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SMART Global Holdings Reports Third Quarter Fiscal 2019 Financial Results

June 27, 2019 4:05 PM

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

Financial Highlights Q3FY19:

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

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

Quarterly Financial ResultsGAAP (1) Non-GAAP (2)
(In millions, except per share amounts)Q3 FY19Q2 FY19Q3 FY18 Q3 FY19Q2 FY19Q3 FY18
Net sales$235.7$304.1$335.5 $235.7$304.1$335.5
Gross profit$43.0$57.1$78.1 $43.7$57.8$78.5
Operating income$7.4$22.5$48.7 $13.2$27.7$53.8
Net income$1.9$12.8$31.9 $7.9$18.0$43.0
Diluted earnings per share (EPS)$0.08$0.55$1.37 $0.34$0.77$1.84
(1) GAAP represents U.S. Generally Accepted Accounting Principles.
(2) Please refer to the “Non-GAAP Information” section and the "Reconciliation of Non-GAAP Financial Measures" table below or further detail on the non-GAAP financial reporting referenced above and a reconciliation of such measures to our nearest GAAP measures.

Business OutlookThe following statements are based upon management's current expectations for the fourth quarter of fiscal 2019 ending August 30, 2019. These statements are forward-looking and actual results may differ materially. SMART undertakes no obligation to update these statements.

Net Sales$270 to $280 million
Gross Margin - GAAP / Non-GAAP19% to 21%
Diluted EPS - GAAP$0.33 to $0.43
Share-based compensation per share$0.18
Intangible amortization per share$0.04
Diluted EPS - Non-GAAP$0.55 to $0.65
Expected diluted share count23.5 million

Conference Call DetailsSMART will host a conference call today for analysts and investors at 1:30 p.m. Pacific time, 4:30 p.m. Eastern time. Dial-in US toll free +1-866-487-6452 using access code 3277125.

A replay of the conference call will be available for one week following today’s call through the Events section of the SMART website at www.smartgh.com or by calling US toll free +1-855-859-2056; Passcode: 3277125.

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

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

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

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

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

SMART Global Holdings, Inc.
and Subsidiaries
Consolidated Income Statements
(In thousands, except per share data)
Three Months Ended Nine Months Ended
May 31, 2019 March 1, 2019 May 25, 2018 May 31, 2019 May 25, 2018
Net sales:
Brazil $100,982 $147,111 $232,742 447,372 599,225
Specialty Memory 98,755 115,608 102,735 354,312 315,626
Specialty Compute and Storage Solutions 35,920 41,344 — 131,915 —
Total net sales 235,657 304,063 335,477 933,599 914,851
Cost of sales (1)(2) 192,622 246,932 257,423 748,364 705,944
Gross profit 43,035 57,131 78,054 185,235 208,907
Operating expenses:
Research and development (1) (2) 11,330 11,238 9,763 34,384 28,165
Selling, general and administrative (1) (2) 24,306 23,442 19,597 73,202 55,502
Total operating expenses 35,636 34,680 29,360 107,586 83,667
Income from operations 7,399 22,451 48,694 77,649 125,240
Other income (expense):
Interest expense, net (5,001) (5,273) (4,098) (16,149) (12,927)
Other income (expense), net 97 252 (7,145) (2,980) (7,312)
Total other expense (4,904) (5,021) (11,243) (19,129) (20,239)
Income before income taxes 2,495 17,430 37,451 58,520 105,001
Provision for income taxes 550 4,644 5,505 12,813 15,256
Net income $1,945 $12,786 $31,946 $45,707 $89,745
Earnings per share:
Basic $0.08 $0.56 $1.44 $2.00 $4.09
Diluted $0.08 $0.55 $1.37 $1.96 $3.90
Shares used in computing earnings per share:
Basic 23,005 22,872 22,206 22,824 21,932
Diluted 23,330 23,359 23,306 23,374 23,020
(1) Includes share-based compensation expense as follows:
Cost of sales $651 $607 $414 $1,803 $859
Research and development 673 660 325 1,967 887
Selling, general and administrative 3,109 2,881 2,558 8,866 4,853
Total stock-based compensation expense $4,433 $4,148 $3,297 $12,636 $6,599
(2) Includes amortization of intangible assets expense as follows:
Cost of sales $16 $98 $— $130 $—
Research and development — — 245 — 735
Selling, general and administrative 961 961 976 2,883 2,992
Total amortization expense $977 $1,059 $1,221 $3,013 $3,727

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

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

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

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

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

Investor Contacts: Karl MoteyVice PresidentStrategic Marketing and Communications(510) 624-8213 [email protected]

Suzanne Schmidt Investor Relations for SMART Global Holdings, Inc. (510) 360-8596 [email protected]

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Source: SMART Global Holdings, Inc.

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