Steel Partners Holdings Reports Fourth Quarter Results

Fourth Quarter 2020 Results

Revenue totaled $338.7 million
Net income from continuing operations was $94.2 million
Net income attributable to common unitholders was $108.4 million, or $2.52 per diluted common unit
Adjusted EBITDA^* totaled $67.1 million; Adjusted EBITDA margin^* was 19.8%
Net cash provided by operating activities of continuing operations was $13.5 million
Adjusted free cash flow^* totaled $13.8 million
Total debt was $334.2 million; net debt,^* which also includes our pension and preferred unit liabilities, less cash and investments, totaled $354.9 million

Full Year 2020 Results

Revenue totaled $1.3 billion
Net income from continuing operations was $83.5 million
Net income attributable to common unitholders was $72.7 million, or $1.65 per diluted common unit
Adjusted EBITDA^* totaled to $213.7 million; Adjusted EBITDA margin^* was 16.3%
Net cash provided by operating activities of continuing operations was $311.2 million
Adjusted free cash flow^* totaled $149.6 million

NEW YORK–(BUSINESS WIRE)–Steel Partners Holdings L.P. (NYSE: SPLP), a diversified global holding company, today announced operating results for the fourth quarter and year ended December 31, 2020.

Q4 2020	Q4 2019	($ in thousands)	FY 2020	FY 2019
$338,719	$346,691	Revenue	$1,310,636	$1,455,048
94,231	10,259	Net income from continuing operations	83,477	79,471
108,388	(28,564)	Net income (loss) attributable to common unitholders	72,675	(1,597)
67,084	46,614	Adjusted EBITDA^*	213,739	195,349
19.8%	13.4%	Adjusted EBITDA margin^*	16.3%	13.4%
7,645	13,293	Purchases of property, plant and equipment	23,226	39,816
13,843	36,491	Adjusted free cash flow^*	149,648	117,028

^*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.

“Despite the many headwinds in 2020, we dedicated ourselves to safely providing quality, on-time products and services to our customers, and our results reflect this hard work and perseverance,” said Executive Chairman Warren Lichtenstein. “We were able to respond to the pandemic and economic volatility by reducing costs, improving our operational performance, and increasing our financial flexibility, which led to increased EBITDA and cash flow despite reduced revenue in 2020. I am proud of our entire team, and we will continue to execute our strategy to deliver value for our unitholders, customers, and employees.”

Results of Operations

Comparisons of the Three Months and Years Ended December 31, 2020 and 2019

	Three Months Ended December 31,						Year Ended December 31,
	2020			2019			2020			2019
Revenue	$	338,719		$	346,691		$	1,310,636		$	1,455,048
Cost of goods sold	222,158			225,373			859,863			952,071
Selling, general and administrative expenses	75,317			78,322			290,784			334,566
Goodwill impairment charges	1,100			—			1,100			15,924
Asset impairment charges	(11		)	—			606			849
Interest expense	6,176			8,737			29,514			38,835
Realized and unrealized (gains) losses on securities, net	(51,158		)	21,405			(25,643		)	(47,315		)
All other (income) expenses, net	(6,595		)	13,915			29,013			58,041
Total costs and expenses	246,987			347,752			1,185,237			1,352,971
Income (loss) before income taxes and equity method investments	91,732			(1,061		)	125,399			102,077
Income tax provision (benefit)	20,135			(19,771		)	38,136			14,563
(Income) loss of associated companies, net of taxes	(22,634		)	8,451			3,786			8,043
Net income from continuing operations	94,231			10,259			83,477			79,471
Income (loss) from discontinued operations, net of taxes	14,191			(38,949		)	(10,199		)	(81,165		)
Net income (loss)	108,422			(28,690		)	73,278			(1,694		)
Net (income) loss attributable to noncontrolling interests in consolidated entities (continuing operations)	(34		)	126			(603		)	97
Net income (loss) attributable to common unitholders	$	108,388		$	(28,564	)	$	72,675		$	(1,597	)

Revenue

Revenue for the three months ended December 31, 2020 decreased $8.0 million, or 2.3%, as compared to the same period last year. The decrease was driven by lower sales volumes in our Energy and Financial Services segments, partially offset by higher sales volume from our Diversified Industrial segment. Excluding an increase in average silver prices in the Diversified Industrial segment of $5.9 million, revenue increased by $4.1 million in our Diversified Industrial segment.

Revenue in 2020 decreased $144.4 million, or 9.9%, as compared to 2019. Excluding the effect of an increase in average silver prices in the Diversified Industrial segment of 1.2%, revenue decreased by 11.1%. The net revenue decrease of 11.1% was due to lower sales volumes across all the reportable segments, primarily due to the impact of COVID-19.

Cost of Goods Sold

Cost of goods sold for the three months ended December 31, 2020 decreased $3.2 million, or 1.4%, as compared to the same period last year, due to decreases in the Energy segment, primarily due to the lower sales volume.

Cost of goods sold in 2020 decreased $92.2 million, or 9.7%, as compared to 2019, due to decreases in the Diversified Industrial and Energy segments. The decrease in cost of goods sold was primarily due to: (1) lower sales volumes in both the Diversified Industrial and Energy segments, (2) the Company’s cost reduction efforts to mitigate the impact of COVID-19, and (3) a $5.0 million reduction in expense due to a favorable settlement of litigation involving our Building Materials business in the Diversified Industrial segment.

Selling, General and Administrative Expenses

Selling, general and administrative expenses (“SG&A”) for the three months ended December 31, 2020 decreased $3.0 million, or 3.8%, as compared to the same period last year. The decrease was primarily driven by cost reduction efforts across all the operating segments, partially offset by higher corporate expenses for the three months ended December 31, 2020.

SG&A in 2020 decreased $43.8 million, or 13.1%, as compared to 2019, primarily due to lower sales volumes and cost reduction initiatives in the Diversified Industrial and Energy segments. These decreases were partially offset by: (1) a $14.0 million environmental reserve charge recorded in 2020 in the Diversified Industrial segment related to a legacy, non-operating site and (2) higher SG&A in the Financial Services segment driven by increased credit performance fees associated with the larger loan balances. There was also a $12.5 million expense associated with a legal settlement in 2019.

Goodwill Impairment Charges

As a result of declines in customer demand and the performance of the Performance Materials business during 2020, the Company recorded a $1.1 million charge in the consolidated statements of operations for three months and year ended December 31, 2020.

The Company fully impaired the Packaging reporting unit’s goodwill during 2019 and recorded aggregate goodwill impairment charges of $41.9 million ($15.9 million classified in continuing operations and $25.9 million classified in discontinued operations).

Asset Impairment Charges

As a result of COVID-19 related declines in our youth sports business within the Energy segment, intangible assets of $0.6 million, primarily customer relationships, were fully impaired in 2020. The impairment charges in 2019 of $0.8 million were primarily related to unused software in the Diversified Industrial segment’s Kasco business.

Interest Expense

Interest expense for the three months ended December 31, 2020 and 2019 was $6.2 million and $8.7 million, respectively. Interest expense for the years ended December 31, 2020 and 2019 was $29.5 million and $38.8 million, respectively. The lower interest expense in the 2020 periods was primarily due to lower interest rates.

Realized and Unrealized (Gains) Losses on Securities, Net

The Company recorded gains of $51.2 million for the three months ended December 31, 2020, as compared to losses of $21.4 million in 2019, and gains of $25.6 million and $47.3 million for the years ended December 31, 2020 and 2019, respectively. The changes in realized and unrealized (gains) losses on securities, net 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 generally accepted accounting principles in the U.S. (“U.S. GAAP”).

All (Income) Other Expenses, Net

All other expenses, net decreased $20.5 million and $29.0 million in the three months and year ended December 31, 2020, respectively, as compared to the same period of last year. The decreases were primarily due to lower provision for loan losses and lower finance interest expense, as compared to 2019 periods.

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. Income tax provision of $20.1 million and $38.1 million, respectively, were recorded for the three months and year ended December 31, 2020, respectively, and tax benefit of $19.8 million and tax provision of $14.6 million were recorded for the three months and year ended December 31, 2019, respectively. 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 30.4% based on the consolidated income before income taxes and equity method investments of $125.4 million in 2020. The lower 2019 effective tax rate reflects benefits for the removal of the valuation allowance on a capital loss carryforward and deductions related to the write-off of investments in certain subsidiaries.

(Income) Loss of Associated Companies, Net of Taxes

The Company recorded income from associated companies, net of taxes, of $22.6 million for the three months ended December 31, 2020, as compared to losses, net of taxes, of $8.5 million for the same period of 2019. The Company incurred losses from associated companies, net of taxes, of $3.8 million in 2020, as compared to losses, net of taxes of $8.0 million in 2019.

Purchases of Property, Plant and Equipment (Capital Expenditures)

Capital expenditures for the fourth quarter of 2020 totaled $7.6 million, or 2.3% of revenue, as compared to $13.3 million, or 3.8% of revenue, in the fourth quarter of 2019. For the year ended December 31, 2020, capital expenditures were $23.2 million, or 1.8% of revenue, as compared to $39.8 million, or 2.7% of revenue, for the year ended December 31, 2019.

Additional Non-GAAP Financial Measures

Adjusted EBITDA for the fourth quarter of 2020 was $67.1 million, as compared to $46.6 million for the same period in 2019. Adjusted EBITDA margin increased to 19.8% in the quarter from 13.4% in the fourth quarter of 2019, primarily due to the Company’s continued focus on cost management and the lower than expected loan losses noted above. Adjusted free cash flow was $13.8 million for the fourth quarter of 2020, as compared to $36.5 million for the same period in 2019.

For the year ended December 31, 2020, Adjusted EBITDA and Adjusted EBITDA margin were $213.7 million and 16.3%, respectively, as compared to $195.3 million and 13.4% in 2019. For year ended December 31, 2020, Adjusted free cash flow was $149.6 million, as compared to $117.0 million for the same period in 2019.

Liquidity and Capital Resources

As of December 31, 2020, the Company had $336.3 million in available liquidity under its senior credit agreement, as well as $18.2 million in cash and cash equivalents, excluding WebBank cash, and $291.4 million in marketable securities and long-term investments.

As of December 31, 2020, total debt was $334.2 million, a decrease of $3.9 million, as compared to December 31, 2019. As of December 31, 2020, net debt totaled $354.9 million, a decrease of $58.5 million, as compared to December 31, 2019. Total leverage (as defined in the Company’s senior credit agreement) was 2.4x as of December 31, 2020 versus 3.3x as of December 31, 2019.

During 2020 and continuing in 2021, WebBank has issued loans under the Small Business Administration’s (“SBA”) Paycheck Protection Program (“PPP”) authorized under the Coronavirus Aid, Relief, and Economic Security Act. As of December 31, 2020, the total PPP loans and associated liabilities are $2.0 billion and $2.1 billion, respectively. The loans were funded by the PPP Liquidity Facility, have terms of between 2 and 5 years, and their repayment is guaranteed by the SBA. Loans can be forgiven in whole or part (up to the full principal and any accrued interest) if certain criteria are met. The timing of loan forgiveness is uncertain at this time, but borrower forgiveness applications and SBA processing is expected over the next several quarters.

Revision for Correction of Errors and Discontinued Operations

In connection with the preparation of its consolidated financial statements for the year ended December 31, 2020, the Company identified errors in its previously filed annual consolidated financial statements and unaudited quarterly consolidated financial statements. The prior period errors are related primarily to a division of the Company’s Electrical Products business within the Diversified Industrial segment that represented approximately 10% and 11% of the Company’s revenue in 2019 and 2020, respectively, and are primarily related to inventories, revenue recognition and trade receivables, and accounts payable. The Company assessed the materiality of the errors in its historical annual consolidated financial statements in accordance with U.S. Securities and Exchange Commission (“SEC”) Staff Accounting Bulletin (“SAB”) Topic 1.M, Materiality, and concluded that the errors were not material to the previously filed annual consolidated financial statements or corresponding unaudited interim periods but would be material in the aggregate if corrected solely in its consolidated financial statements as of and for the year ended December 31, 2020. In accordance with SAB Topic 1.N, Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements, the Company has corrected for these errors by revising previously filed 2019 annual consolidated financial statements in connection with the filing of its 2020 Annual Report on Form 10-K. The revised annual consolidated financial statements also include adjustments to correct certain other immaterial errors, including errors that had previously been adjusted for as out of period corrections in the period identified. For additional information, please refer to Note 25 – “Restatement of Previously Issued Consolidated Financial Statements” of our 2020 Annual Report on Form 10-K. All financial data in this release reflects the impact of those restatements.

In addition, the Company recast all 2019 financial information associated with API Group Limited and certain of its affiliates, which were deconsolidated during the first quarter of 2020 and previously included in the Diversified Industrial segment, to discontinued operations. The 2019 financial information has been recast to reflect these changes on a comparable basis.

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, banking, defense, direct marketing, supply chain management and logistics, and youth sports.

(Financial Tables Follow)

Consolidated Balance Sheets

	December 31, 2020			December 31, 2019
ASSETS
Current assets:
Cash and cash equivalents	$	135,788		$	137,948
Marketable securities	106			220
Trade and other receivables – net of allowance for doubtful accounts of $3,368 and $2,578, respectively	164,106			169,827
Receivables from related parties	2,073			2,221
Loans receivable, including loans held for sale of $88,171 and $226,532, respectively, net	306,091			548,427
Inventories, net	137,086			148,453
Prepaid expenses and other current assets	58,053			41,759
Assets of discontinued operations	—			41,012
Total current assets	803,303			1,089,867
Long-term loans receivable, net	2,183,017			196,145
Goodwill	150,852			149,626
Other intangible assets, net	138,581			158,593
Deferred tax assets	66,553			90,907
Other non-current assets	42,068			69,073
Property, plant and equipment, net	228,992			250,133
Operating lease right-of-use assets	29,715			34,324
Long-term investments	291,297			275,836
Assets of discontinued operations	—			17,267
Total Assets	$	3,934,378		$	2,331,771
LIABILITIES AND CAPITAL
Current liabilities:
Accounts payable	$	100,759		$	88,165
Accrued liabilities	69,967			103,747
Deposits	285,393			615,495
Payables to related parties	4,080			481
Short-term debt	397			1,800
Current portion of long-term debt	10,361			14,208
Current portion of preferred unit liability	—			39,514
Other current liabilities	46,044			51,132
Liabilities of discontinued operations	—			21,256
Total current liabilities	517,001			935,798
Long-term deposits	70,266			139,222
Long-term debt	323,392			322,081
Other borrowings	2,090,223			—
Preferred unit liability	146,892			142,972
Accrued pension liabilities	183,462			183,228
Deferred tax liabilities	2,169			2,497
Long-term operating lease liabilities	21,845			26,458
Other non-current liabilities	39,906			25,057
Liabilities of discontinued operations	—			87,825
Total Liabilities	3,395,156			1,865,138
Commitments and Contingencies
Capital:
Partners’ capital common units: 22,920,804 and 25,023,128 issued and outstanding (after deducting 14,916,635 and 12,647,864 units held in treasury, at cost of $219,245 and $198,781), respectively	707,309			654,249
Accumulated other comprehensive loss	(172,649		)	(191,422		)
Total Partners’ Capital	534,660			462,827
Noncontrolling interests in consolidated entities	4,562			3,806
Total Capital	539,222			466,633
Total Liabilities and Capital	$	3,934,378		$	2,331,771

Consolidated Statements of Operations

	Unaudited
	Three Months Ended December 31,						Year Ended December 31,
	2020			2019			2020			2019
Revenue:
Diversified industrial net sales	$	271,607		$	261,803		$	1,058,745		$	1,119,642
Energy net revenue	32,548			37,307			107,831			163,972
Financial services revenue	34,564			47,581			144,060			171,434
Total revenue	338,719			346,691			1,310,636			1,455,048
Costs and expenses:
Cost of goods sold	222,158			225,373			859,863			952,071
Selling, general and administrative expenses	75,317			78,322			290,784			334,566
Goodwill impairment charges	1,100			—			1,100			15,924
Asset impairment charges	(11		)	—			606			849
Finance interest expense	2,287			3,586			11,733			16,279
Provision for loan losses	(8,759		)	10,957			21,946			43,373
Interest expense	6,176			8,737			29,514			38,835
Realized and unrealized (gains) losses on securities, net	(51,158		)	21,405			(25,643		)	(47,315		)
Other income, net	(123		)	(628		)	(4,666		)	(1,611		)
Total costs and expenses	246,987			347,752			1,185,237			1,352,971
Income (loss) before income taxes and equity method investments	91,732			(1,061		)	125,399			102,077
Income tax provision (benefit)	20,135			(19,771		)	38,136			14,563
(Income) loss of associated companies, net of taxes	(22,634		)	8,451			3,786			8,043
Net income from continuing operations	94,231			10,259			83,477			79,471
Discontinued operations
Income (loss) from discontinued operations, net of taxes	14,191			(38,949		)	(2,808		)	(81,165		)
Net loss on deconsolidation of discontinued operations	—			—			(7,391		)	—
Income (loss) from discontinued operations, net of taxes	14,191			(38,949		)	(10,199		)	(81,165		)
Net income (loss)	108,422			(28,690		)	73,278			(1,694		)
Net (income) loss attributable to noncontrolling interests in consolidated entities (continuing operations)	(34		)	126			(603		)	97
Net income (loss) attributable to common unitholders	$	108,388		$	(28,564	)	$	72,675		$	(1,597	)
Net income (loss) per common unit – basic
Net income from continuing operations	$	3.81		$	0.41		$	3.34		$	3.19
Net income (loss) from discontinued operations	0.57			(1.56		)	(0.41		)	(3.25		)
Net income (loss) attributable to common unitholders	$	4.38		$	(1.15	)	$	2.93		$	(0.06	)
Net income (loss) per common unit – diluted
Net income from continuing operations	$	2.19		$	0.41		$	1.85		$	3.19
Net income (loss) from discontinued operations	0.33			(1.56		)	(0.20		)	(3.25		)
Net income (loss) attributable to common unitholders	$	2.52		$	(1.15	)	$	1.65		$	(0.06	)
Weighted-average number of common units outstanding – basic	24,707,411			24,964,643			24,809,751			24,964,643
Weighted-average number of common units outstanding – diluted	42,930,970			24,964,643			51,390,972			24,964,643

Supplemental Balance Sheet Data (unaudited)

(in thousands, except common and preferred units)	December 31,		December 31,
	2020		2019
Cash and cash equivalents	$	135,788	$	137,948
WebBank cash and cash equivalents	117,553		123,528
Cash and cash equivalents, excluding WebBank	$	18,235	$	14,420
Common units outstanding	22,920,804		25,023,128
Preferred units outstanding	6,422,128		7,927,288

Supplemental Non-GAAP Disclosures (unaudited)

Adjusted EBITDA Reconciliation:

(in thousands)	Three Months Ended December 31, 2020						Year Ended December 31, 2020
	2020			2019			2020			2019
Net income from continuing operations	$	94,231		$	10,259		$	83,477		$	79,471
Income tax provision (benefit)	20,135			(19,771		)	38,136			14,563
Income (loss) from continuing operations before income taxes	114,366			(9,512		)	121,613			94,034
Add (Deduct):
(Income) loss of associated companies, net of taxes	(22,634		)	8,451			3,786			8,043
Realized and unrealized (gains) losses on securities, net	(51,158		)	21,405			(25,643		)	(47,315		)
Interest expense	6,176			8,737			29,514			38,835
Depreciation	11,498			11,659			44,583			44,619
Amortization	5,100			5,406			20,750			21,561
Non-cash goodwill impairment charges	1,100			—			1,100			15,924
Non-cash asset impairment charges	(11		)	—			606			849
Non-cash pension expense	1,200			2,077			3,632			8,290
Non-cash equity-based compensation	298			145			887			779
Other items, net	1,149			(1,754		)	12,911			9,730
Adjusted EBITDA	$	67,084		$	46,614		$	213,739		$	195,349

Total revenue	$	338,719		$	346,691		$	1,310,636		$	1,455,048
Adjusted EBITDA margin	19.8		%	13.4		%	16.3		%	13.4		%

Net Debt Reconciliation:

(in thousands)	December 31,			December 31,
	2020			2019
Total debt	$	334,150		$	338,089
Accrued pension liabilities	183,462			183,228
Preferred unit liability, including current portion	146,892			182,486
Cash and cash equivalents, excluding WebBank	(18,235		)	(14,420		)
Marketable securities	(106		)	(220		)
Long-term investments	(291,297		)	(275,836		)
Net debt	$	354,866		$	413,327

Adjusted Free Cash Flow Reconciliation:

(in thousands)	Three Months Ended December 31, 2020						Year Ended December 31, 2020
	2020			2019			2020			2019
Net cash provided by operating activities of continuing operations	$	13,486		$	53,588		$	311,235		$	118,455
Purchases of property, plant and equipment	(7,645		)	(13,293		)	(23,226		)	(39,816		)
Net increase (decrease) in loans held for sale	8,002			(3,804		)	(138,361		)	38,389
Adjusted free cash flow	$	13,843		$	36,491		$	149,648		$	117,028