Press Release

SMART Global Holdings Reports Second Quarter Fiscal 2019 Financial Results

NEWARK, Calif., March 28, 2019 (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 2019 ended March 1, 2019.

Second Quarter Fiscal 2019 Highlights:    
Net sales of $304.1 million
GAAP operating income of $22.5 million    
GAAP net income of $12.8 million    
Adjusted EBITDA of $33.8 million    
GAAP diluted earnings per share (EPS) of $0.55      
Non-GAAP diluted EPS of $0.77    

“SMART continues to execute well across all of our lines of business in a challenging environment. In our second fiscal quarter, our Specialty Products business and our Specialty Compute and Storage Solutions business performed well.  Our Brazil business, where we supply commodity memory products to high volume requirements in smartphones and PCs, performed in line with expectations in a worsening pricing environment for such products,” said Ajay Shah, Chairman and Chief Executive Officer. 

“We have made good progress towards realizing synergies from our acquisition of Penguin Computing and remain focused on disciplined execution to drive our financial performance,” concluded Mr. Shah.

               
Quarterly Financial Results GAAP (1)   Non-GAAP (2)
(In millions, except per share amounts) Q2 FY19 Q1 FY19 Q2 FY18   Q2 FY19 Q1 FY19 Q2 FY18
Net sales $ 304.1 $ 393.9 $ 314.0   $ 304.1 $ 393.9 $ 314.0
Gross profit $ 57.1 $ 85.1 $ 73.0   $ 57.8 $ 85.6 $ 73.2
Operating income $ 22.5 $ 47.8 $ 45.1   $ 27.7 $ 54.4 $ 48.5
Net income $ 12.8 $ 31.0 $ 36.8   $ 18.0 $ 40.6 $ 37.7
Diluted earnings per share (EPS) $ 0.55 $ 1.33 $ 1.60   $ 0.77 $ 1.75 $ 1.64
               
(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 2019 ending May 31, 2019. These statements are forward-looking and actual results may differ materially. SMART undertakes no obligation to update these statements.

     
Net Sales $260 to $270 million
Gross Margin - GAAP / Non-GAAP 17% to 19%
Diluted EPS - GAAP $0.13 to $0.17
   
Share-based compensation per share $0.17
Intangible amortization per share $0.04
   
Diluted EPS - Non-GAAP $0.34 to $0.38
   
Expected diluted share count 23.5 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 using access code 8966306.

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: 8966306.

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; changes in seasonal impacts on our results; 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, 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, share-based compensation expense, 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, acquisition-related expenses, and other infrequent or unusual items, 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, similarly titled 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
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. With the addition of Penguin Computing and the creation of a new business unit, SMART Specialty Compute & Storage Solutions (SCSS), SMART has expanded its serviceable markets into areas requiring specialized computing platforms in artificial intelligence and machine learning, advanced modeling and high performance computing. 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 products in multiple geographies. See www.smartgh.comwww.smartm.comwww.smarth.comwww.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    
             March 1,
2019 
   November 30,
2018 
   February 23,
2018 
   March 1,
2019 
   February 23,
2018 
   
Net sales:                            
  Brazil       $ 147,111     $ 199,279     $ 208,633       346,390       366,483      
  Specialty Memory         115,608       139,949       105,332       255,557       212,891      
  Specialty Compute and Storage Solutions         41,344       54,651             95,995            
    Total net sales         304,063       393,879       313,965       697,942       579,374      
Cost of sales (1)(2)         246,932       308,810       240,948       555,742       448,521      
  Gross profit         57,131       85,069       73,017       142,200       130,853      
Operating expenses:                            
  Research and development (1) (2)         11,238       11,816       9,852       23,054       18,402      
  Selling, general and administrative (1) (2)         23,442       25,454       18,087       48,896       35,905      
    Total operating expenses         34,680       37,270       27,939       71,950       54,307      
                                 
    Income from operations         22,451       47,799       45,078       70,250       76,546      
Other income (expense):                            
  Interest expense, net         (5,273 )     (5,875 )     (4,230 )     (11,148 )     (8,829 )    
  Other income (expense), net         252       (3,329 )     2,548       (3,077 )     (167 )    
    Total other expense         (5,021 )     (9,204 )     (1,682 )     (14,225 )     (8,996 )    
    Income before income taxes         17,430       38,595       43,396       56,025       67,550      
Provision for income taxes         4,644       7,619       6,602       12,263       9,751      
    Net income       $ 12,786     $ 30,976     $ 36,794     $ 43,762     $ 57,799      
                                 
Earnings per share:                            
  Basic       $ 0.56     $ 1.37     $ 1.68     $ 1.93     $ 2.65      
  Diluted       $ 0.55     $ 1.33     $ 1.60     $ 1.88     $ 2.53      
                                 
Shares used in computing earnings per share:                            
  Basic         22,872       22,595       21,915       22,733       21,794      
  Diluted         23,359       23,257       23,038       23,314       22,877      
                                 
(1) Includes share-based compensation expense as follows:                        
  Cost of sales       $ 607     $ 545     $ 227     $ 1,152     $ 445      
  Research and development         660       634       288       1,294       562      
  Selling, general and administrative         2,881       2,876       1,182       5,757       2,295      
    Total stock-based compensation expense       $ 4,148     $ 4,055     $ 1,697     $ 8,203     $ 3,302      
                                 
(2) Includes amortization of intangible assets expense as follows:                    
  Cost of sales       $ 98     $ 16     $     $ 114     $      
  Research and development                     245             490      
  Selling, general and administrative         961       961       993       1,922       2,016      
    Total amortization expense       $ 1,059     $ 977     $ 1,238     $ 2,036     $ 2,506      
                                 

 

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  
             March 1,
2019 
   November 30,
2018 
   February 23,
2018 
   March 1,
2019 
   February 23,
2018 
 
Reconciliation of gross profit:                          
GAAP gross profit       $   57,131     $   85,069     $   73,017     $   142,200     $   130,853    
  GAAP gross margin         18.8%       21.6%       23.3%       20.4%       22.6%    
                               
Add: Share-based compensation included in cost of sales           607         545         227         1,152         445    
Add: Intangible amortization included in cost of sales           98         16       —          114       —     
                               
Non-GAAP gross profit       $    57,836     $    85,630     $    73,244     $    143,466     $    131,298    
  Non-GAAP gross margin         19.0%       21.7%       23.3%       20.6%       22.7%    
                               
Reconciliation of operating expenses:                          
GAAP operating expenses       $   34,680     $   37,270     $   27,939     $   71,950     $   54,307    
                               
Less: Share-based compensation expense included in opex                          
  Research and development           660         634         288         1,294         562    
  Selling, general and administrative           2,881         2,876         1,182         5,757         2,295    
  Total           3,541         3,510         1,470         7,051         2,857    
                               
Less: Amortization of intangible assets included in opex                          
  Research and development         —        —          245       —          490    
  Selling, general and administrative           961         961         993         1,922         2,016    
  Total           961         961         1,238         1,922         2,506    
                               
Less: S-1 related costs         —        —          513       —          813    
Less: Legal fees - term loan (payment holiday)         —          126       —          126       —     
Less: Acquisition-related expenses         —          1,423       —          1,423       —     
                               
Non-GAAP operating expenses       $    30,178     $    31,250     $    24,718     $    61,428     $    48,131    
                               
Reconciliation of income from operations:                          
GAAP income from operations       $   22,451     $   47,799     $   45,078     $   70,250     $   76,546    
  GAAP operating margin         7.4%       12.1%       14.4%       10.1%       13.2%    
                               
Add: Share-based compensation expense           4,148         4,055         1,697         8,203         3,302    
Add: Amortization of intangible assets           1,059         977         1,238         2,036         2,506    
Add: S-1 related costs         —        —          513       —          813    
Add: Legal fees - term loan (payment holiday)         —          126       —          126       —     
Add: Acquisition-related expenses         —          1,423       —          1,423       —     
                               
Non-GAAP income from operations       $    27,658     $    54,380     $    48,526     $    82,038     $    83,167    
  Non-GAAP operating margin         9.1%       13.8%       15.5%       11.8%       14.4%    
                               

 

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  
             March 1,
2019 
   November 30,
2018 
   February 23,
2018 
   March 1,
2019 
   February 23,
2018 
 
Reconciliation of income before income taxes:                          
GAAP income before income taxes       $ 17,430     $ 38,595     $ 43,396     $ 56,025     $ 67,550    
Add: Share-based compensation expense         4,148       4,055       1,697       8,203       3,302    
Add: Amortization of intangible assets         1,059       977       1,238       2,036       2,506    
Add: S-1 related costs                     513             813    
Add: Legal fees - Term loan (payment holiday)               126             126          
Add: Acquisition-related expenses               1,423             1,423          
Add: Foreign currency (gains)/losses         (47 )     3,384       (2,415 )     3,337       327    
                               
Non-GAAP income before income taxes       $    22,590     $    48,560     $    44,429     $    71,150     $    74,498    
                               
Reconciliation of provision for income taxes:                          
GAAP provision for income taxes       $ 4,644     $ 7,619     $ 6,602     $ 12,263     $ 9,751    
  GAAP effective tax rate         26.6%       19.7%       15.2%       21.9%       14.4%    
                               
Tax effect of adjustments to GAAP results         5       (338 )     (97 )     (333 )     (719 )  
                               
Non-GAAP provision for income taxes       $ 4,639     $ 7,957     $ 6,699     $ 12,596     $ 10,470    
  Non-GAAP effective tax rate         20.5%       16.4%       15.1%       17.7%       14.1%    
                               
Reconciliation of net income and earnings per share (diluted):                       
GAAP net income       $    12,786     $    30,976     $    36,794     $    43,762     $    57,799    
                               
Adjustments to GAAP net income:                          
  Share-based compensation           4,148         4,055         1,697         8,203         3,302    
  Amortization of intangible assets           1,059         977         1,238         2,036         2,506    
  S-1 related costs         —        —          513       —          813    
  Legal fees - Term loan (payment holiday)         —          126       —          126       —     
  Acquisition related expenses         —          1,423       —          1,423       —     
  Foreign currency (gains)/losses           (47 )       3,384         (2,415 )       3,337         327    
  Tax effect of items excluded from non-GAAP results           5         (338 )       (97 )       (333 )       (719 )  
                               
Non-GAAP net income       $    17,951     $    40,603     $    37,730     $    58,554     $    64,028    
                               
Shares used in computing earnings per share (diluted)           23,359         23,257         23,038         23,314         22,877    
                               
Non-GAAP earnings per share (diluted)       $    0.77     $    1.75     $    1.64     $    2.51     $    2.80    
                               
GAAP earnings per share (diluted)       $   0.55     $   1.33     $   1.60     $   1.88     $   2.53    
                               

 

SMART Global Holdings, Inc.  
and Subsidiaries  
Reconciliation of GAAP Net Income to Adjusted EBITDA  
(In thousands)  
                           
        Three Months Ended   Six Months Ended  
         March 1,
2019 
   November 30,
2018 
   February 23,
2018 
   March 1,
2019 
   February 23,
2018 
 
                           
GAAP net income   $    12,786   $    30,976   $    36,794   $    43,762   $    57,799  
                           
  Share-based compensation expense       4,148       4,055     1,697     8,203     3,302  
  Amortization of intangible assets       1,059       977     1,238     2,036     2,506  
  Interest expense, net       5,273       5,875     4,230     11,148     8,829  
  Provision for income tax       4,644       7,619     6,602     12,263     9,751  
  Depreciation       5,868       5,431     5,120     11,299     10,122  
  S-1 related costs     —      —      513     —      813  
  Legal fees - term loan (payment holiday)     —        126     —        126     —   
  Acquisition-related expenses(1)     —        1,423     —        1,423     —   
                           
  Adjusted EBITDA   $    33,778   $    56,482   $    56,194   $    90,260   $    93,122  
                           
                 
  (1) Amounts in Q1'19 are related to acquisition of Penguin Computing in June 2018.              

 

SMART Global Holdings, Inc.  
and Subsidiaries  
Consolidated Balance Sheets  
(In thousands)  
                       
                March 1,   August 31,  
                  2019       2018    
Assets          
Current assets:            
  Cash and cash equivalents   $   95,174     $   31,375    
  Accounts receivable, net        326,470         237,212    
  Inventories         171,843         221,419    
  Prepaid expenses and other current assets       27,927         32,043    
          Total current assets       621,414         522,049    
Property and equipment, net       66,860         56,615    
Other noncurrent assets       17,702         22,449    
Intangible assets, net       24,302         26,255    
Goodwill             46,130         45,394    
          Total assets   $   776,408     $   672,762    
Liabilities and Shareholders’ Equity          
Current liabilities:          
  Accounts payable   $   257,316     $   223,186    
  Accrued liabilities       52,008         45,190    
  Current portion of long-term debt       14,694         27,409    
          Total current liabilities       324,018         295,785    
Long-term debt         194,537         184,190    
Other long-term liabilities       7,563         5,659    
          Total liabilities       526,118         485,634    
Shareholders’ equity:          
  Ordinary shares       691         678    
  Additional paid-in capital       262,603         250,191    
  Accumulated other comprehensive loss       (170,054 )       (175,995 )  
  Retained earnings       157,050         112,254    
          Total shareholders’ equity        250,290         187,128    
          Total liabilities and shareholders’ equity   $   776,408     $   672,762    
                       

 

SMART Global Holdings, Inc.  
and Subsidiaries  
Consolidated Statements of Cash Flows  
(In thousands)  
                                   
                Three Months Ended   Six Months Ended  
                March 1,
2019
  November 30,
2018
  February 23,
2018
   March 1,
2019 
   February 23,
2018 
 
Cash flows from operating activities:                      
  Net income     $   12,786     $   30,976     $   36,794     $   43,762     $   57,799    
  Adjustments to reconcile net income to net cash                       
    provided by operating activities:                      
      Depreciation and amortization       6,927         6,408         6,358         13,335         12,628    
      Share-based compensation       4,148         4,055         1,697         8,203         3,302    
      Provision for doubtful accounts receivable and sales returns       34         (104 )       39         (70 )       67    
      Deferred income tax benefit       (650 )       403         (734 )       (247 )       (954 )  
      (Gain) loss on disposal of property and equipment       (4 )       3         244         (1 )       244    
      Amortization of debt discounts and issuance costs       694         685         722         1,379         1,451    
      Changes in operating assets and liabilities:                      
        Accounts receivable       5,669         (89,441 )       14,894         (83,772 )       (40,907 )  
        Inventories       17,084         30,576         (17,810 )       47,660         (21,556 )  
        Prepaid expenses and other assets       7,424         (3,182 )       (67 )       4,242         1,691    
        Accounts payable       (17,017 )       48,574         (10,145 )       31,557         37,347    
        Accrued expenses and other liabilities       1,959         6,399         2,705         8,358         (2,158 )  
          Net cash provided by operating activities       39,054         35,352         34,697         74,406         48,954    
Cash flows from investing activities:                      
  Capital expenditures and deposits on equipment       (6,232 )       (13,384 )       (4,418 )       (19,616 )       (10,457 )  
  Proceeds from sale of property and equipment       32         21         66         53         66    
  Acquisition of business, net of cash acquired       (148 )     —        —          (148 )     —     
          Net cash used in investing activities       (6,348 )       (13,363 )       (4,352 )       (19,711 )       (10,391 )  
Cash flows from financing activities:                      
  Long-term debt payment       (1,712 )       (1,657 )       (6,125 )       (3,369 )       (12,309 )  
  Fees paid for revolving line of credit refinancing     —        —          (469 )     —          (768 )  
  Payment of costs related to initial public offering     —        —          (302 )     —          (1,591 )  
  Proceeds from borrowings under revolving line of credit       64,000         104,000         103,000         168,000         208,500    
  Repayments of borrowings under revolving line of credit       (64,000 )       (104,000 )       (103,000 )       (168,000 )       (208,500 )  
  Proceeds from issuance of ordinary shares from share option exercises     1,071         2,402         3,638         3,473         4,177    
  Proceeds from issuance of ordinary shares from ESPP     —          968       —          968       —     
  Withholding tax on restricted stock units     (219 )     —        —        (219 )     —     
          Net cash provided by (used in) financing activities       (860 )       1,713         (3,258 )       853         (10,491 )  
  Effect of exchange rate changes on the cash, cash equivalents                      
    and restricted cash *       374         2,018         1,468         2,392         1,237    
          Net increase in cash and cash equivalents and                      
            restricted cash *       32,220         25,720         28,555         57,940         29,309    
Cash, cash equivalents, and restricted cash at beginning of period *       62,954         37,234         30,217         37,234         29,463    
Cash, cash equivalents, and restricted cash at end of period *   $   95,174     $   62,954     $   58,772     $   95,174     $   58,772    
                                   
* Cash balance was adjusted to include restricted cash upon adoption of ASU 2016-18 in fiscal 2019.   

Investor Contacts:
Karl Motey
Vice President
Strategic Marketing and Communications
(510) 624-8213
karl.motey@smartm.com

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

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SMART Global Holdings, Inc.