SMART Global Holdings Reports Fourth Quarter and Full Year Fiscal 2019 Financial Results

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GlobeNewswire, Inc.

Retrieved on:

Thursday, October 3, 2019

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Geotags:

Newark, Us

Organisation:

SMART GLOBAL HOLDINGS, INC.

Summary

Key Points:

NEWARK, Calif., Oct. 03, 2019 (GLOBE NEWSWIRE) -- SMART Global Holdings, Inc. (“SMART” or the “Company”) (NASDAQ: SGH), today reported financial results for the fourth quarter and full year fiscal 2019 ended August 30, 2019.

Fourth Quarter Fiscal 2019 Highlights:

Net sales of $278.4 million
GAAP operating income of $11.4 million
GAAP net income of $5.6 million
Adjusted EBITDA of $25.2 million
GAAP diluted EPS of $0.24
Non-GAAP diluted EPS of $0.50

Full Year Fiscal 2019 Highlights:

Net sales of $1.2 billion
GAAP operating income of $89.1 million
GAAP net income of $51.3 million
Adjusted EBITDA of $134.7 million
GAAP diluted EPS of $2.19
Non-GAAP diluted EPS of $3.34
Cash increase of $66.8 million

“Fiscal 2019 was a year of two halves. In the first half we experienced a healthy memory pricing environment and our financial results benefited from that strength. In the second half of fiscal 2019 component pricing in the memory market declined significantly, which primarily impacted our business in Brazil and, to a lesser extent, our Specialty Memory Products, and resulted in overall revenues in fiscal 2019 declining year-over-year by 6%,” commented Ajay Shah, Chairman and CEO.

“Despite this challenging business environment, our Specialty Memory Products business grew year-over-year, and our Specialty Compute and Storage Solutions business finished strong representing 30% of total net sales for the fourth quarter of fiscal 2019. Additionally, during the year we added $66.8 million in cash while utilizing an additional $75 million to complete two significant acquisitions that are both accretive to earnings in the first full quarter of operations.”

“In Brazil, the new points-based system for local manufacturing became effective July 1, 2019. We are encouraged by the rebound in our forecasted unit volumes since the new rules went into effect,” continued Mr. Shah.

Jack Pacheco, Chief Operating Officer and Chief Financial Officer, added, “Fourth quarter fiscal 2019 financial results were below our previous guidance primarily due to weakness in our supply chain services business, which is reported as part of Specialty Memory Products.”


Quarterly Financial Results	GAAP (1)						Non-GAAP (2)
(In millions, except per share amounts)	Q4 FY19		Q3 FY19		Q4 FY18		Q4 FY19		Q3 FY19		Q4 FY18
Net sales	$	278.4	$	235.7	$	374.0	$	278.4	$	235.7	$	374.0
Gross profit	$	52.3	$	43.0	$	82.7	$	53.4	$	43.7	$	83.8
Operating income	$	11.4	$	7.4	$	45.0	$	18.0	$	13.2	$	51.8
Net income	$	5.6	$	1.9	$	29.7	$	11.9	$	7.9	$	40.0
Diluted earnings per share (EPS)	$	0.24	$	0.08	$	1.28	$	0.50	$	0.34	$	1.72


Annual Financial Results	GAAP (1)				Non-GAAP (2)
(In millions, except per share amounts)	FY19		FY18		FY19		FY18
Net sales	$	1,212.0	$	1,288.8	$	1,212.0	$	1,288.8
Gross profit	$	237.5	$	291.6	$	240.6	$	293.6
Operating income	$	89.1	$	170.2	$	113.2	$	188.8
Net income	$	51.3	$	119.5	$	78.3	$	147.0
Diluted earnings per share (EPS)	$	2.19	$	5.17	$	3.34	$	6.36

(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 first quarter of fiscal 2020 ending November 29, 2019. These statements are forward-looking and actual results may differ materially. SMART undertakes no obligation to update these statements.


Net Sales	$275 to $285 million
Gross Margin - GAAP / Non-GAAP	21% to 23%
Diluted EPS - GAAP	$0.30 to $0.40

Share-based compensation per share	$0.22
Intangible amortization per share	$0.16

Diluted EPS - Non-GAAP	$0.68 to $0.78

Expected diluted share count	23.9 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 6379732.

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: 6379732.

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; 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 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 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									Fiscal Year Ended
			August 30, 2019			May 31, 2019			August 31, 2018			August 30, 2019			August 31, 2018
Net sales:
	Brazil		$	89,123		$	100,982		$	198,624		$	536,495		$	797,849
	Specialty Memory			104,634			98,755			122,820			458,946			438,446
	Specialty Compute and Storage Solutions			84,643			35,920			52,526			216,558			52,526
		Total net sales		278,400			235,657			373,970			1,211,999			1,288,821
Cost of sales (1)(2)				226,108			192,622			291,291			974,472			997,235
	Gross profit			52,292			43,035			82,679			237,527			291,586
Operating expenses:
	Research and development (1) (2)			13,536			11,330			11,659			47,920			39,824
	Selling, general and administrative (1) (2)			30,024			24,306			29,039			103,226			84,541
	Change in estimated fair value of acquisition-related contingent consideration			(2,700	)		—			(3,000	)		(2,700	)		(3,000	)
		Total operating expenses		40,860			35,636			37,698			148,446			121,365
		Income from operations		11,432			7,399			44,981			89,081			170,221
Other income (expense):
	Interest expense, net			(4,567	)		(5,001	)		(6,217	)		(20,716	)		(19,144	)
	Other income (expense), net			819			97			(5,987	)		(2,161	)		(13,299	)
		Total other expense		(3,748	)		(4,904	)		(12,204	)		(22,877	)		(32,443	)
		Income before income taxes		7,684			2,495			32,777			66,204			137,778
Provision for income taxes				2,059			550			3,059			14,872			18,315
		Net income	$	5,625		$	1,945		$	29,718		$	51,332		$	119,463

Earnings per share:
	Basic		$	0.24		$	0.08		$	1.33		$	2.24		$	5.42
	Diluted		$	0.24		$	0.08		$	1.28		$	2.19		$	5.17

Shares used in computing earnings per share:
	Basic			23,366			23,005			22,383			22,959			22,051
	Diluted			23,825			23,330			23,270			23,468			23,119

(1) Includes share-based compensation expense as follows:
	Cost of sales		$	682		$	651		$	475		$	2,485		$	1,334
	Research and development			687			673			572			2,654			1,459
	Selling, general and administrative			4,194			3,109			2,911			13,060			7,764
		Total stock-based compensation expense	$	5,563		$	4,433		$	3,958		$	18,199		$	10,557

(2) Includes amortization of intangible assets expense as follows:
	Cost of sales		$	436		$	16		$	7		$	566		$	7
	Research and development			—			—			252			—			987
	Selling, general and administrative			2,165			961			2,144			5,048			5,136
		Total amortization expense	$	2,601		$	977		$	2,403		$	5,614		$	6,130


SMART Global Holdings, Inc.
and Subsidiaries
Reconciliation of Non-GAAP Financial Measures to GAAP Results
(In thousands, except per share data)

			Three Months Ended									Fiscal Year Ended
			August 30, 2019			May 31, 2019			August 31, 2018			August 30, 2019			August 31, 2018
Reconciliation of gross profit:
GAAP gross profit			$	52,292		$	43,035		$	82,679		$	237,527		$	291,586
	GAAP gross margin			18.8	%		18.3	%		22.1	%		19.6	%		22.6	%

Add: Share-based compensation included in cost of sales				682			651			475			2,485			1,334
Add: Intangible amortization included in cost of sales				436			16			7			566			7
Add: Purchase accounting adjustment				—			—			631			—			631

Non-GAAP gross profit			$	53,410		$	43,702		$	83,792		$	240,578		$	293,558
	Non-GAAP gross margin			19.2	%		18.5	%		22.4	%		19.8	%		22.8	%

Reconciliation of operating expenses:
GAAP operating expenses			$	40,860		$	35,636		$	37,698		$	148,446		$	121,365

Less: Share-based compensation expense included in opex
	Research and development			687			673			572			2,654			1,459
	Selling, general and administrative			4,194			3,109			2,911			13,060			7,764
		Total		4,881			3,782			3,483			15,714			9,223

Less: Amortization of intangible assets included in opex
	Research and development			—			—			252			—			987
	Selling, general and administrative			2,165			961			2,144			5,048			5,136
		Total		2,165			961			2,396			5,048			6,123

Less: S-1 related costs				—			—			—			—			813
Less: Legal fees - term loan (payment holiday)				—			—			—			126			—
Less: Acquisition-related expenses				1,068			431			2,844			2,922			3,435
Less: Contingent consideration fair value adjustment				(2,700	)		—			(3,000	)		(2,700	)		(3,000	)

Non-GAAP operating expenses			$	35,446		$	30,462		$	31,975		$	127,336		$	104,771

Reconciliation of income from operations:
GAAP income from operations			$	11,432		$	7,399		$	44,981		$	89,081		$	170,221
	GAAP operating margin			4.1	%		3.1	%		12.0	%		7.3	%		13.2	%

Add: Share-based compensation expense				5,563			4,433			3,958			18,199			10,557
Add: Amortization of intangible assets				2,601			977			2,403			5,614			6,130
Add: Purchase accounting adjustment				—			—			631			—			631
Add: S-1 related costs				—			—			—			—			813
Add: Legal fees - term loan (payment holiday)				—			—			—			126			—
Add: Acquisition-related expenses				1,068			431			2,844			2,922			3,435
Add: Contingent consideration fair value adjustment				(2,700	)		—			(3,000	)		(2,700	)		(3,000	)

Non-GAAP income from operations			$	17,964		$	13,240		$	51,817		$	113,242		$	188,787
	Non-GAAP operating margin			6.5	%		5.6	%		13.9	%		9.3	%		14.6	%


SMART Global Holdings, Inc.
and Subsidiaries
Reconciliation of Non-GAAP Financial Measures to GAAP Results
(In thousands, except per share data)

		Three Months Ended									Fiscal Year Ended
		August 30, 2019			May 31, 2019			August 31, 2018			August 30, 2019			August 31, 2018

Reconciliation of income before income taxes:
GAAP income before income taxes		$	7,684		$	2,495		$	32,777		$	66,204		$	137,778
Add: Share-based compensation expense			5,563			4,433			3,958			18,199			10,557
Add: Amortization of intangible assets			2,601			977			2,403			5,614			6,130
Add: Purchase accounting adjustment			—			—			631			—			631
Add: S-1 related costs			—			—			—			—			813
Add: Legal fees - Term loan (payment holiday)			—			—			—			126			—
Add: Acquisition-related expenses			1,068			431			2,844			2,922			3,435
Add: Contingent consideration fair value adjustment			(2,700	)		—			(3,000	)		(2,700	)		(3,000	)
Add: Foreign currency (gains)/losses			(332	)		144			5,968			3,149			13,227
Non-GAAP income before income taxes		$	13,884		$	8,480		$	45,581		$	93,514		$	169,571

Reconciliation of provision for income taxes:
GAAP provision for income taxes		$	2,059		$	550		$	3,059		$	14,872		$	18,315
	GAAP effective tax rate		26.8	%		22.0	%		9.3	%		22.5	%		13.3	%

Tax effect of adjustments to GAAP results			33			(14	)		(2,529	)		(314	)		(4,273	)
Non-GAAP provision for income taxes		$	2,026		$	564		$	5,588		$	15,186		$	22,588
	Non-GAAP effective tax rate		14.6	%		6.7	%		12.3	%		16.2	%		13.3	%

Reconciliation of net income and earnings per share (diluted):
GAAP net income		$	5,625		$	1,945		$	29,718		$	51,332		$	119,463

Adjustments to GAAP net income:
	Share-based compensation		5,563			4,433			3,958			18,199			10,557
	Amortization of intangible assets		2,601			977			2,403			5,614			6,130
	Purchase accounting adjustment		—			—			631			—			631
	S-1 related costs		—			—			—			—			813
	Legal fees - Term loan (payment holiday)		—			—			—			126			—
	Acquisition related expenses		1,068			431			2,844			2,922			3,435
	Contingent consideration fair value adjustment		(2,700	)		—			(3,000	)		(2,700	)		(3,000	)
	Foreign currency (gains)/losses		(332	)		144			5,968			3,149			13,227
	Tax effect of items excluded from non-GAAP results		33			(14	)		(2,529	)		(314	)		(4,273	)

Non-GAAP net income		$	11,858		$	7,916		$	39,993		$	78,328		$	146,983

Shares used in computing earnings per share (diluted)			23,825			23,330			23,270			23,468			23,119

Non-GAAP earnings per share (diluted)		$	0.50		$	0.34		$	1.72		$	3.34		$	6.36

GAAP earnings per share (diluted)		$	0.24		$	0.08		$	1.28		$	2.19		$	5.17


SMART Global Holdings, Inc.
and Subsidiaries
Reconciliation of GAAP Net Income to Adjusted EBITDA
(In thousands)

		Three Months Ended								Fiscal Year Ended
		August 30, 2019			May 31, 2019		August 31, 2018			August 30, 2019			August 31, 2018

GAAP net income		$	5,625		$	1,945	$	29,718		$	51,332		$	119,463

	Share-based compensation expense		5,563			4,433		3,958			18,199			10,557
	Amortization of intangible assets		2,601			977		2,403			5,614			6,130
	Interest expense, net		4,567			5,001		6,217			20,716			19,144
	Provision for income tax		2,059			550		3,059			14,872			18,315
	Depreciation		6,452			5,841		5,124			23,592			20,052
	S-1 related costs		—			—		—			—			813
	Legal fees - term loan (payment holiday)		—			—		—			126			—
	Purchase accounting adjustment(1)		—			—		631			—			631
	Acquisition-related expenses(1)		1,068			431		2,844			2,922			3,435
	Contingent consideration fair value adjustment(1)		(2,700	)		—		(3,000	)		(2,700	)		(3,000	)
											—			—
	Adjusted EBITDA	$	25,235		$	19,178	$	50,954		$	134,673		$	195,540


	(1) Amounts in FY19 & FY18 related to acquisitions of SMART EC & Inforce (July 2019) and Penguin Computing (June 2018).


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

			August 30,	August 31,
			2019	2018
Assets
Current assets:
	Cash and cash equivalents		$ 98,139	$ 31,375
	Accounts receivable, net		233,351	237,212
	Inventories		118,738	221,419
	Prepaid expenses and other current assets		37,950	32,043
		Total current assets	488,178	522,049
Property and equipment, net			68,345	56,615
Other noncurrent assets			12,784	22,449
Intangible assets, net			69,325	26,255
Goodwill			79,888	45,394
		Total assets	$ 718,520	$ 672,762
Liabilities and Shareholders’ Equity
Current liabilities:
	Accounts payable		$ 164,866	$ 223,186
	Accrued liabilities		64,898	45,190
	Current portion of long-term debt		24,054	27,409
		Total current liabilities	253,818	295,785
Long-term debt			182,450	184,190
Other long-term liabilities			10,327	5,659
		Total liabilities	446,595	485,634
Shareholders’ equity:
	Ordinary shares		712	678
	Additional paid-in capital		284,459	250,191
	Accumulated other comprehensive loss		(177,866)	(175,995)
	Retained earnings		164,620	112,254
		Total shareholders’ equity	271,925	187,128
		Total liabilities and shareholders’ equity	$ 718,520	$ 672,762


SMART Global Holdings, Inc.
and Subsidiaries
Consolidated Statements of Cash Flows
(In thousands)

					Three Months Ended									Fiscal Year Ended
					August 30, 2019			May 31, 2019			August 31, 2018			August 30, 2019			August 31, 2018
Cash flows from operating activities:
	Net income				$	5,625		$	1,945		$	29,718		$	51,332		$	119,463
	Adjustments to reconcile net income to net cash provided by (used in) operating activities:
		Depreciation and amortization				9,054			6,817			7,526			29,206			26,182
		Share-based compensation				5,563			4,433			3,958			18,199			10,557
		Provision for doubtful accounts receivable and sales returns				(66	)		46			(73	)		(90	)		(86	)
		Deferred income tax benefit				(1,149	)		677			(1,444	)		(719	)		(2,820	)
		Loss on disposal of property and equipment				56			22			461			77			691
		Write off of long-term asset				—			—			—			—			250
		Amortization of debt discounts and issuance costs				718			706			807			2,803			2,972
		Change in fair value of contingent consideration				(2,700	)		—			(3,000	)		(2,700	)		(3,000	)
		Changes in operating assets and liabilities:
			Accounts receivable			11,665			91,430			31,409			19,323			(55,297	)
			Inventories			19,312			35,111			(14,495	)		102,083			(42,435	)
			Prepaid expenses and other assets			(3,393	)		(2,455	)		(5,241	)		(1,606	)		(8,736	)
			Accounts payable			(19,684	)		(76,442	)		(66,331	)		(64,569	)		17,548
			Accrued expenses and other liabilities			23,939			(15,980	)		7,321			16,317			2,618
				Net cash provided by (used in) operating activities		48,940			46,310			(9,384	)		169,656			67,907
Cash flows from investing activities:
	Capital expenditures and deposits on equipment					(3,321	)		(10,496	)		(7,487	)		(33,433	)		(25,738	)
	Proceeds from sale of property and equipment					10			18			204			81			305
	Acquisitions of business, net of cash acquired					(75,940	)		—			(42,316	)		(76,088	)		(42,316	)
				Net cash used in investing activities		(79,251	)		(10,478	)		(49,599	)		(109,440	)		(67,749	)
Cash flows from financing activities:
	Long-term debt payment					(1,680	)		(1,704	)		(5,865	)		(6,753	)		(24,267	)
	Proceeds from issuance of long-term debt, net of costs paid					—			—			59,365			—			59,365
	Fees paid for revolving line of credit refinancing					—			—			—			—			(768	)
	Payment of costs related to initial public offering					—			—			—			—			(1,591	)
	Proceeds from borrowings under revolving line of credit					19,000			67,500			151,895			254,500			429,395
	Repayments of borrowings under revolving line of credit					(19,000	)		(67,500	)		(184,184	)		(254,500	)		(461,684	)
	Proceeds from issuance of ordinary shares from share option exercises					1,301			297			1,324			5,071			7,494
	Proceeds from issuance of ordinary shares from ESPP					—			1,335			—			2,303			—
	Withholding tax on restricted stock units					(290	)		(11	)		—			(520	)		—
				Net cash provided by (used in) financing activities		(669	)		(83	)		22,535			101			7,944
	Effect of exchange rate changes on the cash, cash equivalents and restricted cash *					3,020			(4,824	)		2,867			588			(331	)
				Net increase (decrease) in cash and cash equivalents and restricted cash *		(27,960	)		30,925			(33,581	)		60,905			7,771
Cash, cash equivalents, and restricted cash at beginning of period *						126,099			95,174			70,815			37,234			29,463
Cash, cash equivalents, and restricted cash at end of period *					$	98,139		$	126,099		$	37,234		$	98,139		$	37,234


* 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
[email protected]