SPLP 12.31.2014 10K
 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-K
 
(Mark One)
þ
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For The Fiscal Year Ended December 31, 2014
 OR

¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934  

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)
 
Registrant’s telephone number, including area code: (212) 520-2300

Securities registered pursuant to Section 12(b) of the Act:
 
 
Name of each exchange on
Title of each class
which registered
Common units, $0 par
New York Stock Exchange

Securities registered pursuant to Section 12(g) of the Act:

Common Units, no par value

Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.   Yes ¨   No þ

Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.   Yes ¨   No þ

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.   Yes þ No ¨



Indicate by check mark whether the registrant has submitted electronically 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) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ No ¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. þ

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 definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.  (Check one): 
Large accelerated filer
o
 
Non-accelerated filer
o
Accelerated filer
þ
 
Smaller reporting company
o
 
Indicate by check mark whether the registrant is a shell company (as defined by Rule 12b-2 of the Exchange Act). Yes o No þ

The aggregate market value of our common units held by non-affiliates of registrant as of June 30, 2014 was approximately $323.9 million.

On March 9, 2015, there were 27,521,280 common units outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

The information required by Items 10, 11, 12, 13 and 14 of Part III will be incorporated by reference to certain portions of a definitive proxy statement, which will be filed by the Registrant within 120 days after the close of its fiscal year.

 




STEEL PARTNERS HOLDINGS L.P.

TABLE OF CONTENTS
PART I
Item 1.
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.
 
PART II
Item 5.
Item 6.
Item 7.
Item 7A.
Item 8.
Item 9.
Item 9A.
Item 9B.
 
PART III
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
 
PART IV
Item 15.







As used in this Form 10-K, unless the context otherwise requires the terms “we,” “us,” “our,” “SPLP” and the “Company” refer to Steel Partners Holdings L.P., a Delaware limited partnership.
PART I
 
FORWARD-LOOKING STATEMENTS
 
This report includes “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), including, in particular, forward-looking statements under the headings “Item 7- Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Item 8 - Financial Statements and Supplementary Data.”  These statements appear in a number of places in this report and include statements regarding the Company’s intent, belief or current expectations with respect to (i) its financing plans, (ii) trends affecting its financial condition or results of operations, and (iii) the impact of competition.  The words “expect,” “anticipate,” “intend,” “plan,” “believe,” “seek,” “estimate,” and similar expressions are intended to identify such forward-looking statements; however, this report also contains other forward-looking statements in addition to historical information.

Item 1. Business
 
All monetary amounts used in this discussion are in thousands unless otherwise indicated.

Who We Are
Steel Partners Holdings L.P. ("SPLP" or the "Company") is a global diversified holding company that engages in multiple businesses, including diversified industrial products, energy, defense, supply chain management and logistics, banking, food products and services, sports, training, education, and the entertainment and lifestyle industries.
Each of our companies has its own management team with significant experience and proven success in their industries. Our subsidiary, SP Corporate Services LLC (“SP Corporate”), through Management Services Agreements, provides services to us and some of our companies which include assignment of C-Level management personnel, as well as a variety of services including legal, tax, accounting, treasury, consulting, auditing, administrative, compliance, environmental health and safety, human resources, marketing, investor relations and other similar services.
We work with our businesses to increase corporate value over the long term for our unitholders and all stakeholders by implementing our unique strategy discussed in more detail below.
Our History
SPLP is a limited partnership formed in the State of Delaware on December 16, 2008. SPLP is the successor through a merger on December 31, 2008 with WebFinancial Corporation ("Webfinancial"), a Delaware corporation that was incorporated in 1997. Webfinancial acquired WebBank in 1998.
In December 2008, in order to preserve an investment strategy that successfully served both the company and its investors since its inception, Steel Partners restructured its business. The result was the creation of Steel Partners Holdings L.P., a limited partnership formed in the State of Delaware in December 2008.
Effective July 15, 2009, the Company completed an exchange transaction in which we acquired the limited partnership interest of Steel Partners II, L.P. (“SPII”) pursuant to which we acquired net assets of $454,300 that were held by SPII, consisting of holdings in a variety of companies, in exchange for our common units which were distributed to certain former indirect investors in SPII (the “Exchange Transaction”). As a result, we became a global diversified holding company, with partners' capital of $367,100 as of July 15, 2009, which has increased to $494,859 as of December 31, 2014. Since July 15, 2009, we have concentrated our holdings into a select number of businesses.
On April 10, 2012, after fulfilling stringent regulatory and financial reporting requirements, the company became listed on the New York Stock Exchange (NYSE: SPLP).



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Our Structure
SPLP 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 13 – "Related Party Transactions" to the SPLP consolidated financial statements found elsewhere in this Form 10-K. From its founding in 1990, the Manager and its affiliates have focused on increasing value for investors in the entities it has managed, including SPLP and SPII.
Our wholly-owned subsidiary, Steel Partners Holdings GP Inc., formerly known as Web LLC and Steel Partners Holdings GP LLC, or the “General Partner”, is our general partner. The General Partner converted from a limited liability company to a corporation on September 21, 2010. The General Partner has a board of directors (the “Board of Directors”). The Board of Directors is currently comprised of seven members, five of whom are elected annually by our unitholders and two of whom are appointed by the Manager. Warren G. Lichtenstein, the Executive Chairman of our Manager, serves as the Chairman of the Board of Directors.
Our Strategy
We continuously evaluate the retention and disposition of existing operations and investigate possible acquisitions of new businesses, often focusing on businesses that are selling substantially below intrinsic value. We consider possible synergies and economies of scale in operating and/or making determinations to acquire or dispose of companies. We seek additional means to reduce costs and to encourage integration of operations and the building of business relationships among our companies consistent with our desire that our unitholders benefit from the diversified holding company structure.
We strive to enhance the business operations of our companies and increase long-term value for unitholders and stakeholders through balance sheet improvements, strategic allocation of capital and operational and growth initiatives. Our operational initiatives include creating efficiencies through consolidated purchasing and materials sourcing provided by the Steel Partners Purchasing Council, which arranges shared purchasing programs and is reducing costs for, and providing other benefits to, a number of our companies. We are reducing our companies' operational costs, and enhancing 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. We are 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.
Generally, we seek to actively acquire and maintain control over our companies through our ability to influence their policies. Depending on the size of our ownership interests in any given company, this may be achieved by obtaining board representation and overseeing and providing assistance to the existing management team. We generally view our companies as long-term holdings and we expect to realize value by operating them with a view towards fostering growth and maximizing their value rather than through the sale of ownership interests. The securities of some of the companies in which we have interests are traded on national securities exchanges, while others are privately held or not actively traded.

The following table presents the composition of our operating segments, which include the operations of our consolidated subsidiaries, as well as income or loss from equity method investments and other investments.
Diversified Industrial
Energy
Financial Services
Corporate and Other
Handy & Harman Ltd. ("HNH") (1)
Steel Excel Inc. ("Steel Excel") (1)
WebBank (1) 
SPH Services, Inc. ("SPH Services") (1)
SL Industries, Inc. ("SLI") (2)
BNS Holding, Inc. ("BNS") (1), (3)
 
DGT Holdings Corp. ("DGT") (1)
JPS Industries, Inc. ("JPS") (2)
 
 
BNS Holdings Liquidating Trust ("BNS Liquidating Trust") (1), (3)
 
 
 
ModusLink Global Solutions, Inc. (2)
 
 
 
CoSine Communications, Inc. ("CoSine")(2)
 
 
 
SPII Liquidating Trust (2)
 
 
 
Other Investments (4)
(1)
Consolidated subsidiary
(2)
Equity method investment
(3)
The operations of BNS are included in the Energy segment through June 30, 2012. The results of the BNS Liquidating Trust are included in the Corporate and Other segment beginning July 1, 2012.
(4)
Other investments classified in the Corporate and Other segment include various investments in available-for-sale securities in the Aerospace/Defense, Restaurant and Manufacturing industries.

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Our Businesses - Consolidated Subsidiaries
Handy & Harman Ltd.
SPLP's Ownership Interest
SPLP has an ownership interest of approximately 66.2% as of December 31, 2014 in HNH. (NASDAQ (CM): HNH), formerly known as WHX Corporation, a Delaware corporation. On May 7, 2010, our ownership interest in HNH exceeded 50%, and as a result, HNH became a controlled subsidiary of SPLP and is consolidated from that date. Four of our representatives serve on HNH's eight-member board of directors, one of whom serves as Chairman. Our representatives also serve as the Executive Chairman (Principal Executive Officer), Chief Financial Officer (Principal Accounting Officer), Chief Legal Officer and as various Vice Presidents of HNH.
Description of Business
HNH is a diversified manufacturer of engineered niche industrial products with leading market positions in many of the markets it serves. Through its wholly-owned subsidiaries, HNH focuses on high margin products and innovative technology and serves customers across a wide range of end markets. HNH sells its products and services through direct sales forces, distributors and manufacturer's representatives. HNH owns Handy & Harman Group Ltd. ("H&H Group"), which owns Handy & Harman ("H&H") and Bairnco LLC, formerly Bairnco Corporation. HNH manages its group of businesses on a decentralized basis with operations principally in North America. For the years ended December 31, 2014, 2013 and 2012, HNH generated net sales of $600,468, $571,164 and $498,713, respectively, which comprised 71%, 79% and 79% of SPLP's consolidated revenues, respectively.

In 2014 HNH entered into an agreement to sell Arlon LLC ("Arlon") which operations comprised substantially all of HNH's former Arlon Electronic Materials business. The sale was finalized in January 2015.

HNH Products and Product Mix
Joining Materials

HNH's Joining Materials business primarily fabricates precious metals and their alloys into brazing alloys. Brazing alloys are used to join similar and dissimilar metals, as well as specialty metals and some ceramics, with strong, hermetic joints. The Joining Materials business offers these metal joining products in a wide variety of alloys, including gold, silver, palladium, copper, nickel, aluminum and tin. These brazing alloys are fabricated into a variety of engineered forms and are used in many industries, including electrical, appliance, transportation, construction and general industrial, where dissimilar material and metal joining applications are required. Operating income from precious metal products is principally derived from the "value added" of processing and fabricating and not from the purchase and resale of precious metals. The Joining Materials business enters into commodity futures and forward contracts to mitigate the impact of price fluctuations on its precious and certain non-precious metal inventories that are not subject to fixed price contracts. HNH believes that the business unit that comprises the Joining Materials business is the North American market leader in many of the markets that it serves.
Tubing
HNH's Tubing business manufactures a wide variety of steel tubing products. HNH believes that its Tubing business manufactures the world's longest continuous seamless stainless steel tubing coils, in excess of 5,000 feet, serving the petrochemical infrastructure and shipbuilding markets. In addition, HNH also believes it is the number one supplier of small diameter (less than 3 mm) coil tubing to industry leading specifications serving the aerospace, defense and semiconductor fabrication markets. This unit also manufactures welded carbon steel tubing in coiled and straight lengths with a primary focus on products for the transportation, appliance and heating and oil and gas industries. In addition to producing bulk tubing, it produces value added fabrications for several of these industries.
Building Materials
HNH's Building Materials business manufactures and supplies products primarily to the commercial construction and building industries. It manufactures fasteners and fastening systems for the U.S. commercial low slope roofing industry, which are sold to building and roofing material wholesalers, roofing contractors and private label roofing system manufacturers, and a line of engineered specialty fasteners for the building products industry for fastening applications in the remodeling and

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construction of homes, decking and landscaping. HNH believes that its primary business unit in the Building Materials business is the market leader in fasteners and accessories for commercial low-slope roofing applications and that the majority of the net sales for the segment are for the commercial construction repair and replacement market.
Kasco Blades and Route Repair Services
HNH's Kasco Blades and Route Repair Services business provides meat-room blade products, repair services and resale products for the meat and deli departments of supermarkets, restaurants, meat and fish processing plants, and for distributors of electrical saws and cutting equipment, principally in North America and Europe. Kasco also provides wood cutting blade products for the pallet manufacturing, pallet recycler and portable saw mill industries in North America.
Business Strategy

HNH's business strategy is to enhance the growth and profitability of the HNH business units and to build upon their strengths through internal growth and strategic acquisitions. HNH expects to continue to focus on high margin products and innovative technology. HNH also will continue to evaluate, from time to time, the sale of certain businesses and assets, as well as strategic and opportunistic acquisitions.
HNH uses a set of tools and processes called the HNH Business System to drive operational and sales efficiencies across each of its business units. The HNH Business System is designed to drive strategy deployment and sales and marketing based on lean principles. HNH pursues a number of ongoing strategic initiatives intended to improve its performance, including objectives relating to manufacturing improvement, idea generation, product development and global sourcing of materials and services. HNH utilizes lean tools and philosophies in operations and commercialization activities to increase sales, improve business processes, and reduce and eliminate waste, coupled with the tools targeted at variation reduction.
Customers
HNH is diversified across industrial markets and customers. HNH sells to customers in the construction, electrical, transportation, utility, medical, oil and gas exploration and food industries.
No customer accounted for more than 10% of HNH's consolidated net sales in 2014, 2013 or 2012. HNH's 15 largest customers accounted for approximately 31% of consolidated HNH net sales in 2014.
Foreign Revenue
The following table presents HNH revenue for the periods indicated:
 
Revenue
 
Year Ended December 31,
 
2014
 
2013
 
2012
U.S.
$
550,071

 
$
518,631

 
$
446,387

Foreign (a)
50,397

 
52,533

 
52,326

  Total
$
600,468

 
$
571,164

 
$
498,713

(a)
Foreign revenue is based on the country in which the legal subsidiary generating the revenue is domiciled.

Raw Materials
    
Besides precious metals, the raw materials used in the operations of the Joining Materials, Tubing, Building Materials and Kasco operations consist principally of stainless, galvanized and carbon steel, copper, tin, nickel alloys, a variety of high-performance alloys and various plastic compositions. HNH purchases all such raw materials at open market prices from domestic and foreign suppliers. HNH has not experienced any significant problem in obtaining the necessary quantities of raw materials. Prices and availability, particularly of raw materials purchased from foreign suppliers, are affected by world market conditions and government policies. The raw materials used by HNH in its non-precious metal products are generally readily available from more than one source.
        
        

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Capital Investments

HNH believes that in order to be and remain competitive, its businesses must continuously strive to improve productivity and product quality, and control and/or reduce manufacturing costs. Accordingly, HNH expects to continue to incur capital investments that reduce overall manufacturing costs, improve the quality of products produced and broaden the array of products offered to the industries HNH serves, as well as replace equipment as necessary to maintain compliance with environmental, health and safety laws and regulations. HNH's capital expenditures for 2014, 2013 and 2012 for continuing operations were $12,700, $11,700 and $15,200, respectively. HNH anticipates funding its capital expenditures in 2015 from funds generated by operations and borrowed funds. HNH anticipates its capital expenditures to be in the range between $15,000 and $31,000 per year for the next several years.

HNH requires significant amounts of electricity and natural gas to operate its facilities and is subject to price changes in these commodities. A shortage of electricity or natural gas, or a government allocation of supplies resulting in a general reduction in supplies, could increase costs of production and could cause some curtailment of production.

Employees

As of December 31, 2014 HNH employed 1,925 employees worldwide. Of these employees, 377 were sales employees, 479 were office employees, 148 were covered by collective bargaining agreements, and 921 were non-union operating employees. A total of 321 employees are associated with HNH's Arlon business.

Competition

There are many companies, larger and smaller, domestic and foreign, which manufacture products of the type HNH manufactures. Some of these competitors are larger than HNH and have financial resources greater than it does. Some of these competitors enjoy certain other competitive advantages, including greater name recognition, greater financial, technical, marketing and other resources, a larger installed base of customers and well-established relationships with current and potential customers. Competition is based on quality, technology, service, and price, and in some industries, new product introduction.

Sales Channels

HNH distributes products to customers through its sales personnel, outside sales representatives and distributors in North and South America, Europe, Australia, Asia and several other international markets.

Patents and Trademarks

HNH owns patents and registered trademarks under which certain of its products are sold. In addition, HNH owns a number of U.S. and foreign mechanical patents related to certain of its products, as well as a number of design patents. HNH does not believe that the loss of any or all of these patents or trademarks would have a material adverse effect on its businesses. HNH's patents have remaining durations ranging from less-than-one year to 18 years, with expiration dates occurring at various times in 2015 through 2033.

Environmental Regulation

HNH is subject to laws and regulations relating to the protection of the environment. HNH does not presently anticipate that compliance with currently applicable environmental regulations and controls will significantly change its competitive position, capital spending or earnings during 2015. HNH believes it is in compliance with all orders and decrees it has consented to with environmental regulatory agencies. Please see "Item 1A - Risk Factors," "Item 3 - Legal Proceedings" and Note 21 - "Commitments and Contingencies" to the SPLP consolidated financial statements included in "Item 8 - Financial Statements and Supplementary Data."
                
        

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Steel Excel Inc.

Our Ownership Interest
We have an ownership interest of approximately 57.9% as of December 31, 2014 in Steel Excel, a Delaware corporation formerly known as ADPT Corporation (OTC: SXCL.PK). On May 31, 2012, our ownership percentage exceeded 50%, and Steel Excel became a majority-owned subsidiary and is consolidated from that date forward (see Note 3 - "Acquisitions" to the SPLP consolidated financial statements found elsewhere in this Form 10-K). Three of our representatives serve on Steel Excel's six-member board of directors, one of whom serves as Chairman and another of whom serves as the Chief Executive Officer. Our representatives also serve as Chief Financial Officer and General Counsel. Steel Excel is part of our Energy segment. Energy segment revenues totaled $210,148, $120,029 and $92,834 for the years ended December 31, 2014, 2013 and 2012, respectively, which comprised 25%, 17% and 15% of SPLP's consolidated revenues, respectively.
Description of Business
Through its wholly-owned subsidiary Steel Energy Ltd. ("Steel Energy"), Steel Excel’s Energy business
provides drilling and production services to the oil and gas industry. Through its wholly-owned subsidiary Steel Sports Inc., Steel Excel’s Sports business provides event-based sports services and other health-related services. Steel Excel also makes significant non-controlling investments in entities in industries related to its existing businesses as well as entities in other unrelated industries and continues to identify business acquisition opportunities in both the Energy and Sports industries as well as in other unrelated industries.

Sales
Steel Excel relies primarily on its local operations to sell and market its services. Because they have conducted business together over several years, the members of its local operations have established strong working relationships with certain of their clients. These strong client relationships provide a better understanding of region-specific issues and enable Steel Excel to better address customer needs. In 2014, Steel Excel had two customers, that made up 20% or more of its net revenues, and its top 15 customers made up 81%, 81% and 89% of its net revenues for the years ended December 31, 2014, 2013, and during the seven month period owned by SPLP in 2012, respectively.

Competition
Steel Excel's business operates in a highly competitive industry that is influenced by price, capacity, reputation, and experience. When oil and natural gas prices and drilling activities are at high levels, service companies are ordering new equipment to expand their capacity as they are seeing increased demand for their services and attractive returns on investment. When oil and natural gas prices are declining, service companies may be willing to provide their services at reduced prices to be able to cover their equipment and other fixed costs. To be successful, Steel Excel must provide quality services that meet the specific needs of oil and gas exploration and production companies at competitive prices. In addition, we need to maintain a safe work environment and a well-trained work force to remain competitive.

Steel Excel's energy services are affected by seasonal factors, such as inclement weather, fewer daylight hours, and holidays during the winter months. Heavy snow, ice, wind, or rain can make it difficult to operate and to move equipment between work sites, which can reduce its ability to provide services and generate revenues. These seasonal factors affect Steel Excel's competitors as well. Demand for services in the industry as a whole fluctuates with the supply and demand for oil and natural gas. In general, the need for Steel Excel's services increases when demand exceeds supply. The oil and gas exploration and production companies attempt to take advantage of a higher-priced environment when demand exceeds supply, which leads to an increased need for Steel Excel's services. Conversely, as supply equals or exceeds demand, the oil and gas exploration and production companies will cut back on their production resulting in a decline in their well servicing needs or seek pricing concessions from us and other service providers when the price of oil declines.

The market for the Steel Excel's Sports business’ baseball facility services and soccer camps and leagues is very fragmented, and its competitors are primarily small local or regional operations. The market for its strength and conditioning services is fragmented, and its competitors vary from large national providers of such services to local providers of comparable or other niche services. The baseball facility services and soccer camps and leagues are affected by seasonal factors, with business volume declining from late autumn through early spring as a result of colder temperatures and fewer daylight hours. In addition, inclement weather during peak seasons can have an adverse effect on the business since fields may not be available to reschedule any canceled events. In 2013, Steel Excel completed the construction of an indoor baseball facility to enable it to

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provide year-round baseball services to partially mitigate the revenue declines experienced in non-peak months and during periods of inclement weather.

Government Regulation
Steel Excel's businesses are subject to multiple federal, state, and local laws and regulations pertaining to worker safety, the handling of hazardous materials, transportation standards, and the environment. Among the various environmental laws Steel Excel is subject to, the Clean Water Act established the basic structure for regulating discharges of pollutants into the waters of the United States and quality standards for surface waters. Steel Excel's businesses could be required to obtain permits for the discharge of wastewater or stormwater. In addition, the Oil Pollution Act of 1990 imposed a multitude of requirements on responsible parties related to the prevention of oil spills and liability for damages resulting from such spills in the waters of the United States. These and comparable state laws provide for administrative, civil, and criminal penalties for unauthorized discharges and impose stringent requirements for spill prevention and response planning, as well as considerable potential liability for the costs of removal and damages in connection with unauthorized discharges.

The Comprehensive Environmental Response, Compensation and Liability Act, as amended, and comparable state
laws (“CERCLA” or “Superfund”) impose liability without regard to fault or the legality of the original conduct on certain defined parties, including current and prior owners or operators of a site where a release of hazardous substances occurred and entities that disposed or arranged for the disposition of the hazardous substances found at the site. Under CERCLA, these parties may be subject to joint and several liability for the costs of cleaning up the hazardous substances that were released into the environment and for damages to natural resources. Further, claims may be filed for personal injury and property damages allegedly caused by the release of hazardous substances and other pollutants. We may encounter materials that are considered hazardous substances in the course of our operations. As a result, Steel Excel may incur CERCLA liability for cleanup costs and be subject to related third-party claims. Steel Excel also may be subject to the requirements of the Resource Conservation and Recovery Act, as amended, and comparable state statutes (“RCRA”) related to solid wastes. Under CERCLA or RCRA, Steel Excel could be required to clean up contaminated property (including contaminated groundwater) or to perform remedial activities to prevent future contamination.

Steel Excel's businesses are also subject to the Clean Air Act, as amended, and comparable state laws and regulations that restrict the emission of air pollutants and impose various monitoring and reporting requirements. These laws and regulations may require Steel Excel to obtain approvals or permits for construction, modification, or operation of certain projects or facilities and may require use of emission controls. Various scientific studies suggest that emissions of greenhouse gases, including, among others, carbon dioxide and methane, contribute to global warming. While it is not possible to predict how legislation or new regulations that may be adopted to address greenhouse gas emissions would impact Steel Excel's business, any new restrictions on emissions that are imposed could result in increased compliance costs for, or additional operating restrictions on, its customers and, which could have an adverse effect on its business.

Steel Excel is also subject to the Occupational Safety and Health Act, as amended, (“OSHA”) and comparable state laws that regulate the protection of employee health and safety. OSHA’s hazard communication standard requires that information about hazardous materials used or produced in its operations be maintained and provided to employees and state and local government authorities. Steel Excel believes they are in substantial compliance with OSHA and comparable state law requirements, including general industry standards, record keeping requirements, and monitoring of occupational exposure to regulated substances.

Steel Excel cannot predict the level of enforcement or the interpretation of existing laws and regulations by enforcement agencies in the future, or the substance of future court rulings or permitting requirements. In addition, Steel Excel cannot predict what additional laws and regulations may be put in place in the future, or the effect of those laws and regulations on its business and financial condition. Steel Excel believes it is in substantial compliance with applicable environmental laws and regulations. While Steel Excel does not believe that the cost of compliance is material to our business or financial condition, it is possible that substantial costs for compliance or penalties for non-compliance may be incurred in the future.

Employees
As of December 31, 2014, Steel Excel had 1,000 employees, of which 923 were full-time employees and 77 were part-time employees. All of Steel Excel's employees are located in the United States. Steel Excel also hires additional full-time and part-time employees during peak seasonal periods. None of Steel Excel's employees are covered by collective bargaining agreements. Steel Excel considers its employee relations to be satisfactory.


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WebBank

Our Ownership Interest
SPLP's wholly owned subsidiary, WebFinancial Holding Corporation, conducts financial operations through its wholly-owned subsidiary, WebBank (“WebBank”). WebBank is part of our Financial Services segment. For the years ended December 31, 2014, 2013 and 2012 the Financial Services segment had revenues of $36,647, $28,185 and $21,155, respectively, which comprised 4%, 4% and 3% of SPLP's consolidated revenues, respectively.
Description of Business
WebBank is a Utah chartered industrial bank subject to comprehensive regulation, examination, and supervision of the Federal Deposit Insurance Corporation (“FDIC”) and the State of Utah Department of Financial Institutions (“UDFI”). WebBank is not considered a “bank” for Bank Holding Company Act purposes and, as such, SPLP is not regulated as a bank holding company. WebBank, whose deposits are insured by the FDIC, generates commercial and consumer loans.
WebBank continues to evaluate its different business lines and consider various alternatives to maximize the aggregate value of its businesses and increase value, including seeking acquisitions and/or merger transactions, as well as product line extensions, additions and/or divestitures.
Sales
WebBank generates revenue through a combination of interest income and non-interest income. Interest income is primarily derived from interest and origination fees earned on loans and investments. Non-interest income is primarily derived from minimum activity fee income on contractual lending arrangements, premiums on the sale of loans, and loan servicing fees. For the years ended December 31, 2014, 2013 and 2012, two contractual lending programs accounted for 35%, 46% and 56%, respectively, of WebBank's total revenue.
Government Regulation
WebBank is subject to regulatory capital requirements administered by the FDIC. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, WebBank must meet specific capital guidelines that involve quantitative measures of WebBank’s assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. WebBank’s capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. Failure to meet minimum capital requirements can initiate certain actions by regulators that, if undertaken, could have a direct material adverse effect on WebBank’s financial statements. In addition, federal banking laws and regulations generally would prohibit WebBank from making any capital distribution (including payment of a dividend) if WebBank would be under-capitalized thereafter. Undercapitalized depository institutions are subject to growth limitations and must submit a capital restoration plan, which must be guaranteed by the institution’s holding company. In addition, an undercapitalized institution is subject to increased monitoring and greater regulatory approval requirements.
Currently, WebBank meets or exceeds all applicable regulatory capital requirements.
Competition
WebBank competes with a broad range of banks across its various lines of business.
Employees
As of December 31, 2014, WebBank had 38 employees.
BNS Liquidating Trust
Our Ownership Interest
We have an ownership interest of approximately 84.9% as of December 31, 2014 in BNS Liquidating Trust (previously BNS Holding, Inc.). In June 2012, BNS, in accordance with its shareholder approval plan, distributed its assets and commenced its liquidation. See "Description of Business" section below for additional details.

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Description of Business
BNS was a holding company whose operations ceased as of June 1, 2012 due to the sale of Sun Well Service, Inc. ("Sun Well") to Steel Excel on May 31, 2012 (see Note 3 - "Acquisitions" to the SPLP consolidated financial statements found elsewhere in this Form 10-K). BNS' results include the operations of Sun Well (originally acquired by BNS on February 2, 2011) through the date of sale to Steel Excel. On June 18, 2012, BNS completed a distribution to its shareholders, pursuant to shareholder approval, and distributed cash of approximately $10,300 to its minority shareholders and 2,027,500 shares of Steel Excel common stock to its majority shareholder. No further distributions are anticipated. In June 2012, BNS formed a liquidating trust, the BNS Liquidating Trust, assigned its assets and liabilities to the Trust and initiated its dissolution. The Trust is owned by the BNS former shareholders in the same proportion as their former ownership in BNS.
Employees
The BNS Liquidating Trust had no employees as of December 31, 2014.
DGT Holdings Corp.
Our Ownership Interest
We have an ownership interest of approximately 82.7% as of December 31, 2014 in DGT (OTC: DGTC.OB), a New York corporation. On July 5, 2011, our ownership interest in DGT exceeded 50%, and as a result, DGT became a controlled subsidiary of SPLP and is consolidated from that date. Two of our representatives serve on DGT's four-member board of directors, one of which serves as DGT's President, Chief Executive Officer and Chief Financial Officer, and one is Chairman.
Description of Business
DGT's operations currently consist of a real estate business from the rental of a building retained from the sale of its Medical Systems Group on November 3, 2011 (for additional information, see Note 4 - "Discontinued Operations" to the SPLP consolidated financial statements found elsewhere in this Form 10-K). Continuing operations consist of the real estate business, investments, and general and administrative expenses.
    
Employees
As of December 31, 2014, DGT had no employees.
SPH Services, Inc.
Our Ownership Interest
SPH Services, Inc. (“SPH Services”) is our wholly-owned subsidiary. Three of our representatives serve as members, including Chairman, of the board of directors of SPH Services. These representatives also serve as SPH Services' Chief Executive Officer, President, Secretary, Chief Financial Officer and Treasurer.
Description of Business
SPH Services, which commenced operations on January 1, 2012, was created to consolidate the executive and corporate functions of SPLP and certain of our affiliates, including SP Corporate and Steel Partners LLC, to provide legal, tax, accounting, treasury, consulting, auditing, administration, compliance, environmental health and safety, human resources, marketing, investor relations and similar services, to other affiliated companies. In connection with the formation of SPH Services, we acquired SP Corporate and Steel Partners LLC, our former manager, as well as certain assets from HNH.
SP Corporate has management services agreements with HNH, Steel Excel, WebBank, BNS, DGT and other related companies. Services provided to SPLP and its consolidated subsidiaries are eliminated in consolidation. For additional information on these service agreements see Note 13 - "Related Party Transactions" to the SPLP consolidated financial statements found elsewhere in this Form 10-K.
By consolidating corporate overhead and back office functions, SPLP believes it will achieve cost savings over time for its affiliated companies while delivering more efficient and effective services. As a result of the synergies associated with SP

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Corporate's specialization and capabilities across a broad range of corporate and executive functions that are provided to SPLP and other companies, SP Corporate believes that it will be able to create high value business partnerships by delivering higher quality services and more efficient transaction processing which will result in significant cost savings that can be achieved through standardization, clear processes and procedures, the elimination of non-value adding activities and economies of scale.
Employees
As of December 31, 2014, SPH Services had 65 employees.
Our Business - Equity Method Investments
Associated Companies
Associated companies are investments in operating companies in which we own between 20% and 50% of the outstanding equity and have the ability to exercise significant influence, but not control, over the investee. As such, the investments in these operating companies are accounted for under the equity method of accounting (see Note 2 - "Summary of Significant Accounting Policies" - to the SPLP consolidated financial statements found elsewhere in this Form 10-K). The investments in associated companies are classified as Long-term investments in the Consolidated Balance Sheets (see Note 5 - "Investments" to the SPLP consolidated financial statements found elsewhere in this Form 10-K).
Accounted for at fair value, as of December 31, 2014:
ModusLink Global Solutions, Inc.
We have an ownership interest of approximately 27.7% as of December 31, 2014 in MLNK (NASDAQ: MLNK), a Delaware corporation. MLNK provides supply chain and logistics services to companies in consumer electronics, communications, computing, medical devices, software, luxury goods and retail. In March 2013, pursuant to an agreement between the Company and MLNK, SPLP purchased 7,500,000 shares of MLNK common stock for $4.00 per share. This investment, plus the 6,481,185 MLNK shares already owned by the Company and its subsidiaries, gave the Company a 27.1% ownership interest in MLNK common stock. Accordingly the investment, which was previously classified as an available-for-sale security, was reclassified to an associated company as of March 12, 2013. Two members of SPLP's management team serve on the five-member MLNK board of directors, one of whom serves as chairman. SPLP elected the fair value option to account for MLNK in order to more appropriately reflect the value of MLNK in its financial statements and records any unrealized gains and losses in earnings.
SL Industries, Inc.
We have an ownership interest of approximately 24.0% as of December 31, 2014 in SLI (AMEX:SLI), a New Jersey corporation. SLI designs, manufactures and markets power electronics, motion control, power protection and specialized communication equipment. SLI's products are used in a variety of medical, commercial and military aerospace, computer, datacom, industrial, telecom, transportation, utility, rail and highway equipment applications. Two of our representatives serve on SLI's five-member board of directors, one of whom serves as Chairman. SPLP elected the fair value option to account for SLI in order to more appropriately reflect the value of SLI in its financial statements and records any unrealized gains and losses in earnings.
JPS Industries, Inc.
We have an ownership interest of approximately 38.7% as of December 31, 2014 in JPS (OTC: JPST.PK), a Delaware corporation. JPS is a major U.S. manufacturer of extruded urethanes, ethylene vinyl acetates and mechanically formed glass and aramid substrate materials for specialty applications in a wide expanse of markets requiring highly engineered components. JPS’s products are used in a wide range of applications including: printed electronic circuit boards; advanced composite materials; civilian and military aerospace components; filtration and insulation products; specialty commercial construction substrates; high performance glass laminates for security and transportation applications; photovoltaic solar modules; paint protection films; plasma display screens; medical, automotive and industrial components; and soft body armor for civilian and military applications.
During the second quarter of 2013, JPS stockholders elected 2 members of SPLP's management team to their board to serve 1-year terms, one of which will serve as chairman. As a result of the foregoing events, the investment in JPS, which was

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previously classified as an available-for-sale security in 2012, was reclassified to an associated company as of June 30, 2013. SPLP elected the fair value option to account for JPS in order to more appropriately reflect the value of JPS in its financial statements and records any unrealized gains and losses in earnings.
On January 26, 2015, HNH announced its has commenced a tender offer to purchase up to 10,028,724 shares, or approximately 96.5% of the outstanding shares, of common stock of JPS at a price of $10.00 per share in cash to all stockholders other than SPLP and with respect to the 4,021,580 JPS shares owned by SPLP, in exchange for common stock of HNH. If all shares are tendered, HNH would exchange approximately $60,100 in cash and 863,946 shares of its common stock.

Fox & Hound Restaurant Group
We previously had an indirect ownership interest in Fox & Hound Restaurant Group, a Delaware corporation (“Fox & Hound”). Fox & Hound is a privately held owner and operator of a chain of approximately 130 company-owned and 14 franchised social destination casual dining and entertainment-based restaurants in 32 states. Two of our representatives served on Fox & Hound's four-member board of directors. During the third quarter of 2013, due to the current and projected operating performance of Fox & Hound, the Company wrote its investment down to zero. On December 15, 2013, Fox & Hound filed voluntary petitions for relief under chapter 11 of title 11 of the United States Code in the United States Bankruptcy Court for the District of Delaware. The Bankruptcy Court approved a plan to sell the assets of Fox & Hound and the sale closed on March 12, 2014. The Company did not receive a distribution at the conclusion of the chapter 11 process.

Other

The Company has an investment in a Japanese real estate partnership. In the second quarter of 2013, the Company reclassified this investment to an associated company.

API Technologies Corp. ("API Tech")

In May 2014 our subsidiary Steel Excel, acquired an ownership interest of approximately 20.6% in API Tech. API Tech is a designer and manufacturer of high performance systems, subsystems, modules, and components. Effective as of that date the investment in API Tech has been accounted for as an equity method investment using the fair value option. Steel Excel elected the fair value option to account for its investment in API Tech in order to more appropriately reflect the value of API Tech in its financial statements. Prior to such time, the investment in API Tech was accounted for as an available-for-sale security.

Accounted for under the traditional equity method as of December 31, 2014:
CoSine Communications, Inc.
We have an ownership interest of approximately 48.3% as of December 31, 2014 in CoSine (OTC: COSN.PK), a Delaware corporation. Two of our representatives serve on CoSine's four-member board of directors, one of whom serves as the Chief Executive Officer and Chief Financial Officer. CoSine is currently in the business of seeking to acquire one or more business operations. In January 2015, the Company increased its ownership in CoSine to approximately 80% and CoSine became a controlled subsidiary. For additional information see Note 22 - "Subsequent Events" to the SPLP consolidated financial statements found elsewhere in this Form 10-K.
Other    

Steel Excel has a 40.0% ownership interest in a fitness equipment company and a 46.9% ownership interest in iGo, Inc. ("iGo"), a mobile device accessories provider company.

SP II Liquidating Trust

The Company's investment in each series of the SPII Liquidating Trust is accounted for at fair value under the equity method (see Note 2 - "Summary of Significant Accounting Policies" and Note 13 - “Related Party Transactions” to the SPLP consolidated financial statements found elsewhere in this Form 10-K). The purpose of the SPII Liquidating Trust is to effect the orderly liquidation of certain assets previously held by SPII. SPLP's financial position, financial performance and cash flows will be affected to the extent SPII Liquidating Trust's results in realized or unrealized gains (losses) and by distributions it makes in each reporting period. These investments are classified as Long-term investments in the Consolidated Balance Sheets and the

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gains or losses are recorded in Income (Loss) from other investments - related party in the Consolidated Statements of Operations (see Note 5 - "Investments" to the SPLP consolidated financial statements found elsewhere in this Form 10-K).

Our Common Units
Our common units are quoted on the New York Stock Exchange (NYSE) under the symbol "SPLP".
Other Information
Our business address is 590 Madison Avenue, 32nd Floor, New York, New York 10022, and our telephone number is (212) 520-2300. Our website is www.steelpartners.com. The information contained in, or that can be accessed through, the website is not part of this Form 10-K. This Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and all amendments to those reports, are available to you free of charge through our website as soon as reasonably practicable after those materials have been electronically filed with, or furnished to, the SEC.

Item 1A. Risk Factors

Our business is subject to a number of risks. You should carefully consider the following risk factors, together with all of the other information included or incorporated by reference in this report, before you decide whether to purchase our common units. These factors are not intended to represent a complete list of the general or specific risks that may affect us. It should be recognized that other risks may be significant, presently or in the future, and the risks set forth below may affect us to a greater extent than indicated. If any of the following risks occur, our business, financial condition and results of operations could be materially adversely affected. In such case, the trading price of our common units could decline, and you may lose all or part of your investment.

Risks Related to Our Structure
The unitholders have limited recourse to maintain actions against the General Partner, the Board of Directors, our officers and the Manager.
The Limited Partnership Agreement of SPLP, or the “Partnership Agreement,” contains broad indemnification and exculpation provisions that limit the right of a unitholder to maintain an action against the General Partner, the Board of Directors, our officers and the Manager, or to recover losses or costs incurred by us as a result of their actions or failures to act.
Our Partnership Agreement contains certain limitations on the voting rights of unitholders.
Our Partnership Agreement contains specific provisions that are intended to comply with regulatory limitations on the ownership of our securities as a result of our ownership of WebBank. Under the Partnership Agreement, a person or group that acquires beneficial ownership of 10% or more of the common units without the prior approval of the Board of Directors may lose voting rights with respect to all of its common units in excess of 9.9%.
We may have conflicts of interest with the minority shareholders of our businesses and decisions may need to be made by disinterested directors, without the participation of directors or officers associated with the Manager and the Company, which may be different from the decisions we would make. Companies in which we have interests but we do not control may make decisions that do not serve our interests and those of our unitholders.
The boards of directors and officers of our respective businesses, including directors and officers associated with our Manager and the Company, have fiduciary duties to their shareholders. As a result, they may make decisions that are in the best interests of their shareholders generally but which are not necessarily in the best interest of our unitholders. In dealings with us, the directors and officers of our businesses may have conflicts of interest and decisions may have to be made without their participation. Such decisions may be different from the decisions we would make and may not be in the best interests of our common unitholders, which may have an adverse effect on our business and results of operations.

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There are certain interlocking relationships among us and certain affiliates of Warren G. Lichtenstein, our Executive Chairman, which may present potential conflicts of interest.
Warren G. Lichtenstein, our Executive Chairman and a substantial unitholder, is the Chief Executive Officer of our Manager. As of December 31, 2014, Mr. Lichtenstein directly owned approximately 9% of our outstanding common units. In addition, affiliates of our Manager beneficially own approximately 24% of our outstanding units, although Mr. Lichtenstein disclaims beneficial ownership of any common units not directly held by him. We have entered into transactions and/or agreements with these entities. There can be no assurance that such entities will not have interests in conflict with our own. 
Certain members of our management team may be involved in other business activities that may involve conflicts of interest.
Certain individual members of our management team may, from time to time, be involved in the management of other businesses, including those owned or controlled by our Manager and its affiliates. Accordingly, these individuals may focus a portion of their time and attention on managing these other businesses. Conflicts may arise in the future between our interests and the interests of the other entities and business activities in which such individuals are involved.
We, as a diversified holding company, may have substantial limitations on our ability to sell interests in the underlying operating companies.
We accumulate significant positions in underlying operating companies and have a significant role in the management of various underlying operating companies. As a result, we may face significant legal and market restrictions on selling our interests in the underlying operating companies. For example, employees of the Manager and SPH Services may also serve as managers or members of the board of directors of the underlying operating companies, and, thus, may receive material and confidential information concerning the operating companies that would preclude us, under federal securities laws, from trading securities of the relevant operating company. Some privately held businesses may be subject to shareholders agreements which may limit our ability to sell our interests in such companies. In addition, we may be limited in our ability to sell securities in an underlying operating company in light of the size of our ownership interest and the absence of liquidity in the market to absorb our ownership interest, or, alternatively, may be required to sell our ownership interest at a discounted and unfavorable price.
Being classified as an “investment company” would subject us to numerous restrictions and requirements that would be inconsistent with the manner in which we operate our business, and could have a material adverse effect on our business and operations.
We plan to continue to conduct our business and operations in such a manner as not to be deemed an investment company under the Investment Company Act of 1940, as amended (the “Investment Company Act”).
Investment companies are subject to extensive, restrictive and potentially adverse regulations relating to, among other things, operating methods, management, capital structure, dividends and transactions with affiliates. An entity may generally be deemed to be an investment company for purposes of the Investment Company Act if (a) it is or holds itself out as being engaged primarily in the business of investing, reinvesting or trading in securities; or (b) absent an applicable exemption, it owns investment securities having a value exceeding 40% of certain assets (the “40% Test”). As a result of the Exchange Transaction, on July 14, 2009, we could no longer definitively conclude that we passed the 40% Test or were able to rely on any exception from the definition of an investment company.
The Company has taken actions, including liquidating certain of our assets and acquiring additional interests in existing or new subsidiaries or controlled companies, to comply with the 40% Test, or a relevant exception. Also, since the Company operates as a diversified holding company engaged in a variety of operating businesses, we do not believe we are primarily engaged in an investment company type business, nor do we propose to primarily engage in such a business. Our intent to operate as a diversified holding company, and comply with the 40% test, may limit our ability to make certain investments, compel us to divest certain holdings, or to take or forego certain actions that could otherwise be beneficial to us.
If we were deemed to be an investment company under the Investment Company Act, we may need to further adjust our business strategy and assets, including divesting certain desirable assets immediately to fall outside of the definition or within an exemption, to register as an investment company (and subject to the aforementioned restrictions and requirements) or to cease operations.

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Risks Related to Our Business
We conduct operations or own interests in companies with operations outside of the U.S., which may expose us to additional risks not typically associated with companies that operate solely in the U.S.
We have operations or own interests in securities of companies with operations located outside the U.S. These holdings have additional risks, including risks relating to currency exchange matters, less developed or efficient financial markets than in the U.S., absence of uniform accounting, auditing and financial reporting standards, differences in the legal and regulatory environment, different publicly available information in respect of companies in non-U.S. markets, economic and political risks, and possible imposition of non-U.S. taxes. There can be no assurance that adverse developments with respect to such risks will not adversely affect our assets that are held in certain countries or the returns from these assets.
Our businesses rely, and may rely, on their intellectual property and licenses to use others' intellectual property, for competitive advantage. If our businesses are unable to protect their intellectual property, are unable to obtain or retain licenses to use others' intellectual property, or if they infringe upon or are alleged to have infringed upon others' intellectual property, it could have a material adverse effect on their financial condition, business and results of operations.
The success of each of our businesses depends in part on its, or licenses to use others', brand names, proprietary technology and manufacturing techniques. These businesses rely on a combination of patents, trademarks, copyrights, trade secrets, confidentiality procedures and contractual provisions to protect their intellectual property rights. The steps they have taken to protect their intellectual property rights may not prevent third parties from using their intellectual property without their authorization or independently developing intellectual property that is similar. In addition, the laws of foreign countries may not protect our businesses' intellectual property rights effectively. Stopping unauthorized use of proprietary information and intellectual property, and defending claims of unauthorized use of others' proprietary information or intellectual property, may be difficult, time-consuming and costly and could subject our businesses to significant liability for damages and invalidate their property rights. Such unauthorized use could reduce or eliminate any competitive advantage our businesses have developed, cause them to lose sales or otherwise harm their business.
We are dependent on digital technologies to conduct our daily operations and maintain confidential information.

The Company relies on information technology systems to both manage its daily operations and to secure its intellectual property. We use various protective measures to secure our systems from unauthorized access. However, a failure in or breach of operational or informational security systems or infrastructure, or those of our third party vendors and other service providers, as a result of information system failures or cyber attack, could disrupt business, result in the disclosure or misuse of confidential or proprietary information, including customer and vendor lists, damage our reputation and investor confidence, increase security and remediation costs and cause losses, including potential lawsuits, all of which could have a material adverse effect on our businesses, financial condition and results of operations.

Our businesses are and may be subject to federal, state and foreign environmental laws and regulations that expose them to potential financial liability. Complying with applicable environmental laws requires significant resources, and if our businesses fail to comply, they could be subject to substantial liability.

Some of the facilities and operations of our businesses are, and may be, subject to a variety of federal, state and foreign environmental laws and regulations, including laws and regulations pertaining to the handling, storage and transportation of raw materials, products and wastes, and hazardous materials and wastes, which require and will continue to require significant expenditures to remain in compliance with such laws and regulations. Any material violations of these laws can lead to substantial liability, revocations of discharge permits, fines or penalties, which could negatively impact our financial condition, business and results of operations.
Some of our businesses are subject to certain risks associated with the movement of businesses offshore.
Some of our businesses are potentially at risk of losing business to competitors operating in lower cost countries. An additional risk is the movement offshore of some of our businesses' customers, leading them to procure products or services from more closely located companies. Either of these factors could negatively impact our financial condition, business and results of operations.

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Our business strategy includes acquisitions which entail numerous risks.
Our business strategy and the strategy of our businesses includes acquisitions and entails several risks, including the diversion of management's attention from other business concerns and the need to finance such acquisitions with additional equity and/or debt. Any future acquisitions may also result in material changes in the composition of our assets and liabilities or the assets and liabilities of our businesses and if unsuccessful could reduce the value of our common units. In addition, once found, acquisitions entail further risks, including unanticipated costs and liabilities of the acquired businesses that could materially adversely affect our results of operations; difficulties in assimilating acquired businesses; negative effects on existing business relationships with suppliers and customers and losing key employees of the acquired businesses.
HNH sponsors a defined benefit pension plan which could subject it to substantial cash funding requirements in the future.
HNH's ongoing operating cash flow requirements include arranging for the funding of the minimum requirements of the WHX Corporation Pension Plan ("WHX Pension Plan"). The performance of the financial markets and interest rates, as well as health care trends and associated mortality rates, impact our defined benefit pension plan expense and funding obligations. Significant changes in these factors, including adverse changes in discount rates, investment losses on plan assets and increases in participant life expectancy, may increase our funding obligations and adversely impact our financial statements. Required future contributions are determined based upon assumptions regarding such matters as discount rates on future obligations, assumed rates of return on plan assets and legislative changes. Actual future pension costs and required funding obligations will be affected by changes in the factors and assumptions described in the previous sentence, as well as other changes such as any plan termination or other acceleration events. See Liquidity and Capital Resources section of this Form 10-K for additional information.
    
WebBank operates in a highly regulated environment. Recent and ongoing legislative and regulatory actions may significantly affect our liquidity or financial condition.
     On July 21, 2010, President Barack Obama signed the Dodd-Frank Act into law. The Dodd-Frank Act is intended primarily to overhaul the financial regulatory framework following the global financial crisis and impacts all financial institutions, including WebBank. The Dodd-Frank Act, among other things, established the Bureau of Consumer Financial Protection and Financial Stability Oversight Council, consolidated certain federal bank regulators and imposed increased corporate governance and executive compensation requirements. While many of the provisions in the Dodd-Frank Act are aimed at financial institutions significantly larger than ours, the amount and complexity of regulations has increased our regulatory compliance burden and therefore has increased the Bank’s regulatory risk.
 
In addition, the Dodd-Frank Act added a new Section 13 to the Bank Holding Company Act, the so-called “Volcker Rule,” which generally restricts certain banking entities (including affiliates of depository institutions) from engaging in proprietary trading activities and owning equity in or sponsoring any private equity or hedge fund (collectively, "covered funds"). The Volcker Rule became effective July 21, 2012. The implementing regulations for the Volcker Rule were finalized by various regulatory agencies on December 10, 2013, although thereafter the Federal Reserve extended the conformance period until July 21, 2015. On December 18, 2014, the Federal Reserve further extended the conformance period until July 21, 2016 with respect to investments in, and relationships with, covered funds and foreign funds subject to the Volcker Rule that were in place prior to December 31, 2013. The Federal Reserve also indicated that it eventually intends to grant a final one-year extension of the conformance period for investments in, and relationships with, such funds, until July 21, 2017. The end of the conformance period for proprietary trading activities and investments in, and relationships with, covered funds entered into on or after December 31, 2013 remains July 21, 2015. Under the regulations, following the end of each applicable conformance period, we (and our affiliates) are restricted from engaging in proprietary trading, investing in covered funds or sponsoring new covered funds unless our activities qualify for specified exemption under the rule or satisfy certain requirements under the rule. While we are a banking entity under the Volcker Rule, we do not expect the Volcker Rule to have a material impact on our business
 Furthermore, under the Dodd-Frank Act, all companies that directly or indirectly control an FDIC-insured bank are required to serve as a source of financial strength for such institution. As a result, SPLP could be called upon by the FDIC to infuse additional capital into WebBank to the extent that WebBank fails to satisfy its capital requirements, even if doing so may adversely affect SPLP’s ability to meet its other obligations. Currently, WebBank meets or exceeds all such requirements.

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The U.S. Congress and state legislatures and federal and state regulatory authorities continually review banking laws, regulations and policies for possible changes. We cannot predict whether additional legislation will be enacted and, if enacted, the effect that it would have on our business, financial condition or results of operations.
WebBank may be subject to more stringent capital requirements.
 
In July 2013, the Federal Reserve Board and the FDIC, issued rules that implemented the Basel III changes to the international regulatory capital framework and revised the U.S. risk-based and leverage capital requirements for U.S. banking organizations in order to strengthen identified areas of weakness in capital rules and to address relevant provisions of the Dodd-Frank Act. The rules apply to WebBank. 

Effective January 1, 2015 for WebBank, FDIC regulations implementing the Basel III Accord modified WebBank’s minimum capital requirements by adding a 4.5% Common Equity Tier 1 ratio and increased the Tier 1 capital ratio requirement from 4% to 6%.  Additionally, a Capital Conservation Buffer (composed solely of common equity Tier 1 capital) equal to 2.5% above the new regulatory minimum capital requirements will be phased in starting January 1, 2016 until fully implemented on January 1, 2019. A failure of WebBank to maintain the aggregate minimum capital requirements and Capital Conservation Buffer will impair its ability to make certain distributions (including dividends and stock repurchases) and discretionary bonus payments to executive officers.
 
Although the Company currently cannot predict the specific impact and long-term effects that Basel III will have on WebBank and the banking industry more generally, WebBank is currently within the new regulations.

Increased volatility in raw materials costs and availability may reduce revenues and profitability in our diversified industrial businesses.

Certain of our Diversified Industrial operations are subject to risks associated with increased volatility in raw material prices and availability of key raw materials. If the price for raw materials continues to increase and our operations are not able to pass these price increases to their customers, or are unable to obtain key raw materials, our results of operations may be negatively impacted.
Our energy segment is highly dependent on the activity level of the North American oil and gas industry. Our markets may be adversely affected by industry conditions that are beyond our control.

The level of oil and natural gas exploration and production activity in the United States is volatile. Reduced discovery rates of new oil and natural gas reserves, or a decrease in the development rate of reserves in our market areas, weakness in oil and natural gas prices, or our customers' perceptions that oil and natural gas prices will decrease in the future, could result in a reduction in the utilization of our equipment and result in lower revenues or rates for the services of our Energy segment. Our customers' willingness to undertake these activities depends largely upon prevailing industry conditions that are influenced by many factors over which we have no control.

We and our businesses operate in highly competitive markets.
We operate in a variety of competitive industries and market sectors. Many of our businesses' competitors are substantially larger and have considerably greater financial, technical and marketing resources than we do. Some competitors may have a lower cost of funds than we or our businesses do and access to financing sources that may not be available to us or our businesses. In addition, some of our competitors and the competitors of our businesses may have higher risk tolerances or different risk assessments, which could allow them to consider a wider variety of business opportunities than we or our businesses can.    

Risks Related to Our Manager

We depend on Warren G. Lichtenstein, the Chairman and Chief Executive Officer of the Manager, and Jack Howard, the President of the Manager, in running our businesses. The loss of their services could have a material adverse effect on our business, results and financial condition.
Our success depends on the efforts, skills, reputation and business contacts of Warren G. Lichtenstein, the Chairman and Chief Executive Officer of the Manager and Jack Howard, the President of the Manager. While the key members of the Manager have worked for the Manager and its affiliates for many years, our Manager does not have any employment agreements

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with any of the key members of its management team and their continued service is not guaranteed. The loss of the services of Mr. Lichtenstein or Mr. Howard could have a material adverse effect on our asset value, revenues, net income and cash flows and could harm our ability to maintain or grow our existing operations or pursue additional opportunities in the future.
The interests of our Manager may not be aligned with our interests or those of our unitholders.
Our Manager receives an annual Management Fee at a rate of 1.5% of total partner's capital, payable on the first day of each quarter, subject to quarterly adjustment. Our Manager is entitled to receive a Management Fee regardless of our net income. In addition, our Manager was granted partnership profits interests in the form of incentive units which may be classified into Class C common units of SPLP. The Manager may consider entering into or recommending riskier transactions that represent a potential higher reward in order for the Manager's units to be profitable. Any such riskier investment decisions or recommendations, if unsuccessful, could result in losses to us and a decline in the value of the common units.
We cannot determine the amount of the Management Fee that will be paid over time with any certainty.
The Management Fee is calculated by reference in part to our total partners' capital. Our total partners' capital will be impacted by the performance of our businesses and other businesses we may acquire in the future, as well as the issuance of additional common units. Changes in our total partners' capital and in the resulting Management Fee could be significant, resulting in a material adverse effect on our results of operations. In addition, if our performance declines, assuming our total partners' capital remains the same, the Management Fee will increase as a percentage of our net income.
Our Manager's liability is limited under the Management Agreement, and we have agreed to indemnify our Manager against certain liabilities. Such indemnification may incentivize our Manager to take unnecessary risks with respect to actions for which it will be indemnified.
Under the Management Agreement, our Manager, its members, officers, employees, affiliates, agents and legal representatives are not liable for, and we have agreed to indemnify such persons from, any loss or expense, including without limitations, any judgment, settlement, reasonable attorneys' fees and other costs and expenses incurred in connection with the defense of any actual or threatened proceeding, other than losses resulting from willful misconduct or gross negligence in the performance of such indemnified person's obligations and duties. Such indemnification may incentivize our Manager to take unnecessary risks with respect to actions for which it will be indemnified.
Risks Related to our Common Units
We may issue additional common units in the future without the consent of unitholders and at a discount to the market price of such common units. In particular, sales of significant amounts of the common units may cause the price of the common units to decline.
Under the terms of the Partnership Agreement, additional common units may be issued without the consent of unitholders at a discount to the market price. In addition, other classes of securities may be issued with rights that are senior to or which otherwise have preferential rights to the rights of the common units. Sales of significant amounts of the common units in the public market or the perception that such sales of significant amounts may occur could adversely affect its market price. Moreover, the perceived risk of any potential dilution could cause common unit holders to attempt to sell their common units and investors to “short” the common units, a practice in which an investor sells common units that he or she does not own at prevailing market prices, hoping to purchase common units later at a lower price to cover the sale. Any event that would cause the number of common units being offered for sale to increase would likely cause the common units' market price to further decline. These sales might also make it more difficult for us to sell additional common units in the future at a time and price that we deem appropriate.
Risks Related to Taxation
All statutory references in this section are to the Internal Revenue Code of 1986, as amended, or the “Code.”
Our unitholders may be subject to U.S. federal, state and other income tax on their share of our taxable income, regardless of whether they receive any cash distributions from us.
The Company operates, for U.S. federal income tax purposes, as a partnership and not a publicly traded partnership taxable as a corporation. Our unitholders will be subject to U.S. federal, state, local and possibly, in some cases, foreign income

18


tax on their allocable share of our taxable income, whether or not they receive cash distributions from us. We do not anticipate making any cash distributions or paying any cash dividends. Accordingly, our unitholders may be required to make tax payments in connection with their ownership of common units that significantly exceed their cash distributions in any given year.
Our tax treatment is not assured. If we are taxed as a corporation, it could adversely impact our results of operations.
A partnership is not a taxable entity and distributions by a partnership to a partner are generally not taxable to the partnership or the partner unless the amount of cash distributed to such partner exceeds the partner's adjusted basis in its partnership interest. Section 7704 provides that generally publicly traded partnerships are taxed as corporations. However, an exception, referred to as the “Qualifying Income Exception,” exists with respect to publicly traded partnerships of which 90 percent or more of the gross income for every taxable year consists of “qualifying income” as defined in the Code. We expect that we will meet the Qualifying Income Exception. However, the Qualifying Income Exception will not apply if we register, or are required to register, as an investment company under the Investment Company Act.
If the Qualifying Income Exception is not available to us, then we will be treated as a corporation instead of a partnership. In that event, the deemed incorporation of SPLP should be tax-free, unless the corporation is an investment company for tax purposes and the partners are treated as diversifying their interests. If we were taxed as a corporation, (i) our net income would be taxed at corporate income tax rates, thereby substantially reducing our profitability, (ii) our unitholders would not be allowed to deduct their share of losses of SPLP and (iii) distributions to our unitholders, other than liquidating distributions, would constitute dividends to the extent of our current or accumulated earnings and profits, and would be taxable as such.
Our structure involves complex provisions of U.S. federal income tax law for which no clear precedent or authority may be available.
The U.S. federal income tax treatment of our unitholders depends in some instances on interpretations of complex provisions of U.S. federal income tax law for which no clear precedent or authority may be available. Our Partnership Agreement permits our General Partner to modify it from time to time, including the allocation of items of income, gain, loss and deduction (including unrealized gain and unrealized loss to the extent allowable under U.S. federal income tax law), without the consent of our unitholders, to address certain changes in U.S. federal income tax regulations, legislation or interpretation or to preserve the uniformity of our common units. In some circumstances, such revisions could have a material adverse impact on some or all unitholders. In addition, we formed a subsidiary partnership, to which we contributed certain of our assets ("the “Subsidiary Partnership”). To preserve the uniformity of common units, we (but not the Subsidiary Partnership) will make an election permitted under Section 754 and we will adopt the remedial allocation method under Section 704(c) with respect to items of income, gain, loss and deduction attributable to assets contributed to us (which we will contribute to the Subsidiary Partnership), to account for any difference between the tax basis and fair market value of such assets at the time of contribution, or attributable to the “book-up” or “book-down” of our assets prior to their contribution to the Subsidiary Partnership, or while they were held by the Subsidiary Partnership, to account for the difference between the tax basis and fair market value of such assets at the time of a mark-to-market event. We intend generally to make allocations under Section 704(c) to our unitholders in accordance with their respective percentage interests. However, built-in gain or built-in loss in existence and allocable to the assets we contributed to the Subsidiary Partnership, when recognized, will be allocated to our unitholders as of the contribution date. We intend to prepare our tax returns on the basis that buyers of common units from such unitholders will not inherit such unitholders' built-in gains or built-in losses as of that date as a result of the election under Section 754. However, it is not clear whether this position will be upheld if challenged by the IRS. While we believe it represents the right result, there is no law directly on point.
Tax-exempt entities face unique tax issues from owning common units that may result in adverse tax consequences to them.
A holder of common units that is a tax-exempt organization may be subject to U.S. federal income taxation to the extent that its allocable share of our income consists of unrelated business taxable income (“UBTI”). We may borrow money. A tax-exempt partner of a partnership may be treated as earning UBTI if the partnership regularly engages in a trade or business that is unrelated to the exempt function of the tax-exempt partner, if the partnership derives income from debt-financed property or if the tax-exempt organization's partnership interest itself is debt-financed.

Item 1B. Unresolved Staff Comments

None.


Item 2. Properties

All dollars used in this discussion are in thousands.
HNH
As of December 31, 2014, HNH had 23 active operating plants in the United States, Canada, China, United Kingdom, Germany, France, Poland and Mexico, with a total area of approximately 1,576,838 square feet, including warehouse, office, sales, service and laboratory space. HNH also owns or leases sales, service, office and warehouse facilities at 8 other locations in the United States, which have a total area of approximately 225,330 square feet, and owns or leases 5 non-operating locations with a total area of approximately 321,150 square feet. Manufacturing facilities are located in: Camden and Bear, Delaware; Evansville, Indiana; Agawam, Massachusetts; Middlesex, New Jersey; Arden, North Carolina; Rancho Cucamonga, California; St. Louis, Missouri; Cudahy, Wisconsin; Itasca, Illinois; Warwick, Rhode Island; Toronto and Montreal, Canada; Matamoros, Mexico; Gwent, Wales, United Kingdom; Pansdorf, Germany; Riberac, France; Gliwice, Poland; and Suzhou, China. All plants are owned except for the Middlesex, Arden, Rancho Cucamonga, Montreal, Gliwice and one of two Suzhou plants, which are leased. The Bear, Delaware, Rancho Cucamonga, California, and Suzhou, China facilities, with a total area of approximately 340,481 square feet, are associated with the Company's former Arlon business.
HNH considers its manufacturing plants and service facilities to be well maintained and efficiently equipped, and therefore suitable for the work being done. The productive capacity and extent of utilization of its facilities is dependent in some cases on general business conditions and in other cases on the seasonality of the utilization of its products. Capacity can be expanded at some locations.
Steel Excel
Steel Excel's Energy business owns four buildings in Williston, ND, including one that serves as its headquarters and operations hub in the Bakken basin along with separate buildings with office and shop space. To support its other operations, the Energy business owns shop space Texas and leases shop space in Colorado under an arrangement that expires in 2015. The Energy business also leases shop space and office space under month-to-month arrangements on an as needed basis and owns and leases housing for temporary living arrangements for certain of its employees.

Steel Excel's Sports business has a lease for office space in Hermosa Beach, CA, that expires in June 2015, which serves as its headquarters. Steel Excel's Sports business has a lease for approximately 27.9 acres of land in Yaphank, NY, for its baseball services operation that expires in December 2016. Under this lease Steel Excel has two extension options and a right of first refusal to purchase the parcel. The Sports business also has a lease for 2,300 square feet for its CrossFit® facility in Hermosa Beach, CA, that expires in July 2015 and a lease for 9,940 square feet for its CrossFit® facility in Torrance, CA, that expires in March 2023. In addition, the Sports business has leases in various states for small administrative offices to
support its youth soccer operation.

BNS
As of December 31, 2014, BNS did not own or lease any properties.
DGT
As discussed elsewhere in this Form 10-K, on August 16, 2012 DGT completed the sale of its RFI Corporation ("RFI") subsidiary and sold the related manufacturing and office property in the first quarter of 2015. In addition, as discussed elsewhere in this Form 10-K, on November 3, 2011 DGT completed the sale of Villa Sistemi Medicali S.p.A. ("Villa"), its former Italian subsidiary. DGT continues to own 67,000 square feet of design and manufacturing space in Milan, Italy and currently leases the building to the buyer of Villa.

19


WebBank
As of December 31, 2014, WebBank leases 8,000 square feet of office space headquartered in Salt Lake City, Utah. The term of the lease expires in March 2017. WebBank also leases office space in New Jersey through March 2017. WebBank believes that these facilities are adequate for its current needs and that suitable additional space will be available as required.
SPH Services
As of December 31, 2014, SPH Services leases 20,764 square feet of office space headquartered in New York City, New York. The term of the lease expires in December 2025. SPH Services also leases office space in Los Gatos, California through January 2017.

20


Item 3. Legal Proceedings

The information set forth under Note 21 - "Commitments and Contingencies" of our Notes to Consolidated Financial Statements, included in Part II, Item 8, Financial Statements, of this Report, is incorporated herein by reference. For an additional discussion of certain risks associated with legal proceedings, see the section entitled Part I, Item 1A, Risk Factors, of this Report.

Item 4. Mine Safety Disclosures
 
Not applicable.

PART II



Item 5. Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
 
Market Information
 
As of December 31, 2014, we had 27,566,200 common units issued and outstanding. Our common units, no par value, are quoted on the NYSE under the symbol “SPLP”.  The following table sets forth the information on the high and low sales prices of our common units during 2014 and 2013.
 
Fiscal year ending December 31, 2014
 
High
 
Low
First Quarter
 
$
17.57

 
$
15.70

Second Quarter
 
$
17.21

 
$
15.91

Third Quarter
 
$
16.92

 
$
16.27

Fourth Quarter
 
$
18.55

 
$
15.65

Fiscal year ending December 31, 2013
 
High
 
Low
First Quarter
 
$
13.62

 
$
11.51

Second Quarter
 
$
13.77

 
$
12.90

Third Quarter
 
$
15.47

 
$
13.80

Fourth Quarter
 
$
17.59

 
$
14.88


Holders
 
As of December 31, 2014, there were approximately 140 unitholders of record.
 
Distributions
 
In connection with the Exchange Transaction, we agreed to distribute to the holders of our common units the Target Distribution, subject to certain limitations, during the period from July 16, 2009 to the Final Distribution Date.  On April 6, 2011, we distributed to our unitholders of record as of March 25, 2011, approximately $29,868 (net of approximately $3,229 to treasury units), or $1.18 per common unit, representing the final required distribution in full satisfaction of the Target Distribution.

We may, at our option, make further distributions to the unitholders although we currently have no plan to make any distributions in excess of the Target Distribution.
 



21


Unit Performance Graph
 
The following graph compares the cumulative total return provided to unitholders on our common units since the common units began trading on April 19, 2011, relative to the cumulative total returns of the Russell 2000 index, and a customized peer group of seven companies that includes: Blackstone Group L.P., Leucadia National Corporation, Apollo Investment Corporation, Compass Diversified Holdings LLC, Gladstone Capital Corporation, Knights Capital Group, Inc. and Main Street Capital Corporation. An investment of $100 (with reinvestment of all dividends) is assumed to have been made in our common units, in the peer group, and the index on April 19, 2011 and its relative performance is tracked through December 31, 2014.  We did not declare or pay any dividends during the comparison period. 

 
4/19/2011
 
12/31/2011
 
12/31/2012
 
12/31/2013
 
12/31/2014
Steel Partners Holdings L.P.
$
100

 
$
74.92

 
$
73.30

 
$
107.87

 
$
109.80

Russell 2000 Index
$
100

 
$
90.96

 
$
105.83

 
$
146.91

 
$
154.11

Peer Group
$
100

 
$
72.48

 
$
79.34

 
$
126.85

 
$
126.08


The unit price performance included in this graph is not necessarily indicative of future unit price performance
 
The performance graph shall not be deemed to be incorporated by reference by means of any general statement incorporating by reference this Form 10-K into any filing under the Securities Act or the Exchange Act, except to the extent that we specifically incorporate such information by reference, and shall not otherwise be deemed filed under such acts.

Issuer Purchases of Equity Securities

On December 24, 2013, the Board of Directors of the general partner of the Company approved the repurchase of up to an aggregate of $5,000 of the Company's common units (the “Repurchase Program”). Any purchases made under the Repurchase Program will be made from time to time on the open market at prevailing market prices or in negotiated transactions off the market, in compliance with applicable laws and regulations. In connection with the Repurchase Program, the Company entered into a Stock Purchase Plan which expired on March 26, 2014. The Repurchase Program has no termination date.

22


 
(a)
(b)
(c)
(d)
Period
Total Number of Shares (or Units) Purchased (1)
Average Price Paid per Share (or Unit)
Total Number of Shares (or Units) Purchased as part of Publicly Announced Plans or Programs
Maximum Number (or Approximate Dollar Value) of Shares (or Units) that May Yet Be Purchased Under the Plans or Programs
October 1, 2014 through October 31, 2014
23,155
$
15.32


$
2,430

November 1, 2014 through November 30, 2014
2,041
$
16.78


$
2,430

December 1, 2014 through December 31, 2014
11,367
$
17.34


$
2,430

Total
36,563
 



(1) All units were purchased by DGT, an affiliate of the Company, in open market transactions for its own account.


Item 6. Selected Financial Data
 
The following table contains our selected historical consolidated financial data, which should be read in conjunction with our consolidated financial statements and the related notes thereto, and Management’s Discussion and Analysis of Financial Condition and Results of Operations contained in this Annual Report on Form 10-K. The selected financial data as of and for the years ended December 31, 2014, 2013 and 2012 have been derived from our audited consolidated financial statements at those dates and for those periods, contained elsewhere in this Annual Report on Form 10-K. The historical selected financial data as of and for the years ended December 31, 2011 and 2010 have been derived from our audited consolidated financial statements adjusted for discontinued operations at those dates and for those periods, not contained in this Annual Report on Form 10-K.

The table below presents discontinued operations as follows:

The year ended December 31, 2014 includes the operations of HNH's Arlon business.
The year ended December 31, 2013 includes the operations of HNH's businesses: Arlon, Continental Industries ("Continental"), Canfield Metal Coating Corporation ("CMCC") and Indiana Tube de Mexico, S. De R.L. de C.V. ("ITM") through their respective sale dates, as well as one of Steel Excel's sports businesses.
The year ended December 31, 2012 includes the aforementioned HNH operations, as well as DGT's RFI subsidiary and DGT's Villa subsidiary through their respective sale dates.
The year ended December 31, 2011 includes the aforementioned operations, as well as DGT's operations from July 5, 2011.
The year ended December 31, 2010 includes the aforementioned HNH discontinued operations (from May 7, 2010 through December 31, 2010) as well as the gain on sale of BNS' former subsidiary, Collins Industries, Inc. ("Collins"), which was sold on February 18, 2010.


23


 
Year Ended December 31,
 
2014
 
2013
 
2012
 
2011
 
2010
 
(in thousands, except common unit and per common unit data)
STATEMENTS OF OPERATIONS DATA (a)
 
 
 
 
 
 
 
 
 
Revenues:
 
 
 
 
 
 
 
 
 
    Diversified Industrial, Energy, Financial Services and Corporate and Other
$
849,530

 
$
721,114

 
$
630,771

 
$
542,902

 
$
320,716

Net (loss) income from continuing operations
$
(17,572
)
 
$
38,374

 
$
43,736

 
$
71,298

 
$
12,557

Income from discontinued operations
10,304

 
6,446

 
20,029

 
9,979

 
33,889

Net (loss) income
(7,268
)
 
44,820

 
63,765

 
81,277

 
46,446

Less: Net income attributable to non-controlling interests:
(287
)
 
(25,360
)
 
(22,747
)
 
(45,808
)
 
(14,699
)
Net (loss) income attributable to common unitholders
$
(7,555
)
 
$
19,460

 
$
41,018

 
$
35,469

 
$
31,747

 
 
 
 
 
 
 
 
 
 
Net (loss) income per common unit - basic:
 
 
 
 

 
 

Net (loss) income from continuing operations
$
(0.48
)
 
$
0.51

 
$
1.01

 
$
1.19

 
$
0.57

Net income from discontinued operations
0.21

 
0.14

 
0.37

 
0.22

 
0.69

Net (loss) income attributable to common unitholders
$
(0.27
)
 
$
0.65

 
$
1.38

 
$
1.41

 
$
1.26

Basic weighted average common units outstanding
28,710,220

 
29,912,993

 
29,748,746

 
25,232,985

 
25,234,827

Net (loss) income per common unit - diluted:
 
 
 
 

 
 

Net (loss) income from continuing operations
$
(0.48
)
 
$
0.49

 
$
1.01

 
$
0.81

 
$
0.52

Net income from discontinued operations
0.21

 
0.14

 
0.37

 
0.18

 
0.64

Net (loss) income attributable to common unitholders
$
(0.27
)
 
$
0.63

 
$
1.38

 
$
0.99

 
$
1.16

Diluted weighted average common units outstanding
28,710,220

 
30,798,113

 
29,774,527

 
29,669,582

 
27,482,804

 (a) Statement of operations data includes the consolidation of the results of acquired entities from their respective acquisition dates: primarily, the acquisition of HNH effective May 7, 2010, the acquisition of SWH, Inc. ("SWH") by BNS on February 2, 2011, the acquisition of DGT on July 5, 2011, the acquisition of Steel Excel on May 31, 2012, HNH's acquisition of Wolverine Joining Technologies in April 2013 and Steel Excel's acquisition of the assets of Black Hawk Energy Services, Inc. in December 2013.  

 
December 31,
 
2014
 
2013
 
2012
 
2011
 
2010
BALANCE SHEET DATA
(In thousands, except per common unit data)
Diversified Industrial, Energy, Financial Services and Corporate and Other:
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
188,983

 
$
203,980

 
$
198,027

 
$
127,027

 
$
180,684

Marketable securities
138,457

 
178,485

 
199,128

 

 

   Long-term investments
311,951

 
295,440

 
199,865

 
320,891

 
235,142

Total assets
1,492,905

 
1,522,245

 
1,378,359

 
1,129,843

 
1,091,865

Long-term debt
296,282

 
223,355

 
140,065

 
130,955

 
91,984

SPLP Partners’ capital
494,859

 
616,582

 
527,344

 
415,797

 
405,732

SPLP Partners’ capital per common unit
$
17.95

 
$
19.81

 
$
17.13

 
$
16.51

 
$
16.07



24


Item 7.  Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and related notes thereto that are available elsewhere in this Annual Report on Form 10-K. The following is a discussion and analysis of SPLP's consolidated results of operations for the years ended December 31, 2014, 2013 and 2012. In addition to historical consolidated financial information, the following discussion contains forward-looking statements that reflect our plans, estimates and beliefs. Our actual results could differ materially from those discussed in the forward-looking statements. Factors that could cause or contribute to these differences include those discussed below and elsewhere in this Annual Report on Form 10-K, particularly in “Risk Factors” in Item 1A. All monetary amounts used in this discussion are in thousands except common units and share amounts.
Overview
Steel Partners Holdings L.P. ("SPLP" or the "Company") is a global diversified holding company that engages in multiple businesses, including diversified industrial products, energy, defense, supply chain management and logistics, banking, food products and services, sports, training, education, and the entertainment and lifestyle industries.
Segment Information

The following table presents the composition of our segments, which include the operations of our consolidated subsidiaries, as well as income or loss from equity method investments and other investments. Our segments are managed separately and offer different products and services.
Diversified Industrial
Energy
Financial Services
Corporate
Handy & Harman Ltd. ("HNH") (1)
Steel Excel Inc. ("Steel Excel")(1)
WebBank (1) 
SPH Services, Inc. ("SPH Services") (1)
SL Industries, Inc. ("SLI") (2)
BNS Holding, Inc. ("BNS") (1), (3)
 
DGT Holdings Corp. ("DGT") (1)
JPS Industries, Inc. ("JPS") (2)
 
 
BNS Holdings Liquidating Trust ("BNS Liquidating Trust") (1), (3)
 
 
 
ModusLink Global Solutions, Inc. (2)
 
 
 
CoSine Communications, Inc. ("CoSine")(2)
 
 
 
SPII Liquidating Trust (2)
 
 
 
Other Investments (4)
(1)
Consolidated subsidiary
(2)
Equity method investment
(3)
The operations of BNS are included in the Energy segment through June 30, 2012. The results of the BNS Liquidating Trust are included in the Corporate and Other segment beginning July 1, 2012.
(4)
Other investments classified in Corporate and Other include various investments in available-for-sale securities in the Aerospace/Defense, Restaurant and Manufacturing industries.

25


RESULTS OF OPERATIONS

CONSOLIDATED RESULTS OF OPERATIONS

 
Year Ended December 31,
 
2014
 
2013
 
2012
Revenues
$
849,530

 
$
721,114

 
$
630,771

Cost of goods sold
587,069

 
496,757

 
416,826

Selling, general and administrative expenses
189,495

 
202,121

 
155,522

Goodwill impairment
41,450

 

 

All other expenses
6,243

 
5,711

 
26,461

Total costs and expenses
824,257

 
704,589

 
598,809

Income from continuing operations before income taxes
and equity method income (loss)
25,273

 
16,525

 
31,962

Income tax provision
24,288

 
6,477

 
13,068

Income (Loss) from equity method investments and investments held at fair value:
 
 
 
 
 
(Loss) Income of associated companies, net of taxes
(3,379
)
 
27,786

 
14,204

Income (Loss) from other investments - related party
891

 
(271
)
 
(8,329
)
(Loss) Income from investments held at fair value
(16,069
)
 
811

 
18,967

Net (loss) income from continuing operations
(17,572
)
 
38,374

 
43,736

Income from discontinued operations
10,304

 
6,446

 
20,029

Net (loss) income
(7,268
)
 
44,820

 
63,765

Net income attributable to noncontrolling interests in consolidated entities
(287
)
 
(25,360
)
 
(22,747
)
Net (loss) income attributable to common unitholders
$
(7,555
)
 
$
19,460

 
$
41,018


Revenues

Revenues in 2014 increased $128,416, or 17.8%, as compared to 2013 due to growth from acquisitions of 15.1% and core growth of 6.1%, partially offset by a decrease of 3.4%, due to other factors, primarily precious metal prices. Acquisition growth was due to PAM Fastening Technology, Inc. ("PAM") (acquired November 2013) and Wolverine Joining Technologies, LLC ("Wolverine Joining") (acquired April 2013) in the Diversified Industrial segment and the acquisition of the assets of Black Hawk Energy Services, Inc. ("Black Hawk Inc.") (acquired December 2013) and UK Elite Soccer, Inc. ("UK Elite") (acquired June 2013) in the Energy segment.
 
Revenues in 2013 increased $90,343, or 14.3%, as compared to 2012 due to growth from acquisitions of 11.9% and core growth of 8.2%, partially offset by a decrease of 5.8%, due to reduced investment revenues and other factors, primarily precious metal prices. The acquisition growth in the year ended December 31, 2013 was primarily due to Wolverine Joining and W.P. Hickman Company ("Hickman") (acquired December 2012) in the Diversified Industrial segment. In addition, the acquisition growth was impacted by the inclusion of a full year of Energy segment results in 2013 due to the May 2012 acquisition of Steel Excel, as well as the impact from Steel Excel's 2013 acquisitions of the assets of Black Hawk Inc. and UK Elite.

Costs and Expenses

Costs and expenses in 2014 increased $78,218, or 11.1%, as compared to 2013 and increased $105,780, or 17.7% in 2013, as compared to 2012, primarily due to an increase in cost of goods sold and Selling, general and administrative expenses ("SG&A").

    

26


Cost of Goods Sold
    
Cost of goods sold in 2014 increased $90,312, or 18.2%, as compared to 2013 primarily due to increases in our Diversified Industrial and Energy segments principally as a result of the acquisitions of Wolverine Joining, PAM and the assets of Black Hawk Inc., as well as additional costs due to core growth.
    
Cost of goods sold in 2013 increased $79,931, or 19.2%, as compared to 2012 primarily due to increases in our Diversified Industrial and Energy segments principally as a result of the acquisitions of Wolverine Joining, Hickman and the impact of the inclusion of a full year of Energy segment results in 2013 due to the May 2012 acquisition of Steel Excel, as well as the impact from Steel Excel's 2013 acquisitions of the assets of Black Hawk Inc. and UK Elite.

Selling, General and Administrative Expenses

SG&A expenses in 2014 decreased $12,626, or 6.2%, as compared to 2013 primarily due to a decrease in the Corporate and Other segment due to lower non-cash incentive unit expense recorded in 2014, compared to 2013, as well as a decrease in the Diversified Industrial segment. The Diversified Industrial decrease was due to a decrease from HNH's core business primarily due to the recording of insurance reimbursements, as well as lower benefit costs and reduced business development expenses, which were partially offset by higher incremental expenses from the Wolverine Joining and PAM acquisitions. These decreases were partially offset by an increase in our Financial Services segment due to higher personnel costs and an increase in our Energy segment principally as a result of the acquisition of the assets of Black Hawk Inc., additional costs due to core growth, higher business development costs and certain non-recurring benefits that were recorded in the prior year period.

SG&A expenses in 2013 increased $46,599, or 30.0%, as compared to 2012 primarily due to an increase in the Corporate and Other segment due to higher non-cash incentive unit expense recorded in 2013, compared to 2012 and an increase in the Diversified Industrial segment due to the Wolverine and Hickman acquisitions. Additionally, SG&A expenses increased in our Energy segment due to the impact of the inclusion of a full year of Energy segment results in 2013 due to the May 2012 acquisition of Steel Excel, as well as the impact from Steel Excel's 2013 acquisitions of the assets of Black Hawk Inc. and UK Elite.

Goodwill Impairment

In connection with its annual goodwill impairment test, the Company recognized an impairment charge of $41,450 in the fourth quarter of 2014 related to the goodwill associated with its Energy segment. The impairment resulted from the adverse effects the decline in energy prices had on the oil services industry and the projected results of operations of the Energy segment.

All Other Expenses
    
All other expenses increased $532 in 2014, compared to 2013, primarily from higher interest expense. All other expenses decreased $20,750 in 2013, compared to 2012, primarily from the non-recurring expense for the deferred fee liability to related party recorded in 2012, lower interest expense in 2013 and higher income from investment sales by Steel Excel in 2013, partially offset by higher asset impairment charges recorded in 2013.

(Loss) Income of Associated Companies

The (Loss) Income of associated companies in 2014 decreased by $31,165, compared to 2013, primarily due to a higher reduction in the 2014 period in the fair value of MLNK of approximately $46,100 and a higher reduction in the 2014 period in the fair value of certain investments held by Steel Excel of approximately $5,200, partially offset by higher increases in the fair value of JPS of approximately $5,100 and SLI of approximately $3,000 and the non-recurrence of a reduction in fair value recorded in the 2013 period of approximately $11,500 related to Fox & Hound (see Note 5 – "Investments" to the SPLP consolidated financial statements found elsewhere in this Form 10-K for additional information).

The Income (Loss) of associated companies in 2013 increased by $13,582, compared to 2012, primarily due to increases in the 2013 period in the fair value of MLNK, JPS and SLI of approximately $23,000, $9,000 and $7,000, respectively. The Company began accounting for MLNK and JPS as associated companies recorded at fair value in 2013. These increases were partially offset by an increased reduction in the fair value of Fox & Hound of approximately $11,000 in 2013 and the non-recurrence of an approximately $13,000 increase in fair value of Steel Excel recorded in the 2012 period, prior to Steel Excel becoming a consolidated subsidiary (see Note 5 – "Investments" to the SPLP consolidated financial statements found elsewhere in this Form 10-K for additional information).

27



(Loss) Income from Investment Held at Fair Value

(Loss) Income from investments held at fair value for the years ended December 31, 2014 and 2013 includes income or loss that the Company recognizes on its direct investment in API Group plc ("API'') and its investment in ModusLink warrants (see Note 5 - "Investments" to the SPLP consolidated financial statements found elsewhere in this Form 10-K). (Loss) Income from investments held at fair value for the year ended December 31, 2012 included income or loss that the Company recognized on its direct investment in API and Barbican Group Holdings Limited ("Barbican").


28


SEGMENT RESULTS OF OPERATIONS

The following is a summary of SPLP’s consolidated operating results by segment:
 
Year Ended December 31,
 
2014
 
2013
 
2012
Revenue:
 
 
 
 
 
Diversified industrial
$
600,468

 
$
571,164

 
$
498,713

Energy
210,148

 
120,029

 
92,834

Financial services
36,647

 
28,185

 
21,155

Corporate and other
2,267

 
1,736

 
18,069

Total Revenue
$
849,530

 
$
721,114

 
$
630,771

Net income (loss) by segment:
 
 
 
 
 
Diversified industrial
$
65,543

 
$
51,900

 
$
27,437

Energy
(26,254
)
 
12,641

 
25,034

Financial services
24,251

 
17,668

 
12,913

Corporate
(56,824
)
 
(37,358
)
 
(8,580
)
Net income from continuing operations before income taxes
6,716

 
44,851

 
56,804

Income tax provision
24,288

 
6,477

 
13,068

Net (loss) income from continuing operations
(17,572
)
 
38,374

 
43,736

Income from discontinued operations
10,304

 
6,446

 
20,029

Net income attributable to noncontrolling interests in consolidated entities
(287
)
 
(25,360
)
 
(22,747
)
Net (loss) income attributable to common unitholders
(7,555
)
 
19,460

 
41,018

Other comprehensive (loss) income
(38,779
)
 
59,446

 
(6,125
)
Comprehensive (loss) income attributable to common unitholders
$
(46,334
)
 
$
78,906

 
$
34,893



Diversified Industrial Segment

Our Diversified Industrial segment consists of the operations of HNH, a diversified holding company that owns a variety of manufacturing operations encompassing joining materials, tubing, building materials and cutting replacement products and services businesses. In addition, the segment results include income or loss from equity method investments held by SPLP. The following presents a summary of the Diversified Industrial segment operating results as reported in our consolidated financial statements:    
 
Year Ended December 31,
 
2014
 
2013
 
2012
Net Sales
$
600,468

 
$
571,164

 
$
498,713

Cost of sales
436,914

 
411,859

 
356,561

Gross profit
163,554

 
159,305

 
142,152

Selling, general and administrative expenses
116,394

 
117,920

 
103,295

Asset impairment charges
1,314

 

 

Interest expense
7,544

 
8,593

 
14,134

Derivative activity income
(1,307
)
 
(1,195
)
 
(1,353
)
Other expense, net
181

 
344

 
435

Net income from continuing operations before income taxes
39,428

 
33,643

 
25,641

Income from associated companies:
 
 
 
 
 
JPS
14,277

 
9,204

 

SLI
11,838

 
9,053

 
1,796

Total Segment Income
$
65,543

 
$
51,900

 
$
27,437


29


Comparison of the Years ended December 31, 2014 and 2013
Net sales in 2014 increased by $29,304, or 5.1% when compared to 2013. The change in net sales reflects approximately $26,700 in incremental sales associated with HNH's recent acquisitions and a net increase from core growth of approximately $27,800, which were partially offset by a reduction of approximately $25,200 in net sales due to lower average precious metal prices, principally due to silver. The acquisitions of Wolverine Joining and PAM, net of sales volume transferred to or from the acquired business units as part of HNH's integration activities, provided incremental net sales of approximately $16,700 and $10,000, respectively, during the year ended December 31, 2014. Excluding the impact of these acquisitions, value added sales, defined as net sales less revenue from the direct purchase and resale of precious metals, increased by approximately $27,800 on higher volume, primarily from the Building Materials and Joining Materials groups, which were partially offset by lower sales volume from the Tubing group. The average silver market price was approximately $19.05 per troy ounce in 2014, as compared to $23.79 per troy ounce in 2013.
Gross profit in 2014 increased by $4,249, or 2.7%, when compared to 2013, and, as a percentage of net sales, decreased to 27.2% as compared to 27.9% in 2013. The decrease was principally due to unfavorable production variances in the Tubing group driven by lower sales volume, along with higher international freight costs and a change in product mix in the Building Materials group, which were partially offset by favorable sales mix in the Joining Materials group. The change in gross profit reflects approximately $4,000 in incremental gross profit associated with HNH's recent acquisitions and a net increase from core growth of approximately $4,000, which were partially offset by a reduction of approximately $3,000 in gross profit due to lower average precious metal prices. The acquisitions of Wolverine Joining and PAM, net of sales volume transferred to or from the acquired business units as part of HNH's integration activities, provided incremental gross profit of approximately $1,200 and $2,800, respectively, for the year ended December 31, 2014. Higher sales volume from the Building Materials and Joining Materials groups led to the increase in gross profit from our core business, which was partially offset by unfavorable production variances, leading to a decline in gross profit margin, in the Tubing group due to lower sales volume.

Selling, general and administrative ("SG&A") expenses decreased by $1,526, or 1.3%, in 2014, compared to 2013. The lower SG&A expense in 2014 was driven by a decrease of approximately $3,400 from HNH's core business in 2014, primarily due to the recording of insurance reimbursements totaling $3,100, as compared to similar reimbursements of $1,100 in 2013, as well as lower benefit costs and reduced business development expenses, which were partially offset by approximately $3,100 in incremental expenses from the Wolverine Joining and PAM acquisitions.

In the fourth quarter of 2014, non-cash asset impairment charge of $700 was recorded related to certain equipment owned by the Company's Joining Materials group located in Toronto, Canada, which will either be sold or scrapped as part of HNH's continued integration activities associated with the Wolverine Joining acquisition. In addition, HNH recorded a $600 asset impairment charge associated with certain unused, real property owned by one of HNH's businesses located in Atlanta, Georgia in the fourth quarter of 2014.

Interest expense decreased by $1,049, or 12.2%, in 2014, compared to 2013. Interest expense for 2013 included a loss associated with HNH's redemption of its 10% subordinated secured notes due 2017 ("Subordinated Notes"), including the redemption premium and the write-off of remaining deferred finance costs and unamortized debt discounts. HNH's average interest rate was also lower for 2014 principally due to HNH's redemption of the Subordinated Notes and a decrease in the applicable interest rate margin associated with HNH's new senior credit facility, but was offset by increased average borrowing levels in the second half of 2014.
 
Derivative activity income was $1,307 in 2014 and $1,195 in 2013. The income in 2014 was attributable to HNH's commodity contracts, driven by a 19.9% average silver price decrease during the year. Of the income in 2013, approximately $1,988 was attributable to precious metal contracts driven by a 23.7% average silver price decrease during the year, partially offset by a loss of $793 on the embedded derivative features of HNH's Subordinated Notes and related warrants.

Comparison of the Years ended December 31, 2013 and 2012
Net sales in 2013 increased by $72,451, or 14.5% when compared to 2012. Value added sales increased by $92,200 on higher volume, primarily from HNH's Joining Materials group, including the acquisition of Wolverine Joining, the Tubing group and the Building Materials group, and were partially offset by the impact of lower average precious metal prices of approximately $19,800, principally due to silver. The average silver market price was approximately $23.79 per troy ounce in 2013, as compared to $31.17 per troy ounce in 2012. The acquisition of Wolverine Joining provided incremental net sales of approximately $39,800 in the year ended December 31, 2013 and the December 31, 2012 acquisition of Hickman provided incremental net sales of $17,100 in 2013.

30



Gross profit in 2013 increased by $17,153, or 12.1%, when compared to 2012, and, as a percentage of net sales, decreased to 27.9% as compared to 28.5% in the same period in 2012. The decrease was due to unfavorable product mix and reduced profit generated on the material portion of HNH's products in the Joining Materials group, due principally to lower precious metal prices, which were partially offset by favorable product mix in the Tubing group and increased sales of higher-margin branded fasteners in the Building Materials group. The acquisition of Wolverine Joining provided incremental gross profit of approximately $3,600 during the year ended December 31, 2013, and the acquisition of Hickman provided incremental gross profit of approximately $7,500 in 2013.

Selling, general and administrative ("SG&A") expenses increased by $14,625, or 14.2%, in 2013, compared to 2012. This increase was primarily due to HNH's recent acquisitions, including related integrations costs and acquisition fees, as well as overall higher sales volume in 2013. Incremental costs directly associated with the recent acquisitions totaled approximately $7,200. These increases were partially offset by an insurance reimbursement of $1,100 received for previously incurred environmental remediation costs.

Interest expense decreased by $5,541, or 39.2%, in 2013, compared to 2012. Interest expense for the year ended December 31, 2013 included a loss associated with the redemption of HNH's Subordinated Notes, including the redemption premium and the write-off of remaining deferred finance costs and unamortized debt discounts. This loss was offset by a lower average interest rate in the year ended December 31, 2013, principally due to HNH's debt refinancing in the fourth quarter of 2012, which resulted in the write-off of $1,100 in prior debt issuance costs in that period, and the redemption of the Subordinated Notes.

Derivative activity income was $1,195 in 2013, and $1,353 in 2012. Of the income in 2013, approximately $1,988 was attributable to precious metal contracts, partially offset by a loss of $793 on the embedded derivative features of HNH's Subordinated Notes and related warrants. Of the income in 2012, approximately $522 was attributable to precious metal contracts and approximately $831 was attributable to embedded derivative features of HNH's Subordinated Notes and related warrants.

Energy Segment

The results of SPLP's Energy segment for the years ended December 31, 2014 and 2013 consists of its consolidated subsidiary Steel Excel. The results for the year ended December 31, 2012 include Steel Excel, from its acquisition date of May 31, 2012, and the results of BNS which include the results of Sun Well prior to its sale to Steel Excel. Steel Excel provides drilling and production services to the oil and gas industry. Through its wholly-owned subsidiary Steel Sports Inc., Steel Excel focuses on providing event-based sports and other health-related services. SXCL also makes significant non-controlling investments in entities in industries related to its businesses as well as entities in other unrelated industries and continues to identify business acquisition opportunities in both the Energy and Sports industries as well as in other unrelated industries.The operations of Steel Sports are not considered material to SPLP and are included in our Energy segment.

31


The following presents a summary of the Energy segment operating results:
 
Year Ended December 31,
 
2014
 
2013
 
2012 (a)
Net revenues
$
210,148

 
$
120,029

 
$
92,834

Cost of sales
149,923

 
84,197

 
60,075

Gross profit
60,225

 
35,832

 
32,759

Selling, general and administrative expenses
42,798

 
27,591

 
21,115

Goodwill impairment
41,450

 

 

Interest expense
3,177

 
1,725

 
737

Other income, net
(7,016
)
 
(6,988
)
 
(988
)
Net (loss) income from continuing operations before income taxes
(20,184
)
 
13,504

 
11,895

(Loss) Income from associated companies (b)
(6,070
)
 
(863
)
 
13,139

Total segment (loss) income
$
(26,254
)
 
$
12,641

 
$
25,034

(a) Pro forma revenue and segment income for 2012 was $123,876 and $27,998, respectively and includes the results of Steel Excel prior to SPLP's acquisition of Steel Excel in May 2012.
(b) Amount in 2014 represents Steel Excel's investments in API Tech, a sports business and iGo.
Amount in 2013 represents Steel Excel's investments in a sports business and iGo.
Amount in 2012 represents equity method income related to SPLP's investment in Steel Excel, prior to acquiring a majority interest on May 31, 2012.

Recent developments in the oil services industry will have a significant adverse effect on the results of operations of
the Company's Energy segment in 2015. The decline in energy prices, particularly the significant decline in oil prices, has
resulted in our customers, the oil and gas exploration and production companies (the "E&P Companies"), cutting back on their planned capital expenditure budgets for 2015, which will result in significantly reduced drilling activity. In addition, the E&P Companies are seeking price concessions from their service providers to offset their drop in revenue. Such actions on the part of the E&P Customers had little impact on the Energy segment's operations in 2014, but have had an adverse effect on its operations beginning in the early part of 2015. The Energy segment has experienced a decline in rig utilization in all of its operations and prices for its services have declined. Steel Excel has taken certain actions and instituted cost-reduction measures in an effort to mitigate these adverse effects. The Energy segment's results of operations going forward will be dependent on the price of oil in the future, the resulting drilling rig counts in the basins in which it operates, and Steel Excel's ability to return to the pricing and service levels of the past as oil prices increase. Although the impact on the Energy segment's results of operations in 2015 is very uncertain, the drilling rig count in North America has declined 35% in the early part of 2015 from its high mark
in 2014, which has directly impacted the segment's rig utilization, and the pricing for the segment's services has declined in the
low-to-mid double-digit teens levels in the early part of 2015. As a result, Steel Excel expects the Energy business to experience a significant decline in operating income in 2015 as compared to the 2014 results. As a result of the adverse effects the decline in energy prices had on the oil services industry and the projected results of operations of the Energy segment, the Company recognized a goodwill impairment charge of $41,450 in the fourth quarter of 2014. After the impairment charge, the carrying value of the goodwill in the Energy segment was $19,571 at December 31, 2014. A change in assumptions, including lower long-term growth rates, higher operating costs, or higher discount rates could cause a change in the estimated fair value of the Energy segment, and therefore could result in an additional impairment of goodwill, which would have an adverse effect on our results of operations.

Comparison of the Years ended December 31, 2014 and 2013
    
In 2014, net revenues increased $90,119, or 75.1%, when compared to 2013. The increase was primarily due to $75,500 in revenues from the acquisition of the assets of Black Hawk Inc., which was acquired in December 2013, and an increase in revenues of $6,500 in other energy operations due primarily to an increase in rig utilization for its snubbing services and an increase in revenues from its flow back services related to new equipment purchased in 2014. Net revenues from Steel Excel's sports businesses increased by $8,100 primarily as a result of $6,800 in revenues from UK Elite, which was acquired in June 2013, and an increase in revenues of $1,100 from baseball operations.
    
Gross profit in 2014, increased by $24,393, or 68.1%, as compared to 2013, and as a percentage of revenue declined slightly to 28.7% from 29.9%. Gross profit from Steel Excel's energy businesses increased by $21,100, and as a percentage of revenue declined slightly to 26.5% in 2014 from 27.0% in 2013. The gross profit increase was as a result of $22,400 in gross

32


profit from the acquisition of the assets of Black Hawk Inc., which was acquired in December 2013, partially offset by a decrease in gross profit of $1,200 in Steel Excel's other energy operations. Gross profit from Steel Excel's sports businesses in the 2014 period increased by $3,400 primarily as a result of $2,700 in gross profit from UK Elite and an increase in gross profit of $600 from baseball operations.

SG&A expenses in 2014 increased by $15,207, as compared to 2013. SG&A expenses in Steel Excel's energy businesses increased by $3,100 as a result of $3,000 of costs incurred at Black Hawk Inc. in the 2014 period, whose assets were acquired in December 2013. SG&A expenses in Steel Excel's sports businesses increased by $3,800 primarily as a result of costs incurred at UK Elite, including costs associated with operating the businesses acquired in the current period. Other SG&A expenses increased by $6,100 primarily as a result of increased costs incurred for services provided by affiliates of Steel Excel and an increase in stock-based compensation expense in 2014.
    
A goodwill impairment charge of $41,450 was recorded in the fourth quarter of 2014 as a result of the adverse effects the decline in energy prices had on the oil services industry and the projected results of operations of the Energy segment.
    
Interest expense of $3,177 in 2014 decreased by $1,452, as compared to 2013, primarily as a result of the borrowings under Steel Excel's Amended Credit Agreement being outstanding for the full year in 2014.
    
Other income, net of $7,016 in 2014 primarily represented investment income of $6,600 and realized gains on the sale of marketable securities of $3,800, partially offset by a loss of $1,800 recognized on financial instrument obligations, a loss of $600 recognized upon initially accounting for an investment under the equity method of accounting at fair value, and a foreign exchange loss of $1,100.

Comparison of the Years ended December 31, 2013 and 2012
    
Net revenues in 2013 increased $27,195, or 29.3%, when compared to 2012. The increase was primarily due to full year of Steel Excel's results in 2013 due to the May 2012 acquisition of Steel Excel, as well as the impact from Steel Excel's 2013 acquisitions of the assets of Black Hawk Inc. and UK Elite.
    
Gross profit in 2013 increased by $3,073, or 9.4%, as compared to 2012, and as a percentage of revenue declined to 29.9% from 35.3%. The increase in gross profit was commensurate with the increase in revenues as explained above.

SG&A expenses in 2013 increased by $6,476, as compared to 2012. The increase in SG&A expenses was commensurate with the increase in revenues as explained above.
    
Interest expense of $1,725 in 2013 increased by $988, as compared to 2013, primarily as a result of increased interest expense primarily associated with the borrowings under the Steel Energy Credit Agreement.
    
Other income, net in 2013 and 2012 primarily represented realized gains and losses on the sale of marketable securities.

    

33


Financial Services Segment

The Financial Services segment, for financial reporting purposes, consists of our consolidated and wholly-owned subsidiary, WebFinancial Holding Corporation, which conducts financial operations through its wholly-owned subsidiary, WebBank (which operates in niche banking markets), and WF Asset Corp (which consists of a portfolio of investments). WebBank provides commercial and consumer loans and services. WebBank's deposits are insured by the FDIC up to the current limits, and the bank is examined and regulated by the FDIC and UDFI.
The following presents a summary of the Financial Services segment operating results as reported in our consolidated financial statements:
 
Year Ended December 31,
 
2014
 
2013
 
2012
Revenue:
 
 
 
 
 
Interest income (including fees)
$
24,640

 
$
18,898

 
$
16,051

Non-interest income
12,007

 
9,287

 
5,104

 
36,647

 
28,185

 
21,155

Costs and expenses:
 
 
 
 
 
Selling, general and administrative expenses
11,808

 
9,933

 
7,700

Interest expense
638

 
496

 
957

Recovery of loan losses
(50
)
 
(80
)
 
(416
)
Asset impairment charge

 
168

 
1

 
12,396

 
10,517

 
8,242

Total segment income
$
24,251

 
$
17,668

 
$
12,913


Net Interest Income, Margin and Interest Rate Spreads

Net interest income is the difference between interest earned on interest-bearing assets and interest incurred on interest-bearing liabilities. By its nature, net interest income is especially vulnerable to changes in the mix and amounts of interest-earning assets and interest bearing liabilities. In addition, changes in the interest rates and yields associated with these assets and liabilities can significantly impact net interest income. The following table summarizes the average balances, the amount of interest earned or incurred and the applicable yields for interest earning assets and the costs of interest-bearing liabilities that generate net interest income. For purposes of calculating the yields in these schedules, the average loan balances also include the principal amounts of nonaccrual and restructured loans. However, interest received on nonaccrual loans is included in income only to the extent that cash payments have been received and not applied to principal reductions. In addition, interest on restructured loans is generally accrued at reduced rates.

















34


 
Year Ended December 31,
 
2014
 
2013
 
2012
 
Average
Interest
 
 
Average
Interest
 
 
Average
Interest
 
 
Outstanding
Earned/
Yield/
 
Outstanding
Earned/
Yield/
 
Outstanding
Earned/
Yield/
 
Balance
Paid
Rate
 
Balance
Paid
Rate
 
Balance
Paid
Rate
 
 
 
 
 
 
 
 
 
 
 
 
Interest Earning Assets:
 
 
 
 
 
 
 
 
 
 
 
Loans Receivable
$
94,484

$
24,433

25.9
%
 
$
62,110

$
18,704

30.1
%
 
$
45,377

$
15,822

34.8
%
Mortgaged-Backed Security
70


%
 
58


0.1
%
 


%
Available for Sale Investments
566

14

2.5
%
 
577

13

2.3
%
 
523

16

3.1
%
Fed Funds Sold
637

1

0.1
%
 
692

1

0.1
%
 
1,634

2

0.1
%
Interest Bearing Deposits in other Banks
87,820

192

0.2
%
 
73,345

180

0.3
%
 
83,127

211

0.3
%
Total Interest-Earning Assets
183,577

24,640

13.4
%
 
136,782

18,898

11.4
%
 
130,661

16,051

11.7
%
 
 
 
 
 
 
 
 
 
 
 
 
Non Interest-Earning Assets
1,811

 
 
 
1,286

 
 
 
1,240

 
 
Total Assets
$
185,388

 
 
 
$
138,068

 
 
 
$
131,901

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest-Bearing Liabilities:
 
 
 
 
 
 
 
 
 
 
 
Money Market Accounts
$
58,232

87

0.2
%
 
$
29,312

62

0.2
%
 
$
13,789

59

0.4
%
Time Deposits
88,344

551

0.6
%
 
72,754

434

0.6
%
 
70,677

900

1.3
%
Other Borrowings



 



 



Total Interest-Bearing Liabilities
146,576

638

0.4
%
 
102,066

496

1.3
%
 
84,466

959

1.5
%
 
 
 
 
 
 
 
 
 
 
 
 
Other Non Interest-Bearing Liabilities
3,923

 
 
 
3,347

 
 
 
18,887

 
 
Total Liabilities
150,499

 
 
 
105,413

 
 
 
103,353

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Shareholder's Equity
34,889

 
 
 
32,655

 
 
 
28,548

 
 
Total Liabilities & Shareholder's Equity
$
185,388

 
 
 
$
138,068

 
 
 
$
131,901

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net Interest Income
 
$
24,002

 
 
 
$
18,402

 
 
 
$
15,092

 
 
 
 
 
 
 
 
 
 
 
 
 
Spread on Average Interest-Bearing Funds
 
 
13
%
 
 
 
13.3
%
 
 
 
11.2
%
Net Interest Margin
 
 
13.1
%
 
 
 
13.5
%
 
 
 
11.6
%
Return on Assets
 
 
8.4
%
 
 
 
8.2
%
 
 
 
6.2
%
Return on Equity
 
 
44.5
%
 
 
 
29.5
%
 
 
 
24.4
%
Equity to Assets
 
 
18.8
%
 
 
 
23.2
%
 
 
 
21.5
%

WebBank has several lending arrangements with companies where it originates private label credit card and other loans for consumers and small businesses. These loans are classified as held for sale and are typically sold after origination. As part of these arrangements WebBank earns origination fees that are recorded in interest income, and which increase WebBank's yield on loans.
Interest Income

Interest income increased by $5,742, or 30.4%, in 2014, compared to 2013 due primarily to the addition of new lending programs and to increased volume in the existing lending programs.

Interest income increased by $2,847, or 17.7%, in 2013, compared to 2012, due primarily to the addition of two new lending programs with favorable rates.

Interest Expense

Interest expense represents interest accrued on WebBank depositor accounts.


35


Interest expense increased $142, or 28.6%, in 2014, compared to 2013, primarily due to a larger deposit balance to support loan growth.
 
Interest expense decreased $461, or 48.2%, in 2013, compared to 2012, due to primarily due to a decrease in interest rates.

The following table presents the effects of changing rates and volumes on WebBank’s net interest income for the periods indicated. The rate column shows the effects attributable to changes in rate (changes in rate multiplied by prior volume). The volume column shows the effects attributable to changes in volume (changes in volume multiplied by prior rate). The total column represents the sum of the prior columns. For purposes of this table, changes attributable to both rate and volume, which cannot be segregated, have been allocated proportionately, based on the changes due to rate and the changes due to volume.
 
Year Ended December 31,
 
2014 vs 2013
 
2013 vs 2012
 
2012 vs. 2011
 
Increase/
Increase/
Total
 
Increase/
Increase/
Total
 
Increase/
Increase/
Total
Rate/Volume
(Decrease)
(Decrease)
Increase/
 
(Decrease)
(Decrease)
Increase/
 
(Decrease)
(Decrease)
Increase/
 
Due to Volume
Due to Rate
(Decrease)
 
Due to Volume
Due to Rate
(Decrease)
 
Due to Volume
Due to Rate
(Decrease)
 
 
 
 
 
 
 
 
 
 
 
 
Interest Earning Assets:
 
 
 
 
 
 
 
 
 
 
 
Loans Receivable
$
7,860

$
(2,130
)
$
5,730

 
$
4,572

$
(1,691
)
$
2,881

 
$
1,675

$
3,549

$
5,224

Available For Sale Investments

1

1

 
5

(8
)
(3
)
 



Fed Funds Sold



 
(1
)
1


 



Interest Bearing Deposits in other Banks
26

(15
)
11

 
(24
)
(5
)
(29
)
 
75

1

76

Total Interest-Earning Assets
7,886

(2,144
)
5,742

 
4,552

(1,703
)
2,849

 
1,750

3,550

5,300

 
 
 
 
 
 
 
 
 
 
 
 
Interest-Bearing Liabilities:
 
 


 
 
 
 
 
 
 
 
Money Market Accounts
36

(11
)
25

 
10

(5
)
5

 
19

6

25

Time Deposits
97

21

118

 
27

(493
)
(466
)
 
(139
)
130

(9
)
Total Interest-Bearing Liabilities
133

10

143

 
37

(498
)
(461
)
 
(120
)
136

16

Net Effect on Net Interest Income
$
7,753

$
(2,154
)
$
5,599

 
$
4,515

$
(1,205
)
$
3,310

 
$
1,870

$
3,414

$
5,284

    
Noninterest Income

Noninterest income increased $2,720, or 29.3% in 2014, compared to 2013, due primarily to the addition of new lending programs and increased volume in the existing lending programs.

Noninterest income increased $4,183, or 82.0% in 2013, compared to 2012, due primarily to increased fee income from a new lending program.
    
Recovery of Loan Losses

At December 31, 2014, WebBank had an estimated $57 of impaired loans, of which $4 is guaranteed by the USDA or SBA, and an allowance for loan losses of $558. At December 31, 2013 WebBank had an estimated $2,564 of impaired loans, of which $2,121 was guaranteed by USDA or SBA, and an allowance for loan losses of $424.

The recovery of provision for loan losses is primarily related to WebBank's portfolio of local real estate loans. WebBank routinely obtains appraisals on underlying collateral of nonperforming loans and records a provision for losses if the value of the collateral declines below the value of the loans. WebBank was able to recover previously charged off loans and workout or sell nonperforming loans resulting in net benefit in the provision for loan losses of $50, $80 and $416 in 2014, 2013 and 2012 respectively.

Selling General and Administrative Expenses

The increase in SG&A expenses of $1,875, or 18.9%, in 2014, compared to 2013, was due primarily to higher personnel expense in 2014 due to growth in the business.

36


The increase in SG&A expenses of $2,233, or 29.0%, in 2013, compared to 2012, was due primarily to higher personnel expense in 2013, partially offset by a benefit in the reserve for off balance sheet credit exposures of $175, lower professional fees and lower other miscellaneous costs.
Balance Sheet Analysis
Loan Portfolio
As of December 31, 2014, net loans accounted for 52% of WebBank's total assets compared to 44% at the end of 2013. The following table presents WebBank's loans outstanding by type of loan as of December 31, 2014 and the five most recent year-ends.
 
As of December 31,
 
2014
 
2013
 
2012
 
2011
 
2010
 
Amount
%
 
Amount
%
 
Amount
%
 
Amount
%
 
Amount
%
Real Estate Loans:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Construction
$


 
$


 
$


 
$

%
 
$
988

3.3
%
Commercial - Owner Occupied
1,650

1.4
%
 
4,671

6.1
%
 
6,724

9.8
%
 
8,340

18.8
%
 
9,546

31.9
%
Commercial - Other
264

0.2
%
 
242

0.3
%
 
318

0.5
%
 
300

0.7
%
 
276

0.9
%
Total Real Estate Loans
1,914

1.6
%
 
4,913

6.4
%
 
7,042

10.3
%
 
8,640

19.5
%
 
10,810

36.1
%
Commercial and Industrial:
75,706

63.9
%
 
46,702

60.9
%
 
9,832

14.4
%
 
4,344

9.8
%
 
6,219

20.8
%
Total Commercial and Industrial
75,706

63.9
%
 
46,702

60.9
%
 
9,832

14.4
%
 
4,344

9.8
%
 
6,219

20.8
%
Loans Held for Sale:
40,886

34.5
%
 
25,125

32.7
%
 
51,505

75.3
%
 
31,363

70.7
%
 
12,903

43.1
%
Total Loans
118,506

100.0
%
 
76,740

100
%
 
68,379

100
%
 
44,347

100
%
 
29,932

100
%
Less:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Deferred Fees and Discounts
(20
)
 
 

 
 
21

 
 
(56
)
 
 
(64
)
 
Allowance for Loan Losses
(557
)
 
 
(424
)
 
 
(285
)
 
 
(529
)
 
 
(1,541
)
 
Total Loans Receivable, Net
$
117,929

 
 
$
76,316

 
 
$
68,115

 
 
$
43,762

 
 
$
28,327

 

The following table includes a maturity profile for the loans that were outstanding at December 31, 2014, substantially all of which have floating or adjustable interest rates:
Due During Years Ending December 31,
Real Estate
 
Commercial & Industrial
 
Loans Held for Sale
2015
$
96

 
$
1,142

 
$
40,886

2016-2020
654

 
31,970

 

2021 and following
1,164

 
42,594

 

Total
$
1,914

 
$
75,706

 
$
40,886


Nonperforming Lending Related Asset

Total nonaccrual loans at December 31, 2014 decreased by $121 from December 31, 2013. The decrease included $28 for commercial owner occupied loans and $93 for commercial and industrial loans.

37


 
December 31,
 
2014
 
2013
 
2012
 
2011
 
2010
Non-Accruing Loans:
 
 
 
 
 
 
 
 
 
Commercial Real Estate - Construction
$

 
$

 
$

 
$

 
$
988

Commercial Real Estate - Owner Occupied
374

 
403

 
147

 
914

 
207

Commercial and Industrial
16

 
109

 
94

 
97

 
419

Total
390

 
512

 
241

 
1,011

 
1,614

Accruing Loans Delinquent:
 
 
 
 
 
 
 
 
 
90 Days or More
52

 

 
2,581

 

 

Total
52

 

 
2,581

 

 

Restructured Loans:
 
 
 
 
 
 
 
 
 
Commercial Real Estate - Owner Occupied

 

 

 
1

 
18

Commercial and Industrial

 

 

 

 
7

Total

 

 

 
1

 
25

Foreclosed Assets:
 
 
 
 
 
 
 
 
 
Commercial Real Estate - Owner Occupied
111

 
149

 
68

 
333

 
38

Commercial and Industrial

 

 

 

 
53

Total
111

 
149

 
68

 
333

 
91

Total Non-Performing Assets
$
553

 
$
661

 
$
2,890

 
$
1,345

 
$
1,730

Total as a Percentage of Total Assets
0.2
%
 
0.4
%
 
2.1
%
 
1.1
%
 
2
%

Summary of Loan Loss Experience
The methodologies used to estimate the Allowance for Loan Losses ("ALLL") depend upon the impairment status and portfolio segment of the loan. Loan groupings are created for each loan class and are then graded against historical and industry loss rates.

After applying historic loss experience, as described above, we review the quantitatively derived level of ALLL for each segment using qualitative criteria. We track various risk factors that influence our judgment regarding the level of the ALLL across the portfolio segments.

38


The following table summarizes activity in WebBank's allowance for loan and lease losses for the periods indicated:
 
December 31,
 
2014
 
2013
 
2012
 
2011
 
2010
Balance at Beginning of Period
$
424

 
$
285

 
$
529

 
$
1,541

 
$
2,193

Charge Offs:
 
 
 
 
 
 
 
 
 
Commercial Real Estate - Construction

 

 

 
(440
)
 
(80
)
Commercial Real Estate - Owner Occupied

 

 
(1
)
 
(422
)
 
(482
)
Commercial Real Estate - Other