SMART Global Holdings Reports Second Quarter Fiscal 2020 Financial Results

NEWARK, Calif., April 07, 2020 (GLOBE NEWSWIRE) -- SMART Global Holdings, Inc. (“SMART” or the “Company”) (NASDAQ: SGH), today reported financial results for the second quarter of fiscal 2020 ended February 28, 2020.

Second Quarter Fiscal 2020 Highlights:

• Net sales of $272.0 million
• GAAP net income (loss) of ($9.7) million, or ($0.41) per share
• Non-GAAP net income of $12.8 million, or $0.52 per share
• Adjusted EBITDA of $22.3 million
• Increased cash and equivalents to $141.9 million

“In the second quarter of fiscal 2020, we generated financial results above the midpoint of our guidance range driven by excellent performance from our team members along with better than expected performance from both our Specialty Memory and Brazil businesses,” commented Ajay Shah, Chairman and CEO. “Despite the challenges we all face during the COVID-19 crisis, we remain optimistic about the longer-term positioning of our businesses.”

“During the quarter we significantly improved our capital structure through the issuance of $250 million of convertible senior notes in a private placement, the majority of the proceeds of which we used to pay down our existing, higher interest rate debt, thereby recapitalizing our balance sheet, lowering our interest expense, eliminating quarterly principal payments and extending the debt maturity,” added Jack Pacheco, COO and CFO.

Quarterly Financial Results	GAAP (1)								Non-GAAP (2)
(In millions, except per share amounts)	Q2 FY20			Q1 FY20		Q2 FY19			Q2 FY20		Q1 FY20		Q2 FY19
Net sales	$	272.0		$	272.0	$	304.1		$	272.0	$	272.0	$	304.1
Gross profit	$	51.5		$	54.3	$	57.1		$	52.9	$	55.7	$	57.8
Operating income	$	8.2		$	5.9	$	22.5		$	17.3	$	18.2	$	27.7
Net income (loss)	$	(9.7	)	$	0.2	$	12.8		$	12.8	$	13.4	$	18.0
Diluted earnings per share (EPS)	$	(0.41	)	$	0.01	$	0.55		$	0.52	$	0.55	$	0.77
(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 Outlook
The following statements are based upon management's current expectations for the third quarter of fiscal 2020 ending May 29, 2020. These statements are forward-looking and actual results may differ materially. SMART undertakes no obligation to update these statements.

Net Sales	$270 to $300 million
Gross Margin - GAAP / Non-GAAP	20% to 22%
Diluted EPS - GAAP*	$0.33 ± $0.05
Share-based compensation per share	$0.20
Intangible amortization per share	$0.15
Diluted EPS - Non-GAAP*	$0.68 ± $0.05
Expected diluted share count	24.6 million
*EPS does not include any potential loss from the mark to market of the capped call.

Conference Call Details
SMART 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 [phone] using access code 5089819.

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 [phone]; Passcode: 5089819.

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 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; trade regulations and relations; 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 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, 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, capped call mark to market (MTM) adjustment, integration 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, capped call MTM adjustment, convertible debt original issue discount (OID), integration 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 Holdings

The 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												Six Months Ended
	February 28, 2020				November 29, 2019				March 1, 2019				February 28, 2020				March 1, 2019
Net sales:
Specialty Memory Products	$	111,455			$	103,529			$	115,608			$	214,984			$	255,557
Brazil Products		97,700				93,999				147,111				191,699				346,390
Specialty Compute and Storage Solutions		62,887				74,490				41,344				137,377				95,995
Total net sales		272,042				272,018				304,063				544,060				697,942
Cost of sales (1) (2)		220,536				217,698				246,932				438,234				555,742
Gross profit		51,506				54,320				57,131				105,826				142,200
Operating expenses:
Research and development (1)		14,702				14,886				11,238				29,588				23,054
Selling, general and administrative (1) (2)		28,648				33,553				23,442				62,201				48,896
Total operating expenses		43,350				48,439				34,680				91,789				71,950
Income from operations		8,156				5,881				22,451				14,037				70,250
Other income (expense):
Interest expense, net		(4,150	)			(4,492	)			(5,273	)			(8,642	)			(11,148	)
Other income (expense), net		(12,386	)			(840	)			252				(13,226	)			(3,077	)
Total other expense		(16,536	)			(5,332	)			(5,021	)			(21,868	)			(14,225	)
Income (loss) before income taxes		(8,380	)			549				17,430				(7,831	)			56,025
Provision for income taxes		1,340				325				4,644				1,665				12,263
Net income (loss)	$	(9,720	)		$	224			$	12,786			$	(9,496	)		$	43,762
Earnings per share:
Basic	$	(0.41	)		$	0.01			$	0.56			$	(0.40	)		$	1.93
Diluted	$	(0.41	)		$	0.01			$	0.55			$	(0.40	)		$	1.88
Shares used in computing earnings per share:
Basic		23,906				23,713				22,872				23,809				22,733
Diluted		23,906				24,286				23,359				23,809				23,314
(1) Includes share-based compensation expense as follows:
Cost of sales	$	731			$	730			$	607			$	1,461			$	1,152
Research and development		783				744				660				1,527				1,294
Selling, general and administrative		3,133				4,482				2,881				7,615				5,757
Total stock-based compensation expense	$	4,647			$	5,956			$	4,148			$	10,603			$	8,203
(2) Includes amortization of intangible assets expense as follows:
Cost of sales	$	647			$	647			$	98			$	1,294			$	114
Selling, general and administrative		2,766				2,766				961				5,533				1,922
Total amortization expense	$	3,413			$	3,413			$	1,059			$	6,827			$	2,036

SMART Global Holdings, Inc.
and Subsidiaries
Reconciliation of Non-GAAP Financial Measures to GAAP Results
(In thousands, except per share data)
	Three Months Ended												Six Months Ended
	February 28, 2020				November 29, 2019				March 1, 2019				February 28, 2020				March 1, 2019
Reconciliation of gross profit:
GAAP gross profit	$	51,506			$	54,320			$	57,131			$	105,826			$	142,200
GAAP gross margin		18.9	%			20.0	%			18.8	%			19.5	%			20.4	%
Add: Share-based compensation included in cost of sales		731				730				607				1,461				1,152
Add: Intangible amortization included in cost of sales		647				647				98				1,294				114
Non-GAAP gross profit	$	52,884			$	55,697			$	57,836			$	108,581			$	143,466
Non-GAAP gross margin		19.4	%			20.5	%			19.0	%			20.0	%			20.6	%
Reconciliation of operating expenses:
GAAP operating expenses	$	43,350			$	48,439			$	34,680			$	91,789			$	71,950
Less: Share-based compensation expense included in opex
Research and development		783				744				660				1,527				1,294
Selling, general and administrative		3,133				4,482				2,881				7,615				5,757
Total		3,916		-		5,226		-		3,541		-		9,142		-		7,051
Less: Amortization of intangible assets included in opex
Selling, general and administrative		2,766				2,766				961				5,532				1,922
Total		2,766				2,766				961				5,532				1,922
Less: Legal fees - term loan (payment holiday)		—				—				—				—				126
Less: Acquisition-related expenses		—				946				—				946				1,423
Less: Integration expenses		1,040				2,052				—				3,092				—
Non-GAAP operating expenses	$	35,628			$	37,449			$	30,178			$	73,077			$	61,428
Reconciliation of income from operations:
GAAP income from operations	$	8,156			$	5,881			$	22,451			$	14,037			$	70,250
GAAP operating margin		3.0	%			2.2	%			7.4	%			2.6	%			10.1	%
Add: Share-based compensation expense		4,647				5,956				4,148				10,603				8,203
Add: Amortization of intangible assets		3,413				3,413				1,059				6,826				2,036
Add: Legal fees - term loan (payment holiday)		—				—				—				—				126
Add: Acquisition-related expenses		—				946				—				946				1,423
Add: Integration expenses		1,040				2,052				—				3,092				—
Non-GAAP income from operations	$	17,256			$	18,248			$	27,658			$	35,504			$	82,038
Non-GAAP operating margin		6.3	%			6.7	%			9.1	%			6.5	%			11.8	%

SMART Global Holdings, Inc.
and Subsidiaries
Reconciliation of Non-GAAP Financial Measures to GAAP Results
(In thousands, except per share data)
		Three Months Ended												Six Months Ended
		February 28,  2020				November 29, 2019				March 1, 2019				February 28, 2020				March 1, 2019
Reconciliation of income (loss) before income taxes:
GAAP income (loss) before income taxes		$	(8,380	)		$	549			$	17,430			$	(7,831	)		$	56,025
Add: Share-based compensation expense			4,647				5,956				4,148				10,603				8,203
Add: Amortization of intangible assets			3,413				3,413				1,059				6,826				2,036
Add: Legal fees - term loan (payment holiday)			—				—				—				—				126
Add: Acquisition-related expenses			-				946				—				946				1,423
Add: Integration expenses			1,040				2,052				—				3,092				—
Add: Extinguishment of term loan			6,630				—				—				6,630				—
Add: Capped call MTM adjustment			4,795				—				—				4,795				—
Add: Convertible debt discount OID			399				—				—				399				—
Add: Foreign currency (gains)/losses			1,191				911				(47	)			2,102				3,337
Non-GAAP income before income taxes		$	13,735			$	13,827			$	22,590			$	27,562			$	71,150
Reconciliation of provision for income taxes:
GAAP provision for income taxes		$	1,340			$	325			$	4,644			$	1,665			$	12,263
GAAP effective tax rate			-16.0	%			59.2	%			26.6	%			-21.3	%			21.9	%
Less: Goodwill tax credit			484				—				—				484				—
Tax effect of adjustments to GAAP results			(119	)			(91	)			5				(210	)			(333	)
Non-GAAP provision for income taxes		$	975			$	416			$	4,639			$	1,391			$	12,596
Non-GAAP effective tax rate			7.1	%			3.0	%			20.5	%			5.0	%			17.7	%
Reconciliation of net income (loss) and earnings per share (diluted):
GAAP net income (loss)		$	(9,720	)		$	224			$	12,786			$	(9,496	)		$	43,762
Adjustments to GAAP net income (loss):
Share-based compensation			4,647				5,956				4,148				10,603				8,203
Amortization of intangible assets			3,413				3,413				1,059				6,826				2,036
Legal fees - term loan (payment holiday)			—				—				—				—				126
Acquisition related expenses			—				946				—				946				1,423
Integration expenses			1,040				2,052				—				3,092				—
Extinguishment of term loan			6,630				—				—				6,630				—
Capped call MTM adjustment			4,795				—				—				4,795				—
Convertible debt discount OID			399				—				—				399				—
Goodwill tax credit			484				—				—				484				—
Foreign currency (gains)/losses			1,191				911				(47	)			2,102				3,337
Tax effect of items excluded from non-GAAP results			(119	)			(91	)			5				(210	)			(333	)
Non-GAAP net income		$	12,760			$	13,411			$	17,951			$	26,171			$	58,554
Shares used in computing earnings per share (diluted)			24,567				24,286				23,359				24,440				23,314
Non-GAAP earnings per share (diluted)		$	0.52			$	0.55			$	0.77			$	1.07			$	2.51
GAAP earnings per share (diluted)		$	(0.41	)		$	0.01			$	0.55			$	(0.40	)		$	1.88

SMART Global Holdings, Inc.
and Subsidiaries
Reconciliation of GAAP Net Income (Loss) to Adjusted EBITDA
(In thousands)
	Three Months Ended										Six Months Ended
	February 28,  2020				November 29, 2019			March 1, 2019			February 28, 2020				March 1, 2019
GAAP net income (loss)	$	(9,720	)		$	224		$	12,786		$	(9,496	)		$	43,762
Share-based compensation expense		4,647				5,956			4,148			10,603				8,203
Amortization of intangible assets		3,413				3,413			1,059			6,826				2,036
Interest expense, net		4,150				4,492			5,273			8,642				11,148
Provision for income tax		1,340				325			4,644			1,665				12,263
Depreciation		6,021				6,131			5,868			12,152				11,299
Legal fees - term loan (payment holiday)		—				—			—			—				126
Acquisition-related expenses(1)		—				946			—			946				1,423
Integration expenses		1,040				2,052			—			3,092				—
Extinguishment of term loan		6,630				—			—			6,630				—
Capped call MTM adjustment		4,795				—			—			4,795				—
Adjusted EBITDA	$	22,316			$	23,539		$	33,778		$	45,855			$	90,260
(1) Amounts in FY20 & FY19 related to acquisitions of new businesses, SMART EC & Wireless (July 2019)

SMART Global Holdings, Inc.
and Subsidiaries
Consolidated Balance Sheets
(In thousands)
		February 28,				August 30,
			2020				2019
Assets
Current assets:
Cash and cash equivalents		$	141,860			$	98,139
Accounts receivable, net			217,361				217,433
			161,407				118,738
Prepaid expenses and other current assets			29,279				37,950
Total current assets			549,907				472,260
Property and equipment, net			59,029				68,345
Operating lease right-of-use assets			28,665				—
Other noncurrent assets			29,991				12,784
Intangible assets, net			62,498				69,325
			78,347				81,423
Total assets		$	808,437			$	704,137
Liabilities and Shareholders’ Equity
Current liabilities:
Accounts payable		$	217,256			$	164,866
Accrued liabilities			58,425				48,980
Current portion of long-term debt			1,546				24,054
Total current liabilities			277,227				237,900
Long-term debt			191,593				182,450
Long-term operating lease liabilities			24,440				—
Other long-term liabilities			8,126				10,327
Total liabilities			501,386				430,677
Shareholders’ equity:
Ordinary shares			723				712
Additional paid-in capital			350,086				285,994
Accumulated other comprehensive loss			(198,882	)			(177,866	)
Retained earnings			155,124				164,620
Total shareholders’ equity			307,051				273,460
Total liabilities and shareholders’ equity		$	808,437			$	704,137

SMART Global Holdings, Inc.
and Subsidiaries
Consolidated Statements of Cash Flows
(In thousands)
		Three Months Ended												Six Months Ended
		February 28, 2020				November 29, 2019				March 1, 2019				February 28, 2020				March 1, 2019
Cash flows from operating activities:
Net income (loss)		$	(9,720	)		$	224			$	12,786			$	(9,496	)		$	43,762
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization			9,435				9,544				6,927				18,979				13,335
Share-based compensation			4,647				5,956				4,148				10,603				8,203
Provision for doubtful accounts receivable and sales returns			(100	)			73				34				(27	)			(70	)
Deferred income tax benefit			610				(970	)			(650	)			(360	)			(247	)
(Gain) Loss on disposal of property and equipment			(18	)			(42	)			(4	)			(60	)			(1	)
Loss on mark-to-market derivatives			4,795				—				—				4,795				—
Loss on extinguishment of debt			6,630				—				—				6,630				—
Amortization of debt discounts and issuance costs			1,047				734				694				1,781				1,379
Amortization of operating lease right-of-use assets			1,168				1,114				—				2,282				—
Changes in operating assets and liabilities:
Accounts receivable			9,198				(13,688	)			5,669				(4,490	)			(83,772	)
Inventories			(3,343	)			(42,206	)			17,084				(45,549	)			47,660
Prepaid expenses and other assets			1,386				5,110				7,424				6,496				4,242
Accounts payable			(3,782	)			60,438				(17,017	)			56,656				31,557
Operating lease liabilities			(1,058	)			(1,082	)			—				(2,140	)			—
Accrued expenses and other liabilities			2,439				62				1,959				2,501				8,358
Net cash provided by operating activities			23,334				25,267				39,054				48,601				74,406
Cash flows from investing activities:
Capital expenditures and deposits on equipment			(4,210	)			(5,158	)			(6,232	)			(9,368	)			(19,616	)
Proceeds from sale of property and equipment			54				42				32				96				53
Acquisitions of business, net of cash acquired			—				—				(148	)			—				(148	)
Net cash used in investing activities			(4,156	)			(5,116	)			(6,348	)			(9,272	)			(19,711	)
Cash flows from financing activities:
Long-term debt payments			(797	)			(6,435	)			(1,712	)			(7,232	)			(3,369	)
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			6,000				12,500				64,000				18,500				168,000
Repayments of borrowings under revolving line of credit			(6,000	)			(12,500	)			(64,000	)			(18,500	)			(168,000	)
Proceeds from issuance of ordinary shares from share option exercises			641				1,166				1,071				1,807				3,473
Proceeds from issuance of ordinary shares from ESPP			—				1,242				—				1,242				968
Withholding tax on restricted stock units			(351	)			(20	)			(219	)			(371	)			(219	)
Net cash provided by (used in) financing activities			15,889				(4,047	)			(860	)			11,842				853
Effect of exchange rate changes on the cash, cash equivalents
and restricted cash *			(4,596	)			(2,854	)			374				(7,450	)			2,392
Net increase in cash and cash equivalents
and restricted cash *			30,471				13,250				32,220				43,721				57,940
Cash, cash equivalents, and restricted cash at beginning of period *			111,389				98,139				62,954				98,139				37,234
Cash, cash equivalents, and restricted cash at end of period *		$	141,860			$	111,389			$	95,174			$	141,860			$	95,174
* Cash balance was adjusted to include restricted cash upon adoption of ASU 2016-18 in fiscal 2019.

Investor Contact: 
Suzanne Schmidt
Investor Relations for SMART Global Holdings, Inc.
[phone]
[e-mail]