NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
All amounts used in the Notes to Consolidated Financial Statements are in thousands, except common and preferred units, per common and preferred unit, share and per share data.
1. NATURE OF THE BUSINESS AND BASIS OF PRESENTATION
Nature of the Business
Steel Partners Holdings L.P. ("we," "our," "SPLP" or "Company") is a diversified global holding company that engages in multiple businesses through consolidated subsidiaries and other interests. It owns and operates businesses and has significant interests in various companies, including diversified industrial products, energy, defense, supply chain management and logistics, banking and youth sports. SPLP operates through the following segments: Diversified Industrial, Energy and Financial Services, which are managed separately and offer different products and services. For additional details related to the Company's reportable segments, see Note 18 - "Segment Information." Steel Partners Holdings GP Inc. ("SPH GP"), a Delaware corporation, is the general partner of SPLP and is wholly-owned by SPLP. The Company is managed by SP General Services LLC ("Manager"), pursuant to the terms of an amended and restated management agreement ("Management Agreement") discussed in further detail in Note 17 - "Related Party Transactions."
Impact of the Ongoing Novel Coronavirus ("COVID-19") Pandemic
The ongoing COVID-19 pandemic (in particular, the emergence of new variants of the virus across the globe) has caused, and continues to cause, significant disruptions in the U.S. and global economies. For example, national and local governments in the United States and around the world continue to implement measures to prevent the spread of COVID-19 and its variants, including travel bans, prohibitions on group events and gatherings, shutdowns of certain businesses, quarantines, curfews, and recommendations to practice physical distancing. Such measures have restricted and continue to restrict individuals’ daily activities and curtail or cease many businesses’ normal operations.
As of the date of this filing, for the period ended June 30, 2022, the Company has not experienced any significant disruptions to its businesses as compared to the same period in the prior fiscal year. Despite indications of economic recovery, the severity of the impact of the COVID-19 pandemic on the Company’s business in 2022 and beyond will depend on a number of uncertain factors and trends. Such factors and trends include, but are not limited to: the duration and severity of the virus and its current variants; the emergence of new variant strains; the availability and widespread use of vaccines; the impact of the global business and economic environment on liquidity and the availability of capital; and governmental actions that have been taken, or may be taken in the future, to mitigate adverse economic or other impacts or to mitigate the spread of the virus and its variants. The Company continues to monitor for any developments or updates to COVID-19 guidelines from public health and governmental authorities, as well as the protection of the health and safety of its personnel, and is continuously working to ensure that its health and safety protocols, business continuity plans and crisis management protocols are in place to help mitigate any negative impacts of the COVID-19 pandemic on the Company’s employees, business or operations.
Proposed Merger with Steel Connect, Inc.
On November 19, 2020, the Board of Directors of the Company sent a letter to Steel Connect, Inc. ("Steel Connect" or "STCN") setting forth a non-binding expression of interest to acquire all of the outstanding shares of Steel Connect common stock, par value $0.01 per share, not already owned by the Company and its subsidiaries. On March 24, 2022, the Company delivered a revised expression of interest in a potential combination of the Company and Steel Connect (the "Enhanced Proposal") to the Special Committee of the Board of Directors of Steel Connect ("STCN Special Committee"), which altered and increased the consideration proposed in its November 19, 2020 proposal. Under the Enhanced Proposal, the stockholders of Steel Connect would receive cash consideration of $1.30 per share, representing a premium of approximately 10% over the closing price of the Steel Connect’s common stock on March 23, 2022 and about an 83.1% premium over the closing share price on November 19, 2020.
On May 27, 2022, the Company communicated a further revised expression of interest (the "Further Enhanced Proposal") to the STCN Special Committee, which altered and increased the consideration proposed in the Enhanced Proposal. Under the Further Enhanced Proposal, the stockholders of Steel Connect would receive both (a) cash consideration of $1.35 per share, representing a premium of approximately 12.5% over the closing price of the Steel Connect’s common stock on May 31, 2022 and a premium of approximately 90.1% over the closing share price of Steel Connect’s common stock on November 19, 2020, and (b) a contingent value right to receive their pro rata share of proceeds, to the extent such proceeds exceed $80,000, if
Steel Connect’s ModusLink business were to be sold during the two years period following completion of the proposed combination of the Company and Steel Connect.
On June 12, 2022, Steel Connect, the Company and SP Merger Sub, Inc., a wholly-owned subsidiary of the Company ("Merger Sub"), entered into an agreement and plan of merger (the "Merger Agreement"), pursuant to which Merger Sub will merge with and into Steel Connect (the "Merger"), with Steel Connect surviving the Merger as a wholly-owned subsidiary of the Company. The Merger Agreement provides that each share of Steel Connect’s common stock issued and outstanding immediately prior to the effective time of the Merger (other than dissenting shares and shares owned by Steel Connect, the Company or any of their respective subsidiaries) will, subject to the terms and conditions set forth in the Merger Agreement, be converted into the right to receive (i) $1.35 in cash, without interest and (ii) one contingent value right to receive a pro rata share of the proceeds received by Steel Connect, the Company or any of their affiliates with respect to the sale, transfer or other disposition of all or any portion of the assets currently owned by ModusLink within two years of the Merger's closing date, to the extent such proceeds exceed $80,000 plus certain related costs and expenses. The Company and certain of its affiliates have also entered into a Voting and Support Agreement pursuant to which, among other things, they have agreed to vote all shares of common stock and Series C Preferred Stock beneficially owned by them in favor of the adoption of the Merger Agreement and the Merger and any alternative acquisition agreement approved by the Steel Connect’s board of directors (acting on the recommendation of the STCN Special Committee).
The Merger Agreement includes a "go-shop" period, during which the Company could actively solicit and consider alternative acquisition proposals. The "go-shop" period expired at 11:59 p.m. Eastern time on July 12, 2022.
The closing of the Merger is conditioned upon receipt of approval of the Merger from (i) the holders of a majority in voting power of the outstanding shares of common stock and Series C Preferred Stock of Steel Connect (voting on an as converted to shares of common stock basis), voting together as a single class, (ii) a majority of the outstanding shares of common stock of Steel Connect not owned, directly or indirectly, by the Company and its affiliates and related parties, and any other officers or directors of Steel Connect and (iii) the holders of a majority of the outstanding shares of Series C Preferred Stock of Steel Connect, voting as a separate class, as well as other customary closing conditions. Accordingly, there can be no assurance that the Company will be able to complete the Merger on the expected timeline or at all.
The board of directors of Steel Connect, acting on the unanimous recommendation of the STCN Special Committee, and the Board of Directors of Steel Partner Holdings GP Inc., the general partner of the Company, approved the Merger Agreement and the transactions contemplated by the Merger Agreement (such transactions, collectively, the "Transactions") and resolved to recommend the Steel Connect stockholders adopt the Merger Agreement and approve the Transactions. The STCN Special Committee, which is comprised solely of independent and disinterested directors of Steel Connect who are unaffiliated with Steel Holdings, exclusively negotiated the terms of the Merger Agreement with the Company, with the assistance of its independent financial and legal advisors.
Subject to the satisfaction of all of the conditions to closing, including the receipt of the Steel Connect stockholder approvals, the Merger is expected to close in the second half of 2022.
Basis of Presentation
The accompanying unaudited consolidated financial statements as of June 30, 2022 and for the three and six-month periods ended June 30, 2022 and 2021, which have been prepared by the Company in accordance with the rules and regulations of the Securities and Exchange Commission ("SEC") for interim periods, include the accounts of the Company and its consolidated subsidiaries. In the opinion of management, all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation have been reflected herein. The results of operations for the three and six months ended June 30, 2022 are not necessarily indicative of the operating results for the full year. The accompanying unaudited consolidated financial statements should be read in conjunction with the Company's audited consolidated financial statements included in its Annual Report on Form 10-K for the fiscal year ended December 31, 2021 ("Annual Report" or "Form 10-K"), from which the consolidated balance sheet as of December 31, 2021 has been derived.
The Company's fiscal quarter ends on the last day of the calendar quarter; however, for certain subsidiaries of the Company, the fiscal quarter periods end on the Saturday that is closest to the last day of the calendar quarter, except for the last quarterly period of the fiscal year. The Company and all its subsidiaries close their books for fiscal years on December 31. For ease of presentation, the quarterly financial statements included herein are described as ending on the last day of the calendar quarter.
Certain financial information that is normally included in annual financial statements prepared in accordance with U.S. generally accepted accounting principles ("U.S. GAAP"), but is not required for interim reporting purposes, has been condensed or omitted. Management must make estimates and assumptions that affect the consolidated financial statements and the related footnote disclosures. While management uses its best judgment, actual results may differ from those estimates. Certain reclassifications have been made to the prior period financial statements and notes to conform to the current period presentation.
Accounting Standards Not Yet Effective
In June 2016, the FASB issued ASU 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (ASU 2016-13), which was further updated and clarified by the FASB through issuance of additional related ASUs. This new standard changes the impairment model for most financial assets that are measured at amortized cost and certain other instruments, including trade receivables, from an incurred loss model to an expected loss model and adds certain new required disclosures. Under the expected loss model, entities will recognize estimated credit losses over the entire contractual term of the instrument rather than delaying recognition of credit losses until it is probable the loss has been incurred. In May 2019, the FASB issued ASU 2019-05, Financial Instruments-Credit Losses (Topic 326): Targeted Transition Relief. ASU 2019-05 provides entities with an option to irrevocably elect the fair value option, applied on an instrument-by-instrument basis for eligible instruments, that are within the scope of Subtopic 326-20, upon the adoption of Topic 326. The fair value option election does not apply to held-to-maturity debt securities. The new standards were to be effective for the Company's 2020 fiscal year. In November 2019, the FASB issued ASU 2019-10, Financial Instruments-Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842): Effective Dates. This new standard amended the effective date of Topic 326 for smaller reporting companies until January 1, 2023. A company's determination about whether it is eligible to be a smaller reporting company is based on its most recent determination as of November 15, 2019, in accordance with SEC regulations. As of this date, the Company met the SEC definition of a smaller reporting company. Therefore, the Company will adopt Topic 326 beginning January 1, 2023. The Company is currently evaluating the potential impact of this new guidance; however, it expects that it could have a significant impact on the Company's allowance for loan losses ("ALLL").
2. REVENUES
Disaggregation of Revenues
Revenues are disaggregated at the Company's segment level since the segment categories depict how the nature, amount, timing and uncertainty of revenues and cash flows are affected by economic factors. For additional details related to the Company's reportable segments, see Note 18 - "Segment Information."
The following table presents the Company's revenues disaggregated by geography for the three and six months ended June 30, 2022 and 2021. The Company's revenues are primarily derived domestically. Foreign revenues are based on the country in which the legal subsidiary generating the revenue is domiciled. Revenue from any single foreign country was not material to the Company's consolidated financial statements.
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
United States | $ | 419,645 | | | $ | 360,126 | | | $ | 803,915 | | | $ | 655,994 | |
Foreign | 21,763 | | | 26,307 | | | 43,238 | | | 44,932 | |
Total revenue | $ | 441,408 | | | $ | 386,433 | | | $ | 847,153 | | | $ | 700,926 | |
Contract Balances
Differences in the timing of revenue recognition, billings and cash collections result in billed trade receivables, unbilled receivables (contract assets) and deferred revenues (contract liabilities) on the consolidated balance sheets.
Contract Assets
Unbilled receivables arise when the timing of billings to customers differs from the timing of revenue recognition, such as when the Company recognizes revenue over time before a customer can be billed. Contract assets are classified as Prepaid expenses and other current assets on the consolidated balance sheets. As of June 30, 2022 and December 31, 2021, the contract asset balance was $12,078 and $12,014, respectively.
Contract Liabilities
The Company records deferred revenues when cash payments are received or due in advance of the Company's performance, including amounts that are refundable, which are recorded as contract liabilities. Contract liabilities are classified as Other current liabilities on the consolidated balance sheets, based on the timing of when the Company expects to recognize revenue.
| | | | | |
| Contract Liabilities |
Balance at December 31, 2021 | $ | 3,396 | |
Deferral of revenue | 3,200 | |
Recognition of unearned revenue | (3,437) | |
Balance at June 30, 2022 | $ | 3,159 | |
| |
Balance at December 31, 2020 | $ | 7,707 | |
Deferral of revenue | 7,807 | |
Recognition of unearned revenue | (8,136) | |
Balance at June 30, 2021 | $ | 7,378 | |
3. DISCONTINUED OPERATIONS
On January 31, 2020, the Company announced that API Group Limited and certain of its affiliates commenced administration proceedings in the U.K. The purpose of the administration proceedings is to facilitate an orderly sale or wind-down of its U.K. operations, which include API Laminates Limited and API Foils Holdings Limited. In the U.S., API Americas Inc. voluntarily filed for Chapter 11 proceedings in Bankruptcy Court on February 2, 2020, in order to facilitate the sale or liquidation of its U.S. assets. The API Americas Inc. Chapter 11 bankruptcy proceedings were closed by the Bankruptcy Court on December 21, 2020. The API entities were wholly-owned subsidiaries of the Company and part of the Diversified Industrial segment. The Company deconsolidated the API entities on January 31, 2020 as it no longer held a controlling financial interest as of that date. On the date of the deconsolidation, the Company believed that API became a variable interest entity. The Company determined at deconsolidation that it was not the primary beneficiary of API as the Company no longer held a controlling financial interest in API and the Company lacked significant decision-making ability.
4. ACQUISITION AND DIVESTITURES
2022 Noncontrolling Interest Acquisition
On January 7, 2022, the Company entered into stock purchase agreements with certain stockholders of iGo, Inc. ("iGo") to purchase such stockholders’ shares of iGo common stock at $5.50 per share in cash. Following the acquisition of such shares, the Company owned more than 90% of iGo’s outstanding shares. On January 14, 2022, iGo merged with a subsidiary of the Company ("Merger") without a vote or meeting of iGo's stockholders pursuant to the short-form merger provisions under the Delaware General Corporation Law. All remaining shares of iGo common stock not owned by the Company immediately prior to the Merger were converted into the right to receive $5.50 per share in cash, and the Company acquired all iGo shares it previously did not own for approximately $8,606. Upon completion of the Merger, iGo became a wholly-owned subsidiary of the Company.
2022 Investment in Nonconsolidated Affiliate
On April 1, 2022, the Company acquired an interest in PCS-Mosaic Co-Invest L.P. ("PCS-Mosaic"), a private investment fund for a purchase price of approximately $23,600. The fund is primarily invested in specialized software development and training services. The Company will account for its investment as an equity method investment as the Company does not have a controlling financial interest. The Company has not elected the fair value option to account for PCS-Mosaic which will be carried at cost, plus or minus the Company’s share of net earnings or losses of the investment, subject to certain other adjustments. The Company’s share of net earnings or losses of the investment is included in Income (loss) of associated companies net of tax on the Company’s consolidated statements of operations. Dividends received from the investee reduce the carrying amount of the investment. Due to the timing of receiving financial information from its PCS-Mosaic, the Company will record its share of net earnings or losses on a one quarter lag basis.
2022 Divestiture of SLPE Business
On April 25, 2022, the Company completed the sale of its subsidiary, SLPE, to AEI US Subsidiary LLC, a subsidiary of Advanced Energy Industries, Inc. for a sales price of $144,500, consisting entirely of cash, subject to customary closing net working capital adjustments. The Company recognized a pre-tax gain from continuing operations of $86,037 which is presented in Gains from sales of businesses in the consolidated statement of operations during the three months ended June 30, 2022. SLPE designed, manufactured, and marketed power conversion solutions for original equipment manufacturers in the medical, lighting, audio-visual, controls, and industrial sectors and comprised the Company’s Electrical Products business in the Diversified Industrial segment. SLPE recognized net sales of $65,974 and income before taxes of $5,120 for the year ended December 31, 2021.
2021 Divestiture of Edge Business
On February 1, 2021, the Company completed the sale of its Edge business for a sales price of $16,000, subject to a working capital adjustment. The Company recognized a pre-tax gain of $8,096 which is presented in Gains from sales of businesses in the consolidated statement of operations during the three months ended March 31, 2021. Edge provided roofing edge products and components utilized in the securement of perimeter roof edges and was part of the Company's OMG business in the Diversified Industrial segment. Edge recognized net sales of $17,534 and operating income of $1,250 for the year ended December 31, 2020.
5. LOANS RECEIVABLE, INCLUDING LOANS HELD FOR SALE
Major classifications of Loans receivable, including loans held for sale, held by WebBank as of June 30, 2022 and December 31, 2021 are as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Total | | Current | | Non-current |
| June 30, 2022 | | % | | December 31, 2021 | | % | | June 30, 2022 | | December 31, 2021 | | June 30, 2022 | | December 31, 2021 |
Loans held for sale | $ | 385,964 | | | | | $ | 198,632 | | | | | $ | 385,964 | | | $ | 198,632 | | | $ | — | | | $ | — | |
| | | | | | | | | | | | | | | |
Commercial real estate loans | $ | 817 | | | — | % | | $ | 663 | | | — | % | | $ | — | | | $ | — | | | $ | 817 | | | $ | 663 | |
Commercial and industrial | 774,104 | | | 89 | % | | 779,536 | | | 91 | % | | 352,677 | | | 293,965 | | | 421,427 | | | 485,571 | |
Consumer loans | 92,397 | | | 11 | % | | 76,067 | | | 9 | % | | 71,152 | | | 50,857 | | | 21,245 | | | 25,210 | |
Total loans | 867,318 | | | 100 | % | | 856,266 | | | 100 | % | | 423,829 | | | 344,822 | | | 443,489 | | | 511,444 | |
Less: | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
Allowance for loan losses | (16,502) | | | | | (13,925) | | | | | (16,502) | | | (13,925) | | | — | | | — | |
Total loans receivable, net | $ | 850,816 | | | | | $ | 842,341 | | | | | 407,327 | | | 330,897 | | | 443,489 | | | 511,444 | |
Loans receivable, including loans held for sale (a) | | | | | | | | | $ | 793,291 | | | $ | 529,529 | | | $ | 443,489 | | | $ | 511,444 | |
(a) The carrying value of loans receivable, including loans held for sale, is considered to be representative of fair value because the rates of interest are not significantly different from market interest rates for instruments with similar maturities. The fair value of loans receivable, including loans held for sale, was $1,236,513 and $1,041,459 as of June 30, 2022 and December 31, 2021, respectively.
Loans with a carrying value of approximately $145,172 and $167,437 were pledged as collateral for potential borrowings as of June 30, 2022 and December 31, 2021, respectively. WebBank serviced $2,733 and $2,780 in loans for others as of June 30, 2022 and December 31, 2021, respectively.
WebBank sold loans classified as loans held for sale of $6,965,315 and $4,513,036 during the six months ended June 30, 2022 and 2021, respectively. The sold loans were derecognized from the consolidated balance sheets. Loans classified as loans held for sale primarily consist of consumer and small business loans. Amounts added to loans held for sale during the same periods were $7,182,804 and $4,572,063, respectively.
Allowance for Loan Losses
The ALLL represents an estimate of probable and estimable losses inherent in the loan portfolio as of the balance sheet date. Losses are charged to the ALLL when incurred. Generally, commercial loans are charged off or charged down when they are determined to be uncollectible in whole or in part. Consumer term loans are charged off at 120 days past due and open-end consumer and small and medium business loans are charged off at 180 days past due unless the loan is well secured and in the process of collection. The amount of the ALLL is established by analyzing the portfolio at least quarterly, and a provision for or
reduction of loan losses is recorded so that the ALLL is at an appropriate level at the balance sheet date. The methodologies used to estimate the 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, the quantitatively derived level of ALLL is reviewed for each segment using qualitative criteria. Various risk factors are tracked that influence our judgment regarding the level of the ALLL across the portfolio segments. Primary qualitative factors that may be reflected in the quantitative models include:
•Asset quality trends
•Risk management and loan administration practices
•Portfolio management and controls
•Effect of changes in the nature and volume of the portfolio
•Changes in lending policies and underwriting policies
•Existence and effect of any portfolio concentrations
•National economic business conditions and other macroeconomic adjustments
•Regional and local economic and business conditions
•Data availability and applicability
•Industry monitoring
•Value of underlying collateral
Changes in the level of the ALLL reflect changes in these factors. The magnitude of the impact of each of these factors on the qualitative assessment of the ALLL changes from quarter to quarter according to the extent these factors are already reflected in historic loss rates and according to the extent these factors diverge from one another. Also considered is the uncertainty inherent in the estimation process when evaluating the ALLL. WebBank's ALLL increased $2,686, or 19%, during the three months ended June 30, 2022 and increased $2,577 or 19% during the six months ended June 30, 2022. WebBank continues to monitor the impact of the current economic environment, including potential future negative impacts to its loan portfolio.
Changes in the ALLL are summarized as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| Commercial Real Estate Loans | | Commercial & Industrial | | Consumer Loans | | Total |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
December 31, 2021 | $ | 23 | | | $ | 9,205 | | | $ | 4,697 | | | $ | 13,925 | |
Charge-offs | — | | | (947) | | | (1,273) | | | (2,220) | |
Recoveries | 7 | | | 415 | | | 407 | | | 829 | |
(Benefit) Provision | (5) | | | 648 | | | 639 | | | 1,282 | |
March 31, 2022 | $ | 25 | | | $ | 9,321 | | | $ | 4,470 | | | $ | 13,816 | |
Charge-offs | — | | | (1,005) | | | (884) | | | (1,889) | |
Recoveries | 6 | | | 410 | | | 276 | | | 692 | |
(Benefit) Provision | (6) | | | 2,489 | | | 1,400 | | | 3,883 | |
June 30, 2022 | $ | 25 | | | $ | 11,215 | | | $ | 5,262 | | | $ | 16,502 | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Commercial Real Estate Loans | | Commercial & Industrial | | Consumer Loans | | Total |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
December 31, 2020 | $ | 22 | | | $ | 9,293 | | | $ | 17,744 | | | $ | 27,059 | |
Charge-offs | — | | | (3,607) | | | (3,669) | | | (7,276) | |
Recoveries | 6 | | | 514 | | | 396 | | | 916 | |
(Benefit) Provision | (6) | | | 1,038 | | | (1,747) | | | (715) | |
March 31, 2021 | $ | 22 | | | $ | 7,238 | | | $ | 12,724 | | | $ | 19,984 | |
Charge-offs | — | | | (1,821) | | | (2,470) | | | (4,291) | |
Recoveries | 6 | | | 885 | | | 363 | | | 1,254 | |
(Benefit) Provision | (6) | | | 808 | | | (2,369) | | | (1,567) | |
June 30, 2021 | $ | 22 | | | $ | 7,110 | | | $ | 8,248 | | | $ | 15,380 | |
The ALLL and outstanding loan balances according to the Company's impairment method are summarized as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
June 30, 2022 | Commercial Real Estate Loans | | Commercial & Industrial | | Consumer Loans | | Total |
Allowance for loan losses: | | | | | | | |
Individually evaluated for impairment | $ | 9 | | | $ | 97 | | | $ | — | | | $ | 106 | |
Collectively evaluated for impairment | 16 | | | 11,118 | | | 5,262 | | | 16,396 | |
Total | $ | 25 | | | $ | 11,215 | | | $ | 5,262 | | | $ | 16,502 | |
Outstanding loan balances: | | | | | | | |
Individually evaluated for impairment | $ | 9 | | | $ | 1,077 | | | $ | — | | | $ | 1,086 | |
Collectively evaluated for impairment | 808 | | | 773,027 | | | 92,397 | | | 866,232 | |
Total | $ | 817 | | | $ | 774,104 | | | $ | 92,397 | | | $ | 867,318 | |
| | | | | | | | | | | | | | | | | | | | | | | |
December 31, 2021 | Commercial Real Estate Loans | | Commercial & Industrial | | Consumer Loans | | Total |
Allowance for loan losses: | | | | | | | |
Individually evaluated for impairment | $ | 9 | | | $ | 152 | | | $ | — | | | $ | 161 | |
Collectively evaluated for impairment | 14 | | | 9,053 | | | 4,697 | | | 13,764 | |
Total | $ | 23 | | | $ | 9,205 | | | $ | 4,697 | | | $ | 13,925 | |
Outstanding loan balances: | | | | | | | |
Individually evaluated for impairment | $ | 9 | | | $ | 2,079 | | | $ | — | | | $ | 2,088 | |
Collectively evaluated for impairment | 654 | | | 777,457 | | | 76,067 | | | 854,178 | |
Total | $ | 663 | | | $ | 779,536 | | | $ | 76,067 | | | $ | 856,266 | |
Nonaccrual and Past Due Loans
Commercial and industrial loans past due 90 days or more and still accruing interest were $7,114 and $3,037 at June 30, 2022 and December 31, 2021, respectively. Consumer loans past due 90 days or more and still accruing interest were $640 and $460 at June 30, 2022 and December 31, 2021, respectively. The Company did not have any nonaccrual loans at June 30, 2022 or December 31, 2021.
Past due loans (accruing and nonaccruing) are summarized as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
June 30, 2022 | Current | | 30-89 Days Past Due | | 90+ Days Past Due | | Total Past Due | | Total Loans | | Recorded Investment In Accruing Loans 90+ Days Past Due | | Nonaccrual Loans That Are Current (a) |
Commercial real estate loans | $ | 817 | | | $ | — | | | $ | — | | | $ | — | | | $ | 817 | | | $ | — | | | $ | — | |
Commercial and industrial | 757,990 | | | 9,000 | | | 7,114 | | | 16,114 | | | 774,104 | | | 7,114 | | | — | |
Consumer loans | 89,537 | | | 2,220 | | | 640 | | | 2,860 | | | 92,397 | | | 640 | | | — | |
Total loans | $ | 848,344 | | | $ | 11,220 | | | $ | 7,754 | | | $ | 18,974 | | | $ | 867,318 | | | $ | 7,754 | | | $ | — | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
December 31, 2021 | Current | | 30-89 Days Past Due | | 90+ Days Past Due | | Total Past Due | | Total Loans | | Recorded Investment In Accruing Loans 90+ Days Past Due | | Nonaccrual Loans That Are Current (a) |
Commercial real estate loans | $ | 663 | | | $ | — | | | $ | — | | | $ | — | | | $ | 663 | | | $ | — | | | $ | — | |
Commercial and industrial | 772,157 | | | 4,342 | | | 3,037 | | | 7,379 | | | 779,536 | | | 3,037 | | | — | |
Consumer loans | 74,292 | | | 1,315 | | | 460 | | | 1,775 | | | 76,067 | | | 460 | | | — | |
Total loans | $ | 847,112 | | | $ | 5,657 | | | $ | 3,497 | | | $ | 9,154 | | | $ | 856,266 | | | $ | 3,497 | | | $ | — | |
(a) Represents nonaccrual loans that are not past due more than 30 days; however, full payment of principal and interest is still not expected.
Credit Quality Indicators
In addition to the past due and nonaccrual criteria, loans are analyzed using a loan grading system. Generally, internal grades are assigned to commercial loans based on the performance of the loans, financial/statistical models and loan officer judgment. For consumer loans and some commercial and industrial loans, the primary credit quality indicator is payment status. Reviews and grading of loans with unpaid principal balances of $100 or more is performed once per year. Grades follow definitions of Pass, Special Mention, Substandard and Doubtful, which are consistent with published definitions of regulatory risk classifications. The definitions of Pass, Special Mention, Substandard and Doubtful are summarized as follows:
•Pass: An asset in this category is a higher quality asset and does not fit any of the other categories described below. The likelihood of loss is considered remote.
•Special Mention: An asset in this category has a specific weakness or problem but does not currently present a significant risk of loss or default as to any material term of the loan or financing agreement.
•Substandard: An asset in this category has a developing or minor weakness or weaknesses that could result in loss or default if deficiencies are not corrected or adverse conditions arise.
•Doubtful: An asset in this category has an existing weakness or weaknesses that have developed into a serious risk of significant loss or default with regard to a material term of the financing agreement.
Outstanding loan balances (accruing and nonaccruing) categorized by these credit quality indicators are summarized as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
June 30, 2022 | Non - Graded | | Pass | | Special Mention | | Sub- standard | | Doubtful | | Total Loans |
| | | | | | | | | | | |
| | | | | | | | | | | |
Commercial real estate loans | $ | — | | | $ | 808 | | | $ | — | | | $ | 9 | | | $ | — | | | $ | 817 | |
Commercial and industrial | 572,752 | | | 196,722 | | | 3,553 | | | 1,077 | | | — | | | 774,104 | |
Consumer loans | 92,397 | | | — | | | — | | | — | | | — | | | 92,397 | |
Total loans | $ | 665,149 | | | $ | 197,530 | | | $ | 3,553 | | | $ | 1,086 | | | $ | — | | | $ | 867,318 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
December 31, 2021 | Non - Graded | | Pass | | Special Mention | | Sub- standard | | Doubtful | | Total Loans |
| | | | | | | | | | | |
| | | | | | | | | | | |
Commercial real estate loans | $ | — | | | $ | 654 | | | $ | — | | | $ | 9 | | | $ | — | | | $ | 663 | |
Commercial and industrial | 308,443 | | | 465,333 | | | 3,681 | | | 2,079 | | | — | | | 779,536 | |
Consumer loans | 76,067 | | | — | | | — | | | — | | | — | | | 76,067 | |
Total loans | $ | 384,510 | | | $ | 465,987 | | | $ | 3,681 | | | $ | 2,088 | | | $ | — | | | $ | 856,266 | |
Impaired Loans
Loans are considered impaired when, based on current information and events, it is probable that WebBank will be unable to collect all amounts due in accordance with the contractual terms of the loan agreement, including scheduled interest payments. When loans are impaired, an estimate of the amount of the balance that is impaired is made. A specific reserve is assigned to the loan based on the estimated present value of the loan's future cash flows discounted at the loan's effective interest rate, the observable market price of the loan or the fair value of the loan's underlying collateral less the cost to sell. When the impairment is based on the fair value of the loan's underlying collateral, the portion of the balance that is impaired is charged off, such that these loans do not have a specific reserve in the ALLL. Payments received on impaired loans that are accruing are recognized in interest income, in accordance with the contractual loan agreement. WebBank recognized $45 and $68 on impaired loans for the six months ended June 30, 2022 and 2021, respectively. Payments received on impaired loans that are nonaccruing are not recognized in interest income, but are applied as a reduction of the principal outstanding. Payments are recognized when cash is received. Information on impaired loans is summarized as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Recorded Investment | | | | | | |
June 30, 2022 | Unpaid Principal Balance | | With No Allowance | | With Allowance | | Total Recorded Investment | | Related Allowance | | Average Recorded Investment |
Commercial real estate loans | $ | 9 | | | $ | — | | | $ | 9 | | | $ | 9 | | | $ | 9 | | | $ | 9 | |
Commercial and industrial | 1,077 | | | — | | | 1,077 | | | 1,077 | | | 97 | | | 1,047 | |
Total loans | $ | 1,086 | | | $ | — | | | $ | 1,086 | | | $ | 1,086 | | | $ | 106 | | | $ | 1,056 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Recorded Investment | | | | | | |
December 31, 2021 | Unpaid Principal Balance | | With No Allowance | | With Allowance | | Total Recorded Investment | | Related Allowance | | Average Recorded Investment |
Commercial real estate loans | $ | 9 | | | $ | — | | | $ | 9 | | | $ | 9 | | | $ | 9 | | | $ | 10 | |
Commercial and industrial | 2,079 | | | — | | | 2,079 | | | 2,079 | | | 152 | | | 2,468 | |
Total loans | $ | 2,088 | | | $ | — | | | $ | 2,088 | | | $ | 2,088 | | | $ | 161 | | | $ | 2,478 | |
During the three months ended June 30, 2022, WebBank did not issue new loans under the Small Business Administration's ("SBA") Paycheck Protection Program ("PPP") authorized under the Coronavirus Aid, Relief, and Economic Security ("CARES") Act. The existing loans were funded by the PPP Liquidity Facility, have terms of between two and five years, and their repayment is guaranteed by the SBA. Payments by borrowers on the loans can begin up to 16 months after the
note date, and interest will continue to accrue during the 16-month deferment at 1%. Loans can be forgiven in whole or in part (up to full principal and any accrued interest) if certain criteria are met. Loan processing fees paid to WebBank from the SBA are accounted for as loan origination fees. Net deferred fees are recognized over the life of the loan as yield adjustments on the loans. If a loan is paid off or forgiven by the SBA prior to its maturity date, the remaining unamortized deferred fees will be recognized in interest income at that time. The PPP loans are included in Commercial and industrial loans in the table above. As of June 30, 2022, the total PPP loans and associated liabilities were $177,457 and $118,934, respectively, and included in Long-term loans receivable, net, and Other borrowings, respectively, in the consolidated balance sheet as of June 30, 2022. As of December 31, 2021, the total PPP loans and associated liabilities were $328,713 and $333,963, respectively, and included in Long-term loans receivable, net, and Other borrowings, respectively, in the consolidated balance sheet as of December 31, 2021. Upon borrower forgiveness, the SBA pays WebBank for the principal and accrued interest owed on the loan. The Bank has received forgiveness payments from the SBA and received payments from borrowers of $152,426 during the six months ended June 30, 2022.
The Company is offering loan modifications to assist borrowers during the COVID-19 pandemic. The CARES Act along with the interagency statement issued by the federal banking agencies provides that loan modifications made in response to COVID-19 do not need to be accounted for as a troubled debt restructuring ("TDR"). Accordingly, the Company does not account for such loan modifications as TDRs. The Company's loan modifications allow for payment deferrals, payment reduction, and settlements amongst others. As of June 30, 2022, the Company had granted loan modifications on $4,352 of loans. The loan modification program is ongoing and additional loans continue to be granted modifications. The Company granted approximately $5,595 short–term deferments on loan balances of $4,352, which represent 0.50% of total loan balances as of June 30, 2022. These loan modifications are not classified as TDRs and will not be reported as past due provided that they are performing in accordance with the modified terms.
6. INVENTORIES, NET
A summary of Inventories, net is as follows:
| | | | | | | | | | | |
| June 30, 2022 | | December 31, 2021 |
Finished products | $ | 56,982 | | | $ | 48,801 | |
In-process | 43,332 | | | 37,024 | |
Raw materials | 74,342 | | | 62,207 | |
Fine and fabricated precious metal in various stages of completion | 39,350 | | | 37,707 | |
| 214,006 | | | 185,739 | |
LIFO reserve | (1,355) | | | (1,468) | |
Total | $ | 212,651 | | | $ | 184,271 | |
Fine and Fabricated Precious Metal Inventory
In order to produce certain of its products, the Company purchases, maintains and utilizes precious metal inventory. The Company records certain precious metal inventory at the lower of last-in-first-out ("LIFO") cost or market value, with any adjustments recorded through Cost of goods sold. Remaining precious metal inventory is accounted for primarily at fair value.
The Company obtains certain precious metals under a fee consignment agreement. As of June 30, 2022 and December 31, 2021, the Company had approximately $28,854 and $30,751, respectively, of precious metals, principally silver, under consignment, which are recorded at fair value in Inventories, net with a corresponding liability for the same amount recorded in Accounts payable on the Company's consolidated balance sheets. Fees charged under the consignment agreement are recorded in Interest expense in the Company's consolidated statements of operations.
| | | | | | | | | | | |
| June 30, 2022 | | December 31, 2021 |
Supplemental inventory information: | | | |
Precious metals stated at LIFO cost | $ | 5,887 | | | $ | 3,409 | |
Precious metals stated under non-LIFO cost methods, primarily at fair value | $ | 32,108 | | | $ | 32,830 | |
Market value per ounce: | | | |
Silver | $ | 21.16 | | | $ | 23.32 | |
Gold | $ | 1,830.72 | | | $ | 1,827.90 | |
Platinum | $ | 909.70 | | | n/a |
Palladium | $ | 1,874.91 | | | $ | 1,915.07 | |
7. GOODWILL AND OTHER INTANGIBLE ASSETS, NET
A summary of the change in the carrying amount of goodwill by reportable segment is as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Diversified Industrial | | Energy | | Financial Services | | Corporate and Other | | Total |
Balance as of December 31, 2021 | | | | | | | | | |
Gross goodwill | $ | 180,347 | | | $ | 67,143 | | | $ | 6,515 | | | $ | 81 | | | $ | 254,086 | |
Accumulated impairments | (41,278) | | | (64,790) | | | — | | | — | | | (106,068) | |
Net goodwill | 139,069 | | | 2,353 | | | 6,515 | | | 81 | | | 148,018 | |
| | | | | | | | | |
| | | | | | | | | |
Divestitures(a) | (25,157) | | | — | | | — | | | — | | | (25,157) | |
Currency translation adjustments | (17) | | | — | | | — | | | — | | | (17) | |
| | | | | | | | | |
| | | | | | | | | |
Balance as of June 30, 2022 | | | | | | | | | |
Gross goodwill | 155,173 | | | 67,143 | | | 6,515 | | | 81 | | | 228,912 | |
Accumulated impairments | (41,278) | | | (64,790) | | | — | | | — | | | (106,068) | |
Net goodwill | $ | 113,895 | | | $ | 2,353 | | | $ | 6,515 | | | $ | 81 | | | $ | 122,844 | |
(a) Related to the divestiture of the SLPE business. See Note 4 - "Acquisition and Divestitures."
A summary of Other intangible assets, net is as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| June 30, 2022 | | December 31, 2021 |
| Gross Carrying Amount | | Accumulated Amortization | | Net | | Gross Carrying Amount | | Accumulated Amortization | | Net |
Customer relationships | $ | 190,342 | | | $ | 127,323 | | | $ | 63,019 | | | $ | 212,589 | | | $ | 134,876 | | | $ | 77,713 | |
Trademarks, trade names and brand names | 46,544 | | | 20,912 | | | 25,632 | | | 50,477 | | | 21,516 | | | 28,961 | |
Developed technology, patents and patent applications | 32,605 | | | 22,397 | | | 10,208 | | | 32,554 | | | 21,519 | | | 11,035 | |
Other | 16,225 | | | 14,793 | | | 1,432 | | | 18,766 | | | 16,645 | | | 2,121 | |
Total | $ | 285,716 | | | $ | 185,425 | | | $ | 100,291 | | | $ | 314,386 | | | $ | 194,556 | | | $ | 119,830 | |
Trademarks with indefinite lives as of June 30, 2022 and December 31, 2021 were $11,764 and $11,726, respectively. Amortization expense related to intangible assets was $3,729 and $4,608 for the three months ended June 30, 2022 and 2021, respectively, and $7,993 and $9,376 for the six months ended June 30, 2022 and 2021, respectively.
Based on gross carrying amounts at June 30, 2022, the Company's estimate of amortization expense for identifiable intangible assets for the years ending December 31, 2022 through 2026 is presented in the table below.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ending December 31, |
| | 2022 | | 2023 | | 2024 | | 2025 | | 2026 | | |
Estimated amortization expense | | 15,101 | | | 14,097 | | | 13,525 | | | 12,113 | | | 10,072 | | | |
8. INVESTMENTS
The following table summarizes the Company's long-term investments as of June 30, 2022 and December 31, 2021.
| | | | | | | | | | | | | | | | | | | | | | | |
| Ownership % | | Long-Term Investments Balance |
| | | | | | | |
| June 30, 2022 | | December 31, 2021 | | June 30, 2022 | | December 31, 2021 |
Aerojet Rocketdyne Holdings, Inc. (a) | 4.9 | % | | 4.9 | % | | $ | 158,533 | | | $ | 184,678 | |
Other long-term investments | | | | | 2,866 | | | 1,850 | |
Steel Connect, Inc. ("STCN") convertible notes (b) | | | | | 13,887 | | | 14,841 | |
STCN preferred stock (c) | | | | | 33,637 | | | 34,255 | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
STCN common stock | 30.1 | % | | 30.1 | % | | 24,546 | | | 25,456 | |
PCS-Mosaic | 59.0 | % | | | | 23,600 | | | — | |
| | | | | | | |
| | | | | | | |
Total | | | | | $ | 257,069 | | | $ | 261,080 | |
(a) Gross unrealized gains for Aerojet Rocketdyne Holdings, Inc. ("Aerojet") totaled $147,421 and $178,844 at June 30, 2022 and 2021, respectively.
(b) Represents investment in STCN convertible notes, which the Company accounts for under the fair value option with changes in fair value recognized in the Company's consolidated statements of operations. The Company entered into a convertible note with STCN ("STCN
Note") on February 28, 2019, which matures on March 1, 2024. The cost basis of the STCN Note totaled $14,943 as of both June 30, 2022 and December 31, 2021. The STCN Note is convertible into shares of STCN's common stock at an initial conversion rate of 421.2655 shares of common stock per $1,000 principal amount of the STCN Note (which is equivalent to an initial conversion price of approximately $2.37 per share), subject to adjustment upon the occurrence of certain events. The STCN Note, if converted as of June 30, 2022, when combined with STCN common and preferred shares, also if converted, owned by the Company, would result in the Company having a direct interest of approximately 50.1% of STCN's outstanding shares.
(c) Represents investment in shares of STCN preferred stock, which the Company accounts for under the fair value option with changes in fair value recognized in the Company's consolidated statements of operations. The investment in STCN preferred stock had a cost basis of $35,688 at June 30, 2022 and December 31, 2021. Each share of preferred stock can be converted into shares of STCN's common stock at an initial conversion price equal to $1.96 per share, subject to adjustment upon the occurrence of certain events.
| | | | | | | | | | | | | | | | | | | | | | | |
| (Income) Loss of Associated Companies, Net of Taxes |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
STCN convertible notes | $ | 588 | | | $ | (35) | | | $ | 955 | | | $ | (622) | |
STCN preferred stock | 221 | | | 647 | | | 621 | | | (1,810) | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
STCN common stock | (3,069) | | | (3,452) | | | 807 | | | (22,630) | |
Aviat common stock (a) | — | | | — | | | — | | | (3,899) | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
Total | $ | (2,260) | | | $ | (2,840) | | | $ | 2,383 | | | $ | (28,961) | |
(a) During the six months ended June 30, 2021, the Company sold its remaining investment in Aviat for total proceeds of approximately $24,100.
The amounts of unrealized gains (losses) for the three and six months ended June 30, 2022 and 2021 that relate to equity securities still held as of June 30, 2022 and 2021, respectively, are as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
Net gains (losses) recognized during the period on equity securities | $ | 1,515 | | | $ | 4,470 | | | $ | (26,211) | | | $ | (18,779) | |
Less: Net losses recognized during the period on equity securities sold during the period | — | | | 43 | | | — | | | 36 | |
Unrealized losses recognized during the period on equity securities still held at the end of the period | $ | 1,515 | | | $ | 4,427 | | | $ | (26,211) | | | $ | (18,815) | |
Equity Method Investments
The Company's investments in associated companies include STCN and PCS-Mosaic which are accounted for under the equity method of accounting. STCN is accounted for using the fair value option, however, PCS-Mosaic is not accounted for using the fair value option. Associated companies are included in the Corporate and Other segment. Certain associated companies have a fiscal year end that differs from December 31. Additional information for SPLP's significant investments in associated companies is as follows:
STCN is a publicly-traded holding company, whose wholly-owned subsidiary, ModusLink Corporation, serves the supply chain management market.
The following summary (unaudited) statements of operations amounts are for STCN for the three months and nine months ended April 30, 2022 and 2021, which are STCN's nearest corresponding full fiscal quarter to the Company's fiscal quarters ended June 30, 2022 and 2021, respectively. PCS-Mosaic’s results are not included in the table below as the results will be recorded on a lag basis and therefore the Company will record PCS-Mosaic’s results for the quarter ended June 30, 2022 in the quarter ended September 30, 2022.
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| Three Months Ended Apr 30, | | Nine Months Ended Apr 30, | | |
| 2022 | | 2021 | | 2022 | | 2021 | | | | |
Summary operating results(a) | | | | | | | | | | | |
Net revenue | $ | 51,548 | | | $ | 49,434 | | | $ | 150,223 | | | $ | 178,552 | | | | | |
Gross profit | $ | 9,245 | | | $ | 9,903 | | | $ | 29,551 | | | $ | 39,290 | | | | | |
Loss from continuing operations, after income taxes | $ | (9,695) | | | $ | (9,294) | | | $ | (12,163) | | | $ | (11,481) | | | | | |
Net income (loss) | $ | 30,200 | | | $ | (27,629) | | | $ | (12,271) | | | $ | (33,376) | | | | | |
(a) STCN's summary operating results for the three and nine months ended April 30, 2022, were restated by STCN to reclassify its IWCO Direct business as discontinued operations.
Other Investments
WebBank has held-to-maturity ("HTM") debt securities which are carried at amortized cost and included in Other non-current assets on the Company's consolidated balance sheets. The amount and contractual maturities of HTM debt securities are noted in the tables below. Actual maturities may differ from expected or contractual maturities because borrowers may have the right to call or prepay obligations with or without penalties. The securities are collateralized by unsecured consumer loans.
| | | | | | | | | | | | | | | | | | | | | | | |
| June 30, 2022 |
| Amortized Cost | | Gross Unrealized Gains | | Estimated Fair Value | | Carrying Value |
Collateralized securities | $ | 167,577 | | | $ | 452 | | | $ | 168,029 | | | $ | 167,577 | |
| | | | | | | |
Contractual maturities within: | | | | | | | |
One year to five years | | | | | | | 160,167 | |
Five years to ten years | | | | | | | 5,710 | |
After ten years | | | | | | | 1,700 | |
Total | | | | | | | $ | 167,577 | |
| | | | | | | |
| December 31, 2021 |
| Amortized Cost | | Gross Unrealized Gains | | Estimated Fair Value | | Carrying Value |
Collateralized securities | $ | 54,932 | | | $ | 225 | | | $ | 55,157 | | | $ | 54,932 | |
| | | | | | | |
Contractual maturities within: | | | | | | | |
One year to five years | | | | | | | 42,218 | |
Five years to ten years | | | | | | | 11,199 | |
After ten years | | | | | | | 1,515 | |
Total | | | | | | | $ | 54,932 | |
WebBank regularly evaluates each HTM debt security whose value has declined below amortized cost to assess whether the decline in fair value is other-than-temporary. If there is an other-than-temporary impairment in the fair value of any individual security classified as HTM, WebBank writes down the security to fair value with a corresponding credit loss portion charged to earnings, and the corresponding non-credit portion charged to accumulated other comprehensive income.
9. DEBT
The components of debt and a reconciliation to the carrying amount of long-term debt is presented in the table below:
| | | | | | | | | | | |
| June 30, 2022 | | December 31, 2021 |
Short term debt: | | | |
Foreign | $ | 200 | | | $ | 100 | |
Short-term debt | 200 | | | 100 | |
Long-term debt: | | | |
Credit Agreement | 175,200 | | | 269,850 | |
| | | |
Other debt - domestic | 1,020 | | | 1,071 | |
| | | |
| | | |
| | | |
| | | |
Subtotal | 176,220 | | | 270,921 | |
Less: portion due within one year | 1,020 | | | 1,071 | |
Long-term debt | 175,200 | | | 269,850 | |
Total debt | $ | 176,420 | | | $ | 271,021 | |
As of June 30, 2022 long-term debt maturities in each of the next five years as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Total | | | | 2022 | | 2023 | | 2024 | | 2025 | | 2026 | | Thereafter |
Long-term debt (a) | | $ | 176,220 | | | | | $ | 1,020 | | | $ | — | | | $ | — | | | $ | — | | | $ | 175,200 | | | $ | — | |
(a) As of June 30, 2022, long term debt of $1,020 is expected to mature over the following twelve months.
As of June 30, 2022, the Company's senior credit agreement, as amended and restated ("Credit Agreement") covers substantially all of the Company's subsidiaries, with the exception of WebBank, and provides for a senior secured revolving credit facility in an aggregate principal amount not to exceed $600,000 (the "Revolving Credit Loans"), which includes a $50,000 subfacility for swing line loans, a $50,000 subfacility for standby letters of credit and a foreign currency sublimit (available in euros and pounds sterling) equal to the lesser of $75,000 and the total amount of the Revolving Credit Commitment. The Credit Agreement permits, under certain circumstances, to increase the aggregate principal amount of revolving credit commitments under the Credit Agreement by $300,000 plus additional amounts so long as the Leverage Ratio would not exceed 3.50:1. Borrowings bear interest, at annual rates of either Base Rate, SOFR Rate or Term RFR, at the borrowers’ option, plus an applicable margin, as set forth in the Credit Agreement. As of June 30, 2022, the Credit Agreement also provides for a commitment fee of 0.150% to be paid on unused borrowings.
The Credit Agreement contains financial covenants, including: (i) a Leverage Ratio not to exceed 4.25 to 1.00 for quarterly periods as of the end of each fiscal quarter; provided, however, that notwithstanding the foregoing, following a Material Acquisition, Borrowers shall not permit the Leverage Ratio, calculated as of the end of each of the four (4) fiscal quarters immediately following such Material Acquisition (which, for the avoidance of doubt, shall commence with the fiscal quarter in which such Material Acquisition is consummated), to exceed 4.50 to 1.00 and (ii) an Interest Coverage Ratio, calculated as of the end of each fiscal quarter, not less than 3.00 to 1.00. The Credit Agreement also contains standard representations, warranties and covenants for a transaction of this nature, including, among other things, covenants relating to: (i) financial reporting and notification; (ii) payment of obligations; (iii) compliance with law; (iv) maintenance of insurance; and (v) maintenance of properties. As of June 30, 2022 the Company was in compliance with all financial covenants under the Credit Agreement. The Company believes it will remain in compliance with the Credit Agreements covenants for the next twelve months.
The weighted average interest rate on the Credit Agreement was 2.77% at June 30, 2022. As of June 30, 2022, letters of credit totaling $9,748 had been issued under the Credit Agreement. The primary use of the Company's letters of credit are to support the performance and financial obligations for environmental matters, insurance programs and real estate leases. The Credit Agreement permits the Company to borrow for the dividends on its preferred units, pension contributions, investments, acquisitions and other general corporate expenses. Based on financial results as of June 30, 2022, the Company's total availability under the Credit Agreement, which is based upon Consolidated Adjusted EBITDA and certain covenants as described in the Credit Agreement, was approximately $415,000 as of June 30, 2022.
10. FINANCIAL INSTRUMENTS
WebBank - Economic Interests in Loans
WebBank's derivative financial instruments represent on-going economic interests in loans made after they are sold. These derivatives are carried at fair value on a gross basis in Other non-current assets on the Company's consolidated balance sheets and are classified within Level 3 in the fair value hierarchy (see Note 15 - "Fair Value Measurements"). As of June 30, 2022, outstanding derivatives mature within three to five years. Gains and losses resulting from changes in the fair value of derivative instruments are accounted for in the Company's consolidated statements of operations in Financial Services revenue. Fair value represents the estimated amounts that WebBank would receive or pay to terminate the contracts at the reporting date based on a discounted cash flow model for the same or similar instruments. WebBank does not enter into derivative contracts for speculative or trading purposes.
Precious Metal and Commodity Inventories
As of June 30, 2022, the Company had the following outstanding forward contracts with settlement dates through October 2022. There were no futures contracts outstanding as of June 30, 2022.
| | | | | | | | | | | |
Commodity | Amount (in whole units) | | Notional Value |
Silver | 71,132 ounces | | $ | 1,543 | |
Gold | 1,071 ounces | | $ | 1,969 | |
Palladium | 1,523 ounces | | $ | 2,812 | |
Platinum | 9 ounces | | $ | 8 | |
Copper | 283,000 pounds | | $ | 1,260 | |
Tin | 34 metric tons | | $ | 1,251 | |
Fair Value Hedges. Certain forward contracts are accounted for as fair value hedges under ASC 815 for the Company's precious metal inventory carried at fair value. These contracts hedge 61,423 ounces (in whole units) of silver and a majority of the Company's pounds of copper. The fair values of these derivatives are recognized as derivative assets and liabilities on the Company's consolidated balance sheets. The net changes in fair value of the derivative assets and liabilities, and the changes in the fair value of the underlying hedged inventory, are recognized in the Company's consolidated statements of operations, and such amounts principally offset each other due to the effectiveness of the hedges.
Economic Hedges. The remaining outstanding forward contracts for silver, and all the contracts for gold, palladium and tin, are accounted for as economic hedges. As these derivatives are not designated as accounting hedges under ASC 815, they are accounted for as derivatives with no hedge designation. The derivatives are marked to market with gains and losses recorded in earnings in the Company's consolidated statements of operations. The economic hedges are associated primarily with the Company's precious metal inventory valued using the LIFO method.
The forward contracts were made with a counterparty rated Aa2 by Moody's. Accordingly, the Company has determined that there is minimal credit risk of default. The Company estimates the fair value of its derivative contracts based on the counterparty's statement. The Company maintains collateral on account with the third-party broker which varies in amount depending on the value of open contracts and the current market price.
The fair value and carrying amount of derivative instruments on the Company's consolidated balance sheets are as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
|
| Fair Value of Derivative Assets (Liabilities) |
| June 30, 2022 | | December 31, 2021 |
| Balance Sheet Location | | Fair Value | | Balance Sheet Location | | Fair Value |
Derivatives designated as ASC 815 hedges | | | | | | | |
| | | | | | | |
Commodity contracts | Other assets | | $ | 232 | | | Accrued liabilities | | $ | (53) | |
Derivatives not designated as ASC 815 hedges | | | | | | | |
| | | | | | | |
Commodity contracts | Other assets | | $ | 371 | | | Accrued liabilities | | $ | (349) | |
Economic interests in loans | Other non-current assets | | $ | 5,582 | | | Other non-current assets | | $ | 6,483 | |
The effects of fair value hedge accounting on the consolidated statements of operations for the three and six months ended June 30, 2022 and 2021 are not material. The effects of derivatives not designated as ASC 815 hedging instruments on the consolidated statements of operations for the six months ended June 30, 2022 and 2021 are as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Derivatives Not Designated as Hedging Instruments: | | Location of Gain (Loss) Recognized in Income | | Amount of Gain (Loss) Recognized in Income | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, | | |
| 2022 | | 2021 | | 2022 | | 2021 | | | | |
| | | | | | | | | | | | | | |
Commodity contracts | | Other (expense) income, net | | 1,442 | | | $ | (500) | | | 448 | | | $ | (715) | | | | | |
Economic interests in loans | | Financial Services revenue | | 2,382 | | | 7,682 | | | 1,453 | | | 9,135 | | | | | |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
Total | | | | $ | 3,824 | | | $ | 7,182 | | | $ | 1,901 | | | $ | 8,420 | | | | | |
Financial Instruments with Off-Balance Sheet Risk
WebBank is a party to financial instruments with off-balance sheet risk. In the normal course of business, these financial instruments include commitments to extend credit in the form of loans as part of WebBank's lending arrangements. Those instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amounts recognized on the consolidated balance sheets. The contractual amounts of those instruments reflect the extent of involvement WebBank has in particular classes of financial instruments.
As of June 30, 2022 and December 31, 2021, WebBank's undisbursed loan commitments totaled $525,017 and $218,090, respectively. Commitments to extend credit are agreements to lend to a borrower who meets the lending criteria through one of WebBank's lending agreements, provided there is no violation of any condition established in the contract with the counterparty to the lending arrangement.
Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since certain of the commitments are expected to expire without the credit being extended, the total commitment amounts do not necessarily represent future cash requirements. WebBank evaluates each prospective borrower's credit worthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by WebBank upon extension of credit, is based on management's credit evaluation of the borrower and WebBank's counterparty.
WebBank's exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit is represented by the contractual amount of those instruments. WebBank uses the same credit policy in making commitments and conditional obligations as it does for on balance sheet instruments.
11. PENSION AND OTHER POST-RETIREMENT BENEFITS
The Company maintains several qualified and non-qualified pension plans and other post-retirement benefit plans. The following table presents the components of pension (income) expense for the Company's significant pension plans. The Company's other pension and post-retirement benefit plans are not significant individually or in the aggregate.
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
| | | | | | | |
Interest cost | $ | 2,382 | | | $ | 1,876 | | | $ | 4,764 | | | $ | 3,753 | |
Expected return on plan assets | (6,336) | | | (6,322) | | | (12,671) | | | (12,643) | |
Amortization of actuarial loss | 2,128 | | | 2,945 | | | 4,256 | | | 5,889 | |
Total Pension (Income) Expense | $ | (1,826) | | | $ | (1,501) | | | $ | (3,651) | | | $ | (3,001) | |
Pension (income) expense is included in Selling, general and administrative expenses in the consolidated statements of operations. During the six months ended June 30, 2022, the Company contributed $3,837 to its pension plans. Required future pension contributions are estimated based upon assumptions such 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, including the impact of declines in pension plan assets and interest rates, as well as other changes such as any plan termination or other acceleration events. The Company currently estimates it will contribute $8,600 to its pension plans during the remainder of 2022. In July 2022, the Company contributed $5,600 to its pension plans.
12. CAPITAL AND ACCUMULATED OTHER COMPREHENSIVE LOSS
As of June 30, 2022, the Company had 21,917,246 Class A units (regular common units) outstanding.
Common Unit Repurchase Program
The Board of Directors of SPH GP, the general partner of SPLP (the "Board of SPH GP") has approved the repurchase of up to an aggregate of 7,639,870 of the Company's common units ("Repurchase Program"). The Repurchase Program, which was announced on December 7, 2016, supersedes and cancels, to the extent any amounts remain available, all previously approved repurchase programs. 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 may enter into a stock purchase plan. The Repurchase Program has no termination date. The Company repurchased 500,064 and 768,687 common units for an aggregate purchase price of $20,999 and $31,417 for the three and six months ended June 30, 2022, respectively. Since the inception of the Repurchase Program the Company has purchased 7,020,932 common units for an aggregate price of approximately $130,801. As of June 30, 2022, there remained 618,938 common units that may yet be purchased under the Repurchase Program. In July 2022, the Company repurchased 141,724 common units for $5,942.
Incentive Award Plan
The Company's 2018 Incentive Award Plan ("2018 Plan") provides equity-based compensation through the grant of options to purchase the Company's limited partnership units, unit appreciation rights, restricted units, phantom units, substitute awards, performance awards, other unit-based awards, and includes, as appropriate, any tandem distribution equivalent rights granted with respect to an award (collectively, "LP Units"). On May 18, 2020, the Company's unitholders approved the Amended and Restated 2018 Incentive Award Plan, which increased the number of LP Units issuable under the 2018 Plan by 500,000 to a total of 1,000,000 LP Units. On June 9, 2021, the Company's unitholders approved the Second Amended and Restated 2018 Incentive Award Plan ("Second A&R 2018 Plan"), which increased the number of LP Units issuable under the 2018 Plan by 1,000,000 to a total of 2,000,000 LP Units. The Company granted 5,000 restricted LP Units under the Second A&R 2018 Plan through the six months ended June 30, 2022. Such restricted LP Units were valued based upon the market value of the Company's LP Units on the date of grant, and collectively represent approximately $197 of unearned compensation that will be recognized as expense ratably over the vesting period of the units. The grant has a graded vesting period over three years from the date of grant.
Preferred Units
The Company's 6.0% Series A preferred units, no par value ("SPLP Preferred Units") entitle the holders to a cumulative quarterly cash or in-kind (or a combination thereof) distribution. The Company declared cash distributions of approximately $2,408 and $4,817 to preferred unitholders for both the three and six months ended June 30, 2022 and 2021, respectively. The SPLP Preferred Units have a term of nine years, ending February 2026, and are redeemable at any time at the Company's option at a $25 liquidation value per unit, plus any accrued and unpaid distributions (payable in cash or SPLP common units, or a combination of both, at the Company's discretion). If redeemed in common units, the number of common units to be issued will be equal to the liquidation value per unit divided by the volume weighted-average price of the common units for 60 days prior to the redemption.
The SPLP Preferred Units have no voting rights, except that holders of the preferred units have certain voting rights in limited circumstances relating to the election of directors following the failure to pay six quarterly distributions. The SPLP Preferred Units are recorded as non-current liabilities, including accrued interest expense, on the Company's consolidated balance sheets because they have an unconditional obligation to be redeemed for cash or by issuing a variable number of SPLP common units for a monetary value that is fixed and known at inception. Because the SPLP Preferred Units are classified as liabilities, distributions thereon are recorded as a component of Interest expense in the Company's consolidated statements of operations. As of June 30, 2022 and December 31, 2021, there were 6,422,128 SPLP Preferred Units outstanding.
On August 4, 2022, the Board of SPH GP declared a regular quarterly cash distribution of $0.375 per unit, payable September 15, 2022, to unitholders of record as of September 1, 2022, on its SPLP Preferred Units.
Accumulated Other Comprehensive Loss
Changes, net of tax, where applicable, in AOCI are as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Unrealized loss on available-for-sale debt securities | | | | Cumulative translation adjustments | | Change in net pension and other benefit obligations | | Total |
Balance at December 31, 2021 | $ | (92) | | | | | $ | (13,961) | | | $ | (117,750) | | | $ | (131,803) | |
Net other comprehensive loss attributable to common unitholders | — | | | | | (459) | | | — | | | (459) | |
Balance at March 31, 2022 | (92) | | | | | (14,420) | | | (117,750) | | | (132,262) | |
Net other comprehensive loss attributable to common unitholders | — | | | | | (2,194) | | | — | | | (2,194) | |
Balance at June 30, 2022 | $ | (92) | | | | | $ | (16,614) | | | $ | (117,750) | | | $ | (134,456) | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Unrealized loss on available-for-sale securities | | | | Cumulative translation adjustments | | Change in net pension and other benefit obligations | | Total |
Balance at December 31, 2020 | $ | (274) | | | | | $ | (12,828) | | | $ | (159,547) | | | $ | (172,649) | |
Net other comprehensive loss attributable to common unitholders | — | | | | | (217) | | | — | | | (217) | |
Balance at March 31, 2021 | (274) | | | | | (13,045) | | | (159,547) | | | (172,866) | |
Net other comprehensive income attributable to common unitholders | — | | | | | 614 | | | — | | | 614 | |
Balance at June 30, 2021 | $ | (274) | | | | | $ | (12,431) | | | $ | (159,547) | | | $ | (172,252) | |
| | | | | | | | | |
| | | | | | | | | |
Incentive Unit Awards
In 2012, SPLP issued to the Manager partnership profits interests in the form of Incentive Units which entitle the holder generally to share in 15% of the increase in the equity value of the Company, based on the volume weighted average price of the Company’s common units for the 20 trading days prior to the year-end measurement date. In 2015, the Manager assigned its rights to Incentive Units to a related party, SPH SPV-I LLC ("SPH SPV-I") pursuant to an Incentive Unit Agreement. Vesting in Incentive Units is measured annually on the last day of the Company’s fiscal year and is based upon exceeding a baseline equity value per common unit which is currently $39.26 and was determined when the most recent award vested on December 31, 2021. The number of outstanding Incentive Units is equal to 100% of the common units outstanding, including common units held by non-wholly-owned subsidiaries. The measurement date equity value per common unit is determined by calculating the volume weighted average price of the Company’s common units for 20 trading days prior to a measurement date. If an Incentive Unit award vests as of an annual measurement date they will be issued as Class C units.
Upon vesting in Incentive Units, the baseline equity value will be recalculated as the new baseline equity value to be assessed at the next annual measurement date. If the baseline equity value is not exceeded as of an annual measurement date, then no portion of annual Incentive Units will be classified as Class C common units for that year and the baseline equity value per common unit will be the same amount as determined upon the prior vesting. The Class C units have the same rights as the LP Units, including, without limitation, with respect to partnership distributions and allocations of income, gain, loss and deduction, in all respects, except that liquidating distributions made by the Company to such holder may not exceed the amount of its capital account allocable to such Class C units and such Class C units may not be sold in the public market, until they have converted into LP Units. At such time that the amount of the capital account allocable to a Class C unit is equal to the amount of the capital account allocable to an LP Unit, such Class C unit shall convert automatically into an LP Unit. As of the annual measurement date on December 31, 2021, 1,702,059 Incentive Units vested as the Company’s volume weighted average price exceeded the then baseline equity value of $19.65, and upon vesting, were classified as Class C units. On May 11, 2022, the Company converted and issued the 1,702,059 Class C common units to SPH SPV-I, which SPH SPV-I earned based on the Company’s performance in 2021.
With respect to the Incentive Units that may vest based on the Company's performance in 2022, if June 30, 2022, were the annual measurement date, then approximately 215,626 Incentive Units would vest and be issued as Class C common units based upon the volume weighted-average price of the Company's common units for 20 trading days prior to June 30, 2022. However, pursuant to the terms to the Incentive Unit Agreement, vesting of the Incentive Units only occurs based on the value of the Company’s common units at the annual measurement date on December 31, 2022, and therefore, more, fewer or no Incentive Units may vest for 2022.
13. INCOME TAXES
The Company recorded income tax provisions of $39,436 and $47,045 for the three and six months ended June 30, 2022, and of $35,413 and $50,007 for the three and six months ended June 30, 2021, respectively. The Company's tax provision represents the income tax expense or benefit of its consolidated subsidiaries that are taxable entities. Significant differences between the statutory rate and the effective tax rate include partnership losses for which no tax benefit is recognized, tax expense related to unrealized gains and losses on investment, tax expense related to the net gain on disposal of subsidiaries, changes in deferred tax valuation allowances and other permanent differences. The Company's consolidated subsidiaries have recorded deferred tax valuation allowances to the extent that they believe it is more likely than not that the benefits of certain deferred tax assets will not be realized in future periods.
14. NET INCOME PER COMMON UNIT
The following data was used in computing net income per common unit shown in the Company's consolidated statements of operations:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
Net income from continuing operations | $ | 92,113 | | | $ | 27,435 | | | $ | 96,654 | | | $ | 80,777 | |
Net income attributable to noncontrolling interests in consolidated entities | (35) | | | (323) | | | (11) | | | (714) | |
Net income from continuing operations attributable to common unitholders | 92,078 | | | 27,112 | | | 96,643 | | | 80,063 | |
Net income from discontinued operations attributable to common unitholders | — | | | 128 | | | — | | | 128 | |
Net income attributable to common unitholders | 92,078 | | | 27,240 | | | 96,643 | | | 80,191 | |
Effect of dilutive securities: | | | | | | | |
Interest expense from SPLP Preferred Units (a) | 3,076 | | | 3,076 | | | 6,145 | | | 6,145 | |
Net income attributable to common unitholders – assuming dilution | $ | 95,154 | | | $ | 30,316 | | | $ | 102,788 | | | $ | 86,336 | |
Net income per common unit – basic | | | | | | | |
Net income from continuing operations | $ | 4.03 | | | $ | 1.24 | | | $ | 4.29 | | | $ | 3.60 | |
Net income from discontinued operations | — | | | 0.01 | | | — | | | 0.01 | |
Net income attributable to common unitholders | $ | 4.03 | | | $ | 1.25 | | | $ | 4.29 | | | $ | 3.61 | |
Net income per common unit – diluted | | | | | | | |
Net income from continuing operations | $ | 3.52 | | | $ | 1.02 | | | $ | 3.82 | | | $ | 2.67 | |
Net income from discontinued operations | — | | | 0.01 | | | — | | | 0.01 | |
Net income attributable to common unitholders | $ | 3.52 | | | $ | 1.03 | | | $ | 3.82 | | | $ | 2.68 | |
Denominator for net income per common unit – basic | 22,846,677 | | | 21,829,714 | | | 22,529,635 | | | 22,222,557 | |
Effect of dilutive securities: | | | | | | | |
Incentive Units | 215,626 | | | 1,039,469 | | | 234,820 | | | 519,735 | |
Unvested restricted common units | 185,153 | | | 166,377 | | | 182,543 | | | 148,884 | |
SPLP Preferred Units | 3,814,123 | | | 6,525,677 | | | 3,984,549 | | | 9,352,334 | |
Denominator for net income per common unit – diluted | 27,061,579 | | | 29,561,237 | | | 26,931,547 | | | 32,243,510 | |
(a) Assumes the SPLP Preferred Units were redeemed in common units as described in Note 12 - "Capital and Accumulated Other Comprehensive Loss."
15. FAIR VALUE MEASUREMENTS
Financial assets and liabilities measured at fair value on a recurring basis in the Company's consolidated financial statements as of June 30, 2022 and December 31, 2021 are summarized by type of inputs applicable to the fair value measurements as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
June 30, 2022 | Level 1 | | Level 2 | | Level 3 | | Total |
Assets: | | | | | | | |
Long-term investments (a) | 184,374 | | | — | | | 49,095 | | | 233,469 | |
Precious metal and commodity inventories recorded at fair value | 34,986 | | | — | | | — | | | 34,986 | |
Economic interests in loans (b) | — | | | — | | | 5,582 | | | 5,582 | |
| | | | | | | |
| | | | | | | |
Commodity contracts on precious metal and commodity inventories | — | | | 603 | | | — | | | 603 | |
| | | | | | | |
Warrants (c) | — | | | — | | | 5,385 | | | 5,385 | |
Total | $ | 219,360 | | | $ | 603 | | | $ | 60,062 | | | $ | 280,025 | |
| | | | | | | |
Liabilities: | | | | | | | |
| | | | | | | |
| | | | | | | |
Other precious metal liabilities | $ | 30,135 | | | $ | — | | | $ | — | | | $ | 30,135 | |
| | | | | | | |
| | | | | | | |
Total | $ | 30,135 | | | $ | — | | | $ | — | | | $ | 30,135 | |
| | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
December 31, 2021 | Level 1 | | Level 2 | | Level 3 | | Total |
Assets: | | | | | | | |
Long-term investments (a) | $ | 210,995 | | | $ | — | | | $ | 50,085 | | | $ | 261,080 | |
| | | | | | | |
Precious metal and commodity inventories recorded at fair value | 35,438 | | | — | | | — | | | 35,438 | |
Economic interests in loans (b) | — | | | — | | | 6,483 | | | 6,483 | |
| | | | | | | |
Warrants (c) | — | | | — | | | 6,929 | | | 6,929 | |
| | | | | | | |
Total | $ | 246,433 | | | $ | — | | | $ | 63,497 | | | $ | 309,930 | |
| | | | | | | |
Liabilities: | | | | | | | |
| | | | | | | |
Commodity contracts on precious metal and commodity inventories | $ | — | | | $ | 402 | | | $ | — | | | $ | 402 | |
Other precious metal liabilities | 31,725 | | | — | | | — | | | 31,725 | |
| | | | | | | |
| | | | | | | |
Total | $ | 31,725 | | | $ | 402 | | | $ | — | | | $ | 32,127 | |
(a) For additional detail of the long-term investments see Note 8 - "Investments." The investment in PCS-Mosaic of $23,600 is not included in the fair value leveling tables as it is valued at cost.
(b) For additional detail of the economic interests in loans see Note 10 – "Financial Instruments".
(c) Included within Other non-current assets in the consolidated balance sheets.
There were no transfers of securities among the various measurement input levels during the three and six months ended June 30, 2022.
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (i.e., the "exit price") in an orderly transaction between market participants at the measurement date. Fair value measurements are broken down into three levels based on the reliability of inputs as follows:
Level 1 inputs are quoted prices in active markets for identical assets or liabilities as of the measurement date ("Level 1").
Level 2 inputs may include quoted prices in active markets for similar assets or liabilities, quoted prices in a market that is not active for identical assets or liabilities, or other inputs that can be corroborated by observable market data ("Level 2").
Level 3 inputs are unobservable for the asset or liability when there is little, if any, market activity for the asset or liability. Level 3 inputs are based on the best information available and may include data developed by the Company ("Level 3").
The fair value of the Company's financial instruments, such as cash and cash equivalents, trade and other receivables and accounts payable, approximates carrying value due to the short-term maturities of these assets and liabilities. Carrying cost approximates fair value for long-term debt, which has variable interest rates.
The precious metal and commodity inventories associated with the Company's fair value hedges (see Note 10 - "Financial Instruments") are reported at fair value. Fair values of these inventories are based on quoted market prices on commodity exchanges and are considered Level 1 measurements. The derivative instruments that the Company purchases in connection with its precious metal and commodity inventories, specifically commodity futures and forward contracts, are also
valued at fair value. The futures contracts are Level 1 measurements since they are traded on a commodity exchange. The forward contracts are entered into with a counterparty and are considered Level 2 measurements.
Following is a summary of changes in financial assets measured using Level 3 inputs:
| | | | | | | | | | | | | | | | | | | | | | | |
| Long Term Investments | | Economic Interests in Loans | | Warrants | | Total |
Balance as of December 31, 2021 | $ | 50,085 | | | $ | 6,483 | | | $ | 6,929 | | | $ | 63,497 | |
Purchases | 583 | | | — | | | — | | | 583 | |
Sales and cash collections | — | | | (3,283) | | | (2,150) | | | (5,433) | |
Realized gains | — | | | 2,382 | | | 606 | | | 2,988 | |
| | | | | | | |
Unrealized losses | (1,573) | | | — | | | — | | | (1,573) | |
Balance as of June 30, 2022 | $ | 49,095 | | | $ | 5,582 | | | $ | 5,385 | | | $ | 60,062 | |
| | | | | | | |
Balance as of December 31, 2020 | $ | 48,434 | | | $ | 11,599 | | | $ | 2,618 | | | $ | 62,651 | |
Purchases | 41 | | | — | | | — | | | 41 | |
Sales and cash collections | — | | | (5,069) | | | (2,377) | | | (7,446) | |
Realized gains | — | | | 2,605 | | | 4,836 | | | 7,441 | |
Unrealized gains | 2,509 | | | — | | | — | | | 2,509 | |
| | | | | | | |
Balance as of June 30, 2021 | $ | 50,984 | | | $ | 9,135 | | | $ | 5,077 | | | $ | 65,196 | |
(a) Unrealized gains and losses are recorded in (Income) loss of associated companies, net of taxes in the consolidated statements of operations.
(b) Realized and unrealized gains and losses are recorded in Realized and unrealized (gains) losses on securities, net or Financial services revenue in the consolidated statements of operations.
Long-Term Investments - Valuation Techniques
The Company estimates the value of its investments in STCN preferred stock and the STCN Note using a Binomial Lattice Model and Monte Carlo simulation. Key inputs in these valuations include the trading price and volatility of STCN's common stock, the risk-free rate of return, as well as the dividend rate, conversion price, redemption date of the preferred stock and the maturity date of the STCN Note.
Marketable Securities and Other - Valuation Techniques
The Company determines the fair value of certain corporate securities and corporate obligations by incorporating and reviewing prices provided by third-party pricing services based on the specific features of the underlying securities.
The Company uses the net asset value included in quarterly statements it receives in arrears from a venture capital fund to determine the fair value of such fund and determines the fair value of certain corporate securities and corporate obligations by incorporating and reviewing prices provided by third-party pricing services based on the specific features of the underlying securities. The fair value of the derivatives, or economic interest in loans, held by WebBank (see Note 10 - "Financial Instruments") represent the estimated amounts that WebBank would receive or pay to terminate the contracts at the reporting date and is based on discounted cash flow analyses that consider credit, performance and prepayment. Unobservable inputs used in the discounted cash flow analyses are: a constant prepayment rate of 6.77% to 35.60%, a constant default rate of 1.89% to 21.50% and a discount rate of 1.86% to 26.02%. Warrants were primarily valued using a market approach which leveraged recent securities transactions.
Assets Measured at Fair Value on a Nonrecurring Basis
The Company's non-financial assets and liabilities measured at fair value on a non-recurring basis, include goodwill and other intangible assets, any assets and liabilities acquired in a business combination, or its long-lived assets written down to fair value. To measure fair value for such assets and liabilities, the Company uses techniques including an income approach, a market approach and/or appraisals (Level 3 inputs). The income approach is based on a discounted cash flow analysis and calculates the fair value by estimating the after-tax cash flows attributable to an asset or liability and then discounting the after-tax cash flows to a present value using a risk-adjusted discount rate. Assumptions used in the discounted cash flow analysis ("DCF") require the exercise of significant judgment, including judgment about appropriate discount rates and terminal values, growth rates and the amount and timing of expected future cash flows. The discount rates, which are intended to reflect the risks inherent in future cash flow projections, used in the DCF are based on estimates of the weighted-average cost of capital of a market participant. Such estimates are derived from analysis of peer companies and consider the industry weighted-average return on debt and equity from a market participant perspective. A market approach values a business by considering the prices
at which shares of capital stock, or related underlying assets, of reasonably comparable companies are trading in the public market or the transaction price at which similar companies have been acquired. If comparable companies are not available, the market approach is not used.
16. COMMITMENTS AND CONTINGENCIES
Environmental and Litigation Matters
Certain of the Company's subsidiaries have been designated as potentially responsible parties ("PRPs") by federal and state agencies with respect to certain sites with which they may have had direct or indirect involvement and as defendants in certain litigation matters. Most such legal proceedings and environmental investigations involve unspecified amounts of potential damage claims or awards, are in an initial procedural phase, involve significant uncertainty as to the outcome or involve significant factual issues that need to be resolved, such that it is not possible for the Company to estimate a range of possible loss. For matters that have progressed sufficiently through the investigative process such that the Company is able to reasonably estimate a range of possible loss, an estimated range of possible loss is provided, in excess of the accrued liability (if any) for such matters. Any estimated range is or will be based on currently available information and involves elements of judgment and significant uncertainties. Any estimated range of possible loss may not represent the Company's maximum possible loss exposure. The circumstances of such legal proceedings and environmental investigations will change from time to time, and actual results may vary significantly from the current estimate. For current proceedings not specifically reported below, management does not anticipate that the liabilities, if any, arising from such proceedings would have a material effect on the financial position, liquidity or results of operations of the Company.
The environmental claims are in various stages of administrative or judicial proceedings and include demands for recovery of past governmental costs, and for future investigations and remedial actions. In many cases, the dollar amounts of the claims have not been specified and, with respect to a number of the PRP claims, have been asserted against a number of other entities for the same cost recovery or other relief as was asserted against certain of the Company's subsidiaries. The Company accrues costs associated with environmental and litigation matters on an undiscounted basis, when they become probable and reasonably estimable. As of June 30, 2022, on a consolidated basis, the Company recorded liabilities of $12,214 and $24,930 in Accrued liabilities and Other non-current liabilities, respectively, on the consolidated balance sheet. As of December 31, 2021, on a consolidated basis, the Company recorded liabilities of $2,043 and $23,801 in Accrued Liabilities and Other non-current liabilities, respectively, on the consolidated balance sheet, which represent the current estimate of environmental remediation liabilities as well as reserves related to the litigation matters discussed below. Expenses relating to these costs, and any recoveries, are included in Selling, general and administrative expenses in the Company's consolidated statements of operations. In addition, the Company has insurance coverage available for several of these matters and believes that excess insurance coverage may be available as well. Estimates of the Company's liability for remediation of a particular site and the method and ultimate cost of remediation require a number of assumptions that are inherently difficult to make, and the ultimate outcome may be materially different from current estimates.
Environmental Matters
Certain subsidiaries of the Company have existing and contingent liabilities relating to environmental matters, including costs of remediation, capital expenditures, and potential fines and penalties relating to possible violations of national and state environmental laws. Those subsidiaries have remediation expenses on an ongoing basis, although such costs are continually being readjusted based upon the emergence of new findings, techniques and alternative methods.
Included among these liabilities, certain of the Company's subsidiaries have been identified as PRPs under the Comprehensive Environmental Response, Compensation, and Liability Act ("CERCLA") or similar state statutes at sites and are parties to administrative consent orders in connection with certain properties. Those subsidiaries may be subject to joint and several liabilities imposed by CERCLA on PRPs. Due to the technical and regulatory complexity of remedial activities and the difficulties attendant in identifying PRPs and allocating or determining liability among them, the subsidiaries are unable to reasonably estimate the ultimate cost of compliance with such laws at some of the sites at which the Company's subsidiaries are PRP's.
Based upon information currently available, the Company's subsidiaries do not expect that their respective environmental costs, including the incurrence of additional fines and penalties, if any, will have a material adverse effect on them or that the resolution of these environmental matters will have a material adverse effect on the financial position, results of operations or cash flows of such subsidiaries or the Company, but there can be no such assurances. The Company anticipates that the subsidiaries will pay any such amounts out of their respective working capital, although there is no assurance that they will
have sufficient funds to pay them. In the event that a subsidiary is unable to fund its liabilities, claims could be made against its respective parent companies for payment of such liabilities.
The sites where certain of the Company's subsidiaries have environmental liabilities include the following:
The Company has been working with the Connecticut Department of Energy and Environmental Protection ("CTDEEP") with respect to its obligations under a 1989 consent order that applies to a former manufacturing facility located in Fairfield, Connecticut. An ecological risk assessment of the wetlands portion was submitted in the second quarter of 2016 to the CTDEEP for their review and approval. Company officials continue to meet with CTDEEP representatives to address a final workplan. Additional investigation of the wetlands is expected, pending approval of a mutually acceptable wetlands work plan. An updated work plan to investigate the upland portion of the parcel was prepared by the Company and approved by the CTDEEP in March 2018 and completed during 2019 and 2020. Additional upland investigatory work will be required to fully define the areas requiring remediation and is also dependent upon CTDEEP requirements and approval. Based on currently known information, the Company reasonably estimates that it may incur aggregate losses over a period of multiple years of between $10,500 and $17,500. The Company has a reserve of $14,000 recorded for future remediation costs, which is our best estimate within this range of potential losses. Due to the uncertainties, there can be no assurance that the final resolution of this matter will not be material to the financial position, results of operations or cash flows of the Company.
In 1986, a subsidiary of the Company entered into an administrative consent order ("ACO") with the New Jersey Department of Environmental Protection ("NJDEP") to investigate and remediate property in Montvale, New Jersey that it purchased in 1984. The ACO involves investigation and remediation activities to be performed with regard to soil and groundwater contamination. The Company has been actively investigating and remediating the soil and groundwater since that time and has completed the implementation of the improved groundwater treatment system in operation at the property. Pursuant to a settlement agreement with the former owner/operator of the site, the responsibility for site investigation and remediation costs and other related costs are contractually allocated 75% to the former owner/operator and 25% jointly to the Company, all after having the first $1,000 paid by the former owner/operator. Additionally, the Company had been reimbursed indirectly through insurance coverage for a portion of the costs for which it is responsible. There is no assurance that the former owner/operator or guarantors will continue to timely reimburse the Company for expenditures and/or will be financially capable of fulfilling their obligations under the settlement agreement and the guaranties. There is no assurance that there will be any additional insurance reimbursement. A reserve of approximately $900 has been established for the Company's expected 25% share of anticipated costs at this site, which is based upon the recent selection of a final remedy, on-going operations and maintenance, additional investigations and monitored natural attenuation testing over the next 30 years. Also, a reserve and related receivable of approximately $2,700 has been established for the former owner/operator's expected share of anticipated costs at this site. On December 18, 2019, the State of New Jersey ("State") filed a complaint against the Company and other non-affiliated corporations related to former operations at this location. The State is seeking unspecified damages, including reimbursement for all cleanup and removal costs and other damages that the State claims it has incurred, including the lost value of, and reasonable assessment costs for any natural resource injured as a result of the alleged discharge of hazardous substances and pollutants, as well as attorneys' fees and costs. On March 16, 2020, the Company filed a partial motion to dismiss, resulting in dismissal with prejudice of the State's trespass claim and limiting the damages recoverable through the State's public nuisance claim to monetary relief associated with abatement. On June 11, 2020, the State filed an Amended Complaint, bringing the same claims as the original complaint. On July 1, 2020, the Company answered and asserted crossclaims for indemnification and contribution against another defendant, Cycle Chem, Inc. Cycle Chem also asserted crossclaims against the Company, which have been answered. The parties have largely completed written and document discovery and confidential mediation. As a result of the mediation, the State has verbally agreed to a settlement amount of $10,500, of which the Company would be required to pay $2,625, its 25% share, and of which other non-affiliated corporations would pay the remaining $7,875, their 75% share. The State is required to go through a formal approval process on the settlement amount which is expected to take several weeks. In the meantime, the legal proceedings have been delayed while the settlement process is finalized.
The Company's subsidiary, SL Industries, Inc. ("SLI"), may incur environmental costs in the future as a result of the past activities of its former subsidiary, SL Surface Technologies, Inc. ("SurfTech"), in Pennsauken, New Jersey ("Pennsauken Site") and Camden, New Jersey and at its former subsidiary, SGL Printed Circuits in Wayne, New Jersey. At the Pennsauken Site, in 2013, SLI entered into a consent decree with both the U.S. Department of Justice and the U.S. Environmental Protection Agency ("EPA") and has since completed the remediation required by the consent decree and has paid the EPA a fixed sum for its past oversight costs. Separate from the consent decree, in December 2012, the NJDEP made a settlement demand of $1,800 for past and future cleanup and removal costs and natural resource damages ("NRD"). To avoid the time and expense of litigating the matter, SLI offered to pay approximately $300 to fully resolve the claim presented by the State. SLI's settlement offer was rejected. On December 6, 2018, the State filed a complaint against SLI related to its operations at the Pennsauken Site. The State is seeking treble damages and attorneys' fees, NRD for loss of use of groundwater, as well as a request for relief that
SLI pay all cleanup and removal costs that the State has incurred and will incur at the Pennsauken Site. SLI has informed the State that it is willing to mediate, and the State is attempting to receive authorization to mediate. The State's most recent demand for all costs, including NRD, was for $11,500. On August 21, 2019, SLI responded with a $1,070 settlement offer. The Company has a reserve of $1,070, which is our best estimate within the range of potential losses. SLI intends to assert all legal and procedural defenses available to it. Accordingly, there can be no assurance that the resolution of this matter will not be material to the financial position, results of operations or cash flows of the Company.
SLI reported soil contamination and a groundwater contamination in 2003 from the SurfTech site located in Camden, New Jersey. Substantial investigation and remediation work have been completed under the direction of the licensed site remediation professional ("LSRP") for the site. Additional soil excavation and chemical treatment is expected to start in the second half of 2022. Post-remediation groundwater monitoring will be conducted, and a full-scale groundwater bioremediation is expected to be implemented following completion of soil excavation. A reserve of $2,800 has been established for anticipated costs at this site, but there can be no assurance that there will not be potential additional costs associated with the site which cannot be reasonably estimated at this time. Accordingly, there can be no assurance that the resolution of this matter will not be material to the financial position, results of operations or cash flows of the Company.
SLI is currently participating in environmental assessment and cleanup at a commercial facility located in Wayne, New Jersey. Contaminated soil and groundwater have undergone remediation with the NJDEP and LSRP oversight, but contaminants of concern in groundwater and surface water, which extend off-site, remain above applicable NJDEP remediation standards. A reserve of approximately $1,300 has been established for anticipated costs, but there can be no assurance that there will not be potential additional costs associated with the site which cannot be reasonably estimated at this time. Accordingly, there can be no assurance that the resolution of this matter will not be material to the financial position, results of operations or cash flows of SLI, HNH or the Company.
Litigation Matters
Sciabacucchi v. DeMarco. On December 8, 2017, a stockholder class action, captioned Sciabacucchi v. DeMarco, et al., was filed in the Court of Chancery of the State of Delaware (the "Chancery Court") by a purported former stockholder of Handy & Harman Ltd. ("HNH") challenging the Company's acquisition, through a subsidiary, of all of the outstanding shares of common stock of HNH not already owned by the Company or any of its affiliates. The action named as defendants the former members of the HNH board of directors, the Company and SPH GP, and alleged, among other things, that the defendants breached their fiduciary duties to the former public stockholders of HNH in connection with the aforementioned acquisition. The complaint sought, among other relief, unspecified monetary damages, attorneys' fees and costs. On July 9, 2019, the Company entered into a settlement of the case, solely to avoid the substantial burden, expense, inconvenience and distraction of continued litigation and to resolve each of the plaintiff's claims against the defendant parties. In the settlement, the defendants agreed to pay the plaintiff class $30,000, but denied that they engaged in any wrongdoing or committed any violation of law or breach of duty and stated that they believe they acted properly, in good faith, and in a manner consistent with their legal duties. The settlement was approved by the Chancery Court on December 2, 2019. Our insurance carriers agreed to contribute an aggregate of $17,500 toward the settlement amount. The Company recorded a charge of $12,500 in Selling, general and administrative expenses in the consolidated statement of operations for the fiscal year ended December 31, 2019, which consisted of the legal settlement of $30,000, reduced by the $17,500 of insurance recoveries. The settlement was paid on December 17, 2019. The Company made a demand of an aggregate of $10,000 in further contributions from two insurance carriers. The dispute with the insurance carriers was litigated in the New York Supreme Court and the Court ruled on June 16, 2021 in the Company's favor on all issues and authorized a judgment to be entered against the insurance carriers for $11,300 plus statutory interest at 9% from June 16, 2021. On November 10, 2021, the Company entered into a settlement agreement with such carriers for approximately $11,000. The Company is party to a contingency agreement with its counsel whereby its counsel received 20% of the settlement received by the Company related to this matter. The Company received net settlement payments totaling $8,827 in November 2021.
Reith v. Lichtenstein, et al. On April 13, 2018, a purported shareholder of STCN, Donald Reith, filed a verified complaint, Reith v. Lichtenstein, et al., 2018-0277 (Del. Ch.) (the "Reith litigation") in the Chancery Court. The plaintiff sought to assert class action and derivative claims against the Company, together with STCN and with certain of members of STCN's board of directors, as well as other named defendants (collectively, the "defendants") in connection with the acquisition of $35,000 of STCN's Series C Preferred Stock by an affiliate of the Company and equity grants made to three individual defendants. The complaint includes claims for breach of fiduciary duty against all the individual defendants as STCN directors; claims for aiding and abetting breach of fiduciary duty against the Company; a claim for breach of fiduciary duty as controlling stockholder against the Company; and a derivative claim for unjust enrichment against the Company and the three individuals who received equity grants. The complaint demands damages in an unspecified amount for STCN and its stockholders, together with rescission, disgorgement and other equitable relief. The defendants moved to dismiss the complaint for failure to plead
demand futility and failure to state a claim. On June 28, 2019, the Chancery Court denied most of defendants' the motion to dismiss, allowing the matter to proceed. On August 13, 2021, the defendants and plaintiff (the "parties"), entered into a memorandum of understanding (the "MOU") in connection with the settlement of the Reith litigation. Pursuant to the MOU, the defendants agreed to cause their directors' and officers' liability insurance carriers to pay to STCN $2,750 in cash. The Company's insurance carrier agreed to pay $1,100 of the settlement and STCN's insurance carrier agreed to pay the remaining $1,650. Following the parties’ entry into a Stipulation and Agreement of Compromise, Settlement, and Release (the "Proposed Settlement Agreement") on February 18, 2022, on March 17, 2022, the Chancery Court granted, with modifications, a scheduling order (the "Scheduling Order") in connection with the Proposed Settlement Agreement. Pursuant to the Scheduling Order, during April 2022 the insurers completed the wiring of the settlement payments into an account jointly controlled by counsel for plaintiff and STCN, where the funds are to remain until final court approval of the settlement. In addition, pursuant to the terms of the MOU, certain of the individual defendants who are also current and former employees of the Company—Warren Lichtenstein (Executive Chairman), Jack Howard (President), and William Fejes (former Chief Operating Officer)—entered into separate letter agreements (the "Surrender Agreements") with STCN whereby they each agreed to surrender to STCN an aggregate 3,300,000 shares which they had initially received in December 2017 in consideration for services to STCN. The surrenders and cancellations are in the following amounts: for Mr. Lichtenstein, 1,833,333 vested shares and 300,000 unvested shares; for Mr. Howard, 916,667 vested shares and 150,000 unvested shares; and for Mr. Fejes, 100,000 vested shares. The surrenders and cancellations are to be completed no later than seven calendar days following final approval of the settlement by the court and the exhaustion of any appeals therefrom or the expiration of time to appeal. Mr. Lichtenstein, Mr. Howard and Mr. Fejes surrendered the shares required under their respective Surrender Agreement and such shares were subsequently cancelled. The settlement requires court approval, and there can be no assurances that such approval will be granted. Per the Scheduling Order, a settlement hearing is currently scheduled for August 12, 2022, prior to which time the parties may file additional settlement papers. The settlement also provides that STCN shall pay the legal fees and costs of plaintiff's counsel of $2,050, subject to court approval of that payment, after STCN receives the settlement amount of $2,750 from the account described above.
A subsidiary of BNS Holdings Liquidating Trust ("BNS Sub") has been named as a defendant in multiple alleged asbestos-related toxic-tort claims filed over a period beginning in 1994 through June 30, 2022. In many cases these claims involved more than 100 defendants. There remained approximately 46 pending asbestos claims as of June 30, 2022. BNS Sub believes it has significant defenses to any liability for toxic-tort claims on the merits. None of these toxic-tort claims has gone to trial and, therefore, there can be no assurance that these defenses will prevail. BNS Sub has insurance policies covering asbestos-related claims for years beginning 1974 through 1988. BNS Sub annually receives retroactive billings or credits from its insurance carriers for any increase or decrease in claims accruals as claims are filed, settled or dismissed, or as estimates of the ultimate settlement costs for the then-existing claims are revised. As of both June 30, 2022 and December 31, 2021, BNS Sub has accrued $1,465 relating to the open and active claims against BNS Sub. This accrual includes the amount of unpaid retroactive billings submitted to the Company by the insurance carriers and also the Company's best estimate of the likely costs for BNS Sub to settle these claims outside the amounts funded by insurance. There can be no assurance that the number of future claims and the related costs of defense, settlements or judgments will be consistent with the experience to-date of existing claims and that BNS Sub will not need to significantly increase its estimated liability for the costs to settle these claims to an amount that could have a material effect on the consolidated financial statements.
Aerojet Election Contest Litigation. On January 28, 2022, SPLP delivered a letter to Aerojet Rocketdyne Holdings, Inc. ("Aerojet"), a portfolio company of SPLP, nominating a slate of director candidates, consisting of four then current directors of Aerojet, including Mr. Lichtenstein (Executive Chairman of SPLP), and four other individuals (collectively, the "SPLP Slate"), for election at Aerojet's 2022 annual meeting of stockholders (the "Annual Meeting"). On February 10, 2022, Mr. Lichtenstein and three other Aerojet directors included in the SPLP Slate (the "Director Plaintiffs") filed suit in the Court of Chancery of the State of Delaware naming as Defendants Eileen P. Drake, Aerojet's CEO, and the three other then current Aerojet directors (the "Director Defendants") seeking, among other things, declaratory and injunctive relief regarding the Director Defendants' use of Aerojet's corporate resources to disparage the Director Plaintiffs and oppose the SPLP Slate. At the time, the Director Defendants and the Director Plaintiffs comprised the entire Board of Aerojet (the "Aerojet Board") which was split four to four.
On February 15, 2022, the Court granted the Director Plaintiffs' motion for a temporary restraining order subject to certain modifications and directed the parties to submit an implementing order. The parties were unable to agree and submitted competing forms of order.
On February 23, 2022, the Court issued a letter opinion granting the Director Plaintiffs' proposed order and rejecting the Director Defendants' proposed order. Among other things, the Court rejected the Director Defendants' proposal to require Aerojet to fund up to $20,000 of the parties' proxy solicitation expenses. The Court also rejected the Director Defendants' proposal to require Aerojet to reimburse the parties' litigation costs for affirmative claims.
Consistent with the proposal made by the Director Plaintiffs, the order entered by the Court of Chancery (the "Order") imposed the following prohibitions so long as the Aerojet Board was evenly divided regarding the election contest:
•None of the Aerojet directors nor any of the Aerojet officers, employees or anyone purporting to act on Aerojet's behalf may make any public statement, issue any press release or make any disclosure on behalf of Aerojet in support of the election efforts of any candidate for election at the Annual Meeting without the prior written approval of the Aerjoet Board or a duly authorized committee; and
•None of the Aerojet directors nor any of the Aerojet officers, employees or anyone purporting to act on Aerojet's behalf may use Aerojet funds or other Aerojet resources in support of the election efforts of any candidate for election at the Annual Meeting without the prior written approval of the Aerojet Board or a duly authorized committee.
Separately, on February 11, 2022, the Director Defendants brought a lawsuit directly, derivatively and purportedly by Aerojet, against the Director Plaintiffs and SPH Group Holdings LLC ("SPHG Holdings"), an affiliate of SPLP, in the Delaware Court of Chancery. The Complaint alleged claims for breach of fiduciary duty, aiding and abetting breach of fiduciary duty and a violation of Aerojet's advance-notice bylaws. The Complaint also alleged, among other things, that Mr. Lichtenstein had launched a proxy contest to gain control of the Aerojet Board and that SPHG Holdings had aided and abetted his conduct.
On February 25, 2022, the Court entered an order consolidating the lawsuit brought by the Director Plaintiffs with the lawsuit brought by the Director Defendants and expedited the schedule. Trial was set for May 23-25, 2022.
On March 7, 2022, the Director Defendants voluntarily dismissed the direct and derivative claims they had previously asserted against the Director Plaintiffs and SPHG Holdings.
On April 21, 2022, the Director Defendants filed an Answer, along with Counterclaims and a Third-Party Complaint, in response to the Director Plaintiffs' Complaint and Supplemental Complaint. The Counterclaims and Third-Party Complaint reasserted many of the same allegations asserted on February 11, 2022 and dismissed voluntarily. The Counterclaims and Third-Party Complaint asserted claims against SPLP, SPHG Holdings, SPH GP and the Director Plaintiffs, as well as the other three members of the SPLP Slate (collectively the "Counterclaim Defendants").
The Counterclaims and Third-Party Complaint asserted claims for breach of fiduciary duty, aiding and abetting fiduciary breaches and fraud. According to the Counterclaims, Mr. Lichtenstein, his director nominees and SPLP breached fiduciary duties by nominating a slate of directors and their failure to participate in an effort by Ms. Drake and the three directors aligned with her to oppose the nominations by SPLP. The Counterclaims and Third-Party Complaint also alleged that SPLP and the three SPLP nominees who were not on the Aerojet Board aided and abetted these alleged fiduciary breaches. The fraud claim was based on the allegation that the Counterclaim Defendants failed to disclose information regarding their proxy contest to Aerojet. SPLP believes the claims brought by the Director Defendants were without merit.
On April 27, 2022, SPHG Holdings and Warren Lichtenstein filed a Complaint in the United States District Court for the Central District of California naming as defendants Eileen Drake and the other members of her purported slate of directors (the "Federal Suit Defendants") that she sought to install on the Aerojet Board at a special meeting of stockholders of Aerojet (the "Special Meeting"). The Federal Suit Defendants had filed a proxy statement with the SEC (the "Special Meeting Proxy") seeking to call the Special Meeting for the purpose of removing all the members of the Aerojet Board and replacing them with the Federal Suit Defendants. The Complaint alleged that the Special Meeting Proxy, and other materials disseminated by the Federal Suit Defendants to Aerojet stockholders, contain false and misleading statements in violation of Section 14(a) of the Exchange Act and SEC Rule 14a-9. The Complaint sought injunctive and declaratory relief. On July 5, 2022, Mr. Lichtenstein and SPHG Holdings voluntarily dismissed the federal lawsuit without prejudice.
The trial for the Delaware lawsuit was held on May 23-25, 2022. The Court issued a post-trial opinion on June 16, 2022, and entered a Partial Final Judgment (the "Judgment") on June 21, 2022. Among other things, the Judgment granted the declaratory and injunctive relief sought by the Director Plaintiffs in their complaint of February 7, 2022, including requiring that Aerojet issue certain corrective disclosure, and denied the Director Plaintiffs' request that the Director Defendants be held in contempt and required to pay the Director Plaintiffs' attorneys' fees. The possible liability, if any, with respect to this dispute cannot be determined as of this date. Prior to the trial, the Court severed the Director Defendants' putative counterclaims and third-party claims against the Counterclaim Defendants. The Counterclaim Defendants intend to vigorously defend against the Director Defendants' putative counterclaims and third-party claims, and the probable resolution and possible liability, if any, with respect to those putative claims cannot be determined as of this date.
At the Special Meeting, held on June 30, 2022, the stockholders of Aerojet elected a new eight-member board of directors that did not include Warren G. Lichtenstein, the other Director Plaintiffs or any of the other director candidates nominated by SPLP for election at the meeting.
In the ordinary course of our business, the Company is subject to other periodic lawsuits, investigations, claims and proceedings, including, but not limited to, contractual disputes, employment, environmental, health and safety matters, as well as claims associated with our historical acquisitions and divestitures. There is insurance coverage available for many of the foregoing actions. Although the Company cannot predict with certainty the ultimate resolution of lawsuits, investigations, claims and proceedings asserted against the Company, it does not believe any currently pending legal proceeding to which it is a party will have a material adverse effect on its business, prospects, financial condition, cash flows, results of operations or liquidity.
17. RELATED PARTY TRANSACTIONS
Management Agreement with SP General Services LLC
SPLP is managed by the Manager, pursuant to the terms of the Management Agreement, which receives a fee at an annual rate of 1.5% of total Partners' capital ("Management Fee"), payable on the first day of each quarter and subject to a quarterly adjustment. In addition, SPLP may issue to the Manager partnership profits interests in the form of incentive units, which will be classified as Class C common units of SPLP, upon the attainment of certain specified performance goals by SPLP, which are determined as of the last day of each fiscal year (see Note 12 - "Capital and Accumulated Other Comprehensive Loss" for additional information on the incentive units).
The Management Agreement is automatically renewed each December 31 for successive one-year terms unless otherwise determined at least 60 days prior to each renewal date by a majority of the Company's independent directors. The Management Fee was $2,450 and $2,203 for the three months ended June 30, 2022 and 2021, respectively, and $4,937 and $4,209 for the six months ended June 30, 2022 and 2021, respectively. The Management Fee is included in Selling, general and administrative expenses in the Company's consolidated statements of operations. Unpaid Management Fees included in Payables to related parties on the Company's consolidated balance sheet were $50 and $49 as of June 30, 2022 and December 31, 2021, respectively.
SPLP will bear (or reimburse the Manager with respect to) all its reasonable costs and expenses of the managed entities, the Manager, SPH GP or their affiliates, including but not limited to: legal, tax, accounting, auditing, consulting, administrative, compliance, investor relations costs related to being a public entity rendered for SPLP or SPH GP, as well as expenses incurred by the Manager and SPH GP which are reasonably necessary for the performance by the Manager of its duties and functions under the Management Agreement and certain other expenses incurred by managers, officers, employees and agents of the Manager or its affiliates on behalf of SPLP. Reimbursable expenses incurred by the Manager in connection with its provision of services under the Management Agreement were approximately $1,218 and $1,142 for the three months ended June 30, 2022 and 2021, respectively, and $1,992 and $1,986 for the six months ended June 30, 2022 and 2021, respectively. Unpaid amounts for reimbursable expenses were approximately $1,855 and $1,673 as of June 30, 2022 and December 31, 2021, respectively, and are included in Payables to related parties on the Company's consolidated balance sheets.
Corporate Services
The Company's subsidiary, Steel Services Ltd ("Steel Services"), through management services agreements with its subsidiaries and portfolio companies, provides services, which include assignment of C-Level management personnel, legal, tax, accounting, treasury, consulting, auditing, administrative, compliance, environmental health and safety, human resources, marketing, investor relations, operating group management and other similar services. In addition to its servicing agreements with SPLP and its consolidated subsidiaries, which are eliminated in consolidation, Steel Services has management services agreements with other companies considered to be related parties, including J. Howard Inc., Steel Partners, Ltd. and affiliates, and STCN. In total, Steel Services currently charges approximately $3,398 annually to these companies. All amounts billed under these service agreements are classified as a reduction of Selling, general and administrative expenses. The receivable from STCN of $2,097 as of June 30, 2022, represents $1,292 of receivables for the management services agreement, $280 receivable from STCN notes, and a $525 receivable for dividends on STCN preferred stock.
Mutual Securities, Inc.
Pursuant to the Management Agreement, the Manager is responsible for selecting executing brokers. Securities transactions for SPLP are allocated to brokers on the basis of reliability, price and execution. The Manager has selected Mutual
Securities, Inc. as an introducing broker and may direct a substantial portion of the managed entities' trades to such firm, among others. An officer of the Manager and SPH GP is affiliated with Mutual Securities, Inc. The commissions paid by SPLP to Mutual Securities, Inc. were not significant in any period.
Other
At June 30, 2022 and December 31, 2021, several related parties and consolidated subsidiaries had deposits totaling $1,108 and $1,115 at WebBank, respectively. Approximately $28 and $36 of these deposits, including interest which was not significant, have been eliminated in consolidation as of June 30, 2022 and December 31, 2021, respectively.
18. SEGMENT INFORMATION
SPLP operates through the following segments: Diversified Industrial, Energy, and Financial Services, which are managed separately and offer different products and services. The Diversified Industrial segment is comprised of manufacturers of engineered niche industrial products, including joining materials, tubing, building materials, performance materials, electrical products, cutting replacement products and services, and a packaging business. The Energy segment provides drilling and production services to the oil & gas industry and owns a youth sports business. The Financial Services segment consists primarily of the operations of WebBank, a Utah chartered industrial bank, which engages in a full range of banking activities.
Corporate and Other consists of several consolidated subsidiaries, including Steel Services, equity method and other investments, and cash and cash equivalents. Its income or loss includes certain unallocated general corporate expenses.
Steel Services has management services agreements with its consolidated subsidiaries and other related companies as further discussed in Note 17 - "Related Party Transactions." Steel Services charged the Diversified Industrial, Energy and Financial Services segments approximately $12,544, $2,142 and $536, respectively, for the three months ended June 30, 2022 and $7,403, $1,409 and $224, respectively, for the three months ended June 30, 2021. Steel Services charged the Diversified Industrial, Energy and Financial Services segments approximately $22,900, $3,568, and $918, respectively, for the six months ended June 30, 2022 and $14,806, $2,637, and $448, respectively, for the six months ended June 30, 2021. These service fees are reflected as expenses in the segment income (loss) below, but are eliminated in consolidation.
Segment information is presented below:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
Revenue: | | | | | | | |
Diversified Industrial | $ | 346,664 | | | $ | 305,759 | | | $ | 673,913 | | | $ | 554,248 | |
Energy | 47,024 | | | 41,768 | | | 85,341 | | | 73,854 | |
Financial Services | 47,720 | | | 38,906 | | | 87,899 | | | 72,824 | |
Total revenue | $ | 441,408 | | | $ | 386,433 | | | $ | 847,153 | | | $ | 700,926 | |
Income (loss) from continuing operations before interest expense and income taxes: | | | | | | | |
Diversified Industrial | $ | 121,952 | | | $ | 35,832 | | | $ | 156,034 | | | $ | 63,536 | |
Energy | 3,677 | | | 3,644 | | | 7,629 | | | 6,461 | |
Financial Services | 13,709 | | | 23,718 | | | 27,636 | | | 44,167 | |
Corporate and Other | (2,971) | | | 5,158 | | | (38,258) | | | 27,590 | |
Income from continuing operations before interest expense and income taxes | 136,367 | | | 68,352 | | | 153,041 | | | 141,754 | |
Interest expense | 4,818 | | | 5,504 | | | 9,342 | | | 10,970 | |
Income tax provision | 39,436 | | | 35,413 | | | 47,045 | | | 50,007 | |
Net income | $ | 92,113 | | | $ | 27,435 | | | $ | 96,654 | | | $ | 80,777 | |
(Income) loss of associated companies, net of taxes: | | | | | | | |
| | | | | | | |
| | | | | | | |
Corporate and Other | $ | (2,260) | | | $ | (2,840) | | | $ | 2,383 | | | $ | (28,961) | |
Total | $ | (2,260) | | | $ | (2,840) | | | $ | 2,383 | | | $ | (28,961) | |
Segment depreciation and amortization: | | | | | | | |
Diversified Industrial | $ | 10,392 | | | $ | 11,843 | | | $ | 21,753 | | | $ | 23,815 | |
Energy | 2,643 | | | 3,066 | | | 5,164 | | | 6,060 | |
Financial Services | 133 | | | 121 | | | 261 | | | 245 | |
Corporate and Other | 180 | | | 40 | | | 333 | | | 79 | |
Total depreciation and amortization | $ | 13,348 | | | $ | 15,070 | | | $ | 27,511 | | | $ | 30,199 | |
19. REGULATORY MATTERS
WebBank is subject to various regulatory capital requirements administered by federal banking agencies. Failure to meet minimum capital requirements can initiate certain actions by regulators that, if undertaken, could have a direct material effect on WebBank's financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, WebBank must meet specific capital guidelines that involve quantitative measures of its 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.
As a result of Basel III becoming fully implemented as of January 1, 2019, WebBank's minimum requirements increased for both the quantity and quality of capital held by WebBank. The rules include a new common equity Tier 1 capital to risk-weighted assets ratio ("CET1 Ratio") of 4.5% and a capital conservation buffer of 2.5% of risk-weighted assets, which as fully phased-in, effectively results in a minimum CET1 Ratio of 7.0%. Basel III raises the minimum ratio of Tier 1 capital to risk-weighted assets from 4.0% to 6.0% (which, with the capital conservation buffer, effectively results in a minimum Tier 1 capital ratio of 8.5% as fully phased-in), and effectively results in a minimum total capital to risk-weighted assets ratio of 10.5% (with the capital conservation buffer fully phased-in), and requires a minimum leverage ratio of 4.0%. Basel III also made changes to risk weights for certain assets and off-balance-sheet exposures. WebBank expects that its capital ratios under Basel III will continue to exceed the well capitalized minimum capital requirements, and such amounts are disclosed in the table below:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | Amount of Capital Required |
| | Actual | | For Capital Adequacy Purposes | | Minimum Capital Adequacy With Capital Buffer | | To Be Well Capitalized Under Prompt Corrective Provisions |
| | Amount | | Ratio | | Amount | | Ratio | | Amount | | Ratio | | Amount | | Ratio |
As of June 30, 2022 | | | | | | | | | | | | | | | | |
Total Capital | | | | | | | | | | | | | | | | |
(to risk-weighted assets) | | $ | 273,270 | | | 17.70 | % | | $ | 123,810 | | | 8.00 | % | | $ | 162,501 | | | 10.50 | % | | $ | 154,763 | | | 10.00 | % |
Tier 1 Capital | | | | | | | | | | | | | | | | |
(to risk-weighted assets) | | $ | 256,768 | | | 16.60 | % | | $ | 92,858 | | | 6.00 | % | | $ | 131,548 | | | 8.50 | % | | $ | 123,810 | | | 8.00 | % |
Common Equity Tier 1 Capital | | | | | | | | | | | | | | | | |
(to risk-weighted assets) | | $ | 256,768 | | | 16.60 | % | | $ | 69,643 | | | 4.50 | % | | $ | 108,334 | | | 7.00 | % | | $ | 100,596 | | | 6.50 | % |
Tier 1 Capital | | | | | | | | | | | | | | | | |
(to average assets) | | $ | 256,768 | | | 20.20 | % | | $ | 50,875 | | | 4.00 | % | | n/a | | n/a | | $ | 63,594 | | | 5.00 | % |
| | | | | | | | | | | | | | | | |
As of December 31, 2021 | | | | | | | | | | | | | | | | |
Total Capital | | | | | | | | | | | | | | | | |
(to risk-weighted assets) | | $ | 257,262 | | | 27.10 | % | | $ | 75,907 | | | 8.00 | % | | $ | 99,628 | | | 10.50 | % | | $ | 94,884 | | | 10.00 | % |
Tier 1 Capital | | | | | | | | | | | | | | | | |
(to risk-weighted assets) | | $ | 245,377 | | | 25.90 | % | | $ | 56,930 | | | 6.00 | % | | $ | 80,651 | | | 8.50 | % | | $ | 75,907 | | | 8.00 | % |
Common Equity Tier 1 Capital | | | | | | | | | | | | | | | | |
(to risk-weighted assets) | | $ | 245,377 | | | 25.90 | % | | $ | 42,698 | | | 4.50 | % | | $ | 66,419 | | | 7.00 | % | | $ | 61,674 | | | 6.50 | % |
Tier 1 Capital | | | | | | | | | | | | | | | | |
(to average assets) | | $ | 245,377 | | | 26.80 | % | | $ | 36,687 | | | 4.00 | % | | n/a | | n/a | | $ | 45,859 | | | 5.00 | % |
`
The Federal Reserve, Office of the Comptroller of Currency and Federal Deposit Insurance Corporation issued an interim final rule that excludes loans pledged as collateral to the Federal Reserve's PPP Lending Facility from supplementary leverage ratio exposure and average total consolidated assets. Additionally, PPP loans will receive a zero percent risk weight under the risk-based capital rules of the federal banking agencies.
20. SUPPLEMENTAL CASH FLOW INFORMATION
A summary of supplemental cash flow information for the six months ended June 30, 2022 and 2021 is presented in the following table:
| | | | | | | | | | | |
| Six Months Ended June 30, |
| 2022 | | 2021 |
Cash paid during the period for: | | | |
Interest | $ | 10,252 | | | $ | 12,607 | |
Taxes | $ | 13,179 | | | $ | 5,819 | |
21. SUBSEQUENT EVENTS
WebBank Acquisition of Premium Finance Receivables
On August 2, 2022, WebBank closed the transaction to acquire certain specified assets, primarily consisting of $31,863 of premium finance receivables. The transaction occurred pursuant to an asset purchase agreement entered into on February 4, 2022. The acquisition will allow WebBank to continue to grow its premium finance loan portfolio. The purchase price contains an approximately $1,593 purchase premium of the premium finance receivables plus a profit share interest, which is expected to be approximately $1,600.