SMART Global Holdings Reports Third Quarter Fiscal 2019 Financial Results

NEWARK, Calif., June 27, 2019 (GLOBE NEWSWIRE) -- SMART Global Holdings, Inc. (“SMART”) (NASDAQ: SGH), parent company of SMART Modular Technologies, Inc., today reported financial results for the third quarter of fiscal 2019 ended May 31, 2019.

Financial Highlights Q3FY19:

  • Net sales of $235.7 million
  • GAAP EPS of $0.08
  • Non-GAAP EPS of $0.34
  • GAAP gross margin of 18.3%
  • Non-GAAP gross margin of 18.5%
  • Cash and equivalents of $126 million
  • Cash flow from operations up 19% sequentially to $46 million
  • Specialty Products revenue YTD up 12% to $354 million

“Despite significant declines in memory pricing that caused our revenue to be weaker than expected during our third fiscal quarter, we were able to achieve non-GAAP earnings which was within the range of our guidance,”  commented Ajay Shah, Chairman and Chief Executive Officer.  “Importantly,  during the quarter we maintained our gross margins and generated $46 million in cash flow from operations, ending the quarter with $126 million in cash on the balance sheet thus positioning us well to execute on our growth strategies.” 

“As we look forward to our fourth fiscal quarter ending in August, we are forecasting significantly better revenue and earnings performance even though the memory pricing environment remains weak. This is due to improvements in Specialty Memory unit volumes and strength in Specialty Compute,” concluded Mr. Shah.

               
Quarterly Financial Results GAAP (1)   Non-GAAP (2)
(In millions, except per share amounts) Q3 FY19 Q2 FY19 Q3 FY18   Q3 FY19 Q2 FY19 Q3 FY18
Net sales $ 235.7 $ 304.1 $ 335.5   $ 235.7 $ 304.1 $ 335.5
Gross profit $ 43.0 $ 57.1 $ 78.1   $ 43.7 $ 57.8 $ 78.5
Operating income $ 7.4 $ 22.5 $ 48.7   $ 13.2 $ 27.7 $ 53.8
Net income $ 1.9 $ 12.8 $ 31.9   $ 7.9 $ 18.0 $ 43.0
Diluted earnings per share (EPS) $ 0.08 $ 0.55 $ 1.37   $ 0.34 $ 0.77 $ 1.84
               
(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" table below or 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 fourth quarter of fiscal 2019 ending August 30, 2019. These statements are forward-looking and actual results may differ materially. SMART undertakes no obligation to update these statements.

     
Net Sales $270 to $280 million
Gross Margin - GAAP / Non-GAAP 19% to 21%
Diluted EPS - GAAP $0.33 to $0.43
   
Share-based compensation per share $0.18
Intangible amortization per share $0.04
   
Diluted EPS - Non-GAAP $0.55 to $0.65
   
Expected diluted share count 23.5 million
 

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 3277125.

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: 3277125.

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; changes in seasonal impacts on our results; 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, non-GAAP net income per diluted share, and non-GAAP diluted EPS. We define Adjusted EBITDA as GAAP net income plus net interest expense, income tax expense, depreciation and amortization expense, share-based compensation expense, 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, acquisition-related expenses, and other infrequent or unusual items, 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, similarly titled 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 to Adjusted EBITDA” tables below for more detail on non-GAAP calculations.

About SMART Global Holdings
The SMART family of companies are global leaders in specialty memory, storage and hybrid solutions serving the electronics industry with standard and custom products for over 25 years. SMART delivers components, modules and solutions to a broad customer base, including OEMs in computing, networking, communications, storage, mobile and industrial markets. With the addition of Penguin Computing and the creation of a new business unit, SMART Specialty Compute & Storage Solutions (SCSS), SMART has expanded its serviceable markets into areas requiring specialized computing platforms in artificial intelligence and machine learning, advanced modeling and high performance computing. Customers rely on SMART as a strategic supplier with custom designs, product quality, technical support, a global footprint, and the ability to provide locally manufactured products in multiple geographies. See www.smartgh.comwww.smartm.comwww.smarth.comwww.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   Nine Months Ended  
             May 31,
2019 
   March 1,
2019
 
   May 25,
2018
 
   May 31,
2019 
   May 25,
2018
 
 
Net sales:                          
  Brazil       $ 100,982     $ 147,111     $ 232,742       447,372       599,225    
  Specialty Memory         98,755       115,608       102,735       354,312       315,626    
  Specialty Compute and Storage Solutions         35,920       41,344             131,915          
    Total net sales         235,657       304,063       335,477       933,599       914,851    
Cost of sales (1)(2)         192,622       246,932       257,423       748,364       705,944    
  Gross profit         43,035       57,131       78,054       185,235       208,907    
Operating expenses:                          
  Research and development (1) (2)         11,330       11,238       9,763       34,384       28,165    
  Selling, general and administrative (1) (2)         24,306       23,442       19,597       73,202       55,502    
    Total operating expenses         35,636       34,680       29,360       107,586       83,667    
    Income from operations         7,399       22,451       48,694       77,649       125,240    
Other income (expense):                          
  Interest expense, net         (5,001 )     (5,273 )     (4,098 )     (16,149 )     (12,927 )  
  Other income (expense), net         97       252       (7,145 )     (2,980 )     (7,312 )  
    Total other expense         (4,904 )     (5,021 )     (11,243 )     (19,129 )     (20,239 )  
    Income before income taxes         2,495       17,430       37,451       58,520       105,001    
Provision for income taxes         550       4,644       5,505       12,813       15,256    
    Net income       $ 1,945     $ 12,786     $ 31,946     $ 45,707     $ 89,745    
                               
Earnings per share:                          
  Basic       $ 0.08     $ 0.56     $ 1.44     $ 2.00     $ 4.09    
  Diluted       $ 0.08     $ 0.55     $ 1.37     $ 1.96     $ 3.90    
                               
Shares used in computing earnings per share:                          
  Basic         23,005       22,872       22,206       22,824       21,932    
  Diluted         23,330       23,359       23,306       23,374       23,020    
                               
(1) Includes share-based compensation expense as follows:                      
  Cost of sales       $ 651     $ 607     $ 414     $ 1,803     $ 859    
  Research and development         673       660       325       1,967       887    
  Selling, general and administrative         3,109       2,881       2,558       8,866       4,853    
    Total stock-based compensation expense       $ 4,433     $ 4,148     $ 3,297     $ 12,636     $ 6,599    
                               
(2) Includes amortization of intangible assets expense as follows:                      
  Cost of sales       $ 16     $ 98     $     $ 130     $    
  Research and development                     245             735    
  Selling, general and administrative         961       961       976       2,883       2,992    
    Total amortization expense       $ 977     $ 1,059     $ 1,221     $ 3,013     $ 3,727    
                               


   
SMART Global Holdings, Inc.  
and Subsidiaries  
Reconciliation of Non-GAAP Financial Measures to GAAP Results  
(In thousands, except per share data)  
                               
            Three Months Ended   Nine Months Ended  
             May 31,
2019 
   March 1,
2019
 
   May 25,
2018
 
   May 31,
2019 
   May 25,
2018
 
 
Reconciliation of gross profit:                          
GAAP gross profit       $ 43,035   $ 57,131   $ 78,054   $ 185,235   $ 208,907  
  GAAP gross margin         18.3%     18.8%     23.3%     19.8%     22.8%  
                               
Add: Share-based compensation included in cost of sales         651     607     414     1,803     859  
Add: Intangible amortization included in cost of sales         16     98         130      
                               
Non-GAAP gross profit       $    43,702   $    57,836   $    78,468   $    187,168   $    209,766  
  Non-GAAP gross margin         18.5%     19.0%     23.4%     20.0%     22.9%  
                               
Reconciliation of operating expenses:                          
GAAP operating expenses       $ 35,636   $ 34,680   $ 29,360   $ 107,586   $ 83,667  
                               
Less: Share-based compensation expense included in opex                          
  Research and development         673     660     325     1,967     887  
  Selling, general and administrative         3,109     2,881     2,558     8,866     4,853  
    Total         3,782     3,541     2,883     10,833     5,740  
                               
Less: Amortization of intangible assets included in opex                          
  Research and development                 245         735  
  Selling, general and administrative         961     961     976     2,883     2,992  
    Total         961     961     1,221     2,883     3,727  
                               
Less: S-1 related costs                         813  
Less: Legal fees - term loan (payment holiday)                     126      
Less: Acquisition-related expenses                 591     1,423     591  
Less: Diligence expenses         431             431      
                               
Non-GAAP operating expenses       $    30,462   $    30,178   $    24,665   $    91,890   $    72,796  
                               
Reconciliation of income from operations:                          
GAAP income from operations       $ 7,399   $ 22,451   $ 48,694   $ 77,649   $ 125,240  
  GAAP operating margin         3.1%     7.4%     14.5%     8.3%     13.7%  
                               
Add: Share-based compensation expense         4,433     4,148     3,297     12,636     6,599  
Add: Amortization of intangible assets         977     1,059     1,221     3,013     3,727  
Add: S-1 related costs                         813  
Add: Legal fees - term loan (payment holiday)                     126      
Add: Acquisition-related expenses                 591     1,423     591  
Add: Diligence expenses         431             431      
                               
Non-GAAP income from operations       $    13,240   $    27,658   $    53,803   $    95,278   $    136,970  
  Non-GAAP operating margin         5.6%     9.1%     16.0%     10.2%     15.0%  
                               


   
SMART Global Holdings, Inc.  
and Subsidiaries  
Reconciliation of Non-GAAP Financial Measures to GAAP Results  
(In thousands, except per share data)  
                               
            Three Months Ended   Nine Months Ended  
             May 31,
2019 
   March 1,
2019
 
   May 25,
2018
 
   May 31,
2019 
   May 25,
2018
 
 
Reconciliation of income before income taxes:                          
GAAP income before income taxes       $ 2,495   $ 17,430   $ 37,451   $ 58,520   $ 105,001  
Add: Share-based compensation expense         4,433     4,148     3,297     12,636     6,599  
Add: Amortization of intangible assets         977     1,059     1,221     3,013     3,727  
Add: S-1 related costs                         813  
Add: Legal fees - Term loan (payment holiday)                     126      
Add: Acquisition-related expenses                 591     1,423     591  
Add: Diligence expenses         431             431      
Add: Foreign currency (gains)/losses         144     (47)     6,932     3,481     7,259  
                               
Non-GAAP income before income taxes       $    8,480   $    22,590   $    49,492   $    79,630   $    123,990  
                               
Reconciliation of provision for income taxes:                          
GAAP provision for income taxes       $ 550   $ 4,644   $ 5,505   $ 12,813   $ 15,256  
  GAAP effective tax rate         22.0%     26.6%     14.7%     21.9%     14.5%  
                               
Tax effect of adjustments to GAAP results         (14)     5     (1,025)     (347)     (1,744)  
                               
Non-GAAP provision for income taxes       $ 564   $ 4,639   $ 6,530   $ 13,160   $ 17,000  
  Non-GAAP effective tax rate         6.7%     20.5%     13.2%     16.5%     13.7%  
                               
Reconciliation of net income and earnings per share (diluted):                       
GAAP net income       $    1,945   $    12,786   $    31,946   $    45,707   $    89,745  
                               
Adjustments to GAAP net income:                          
  Share-based compensation         4,433     4,148     3,297     12,636     6,599  
  Amortization of intangible assets         977     1,059     1,221     3,013     3,727  
  S-1 related costs                         813  
  Legal fees - Term loan (payment holiday)                     126      
  Acquisition-related expenses                 591     1,423     591  
  Diligence expenses         431             431      
  Foreign currency (gains)/losses         144     (47)     6,932     3,481     7,259  
  Tax effect of items excluded from non-GAAP results         (14)     5     (1,025)     (347)     (1,744)  
                               
Non-GAAP net income       $    7,916   $    17,951   $    42,962   $    66,470   $    106,990  
                               
Shares used in computing earnings per share (diluted)         23,330     23,359     23,306     23,374     23,020  
                               
Non-GAAP earnings per share (diluted)       $    0.34   $    0.77   $    1.84   $    2.84   $    4.65  
                               
GAAP earnings per share (diluted)       $ 0.08   $ 0.55   $ 1.37   $ 1.96   $ 3.90  
                               


   
SMART Global Holdings, Inc.  
and Subsidiaries  
Reconciliation of GAAP Net Income to Adjusted EBITDA  
(In thousands)  
                           
        Three Months Ended   Nine Months Ended  
         May 31,
2019 
   March 1,
2019
 
   May 25,
2018
 
   May 31,
2019 
   May 25,
2018
 
 
                           
GAAP net income   $    1,945   $    12,786   $    31,946   $    45,707   $    89,745  
                           
  Share-based compensation expense     4,433     4,148     3,297     12,636     6,599  
  Amortization of intangible assets     977     1,059     1,221     3,013     3,727  
  Interest expense, net     5,001     5,273     4,098     16,149     12,927  
  Provision for income tax     550     4,644     5,505     12,813     15,256  
  Depreciation     5,841     5,868     4,806     17,140     14,928  
  S-1 related costs                     813  
  Legal fees - term loan (payment holiday)                 126      
  Acquisition-related expenses             591     1,423     591  
  Diligence expenses     431             431      
                           
  Adjusted EBITDA   $    19,178   $    33,778   $    51,464   $    109,438   $    144,586  
                                   


   
SMART Global Holdings, Inc.  
and Subsidiaries  
Consolidated Balance Sheets  
(In thousands)  
                       
                May 31,   August 31,  
                2019
  2018
 
Assets          
Current assets:            
  Cash and cash equivalents   $ 126,099     $ 31,375    
  Accounts receivable, net     230,177       237,212    
  Inventories       132,816       221,419    
  Prepaid expenses and other current assets     31,052       32,043    
          Total current assets     520,144       522,049    
Property and equipment, net     67,135       56,615    
Other noncurrent assets     14,603       22,449    
Intangible assets, net     23,326       26,255    
Goodwill           44,805       45,394    
          Total assets   $ 670,013     $ 672,762    
Liabilities and Shareholders’ Equity          
Current liabilities:          
  Accounts payable   $ 177,519     $ 223,186    
  Accrued liabilities     36,059       45,190    
  Current portion of long-term debt     19,087       27,409    
          Total current liabilities     232,665       295,785    
Long-term debt       188,428       184,190    
Other long-term liabilities     6,840       5,659    
          Total liabilities     427,933       485,634    
Shareholders’ equity:          
  Ordinary shares     696       678    
  Additional paid-in capital     268,652       250,191    
  Accumulated other comprehensive loss     (186,263 )     (175,995 )  
  Retained earnings     158,995       112,254    
          Total shareholders’ equity     242,080       187,128    
          Total liabilities and shareholders’ equity   $ 670,013     $ 672,762    
                       


   
SMART Global Holdings, Inc.  
and Subsidiaries  
Consolidated Statements of Cash Flows  
(In thousands)  
                                   
                Three Months Ended   Nine Months Ended  
                May 31,
2019
  March 1,
2019
  May 25,
2018
   May 31,
2019 
   May 25,
2018
 
 
Cash flows from operating activities:                      
  Net income     $ 1,945     $ 12,786     $ 31,946     $ 45,707     $ 89,745    
  Adjustments to reconcile net income to net cash                      
    provided by operating activities:                      
      Depreciation and amortization     6,817       6,927       6,028       20,152       18,656    
      Share-based compensation     4,433       4,148       3,297       12,636       6,599    
      Provision for doubtful accounts receivable and sales returns     46       34       (80 )     (24 )     (13 )  
      Deferred income tax benefit     677       (650 )     (422 )     430       (1,376 )  
      (Gain) loss on disposal of property and equipment     22       (4 )     (14 )     21       230    
      Write off of long-term asset                 250             250    
      Amortization of debt discounts and issuance costs     706       694       714       2,085       2,165    
      Changes in operating assets and liabilities:                      
        Accounts receivable     91,430       5,669       (45,799 )     7,658       (86,706 )  
        Inventories     35,111       17,084       (6,384 )     82,771       (27,940 )  
        Prepaid expenses and other assets     (2,455 )     7,424       (5,186 )     1,787       (3,495 )  
        Accounts payable     (76,442 )     (17,017 )     46,532       (44,885 )     83,879    
        Accrued expenses and other liabilities     (15,980 )     1,959       (2,545 )     (7,622 )     (4,703 )  
          Net cash provided by operating activities     46,310       39,054       28,337       120,716       77,291    
                                                     
Cash flows from investing activities:                      
  Capital expenditures and deposits on equipment     (10,496 )     (6,232 )     (7,794 )     (30,112 )     (18,251 )  
  Proceeds from sale of property and equipment     18       32       35       71       101    
  Acquisition of business, net of cash acquired           (148 )           (148 )        
          Net cash used in investing activities     (10,478 )     (6,348 )     (7,759 )     (30,189 )     (18,150 )  
                                                     
Cash flows from financing activities:                      
  Long-term debt payment     (1,704 )     (1,712 )     (6,093 )     (5,073 )     (18,402 )  
  Fees paid for revolving line of credit refinancing                             (768 )  
  Payment of costs related to initial public offering                             (1,591 )  
  Proceeds from borrowings under revolving line of credit     67,500       64,000       69,000       235,500       277,500    
  Repayments of borrowings under revolving line of credit     (67,500 )     (64,000 )     (69,000 )     (235,500 )     (277,500 )  
  Proceeds from issuance of ordinary shares from share option exercises   297       1,071       1,993       3,770       6,170    
  Proceeds from issuance of ordinary shares from ESPP     1,335                   2,303          
  Withholding tax on restricted stock units     (11 )     (219 )           (230 )        
          Net cash provided by (used in) financing activities     (83 )     (860 )     (4,100 )     770       (14,591 )  
  Effect of exchange rate changes on the cash, cash equivalents                      
    and restricted cash *     (4,824 )     374       (4,435 )     (2,432 )     (3,198 )  
          Net increase in cash and cash equivalents and                      
            restricted cash *     30,925       32,220       12,043       88,865       41,352    
                                                       
Cash, cash equivalents, and restricted cash at beginning of period *     95,174       62,954       58,772       37,234       29,463    
Cash, cash equivalents, and restricted cash at end of period *   $ 126,099     $ 95,174     $ 70,815     $ 126,099     $ 70,815    
                                   
                                   
* Cash balance was adjusted to include restricted cash upon adoption of ASU 2016-18 in fiscal 2019.              
                                   

Investor Contacts: 
Karl Motey
Vice President
Strategic Marketing and Communications
(510) 624-8213
karl.motey@smartm.com

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

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Source: SMART Global Holdings, Inc.