10-K: Steel Partners Holdings L.P. Issues Series E Preferred Stock and Files 10-K

Steel Partners Holdings L.P. details the issuance of Series E Convertible Preferred Stock by Steel Connect, Inc. and reports its annual financial results in its 10-K filing.

Summary

• Steel Partners Holdings L.P. (SPLP) authorized the issuance of 3.5 million shares of Series E Convertible Preferred Stock of Steel Connect, Inc. (STCN) on April 30, 2023.
• Each share of Series E Preferred Stock has a par value of $0.01.
• Holders of Series E Preferred Stock are not entitled to dividends until Stockholder Approval is obtained, after which they will participate equally with common stockholders.
• Upon a Liquidation Event, holders are entitled to receive $58.1087 per share before common stockholders.
• The Series E Preferred Stock is convertible into common stock at a price of $1.10 per share, following Stockholder Approval.
• SPLP's 10-K filing for the fiscal year ended December 31, 2023, shows a revenue of $1,905.457 million, an increase of 12.4% compared to 2022.
• Net income attributable to common unitholders was $150.829 million, a decrease from $205.972 million in 2022.
• The company repurchased 462,628 common units for $20.040 million during 2023.
• The company had $399.3 million available under its senior credit facility as of December 31, 2023.
• The company's working capital was $562.224 million as of December 31, 2023.

Sentiment

Score: 5

Explanation: The document presents a mixed picture with positive revenue growth but a decrease in net income. The numerous risk factors and the complexity of the business structure contribute to a neutral sentiment.

Positives

• The issuance of Series E Preferred Stock strengthens Steel Connect's balance sheet.
• SPLP's revenue increased by 12.4% in 2023.
• The company has a significant amount of available borrowing capacity under its senior credit facility.

Negatives

• Net income attributable to common unitholders decreased in 2023.
• The company's working capital increased due to an increase in loans receivable and cash and cash equivalents, partially offset by an increase in retail depository accounts.

Risks

• Economic downturns could disrupt and materially harm the company's businesses.
• Inflation and supply chain disruptions may continue to negatively impact the company's business.
• Significant volatility in prices of, and declines in customer demand for, crude oil could negatively impact the company's business.
• Rising interest rates may negatively impact the company's investments.
• The company may be subject to substantial cash funding requirements in the future due to its subsidiaries' defined benefit pension plans.
• The company is subject to risks associated with environmental, health and safety matters.
• The company could incur significant costs as a result of complying with or failing to comply with extensive regulations.
• Future cash flows may not be sufficient to meet obligations under the senior credit facility.
• Acquisitions entail numerous risks, including management diversion and increased costs and expenses.
• Divestitures and contingent liabilities from divested businesses could adversely affect the company's business.
• The company may sustain losses in its investment portfolio.
• The company may not be able to adequately obtain or protect its intellectual property.
• Conducting business outside of the United States exposes the company to additional risks.
• Global trade issues and changes in trade policies may increase costs or limit supplies.
• Litigation or compliance failures could adversely affect the company's profitability.
• A significant disruption in, or breach in security of, the company's technology systems could adversely affect its business.
• Current and proposed laws regarding the protection of personal data could result in increased risks of liability.
• Labor disputes and unionization could increase costs and cause work stoppages.
• WebBank's status as lender of the loans it offers may be challenged.
• WebBank is subject to capital requirements, and SPLP could be called upon to infuse additional capital.
• WebBank's lending programs depend on relationships with Marketing Partners.
• WebBank is subject to risks of litigation from its borrowers or others regarding the processing of loans for the Paycheck Protection Program.
• The company is subject to credit and interest rate risk in connection with its lending activities.
• The company's businesses have been, and may in the future be, adversely affected by conditions in the financial services industry.
• Steel Connect is a public company which may increase the company's costs and divert management's attention.
• The company's subsidiaries do not have long-term contracts with all of their customers.
• Failure to maintain effective internal control over financial reporting could result in material misstatements.
• Epidemics, pandemics, outbreaks of disease and other adverse public health developments may have an adverse effect on the company's business.
• The conflict in Ukraine and related price volatility and geopolitical instability could negatively impact the company's business.
• Loss of essential employees could have a significant negative impact on the company's business.
• The unitholders have limited recourse to maintain actions against the General Partner, the Board of Directors, the officers and the Manager.
• The Partnership Agreement contains certain provisions that may limit the voting rights of some unitholders.
• The company may have conflicts of interest with the minority shareholders of its businesses.
• There are certain interlocking relationships among the company and certain affiliates of Warren G. Lichtenstein, which may present potential conflicts of interest.
• Certain members of the company's management team may be involved in other business activities that may involve conflicts of interest.
• The company depends on Warren G. Lichtenstein and Jack L. Howard in running its businesses.
• The company cannot determine the amount of the Management Fee that will be paid or Class C partnership units that will be issued over time with any certainty.
• The Manager's liability is limited under the Management Agreement, and the company has agreed to indemnify its Manager against certain liabilities.
• The Partnership Agreement limits the General Partner's fiduciary duties to the company's unitholders.
• The company may issue additional common or preferred units in the future without the consent of unitholders.
• Transfer restrictions contained in the company's Partnership Agreement and other factors could hinder the development of an active market for its common or preferred units.
• The preferred units give the holders thereof liquidation and distribution preferences over the company's common unitholders.
• The company's common unitholders may be subject to U.S. federal, state and other income tax on their share of the company's taxable income, regardless of whether they receive any cash distributions from the company.
• The company and its current unitholders may be liable for adjustments to the company's prior year tax returns as a result of centralized partnership audit procedures.
• Changes in tax rates, laws or regulations, including U.S. government tax reform, could have a negative impact on the company's results of operations.
• The company's tax treatment depends on its status as a partnership for U.S. federal income tax purposes and is not assured.
• The company's structure involves complex provisions of U.S. federal income tax law for which no clear precedent or authority may be available.
• Tax-exempt entities and non-U.S. persons face unique tax issues from owning common units that may result in adverse tax consequences to them.
• The company's interests in certain of its businesses are held in intermediate holding companies treated as corporations for U.S. federal income tax purposes.
• The company's subsidiaries may not be able to fully utilize their tax benefits.
• Holders of the company's common units may be subject to state, local, and foreign taxes and return filing requirements as a result of owning such units.

Future Outlook

The company believes that it and its operating subsidiaries have access to adequate resources to meet their needs for normal operating costs, capital expenditures, pension payments, debt obligations and working capital for their existing business, as well as to fund its taxes, legal and environmental matters, for at least the next twelve months.

Industry Context

The document reflects the ongoing trends of diversification and strategic acquisitions in the holding company space, as well as the challenges of managing a complex portfolio of businesses across various sectors. The company's exposure to the energy sector and its reliance on financial services highlight the importance of managing commodity price volatility and regulatory risks.

Comparison to Industry Standards

• The company's revenue growth of 12.4% is above the average for diversified holding companies, which typically see single-digit growth.
• The decrease in net income attributable to common unitholders is a concern, as many holding companies aim for consistent profit growth.
• The company's available credit of $399.3 million is a positive sign, indicating financial flexibility, which is comparable to other well-capitalized holding companies.
• The company's repurchase of 462,628 common units is a common practice among holding companies to return value to shareholders, but the amount is relatively small compared to the company's market capitalization.
• The company's reliance on a few key customers in its Supply Chain segment is a risk, which is similar to other companies in the supply chain management industry.
• The company's exposure to the oil and gas industry is a risk, as this sector is subject to significant volatility, which is a common challenge for companies in the energy sector.
• The company's financial services segment, WebBank, faces similar regulatory and credit risks as other financial institutions.

Legal Proceedings

• The company is subject to periodic lawsuits, investigations, claims and proceedings, including, but not limited to, contractual disputes, employment, environmental, health and safety matters, claims associated with its historical acquisitions and divestitures, and other legal proceedings.

Related Party Transactions

• SPLP is managed by SP General Services LLC, which receives a management fee.
• Steel Services Ltd provides services to the company's subsidiaries and portfolio companies.
• Securities transactions for SPLP are allocated to brokers on the basis of reliability, price and execution, and the Manager has selected Mutual Securities, Inc. as an introducing broker.

Stakeholder Impact

• Shareholders may be concerned about the decrease in net income.
• Employees may be affected by potential changes in the company's operations.
• Customers may be affected by changes in the company's supply chain and service offerings.
• Suppliers may be affected by changes in the company's procurement practices.
• Creditors may be affected by changes in the company's financial performance and debt levels.

Next Steps

• The company will continue to implement improvements using the Steel Business System.
• The company will support profitable sales growth both organically and potentially through acquisitions.
• The company will evaluate strategic alternatives with respect to its businesses and/or assets.
• The company will continue to examine all of its options and strategies, including acquisitions, divestitures and other corporate transactions, to increase cash flows and stakeholder value.

Key Dates

Keywords

Series E Preferred Stock, Steel Connect, 10-K Filing, Financial Results, Net Income, Revenue, Debt, Capital, WebBank, ModusLink, Acquisitions, Divestitures, Risk Factors, Internal Control, Pension Plans, Share Repurchase, Preferred Units, Financial Services, Supply Chain, Diversified Industrial, Energy