sgh-10q_20190301.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 March 1, 2019

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 every Interactive Data File required to be submitted 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 such files).    Yes      No  

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a 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

 

  

  

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 March 1, 2019, the registrant had 22,927,251 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 Income Statements

4

 

Condensed Consolidated Statements of Comprehensive Income

5

 

Condensed Consolidated Statement of Equity

6

 

Condensed Consolidated Statements of Cash Flows

7

 

Notes to Unaudited Condensed Consolidated Financial Statements

8

Item 2.

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

37

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

41

Item 4.

Controls and Procedures

42

PART II.

OTHER INFORMATION

43

Item 1.

Legal Proceedings

43

Item 1A.

Risk Factors

43

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

43

Item 3.

Defaults Upon Senior Securities

43

Item 4.

Mine Safety Disclosures

43

Item 5.

Other Information

43

Item 6.

Exhibits

44

Signatures

45

 

 

1


 

Cautionary Note Regarding Forward-Looking Statements

This Quarterly Report on Form 10-Q includes a number of forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, 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 31, 2018, and in this report, and in Item 2 of Part I – “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and elsewhere in this report. 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.

 

 

2


 

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)

 

 

 

March 1,

 

 

August 31,

 

 

 

2019

 

 

2018

 

Assets

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

95,174

 

 

$

31,375

 

Accounts receivable, net of allowances of $156 and $225 as of March 1, 2019

   and August 31, 2018, respectively

 

 

326,470

 

 

 

237,212

 

Inventories

 

 

171,843

 

 

 

221,419

 

Prepaid expenses and other current assets

 

 

27,927

 

 

 

32,043

 

Total current assets

 

 

621,414

 

 

 

522,049

 

Property and equipment, net

 

 

66,860

 

 

 

56,615

 

Other noncurrent assets

 

 

17,702

 

 

 

22,449

 

Intangible assets, net

 

 

24,302

 

 

 

26,255

 

Goodwill

 

 

46,130

 

 

 

45,394

 

Total assets

 

$

776,408

 

 

$

672,762

 

Liabilities and Shareholders’ Equity

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

257,316

 

 

$

223,186

 

Accrued liabilities

 

 

52,008

 

 

 

45,190

 

Current portion of long-term debt

 

 

14,694

 

 

 

27,409

 

Total current liabilities

 

 

324,018

 

 

 

295,785

 

Long-term debt

 

 

194,537

 

 

 

184,190

 

Other long-term liabilities

 

 

7,563

 

 

 

5,659

 

Total liabilities

 

$

526,118

 

 

$

485,634

 

Commitments and contingencies (see Note 10)

 

 

 

 

 

 

 

 

Shareholders’ equity:

 

 

 

 

 

 

 

 

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

   outstanding 22,927 and 22,480 as of March 1, 2019 and August 31, 2018,

   respectively

 

 

691

 

 

 

678

 

Additional paid-in capital

 

 

262,603

 

 

 

250,191

 

Accumulated other comprehensive loss

 

 

(170,054

)

 

 

(175,995

)

Retained earnings

 

 

157,050

 

 

 

112,254

 

Total shareholders’ equity

 

 

250,290

 

 

 

187,128

 

Total liabilities and shareholders’ equity

 

$

776,408

 

 

$

672,762

 

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

 

3


 

SMART Global Holdings, Inc. and Subsidiaries

Condensed Consolidated Income Statements

(In thousands, except per share data)

(Unaudited)

 

  

 

Three Months Ended

 

 

Six Months Ended

 

 

 

March 1,

 

 

February 23,

 

 

March 1,

 

 

February 23,

 

 

 

2019

 

 

2018

 

 

2019

 

 

2018

 

Net sales (1)

 

$

304,063

 

 

$

313,965

 

 

$

697,942

 

 

$

579,374

 

Cost of sales

 

 

246,932

 

 

 

240,948

 

 

 

555,742

 

 

 

448,521

 

Gross profit

 

 

57,131

 

 

 

73,017

 

 

 

142,200

 

 

 

130,853

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

 

11,238

 

 

 

9,852

 

 

 

23,054

 

 

 

18,402

 

Selling, general, and administrative

 

 

23,442

 

 

 

18,087

 

 

 

48,896

 

 

 

35,905

 

Total operating expenses

 

 

34,680

 

 

 

27,939

 

 

 

71,950

 

 

 

54,307

 

Income from operations

 

 

22,451

 

 

 

45,078

 

 

 

70,250

 

 

 

76,546

 

Interest expense, net

 

 

(5,273

)

 

 

(4,230

)

 

 

(11,148

)

 

 

(8,829

)

Other income (expense), net

 

 

252

 

 

 

2,548

 

 

 

(3,077

)

 

 

(167

)

Total other expense

 

 

(5,021

)

 

 

(1,682

)

 

 

(14,225

)

 

 

(8,996

)

Income before income taxes

 

 

17,430

 

 

 

43,396

 

 

 

56,025

 

 

 

67,550

 

Provision for income taxes

 

 

4,644

 

 

 

6,602

 

 

 

12,263

 

 

 

9,751

 

Net income

 

$

12,786

 

 

$

36,794

 

 

$

43,762

 

 

$

57,799

 

Earnings per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.56

 

 

$

1.68

 

 

$

1.93

 

 

$

2.65

 

Diluted

 

$

0.55

 

 

$

1.60

 

 

$

1.88

 

 

$

2.53

 

Shares used in computing earnings per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

22,872

 

 

 

21,915

 

 

 

22,733

 

 

 

21,794

 

Diluted

 

 

23,359

 

 

 

23,038

 

 

 

23,314

 

 

 

22,877

 

 

(1)

Includes sales to affiliates of $32,917 and $68,214 in the three and six months ended March 1, 2019, respectively, and $35,102 and $61,071 for the same periods ended February 23, 2018, respectively (see Note 3).

See accompanying notes to unaudited condensed consolidated financial statements.

 

 

4


 

SMART Global Holdings, Inc. and Subsidiaries

Condensed Consolidated Statements of Comprehensive Income

(In thousands)

(Unaudited)

 

 

 

Three Months Ended

 

 

Six Months Ended

 

 

 

March 1,

 

 

February 23,

 

 

March 1,

 

 

February 23,

 

 

 

2019

 

 

2018

 

 

2019

 

 

2018

 

Net income

 

$

12,786

 

 

$

36,794

 

 

$

43,762

 

 

$

57,799

 

Other comprehensive income (loss):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation

 

 

2,839

 

 

 

6,411

 

 

 

5,941

 

 

 

(766

)

Comprehensive income

 

$

15,625

 

 

$

43,205

 

 

$

49,703

 

 

$

57,033

 

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

5


 

SMART Global Holdings, Inc. and Subsidiaries

Condensed Consolidated Statement of Equity

(In thousands)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

Retained

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Additional

 

 

other

 

 

earnings

 

 

Total

 

 

 

Ordinary shares

 

 

paid-in

 

 

comprehensive

 

 

(accumulated

 

 

shareholders’

 

 

 

Shares

 

 

Amount

 

 

capital

 

 

loss

 

 

deficit)

 

 

equity

 

Balances as of August 25, 2017

 

 

21,666

 

 

$

653

 

 

$

232,162

 

 

$

(143,210

)

 

$

(7,209

)

 

$

82,396

 

Stock-based compensation expense

 

 

 

 

 

 

 

 

1,605

 

 

 

 

 

 

 

 

 

1,605

 

Issuance of ordinary shares from exercises

 

 

81

 

 

 

3

 

 

 

919

 

 

 

 

 

 

 

 

 

922

 

Issuance of ordinary shares from release of

   restricted stock units

 

 

4

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation

 

 

 

 

 

 

 

 

 

 

 

(7,177

)

 

 

 

 

 

(7,177

)

Net income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

21,005

 

 

 

21,005

 

Balance as of November 24, 2017

 

 

21,751

 

 

 

656

 

 

 

234,686

 

 

 

(150,387

)

 

 

13,796

 

 

 

98,751

 

Stock-based compensation expense

 

 

 

 

 

 

 

 

1,697

 

 

 

 

 

 

 

 

 

1,697

 

Issuance of ordinary shares from exercises

 

 

300

 

 

 

9

 

 

 

3,246

 

 

 

 

 

 

 

 

 

3,255

 

Issuance of ordinary shares from release of

   restricted stock units

 

 

55

 

 

 

1

 

 

 

(1

)

 

 

 

 

 

 

 

 

 

Foreign currency translation

 

 

 

 

 

 

 

 

 

 

 

6,411

 

 

 

 

 

 

6,411

 

Net income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

36,794

 

 

 

36,794

 

Balance as of February 23, 2018

 

 

22,106

 

 

$

666

 

 

$

239,628

 

 

$

(143,976

)

 

$

50,590

 

 

$

146,908

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Additional

 

 

other

 

 

 

 

 

 

Total

 

 

 

Ordinary shares

 

 

paid-in

 

 

comprehensive

 

 

Retained

 

 

shareholders’

 

 

 

Shares

 

 

Amount

 

 

capital

 

 

loss

 

 

earnings

 

 

equity

 

Balances as of August 31, 2018

 

 

22,480

 

 

$

678

 

 

$

250,191

 

 

$

(175,995

)

 

$

112,254

 

 

$

187,128

 

Stock-based compensation expense

 

 

 

 

 

 

 

 

4,055

 

 

 

 

 

 

 

 

 

4,055

 

Issuance of ordinary shares from exercises

 

 

210

 

 

 

6

 

 

 

2,396

 

 

 

 

 

 

 

 

 

2,402

 

Issuance of ordinary shares from release of

   restricted stock units

 

 

55

 

 

 

2

 

 

 

(2

)

 

 

 

 

 

 

 

 

 

Issuance of ordinary shares from

   employee share purchase plan

 

 

36

 

 

 

1

 

 

 

967

 

 

 

 

 

 

 

 

 

968

 

Effect of adopting ASC 606

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1,034

 

 

 

1,034

 

Foreign currency translation

 

 

 

 

 

 

 

 

 

 

 

3,102

 

 

 

 

 

 

3,102

 

Net income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

30,976

 

 

 

30,976

 

Balance as of November 30, 2018

 

 

22,781

 

 

 

687

 

 

 

257,607

 

 

 

(172,893

)

 

 

144,264

 

 

 

229,665

 

Stock-based compensation expense

 

 

 

 

 

 

 

 

4,148

 

 

 

 

 

 

 

 

 

4,148

 

Issuance of ordinary shares from exercises

 

 

87

 

 

 

3

 

 

 

1,068

 

 

 

 

 

 

 

 

 

1,071

 

Issuance of ordinary shares from release of

   restricted stock units

 

 

67

 

 

 

1

 

 

 

(1

)

 

 

 

 

 

 

 

 

 

Withholding tax on restricted stock units

 

 

(8

)

 

 

 

 

 

(219

)

 

 

 

 

 

 

 

 

(219

)

Foreign currency translation

 

 

 

 

 

 

 

 

 

 

 

2,839

 

 

 

 

 

 

2,839

 

Net income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

12,786

 

 

 

12,786

 

Balance as of March 1, 2019

 

 

22,927

 

 

$

691

 

 

$

262,603

 

 

$

(170,054

)

 

$

157,050

 

 

$

250,290

 

 

See accompanying notes to unaudited condensed consolidated financial statements.

6


 

SMART Global Holdings, Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows

(In thousands)

(Unaudited)

 

 

 

Six Months Ended

 

 

 

March 1,

 

 

February 23,

 

 

 

2019

 

 

2018

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

Net income

 

$

43,762

 

 

$

57,799

 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

13,335

 

 

 

12,628

 

Share-based compensation

 

 

8,203

 

 

 

3,302

 

Provision for doubtful accounts receivable and sales returns

 

 

(70

)

 

 

67

 

Deferred income tax benefit

 

 

(247

)

 

 

(954

)

(Gain) loss on disposal of property and equipment

 

 

(1

)

 

 

244

 

Amortization of debt discounts and issuance costs

 

 

1,379

 

 

 

1,451

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Accounts receivable

 

 

(83,772

)

 

 

(40,907

)

Inventories

 

 

47,660

 

 

 

(21,556

)

Prepaid expenses and other assets

 

 

4,242

 

 

 

1,691

 

Accounts payable

 

 

31,557

 

 

 

37,347

 

Accrued expenses and other liabilities

 

 

8,358

 

 

 

(2,158

)

Net cash provided by operating activities

 

 

74,406

 

 

 

48,954

 

Cash flows from investing activities:

 

 

 

 

 

 

 

 

Capital expenditures and deposits on equipment

 

 

(19,616

)

 

 

(10,457

)

Proceeds from sale of property and equipment

 

 

53

 

 

 

66

 

Acquisition of business, net of cash acquired

 

 

(148

)

 

 

 

Net cash used in investing activities

 

 

(19,711

)

 

 

(10,391

)

Cash flows from financing activities:

 

 

 

 

 

 

 

 

Fees paid for revolving line of credit financing

 

 

 

 

 

(768

)

Long-term debt payment

 

 

(3,369

)

 

 

(12,309

)

Payment of costs related to initial public offering (IPO)

 

 

 

 

 

(1,591

)

Proceeds from borrowings under revolving line of credit

 

 

168,000

 

 

 

208,500

 

Repayments of borrowings under revolving line of credit

 

 

(168,000

)

 

 

(208,500

)

Proceeds from issuance of ordinary shares from share option exercises

 

 

3,473

 

 

 

4,177

 

Proceeds from issuance of ordinary shares from employee share purchase plan

 

 

968

 

 

 

 

Withholding tax on restricted stock units

 

 

(219

)

 

 

 

Net cash provided by (used in) financing activities

 

 

853

 

 

 

(10,491

)

Effect of exchange rate changes on cash, cash equivalents and restricted cash *

 

 

2,392

 

 

 

1,237

 

Net increase in cash, cash equivalents and restricted cash *

 

 

57,940

 

 

 

29,309

 

Cash, cash equivalents and restricted cash at beginning of period *

 

 

37,234

 

 

 

29,463

 

Cash, cash equivalents and restricted cash at end of period *

 

$

95,174

 

 

$

58,772

 

Supplemental disclosures of cash flow information:

 

 

 

 

 

 

 

 

Cash paid during the period:

 

 

 

 

 

 

 

 

Cash paid for interest

 

$

9,958

 

 

$

7,481

 

Cash paid for income taxes, net of refunds

 

 

7,739

 

 

 

9,835

 

Noncash activities information:

 

 

 

 

 

 

 

 

Capital expenditures included in accounts payable at period end

 

 

935

 

 

 

381

 

 

 

 

 

 

 

 

 

 

* Cash balance was adjusted to include restricted cash upon adoption of ASU 2016-18 in fiscal 2019.

 

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

7


 

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 data compute and storage products and solutions sold primarily to original equipment manufacturers (OEMs) as well as end customers for enterprise applications. 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. headquarters 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 six months ended March 1, 2019 and February 23, 2018 were both 26-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

The Company’s revenues include products and services. The Company’s product revenues are predominantly derived from the sale of memory modules, Flash memory cards and storage products, which the Company designs and manufactures. The Company’s service revenues are derived from procurement, logistics, inventory management, temporary warehousing, kitting and packaging services. Also, a small portion of the Company’s product sales include extended warranty and on-site services, subscriptions to the Company’s high performance computing environment, professional services, software and related support.

8


 

The Company determines revenue recognition through the following steps: (1) identification of the contract with a customer; (2) identification of the performance obligations in the contract; (3) determination of the transaction price; (4) allocation of the transaction price to the performance obligations in the contract; and (5) recognition of revenue when, or as, a performance obligation is satisfied.

The Company’s contracts are executed through a combination of written agreements along with purchase orders with all customers including certain general terms and conditions. Generally, purchase orders entail products, quantities and prices, which define the performance obligations of each party and are approved and accepted by the Company. The Company’s contracts with customers do not include extended payment terms. Payment terms vary by contract type and type of customer and generally range from 30 to 45 days from invoice. Additionally, taxes assessed by a governmental authority that are both imposed on and concurrent with a specific revenue-producing transaction, that are collected by the Company from a customer and deposited with the relevant government authority, are excluded from revenue.

The transaction price is determined based on the consideration to which the Company will be entitled in exchange for transferring goods or services to the customer adjusted for estimated variable consideration.  Variable consideration may include discounts, rights of return, refunds, and other similar obligations. The Company allocates the transaction price to each distinct product and service based on its relative standalone selling price. The standalone selling price for products primarily involves the cost to produce the deliverable plus the anticipated margin and for services is estimated based on the Company’s approved list price.

In the normal course of business, the Company does not accept product returns unless the items are defective as manufactured. The Company establishes provisions for estimated returns and warranties. In addition, the Company does not typically provide customers with the right to a refund and does not transact for noncash consideration.

Standard Products

The Company’s main performance obligations are to deliver the requested goods to customers according to the agreed-upon shipping terms. The Company recognizes revenue when control transfers to the customer (i.e., when the Company’s performance obligation is satisfied). The Company invoices the customer and recognizes revenues for such delivery when control transfers based on shipping terms.

Customized Products

For customized product sales with terms that require the customer to purchase 100% of all parts built to fulfill the customers forecast, the Company recognizes revenue when control of the underlying assets passes to the customer, as the customer is able to both direct the use of, and obtain substantially all of the remaining benefit from the assets; the customer has the significant risks and rewards associated with ownership of the assets; and the Company has a present right to payment. For these sales, control passes when the Company has made these products available to the customer and under the terms of the agreement cannot repurpose them without the customer’s express consent.  Accordingly, the Company will recognize revenue at the point in time when products made to the customer’s order or forecast are completed and made available to the customer.

Non-cancellable nonrefundable, or NCNR, customized product sales are recognized over time on a cost incurred basis. The customer obtains control and benefits from the services as they are performed over the period based on the cost input measure in the production process for the NCNR customized product. The terms within the NCNR sales orders provide the Company with a legally enforceable right to receive payment including a reasonable profit margin upon customer cancellation for performance completed to date. Accordingly, the Company recognizes revenue over time as customized products listed within the NCNR orders are completed.

Computing Products and Services

A small portion of the Company’s product sales includes extended warranty and on-site services, subscriptions to the Company’s high performance computing environment, professional consulting services including installation and other services, and hardware and software related support. Each contract may contain multiple performance obligations, which requires the transaction price to be allocated to each performance obligation. The Company allocates the consideration to each performance obligation based on the relative selling price. The Company uses best-estimated selling price, determined as the best estimate of the price at which the Company would transact if it sold the deliverable regularly on a stand-alone basis.  

For services provided to the customers over a period of time, such revenues are recognized over time in line with when the customer receives and consumes the benefit of the services. Extended warranty and on-site services, hardware support, software support, and subscription revenue for access to the Company’s high performance computing environment is deferred and recognized ratably over the contractual period as the Company transfers control as it satisfies its performance obligations over time as the services are rendered.  Subscription revenue for certain customers is recognized based on the contractual fee to use the high-performance-computing environment.  Professional consulting services revenue is recognized as the service is performed and the customer obtains control and benefits from the services as they are performed over the period.  The methods of recognizing revenue for each of these products and services were selected because they reflect a faithful depiction of the transfer of control.

9


 

Agency Services

The Company has service performance obligations for agency related services such as procurement, logistics, inventory management, temporary warehousing, kitting and packaging services for certain agency basis customers. The agency services are also known as supply chain services and the performance obligations for these services consist of customized, integrated supply chain services management to assist customers in the planning, execution and overall management of the procurement processes.

For these customers that are accounted for on an agency basis, 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 has separate agent performance obligations as follows: (a) procurement, logistics, and inventory management, (b) temporary warehousing, and (c) 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 (i.e. fee as a percentage of the associated material being procured, warehoused, kitted or packaged). The Company recognizes revenue for procurement, logistics and inventory management upon the completion of the services or performance obligation, typically upon shipment of the product, as the criteria for over time recognition is not met.  For temporary warehousing, kitting and packaging services, revenue is recognized over time, but the period of performance is typically very short in duration. There are no obligations subsequent to shipment of the product under the agency arrangements.

Contract Costs

As a practical expedient, the Company recognizes the incremental costs of obtaining a contract, specifically commission expenses that have an amortization period of less than twelve months, as an expense when incurred. Additionally, the Company has adopted an accounting policy to recognize shipping costs that occur after control transfers, if any, to the customer as a fulfillment activity. The Company records shipping and handling costs related to revenue transactions within cost of sales as a period cost.

Gross Billings and Net Sales

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

 

 

Six Months Ended

 

 

 

March 1,

 

 

February 23,

 

 

March 1,

 

 

February 23,

 

 

 

2019

 

 

2018 (2)

 

 

2019

 

 

2018 (2)

 

Service revenue, net

 

$

11,013

 

 

$

9,634

 

 

$

25,651

 

 

$

19,476

 

Cost of purchased materials - service (1)

 

 

279,910

 

 

 

228,217

 

 

 

596,533

 

 

 

456,785

 

Gross billings for services

 

 

290,923

 

 

 

237,851

 

 

 

622,184

 

 

 

476,261

 

Product net sales

 

 

293,050

 

 

 

304,331

 

 

 

672,291

 

 

 

559,898

 

Gross billings to customers

 

$

583,973

 

 

$

542,182

 

 

$

1,294,475

 

 

$

1,036,159

 

Product net sales

 

$

293,050

 

 

$

304,331

 

 

$

672,291

 

 

$

559,898

 

Service revenue, net

 

 

11,013

 

 

 

9,634

 

 

 

25,651

 

 

 

19,476

 

Net sales

 

$

304,063

 

 

$

313,965

 

 

$

697,942

 

 

$

579,374

 

 

 

(1)

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

 

(2)

Amounts for fiscal 2018 are accounted for under ASC 605 (refer to Note 1(u)).

 

10


 

Contract Balances

The Company records accounts receivable when it has an unconditional right to consideration. Contract assets represent amounts recognized as revenue for which the Company does not have the unconditional right to consideration. All contract assets represent amounts related to invoices expected to be issued during the next 12-month period and are recorded as prepaid expenses and other current assets. Contract liabilities are recorded when cash payments are received or due in advance of performance. Contract liabilities consist of advance payments and deferred revenue, where the Company has unsatisfied performance obligations. Contract liabilities are classified as deferred revenue and are allocated between accrued liabilities and other long-term liabilities of our condensed consolidated balance sheet based on the timing of when the customer takes control of the asset or receives the benefit of the service. Payment terms vary by customer. The time between invoicing and when payment is due is not significant. Changes in the accounts receivable, contract assets and the deferred revenues balances during the six months ended March 1, 2019 are as follows (in thousands):

 

 

 

March 1,

 

 

September 1,

 

 

 

 

 

 

 

2019

 

 

2018

 

 

$ Change

 

Accounts receivable

 

$

326,470

 

 

$

240,098

 

 

$

86,372

 

Contract assets

 

$

776

 

 

$

1,136

 

 

$

(360

)

Deferred revenue

 

$

15,214

 

 

$

11,750

 

 

$

3,464

 

 

The decrease in contract assets from $1.1 million as of September 1, 2018 to $0.8 million as of March 1, 2019 was primarily driven by an increase in billing of amounts that had been recognized as revenue in prior periods and recorded as contract assets because they had not been billed. The increase in deferred revenue from $11.8 million to $15.2 million was due to additional funds collected for hosting and support contracts signed during the quarter in which billing occurred in advance of revenue recognition. During the six months ended March 1, 2019, $3.7 million of revenue recognized was included in the deferred revenue balance at the beginning of the period, which was offset by additional deferrals during the period.

Disaggregation of Revenue

The Company disaggregates revenue by source of revenue and geography; no other level of disaggregation is required considering the type of products, customer, markets, contracts, duration of contracts, timing of transfer of control, and sales channels. The revenue by geography is disclosed in Note 11, and revenue by source is as follows (in thousands):

 

 

 

Three Months Ended

 

 

Six Months Ended

 

 

 

March 1,

 

 

February 23,

 

 

March 1,

 

 

February 23,

 

 

 

2019

 

 

2018

 

 

2019

 

 

2018

 

Brazil

 

$

147,111

 

 

$

208,633

 

 

$

346,390

 

 

$

366,483

 

Specialty Memory

 

 

115,608

 

 

 

105,332

 

 

 

255,557