Steel Partners Holdings Reports Second Quarter Financial Results and Declares Quarterly Distribution on its Series A Preferred Units

Second Quarter 2022 Results

  • Revenue totaled $441.4 million, an increase of 14.2% as compared to the same period in the prior year
  • Net income was $92.1 million, an increase of 234.2% as compared to the same period in the prior year
  • Net income attributable to common unitholders was $92.1 million, or $3.52 per diluted common unit
  • Adjusted EBITDA* decreased to $59.0 million from $74.4 million for the same period in the prior year; Adjusted EBITDA margin* was 13.4%
  • Net cash used in operating activities was $87.6 million
  • Adjusted free cash flow* totaled $34.4 million
  • Total debt at quarter-end was $176.4 million; net debt,* which includes, among other items, pension and preferred unit liabilities, and marketable securities and long term investment assets totaled $114.4 million

First Half 2022 Results

  • Revenue totaled $847.2 million, an increase of 20.9%, as compared to the same period in the prior year
  • Net income was $96.7 million, an increase of 19.5% as compared to the same period in the prior year
  • Net income attributable to common unitholders was $96.6 million, or $3.82 per diluted common unit
  • Adjusted EBITDA* decreased slightly to $123.6 million from $124.1 million for the same period in the prior year; Adjusted EBITDA margin* was 14.6%
  • Net cash used in operating activities of continuing operations was $100.9 million
  • Adjusted free cash flow* totaled $68.0 million

NEW YORK–(BUSINESS WIRE)–Steel Partners Holdings L.P. (NYSE: SPLP), a diversified global holding company, today announced operating results for the second quarter ended June 30, 2022.

Q2 2022

 

Q2 2021

 

($ in thousands)

 

YTD 2022

 

YTD 2021

$441,408

 

$386,433

 

Revenue

 

$847,153

 

$700,926

92,113

 

27,563

 

Net income

 

96,654

 

80,905

92,078

 

27,240

 

Net income attributable to common unitholders

 

96,643

 

80,191

59,048

 

74,364

 

Adjusted EBITDA*

 

123,618

 

124,140

13.4%

 

19.2%

 

Adjusted EBITDA margin*

 

14.6%

 

17.7%

10,724

 

9,024

 

Purchases of property, plant and equipment

 

18,470

 

13,925

34,378

 

48,520

 

Adjusted free cash flow*

 

68,001

 

53,993

*See reconciliations to the nearest GAAP measure included in the financial tables. See “Note Regarding Use of Non-GAAP Financial Measurements” below for the definition of these non-GAAP measures.

“During the first half of 2022, we have continued to execute our long term strategies,” said Executive Chairman Warren Lichtenstein. “We have generated record revenue, reduced debt, and invested capital back into our businesses. Our focus on creating value for all our stakeholders is reflected in our strong results.”

Proposed Merger with Steel Connect

On June 12, 2022, Steel Connect, Inc. (“Steel Connect”), the Company and SP Merger Sub, Inc., a wholly-owned subsidiary of the Company (“Merger Sub”), entered into an agreement and plan of merger (the “Merger Agreement”), pursuant to which Merger Sub will merge with and into Steel Connect (the “Merger”), with Steel Connect surviving the Merger as a wholly-owned subsidiary of the Company. The Merger Agreement provides that each share of Steel Connect’s common stock issued and outstanding immediately prior to the effective time of the Merger (other than dissenting shares and shares owned by Steel Connect, the Company or any of their respective subsidiaries) will, subject to the terms and conditions set forth in the Merger Agreement, be converted into the right to receive (i) $1.35 in cash, without interest and (ii) one contingent value right to receive a pro rata share of the proceeds received by Steel Connect, the Company or any of their affiliates with respect to the sale, transfer or other disposition of all or any portion of the assets currently owned by ModusLink within two years of the Merger’s closing date, to the extent such proceeds exceed $80 million plus certain related costs and expenses. The Company and certain of its affiliates have also entered into a Voting and Support Agreement pursuant to which, among other things, they have agreed to vote all shares of common stock and Series C Preferred Stock beneficially owned by them in favor of the adoption of the Merger Agreement and the Merger and any alternative acquisition agreement approved by Steel Connect’s board of directors (acting on the recommendation of the STCN Special Committee).

The Merger Agreement includes a “go-shop” period, during which the Company could actively solicit and consider alternative acquisition proposals. The “go-shop” period expired at 11:59 p.m. Eastern time on July 12, 2022.

The closing of the Merger is conditioned upon receipt of approval of the Merger from (i) the holders of a majority in voting power of the outstanding shares of common stock and Series C Preferred Stock of Steel Connect (voting on an as converted to shares of common stock basis), voting together as a single class, (ii) a majority of the outstanding shares of common stock of Steel Connect not owned, directly or indirectly, by the Company and its affiliates and related parties, and any other officers or directors of Steel Connect and (iii) the holders of a majority of the outstanding shares of Series C Preferred Stock of Steel Connect, voting as a separate class, as well as other customary closing conditions. Accordingly, there can be no assurance that the Company will be able to complete the Merger on the expected timeline or at all.

Subject to the satisfaction of all of the conditions to closing, including the receipt of the Steel Connect stockholder approvals, the Merger is expected to close in the second half of 2022.

Results of Operations

Comparison of the Three and Six Months Ended June 30, 2022 and 2021 (unaudited)

(Dollar amounts in table and commentary in thousands, unless otherwise indicated)

Three Months Ended

June 30,

 

Six Months Ended

June 30,

 

2022

 

2021

 

2022

 

2021

Revenue

$ 441,408

 

$ 386,433

 

$ 847,153

 

$ 700,926

Cost of goods sold

288,813

 

250,597

 

556,983

 

459,282

Selling, general and administrative expenses

100,841

 

74,588

 

186,965

 

143,388

Asset impairment charges

32

 

 

435

 

Interest expense

4,818

 

5,504

 

9,342

 

10,970

Realized and unrealized (gains) losses on securities, net

(1,515)

 

(4,470)

 

26,211

 

18,779

Gains from sales of businesses

(85,185)

 

 

(85,185)

 

(8,096)

All other expense (income), net*

4,315

 

206

 

6,320

 

(25,220)

Total costs and expenses

312,119

 

326,425

 

701,071

 

599,103

Income from operations before income taxes and equity method investments

129,289

 

60,008

 

146,082

 

101,823

Income tax provision

39,436

 

35,413

 

47,045

 

50,007

(Income) loss of associated companies, net of taxes

(2,260)

 

(2,840)

 

2,383

 

(28,961)

Net income

$ 92,113

 

$ 27,435

 

$ 96,654

 

$ 80,777

* includes finance interest, provision for (benefit from) loan losses, and other income from the consolidated statements of operations

Revenue

Revenue for the three months ended June 30, 2022 increased $54,975, or 14.2%, as compared to the same period last year, as a result of higher sales across all the reportable segments despite the divestiture of the SLPE business in April 2022 . The increases were primarily due to: (1) $27,060 higher sales for the Building Materials business unit due primarily to the impact of favorable pricing; (2) $8,814 from the Financial Services segment primarily due to higher credit risk transfer and held for sale balances, as well as higher non-interest income related to increased volume as compared to the three months ended June 30, 2021; these increases were partially offset by lower non-interest income due to fewer warrant sales as compared to the three months ended June 30, 2021; and (3) $5,256 from the Energy segment primarily due to favorable pricing driven by higher demand from the energy sector as a result of higher energy prices.

Revenue for the six months ended June 30, 2022 increased $146,227, or 20.9%, as compared to the same period last year, as a result of higher sales across all the reportable segments despite the divestiture of the SLPE business in April 2022 . The increases were primarily due to: (1) $70,741 higher sales for the Building Materials business unit primarily due to the impact of favorable pricing, and to a lesser extent increased demand for its roofing products; (2) $15,075 from the Financial Services segment primarily due to increased interest income on higher credit risk transfer balances, asset based lending and held for sale balances, as well as higher non-interest income related to increased volume; these increases were partially offset by lower non-interest income due to fewer warrant sales as compared to the six months ended June 30, 2021; (3) $14,687 higher sales for the Electrical Products business unit driven by higher demand from its aerospace & defense, oil & gas, and medical sectors, as well as favorable pricing, partially offset by the impact of divestiture of SLPE business from the Diversified Industrial segment; and (4) $11,487 from the Energy segment primarily due to favorable pricing and higher rig hours driven by higher demand from the energy sector as a result of higher energy prices.

Cost of Goods Sold

Cost of goods sold for the three months ended June 30, 2022 increased $38,216, or 15.2%, as compared to the same period last year, primarily driven by higher sales discussed above, as well as higher material and labor costs in the Diversified Industrial and Energy segments, partially offset by the impact of divestiture of the SLPE business.

Cost of goods sold for the six months ended June 30, 2022 increased $97,701, or 21.3%, as compared to the same period last year, due to increases in the Diversified Industrial and Energy segments. The increases in the Diversified Industrial and Energy segments in the six months ended June 30, 2022 were primarily due to the higher sales volume discussed above, partially offset by the impact of divestiture of SLPE business.

Selling, General and Administrative Expenses

Selling, general and administrative expenses (“SG&A”) for the three months ended June 30, 2022 increased $26,253, or 35.2%, as compared to the same period last year. The increase was primarily due to higher expenses from the Financial Services segment and, to a lesser extent, higher expenses for Corporate. SG&A expenses for the Financial Services segment increased approximately $14,100 primarily due to higher credit performance fees due to higher credit risk transfer (“CRT”) balances as well as higher personnel costs. SG&A expenses for Corporate increased by approximately $10,400 primarily due to higher legal fees.

SG&A for the six months ended June 30, 2022 increased $43,577, or 30.4%, , as compared to the same period last year. The increase was primarily driven by trends similar to the quarter ended June 30, 2022.

Asset Impairment Charges

The Company recorded an impairment charge of $435 for the six months ended June 30, 2022 for idle equipment associated with the Joining Materials business unit from the Diversified Industrial segment. There were no impairment charges for the respective periods of 2021.

Interest Expense

Interest expense for the three and six months ended June 30, 2022 decreased $686, or 12.5% and $1,628 or 14.8%, respectively, as compared to the same periods last year. The decreases were primarily due to lower average debt levels, as compared to the same periods of 2021.

Gains from sales of businesses

The Company recorded a pre-tax gain of $85,185 for the three and six months ended June 30, 2022, primarily related to the sale of the SLPE business from the Diversified Industrials segment. The sales price of SLPE was $144.5 million, subject to working capital adjustments.The Company recorded a pre-tax gain of $8,096 for the six months ended June 30, 2021 related to the divestiture of the Edge business from the Diversified Industrial segment.

Realized and Unrealized Losses on Securities, Net

The Company recorded gains of $1,515 for the three months ended June 30, 2022, as compared to gains of $4,470 in the same period of 2021. The Company recorded losses of $26,211 for the six months ended June 30, 2022, as compared to losses of $18,779 in the same period of 2021. These gains and losses were primarily due to unrealized gains and losses related to the mark-to-market adjustments on the Company’s portfolio of securities in these periods.

All Other Expense (Income), Net

All other expense, net was $4,315 for the three months ended June 30, 2022, as compared to all other expense, net of $206 in the same period of 2021. All other expense (income), net for the three and six months ended June 30, 2022 was primarily due to net provisions for loan losses and finance interest. All other income, net for the six months ended June 30, 2021 was primarily due to (1) a $19,740 one-time dividend from Aerojet, (2) a pre-tax gain of $6,646 on the sale of an idle facility in the Joining Materials business.

Income Tax Provision

The Company recorded income tax provisions of $39,436 and $35,413 for the three months ended June 30, 2022 and 2021, respectively. The Company recorded income tax provisions of $47,045 and $50,007 for the six months ended June 30, 2022 and 2021, respectively. The Company’s effective tax rate was 30.5% and 59.0% for the three months ended June 30, 2022 and 2021, respectively, and was 32.2% and 49.1% for the six months ended June 30, 2022 and 2021, respectively. The lower effective tax rate for the six months ended June 30, 2022 is primarily due to the change in U.S. income tax expense related to unrealized gains and losses on investment, and the net capital gain recognized as a result of the disposal of consolidated subsidiaries that took place during the quarter. As a limited partnership, the Company is generally not responsible for federal and state income taxes, and its profits and losses are passed directly to its limited partners for inclusion in their respective income tax returns. Provisions have been made for federal, state, local or foreign income taxes on the results of operations generated by our consolidated subsidiaries that are taxable entities. Significant differences between the statutory rate and the effective tax rate include partnership losses for which no tax benefit is recognized, tax expense related to unrealized gains and losses on investment, state taxes, changes in deferred tax valuation allowances and other permanent differences.

(Income) loss of Associated Companies, Net of Taxes

The Company recorded income of associated companies, net of taxes, of $2,260 and loss of associated companies, net of tax, of $2,383 for the three and six months ended June 30, 2022, respectively, as compared to income from associated companies, net of taxes, of $2,840 and $28,961 for the three and six months ended June 30, 2021, respectively. The fluctuations for these periods were primarily due to the changes in fair value of the Company’s investment in Steel Connect.

Purchases of Property, Plant and Equipment (Capital Expenditures)

Capital expenditures for the three months ended June 30, 2022 totaled $10,724, or 2.4% of revenue, as compared to $9,024, or 2.3% of revenue, in the same period of 2021. Capital expenditure for the six months ended June 30, 2022 totaled $18,470, or 2.2% of revenue, as compared to $13,925, or 2.0% of revenue for the same period of 2021.

Additional Non-GAAP Financial Measures

Adjusted EBITDA was $59,048 for the three months ended June 30, 2022, as compared to $74,364 for the same period of 2021. Adjusted EBITDA decreased by $15,316 primarily due to decreases in the Financial Service segment due to higher loan loss provisions and higher credit performance fees as a result of higher credit risk transfer balances as well as higher personnel costs and in the Corporate driven by higher legal fees, partially offset by increase from the Energy segment primarily driven by strong sales performance. For the three months ended June 30, 2022, adjusted free cash flow was $34,378 as compared to $48,520 for the same period in 2021. Adjusted free cash flow decreased by $14,142 primarily due to lower EBITDA performance, partially offset by improved management of working capital.

Adjusted EBITDA was $123,618 for the six months ended June 30, 2022, as compared to $124,140 for the same period of 2021. Adjusted EBITDA decreased by $522 primarily due to decreases in the Financial Service segment due to higher loan loss provisions and higher credit performance fees as a result of higher credit risk transfer balances as well as higher personnel costs and in the Corporate driven by higher legal fees, partially offset by increases from the Diversified Industrial and Energy segments primarily driven by strong sales performance. For the six months ended June 30, 2022, adjusted free cash flow was $68,001 as compared to $53,993 for the same period in 2021. Adjusted free cash flow increased by $14,008 primarily due to improved management of working capital.

Liquidity and Capital Resources

As of June 30, 2022, the Company had approximately $415,000 in availability under its senior credit agreement, as well as $30,655 in cash and cash equivalents, excluding WebBank cash, and approximately $257,069 in long-term investments (including marketable securities).

As of June 30, 2022, total debt was $176,420, a decrease of approximately $94,601, as compared to December 31, 2021. As of June 30, 2022, net debt totaled $114,390, a decrease of approximately $110,723, primarily driven by payments on Company’s senior credit facility using proceeds from the sale of SLPE. Total leverage (as defined in the Company’s senior credit agreement) was approximately 1.1x as of June 30, 2022 as compared to approximately 1.6x as of December 31, 2021.

Quarterly Cash Distribution on Series A Preferred Units

On August 5, 2022, the Company’s board of directors declared a regular quarterly cash distribution of $0.375 per unit, payable September 15, 2022, to unitholders of record as of September 1, 2022, on its 6% Series A Preferred Units, no par value (“Series A Preferred”).

Any future determination to declare distributions on its units of Series A Preferred, and any determination to pay such distributions in cash or in kind, or a combination thereof, will remain at the discretion of Steel Partners’ board of directors and will be dependent upon a number of factors, including the Company’s results of operations, cash flows, financial position, and capital requirements, among others.

About Steel Partners Holdings L.P.

Steel Partners Holdings L.P. (www.steelpartners.com) 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, banking and youth sports. At Steel Partners, our culture and core values of Teamwork, Respect, Integrity, and Commitment guide our Kids First purpose, which is to forge a path of success for the next generation by instilling values, building character, and teaching life lessons through sports.

(Financial Tables Follow)

Consolidated Balance Sheets (unaudited)

 

(in thousands, except common units)

June 30, 2022

 

December 31, 2021

ASSETS

 

 

 

Current assets:

 

 

 

Cash and cash equivalents

$ 201,623

 

$ 325,363

Trade and other receivables – net of allowance for doubtful accounts of $3,014 and $3,510, respectively

215,527

 

193,976

Receivables from related parties

1,942

 

2,944

Loans receivable, including loans held for sale of $385,964 and $198,632, respectively, net

793,291

 

529,529

Inventories, net

212,651

 

184,271

Prepaid expenses and other current assets

50,479

 

48,019

Total current assets

1,475,513

 

1,284,102

Long-term loans receivable, net

443,489

 

511,444

Goodwill

122,844

 

148,018

Other intangible assets, net

100,291

 

119,830

Other non-current assets

188,512

 

79,143

Property, plant and equipment, net

228,574

 

234,976

Operating lease right-of-use assets

35,663

 

36,636

Long-term investments

257,069

 

261,080

Total Assets

$ 2,851,955

 

$ 2,675,229

LIABILITIES AND CAPITAL

 

 

 

Current liabilities:

 

 

 

Accounts payable

$ 142,243

 

$ 123,282

Accrued liabilities

109,069

 

86,848

Deposits

843,664

 

447,152

Payables to related parties

2,078

 

1,885

Short-term debt

200

 

100

Current portion of long-term debt

1,020

 

1,071

Other current liabilities

71,580

 

54,674

Total current liabilities

1,169,854

 

715,012

Long-term deposits

341,843

 

377,735

Long-term debt

175,200

 

269,850

Other borrowings

118,934

 

333,963

Preferred unit liability

150,899

 

149,570

Accrued pension liabilities

74,795

 

82,376

Deferred tax liabilities

28,583

 

13,674

Long-term operating lease liabilities

27,915

 

27,511

Other non-current liabilities

40,422

 

36,490

Total Liabilities

2,128,445

 

2,006,181

Commitments and Contingencies

 

 

 

Capital:

 

 

 

Partners’ capital common units: 21,917,246 and 21,018,009 issued and outstanding (after deducting 17,579,619 and 16,810,932 units held in treasury, at cost of $295,701 and $264,284), respectively

856,908

 

795,140

Accumulated other comprehensive loss

(134,456)

 

(131,803)

Total Partners’ Capital

722,452

 

663,337

Noncontrolling interests in consolidated entities

1,058

 

5,711

Total Capital

723,510

 

669,048

Total Liabilities and Capital

$ 2,851,955

 

$ 2,675,229

Consolidated Statements of Operations (unaudited)

 

(in thousands, except common units and per common unit data)

Three Months Ended

June 30,

 

Six Months Ended

June 30,

 

2022

 

2021

 

2022

 

2021

Revenue:

 

 

 

 

 

 

 

Diversified Industrial net sales

$ 346,664

 

$ 305,759

 

$ 673,913

 

$ 554,248

Energy net revenue

47,024

 

41,768

 

85,341

 

73,854

Financial Services revenue

47,720

 

38,906

 

87,899

 

72,824

Total revenue

441,408

 

386,433

 

847,153

 

700,926

Costs and expenses:

 

 

 

 

 

 

 

Cost of goods sold

288,813

 

250,597

 

556,983

 

459,282

Selling, general and administrative expenses

100,841

 

74,588

 

186,965

 

143,388

Asset impairment charges

32

 

 

435

 

Finance interest expense

1,672

 

2,627

 

2,836

 

4,859

Provision for (benefit from) loan losses

3,883

 

(1,567)

 

5,165

 

(2,282)

Gains from sales of businesses

(85,185)

 

 

(85,185)

 

(8,096)

Interest expense

4,818

 

5,504

 

9,342

 

10,970

Realized and unrealized (gains) losses on securities, net

(1,515)

 

(4,470)

 

26,211

 

18,779

Other income, net

(1,240)

 

(854)

 

(1,681)

 

(27,797)

Total costs and expenses

312,119

 

326,425

 

701,071

 

599,103

Income from operations before income taxes and equity method investments

129,289

 

60,008

 

146,082

 

101,823

Income tax provision

39,436

 

35,413

 

47,045

 

50,007

(Income) loss of associated companies, net of taxes

(2,260)

 

(2,840)

 

2,383

 

(28,961)

Net income from continuing operations

92,113

 

27,435

 

96,654

 

80,777

Discontinued operations

 

 

 

 

 

 

 

Net gain from discontinued operations, net of taxes

 

128

 

 

128

Net income

92,113

 

27,563

 

96,654

 

80,905

Net income attributable to noncontrolling interests in consolidated entities

(35)

 

(323)

 

(11)

 

(714)

Net income attributable to common unitholders

$ 92,078

 

$ 27,240

 

$ 96,643

 

$ 80,191

Net income per common unit – basic

 

 

 

 

 

 

 

Net income from continuing operations

$ 4.03

 

$ 1.24

 

$ 4.29

 

$ 3.60

Net income from discontinued operations

0.01

0.01

Net income attributable to common unitholders

$ 4.03

 

$ 1.25

 

$ 4.29

 

$ 3.61

Net income per common unit – diluted

 

 

 

 

 

 

 

Net income from continuing operations

$ 3.52

 

$ 1.02

 

$ 3.82

 

$ 2.67

Net income from discontinued operations

 

0.01

 

 

0.01

Net income attributable to common unitholders

$ 3.52

 

$ 1.03

 

$ 3.82

 

$ 2.68

Weighted-average number of common units outstanding – basic

22,846,677

 

21,829,714

 

22,529,635

 

22,222,557

Weighted-average number of common units outstanding – diluted

27,061,579

 

29,561,237

 

26,931,547

 

32,243,510

Supplemental Balance Sheet Data (June 30, 2022 unaudited)

 

(in thousands, except common and preferred units)

June 30,

 

December 31,

 

2022

 

2021

Cash and cash equivalents

$ 201,623

 

$ 325,363

WebBank cash and cash equivalents

170,968

 

308,589

Cash and cash equivalents, excluding WebBank

$ 30,655

 

$ 16,774

Common units outstanding

21,917,246

 

21,018,009

Preferred units outstanding

6,422,128

 

6,422,128

Contacts

Investor Relations

Jennifer Golembeske

212-520-2300

[email protected]

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