First Quarter 2024 Results
- Net revenue totaled $41.3 million, as compared to $51.4 million
in the same period of the prior fiscal year.
- Net income was $4.4 million, as compared to of $5.0 million in
the same period of the prior fiscal year.
- Net income attributable to common stockholders was $3.9
million, as compared to $4.4 million in the same period of the
prior fiscal year.
- Adjusted EBITDA* was $3.3 million, as compared to $7.3 million
in the same period of the prior fiscal year.
- Net cash provided by operating activities was $6.6
million.
- Free Cash Flow* totaled $6.0 million.
- Total debt was $12.3 million; Net Debt* totaled $(264.4)
million.
Steel Connect, Inc. (the "Company") (NASDAQ: STCN) today
announced financial results for its first quarter ended October 31,
2023.
Results of Operations
The financial information and discussion that follows below are
for the Company's operations. Due to the application of pushdown
accounting as a result of the exchange transaction ("Exchange
Transaction") on May 1, 2023 with Steel Partners L.P. (“Steel
Partners”), the Company’s consolidated financial statements include
a black line division between the two distinct periods to indicate
the application of two different bases of accounting, which may not
be comparable, between the periods presented. References herein to
the "three months ended October 31, 2023" or the "first quarter"
are for the Successor period, August 1, 2023 through October 31,
2023. References herein to the “three months ended October 31,
2022” or the “prior fiscal year” are for the Predecessor period,
August 1, 2022 through October 31, 2022. As it relates to the
results of operations, while the Successor period and the
Predecessor period are distinct reporting periods, the effects of
the change of control for financial statement purposes did not have
a material impact on the comparability of our results of operations
between the periods, unless otherwise noted related to the impact
from pushdown accounting.
Successor
Predecessor
Three Months
Ended
October 31,
Three Months
Ended
October 31,
2023
2022
(in thousands)
Net revenue
$
41,341
$
51,359
Net income
4,436
4,957
Net income attributable to common
stockholders
$
3,900
$
4,420
Adjusted EBITDA*
$
3,311
$
7,281
Adjusted EBITDA margin*
8.0
%
14.2
%
Net cash provided by operating
activities
6,583
8,252
Additions to property and equipment
(552
)
(548
)
Free cash flow*
$
6,031
$
7,704
*
See reconciliations of these
non-GAAP measurements to the most directly comparable GAAP measures
included in the financial tables. See also "Note Regarding Use of
Non-GAAP Financial Measurements" below for the definitions of these
non-GAAP measures.
Comparison of the First Quarter Ended October 31, 2023 and
2022
Successor
Predecessor
Three Months
Ended
October 31,
Three Months
Ended
October 31,
(unaudited in
thousands)
2023
2022
Fav (Unfav) ($)
% Change
Net revenue
$41,341
$51,359
$(10,018)
(19.5) %
Cost of revenue
(29,866)
(37,094)
7,228
19.5 %
Gross profit
11,475
14,265
(2,790)
(19.6) %
Gross profit percentage
27.8%
27.8%
—
—
Selling, general and administrative
(8,795)
(10,386)
1,591
15.3 %
Amortization
(875)
—
(875)
(100.0) %
Interest expense
(247)
(826)
579
70.1 %
Other gains, net
3,549
3,030
519
17.1 %
Total costs and expenses
(36,234)
(45,276)
9,042
20.0 %
Income before income taxes
5,107
6,083
(976)
(16.0) %
Income tax expense
(671)
(1,126)
455
40.4 %
Net income
$4,436
$4,957
$(521)
(10.5) %
Net Revenue
Net revenue for the first quarter decreased $10.0 million, or
19.5%, as compared to the same period in the prior fiscal year.
This decrease in net revenue was primarily driven by lower volumes
associated with clients in the computing and consumer electronics
markets. Fluctuations in foreign currency exchange rates had an
insignificant impact on the Supply Chain segment's net revenues for
the three months ended October 31, 2023, as compared to the same
period in the prior year.
Cost of Revenue
Cost of revenue for the first quarter included materials
procured on behalf of our Supply Chain clients of $13.5 million, as
compared to $19.3 million for the same period in the prior fiscal
year, a decrease of $5.8 million. Total cost of revenue decreased
by $7.2 million for the first quarter, as compared to the same
period in the prior fiscal year, primarily due to an decrease in
material and labor costs as a result of lower revenue. Fluctuations
in foreign currency exchange rates had an insignificant impact on
the Supply Chain segment's cost of revenues for the three months
ended October 31, 2023, as compared to the same period in the prior
year.
Gross Profit Margin
Gross profit for the first quarter decreased by approximately
$2.8 million as compared to the same period in the prior fiscal
year, primarily driven by lower sales volume discussed above. The
gross profit percentage remained relatively unchanged from the
prior period. Fluctuations in foreign currency exchange rates had
an insignificant impact on Supply Chain's gross margin for the
three months ended October 31, 2023.
Selling, General and Administrative
Selling, general and administrative ("SG&A") expenses during
the first quarter decreased by approximately $1.6 million as
compared to the same period in the prior fiscal year.
SG&A expenses for the Supply Chain segment decreased by $0.5
million primarily due to bad debt expense recorded in the same
period in the prior fiscal year that did not reoccur in the current
year quarter. Corporate-level activity decreased by $1.1 million,
primarily due to a decrease in legal and other professional fees.
Fluctuations in foreign currency exchange rates did not have a
significant impact on selling, general and administrative expenses
for the three months ended October 31, 2023.
Amortization Expense
Amortization expense for the first quarter was $0.9 million and
was driven by the recognition of intangible assets in connection
with the application of pushdown accounting as a result of the
Exchange Transaction. As the Exchange Transaction closed on May 1,
2023, there was no activity for the same period in the prior fiscal
year.
Interest Expense
Total interest expense during the first quarter decreased $0.6
million as compared to the same period in the prior fiscal year,
primarily due to the cessation of the amortization of the discount
on the 7.50% Convertible Senior Note due September 1, 2024 (the
“SPHG Note”) as of May 1, 2023, the date of the Exchange
Transaction.
Other Gains, Net
Other gains, net are primarily composed of investment gains
(losses), foreign exchange gains (losses), interest income, and
sublease income.
The Company recorded $3.5 million to Other gains, net for the
first quarter, primarily due to: (1) $3.2 million interest income
on money market funds, (2) $0.4 million net foreign exchange gains,
and (3) $0.2 million sublease income, offset partially by $0.4
million net unrealized losses on investments in equity
securities.
The Company recorded $3.0 million to Other gains, net, for the
same period in the prior fiscal year primarily due to $2.5 million
in foreign exchange gains.
Income Tax Expense
During the first quarter, the Company recorded income tax
expense of approximately $0.7 million as compared to $1.1 million
for the same period in the prior fiscal year. The decrease in
income tax expense is primarily due to lower taxable income in
foreign jurisdictions, as compared to the prior year.
Net Income
Net income for the first quarter decreased $0.5 million, as
compared to the same period in the prior fiscal year. The decrease
in net income is primarily due lower gross profit, offset partially
by lower operating expenses and non-operating expenses. Refer to
above explanations for further details.
Additions to Property and Equipment (Capital
Expenditures)
Capital expenditures for the first quarter totaled $0.6 million,
or 1.3% of net revenue, as compared to $0.5 million, or 1.1% of net
revenue, for the same period in the prior fiscal year.
Adjusted EBITDA
Adjusted EBITDA decreased $4.0 million, or 54.5%, for the first
quarter as compared to the same period in the prior fiscal year,
primarily due to an increase in interest income of $3.1 million
related to new investments in money market funds.
Liquidity and Capital Resources
As of October 31, 2023, the Company had cash and cash
equivalents of $276.7 million and ModusLink had readily available
borrowing capacity of $11.9 million under its revolving credit
facility with Umpqua Bank.
As of October 31, 2023, the fair value of outstanding debt was
$12.3 million, which was comprised of $12.9 million principal
outstanding on the SPHG Note.
About Steel Connect, Inc.
Steel Connect, Inc. is a holding company whose wholly-owned
subsidiary, ModusLink Corporation, serves the supply chain
management market.
ModusLink is an end-to-end global supply chain solutions and
e-commerce provider serving clients in markets such as consumer
electronics, communications, computing, medical devices, software
and retail. ModusLink designs and executes critical elements in its
clients' global supply chains to improve speed to market, product
customization, flexibility, cost, quality and service. These
benefits are delivered through a combination of industry expertise,
innovative service solutions, and integrated operations, proven
business processes, an expansive global footprint and world-class
technology. ModusLink also produces and licenses an entitlement
management solution powered by its enterprise-class Poetic
software, which offers a complete solution for activation,
provisioning, entitlement subscription, and data collection from
physical goods (connected products) and digital products. ModusLink
has an integrated network of strategically located facilities in
various countries, including numerous sites throughout North
America, Europe and Asia.
– Financial Tables Follow –
Steel Connect, Inc. and
Subsidiaries
Condensed Consolidated Balance
Sheets
(in thousands)
Successor
October 31, 2023
July 31, 2023
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents
$
276,705
$
121,372
Accounts receivable, trade, net
27,974
28,616
Inventories, net
6,756
8,569
Funds held for clients
1,946
2,031
Prepaid expenses and other current
assets
4,402
158,686
Total current assets
317,783
319,274
Property and equipment, net
3,724
3,698
Operating lease right-of-use assets
25,997
27,098
Investments
3,443
—
Other intangible assets, net
33,714
34,589
Goodwill
22,785
22,785
Other assets
3,149
3,737
Total assets
$
410,595
$
411,181
LIABILITIES, CONTINGENTLY
REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable
$
24,889
$
26,514
Accrued expenses
26,198
26,774
Funds held for clients
1,902
1,949
Current lease obligations
8,680
7,973
Convertible note payable
12,327
—
Other current liabilities
3,902
4,544
Total current liabilities
77,898
67,754
Convertible note payable
—
12,461
Long-term lease obligations
17,818
19,161
Other long-term liabilities
5,475
5,442
Total long-term liabilities
23,293
37,064
Total liabilities
101,191
104,818
Contingently redeemable preferred
stock
237,739
237,739
Total stockholders' equity
71,665
68,624
Total liabilities, contingently redeemable
preferred stock and stockholders' equity
$
410,595
$
411,181
Steel Connect, Inc. and
Subsidiaries
Condensed Consolidated
Statements of Operations
(in thousands, except per
share amounts)
(unaudited)
Successor
Predecessor
Three Months
Ended
October 31,
Three Months
Ended
October 31,
2023
2022
Net revenue
$
41,341
$
51,359
Cost of revenue
29,866
37,094
Gross profit
11,475
14,265
Operating expenses:
Selling, general and administrative
8,795
10,386
Amortization
875
—
Total operating expenses
9,670
10,386
Operating income
1,805
3,879
Other income (expense):
Interest income
3,219
144
Interest expense
(247
)
(826
)
Other gains, net
330
2,886
Total other income
3,302
2,204
Income before income taxes
5,107
6,083
Income tax expense
671
1,126
Net income
4,436
4,957
Less: Preferred dividends on Series C
redeemable preferred stock
(536
)
(537
)
Net income attributable to common
stockholders
$
3,900
$
4,420
Net income per common shares -
basic
$
0.15
$
0.69
Net income per common shares -
diluted
$
0.15
$
0.59
Weighted-average number of common
shares outstanding - basic
6,199
6,434
Weighted-average number of common
shares outstanding - diluted
26,066
8,403
Steel Connect, Inc. and
Subsidiaries
Condensed Consolidated
Statements of Cash Flows
(in thousands)
(unaudited)
Successor
Predecessor
Three months
ended
October 31,
Three months
ended
October 31,
2023
2022
Cash flows from operating activities:
Net income
$
4,436
$
4,957
Adjustments to reconcile net income to
cash flows from operating activities:
Depreciation
435
459
Amortization of finite-lived intangible
assets
875
—
Amortization of deferred financing
costs
—
12
Accretion of debt discount
—
510
Share-based compensation
137
177
Non-cash lease expense
2,197
2,230
Bad debt (recovery) expense
(8
)
960
Other gains, net
(330
)
(2,885
)
Changes in operating assets and
liabilities:
Accounts receivable, net
238
3,026
Inventories, net
1,525
(1,077
)
Prepaid expenses and other current
assets
(367
)
(168
)
Accounts payable, accrued restructuring
and accrued expenses
(1,351
)
1,553
Refundable and accrued income taxes,
net
312
118
Other assets and liabilities
(1,516
)
(1,620
)
Net cash provided by operating
activities
6,583
8,252
Cash flows from investing activities:
Purchases of investments
(3,890
)
—
Proceeds from disposition of
securities
154,526
—
Additions of property and equipment
(552
)
(548
)
Proceeds from the disposition of property
and equipment
—
16
Net cash provided by (used in) investing
activities
150,084
(532
)
Cash flows from financing activities:
Preferred dividend payments
(536
)
(537
)
Repayments on capital lease
obligations
—
(19
)
Net cash used in financing activities
(536
)
(556
)
Net effect of exchange rate changes on
cash, cash equivalents and restricted cash
(884
)
(405
)
Net increase in cash, cash equivalents and
restricted cash
155,247
6,759
Cash, cash equivalents and restricted
cash, beginning of period
123,404
58,045
Cash, cash equivalents and restricted
cash, end of period
$
278,651
$
64,804
Cash and cash equivalents, end of
period
$
276,705
$
59,948
Restricted cash for funds held for
clients, end of period
1,946
4,856
Cash, cash equivalents and restricted
cash, end of period
$
278,651
$
64,804
Steel Connect, Inc. and
Subsidiaries
Segment Data
(in thousands)
(unaudited)
Successor
Predecessor
Three Months
Ended
October 31,
Three Months
Ended
October 31,
2023
2022
(Unaudited)
Net revenue:
Supply Chain
$
41,341
$
51,359
Total segment net revenue
41,341
51,359
Operating income:
Supply Chain
2,675
5,851
Total segment operating income
2,675
5,851
Corporate-level activity
(870
)
(1,972
)
Total operating income
1,805
3,879
Total other income, net
3,302
2,204
Income before income taxes
$
5,107
$
6,083
Steel Connect, Inc. and
Subsidiaries
Reconciliation of Non-GAAP
Measures to GAAP Measures
(in thousands)
(unaudited)
EBITDA and Adjusted EBITDA
Reconciliations:
Successor
Predecessor
Three Months
Ended
October 31,
Three Months
Ended
October 31,
2023
2022
Net income
$
4,436
$
4,957
Interest income
(3,219
)
(144
)
Interest expense
247
826
Income tax expense
671
1,126
Depreciation
435
459
Amortization
875
—
EBITDA
3,445
7,224
Strategic consulting and other related
professional fees
—
648
Executive severance and employee
retention
—
(116
)
Share-based compensation
137
177
Loss on sale of long-lived assets
—
16
Unrealized foreign exchange (gains),
net
(48
)
(511
)
Other non-cash (gains), net
(223
)
(157
)
Adjusted EBITDA
$
3,311
$
7,281
Net revenue
$
41,341
$
51,359
Adjusted EBITDA margin
8.0
%
14.2
%
Free Cash Flow
Reconciliation:
Successor
Predecessor
Three Months
Ended
October 31,
Three Months
Ended
October 31,
2023
2022
Net cash provided by operating
activities
$
6,583
$
8,252
Additions to property and equipment
(552
)
(548
)
Free cash flow
$
6,031
$
7,704
Net Debt
Reconciliation:
Successor
October 31,
2023
July 31,
2023
Total debt, net
$
12,327
12,461
Cash and cash equivalents
(276,705
)
(121,372
)
Net debt
$
(264,378
)
$
(108,911
)
Note Regarding Use of Non-GAAP Financial Measurements
In addition to the financial measures prepared in accordance
with generally accepted accounting principles, the Company uses
EBITDA, Adjusted EBITDA, Free Cash Flow and Net Debt, all of which
are non-GAAP financial measures, to assess its performance. EBITDA
represents earnings (losses) before interest income, interest
expense, income tax expense (benefit), depreciation, and
amortization. We define Adjusted EBITDA as net income (loss)
excluding net charges related to interest income, interest expense,
income tax expense (benefit), depreciation, amortization, strategic
consulting and other related professional fees, executive severance
and employee retention, restructuring and restructuring-related
expense, share-based compensation, (gain) loss on sale of
long-lived assets, impairment of long-lived assets, unrealized
foreign exchange (gains) losses, net, and other non-cash (gains)
losses, net. The Company defines Free Cash Flow as net cash
provided by (used in) operating activities less additions to
property and equipment, and defines Net Debt as the sum of total
debt, excluding reductions for unamortized discounts and issuance
costs, less cash and cash equivalents.
We believe that providing these non-GAAP measurements to
investors is useful, as these measures provide important
supplemental information of our performance to investors and permit
investors and management to evaluate the operating performance of
our business. These measures provide useful supplemental
information to management and investors regarding our operating
results as they exclude certain items whose fluctuation from
period-to-period do not necessarily correspond to changes in the
operating results of our business. We use EBITDA and Adjusted
EBITDA in internal forecasts and models when establishing internal
operating budgets, supplementing the financial results and
forecasts reported to our Board of Directors, determining a
component of certain incentive compensation for executive officers
and other key employees based on operating performance, determining
compliance with certain covenants in the Company's credit
facilities, and evaluating short-term and long-term operating
trends in our core business. We use Free Cash Flow to conduct and
evaluate our business because, although it is similar to cash flow
from operations, we believe it is a useful measure of cash flows
since purchases of property and equipment are a necessary component
of ongoing operations, and similar to the use of Net Debt, assists
management with its capital planning and financing
considerations.
We believe that these non-GAAP financial measures assist in
providing an enhanced understanding of our underlying operational
measures to manage our core businesses, to evaluate performance
compared to prior periods and the marketplace, and to establish
operational goals. Further, we believe that these non-GAAP
financial adjustments are useful to investors because they allow
investors to evaluate the effectiveness of the methodology and
information used by management in our financial and operational
decision-making. These non-GAAP financial measures should not be
considered in isolation or as a substitute for financial
information provided in accordance with U.S. GAAP. These non-GAAP
financial measures may not be computed in the same manner as
similarly titled measures used by other companies.
Some of the limitations of EBITDA and Adjusted EBITDA
include:
- EBITDA and Adjusted EBITDA do not reflect changes in, or cash
requirements for, our working capital needs;
- EBITDA and Adjusted EBITDA do not reflect our interest expense,
or the cash requirements necessary to service interest or principal
payments, on our debt;
- EBITDA and Adjusted EBITDA do not reflect our tax expense or
the cash requirements to pay our taxes;
- EBITDA and Adjusted EBITDA do not reflect historical capital
expenditures or future requirements for capital expenditures or
contractual commitments;
- although depreciation and amortization are non-cash charges,
the assets being depreciated and amortized will often have to be
replaced in the future, and EBITDA and Adjusted EBITDA do not
reflect any cash requirements for such replacements; and
- other companies in our industry may calculate EBITDA and
Adjusted EBITDA differently, limiting their usefulness as
comparative measures.
In addition, Net Debt assumes the Company's cash and cash
equivalents can be used to reduce outstanding debt without
restriction, while Free Cash Flow has limitations due to the fact
that it does not represent the residual cash flow available for
discretionary expenditures and excludes the Company's remaining
investing activities and financing activities, including the
requirement for principal payments on the Company's outstanding
indebtedness.
See reconciliations of these non-GAAP measures to the most
directly comparable GAAP measures included in the financial tables
of this release.
Net Operating Loss Carryforwards
The Company's Restated Certificate of Incorporation (the
“Protective Amendment”) and Amended Tax Benefits Preservation Plan
(the “Tax Plan”) includes provisions designed to protect the tax
benefits of the Company's net operating loss carryforwards by
preventing certain transfers of our securities that could result in
an "ownership change" (as defined under Section 382 of the Internal
Revenue Code). The Protective Amendment generally restricts any
direct or indirect transfer if the effect would be to (i) increase
the direct, indirect or constructive ownership of any stockholder
from less than 4.99 percent to 4.99 percent or more of the shares
of common stock then outstanding or (ii) increase the direct,
indirect or constructive ownership of any stockholder owning or
deemed to own 4.99 percent or more of the shares of common stock
then outstanding. Pursuant to the Protective Amendment, any direct
or indirect transfer attempted in violation of the Protective
Amendment would be void as of the date of the prohibited transfer
as to the purported transferee (or, in the case of an indirect
transfer, the ownership of the direct owner of the shares would
terminate simultaneously with the transfer), and the purported
transferee (or in the case of any indirect transfer, the direct
owner) would not be recognized as the owner of the shares owned in
violation of the Protective Amendment (the "excess stock") for any
purpose, including for purposes of voting and receiving dividends
or other distributions in respect of such shares, or in the case of
options, receiving shares in respect of their exercise. Pursuant to
the Tax Plan and subject to certain exceptions, if a stockholder
(or group) becomes a 4.99-percent stockholder after adoption of the
Tax Plan, certain rights attached to each outstanding share of our
common stock would generally become exercisable and entitle
stockholders (other than the new 4.99-percent stockholder or group)
to purchase additional shares of the Company at a significant
discount, resulting in substantial dilution in the economic
interest and voting power of the new 4.99-percent stockholder (or
group). In addition, under certain circumstances in which the
Company is acquired in a merger or other business combination after
an non-exempt stockholder (or group) becomes a new 4.99-percent
stockholder, each holder of a right (other than the new
4.99-percent stockholder or group) would then be entitled to
purchase shares of the acquiring company's common stock at a
discount. For further discussion of the Company's tax benefits
preservation plan, please see the Company's filings with the
SEC.
Forward-Looking Statements
This release contains forward-looking statements within the
meaning of the Private Securities Litigation Reform Act of 1995.
Statements in this release that are not historical facts are hereby
identified as "forward-looking statements" for the purpose of the
safe harbor provided by Section 27A of the Securities Act of 1933,
as amended, and Section 21E of the Securities Exchange Act of 1934,
as amended. All statements other than statements of historical
fact, including without limitation, those with respect to the
Company's goals, plans, expectations and strategies set forth
herein are forward-looking statements. The following important
factors and uncertainties, among others, could cause actual results
to differ materially from those described in these forward-looking
statements: changes in the Company’s relationships with significant
clients; fluctuations in demand for our products and services; the
Company’s ability to achieve and sustain operating profitability;
demand variability from clients without minimum purchase
requirements; general economic conditions and public health crises;
intense competition in the Company’s business; risks relating to
impairment, misappropriation, theft and credit-related issues with
respect to funds held for the Company’s clients; our ability to
maintain adequate inventory levels; our ability to raise or access
capital in the future; difficulties increasing operating
efficiencies and effecting cost savings; loss of essential
employees or an inability to recruit and retain personnel; the
Company's ability to execute on its business strategy and to
achieve anticipated synergies and benefits from business
acquisitions; risks inherent with conducting international
operations, including the Company’s operations in Mainland China;
the risk of damage, misappropriation or loss of the physical or
intellectual property of the Company’s clients; increased
competition and technological changes in the markets in which the
Company competes; disruptions in or breaches of the Company’s
technology systems; failure to settle disputes and litigation on
terms favorable to the Company; the Company's ability to preserve
and monetize its net operating losses; changes in tax rates, laws
or regulations; failure to maintain compliance with Nasdaq’s
continued listing requirements; potential conflicts of interest
arising from the interests of the members of the Company’s board of
directors in Steel Holdings and its affiliates; risks related to
the reverse/forward stock split; potential restrictions imposed by
its indebtedness; and potential adverse effects from changes in
interest rates. For a detailed discussion of cautionary statements
and risks that may affect the Company's future results of
operations and financial results, please refer to the Company's
filings with the SEC, including, but not limited to, the risk
factors in the Company's Annual Report on Form 10-K filed with the
SEC on November 8, 2023. These filings are available on the
Company's Investor Relations website under the "SEC Filings"
tab.
All forward-looking statements are necessarily only estimates of
future results, and there can be no assurance that actual results
will not differ materially from expectations, and, therefore, you
are cautioned not to place undue reliance on such statements.
Further, any forward-looking statement speaks only as of the date
on which it is made, and we undertake no obligation to update any
forward-looking statement to reflect events or circumstances after
the date on which the statement is made or to reflect the
occurrence of unanticipated events.
View source
version on businesswire.com: https://www.businesswire.com/news/home/20231213571152/en/
Investor Relations Contact
Jennifer Golembeske 914-461-1276
investorrelations@steelconnectinc.com
Steel Connect (NASDAQ:STCN)
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