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EX-32 - EXHIBIT 32 - STEEL PARTNERS HOLDINGS L.P.ex321splp3311610q.htm
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EX-32 - EXHIBIT 32 - STEEL PARTNERS HOLDINGS L.P.ex322splp3311610q.htm
 


UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
 
QUARTERLY REPORT
 
PURSUANT TO SECTION 13 or 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended March 31, 2016
 
Commission File Number: 001-35493
 
STEEL PARTNERS HOLDINGS L.P.
(Exact name of registrant as specified in its charter)
 
Delaware
13-3727655
(State of Incorporation)
(I.R.S. Employer Identification No.)
 
 
590 Madison Avenue, 32nd Floor
 
New York, New York
10022
(Address of principal executive offices)
(Zip Code)
 
(212) 520-2300
(Registrant’s telephone number)
 
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 o
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes þ No o
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12-b-2 of the Exchange Act.
 
Large accelerated filer o
Accelerated filer þ
Non-accelerated filer o
Smaller reporting company o
 
 
(Do not check if a smaller reporting company)
 
 
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 number of shares outstanding of the Registrant’s common units as of May 2, 2016 was 26,632,689.


 



STEEL PARTNERS HOLDINGS L.P.

TABLE OF CONTENTS

PART I — FINANCIAL INFORMATION
Page
Item 1.
Financial Statements (unaudited)
 
 
 
 
 
Consolidated Balance Sheets as of March 31, 2016 and December 31, 2015
 
 
 
 
Consolidated Statements of Operations for the three months ended March 31, 2016 and 2015
 
 
 
 
Consolidated Statements of Comprehensive Income for the three months ended March 31, 2016 and 2015
 
 
 
 
Consolidated Statements of Cash Flows for the three months ended March 31, 2016 and 2015
 
 
 
 
 
 
 
 
 
 
 
Item 2.
 
 
 
Item 4.
 
 
 
PART II — OTHER INFORMATION
 
 
 
 
Item 1.
 
 
 
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
 
 
 
Item 6.
 
 
 









PART I - FINANCIAL STATEMENTS
 

Item 1. Financial Statements
STEEL PARTNERS HOLDINGS L.P.
Consolidated Balance Sheets
(unaudited)
(in thousands, except common units)
 
March 31, 2016
 
December 31, 2015
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
154,306

 
$
185,852

Restricted cash
11,436

 
21,644

Marketable securities
79,078

 
80,842

Trade and other receivables (net of allowance for doubtful accounts of $2,026 in 2016 and $1,945 in 2015)
131,972

 
114,215

Receivables from related parties
971

 
1,722

Loans receivable including loans held for sale of $240,731 and $159,592, respectively, net
242,041

 
164,987

Inventories, net
108,486

 
102,267

Prepaid expenses and other current assets
19,226

 
45,396

Assets held for sale
2,549

 
2,549

Total current assets
750,065

 
719,474

Long-term loans receivable, net
66,143

 
62,036

Goodwill
101,240

 
101,853

Other intangible assets, net
133,758

 
138,963

Deferred tax assets - non-current
213,694

 
212,894

Other non-current assets
28,681

 
26,937

Property, plant and equipment, net
251,295

 
255,402

Long-term investments
162,023

 
167,214

Total Assets
$
1,706,899

 
$
1,684,773

 
 
 
 
LIABILITIES AND CAPITAL
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
74,779

 
$
59,992

Accrued liabilities
42,333

 
60,802

Financial instruments
11,425

 
21,639

Deposits
172,656

 
155,112

Payable to related parties
790

 
704

Short-term debt
1,530

 
1,269

Current portion of long-term debt
2,194

 
2,176

Other current liabilities
14,077

 
19,105

Liabilities of discontinued operations
450

 
450

Total current liabilities
320,234

 
321,249

Long-term deposits
130,904

 
97,060

Long-term debt
228,119

 
235,913

Accrued pension liability
273,548

 
276,525

Deferred tax liabilities - non-current
4,126

 
4,759

Other liabilities
8,795

 
8,905

Total Liabilities
965,726

 
944,411

Commitments and Contingencies

 

Capital:
 
 
 
Partners’ capital common units: 26,632,689 issued and outstanding (after deducting 10,055,224 held in treasury, at cost of $157,603) at March 31, 2016 and December 31, 2015
618,217

 
612,302

Accumulated other comprehensive loss
(52,154
)
 
(54,268
)
Total Partners’ Capital
566,063

 
558,034

Noncontrolling interests in consolidated entities
175,110

 
182,328

Total Capital
741,173

 
740,362

Total Liabilities and Capital
$
1,706,899

 
$
1,684,773



See accompanying Notes to Consolidated Financial Statements

2




STEEL PARTNERS HOLDINGS L.P.
Consolidated Statements of Operations
(unaudited)
(in thousands, except common units and per common unit data)
 
Three Months Ended March 31,
 
2016
 
2015
Revenue
 
 
 
Diversified industrial net sales
$
206,600

 
$
137,982

Energy net sales
19,999

 
38,885

Financial services revenue
20,194

 
12,176

Investment and other income
461

 
400

Net investment gains

 
25,138

Total revenue
247,254

 
214,581

Costs and expenses
 
 
 
Cost of goods sold
170,923

 
131,146

Selling, general and administrative expenses
61,305

 
60,459

Asset impairment charges
1,470

 
5,598

Finance interest expense
529

 
264

Provision for loan losses
238

 
62

Interest expense
2,033

 
2,034

Realized and unrealized loss on derivatives
123

 
207

Other income, net
(884
)
 
(2,455
)
Total costs and expenses
235,737

 
197,315

Income from continuing operations before income taxes
and equity method income (loss)
11,517

 
17,266

Income tax provision
3,735

 
7,920

Income (Loss) from equity method investments and investments held at fair value:
 
 
 
(Loss) Income of associated companies, net of taxes
(4,971
)
 
4,649

Income from other investments - related party

 
399

(Loss) Income from investments held at fair value
(467
)
 
4,413

Net income from continuing operations
2,344

 
18,807

Discontinued operations:
 
 
 
Income from discontinued operations, net of taxes

 
565

Gain on sale of discontinued operations, net of taxes

 
86,406

Net income from discontinued operations

 
86,971

Net income
2,344

 
105,778

Net (income) loss attributable to noncontrolling interests in consolidated entities:
 
 
 
Continuing operations
(382
)
 
3,584

Discontinued operations

 
(30,931
)
 
(382
)
 
(27,347
)
Net income attributable to common unitholders
$
1,962

 
$
78,431

Net income per common unit - basic
 
 
 
Net income from continuing operations
$
0.07

 
$
0.81

Net income from discontinued operations

 
2.03

Net income attributable to common unitholders
$
0.07

 
$
2.84

Net income per common unit - diluted
 
 
 
Net income from continuing operations
$
0.07

 
$
0.80

Net income from discontinued operations

 
2.00

Net income attributable to common unitholders
$
0.07

 
$
2.80

Weighted average number of common units outstanding - basic
26,632,689

 
27,658,494

Weighted average number of common units outstanding - diluted
26,645,083

 
28,069,888



See accompanying Notes to Consolidated Financial Statements

3


STEEL PARTNERS HOLDINGS L.P.
Consolidated Statements of Comprehensive Income
(unaudited)
(in thousands)


 
Three Months Ended March 31,
 
2016
 
2015
 
 
 
 
Net income
$
2,344

 
$
105,778

Other comprehensive income (loss), net of tax:
 
 
 
Gross unrealized gains on available for sale securities, net of tax
5,801

 
27,061

Reclassification of unrealized losses (gains) on available-for-sale securities, net of tax (a)
1,011

 
(22,663
)
 
6,812

 
4,398

Gross unrealized loss on derivative financial instruments
(1,364
)
 

Currency translation adjustment
(2,269
)
 
(1,634
)
Change in pension liability and other post-retirement benefit obligations, net of tax
180

 
1,627

    Other comprehensive income
3,359

 
4,391

Comprehensive income
5,703

 
110,169

Comprehensive income attributable to non-controlling interests
(1,627
)
 
(29,638
)
Comprehensive income attributable to common unit holders
$
4,076

 
$
80,531

 
 
 
 
Tax provision (benefit) on gross unrealized gains and losses on available-for-sale securities
$
986

 
$
(2,976
)
Tax provision (benefit) on reclassification of unrealized gains and losses on available-for-sale securities
$
578

 
$
(91
)
Tax provision on change in pension and other post-retirement benefit obligations
$

 
$
395


(a) For the three months ended March 31, 2016 unrealized holding losses of $1,470 and $119 were reclassified to Asset impairment charges and Other income, net, respectively. For the three months ended March 31, 2015 unrealized holding gains of $185 and $22,478 were reclassified to Other income, net and Net investment (losses) gains, respectively.



See accompanying Notes to Consolidated Financial Statements

4


STEEL PARTNERS HOLDINGS L.P.
Consolidated Statements of Cash Flows
(unaudited)
(in thousands)
 
Three Months Ended March 31,
 
2016
 
2015
Cash flows from operating activities:
 
 
 
Net income
$
2,344

 
$
105,778

Net income from discontinued operations

 
(86,971
)
Adjustments to reconcile net income to net cash used in operating activities:
 
 
 
Net investment gains

 
(25,138
)
Provision for loan losses
238

 
62

Loss (Income) of associated companies
4,971

 
(4,649
)
Income from other investments - related party

 
(399
)
Loss (Income) from investments held at fair value
467

 
(4,413
)
Deferred income taxes
648

 
3,590

Depreciation and amortization
13,464

 
9,672

Reclassification of net cash settlements on derivative instruments
136

 
8

Stock based compensation
1,391

 
11,279

Impairment charges
1,470

 
5,598

Other
(259
)
 
4,415

Net change in operating assets and liabilities:
 
 
 
Receivables
(19,879
)
 
(19,035
)
Inventories
(6,681
)
 
(8,367
)
Prepaid and other assets
625

 
(1,921
)
Accounts payable, accrued and other liabilities
2,909

 
(1,579
)
Net increase in loans held for sale
(81,139
)
 
(13,661
)
Net cash used in operating activities of continuing operations
(79,295
)
 
(25,731
)
Net cash used in operating activities of discontinued operations

 
(2,264
)
Net cash used in operating activities
(79,295
)
 
(27,995
)
Cash flows from investing activities:
 
 
 
Purchases of investments
(14,989
)
 
(51,993
)
Proceeds from sales of investments
31,497

 
25,798

Maturities of marketable securities
787

 
8

Net increase in loans and other receivables
(1,255
)
 
(3,476
)
Purchases of property, plant and equipment
(6,339
)
 
(5,204
)
Reclassification of restricted cash
10,214

 
(3,770
)
Net cash settlements on derivative instruments
(136
)
 
(8
)
Proceeds from sale of assets
1,456

 
1,105

Acquisitions, net of cash acquired

 
(9,385
)
Investments in associated companies

 
(7,368
)
Proceeds from sales of discontinued operations

 
152,889

Net cash used in investing activities of discontinued operations

 
(75
)
Other
54

 
(186
)
Net cash provided by investing activities
21,289

 
98,335

Cash flows from financing activities:
 
 
 
Net revolver repayments
(6,777
)
 
(71,202
)
Net borrowings of term loans – foreign
7

 
266

Repayments of term loans – domestic
(450
)
 
(3,391
)
Subsidiary's purchases of the Company's common units

 
(573
)
Subsidiary's purchases of their common stock
(14,268
)
 

Deferred finance charges
(82
)
 
(282
)
Net increase in deposits
51,388

 
13,326

Other
(3,115
)
 
1,441

Net cash provided by (used in) financing activities
26,703

 
(60,415
)
Net change for the period
(31,303
)
 
9,925

Effect of exchange rate changes on cash and cash equivalents
(243
)
 
405

Cash and cash equivalents at beginning of period
185,852

 
188,983

Cash and cash equivalents at end of period
$
154,306

 
$
199,313


See accompanying Notes to Consolidated Financial Statements

5


STEEL PARTNERS HOLDINGS L.P.
Consolidated Statement of Changes in Capital
(unaudited)
(in thousands, except common units and treasury units)
 
Steel Partners Holdings L.P. Common Unit Holders
 
 
 
 
 
Common
 
Treasury Units
 
Partners’
 
Accumulated
Other
Comprehensive
 
Total Partners'
 
Non-controlling interests in Consolidated
 
Total
 
Units
 
Units
 
Dollars
 
Capital
 
Loss
 
Capital
 
Entities
 
Capital
Balance at December 31, 2015
36,687,913

 
(10,055,224
)
 
$
(157,603
)
 
$
612,302

 
$
(54,268
)
 
$
558,034

 
$
182,328

 
$
740,362

Net income

 

 

 
1,962

 

 
1,962

 
382

 
2,344

Unrealized gain on available-for-sale investments

 

 

 

 
5,273

 
5,273

 
1,539

 
6,812

Unrealized loss derivative financial instruments

 

 

 

 
(1,237
)
 
(1,237
)
 
(127
)
 
(1,364
)
Currency translation adjustment

 

 

 

 
(2,105
)
 
(2,105
)
 
(164
)
 
(2,269
)
Changes in post-retirement benefit obligations

 

 

 

 
183

 
183

 
(3
)
 
180

Equity compensation- restricted units

 

 

 
94

 

 
94

 

 
94

Equity compensation- subsidiaries

 

 

 
562

 

 
562

 
340

 
902

Subsidiary's purchases of their common stock

 

 

 
4,902

 

 
4,902

 
(10,613
)
 
(5,711
)
Other, net

 

 

 
(1,605
)
 

 
(1,605
)
 
1,428

 
(177
)
Balance at March 31, 2016
36,687,913

 
(10,055,224
)
 
$
(157,603
)
 
$
618,217

 
$
(52,154
)
 
$
566,063

 
$
175,110

 
$
741,173


See accompanying Notes to Consolidated Financial Statements

6


STEEL PARTNERS HOLDINGS L.P.
Notes to Consolidated Financial Statements
(in thousands except common unit and per common unit data)


1. NATURE OF THE BUSINESS AND BASIS OF PRESENTATION

Nature of the Business
Steel Partners Holdings L.P. ("SPLP" or the "Company") is a global diversified holding company that engages in multiple businesses through consolidated subsidiaries, associated companies and other interests. It owns and operates businesses and has significant interests in companies in various industries, including diversified industrial products, energy, defense, supply chain management and logistics, banking and youth sports.
SPLP strives to enhance the business operations of its companies and increase long-term value for unitholders and stakeholders through balance sheet improvements, strategic allocation of capital and operational and growth initiatives. The Company uses a set of tools and processes called the Steel Business System to drive operational and sales efficiencies across each of its business units. The Steel Business System is designed to drive strategy deployment and sales and marketing based on lean principles. SPLP's 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 SPLP's companies. The Company strives to reduce our companies' operational costs, and enhance growth and profitability, through the implementation of Steel Partners Operational Excellence Programs, which include the deployment of Lean Manufacturing, Design for Six Sigma, Six Sigma and Strategy Deployment. SPLP is focused on reducing corporate overhead of our companies by centralizing certain administrative and corporate services through Steel Partners Corporate Services that provides management, consulting and advisory services.

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 additional details related to the Company's reportable segments see Note 17 - "Segment Information." Steel Partners Holdings GP Inc. (“SPH GP”), a Delaware corporation, is the general partner of SPLP and is wholly-owned by SPLP. The Company is managed by SP General Services LLC (the “Manager”), pursuant to the terms of an amended and restated management agreement (the “Management Agreement”) discussed in further detail in Note 12 - "Related party Transactions".
Basis of Presentation

The consolidated balance sheet as of December 31, 2015, which has been derived from audited financial statements, and the unaudited consolidated financial statements included herein have been prepared by the Company in accordance with the rules and regulations of the Securities and Exchange Commission for interim periods. Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. generally accepted accounting
principles ("U.S. GAAP") have been condensed or omitted in accordance with those rules and regulations. The Company believes that the disclosures made are adequate to make the information not misleading. This quarterly report on Form 10-Q should be read in conjunction with the Company's audited consolidated financial statements on Form 10-K for the year ended December 31, 2015. Certain amounts for the prior year have been reclassified to conform to the current year presentation.

In the opinion of management, the interim financial statements reflect all normal and recurring adjustments necessary to present fairly the consolidated financial position and the results of operations and changes in cash flows for the interim periods. The preparation of the consolidated financial statements in conformity with U.S. GAAP requires the Company to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and 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. The results of operations for the three months ended March 31, 2016 are not necessarily indicative of the operating results for the full year.

During 2015, one of the Company's subsidiaries, Steel Excel, identified an error related to the manner in which the provision for income taxes had reflected the tax effects related to unrealized gains and losses on available for sale securities during 2014 and 2013. As a result, the Company recorded an adjustment to correct the error in the first quarter of 2015 to its tax provision of approximately $3,500, which is included in the Consolidated Statements of Operations for the three months ended March 31, 2015.


7


STEEL PARTNERS HOLDINGS L.P.
Notes to Consolidated Financial Statements
(in thousands except common unit and per common unit data)

The consolidated financial statements include the accounts of the Company and its majority or wholly-owned subsidiaries, which include the following:
 
Ownership as of
 
March 31, 2016
 
December 31, 2015
BNS Liquidating Trust ("BNS Liquidating Trust")
84.9
%
 
84.9
%
DGT Holdings Corp. ("DGT") (a)
100.0
%
 
100.0
%
Handy & Harman Ltd. ("HNH")
69.8
%
 
70.1
%
SPH Services, Inc. ("SPH Services")
100.0
%
 
100.0
%
Steel Excel Inc. ("Steel Excel")
60.8
%
 
58.3
%
WebFinancial Holding Corporation ("WFHC") (b)
90.7
%
 
90.7
%
(a) DGT’s financial statements are recorded on a two-month lag, and as a result, the Company's Consolidated Balance Sheet and Consolidated Statement of Operations as of and for the three months ended March 31, 2016 includes DGT’s activity as of and for its three months ended January 31, 2016.
(b) WFHC owns 100% of WebBank ("WebBank") and 100% of WebFinancial Holding LLC ("WFH LLC") (formerly CoSine), which operates through its subsidiary API Group plc ("API").

Recent Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2014-09, Revenue from Contracts with Customers (Topic 606). The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services, and the guidance defines a five step process to achieve this core principle. In August 2015, the FASB issued ASU No. 2015-14, which deferred the effective date of ASU No. 2014-09 by one year. The ASU, as amended, is effective for the Company's 2018 fiscal year and may be applied either (i) retrospectively to each prior reporting period presented with an election for certain specified practical expedients, or (ii) retrospectively with the cumulative effect of initially applying the ASU recognized at the date of initial application, with additional disclosure requirements. The Company is evaluating the potential impact of this new guidance, but does not currently anticipate that the application of ASU No. 2014-09 will have a significant effect on its financial condition, results of operations or its cash flows. We have not yet determined the method by which we will adopt the standard.

In July 2015, the FASB issued ASU No. 2015-11, Inventory (Topic 330): Simplifying the Measurement of Inventory, which requires an entity to measure inventory at the lower of cost and net realizable value. Net realizable value is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal and transportation. The amendments do not apply to inventory that is measured using the last-in, first-out ("LIFO") cost method. The Company is currently evaluating the potential impact of this new guidance, which is effective for the Company's 2017 fiscal year.

In September 2015, the FASB issued ASU No. 2015-16, Business Combinations (Topic 805): Simplifying the Accounting for Measurement-Period Adjustments, which eliminates the requirement to restate prior-period financial statements for measurement-period adjustments following a business combination. The new guidance requires that the cumulative impact of a measurement-period adjustment (including the impact on prior periods) be recognized in the reporting period in which the adjustment is identified. The prior-period impact of the adjustment should either be presented separately on the face of the income statement or disclosed in the notes. This new guidance is effective for the Company's 2016 fiscal year. The amendments in this ASU will be applied prospectively to adjustments to provisional amounts that occur in 2016 and thereafter.

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842). The new standard establishes a right-of-use ("ROU") model that requires a lessee to record a ROU asset and a lease liability, measured on a discounted basis, on the balance sheet for all leases with terms longer than 12 months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement. A modified retrospective transition approach is required for capital and operating leases existing at the date of adoption, with certain practical expedients available. The Company is currently evaluating the potential impact of this new guidance, which is effective for the Company's 2019 fiscal year.

In March 2016, the FASB issued ASU No. 2016-09, Compensation-Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting. This new standard simplifies the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows, among other things. The new standard is effective for the Company's 2017 fiscal year. The Company is currently evaluating the potential impact of this new guidance.

8


STEEL PARTNERS HOLDINGS L.P.
Notes to Consolidated Financial Statements
(in thousands except common unit and per common unit data)

2. ACQUISITIONS

2015 Acquisitions
HNH's Acquisition of JPS
Effective July 2, 2015, HNH completed the acquisition of JPS Industries, Inc. ("JPS") pursuant to an agreement and plan of merger, dated as of May 31, 2015. JPS is a major U.S. manufacturer of mechanically formed glass and aramid substrate materials for specialty applications in a wide expanse of markets requiring highly engineered components. At the effective time of the Merger (as defined below), Sub was merged with and into JPS ("Merger"), with JPS being the surviving corporation in the Merger, and each outstanding share of JPS common stock (other than shares held by HNH and its affiliates, including SPH Group Holdings LLC ("SPH Group Holdings"), a subsidiary of SPLP, and a significant stockholder of JPS, was converted into the right to receive $11.00 in cash. The total merger consideration was $114,493 which represents the aggregate cash merger consideration of $70,255 and the fair value of SPLP's previously held interest in JPS of $44,238. The cash consideration was funded primarily by HNH and also by SPH Group Holdings. SPH Group Holding's funding of the aggregate merger consideration totaled approximately $4,510, with the remainder funded by HNH financed through additional borrowings under HNH's senior secured revolving credit facility.

As a result of the closing of the Merger, JPS was indirectly owned by both HNH and SPH Group Holdings. Following the expiration of the 20-day period provided in Section 262(d)(2) of the Delaware General Corporation Law for JPS stockholders to exercise appraisal rights in connection with the Merger, and in accordance with an exchange agreement, dated as of May 31, 2015, by and between HNH and SPH Group Holdings, on July 31, 2015, HNH exchanged 1,429,407 shares of HNH’s common stock with a value of $48,700 for all shares of JPS common stock held by SPH Group Holdings. As a result of the exchange, HNH owned 100% of JPS.

The following table summarizes the assets acquired and liabilities assumed at the acquisition date on a
preliminary basis:
 
Amount
 Assets:
 
 Cash and cash equivalents
$
22

Trade and other receivables
21,201

Inventories
27,126

Prepaid expenses and other current assets
4,961

Property, plant & equipment
45,384

Goodwill
32,336

Other intangible assets
9,120

Deferred tax assets - non-current
19,286

Other non-current assets
3,280

 Total assets acquired
162,716

 Liabilities:
 
Accounts payable
10,674

Accrued liabilities
5,533

Long-term debt
1,500

Accrued pension liability
30,367

Other liabilities
149

 Total liabilities assumed
48,223

 Net assets acquired
$
114,493


The preliminary purchase price allocation is subject to finalization of valuations of certain acquired assets and liabilities. The goodwill of $32,336 arising from the acquisition consists largely of the synergies expected from combining the operations of HNH and JPS. All of the goodwill is assigned to SPLP's Diversified Industrial segment and is not expected to be deductible for income tax purposes. Other intangible assets consist primarily of acquired trade names of approximately $4,300, customer relationships of approximately $3,100, and unpatented technology of approximately $1,700. These intangible assets have been assigned useful lives ranging from 10 to 15 years based on the long operating history, broad market recognition and continued demand for the associated brands, and the limited turnover and longstanding relationships JPS has with its existing customer base. The valuations of acquired trade names and unpatented technology were performed utilizing a relief from royalty method, and significant assumptions used in the valuation included the royalty rate assumed and the expected level of

9


STEEL PARTNERS HOLDINGS L.P.
Notes to Consolidated Financial Statements
(in thousands except common unit and per common unit data)

future sales, as well as the rate of technical obsolescence for the unpatented technology. The acquired customer relationships were valued using an excess earnings approach, and significant assumptions used in the valuation included the customer attrition rate assumed and the expected level of future sales.

CoSine Acquisition
Description of the Transaction    

On January 20, 2015 ("CoSine Acquisition Date"), the Company entered into a contribution agreement (the “Contribution Agreement”) with CoSine Communications, Inc. ("CoSine"). Pursuant to the Contribution Agreement, the Company contributed (i) 24,807,203 ordinary shares of API and (ii) 445,456 shares of common stock of Nathan’s Famous, Inc. ("Nathan's") to CoSine in exchange for 16,500,000 shares of newly issued CoSine common stock and 12,761 shares of newly issued 7.5% series B non-voting preferred stock, which increased SPLP's ownership of CoSine to approximately 80%. Prior to obtaining a controlling interest, SPLP owned approximately 48% of the outstanding shares of CoSine, and its investment was accounted for under the traditional equity method. As a result of the above transaction, CoSine became a majority-owned controlled subsidiary and is consolidated with SPLP from the CoSine Acquisition Date. Prior to CoSine's Acquisition of API, CoSine was included in the Corporate and Other segment. Beginning in the second quarter of 2015, CoSine is included in the Diversified Industrial segment.

The Contribution Agreement was the first step in a plan for a wholly owned UK subsidiary of CoSine ("BidCo") to make an offer (the “Offer”), which commenced on February 4, 2015, to acquire all of the issued and to be issued shares in API for 60 pence in cash per API share not already owned by BidCo. As a result of the Offer, BidCo owned approximately 98% of API as of March 31, 2015, however CoSine did not obtain control over the operations of API until April 17, 2015 (see the "CoSine's Acquisition of API" section below).

Fair Value of Consideration Paid

As of the CoSine Acquisition Date, the fair value of the Company's previously held equity interest and the noncontrolling interest in CoSine were valued at approximately $2.51 per share. Accordingly, the Company remeasured its previously held equity interest to a fair value of approximately $12,011, resulting in an investment gain, which was recorded in the first quarter of 2015, of approximately $6,900 and is included in Net investment (losses) gains in the Consolidated Statements of Operations.

The table below details the consideration paid to acquire the controlling interest in CoSine:
 
 
 
 
Fair Value of Consideration Paid
Previously held common equity of CoSine
 
4,779,721

 
 
Fair Value Per Share (a)
 
$
2.51

 
$
12,011

 
 
 
 
 
Shares of API transferred to CoSine
 
24,807,203

 
 
Fair Value Per Share (b)
 
$
0.92

 
22,823

 
 
 
 
 
Shares of Nathan's transferred to CoSine
 
445,456

 
 
Fair Value Per Share (c)
 
$
70.50

 
31,405

 
 
 
 
$
66,239

(a) Based on comparable company trading multiples and discounted cash flow analysis.
(b) Represents the Offer price of 60 pence at the U.S. dollar to GBP exchange rate on the CoSine Acquisition Date.
(c) Determined by analysis of other publicly traded companies.

    

10


STEEL PARTNERS HOLDINGS L.P.
Notes to Consolidated Financial Statements
(in thousands except common unit and per common unit data)

Allocation of Consideration Paid

The following table summarizes the estimates of the fair values of the assets acquired and liabilities assumed as of the CoSine Acquisition Date as well as the fair value of the noncontrolling interest in CoSine:
 
 
Amount
 Assets:
 
 
 Cash
 
$
17,614

 Prepaid expenses and other current assets
 
7

 Investments
 
54,228

 Goodwill
 
8,295

 Total assets acquired
 
80,144

 Liabilities:
 
 
Accounts payable
 
280

Accrued liabilities
 
783

 Total liabilities assumed
 
1,063

 Fair value of noncontrolling interest
 
12,842

 Net assets acquired
 
$
66,239

    
CoSine's Acquisition of API

Description of the Transaction
As discussed above, CoSine obtained control over the operations of API on April 17, 2015 ("API Acquisition Date"), at which time API became a majority-owned subsidiary of CoSine. API is a manufacturer and distributor of foils, films and laminates used to enhance the visual appeal of products and packaging. API is headquartered in Cheshire, England.

Fair Value of Consideration Paid

The table below details the consideration paid to acquire the controlling interest in API:

 
 
Fair Value of Consideration Paid
 
 
 
Previously held common equity of API
 
$
22,861

 
 
 
Cash paid for additional API equity
 
47,866

 
 
$
70,727


    
    

















11


STEEL PARTNERS HOLDINGS L.P.
Notes to Consolidated Financial Statements
(in thousands except common unit and per common unit data)

Allocation of Consideration Paid

The following table summarizes the preliminary estimates of the fair values of the assets acquired and liabilities assumed as of the API Acquisition Date:
 
 
Amount
 Assets:
 
 
 Cash
 
$
5,424

 Trade and other receivables
 
24,160

 Inventories
 
22,900

 Prepaid expenses and other current assets
 
4,838

 Property, plant and equipment
 
41,884

 Other non-current assets
 
4,814

 Goodwill
 
14,117

 Other intangible assets
 
23,664

 Total assets acquired
 
141,801

 Liabilities:
 
 
 Accounts payable
 
24,556

 Accrued liabilities
 
7,028

 Short-term debt
 
2,104

 Long-term debt
 
22,784

 Accrued pension liability
 
11,791

 Deferred tax liabilities - non-current
 
2,811

 Total liabilities assumed
 
71,074

 Net assets acquired
 
$
70,727


The preliminary purchase price allocation is subject to finalization of valuations of certain acquired assets. All of the goodwill is assigned to SPLP's Diversified Industrial segment and is not expected to be deductible for income tax purposes. Other intangible assets consist primarily of acquired trade names of approximately $5,200 and customer relationships of $18,430. Based on our preliminary evaluation, the trade names have been assigned a 10-year useful life based on the long operating history, broad market recognition and continued demand for the associated brands, and customer relationships have been assigned a 7-year life based on the expected turnover of API's existing customer base. The valuation of acquired trade names was performed utilizing a relief from royalty method, and significant assumptions used in the valuation include the royalty rate assumed and the expected level of future sales. The acquired customer relationships were valued using an excess earnings approach, and significant assumptions used in the valuation include the customer attrition rate assumed and the expected level of future sales.

Pro Forma Results
    
The following unaudited pro forma results of operations assumes that the API and JPS acquisitions were made at the beginning of 2015. This unaudited pro forma information does not purport to be indicative of the results that would have been obtained if the acquisitions had actually occurred at the beginning of the year prior to acquisition, nor of the results that may be reported in the future. The 2015 supplemental pro forma earnings were adjusted to reflect incremental depreciation and amortization expense based on the fair value adjustments for the acquired property, plant and equipment and intangible assets and exclude $1,969 of acquisition-related costs incurred in the three months ended March 31, 2015.
 
Three Months Ended March 31,
 
2015
Revenue
$
300,011

Net income from continuing operations attributable to common unitholders
13,388

Net income from continuing operations per common unit - basic
0.60

Net income from continuing operations per common unit - diluted
0.59


The amount of operating loss of CoSine included in the Company’s Consolidated Statement of Operations for the three months ended March 31, 2015 totaled approximately $2,400.


    


12


STEEL PARTNERS HOLDINGS L.P.
Notes to Consolidated Financial Statements
(in thousands except common unit and per common unit data)


HNH Acquisition of ITW Polymers Sealants North America Inc. (“ITW”)

On March 31, 2015, HNH, through its indirect subsidiary, OMG, Inc. (“OMG”), acquired certain assets and assumed certain liabilities of ITW, which are used in the business of manufacturing two-component polyurethane adhesive for the roofing industry for a cash purchase price of $27,400, reflecting a final working capital adjustment of $400 paid in June 2015. The assets acquired and liabilities assumed primarily included net working capital of inventories and accrued liabilities; property, plant and equipment; and intangible assets, primarily unpatented technology, valued at $1,700, $100 and $4,400, respectively. In connection with the ITW acquisition, HNH has recorded goodwill totaling approximately $21,268, which is expected to be deductible for income tax purposes.    

3. ASSETS HELD FOR SALE AND DISCONTINUED OPERATIONS

Assets and liabilities of discontinued operations at March 31, 2016 and December 31, 2015 include a building owned by DGT in the amount of $2,549, which is held for sale, and liabilities of $450 from a sports business owned by Steel Excel. Summary results for our discontinued operations included in the Company's Consolidated Statements of Operations are detailed in the table below.
 
Three Months Ended March 31,
 
2015 (a)
Revenue
$
5,952

Net income from operations
565

Net loss from operations after taxes and noncontrolling interests
(1,117
)
Gain on sale of discontinued operations after taxes and noncontrolling interests
57,158

(a) Includes gain on sale of Arlon LLC ("Arlon"). On December 18, 2014, HNH entered into a contract to sell its Arlon business for $157,000 in cash, subject to customary adjustments. The closing of the sale occurred in January 2015. The operations of Arlon, which manufactures high performance materials for the printed circuit board industry and silicone rubber-based materials, were part of SPLP's Diversified Industrial segment.

4. INVESTMENTS

A) Short-Term Investments

Marketable Securities

The Company's short-term investments primarily consist of its marketable securities portfolio held by its subsidiary, Steel Excel. These marketable securities as of March 31, 2016, and December 31, 2015, are classified as "available-for-sale" securities, with changes in fair value recognized in Partners' Capital as Other comprehensive income (loss), except for other-than-temporary impairments, which are reflected as a reduction of cost and charged to the Consolidated Statement of Operations. The classification of marketable securities as a current asset is based on the intended holding period and realizability of the investment.

















13


STEEL PARTNERS HOLDINGS L.P.
Notes to Consolidated Financial Statements
(in thousands except common unit and per common unit data)


The Company's portfolio of marketable securities was as follows:
 
March 31, 2016
 
December 31, 2015
 
Cost
 
Gross Unrealized Gains
 
Gross Unrealized Losses
 
Fair value
 
Cost
 
Gross Unrealized Gains
 
Gross Unrealized Losses
 
Fair value
Available for sale securities
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Short-term deposits
$
41,030

 
$

 
$

 
$
41,030

 
$
30,118

 
$

 
$

 
$
30,118

Mutual funds
11,835

 
2,413

 

 
14,248

 
11,835

 
2,182

 

 
14,017

Corporate securities
39,783

 
5,164

 
(491
)
 
44,456

 
41,861

 
250

 
(549
)
 
41,562

Corporate obligations
20,704

 
392

 
(722
)
 
20,374

 
25,747

 
98

 
(582
)
 
25,263

Total marketable securities
113,352

 
7,969

 
(1,213
)
 
120,108

 
109,561

 
2,530

 
(1,131
)
 
110,960

Amounts classified as cash equivalents
(41,030
)
 

 

 
(41,030
)
 
(30,118
)
 

 

 
(30,118
)
Amounts classified as marketable securities
$
72,322

 
$
7,969

 
$
(1,213
)
 
$
79,078

 
$
79,443

 
$
2,530

 
$
(1,131
)
 
$
80,842


Proceeds from sales of marketable securities were $31,500 and $23,098 in the three months ended March 31, 2016 and 2015, respectively. The Company determines gains and losses from sales of marketable securities based on specific identification of the securities sold.

Gross realized gains and losses from sales of marketable securities, all of which are reported as a component of Other income, net in the Consolidated Statements of Operations, were as follows:
 
Three Months Ended March 31,
 
2016
 
2015
Gross realized gains
$
65

 
$
1,190

Gross realized losses
(1,393
)
 
(375
)
   Realized (losses) gains, net
$
(1,328
)
 
$
815


The fair value of marketable securities with unrealized losses at March 31, 2016, all of which had unrealized losses for periods of less than twelve months, were as follows:
 
Fair Value
 
Gross Unrealized Losses
Corporate securities
$
4,199

 
$
(491
)
Corporate obligations
17,505

 
(722
)
    Total
$
21,704

 
$
(1,213
)

The fair value of marketable securities with unrealized losses at December 31, 2015, all of which had unrealized losses for periods of less than twelve months were as follows:
 
Fair Value
 
Gross Unrealized Losses
Corporate securities
$
2,283

 
$
(549
)
Corporate obligations
13,199

 
(582
)
    Total
$
15,482

 
$
(1,131
)

Gross unrealized losses primarily related to losses on corporate securities and corporate obligations, which primarily consist of investments in equity and debt securities of publicly-traded entities. Based on Steel Excel's evaluation of such securities, it determined that certain unrealized losses represented other-than-temporary impairments. This determination was based on several factors, including adverse changes in the market conditions and economic environments in which the entities operate. Steel Excel recognized impairment charges of approximately $1,500 for the three months ended March 31, 2016, equal to the cost basis of such securities in excess of their fair values. Steel Excel has determined that there was no indication of

14


STEEL PARTNERS HOLDINGS L.P.
Notes to Consolidated Financial Statements
(in thousands except common unit and per common unit data)

other-than-temporary impairments on its other investments with unrealized losses as of March 31, 2016. This determination was based on several factors, including the length of time and extent to which fair value has been less than the cost basis, the financial condition and near-term prospects of the entity, and the intent and ability to hold the corporate securities for a period of time sufficient to allow for any anticipated recovery in market value.
          
The amortized cost and estimated fair value of available-for-sale debt securities and marketable securities as of March 31, 2016, by contractual maturity, were as follows:
 
Cost
 
Estimated Fair Value
Mature after one year through three years
$
2,477

 
$
2,869

Mature after three years
18,227

 
17,505

Total debt securities
20,704

 
20,374

Securities with no contractual maturities
$
92,648

 
$
99,734

 
$
113,352

 
$
120,108




15


STEEL PARTNERS HOLDINGS L.P.
Notes to Consolidated Financial Statements
(in thousands except common unit and per common unit data)

B) Long-Term Investments

The following table summarizes the Company's long-term investments as of March 31, 2016 and December 31, 2015. For those investments at fair value, the carrying amount of the investment equals its respective fair value.
 
 
 
 
Investment Balance
 
Income (Loss) Recorded in Statement of Operations
 
 
 
 
 
 
 
Three Months Ended March 31,
(A) AVAILABLE-FOR-SALE SECURITIES
 
 
 
March 31, 2016
December 31, 2015
 
2016
 
2015
 Fair Value Changes Recorded in Accumulated Other Comprehensive (Loss)Income:
 
 
 
 
 
 
 
 
 
     Equity securities - U.S. (1)
 
 
 
 
 
 
 
 
 
       Aerospace/Defense
 
 
 
$
68,485

$
65,474

 
 
 
 
       Other
 
 
 
576

568

 
 
 
 
 
 
 
 
69,061

66,042

 
 
 
 
   Fair Value Changes Recorded in Consolidated Statement of Operations:
 
 
 
 
 
 
 
 
 
       API  
 
 
 


 
$

 
$
4,450

 
 
 
 
69,061

66,042

 
$

 
$
4,450

(B) EQUITY METHOD INVESTMENTS
 
 
 
 
 
 
 
 
 
  Investments in Associated Companies:
March 31, 2016
December 31, 2015
 
 
 
 
 
 
 
 At Cost:
Ownership
 
 
 
 
 
 
 
       WFH LLC (formerly CoSine) (2)
90.7
%
90.7
%
 


 
$

 
$
(602
)
       Other (6)
 
 
 
4,134

4,166

 
29

 
(137
)
 At Fair Value:
 
 
 
 
 
 
 
 
 
  ModusLink Global Solutions, Inc. ("MLNK") (1)
31.3
%
31.5
%
 
25,402

40,862

 
(12,748
)
 
1,726

  SL Industries, Inc. ("SLI") (1)
25.1
%
25.1
%
 
33,825

31,716

 
2,109

 
3,731

 JPS Industries, Inc. ("JPS") (1)
100.0
%
100.0
%
 


 

 
1,769

 API Technologies Corp. ("API Tech") (1)
20.5
%
20.6
%
 
22,526

15,779

 
6,746

 
(686
)
  Aviat Networks, Inc. ("Aviat") (1)
12.9
%
12.9
%
 
5,710

6,175

 
(465
)
 
(1,287
)
  Other (3)
43.8
%
43.8
%
 
1,289

1,931

 
(642
)
 
135

 
 
 
 
92,886

100,629


$
(4,971
)

$
4,649

  Other Investments at Fair Value - Related Party:
 
 
 
 
 
 
 
 
 
SPII Liquidating Trust - Series G (SPCA) (3), (4)
 
 
 


 

 
483

SPII Liquidating Trust - Series H (SPJSF) (3), (5)
 
 
 


 

 
(84
)
 
 
 
 


 
$

 
$
399

 (C) OTHER INVESTMENTS
 
 
 
 
 
 
 
 
 
     ModusLink Warrants (3)
 
 
 
76

543

 
$
(467
)
 
$
(37
)
 
 
 
 
 
 
 
 
 
 
Total Long-Term Investments
 
 
 
$
162,023

$
167,214

 
 
 
 
(1) Level 1 investments.
(2) WFH LLC (formerly Cosine) is a consolidated subsidiary as of the first quarter of 2015.
(3) Level 3 investment. For additional information related to the Company's Level 3 investments, see Note 5 - "Fair Value Measurements."
(4) Steel Partners China Access I L.P. Trust H was liquidated during the first quarter of 2015.
(5) Steel Partners Japan Strategic Fund, L.P. Trust G was liquidated during the second quarter of 2015.
(6) Represents Steel Excel's investments in a sports business and iGo, Inc. ("iGo") of 40.0% and 45.7%, respectively and a 50% investment in API Optix s.r.o ("API Optix"), a joint venture investment held by API.
    

16


STEEL PARTNERS HOLDINGS L.P.
Notes to Consolidated Financial Statements
(in thousands except common unit and per common unit data)

The following table presents activity for the available-for-sale securities presented in the table above for the three months ended March 31, 2016 and 2015:
 
Three Months Ended March 31,
 
2016
 
2015
(A) AVAILABLE-FOR-SALE SECURITIES
 
 
 
   Fair Value Changes Recorded in Accumulated Other Comprehensive (Loss) Income:
 
 
 
  Change in net unrealized holding (losses) gains included in Accumulated other comprehensive (loss) income
$
3,019

 
$
20,481

Reclassified out of Accumulated other comprehensive (loss) income :
 
 
 
   Unrealized gains
$

 
$
(22,478
)
     Total
$

 
$
(22,478
)

(A) AVAILABLE-FOR-SALE SECURITIES

Fair Value Changes Recorded in Accumulated Other Comprehensive (Loss) Income

For purposes of determining gross realized gains and losses, the cost of securities sold is based on specific identification. Gross unrealized gains and gross unrealized losses are reported in Accumulated other comprehensive (loss) income ("AOCI") in the Company's Consolidated Balance Sheets. In January 2015 the Company contributed Nathan’s, one if its available -for-sale securities, to CoSine in exchange for additional CoSine equity (see Note 2 - "Acquisitions" for additional information). Also, in the first quarter of 2015, Cosine sold approximately 222,000 shares of Nathan's for proceeds of approximately $16,000 and received a special dividend of approximately $5,600 which is included in Other income, net in the Consolidated Statement of Operations for the three months ended March 31, 2015. As a result, management determined there to be an other-than-temporary impairment in the stock price and recorded an impairment charge of approximately $5,600.

The cost basis and unrealized gains and losses related to our available-for-sale securities which are classified as long-term investments are as follows:
 
March 31, 2016
 
December 31, 2015
 
Cost
Gross Unrealized Gains
Gross Unrealized Losses
Fair Value
 
Cost
Gross Unrealized Gains
Gross Unrealized Losses
Fair Value
Aerospace/Defense
$
11,675

$
56,810

$

$
68,485

 
$
11,675

$
53,799

$

$
65,474

Other
575

1


576

 
575


(7
)
568

 
$
12,250

$
56,811

$

$
69,061

 
$
12,250

$
53,799

$
(7
)
$
66,042

Fair Value Changes Recorded in Consolidated Statement of Operations

Available-for-sale securities that are classified as long-term investments also included the Company's investment in API prior to its acquisition in the second quarter of 2015 (see Note 2 - "Acquisitions" for additional information). Changes in the fair value of this investment were reported in the Company's Consolidated Statements of Operations as (Loss) Income from investments held at fair value.
(B) EQUITY METHOD INVESTMENTS
Investments in Associated Companies

The Company’s investments in associated companies are accounted for under the equity method of accounting. The Company elected to record certain investments under the equity method at fair value beginning on the dates these investments became subject to the equity method. Associated companies are included in the Diversified Industrial, Energy or Corporate segments. Certain associated companies have a fiscal year end that differs from December 31. Additional information for each of SPLP's investments in associated companies as of March 31, 2016 are as follows:
Traditional Equity Method

17


STEEL PARTNERS HOLDINGS L.P.
Notes to Consolidated Financial Statements
(in thousands except common unit and per common unit data)


Steel Excel has an investment in iGo, a provider of accessories for mobile devices. This investment is being accounted for under the traditional equity method as an associated company. Steel Excel fully impaired its investment in a sports business in the third quarter of 2015. Based on the closing market price of iGo's publicly-traded shares, the value of the investment in iGo was approximately $3,700 and $3,900 at March 31, 2016 and December 31, 2015, respectively.

WFH LLC's API subsidiary has a 50% joint venture in API Optix with IQ Structures s.r.o. API Optix provides development and origination services in the field of micro and nano-scale surface relief technology. The investment, based in Prague, Czech Republic, is being accounted for under the traditional equity method as an associated company.

Equity Method, At Fair Value:

MLNK provides supply chain and logistics services to companies in consumer electronics, communications, computing, medical devices, software, luxury goods and retail. MLNK also issued the Company warrants to purchase an additional 2,000,000 shares at $5.00 per share. See the "Other Investments" section of this Note for a further description of these warrants and their valuation for financial statement reporting. These warrants will expire in March 2018.

SLI is a publicly traded company that designs, manufactures and markets power electronics, motion control, power protection and specialized communication equipment. On April 6, 2016, HNH entered into a definitive merger agreement with SLI, pursuant to which it commenced a cash tender offer to purchase all of the outstanding shares of SLI’s common stock (see Note 22 - "Subsequent Events" for additional information).

API Tech is a designer and manufacturer of high performance systems, subsystems, modules, and components. In April 2016, API Tech consummated merger pursuant to which holders of its common stock received $2.00 for each share held. Upon consummation of the merger, Steel Excel received $22,900 for its investment in API.
 
Aviat Networks, Inc., is a global provider of microwave networking solutions. Prior to being classified as an equity method investment in January 2015, the investment in Aviat was accounted for as an available-for-sale security, and upon the change in classification Steel Excel recognized a loss of approximately $2,800 that had previously been included as a component of AOCI.

The Other investment represents the Company's investment in a Japanese real estate partnership.

Associated Company Information
    
The below summary balance sheet amounts are for the nearest practicable period. The below summary income statement amounts include results for associated companies for the periods in which they were accounted for as an associated company, or the nearest practicable corresponding period. This summary data may be derived from unaudited financial statements and may contain a lag.
 
March 31, 2016
 
December 31, 2015
Summary of balance sheet amounts:
 
 
 
Current assets
$
511,669

 
$
540,446

Noncurrent assets
87,609

 
91,840

Total assets
$
599,278

 
$
632,286

Current liabilities
$
308,259

 
$
329,201

Noncurrent liabilities
99,157

 
98,730

Total liabilities
407,416

 
427,931

Parent equity
191,862

 
204,355

Total liabilities and equity
$
599,278

 
$
632,286

 
Three Months Ended March 31,
 
2016
 
2015
Summary income statement amounts:
 
 
 
Revenue
$
172,750

 
$
221,067

Gross profit
22,833

 
31,188

Income (loss) from continuing operations
(9,805
)
 
1,890

Net (loss) income after noncontrolling interests
(10,500
)
 
6,995


18


STEEL PARTNERS HOLDINGS L.P.
Notes to Consolidated Financial Statements
(in thousands except common unit and per common unit data)

Other Investments at Fair Value - Related Party

The income or loss from Other investments at fair value - related party, represented the changes in fair value of Company’s investment in the SPII Liquidating Trust (see Note 12 - “Related Party Transactions”) which were liquidated during 2015. These investments were accounted for under the equity method. In February 2015, the SPII Liquidating Trust comprising Trust H was fully liquidated and, as a result, the Company received its proportional interest of the cash and investments in Trust H totaling approximately $2,730. There were no gains or losses recorded on any of the liquidations.
 
(C) OTHER INVESTMENTS

In connection with the acquisition of MLNK common shares in March 2013, the Company received warrants ("ModusLink Warrants") to acquire an additional 2,000,000 shares at an exercise price of $5.00 per share. The ModusLink Warrants are accounted for as an asset at fair value with changes in fair value recognized each period in (Loss) Income from investments held at fair value in the Company's Consolidated Statements of Operations. The ModusLink Warrants have a life of 5 years and are valued using the Black-Scholes option pricing model. Assumptions used in the current valuation were as follows: 1) volatility of 52.0% 2) term of approximately 2 years 3) risk free interest rate of 1.21% based on the U.S. Treasury bill yield, and 4) an expected dividend of $0.

INVESTMENTS INCLUDED WITHIN OTHER NON-CURRENT ASSETS

Steel Excel's other investments at March 31, 2016, include an investment in a venture capital fund totaling $500, preferred stock of an investee of $100 and a promissory note with an amortized cost of $3,000, which is a reasonable approximation of fair value at March 31, 2016.

WebBank has $7,771 and $6,558 of held-to-maturity securities at March 31, 2016 and December 31, 2015, respectively. WebBank records these securities at amortized cost. The dollar value of these securities with expected maturities from five years through ten years is $5,703, and after ten years is $1,103. Actual maturities may differ from expected or contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. The securities are collateralized by unsecured consumer loans. These securities had an estimated fair value of $7,780 and $6,551 at March 31, 2016 and December 31, 2015.


19


STEEL PARTNERS HOLDINGS L.P.
Notes to Consolidated Financial Statements
(in thousands except common unit and per common unit data)

5. FAIR VALUE MEASUREMENTS

Financial assets and liabilities measured at fair value on a recurring basis in the consolidated financial statements as of March 31, 2016 and December 31, 2015 are summarized by type of inputs applicable to the fair value measurements as follows:
March 31, 2016
Level 1
 
Level 2
 
Level 3
 
Total
Assets:
 
 
 
 
 
 
 
Marketable securities (a)
$
48,391

 
$
4,236

 
$
26,451

 
$
79,078

Long-term investments (a)
157,769

 

 
1,365

 
159,134

Investments in certain funds

 

 
549

 
549

Precious metal and commodity inventories recorded at fair value
11,747

 

 

 
11,747

Total
$
217,907

 
$
4,236

 
$
28,365

 
$
250,508

 
 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
 
Financial instrument obligations
$
11,425

 
$

 
$

 
$
11,425

Foreign currency forward exchange contracts

 
1,181

 

 
1,181

Commodity contracts on precious metal and commodity inventories

 
5

 

 
5

Total
$
11,425

 
$
1,186

 
$

 
$
12,611

December 31, 2015
Level 1
 
Level 2
 
Level 3
 
Total
Assets:
 
 
 
 
 
 
 
Marketable securities (a)
$
42,274

 
$
6,143

 
$
27,425

 
$
75,842

Long-term investments (a)
160,574

 

 
2,474

 
163,048

Investments in certain funds

 

 
555

 
555

Precious metal and commodity inventories recorded at fair value
10,380

 

 

 
10,380

Commodity contracts on precious metal and commodity inventories

 
215

 

 
215

Foreign currency forward exchange contracts

 
325

 

 
325

Total
$
213,228

 
$
6,683

 
$
30,454

 
$
250,365

 
 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
 
Financial instrument obligations
$
21,639

 
$

 
$

 
$
21,639

Interest rate swap agreement

 
30

 

 
30

Foreign currency forward exchange contracts

 
30

 

 
30

Total
$
21,639

 
$
60

 
$

 
$
21,699

(a) For additional detail of the marketable securities and long-term investments see Note 4 - "Investments."
    
There were no transfers of securities among the various measurement input levels during the three months ended
March 31, 2016.

Investments measured and reported at fair value are classified and disclosed in one of the following categories:

Level 1 - Quoted prices are available in active markets for identical investments as of the reporting date. The types of investments included in Level 1 are listed debt and equity securities.

Level 2 - Pricing inputs are other than quoted prices in active markets for identical assets, which are either directly or indirectly observable as of the reporting date, and can include quoted prices in active markets for similar assets or liabilities, quoted prices in a market that is not active for identical assets or liabilities, or other inputs that can be corroborated by observable market data. Investments which are generally included in this category include corporate bonds and loans, less liquid and restricted equity securities, and foreign currency forward exchange contracts.

Level 3 - Pricing inputs are unobservable for the investment and include situations where there is little, if any, market activity for the investment. The inputs into the determination of fair value require significant management judgment or estimation and due to lack of observable inputs, the assumptions used may impact the fair value of these investments in future periods. Investments which are generally included in this category include private investments and non-exchange traded derivative contracts.
    

20


STEEL PARTNERS HOLDINGS L.P.
Notes to Consolidated Financial Statements
(in thousands except common unit and per common unit data)

The fair value of the Company's financial instruments, such as cash and cash equivalents, trade and other receivables and trade payables, approximate carrying value due to the short-term maturities of these assets and liabilities. Carrying cost approximates fair value for long-term debt which has variable interest rates.

The precious metal and commodity inventories associated with HNH's fair value hedges (see Note 6 - "Financial Instruments") are reported at fair value. Fair value of these inventories is based on quoted market prices on commodity exchanges and are considered Level 1 measurements. The derivative instruments that HNH purchases in connection with its precious metal and commodity inventories, specifically commodity futures and forwards contracts, are also valued at fair value. The futures contracts are Level 1 measurements since they are traded on a commodity exchange. The forward contracts are entered into with a counterparty and are considered Level 2 measurements.

Interest rate swap agreements were considered Level 2 measurements as the inputs were observable at commonly quoted intervals. These agreements expired in February 2016.

Following is a summary of changes in financial assets measured using Level 3 inputs:
 
Long - Term Investments
 
 
 
 
 
Investments in Associated Companies (a)
 
Other Investments - Related Party (b)
 
ModusLink Warrants (c)
 
Marketable Securities and Other (d), (e)
 
Total
Assets
 
 
 
 
 
 
 
 
 
Balance at December 31, 2014
$
2,163

 
$
9,623

 
$
2,199

 
$
34,421

 
$
48,406

Purchases

 

 

 

 

Sales

 
(2,727
)
 

 
(163
)
 
(2,890
)
Unrealized gains
135

 
484

 

 

 
619

Unrealized losses

 
(84
)
 
(36
)
 
(2,885
)
 
(3,005
)
Balance at March 31, 2015
$
2,298

 
$
7,296

 
$
2,163

 
$
31,373

 
$
43,130

 
 
 
 
 
 
 
 
 
 
Balance at December 31, 2015
$
1,931

 
$

 
$
543

 
$
27,980

 
$
30,454

Purchases

 

 

 

 

Sales

 

 

 
(3,634
)
 
(3,634
)
Realized gain on sale

 

 

 

 

Unrealized gains

 

 

 
2,654

 
2,654

Unrealized losses
(642
)
 

 
(467
)
 

 
(1,109
)
Balance at March 31, 2016
$
1,289

 
$

 
$
76

 
$
27,000

 
$
28,365

(a) Unrealized gains and losses are recorded in (Loss) Income of associated companies, net of taxes in the Company's Consolidated Statements of
Operations.
(b) Unrealized gains and losses are recorded in Income from other investments-related party in the Company's Consolidated
Statements of Operations.
(c) Unrealized gains and losses are recorded in (Loss) Income from investments held at fair value in the Company's Consolidated Statements
of Operations.
(d) Realized gains and losses on sale is recorded in Other income, net in the Company's Consolidated Statements of Operations.
(e) Unrealized gains and losses on marketable securities are recorded in AOCI.

Long-Term Investments - Valuation Techniques

The Company primarily uses two valuation methods to estimate the fair value of its equity securities measured using Level 3 inputs. The Company estimates the value of one of its investments in an associated company primarily using a discounted cash flow method adjusted for additional information related to debt covenants, solvency issues, etc. The ModusLink Warrants are valued using the Black-Scholes option pricing model (for additional information see Note 4 - "Investments").
               
               

21


STEEL PARTNERS HOLDINGS L.P.
Notes to Consolidated Financial Statements
(in thousands except common unit and per common unit data)

Marketable Securities and Other - Valuation Techniques
               
The Company uses the net asset value included in quarterly statements it receives in arrears from a venture capital fund to determine the fair value of such fund. The Company determines the fair value of certain corporate securities and corporate obligations by incorporating and reviewing prices provided by third-party pricing services based on the specific features of the underlying securities.

Assets Measured at Fair Value on a Nonrecurring Basis

The Company’s non-financial assets measured at fair value on a non-recurring basis include the tangible and intangible assets acquired and liabilities assumed in the acquisitions, as well as any related goodwill. Significant judgments and estimates are made to determine the acquisition date fair values which may include the use of appraisals, discounted cash flow techniques or other information the Company considers relevant to the fair value measurement.

As of March 31, 2016 and December 31, 2015, WebBank has impaired loans with a fair value of $906 and $423 that are collateral-dependent, and that were measured at fair value of the collateral less estimated selling costs using Level 3 inputs. See the Impaired Loans section of Note 7 - "Trade, Other and Loans Receivable" for additional discussion of loan impairment measurements.

6. FINANCIAL INSTRUMENTS

At March 31, 2016 and December 31, 2015 financial instrument liabilities and related restricted cash consists primarily of $11,425 and $21,639, respectively, of short sales of corporate securities.

Activity is summarized below for financial instrument liabilities and related restricted cash:
 
 
March 31,
 
 
2016
 
2015
Balance, beginning of period
 
$
21,639

 
$
21,311

Settlement of short sales of corporate securities
 
(9,176
)
 
(353
)
Short sales of corporate securities
 
76

 
164

Net investment (gains) losses
 
(1,114
)
 
186

Receipt of dividends, net of interest expense
 

 

Balance of financial instrument liabilities and related restricted cash, end of period
 
$
11,425

 
$
21,308


Short Sales of Corporate Securities
               
From time to time, Steel Excel enters into short sale transactions on certain corporate securities in which Steel Excel received proceeds from the sale of such securities and incurred obligations to deliver such securities at a later date. Upon initially entering into such short sale transactions Steel Excel recognizes a liability equal to the fair value of the obligation, with a comparable amount of cash and cash equivalents reclassified as restricted cash. Subsequent changes in the fair value of such obligations, determined based on the closing market price of the securities, are recognized currently as gains or losses, with a comparable adjustment made between unrestricted and restricted cash.

Foreign Currency Forward Contracts

API, enters into foreign currency forward contracts to hedge its receivables and payables denominated in other currencies. In addition, API enters into foreign currency forward contracts to hedge the value of its future sales denominated in Euros and the value of its future purchases denominated in USD. These hedges have settlement dates ranging through March 2017.
    
The forward contracts that are used to hedge the risk of foreign exchange movement on its receivables and payables are accounted for as fair value hedges under ASC 815. At March 31, 2016 there were contracts in place to buy Sterling and sell Euros in the amount of €3,500. The fair values of these derivatives are recognized as derivative assets and liabilities in the Company's Consolidated Balance Sheets. The net change in fair value of the derivative assets and liabilities are recognized in the consolidated statement of operations.


22


STEEL PARTNERS HOLDINGS L.P.
Notes to Consolidated Financial Statements
(in thousands except common unit and per common unit data)

The forward contracts that are used to hedge the value of API's future sales and purchases are accounted for as cash flow hedges in accordance with ASC 815. At March 31, 2016 there were contracts in place to hedge the value of future sales denominated in Euros in the amount of €20,350 and the value of future purchases denominated in USD in the amount of $2,700. These hedges are fully effective and accordingly, the changes in fair value are recorded in AOCI and, at maturity, any gain or loss on the forward contract is reclassified from AOCI into the Consolidated Statement of Operations.

Precious Metal and Commodity Inventories

HNH's precious metal and commodity inventories are subject to market price fluctuations. HNH enters into commodity futures and forward contracts to mitigate the impact of price fluctuations on its precious and certain non-precious metal inventories that are not subject to fixed-price contracts. HNH's hedging strategy is designed to protect it against normal volatility; therefore, abnormal price changes in these commodities or markets could negatively impact HNH's earnings. HNH does not enter into derivatives or other financial instruments for trading or speculative purposes.

As of March 31, 2016, HNH had the following outstanding forward contracts with settlement dates through April 2016. There were no futures contracts outstanding as of March 31, 2016.
Commodity
Amount
Notional Value
Silver
762,562 ounces
$
11,700

Gold
       1,000 ounces
$
1,200

Copper
200,000 pounds
$
400

Tin
55 metric tons
$
900


HNH accounts for these contracts as either fair value hedges or economic hedges under the guidance in Accounting Standards Codification 815, Derivatives and Hedging.

Fair Value Hedges. Of the total forward contracts outstanding, 587,562 ounces of silver and substantially all of the copper contracts are designated and accounted for as fair value hedges. The fair values of these derivatives are recognized as derivative assets and liabilities in the Company's Consolidated Balance Sheets. The net change in fair value of the derivative assets and liabilities, and the change in the fair value of the underlying hedged inventory, are recognized in the Company's Consolidated Statement of Operations, and such amounts principally offset each other due to the effectiveness of the hedges. The fair value hedges are associated primarily with HNH's precious metal inventory carried at fair value.

Economic Hedges. The remaining outstanding forward contracts for silver, and all of the contracts for gold and tin, are accounted for as economic hedges. As these derivatives are not designated as accounting hedges, they are accounted for as derivatives with no hedge designation. The derivatives are marked to market, and both realized and unrealized gains and losses are recorded in current period earnings in the Company's Consolidated Statement of Operations. The economic hedges are associated primarily with HNH's precious metal inventory valued using the LIFO method.

The forward contracts were made with a counter party rated A+ by Standard & Poors. Accordingly, HNH has determined that there is minimal credit risk of default. HNH estimates the fair value of its derivative contracts through the use of market quotes or broker valuations when market information is not available. HNH maintains collateral on account with the third-party broker. Such collateral consists of both cash that varies in amount depending on the value of open contracts, as well as ounces of precious metal held on account by the broker.    

Debt Agreements

As discussed in Note 13 - "Long Term Debt and Capital Lease Obligations," HNH entered into two interest rate swap agreements to reduce its exposure to interest rate fluctuations. These derivatives were not designated as accounting hedges under U.S. GAAP; they were accounted for as derivatives with no hedge designation. HNH recorded the gains or losses both from the mark-to-market adjustments and net settlements in interest expense in the Company's Consolidated Statement of Operations as the hedges were intended to offset interest rate movements. The agreements expired in February 2016.






23


STEEL PARTNERS HOLDINGS L.P.
Notes to Consolidated Financial Statements
(in thousands except common unit and per common unit data)

Fair value and carrying amount of derivative instruments in the Company's Consolidated Balance Sheets is as follows.
Derivative
 
Balance Sheet Location
 
March 31, 2016
 
December 31, 2015
Commodity contracts (a), (b)
 
Prepaid expenses and other current assets
 
$
58

 
$
197

Commodity contracts (c)
 
Accrued Liabilities/Prepaid expenses and other current assets
 
$
(63
)
 
$
18

Interest rate swap agreements
 
Other current liabilities
 
$

 
$
(30
)
Foreign exchange forward contracts (a), (d)
 
Accrued liabilities
 
$
(1,037
)
 
$
325

Foreign exchange forward contracts (a), (b)
 
Accrued liabilities
 
$
(144
)
 
$
(30
)
(a) Designated as hedging instruments as of March 31, 2016.
(b) Fair value hedge
(c) Economic hedge
(d) Cash flow hedge

Effect of derivative instruments on the Company's Consolidated Statements of Operations:
 
 
 
 
Three Months Ended March 31,
 
 
 
 
2016
 
2015
Derivative
 
Statement of Operations Location
 
Gain (loss)
 
Gain (loss)
Commodity contracts (a), (b)
 
Cost of goods sold
 
$
(978
)
 
$
(914
)
Commodity contracts (c)
 
Cost of goods sold
 
(24
)
 
147

Commodity contracts (c)
 
Realized and unrealized loss on derivatives
 
(123
)
 
(207
)
Interest rate swap agreements
 
Interest expense
 

 
(45
)
Foreign exchange forward contracts (a), (d)
 
Revenue/Cost of goods sold
 
108

 

Foreign exchange forward contracts (a), (b)
 
Other income, net
 
(196
)
 

Total derivatives
 
 
 
$
(1,213
)
 
$
(1,019
)
(a) Designated as hedging instruments as of March 31, 2016.
(b) Fair value hedge
(c) Economic hedge
(d) Cash flow hedge

Financial Instruments with Off-Balance Sheet Risk

WebBank is a party to financial instruments with off-balance sheet risk. In the normal course of business, these financial instruments include commitments to extend credit in the form of loans as part of WebBank’s lending arrangements. Those instruments involve to varying degrees, elements of credit and interest rate risk in excess of the amount recognized on the balance sheet. The contract amounts of those instruments reflect the extent of involvement WebBank has in particular classes of financial instruments.

At March 31, 2016 and December 31, 2015