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EX-32.2 - EXHIBIT 32.2 SPLP PRINCIPAL FINANCIAL OFFICER 906 CERTIFICATION - STEEL PARTNERS HOLDINGS L.P.ex322splp9301610q.htm
EX-32.1 - EXHIBIT 32.1 SPLP PRINCIPAL EXECUTIVE OFFICER 906 CERTIFICATION - STEEL PARTNERS HOLDINGS L.P.ex321splp9301610q.htm
EX-31.2 - EXHIBIT 31.2 SPLP PRINCIPAL FINANCIAL OFFICER 302 CERTIFICATION - STEEL PARTNERS HOLDINGS L.P.ex312splp9301610q.htm
EX-31.1 - EXHIBIT 31.1 SPLP PRINCIPAL EXECUTIVE OFFICER 302 CERTIFICATION - STEEL PARTNERS HOLDINGS L.P.ex311splp9301610-q.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 September 30, 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 November 3, 2016 was 26,152,976.


 



STEEL PARTNERS HOLDINGS L.P.
TABLE OF CONTENTS

PART I — FINANCIAL INFORMATION
Page
Item 1.
Financial Statements (unaudited)
 
 
 
 
 
Consolidated Balance Sheets as of September 30, 2016 and December 31, 2015
 
 
 
 
Consolidated Statements of Operations for the three and nine months ended September 30, 2016 and 2015
 
 
 
 
Consolidated Statements of Comprehensive Income (Loss) for the three and nine months ended September 30, 2016 and 2015
 
 
 
 
Consolidated Statement of Changes in Capital for the nine months ended September 30, 2016
 
 
 
 
Consolidated Statements of Cash Flows for the nine months ended September 30, 2016 and 2015
 
 
 
 
 
 
 
Item 2.
 
 
 
Item 4.
 
 
 
PART II — OTHER INFORMATION
 
 
 
 
Item 1.
 
 
 
Item 1A.
Risk Factors
 
 
 
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
 
 
 
Item 6.
 
 
 




PART I - FINANCIAL INFORMATION
Item 1. Financial Statements

STEEL PARTNERS HOLDINGS L.P.
Consolidated Balance Sheets
(unaudited)
(in thousands, except common units)
 
September 30, 2016
 
December 31, 2015
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
328,339

 
$
185,852

Restricted cash
12,446

 
21,644

Marketable securities
67,290

 
80,842

 Trade and other receivables - net of allowance for doubtful accounts of $2,863 and $1,945, respectively
170,236

 
114,215

Receivables from related parties
335

 
1,722

 Loans receivable, including loans held for sale of $107,318 and $159,592, respectively, net
115,599

 
164,987

Inventories, net
127,619

 
102,267

Prepaid expenses and other current assets
23,883

 
45,396

Assets held for sale
2,549

 
2,549

Total current assets
848,296

 
719,474

Long-term loans receivable, net
75,100

 
62,036

Goodwill
191,397

 
101,853

Other intangible assets, net
235,737

 
138,963

Deferred tax assets
178,221

 
212,894

Other non-current assets
26,020

 
26,937

Property, plant and equipment, net
263,937

 
255,402

Long-term investments
114,905

 
167,214

Total Assets
$
1,933,613

 
$
1,684,773

LIABILITIES AND CAPITAL
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
90,656

 
$
59,992

Accrued liabilities
69,885

 
60,802

Financial instruments
12,446

 
21,639

Deposits
66,782

 
155,112

Payables to related parties
755

 
704

Short-term debt
1,237

 
1,269

Current portion of long-term debt
3,622

 
2,176

Other current liabilities
15,846

 
19,105

Liabilities of discontinued operations
450

 
450

Total current liabilities
261,679

 
321,249

Long-term deposits
223,134

 
97,060

Long-term debt
418,105

 
235,913

Accrued pension liabilities
263,779

 
276,525

Deferred tax liabilities
2,904

 
4,759

Other non-current liabilities
11,052

 
8,905

Total Liabilities
1,180,653

 
944,411

Commitments and Contingencies


 


Capital:
 
 
 
Partners' Capital common units: 26,152,976 and 26,632,689 issued and outstanding (after deducting 10,558,687 and 10,055,224 units held in treasury, at cost of $164,900 and $157,603), respectively
636,388

 
612,302

Accumulated other comprehensive loss
(50,818
)
 
(54,268
)
Total Partners' Capital
585,570

 
558,034

Noncontrolling interests in consolidated entities
167,390

 
182,328

Total Capital
752,960

 
740,362

Total Liabilities and Capital
$
1,933,613

 
$
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 September 30,
 
Nine Months Ended September 30,
 
2016
 
2015
 
2016
 
2015
Revenue:
 
 
 
 
 
 
 
Diversified industrial net sales
$
274,327

 
$
224,635

 
$
722,399

 
$
555,888

Energy net revenue
27,154

 
33,480

 
68,868

 
107,975

Financial services revenue
15,368

 
18,226

 
53,777

 
45,886

Investment and other income
164

 
105

 
791

 
609

Net investment (losses) gains

 
(56
)
 

 
32,267

Total revenue
317,013

 
276,390

 
845,835

 
742,625

Costs and expenses:
 
 
 
 
 
 
 
Cost of goods sold
221,876

 
195,384

 
590,814

 
494,502

Selling, general and administrative expenses
73,592

 
57,202

 
198,779

 
168,891

Asset impairment charges
3,057

 
9,202

 
11,527

 
37,540

Finance interest expense
640

 
370

 
1,832

 
959

Provision for (recovery of) loan losses
484

 
(69
)
 
919

 
(39
)
Interest expense
3,025

 
2,347

 
7,390

 
6,520

Realized and unrealized loss (gain) on derivatives
275

 
(168
)
 
814

 
(273
)
Other income, net
(972
)
 
(8,011
)
 
(7,220
)
 
(17,073
)
Total costs and expenses
301,977

 
256,257

 
804,855

 
691,027

Income from continuing operations before income taxes, equity method income (loss) and investments held at fair value
15,036

 
20,133

 
40,980

 
51,598

Income tax provision
8,334

 
13,125

 
18,357

 
24,705

Income (loss) from equity method investments and investments held at fair value:
 
 
 
 
 
 
 
Income (loss) of associated companies, net of taxes
5,990

 
(21,066
)
 
2,729

 
(17,237
)
Income from other investments - related party

 

 

 
361

Income (loss) from investments held at fair value
377

 
(734
)
 
(80
)
 
3,152

Net income (loss) from continuing operations
13,069

 
(14,792
)
 
25,272

 
13,169

Discontinued operations:
 
 
 
 
 
 
 
Income from discontinued operations, net of taxes

 

 

 
565

Gain on sale of discontinued operations, net of taxes

 
195

 

 
86,453

Net income from discontinued operations

 
195

 

 
87,018

Net income (loss)
13,069

 
(14,597
)
 
25,272

 
100,187

Net (income) loss attributable to noncontrolling interests in consolidated entities:
 
 
 
 
 
 
 
Continuing operations
(2,237
)
 
4,404

 
(3,269
)
 
9,508

Discontinued operations

 
(1,950
)
 

 
(32,828
)
Net (income) loss attributable to noncontrolling interests in consolidated entities
(2,237
)
 
2,454

 
(3,269
)
 
(23,320
)
Net income (loss) attributable to common unitholders
$
10,832

 
$
(12,143
)
 
$
22,003

 
$
76,867

Net income (loss) per common unit - basic
 
 
 
 
 
 
 
Net income (loss) from continuing operations
$
0.41

 
$
(0.38
)
 
$
0.83

 
$
0.82

Net (loss) income from discontinued operations

 
(0.06
)
 

 
1.97

Net income (loss) attributable to common unitholders
$
0.41

 
$
(0.44
)
 
$
0.83

 
$
2.79

Net income (loss) per common unit - diluted
 
 
 
 
 
 
 
Net income (loss) from continuing operations
$
0.41

 
$
(0.38
)
 
$
0.83

 
$
0.82

Net (loss) income from discontinued operations

 
(0.06
)
 

 
1.96

Net income (loss) attributable to common unitholders
$
0.41

 
$
(0.44
)
 
$
0.83

 
$
2.78

Weighted-average number of common units outstanding - basic
26,152,976

 
27,226,589

 
26,421,116

 
27,506,890

Weighted-average number of common units outstanding - diluted
26,160,965

 
27,226,589

 
26,434,636

 
27,679,474


See accompanying Notes to Consolidated Financial Statements

3


STEEL PARTNERS HOLDINGS L.P.
Consolidated Statements of Comprehensive Income (Loss)
(unaudited)
(in thousands)
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2016
 
2015
 
2016
 
2015
Net income (loss)
$
13,069

 
$
(14,597
)
 
$
25,272

 
$
100,187

Other comprehensive (loss) income, net of tax:
 
 
 
 
 
 
 
Gross unrealized (losses) gains on available-for-sale securities
(933
)
 
(24,042
)
 
12,631

 
(7,765
)
Reclassification of unrealized (gains) losses on available-for-sale securities(a)
(153
)
 
(567
)
 
553

 
(18,176
)
Gross unrealized gains (losses) on derivative financial instruments
56

 
(997
)
 
(2,113
)
 
(986
)
Currency translation adjustments
(3,349
)
 
(1,998
)
 
(6,516
)
 
(2,165
)
Change in pension liabilities and other post-retirement benefit obligations
(274
)
 

 
67

 
1,627

Other comprehensive (loss) income
(4,653
)
 
(27,604
)
 
4,622

 
(27,465
)
Comprehensive income (loss)
8,416

 
(42,201
)
 
29,894

 
72,722

Comprehensive (income) loss attributable to noncontrolling interests
(2,535
)
 
5,659

 
(4,441
)
 
(28,462
)
Comprehensive income (loss) attributable to common unitholders
$
5,881

 
$
(36,542
)
 
$
25,453

 
$
44,260

 
 
 
 
 
 
 
 
Tax provision (benefit) on gross unrealized gains (losses) on available-for-sale securities
$
997

 
$
(3,279
)
 
$
1,569

 
$
(5,096
)
Tax (benefit) provision on reclassification of unrealized (gains) losses on available-for-sale securities
$
(79
)
 
$
(284
)
 
$
323

 
$
6,434

Tax benefit on foreign currency translation adjustments
$
(7
)
 
$

 
$
(467
)
 
$

Tax provision on change in pension liabilities and other post-retirement benefit obligations
$

 
$

 
$

 
$
395


(a)
For the three months ended September 30, 2016, unrealized holding gains of $232 were reclassified to Other income, net. For the three months ended September 30, 2015, unrealized holding gains of $567 were reclassified to Other income, net. For the nine months ended September 30, 2016, unrealized holding gains of $594 and unrealized holding losses of $1,470 were reclassified to Other income, net and Asset impairment charges, respectively. For the nine months ended September 30, 2015, unrealized holding losses of $11,487 were reclassified to Other income, net and unrealized holding gains of $29,663 were reclassified to Net investment gains.

See accompanying Notes to Consolidated Financial Statements

4


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 Unitholders
 
 
 
 
 
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

 

 

 
22,003

 

 
22,003

 
3,269

 
25,272

Unrealized gains on available-for-sale securities

 

 

 

 
11,222

 
11,222

 
1,962

 
13,184

Unrealized losses derivative financial instruments

 

 

 

 
(1,929
)
 
(1,929
)
 
(184
)
 
(2,113
)
Currency translation adjustments

 

 

 

 
(5,924
)
 
(5,924
)
 
(592
)
 
(6,516
)
Changes in post-retirement benefit obligations

 

 

 

 
81

 
81

 
(14
)
 
67

Equity compensation - restricted units
23,750

 

 

 
281

 

 
281

 

 
281

Equity compensation - subsidiaries

 

 

 
1,546

 

 
1,546

 
861

 
2,407

Purchases of SPLP common units

 
(503,463
)
 
(7,297
)
 
(7,297
)
 

 
(7,297
)
 

 
(7,297
)
Subsidiaries' purchases of their common stock

 

 

 
13,573

 

 
13,573

 
(25,972
)
 
(12,399
)
Other, net

 

 

 
(6,020
)
 

 
(6,020
)
 
5,732

 
(288
)
Balance at September 30, 2016
36,711,663

 
(10,558,687
)
 
$
(164,900
)
 
$
636,388

 
$
(50,818
)
 
$
585,570

 
$
167,390

 
$
752,960


See accompanying Notes to Consolidated Financial Statements

5


STEEL PARTNERS HOLDINGS L.P.
Consolidated Statements of Cash Flows
(unaudited)
(in thousands)
 
Nine Months Ended September 30,
 
2016
 
2015
Cash flows from operating activities:
 
 
 
Net income
$
25,272

 
$
100,187

Net income from discontinued operations

 
(87,018
)
Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Net investment gains

 
(32,267
)
Provision for (recovery of) loan losses
919

 
(39
)
(Income) loss of associated companies, net of taxes
(2,729
)
 
17,237

Income from other investments - related party

 
(361
)
Loss (income) from investments held at fair value
80

 
(3,152
)
Deferred income taxes
9,218

 
6,783

Depreciation and amortization
46,487

 
34,471

Stock-based compensation
3,086

 
7,378

Asset impairment charges
12,936

 
37,540

Other
(231
)
 
(7,508
)
Net change in operating assets and liabilities:
 
 
 
Trade and other receivables
(20,512
)
 
(6,863
)
Inventories
770

 
3,655

Prepaid expenses and other current assets
(4,769
)
 
(391
)
Accounts payable, accrued and other current liabilities
(1,184
)
 
(15,029
)
Net decrease (increase) in loans held for sale
52,275

 
(52,248
)
Net cash provided by operating activities of continuing operations
121,618

 
2,375

Net cash used in operating activities of discontinued operations

 
(2,266
)
Net cash provided by operating activities
121,618

 
109

Cash flows from investing activities:
 
 
 
Purchases of investments
(21,893
)
 
(28,927
)
Proceeds from sales of investments
70,114

 
82,667

Proceeds from maturities of marketable securities
3,151

 
58

Loan originations, net of collections
(17,866
)
 
3,473

Purchases of property, plant and equipment
(18,733
)
 
(17,037
)
Reclassification of restricted cash
9,193

 
1,533

Proceeds from sale of assets
10,129

 
9,395

Acquisitions, net of cash acquired
(196,546
)
 
(117,226
)
Investments in associated companies

 
(7,607
)
Proceeds from sale of discontinued operations

 
155,517

Net cash used in investing activities of discontinued operations

 
(75
)
Other
(759
)
 
245

Net cash (used in) provided by investing activities
(163,210
)
 
82,016

Cash flows from financing activities:
 
 
 
Proceeds from term loans
9,839

 
1,433

Net revolver borrowings (repayments)
167,177

 
(41,280
)
Net (repayments) borrowings of term loans – foreign
(173
)
 
79

Repayments of term loans – domestic
(1,159
)
 
(10,845
)
Subsidiary's purchases of the Company's common units

 
(8,537
)
Purchases of the Company's common units
(7,297
)
 
(1,917
)
Subsidiaries' purchases of their common stock
(20,956
)
 
(6,105
)
Purchase of subsidiary shares from noncontrolling interests

 
(93
)
Deferred finance charges
(372
)
 
(404
)
Net increase in deposits
37,743

 
49,257

Other
152

 
(652
)
Net cash provided by (used in) financing activities
184,954

 
(19,064
)
Net change for the period
143,362

 
63,061

Effect of exchange rate changes on cash and cash equivalents
(875
)
 
(549
)
Cash and cash equivalents at beginning of period
185,852

 
188,983

Cash and cash equivalents at end of period
$
328,339

 
$
251,495


See accompanying Notes to Consolidated Financial Statements

6


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

All amounts used in the Notes to Consolidated Financial Statements are in thousands, except common units 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 "Company") is a diversified global 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 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 ("Manager"), pursuant to the terms of an amended and restated management agreement ("Management Agreement") discussed in further detail in Note 16 - "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 and nine months ended September 30, 2016 are not necessarily indicative of the operating results for the full year.

During 2015, one of the Company's subsidiaries, Steel Excel Inc. ("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 Statement of Operations for the nine months ended September 30, 2015.

The consolidated financial statements include the accounts of the Company and its majority or wholly-owned subsidiaries, which include the following:
 
Ownership as of
 
September 30, 2016
 
December 31, 2015
BNS Holdings Liquidating Trust ("BNS Liquidating Trust")
84.9
%
 
84.9
%
DGT Holdings Corp. ("DGT") (a)
100.0
%
 
100.0
%
Handy & Harman Ltd. ("HNH")
69.9
%
 
70.1
%
Steel Services, LTD ("Steel Services")
100.0
%
 
100.0
%
Steel Excel
64.2
%
 
58.3
%
WebFinancial Holding Corporation ("WFHC") (b)
91.2
%
 
90.8
%

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 Statements of Operations as of and for the three and nine months ended September 30, 2016 includes DGT's activity as of and for its three and nine months ended July 31, 2016.
(b)
WFHC owns 100% of WebBank ("WebBank") and 100% of WebFinancial Holding LLC ("WFH LLC") (formerly CoSine Communications, Inc.), 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 statement of operations 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 January 2016, the FASB issued ASU No. 2016-01, Financial Instruments—Overall (Topic 825): Recognition and Measurement of Financial Assets and Financial Liabilities, which requires certain equity investments to be measured at fair value with changes in fair value recognized in net income. The new standard also simplifies the impairment assessment of equity investments without readily determinable fair values by requiring a qualitative assessment to identify impairment and requires separate presentation of financial assets and financial liabilities by measurement category and form of financial asset on the balance sheet or the accompanying notes to the financial statements. The Company is currently evaluating the potential impact of this new guidance, which is effective for the Company's 2018 fiscal year.

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 statement of operations. 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.

In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurements of Credit Losses on Financial Instruments. The new standard changes the impairment model for most financial assets that are measured at amortized cost and certain other instruments, including trade and loan receivables, from an incurred loss model to an expected loss model and adds certain new required disclosures. Under the expected loss model, entities will recognize estimated credit losses

8


to be incurred over the entire contractual term of the instrument rather than delaying recognition of credit losses until it is probable the loss has been incurred. In addition, the new standard requires recording credit losses on available-for-sale debt securities through an allowance account. The new standard is effective for the Company's 2020 fiscal year with early adoption permitted for all entities in fiscal years beginning after December 15, 2018. The Company is currently evaluating the potential impact of this new guidance.

In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments. This new standard provides guidance to help decrease diversity in practice in how certain cash receipts and cash payments are classified in the statement of cash flows. The amendments in ASU No. 2016-15 provide guidance on eight specific cash flow issues. The new standard is effective for the Company's 2018 fiscal year. The Company is currently evaluating the potential impact of this new guidance.

2. ACQUISITIONS

2016 Acquisitions

HNH's Acquisition of EME

On September 30, 2016, SL Montevideo Technology, Inc. ("SMTI"), a subsidiary of SL Industries, Inc. ("SLI") (which was acquired by HNH in June 2016 as discussed further below), entered into an asset purchase agreement ("Purchase Agreement") with Hamilton Sundstrand Corporation ("Hamilton"). Pursuant to the Purchase Agreement, SMTI acquired from Hamilton certain assets of its Electromagnetic Enterprise division ("EME") used or useful in the design, development, manufacture, marketing, service, distribution, repair, and sale of electric motors, starters and generators for certain commercial applications, including for use in commercial hybrid electric vehicles and refrigeration and in the aerospace and defense sectors. The acquisition of EME expands SLI's product portfolio and diversifies its customer base. SMTI purchased the acquired net assets for $64,500 in cash and assumption of certain ordinary course business liabilities, subject to adjustments related to working capital at closing and quality of earnings of the acquired business for the period of January 1, 2016 to June 30, 2016, each as provided in the Purchase Agreement. The Purchase Agreement includes a guarantee by Hamilton of a minimum level of product purchases from SMTI by an affiliate of Hamilton for calendar years 2017, 2018, and 2019, in exchange for compliance by SMTI with certain operating covenants. The transaction was financed with additional borrowings under HNH's senior secured revolving credit facility.

The following table summarizes the amounts of the assets acquired and liabilities assumed at the acquisition date on a preliminary basis:
 
Amount
Assets:
 
Trade and other receivables
$
4,247

Inventories
3,004

Prepaid expenses and other current assets
28

Property, plant and equipment
1,967

Goodwill
32,686

Other intangible assets
28,820

Total assets acquired
70,752

Liabilities:
 
Accounts payable
3,440

Accrued liabilities
2,812

Total liabilities assumed
6,252

Net assets acquired
$
64,500


The preliminary purchase price allocation is subject to finalization of valuations of certain acquired assets and liabilities. The goodwill of $32,686 arising from the acquisition consists largely of the synergies expected from combining the operations of SLI and EME. The goodwill is assigned to the Company's Diversified Industrial segment and is expected to be deductible for income tax purposes. Other intangibles consist solely of customer relationships of $28,820. These customer relationships have been assigned a useful life of 15 years based on the limited turnover and long-standing relationships EME has with its existing customer base. 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.

No net sales or operating income of the acquired business are included in the Consolidated Statement of Operations for the three or nine months ended September 30, 2016 based on the acquisition date. The future results of operations of the acquired business will be reported within the Company's Diversified Industrial segment.

API's Acquisition of Hazen Paper Company


9


On July 27, 2016, API acquired Hazen Paper Company's ("Hazen") lamination facility and business in Osgood, Indiana for approximately $14,000. The acquisition, which is not material to SPLP's operations, is part of API's strategy to focus on brand enhancement solutions for the packaging market, and it enables API to provide a combined foils and laminate offering to customers in the U.S., while giving broader coverage for its global customers. In connection with the Hazen acquisition, the Company has recorded property, plant and equipment, other intangible assets (primarily customer relationships) and goodwill totaling approximately $6,200, $2,700 and $4,100, respectively.

HNH's Acquisition of SLI

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, at a purchase price of $40.00 per share in cash ("Offer"). SLI designs, manufactures and markets power electronics, motion control, power protection, power quality electromagnetic equipment, and custom gears and gearboxes that are used in a variety of medical, commercial and military aerospace, computer, datacom, industrial, architectural and entertainment lighting, and telecom applications. Consummation of the Offer was subject to certain conditions, including the tender of a number of shares that constituted at least (1) a majority of SLI's outstanding shares and (2) 60% of SLI's outstanding shares not owned by HNH or any of its affiliates, as well as other customary conditions. SPLP beneficially owned approximately 25.1% of SLI's outstanding shares.

On June 1, 2016, the conditions noted above, as well as all other conditions to the Offer were satisfied, and HNH successfully completed its tender offer through a wholly-owned subsidiary. Pursuant to the terms of the merger agreement, the wholly-owned subsidiary merged with and into SLI, with SLI being the surviving corporation ("SLI Merger"). Upon completion of the SLI Merger, SLI became a wholly-owned subsidiary of HNH.

The total merger consideration was approximately $161,985, excluding related transaction fees and expenses. The merger consideration represents the aggregate cash merger consideration of approximately $122,191 paid by HNH to non-affiliates and the fair value of SPLP's previously held interest in SLI of approximately $39,794. The funds necessary to consummate the Offer, the SLI Merger and to pay related fees and expenses were financed with additional borrowings under HNH's senior secured revolving credit facility.

The following table summarizes the amounts of the assets acquired and liabilities assumed at the acquisition date on a preliminary basis:
 
Amount
Assets:
 
Cash and cash equivalents
$
4,985

Trade and other receivables
32,544

Inventories
25,960

Prepaid expenses and other current assets
8,455

Property, plant and equipment
23,950

Goodwill
54,317

Other intangible assets
87,916

Other non-current assets
825

Total assets acquired
238,952

Liabilities:
 
Accounts payable
18,433

Accrued liabilities
17,308

Long-term debt
9,500

Deferred tax liabilities
26,093

Other non-current liabilities
5,633

Total liabilities assumed
76,967

Net assets acquired
$
161,985


The preliminary purchase price allocation is subject to finalization of valuations of certain acquired assets and liabilities. The goodwill of $54,317 arising from the acquisition consists largely of the synergies expected from combining the operations of HNH and SLI. The goodwill is assigned to the Company's Diversified Industrial segment and is not expected to be deductible for income tax purposes. Other intangibles consist primarily of acquired trade names of approximately $14,600, customer relationships of approximately $59,500, developed technology and patents of approximately $10,600 and customer order backlog of $3,100. The customer order backlog is being amortized based on the expected period over which the orders will be fulfilled, ranging from

10


two to eight months. The remaining 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 long-standing relationships SLI has with its existing customer base. The valuations of acquired trade names and developed technology and patents 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 future sales, as well as the rate of technical obsolescence for the developed technology and patents. 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. Included in Accrued liabilities and Other non-current liabilities above is a total of $7,500 for existing and contingent liabilities relating to SLI's environmental matters, which are further discussed in Note 15 - "Commitments and Contingencies."

The amount of net sales and operating income of the acquired business included in the Company's Consolidated Statements of Operations for the three months ended September 30, 2016 was approximately $48,300 and $200. The amount of net sales and operating loss of the acquired business included in the Company's Consolidated Statements of Operations for the nine months ended September 30, 2016 was approximately $60,100 and $3,000. The operating loss for the nine-month period includes $1,900 of expenses associated with the amortization of the fair value adjustment to acquisition-date inventories. The operating loss for the nine-month period also includes $1,900 of expenses associated with the acceleration of SLI's previously outstanding stock-based compensation awards, which became fully vested on the date of acquisition pursuant to the terms of the merger agreement, and which are included in Selling, general and administrative expenses in the Company's 2016 Consolidated Statements of Operations. The results of operations of the acquired business are reported within the Company's Diversified Industrial segment.

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), HNH's acquisition subsidiary 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 by HNH and 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 owns 100% of JPS.

The following table summarizes the assets acquired and liabilities assumed at the acquisition date:

11


 
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 and equipment
45,384

Goodwill
32,162

Other intangible assets
9,120

Deferred tax assets
19,788

Other non-current assets
3,112

Total assets acquired
162,876

Liabilities:
 
Accounts payable
10,674

Accrued liabilities
5,838

Long-term debt
1,500

Accrued pension liabilities
30,367

Other non-current liabilities
4

Total liabilities assumed
48,383

Net assets acquired
$
114,493


The goodwill of $32,162 arising from the acquisition consists largely of the synergies expected from combining the operations of HNH and JPS. 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 developed 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 developed 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 future sales, as well as the rate of technical obsolescence for the developed 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.

The amount of net sales and operating loss of the acquired business included in the Consolidated Statements of Operations for both the three and nine months ended September 30, 2015 were approximately $28,100 and $2,300, respectively, which include $3,300 of nonrecurring expense related to the fair value adjustment to acquisition-date inventories. The results of operations of the acquired business are reported within the Company's Diversified Industrial segment.

CoSine Acquisition

On January 20, 2015 ("CoSine Acquisition Date"), the Company entered into a contribution agreement ("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 discussed below, 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, 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).

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

12


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 consideration paid to acquire the controlling interest in CoSine was $66,239, which was comprised of $12,011 related to the fair value of the previously held common equity of CoSine, $22,823 for the fair value of the API shares transferred to CoSine and $31,405 for the fair value of the Nathan's shares transferred to CoSine. The following table summarizes 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 and cash equivalents
$
17,614

Prepaid expenses and other current assets
7

Goodwill
8,295

Long-term investments
54,228

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

As discussed above, CoSine obtained control over the operations of API on April 17, 2015 ("API Acquisition Date"), at which time API became a consolidated 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. 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


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

Trade and other receivables
24,160

Inventories
22,900

Prepaid expenses and other current assets
4,838

Property, plant and equipment
42,238

Goodwill
14,456

Other intangible assets
22,749

Other non-current assets
4,816

Total assets acquired
141,581

Liabilities:
 
Accounts payable
24,556

Accrued liabilities
7,028

Short-term debt
2,104

Long-term debt
22,784

Accrued pension liabilities
11,791

Deferred tax liabilities
2,591

Total liabilities assumed
70,854

Net assets acquired
$
70,727


13



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 $5,100 and customer relationships of approximately $17,700. Based on our 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 included 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 included the customer attrition rate assumed and the expected level of future sales.

Pro Forma Results

The following unaudited pro forma data is presented for informational purposes only and does not purport to be indicative of the results of future operations or of the results that would have occurred had the JPS and API acquisitions taken place on January 1, 2014 and the SLI and EME acquisitions taken place on January 1, 2015. The information for the nine months ended September 30, 2016 and 2015 is based on historical financial information with respect to the acquisitions and does not include operational or other changes which might have been effected by the Company. The supplemental unaudited pro forma earnings for both periods 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, which are amortized using the double-declining balance method for customer relationships and the straight line method for other intangibles, over periods principally ranging from 10 to 15 years, except for the customer order backlog, which is amortized over periods ranging from two to eight months. The supplemental unaudited proforma earnings were also adjusted to reflect incremental interest expense on the borrowings made to finance the acquisitions.

The supplemental unaudited pro forma earnings exclude a total of $6,900 of acquisition-related costs incurred by HNH, SLI and EME during the nine months ended September 30, 2016. The 2016 supplemental unaudited pro forma earnings further reflect adjustments to exclude $1,900 of nonrecurring expense related to SLI's amortization of the fair value adjustment to acquisition-date inventories, as well as $1,900 in expense associated with the acceleration of SLI's previously outstanding stock-based compensation awards. The 2015 supplemental unaudited pro forma earnings were adjusted to include both the fair value adjustment to acquisition-date inventories and the expense associated with the acceleration of SLI's previously outstanding stock-based compensation awards. The 2015 supplemental unaudited pro forma earnings also reflect adjustments to exclude a total of $8,700 of acquisition related costs incurred by HNH, JPS, SLI and API during the nine months of 2015 and $4,375 of nonrecurring expense related to JPS's and API's amortization of the fair value adjustment to acquisition-date inventories.
 
Nine Months Ended September 30,
 
2016
 
2015
Total revenue
$
979,136

 
$
1,069,762

Net income from continuing operations
24,143

 
11,114

Net income from continuing operations per common unit - basic
0.71

 
0.71

Net income from continuing operations per common unit - diluted
0.71

 
0.71


3. DISCONTINUED OPERATIONS AND ASSET IMPAIRMENT CHARGES

Discontinued Operations

Discontinued operations in 2015 include the operations of Arlon, LLC ("Arlon"), a manufacturer of high performance materials for the printed circuit board industry and silicone rubber-based materials, which was part of SPLP's Diversified Industrial segment. On December 18, 2014, HNH entered into a contract to sell its Arlon business for $157,000 in cash, less transaction fees, subject to a final working capital adjustment and certain potential reductions as provided in the stock purchase agreement, which are reflected in proceeds from sale of discontinued operations in the Consolidated Statement of Cash Flows for the nine months ended September 30, 2015. The closing occurred in January 2015.
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2016
 
2015
 
2016
 
2015
Total revenue
$

 
$

 
$

 
$
5,952

Net income from operations

 

 

 
565

Net loss from operations after taxes and noncontrolling interests

 
(1,887
)
 

 
(3,002
)
Gain on sale of discontinued operations after taxes and noncontrolling interests

 
134

 

 
57,193



14


Asset Impairment Charges

In connection with HNH's continued integration of JPS, HNH approved the closure of JPS' Slater, South Carolina operating facility during the second quarter of 2016 and recorded impairment charges totaling approximately $7,900 associated with the planned closure, including write-downs of $6,600 to property, plant, and equipment and $400 to intangible assets, as well as a $900 inventory write-down, which was recorded in Cost of goods sold in the Company's Consolidated Statements of Operations.

Due to improved operational productivity and available capacity at Lucas-Milhaupt facilities, HNH has approved the closure of its Lucas-Milhaupt Gliwice, Poland operating facility as part of its continual focus to optimize infrastructure costs. During the third quarter of 2016, HNH recorded asset impairment charges totaling $3,557, primarily due to write-downs of $1,500 to property, plant, and equipment and $500 to inventories, associated with the planned closure. The inventory write-down was recorded in Cost of goods sold in the Company's Consolidated Statements of Operations.

Sale of API's Security Holographics Business

In April 2016, API sold its security holographics business for approximately $8,000 and recorded a gain of approximately $2,800, which is recorded in Other income, net in the Consolidated Statements of Operations for the nine months ended September 30, 2016. API's security holographics business created custom optical security solutions to protect secure documents and premium products against counterfeit and fraud and it was included in the Company's Diversified Industrial segment. The sale was part of API's strategy to focus on its decorative holographic offerings for the packaging market. The operations of this business were not significant to the consolidated financial statements of SPLP.

4. LOANS RECEIVABLE, INCLUDING LOANS HELD FOR SALE

Major classification of WebBank's loans receivable, including loans held for sale, at September 30, 2016 and December 31, 2015 are as follows:
 
Total
 
Current
 
Non-current
 
September 30, 2016
 
%
 
December 31, 2015
 
%
 
September 30, 2016
 
December 31, 2015
 
September 30, 2016
 
December 31, 2015
Loans held for sale
$
107,318

 


 
$
159,592

 


 
$
107,318

 
$
159,592

 
$

 
$

Real estate loans:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial – owner occupied
$
952

 
1
%
 
$
1,542

 
2
%
 
63

 
97

 
$
889

 
1,445

Commercial – other
267

 
%
 
281

 
%
 

 

 
267

 
281

Total real estate loans
1,219

 
1
%
 
1,823

 
2
%
 
63

 
97

 
1,156

 
1,726

Commercial and industrial
59,937

 
71
%
 
66,253

 
98
%
 
1,064

 
5,943

 
58,873

 
60,310

Consumer Loans
23,846

 
28
%
 

 
%
 
8,775

 

 
15,071

 

Total loans
85,002

 
100
%
 
68,076

 
100
%
 
9,902

 
6,040

 
75,100

 
62,036

Less:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Deferred fees and discounts
(11
)
 
 
 
(15
)
 
 
 
(11
)
 
(15
)
 

 

Allowance for loan losses
(1,610
)
 
 
 
(630
)
 
 
 
(1,610
)
 
(630
)
 

 

Total loans receivable, net
$
83,381

 
 
 
$
67,431

 
 
 
8,281

 
5,395

 
75,100

 
62,036

Loans receivable, including loans held for sale (a)


 
 
 


 
 
 
$
115,599

 
$
164,987

 
$
75,100

 
$
62,036

(a)
The carrying value is considered to be representative of fair value because the rates of interest are not significantly different from market interest rates for instruments with similar maturities. The fair value of loans receivable, including loans held for sale, net was $189,879 and $226,541 at September 30, 2016 and December 31, 2015, respectively.

Loans with a carrying value of approximately $57,522 and $63,393 were pledged as collateral for potential borrowings at September 30, 2016 and December 31, 2015, respectively. WebBank serviced $19,770 in loans for others at September 30, 2016.

The Allowance for Loan Losses ("ALLL") represents an estimate of probable and estimable losses inherent in the loan portfolio as of the balance sheet date. The amount of the ALLL is established by analyzing the portfolio at least quarterly and a provision for or reduction of loan losses is recorded so that the ALLL is at an appropriate level at the balance sheet date. The increase in the ALLL was due to an increase in existing impaired loans and the addition of a loan portfolio of held-to-maturity consumer loans. There have been no other significant changes in the credit quality of loans in the loan portfolio since December 31, 2015.


15


5. INVENTORIES, NET

A summary of Inventories, net is as follows:
 
September 30, 2016
 
December 31, 2015
Finished products
$
40,991

 
$
39,405

In-process
23,467

 
20,814

Raw materials
44,771

 
28,893

Fine and fabricated precious metal in various stages of completion
20,188

 
13,155

 
129,417

 
102,267

LIFO reserve
(1,798
)
 

Total
$
127,619

 
$
102,267


Fine and Fabricated Precious Metal Inventory

In order to produce certain of its products, HNH purchases, maintains and utilizes precious metal inventory. HNH records certain precious metal inventory at the lower of LIFO cost or market, with any adjustments recorded through Cost of goods sold. Remaining precious metal inventory is accounted for primarily at fair value.

Certain customers and suppliers of HNH choose to do business on a "pool" basis. Such customers or suppliers furnish precious metal to HNH for return in fabricated form or for purchase from or return to the supplier. When the customer's precious metal is returned in fabricated form, the customer is charged a fabrication charge. The value of pooled precious metal is not included in the Company's Consolidated Balance Sheets. To the extent HNH is able to utilize customer precious metal in its production process, such customer metal replaces the need for HNH to purchase its own inventory. As of September 30, 2016, customer metal in HNH's custody consisted of 139,450 ounces of silver, 520 ounces of gold and 1,391 ounces of palladium.
 
September 30, 2016
 
December 31, 2015
Supplemental inventory information:
 
 
 
Precious metals stated at LIFO cost
$
4,946

 
$
3,536

Precious metals stated under non-LIFO cost methods, primarily at fair value
13,444

 
9,619

Market value per ounce:
 
 
 
Silver
19.80

 
13.86

Gold
1,338.65

 
1,062.25

Palladium
697.00

 
547.00


6. GOODWILL AND OTHER INTANGIBLE ASSETS, NET

A reconciliation of the change in the carrying value of goodwill by reportable segment is as follows:
 
Diversified Industrial
 
Energy
 
Corporate and Other
 
Total
Balance at December 31, 2015
 
 
 
 
 
 
 
Gross goodwill
$
101,772

 
$
64,790

 
$
81

 
$
166,643

Accumulated impairments

 
(64,790
)
 

 
(64,790
)
Net goodwill
101,772

 

 
81

 
101,853

Acquisitions (a)
91,094

 

 

 
91,094

Currency translation adjustment
(1,716
)
 

 

 
(1,716
)
Other adjustments
166

 

 

 
166

Balance at September 30, 2016
 
 
 
 
 
 
 
Gross goodwill
191,316

 
64,790

 
81

 
256,187

Accumulated impairments

 
(64,790
)
 

 
(64,790
)
Net goodwill
$
191,316

 
$

 
$
81

 
$
191,397

(a)
Goodwill from acquisitions during 2016 relates to HNH's acquisitions of SLI and EME, as well as API's acquisition of Hazen. The goodwill recorded for these acquisitions is subject to adjustment during the finalization of the purchase price allocations. For additional information, see Note 2 - "Acquisitions."

A summary of Other intangible assets, net is as follows:

16


 
September 30, 2016
 
December 31, 2015
 
Gross Carrying Amount
 
Accumulated Amortization
 
Net
 
Gross Carrying Amount
 
Accumulated Amortization
 
Net
Customer relationships
$
222,101

 
$
52,286

 
$
169,815

 
$
134,814

 
$
41,153

 
$
93,661

Trademarks
51,381

 
10,762

 
40,619

 
38,157

 
8,361

 
29,796

Patents and technology
27,815

 
8,733

 
19,082

 
17,010

 
7,379

 
9,631

Other
11,632

 
5,411

 
6,221

 
8,480

 
2,605

 
5,875

 
$
312,929

 
$
77,192

 
$
235,737

 
$
198,461

 
$
59,498

 
$
138,963


Other intangible assets, net as of September 30, 2016 includes approximately $119,400 in intangible assets, primarily trade names, customer relationships, and developed technology and patents, associated with the SLI, EME and Hazen acquisitions. These balances are subject to adjustment during the finalization of the purchase price allocations for the SLI, EME and Hazen acquisitions.

Trademarks with indefinite lives as of September 30, 2016 and December 31, 2015 were $8,020. Amortization expense related to intangible assets was $9,360 and $4,512 for the three months ended September 30, 2016 and 2015, respectively, and $18,332 and $11,864 for the nine months ended September 30, 2016 and 2015, respectively. The increase in amortization expense during 2016 was principally due to the Company's recent acquisitions discussed in Note 2 - "Acquisitions." Future amortization expense of the intangible assets acquired in the SLI and EME acquisitions is expected to total $4,200 for the remainder of 2016, $13,300, $11,600, $10,300, $9,200, and $62,600 in 2017, 2018, 2019, 2020, and thereafter, respectively.

7. 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 September 30, 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. The Company's portfolio of marketable securities was as follows:
 
September 30, 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
$
66,211

 
$

 
$

 
$
66,211

 
$
30,118

 
$

 
$

 
$
30,118

Mutual funds
11,835

 
3,624

 

 
15,459

 
11,835

 
2,182

 

 
14,017

Corporate securities
27,335

 
6,282

 
(1,041
)
 
32,576

 
41,861

 
250

 
(549
)
 
41,562

Corporate obligations
19,683

 
1,915

 
(2,343
)
 
19,255

 
25,747

 
98

 
(582
)
 
25,263

Total marketable securities
125,064

 
11,821

 
(3,384
)
 
133,501

 
109,561

 
2,530

 
(1,131
)
 
110,960

Amounts classified as cash equivalents
(66,211
)
 

 

 
(66,211
)
 
(30,118
)
 

 

 
(30,118
)
Amounts classified as marketable securities
$
58,853

 
$
11,821

 
$
(3,384
)
 
$
67,290

 
$
79,443

 
$
2,530

 
$
(1,131
)
 
$
80,842


Proceeds from sales of marketable securities were $3,100 and $22,800 in the three months ended September 30, 2016 and 2015, respectively, and were $47,200 and $72,602 in the nine months ended September 30, 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:

17


 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2016
 
2015
 
2016
 
2015
Gross realized gains
$
899

 
$
2,135

 
$
2,902

 
$
6,735

Gross realized losses
(667
)
 
(5,528
)
 
(2,308
)
 
(6,321
)
Realized gains (losses), net
$
232

 
$
(3,393
)
 
$
594

 
$
414


The fair value of marketable securities with unrealized losses at September 30, 2016, and the duration of time that such losses had been unrealized, were as follows:
 
Less than 12 Months
 
12 Months or Greater
 
Total
 
Fair Value
 
Gross Unrealized Losses
 
Fair Value
 
Gross Unrealized Losses
 
Fair Value
 
Gross Unrealized Losses
Corporate securities
$
3,367

 
$
(912
)
 
$
695

 
$
(129
)
 
$
4,062

 
$
(1,041
)
Corporate obligations
15,030

 
(2,343
)
 

 

 
15,030

 
(2,343
)
Total
$
18,397

 
$
(3,255
)
 
$
695

 
$
(129
)
 
$
19,092

 
$
(3,384
)

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

 
$
(549
)
Corporate obligations
 
 
 
 
13,199

 
(582
)
Total
 
 
 
 
$
15,482

 
$
(1,131
)

The 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 asset impairment charges of approximately $1,500 for the nine months ended September 30, 2016 and approximately $7,900 and $30,600 for the three and nine months ended September 30, 2015, respectively, equal to the cost basis of such securities in excess of their fair values. Steel Excel has determined that there was no indication of other-than-temporary impairments on its other investments with unrealized losses as of September 30, 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 September 30, 2016, by contractual maturity, were as follows:
 
Cost
 
Estimated Fair Value
Debt securities maturing after one year through three years
$
19,683

 
$
19,255

Securities with no contractual maturities
105,381

 
114,246

 
$
125,064

 
$
133,501


B) Long-Term Investments

The following table summarizes the Company's long-term investments as of September 30, 2016 and December 31, 2015. For those investments at fair value, the carrying amount of the investment equals its respective fair value.

18


 
 
 
 
Investment Balance
 
Income (Loss) Recorded in the Statement of Operations
 
 
 
 
 
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
(1) AVAILABLE-FOR-SALE SECURITIES
 
 
September 30, 2016
December 31, 2015
 
2016
 
2015
 
2016
 
2015
Fair Value Changes Recorded in Accumulated Other Comprehensive Loss:
 
 
 
 
 
 
 
 
 
 
 
 
Equity securities - U.S. (1)
 
 
 
 
 
 
 
 
 
 
 
 
 
  Aerospace/Defense
 
 
 
$
73,502

$
65,474

 
 
 
 
 
 
 
 
  Other
 
 
 
577

568

 
 
 
 
 
 
 
 
Total
 
 
 
74,079

66,042

 
 
 
 
 
 
 
 
Fair Value Changes Recorded in the Consolidated Statement of Operations:
 
 
 
 
 
 
 
 
 
 
 
 
  Equity securities
 
 
 


 
$

 
$

 
$

 
$
4,449

  Corporate obligations (2)
 
 
 
3,878


 
340

 

 
399

 

Total
 
 
 
77,957

66,042

 
$
340

 
$

 
$
399

 
$
4,449

(2) EQUITY METHOD
 
 
 
 
 
 
 
 
 
 
 
 
 
Investments in Associated Companies:
September 30, 2016
December 31, 2015
 
 
 
 
 
 
 
 
 
 
 
At Cost:
Ownership
 
 
 
 
 
 
 
 
 
 
 
  WFH LLC (formerly CoSine) (3)
91.2
%
90.8
%
 


 
$

 
$

 
$

 
$
(602
)
  Other (4)
 
 
 
3,149

4,166

 
(126
)
 
(2,496
)
 
(164
)
 
(2,782
)
At Fair Value:
 
 
 
 
 
 
 
 
 
 
 
 
 
  ModusLink Global Solutions, Inc. ("MLNK") (1)
29.8
%
31.5
%
 
26,094

40,862

 
5,104

 
(8,389
)
 
(11,808
)
 
(12,442
)
  SLI (3)
100.0
%
25.1
%
 

31,716

 

 
(4,586
)
 
8,078

 
(4,974
)
  JPS (3)
100.0
%
100.0
%
 


 

 
402

 

 
5,831

  API Technologies Corp. ("API Tech")
%
20.6
%
 

15,779

 

 
(3,888
)
 
7,089

 
457

  Aviat Networks, Inc. ("Aviat") (1)
12.7
%
12.9
%
 
6,227

6,175

 
1,012

 
(1,769
)
 
51

 
(2,493
)
  Other (5)
43.8
%
43.8
%
 
1,414

1,931

 

 
(340
)
 
(517
)
 
(232