SMART Global Holdings Reports Second Quarter Fiscal 2020 Financial Results - SMART Glb Hldgs (NASDAQ:SGH)

NEWARK, Calif., April 07, 2020 (GLOBE NEWSWIRE) -- SMART Global Holdings, Inc. ("SMART" or the "Company") 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 +1-866-487-6452 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 +1-855-859-2056; 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.
(510) 360-8596
ir@smartm.com

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