First Quarter 2025 Results
Steel Connect, Inc. (the "Company") (NASDAQ: STCN) today
announced financial results for its first quarter ended October 31,
2024.
Results of Operations
Three Months Ended
October 31,
2024
2023
(in thousands)
Net revenue
$
50,487
$
41,341
Net income
2,365
4,436
Net income attributable to common
stockholders
1,828
3,900
Adjusted EBITDA*
7,382
3,311
Adjusted EBITDA margin*
14.6
%
8.0
%
Net cash provided by operating
activities
11,990
6,583
Additions to property and equipment
(581
)
(552
)
Free cash flow*
$
11,409
$
6,031
* 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, 2024 and
2023
The financial information and discussion that follows below are
for the Company's operations. Except as otherwise noted,
fluctuations in foreign currency exchange rates had an
insignificant impact on the results for the three months ended
October 31, 2024 as compared to the three months ended October 31,
2023.
Three Months Ended October
31,
(unaudited in
thousands)
2024
2023
Fav (Unfav) ($)
% Change
Net revenue
$
50,487
$
41,341
$
9,146
22.1
%
Cost of revenue
(33,251
)
(29,866
)
(3,385
)
(11.3
)%
Gross profit
17,236
11,475
5,761
50.2
%
Gross profit percentage
34.1
%
27.8
%
—
630
bpts
Selling, general and administrative
expenses
(9,842
)
(8,795
)
(1,047
)
(11.9
)%
Amortization expense
(893
)
(875
)
(18
)
(2.1
)%
Interest expense
(111
)
(247
)
136
55.1
%
Other (losses) gains, net (including
interest income)
(3,208
)
3,549
(6,757
)
(190.4
)%
Total costs and expenses
(47,305
)
(36,234
)
(11,071
)
(30.6
)%
Income before income taxes
3,182
5,107
(1,925
)
(37.7
)%
Income tax expense
(817
)
(671
)
(146
)
(21.8
)%
Net income
$
2,365
$
4,436
$
(2,071
)
(46.7
)%
Net Revenue
Net revenue for the first quarter increased by approximately
$9.1 million as compared to the same period in the prior fiscal
year. The increase in net revenue was primarily driven by favorable
sales mix and higher volumes associated with clients in the
computing and consumer electronics markets.
Cost of Revenue
Cost of revenue increased $3.4 million for the first quarter, as
compared to the same period in the prior year, primarily due to an
increase of materials procured on behalf of the Company's clients
of $2.3 million as well as an increase in labor costs as a result
of higher revenue.
Gross Profit Margin
Gross profit increased by approximately $5.8 million for the
first quarter as compared to the same period in the prior year, and
the gross profit percentage for the first quarter increased 630
basis points to 34.1% from 27.8% as compared to the same period in
the prior year, primarily due to higher revenue as a result of
favorable sales mix associated with clients in the computing and
consumer electronics markets.
Selling, General and Administrative Expenses
Selling, general and administrative ("SG&A") expenses during
the first quarter increased by approximately $1.0 million as
compared to the same period in the prior fiscal year, primarily due
to an increase in Corporate-level activity. Corporate-level
activity increased by $1.2 million, primarily due to an increase in
legal and other professional fees, as well as an increase in
management fees incurred under Amendment No. 2 to the Steel Connect
Management Services Agreement, which was effective January 1,
2024.
Amortization Expense
Amortization expense of the Company's customer relationships
intangible asset remained relatively flat for the first quarter as
compared to the same period in the prior year.
Interest Expense
Total interest expense during the first quarter decreased $0.1
million as compared to the same period in the prior year, primarily
due to the maturity of the 7.50% Senior Convertible Note due 2024
(the "SPHG Note") on September 1, 2024.
Other (Losses) Gains, Net (including Interest Income)
Other (losses) gains, net are primarily composed of investment
gains (losses), foreign exchange gains (losses), interest income,
and sublease income.
The Company recorded $3.2 million in net losses for the first
quarter, primarily due to $5.5 million net unrealized losses on
investments in equity securities, partially offset by $2.8 million
in interest income.
The Company recorded $3.5 million in net gains for the same
period in the prior year, primarily due to: (1) $3.2 million
interest income, (2) $0.4 million foreign exchange net gains, and
(3) $0.2 million sublease income, offset partially by $0.4 million
net unrealized losses on investments in equity securities.
Income Tax Expense
During the first quarter, the Company recorded income tax
expense of approximately $0.8 million as compared to $0.7 million
for the same period in the prior fiscal year. The increase in
income tax expense is primarily due to higher taxable income in
foreign jurisdictions, as compared to the prior year period.
Net Income
Net income for the first quarter decreased $2.1 million, as
compared to the same period in the prior fiscal year. The decrease
in net income is primarily due to the $6.8 million unfavorable
change in Other (losses) gains, net (including interest income) for
the first quarter as compared to the same period in the prior year.
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 1.2% of net revenue, as compared to $0.6 million, or 1.3% of net
revenue, for the same period in the prior fiscal year.
Adjusted EBITDA
Adjusted EBITDA increased $4.1 million, or 123.0%, for the first
quarter as compared to the same period in the prior fiscal year,
primarily due to an increase in gross profit of $5.8 million,
offset partially by $1.1 million unfavorable changes in realized
foreign exchange losses.
Liquidity and Capital Resources
As of October 31, 2024, the Company had cash and cash
equivalents of $233.9 million and ModusLink had readily available
borrowing capacity of $11.9 million under its revolving credit
facility with Umpqua Bank.
The Company repaid the outstanding principal and accrued
interest for the SPHG Note upon its maturity.
Subsequent Events
On November 27, 2024, the Audit Committee of the Board of
Directors of Steel Connect approved a short-form merger (the
“Short-Form Merger”) with Steel Partners Holdings L.P. (“Steel
Holdings”) in accordance with the terms of the stockholders’
agreement dated April 30, 2023 between Steel Connect, Steel
Holdings and other signatories thereto. No approval is required by
the Board or the Company’s minority stockholders. Steel Holdings
has no obligation to consummate the Short-Form Merger. If Steel
Holdings determines to proceed with the Short-Form Merger, Steel
Holdings, which together with its affiliates, owns greater than 90%
of the outstanding common stock of Steel Connect, intends to
acquire the remaining shares of common stock of Steel Connect that
it does not currently own for $11.45 per share in cash. In
addition, if, prior to the effective time of the Short-Form Merger,
Steel Connect has not distributed to stockholders proceeds, if any,
from the proposed settlement of the class and derivative action
filed in the Delaware Court of Chancery styled Reith v.
Lichtenstein, et al, holders of shares of common stock (other than
shares held by officers and directors of Steel Connect and certain
shares held by Steel Holdings and its affiliates) will receive a
contingent value right to receive their pro rata share of the net
settlement proceeds, if any, as described in a contingent value
right agreement. Additional information regarding the Short-Form
Merger is contained in the Current Report on Form 8-K filed with
the SEC on November 29, 2024.
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, telecommunications, computing and storage, software
and content, consumer packaged goods, health and personal care
products, retail and luxury and connected devices. 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)
October 31, 2024
July 31, 2024
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents
$
233,927
$
248,614
Accounts receivable, trade, net
34,543
33,443
Inventories, net
8,667
6,733
Funds held for clients
2,465
2,576
Prepaid expenses and other current
assets
3,797
4,462
Total current assets
283,399
295,828
Property and equipment, net
5,642
5,536
Operating lease right-of-use assets
18,555
20,748
Investments
48,693
41,376
Other intangible assets, net
30,143
31,036
Goodwill
19,703
19,703
Deferred tax assets
67,860
68,315
Other assets
2,763
3,086
Total assets
$
476,758
$
485,628
LIABILITIES, CONTINGENTLY
REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable
$
29,031
$
25,219
Accrued expenses
22,200
21,659
Funds held for clients
2,408
2,532
Current lease obligations
7,881
8,319
Convertible note payable
—
12,903
Other current liabilities
4,858
4,423
Total current liabilities
66,378
75,055
Long-term lease obligations
11,020
12,740
Other long-term liabilities
5,048
5,913
Total long-term liabilities
16,068
18,653
Total liabilities
82,446
93,708
Contingently redeemable preferred
stock
237,739
237,739
Total stockholders' equity
156,573
154,181
Total liabilities, contingently redeemable
preferred stock and stockholders' equity
$
476,758
$
485,628
Steel Connect, Inc. and
Subsidiaries
Condensed Consolidated
Statements of Operations
(in thousands, except per
share amounts)
(unaudited)
Three Months Ended
October 31,
2024
2023
Net revenue
$
50,487
$
41,341
Cost of revenue
33,251
29,866
Gross profit
17,236
11,475
Operating expenses:
Selling, general and administrative
9,842
8,795
Amortization
893
875
Total operating expenses
10,735
9,670
Operating income
6,501
1,805
Other income (expense):
Interest income
2,814
3,219
Interest expense
(111
)
(247
)
Other (losses) gains, net
(6,022
)
330
Total other (expense) income, net
(3,319
)
3,302
Income before income taxes
3,182
5,107
Income tax expense
817
671
Net income
2,365
4,436
Less: Preferred dividends on Series C
redeemable preferred stock
(537
)
(536
)
Net income attributable to common
stockholders
$
1,828
$
3,900
Net income per common shares -
basic
$
0.07
$
0.15
Net income per common shares -
diluted
$
0.07
$
0.15
Weighted-average number of common
shares outstanding - basic
6,256
6,199
Weighted-average number of common
shares outstanding - diluted
26,104
26,066
Steel Connect, Inc. and
Subsidiaries
Condensed Consolidated
Statements of Cash Flows
(in thousands)
(unaudited)
Three months ended October
31,
2024
2023
Cash flows from operating activities:
Net income
$
2,365
$
4,436
Adjustments to reconcile net income to
cash flows from operating activities:
Depreciation
606
435
Amortization of finite-lived intangible
assets
893
875
Share-based compensation
181
137
Non-cash lease expense
2,417
2,197
Bad debt recovery
(22
)
(8
)
Other losses (gains), net
6,032
(330
)
Changes in operating assets and
liabilities:
Accounts receivable, net
(943
)
238
Inventories, net
(1,889
)
1,525
Prepaid expenses and other current
assets
632
(367
)
Accounts payable, accrued restructuring
and accrued expenses
4,100
(1,351
)
Refundable and accrued income taxes,
net
(58
)
312
Other assets and liabilities
(2,324
)
(1,516
)
Net cash provided by operating
activities
11,990
6,583
Cash flows from investing activities:
Purchases of investments
(12,797
)
(3,890
)
Proceeds from disposition of
securities
—
154,526
Additions of property and equipment
(581
)
(552
)
Proceeds from the disposition of property
and equipment
1
—
Net cash (used in) provided by investing
activities
(13,377
)
150,084
Cash flows from financing activities:
Preferred dividend payments
(537
)
(536
)
Repayment of remaining principal balance
on SPHG Note
(12,940
)
—
Net cash used in financing activities
(13,477
)
(536
)
Net effect of exchange rate changes on
cash, cash equivalents and restricted cash
66
(884
)
Net increase in cash, cash equivalents and
restricted cash
(14,798
)
155,247
Cash, cash equivalents and restricted
cash, beginning of period
251,190
123,404
Cash, cash equivalents and restricted
cash, end of period
$
236,392
$
278,651
Cash and cash equivalents, end of
period
$
233,927
$
276,705
Restricted cash for funds held for
clients, end of period
2,465
1,946
Cash, cash equivalents and restricted
cash, end of period
$
236,392
$
278,651
Steel Connect, Inc. and
Subsidiaries
Segment Data
(in thousands)
(unaudited)
Three Months Ended October
31,
2024
2023
(Unaudited)
Net revenue:
Supply Chain
$
50,487
$
41,341
Total segment net revenue
50,487
41,341
Operating income:
Supply Chain
8,547
2,675
Corporate-level activity
(2,046
)
(870
)
Total operating income
6,501
1,805
Total other income, net
(3,319
)
3,302
Income before income taxes
$
3,182
$
5,107
Steel Connect, Inc. and
Subsidiaries
Reconciliation of Non-GAAP
Measures to GAAP Measures
(in thousands)
(unaudited)
EBITDA and Adjusted EBITDA
Reconciliations:
Three Months Ended October
31,
2024
2023
Net income
$
2,365
$
4,436
Interest income
(2,814
)
(3,219
)
Interest expense
111
247
Income tax expense
817
671
Depreciation
606
435
Amortization
893
875
EBITDA
1,978
3,445
Share-based compensation
181
137
Gain on sale of long-lived assets
(1
)
—
Unrealized foreign exchange gains, net
(311
)
(48
)
Other non-cash losses (gains), net
5,535
(223
)
Adjusted EBITDA
$
7,382
$
3,311
Net revenue
$
50,487
$
41,341
Adjusted EBITDA margin
14.6
%
8.0
%
Free Cash Flow Reconciliation:
Three Months Ended October
31,
2024
2023
Net cash provided by operating
activities
$
11,990
$
6,583
Additions to property and equipment
(581
)
(552
)
Free cash flow
$
11,409
$
6,031
Net Cash (Debt) Reconciliation:
October 31, 2024
July 31, 2024
Total debt, net
$
—
12,903
Cash and cash equivalents
(233,927
)
(248,614
)
Net cash (debt)
$
(233,927
)
$
(235,711
)
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 Cash (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 Cash (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”) 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. For further
discussion of the Protective Amendment, please see the Company's
filings with the SEC.
Forward-Looking Statements
This release contains forward-looking statements. Statements in
this release that are not historical facts are hereby identified as
"forward-looking statements". All statements other than statements
of historical fact, including without limitation, those with
respect to the Company's goals, plans, expectations and strategies
and expectations regarding the Short-Form Merger and the Reith CVRs
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; the occurrence of
any event, change or other circumstance that could result in the
Short-Form Merger not being consummated; the outcome of any legal
proceedings that may be instituted against Steel Connect or Steel
Holdings relating to the Short-Form Merger; the amount of the
costs, fees, expenses and charges related to the Short-Form Merger;
the possible adverse effect on Steel Connect’s or Steel Holdings’
businesses and the price of Common Stock if the Short-Form Merger
is not completed in a timely manner or at all; the court’s rulings
with respect to the proposed settlement of the Reith Litigation,
which may affect whether any payment is made under the Reith CVR or
the amount of any such payment; 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 6, 2024. 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.
Additional Information and Where to Find It
In connection with the Short-Form Merger, (i) Steel Connect and
Steel Holdings and certain affiliates of Steel Holdings intend to
jointly file a Schedule 13E-3. Steel Connect will mail the Schedule
13E-3 to its stockholders. This communication is not a substitute
for the Schedule 13E-3 or any other document that Steel Connect or
Steel Holdings may file with the SEC or send to Steel Connect’s
stockholders in connection with the Short-Form Merger. STOCKHOLDERS
OF STEEL CONNECT ARE NOT BEING ASKED TO APPROVE OR DISAPPROVE, OR
FURNISH A PROXY IN CONNECTION WITH, THE SHORT-FORM MERGER.
Investors will be able to obtain a free copy of the Schedule
13E-3, when available, and other relevant documents filed by Steel
Connect with the SEC at the SEC’s website at www.sec.gov. In
addition, investors may obtain a free copy of the Schedule 13E-3,
when available, and other relevant documents from Steel Connect’s
website at www.steelconnectinc.com or by directing a request to
Steel Connect, Inc., Attn: Jennifer Golembeske, 590 Madison Avenue,
32nd Floor, New York, NY 10022 or by calling (914) 461-1276.
View source
version on businesswire.com: https://www.businesswire.com/news/home/20241211125222/en/
Investor Relations
Jennifer Golembeske 914-461-1276
investorrelations@steelconnectinc.com
Steel Connect (NASDAQ:STCN)
Gráfica de Acción Histórica
De Dic 2024 a Ene 2025
Steel Connect (NASDAQ:STCN)
Gráfica de Acción Histórica
De Ene 2024 a Ene 2025
