Steel Partners(SPLP) - 2023 Q4 - Annual Report

Business Segments - Steel Partners Holding L.P. operates through four segments: Diversified Industrial, Energy, Financial Services, and Supply Chain, focusing on long-term corporate value enhancement [23]. - The Diversified Industrial segment includes businesses that manufacture engineered niche industrial products, with significant market positions across various regions including North America, Europe, and Asia [25]. - The Energy segment provides drilling and production services primarily in the Bakken, Niobrara, Permian, and San Juan basins, emphasizing well completion and maintenance services [34]. - WebBank, a subsidiary of Steel Partners, engages in a full range of banking activities, including originating loans and issuing credit cards, and is subject to FDIC regulation [37]. - ModusLink Corporation, part of the Supply Chain segment, offers end-to-end global supply chain solutions, serving markets such as consumer electronics and medical devices [38]. Workforce and Operations - As of December 31, 2023, the company employed approximately 5,100 employees worldwide, indicating a robust workforce to support its operations [44]. - The company has not experienced significant issues in obtaining necessary raw materials, which are generally available from multiple sources [41]. - The company is exposed to risks from epidemics and public health emergencies, which could disrupt operations and financial performance [133]. - The loss of essential employees could significantly affect Steel Connect's operations and financial condition [136]. Financial Performance - Revenue for the year ended December 31, 2023, increased by $210,016, or 12.4%, to $1,905,457 compared to $1,695,441 in 2022, driven by higher revenue from the Financial Services segment and the newly added Supply Chain segment [202]. - Selling, general and administrative expenses (SG&A) rose by $121,583, or 31.7%, to $504,960 in 2023, primarily due to increased costs in the Financial Services and Supply Chain segments [204]. - Net income attributable to common unitholders for 2023 was $150,829, a decrease of $55,143, or 26.8%, from $205,972 in 2022 [201]. - The Financial Services segment generated revenue of $416,911 in 2023, an increase of $188,947, or 82.9%, compared to $227,964 in 2022 [214]. - The Supply Chain segment, added on May 1, 2023, reported revenue of $115,144 and operating income of $8,726 [218]. Market and Economic Conditions - Economic downturns in sectors such as transportation, oil and gas exploration, and construction could disrupt revenues, which are cyclical and sensitive to national and global economic conditions [56]. - Revenues in the Supply Chain segment depend on customer traffic and demand, which may decline due to macroeconomic uncertainties, impacting future growth prospects [57]. - Inflation and supply chain disruptions have increased costs, which may not be fully recoverable through price adjustments, adversely affecting financial results [59]. - Significant volatility in crude oil prices has materially affected the Diversified Industrial and Energy segments, with ongoing geopolitical tensions exacerbating this instability [60]. - Customer demand is sensitive to oil and gas price fluctuations, with recent OPEC+ production cuts leading to demand loss and price volatility [61]. Regulatory and Compliance Risks - Steel Partners is committed to compliance with evolving regulations across various jurisdictions, ensuring adherence to environmental, labor, and financial laws [51]. - The company is subject to substantial cash funding requirements for defined benefit pension plans, which may increase due to market performance and interest rate changes [67]. - Compliance with environmental, health, and safety regulations may incur substantial costs for the company, impacting financial performance [68]. - The company may incur substantial additional compliance costs if proposed SEC rules on climate-related disclosures are adopted [75]. - The company faces significant risks related to climate change regulations that could increase costs and reduce demand for its Energy segment services [73]. Credit and Financial Risks - Rising interest rates could increase borrowing costs and adversely impact the company's ability to raise funds, affecting overall financial condition [66]. - The company may face increased scrutiny from regulators due to ongoing legislative and regulatory actions affecting its lending programs [83]. - Credit risk on PPP loans may arise if the SBA determines deficiencies in loan origination or servicing, potentially leading to loss recovery claims against WebBank [120]. - Recent events in the financial services industry, including bank failures, have raised liquidity concerns that could adversely affect the company's operations [124]. Cybersecurity and Technology Risks - The company’s cybersecurity program includes comprehensive incident response and recovery plans to address potential cybersecurity threats [176]. - The Audit Committee oversees the company's cybersecurity risk management, ensuring effective controls and strategies are in place [177]. - Disruptions or breaches in technology systems could result in operational delays and financial losses, affecting competitive position [102]. Tax and Partnership Considerations - Common unitholders may be subject to U.S. federal, state, and local income tax on their share of taxable income, regardless of cash distributions received [153]. - Changes in tax laws, such as the reduction of the U.S. corporate income tax rate from 35% to 21%, could negatively impact the company's financial results [158]. - The company is subject to partnership audit rules that could result in tax liabilities for current unitholders due to adjustments in prior year tax returns [156]. - If taxed as a corporation, the company would face a 21% corporate income tax rate, significantly reducing profitability and cash available for distribution [161]. Client and Revenue Concentration - For the fiscal year ended July 31, 2023, Steel Connect's 10 largest clients accounted for approximately 83% of consolidated net revenue, up from 78% in 2022 [127]. - Two customers contributed approximately 41% and 13% of consolidated net revenue for the fiscal year ended July 31, 2023, compared to 31% and 12% in 2022 [127]. - Steel Connect's revenue is subject to demand variability, with no long-term contracts obligating clients to purchase services, which could lead to significant revenue fluctuations [128]. Strategic Initiatives - The company’s business strategy includes acquisitions, which entail risks such as management diversion and increased costs [87]. - The Management Fee for the Manager is set at an annual rate of 1.5% of total partners' capital, which could vary significantly based on business performance [145]. - The company has approved a repurchase program for up to 8,770,240 common units, with 462,628 units purchased in 2023 for an aggregate price of $20,040 [191].