sgh-10q_20180525.htm

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 

FORM 10-Q

 

(Mark One)

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended May 25, 2018

OR

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number: 001-38102

 

SMART GLOBAL HOLDINGS, INC.

(Exact Name of Registrant as Specified in its Charter)

 

Cayman Islands

98-1013909

( State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer
Identification No.)

c/o Maples Corporate Services Limited

P.O. Box 309

Ugland House

Grand Cayman, Cayman Islands

KY1-1104

(Address of principal executive offices)

(Zip Code)

Registrant’s telephone number, including area code: (510) 623-1231

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes      No  

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes      No  

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

 

  

Accelerated filer

 

 

 

 

 

Non-accelerated filer

 

  (Do not check if a smaller reporting company)

  

Smaller reporting company

 

 

 

 

 

 

 

 

Emerging growth company

 

 

 

 

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes      No  

As of May 25, 2018, the registrant had 22,307,512 ordinary shares outstanding.

 

 

 

 


Table of Contents

 

 

 

Page

PART I.

FINANCIAL INFORMATION

3

Item 1.

Financial Statements (Unaudited)

3

 

Condensed Consolidated Balance Sheets

3

 

Condensed Consolidated Statements of Operations

4

 

Condensed Consolidated Statements of Comprehensive Income (Loss)

5

 

Condensed Consolidated Statements of Cash Flows

6

 

Notes to Unaudited Condensed Consolidated Financial Statements

7

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

29

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

34

Item 4.

Controls and Procedures

34

PART II.

OTHER INFORMATION

36

Item 1.

Legal Proceedings

36

Item 1A.

Risk Factors

36

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

36

Item 3.

Defaults Upon Senior Securities

36

Item 4.

Mine Safety Disclosures

36

Item 5.

Other Information

36

Item 6.

Exhibits

37

Signatures

38

 

 

i


 

Cautionary Note Regarding Forward-Looking Statements

This Quarterly Report on Form 10-Q includes a number of forward-looking statements that involve many risks and uncertainties. Forward-looking statements are identified by the use of the words “would,” “could,” “will,” “may,” “expect,” “believe,” “should,” “anticipate,” “if,” “future,” “intend,” “plan,” “estimate,” “potential,” “target,” “seek,” or “continue” and similar words and phrases, including the negatives of these terms, or other variations of these terms, that denote future events. These statements reflect our current views with respect to future events and our potential financial performance and are subject to risks and uncertainties that could cause our actual results and financial position to differ materially and adversely from what is projected or implied in any forward-looking statements included in this report. These factors include, but are not limited to, the risks described under the caption “Risk Factors” in the documents we file from time to time with the Securities and Exchange Commission, including in our Annual Report on Form 10-K for our fiscal year ended August 25, 2017 and in our Quarterly Reports on Form 10-Q that have been and will be filed by us in our fiscal year 2018, which runs from August 26, 2017 to August 31, 2018. Moreover, we operate in a very competitive and rapidly changing environment. New risks emerge from time to time. It is not possible for our management to predict all risks, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements we may make. In light of these risks, uncertainties and assumptions, the forward-looking events and circumstances discussed in this report may not occur and actual results could differ materially and adversely from those anticipated or implied in the forward-looking statements. We make these forward-looking statements based upon information available on the date of this report, and we expressly disclaim any obligation to update or alter any forward-looking statements, whether as a result of new information or otherwise, except as required by law.

 

 

ii


 

PART I—FINANCIAL INFORMATION

Item 1. Financial Statements.

SMART Global Holdings, Inc.

and Subsidiaries

Condensed Consolidated Balance Sheets

(In thousands, except per share data)

(Unaudited)

 

  

 

May 25,

 

 

August 25,

 

 

 

2018

 

 

2017

 

Assets

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

64,495

 

 

$

22,436

 

Accounts receivable, net of allowances of $298 and $314 as of May 25, 2018

   and August 25, 2017, respectively

 

 

262,101

 

 

 

183,303

 

Inventories

 

 

147,948

 

 

 

127,135

 

Prepaid expenses and other current assets

 

 

20,219

 

 

 

14,115

 

Total current assets

 

 

494,763

 

 

 

346,989

 

Property and equipment, net

 

 

53,051

 

 

 

55,182

 

Other noncurrent assets

 

 

21,193

 

 

 

26,728

 

Intangible assets, net

 

 

1,173

 

 

 

5,107

 

Goodwill

 

 

42,872

 

 

 

46,022

 

Total assets

 

$

613,052

 

 

$

480,028

 

Liabilities and Shareholders’ Equity

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

264,954

 

 

$

189,717

 

Accrued liabilities

 

 

20,816

 

 

 

27,316

 

Current portion of long-term debt

 

 

22,073

 

 

 

22,841

 

Total current liabilities

 

 

307,843

 

 

 

239,874

 

Long-term debt

 

 

136,606

 

 

 

154,450

 

Deferred tax liabilities

 

 

351

 

 

 

1,439

 

Other long-term liabilities

 

 

1,897

 

 

 

1,869

 

Total liabilities

 

$

446,697

 

 

$

397,632

 

Commitments and contingencies (see Note 9)

 

 

 

 

 

 

 

 

Shareholders’ equity:

 

 

 

 

 

 

 

 

Ordinary shares, $0.03 par value. Authorized 200,000 shares; issued and

   outstanding 22,308 and 21,666 as of May 25, 2018 and August 25, 2017,

   respectively

 

 

672

 

 

 

653

 

Additional paid-in capital

 

 

245,097

 

 

 

232,162

 

Accumulated other comprehensive loss

 

 

(161,950

)

 

 

(143,210

)

Retained earnings

 

 

82,536

 

 

 

(7,209

)

Total shareholders’ equity

 

 

166,355

 

 

 

82,396

 

Total liabilities and shareholders’ equity

 

$

613,052

 

 

$

480,028

 

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

 

3


 

SMART Global Holdings, Inc. and Subsidiaries

Condensed Consolidated Statements of Operations

(In thousands, except per share data)

(Unaudited)

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

May 25,

 

 

May 26,

 

 

May 25,

 

 

May 26,

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Net sales (1)

 

$

335,477

 

 

$

206,974

 

 

$

914,851

 

 

$

538,272

 

Cost of sales

 

 

257,423

 

 

 

159,599

 

 

 

705,944

 

 

 

424,030

 

Gross profit

 

 

78,054

 

 

 

47,375

 

 

 

208,907

 

 

 

114,242

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

 

9,763

 

 

 

8,797

 

 

 

28,165

 

 

 

28,442

 

Selling, general, and administrative

 

 

19,597

 

 

 

17,193

 

 

 

55,502

 

 

 

49,037

 

Management advisory fees

 

 

 

 

 

1,000

 

 

 

 

 

 

3,000

 

Restructuring charge

 

 

 

 

 

 

 

 

 

 

 

457

 

Total operating expenses

 

 

29,360

 

 

 

26,990

 

 

 

83,667

 

 

 

80,936

 

Income from operations

 

 

48,694

 

 

 

20,385

 

 

 

125,240

 

 

 

33,306

 

Interest expense, net

 

 

(4,098

)

 

 

(8,294

)

 

 

(12,927

)

 

 

(23,072

)

Other income (expense), net

 

 

(7,145

)

 

 

(762

)

 

 

(7,312

)

 

 

(1,664

)

Total other expense

 

 

(11,243

)

 

 

(9,056

)

 

 

(20,239

)

 

 

(24,736

)

Income before income taxes

 

 

37,451

 

 

 

11,329

 

 

 

105,001

 

 

 

8,570

 

Provision for income taxes

 

 

5,505

 

 

 

3,371

 

 

 

15,256

 

 

 

6,156

 

Net income

 

$

31,946

 

 

$

7,958

 

 

$

89,745

 

 

$

2,414

 

Earnings per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

1.44

 

 

$

0.57

 

 

$

4.09

 

 

$

0.17

 

Diluted

 

$

1.37

 

 

$

0.50

 

 

$

3.90

 

 

$

0.16

 

Shares used in computing earnings per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

22,206

 

 

 

13,986

 

 

 

21,932

 

 

 

13,909

 

Diluted

 

 

23,306

 

 

 

15,955

 

 

 

23,020

 

 

 

15,230

 

 

(1)

Includes sales to affiliates of $39,665 and $100,737 in the three and nine months ended May 25, 2018, respectively, and $21,554 and $48,242, respectively, for the corresponding periods of fiscal 2017 (see Note 2).

See accompanying notes to unaudited condensed consolidated financial statements.

 

 

4


 

SMART Global Holdings, Inc. and Subsidiaries

Condensed Consolidated Statements of Comprehensive Income (Loss)

(In thousands)

(Unaudited)

 

  

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

May 25,

 

 

May 26,

 

 

May 25,

 

 

May 26,

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Net income

 

$

31,946

 

 

$

7,958

 

 

$

89,745

 

 

$

2,414

 

Other comprehensive income (loss):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation

 

 

(17,974

)

 

 

(3,021

)

 

 

(18,740

)

 

 

983

 

Other comprehensive income (loss)

 

 

(17,974

)

 

 

(3,021

)

 

 

(18,740

)

 

 

983

 

Comprehensive income

 

$

13,972

 

 

$

4,937

 

 

$

71,005

 

 

$

3,397

 

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

5


 

SMART Global Holdings, Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows

(In thousands)

(Unaudited)

 

 

 

Nine Months Ended

 

 

 

May 25,

 

 

May 26,

 

 

 

2018

 

 

2017

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

Net income

 

$

89,745

 

 

$

2,414

 

Adjustments to reconcile net income to net cash provided by

   (used in) operating activities:

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

18,656

 

 

 

25,399

 

Share-based compensation

 

 

6,599

 

 

 

3,533

 

Provision for doubtful accounts receivable and sales returns

 

 

(13

)

 

 

31

 

Deferred income tax benefit

 

 

(1,376

)

 

 

(1,195

)

Loss on disposal of property and equipment

 

 

230

 

 

 

129

 

Extinguishment loss on long-term debt

 

 

 

 

 

1,386

 

Write off of long-term asset

 

 

250

 

 

 

 

Amortization of debt discounts and issuance costs

 

 

2,165

 

 

 

6,424

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Accounts receivable

 

 

(86,706

)

 

 

(33,516

)

Inventories

 

 

(27,940

)

 

 

(31,184

)

Prepaid expenses and other assets

 

 

(3,495

)

 

 

741

 

Accounts payable

 

 

83,879

 

 

 

11,799

 

Accrued expenses and other liabilities

 

 

(4,703

)

 

 

7,097

 

Net cash provided by (used in) operating activities

 

 

77,291

 

 

 

(6,942

)

Cash flows from investing activities:

 

 

 

 

 

 

 

 

Capital expenditures and deposits on equipment

 

 

(18,251

)

 

 

(11,179

)

Proceeds from sale of property and equipment

 

 

101

 

 

 

467

 

Net cash used in investing activities

 

 

(18,150

)

 

 

(10,712

)

Cash flows from financing activities:

 

 

 

 

 

 

 

 

Fees paid for revolving line of credit financing

 

 

(768

)

 

 

 

Long-term debt payment

 

 

(18,402

)

 

 

(17,689

)

Payment for extinguishment of long-term debt

 

 

 

 

 

(938

)

Payment of costs related to initial public offering (IPO)

 

 

(1,591

)

 

 

(200

)

Proceeds from borrowings under revolving line of credit

 

 

277,500

 

 

 

338,250

 

Repayments of borrowings under revolving line of credit

 

 

(277,500

)

 

 

(338,250

)

Proceeds from issuance of ordinary shares from share option exercises

 

 

6,170

 

 

 

348

 

Net cash used in financing activities

 

 

(14,591

)

 

 

(18,479

)

Effect of exchange rate changes on cash and cash equivalents

 

 

(2,491

)

 

 

(160

)

Net increase (decrease) in cash and cash equivalents

 

 

42,059

 

 

 

(36,293

)

Cash and cash equivalents at beginning of period

 

 

22,436

 

 

 

58,634

 

Cash and cash equivalents at end of period

 

$

64,495

 

 

$

22,341

 

Supplemental disclosures of cash flow information:

 

 

 

 

 

 

 

 

Cash paid during the period:

 

 

 

 

 

 

 

 

Cash paid for interest

 

$

11,048

 

 

$

17,215

 

Cash paid for income taxes, net of refunds

 

 

17,085

 

 

 

5,293

 

Noncash activities information:

 

 

 

 

 

 

 

 

Capital expenditures included in accounts payable at period end

 

 

614

 

 

 

275

 

IPO costs included in accounts payable and accrued liabilities at period end

 

 

 

 

 

1,990

 

Proceeds receivable from the exercise of stock options

 

 

(185

)

 

 

 

Warrants issued in connection with debt

 

 

 

 

 

21,341

 

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

6


 

Smart Global Holdings, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

Note 1. Basis of Presentation and Principles of Consolidation

(a)

Overview

On August 26, 2011, SMART Global Holdings, Inc., formerly known as Saleen Holdings, Inc., a Cayman Islands exempted company (SMART Global Holdings, and together with its subsidiaries, the Company), consummated a transaction with SMART Worldwide Holdings, Inc., formerly known as SMART Modular Technologies (WWH), Inc. (SMART Worldwide), pursuant to an Agreement and Plan of Merger whereby, through a series of transactions, SMART Global Holdings acquired substantially all of the equity interests of SMART Worldwide with SMART Worldwide surviving as an indirect wholly owned subsidiary of SMART Global Holdings (the Acquisition). SMART Global Holdings is an entity that was formed by investment funds affiliated with Silver Lake Partners and Silver Lake Sumeru (collectively Silver Lake). As a result of the Acquisition, since there was a change of control resulting in Silver Lake as the controlling shareholder group, the Company applied the acquisition method of accounting and established a new basis of accounting.

The Company, through its subsidiaries, provides specialty memory solutions sold primarily to original equipment manufacturers (OEMs). The Company offers these solutions to customers worldwide and also offers custom supply chain services including procurement, logistics, inventory management, temporary warehousing, kitting and packaging services.  

SMART Global Holdings is domiciled in the Cayman Islands and has its U.S. offices in Newark, California. The Company has operations in the United States, Brazil, Malaysia, Taiwan, Hong Kong, Scotland, Singapore and South Korea.

(b)

Basis of Presentation

The accompanying condensed consolidated financial statements comprise SMART Global Holdings and its wholly owned subsidiaries. Intercompany transactions have been eliminated in the condensed consolidated financial statements.

The Company uses a 52- to 53-week fiscal year ending on the last Friday in August. The three months ended May 25, 2018 and May 26, 2017 were both 13 week fiscal periods.

The accompanying unaudited condensed consolidated financial statements and related notes have been prepared in accordance with U.S. generally accepted accounting principles (U.S. GAAP) and in conformity with the rules and regulations of the Securities and Exchange Commission (SEC) applicable to interim financial information. As such, certain information and footnote disclosures normally included in complete annual financial statements prepared in accordance with U.S. GAAP have been omitted in accordance with the rules and regulations of the SEC. In the opinion of management, the accompanying unaudited condensed consolidated financial statements contain all adjustments, consisting of normal recurring accruals, necessary to present fairly the financial position of the Company and its results of operations and cash flows for the interim periods presented. The financial data and other information disclosed in these notes to the condensed consolidated financial statements related to the interim periods are unaudited.

All financial information for two of the Company’s subsidiaries, SMART Modular Technologies Indústria de Componentes Eletrônicos Ltda. (SMART Brazil) and SMART Modular Technologies do Brasil Indústria e Comércio de Componentes Ltda. (SMART do Brazil), is included in the Company’s condensed consolidated financial statements on a one-month lag because their fiscal years begin August 1 and end July 31.

(c)

Use of Estimates

The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods presented. Actual results could differ from the estimates made by management. Significant items subject to such estimates and assumptions include the useful lives of long-lived assets, the valuation of deferred tax assets and inventory, share-based compensation, the estimated net realizable value of Brazilian tax credits, income tax uncertainties and other contingencies.

(d)

Revenue Recognition

Product revenue is recognized when there is persuasive evidence of an arrangement, product delivery has occurred, the sales price is fixed or determinable, and collectability is reasonably assured. Product revenue typically is recognized at the time of shipment or when the customer takes title to the goods. All amounts billed to a customer related to shipping and handling are classified as revenue, while all costs incurred by the Company for shipping and handling are classified as cost of sales. Sales taxes collected from customers and remitted to governmental authorities are accounted for on a net basis and, therefore, are excluded from net sales in the condensed consolidated statements of operations.

7


 

In addition, the Company has classes of transactions with customers that are accounted for on an agency basis (i.e., the Company recognizes as revenue the amount billed less the material procurement costs of products serviced as an agent with the cost of providing these services embedded with the cost of sales). The Company provides procurement, logistics, inventory management, temporary warehousing, kitting and packaging services for these customers. Revenue from these arrangements is recognized as service revenue and is determined by a fee for services based on material procurement costs. The Company recognizes service revenue upon the completion of the services, typically upon shipment of the product. There are no obligations subsequent to shipment of the product under the agency arrangements.

The following is a summary of the Company’s gross billings to customers and net sales for services and products (in thousands):

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

May 25,

 

 

May 26,

 

 

May 25,

 

 

May 26,

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Service revenue, net

 

$

11,270

 

 

$

9,869

 

 

$

30,746

 

 

$

27,853

 

Cost of purchased materials - service (1)

 

 

258,098

 

 

 

246,498

 

 

 

714,883

 

 

 

648,886

 

Gross billings for services

 

 

269,368

 

 

 

256,367

 

 

 

745,629

 

 

 

676,739

 

Product net sales

 

 

324,207

 

 

 

197,105

 

 

 

884,105

 

 

 

510,419

 

Gross billings to customers

 

$

593,575

 

 

$

453,472

 

 

$

1,629,734

 

 

$

1,187,158

 

Product net sales

 

$

324,207

 

 

$

197,105

 

 

$

884,105

 

 

$

510,419

 

Service revenue, net

 

 

11,270

 

 

 

9,869

 

 

 

30,746

 

 

 

27,853

 

Net sales

 

$

335,477

 

 

$

206,974

 

 

$

914,851

 

 

$

538,272

 

 

(1)Represents cost of sales associated with service revenue reported on a net basis.

(e)

Cash and Cash Equivalents

All highly liquid investments with maturities of 90 days or less from original dates of purchase are carried at cost, which approximates fair value, and are considered to be cash. Cash and cash equivalents include cash on hand, cash deposited in checking and saving accounts, money market accounts, and securities with maturities of less than 90 days at the time of purchase.

(f)

Allowance for Doubtful Accounts

The Company evaluates the collectability of accounts receivable based on a combination of factors. In cases where the Company is aware of circumstances that may impair a specific customer’s ability to meet its financial obligations, the Company records a specific allowance against amounts due and, thereby, reduces the net recognized receivable to the amount management reasonably believes will be collected. For all other customers, the Company recognizes allowances for doubtful accounts based on a combination of factors including the length of time the receivables are outstanding, industry and geographic concentrations, the current business environment and historical experience.

(g)

Sales of Receivables

Designated subsidiaries of the Company may, from time to time, sell certain of their receivables to third parties. Sales of receivables are recognized at the point in which the receivables sold are transferred beyond the reach of the Company and its creditors, the purchaser has the right to pledge or exchange the receivables and the subsidiaries have surrendered control over the transferred receivables. See Note 3 for further details.

(h)

Inventories

Inventories are valued at the lower of actual cost or market value. Inventory value is determined on a specific identification basis for material and an allocation of labor and manufacturing overhead. At each balance sheet date, the Company evaluates the ending inventories for excess quantities and obsolescence. This evaluation includes an analysis of sales levels by product family and considers historical demand and forecasted demand in relation to the inventory on hand, competitiveness of product offerings, market conditions and product life cycles. The Company adjusts carrying value to the lower of its cost or market value. Inventory write-downs are not reversed and create a new cost basis.

(i)

Prepaid State Value-Added Taxes (ICMS)

Since 2004, the Sao Paulo State tax authorities have granted SMART Brazil a tax benefit to defer and eventually eliminate the payment of ICMS levied on certain imports from independent suppliers. This benefit, known as an ICMS Special Regime, is subject to renewal every two years. When the then current ICMS Special Tax Regime expired on March 31, 2010, SMART Brazil timely applied for a renewal of the benefit, however, the renewal was not granted until August 4, 2010.

8


 

On June 22, 2010, the Sao Paulo authorities published a regulation allowing companies that applied for a timely renewal of an ICMS Special Regime to continue utilizing the benefit until a final conclusion on the renewal request was rendered. As a result of this publication, SMART Brazil was temporarily allowed to utilize the benefit while it waited for its renewal. From April 1, 2010, when the ICMS benefit lapsed, through June 22, 2010 when the regulation referred to above was published, SMART Brazil was required to pay the ICMS taxes on imports, which payments result in ICMS credits that may be used to offset ICMS obligations generated from sales by SMART Brazil of its products; however, the vast majority of SMART Brazil’s sales in Sao Paulo were either subject to a lower ICMS rate or were made to customers that were entitled to other ICMS benefits that enabled them to eliminate the ICMS levied on their purchases of products from SMART Brazil. As a result, from April 1, 2010 through June 22, 2010, SMART Brazil did not have sufficient ICMS collections against which to apply the credits and the credit balance increased significantly.

Effective February 1, 2011, in connection with its participation in a Brazilian government incentive program known as Support Program for the Technological Development of the Semiconductor and Display Industries Laws, or PADIS, SMART Brazil spun off the module manufacturing operations into SMART do Brazil, a separate subsidiary of the Company. In connection with this spin off, SMART do Brazil applied for a tax benefit from the State of Sao Paulo in order to obtain a deferral of state ICMS. This tax benefit is referred to as State PPB, or CAT 14. The CAT 14 approval was not obtained until July 21, 2011, and from February 1, 2011 until the CAT 14 approval was granted, SMART do Brazil did not have sufficient ICMS collections against which to apply the credits accrued upon payment of the ICMS on SMART do Brazil’s imports and inputs locally acquired, and therefore, it generated additional excess ICMS credits.

As of  May 25, 2018, the total ICMS tax credits reported on the Company’s accompanying condensed consolidated balance sheet are R$44.4 million (or $12.8 million), of which (i) R$16.6 million (or $4.8 million) are fully vested ICMS credits, classified as prepaid and other current assets and R$24.5 million (or $7.0 million) classified as other noncurrent assets, and (ii) R$3.3 million (or $0.9 million) are ICMS credits subject to vesting in 48 equal monthly amounts, classified as prepaid expenses and other current assets (R$1.1 million or $0.3 million) and other noncurrent assets (R$2.2 million or $0.6 million). As of August 25, 2017, the total ICMS tax credits reported on the Company’s accompanying condensed consolidated balance sheet are R$40.9 million (or $13.1 million), of which (i) R$38.4 million (or $12.3 million) are fully vested ICMS credits, classified as other noncurrent assets, and (ii) R$2.5 million (or $0.8 million) are ICMS credits subject to vesting in 48 equal monthly amounts, classified as other noncurrent assets (R$0.6 million or $0.2 million) and prepaid expenses and other current assets (R$1.9 million or $0.6 million). It is expected that the excess ICMS credits will continue to be recovered in fiscal 2018 through fiscal 2022. The Company updates its forecast of the recoverability of the ICMS credits quarterly, considering the following key variables in Brazil: timing of government approvals of automated credit utilization, the total amount of sales, the product mix and the inter and intra state mix of sales. If these estimates or the mix of products or regions vary, it could take longer or shorter than expected to recover the accumulated ICMS credits, resulting in a reclassification of ICMS credits from current to noncurrent, or vice versa.

In April and June 2016, the Company filed cases with the State of Sao Paulo tax authorities to seek approval to sell excess ICMS credits. In December 2017, the Company obtained approval to sell R$31.6 million (or $9.1 million) of its ICMS credits.  Once approved, sales of ICMS credits usually take three to six months to complete and typically incur a discount to the face amount of the credits sold, as well as fees for the arrangers of these sales which together aggregate 10% to 15% of the face amount of the credits being sold. Once the sale is complete, the tax authorities usually approve the transfer of credits in monthly installments and the proceeds resulting from the sale of the aforementioned credits shall be received by the Company accordingly. The Company has recorded valuation adjustments for the estimated discount and fees that the Company will need to offer in order to sell the ICMS credits to other companies.  

(j)

Property and Equipment

Property and equipment are recorded at cost. Depreciation and amortization are computed based on the shorter of the estimated useful lives or the related lease terms, using the straight-line method. Estimated useful lives are presented below:

 

 

 

Period

Asset:

 

 

Manufacturing equipment

 

2 to 5 years

Office furniture, software, computers and equipment

 

2 to 5 years

Leasehold improvements*

 

2 to 60 years

 

 

*

Includes the land lease for the Penang facility with a term expiring in 2070.

9


 

(k)

Goodwill

The Company performs a goodwill impairment test annually during the fourth quarter of its fiscal year and more frequently if events or circumstances indicate that impairment may have occurred. Such events or circumstances may, among others, include significant adverse changes in the general business climate. As of May 25, 2018 and August 25, 2017, the carrying value of goodwill on the Company’s condensed consolidated balance sheet was $42.9 million and $46.0 million, respectively.

When conducting the annual impairment test for goodwill, the Company compares the estimated fair value of a reporting unit containing goodwill to its book value. The estimated fair value is computed using two approaches: the income approach, which is the present value of expected cash flows, discounted at a risk-adjusted weighted average cost of capital; and the market approach, which is based on using market multiples of companies in similar lines of business. If the fair value of the reporting unit is determined to be more than its book value, no goodwill impairment is recognized. The excess of the fair value of the reporting unit over the fair value of assets less liabilities is the implied value of goodwill and is used to determine the amount of impairment.

All of the $42.9 million carrying value of goodwill on the Company’s condensed consolidated balance sheet as of May 25, 2018 is associated with the Company’s single reporting unit. No impairment of goodwill was recognized through May 25, 2018.

The changes in the carrying amount of goodwill during the nine months ended May 25, 2018 and fiscal 2017 are as follows (in thousands):

 

  

 

Total

 

Balance as of August 26, 2016

 

$

44,976

 

Translation adjustments

 

 

1,046

 

Balance as of August 25, 2017

 

 

46,022

 

Translation adjustments

 

 

(3,150

)

Balance as of May 25, 2018

 

$

42,872

 

 

(l)

Intangible Assets, Net

The following table summarizes the gross amounts and accumulated amortization of intangible assets from the Acquisition by type as of May 25, 2018 and August 25, 2017 (dollars in thousands):

 

 

 

 

 

 

 

May 25, 2018

 

 

August 25, 2017

 

 

 

Weighted

 

 

Gross

 

 

 

 

 

 

 

 

 

 

Gross

 

 

 

 

 

 

 

 

 

 

 

avg.

 

 

Carrying

 

 

Accumulated

 

 

 

 

 

 

Carrying

 

 

Accumulated

 

 

 

 

 

 

 

life (yrs)

 

 

amount

 

 

amortization

 

 

Net

 

 

amount

 

 

amortization

 

 

Net

 

Customer relationships

 

 

5

 

 

$

24,256

 

 

$

(23,328

)

 

$

928

 

 

$

26,971

 

 

$

(22,844

)

 

$

4,127

 

Technology

 

 

4

 

 

 

4,900

 

 

 

(4,655

)

 

 

245

 

 

 

4,900

 

 

 

(3,920

)

 

 

980

 

Total

 

 

 

 

 

$

29,156

 

 

$

(27,983

)

 

$

1,173

 

 

$

31,871

 

 

$

(26,764

)

 

$

5,107

 

 

Amortization expense related to intangible assets for the three and nine months ended May 25, 2018 totaled approximately $1.2 million and $3.7 million, respectively, and $3.0 million and $9.0 million, respectively, for the corresponding periods of fiscal 2017. Acquired intangibles are amortized on a straight-line basis over the remaining estimated economic life of the underlying intangible assets.

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

May 25,

 

 

May 26,

 

 

May 25,

 

 

May 26,

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Amortization of intangible assets (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

$

245

 

 

$

1,224

 

 

$

735

 

 

$

3,672

 

Selling, general and administrative

 

 

976

 

 

 

1,774

 

 

 

2,992

 

 

 

5,296

 

Total

 

$

1,221

 

 

$

2,998

 

 

$

3,727

 

 

$

8,968

 

 

10


 

(m)

Long-Lived Assets

Long-lived assets, excluding goodwill, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset group may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset group to the future undiscounted cash flows expected to be generated by the asset group. If such assets are considered to be impaired, the impairment is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. Assets to be disposed are reported at the lower of the carrying amount or fair value, less cost to sell. No impairment of long-lived assets was recognized during the nine months ended May 25, 2018 and May 26, 2017.

(n)

Research and Development Expense

Research and development expenditures are expensed in the period incurred.

(o)

Income Taxes

The Company uses the asset and liability method of accounting for income taxes. Deferred tax assets and liabilities are recognized for the future consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis and net operating loss and credit carryforwards. When necessary, a valuation allowance is recorded to reduce tax assets to amounts expected to be realized. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income (or loss) in the period that includes the enactment date. The Company recognizes the effect of income tax positions only if those positions are more likely than not of being sustained. Recognized income tax positions are measured at the largest amount that is greater than 50% likely of being realized. Changes in recognition or measurement are reflected in the period in which the change in judgment occurs. The Company records interest and penalties related to unrecognized tax benefits in tax expense.

(p)

Foreign Currency Translation

For foreign subsidiaries using the local currency as their functional currency, assets and liabilities are translated at exchange rates in effect at the balance sheet date and income and expenses are translated at average exchange rates during the period. The effect of this translation is reported in other comprehensive income (loss). Exchange gains and losses arising from transactions denominated in a currency other than the functional currency of the respective foreign subsidiaries are included in results of operations.

For foreign subsidiaries using the U.S. dollar as their functional currency, the financial statements of these foreign subsidiaries are remeasured into U.S. dollars using the historical exchange rate for property and equipment and certain other nonmonetary assets and liabilities and related depreciation and amortization on these assets and liabilities. The Company uses the exchange rate at the balance sheet date for the remaining assets and liabilities, including deferred taxes. A weighted average exchange rate is used for each period for revenues and expenses.

All foreign subsidiaries and branch offices, except those in Brazil and South Korea, use the U.S. dollar as their functional currency. The gains or losses resulting from the remeasurement process are recorded in other income (expense) in the accompanying condensed consolidated statements of operations.

During the three and nine months ended May 25, 2018 and May 26, 2017, the Company recorded $6.9 million and $7.3 million, respectively, and $1.0 million and $0.7 million, respectively, for the corresponding periods of fiscal 2017, of foreign exchange losses primarily related to its Brazilian operating subsidiaries.

(q)

Share-Based Compensation

The Company accounts for share-based compensation under ASC 718, Compensation—Stock Compensation, which requires companies to recognize in their statement of operations all share-based payments, including grants of share options and other types of equity awards, based on the grant-date fair value of such share-based awards.

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

May 25,

 

 

May 26,

 

 

May 25,

 

 

May 26,

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Share-based compensation expense (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of sales

 

$

414

 

 

$

176

 

 

$

859

 

 

$

444

 

Research and development

 

 

325

 

 

 

(22

)

 

 

887

 

 

 

423

 

Selling, general and administrative

 

 

2,558

 

 

 

1,235

 

 

 

4,853

 

 

 

2,666

 

Total

 

$

3,297

 

 

$

1,389

 

 

$

6,599

 

 

$

3,533

 

 

11


 

(r)

Loss Contingencies

The Company is subject to the possibility of various loss contingencies arising in the ordinary course of business. The Company considers the likelihood of a loss and the ability to reasonably estimate the amount of loss in determining the necessity for and amount of any loss contingencies. Estimated loss contingencies are accrued when it is probable that a liability has been incurred or an asset impaired and the amount of loss can be reasonably estimated. The Company regularly evaluates the most current information available to determine whether any such accruals should be recorded or adjusted.

(s)

Comprehensive Income (Loss)

Comprehensive income (loss) consists of net income (loss) and other gains and losses affecting shareholders’ equity that, under U.S. GAAP are excluded from net income (loss). The Company’s other comprehensive income (loss) generally consists of foreign currency translation adjustments.

(t)

Concentration of Credit and Supplier Risk

The Company’s concentration of credit risk consists principally of cash and cash equivalents and accounts receivable. The Company’s revenues and related accounts receivable reflect a concentration of activity with five customers (see Note 11). The Company does not require collateral or other security to support accounts receivable. The Company performs periodic credit evaluations of its customers to minimize collection risk on accounts receivable and maintains allowances for potentially uncollectible accounts.

The Company relies on five suppliers for the majority of its raw materials. At May 25, 2018 and August 25, 2017, the Company owed these five suppliers $218.4 million and $153.7 million, respectively, which was recorded as accounts payable. The inventory purchases from these suppliers during the three and nine months ended May 25, 2018 were $0.4 billion and $1.2 billion, respectively, and $0.3 billion, and $0.9 billion, respectively for the corresponding periods of fiscal 2017.

(u)

New Accounting Pronouncements

In March 2018, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2018-05, Income Taxes (Topic 740): Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 118. This standard amends ASC 740, Income Taxes, to provide guidance on accounting for tax effects of the Tax cuts and Jobs Act (the “Tax Act”) pursuant to Staff Accounting Bulletin No. 118, which allows companies to complete the accounting under ASC 740 within one-year measurement period from the Tax Act enactment date. This standard is effective upon issuance. The Company has applied the guidance in ASU 2018-05, see Note 5, Income Taxes, for further disclosure.  

In February 2018, the FASB issued ASU No. 2018-02, Income Statement-Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Comprehensive Income. The new guidance allows companies to reclassify stranded tax effects resulting from the Tax Act, from accumulated other comprehensive income to retained earnings. The guidance also requires certain new disclosures regardless of the election.  The Company is required to adopt the guidance in the first quarter of fiscal 2020. Early adoption is permitted. The Company is currently evaluating the timing and the impact of these amendments to its consolidated financial statements

In January 2017, the FASB issued ASU No. 2017-04, Intangibles—Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment, which simplified the accounting for goodwill impairment by eliminating step 2 from the goodwill impairment test. ASU 2017-04 will be effective for the Company beginning on December 15, 2019 and early adoption is permitted. The Company adopted this ASU in fiscal 2017 and it did not have a material impact on its consolidated financial statements.

In November 2016, the FASB issued ASU No. 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash, which clarifies the presentation of changes in restricted cash and restricted cash equivalents in the statement of cash flows. ASU 2016-18 will be effective for the Company in the first quarter of fiscal 2019 and early adoption is permitted. The changes in restricted cash and restricted cash equivalents during the period will be included in the beginning and ending cash and cash equivalents balance reconciliation on the statement of cash flows. The Company has $6.3 million of restricted cash at May 25, 2018, which is classified as noncurrent assets in the accompanying condensed consolidated financial statements.

In August 2016, the FASB issued ASU No. 2016-15, Cash Flow Statements, Classification of Certain Cash Receipts and Cash Payments. The new guidance is intended to address the diversity in practice in how certain cash receipts and cash payments are presented and classified in the statement of cash flows under Topic 230, Statement of Cash Flows, and other Topics. The guidance addresses eight specific cash flow classification issues with the objective of reducing diversity in practice. The amendments are effective for public business entities for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption is permitted including adoption in an interim period. If an entity early adopts the amendments in an interim period, any adjustments should be reflected as of the beginning of the fiscal year that includes the interim period. An entity that elects early adoption must adopt all of the amendments in the same period. The amendments should be applied using a retrospective transition period to each period presented. The Company does not believe the adoption of ASU 2016-15 will have a material impact on its consolidated financial statements.

12


 

In March 2016, the FASB issued ASU No. 2016-09, Compensation—Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting, which simplified certain aspects of the accounting for share-based payment transactions, including income taxes, forfeitures and classification of awards and classification in the statement of cash flows. In the first quarter of fiscal 2018, the Company adopted the applicable provisions of this standard as follows:

 

The guidance requires excess tax benefits and tax deficiencies to be recorded as income tax benefit or expense in the statement of operations when the awards vest are settled, and eliminates the requirement to reclassify cash flows related to excess tax benefits from financing activities to operating activities on the statement of cash flows. The Company adopted the guidance prospectively effective August 26, 2017, and there was no impact to its consolidated financial statements.  

 

The guidance eliminates the requirement that excess tax benefits must be realized (through a reduction in income taxes payable) before companies can recognize them.  The Company applied the modified retrospective transition method upon adoption.  The previously unrecognized excess tax effects were recorded as a deferred tax asset in the amount of $0.9 million, which was fully offset by a valuation allowance of the same amount as of August 26, 2017, resulting no impact to opening retained earnings.  

 

In accordance with the guidance, the Company has elected to make an entity-wide accounting policy change to account for forfeitures when they occur.  There is no cumulative-effect on opening retained earnings.  

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842), which modified lease accounting for both lessees and lessors to increase transparency and comparability by recognizing lease assets and lease liabilities by lessees for those leases classified as operating leases under previous accounting standards and disclosing key information about leasing arrangements. ASU 2016-02 will be effective for the Company beginning on September 1, 2019 and early adoption is permitted. In transition, lessees and lessors are required to recognize and measure leases at the beginning of the earliest period presented using a modified retrospective approach.  Although the Company is currently evaluating the impact of adopting ASU 2016-02 on its consolidated financial statements and related disclosures, as disclosed in Note 9(a), the Company has over $16.4 million in lease commitments at May 25, 2018 and believes that the adoption will have a material impact to the consolidated financial statements.

In November 2015, the FASB issued ASU No. 2015-17, Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes, which simplifies the presentation of deferred income taxes by requiring that deferred tax assets and liabilities be classified as noncurrent on the balance sheet. ASU 2015-17 will be effective for the Company beginning on September 1, 2017 with early application permitted as of the beginning of any interim or annual reporting period. The Company early adopted this ASU in fiscal 2017 and it did not have a material impact on its consolidated financial statements.

In May 2014, the FASB issued a new standard, ASU No. 2014-09, Revenue from Contracts with Customers, as amended, which will supersede nearly all existing revenue recognition guidance. Under ASU 2014-09, an entity is required to recognize revenue upon transfer of promised goods or services to customers in an amount that reflects the expected consideration received in exchange for those goods or services. ASU No. 2014-09 defines a five-step process in order to achieve this core principle, which may require the use of judgment and estimates, and also requires expanded qualitative and quantitative disclosures relating to the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers, including significant judgments and estimates used. The FASB has recently issued several amendments to the new standard, including clarification on identifying performance obligations. The amendments include ASU No. 2016-08, Revenue from Contracts with Customers (Topic 606)—Principal versus Agent Considerations, which was issued in March 2016, and clarifies the implementation guidance for principal versus agent considerations in ASU 2014-09. The new standard permits adoption either by using (i) a full retrospective approach for all periods presented in the period of adoption or (ii) a modified retrospective approach with the cumulative effect of initially applying the new standard recognized at the date of initial application and providing certain additional disclosures. The new standard is effective for annual reporting periods beginning after December 15, 2017, with early adoption permitted for annual reporting periods beginning after December 15, 2016. The Company does not plan to early adopt, and accordingly, will adopt the new standard effective September 1, 2018. The Company currently plans to adopt using the modified retrospective approach. Upon adoption on September 1, 2018, the Company will record a cumulative effect adjustment to retained earnings related to the difference in timing of revenue recognition required under the new standards.  

A change for the Company under ASC 606 relates to the timing of revenue recognition for customized product sales orders deemed not cancellable and nonrefundable (NCNR). Under current accounting standards, the Company recognizes revenue and costs related to these sales when products are shipped or delivered to the customers based on the terms of the purchase orders and sales agreements. Under ASC 606, the terms within the NCNR sales orders that provide the Company with a legally enforceable right to receive payment for performance completed to date will affect the timing of revenue recognition. Accordingly, the Company will recognize revenue over time as customized products listed within the NCNR orders are completed.

The Company is in the process of finalizing its assessment and implemented policies, processes, and controls to support the standard measurement and disclosure requirements.

13


 

(v)

Subsequent Events

Acquisition of Penguin Computing, Inc.

On June 8, 2018, SMART Global Holdings entered into an Agreement and Plan of Merger (the “Merger Agreement”), by and among the SMART Global Holdings, Glacier Acquisition Sub, Inc., a wholly-owned indirect subsidiary of SMART Global Holdings (“Merger Sub”), Penguin Computing, Inc., (“Penguin”) and Fortis Advisors LLC, solely in its capacity as the representative of the holders of the securities of Penguin. Pursuant to the Merger Agreement, on June 8, 2018, Merger Sub was merged with and into Penguin, with Penguin surviving as a wholly-owned indirect subsidiary of the SMART Global Holdings (the “Merger”).

The aggregate consideration payable by the Company for the Merger is up to $85 million, which includes up to $25.0 million of potential cash earn-out payments based on Penguin’s achievement of specified gross profit levels through December 31, 2018, pursuant to the provisions of the Merger Agreement. The Company paid $60 million at closing (subject to certain adjustments as provided in the Merger Agreement), which included the assumption by the Company of Penguin’s outstanding indebtedness.

At the closing of the Merger, the Company deposited $6.0 million of the purchase price into escrow as security for Penguin’s indemnification obligations during the escrow period of one year. The Company also deposited $2.0 million of the purchase price into escrow as security for customary post-closing adjustments to the purchase price. The Merger Agreement contains customary representations and warranties of the Company and Penguin. The parties have agreed to indemnify each other for certain breaches of representations, warranties and covenants.

Incremental Facility Amendment

On June 8, 2018, the parties to the Amended Credit Agreement (as defined in Note 6) entered into an Incremental Facility Amendment (the “Incremental Facility Amendment”) which provides for, among other things, an incremental $60.0 million term loan facility (the “Additional Term B Loan”). On June 8, 2018, SMART Modular Technologies (Global), Inc. (“Global”) borrowed pursuant to the Incremental Facility Amendment, $60.0 million in aggregate principal amount of Additional Term B Loan under the Amended Credit Agreement, a portion of which was used to fund the cash purchase price of the Merger. The terms and provisions of the Additional Term B Loan are, in all material respects, substantially consistent with the terms and provisions of the other term loans currently outstanding under the Amended Credit Agreement.

 

(2)

Related Party Transactions

In the normal course of business, the Company had transactions with its affiliates as follows (in thousands):

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

May 25,

 

 

May 26,

 

 

May 25,

 

 

May 26,

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Affiliates:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net sales

 

$

39,665

 

 

$

21,554

 

 

$

100,737

 

 

$

48,242

 

Expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Management advisory fees

 

$

 

 

$

1,000

 

 

$

 

 

$

3,000

 

 

As of May 25, 2018 and August 25, 2017, amounts due from these affiliates were $8.7 million and $8.7 million, respectively.

Management advisory fees represent fees paid to entities affiliated with Silver Lake pursuant to a management agreement (the Management Agreement) that was terminated upon closing of the Company’s initial public offering (IPO) on May 30, 2017.  There were no amounts due under this agreement as of May 25, 2018 and August 25, 2017.

(3)

Accounts Receivable Purchasing Facility

In May 2012, SMART Modular Technologies, Inc. (SMART Modular) and SMART Modular Technologies (Europe) Limited (collectively, for this footnote only, Sellers), both wholly owned subsidiaries of the Company, entered into a Receivables Purchasing Agreement (as amended, the RPA) with Wells Fargo Bank, N.A. (Wells Fargo). Under the RPA, the Sellers can offer to sell to Wells Fargo certain Eligible Receivables (as defined in the RPA) due from certain designated customers, and Wells Fargo has the right to purchase Eligible Receivables offered for sale by Sellers. The maximum amount of Eligible Receivables that Wells Fargo can purchase is capped based upon the aggregate outstanding balances of purchased receivables which maximum is set at $50 million with sublimits assigned to each of Sellers’ customers that are approved for the program. Wells Fargo has no obligation to purchase any Eligible Receivables under the RPA. All purchases of Eligible Receivables are at a discount equal to a 2-month LIBOR plus 2.75% annual discount margin, calculated on a daily basis for the number of days between the payment of the purchase price by Wells Fargo to the Sellers and the actual collection of the Eligible Receivables by Wells Fargo from the account debtor. Purchases are also subject to a 95% advance rate with the 5% being reimbursed to the Sellers upon collection by Wells Fargo from the account debtor. Under the

14


 

terms of the RPA, Sellers retain limited recourse for product warranties and commercial disputes and Wells Fargo bears the full risk of insolvency and collectability. Sellers are appointed as the agent of Wells Fargo to perform collection services. The RPA has standard representations and warranties, including for the validity and collectability of the Eligible Receivables, and various negative and affirmative covenants that are typical for arrangements of this nature. The obligations of the Sellers are jointly and severally guaranteed by SMART Worldwide and its subsidiary Global. Financing under this receivables purchase program qualifies for off-balance sheet financing as the transfer of receivables to Wells Fargo represents a true-sale. The RPA was terminated effective June 30, 2017.

During the nine months ended May 25, 2018 and May 26, 2017, the Sellers sold $0 and $153.6 million of accounts receivables under the RPA respectively. The outstanding balance of receivables sold and not yet collected was $0 as of both May 25, 2018 and August 25, 2017. Total interest expense paid during both the three and nine months ended May 25, 2018 were $0, and $0.2 million and $0.6 million, respectively, for the corresponding periods of fiscal 2017.

(4)

Balance Sheet Details

Inventories

Inventories consisted of the following (in thousands):

 

  

 

May 25,

 

 

August 25,

 

 

 

2018

 

 

2017

 

Raw materials

 

$

72,839

 

 

$

42,255

 

Work in process

 

 

27,406

 

 

 

22,965

 

Finished goods

 

 

47,703

 

 

 

61,915

 

Total inventories*

 

$

147,948

 

 

$

127,135

 

 

 

*

As of May 25, 2018 and August 25, 2017, 27% and 34%, respectively, of total inventories represented inventory held under the Company's supply chain services.

Prepaid Expenses and Other Current Assets

Prepaid expenses and other current assets consisted of the following (in thousands):

 

 

 

May 25,

 

 

August 25,

 

 

 

2018

 

 

2017

 

Prepaid ICMS taxes in Brazil*

 

$

5,084

 

 

$

 

Unbilled service receivables

 

 

3,131

 

 

 

4,280

 

Prepaid income taxes

 

 

1,587

 

 

 

1,023

 

Prepayment for VAT and other transaction taxes

 

 

1,485

 

 

 

1,890

 

Revolver debt fees

 

 

970

 

 

 

970

 

Other prepaid expenses and other current assets

 

 

7,962

 

 

 

5,952

 

Total prepaid expenses and other current assets

 

$

20,219

 

 

$

14,115

 

 

 

 

 

 

 

 

 

 

* See Note 1(i)

 

 

 

 

 

 

 

 

Property and Equipment, Net

Property and equipment consisted of the following (in thousands):

 

  

 

May 25,

 

 

August 25,

 

 

 

2018

 

 

2017

 

Office furniture, software, computers and equipment

 

$

18,376

 

 

$

17,134

 

Manufacturing equipment

 

 

99,031

 

 

 

96,318

 

Leasehold improvements*

 

 

23,505

 

 

 

24,302

 

 

 

 

140,912

 

 

 

137,754

 

Less accumulated depreciation and amortization

 

 

87,861

 

 

 

82,572

 

Net property and equipment

 

$

53,051

 

 

$

55,182

 

 

 

*

Includes Penang facility, which is situated on leased land.

15


 

Depreciation and amortization expense for property and equipment during the three and nine months ended May 25, 2018 was approximately $4.8 million and $14.9 million, respectively, and $4.8 million and $16.4 million, respectively, for the corresponding periods of fiscal 2017.

Other Noncurrent Assets

Other noncurrent assets consisted of the following (in thousands):

 

 

 

May 25,

 

 

August 25,

 

 

 

2018

 

 

2017

 

Prepaid ICMS taxes in Brazil*

 

$

7,667

 

 

$

12,253

 

Restricted cash

 

 

6,320

 

 

 

7,027

 

Deferred tax assets

 

 

2,387

 

 

 

2,098

 

Revolver debt fees

 

 

1,621

 

 

 

2,334

 

Tax receivable

 

 

1,319

 

 

 

1,223

 

Other

 

 

1,879

 

 

 

1,793

 

Total other noncurrent assets

 

$