Press Release

SMART Global Holdings Reports Third Quarter Fiscal 2018 Financial Results

NEWARK, Calif., June 21, 2018 (GLOBE NEWSWIRE) -- SMART Global Holdings, Inc. (“SMART”) (NASDAQ:SGH), parent company of SMART Modular Technologies, Inc., today reported financial results for the third quarter of fiscal 2018 ended May 25, 2018.

Third Quarter Fiscal 2018 Highlights:

  • Net sales of $335.5 million, 62% higher than comparable quarter of prior year
  • GAAP operating income of $48.7 million
  • GAAP net income of $31.9 million
  • Adjusted EBITDA of $51.5 million
  • GAAP diluted earnings per share (EPS) of $1.37
  • Non-GAAP diluted EPS of $1.84 (excluding FX losses)

“I am pleased to report another strong sales quarter with net revenues 62 percent higher than the comparable period a year ago.  Both our Specialty and Brazil businesses performed very well.  Additionally, as announced on June 11, we have embarked upon the first step in our strategy to broaden our offerings with the acquisition of Penguin Computing,” commented Ajay Shah, Chairman and Chief Executive Officer of SMART Global Holdings.  “Penguin is the cornerstone of our new business unit, SMART Specialty Compute & Storage Solutions (SCSS), and greatly expands the markets and technologies where we can participate into areas requiring specialized computing platforms in artificial intelligence, machine learning, advanced modeling and high performance computing.  We expect to leverage our proven system design and integration capabilities and create a more diversified business.”

Jack Pacheco, Chief Operating and Financial Officer, added, “The strength in net sales in the third fiscal quarter was due to continued strength in our Specialty Memory business and our increased penetration into the Brazilian market.  That said, due to the recent depreciation of the Brazilian Real, we saw a $0.27 per share negative impact to our GAAP earnings due to foreign currency losses.  The Specialty Memory business and our Brazil memory business continue to be markets where we have a unique competitive advantage, a proven business model, and growth potential in multiple sectors.”

                   
Quarterly Financial Results GAAP (1)   Non-GAAP (2)    
(In millions, except per share amounts) Q3 FY18 Q2 FY18 Q3 FY17   Q3 FY18 Q2 FY18 Q3 FY17    
Net sales $ 335.5 $ 314.0 $ 207.0   $ 335.5 $ 314.0 $ 207.0    
Gross profit $ 78.1 $ 73.0 $ 47.4   $ 78.5 $ 73.2 $ 47.6    
Operating income $ 48.7 $ 45.1 $ 20.4   $ 53.8 $ 48.5 $ 24.8    
Net income $ 31.9 $ 36.8 $ 8.0   $ 43.0 $ 37.7 $ 14.6    
Diluted earnings per share (EPS) (3) $ 1.37 $ 1.60 $ 0.50   $ 1.84 $ 1.64 $ 0.92    

(1)  GAAP represents U.S. Generally Accepted Accounting Principles.
(2)  Please refer to the “Non-GAAP Information” section and the "Reconciliation of Non-GAAP Financial Measures" table below for further detail on the non-GAAP financial reporting referenced herein and a reconciliation of such measures to our nearest GAAP measures.
(3)  Beginning in the third quarter of fiscal 2018, we will exclude foreign currency gains/losses from our non-GAAP diluted EPS as we believe this non-GAAP financial measure is a more relevant indicator of our core operating results. This change is reflected for all the periods presented in this release.       

Business Outlook
The following statements are based upon management's current expectations for the fourth quarter of fiscal 2018 ending August 31, 2018 and include the results of Penguin Computing from the acquisition date of June 8, 2018. As the purchase accounting for this acquisition is still being evaluated, the GAAP forecast does not incorporate any related purchase price adjustments which may affect actual results. These statements are forward-looking and actual results may differ materially. SMART undertakes no obligation to update these statements.

             
    Net Sales - GAAP / Non-GAAP $360 to $380 million    
    Gross Margin - GAAP / Non-GAAP 22% to 23%    
    Diluted EPS - GAAP $1.41 to $1.50    
           
    Share-based compensation per share $0.12    
    Intangible amortization per share $0.05    
    Acquisition costs per share $0.04    
           
    Diluted EPS - Non-GAAP $1.62 to $1.71    
           
    Expected diluted share count 23.4 million    
             

Conference Call Details
SMART will host a conference call today for analysts and investors at 1:30pm Pacific Time, 4:30pm Eastern Time. Dial-in US toll free +1-866-487-6452 using access code 6781298.

A replay of the conference call will be available for one week following today’s call through the Events section of the SMART website at www.smartgh.com or by calling US toll free +1-855-859-2056; Passcode: 6781298.

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

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

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

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

About SMART Global Holdings
The SMART family of companies are global leaders in specialty memory, storage and hybrid solutions serving the electronics industry with standard and custom products for over 25 years. SMART delivers components, modules and solutions to a broad customer base, including OEMs in computing, networking, communications, storage, mobile and industrial markets. With the addition of Penguin Computing and the creation of a new business unit, SMART Specialty Compute & Storage Solutions (SCSS), SMART has expanded its serviceable markets into areas requiring specialized computing platforms in artificial intelligence and machine learning, advanced modeling and high performance computing. Customers rely on SMART as a strategic supplier with custom designs, product quality, technical support, a global footprint, and the ability to provide locally manufactured products in multiple geographies. See www.smartgh.com, www.smartm.com, www.smarth.com or www.smartsscs.com for more information.



SMART Global Holdings, Inc.  
and Subsidiaries  
Consolidated Statements of Income  
(In thousands, except per share data)  
                               
            Three Months Ended   Nine Months Ended  
             May 25,
2018 
   February 23,
2018
 
   May 26,
2017 
   May 25,
2018 
   May 26,
2017 
 
Net sales:                          
  Brazil DRAM       $ 71,157     $ 67,322     $ 38,028     $ 190,438     $ 86,051    
  Brazil Mobile Memory         161,585       141,311       71,216       408,787       177,359    
  Specialty Memory         102,735       105,332       97,730       315,626       274,862    
    Total net sales         335,477       313,965       206,974       914,851       538,272    
Cost of sales (1)         257,423       240,948       159,599       705,944       424,030    
  Gross profit         78,054       73,017       47,375       208,907       114,242    
Operating expenses:                          
  Research and development (1) (2)         9,763       9,852       8,797       28,165       28,442    
  Selling, general and administrative (1) (2)         19,597       18,087       17,193       55,502       49,037    
  Management advisory fees                     1,000             3,000    
  Restructuring                                 457    
    Total operating expenses         29,360       27,939       26,990       83,667       80,936    
    Income from operations         48,694       45,078       20,385       125,240       33,306    
Other income (expense):                          
  Interest expense, net         (4,098 )     (4,230 )     (8,294 )     (12,927 )     (23,072 )  
  Other income (expense), net         (7,145 )     2,548       (762 )     (7,312 )     (1,664 )  
    Total other expense         (11,243 )     (1,682 )     (9,056 )     (20,239 )     (24,736 )  
    Income before income taxes         37,451       43,396       11,329       105,001       8,570    
Provision for income taxes         5,505       6,602       3,371       15,256       6,156    
    Net income       $ 31,946     $ 36,794     $ 7,958     $ 89,745     $ 2,414    
                               
Earnings per share:                          
  Basic       $ 1.44     $ 1.68     $ 0.57     $ 4.09     $ 0.17    
  Diluted       $ 1.37     $ 1.60     $ 0.50     $ 3.90     $ 0.16    
                               
Shares used in computing earnings per share:                          
  Basic         22,206       21,915       13,986       21,932       13,909    
  Diluted         23,306       23,038       15,955       23,020       15,230    
                               
(1) Includes share-based compensation expense as follows:                      
  Cost of sales       $ 414     $ 227     $ 176     $ 859     $ 444    
  Research and development         325       288       (22 )     887       423    
  Selling, general and administrative         2,558       1,182       1,235       4,853       2,666    
    Total stock-based compensation expense       $ 3,297     $ 1,697     $ 1,389     $ 6,599     $ 3,533    
                               
(2) Includes amortization of intangible assets expense as follows:                  
  Research and development       $ 245     $ 245     $ 1,224     $ 735     $ 3,672    
  Selling, general and administrative         976       993       1,774       2,992       5,296    
    Total amortization expense       $ 1,221     $ 1,238     $ 2,998     $ 3,727     $ 8,968    



SMART Global Holdings, Inc.
and Subsidiaries
Reconciliation of Non-GAAP Financial Measures to GAAP Results
(In thousands, except per share data)
                             
            Three Months Ended   Nine Months Ended
             May 25,
2018 
   February 23,
2018
 
   May 26,
2017 
   May 25,
2018 
   May 26,
2017 
Reconciliation of gross profit:                        
GAAP gross profit       $ 78,054     $ 73,017     $ 47,375     $ 208,907     $ 114,242  
  GAAP gross margin         23.3 %     23.3 %     22.9 %     22.8 %     21.2 %
                             
Add: Share-based compensation included in cost of sales         414       227       176       859       444  
                             
Non-GAAP gross profit       $ 78,468     $ 73,244     $ 47,551     $ 209,766     $ 114,686  
  Non-GAAP gross margin         23.4 %     23.3 %     23.0 %     22.9 %     21.3 %
                             
Reconciliation of operating expenses:                        
GAAP operating expenses       $ 29,360     $ 27,939     $ 26,990     $ 83,667     $ 80,936  
                             
Less: Share-based compensation expense included in opex                        
  Research and development         325       288       (22 )     887       423  
  Selling, general and administrative         2,558       1,182       1,235       4,853       2,666  
    Total         2,883       1,470       1,213       5,740       3,089  
                             
Less: Amortization of intangible assets included in opex                        
  Research and development         245       245       1,224       735       3,672  
  Selling, general and administrative         976       993       1,774       2,992       5,296  
    Total         1,221       1,238       2,998       3,727       8,968  
                             
Less: S-1 related costs               513             813        
Less: Acquisition costs         591                   591        
                             
Non-GAAP operating expenses       $ 24,665     $ 24,718     $ 22,779     $ 72,796     $ 68,879  
                             
Reconciliation of income from operations:                        
GAAP income from operations       $ 48,694     $ 45,078     $ 20,385     $ 125,240     $ 33,306  
  GAAP operating margin         14.5 %     14.4 %     9.8 %     13.7 %     6.2 %
                             
Add: Share-based compensation expense         3,297       1,697       1,389       6,599       3,533  
Add: Amortization of intangible assets         1,221       1,238       2,998       3,727       8,968  
Add: S-1 related costs               513             813        
Add: Acquisition costs         591                   591        
                             
Non-GAAP income from operations       $ 53,803     $ 48,526     $ 24,772     $ 136,970     $ 45,807  
  Non-GAAP operating margin         16.0 %     15.5 %     12.0 %     15.0 %     8.5 %
                             
Reconciliation of income before income taxes:                        
GAAP income before income taxes       $ 37,451     $ 43,396     $ 11,329     $ 105,001     $ 8,570  
Add: Share-based compensation expense         3,297       1,697       1,389       6,599       3,533  
Add: Amortization of intangible assets         1,221       1,238       2,998       3,727       8,968  
Add: S-1 related costs               513             813        
Add: Acquisition costs         591                   591        
Less: Amortization of debt discount related to warrants                     1,733             3,913  
Less: Loss on extinguishment of LT debt                                 1,385  
Add: Foreign currency (gains) losses         6,932       (2,415 )     1,009       7,259       748  
                             
Non-GAAP income before income taxes       $ 49,492     $ 44,429     $ 18,458     $ 123,990     $ 27,117  
                             
Reconciliation of provision for income taxes:                        
GAAP provision for income taxes       $ 5,505     $ 6,602     $ 3,371     $ 15,256     $ 6,156  
  GAAP effective tax rate         14.7 %     15.2 %     29.8 %     14.5 %     71.8 %
                             
Tax effect of adjustments to GAAP results         (1,025 )     (96 )     (477 )     (1,744 )     (1,153 )
                             
Non-GAAP provision for income taxes       $ 6,530     $ 6,698     $ 3,848     $ 17,000     $ 7,309  
  Non-GAAP effective tax rate         13.2 %     15.1 %     20.8 %     13.7 %     27.0 %



SMART Global Holdings, Inc.
and Subsidiaries
Reconciliation of Non-GAAP Financial Measures to GAAP Results (continued)
(In thousands, except per share data)
                             
            Three Months Ended   Nine Months Ended
             May 25,
2018 
   February 23,
2018
 
   May 26,
2017 
   May 25,
2018 
   May 26,
2017 
Reconciliation of net income and earnings per share (diluted):                     
GAAP net income       $ 31,946     $ 36,794     $ 7,958     $ 89,745     $ 2,414  
                             
Adjustments to GAAP net income:                        
  Share-based compensation         3,297       1,697       1,389       6,599       3,533  
  Amortization of intangible assets         1,221       1,238       2,998       3,727       8,968  
  S-1 related costs               513             813        
  Acquisition costs         591                   591        
  Amortization of debt discount related to warrants                     1,733             3,913  
  Loss on extinguishment of LT debt                                 1,385  
  Foreign currency (gains) losses         6,932       (2,415 )     1,009       7,259       748  
  Tax effect of items excluded from non-GAAP results         (1,025 )     (96 )     (477 )     (1,744 )     (1,153 )
                             
Non-GAAP net income       $ 42,962     $ 37,731     $ 14,610     $ 106,990     $ 19,808  
                             
Shares used in computing earnings per share (diluted)         23,306       23,038       15,955       23,020       15,230  
                             
Non-GAAP earnings per share (diluted)       $    1.84     $    1.64     $    0.92     $    4.65     $    1.30  



SMART Global Holdings, Inc.
 
and Subsidiaries  
Reconciliation of GAAP Net Income (loss) to Adjusted EBITDA  
(In thousands)  
                           
        Three Months Ended   Nine Months Ended  
         May 25,
2018 
   February 23,
2018
 
   May 26,
2017 
   May 25,
2018 
   May 26,
2017 
 
                           
GAAP net income   $ 31,946   $ 36,794   $ 7,958   $ 89,745   $ 2,414  
                           
  Share-based compensation expense     3,297     1,697     1,389     6,599     3,533  
  Amortization of intangible assets     1,221     1,238     2,998     3,727     8,968  
  Interest expense, net     4,098     4,230     8,294     12,927     23,072  
  Provision for income tax     5,505     6,602     3,371     15,256     6,156  
  Depreciation     4,806     5,120     4,848     14,928     16,431  
  S-1 related costs         513         813      
  Acquisition costs     591             591      
  Management advisory fees             1,000         3,000  
  Debt extension costs*                     1,745  
  Loss on extinguishment of LT debt **                     1,385  
  Restructuring                     457  
  Special retention bonuses                     25  
  Investment advisory fees                     540  
  Obsolete inventory related to restructuring                   372  
                           
  Adjusted EBITDA   $ 51,464   $ 56,194   $ 29,858   $ 144,586   $ 68,098  
                           
  * Debt extension costs consist of $1.7 million associated with the amendment of our senior secured term loan and revolving credit facility in November 2016.
  ** Loss on extinguishment of long-term debt consists of $1.4 million loss on a February 2017 extinguishment.          



SMART Global Holdings, Inc.
 
and Subsidiaries  
Consolidated Balance Sheets  
(In thousands)  
                         
                May 25,    August 25,    
                2018
  2017
   
Assets            
Current assets:              
  Cash and cash equivalents   $ 64,495     $ 22,436      
  Accounts receivable, net     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      
Shareholders’ equity:            
  Ordinary shares     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      



SMART Global Holdings, Inc.
and Subsidiaries
Consolidated Statements of Cash Flows
(In thousands)
                                 
                Three Months Ended   Nine Months Ended
                May 25,
2018
  February 23,
2018
  May 26,
2017
   May 25,
2018 
   May 26,
2017 
Cash flows from operating activities:                    
  Net income     $ 31,946     $ 36,794     $ 7,958     $ 89,745     $ 2,414  
  Adjustments to reconcile net income to net cash                    
    provided by (used in) operating activities:                    
      Depreciation and amortization     6,028       6,358       7,846       18,656       25,399  
      Share-based compensation     3,297       1,697       1,389       6,599       3,533  
      Provision for doubtful accounts receivable and sales returns     (80 )     39       205       (13 )     31  
      Deferred income tax benefit     (422 )     (734 )     (84 )     (1,376 )     (1,195 )
      (Gain) loss on disposal of property and equipment     (14 )     244             230       129  
      Write off of long-term asset     250                   250        
      Extinguishment loss on long-term debt                             1,386  
      Amortization of debt discounts and issuance costs     714       722       2,480       2,165       6,424  
      Changes in operating assets and liabilities:                    
        Accounts receivable     (45,799 )     14,894       (36,891 )     (86,706 )     (33,516 )
        Inventories     (6,384 )     (17,810 )     (4,833 )     (27,940 )     (31,184 )
        Prepaid expenses and other assets     (5,186 )     (67 )     (735 )     (3,495 )     741  
        Accounts payable     46,532       (10,145 )     27,525       83,879       11,799  
        Accrued expenses and other liabilities     (2,545 )     2,705       3,846       (4,703 )     7,097  
          Net cash provided by (used in) operating activities     28,337       34,697       8,706       77,291       (6,942 )
Cash flows from investing activities:                    
  Capital expenditures and deposits on equipment     (7,794 )     (4,418 )     (3,784 )     (18,251 )     (11,179 )
  Proceeds from sale of property and equipment     35       66       425       101       467  
          Net cash used in investing activities     (7,759 )     (4,352 )     (3,359 )     (18,150 )     (10,712 )
Cash flows from financing activities:                    
  Long-term debt payment     (6,093 )     (6,125 )     (5,954 )     (18,402 )     (17,689 )
  Payment for extinguishment of long-term debt                             (938 )
  Fees paid for revolving line of credit refinancing           (469 )           (768 )      
  Payment of costs related to initial public offering           (302 )     (200 )     (1,591 )     (200 )
  Proceeds from borrowings under revolving line of credit     69,000       103,000       123,000       277,500       338,250  
  Repayments of borrowings under revolving line of credit     (69,000 )     (103,000 )     (123,000 )     (277,500 )     (338,250 )
  Proceeds from issuance of ordinary shares from share option exercises   1,993       3,638       348       6,170       348  
          Net cash used in financing activities     (4,100 )     (3,258 )     (5,806 )     (14,591 )     (18,479 )
  Effect of exchange rate changes on cash and cash equivalents     (3,799 )     1,226       (541 )     (2,491 )     (160 )
          Net increase (decrease) in cash and cash equivalents     12,679       28,313       (1,000 )     42,059       (36,293 )
Cash and cash equivalents at beginning of period     51,816       23,503       23,341       22,436       58,634  
Cash and cash equivalents at end of period   $ 64,495     $ 51,816     $ 22,341     $ 64,495     $ 22,341  


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

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