Ils ne savaient que faire de lui.

English Translation

They didn’t know what to do with him.

They didn’t know what to do with him.doesn’t ne…que mean “only”?

I know the “pas” gets dropped sometimes.

It can indeed mean that, for example in:
Je ne veux que la paix dans le monde

But here it doesn’t have that meaning. I think the translation is fine (I’m assuming the translation was english → french), although I’d say that maybe something like “They knew not what to do with him” would perhaps better match the tone.

A more everyday translation could be (that actually includes the “pas” that you mentioned):
Ils ne savaient pas quoi faire de lui

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