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SMART Global Holdings Reports Third Quarter Fiscal 2020 Financial Results

July 7, 2020 4:05 PM

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

Third Quarter Fiscal 2020 Highlights:

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

Quarterly Financial ResultsGAAP (1) Non-GAAP (2)
(In millions, except per share amounts)Q3 FY20Q2 FY20Q3 FY19 Q3 FY20Q2 FY20Q3 FY19
Net sales$281.3 $272.0 $235.7 $281.3 $272.0 $235.7
Gross profit$54.2 $51.5 $43.0 $55.9 $52.9 $43.7
Operating income$10.1 $8.2 $7.4 $20.3 $17.3 $13.2
Net income (loss)$0.8 $(9.7)$1.9 $17.1 $12.8 $7.9
Diluted earnings per share (EPS)$0.03 $(0.41)$0.08 $0.70 $0.52 $0.34
(1) GAAP represents U.S. Generally Accepted Accounting Principles.
(2) Please refer to the “Non-GAAP Information” section and the "Reconciliation of Non-GAAP Financial Measures" tables below
for further detail on the non-GAAP financial reporting referenced above and a reconciliation of such measures
to our nearest GAAP measures.

Business OutlookThe following statements are based upon management's current expectations for the fourth quarter of fiscal 2020 ending August 28, 2020. These statements are forward-looking and actual results may differ materially. SMART undertakes no obligation to update these statements.

Net Sales$290 to $310 million
Gross Margin - GAAP / Non-GAAP20% to 22%
Diluted EPS - GAAP$0.34 ± $0.08
Share-based compensation per share$0.21
Intangible amortization per share$0.15
Convertible debt discount OID and fees per share$0.08
Diluted EPS - Non-GAAP$0.78 ± $0.08
Expected diluted share count24.5 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 5089819. We will post an accompanying slide presentation to our website prior to the beginning of the call.

A replay of the conference call will be available for one week following today’s call through the Events section of the SMART website at www.smartgh.com or by calling US toll free +1-855-859-2056; Passcode: 5089819.

Forward-Looking 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; disruptions in our operations or in global markets as a result of the outbreak of COVID-19; changes in trade regulations or adverse developments in international trade relations and agreements; changes in currency exchange rates; overall information technology spending; appropriations for government spending; the success of our strategic initiatives including additional investments in new products, additional capacity and acquisitions; the DRAM market and the temporary and volatile nature of pricing trends; deterioration in customer relationships; production or manufacturing difficulties; competitive factors; technological changes; difficulties with or delays in the introduction of new products; slowing or contraction of growth in the memory market in Brazil; reduction in or termination of local content requirements in Brazil; changes to applicable tax regimes or rates; prices for the end products of our customers; fluctuations in material costs and availability; strikes or labor disputes; deterioration in or loss of relations with any of our limited number of key vendors; changes in the availability of supply of materials, components or memory products; the inability of Penguin Computing to obtain and retain security clearances to expand its government business; and other factors and risks detailed in SMART’s filings with the Securities and Exchange Commission. Such factors and risks as outlined above and in such filings may not constitute all factors and risks that could cause actual results of SMART to be materially different from the historical results and/or from any future results or outcomes expressed or implied by such forward-looking statements. SMART and its subsidiaries operate in a continually changing business environment and new factors emerge from time to time. SMART cannot predict such factors, nor can it assess the impact, if any, from such factors on SMART or its subsidiaries’ results. Accordingly, investors are cautioned not to place undue reliance on any forward-looking statements. Forward-looking statements should not be relied upon as a prediction of actual results. These forward-looking statements are made as of today, and SMART does not intend, and has no obligation, to update or revise any forward-looking statements in order to reflect events or circumstances that may arise after the date of this press release, except as required by law.

Non-GAAP 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, and non-GAAP net income per diluted share. We define Adjusted EBITDA as GAAP net income (loss) plus net interest expense, income tax expense, depreciation and amortization expense, share-based compensation expense, loss on extinguishment of debt/revolver, capped call mark to market (MTM) adjustment, integration expenses, COVID-19 expenses, acquisition-related expenses and other infrequent or unusual items. Adjusted EBITDA is not a measure of financial performance calculated in accordance with U.S. GAAP and should be viewed as a supplement to, not a substitute for, our results of operations presented on the basis of U.S. GAAP. Adjusted EBITDA also does not purport to represent cash flow provided by, or used in, operating activities in accordance with U.S. GAAP and should not be used as a measure of liquidity.

The non-GAAP financial results presented herein exclude share-based compensation expense, intangible amortization expense, loss on extinguishment of debt/revolver, capped call MTM adjustment, convertible debt original issue discount (OID), integration expenses, COVID-19 expenses, acquisition-related expenses and other infrequent or unusual expenses, and with respect to non-GAAP diluted EPS, foreign currency gains (losses). These non-GAAP financial measures are provided to enhance the user's overall understanding of our financial performance. By excluding these charges, as well as any related tax effects, our non-GAAP results provide information to management and investors that is useful in assessing SMART's core operating performance and in evaluating and comparing our results of operations on a consistent basis from period to period. These non-GAAP financial measures are also used by management to evaluate financial results, to plan and forecast future periods, and to assess performance of certain executives for compensation purposes. The presentation of this additional information is not meant to be a substitute for the corresponding financial measures prepared in accordance with U.S. GAAP. In addition, these measures may not be used similarly by other companies and therefore may not be comparable between companies.

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

About SMART Global HoldingsThe SMART lines of business are leading designers and manufacturers of electronic products focused on memory and computing technology areas. The Company specializes in application specific product development and support for customers in enterprise, government and OEM sales channels. Customers rely on SMART as a strategic supplier with top tier customer service, product quality, and technical support with engineering, sales, manufacturing, supply chain and logistics capabilities worldwide. The Company targets customers in markets such as communications, storage, networking, mobile, industrial automation, industrial internet of things, government, military, edge computing and high performance computing. SMART operates in three primary product areas: Specialty Memory products, Brazil products and Specialty Compute and Storage Solutions.

See www.smartgh.com, www.smartm.com, www.smartembedded.com, www.smartsscs.com and www.penguincomputing.com for more information.

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

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

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

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

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

SMART Global Holdings, Inc.
and Subsidiaries
Consolidated Statements of Cash Flows
(In thousands)
Three Months Ended Nine Months Ended
May 29, 2020 February 28, 2020 May 31, 2019 May 29, 2020 May 31, 2019
Cash flows from operating activities:
Net income (loss) $825 $(9,720) $1,945 $(8,671) $45,707
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization 8,818 9,435 6,817 27,797 20,152
Share-based compensation 4,907 4,647 4,433 15,510 12,636
Provision for doubtful accounts receivable and sales returns 74 (100) 46 47 (24)
Deferred income tax benefit 425 610 677 65 430
(Gain) Loss on disposal of property and equipment 41 (18) 22 (19) 21
Loss on mark-to-market adjustment of the capped call 2,924 4,795 — 7,719 —
Loss on extinguishment of debt/revolver 192 6,630 — 6,822 —
Amortization of debt discounts and issuance costs 2,005 1,047 706 3,786 2,085
Amortization of operating lease right-of-use assets 1,287 1,168 — 3,569 —
Changes in operating assets and liabilities:
Accounts receivable (13,395) 9,198 91,430 (17,885) 7,658
Inventories (26,932) (3,343) 35,111 (72,481) 82,771
Prepaid expenses and other assets (7,615) 1,386 (2,455) (1,119) 1,787
Accounts payable 39,031 (3,782) (76,442) 95,687 (44,885)
Operating lease liabilities (1,363) (1,058) — (3,503) —
Accrued expenses and other liabilities 2,402 2,439 (15,980) 4,903 (7,622)
Net cash provided by operating activities 13,626 23,334 46,310 62,227 120,716
Cash flows from investing activities:
Capital expenditures and deposits on equipment (7,521) (4,210) (10,496) (16,889) (30,112)
Proceeds from sale of property and equipment 58 54 18 154 71
Acquisitions of business, net of cash acquired — — — — (148)
Net cash used in investing activities (7,463) (4,156) (10,478) (16,735) (30,189)
Cash flows from financing activities:
Long-term debt payment - Term Loan — — — (5,625) —
Long-term debt payment - BNDES (685) (797) (1,704) (2,292) (5,073)
Purchase of capped call — (21,825) — (21,825) —
Proceeds from convertible notes due 2026, net of discount — 243,125 — 243,125 —
Payment for extinguishment of long-term debt — (204,904) — (204,904) —
Proceeds from borrowings under revolving line of credit 42,000 6,000 67,500 60,500 235,500
Repayments of borrowings under revolving line of credit (42,000) (6,000) (67,500) (60,500) (235,500)
Proceeds from issuance of ordinary shares from share option exercises 134 641 297 1,941 3,770
Proceeds from issuance of ordinary shares from ESPP 1,742 — 1,335 2,984 2,303
Withholding tax on restricted stock units (282) (351) (11) (653) (230)
Net cash provided by (used in) financing activities 909 15,889 (83) 12,751 770
Effect of exchange rate changes on the cash and cash equivalents (17,087) (4,596) (4,824) (24,537) (2,432)
Net increase (decrease) in cash and cash equivalents (10,015) 30,471 30,925 33,706 88,865
Cash and cash equivalents at beginning of period 141,860 111,389 95,174 98,139 37,234
Cash and cash equivalents at end of period $131,845 $141,860 $126,099 $131,845 $126,099

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

SGH_Logo_2.jpg

Source: SMART Global Holdings, Inc.

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