes due to volume.
|
| | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2019 vs 2018 | | 2018 vs 2017 |
| Increase/(Decrease) | | Increase/(Decrease) |
| Due to Volume | Due to Rate | Total | | Due to Volume | Due to Rate | Total |
Earning assets: | | | | | | | |
Loans receivable | $ | 39,524 |
| $ | 7,732 |
| $ | 47,256 |
| | $ | 24,713 |
| $ | 6,125 |
| $ | 30,838 |
|
Held-to-maturity securities | 358 |
| 349 |
| 707 |
| | 675 |
| 34 |
| 709 |
|
Available-for-sale investments | 9 |
| (17 | ) | (8 | ) | | 44 |
| 3 |
| 47 |
|
Federal funds sold | 207 |
| 18 |
| 225 |
| | 13 |
| 21 |
| 34 |
|
Interest bearing deposits | (1,593 | ) | 770 |
| (823 | ) | | 168 |
| 1,627 |
| 1,795 |
|
Total earning assets | 38,505 |
| 8,852 |
| 47,357 |
| | 25,613 |
| 7,810 |
| 33,423 |
|
Savings accounts | 986 |
| 853 |
| 1,839 |
| | 87 |
| 569 |
| 656 |
|
Time deposits | 1,605 |
| 2,547 |
| 4,152 |
| | 3,052 |
| 1,895 |
| 4,947 |
|
Total funds | 2,591 |
| 3,400 |
| 5,991 |
| | 3,139 |
| 2,464 |
| 5,603 |
|
Net variance | $ | 35,914 |
| $ | 5,452 |
| $ | 41,366 |
| | $ | 22,474 |
| $ | 5,346 |
| $ | 27,820 |
|
Balance Sheet Analysis
Loan Portfolio
As of December 31, 2019, net loans accounted for 77% of WebBank's total assets compared to 58% at the end of 2018. The following table presents WebBank's loans outstanding by type of loan as of December 31, 2019 and the five most recent year-ends.
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| As of December 31, |
| 2019 | | 2018 | | 2017 | | 2016 | | 2015 |
| Amount | % | | Amount | % | | Amount | % | | Amount | % | | Amount | % |
Real estate loans: | | | | | | | | | | | | | | |
Commercial - owner occupied | $ | 230 |
| — | % | | $ | 252 |
| 0.1 | % | | $ | 272 |
| 0.1 | % | | $ | 604 |
| 0.4 | % | | $ | 1,542 |
| 0.7 | % |
Commercial - other | 429 |
| 0.1 | % | | 380 |
| 0.1 | % | | 296 |
| 0.1 | % | | 266 |
| 0.2 | % | | 281 |
| 0.1 | % |
Total real estate loans | 659 |
| 0.1 | % | | 632 |
| 0.2 | % | | 568 |
| 0.2 | % | | 870 |
| 0.6 | % | | 1,823 |
| 0.8 | % |
Commercial and industrial | 251,349 |
| 32.2 | % | | 146,758 |
| 28.0 | % | | 84,726 |
| 30.8 | % | | 50,564 |
| 32.6 | % | | 66,253 |
| 29.1 | % |
Consumer loans | 302,714 |
| 38.8 | % | | 188,391 |
| 35.9 | % | | 53,238 |
| 19.3 | % | | 22,805 |
| 14.7 | % | | — |
| — | % |
Loans held for sale | 225,013 |
| 28.9 | % | | 188,143 |
| 35.9 | % | | 136,773 |
| 49.7 | % | | 80,692 |
| 52.1 | % | | 159,592 |
| 70.1 | % |
Total loans | 779,735 |
| 100.0 | % | | 523,924 |
| 100.0 | % | | 275,305 |
| 100.0 | % | | 154,931 |
| 100.0 | % | | 227,668 |
| 100.0 | % |
Less: | | | | | | | | | | | | | | |
Deferred fees and discounts | — |
| | | — |
| | | — |
| | | — |
| | | (15 | ) | |
Allowance for loan losses | (36,682 | ) | | | (17,659 | ) | | | (5,237 | ) | | | (1,483 | ) | | | (630 | ) | |
Total loans receivable, net | $ | 743,053 |
| | | $ | 506,265 |
| | | $ | 270,068 |
| | | $ | 153,448 |
| | | $ | 227,023 |
| |
The following table includes a maturity profile for the loans that were outstanding at December 31, 2019:
|
| | | | | | | | | | | | | | | |
Due During Years Ending December 31, | Real Estate | | Commercial & Industrial | | Consumer | | Loans Held for Sale |
2020 | $ | — |
| | $ | 233,510 |
| | $ | 125,067 |
| | $ | 225,013 |
|
2021-2024 | 230 |
| | 17,839 |
| | 177,647 |
| | — |
|
2025 and thereafter | 429 |
| | — |
| | — |
| | — |
|
Total | $ | 659 |
| | $ | 251,349 |
| | $ | 302,714 |
| | $ | 225,013 |
|
Nonperforming Lending Related Assets
Total nonaccrual loans were $0 at December 31, 2019 and 2018.
|
| | | | | | | | | | | | | | | | | | | |
| As of December 31, |
| 2019 | | 2018 | | 2017 | | 2016 | | 2015 |
Non-accruing loans: | | | | | | | | | |
Commercial real estate - owner occupied | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 341 |
|
Commercial and industrial | — |
| | — |
| | — |
| | — |
| | 2 |
|
Total | — |
| | — |
| | — |
| | — |
| | 343 |
|
Accruing loans delinquent: | | | | | | | | | |
90 days or more | 8,051 |
| | 3,326 |
| | 2,658 |
| | 3 |
| | — |
|
Total | 8,051 |
| | 3,326 |
| | 2,658 |
| | 3 |
| | — |
|
Foreclosed assets: | | | | | | | | | |
Commercial real estate - owner occupied | — |
| | — |
| | — |
| | — |
| | 11 |
|
Total | — |
| | — |
| | — |
| | — |
| | 11 |
|
Total non-performing assets | $ | 8,051 |
| | $ | 3,326 |
| | $ | 2,658 |
| | $ | 3 |
| | $ | 354 |
|
Total as a percentage of total assets | 0.9 | % | | 0.4 | % | | 0.4 | % | | — | % | | 0.1 | % |
Summary of Loan Loss Experience
The methodologies used to estimate the allowance for loan losses ("ALLL") depend upon the impairment status and portfolio segment of the loan. Loan groupings are created for each loan class and are then graded against historical and industry loss rates. After applying historic loss experience, as described above, we review the quantitatively derived level of ALLL for each segment using qualitative criteria. We track various risk factors that influence our judgment regarding the level of the ALLL across the portfolio segments. The following table summarizes activity in WebBank's allowance for loan and lease losses for the periods indicated:
|
| | | | | | | | | | | | | | | | | | | |
| As of December 31, |
| 2019 | | 2018 | | 2017 | | 2016 | | 2015 |
Balance at beginning of period | $ | 17,659 |
| | $ | 5,237 |
| | $ | 1,483 |
| | $ | 630 |
| | $ | 557 |
|
Charge offs: | | | | | | | | | |
Commercial and industrial | (8,667 | ) | | (2,772 | ) | | (933 | ) | | — |
| | — |
|
Other | (17,918 | ) | | (4,549 | ) | | (1,214 | ) | | — |
| | — |
|
Total charge offs | (26,585 | ) | | (7,321 | ) | | (2,147 | ) | | — |
| | — |
|
Recoveries: | | | | | | | | | |
Commercial real estate - owner occupied | 22 |
| | 20 |
| | 17 |
| | 14 |
| | 25 |
|
Commercial real estate - other | — |
| | — |
| | — |
| | 35 |
| | 44 |
|
Commercial and industrial | 461 |
| | 272 |
| | 142 |
| | 30 |
| | 54 |
|
Other | 1,752 |
| | 393 |
| | 103 |
| | — |
| | — |
|
Total recoveries | 2,235 |
| | 685 |
| | 262 |
| | 79 |
| | 123 |
|
Net (charge offs) recoveries | (24,350 | ) | | (6,636 | ) | | (1,885 | ) | | 79 |
| | 123 |
|
Additions charged to operations | 43,373 |
| | 19,058 |
| | 5,639 |
| | 774 |
| | (50 | ) |
Balance at end of period | $ | 36,682 |
| | $ | 17,659 |
| | $ | 5,237 |
| | $ | 1,483 |
| | $ | 630 |
|
Ratio of net charge offs during the period to average loans outstanding during the period | 3.8 | % | | 1.7 | % | | 0.8 | % | | — | % | | (0.1 | )% |
The distribution of WebBank's allowance for losses on loans at the dates indicated is summarized as follows:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| As of December 31, |
| 2019 | | 2018 | | 2017 | | 2016 | | 2015 |
| Amount | % of Loans in Each Category of Total Loans | | Amount | % of Loans in Each Category of Total Loans | | Amount | % of Loans in Each Category of Total Loans | | Amount | % of Loans in Each Category of Total Loans | | Amount | % of Loans in Each Category of Total Loans |
Commercial real estate - owner occupied | $ | 16 |
| — | % | | $ | 19 |
| — | % | | $ | 6 |
| 0.1 | % | | $ | 22 |
| 0.4 | % | | $ | 39 |
| 0.7 | % |
Commercial real estate - other | 8 |
| 0.1 | % | | 7 |
| 0.1 | % | | 7 |
| 0.1 | % | | 7 |
| 0.2 | % | | 9 |
| 0.1 | % |
Commercial and industrial | 10,920 |
| 32.2 | % | | 6,165 |
| 28.0 | % | | 2,800 |
| 30.8 | % | | 880 |
| 32.6 | % | | 582 |
| 29.1 | % |
Other consumer loans | 25,738 |
| 38.8 | % | | 11,468 |
| 36.0 | % | | 2,424 |
| 19.3 | % | | 574 |
| 14.7 | % | | — |
| — | % |
Loans held for sale | — |
| 28.9 | % | | — |
| 35.9 | % | | — |
| 49.7 | % | | — |
| 52.1 | % | | — |
| 70.1 | % |
Total loans | $ | 36,682 |
| 100.0 | % | | $ | 17,659 |
| 100.0 | % | | $ | 5,237 |
| 100.0 | % | | $ | 1,483 |
| 100.0 | % | | $ | 630 |
| 100.0 | % |
Corporate and Other
Segment operating income was $14,847 in 2019, as compared to a loss of $81,286 in 2018. The change was primarily due to higher investment income in 2019. The increase in 2019 was negatively impacted by legal expenses associated with a legal settlement.
For additional information on the Company's investments, see Note 2 - "Summary of Significant Accounting Policies" and Note 11 - "Investments" to the SPLP consolidated financial statements found elsewhere in this Form 10-K.
DISCUSSION OF CONSOLIDATED CASH FLOWS
The following table provides a summary of the Company's consolidated cash flows for the years ended December 31, 2019 and 2018:
|
| | | | | | | |
| December 31, |
| 2019 | | 2018 |
Net cash provided by operating activities | $ | 111,743 |
| | $ | 52,751 |
|
Net cash used in investing activities | (274,965 | ) | | (366,429 | ) |
Net cash (used in) provided by financing activities | (36,146 | ) | | 226,621 |
|
Net change for the period | $ | (199,368 | ) | | $ | (87,057 | ) |
Cash Flows from Operating Activities
Net cash provided by operating activities for the year ended December 31, 2019 was $111,743. Net income of $3,853 was impacted by certain non-cash items and a net unfavorable change of $53,622 relating to certain operating assets and liabilities. The net change in operating assets and liabilities was primarily due to an increase of $36,870 in loans held for sale due to the timing of loan originations, which can vary significantly from period-to-period since these loans are typically sold after origination, as well as the level of activity at WebBank, a decrease of $30,706 in accounts payable, accrued and other liabilities due primarily to higher pension contributions, a decrease of $20,694 in trade and other receivables due to timing of receipts, an increase in inventories of $9,491 to support sales growth in the Diversified Industrial segment, and a decrease in prepaid expenses and other assets of $2,751.
Net cash provided by operating activities for the year ended December 31, 2018 was $52,751. Net loss of $31,490 was impacted by certain non-cash items and a net unfavorable change of $88,843 relating to certain operating assets and liabilities. The net change in operating assets and liabilities was primarily due to an increase of $51,370 in loans held for sale due to the timing of loan originations, which can vary significantly from period-to-period since these loans are typically sold after origination, as well as the level of activity at WebBank, an increase of $19,625 in trade and other receivables due to timing of receipts, an increase in inventories of $7,415 to support sales growth in the Diversified Industrial segment, and an increase in prepaid expenses and other assets of $7,851.
Cash Flows from Investing Activities
Net cash used in investing activities for the year ended December 31, 2019 was $274,965. Significant items included loan originations, net of collections of $205,874, proceeds from maturities and sales of investments (net of purchases) of $32,810, net cash paid for the National Partners acquisition of $45,559, purchases of property, plant and equipment of $43,024 and short position settlements of $14,611.
Net cash used in investing activities for the year ended December 31, 2018 was $366,429. Significant items included purchases of property, plant and equipment of $47,085, an increase in loan originations, net of collections of $203,885, primarily due to larger outstanding loan balances, and net cash paid for acquisitions of $62,683, primarily for the Dunmore acquisition, as well as purchases of investments (net of maturities and sales) of $56,269, including the Company's investments in Babcock & Wilcox Enterprises, Inc. ("BW") shares, partially offset by proceeds from the sales of assets of $5,909. The Company's investments in BW shares totaled $76,261 in 2018.
Cash Flows from Financing Activities
Net cash used in financing activities for the year ended December 31, 2019 was $36,146, including net revolver repayments of $64,712, term loan repayments of $7,304 and cash used to purchase the Company's common units of $6,721, partially offset by a net increase in WebBank's deposits of $43,406.
Net cash provided by financing activities for the year ended December 31, 2018 was $226,621, including net revolver borrowings of $65,315 and a net increase in WebBank's deposits of $200,311. These increases were partially offset by cash used to purchase the Company's common units of $21,202 and $18,068 used to purchase subsidiary shares from noncontrolling interests, primarily the acquisition of WFHC shares.
LIQUIDITY AND CAPITAL RESOURCES
SPLP (excluding its operating subsidiaries, "Holding Company") is a diversified global holding company with assets that principally consist of the stock of its direct subsidiaries, equity method and other investments, and cash and cash equivalents. The Company works with its businesses to enhance the liquidity and operations of its businesses and increase long-term value for its unitholders and stakeholders through balance sheet improvements, capital allocation policies, and operational and growth initiatives, which are further described in Part I, Item 1 - "Business - Business Strategy."
Management is utilizing the following strategies to continue to enhance liquidity: (1) continuing to implement improvements using the Steel Business System throughout all the Company's operations to increase sales and operating efficiencies, (2) supporting profitable sales growth both internally and potentially through acquisitions and (3) evaluating from time to time and as appropriate, strategic alternatives with respect to its businesses and/or assets. The Company continues to examine all of its options and strategies, including acquisitions, divestitures and other corporate transactions, to increase cash flow and stakeholder value.
The Company's senior credit facility ("Credit Agreement") consists of a revolving credit facility in an aggregate principal amount not to exceed $500,000 and a $200,000 term loan with quarterly amortization equating to 5.0% per annum. The Credit Agreement covers substantially all of the Company's subsidiaries, with the exception of WebBank. Availability under the Credit Agreement is based upon earnings and certain covenants, including a maximum ratio limit on Total Leverage and a minimum ratio
limit on Interest Coverage, as defined in the Credit Agreement. The Credit Agreement is subject to certain mandatory prepayment provisions and restrictive and financial covenants, primarily the leverage ratios described above. The Company was in compliance with all financial covenants as of December 31, 2019. If the Company does not meet its financial covenants, and if it is unable to secure necessary waivers or other amendments from its lenders on terms acceptable to management, its ability to access available lines of credit could be limited, its debt obligations could be accelerated and liquidity could be adversely affected. The Credit Agreement will expire on November 14, 2022, and all outstanding amounts will be due and payable.
The Holding Company and its operating businesses believe that they have access to adequate resources to meet their needs for normal operating costs, capital expenditures, pension payments, debt obligations and working capital for their existing business, as well as to fund its taxes, legal and environmental matters, for at least the next twelve months. These resources include cash and cash equivalents, investments, cash provided by operating activities and unused lines of credit. The Holding Company and its operating businesses' ability to satisfy their debt service obligations, to fund planned capital expenditures and required pension payments, and to make acquisitions or repurchase units under its common unit Repurchase Program will depend upon their future operating performance, which will be affected by prevailing economic conditions in the markets in which they operate, as well as financial, business and other factors, some of which are beyond their control. As indicated above, there can be no assurances that the Holding Company and its operating businesses will continue to have access to their lines of credit if their financial performance does not satisfy the financial covenants set forth in their respective financing agreements, which could also result in the acceleration of their debt obligations by their respective lenders, adversely affecting liquidity.
As of December 31, 2019, the Company's working capital was $154,380, as compared to working capital of $395,510 as of December 31, 2018. The decline in working capital during the year ended December 31, 2019 was primarily due to an increase in retail depository accounts (current liabilities) to fund WebBank's operations, as opposed to the use of non-current brokered certificates of deposits. As of December 31, 2019, the availability under the Credit Agreement was approximately $161,314. During the years ended December 31, 2019 and 2018, capital expenditures were $43,024 and $47,085, respectively. The Company currently expects full year capital expenditures in the range of $30,000 to $39,000 in 2020. The Company and its subsidiaries have ongoing commitments as noted in the table below. These commitments include funding of the minimum requirements of its subsidiaries' pension plans. Required future pension contributions are estimated based upon assumptions such as discount rates on future obligations, assumed rates of return on plan assets and legislative changes. Actual future pension costs and required funding obligations will be affected by changes in the factors and assumptions described in the previous sentence, as well as other changes such as any plan termination or other acceleration events.
WebBank manages its liquidity to provide adequate funds to meet anticipated financial obligations, such as certificate of deposit maturities and to fund customer credit needs. WebBank had $125,047 and $281,566 in cash and cash equivalents, time deposits placed at other institutions, and federal funds sold at December 31, 2019 and 2018, respectively. WebBank had $40,000 and $35,000 in lines of credit from its correspondent banks at December 31, 2019 and 2018, respectively. WebBank had $21,287 and $71,345 available from the Federal Reserve discount window at December 31, 2019 and 2018, respectively. Therefore, WebBank had a total of $186,334 and $387,911 in cash, lines of credit and access to the Federal Reserve Bank discount window at December 31, 2019 and 2018, respectively, which represents approximately 19.4% and 44.5%, respectively, of WebBank's total assets.
Contractual Commitments and Contingencies
Our consolidated contractual obligations as of December 31, 2019 are identified in the table below:
|
| | | | | | | | | | | | | | | | | | | |
| Payments Due By Period |
| Less Than 1 Year | | 1 - 3 Years | | 3 - 5 Years | | Thereafter | | Total |
Debt obligations (a) | $ | 17,405 |
| | $ | 391,136 |
| | $ | — |
| | $ | — |
| | $ | 408,541 |
|
Estimated interest expense (a), (b) | 16,036 |
| | 30,611 |
| | — |
| | — |
| | 46,647 |
|
Deposits (c) | 615,495 |
| | 135,984 |
| | 3,238 |
| | — |
| | 754,717 |
|
Operating lease obligations | 11,346 |
| | 16,804 |
| | 9,119 |
| | 14,930 |
| | 52,199 |
|
Finance lease obligations | 2,005 |
| | 3,717 |
| | 3,012 |
| | 809 |
| | 9,543 |
|
Minimum pension contributions (d) | 36,600 |
| | 67,500 |
| | 42,350 |
| | 5,600 |
| | 152,050 |
|
Preferred unit liability (e) | 40,000 |
| | — |
| | — |
| | — |
| | 40,000 |
|
Total | $ | 738,887 |
| | $ | 645,752 |
| | $ | 57,719 |
| | $ | 21,339 |
| | $ | 1,463,697 |
|
| |
(a) | Assumes repayment of the remaining balance outstanding on the Credit Agreement on its contractual maturity date, November 14, 2022. The outstanding balance on SPLP's Credit Agreement will fluctuate before maturity, and the repayment dates and amounts may differ. |
| |
(b) | Estimated interest expense does not include non-cash amortization of debt issuance costs, which is included in interest expense in the Company's consolidated statements of operations. The interest rates used to estimate future interest expense were based on interest rates at |
December 31, 2019. As the majority of the Company's long-term debt bears interest at variable rates, any future interest rate fluctuations will impact future cash payments.
| |
(c) | Excludes interest. The average interest rate on deposits at December 31, 2019 was 2.09%, and interest rates ranged from 0.00% to 3.16%. |
| |
(d) | Represents total expected required minimum pension plan contributions to the Company's significant pension plans for 2020, 2021, 2022, 2023, 2024 and for the five years thereafter. Actual future pension costs and required funding obligations will be affected by changes in the factors and assumptions described elsewhere in this Annual Report on Form 10-K, as well as other changes such as any plan termination or other acceleration events. The Company's other pension and post-retirement obligations are not significant individually or in the aggregate. |
| |
(e) | Represents redemption of 1,600,000 6.0% Series A preferred units, no par value, on the third anniversary of the original issuance date of the SPLP preferred units (February 7, 2020) at a redemption price equal to the liquidation preference value of $25 per unit, in cash. In addition to the amount in the table above, the Partnership Agreement also specifies that if the SPLP preferred units are not redeemed earlier, then on the ninth anniversary of the original issuance date (February 7, 2026), the remaining SPLP preferred units will be redeemed. The redemption price will be $25 per unit in cash or in common units or a combination thereof, at the sole discretion of the Company's Board of Directors. Upon redemption, the holders of the SPLP preferred units will also receive any accumulated and unpaid distributions as of the redemption date. The SPLP preferred units entitle the holders to a cumulative quarterly cash or in-kind (or a combination thereof) distribution, if and when declared at the discretion of the Company's Board of Directors. |
Environmental Liabilities
Certain of the Company's facilities are subject to environmental remediation obligations. The Company has estimated its liability to remediate these sites and has recorded liabilities of $11,686 at December 31, 2019. For further discussion regarding these commitments, among others, see Note 20 - "Commitments and Contingencies" to the Company's consolidated financial statements found elsewhere in this Form 10-K.
Deposits
Deposits at WebBank at December 31, 2019 and 2018 were as follows:
|
| | | | | | | |
| 2019 | | 2018 |
Current | $ | 615,495 |
| | $ | 431,959 |
|
Long-term | 139,222 |
| | 279,352 |
|
Total | $ | 754,717 |
| | $ | 711,311 |
|
The increase in deposits at December 31, 2019, as compared to 2018, is due to WebBank's asset growth. The average original maturity for time deposits at December 31, 2019 was 21 months, as compared to 23 months at December 31, 2018.
The following table details the maturity of time deposits as of December 31, 2019:
|
| | | | | | | | | | | | | | | | | | | |
| Maturity |
| < 3 Months | | 3 to 6 Months | | 6 to 12 Months | | > 12 Months | | Total |
Certificate of deposits less than $100 | $ | 63,206 |
| | $ | 99,334 |
| | $ | 194,654 |
| | $ | 135,972 |
| | $ | 493,166 |
|
Certificate of deposits of $100 or more | 1,279 |
| | 2,972 |
| | 779 |
| | 3,250 |
| | 8,280 |
|
Total certificates of deposits | $ | 64,485 |
| | $ | 102,306 |
| | $ | 195,433 |
| | $ | 139,222 |
| | $ | 501,446 |
|
Off-Balance Sheet Risk
It is not the Company's usual business practice to enter into off-balance sheet arrangements such as guarantees on loans and financial commitments, indemnification arrangements and retained interests in assets transferred to an unconsolidated entity for securitization purposes. SPLP uses the same credit policy in making commitments and conditional obligations as it does for on-balance sheet instruments.
WebBank is a party to financial instruments with off-balance sheet risk. In the normal course of business, these financial instruments include commitments to extend credit in the form of loans as part of WebBank's lending arrangements with Marketing Partners. Those instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized on the Company's consolidated balance sheets. The contractual amounts of those instruments reflect the extent of involvement WebBank has in particular classes of financial instruments.
At December 31, 2019 and 2018, WebBank's undisbursed commitments under these instruments totaled $125,861 and $130,697, respectively. Commitments to extend credit are agreements to lend to a borrower who meets the lending criteria established by WebBank through one of WebBank's lending agreements with its Marketing Partners, provided there is no violation of any condition established in the contract with the counterparty to the lending arrangement. Commitments generally have fixed
expiration dates or other termination clauses and may require payment of a fee, and in some cases are subject to ongoing adjustment by WebBank. Since certain of the commitments are expected to expire without the credit being extended, the total commitment amounts do not necessarily represent future cash requirements. WebBank evaluates each prospective borrower's credit worthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by WebBank upon extension of credit, is based on management's credit evaluation of the borrower and WebBank's Marketing Partner.
WebBank's exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit is represented by the contractual amount of those instruments. WebBank uses the same credit policy in making commitments and conditional obligations as it does for on-balance sheet instruments.
Critical Accounting Policies
The Company's discussion and analysis of financial condition and results of operations is based upon its consolidated financial statements, which have been prepared in conformity with U.S. GAAP. Preparation of these consolidated financial statements requires the Company to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues, expenses and related disclosure of contingent assets and liabilities. Estimates are based on historical experience, expected future cash flows and various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates.
Note 2 - "Summary of Significant Accounting Policies" to the Company's consolidated financial statements, included elsewhere in this Annual Report on Form 10-K, includes a summary of the significant accounting policies and methods used in the preparation of the consolidated financial statements. The following is a discussion of the critical accounting policies and methods used by the Company.
Goodwill and Other Intangible Assets, Net
Goodwill, which is not amortized, represents the difference between the purchase price and the fair value of identifiable net assets acquired in a business combination. We review goodwill for impairment annually in the fourth quarter, and test for impairment during the year if an event occurs or circumstances change that would indicate the carrying amount may be impaired. Examples of such events would include pertinent macroeconomic conditions, industry and market considerations, overall financial performance and other factors. An entity can choose between using the Step 0 approach or the Step 1 approach.
For the Step 0 approach, an entity may assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. An entity has an unconditional option to bypass the Step 0 assessment for any reporting unit in any period and proceed directly to performing the first step of the goodwill impairment test. An entity may resume performing the Step 0 assessment in any subsequent period. For the Step 1 approach, which is a quantitative approach, the Company will calculate the fair value of a reporting unit and compare it to its carrying amount. There are several methods that may be used to estimate a reporting unit's fair value, including the income approach, the market approach and/or the cost approach. The amount of impairment, if any, is determined by comparing the fair value of a reporting unit with its carrying amount and recognizing an impairment charge based on the amount that the carrying amount exceeds the reporting unit's fair value. The loss
recognized should not exceed the total goodwill allocated to the reporting unit.
For 2019, the Company utilized the Step 0 approach for all of its reporting units, except for the packaging business, which includes the operations of API and Dunmore, and is within its Diversified Industrial segment. Based on its qualitative assessment, the Company does not believe that it is more likely than not that the fair value of any of its reporting units tested under this approach is less than its carrying value. The Company performed a quantitative assessment of goodwill associated with the packaging business as a result of declines in customer demand and the performance of the packaging business. In our 2018 Form 10-K, we previously disclosed that there was a risk of future goodwill impairment of the packaging business if the fair value of this reporting unit, and its associated assets, decreased in value due to further declines in market conditions or customer demand. As discussed in Note 9 - "Goodwill and Other Intangible Assets, Net" to the SPLP consolidated financial statements included in Part II of this Form 10-K, during the third quarter of 2019, the Company determined that it was more likely than not that the fair value of the packaging business was below its carrying amount. Accordingly, the Company performed an assessment using a discounted cash flow method with consideration of market comparisons, and determined that the fair value of the packaging business was less than its carrying amount. As a result, the Company fully impaired the packaging business' goodwill and recorded a $41,853 charge in Goodwill impairment charges in the accompanying consolidated statements of operations found elsewhere in this Form 10-K for the year ended December 31, 2019.
For 2018, the Company utilized the Step 0 approach for all of its reporting units, except for the packaging business within its Diversified Industrial segment. There were no goodwill impairment charges recorded as a result of these assessments.
For definite-lived intangible assets, the Company evaluates the carrying amount of such assets when circumstances indicate the carrying amount may not be recoverable. Conditions that could have an adverse impact on the cash flows and fair value of the long-lived assets are deteriorating business climate, condition of the asset or plans to dispose of the asset before the end of its useful life. If the assets' carrying amounts exceed the sum of the undiscounted cash flows, an impairment charge is recognized in the amount by which the carrying amounts exceed their fair values. The Company performs such assessments at the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities, which is generally at the plant level, operating company level or the reporting unit level, depending on the level of interdependencies in the Company's operations. During 2019 and 2018, the Company recorded non-cash impairment charges totaling $3,078 and $8,108, respectively, primarily due to declines in the Company's packaging business.
Intangible assets with indefinite lives, which are only within the Diversified Industrial segment, are tested for impairment at least annually, or when events or changes in circumstances indicate that it is more likely than not that the asset is impaired. Companies can use the same two testing approaches for indefinite-lived intangibles as for goodwill. For 2019 and 2018, the Company utilized the Step 0 approach to assess its intangible assets with indefinite lives, except for the indefinite lives intangible assets of Dunmore, which utilized a Step 1 approach in 2019. The results of these tests indicated no impairment in either of these years.
Long-Lived Asset Testing
The Company's accounting policy for long-lived assets is to estimate the depreciable lives of property, plant and equipment, and to depreciate such assets over such lives. The Company tests long-lived assets for impairment whenever events or changes in circumstances indicate the carrying amount of such assets may not be recoverable. If the carrying amounts of the long-lived assets exceed the sum of the undiscounted cash flows, an impairment charge is recognized in the amount by which the carrying amounts exceeds their fair values. The Company performs such assessments at the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities, which is generally at the plant level, operating company level or the reporting unit level, depending on the level of interdependencies in the Company's operations. The Company considers various factors in determining whether an impairment test is necessary, including among other things: a significant or prolonged deterioration in operating results and projected cash flows; significant changes in the extent or manner in which assets are used; technological advances with respect to assets which would potentially render them obsolete; the Company's strategy and capital
planning; and the economic climate in the markets it serves. When estimating future cash flows and if necessary, fair value, the Company makes judgments as to the expected utilization of assets and estimated future cash flows related to those assets. The Company considers historical and anticipated future results, general economic and market conditions, the impact of planned business and operational strategies and other information available at the time the estimates are made. The Company believes these estimates are reasonable; however, changes in circumstances or conditions could have a significant impact on its estimates, which might result in material impairment charges in the future.
As discussed in Note 6 - "Asset Impairment Charges" to the SPLP consolidated financial statements found elsewhere in this Form 10-K, as a result of declines in market conditions and customer demand at API, which is in the Company's packaging business in its Diversified Industrial segment, the Company performed a recoverability test as of December 31, 2019 to determine if the carrying amount of API's long-lived assets were recoverable based on their undiscounted cash flows over their future service potential. The testing performed indicated that API's long-lived assets may not be recoverable and accordingly, the fair value of these assets was estimated in order to determine if they were impaired as of December 31, 2019. The Company used both cost and market approaches in determining the fair value of API's long-lived assets. As a result of this testing, the Company determined that the carrying value of API's long-lived assets, primarily machinery and equipment and buildings, exceeded their estimated market value by $26,514. The Company recorded this impairment in Asset Impairment Charges in the accompanying consolidated statement of operations for the year ended December 31, 2019, found elsewhere in this Form 10-K.
Pension and Other Post-Retirement Benefit Costs
Some of the Company's subsidiaries maintain qualified and non-qualified pension and other post-retirement benefit plans. The Company recorded pension expense of $8,115 for the year ended December 31, 2019 related to its significant pension plans, and, at December 31, 2019, the Company had recorded pension liabilities totaling $196,077. Pension benefits are generally based on years of service and the amount of compensation earned during the participants' employment. However, the qualified pension benefits have been frozen for all participants.
The pension and other post-retirement benefit costs are developed from actuarial valuations. Inherent in these valuations are key assumptions, including discount and mortality rates and expected long-term rates of return on plan assets. Material changes in pension and other post-retirement benefit costs may occur in the future due to changes in these assumptions, changes in the number of plan participants, changes in the level of benefits provided, changes to the level of contributions to these plans and other factors.
Actuarial assumptions for its pension and other post-retirement benefit plans are determined each year to calculate liability information as of year end, and pension and other post-retirement benefit expense or income for the following year. The discount rate assumption is derived from the rate of return on high-quality bonds.
The various pension plan assets are diversified as to type of assets, investment strategies employed and number of investment managers used. Investments may include equities, fixed income, cash equivalents, convertible securities and private investment funds. Derivatives may be used as part of the investment strategy. The transfer of assets may be directed between investment managers in order to rebalance the portfolio in accordance with asset allocation guidelines established by the Company. The private investment funds, or the investment funds they are invested in, own marketable and non-marketable securities and other investment instruments. Such investments are valued by the private investment funds, underlying investment managers or the underlying investment funds at fair value, as described in their respective financial statements and offering memorandums. These values are utilized in quantifying the value of the assets of its pension plans, which are then used in the determination of the unfunded pension liabilities on the Company's consolidated balance sheets. Because of the inherent uncertainty of valuation of some of the pension plans' investments in private investment funds and the nature of some of the underlying investments held by the investment funds, the recorded value may differ from the value that would have been used had a ready market existed for some of these investments for which market quotations are not readily available. Management uses judgment to make assumptions on which its employee benefit liabilities and expenses are based. The effect of a 1% change in discount rate or expected return on asset assumptions for the pension plans sponsored by the Company's subsidiaries would not be material to the Company.
Loan Impairment and Allowance for Loan Losses
A loan is considered impaired when, based on current information and events, it is probable that WebBank will be unable to collect all amounts due according to the contractual terms of the loan agreement, including scheduled interest payments. When a loan has been identified as being impaired, the amount of impairment is measured based on the present value of expected future cash flows discounted at the loan's effective interest rate or, when appropriate, the loan's observable fair value or the fair value of the collateral (less any selling costs) if the loan is collateral-dependent. If the measurement of the impaired loan is less than the recorded investment in the loan (including accrued interest, net of deferred loan fees or costs and unamortized premium or discount), an impairment is recognized by creating or adjusting an existing allocation of the ALLL, or by charging down the loan to its value determined in accordance with U.S. GAAP.
The ALLL is established as losses are estimated to have occurred through a provision for loan losses charged to earnings. Loan losses are charged against the allowance when the uncollectability of a loan or receivable balance is confirmed. Subsequent recoveries, if any, are credited to the allowance. The ALLL is evaluated on a regular basis and is based upon a periodic review of the collectability of the amounts due in light of historical experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrower's ability to repay, estimated value of any underlying collateral and prevailing economic conditions. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available. The allowance consists of specific and general components. The specific component relates to loans that are classified as doubtful, substandard or loss. For such loans that are classified as impaired, an allowance is established when the discounted cash flows (or collateral value or observable market price) of the impaired loan is lower than the carrying value of that loan. The general component covers non-classified loans and is based on historical loss experience and is adjusted for qualitative factors to cover uncertainties that could affect the estimate of probable losses. The ALLL is increased by charges to income and decreased by charge-offs (net of recoveries). The periodic evaluation of the adequacy of the allowance is based on WebBank's past loss experience, known and inherent risks in the portfolio, adverse situations that may affect the debtor's ability to repay, the estimated value of any underlying collateral and current economic conditions. Since our loss rates are applied to large pools of loans, even minor changes in the level of estimated losses can significantly affect management's determination of the appropriate ALLL because those changes must be applied across a large portfolio.
Income Taxes
As a limited partnership, we are generally not responsible for federal and state income taxes, and our profits and losses are passed directly to our limited partners for inclusion in their respective income tax returns. Our subsidiaries that are corporate subsidiaries are subject to federal and state income taxes. The table in Note 17 - "Income Taxes" to the SPLP consolidated financial statements, found elsewhere in this Form 10-K, reconciles a hypothetical calculation of federal income taxes based on the federal
statutory rate applied to the income or loss before income taxes and equity method investments. The tax effect of income passed through to common unitholders is subtracted from the hypothetical calculation.
Our subsidiaries that are subject to income taxes use the liability method of accounting for such taxes. Under the liability method, deferred tax assets and deferred tax liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases, and operating loss and tax credit carryforwards. Deferred tax assets and deferred tax liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and deferred tax liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Our subsidiaries evaluate the recoverability of deferred tax assets and establish a valuation allowance when it is more likely than not that some portion of the deferred tax assets will not be realized.
When tax returns are filed, it is highly certain that most positions taken would be sustained upon examination by the taxing authorities, while others are subject to uncertainty about the merits of the position taken or the amount of the position that would be ultimately sustained. The benefit of a tax position is recognized in the consolidated financial statements in the period during which, based on all available evidence, management believes it is more likely than not that the position will be sustained upon examination, including the resolution of appeals or litigation processes, if any. Tax positions taken are not offset or aggregated with other positions. Tax positions that meet the more-likely-than-not recognition threshold are measured as the largest amount of tax benefit that is more than 50% likely of being realized upon settlement with the applicable taxing authority. The portion of the benefits associated with tax positions taken that exceeds the amount measured as described above is provided for and reflected as a liability for unrecognized tax benefits on the consolidated balance sheets, along with any associated interest and penalties that would be payable to the taxing authorities upon examination.
New or Recently Adopted Accounting Pronouncements
For a discussion of the Company's new or recently adopted accounting pronouncements, see Note 2 - "Summary of Significant Accounting Policies" to the SPLP consolidated financial statements found elsewhere in this Form 10-K.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
In this "Quantitative and Qualitative Disclosure About Market Risk" section, all dollar amounts are in thousands.
Market risk is the risk of loss arising from adverse changes in market rates and prices, such as interest rates, foreign currency exchange rates and commodity prices. Our significant market risks are primarily associated with interest rates, equity prices and, to a lesser extent, derivatives. The following sections address the significant market risks associated with our business activities.
SPLP's quantitative and qualitative disclosures about market risk include forward-looking statements with respect to management's opinion about the risk associated with the Company's financial instruments. These statements are based on certain assumptions with respect to market prices, interest rates and other industry-specific risk factors. To the extent these assumptions prove to be inaccurate, future outcomes may differ materially from those discussed herein.
Risks Relating to Investments
The Company's investments are primarily classified as Marketable securities or Long-term investments and are primarily recorded on the Company's consolidated balance sheets at fair value. These investments are subject to equity price risk.
At December 31, 2019, Marketable securities aggregated approximately $220, which includes mutual funds and corporate equities that are reported at fair value. A change in the equity price of these securities could impact our results in future periods.
Included in the Company's Long-term investments of $275,836 at December 31, 2019 are equity securities and associated company investments, which are both subject to equity price risk. The Company's significant long-term equity securities investments include common stock ownership interests of $180,357, or 5.0%, and $4,989, or 3.0%, of outstanding shares of Aerojet Rocketdyne Holdings, Inc. and BW, respectively, as of December 31, 2019. The Company's significant associated company investments as of December 31, 2019 include its investments in Steel Connect, Inc. and Aviat Networks, Inc. The Company's investments in associated companies are accounted for under the equity method of accounting, primarily using the fair value option. A change in the equity price of our investments in these securities could impact our results in future periods.
See Note 11 - "Investments" to the SPLP consolidated financial statements found elsewhere in this Form 10-K for more information about the Company's investments.
Risks Relating to Interest Rates
The fair value of cash and cash equivalents, trade and other receivables, accounts payable and short-term borrowings approximate their carrying values and are relatively insensitive to changes in interest rates due to the short-term maturities of these instruments or the variable nature of the associated interest rates.
Credit Facilities and Pension Obligations
At December 31, 2019, the Company's long-term debt obligations were comprised primarily of variable rate instruments. Accordingly, the fair value of such instruments may be relatively sensitive to effects of interest rate fluctuations. An increase or decrease in interest expense from a 1% change in interest rates would be approximately $4,059 on an annual basis based on total variable-interest debt outstanding as of December 31, 2019. In addition, the fair value of such instruments is also affected by investors' assessments of the risks associated with industries in which the Company operates, as well as its overall creditworthiness and ability to satisfy such obligations upon their maturity.
A reduction in long-term interest rates could materially increase the Company's cash funding obligations to its pension and other post-retirement benefit plans.
WebBank
WebBank derives a portion of its income from the excess of interest collected over interest paid. The rates of interest WebBank earns on assets and pays on liabilities generally are established contractually for a period of time. Market interest rates change over time. Accordingly, WebBank's results of operations, like those of most financial institutions, are impacted by changes in interest rates and the interest rate sensitivity of its assets and liabilities.
WebBank monitors and measures its exposure to changes in interest rates in order to comply with applicable government regulations and risk policies established by WebBank's board of directors and in order to preserve shareholder value. In monitoring interest rate risk, WebBank analyzes assets and liabilities based on characteristics including size, coupon rate, repricing frequency, maturity date and likelihood of prepayment.
WebBank currently focuses held-to-maturity lending efforts toward originating competitively priced adjustable-rate or fixed-rate loan products with short to intermediate terms to maturity, generally 7 years or less. This theoretically allows WebBank to maintain a portfolio of loans that will have relatively little sensitivity to changes in the level of interest rates, while providing a reasonable spread over the cost of liabilities used to fund the loans.
The principal objective of WebBank's asset/liability management is to manage the sensitivity of Market Value of Equity ("MVE") to changing interest rates. Asset/liability management is governed by policies reviewed and approved annually by WebBank's board of directors. WebBank's board of directors has delegated the responsibility to oversee the administration of these policies to WebBank's asset/liability committee, or "ALCO." The interest rate risk strategy currently deployed by ALCO is to primarily use "natural" balance sheet hedging (as opposed to derivative hedging). ALCO fine tunes the overall MVE sensitivity by recommending lending and deposit strategies. WebBank then executes the recommended strategy by increasing or decreasing the duration of the loan and deposit products, resulting in the appropriate level of market risk that WebBank's board of directors wants to maintain.
WebBank measures interest rate sensitivity as the difference between amounts of interest earning assets and interest bearing liabilities that mature or reprice within a given period of time. The difference provides an indication of the extent to which an institution's interest rate spread will be affected by changes in interest rates. If the amount of interest rate sensitive assets exceeds the amount of interest rate sensitive liabilities, then the bank is considered to be asset sensitive. If the amount of interest rate sensitive liabilities exceeds the amount of interest rate sensitive assets, then the bank is considered to be liability sensitive. In a rising interest rate environment, an institution that is asset sensitive would be in a better position than an institution that is liability sensitive because the yield on its assets would increase at a faster pace than the cost of its interest bearing liabilities. During a period of falling interest rates, however, an institution that is asset sensitive would tend to have its assets reprice at a faster rate than its liabilities, which would tend to reduce the growth in its net interest income. The opposite is true if the institution is liability sensitive.
WebBank's board of directors and relevant government regulations establish limits on the level of acceptable interest rate risk at WebBank to which management adheres. There can be no assurance, however, that, in the event of an adverse change in interest rates, WebBank's efforts to limit interest rate risk will be successful.
Risks Relating to Commodity Prices
In the normal course of business, our operations are exposed to market risk or price fluctuations related to the purchase of electricity, natural gas, fuel and petroleum-based commodities, including adhesives, and other products, such as yarns, precious metals, electronic and electrical components, steel products and certain non-ferrous metals used as raw materials. The Company is also exposed to the effects of price fluctuations on the value of its commodity inventories, in particular, its precious metal inventory. The raw materials and energy which we use are largely commodities, subject to price volatility caused by changes in global supply and demand and governmental controls.
The Company's market risk strategy has generally been to obtain competitive prices for its products and services, sourced from more than one vendor, and allow operating results to reflect market price movements dictated by supply and demand. The Company enters into commodity futures and forward contracts to mitigate the impact of price fluctuations on its precious and certain non-precious metal inventories that are not subject to fixed price contracts. The Company's hedging strategy is designed to protect it against normal volatility; therefore, abnormal price changes in these commodities or markets could negatively impact the Company's earnings. Certain of these derivatives are not designated as accounting hedges under Accounting Standards Codification 815, Derivatives and Hedging. As of December 31, 2019, the Company had entered into forward contracts, with settlement dates through January 2020, for silver with a total value of $4,285, for gold with a total value of $7,622, for palladium with a value of $1,560, for copper with a total value of $659 and for tin with a total value of $338. There were no futures contracts outstanding at December 31, 2019.
To the extent that we have not mitigated our exposure to rising raw material and energy prices, we may not be able to increase our prices to our customers to offset such potential raw material or energy price increases, which could have a material adverse effect on our results of operations and operating cash flows.
Risks Relating to Foreign Currency Exchange
The Company, primarily through its Diversified Industrial segment subsidiaries, manufactures and sells its products in a number of countries throughout the world and, as a result, is exposed to movements in foreign currency exchange rates. The Company's major foreign currency exposures involve the markets in Asia, Europe, Canada and Mexico. The Company is subject to the risk of price fluctuations related to anticipated revenues and operating costs, firm commitments for capital expenditures and existing assets or liabilities denominated in currencies other than the U.S. dollar. The Company has not generally used derivative instruments to manage these specific risks; however, the Company has historically entered into foreign currency forward contracts to hedge certain of its receivables and payables denominated in other currencies, primarily those associated with its packaging business located in the United Kingdom. In addition, the Company has historically entered into foreign currency forward contracts to hedge the value of certain of its future sales denominated in Euros and the value of certain of its future purchases denominated in U.S. dollars, also associated with its packaging business located in the United Kingdom.
Item 8. Financial Statements and Supplementary Data
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the unitholders and the Board of Directors of Steel Partners Holdings L.P.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Steel Partners Holdings L.P. and subsidiaries (the "Company") as of December 31, 2019 and 2018, the related consolidated statements of operations, comprehensive income (loss), changes in capital, and cash flows, for each of the two years in the period ended December 31, 2019 and the related notes (collectively referred to as the "financial statements"). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2019 and 2018, and the results of its operations and its cash flows for each of the two years in the period ended December 31, 2019, in conformity with accounting principles generally accepted in the United States of America.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of December 31, 2019, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 27, 2020, expressed an unqualified opinion on the Company's internal control over financial reporting.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ Deloitte & Touche LLP
New York, New York
February 27, 2020
We have served as the Company's auditor since 2018.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the unitholders and the Board of Directors of Steel Partners Holdings L.P.
Opinion on Internal Control over Financial Reporting
We have audited the internal control over financial reporting of Steel Partners Holdings L.P. and subsidiaries (the "Company") as of December 31, 2019, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2019, based on criteria established in Internal Control - Integrated Framework (2013) issued by COSO.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated financial statements as of and for the year ended December 31, 2019, of the Company and our report dated February 27, 2020, expressed an unqualified opinion on those financial statements.
As described in Management's Report on Internal Control Over Financial Reporting within Item 9A of this Form 10-K, management excluded from its assessment the internal control over financial reporting at National Partners, which was acquired on April 1, 2019 and whose financial statements constitute approximately 4.9% of the Company's total consolidated assets as of December 31, 2019 and approximately 0.2% of the Company's total consolidated revenue for the year then ended. Accordingly, our audit did not include the internal control over financial reporting at National Partners.
Basis for Opinion
The Company's management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management's Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company's internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control over Financial Reporting
A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ Deloitte & Touche LLP
New York, New York
February 27, 2020
STEEL PARTNERS HOLDINGS L.P.
Consolidated Balance Sheets
(in thousands, except common units)
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| December 31, 2019 | | December 31, 2018 |
ASSETS | | | |
Current assets: | | | |
Cash and cash equivalents | $ | 148,348 |
| | $ | 334,884 |
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Restricted cash | — |
| | 12,434 |
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Marketable securities | 220 |
| | 1,439 |
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Trade and other receivables - net of allowance for doubtful accounts of $2,725 and $2,885, respectively | 188,410 |
| | 209,543 |
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Receivables from related parties | 2,221 |
| | 425 |
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Loans receivable, including loans held for sale of $225,013 and $188,143, respectively, net | 546,908 |
| | 341,890 |
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Inventories, net | 167,833 |
| | 158,850 |
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Prepaid expenses and other current assets | 36,261 |
| | 32,826 |
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Total current assets | 1,090,201 |
| | 1,092,291 |
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Long-term loans receivable, net | 196,145 |
| | 164,375 |
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Goodwill | 149,626 |
| | 183,945 |
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Other intangible assets, net | 158,593 |
| | 183,541 |
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Deferred tax assets | 88,645 |
| | 96,040 |
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Other non-current assets | 70,666 |
| | 80,356 |
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Property, plant and equipment, net | 262,277 |
| | 297,467 |
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Operating lease right-of-use assets | 40,365 |
| | — |
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Long-term investments | 275,836 |
| | 258,044 |
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Total Assets | $ | 2,332,354 |
| | $ | 2,356,059 |
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LIABILITIES AND CAPITAL | | | |
Current liabilities: | | | |
Accounts payable | $ | 99,844 |
| | $ | 106,261 |
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Accrued liabilities | 119,642 |
| | 120,043 |
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Financial instruments | — |
| | 12,434 |
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Deposits | 615,495 |
| | 431,959 |
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Payables to related parties | 481 |
| | 248 |
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Short-term debt | 3,197 |
| | 3,094 |
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Current portion of long-term debt | 14,208 |
| | 799 |
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Current portion of preferred unit liability | 39,782 |
| | — |
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Other current liabilities | 43,172 |
| | 21,943 |
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Total current liabilities | 935,821 |
| | 696,781 |
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Long-term deposits | 139,222 |
| | 279,352 |
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Long-term debt | 391,136 |
| | 478,096 |
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Preferred unit liability | 144,247 |
| | 180,340 |
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Accrued pension liabilities | 196,077 |
| | 205,770 |
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Deferred tax liabilities | 3,614 |
| | 2,225 |
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Long-term operating lease liabilities | 31,262 |
| | — |
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Other non-current liabilities | 14,556 |
| | 20,987 |
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Total Liabilities | 1,855,935 |
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| 1,863,551 |
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Commitments and Contingencies |
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Capital: | | | |
Partners' capital common units: 25,023,128 and 25,294,003 issued and outstanding (after deducting 12,647,864 and 12,142,528 units held in treasury, at cost of $198,781 and $192,060), respectively | 664,035 |
| | 666,031 | |