SMART Global Holdings Reports Third Quarter Fiscal 2020 Financial Results

NEWARK, Calif., July 07, 2020 (GLOBE NEWSWIRE) -- SMART Global Holdings, Inc. (“SMART” or the “Company”) (NASDAQ: SGH), today reported financial results for the third quarter of fiscal 2020 ended May 29, 2020.

Third Quarter Fiscal 2020 Highlights:

  • Net sales of $281.3 million, 19.4% higher than the year ago quarter.
  • GAAP net income of $0.8 million, or $0.03 per share, 57.6% and 59.5% lower than the year ago quarter, respectively.
  • Non-GAAP net income of $17.1 million, or $0.70 per share, 115.8% and 106.1% higher than the year ago quarter, respectively.
  • Adjusted EBITDA of $25.4 million,  32.5% higher than the year ago quarter.

“Thanks to the outstanding execution from our team in these challenging times we were able to achieve growth in revenue and gross profit over the previous quarter, and over the same period last year. This, combined with the operating leverage in our financial model, drove a strong increase in non-GAAP earnings per share and another quarter of operating cash flow generation,” commented Ajay Shah, Chairman and CEO.    

               
Quarterly Financial Results GAAP (1)   Non-GAAP (2)
(In millions, except per share amounts) Q3 FY20 Q2 FY20 Q3 FY19   Q3 FY20 Q2 FY20 Q3 FY19
Net sales $ 281.3  $ 272.0   $ 235.7    $ 281.3  $ 272.0  $ 235.7 
Gross profit $ 54.2  $ 51.5   $ 43.0    $ 55.9  $ 52.9  $ 43.7 
Operating income $ 10.1  $ 8.2   $ 7.4    $ 20.3  $ 17.3  $ 13.2 
Net income (loss) $ 0.8  $ (9.7 ) $ 1.9    $ 17.1  $ 12.8  $ 7.9 
Diluted earnings per share (EPS) $ 0.03  $ (0.41 ) $ 0.08    $ 0.70  $ 0.52  $ 0.34 
               
(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 fourth quarter of fiscal 2020 ending August 28, 2020. These statements are forward-looking and actual results may differ materially. SMART undertakes no obligation to update these statements.

     
Net Sales $290 to $310 million
Gross Margin - GAAP / Non-GAAP 20% to 22%
Diluted EPS - GAAP $0.34 ± $0.08
   
Share-based compensation per share $0.21
Intangible amortization per share $0.15
Convertible debt discount OID and fees per share $0.08
   
Diluted EPS - Non-GAAP $0.78 ± $0.08
   
Expected diluted share count 24.5 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 5089819.  We will post an accompanying slide presentation to our website prior to the beginning of the call.

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; changes in trade regulations or adverse developments in international trade relations and agreements; 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/revolver, capped call mark to market (MTM) adjustment, integration expenses, COVID-19 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/revolver, capped call MTM adjustment, convertible debt original issue discount (OID), integration expenses, COVID-19 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   Nine Months Ended  
            May 29, 2020   February 28, 2020   May 31, 2019   May 29, 2020   May 31, 2019  
Net sales:                          
  Specialty Memory Products       $ 127,700     $ 111,455     $ 98,755     $ 342,685     $ 354,312    
  Brazil Products         92,701       97,700       100,982       284,400       447,373    
  Specialty Compute and Storage Solutions         60,886       62,887       35,920       198,262       131,914    
    Total net sales         281,287       272,042       235,657       825,347       933,599    
Cost of sales (1) (2)         227,054       220,536       192,622       665,288       748,364    
  Gross profit         54,233       51,506       43,035       160,059       185,235    
Operating expenses:                          
  Research and development (1)         14,436       14,702       11,330       44,023       34,384    
  Selling, general and administrative (1) (2)         29,733       28,648       24,306       91,935       73,202    
    Total operating expenses         44,169       43,350       35,636       135,958       107,586    
                               
    Income from operations         10,064       8,156       7,399       24,101       77,649    
Other income (expense):                          
  Interest expense, net         (3,094 )     (4,150 )     (5,001 )     (11,736 )     (16,149 )  
  Other income (expense), net         (3,445 )     (12,386 )     97       (16,671 )     (2,980 )  
    Total other expense         (6,539 )     (16,536 )     (4,904 )     (28,407 )     (19,129 )  
    Income (loss) before income taxes         3,525       (8,380 )     2,495       (4,306 )     58,520    
Provision for income taxes         2,700       1,340       550       4,365       12,813    
    Net income (loss)       $ 825     $ (9,720 )   $ 1,945     $ (8,671 )   $ 45,707    
                               
Earnings per share:                          
  Basic       $ 0.03     $ (0.41 )   $ 0.08     $ (0.36 )   $ 2.00    
  Diluted       $ 0.03     $ (0.41 )   $ 0.08     $ (0.36 )   $ 1.96    
                               
Shares used in computing earnings per share:                          
  Basic         24,066       23,906       23,005       23,895       22,824    
  Diluted         24,431       23,906       23,330       23,895       23,374    
                               
(1) Includes share-based compensation expense as follows:                      
  Cost of sales       $ 699     $ 731     $ 651     $ 2,161     $ 1,803    
  Research and development         780       783       673       2,306       1,967    
  Selling, general and administrative         3,428       3,133       3,109       11,043       8,866    
    Total stock-based compensation expense       $ 4,907     $ 4,647     $ 4,433     $ 15,510     $ 12,636    
                               
(2) Includes amortization of intangible assets expense as follows:                    
  Cost of sales       $ 647     $ 647     $ 16     $ 1,941     $ 130    
  Selling, general and administrative         2,767       2,766       960       8,299       2,882    
    Total amortization expense       $ 3,414     $ 3,413     $ 976     $ 10,240     $ 3,012    
                               


 
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 29, 2020   February 28, 2020   May 31, 2019   May 29, 2020   May 31, 2019
Reconciliation of gross profit:                        
GAAP gross profit       $ 54,233     $ 51,506     $ 43,035     $ 160,059     $ 185,235  
  GAAP gross margin         19.3 %     18.9 %     18.3 %     19.4 %     19.8 %
                             
Add: Share-based compensation included in cost of sales       699       731       651       2,161       1,803  
Add: Intangible amortization included in cost of sales         647       647       16       1,941       130  
Add: COVID-19 expenses         282                   282        
                             
Non-GAAP gross profit       $ 55,861     $ 52,884     $ 43,702     $ 164,443     $ 187,168  
  Non-GAAP gross margin         19.9 %     19.4 %     18.5 %     19.9 %     20.0 %
                             
Reconciliation of operating expenses:                        
GAAP operating expenses       $ 44,169     $ 43,350     $ 35,636     $ 135,958       107,586  
                             
Less: Share-based compensation expense included in opex                    
  Research and development         780       783       673       2,306       1,967  
  Selling, general and administrative         3,428       3,133       3,109       11,043       8,866  
    Total         4,208   -   3,916   -   3,782       13,349   -   10,833  
Less: Amortization of intangible assets included in opex                        
  Selling, general and administrative         2,767       2,766       960       8,299       2,882  
    Total         2,767       2,766       960       8,299       2,882  
                             
Less: Legal fees - term loan (payment holiday)                                 126  
Less: Acquisition-related expenses                     431       946       1,854  
Less: Integration expenses         1,432       1,040             4,524        
Less: COVID-19 expenses         228                   228        
                             
Non-GAAP operating expenses       $ 35,534     $ 35,628     $ 30,463     $ 108,612     $ 91,891  
                             
Reconciliation of income from operations:                        
GAAP income from operations       $ 10,064     $ 8,156     $ 7,399     $ 24,101     $ 77,649  
  GAAP operating margin         3.6 %     3.0 %     3.1 %     2.9 %     8.3 %
                             
Add: Share-based compensation expense         4,907       4,647       4,433       15,510       12,636  
Add: Amortization of intangible assets         3,414       3,413       976       10,240       3,012  
Add: Legal fees - term loan (payment holiday)                                 126  
Add: Acquisition-related expenses                     431       946       1,854  
Add: Integration expenses         1,432       1,040             4,524        
Add: COVID-19 expenses         510                   510        
                             
Non-GAAP income from operations       $ 20,327     $ 17,256     $ 13,239     $ 55,831     $ 95,277  
  Non-GAAP operating margin         7.2 %     6.3 %     5.6 %     6.8 %     10.2 %
                             


 
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 29, 2020   February 28, 2020   May 31, 2019   May 29, 2020   May 31, 2019
Reconciliation of income (loss) before income taxes:                        
GAAP income (loss) before income taxes       $ 3,525     $ (8,380 )   $ 2,495     $ (4,306 )   $ 58,520  
Add: Share-based compensation expense         4,907       4,647       4,433       15,510       12,636  
Add: Amortization of intangible assets         3,414       3,413       976       10,240       3,012  
Add: Legal fees - term loan (payment holiday)                                 126  
Add: Acquisition-related expenses                     431       946       1,854  
Add: Integration expenses         1,432       1,040             4,524        
Add: COVID-19 expenses         510                   510        
Add: Extinguishment of term loan/revolver         192       6,630             6,822        
Add: Capped call MTM adjustment         2,924       4,795             7,719        
Add: Convertible debt discount OID and fees         1,960       399             2,359        
Add: Foreign currency (gains)/losses         484       1,191       144       2,586       3,481  
                             
Non-GAAP income before income taxes       $ 19,348     $ 13,735     $ 8,479     $ 46,910     $ 79,629  
                             
Reconciliation of provision for income taxes:                        
GAAP provision for income taxes       $ 2,700     $ 1,340     $ 550     $ 4,365     $ 12,813  
  GAAP effective tax rate         76.6 %     -16.0 %     22.0 %     -101.4 %     21.9 %
                             
Less: Goodwill tax credit         484       484             968        
Tax effect of adjustments to GAAP results         (48 )     (119 )     (14 )     (258 )     (347 )
                             
Non-GAAP provision for income taxes       $ 2,264     $ 975     $ 564     $ 3,655     $ 13,160  
  Non-GAAP effective tax rate         11.7 %     7.1 %     6.7 %     7.8 %     16.5 %
                             
Reconciliation of net income (loss) and earnings per share (diluted):                    
GAAP net income (loss)       $ 825     $ (9,720 )   $ 1,945     $ (8,671 )   $ 45,707  
                             
Adjustments to GAAP net income (loss):                        
  Share-based compensation         4,907       4,647       4,433       15,510       12,636  
  Amortization of intangible assets         3,414       3,413       976       10,240       3,012  
  Legal fees - term loan (payment holiday)                                 126  
  Acquisition related expenses                     431       946       1,854  
  Integration expenses         1,432       1,040             4,524        
  COVID-19 expenses         510                   510        
  Extinguishment of term loan/revolver         192       6,630             6,822        
  Capped call MTM adjustment         2,924       4,795             7,719        
  Convertible debt discount OID and fees         1,960       399             2,359        
  Goodwill tax credit         484       484             968        
  Foreign currency (gains)/losses         484       1,191       144       2,586       3,481  
  Tax effect of items excluded from non-GAAP results       (48 )     (119 )     (14 )     (258 )     (347 )
                             
Non-GAAP net income       $ 17,084     $ 12,760     $ 7,915     $ 43,255     $ 66,469  
                             
Shares used in computing earnings per share (diluted)         24,431       24,567       23,330       24,450       23,374  
                             
Non-GAAP earnings per share (diluted)       $ 0.70     $ 0.52     $ 0.34     $ 1.77     $ 2.84  
                             
GAAP earnings per share (diluted)       $ 0.03     $ (0.41 )   $ 0.08     $ (0.36 )   $ 1.96  
                             


   
SMART Global Holdings, Inc.  
and Subsidiaries  
Reconciliation of GAAP Net Income (Loss) to Adjusted EBITDA  
(In thousands)  
                             
          Three Months Ended   Nine Months Ended  
          May 29, 2020   February 28, 2020   May 31, 2019   May 29, 2020   May 31, 2019  
                             
GAAP net income (loss)     $ 825   $ (9,720 )   $ 1,945   $ (8,671 )   $ 45,707  
                             
  Share-based compensation expense       4,907     4,647       4,433     15,510       12,636  
  Amortization of intangible assets       3,414     3,413       976     10,240       3,012  
  Interest expense, net       3,094     4,150       5,001     11,736       16,149  
  Provision for income tax       2,700     1,340       550     4,365       12,813  
  Depreciation       5,405     6,021       5,841     17,557       17,140  
  Legal fees - term loan (payment holiday)                         126  
  Acquisition-related expenses(1)                 431     946       1,854  
  Integration expenses         1,432     1,040           4,524        
  COVID-19 expenses       510               510        
  Extinguishment of term loan/revolver     192     6,630         6,822        
  Capped call MTM adjustment       2,924     4,795         7,719        
                             
  Adjusted EBITDA     $ 25,403   $ 22,316     $ 19,177   $ 71,258     $ 109,437  
                             
                             
  (1) Amounts related to acquisitions of new businesses, SMART EC & Wireless (July 2019).                  
                             


   
SMART Global Holdings, Inc.  
and Subsidiaries  
Consolidated Balance Sheets  
(In thousands)  
                       
                May 29,   August 30,  
                  2020       2019    
Assets          
Current assets:          
  Cash and cash equivalents   $ 131,845     $ 98,139    
  Accounts receivable, net     223,211       217,433    
  Inventories       180,554       118,738    
  Prepaid expenses and other current assets     31,496       37,950    
          Total current assets     567,106       472,260    
Property and equipment, net     53,760       68,345    
Operating lease right-of-use assets     26,289          
Other noncurrent assets     12,609       12,784    
Intangible assets, net     59,085       69,325    
Goodwill           73,451       81,423    
          Total assets   $ 792,300     $ 704,137    
Liabilities and Shareholders’ Equity          
Current liabilities:          
  Accounts payable   $ 245,774     $ 164,866    
  Accrued liabilities     59,878       48,980    
  Current portion of long-term debt     608       24,054    
          Total current liabilities     306,260       237,900    
Long-term debt     193,547       182,450    
Long-term operating lease liabilities     21,847          
Other long-term liabilities     6,127       10,327    
          Total liabilities     527,781       430,677    
Shareholders’ equity:          
  Ordinary shares     728       712    
  Additional paid-in capital     342,476       285,994    
  Accumulated other comprehensive loss     (234,634 )     (177,866 )  
  Retained earnings     155,949       164,620    
          Total shareholders’ equity     264,519       273,460    
          Total liabilities and shareholders’ equity $ 792,300     $ 704,137    
                       


 
SMART Global Holdings, Inc.
and Subsidiaries
Consolidated Statements of Cash Flows
(In thousands)
                                 
                Three Months Ended   Nine Months Ended
                May 29, 2020   February 28, 2020   May 31, 2019   May 29, 2020   May 31, 2019
Cash flows from operating activities:                    
  Net income (loss)   $ 825     $ (9,720 )   $ 1,945     $ (8,671 )   $ 45,707  
  Adjustments to reconcile net income (loss) to net cash                    
    provided by operating activities:                    
      Depreciation and amortization     8,818       9,435       6,817       27,797       20,152  
      Share-based compensation     4,907       4,647       4,433       15,510       12,636  
      Provision for doubtful accounts receivable and sales returns     74       (100 )     46       47       (24 )
      Deferred income tax benefit     425       610       677       65       430  
      (Gain) Loss on disposal of property and equipment     41       (18 )     22       (19 )     21  
      Loss on mark-to-market adjustment of the capped call     2,924       4,795       —        7,719       —   
      Loss on extinguishment of debt/revolver     192       6,630       —        6,822       —   
      Amortization of debt discounts and issuance costs     2,005       1,047       706       3,786       2,085  
      Amortization of operating lease right-of-use assets     1,287       1,168       —        3,569       —   
      Changes in operating assets and liabilities:                    
        Accounts receivable     (13,395 )     9,198       91,430       (17,885 )     7,658  
        Inventories     (26,932 )     (3,343 )     35,111       (72,481 )     82,771  
        Prepaid expenses and other assets     (7,615 )     1,386       (2,455 )     (1,119 )     1,787  
        Accounts payable     39,031       (3,782 )     (76,442 )     95,687       (44,885 )
        Operating lease liabilities     (1,363 )     (1,058 )     —        (3,503 )     —   
        Accrued expenses and other liabilities     2,402       2,439       (15,980 )     4,903       (7,622 )
          Net cash provided by operating activities     13,626       23,334       46,310       62,227       120,716  
Cash flows from investing activities:                    
  Capital expenditures and deposits on equipment     (7,521 )     (4,210 )     (10,496 )     (16,889 )     (30,112 )
  Proceeds from sale of property and equipment     58       54       18       154       71  
  Acquisitions of business, net of cash acquired     —        —        —        —        (148 )
          Net cash used in investing activities     (7,463 )     (4,156 )     (10,478 )     (16,735 )     (30,189 )
Cash flows from financing activities:                    
  Long-term debt payment - Term Loan     —        —        —        (5,625 )     —   
  Long-term debt payment - BNDES     (685 )     (797 )     (1,704 )     (2,292 )     (5,073 )
  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     42,000       6,000       67,500       60,500       235,500  
  Repayments of borrowings under revolving line of credit     (42,000 )     (6,000 )     (67,500 )     (60,500 )     (235,500 )
  Proceeds from issuance of ordinary shares from share option exercises   134       641       297       1,941       3,770  
  Proceeds from issuance of ordinary shares from ESPP     1,742       —        1,335       2,984       2,303  
  Withholding tax on restricted stock units     (282 )     (351 )     (11 )     (653 )     (230 )
          Net cash provided by (used in) financing activities     909       15,889       (83 )     12,751       770  
                                 
  Effect of exchange rate changes on the cash and cash equivalents   (17,087 )     (4,596 )     (4,824 )     (24,537 )     (2,432 )
                                 
          Net increase (decrease) in cash and cash equivalents     (10,015 )     30,471       30,925       33,706       88,865  
Cash and cash equivalents at beginning of period     141,860       111,389       95,174       98,139       37,234  
Cash and cash equivalents at end of period   $ 131,845     $ 141,860     $ 126,099     $ 131,845     $ 126,099  
                                 

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.