SMART Global Holdings Reports First Quarter Fiscal 2021 Financial Results

SMART Global Holdings, Inc. (“SMART” or the “Company”) (NASDAQ: SGH), today reported financial results for the first quarter fiscal 2021 ended November 27, 2020.

First Quarter Fiscal 2021 Highlights:

  • Net sales of $291.7 million, 7.2% higher than the year ago quarter.
  • GAAP net income of $2.0 million, or $0.08 per share, compared with $0.2 million or $0.01 per share in the year ago quarter.
  • Non-GAAP net income of $19.6 million or $0.78 per share, 46.4% and 41.8% higher than the year ago quarter, respectively.
  • Adjusted EBITDA of $29.5 million, 25.4% higher than the year ago quarter.

“I am proud of the results our team delivered in the first quarter of fiscal 2021 during these challenging times. Total revenue grew by 7% when compared to the first quarter a year ago, and non-GAAP earnings per share of $0.78 exceeded the high end of our guidance range,” commented Mark Adams, President and CEO.

“With our continuing focus on delivering differentiated solutions to our valued customers and driving operational excellence across each of our businesses, we remain optimistic about the future and our ability to deliver strong returns for our shareholders,” concluded Mr. Adams.

Quarterly Financial Results 

GAAP (1)

 

Non-GAAP (2)

(In millions, except per share amounts) 

Q1 FY21

Q4 FY20

Q1 FY20

 

Q1 FY21

Q4 FY20

Q1 FY20

Net sales 

$

291.7

$

297.0

$

272.0

 

$

291.7

$

297.0

$

272.0

Gross profit 

$

52.6

$

56.3

$

54.3

 

$

54.1

$

57.8

$

55.7

Operating income 

$

7.6

$

17.2

$

5.9

 

$

23.7

$

28.4

$

18.2

Net income 

$

2.0

$

7.5

$

0.2

 

$

19.6

$

20.4

$

13.4

Diluted earnings per share (EPS) 

$

0.08

$

0.30

$

0.01

 

$

0.78

$

0.82

$

0.55

(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 second quarter of fiscal 2021 ending February 26, 2021. These statements are forward-looking and actual results may differ materially. SMART undertakes no obligation to update these statements.

Net Sales

$285 to $305 million

Gross Margin - GAAP / Non-GAAP

18% to 20%

Diluted EPS - GAAP

$0.38 ± $0.05

Share-based compensation per share

$0.20

Intangible amortization per share

$0.14

Convertible debt discount OID and fees per share

$0.08

Diluted EPS - Non-GAAP

$0.80 ± $0.05

Expected diluted share count

25.6 million

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, or International toll free +1-213-660-0710 using access code 9456176. 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, or International toll free +1 404-537-3406; Passcode: 9456176.

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; 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 incentives for local manufacturing 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/revolver, capped call mark to market (MTM) adjustment, restructuring expenses, integration expenses, COVID-19 expenses, acquisition-related expenses, gain on settlements 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) and fees, restructuring expenses, integration expenses, COVID-19 expenses, acquisition-related expenses, gain on settlements 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 to Adjusted EBITDA” tables below for more detail on non-GAAP calculations.

About SMART Global Holdings – SGH
SGH is comprised of business units that are leading designers and manufacturers of electronic products focused on computing and memory technology. These businesses specialize in application-specific product development and support for customers in enterprise, government and OEM sales channels.

Customers rely on SGH businesses as their strategic suppliers providing exceptional customer service, product quality, and technical support with engineering, sales, manufacturing, supply chain and logistics capabilities that span the globe. SGH’s businesses support customers in communications, storage, networking, mobile, industrial automation, IoT and industrial IoT, government, military, and computing including edge and high performance computing markets. SGH businesses operate in three primary areas: specialty compute and storage solutions, specialty memory products, and Brazil.

For more information about SGH business units, visit: SMART Modular Technologies; SMART Embedded Computing; SMART Supply Chain Services; and Penguin Computing.

SMART Global Holdings, Inc.
and Subsidiaries
Consolidated Income Statements
(In thousands, except per share data)
 
Three Months Ended
November 27,
2020
August 28,
2020
November 29,
2019
Net sales:
Specialty Memory Products

$

120,657

$

125,142

$

103,529

Brazil Products

105,166

105,011

93,999

Specialty Compute and Storage Solutions

65,873

66,877

74,490

Total net sales

291,697

297,030

272,018

Cost of sales (1) (2)

239,053

240,693

217,698

Gross profit

52,644

56,337

54,320

Operating expenses:
Research and development (1)

6,964

8,032

14,886

Selling, general and administrative (1) (2)

38,056

27,587

33,553

Restructuring charge

3,487

Total operating expenses

45,020

39,107

48,439

Income from operations

7,624

17,230

5,881

Other income (expense):
Interest expense, net

(3,154

)

(3,265

)

(4,492

)

Other income (expense), net

832

(299

)

(840

)

Total other expense

(2,322

)

(3,564

)

(5,332

)

Income before income taxes

5,302

13,666

549

Provision for income taxes

3,275

6,139

325

Net income

$

2,027

$

7,527

$

224

 
Earnings per share:
Basic

$

0.08

$

0.31

$

0.01

Diluted

$

0.08

$

0.30

$

0.01

 
Shares used in computing earnings per share:
Basic

24,561

24,290

23,713

Diluted

25,103

24,839

24,286

 
(1) Includes share-based compensation expense as follows:
Cost of sales

$

838

$

861

$

730

Research and development

778

763

744

Selling, general and administrative

9,472

1,582

4,482

Total stock-based compensation expense

$

11,088

$

3,206

$

5,956

 
(2) Includes amortization of intangible assets expense as follows:
Cost of sales

$

647

$

647

$

647

Selling, general and administrative

2,766

2,767

2,766

Total amortization expense

$

3,413

$

3,414

$

3,413

 
SMART Global Holdings, Inc.
and Subsidiaries
Reconciliation of Non-GAAP Financial Measures to GAAP Results
(In thousands, except per share data)
 
Three Months Ended
November 27,
2020
August 28,
2020
November 29,
2019
Reconciliation of gross profit:
GAAP gross profit

$

52,644

$

56,337

$

54,320

GAAP gross margin

18.0

%

19.0

%

20.0

%

 
Add: Share-based compensation included in cost of sales

838

861

730

Add: Intangible amortization included in cost of sales

647

647

647

 
Non-GAAP gross profit

$

54,129

$

57,845

$

55,697

Non-GAAP gross margin

18.6

%

19.5

%

20.5

%

 
Reconciliation of operating expenses:
GAAP operating expenses

$

45,020

$

39,107

$

48,439

 
Less: Share-based compensation expense included in opex
Research and development

778

763

744

Selling, general and administrative

9,472

1,582

4,482

Total

10,250

2,345

5,226

Less: Amortization of intangible assets included in opex
Selling, general and administrative

2,766

2,767

2,766

Total

2,766

2,767

2,766

 
Less: Acquisition-related expenses

1,617

1,061

946

Less: Integration/restructuring expenses

3,487

2,052

 
Non-GAAP operating expenses

$

30,388

$

29,447

$

37,449

 
Reconciliation of income from operations:
GAAP income from operations

$

7,624

$

17,230

$

5,881

GAAP operating margin

2.6

%

5.8

%

2.2

%

 
Add: Share-based compensation expense

11,088

3,206

5,956

Add: Amortization of intangible assets

3,413

3,414

3,413

Add: Acquisition-related expenses

1,617

1,061

946

Add: Integration/restructuring expenses

3,487

2,052

 
Non-GAAP income from operations

$

23,741

$

28,398

$

18,248

Non-GAAP operating margin

8.1

%

9.6

%

6.7

%

SMART Global Holdings, Inc.
and Subsidiaries
Reconciliation of Non-GAAP Financial Measures to GAAP Results
(In thousands, except per share data)
 
Three Months Ended
November 27,
2020
August 28,
2020
November 29,
2019
Reconciliation of income before income taxes:
GAAP income before income taxes

$

5,302

$

13,666

$

549

Add: Share-based compensation expense

11,088

3,206

5,956

Add: Amortization of intangible assets

3,413

3,414

3,413

Add: Acquisition-related expenses

1,617

1,061

946

Add: Integration/Restructuring expenses

3,487

2,052

Add: Gain on settlement of indemnity claim

(364

)

Add: Convertible debt discount OID and fees

2,062

2,026

Add: Foreign currency (gains)/losses

(642

)

822

911

 
Non-GAAP income before income taxes

$

22,839

$

27,318

$

13,827

 
Reconciliation of provision for income taxes:
GAAP provision for income taxes

$

3,275

$

6,139

$

325

GAAP effective tax rate

61.8

%

44.9

%

59.2

%

 
Less: Goodwill tax credit

(673

)

Tax effect of adjustments to GAAP results

64

(82

)

(91

)

 
Non-GAAP provision for income taxes

$

3,211

$

6,894

$

416

Non-GAAP effective tax rate

14.1

%

25.2

%

3.0

%

 
Reconciliation of net income and earnings per share (diluted):
GAAP net income

$

2,027

$

7,527

$

224

 
Adjustments to GAAP net income:
Share-based compensation

11,088

3,206

5,956

Amortization of intangible assets

3,413

3,414

3,413

Acquisition-related expenses

1,617

1,061

946

Integration/restructuring expenses

3,487

2,052

Convertible debt discount OID and fees

2,062

2,026

Gain on settlement of indemnity claim

(364

)

Goodwill tax credit

(673

)

Foreign currency (gains)/losses

(642

)

822

911

Tax effect of items excluded from non-GAAP results

64

(82

)

(91

)

 
Non-GAAP net income

$

19,628

$

20,424

$

13,411

 
Shares used in computing earnings per share (diluted)

25,103

24,839

24,286

 
Non-GAAP earnings per share (diluted)

$

0.78

$

0.82

$

0.55

 
GAAP earnings per share (diluted)

$

0.08

$

0.30

$

0.01

 
SMART Global Holdings, Inc.
and Subsidiaries
Reconciliation of GAAP Net Income to Adjusted EBITDA
(In thousands)
 
Three Months Ended
November 27,
2020
August 28,
2020
November 29,
2019
 
GAAP net income

$

2,027

$

7,527

$

224

 
Share-based compensation expense

11,088

3,206

5,956

Amortization of intangible assets

3,413

3,414

3,413

Interest expense, net

3,154

3,265

4,492

Provision for income tax

3,275

6,139

325

Depreciation

4,954

5,219

6,131

Acquisition-related expenses(1)

1,617

1,061

946

Integration/restructuring expenses

3,487

2,052

Gain on settlement of indemnity claim

(364

)

 
Adjusted EBITDA

$

29,527

$

32,954

$

23,539

 

(1) Amounts related to acquisitions of Cree (pending) and SMART EC & Wireless (July 2019).

SMART Global Holdings, Inc.
and Subsidiaries
Consolidated Balance Sheets
(In thousands)
 

November 27,

August 28,

2020

2020

Assets
Current assets:
Cash and cash equivalents

$

164,097

$

150,811

Accounts receivable, net

212,886

215,918

Inventories

147,203

162,991

Prepaid expenses and other current assets

34,337

26,990

Total current assets

558,523

556,710

Property and equipment, net

60,045

54,705

Operating lease right-of-use assets

23,050

25,013

Other noncurrent assets

18,749

20,554

Intangible assets, net

52,258

55,671

Goodwill

72,100

73,955

Total assets

$

784,725

$

786,608

Liabilities and Shareholders’ Equity
Current liabilities:
Accounts payable

$

235,557

$

224,660

Accrued liabilities

47,011

57,829

Total current liabilities

282,568

282,489

Long-term debt

197,634

195,573

Long-term operating lease liabilities

19,524

20,829

Other long-term liabilities

6,681

5,613

Total liabilities

506,407

504,504

Shareholders’ equity:
Ordinary shares

751

737

Additional paid-in capital

356,827

346,131

Accumulated other comprehensive loss

(244,764

)

(228,241

)

Retained earnings

165,504

163,477

Total shareholders’ equity

278,318

282,104

Total liabilities and shareholders’ equity

$

784,725

$

786,608

 
SMART Global Holdings, Inc.
and Subsidiaries
Consolidated Statements of Cash Flows
(In thousands)
 
Three Months Ended
November 27,
2020
August 28,
2020
November 29,
2019
Cash flows from operating activities:
Net income

$

2,027

$

7,527

$

224

Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization

8,367

8,633

9,544

Share-based compensation

11,088

3,206

5,956

Provision for doubtful accounts receivable and sales returns

(9

)

(118

)

73

Deferred income tax benefit

222

(2,181

)

(970

)

(Gain) Loss on disposal of property and equipment

(5

)

2,565

(42

)

Amortization of debt discounts and issuance costs

2,116

2,080

734

Amortization of operating lease right-of-use assets

1,413

1,491

1,114

Changes in operating assets and liabilities:
Accounts receivable

(1,930

)

5,537

(13,688

)

Inventories

12,919

20,641

(42,206

)

Prepaid expenses and other assets

(9,277

)

(1,291

)

5,110

Accounts payable

18,022

(26,251

)

60,438

Operating lease liabilities

(1,504

)

(1,260

)

(1,082

)

Accrued expenses and other liabilities

(7,880

)

(4,421

)

62

Net cash provided by operating activities

35,569

16,159

25,267

Cash flows from investing activities:
Capital expenditures and deposits on equipment

(14,644

)

(7,386

)

(5,158

)

Proceeds from sale of property and equipment

16

250

42

Net cash used in investing activities

(14,628

)

(7,136

)

(5,116

)

Cash flows from financing activities:
Long-term debt payment - term loan

(5,625

)

Long-term debt payment - BNDES

(615

)

(810

)

Proceeds from borrowings under revolving line of credit

19,500

42,500

12,500

Repayments of borrowings under revolving line of credit

(19,500

)

(42,500

)

(12,500

)

Proceeds from issuance of ordinary shares from share option exercises

1,337

554

1,166

Proceeds from issuance of ordinary shares from ESPP

1,768

1,242

Withholding tax on restricted stock units

(3,483

)

(96

)

(20

)

Net cash used in financing activities

(378

)

(157

)

(4,047

)

 
Effect of exchange rate changes on the cash and cash equivalents

(7,277

)

10,100

(2,854

)

 
Net increase in cash and cash equivalents

13,286

18,966

13,250

Cash and cash equivalents at beginning of period

150,811

131,845

98,139

Cash and cash equivalents at end of period

$

164,097

$

150,811

$

111,389

 

Contacts:

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

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