Steel Connect Reports First Quarter Fiscal 2024 Financial Results

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.

NEW YORK–(BUSINESS WIRE)–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.

Contacts

Investor Relations Contact

Jennifer Golembeske

914-461-1276

investorrelations@steelconnectinc.com

Read full story here

Artículos Relacionados