SMART Global Holdings Reports Second Quarter Fiscal 2018 Financial Results

2018-03-22 / @nasdaq

 

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 ResultsGAAP (1) Non-GAAP (2)
(In millions, except per share amounts)Q2 FY18Q1 FY18Q2 FY17 Q2 FY18Q1 FY18Q2 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-GAAP21% 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 count23.2 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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