SMART Global Holdings Reports Second Quarter Fiscal 2020 Financial Results

NEWARK, Calif., April 07, 2020 (GLOBE NEWSWIRE) -- SMART Global Holdings, Inc. (“SMART” or the “Company”) (NASDAQ: SGH), today reported financial results for the second quarter of fiscal 2020 ended February 28, 2020.

Second Quarter Fiscal 2020 Highlights:

  • Net sales of $272.0 million
  • GAAP net income (loss) of ($9.7) million, or ($0.41) per share
  • Non-GAAP net income of $12.8 million, or $0.52 per share
  • Adjusted EBITDA of $22.3 million
  • Increased cash and equivalents to $141.9 million

“In the second quarter of fiscal 2020, we generated financial results above the midpoint of our guidance range driven by excellent performance from our team members along with better than expected performance from both our Specialty Memory and Brazil businesses,” commented Ajay Shah, Chairman and CEO. “Despite the challenges we all face during the COVID-19 crisis, we remain optimistic about the longer-term positioning of our businesses.”

“During the quarter we significantly improved our capital structure through the issuance of $250 million of convertible senior notes in a private placement, the majority of the proceeds of which we used to pay down our existing, higher interest rate debt, thereby recapitalizing our balance sheet, lowering our interest expense, eliminating quarterly principal payments and extending the debt maturity,” added Jack Pacheco, COO and CFO.

               
Quarterly Financial Results GAAP (1)   Non-GAAP (2)
(In millions, except per share amounts) Q2 FY20 Q1 FY20 Q2 FY19   Q2 FY20 Q1 FY20 Q2 FY19
Net sales $ 272.0   $ 272.0 $ 304.1   $ 272.0 $ 272.0 $ 304.1
Gross profit $ 51.5   $ 54.3 $ 57.1   $ 52.9 $ 55.7 $ 57.8
Operating income $ 8.2   $ 5.9 $ 22.5   $ 17.3 $ 18.2 $ 27.7
Net income (loss) $ (9.7 ) $ 0.2 $ 12.8   $ 12.8 $ 13.4 $ 18.0
Diluted earnings per share (EPS) $ (0.41 ) $ 0.01 $ 0.55   $ 0.52 $ 0.55 $ 0.77
               
(1)  GAAP represents U.S. Generally Accepted Accounting Principles.        
(2)  Please refer to the “Non-GAAP Information” section and the "Reconciliation of Non-GAAP Financial Measures" tables below for further detail on the non-GAAP financial reporting referenced above and a reconciliation of such measures to our nearest GAAP measures.
 

Business Outlook
The following statements are based upon management's current expectations for the third quarter of fiscal 2020 ending May 29, 2020. These statements are forward-looking and actual results may differ materially. SMART undertakes no obligation to update these statements.

     
Net Sales $270 to $300 million
Gross Margin - GAAP / Non-GAAP 20% to 22%
Diluted EPS - GAAP* $0.33 ± $0.05
   
Share-based compensation per share $0.20
Intangible amortization per share $0.15
   
Diluted EPS - Non-GAAP* $0.68 ± $0.05
   
Expected diluted share count 24.6 million
     
*EPS does not include any potential loss from the mark to market of the capped call.
     

Conference Call Details
SMART will host a conference call today for analysts and investors at 1:30 p.m. Pacific time, 4:30 p.m. Eastern time. Dial-in US toll free +1-866-487-6452 using access code 5089819.

A replay of the conference call will be available for one week following today’s call through the Events section of the SMART website at www.smartgh.com or by calling US toll free +1-855-859-2056; Passcode: 5089819.

Forward-Looking Statements
This release contains, and statements made during the above-referenced conference call will contain "forward-looking statements" including among other things, statements regarding future events and the future financial performance of SMART (including the business outlook for the next fiscal quarter) and statements regarding growth drivers in SMART’s industries and markets. These statements are only predictions and may differ materially from actual future events or results due to a variety of factors, including but not limited to: business and economic conditions and growth trends in the technology industry, our customer markets and various geographic regions; global economic conditions and uncertainties in the geopolitical environment; disruptions in our operations or in global markets as a result of the outbreak of COVID-19; trade regulations and relations; changes in currency exchange rates; overall information technology spending; appropriations for government spending; the success of our strategic initiatives including additional investments in new products, additional capacity and acquisitions; the DRAM market and the temporary and volatile nature of pricing trends; deterioration in customer relationships; production or manufacturing difficulties; competitive factors; technological changes; difficulties with or delays in the introduction of new products; slowing or contraction of growth in the memory market in Brazil; reduction in or termination of local content requirements in Brazil; changes to applicable tax regimes or rates; prices for the end products of our customers; fluctuations in material costs and availability; strikes or labor disputes; deterioration in or loss of relations with any of our limited number of key vendors; changes in the availability of supply of materials, components or memory products; the inability of Penguin Computing to obtain and retain security clearances to expand its government business; and other factors and risks detailed in SMART’s filings with the Securities and Exchange Commission. Such factors and risks as outlined above and in such filings may not constitute all factors and risks that could cause actual results of SMART to be materially different from the historical results and/or from any future results or outcomes expressed or implied by such forward-looking statements. SMART and its subsidiaries operate in a continually changing business environment and new factors emerge from time to time. SMART cannot predict such factors, nor can it assess the impact, if any, from such factors on SMART or its subsidiaries’ results. Accordingly, investors are cautioned not to place undue reliance on any forward-looking statements. Forward-looking statements should not be relied upon as a prediction of actual results. These forward-looking statements are made as of today, and SMART does not intend, and has no obligation, to update or revise any forward-looking statements in order to reflect events or circumstances that may arise after the date of this press release, except as required by law.

Non-GAAP Information
Certain non-GAAP financial measures are contained in this press release or will be discussed on our conference call, including non-GAAP gross profit, non-GAAP operating income, Adjusted EBITDA, non-GAAP net income, and non-GAAP net income per diluted share. We define Adjusted EBITDA as GAAP net income (loss) plus net interest expense, income tax expense, depreciation and amortization expense, share-based compensation expense, loss on extinguishment of debt, capped call mark to market (MTM) adjustment, integration expenses, acquisition-related expenses and other infrequent or unusual items. Adjusted EBITDA is not a measure of financial performance calculated in accordance with U.S. GAAP and should be viewed as a supplement to, not a substitute for, our results of operations presented on the basis of U.S. GAAP. Adjusted EBITDA also does not purport to represent cash flow provided by, or used in, operating activities in accordance with U.S. GAAP and should not be used as a measure of liquidity.

The non-GAAP financial results presented herein exclude share-based compensation expense, intangible amortization expense, loss on extinguishment of debt, capped call MTM adjustment, convertible debt original issue discount (OID), integration expenses, acquisition-related expenses and other infrequent or unusual expenses, and with respect to non-GAAP diluted EPS, foreign currency gains (losses). These non-GAAP financial measures are provided to enhance the user's overall understanding of our financial performance. By excluding these charges, as well as any related tax effects, our non-GAAP results provide information to management and investors that is useful in assessing SMART's core operating performance and in evaluating and comparing our results of operations on a consistent basis from period to period. These non-GAAP financial measures are also used by management to evaluate financial results, to plan and forecast future periods, and to assess performance of certain executives for compensation purposes. The presentation of this additional information is not meant to be a substitute for the corresponding financial measures prepared in accordance with U.S. GAAP. In addition, these measures may not be used similarly by other companies and therefore may not be comparable between companies.

Investors are encouraged to review the “Reconciliation of Non-GAAP Financial Measures to GAAP Results” and “Reconciliation of GAAP Net Income (Loss) to Adjusted EBITDA” tables below for more detail on non-GAAP calculations.

About SMART Global Holdings

The SMART lines of business are leading designers and manufacturers of electronic products focused on memory and computing technology areas. The Company specializes in application specific product development and support for customers in enterprise, government and OEM sales channels. Customers rely on SMART as a strategic supplier with top tier customer service, product quality, and technical support with engineering, sales, manufacturing, supply chain and logistics capabilities worldwide. The Company targets customers in markets such as communications, storage, networking, mobile, industrial automation, industrial internet of things, government, military, edge computing and high performance computing. SMART operates in three primary product areas: Specialty Memory products, Brazil products and Specialty Compute and Storage Solutions.

See www.smartgh.com, www.smartm.comwww.smartembedded.com, www.smartsscs.com and www.penguincomputing.com for more information.

SMART Global Holdings, Inc.
and Subsidiaries
Consolidated Income Statements
(In thousands, except per share data)
                   
  Three Months Ended   Six Months Ended
  February 28,
2020
  November 29,
2019
  March 1,
2019
  February 28,
2020
  March 1,
2019
Net sales:                  
Specialty Memory Products $ 111,455     $ 103,529     $ 115,608     $ 214,984     $ 255,557  
Brazil Products   97,700       93,999       147,111       191,699       346,390  
Specialty Compute and Storage Solutions   62,887       74,490       41,344       137,377       95,995  
Total net sales   272,042       272,018       304,063       544,060       697,942  
Cost of sales (1) (2)   220,536       217,698       246,932       438,234       555,742  
Gross profit   51,506       54,320       57,131       105,826       142,200  
Operating expenses:                  
Research and development (1)   14,702       14,886       11,238       29,588       23,054  
Selling, general and administrative (1) (2)   28,648       33,553       23,442       62,201       48,896  
Total operating expenses   43,350       48,439       34,680       91,789       71,950  
                   
Income from operations   8,156       5,881       22,451       14,037       70,250  
Other income (expense):                  
Interest expense, net   (4,150 )     (4,492 )     (5,273 )     (8,642 )     (11,148 )
Other income (expense), net   (12,386 )     (840 )     252       (13,226 )     (3,077 )
Total other expense   (16,536 )     (5,332 )     (5,021 )     (21,868 )     (14,225 )
Income (loss) before income taxes   (8,380 )     549       17,430       (7,831 )     56,025  
Provision for income taxes   1,340       325       4,644       1,665       12,263  
Net income (loss) $ (9,720 )   $ 224     $ 12,786     $ (9,496 )   $ 43,762  
                   
Earnings per share:                  
Basic $ (0.41 )   $ 0.01     $ 0.56     $ (0.40 )   $ 1.93  
Diluted $ (0.41 )   $ 0.01     $ 0.55     $ (0.40 )   $ 1.88  
                   
Shares used in computing earnings per share:                  
Basic   23,906       23,713       22,872       23,809       22,733  
Diluted   23,906       24,286       23,359       23,809       23,314  
                   
(1) Includes share-based compensation expense as follows:                  
Cost of sales $ 731     $ 730     $ 607     $ 1,461     $ 1,152  
Research and development   783       744       660       1,527       1,294  
Selling, general and administrative   3,133       4,482       2,881       7,615       5,757  
Total stock-based compensation expense $ 4,647     $ 5,956     $ 4,148     $ 10,603     $ 8,203  
                   
(2) Includes amortization of intangible assets expense as follows:                  
Cost of sales $ 647     $ 647     $ 98     $ 1,294     $ 114  
Selling, general and administrative   2,766       2,766       961       5,533       1,922  
Total amortization expense $ 3,413     $ 3,413     $ 1,059     $ 6,827     $ 2,036  
                   


SMART Global Holdings, Inc.
and Subsidiaries
Reconciliation of Non-GAAP Financial Measures to GAAP Results
(In thousands, except per share data)
                   
  Three Months Ended   Six Months Ended
  February 28,
2020
  November 29,
2019
  March 1,
2019
  February 28,
2020
  March 1,
2019
Reconciliation of gross profit:                  
GAAP gross profit $ 51,506     $ 54,320     $ 57,131     $ 105,826     $ 142,200  
GAAP gross margin   18.9 %     20.0 %     18.8 %     19.5 %     20.4 %
                   
Add: Share-based compensation included in cost of sales   731       730       607       1,461       1,152  
Add: Intangible amortization included in cost of sales   647       647       98       1,294       114  
                   
Non-GAAP gross profit $ 52,884     $ 55,697     $ 57,836     $ 108,581     $ 143,466  
Non-GAAP gross margin   19.4 %     20.5 %     19.0 %     20.0 %     20.6 %
                   
Reconciliation of operating expenses:                  
GAAP operating expenses $ 43,350     $ 48,439     $ 34,680     $ 91,789      $ 71,950  
                   
Less: Share-based compensation expense included in opex                  
Research and development   783       744       660       1,527       1,294  
Selling, general and administrative   3,133       4,482       2,881       7,615       5,757  
Total   3,916   -   5,226   -   3,541   -   9,142   -   7,051  
                   
Less: Amortization of intangible assets included in opex                  
Selling, general and administrative   2,766       2,766       961       5,532       1,922  
Total   2,766       2,766       961       5,532       1,922  
                   
Less: Legal fees - term loan (payment holiday)                           126  
Less: Acquisition-related expenses         946             946       1,423  
Less: Integration expenses   1,040       2,052             3,092        
                   
Non-GAAP operating expenses $ 35,628     $ 37,449     $ 30,178     $ 73,077     $ 61,428  
                   
Reconciliation of income from operations:                  
GAAP income from operations $ 8,156     $ 5,881     $ 22,451     $ 14,037     $ 70,250  
GAAP operating margin   3.0 %     2.2 %     7.4 %     2.6 %     10.1 %
                   
Add: Share-based compensation expense   4,647       5,956       4,148       10,603       8,203  
Add: Amortization of intangible assets   3,413       3,413       1,059       6,826       2,036  
Add: Legal fees - term loan (payment holiday)                           126  
Add: Acquisition-related expenses         946             946       1,423  
Add: Integration expenses   1,040       2,052             3,092        
                   
Non-GAAP income from operations $ 17,256     $ 18,248     $ 27,658     $ 35,504     $ 82,038  
Non-GAAP operating margin   6.3 %     6.7 %     9.1 %     6.5 %     11.8 %
                   


SMART Global Holdings, Inc.
and Subsidiaries
Reconciliation of Non-GAAP Financial Measures to GAAP Results
(In thousands, except per share data)
                     
    Three Months Ended   Six Months Ended
    February 28,
 
2020
  November 29,
2019
  March 1,
2019
  February 28,
2020
  March 1,
2019
Reconciliation of income (loss) before income taxes:                  
GAAP income (loss) before income taxes $ (8,380 )   $ 549     $ 17,430     $ (7,831 )   $ 56,025  
Add: Share-based compensation expense   4,647       5,956       4,148       10,603       8,203  
Add: Amortization of intangible assets   3,413       3,413       1,059       6,826       2,036  
Add: Legal fees - term loan (payment holiday)                           126  
Add: Acquisition-related expenses   -       946             946       1,423  
Add: Integration expenses   1,040       2,052             3,092        
Add: Extinguishment of term loan   6,630                   6,630        
Add: Capped call MTM adjustment   4,795                   4,795        
Add: Convertible debt discount OID   399                   399        
Add: Foreign currency (gains)/losses   1,191       911       (47 )     2,102       3,337  
                     
Non-GAAP income before income taxes $ 13,735     $ 13,827     $ 22,590     $ 27,562     $ 71,150  
                     
Reconciliation of provision for income taxes:                  
GAAP provision for income taxes $ 1,340     $ 325     $ 4,644     $ 1,665     $ 12,263  
GAAP effective tax rate   -16.0 %     59.2 %     26.6 %     -21.3 %     21.9 %
                     
Less: Goodwill tax credit   484                   484        
Tax effect of adjustments to GAAP results   (119 )     (91 )     5       (210 )     (333 )
                     
Non-GAAP provision for income taxes $ 975     $ 416     $ 4,639     $ 1,391     $ 12,596  
Non-GAAP effective tax rate   7.1 %     3.0 %     20.5 %     5.0 %     17.7 %
                     
Reconciliation of net income (loss) and earnings per share (diluted):                  
GAAP net income (loss) $ (9,720 )   $ 224     $ 12,786     $ (9,496 )   $ 43,762  
                     
Adjustments to GAAP net income (loss):                  
Share-based compensation   4,647       5,956       4,148       10,603       8,203  
Amortization of intangible assets   3,413       3,413       1,059       6,826       2,036  
Legal fees - term loan (payment holiday)                           126  
Acquisition related expenses         946             946       1,423  
Integration expenses   1,040       2,052             3,092        
Extinguishment of term loan   6,630                   6,630        
Capped call MTM adjustment   4,795                   4,795        
Convertible debt discount OID   399                   399        
Goodwill tax credit   484                   484        
Foreign currency (gains)/losses   1,191       911       (47 )     2,102       3,337  
Tax effect of items excluded from non-GAAP results   (119 )     (91 )     5       (210 )     (333 )
                     
Non-GAAP net income $ 12,760     $ 13,411     $ 17,951     $ 26,171     $ 58,554  
                     
Shares used in computing earnings per share (diluted)   24,567       24,286       23,359       24,440       23,314  
                     
Non-GAAP earnings per share (diluted) $ 0.52     $ 0.55     $ 0.77     $ 1.07     $ 2.51  
                     
GAAP earnings per share (diluted) $ (0.41 )   $ 0.01     $ 0.55     $ (0.40 )   $ 1.88  
                     


SMART Global Holdings, Inc.
and Subsidiaries
Reconciliation of GAAP Net Income (Loss) to Adjusted EBITDA
(In thousands)
                     
  Three Months Ended   Six Months Ended  
  February 28,
 
2020
  November 29,
2019
  March 1,
2019
  February 28,
2020
  March 1,
2019
 
                     
GAAP net income (loss) $ (9,720 )   $ 224   $ 12,786   $ (9,496 )   $ 43,762  
                     
Share-based compensation expense   4,647       5,956     4,148     10,603       8,203  
Amortization of intangible assets   3,413       3,413     1,059     6,826       2,036  
Interest expense, net   4,150       4,492     5,273     8,642       11,148  
Provision for income tax   1,340       325     4,644     1,665       12,263  
Depreciation   6,021       6,131     5,868     12,152       11,299  
Legal fees - term loan (payment holiday)                       126  
Acquisition-related expenses(1)         946         946       1,423  
Integration expenses   1,040       2,052         3,092        
Extinguishment of term loan   6,630               6,630        
Capped call MTM adjustment   4,795               4,795        
                     
Adjusted EBITDA $ 22,316     $ 23,539   $ 33,778   $ 45,855     $ 90,260  
                     
(1) Amounts in FY20 & FY19 related to acquisitions of new businesses, SMART EC & Wireless (July 2019)                  
                     


SMART Global Holdings, Inc.
and Subsidiaries
Consolidated Balance Sheets
(In thousands)
         
    February 28,   August 30,
      2020       2019  
Assets        
Current assets:        
Cash and cash equivalents   $ 141,860     $ 98,139  
Accounts receivable, net     217,361       217,433  
      161,407       118,738  
Prepaid expenses and other current assets     29,279       37,950  
Total current assets     549,907       472,260  
Property and equipment, net     59,029       68,345  
Operating lease right-of-use assets     28,665        
Other noncurrent assets     29,991       12,784  
Intangible assets, net     62,498       69,325  
      78,347       81,423  
Total assets   $ 808,437     $ 704,137  
Liabilities and Shareholders’ Equity        
Current liabilities:        
Accounts payable   $ 217,256     $ 164,866  
Accrued liabilities     58,425       48,980  
Current portion of long-term debt     1,546       24,054  
Total current liabilities     277,227       237,900  
Long-term debt     191,593       182,450  
Long-term operating lease liabilities     24,440        
Other long-term liabilities     8,126       10,327  
Total liabilities     501,386       430,677  
Shareholders’ equity:        
Ordinary shares     723       712  
Additional paid-in capital     350,086       285,994  
Accumulated other comprehensive loss     (198,882 )     (177,866 )
Retained earnings     155,124       164,620  
Total shareholders’ equity     307,051       273,460  
Total liabilities and shareholders’ equity   $ 808,437     $ 704,137  
         


SMART Global Holdings, Inc.
and Subsidiaries
Consolidated Statements of Cash Flows
(In thousands)
                     
    Three Months Ended   Six Months Ended
    February 28,
2020
  November 29,
2019
  March 1,
2019
  February 28,
2020
  March 1,
2019
Cash flows from operating activities:                    
Net income (loss)   $ (9,720 )   $ 224     $ 12,786     $ (9,496 )   $ 43,762  
Adjustments to reconcile net income (loss) to net cash                    
provided by operating activities:                    
Depreciation and amortization     9,435       9,544       6,927       18,979       13,335  
Share-based compensation     4,647       5,956       4,148       10,603       8,203  
Provision for doubtful accounts receivable and sales returns     (100 )     73       34       (27 )     (70 )
Deferred income tax benefit     610       (970 )     (650 )     (360 )     (247 )
(Gain) Loss on disposal of property and equipment     (18 )     (42 )     (4 )     (60 )     (1 )
Loss on mark-to-market derivatives     4,795                   4,795        
Loss on extinguishment of debt     6,630                   6,630        
Amortization of debt discounts and issuance costs     1,047       734       694       1,781       1,379  
Amortization of operating lease right-of-use assets     1,168       1,114             2,282        
Changes in operating assets and liabilities:                    
Accounts receivable     9,198       (13,688 )     5,669       (4,490 )     (83,772 )
Inventories     (3,343 )     (42,206 )     17,084       (45,549 )     47,660  
Prepaid expenses and other assets     1,386       5,110       7,424       6,496       4,242  
Accounts payable     (3,782 )     60,438       (17,017 )     56,656       31,557  
Operating lease liabilities     (1,058 )     (1,082 )           (2,140 )      
Accrued expenses and other liabilities     2,439       62       1,959       2,501       8,358  
Net cash provided by operating activities     23,334       25,267       39,054       48,601       74,406  
Cash flows from investing activities:                    
Capital expenditures and deposits on equipment     (4,210 )     (5,158 )     (6,232 )     (9,368 )     (19,616 )
Proceeds from sale of property and equipment     54       42       32       96       53  
Acquisitions of business, net of cash acquired                 (148 )           (148 )
Net cash used in investing activities     (4,156 )     (5,116 )     (6,348 )     (9,272 )     (19,711 )
Cash flows from financing activities:                    
Long-term debt payments     (797 )     (6,435 )     (1,712 )     (7,232 )     (3,369 )
Purchase of capped call     (21,825 )                 (21,825 )      
Proceeds from convertible notes due 2026, net of discount     243,125                   243,125        
Payment for extinguishment of long-term debt     (204,904 )                 (204,904 )      
Proceeds from borrowings under revolving line of credit     6,000       12,500       64,000       18,500       168,000  
Repayments of borrowings under revolving line of credit     (6,000 )     (12,500 )     (64,000 )     (18,500 )     (168,000 )
Proceeds from issuance of ordinary shares from share option exercises   641       1,166       1,071       1,807       3,473  
Proceeds from issuance of ordinary shares from ESPP           1,242             1,242       968  
Withholding tax on restricted stock units     (351 )     (20 )     (219 )     (371 )     (219 )
Net cash provided by (used in) financing activities     15,889       (4,047 )     (860 )     11,842       853  
Effect of exchange rate changes on the cash, cash equivalents                    
and restricted cash *     (4,596 )     (2,854 )     374       (7,450 )     2,392  
Net increase in cash and cash equivalents                    
  and restricted cash *     30,471       13,250       32,220       43,721       57,940  
Cash, cash equivalents, and restricted cash at beginning of period *     111,389       98,139       62,954       98,139       37,234  
Cash, cash equivalents, and restricted cash at end of period *   $ 141,860     $ 111,389     $ 95,174     $ 141,860     $ 95,174  
                     
                     
* Cash balance was adjusted to include restricted cash upon adoption of ASU 2016-18 in fiscal 2019.                
                     

Investor Contact: 
Suzanne Schmidt
Investor Relations for SMART Global Holdings, Inc.
(510) 360-8596
ir@smartm.com

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Source: SMART Global Holdings, Inc.