Steel Connect, Inc. (the "Company") (NASDAQ: STCN) today
announced financial results for its fourth quarter and fiscal year
ended July 31, 2024.
Results of Operations
Due to the previously disclosed application of pushdown
accounting, 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. The pre-exchange
period through April 30, 2023, is referred to as the "Predecessor"
period. The post-exchange period, May 1, 2023, and onward, includes
the impact of pushdown accounting and is referred to as the
"Successor" period.
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
Successor
Successor
Predecessor
Combined-
Three Months Ended July
31,
Three Months Ended July
31,
Fiscal Year Ended July
31,
August 1, 2022 to April
30,
Period from August 1, 2022
through July 31,
2024
2023
2024
2023
2023
(in thousands)
Net revenue
$
45,868
$
40,804
$
174,109
$
148,283
$
189,087
Net income
6,537
8,149
87,980
7,460
15,609
Net income attributable to common
stockholders
$
6,006
$
7,612
$
85,845
$
5,867
$
13,480
Adjusted EBITDA*
$
4,282
$
10,560
$
16,374
$
17,146
$
27,706
Adjusted EBITDA margin*
9.3
%
25.9
%
9.4
%
11.6
%
14.7
%
Net cash provided by operating
activities
$
6,420
$
8,523
$
21,848
$
9,000
$
17,523
Additions to property and equipment
(1,054
)
(807
)
(3,965
)
(1,311
)
(2,118
)
Free cash flow*
$
5,366
$
7,716
$
17,883
$
7,689
$
15,405
* 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 Fourth Quarter and Fiscal Year Ended July
31, 2024 and 2023
The financial information and discussion that follows below are
for the Company's operations. References herein to the “fiscal year
ended July 31, 2023” combine the operational results for the August
1, 2022 to April 30, 2023 Predecessor period and the May 1 to July
31, 2023 Successor period to enhance the comparability of such
information to the current fiscal year. Fluctuations in foreign
currency exchange rates had an insignificant impact on the results
for the fourth quarter and the fiscal year ended July 31, 2024, as
compared to the same periods in the prior year.
Three Months Ended
July 31,
2024
2023
Fav (Unfav) ($)
% Change
(unaudited, $ in
thousands)
Net revenue
$
45,868
$
40,804
$
5,064
12.4
%
Cost of revenue
(33,214
)
(29,749
)
(3,465
)
(11.6
)%
Gross profit
12,654
11,055
1,599
14.5
%
Gross profit margin
27.6
%
27.1
%
—
50
bpts
Selling, general and administrative
(10,808
)
(8,523
)
(2,285
)
(26.8
)%
Amortization
(893
)
(911
)
18
2.0
%
Interest expense
(257
)
(265
)
8
3.0
%
Other gains, net (including interest
income)
5,753
6,395
(642
)
(10.0
)%
Total costs and expenses
(39,419
)
(33,053
)
(6,366
)
19.3
%
Income before income taxes
6,449
7,751
(1,302
)
(16.8
)%
Income tax benefit
88
398
(310
)
(77.9
)%
Net income
$
6,537
$
8,149
$
(1,612
)
(19.8
)%
Fiscal Year Ended
July 31,
2024
2023
Fav (Unfav) ($)
% Change
(unaudited, $ in
thousands)
Net revenue
$
174,109
$
189,087
$
(14,978
)
(7.9
)%
Cost of revenue
(125,616
)
(137,780
)
12,164
8.8
%
Gross profit
48,493
51,307
(2,814
)
(5.5
)%
Gross profit margin
27.9
%
27.1
%
—
80
bpts
Selling, general and administrative
(37,478
)
(41,986
)
4,508
10.7
%
Amortization
(3,554
)
(911
)
(2,643
)
(290.1
)%
Interest expense
(996
)
(2,853
)
1,857
65.1
%
Other gains, net (including interest
income)
14,492
11,284
3,208
28.4
%
Total costs and expenses
(153,152
)
(172,246
)
19,094
11.1
%
Income before income taxes
20,957
16,841
4,116
24.4
%
Income tax benefit (expense)
67,023
(1,232
)
68,255
5540.2
%
Net income
$
87,980
$
15,609
$
72,371
463.6
%
Net Revenue
Net revenue for the fourth quarter increased $5.1 million, or
12.4%, as compared to the same period in the prior year. This
increase in net revenue was primarily driven by higher volumes,
favorable pricing mix and new program starts associated with
clients in the computing and consumer electronics markets.
Net revenue for the fiscal year ended July 31, 2024 decreased by
approximately $15.0 million, or 7.9%, as compared to the fiscal
year ended July 31, 2023, primarily driven by lower volumes related
to clients in the computing and consumer electronics markets,
partially offset by new business revenue from new clients in the
consumer electronics market.
Cost of Revenue
Cost of revenue for the fourth quarter increased $3.5 million,
or 11.6%, as compared to the same period in the prior year,
primarily due to a $2.5 million increase in materials procured on
behalf of clients as a result of higher sales volume for clients in
the computing and consumer electronics markets.
Cost of revenue for the fiscal year ended July 31, 2024
decreased $12.2 million, or 8.8%, as compared to the fiscal year
ended July 31, 2023, primarily due to a $12.6 million decrease in
materials procured on behalf of clients in the computing and
consumer electronics markets.
Gross Profit
The Company's gross profit increased by $1.6 million, or 14.5%,
as compared to the same period in the prior year, and the Company's
gross margin percentage increased by 50 basis points to 27.6%, as
compared to 27.1% for the same period in the prior year, primarily
due to higher sales volume and favorable pricing mix for clients in
the computing and consumer electronics markets.
The Company's gross profit decreased by $2.8 million, or 5.5%,
for the fiscal year ended July 31, 2024 as compared to the fiscal
year ended July 31, 2023 primarily due to lower sales volume
discussed above. The gross profit percentage for the fiscal year
ended July 31, 2024 increased 80 basis points to 27.9% from 27.1%
for the fiscal year ended July 31, 2023, primarily due to changes
in customer sales mix.
Selling, General and Administrative
Selling, general and administrative ("SG&A") expenses for
the fourth quarter increased $2.3 million, or 26.8%, as compared to
the same period in the prior year. SG&A expenses for ModusLink
Corporation ("Supply Chain") increased by $1.4 million due to
partial recovery of previously reserved bad debt in the fourth
quarter of fiscal year 2023 that did not reoccur in the current
year quarter and other miscellaneous expenses, none of which are
individually significant. Corporate-level activity increased by
$0.9 million, primarily driven by an increase in mergers and
acquisition related expenses.
SG&A expenses for the fiscal year ended July 31, 2024
decreased by approximately $4.5 million or 10.7%, as compared to
the fiscal year ended July 31, 2023, primarily due to
Corporate-level activity. Corporate-level activity decreased by
$5.1 million, primarily due to a decrease in legal and other
professional fees related to the Exchange Transaction which closed
in May 2023. This activity was partially offset by an increase in
mergers and acquisitions related expenses during the fiscal year
ended July 31, 2024.
Amortization Expense
Amortization expense is related to the recognition of intangible
assets in connection with the application of pushdown accounting as
a result of the Exchange Transaction, which closed on May 1, 2023.
Amortization expense for the fourth quarter remained relatively
flat as compared to the same period in the prior year.
Amortization expense for the fiscal year ended July 31, 2024
increased $2.6 million or 290.1% as compared to the fiscal year
ended July 31, 2023. The increase is due to a full years' worth of
amortization being recognized for the fiscal year ended July 31,
2024, as compared to only three months' worth of amortization
recognized for the fiscal year ended July 31, 2023.
Interest Expense
Total interest expense for the fourth quarter remained
relatively flat as compared to the same period in the prior
year.
Total interest expense for the fiscal year ended July 31, 2024
decreased $1.9 million or 65.1% as compared to the fiscal year
ended July 31, 2023, primarily due to the cessation of the
amortization of the discount on the 7.50% Senior Convertible Note
due 2024 (the "SPHG Note") as of May 1, 2023, the date of the
Exchange Transaction.
Other Gains, Net (including Interest Income):
Other gains, net for the three months ended July 31, 2024 and
2023 were approximately $5.8 million and $6.4 million. Other gains,
net for the three months ended July 31, 2024 included: (1) $3.3
million interest income, primarily earned on money market funds;
(2) $1.3 million grant income; and (3) $0.9 million net gains on
investments. Other gains, net for the three months ended July 31,
2023 included: (1) $5.1 million realized gains on the disposition
of the Aerojet shares received in the Exchange Transaction, and (2)
$0.7 million of interest income received on money market funds.
Other gains, net for the fiscal year ended July 31, 2024 and the
fiscal year ended July 31, 2023 were $14.5 million and $11.3
million, respectively. Other gains, net for the fiscal year ended
July 31, 2024 included: (1) $13.7 million interest income,
primarily earned on money market funds, (2) $1.4 million grant
income, and (3) $0.4 million sublease income. This activity was
partially offset by (1) $0.6 million net losses on investments and
(2) $0.4 million net unrealized loss on the fair value
remeasurement of the SPHG Note. Other gains, net for the fiscal
year ended July 31, 2023 included: (1) $5.1 million realized gains
on the disposition of the Aerojet shares received in the Exchange
Transaction, (2) $2.3 million gain from proceeds received from the
sale of an investment, (3) $1.6 million interest income, primarily
earned on money market funds, (4) $1.4 million settlement with a
client, and (5) $1.0 million sublease income. This activity was
partially offset by $0.5 million unrealized loss on the fair value
remeasurement of the SPHG Note.
Income Tax Benefit (Expense)
Income tax benefit for the fourth quarter was $0.1 million, as
compared to $0.4 million for the same period in the prior year. The
change in income tax benefit for the three months ended July 31,
2024 as compared to the prior year period was primarily due to the
mix of earnings from our U.S. and foreign jurisdictions.
Income tax benefit for the fiscal year ended July 31, 2024 was
approximately $67.0 million, as compared to $1.2 million income tax
expense for the fiscal year ended July 31, 2023. The favorable
change in income tax is due to the Company's release of a portion
of its valuation allowance for certain pre-existing Company
deferred tax assets. The release resulted in a non-cash adjustment
to income tax benefit of $73.4 million for the fiscal year ended
July 31, 2024, which increased from the income tax benefit of $71.5
million in the third quarter of fiscal year 2024 due to an increase
in taxable income that resulted in more NOLs being utilized before
their expiration at fiscal year end.
Net Income
Net income for the fourth quarter decreased $1.6 million, or
19.8%, as compared to the same period in the prior year. The
decrease in net income is primarily due to unfavorable changes
within non-operating expenses, such as the decrease in other gains,
net of $0.6 million and $0.3 million unfavorable change in income
tax benefit. See above explanations for further details.
Net income for the fiscal year ended July 31, 2024 increased
$72.4 million, or 463.6%, as compared to the fiscal year ended July
31, 2023. The increase in net income is primarily due to the
non-cash, significant income tax benefit accounting adjustment
booked during the fiscal year ended July 31, 2024. See above for
further details.
Additions to Property and Equipment (Capital
Expenditures)
Capital expenditures for the fourth quarter totaled $1.1
million, or 2.3% of net revenue, as compared to $0.8 million, or
2.0% of net revenue, for the same period in the prior year. Capital
expenditures increased to $4.0 million, or 2.3% of net revenue for
the fiscal year ended July 31, 2024, from $2.1 million, or 1.1% of
net revenue, for the fiscal year ended July 31, 2023.
Adjusted EBITDA
Adjusted EBITDA decreased $6.3 million, or 59.5%, for the fourth
quarter as compared to the same period in the prior year, primarily
due to higher operating expenses of $3.6 million and lower realized
gains of $3.4 million due to the $5.1 million gain on the
disposition of the Aerojet shares received in the Exchange
Transaction in the prior year period that did not reoccur in the
current year quarter, partially offset by higher gross profit of
$1.6 million.
Adjusted EBITDA decreased $11.3 million, or 40.9%, for the
fiscal year ended July 31, 2024, as compared to the fiscal year
ended July 31, 2023, primarily due to lower realized foreign
exchange gains of $3.4 million, lower realized gains of $3.2
million due to the $5.1 million gain on the disposition of the
Aerojet shares received in the Exchange Transaction in the prior
year period that did not reoccur in the current year, and a $2.8
million decrease in gross profit driven by lower sales volume.
Liquidity and Capital Resources
As of July 31, 2024, the Company had cash and cash equivalents
of $248.6 million and ModusLink Corporation ("ModusLink") had
readily available borrowing capacity of $11.9 million under its
revolving credit facility with Umpqua Bank.
As of July 31, 2024, total debt outstanding was $12.9 million,
which was the fair value of the SPHG Note due September 1, 2024.
The SPHG Note matured on September 1, 2024 and the Company paid off
the outstanding principal and accrued interest for the SPHG Note
upon its maturity.
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, medical devices, 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 Pacific.
– Financial Tables Follow –
Steel Connect, Inc. and
Subsidiaries
Condensed Consolidated Balance
Sheets
(in thousands)
Successor
July 31, 2024
July 31, 2023
ASSETS
Current assets:
Cash and cash equivalents
$
248,614
$
121,372
Accounts receivable, trade, net
33,443
28,616
Inventories, net
6,733
8,569
Funds held for clients
2,576
2,031
Prepaid expenses and other current
assets
4,462
158,686
Total current assets
295,828
319,274
Property and equipment, net
5,536
3,698
Operating lease right-of-use assets
20,748
27,098
Investments
41,376
—
Other intangible assets, net
31,036
34,589
Goodwill
19,703
22,785
Deferred tax asset
68,315
317
Other assets
3,086
3,420
Total assets
$
485,628
$
411,181
LIABILITIES, CONTINGENTLY
REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable
$
25,219
$
26,514
Accrued expenses
21,659
26,774
Funds held for clients
2,532
1,949
Current lease obligations
8,319
7,973
Convertible note payable
12,903
—
Other current liabilities
4,423
4,544
Total current liabilities
75,055
67,754
Convertible note payable
—
12,461
Long-term lease obligations
12,740
19,161
Other long-term liabilities
5,913
5,442
Total long-term liabilities
18,653
37,064
Total liabilities
93,708
104,818
Contingently redeemable preferred
stock
Series C contingently redeemable preferred
stock
35,006
35,006
Series E contingently redeemable preferred
stock
202,733
202733
Total contingently redeemable preferred
stock
237,739
237,739
Total stockholders' equity
154,181
68,624
Total liabilities, contingently redeemable
preferred stock and stockholders' equity
$
485,628
$
411,181
Steel Connect, Inc. and
Subsidiaries
Condensed Consolidated
Statements of Operations
(in thousands, except per
share amounts)
Unaudited
Unaudited
Successor
Successor
Successor
Predecessor
Combined-
Three Months Ended July
31,
Three Months Ended July
31,
Fiscal Year Ended July
31,
August 1, 2022 to April
30,
Period from August 1, 2022
through July 31,
2024
2023
2024
2023
2023
Net revenue
$
45,868
$
40,804
$
174,109
$
148,283
$
189,087
Cost of revenue
33,214
29,749
125,616
108,031
137,780
Gross profit
12,654
11,055
48,493
40,252
51,307
Operating expenses:
Selling, general and administrative
10,808
8,523
37,478
33,463
41,986
Amortization
893
911
3,554
—
911
Total operating expenses
11,701
9,434
41,032
33,463
42,897
Operating income
953
1,621
7,461
6,789
8,410
Other income (expense):
Interest income
3,342
707
13,716
928
1,635
Interest expense
(257
)
(265
)
(996
)
(2,588
)
(2,853
)
Other gains, net
2,411
5,688
776
3,961
9,649
Total other income
5,496
6,130
13,496
2,301
8,431
Income before income taxes
6,449
7,751
20,957
9,090
16,841
Income tax (benefit) expense
(88
)
(398
)
(67,023
)
1,630
1,232
Net income
6,537
8,149
87,980
7,460
15,609
Less: Preferred dividends on redeemable
preferred stock
(531
)
(537
)
(2,135
)
(1,593
)
(2,129
)
Net income attributable to common
stockholders
$
6,006
$
7,612
$
85,845
$
5,867
$
13,480
Net income per share - basic
$
0.23
$
0.29
$
3.30
$
0.91
$
0.52
Net income per share - diluted
$
0.23
$
0.29
$
3.11
$
0.89
$
0.52
Weighted-average number of common units
outstanding - basic
6,239
6,177
6,218
6,449
6,027
Weighted-average number of common units
outstanding - diluted
26,120
27,960
28,589
8,417
25,894
Steel Connect, Inc. and
Subsidiaries
Condensed Consolidated
Statements of Cash Flows
(in thousands)
Successor
Predecessor
Fiscal Year Ended July
31,
May 1 to July 31,
August 1, 2022 to April
30,
2024
2023
2023
Cash flows from operating activities:
Net income
$
87,980
$
8,149
$
7,460
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation
1,826
456
1,427
Amortization of intangible assets
3,554
911
—
Amortization of deferred financing
costs
—
—
36
Accretion of debt discount
—
—
1,688
Share-based compensation
632
236
529
Deferred taxes
(68,470
)
(250
)
—
Non-cash lease expense
9,193
2,208
6,760
Bad debt (recovery) expense
(46
)
(297
)
1,136
Other gains, net
661
(5,687
)
(3,962
)
Non-cash impact of application of pushdown
accounting
—
8,079
—
Changes in operating assets and
liabilities:
Accounts receivable, net
(5,089
)
8,409
2,933
Inventories, net
1,608
(1,567
)
1,440
Prepaid expenses and other current
assets
(416
)
905
(1,237
)
Accounts payable and accrued expenses
(2,477
)
(1,690
)
(3,886
)
Refundable and accrued income taxes,
net
(134
)
(214
)
(829
)
Other assets and liabilities
(6,974
)
(11,125
)
(4,495
)
Net cash provided by operating
activities
21,848
8,523
9,000
Cash flows from investing activities:
Additions to property and equipment
(3,965
)
(807
)
(1,311
)
Proceeds from the disposition of property
and equipment
9
1
166
Proceeds from the sale of securities
157,915
53,644
1,881
Purchases of investments
(45,377
)
—
—
Net cash provided by investing
activities
108,582
52,838
736
Cash flows from financing activities:
Series C redeemable preferred stock
dividend payments
(2,135
)
(537
)
(1,593
)
Payment of deferred financing costs
—
—
(149
)
Repayments on capital lease
obligations
—
—
(38
)
Repayments on debt
—
(1,000
)
(1,000
)
Payments for fractional shares resulting
from the Reverse/Forward stock split
—
(2,288
)
—
Net cash used in financing activities
(2,135
)
(3,825
)
(2,780
)
Net effect of exchange rate changes on
cash and cash equivalents
(508
)
(29
)
895
Net increase (decrease) in cash, cash
equivalents and restricted cash
127,787
57,507
7,851
Cash, cash equivalents and restricted
cash, beginning of period
123,403
65,896
58,045
Cash, cash equivalents and restricted
cash, end of period
$
251,190
$
123,403
$
65,896
Steel Connect, Inc. and
Subsidiaries
Segment Data
(in thousands)
Successor
Successor
Successor
Predecessor
Combined-
Three Months Ended July
31,
Three Months Ended July
31,
Fiscal Year Ended July
31,
August 1, 2022 to April
30,
Period from August 1, 2022
through July 31,
2024
2023
2024
2023
2023
Net revenue:
Supply Chain
$
45,868
$
40,804
$
174,109
$
148,283
$
189,087
Total segment net revenue
$
45,868
$
40,804
$
174,109
$
148,283
$
189,087
Operating income:
Supply Chain
3,551
3,328
13,739
16,488
19,816
Corporate-level activity
(2,598
)
(1,707
)
(6,278
)
(9,699
)
(11,406
)
Total operating income
953
1,621
7,461
6,789
8,410
Total other income
5,496
6,130
13,496
2,301
8,431
Income before income taxes
$
6,449
$
7,751
$
20,957
$
9,090
$
16,841
Steel Connect, Inc. and
Subsidiaries
Reconciliation of Non-GAAP
Measures to GAAP Measures
(in thousands)
(unaudited)
EBITDA and Adjusted EBITDA
Reconciliations:
Successor
Successor
Successor
Predecessor
Combined-
Three Months Ended July
31,
Three Months Ended July
31,
Fiscal Year Ended July
31,
August 1, 2022 to April
30,
Period from August 1, 2022
through July 31,
2024
2023
2024
2023
2023
Net income
$
6,537
$
8,149
$
87,980
$
7,460
$
15,609
Interest income
(3,342
)
(707
)
(13,716
)
(928
)
(1,635
)
Interest expense
257
265
996
2,588
2,853
Income tax (benefit) expense
(88
)
(398
)
(67,023
)
1,630
1,232
Depreciation
502
456
1,826
1,427
1,883
Amortization
893
911
3,554
—
911
EBITDA
4,759
8,676
13,617
12,177
20,853
Strategic consulting and other related
professional fees
—
1,427
—
4,616
6,043
Executive severance and employee
retention
—
—
—
(150
)
(150
)
Restructuring and restructuring-related
expense
30
(62
)
163
97
35
Share-based compensation
173
236
632
529
765
Loss (gain) on sale of long-lived
assets
9
(1
)
10
(128
)
(129
)
Unrealized foreign exchange losses,
net
207
742
1,042
3,562
4,304
Other non-cash gains, net
(896
)
(458
)
910
(3,557
)
(4,015
)
Adjusted EBITDA
$
4,282
$
10,560
$
16,374
$
17,146
$
27,706
Net revenue
$
45,868
$
40,804
$
174,109
$
148,283
$
189,087
Adjusted EBITDA margin
9.3
%
25.9
%
9.4
%
11.6
%
14.7
%
Free Cash Flow Reconciliation:
Successor
Successor
Successor
Predecessor
Combined-
Three Months Ended July
31,
Three Months Ended July
31,
Fiscal Year Ended July
31,
August 1, 2022 to April
30,
Period from August 1, 2022
through July 31,
2024
2023
2024
2023
2023
Net cash provided by operating
activities
$
6,420
$
8,523
$
21,848
$
9,000
$
17,523
Additions to property and equipment
(1,054
)
(807
)
(3,965
)
(1,311
)
(2,118
)
Free cash flow
$
5,366
$
7,716
$
17,883
$
7,689
$
15,405
Net Debt Reconciliation:
Successor
July 31, 2024
July 31, 2023
Total debt, net
$
12,903
$
12,461
Cash and cash equivalents
(248,614
)
(121,372
)
Net debt
$
(235,711
)
$
(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 before interest income, interest expense,
income tax (benefit) expense, depreciation and amortization of
intangible assets. We define Adjusted EBITDA as net income
excluding net charges related to interest income, interest expense,
income tax (benefit) expense, depreciation, amortization, strategic
consulting and other related professional fees, executive severance
and employee retention, restructuring and restructuring-related
expense, share-based compensation, loss (gain) on sale of
long-lived assets, unrealized foreign exchange losses, net, and
other non-cash gains, net. The Company defines Free Cash Flow as
net cash provided by 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”) 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 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; the investment of our assets in cash and
cash equivalents and investment securities; 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 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.
View source
version on businesswire.com: https://www.businesswire.com/news/home/20241106803354/en/
Investor Relations Jennifer Golembeske 914-461-1276
investorrelations@steelconnectinc.com
Steel Connect (NASDAQ:STCN)
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