Press Release

SMART Global Holdings Reports Second Quarter Fiscal 2018 Financial Results

NEWARK, Calif., March 22, 2018 (GLOBE NEWSWIRE) --

SMART Global Holdings, Inc. (“SMART”) (NASDAQ:SGH), parent company of SMART Modular Technologies, Inc., today reported financial results for the second quarter of fiscal 2018 ended February 23, 2018.

Second Quarter Fiscal 2018 Highlights:

  • Net sales of $314.0 million, 83% higher than prior year quarter
  • GAAP operating income of $45.1 million
  • GAAP net income of $36.8 million
  • Adjusted EBITDA of $56.2 million
  • GAAP diluted EPS of $1.60 (1)
  • Non-GAAP diluted EPS of $1.73(1)
       (1) GAAP and Non-GAAP diluted EPS include $0.10 of EPS due to FX gains

“The second quarter of fiscal 2018 came in above expectations as we benefited from multiple growth drivers.  The overall memory industry supply and demand dynamics remained favorable with respect to increasing memory densities and pricing.  Additionally, in Brazil, the economy continued to improve and we benefited from local content requirements.  Lastly, we once again demonstrated exceptional operating expense control and operating leverage in our financial model,” commented Iain MacKenzie, President and Co-Chief Executive Officer of SMART Global Holdings.

“We remain confident in our ability to drive additional growth and improvement in both SMART Brazil and our Specialty Memory businesses as the global memory market and economic trends in Brazil remain positive, and we see increasing demand from our OEM customers, particularly in the storage and networking end markets,” added Mr. MacKenzie.

“As we announced on March 14, 2018, I am very pleased that Ajay Shah has agreed to accept the role of President and CEO.  Ajay’s extensive industry knowledge and long history with SMART make him the ideal executive to lead SMART through this next phase of growth.  I look forward to working closely with Ajay through this transition,” concluded Mr. MacKenzie.

               
Quarterly Financial Results GAAP (1)   Non-GAAP (2)
(In millions, except per share amounts) Q2 FY18 Q1 FY18 Q2 FY17   Q2 FY18 Q1 FY18 Q2 FY17
Net sales $   314.0 $   265.4 $   172.0     $   314.0 $   265.4 $   172.0
Gross profit $   73.0 $   57.8 $   37.2     $   73.2 $   58.1 $   37.3
Operating income $   45.1 $   31.5 $   9.3     $   48.5 $   34.6 $   13.3
Net income (loss) $   36.8 $   21.0 $   (2.3 )   $   39.9 $   23.8 $   4.9
Earnings (loss) per share - diluted $   1.60 $   0.92 $   (0.17 )   $   1.73 $   1.05 $   0.35
  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 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 2018 ending May 25, 2018. These statements are forward-looking and actual results may differ materially. SMART undertakes no obligation to update these statements.

       
Net Sales - GAAP / Non-GAAP $320 to $340 million  
Gross Margin - GAAP / Non-GAAP 21% to 23%  
Diluted EPS - GAAP $1.61 to $1.69  
     
Intangible amortization per share $0.05  
Stock-based compensation per share $0.08  
     
Diluted EPS - Non-GAAP $1.74 to $1.82  
     
Expected diluted share count 23.2 million  
       

Conference Call Details
SMART will host a conference call today for analysts and investors at 2:30pm Pacific Time, 5:30 pm Eastern Time. Dial-in US toll free +1-866-487-6452 using access code 9983539.

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: 9983539.

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 industry 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; overall information technology spending; the success of our strategic initiatives including additional investments in new products and additional capacity; 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; deterioration in or loss of relations with any of our limited number of key vendors;  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 operates 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 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 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, stock-based compensation expense, restructuring charges,  amortization of non-cash debt discount related to warrants, non-cash charges in connection with refinancing, 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 do not include stock-based compensation expense, intangible amortization expense, amortization of non-cash debt discount related to warrants and non-cash charges in connection with refinancing. These non-GAAP financial measures are provided to enhance the user's overall understanding of our financial performance. By excluding these charges and gains, 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 Adjusted EBITDA and 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. 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 memory products in multiple geographies. See www.smartgh.com, www.smartm.com, www.smarth.com or www.smartsscs.com for more information.

     
SMART Global Holdings, Inc.    
and Subsidiaries    
Consolidated Statements of Income    
(In thousands, except per share data)    
                                 
            Three Months Ended   Six Months Ended    
             February 23,
2018
 
   November 24,
2017
 
   February 24,
2017
 
   February 23,
2018
 
   February 24,
2017
 
   
Net sales:                            
  Brazil DRAM       $   67,322     $   51,959     $   28,695     $   119,281     $   48,023      
  Brazil Mobile Memory           141,311         105,891         49,932         247,202         106,143      
  Specialty Memory           105,332         107,559         93,327         212,891         177,132      
    Total net sales           313,965         265,409         171,954         579,374         331,298      
Cost of sales (1)           240,948         207,573         134,797         448,521         264,431      
  Gross profit           73,017         57,836         37,157         130,853         66,867      
Operating expenses:                            
  Research and development (1) (2)           9,852         8,550         9,948         18,402         19,645      
  Selling, general and administrative (1) (2)           18,087         17,818         16,434         35,905         31,844      
  Management advisory fees         —        —          1,000       —          2,000      
  Restructuring          —        —          471       —          457      
    Total operating expenses           27,939         26,368         27,853         54,307         53,946      
    Income from operations           45,078         31,468         9,304         76,546         12,921      
Other income (expense):                            
  Interest expense, net           (4,230 )       (4,599 )       (8,512 )       (8,829 )       (14,778 )    
  Other income (expense), net           2,548         (2,715 )       (1,005 )       (167 )       (902 )    
    Total other expense           (1,682 )       (7,314 )       (9,517 )       (8,996 )       (15,680 )    
    Income (loss) before income taxes           43,396         24,154         (213 )       67,550         (2,759 )    
Provision for income taxes           6,602         3,149         2,124         9,751         2,785      
    Net income (loss)       $   36,794     $   21,005     $   (2,337 )   $   57,799     $   (5,544 )    
                                 
Earnings per share:                            
  Basic       $   1.68     $   0.97     $   (0.17 )   $   2.65     $   (0.40 )    
  Diluted       $   1.60     $   0.92     $   (0.17 )   $   2.53     $   (0.40 )    
                                 
Shares used in computing earnings per share:                            
  Basic           21,915         21,673         13,870         21,794         13,870      
  Diluted           23,038         22,715         13,870         22,877         13,870      
                                 
(1) Includes share-based compensation expense as follows:                        
  Cost of sales       $   227     $   218     $   142     $   445     $   268      
  Research and development           288         274         230         562         445      
  Selling, general and administrative           1,182         1,113         722         2,295         1,431      
    Total stock-based compensation expense       $   1,697     $   1,605     $   1,094     $   3,302     $   2,144      
                                 
(2) Includes amortization of intangible assets expense as follows:                    
  Research and development       $   245     $   245     $   1,224     $   490     $   2,448      
  Selling, general and administrative           993         1,023         1,723         2,016         3,522      
    Total amortization expense       $   1,238     $   1,268     $   2,947     $   2,506     $   5,970      
                                 


       
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 23,
2018
 
   November 24,
2017
 
   February 24,
2017
 
   February 23,
2018
 
   February 24,
2017
 
     
Reconciliation of gross profit:                              
GAAP gross profit       $   73,017     $   57,836     $   37,157     $   130,853     $   66,867        
  GAAP gross margin         23.3 %     21.8 %     21.6 %     22.6 %     20.2 %      
                                   
Add: Share-based compensation included in cost of sales           227         218         142         445         268        
                                   
Non-GAAP gross profit       $   73,244     $   58,054     $   37,299     $   131,298     $   67,135        
  Non-GAAP gross margin         23.3 %     21.9 %     21.7 %     22.7 %     20.3 %      
                                   
Reconciliation of operating expenses:                              
GAAP operating expenses       $   27,939     $   26,368     $   27,853     $   54,307     $   53,946        
                                   
Less: Share-based compensation expense included in opex                              
  Research and development           288         274         230         562         445        
  Selling, general and administrative           1,182         1,113         722         2,295         1,431        
    Total           1,470         1,387         952         2,857         1,876        
                                   
Less: Amortization of intangible assets included in opex                              
  Research and development           245         245         1,224         490         2,448        
  Selling, general and administrative           993         1,023         1,723         2,016         3,522        
    Total           1,238         1,268         2,947         2,506         5,970        
                                   
Less: S-1 related costs           513         300       —          813       —         
                                   
Non-GAAP operating expenses       $   24,718     $   23,413     $   23,954     $   48,131     $   46,100        
                                   
Reconciliation of income from operations:                              
GAAP income from operations       $   45,078     $   31,468     $   9,304     $   76,546     $   12,921        
  GAAP operating margin         14.4 %     11.9 %     5.4 %     13.2 %     3.9 %      
                                   
Add: Share-based compensation expense           1,697         1,605         1,094         3,302         2,144        
Add: Amortization of intangible assets           1,238         1,268         2,947         2,506         5,970        
Add: S-1 related costs           513         300       —          813       —         
                                   
Non-GAAP income from operations       $   48,526     $   34,641     $   13,345     $   83,167     $   21,035        
  Non-GAAP operating margin         15.5 %     13.1 %     7.8 %     14.4 %     6.3 %      
                                   
Reconciliation of provision for income taxes:                              
GAAP provision for income taxes       $   6,602     $   3,149     $   2,124     $   9,751     $   2,785        
  GAAP effective tax rate         15.2 %     13.0 %     -997.2 %     14.4 %     -100.9 %      
                                   
Tax effect of adjustments to GAAP results           (338 )       (348 )       (365 )       (686 )       (702 )      
                                   
Non-GAAP provision for income taxes       $   6,940     $   3,497     $   2,489     $   10,437     $   3,487        
  Non-GAAP effective tax rate         14.8 %     12.8 %     33.7 %     14.1 %     39.1 %      
                                   
Reconciliation of net income (loss) and earnings per share (diluted):                         
GAAP net income (loss)       $   36,794     $   21,005     $   (2,337 )   $   57,799     $   (5,544 )      
                                   
Adjustments to GAAP net income:                              
  Share-based compensation           1,697         1,605         1,094         3,302         2,144        
  Amortization of intangible assets           1,238         1,268         2,947         2,506         5,970        
  Amortization of debt discount related to warrants         —        —          2,180       —          2,180        
  S-1 related costs           513         300       —          813       —         
  Loss on extinguishment of LT debt         —        —          1,385       —          1,385        
  Tax effect of items excluded from non-GAAP results           (338 )       (348 )       (365 )       (686 )       (702 )      
                                   
Non-GAAP net income       $   39,904     $   23,830     $   4,904     $   63,734     $   5,433        
                                   
Shares used in computing earnings per share (diluted)           23,038         22,715         14,142         22,877         14,137        
                                   
Non-GAAP earnings per share (diluted)       $    1.73     $    1.05     $    0.35     $    2.79     $    0.38        
                                   


   
SMART Global Holdings, Inc.  
and Subsidiaries  
Reconciliation of GAAP Net Income (loss) to Adjusted EBITDA  
(In thousands)  
                           
        Three Months Ended   Six Months Ended  
         February 23,
2018
 
   November 24,
2017
 
   February 24,
2017
 
   February 23,
2018
 
   February 24,
2017
 
 
                           
GAAP net income (loss)   $   36,794   $   21,005   $   (2,337 )   $   57,799   $   (5,544 )  
                           
  Share-based compensation expense       1,697       1,605       1,094         3,302       2,144    
  Amortization of intangible assets       1,238       1,268       2,947         2,506       5,970    
  Interest expense, net       4,230       4,599       8,512         8,829       14,778    
  Provision for income tax       6,602       3,149       2,124         9,751       2,785    
  Depreciation       5,120       5,002       6,044         10,122       11,583    
  S-1 related costs       513       300     —        813     —     
  Management advisory fees     —      —        1,000       —        2,000    
  Debt extension costs*     —      —        1,745       —        1,745    
  Loss on extinguishment of LT debt **     —      —        1,385       —        1,385    
  Restructuring     —      —        471       —        457    
  Special retention bonuses     —      —      —        —        25    
  Investment advisory fees     —      —        134       —        540    
  Obsolete inventory related to restructuring   —      —        372       —        372    
                           
  Adjusted EBITDA   $   56,194   $   36,928   $   23,491     $   93,122   $   38,240    
                           
                           
  * Debt extension costs consist of $1.7 million associated with the amendment of our senior secured term loan and revolving credit facility in November 2016.
  ** Loss on extinguishment of long-term debt consists of $1.4 million loss on a February 2017 extinguishment.   
                           


   
SMART Global Holdings, Inc.  
and Subsidiaries  
Consolidated Balance Sheets  
(In thousands)  
                         
                February 23,   August 25,    
                  2018       2017      
Assets            
Current assets:              
  Cash and cash equivalents   $   51,816     $   22,436      
  Accounts receivable, net        223,500         183,303      
  Inventories         148,577         127,135      
  Prepaid expenses and other current assets       18,181         14,115      
          Total current assets       442,074         346,989      
Property and equipment, net       53,238         55,182      
Other noncurrent assets       21,556         26,728      
Intangible assets, net       2,533         5,107      
Goodwill             45,709         46,022      
          Total assets   $   565,110     $   480,028      
Liabilities and Shareholders’ Equity            
Current liabilities:            
  Accounts payable   $   225,718     $   189,717      
  Accrued liabilities       24,151         27,316      
  Current portion of long-term debt       22,954         22,841      
          Total current liabilities       272,823         239,874      
Long-term debt         142,752         154,450      
Deferred tax liabilities       730         1,439      
Other long-term liabilities       1,897         1,869      
          Total liabilities   $   418,202     $   397,632      
Shareholders’ equity:            
  Ordinary shares       666         653      
  Additional paid-in capital       239,628         232,162      
  Accumulated other comprehensive loss       (143,976 )       (143,210 )    
  Retained earnings       50,590         (7,209 )    
          Total shareholders’ equity        146,908         82,396      
          Total liabilities and shareholders’ equity   $   565,110     $   480,028      
                         


       
SMART Global Holdings, Inc.      
and Subsidiaries      
Consolidated Statements of Cash Flows      
(In thousands)      
                                       
                Three Months Ended   Six Months Ended      
                February 23,
2018
  November 24,
2017
  February 24,
2017
   February 23,
2018
 
   February 24,
2017
 
     
Cash flows from operating activities:                          
  Net income (loss)   $   36,794     $   21,005     $   (2,337 )   $   57,799     $   (5,544 )      
  Adjustments to reconcile net income (loss) to net cash                           
    provided by (used in) operating activities:                          
      Depreciation and amortization       6,358         6,270         8,991         12,628         17,553        
      Share-based compensation       1,697         1,605         1,094         3,302         2,144        
      Provision for doubtful accounts receivable and sales returns       39         28         18         67         (174 )      
      Deferred income tax benefit       (734 )       (220 )       (806 )       (954 )       (1,111 )      
      Loss on disposal of property and equipment       244       —          129         244         129        
      Extinguishment loss on long-term debt     —        —          1,386       —          1,386        
      Amortization of debt discounts and issuance costs       722         729         2,922         1,451         3,944        
      Changes in operating assets and liabilities:                          
        Accounts receivable       14,894         (55,801 )       (18,235 )       (40,907 )       3,375        
        Inventories       (17,810 )       (3,746 )       (35,351 )       (21,556 )       (26,351 )      
        Prepaid expenses and other assets       (67 )       1,758         852         1,691         1,476        
        Accounts payable       (10,145 )       47,492         40,674         37,347         (15,726 )      
        Accrued expenses and other liabilities       2,705         (4,863 )       2,036         (2,158 )       3,251        
          Net cash provided by (used in) operating activities       34,697         14,257         1,373         48,954         (15,648 )      
Cash flows from investing activities:                          
  Capital expenditures and deposits on equipment       (4,418 )       (6,039 )       (4,320 )       (10,457 )       (7,395 )      
  Proceeds from sale of property and equipment       66       —          42         66         42        
          Net cash used in investing activities       (4,352 )       (6,039 )       (4,278 )       (10,391 )       (7,353 )      
Cash flows from financing activities:                          
  Long-term debt payment       (6,125 )       (6,184 )       (6,404 )       (12,309 )       (11,735 )      
  Payment for extinguishment of long-term debt     —        —          (938 )     —          (938 )      
  Fees paid for revolving line of credit refinancing       (469 )       (299 )     —          (768 )     —         
  Payment of costs related to initial public offering       (302 )       (1,289 )     —          (1,591 )     —         
  Proceeds from borrowings under revolving line of credit       103,000         105,500         105,000         208,500         215,250        
  Repayments of borrowings under revolving line of credit       (103,000 )       (105,500 )       (105,000 )       (208,500 )       (215,250 )      
  Proceeds from issuance of ordinary shares from share option exercise     3,638         539       —          4,177       —         
          Net cash used in financing activities       (3,258 )       (7,233 )       (7,342 )       (10,491 )       (12,673 )      
  Effect of exchange rate changes on cash and cash equivalents       1,226         82         (98 )       1,308         381        
          Net increase (decrease) in cash and cash equivalents       28,313         1,067         (10,345 )       29,380         (35,293 )      
Cash and cash equivalents at beginning of period       23,503         22,436         33,686         22,436         58,634        
Cash and cash equivalents at end of period   $   51,816     $   23,503     $   23,341     $   51,816     $   23,341        
                                       


Investor Contact:

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

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