SXCL 9.30.2013 10Q


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
_____________________ 

FORM 10-Q
 
(Mark One)
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2013 or
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from              to

Commission file number 0-15071
 _____________________

Steel Excel Inc.
(Exact name of Registrant as specified in its charter)

DELAWARE
(State or other jurisdiction of incorporation or organization)
94-2748530
(I.R.S. Employer Identification No.)


1133 WESTCHESTER AVENUE, SUITE N222
WHITE PLAINS, NEW YORK
(Address of principal executive offices)
10604
(Zip Code)

Registrant's telephone number, including area code (914) 461-1300
 _____________________

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

Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the Registrant was required to submit and post such files). Yes ý No ¨

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definition of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one).

Large accelerated filer o
Accelerated filer ý
Non-accelerated filer o
Smaller reporting company o
 
 
(Do not check if a smaller reporting company)

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No ý

As of November 5, 2013, there were 12,299,359 shares of Steel Excel’s common stock outstanding.




TABLE OF CONTENTS
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

2



PART I. FINANCIAL INFORMATION

Item 1. Financial Statements
Steel Excel Inc.
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2013
 
2012
 
2013
 
2012
 
(in thousands, except per-share data)
Net revenues
$
31,845

 
$
34,293

 
$
87,571

 
$
73,189

 
 
 
 
 
 
 
 
Cost of revenues
23,406

 
22,089

 
62,209

 
45,817

 
 
 
 
 
 
 
 
Gross profit
8,439

 
12,204

 
25,362

 
27,372

 
 
 
 
 
 
 
 
Operating expenses:
 
 
 
 
 

 
 

Selling, general and administrative expenses
6,393

 
6,282

 
18,568

 
16,038

Amortization of intangibles
1,985

 
2,635

 
6,616

 
5,028

Total operating expenses
8,378

 
8,917

 
25,184

 
21,066

 
 
 
 
 
 
 
 
Operating income
61

 
3,287

 
178

 
6,306

 
 
 
 
 
 
 
 
Interest income, net
472

 
81

 
2,341

 
572

Other income (expense), net
1,329

 
392

 
1,190

 
(81
)
 
 
 
 
 
 
 
 
Income from continuing operations before income taxes
1,862

 
3,760

 
3,709

 
6,797

 
 
 
 
 
 
 
 
Benefit from income taxes
297

 
1,105

 
2,310

 
15,378

 
 
 
 
 
 
 
 
Net income from continuing operations
2,159

 
4,865

 
6,019

 
22,175

 
 
 
 
 
 
 
 
Income (loss) from discontinued operations, net of taxes

 
484

 

 
(1,986
)
 
 
 
 
 
 
 
 
Net income
2,159

 
5,349

 
6,019

 
20,189

 
 
 
 
 
 
 
 
Net loss attributable to non-controlling interests in consolidated entities
 
 
 
 
 

 
 

Continuing operations
311

 

 
832

 

Discontinued operations

 

 

 
580

 
 
 
 
 
 
 
 
Net income attributable to Steel Excel Inc.
$
2,470

 
$
5,349

 
$
6,851

 
$
20,769

 
 
 
 
 
 
 
 
Basic income (loss) per share attributable to Steel Excel Inc.:
 
 
 
 
 

 
 

Net income from continuing operations
$
0.20

 
$
0.37

 
$
0.54

 
$
1.88

Income (loss) from discontinued operations, net of taxes
$

 
$
0.04

 
$

 
$
(0.12
)
Net income
$
0.20

 
$
0.41

 
$
0.54

 
$
1.76

 
 
 
 
 
 
 
 
Diluted income (loss) per share attributable to Steel Excel Inc.:
 
 
 
 
 

 
 

Net income from continuing operations
$
0.20

 
$
0.37

 
$
0.54

 
$
1.87

Income (loss) from discontinued operations, net of taxes
$

 
$
0.04

 
$

 
$
(0.12
)
Net income
$
0.20

 
$
0.41

 
$
0.54

 
$
1.75

 
 
 
 
 
 
 
 
Shares used in computing income (loss) per share:
 
 
 
 
 

 
 

Basic
12,529

 
12,982

 
12,736

 
11,820

Diluted
12,546

 
13,001

 
12,754

 
11,840

 
See accompanying Notes to Consolidated Financial Statements.

3



Steel Excel Inc.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(unaudited)
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2013
 
2012
 
2013
 
2012
 
(in thousands)
Net income
$
2,159

 
$
5,349

 
$
6,019

 
$
20,189

Other comprehensive income (loss), net of taxes
 

 
 

 
 

 
 

Foreign currency translation adjustment, net of taxes
(349
)
 
(62
)
 
(385
)
 
(70
)
Net unrealized gain on marketable securities, net of taxes
1,245

 
942

 
4,759

 
560

 
 
 
 
 
 
 
 
Comprehensive income
3,055

 
6,229

 
10,393

 
20,679

Comprehensive loss attributable to non-controlling interest
311

 

 
832

 
580

 
 
 
 
 
 
 
 
Comprehensive income attributable to Steel Excel Inc.
$
3,366

 
$
6,229

 
$
11,225

 
$
21,259

 
See accompanying Notes to Consolidated Financial Statements.

4



Steel Excel Inc.
CONSOLIDATED BALANCE SHEETS
(unaudited)
 
September 30,
2013
 
December 31, 2012
 
(in thousands)
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
121,914

 
$
71,556

Marketable securities
169,495

 
199,128

Accounts receivable, net of allowance for doubtful accounts of $0
15,540

 
17,257

Deferred income taxes
188

 
188

Prepaid expenses and other current assets
6,317

 
3,482

Total current assets
313,454

 
291,611

Property and equipment, net
75,868

 
77,768

Goodwill
59,164

 
53,093

Intangible assets, net
33,271

 
39,887

Other investments
25,849

 
1,021

Investments in equity method investees
8,984

 

Deferred income taxes
1,696

 
1,696

Other long-term assets
1,785

 
1,419

Total assets
$
520,071

 
$
466,495

 
 
 
 
Liabilities and Stockholders' Equity:
 

 
 

Current liabilities:
 

 
 

Accounts payable
$
3,177

 
$
4,282

Accrued expenses and other liabilities
7,822

 
6,103

Current portion of long-term debt
10,000

 
4,000

Current portion of capital lease obligations
413

 
413

3/4% convertible senior subordinated notes due 2023
346

 
346

Total current liabilities
21,758

 
15,144

Capital lease obligations, net of current portion
670

 
984

Long-term debt, net of current portion
57,500

 
9,000

Deferred income taxes
448

 
33

Other long-term liabilities
10,281

 
9,372

Total liabilities
90,657

 
34,533

 
 
 
 
Commitments and contingencies


 


 
 
 
 
Stockholders' equity:
 

 
 

Common stock ($0.001 par value, 40,000 shares authorized; 14,398 shares
 
 
 
and 14,365 shares issued and outstanding in 2013 and 2012, respectively)
14

 
14

Additional paid-in capital
274,765

 
272,786

Accumulated other comprehensive income
5,320

 
946

Retained earnings
206,623

 
199,772

Treasury stock, at cost (2013 - 2,093 shares; 2012 - 1,458 shares)
(59,433
)
 
(41,617
)
Total Steel Excel Inc. stockholders' equity
427,289

 
431,901

Non-controlling interest
2,125

 
61

Total stockholders' equity
429,414

 
431,962

 
 
 
 
Total liabilities and stockholders' equity
$
520,071

 
$
466,495

 See accompanying Notes to Consolidated Financial Statements.

5



Steel Excel Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
 
Nine Months Ended September 30,
 
2013
 
2012
 
(in thousands)
Cash Flows From Operating Activities:
 
 
 
Net income
$
6,019

 
$
20,189

Adjustments to reconcile net income to net cash provided by (used in) operating activities:
 

 
 

Loss from discontinued operations

 
1,986

Stock-based compensation expense
1,979

 
857

Depreciation and amortization
14,417

 
10,324

Adjustment of deferred income taxes
(2,364
)
 
(15,079
)
Gain on sales of marketable securities
(1,834
)
 
(98
)
Loss on extinguishment of debt
463

 

Other
373

 
1,153

Changes in operating assets and liabilities, net of effects of acquisitions:
 

 
 

Accounts receivable
2,354

 
(21,532
)
Prepaid expenses and other assets
(2,019
)
 
(1,355
)
Accounts payable
(4,682
)
 
1,177

Accrued expenses and other liabilities
2,640

 
280

Net cash used in operating activities of discontinued operations

 
(823
)
Net cash provided by (used in) operating activities
17,346

 
(2,921
)
 
 
 
 
Cash Flows From Investing Activities:
 

 
 

Purchases of businesses, net of cash acquired
(1,125
)
 
(52,492
)
Purchases of property and equipment
(6,248
)
 
(7,607
)
Proceeds from sale of property and equipment
527

 

Investments in cost method investee
(25,000
)
 

Investments in equity method investees
(9,202
)
 

Purchases of marketable securities
(161,288
)
 
(498,964
)
Sales of marketable securities
65,474

 
568,634

Maturities of marketable securities
134,669

 
51,804

Net cash provided by investing activities of discontinued operations

 
75

Net cash provided by (used in) investing activities
(2,193
)
 
61,450

 
 
 
 
Cash Flows From Financing Activities:
 

 
 

Repurchases of common stock
(17,816
)
 

Proceeds from issuance of long-term debt
70,000

 

Payments for debt issuance costs
(1,130
)
 
 
Repayments of capital lease obligations
(314
)
 
(126
)
Repayments of long-term debt
(15,500
)
 
(2,000
)
Net cash provided by (used in) financing activities
35,240

 
(2,126
)
 
 
 
 
Net increase in cash and cash equivalents
50,393

 
56,403

Effect of foreign currency translation on cash and cash equivalents
(35
)
 
52

Cash and cash equivalents at beginning of period
71,556

 
8,487

 
 
 
 
Cash and cash equivalents at end of period
$
121,914

 
$
64,942

See accompanying Notes to Consolidated Financial Statements.

6



Steel Excel Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

1.
Description and Basis of Presentation

Steel Excel Inc. (“Steel Excel” or the “Company”) currently operates in two reporting segments - Energy and Sports. Through its wholly-owned subsidiary Steel Energy Ltd. ("Steel Energy"), the Company's Energy segment focuses on providing services to oil and gas companies, utilizing technological advances in supporting horizontal drilling and hydraulic fracturing. Through its wholly-owned subsidiary Steel Sports Inc., the Company's Sports segment focuses on providing event-based sports and entertainment services and other health-related services, including baseball facility services, baseball and soccer camps and leagues, and strength and conditioning services. The Company also continues to identify other new business acquisition opportunities.

The accompanying unaudited consolidated financial statements (the “Financial Statements”) of Steel Excel and its subsidiaries, which have been prepared in accordance with the instructions to Form 10-Q and therefore do not include all information and footnotes necessary for a fair presentation of financial position, results of operations, and cash flows in conformity with generally accepted accounting principles, should be read in conjunction with the notes to the consolidated financial statements contained in the Company’s annual report on Form 10-K for the year ended December 31, 2012. The Company believes that all adjustments, consisting primarily of normal recurring accruals, necessary for a fair presentation have been included in the Financial Statements. The operating results of any period are not necessarily indicative of the results for the entire year or any future period.

Commencing with the quarterly period ended June 30, 2013, the Company's quarter-end dates coincide with the calendar quarter-end dates. Prior to that time, the Company's quarter-end dates were based on fiscal quarters ending on the thirteenth Saturday of such fiscal quarter. The Company's quarter-end dates were September 30 and September 29 for the 2013 and 2012 periods, respectively.

The results of operations for the nine-month period ended September 30, 2012, include a non-cash benefit for income taxes of $15.1 million as a result of a measurement period adjustment related to an acquisition (see Note 3). Certain other prior-period amounts in the Financial Statements have been reclassified to conform to the 2013 presentation, including the reclassifications necessary to reflect the financial position, results of operations, and cash flows of a disposed business separately from continuing operations (see Note 5).

2.
Recent Accounting Pronouncements

In February 2013, the Financial Accounting Standards Board (the "FASB") issued Accounting Standards Update (“ASU”) No. 2013-02, Comprehensive Income (Topic 220): Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income, which requires an entity to provide information about the amounts reclassified out of accumulated other comprehensive income by component. This pronouncement was effective for reporting periods beginning after December 15, 2012. The Company adopted this pronouncement effective as of January 1, 2013. The adoption of ASU No. 2013-02 did not have a material effect on the Financial Statements.

In March 2013, the FASB issued ASU No. 2013-05, Foreign Currency Matters (Topic 830): Parent's Accounting for the Cumulative Translation Adjustment upon Derecognition of Certain Subsidiaries or Groups of Assets within a Foreign Entity or of an Investment in a Foreign Entity. The objective of this pronouncement is to resolve the diversity in practice regarding the release into net income of the cumulative translation adjustment upon derecognition of a subsidiary or group of assets within a foreign entity. ASU No. 2013-05 is effective prospectively for fiscal years beginning after December 15, 2013, and for interim reporting periods within those years, with early adoption permitted. The Company does not expect the adoption of ASU No. 2013-05 to have a material effect on the Financial Statements.

In July 2013, the FASB issued ASU No. 2013-11, Income Taxes (Topic 740): Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists, which provides guidance on the financial statement presentation of an unrecognized tax benefit when a net operating loss carryforward, similar tax loss, or tax credit carryforward exists. This pronouncement is effective for fiscal years beginning after December 15, 2013, and for interim reporting periods within those years. The Company does not expect the adoption of ASU No. 2013-11 to have a material effect on the Financial Statements.

3.
Acquisitions

7




On January 31, 2013, the Company acquired a 20% membership interest in Ruckus Sports LLC ("Ruckus"), an obstacle course and mass-participation events company, with an option to acquire an additional 40% membership interest in the next two years. Pursuant to an operating agreement, the Company appointed two directors on a three-member board of directors and therefore has the ability to control the operations of Ruckus. The Company has determined that Ruckus is a variable interest entity (“VIE”) and that the Company is the primary beneficiary. Accordingly, the Company accounted for its acquisition of its 20% membership interest as a business combination and consolidates Ruckus. The fair value of the non-controlling interest at the acquisition date was based on the amount paid by the Company for a 20% membership interest and a control premium equal to 50% of the total consideration based on a study of business combinations. In May 2013 and July 2013 the Company acquired additional membership interests in Ruckus of 10% and 15%, respectively, increasing the Company's ownership interest to 45% as of September 30, 2013. Such additional investments were recorded as equity transactions since Ruckus was a consolidated VIE at the time of the investments.

In November 2013, Ruckus cancelled a scheduled event and placed the majority of its employees on non-paid leave as a result of not having sufficient cash to fund current operations.  Ruckus continues to explore its alternatives and assess its ability to remain a going concern.  For the nine and three months ended September 30, 2013, the Company’s results of operations included revenues of $1.0 million and $0.4 million, respectively, operating losses of $1.5 million and $0.9 million, respectively, and net losses after non-controlling interests of $0.5 million and $0.4 million, respectively, from Ruckus.  At September 30, 2013, the Company’s balance sheet included $3.9 million of assets, including $3.5 million of goodwill, and $0.9 million of liabilities from Ruckus.

On June 19, 2013, the Company acquired 80% of the outstanding common stock of UK Elite Soccer, Inc. ("UK Elite"), a provider of youth soccer programs and camps. The Company accounted for the acquisition of UK Elite as a business combination. The fair value of the non-controlling interest at the acquisition date was based on the amount paid by the Company for 80% of the common stock.

The Company acquired Ruckus and UK Elite, both of which are included in the Company's Sports segment, in exchange for aggregate cash payments of $3.1 million and the contribution of a loan of $0.1 million made in December 2012. The estimated fair value of the assets and liabilities acquired in connection with the Ruckus and UK Elite transactions, determined as of the respective acquisition dates, was as follows:
 
 
Amount
 
(in thousands)
Cash
$
1,991

Accounts receivable
637

Marketable securities
195

Prepaid expenses and other current assets
759

Property and equipment
69

Other assets
55

Accounts payable
(96
)
Accrued liabilities and other current liabilities
(3,481
)
Long-term liabilities
(53
)
Total identifiable net assets acquired
76

 
 

Non-controlling interest
(2,896
)
Goodwill
6,071

 
 

Net assets acquired
$
3,251

 
There were no identifiable intangible assets recognized separately from goodwill in connection with the acquisition of Ruckus. The fair values recognized in connection with the UK Elite transaction are provisional pending the Company's continued evaluation, including assessing any identifiable intangible assets, the value of which are included in goodwill as of September 30, 2013. The goodwill recognized in connection with the Ruckus and UK Elite transactions arises from the growth

8



potential the Company sees for the investment, along with expected synergies within the Company’s Sports segment, and is expected to be fully deductible for tax purposes.

The results of operations of Ruckus and UK Elite have been included in the Company's results of operations since their respective acquisition dates. Revenues from Ruckus and UK Elite totaled $4.9 million and $5.9 million for the three months and nine months ended September 30, 2013, respectively. Operating income from the combined results of operations of Ruckus and UK Elite was $0.3 million for the three months ended September 30, 2013; operating losses from the combined results of operations of Ruckus and UK Elite were $0.4 million for the nine months ended September 30, 2013.

The carrying amounts and classifications of combined assets and liabilities of Ruckus and UK Elite included in the Company’s Financial Statements as of September 30, 2013, are as follows:
 
 
Amount
 
(in thousands)
Current assets
$
1,717

Long-term assets
$
6,347

Current liabilities
$
1,038

Long-term liabilities
$
53

 
On February 9, 2012, and May 31, 2012, the Company acquired Eagle Well Services, Inc. ("Eagle Well") and Sun Well Service, Inc. ("Sun Well"), respectively, both of which are included in the Company's Energy segment. The following pro forma financial information combines the results of operations of the Company, Sun Well, and Eagle Well for the nine months ended September 30, 2012, as if the acquisitions had occurred on January 1, 2012. Pro forma financial information for the 2013 periods is not presented and the 2012 periods do not include any amounts for Ruckus or UK Elite since they were not material to the Company's results of operations. The pro forma financial information is not necessarily indicative of what would have actually occurred had the acquisitions been consummated at the beginning of 2012 or results that may occur in the future.
 
 
Amount
 
(in thousands)
Net revenues
$
96,961

Income from continuing operations, net of taxes
$
24,591

Income (loss) from discontinued operations, net of taxes
$
(1,986
)
Net income attributable to Steel Excel Inc.
$
23,185


In December 2012, the Company identified a measurement period adjustment related to the acquisition of Sun Well for a deferred tax liability of $15.1 million associated with the identifiable intangible assets acquired. Such amount was recorded as if the measurement period adjustment was recognized at the acquisition date. As a result of the deferred tax liability recognized, the Company reversed a portion of its valuation allowance for deferred tax assets and recognized a non-cash benefit for income taxes of $15.1 million in the nine months ended September 30, 2013.

In connection with its acquisition of Rogue Pressure Services, Inc. ("Rogue") in December 2011, the Company recognized a liability of $1.2 million for contingent consideration payable upon attaining certain operational performance levels in the ensuing three years. In December 2012, the Company reversed $0.7 million of the contingent consideration liability based on the failure to achieve the operational performance levels in 2012 and projections of future years' performance. In September 2013, the Company reversed the remaining $0.5 million of the contingent consideration liability based on the projections for 2013 and 2014. Such amount was recognized as a reduction of "Selling, general, and administrative expenses" in the three and nine months ended September 30, 2013.

4.    Stock Benefit Plans

The Company grants stock options and other stock-based awards to employees, non-employee directors, and consultants under two equity incentive plans, the 2004 Equity Incentive Plan, as amended (the “2004 Plan”), and the 2006 Director Plan, as amended (the "2006 Plan, and collectively the "Equity Plans"). Stock-based compensation expense by type of

9



award, all of which was recognized as a component of "Selling, general, and administrative expenses" in the consolidated statements of operations for the three and nine months ended September 30, 2013 and 2012, was as follows:
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2013
 
2012
 
2013
 
2012
 
(in thousands)
Stock options
$
25

 
$
26

 
$
76

 
$
68

Restricted stock
277

 
395

 
1,903

 
789

Total stock-based compensation
$
302

 
$
421

 
$
1,979

 
$
857


During the nine months ended September 30, 2013, the Company granted 15,000 restricted stock units and 17,320 shares of restricted stock to its employees, non-employee directors, and consultants. The Company did not grant any stock options during the first nine months of 2013.

5.
Discontinued Operations

In July 2012, the Company shut down The Show, a Sports segment operation that was not meeting expectations. The results of operations related to The Show for the three- and nine-month periods ended September 30, 2012, were as follows:
 
 
Three Months Ended
 
Nine Months Ended
 
September 30, 2012
 
(in thousands)
 
 
 
 
Revenues
$

 
$
451

 

 

Loss from discontinued operations before income taxes
$
484

 
$
(1,986
)
Benefit from income taxes

 

Loss from discontinued operations, net of taxes
$
484

 
$
(1,986
)

6.
Investments

Marketable Securities

All of the Company's marketable securities as of September 30, 2013, and December 31, 2012, were classified as "available-for-sale" securities, with changes in fair value recognized in stockholders' equity as "other comprehensive income (loss)". Classification of marketable securities as a current asset is based on the intended holding period and realizability of the investment.

Marketable securities at September 30, 2013, consisted of the following:
 

10



 
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Estimated
Fair
Value
 
(in thousands)
Short-term deposits
$
106,903

 
$

 
$

 
$
106,903

Mutual funds
12,506

 
3,623

 

 
16,129

United States government securities
50,383

 
29

 

 
50,412

Corporate securities
69,974

 
8,220

 
(4,224
)
 
73,970

Corporate obligations
23,573

 
855

 
(42
)
 
24,386

Commercial paper
6,297

 
1

 

 
6,298

Total available-for-sale securities
269,636

 
12,728

 
(4,266
)
 
278,098

Amounts classified as cash equivalents
(108,603
)
 

 

 
(108,603
)
Amounts classified as marketable securities
$
161,033

 
$
12,728

 
$
(4,266
)
 
$
169,495

 
Marketable securities at December 31, 2012, consisted of the following:
 
 
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Estimated
Fair
Value
 
(in thousands)
Short-term deposits
$
48,596

 
$

 
$

 
$
48,596

Mutual funds
10,368

 
1,452

 

 
11,820

United States government securities
99,299

 
178

 

 
99,477

Corporate securities
20,842

 
1,255

 
(1,980
)
 
20,117

Corporate obligations
48,708

 
283

 
(277
)
 
48,714

Commercial paper
22,275

 
16

 

 
22,291

Total available-for-sale securities
250,088

 
3,184

 
(2,257
)
 
251,015

Amounts classified as cash equivalents
(51,887
)
 

 

 
(51,887
)
Amounts classified as marketable securities
$
198,201

 
$
3,184

 
$
(2,257
)
 
$
199,128

 
Proceeds from sales of marketable securities were $65.5 million and $568.6 million for the nine months ended September 30, 2013 and 2012, respectively, and $20.4 million and $77.7 million for the three months ended September 30, 2013 and 2012, respectively. The company determines gains and losses from sales of marketable securities based on specific identification of the securities sold. Gross realized gains and losses from sales of marketable securities, all of which are reported as a component of "Other income (expense), net" in the consolidated statements of operations for the three months and nine months ended September 30, 2013 and 2012, were as follows:

 
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
 
2013
 
2012
 
2013
 
2012
 
 
(in thousands)
Gross realized gains
 
$
1,914

 
$
42

 
$
5,779

 
$
138

Gross realized losses
 
(51
)
 
(35
)
 
(3,945
)
 
(40
)
Realized gains (losses) - net
 
$
1,863

 
$
7

 
$
1,834

 
$
98



The fair value of the Company’s marketable securities with unrealized losses at September 30, 2013, and the duration of time that such losses had been unrealized, were as follows:
 

11



 
Less than 12 Months
 
12 Months or Greater
 
Total
 
Fair
Value
 
Gross
Unrealized
Losses
 
Fair
Value
 
Gross
Unrealized
Losses
 
Fair
Value
 
Gross
Unrealized
Losses
 
(in thousands)
Corporate securities
$
22,725

 
$
(3,968
)
 
$
176

 
$
(256
)
 
$
22,901

 
$
(4,224
)
Corporate obligations
940

 
(42
)
 

 

 
940

 
(42
)
Total
$
23,665

 
$
(4,010
)
 
$
176

 
$
(256
)
 
$
23,841

 
$
(4,266
)

The fair value of the Company’s marketable securities with unrealized losses at December 31, 2012, all of which had been unrealized for a period of less than twelve months, were as follows:

 
 
 
 
 
 
 
 
 
Fair
Value
 
Gross Unrealized
Losses
 
 
 
 
 
 
 
 
 
(in thousands)
Corporate securities
 
 
 
 
 
 
 
 
$
6,389

 
$
(1,980
)
Corporate obligations
 
 
 
 
 
 
 
 
14,252

 
(277
)
Total

 

 

 

 
$
20,641

 
$
(2,257
)
 
Gross unrealized losses primarily related to losses on corporate securities. The Company has evaluated such securities, which primarily consist of investments in publicly-traded entities, as of September 30, 2013, and has determined that there was no indication of other-than-temporary impairments. This determination was based on several factors, including the length of time and extent to which fair value has been less than the cost basis, the financial condition and near-term prospects of the entity, and the Company's intent and ability to hold the corporate securities for a period of time sufficient to allow for any anticipated recovery in market value.
 
The amortized cost and estimated fair value of available-for-sale debt securities at September 30, 2013, by contractual maturity, were as follows:
 
 
Cost
 
Estimated 
Fair Value
 
(in thousands)
Debt securities:
 
 
 
Mature in one year or less
$
44,134

 
$
44,157

Mature after one year through three years
14,285

 
14,435

Mature in more than three years
21,834

 
22,504

Total debt securities
80,253

 
81,096

Securities with no contractual maturities
189,383

 
197,002

Total
$
269,636

 
$
278,098


Equity-Method Investments

In January 2013, the Company acquired a 40% membership interest in Again Faster LLC, a fitness equipment company, for total cash consideration of $4.0 million. The Company accounts for its investment in Again Faster under the equity method as the Company owns more than 20%, providing the Company with significant influence, but does not have a controlling financial interest or other control over the operations of Again Faster.

On August 23, 2013, the Company acquired 1,316,866 shares of the common stock of iGo, Inc. (“iGo”), in a cash tender offer for total consideration of $5.2 million. The shares of common stock of iGo acquired by the Company represent approximately 44.0% of the outstanding shares of iGo on a fully-diluted basis and approximately 44.7% of the issued and outstanding shares of iGo. Pursuant to the Stock Purchase and Sale Agreement between the Company and iGo entered into on

12



July 11, 2013, two members of iGo’s four-member board of directors were replaced by two designees of the Company. The Company accounts for its investment in iGo under the equity method as the Company’s 44.7% voting interest and board representation provide it with significant influence, but do not provide the Company with control over iGo’s operations. The value of the Company’s investment in iGo was approximately $4.0 million at September 30, 2013, based on the closing market price of iGo’s publicly-traded shares. The Company believes that this decline in value is temporary and therefore has not adjusted the carrying value of the investment.

Other Investments

In July 2013, the Company invested $25.0 million in a limited partnership that co-invested with other private investment funds in a public company. The Company accounts for this investment under the cost method as the limited partnership has no operations and the Company does not have significant influence over the operations of the public company investee. Such investment had an approximate fair value of $24.9 million at September 30, 2013, based on the net asset value included in the monthly statement it receives from the partnership.

7.
Fair Value Measurements

Fair values of assets and liabilities are determined based on a three-level measurement input hierarchy. Level 1 inputs are quoted prices in active markets for identical assets or liabilities as of the measurement date.

Level 2 inputs are other than quoted market prices that are observable, either directly or indirectly, for an asset or liability. Level 2 inputs can 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. The Company uses quoted prices of similar instruments with an active market to determine the fair value of its Level 2 investments.

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. The Company uses the net asset value included in quarterly statements it receives in arrears from two venture capital funds to determine the fair value of such funds.  The Company uses prices determined by third-party pricing services based on the specific features of the underlying securities for certain corporate securities and corporate obligations. The Company uses its own forecast data and probability assessments to determine the fair value of the contingent consideration.

Assets and liabilities measured at fair value on a recurring basis at September 30, 2013, summarized by measurement input category, were as follows:
 
 
Total
 

Level 1
 

Level 2
 

Level 3
 
(in thousands)
Assets
 
 
 
 
 
 
 
Cash, including short-term deposits(1)
$
120,214

 
$
120,214

 
$

 
$

Mutual funds(2)
16,129

 
16,129

 

 

United States government securities(2)
50,412

 
50,412

 

 

Corporate securities(2)
73,970

 
67,922

 

 
6,048

Commercial paper(3)
6,298

 

 
6,298

 

Corporate obligations(2)
24,386

 

 
12,573

 
11,813

Investments in certain funds(4)
849

 

 

 
849

 
$
292,258

 
$
254,677

 
$
18,871

 
$
18,710

 
(1)
Reported within "Cash and cash equivalents".
(2)
Reported within “Marketable securities”.
(3)
At September 30, 2013, the Company reported $1.7 million and $4.6 million within "Cash and cash equivalents" and "Marketable securities", respectively.
(4)
Reported within "Other investments".


13



Assets and liabilities measured at fair value on a recurring basis at December 31, 2012, summarized by measurement input category, were as follows:
 
 
Total
 

Level 1
 

Level 2
 

Level 3
 
(in thousands)
Assets
 
 
 
 
 
 
 
Cash, including short-term deposits(1)
$
68,265

 
$
68,265

 
$

 
$

Mutual funds(2)
11,820

 
11,820

 

 

United States government securities(2)
99,477

 
99,477

 

 

Corporate securities(2)
20,117

 
20,117

 

 

Commercial paper(3)
22,291

 

 
22,291

 

Corporate obligations(2)
48,714

 

 
46,931

 
1,783

Investments in certain funds(4)
1,021

 

 

 
1,021

 
$
271,705

 
$
199,679

 
$
69,222

 
$
2,804

 
 
 
 
 
 
 
 
Liabilities
 

 
 

 
 

 
 

Acquisition-related contingent consideration(5)
$
(475
)
 
$

 
$

 
$
(475
)
 
(1)
At December 31 2012, the Company reported $68.2 million and $0.1 million within “Cash and cash equivalents” and “Marketable securities,” respectively.
(2)
Reported within “Marketable securities.”
(3)
At December 31, 2012, the Company reported $3.4 million and $18.9 million within "Cash and cash equivalents" and "Marketable securities."
(4)
Reported within "Other investments".
(5)
Reported within “Accrued expenses”.

There were no transfers of securities among the various measurement input levels during the nine month period ended September 30, 2013. The liability for contingent consideration was reversed during the nine-month period ended September 30, 2013 (see Note 3).

Changes in the fair value of assets valued using Level 3 measurement inputs during the nine-month period ended September 30, 2013, were as follows:
 
 
 
 
Amount
 
 
 
(in thousands)
Balance, January 1, 2013
 
 
$
2,804

Purchases
 
 
39,332

Sales
 
 
(22,958
)
Realized gain on sale
 
 
1,556

Change in fair value
 
 
(2,024
)
Balance, September 30, 2013
 
 
$
18,710

 
In November 2012, the Company invested $6.0 million in convertible debentures of School Specialty Inc. (“School Specialty”) with a face amount of $11.9 million. On January 28, 2013, School Specialty filed for protection under Chapter 11 of the United States Bankruptcy Code, and in subsequent months the Company invested approximately $21.3 million as part of the debtor-in-possession loan to School Specialty. Upon School Specialty emerging from bankruptcy on June 11, 2013, the Company received 26,457 shares of common stock of the post-bankruptcy entity in exchange for the convertible debentures, and received $17.5 million in cash and 49,136 shares of common stock of the post-bankruptcy entity in exchange for its investment in the debtor-in-possession loan. The fair value of the common stock of the post-bankruptcy entity received was $109 per share. In connection with these transactions, the Company recognized a loss on disposal of the subordinated debentures of approximately $3.2 million and a gain on disposal of the investment in the debtor-in-possession loan of approximately $1.6 million, both of which are included as a component of “Other income (expense), net” in the consolidated

14



statements of operations for the nine months ended September 30, 2013. In addition, the Company invested $9.8 million in senior secured notes of the post-bankruptcy entity in June 2013. The Company's investments in the common stock and senior secured notes of the post-bankruptcy entity are included as Level 3 corporate securities and Level 3 corporate obligations, respectively, as of September 30, 2013.


The Company’s 3/4% Convertible Senior Notes due December 22, 2023 had a carrying value of approximately $0.3 million as of September 30, 2013, and December 31, 2012, which was a reasonable approximation of fair value as of both dates.

8.
Property and Equipment, Net

Property and equipment at September 30, 2013, and December 31, 2012, consisted of the following:
 
 
September 30, 2013
 
December 31, 2012
 
(in thousands)
Rigs and other equipment
$
71,845

 
$
68,404

Buildings and improvements
13,295

 
12,019

Land
1,068

 
1,068

Vehicles
1,742

 
1,639

Furniture and fixtures
289

 
289

Assets in progress
3,233

 
2,342

 
91,472

 
85,761

Accumulated depreciation
(15,604
)
 
(7,993
)
Property and equipment, net
$
75,868

 
$
77,768


Depreciation expense was $2.6 million and $2.5 million for the three months ended September 30, 2013 and 2012, respectively. Depreciation expense was $7.8 million and $5.3 million for the nine months ended September 30, 2013 and 2012, respectively.

During the nine months ended September 30, 2012, the Company wrote off $0.1 million of property and equipment related to the shutdown of The Show (see Note 5). This write-off is included in “Income (loss) from discontinued operations" in the consolidated statements of operations.

9.
Goodwill and Other Intangible Assets

The Company's intangible assets at September 30, 2013, and December 31, 2012, all of which are subject to amortization, consisted of the following:
 
 
September 30, 2013
 
  December 31, 2012
 
Cost
 
Accumulated
Amortization
 
Net
 
Cost
 
Accumulated
Amortization
 
Net
 
(in thousands)
Sports segment:
 
 
 
 
 
 
 
 
 
 
 
Customer relationships
$
235

 
$
(102
)
 
$
133

 
$
235

 
$
(67
)
 
$
168

 
 
 
 
 
 
 
 
 
 
 
 
Energy segment:


 


 
 

 
 
 
 
 
 
Customer relationships
43,100

 
(11,986
)
 
31,114

 
43,100

 
(6,356
)
 
36,744

Trade names
4,100

 
(2,076
)
 
2,024

 
4,100

 
(1,125
)
 
2,975

 
47,200

 
(14,062
)
 
33,138

 
47,200

 
(7,481
)
 
39,719

 Total
$
47,435

 
$
(14,164
)
 
$
33,271

 
$
47,435

 
$
(7,548
)
 
$
39,887


15



 
Amortization expense was $2.0 million and $2.6 million, for the three months ended September 30, 2013 and 2012, respectively. Amortization expense was $6.6 million and $5.0 million, for the nine months ended September 30, 2013 and 2012, respectively.

Estimated aggregate amortization expense related to the intangible assets for the next five years is as follows:
 
 
 
 
 
 
Amount
 
 
 
 
 
(in thousands)
For the year ended December 31:
 
 
 
 
 
Remainder of 2013
 
 
 
 
$
3,115

2014
 
 
 
 
6,612

2015
 
 
 
 
5,281

2016
 
 
 
 
4,273

2017
 
 
 
 
3,158

Thereafter
 
 
 
 
10,832

 
 
 
 
 
$
33,271


The changes to the Company’s carrying amount of goodwill were as follows:
 
 
Nine Months Ended September 30, 2013
 
Year Ended December 31, 2012
 
Energy
 
Sports
 
Total
 
Energy
 
Sports
 
Total
 
(in thousands)
Balance at beginning of period
$
52,939

 
$
154

 
$
53,093

 
$
6,256

 
$
1,988

 
$
8,244

Acquisitions (see Note 3)

 
6,071

 
6,071

 
46,683

 
154

 
46,837

Impairments

 

 

 

 
(1,988
)
 
(1,988
)
Balance at end of period
$
52,939

 
$
6,225

 
$
59,164

 
$
52,939

 
$
154

 
$
53,093

 
Goodwill at September 30, 2013 includes VIE goodwill of $3.6 million in the Company's Sports segment. There was no VIE goodwill at December 31, 2012. During the nine months ended September 30, 2012, the Company recognized a goodwill impairment of $1.8 million related to The Show, which is included in “Income (loss) from discontinued operations" in the consolidated statements of operations. Including a goodwill impairment of $0.2 million incurred in the latter half of 2012 related to another Sports segment operation, accumulated goodwill impairment was $2.0 million at September 30, 2013, and December 31, 2012.

The components of goodwill at September 30, 2013, and December 31, 2012, were as follows:
 
 
September 30, 2013
 
December 31, 2012
 
(in thousands)
Goodwill
$
61,152

 
$
55,081

Accumulated impairment
(1,988
)
 
(1,988
)
Net goodwill
$
59,164

 
$
53,093


10.
Long-term Debt

On July 3, 2013, Steel Energy entered into a credit agreement (the “Energy Credit Agreement”) with Wells Fargo Bank National Association, RBS Citizens, N.A., and Comerica Bank. The Energy Credit Agreement provided for a borrowing capacity of $80.0 million consisting of a $70.0 million secured term loan (the “Term Loan”) that was fully drawn by Steel Energy on July 3, 2013, and up to $10.0 million in revolving loans (the “Revolving Loans”) subject to a borrowing base of 85% of the eligible accounts receivable. Borrowings under the Energy Credit Agreement are collateralized by substantially all the

16



assets of Steel Energy and its wholly-owned subsidiaries Sun Well and Rogue, and a pledge of all of the issued and outstanding shares of capital stock of Sun Well and Rogue, and are fully guaranteed by Sun Well and Rogue. The proceeds of the Term Loan at closing, along with proceeds from intercompany loans to Steel Energy from Sun Well and Rogue, were used to pay the Company a dividend of $80.0 million and certain fees and expenses related to the Energy Credit Agreement. The Company incurred fees totaling approximately $1.1 million in connection with the Energy Credit Agreement that are being amortized over the life of the arrangement as a component of interest expense.
The Energy Credit Agreement has a five-year term, with the Term Loan amortizing in quarterly installments of $2.5 million and a balloon payment due on the maturity date. At September 30, 2013, $67.5 million was outstanding under the Term Loan and no amount was outstanding under the Revolving Loans. Principal payments under the Energy Credit Agreement for the remainder of 2013 and subsequent years are as follows:
 
 
 
Amount
 
 
 
(in thousands)
Remainder of 2013
 
 
$
2,500

2014
 
 
10,000

2015
 
 
10,000

2016
 
 
10,000

2017
 
 
10,000

2018
 
 
25,000

Total
 
 
67,500

Less current portion
 
 
10,000

Total long-term debt
 
 
57,500

Borrowings under the Energy Credit Agreement bear interest at annual rates of either (i) the Base Rate plus an applicable margin of 1.50% to 2.25% or (ii) LIBOR plus an applicable margin of 2.50% to 3.25%. The “Base Rate” is the greatest of (i) the prime lending rate, (ii) the Federal Funds Rate plus 0.5%, and (iii) the one-month LIBOR plus 1.0%. The applicable margin for both Base Rate and LIBOR is determined based on the leverage ratio calculated in accordance with the Energy Credit Agreement. LIBOR-based borrowings are available for interest periods of one, three, or six months. In addition, the Company is required to pay commitment fees of between 0.375% and 0.50% per annum on the daily unused amount of the Revolving Loans. For the three months and nine months ended September 30, 2013, the Company incurred interest expense of $0.7 million in connection with the Energy Credit Agreement, consisting of $0.5 million in interest on the Term Loans and $0.2 million of amortization of deferred financing fees.
The Energy Credit Agreement contains certain financial covenants, including (i) a leverage ratio not to exceed 3.00:1 for quarterly periods through June 15, 2015, 2.75:1 for quarterly periods through June 30, 2017, and 2.5:1 thereafter and (ii) a fixed charge coverage ratio of 1.15:1 for quarterly periods through December 31, 2016, and 1.25:1 thereafter. The Energy Credit Agreement also contains standard representations, warranties and covenants, including, among other things, covenants relating to (i) financial reporting and notification, (ii) payment of obligations, (iii) compliance with law, (iv) maintenance of properties and (v) payment of restricted payments. The repayment of the Term Loan can be accelerated upon (i) a change in control, which would include Steel Energy owning less than 100% of the equity of Sun Well or Rogue or Steel Partners Holdings L.P. (“SPLP”) owning, directly or indirectly, less than 35% of Steel Energy or (ii) other events of default, including payment failure, false representations, covenant breaches, and bankruptcy.

Sun Well previously had a credit agreement (the "Sun Well Credit Agreement") with Wells Fargo Bank, National Association, that included a term loan of $20.0 million and a revolving line of credit for up to $5.0 million. All amounts due under the Sun Well Credit Agreement were fully repaid in the first nine months of 2013 and the facility was terminated as of July 3, 2013, upon closing of the Energy Credit Agreement. For the nine months ended September 30, 2013, the Company incurred interest expense of $0.3 million in connection with the Sun Well Credit Agreement. Upon termination of the Sun Well Credit Agreement, the Company recognized a loss on extinguishment of $0.5 million from the write off of unamortized deferred financing costs, which was reported as a component of "Other income (expense), net" in the consolidated statements of operations for the three and nine months ended September 30, 2013.

11.
Other Liabilities

“Accrued expenses and other current liabilities” consisted of the following:

17



 
 
September 30, 2013
 
December 31, 2012
 
(in thousands)
Tax-related
$
1,136

 
$
1,197

Accrued compensation and related taxes
3,103

 
3,424

Deferred revenue
675

 
299

Insurance
521

 

Professional services
248

 
282

Accrued fuel and rig-related charges
291

 
162

Interest
476

 
25

Other
1,372

 
714

 
$
7,822

 
$
6,103

 
“Other long-term liabilities” consisted of the following:
 
 
September 30, 2013
 
December 31, 2012
 
(in thousands)
Tax-related
$
7,340

 
$
7,340

Deferred compensation
2,888

 
2,032

Other
53

 

 
$
10,281

 
$
9,372

 

12.
Accumulated Other Comprehensive Income

Changes in the components of "Accumulated other comprehensive income" were as follows:
 
 
Unrealized
Gain on
Securities
 
Cumulative
Translation
Adjustment
 
Total
 
(in thousands)
Balance at January 1, 2013
$
927

 
$
19

 
$
946

 
 
 
 
 
 
Other comprehensive income (loss) before reclassifications, net of taxes
6,593

 
(39
)
 
6,554

Amounts reclassified to realized gain
(1,834
)
 
(346
)
 
(2,180
)
 
 
 
 
 
 
Net current period other comprehensive income
4,759

 
(385
)
 
4,374

 
 
 
 
 
 
Balance at September 30, 2013
$
5,686

 
$
(366
)
 
$
5,320


13.
Income Taxes

The Company accounts for income taxes in accordance with Accounting Standards Codification (“ASC”) Topic 740, Income Taxes, which requires that deferred tax assets and liabilities are recognized using enacted tax rates for the effect of temporary differences between the book and tax bases of recorded assets and liabilities. ASC 740 also requires that deferred tax assets be reduced by a valuation allowance if it is more likely than not that some or all of the deferred tax assets will not be realized. Based on its history of operating losses, the Company has offset its net deferred tax assets by a full valuation allowance. Any reversal of the corresponding valuation allowance will generally result in a tax benefit being recorded in the consolidated statement of operations in the respective period.


18



The Company recognized a benefit from income taxes of $2.3 million and $15.4 million for the nine-month periods ended September 30, 2013 and 2012, respectively, primarily due to a partial reversal of the Company's valuation allowance for deferred tax assets. In the 2013 period, the Company reversed $2.8 million of the valuation allowance as a result of deferred tax liabilities recognized related to the unrealized gains on marketable securities. In the 2012 period, the Company reversed $15.1 of the valuation allowance as a result of deferred tax liabilities recognized related to the identifiable intangible assets recorded in connection with the acquisition of Sun Well in May 2012.

14.
Segment Information

The Company currently reports its business in two reportable segments - Energy and Sports. The Company measures profit or loss of its segments based on operating income (loss).

Segment information relating to the Company's results of continuing operations was as follows:
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2013
 
2012
 
2013
 
2012
 
(in thousands)
Revenues
 
 
 
 
 
 
 
Energy
$
25,162

 
$
33,037

 
$
78,272

 
$
70,788

Sports
6,683

 
1,256

 
9,299

 
2,401

Total revenues
$
31,845

 
$
34,293

 
$
87,571

 
$
73,189

 
 
 
 
 
 
 
 
Operating income (loss)
 
 
 
 
 
 
 
Energy
$
2,006

 
$
5,566

 
$
8,626

 
$
14,550

Sports
88

 
(463
)
 
(1,790
)
 
(1,392
)
Total segment operating income
2,094

 
5,103

 
6,836

 
13,158

Corporate and other business activities
(2,033
)
 
(1,816
)
 
(6,658
)
 
(6,852
)
Interest income, net
472

 
81

 
2,341

 
572

Other income (expense), net
1,329

 
392

 
1,190

 
(81
)
Income from continuing operations before income taxes
$
1,862

 
$
3,760

 
$
3,709

 
$
6,797

 
 
 
 
 
 
 
 
Depreciation and amortization expense:
 
 
 
 
 
 
 
Energy
$
4,386

 
$
5,028

 
$
13,923

 
$
9,935

Sports
175

 
169

 
494

 
389

Total depreciation and amortization expense
$
4,561

 
$
5,197

 
$
14,417

 
$
10,324


Segment information related to the Company's assets was as follows:
 
 
September 30, 2013
 
December 31, 2012
 
(in thousands)
Sports
$
22,878

 
$
7,613

Energy
181,866

 
199,889

Corporate and other business activities
315,327

 
258,993

Total assets
$
520,071

 
$
466,495

 
15.
Net Income (Loss) Per Share

Basic net income (loss) per share of common stock is computed by dividing net income (loss) by the weighted-average number of common shares outstanding during the period. Diluted net income (loss) per share gives effect to all potentially dilutive common shares outstanding during the period.


19



Amounts used in the calculation of basic and diluted net income (loss) per share of common stock for the three and nine months ended September 30, 2013 and 2012, were as follows:

 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2013
 
2012
 
2013
 
2012
 
(in thousands, except per share data)
Numerators:
 
 
 
 
 
 
 
Net income from continuing operations
$
2,159

 
$
4,865

 
$
6,019

 
$
22,175

Non-controlling interest
311

 

 
832

 

Net income from continuing operations attributable to Steel Excel Inc.
$
2,470

 
$
4,865

 
$
6,851

 
$
22,175

 
 
 
 
 
 
 
 
Income (loss) from discontinued operations, net of taxes
$

 
$
484

 
$

 
$
(1,986
)
Non-controlling interest

 

 

 
580

Loss from discontinued operations, net of taxes, attributable to Steel Excel Inc.
$

 
$
484

 
$

 
$
(1,406
)
 
 
 
 
 
 
 
 
Net income attributable to Steel Excel Inc.
$
2,470

 
$
5,349

 
$
6,851

 
$
20,769

 
 
 
 
 
 
 
 
Denominators:
 
 
 
 
 
 
 
Basic weighted average common shares outstanding
12,529

 
12,982

 
12,736

 
11,820

Effect of dilutive securities:
 
 
 
 
 
 
 
Stock-based awards
17

 
19

 
18

 
20

Diluted weighted average common shares outstanding
12,546

 
13,001

 
12,754

 
11,840

 
 
 
 
 
 
 
 
Basic income (loss) per share attributable to Steel Excel Inc.:
 
 
 
 
 
 
 
Net income from continuing operations
$
0.20

 
$
0.37

 
$
0.54

 
$
1.88

Income (loss) from discontinued operations, net of taxes
$

 
$
0.04

 
$

 
$
(0.12
)
Net income
$
0.20

 
$
0.41

 
$
0.54

 
$
1.76

 
 
 
 
 
 
 
 
Diluted income (loss) per share attributable to Steel Excel Inc.:
 
 
 
 
 
 
 
Net income from continuing operations
$
0.20

 
$
0.37

 
$
0.54

 
$
1.87

Income (loss) from discontinued operations, net of taxes
$

 
$
0.04

 
$

 
$
(0.12
)
Net income
$
0.20

 
$
0.41

 
$
0.54

 
$
1.75



16.
Related Party Transactions

SPLP beneficially owned approximately 53.7% of the Company’s outstanding common stock as of September 30, 2013. The power to vote and dispose of the securities held by SPLP is controlled by Steel Partners Holdings GP Inc. (“SPH GP”). Warren G. Lichtenstein, the Chairman of the Board of Directors and President of the Company's Sports segment, is also the Executive Chairman of SPH GP. Certain other affiliates of SPH GP hold positions with the Company, including Jack Howard, as Vice Chairman and principal executive officer, James F. McCabe, Jr., as Chief Financial Officer, and Leonard J. McGill, as Vice President, General Counsel, and Secretary. Each of Warren G. Lichtenstein and Jack L. Howard is compensated with cash compensation and equity awards or equity-based awards in amounts that are consistent with the Company’s Non-employee Director Compensation Policy.

In October 2011, the Company contracted with SP Corporate Services LLC (“SP Corporate”), a SPLP affiliate, to provide financial management and administrative services, including the services of a chief financial officer. Through July 2012, the Company paid SP Corporate $35,000 per month for the provision of such services. Effective August 2012, the services SP Corporate provides were expanded to include executive and financial management services in the areas of finance,

20



regulatory reporting, and other administrative and operational functions. The Company pays SP Corporate $300,000 per month for these expanded services. The services agreement with SP Corporate was approved by a committee of the Company’s independent directors. In addition, the Company reimburses SP Corporate and other SPLP affiliates for certain expenses incurred on the Company’s behalf. During the three months ended September 30, 2013 and 2012, the Company incurred expenses of $1.0 million and $0.9 million, respectively, related to services provided by SP Corporate and reimbursements of expenses incurred on its behalf by SP Corporate and its affiliates. During the nine months ended September 30, 2013 and 2012, the Company incurred expenses of $3.0 million and $1.3 million, respectively, related to services provided by SP Corporate and reimbursements of expenses incurred on its behalf by SP Corporate and its affiliates. As of September 30, 2013, the Company owed SP Corporate $0.2 million.

In October 2013, iGo contracted with SP Corporate to provide certain executive, other employee, and corporate services for a fixed annual fee of $0.4 million. In addition, iGo will reimburse SP Corporate for reasonable and necessary business expenses incurred on iGo’s behalf. The services agreement was approved by the independent directors of iGo.

The Company holds $15.1 million of short-term deposits at WebBank, an affiliate of SPLP, and recorded interest income of $21,231 and $68,918 for the three and nine months ended September 30, 2013, respectively. The Company recorded interest income of $32,271 and $57,997 from WebBank during the three and nine months ended September 30, 2012, respectively.

17.
Supplemental Cash Flow Information

Cash paid for interest and income taxes and non-cash investing financing and investing activities for the nine months ended September 30, 2013 and 2012, were as follows:

 
Nine Months Ended September 30,
 
2013
 
2012
 
(in thousands)
 
 
 
 
 
Interest paid
$
539

 
$
222

Income taxes paid
$
1,594

 
$

 
 
 
 
Non-cash investing and financing activities:
 
 
 
Issuance of common stock for acquisition of Sun Well
$

 
$
60,825

  
18.
Subsequent Events

On October 29, 2013, a newly-formed, wholly owned subsidiary of Steel Energy entered into an Asset Purchase Agreement (the “Asset Purchase Agreement”) to acquire substantially all of the assets of Black Hawk Energy Services, Inc. (“Black Hawk”) for $60.0 million in cash.  Closing of Asset Purchase Agreement is subject to several closing conditions, including that there has been no material adverse effect on the condition of Black Hawk, consent, if necessary, of the lenders under the Steel Energy Credit Agreement, certain employees of Black Hawk accepting employment, and satisfaction of certain employment matters requirements.  In connection with the Asset Purchase Agreement, Steel Energy will execute a guaranty at closing that guarantees the payment obligations, if any, of its newly-formed subsidiary after the closing.

In November 2013, Ruckus cancelled a scheduled event and placed the majority of its employees on non-paid leave as a result of not having sufficient cash to fund current operations.  Ruckus continues to explore its alternatives and assess its ability to remain a going concern.




21



Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Certain statements contained in this quarterly report on Form 10-Q that are not purely historical are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended ( the “Exchange Act”). Such statements involve known and unknown risks, uncertainties, and other factors that may cause actual results, performance, or achievements of the Company to be materially different from any future results, performance, or achievements expressed or implied by such forward-looking statements. Although the Company believes that the expectations reflected in such forward-looking statements are based upon reasonable assumptions, the Company’s actual results could differ materially from those set forth in the forward-looking statements. See Item I Part 1A in the Company’s annual report on Form 10-K for the year ended December 31, 2012, for a description of certain factors that might cause such a difference.

Steel Excel Inc. (“Steel Excel” or the “Company”) currently operates in two reporting segments - Energy and Sports. The Energy segment focuses on providing services to oil and gas companies, utilizing technological advances in supporting horizontal drilling and hydraulic fracturing. The Sports segment focuses on providing event-based sports and entertainment services and other health-related services, including baseball facility services, baseball and soccer camps and leagues, and strength and conditioning services. The Company also continues to identify other new business acquisition opportunities.

Commencing with the quarterly period ended June 30, 2013, the Company's quarter-end dates coincide with the calendar quarter-end dates. Prior to that time, the Company's quarter-end dates were based on fiscal quarters ending on the thirteenth Saturday of such fiscal quarter. The Company's quarter-end dates were September 30 and September 29 for the 2013 and 2012 periods, respectively.

In February 2012 and May 2012, the Company acquired Eagle Well Services, Inc., and Sun Well Service, Inc. ("Sun Well"), respectively, both of which are included in the Company's Energy segment.

In January 2013, the Company acquired a 20% membership interest in Ruckus Sports LLC ("Ruckus"). The Company consolidates Ruckus based on its assessment that Ruckus is a variable interest entity and that the Company is the primary beneficiary. In May 2013 and July 2013 the Company acquired additional membership interests in Ruckus of 10% and 15%, respectively, increasing the Company's ownership interest to 45% as of September 30, 2013. In November 2013, Ruckus cancelled a scheduled event and placed the majority of its employees on non-paid leave as a result of not having sufficient cash to fund current operations.  Ruckus continues to explore its alternatives and assess its ability to remain a going concern.

In June 2013, the Company acquired 80% of the outstanding common stock of UK Elite Soccer, Inc. ("UK Elite"). Both Ruckus and UK Elite are included in the Company's Sports segment.

In July 2013, Steel Energy Ltd, a wholly-owned subsidiary of the Company, entered into a credit agreement (the “Energy Credit Agreement”) that provided for a borrowing capacity of $80.0 million consisting of a $70.0 million secured term loan that was fully drawn upon closing and up to $10.0 million in revolving loans. A pre-existing credit agreement at Sun Well (the “Sun Well Credit Agreement”) that had been fully repaid was terminated upon closing of the Energy Credit Agreement.

In July 2012, the Company shut down The Show, a Sports segment operation that was not meeting expectations. The unaudited consolidated financial statements contained in this quarterly report on Form 10-Q reflect The Show as a discontinued operation.

The following discussion and analysis should be read in conjunction with the Company’s unaudited consolidated financial statements and notes thereto.

Results of Operations

The net revenues and operating income by reportable segment for the three- and nine-month periods ended September 30, 2013 and 2012, were as follows:


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Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2013
 
2012
 
2013
 
2012
 
(in thousands)
 
 
 
 
 
 
 
 
Energy net revenues
$
25,162

 
$
33,037

 
$
78,272

 
$
70,788

Sports net revenues
6,683

 
1,256

 
9,299

 
2,401

Consolidated net revenues
$
31,845

 
$
34,293

 
$
87,571

 
$
73,189

 
 
 
 
 
 
 
 
Energy operating income
$
2,006

 
$
5,566

 
$
8,626

 
$
14,550

Sports operating income (loss)
88

 
(463
)
 
(1,790
)
 
(1,392
)
Corporate and other business activities
$
(2,033
)
 
$
(1,816
)
 
$
(6,658
)
 
$
(6,852
)
Consolidated operating income
$
61

 
$
3,287

 
$
178

 
$
6,306


Nine months ended September 30, 2013, compared to nine months ended September 30, 2012

Net revenues for the nine months ended September 30, 2013, increased by $14.4 million as compared to the 2012 period. Net revenues from the Company's Energy segment increased by $7.5 million as a result of the acquisition of Sun Well in May 2012 being included for the entire 2013 period. Such increase was partially offset by a decrease in revenues at operations in the Energy segment operated in both periods as a result of increased competition in the marketplace and a decline in rig utilization partially resulting from unfavorable weather conditions. Net revenues from the Company's Sports segment increased by $6.9 million primarily as a result of acquisitions consummated subsequent to the 2012 period.

Gross profit for the nine months ended September 30, 2013, decreased by $2.0 million as compared to the 2012 period, and as a percentage of revenue declined to 29.0% from 37.4%. Gross profit in the Energy segment decreased by $5.2 million and as a percentage of revenue declined to 26.0% in the first nine months of 2013 from 36.2% in the comparable 2012 period. Such decline in the 2013 period was due primarily to increased competition in the marketplace, a decline in rig utilization as a result of unfavorable weather conditions, increased rig staffing costs, fewer rigs operating around the clock that resulted in higher costs for generating comparable revenues, a decline in higher-margin services in the 2013 period resulting from a change in the overall mix of services provided, increased workers compensation insurance costs, and settlement of a customer claim. Gross profit in the Sports segment increased by $3.2 million primarily as a result of acquisitions consummated subsequent to the 2012 period.

Selling, general and administrative ("SG&A") expenses in the first nine months of 2013 increased by $2.5 million as compared to the comparable 2012 period primarily as a result of the acquisitions in the Sports segment and Sun Well being included for the entire 2013 period, partially offset by the reversal of the contingent consideration liability associated with the acquisition of Rogue and certain credits received related to insurance.
 
Amortization of intangibles in the first nine months of 2013 increased by $1.6 million as compared to the comparable 2012 period as a result of intangible assets recognized in connection with the acquisition of Sun Well.

Net interest income of $2.3 million in the first nine months of 2013 increased by $1.8 million as compared to the 2012 period primarily as a result of increased interest income of $2.5 million from the Company investing in higher yield money market funds and corporate obligations in the 2013 period. Such increase was partially offset by an increase in interest expense of $0.7 million primarily associated with the borrowings under the Steel Energy Credit Agreement.

Other income of $1.2 million in the first nine months of 2013 primarily represented realized gains on the sale of marketable securities of $1.8 million partially offset by a loss on extinguishment of debt of $0.5 million from the write off of unamortized deferred financing costs upon terminating the Sun Well Credit Agreement.

The Company recognized a benefit for income taxes of $2.3 million and $15.4 million for the nine months ended September 30, 2013 and 2012, respectively, primarily as a result of a reversal of a portion of its valuation allowance for deferred income tax assets. Such reversal in the 2013 period resulted from the deferred tax liabilities recognized in connection with unrealized gains on marketable securities included as a component of other comprehensive income. Such reversal in the 2012 period resulted from the deferred tax liabilities recognized on the identifiable intangible assets acquired in connection with the acquisition of Sun Well.

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The results of operations for the nine months ended September 30, 2012, included a loss from discontinued operations of $2.0 million related to The Show.

Three months ended September 30, 2013, compared to three months ended September 30, 2012

Net revenues for the three months ended September 30, 2013, decreased by $2.4 million as compared to the 2012 period. Net revenues from the Company's Energy segment decreased by $7.9 million as a result of increased competition in the marketplace and a decline in rig utilization. The decrease in net revenues in the Energy segment were partially offset by an increase of $5.4 million in the Company's Sports segment primarily as a result of acquisitions consummated subsequent to the 2012 period.

Gross profit for the three months ended September 30, 2013, decreased by $3.8 million as compared to the 2012 period, and as a percentage of revenue declined to 26.5% from 35.6%. Gross profit in the Energy segment decreased by $6.2 million and as a percentage of revenue declined to 20.3% in the third quarter of 2013 from 34.2% in the comparable 2012 period. Such decline in the 2013 period was due primarily to increased competition in the marketplace, a decline in rig utilization, increased rig staffing costs, fewer rigs operating around the clock that resulted in higher costs for generating comparable revenues, a decline in higher-margin services in the 2013 period resulting from a change in the overall mix of services provided, increased workers compensation insurance costs, and settlement of a customer claim. Gross profit in the Sports segment increased by $2.4 million primarily as a result of acquisitions consummated subsequent to the 2012 period.

SG&A expenses in the third quarter of 2013 increased by $0.1 million as compared to the comparable 2012 period primarily as a result of the acquisitions in the Sports segment, partially offset by the reversal of the contingent consideration liability associated with the acquisition of Rogue and certain credits received related insurance. 

Amortization of intangibles in the third quarter of 2013 decreased by $0.7 million as compared to the comparable 2012 period as a result of a reduced rate of amortization in the second year for the intangible assets recognized in connection with the acquisition of Sun Well.

Net interest income of $0.5 million in the third quarter of 2013 increased by $0.4 million as compared to the 2012 period primarily as a result of increased interest income of $0.9 million from the Company investing in higher yield money market funds and corporate obligations in the 2013 period. Such increase was partially offset by an increase in interest expense of $0.5 million primarily associated with the borrowings under the Steel Energy Credit Agreement.

Other income of $1.3 million in the third quarter of 2013 primarily represented realized gains on the sale of marketable securities of $1.9 million partially offset by a loss on extinguishment of debt of $0.5 million from the write off of unamortized deferred financing costs upon terminating the Sun Well Credit Agreement.

The Company recognized a benefit for income taxes of $0.3 million and $1.1 million for the three months ended September 30, 2013 and 2012, respectively, primarily as a result of a reversal of a portion of its valuation allowance for deferred income tax assets. Such reversal in the 2013 period resulted from the deferred tax liabilities recognized in connection with unrealized gains on marketable securities included as a component of other comprehensive income. Such reversal in the 2012 period resulted from the deferred tax liabilities recognized on the identifiable intangible assets acquired in connection with the acquisition of Sun Well.

Financial Condition

The Energy Credit Agreement entered into on July 3, 2013, provided for a borrowing capacity of $80.0 million consisting of a $70.0 million secured term loan (the “Term Loan”) that was fully drawn by Steel Energy on July 3, 2013, and up to $10.0 million in revolving loans (the “Revolving Loans”) subject to a borrowing base of 85% of the eligible accounts receivable. Borrowings under the Energy Credit Agreement are collateralized by substantially all the assets of Steel Energy and its wholly-owned subsidiaries Sun Well and Rogue, and a pledge of all of the issued and outstanding shares of capital stock of Sun Well and Rogue, and are fully guaranteed by Sun Well and Rogue. The proceeds of the Term Loan at closing, along with proceeds from intercompany loans to Steel Energy from Sun Well and Rogue, were used to pay the Company a dividend of $80.0 million and certain fees and expenses related to the Energy Credit Agreement. The Company incurred fees totaling approximately $1.1 million in connection with the Energy Credit Agreement that are being amortized over the life of the arrangement as a component of interest expense.


24



The Energy Credit Agreement has a five-year term, with the Term Loan amortizing in quarterly installments of $2.5 million and a balloon payment due on the maturity date. Borrowings under the Energy Credit Agreement bear interest at annual rates of either (i) the Base Rate plus an applicable margin of 1.50% to 2.25% or (ii) LIBOR plus an applicable margin of 2.50% to 3.25%. The “Base Rate” is the greatest of (i) the prime lending rate, (ii) the Federal Funds Rate plus 0.5%, and (iii) the one-month LIBOR plus 1.0%. The applicable margin for both Base Rate and LIBOR is determined based on