PENG 10-Q
Penguin Solutions, Inc. (PENG)
10-Q
2024-07-09
For: 2024-05-31
View Original
Added on
April 12, 2026
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
For the quarterly period ended May 31, 2024
OR
For the transition period from to
Commission File Number 001-38102
(Exact name of registrant as specified in its charter)
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | ||||
| (Address of Principal Executive Offices) | (Zip Code) | ||||
Registrant’s telephone number, including area code: (510 ) 623-1231
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||||||
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Accelerated filer | Non-accelerated filer | Smaller reporting company | Emerging growth company | |||||||||||
| ☒ | ☐ | ☐ | ||||||||||||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
As of July 1, 2024, the registrant had 52,914,787 ordinary shares outstanding.
Table of Contents
| Page | ||||||||
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Cautionary Note Regarding Forward-Looking Statements
This Quarterly Report on Form 10-Q (“Quarterly Report”) contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, Section 21E of the Securities Exchange Act of 1934, as amended, and the Private Securities Litigation Reform Act of 1995 that are not historical in nature, that are predictive or that depend upon or refer to future events or conditions. These statements include, but are not limited to, statements regarding our future financial or operating performance, the extent and timing of future revenues and expenses and customer demand; statements regarding the deployment of our products and services; statements regarding our reliance on third parties; and statements using words such as “anticipate,” “believe,” “could,” “estimate,” “expect,” “forecast,” “intend,” “plan,” “potential,” “should” and similar words and the negatives thereof. These forward-looking statements are based on our current expectations or forecasts of future events, circumstances, results or aspirations and are subject to a number of significant risks, uncertainties and other factors, many of which are outside of our control, including but not limited to, global business and economic conditions and growth trends in technology industries, our customer markets and various geographic regions; uncertainties in the geopolitical environment; the ability to manage our cost structure; disruptions in our operations or supply chain; changes in trade regulations or adverse developments in international trade relations and agreements; changes in currency exchange rates; overall information technology spending; appropriations for government spending; the success of our strategic initiatives including additional investments in new products and additional capacity; acquisitions of companies or technologies and the failure to successfully integrate and operate them or customers’ negative reactions to them; incurring unanticipated costs related to the sale of our SMART Brazil business; issues, delays or complications in integrating the operations of Stratus Technologies; limitations on or changes in the availability of supply of materials and components; fluctuations in material costs; the temporary or volatile nature of pricing trends in memory or elsewhere; deterioration in customer relationships; our dependence on a select number of customers and the timing and volume of customer orders; 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 LED market; changes to applicable tax regimes or rates; prices for the end products of our customers; strikes or labor disputes; deterioration in or loss of relations with any of our limited number of key vendors; the inability to maintain or expand government business; and the continuing availability of borrowings under term loans and revolving lines of credit and our ability to raise capital through debt or equity financings. These and other risks, uncertainties and factors are described in greater detail under the sections titled “Risk Factors,” “Critical Accounting Estimates,” “Results of Operations,” “Quantitative and Qualitative Disclosures About Market Risk” and “Liquidity and Capital Resources” contained in our Annual Report on Form 10-K for the fiscal year ended August 25, 2023, this Quarterly Report and the risks discussed in our other Securities and Exchange Commission (“SEC”) filings. The risks, uncertainties and factors outlined above, and in such SEC filings, do not constitute all risks, uncertainties and factors that could cause actual results of our Company to be materially different from such forward-looking statements. Accordingly, you are cautioned not to place undue reliance on any forward-looking statements.
The forward-looking statements included in this Quarterly Report are made only as of the date of this Quarterly Report. We do not intend, and have 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 Quarterly Report, except as required by law.
About This Quarterly Report
As used herein, “SGH,” “Company,” “Registrant,” “we,” “our,” “us” or similar terms refer to SMART Global Holdings, Inc. and its consolidated subsidiaries, unless the context indicates otherwise. Our fiscal year is the 52- or 53-week period ending on the last Friday in August. Fiscal years 2024 and 2023 contain 53 weeks and 52 weeks, respectively. All period references are to our fiscal periods unless otherwise indicated.
SGH, SMART Global Holdings, SMART Modular Technologies, SMART, Intelligent Platform Solutions, Penguin Computing, Penguin Edge, Penguin Solutions, the Penguin Computing logo, CreeLED, J Series, XLamp, Stratus, Stratus Technologies, the Stratus Logo and our other trademarks or service marks appearing in this Quarterly Report are our trademarks or registered trademarks. Trade names, trademarks and service marks of other companies appearing in this Quarterly Report are the property of their respective holders.
3 | |||||
PART I. Financial Information
Item 1. Financial Statements
INDEX TO FINANCIAL STATEMENTS
| Page | |||||
4 | |||||
SMART Global Holdings, Inc.
Consolidated Balance Sheets
(In thousands, except par value amount)
(Unaudited)
| As of | May 31, 2024 | August 25, 2023 | |||||||||
| Assets | |||||||||||
| Cash and cash equivalents | $ | $ | |||||||||
| Short-term investments | |||||||||||
| Accounts receivable, net | |||||||||||
| Inventories | |||||||||||
| Other current assets | |||||||||||
| Current assets of discontinued operations | |||||||||||
| Total current assets | |||||||||||
| Property and equipment, net | |||||||||||
| Operating lease right-of-use assets | |||||||||||
| Intangible assets, net | |||||||||||
| Goodwill | |||||||||||
| Deferred tax assets | |||||||||||
| Other noncurrent assets | |||||||||||
| Total assets | $ | $ | |||||||||
| Liabilities and Equity | |||||||||||
| Accounts payable and accrued expenses | $ | $ | |||||||||
| Current debt | |||||||||||
| Deferred revenue | |||||||||||
| Acquisition-related contingent consideration | |||||||||||
| Other current liabilities | |||||||||||
| Current liabilities of discontinued operations | |||||||||||
| Total current liabilities | |||||||||||
| Long-term debt | |||||||||||
| Noncurrent operating lease liabilities | |||||||||||
| Other noncurrent liabilities | |||||||||||
| Total liabilities | |||||||||||
| Commitments and contingencies | |||||||||||
| SMART Global Holdings shareholders’ equity: | |||||||||||
Ordinary shares, $ | |||||||||||
| Additional paid-in capital | |||||||||||
| Retained earnings | |||||||||||
Treasury shares, | ( | ( | |||||||||
| Accumulated other comprehensive income (loss) | ( | ||||||||||
| Total SGH shareholders’ equity | |||||||||||
| Noncontrolling interest in subsidiary | |||||||||||
| Total equity | |||||||||||
| Total liabilities and equity | $ | $ | |||||||||
The accompanying notes are an integral part of these consolidated financial statements.
5 | |||||
SMART Global Holdings, Inc.
Consolidated Statements of Operations
(In thousands, except per share amounts)
(Unaudited)
| Three Months Ended | Nine Months Ended | ||||||||||||||||||||||
| May 31, 2024 | May 26, 2023 | May 31, 2024 | May 26, 2023 | ||||||||||||||||||||
| Net sales: | |||||||||||||||||||||||
| Products | $ | $ | $ | $ | |||||||||||||||||||
| Services | |||||||||||||||||||||||
| Total net sales | |||||||||||||||||||||||
| Cost of sales: | |||||||||||||||||||||||
| Products | |||||||||||||||||||||||
| Services | |||||||||||||||||||||||
| Total cost of sales | |||||||||||||||||||||||
| Gross profit | |||||||||||||||||||||||
| Operating expenses: | |||||||||||||||||||||||
| Research and development | |||||||||||||||||||||||
| Selling, general and administrative | |||||||||||||||||||||||
| Impairment of goodwill | |||||||||||||||||||||||
| Change in fair value of contingent consideration | |||||||||||||||||||||||
| Other operating (income) expense | ( | ||||||||||||||||||||||
| Total operating expenses | |||||||||||||||||||||||
| Operating income (loss) | ( | ||||||||||||||||||||||
| Non-operating (income) expense: | |||||||||||||||||||||||
| Interest expense, net | |||||||||||||||||||||||
| Other non-operating (income) expense | |||||||||||||||||||||||
| Total non-operating (income) expense | |||||||||||||||||||||||
| Income (loss) before taxes | ( | ( | ( | ||||||||||||||||||||
| Income tax provision (benefit) | ( | ||||||||||||||||||||||
| Net income (loss) from continuing operations | ( | ( | ( | ||||||||||||||||||||
| Net income (loss) from discontinued operations | ( | ( | |||||||||||||||||||||
| Net income (loss) | ( | ( | ( | ||||||||||||||||||||
| Net income attributable to noncontrolling interest | |||||||||||||||||||||||
| Net income (loss) attributable to SGH | $ | $ | ( | $ | ( | $ | ( | ||||||||||||||||
| Basic earnings (loss) per share: | |||||||||||||||||||||||
| Continuing operations | $ | $ | ( | $ | ( | $ | ( | ||||||||||||||||
| Discontinued operations | ( | ( | |||||||||||||||||||||
| $ | $ | ( | $ | ( | $ | ( | |||||||||||||||||
| Diluted earnings (loss) per share: | |||||||||||||||||||||||
| Continuing operations | $ | $ | ( | $ | ( | $ | ( | ||||||||||||||||
| Discontinued operations | ( | ( | |||||||||||||||||||||
| $ | $ | ( | $ | ( | $ | ( | |||||||||||||||||
| Shares used in per share calculations: | |||||||||||||||||||||||
| Basic | |||||||||||||||||||||||
| Diluted | |||||||||||||||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
6 | |||||
SMART Global Holdings, Inc.
Consolidated Statements of Comprehensive Income (Loss)
(In thousands)
(Unaudited)
| Three Months Ended | Nine Months Ended | ||||||||||||||||||||||
| May 31, 2024 | May 26, 2023 | May 31, 2024 | May 26, 2023 | ||||||||||||||||||||
| Net income (loss) | $ | $ | ( | $ | ( | $ | ( | ||||||||||||||||
| Other comprehensive income (loss), net of tax: | |||||||||||||||||||||||
| Cumulative translation adjustment | ( | ||||||||||||||||||||||
| Cumulative translation adjustment reclassified to net income (loss) | ( | ||||||||||||||||||||||
| Gains (losses) on derivative instruments | |||||||||||||||||||||||
| Gains (losses) on investments | ( | ( | |||||||||||||||||||||
| Comprehensive income (loss) | ( | ( | |||||||||||||||||||||
| Comprehensive income attributable to noncontrolling interest | |||||||||||||||||||||||
| Comprehensive income (loss) attributable to SGH | $ | $ | ( | $ | $ | ( | |||||||||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
7 | |||||
SMART Global Holdings, Inc.
Consolidated Statements of Shareholders’ Equity
(In thousands)
(Unaudited)
| Shares Issued | Amount | Additional Paid-in Capital | Retained Earnings | Treasury Shares | Accumulated Other Comprehensive Income (Loss) | Total SGH Shareholders’ Equity | Non- controlling Interest in Subsidiary | Total Equity | |||||||||||||||||||||||||||||||||||||||||||||
| As of August 25, 2023 | $ | $ | $ | $ | ( | $ | ( | $ | $ | $ | |||||||||||||||||||||||||||||||||||||||||||
| Net income (loss) | — | — | — | ( | — | — | ( | ( | |||||||||||||||||||||||||||||||||||||||||||||
| Other comprehensive income (loss) | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||
| Shares issued under equity plans | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||
| Repurchase of ordinary shares | — | — | — | — | ( | — | ( | — | ( | ||||||||||||||||||||||||||||||||||||||||||||
| Share-based compensation expense | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||
| Distribution to noncontrolling interest | — | — | — | — | — | — | — | ( | ( | ||||||||||||||||||||||||||||||||||||||||||||
| As of December 1, 2023 | ( | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Net income (loss) | — | — | — | ( | — | — | ( | ( | |||||||||||||||||||||||||||||||||||||||||||||
| Other comprehensive income (loss) | — | — | — | — | — | ( | ( | — | ( | ||||||||||||||||||||||||||||||||||||||||||||
| Shares issued under equity plans | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||
| Repurchase of ordinary shares | — | — | — | — | ( | — | ( | — | ( | ||||||||||||||||||||||||||||||||||||||||||||
| Share-based compensation expense | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||
| As of March 1, 2024 | ( | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Net income | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||
| Other comprehensive income (loss) | — | — | — | — | — | ( | ( | — | ( | ||||||||||||||||||||||||||||||||||||||||||||
| Shares issued under equity plans | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||
| Repurchase of ordinary shares | — | — | — | — | ( | — | ( | — | ( | ||||||||||||||||||||||||||||||||||||||||||||
| Share-based compensation expense | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||
| As of May 31, 2024 | $ | $ | $ | $ | ( | $ | $ | $ | $ | ||||||||||||||||||||||||||||||||||||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
8 | ||||||||
SMART Global Holdings, Inc.
Consolidated Statements of Shareholders’ Equity
(In thousands)
(Unaudited)
| Shares Issued | Amount | Additional Paid-in Capital | Retained Earnings | Treasury Shares | Accumulated Other Comprehensive Income (Loss) | Total SGH Shareholders’ Equity | Non- controlling Interest in Subsidiary | Total Equity | |||||||||||||||||||||||||||||||||||||||||||||
| As of August 26, 2022 | $ | $ | $ | $ | ( | $ | ( | $ | $ | $ | |||||||||||||||||||||||||||||||||||||||||||
| Net income | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||
| Other comprehensive income (loss) | — | — | — | — | — | ( | ( | — | ( | ||||||||||||||||||||||||||||||||||||||||||||
| Shares issued under equity plans | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||
| Repurchase of ordinary shares | — | — | — | — | ( | — | ( | — | ( | ||||||||||||||||||||||||||||||||||||||||||||
| Share-based compensation expense | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||
| — | — | ( | — | — | ( | — | ( | ||||||||||||||||||||||||||||||||||||||||||||||
| As of November 25, 2022 | ( | ( | |||||||||||||||||||||||||||||||||||||||||||||||||||
| Net income (loss) | — | — | — | ( | — | — | ( | ( | |||||||||||||||||||||||||||||||||||||||||||||
| Other comprehensive income (loss) | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||
| Shares issued under equity plans | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||
| Repurchase of ordinary shares | — | — | — | — | ( | — | ( | — | ( | ||||||||||||||||||||||||||||||||||||||||||||
| Purchase of Capped Calls | — | — | ( | — | — | — | ( | — | ( | ||||||||||||||||||||||||||||||||||||||||||||
| Settlement of Capped Calls | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||
| Share-based compensation expense | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||
| Distribution to noncontrolling interest | — | — | — | — | — | — | — | ( | ( | ||||||||||||||||||||||||||||||||||||||||||||
| As of February 24, 2023 | ( | ( | |||||||||||||||||||||||||||||||||||||||||||||||||||
| Net income (loss) | — | — | — | ( | — | — | ( | ( | |||||||||||||||||||||||||||||||||||||||||||||
| Other comprehensive income (loss) | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||
| Shares issued under equity plans | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||
| Repurchase of ordinary shares | — | — | — | — | ( | — | ( | — | ( | ||||||||||||||||||||||||||||||||||||||||||||
| Share-based compensation expense | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||
| As of May 26, 2023 | $ | $ | $ | $ | ( | $ | ( | $ | $ | $ | |||||||||||||||||||||||||||||||||||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
9 | ||||||||
SMART Global Holdings, Inc.
Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
| Nine Months Ended | May 31, 2024 | May 26, 2023 | |||||||||
| Cash flows from operating activities | |||||||||||
| Net income (loss) | $ | ( | $ | ( | |||||||
| Net income (loss) from discontinued operations | ( | ||||||||||
| Net loss from continuing operations | ( | ( | |||||||||
| Adjustments to reconcile net loss from continuing operations to net cash provided by (used for) operating activities: | |||||||||||
| Depreciation expense and amortization of intangible assets | |||||||||||
| Amortization of debt discount and issuance costs | |||||||||||
| Share-based compensation expense | |||||||||||
| Impairment of goodwill | |||||||||||
| Change in fair value of contingent consideration | |||||||||||
| (Gain) loss on extinguishment or prepayment of debt | |||||||||||
| Deferred income taxes, net | ( | ||||||||||
| Other | ( | ||||||||||
| Changes in operating assets and liabilities: | |||||||||||
| Accounts receivable | |||||||||||
| Inventories | ( | ||||||||||
| Other assets | ( | ||||||||||
| Accounts payable and accrued expenses and other liabilities | ( | ||||||||||
| Payment of acquisition-related contingent consideration | ( | ( | |||||||||
| Net cash provided by operating activities from continuing operations | |||||||||||
| Net cash provided by (used for) operating activities from discontinued operations | ( | ||||||||||
| Net cash provided by operating activities | |||||||||||
| Cash flows from investing activities | |||||||||||
| Capital expenditures and deposits on equipment | ( | ( | |||||||||
| Proceeds from maturities of investment securities | |||||||||||
| Purchases of held-to-maturity investment securities | ( | ||||||||||
| Acquisition of business, net of cash acquired | ( | ||||||||||
| Other | ( | ||||||||||
| Net cash used for investing activities from continuing operations | ( | ( | |||||||||
| Net cash provided by (used for) investing activities from discontinued operations | ( | ||||||||||
| Net cash provided by (used for) investing activities | ( | ||||||||||
| Cash flows from financing activities | |||||||||||
| Repayments of debt | ( | ( | |||||||||
| Payment of acquisition-related contingent consideration | ( | ( | |||||||||
| Payments to acquire ordinary shares | ( | ( | |||||||||
| Distribution to noncontrolling interest | ( | ( | |||||||||
| Proceeds from issuance of ordinary shares | |||||||||||
| Proceeds from debt | |||||||||||
| Payment of premium in connection with convertible note exchange | ( | ||||||||||
| Net cash paid for settlement and purchase of Capped Calls | ( | ||||||||||
| Other | ( | ( | |||||||||
| Net cash provided by (used for) financing activities from continuing operations | ( | ||||||||||
| Net cash used for financing activities from discontinued operations | ( | ( | |||||||||
| Net cash provided by (used for) financing activities | ( | ||||||||||
| Effect of changes in currency exchange rates | ( | ||||||||||
| Net increase in cash and cash equivalents | |||||||||||
| Cash and cash equivalents at beginning of period | |||||||||||
| Cash and cash equivalents at end of period | $ | $ | |||||||||
| Cash and cash equivalents at end of period: | |||||||||||
| Continuing operations | $ | $ | |||||||||
| Discontinued operations | |||||||||||
| $ | $ | ||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
10 | |||||
SMART Global Holdings, Inc.
Notes to Consolidated Financial Statements
(Tabular amounts in thousands, except per share amounts)
(Unaudited)
Significant Accounting Policies
Basis of Presentation
The accompanying consolidated financial statements include the accounts of SMART Global Holdings, Inc. and its consolidated subsidiaries and have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) consistent in all material respects with those applied in our Annual Report on Form 10-K for the fiscal year ended August 25, 2023 and the applicable rules and regulations of the Securities and Exchange Commission (“SEC”) regarding interim financial information. Certain information and disclosures normally included in consolidated financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations. In the opinion of our management, the accompanying unaudited consolidated financial statements contain all necessary adjustments, consisting of a normal recurring nature, to fairly state the financial information set forth herein. These consolidated interim financial statements should be read in conjunction with the consolidated financial statements and accompanying notes included in our Annual Report on Form 10-K for the fiscal year ended August 25, 2023.
Presentation of SMART Brazil as Discontinued Operations: On June 13, 2023, we entered into an agreement to divest of an 81 % interest in SMART Modular Technologies do Brasil – Indústria e Comercio de Componentes Ltda. (“SMART Brazil”). We concluded that, as of August 25, 2023, (i) the net assets of SMART Brazil met the criteria for classification as held for sale and (ii) the proposed sale represented a strategic shift that was expected to have a major effect on our operations and financial results. On November 29, 2023, we completed the divestiture. The balance sheets, results of operations and cash flows of SMART Brazil have been presented as discontinued operations for all periods presented. SMART Brazil was previously included within our Memory Solutions segment. See “Divestiture of SMART Brazil.”
Unless otherwise noted, amounts and discussion within these notes to the consolidated financial statements relate to our continuing operations. Prior period comparative information has been conformed to current period presentation for continuing operations.
Reclassifications: Certain reclassifications have been made to prior period amounts to conform to current period presentation.
Fiscal Year: Our fiscal year is the 52- or 53-week period ending on the last Friday in August. Fiscal years 2024 and 2023 contain 53 weeks and 52 weeks, respectively. All period references are to our fiscal periods unless otherwise indicated.
Financial information for our subsidiaries in Brazil was included in our consolidated financial statements on a one-month lag because their fiscal years ended on July 31 of each year. In connection with the completion of the divestiture of an 81 % interest in SMART Brazil, we ceased consolidating the operations of SMART Brazil in our financial statements as of the November 29, 2023 disposal date. As a result, financial information for the first quarter of 2024 includes the four-month period for our SMART Brazil operations from August 1, 2023 to November 29, 2023.
Divestiture of SMART Brazil
Overview of Transaction
On November 29, 2023, we completed the previously announced divestiture of SMART Brazil pursuant to the terms of that certain Stock Purchase Agreement (the “Brazil Purchase Agreement”), by and among SMART Modular Technologies (LX) S.à r.l., a société à responsabilité limitée governed by the laws of Grand Duchy of Luxembourg and a wholly owned subsidiary of SGH (the “Brazil Seller”), Lexar Europe B.V., a company organized under the laws of The Netherlands (the “Brazil Purchaser”), Shenzhen Longsys Electronics Co., Ltd., a company limited by shares governed by the laws of the People’s Republic of China (“Longsys”), solely with respect to certain provisions therein, Shanghai Intelligent Memory Semiconductor Co., Ltd., a limited liability company governed by the laws of the People’s Republic of China and, solely with respect to certain provisions therein, SGH.
11 | |||||
Pursuant to the Brazil Purchase Agreement, Brazil Seller sold to Brazil Purchaser, and Brazil Purchaser purchased from Brazil Seller, 81 % of Brazil Seller’s right, title and interest in and to the outstanding quotas of SMART Brazil, with Brazil Seller retaining a 19 % interest in SMART Brazil (the “Retained Interest”) (the “Brazil Divestiture”).
At the closing of the Brazil Divestiture, Brazil Purchaser paid to Brazil Seller (based on a total enterprise value of $205 million for SMART Brazil) an upfront cash purchase price, subject to certain customary adjustments as set forth in the Brazil Purchase Agreement. In addition, pursuant to the Brazil Purchase Agreement, Brazil Seller has a right to receive, and Brazil Purchaser is obligated to pay, (i) a deferred payment due eighteen months following the closing and (ii) subject to and at the time of exercise of the Put/Call Option (as defined below), an additional deferred cash adjustment equal to 19 % of the amount of SMART Brazil’s net cash as of the closing (as calculated pursuant to the Brazil Purchase Agreement).
Put/Call Option: Pursuant to the Brazil Purchase Agreement, at the closing, SMART Brazil, Brazil Seller, Brazil Purchaser and Longsys entered into a Quotaholders Agreement, which provides Brazil Seller with a put option to sell the Retained Interest in SMART Brazil to Brazil Purchaser (the “Put Option”) during three exercise windows following SMART Brazil’s fiscal years ending December 31, 2026, December 31, 2027 or December 31, 2028 (the “Exercise Windows”), with such Exercise Windows beginning on June 15, 2027 and ending on July 15, 2027, beginning on June 15, 2028 and ending on July 15, 2028 and beginning on June 15, 2029 and ending on July 15, 2029, respectively. A call option has also been granted to Brazil Purchaser to require Brazil Seller to sell the Retained Interest to Brazil Purchaser during the Exercise Windows (together with the Put Option, the “Put/Call Option”). The price for the Put/Call Option is based on a 100 % enterprise value of 7.5 x net income for SMART Brazil for the preceding fiscal year at the time of exercise.
Consideration: The following is a summary of total consideration in exchange for the sale of an 81 % interest in SMART Brazil:
Cash received at closing (1) | $ | ||||
Post-closing adjustment for net cash and net working capital (2) | |||||
Deferred payment (3) | |||||
Deferred cash adjustment (4) | |||||
| Total consideration | $ | ||||
(1)Includes $26.8 million of cash received at closing for an estimated amount of net cash and an estimated net working capital amount (in excess of a minimum target amount) as of the closing.
(2)Represents the post-closing adjustment for net cash and net working capital, which was received in the third quarter of 2024 upon completion of the review of the final net cash and final working capital amounts.
(3)Represents the fair value of the deferred payment, comprised of a notional amount of $28.4 million, discounted at 7.5 % and due May 2025. The deferred payment was included in other current assets in the accompanying consolidated balance sheet as of May 31, 2024 and in other noncurrent assets as of August 25, 2023.
(4)Represents the fair value of the deferred cash adjustment, comprised of a notional amount of $4.8 million, discounted at 7.5 %, equal to 19 % of the amount of SMART Brazil’s net cash as of the closing (as calculated pursuant to the Brazil Purchase Agreement). The deferred cash adjustment, which is accounted for as a derivative financial instrument, is due at the time of exercise of the Put/Call Option and was included in other noncurrent assets in the accompanying consolidated balance sheet.
Presentation of SMART Brazil Operations
As of August 25, 2023, we concluded that the net assets of SMART Brazil met the criteria for classification as held for sale. In addition, the divestiture of SMART Brazil is expected to have a major effect on our operations and financial results. As a result, we have presented the results of operations, cash flows and financial position of SMART Brazil as discontinued operations in the accompanying consolidated financial statements and notes for all periods presented.
A disposal group classified as held for sale is measured at the lower of its carrying amount or fair value less costs to sell. Accordingly, we evaluated the carrying value of the net assets of SMART Brazil (including $206.3 million recognized within shareholders’ equity related to the cumulative translation adjustment from SMART Brazil), estimated costs to sell and expected proceeds and concluded the net assets were impaired as of August 25, 2023. As a result, we recognized an impairment charge of $153.0 million in the fourth quarter of 2023 to write down the carrying value of the net assets of SMART Brazil. In addition, we concluded that the outside basis of SMART Brazil inclusive of any withholding taxes should be recognized upon the classification as held for sale as of August 25, 2023. Accordingly, we recognized withholding taxes on the expected capital gain and deferred tax liabilities of $28.6 million in 2023.
12 | |||||
Assets and liabilities of SMART Brazil as of the November 29, 2023 disposal date and as of August 25, 2023 were as follows:
| As of | November 29, 2023 | August 25, 2023 | |||||||||
| Cash and cash equivalents | $ | $ | |||||||||
| Accounts receivable, net | |||||||||||
| Inventories | |||||||||||
| Other current assets | |||||||||||
| Total current assets | |||||||||||
| Property and equipment, net | |||||||||||
| Operating lease right-of-use assets | |||||||||||
| Goodwill | |||||||||||
| Other noncurrent assets | |||||||||||
| Total assets | |||||||||||
| Impairment of SMART Brazil assets | ( | ( | |||||||||
| Total assets, net of impairment | $ | $ | |||||||||
| Accounts payable and accrued expenses | $ | $ | |||||||||
| Current debt | |||||||||||
| Other current liabilities | |||||||||||
| Total current liabilities | |||||||||||
| Long-term debt | |||||||||||
| Noncurrent operating lease liabilities | |||||||||||
| Noncurrent deferred tax liabilities | |||||||||||
| Other noncurrent liabilities | $ | ||||||||||
| Total liabilities | $ | $ | |||||||||
| Net assets of discontinued operations | $ | ( | $ | ( | |||||||
| Reported as: | |||||||||||
| Current assets of discontinued operations | $ | ||||||||||
| Current liabilities of discontinued operations | |||||||||||
| Net assets of discontinued operations | $ | ( | |||||||||
13 | |||||
The following table presents the results of operations for SMART Brazil:
Three Months Ended | Nine Months Ended | ||||||||||||||||
| May 26, 2023 | May 31, 2024 | May 26, 2023 | |||||||||||||||
| Net sales | $ | $ | $ | ||||||||||||||
| Cost of sales | |||||||||||||||||
| Gross profit | ( | ||||||||||||||||
| Operating expenses: | |||||||||||||||||
| Research and development | |||||||||||||||||
| Selling, general and administrative | |||||||||||||||||
| Other operating (income) expense | |||||||||||||||||
| Total operating expenses | |||||||||||||||||
| Operating income (loss) | ( | ( | ( | ||||||||||||||
| Non-operating (income) expense: | |||||||||||||||||
Loss from divestiture of 81% interest in SMART Brazil | |||||||||||||||||
| Interest (income) expense, net | ( | ( | ( | ||||||||||||||
| Other non-operating (income) expense | |||||||||||||||||
| Total non-operating (income) expense | ( | ( | |||||||||||||||
| Income (loss) before taxes | ( | ( | ( | ||||||||||||||
| Income tax provision (benefit) | ( | ( | ( | ||||||||||||||
| Net income (loss) from discontinued operations | $ | ( | $ | ( | $ | ||||||||||||
Loss from Divestiture of SMART Brazil
The following table presents the calculation of the loss from the divestiture of an 81 % interest in SMART Brazil:
| Proceeds, less costs to sell and other expenses: | |||||
| Consideration | $ | ||||
| Costs to sell and other expenses | ( | ||||
| Basis in 81% interest in SMART Brazil: | |||||
| Net assets of SMART Brazil | |||||
Cumulative translation adjustment (1) | |||||
Gain on revalue of 19% Retained Interest in SMART Brazil (2) | |||||
| Pre-tax loss on divestiture of 81% interest in SMART Brazil | |||||
| Income tax provision | |||||
| Loss on divestiture of 81% interest in SMART Brazil | $ | ||||
(1)The sale of an 81 % interest in SMART Brazil resulted in the de-consolidation of SMART Brazil and, accordingly, the release of the related cumulative translation adjustment. Included in the basis calculation above is the balance of cumulative translation adjustment for SMART Brazil as of the closing. The release of the cumulative translation adjustment is included in net income (loss) from discontinued operations in the accompanying consolidated statement of operations.
(2)In connection with the transaction, we revalued our 19 % Retained Interest in SMART Brazil based on the implied value for 100 % of SMART Brazil, adjusted for lack of control premium. As of May 31, 2024, the carrying value of our remaining 19 % interest in SMART Brazil was $37.8 million and was included in other noncurrent assets in the accompanying consolidated balance sheet as a non-marketable equity investment.
14 | |||||
Recognition Periods: The loss from the divestiture of an 81 % interest in SMART Brazil was recognized as follows:
| Three Months Ended | |||||||||||||||||
| December 1, 2023 | August 25, 2023 | Total | |||||||||||||||
| Pre-tax loss on divestiture of 81% interest in SMART Brazil | $ | $ | $ | ||||||||||||||
| Income tax provision (benefit) | ( | ||||||||||||||||
| Loss on divestiture of 81% interest in SMART Brazil | $ | $ | $ | ||||||||||||||
Recently Issued Accounting Standards
In December 2023, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures. The amendments in this ASU are intended to increase transparency through improvements to annual disclosures primarily related to income tax rate reconciliation and income taxes paid. The amendments in this ASU are effective for us in 2026 for annual reporting, with early adoption permitted. The ASU may be applied on a prospective basis, although retrospective application is permitted. We are evaluating the timing and effects of this ASU on our income tax disclosures.
In November 2023, the FASB issued ASU 2023-07 – Segment Reporting (Topic 280): Improvements to Segment Reporting Disclosures, which will require an entity to provide more detailed information about its reportable segment expenses that are included within management’s measurement of profit and loss and will require certain annual disclosures to be provided on an interim basis. The amendments in this ASU are effective for us in 2025 for annual reporting and in 2026 for interim reporting, with early adoption permitted beginning in 2024, and is required to be applied using the full retrospective method of transition. We are evaluating the timing and effects of adoption of this ASU on our segment disclosures.
Business Acquisition
Stratus Technologies
On August 29, 2022 (the “Stratus Acquisition Date”), we completed the acquisition of Storm Private Holdings I Ltd., a Cayman Islands exempted company (“Stratus Holding Company” and together with its subsidiaries, “Stratus Technologies”), pursuant to the terms of that certain Share Purchase Agreement (the “Stratus Purchase Agreement”), dated as of June 28, 2022, by and among SGH, Stratus Holding Company and Storm Private Investments LP, a Cayman Islands exempted limited partnership (the “Stratus Seller”). Pursuant to the Stratus Purchase Agreement, among other matters, the Stratus Seller sold to SGH, and SGH purchased from the Stratus Seller, all of the Stratus Seller’s right, title and interest in and to the outstanding equity securities of Stratus Holding Company.
Purchase Price: At the closing of the transaction, we paid the Stratus Seller a cash purchase price of $225.0 million, subject to certain adjustments. In addition, the Stratus Seller had the right to receive, and we were obligated to pay, contingent consideration of up to $50.0 million (the “Stratus Earnout”) based on the gross profit performance of Stratus Technologies during the first full 12 fiscal months following the closing of the acquisition. In the second quarter of 2024, we paid in full $50.0 million related to the Stratus Earnout.
Cash and Investments
As of May 31, 2024 and August 25, 2023, all of our debt securities, the fair values of which approximated their carrying values, were classified as held to maturity. Cash, cash equivalents and short-term investments were as follows:
| As of May 31, 2024 | As of August 25, 2023 | ||||||||||||||||||||||
Cash and Cash Equivalents | Short-term Investments | Cash and Cash Equivalents | Short-term Investments | ||||||||||||||||||||
Cash | $ | $ | $ | $ | |||||||||||||||||||
| Level 1: | |||||||||||||||||||||||
| Money market funds | |||||||||||||||||||||||
| U.S. Treasury securities | |||||||||||||||||||||||
| $ | $ | $ | $ | ||||||||||||||||||||
15 | |||||
Non-marketable Equity Investments
As of May 31, 2024 and August 25, 2023, other noncurrent assets included $43.0 million and $4.2 million, respectively, of non-marketable equity investments, which are accounted for under the measurement alternative at cost less impairment, if any. In the event an observable price change occurs in an orderly transaction for an identical or a similar investment, the carrying value of investments would be remeasured to fair value as of the date that the observable transaction occurred, with any resulting gains or losses recorded in earnings.
Accounts Receivable
In the third quarter of 2023, we entered into a trade accounts receivable sale program with a third-party financial institution to sell certain of our trade accounts receivable on a non-recourse basis pursuant to a factoring arrangement. This program allows us to sell certain of our trade accounts receivables up to $60.0 million. As of May 31, 2024, there have been no trade accounts receivable sold under this program.
Inventories
| As of | May 31, 2024 | August 25, 2023 | |||||||||
| Raw materials | $ | $ | |||||||||
| Work in process | |||||||||||
| Finished goods | |||||||||||
| $ | $ | ||||||||||
As of May 31, 2024 and August 25, 2023, 21 % and 8 %, respectively, of total inventories were owned and held under our logistics services program.
Property and Equipment
| As of | May 31, 2024 | August 25, 2023 | |||||||||
| Equipment | $ | $ | |||||||||
| Buildings and building improvements | |||||||||||
| Furniture, fixtures and software | |||||||||||
| Land | |||||||||||
| Accumulated depreciation | ( | ( | |||||||||
| $ | $ | ||||||||||
Depreciation expense for property and equipment was $5.6 million and $20.3 million in the third quarter and first nine months of 2024, respectively, and $6.8 million and $19.2 million in the third quarter and first nine months of 2023, respectively.
16 | |||||
Intangible Assets and Goodwill
As of May 31, 2024 | As of August 25, 2023 | ||||||||||||||||||||||
Gross Amount | Accumulated Amortization | Gross Amount | Accumulated Amortization | ||||||||||||||||||||
| Intangible assets: | |||||||||||||||||||||||
| Technology | $ | $ | ( | $ | $ | ( | |||||||||||||||||
| Customer relationships | ( | ( | |||||||||||||||||||||
| Trademarks/trade names | ( | ( | |||||||||||||||||||||
| $ | $ | ( | $ | $ | ( | ||||||||||||||||||
| Goodwill by segment: | |||||||||||||||||||||||
| Intelligent Platform Solutions | $ | $ | |||||||||||||||||||||
| Memory Solutions | |||||||||||||||||||||||
| $ | $ | ||||||||||||||||||||||
In the first nine months of 2024 and 2023, we capitalized $1.4 million and $127.3 million, respectively, for intangible assets with weighted-average useful lives of 18.4 years and 6.1 years, respectively. Amortization expense for intangible assets was $9.9 million and $30.1 million in the third quarter and first nine months of 2024, respectively, and $11.8 million and $33.6 million in the third quarter and first nine months of 2023, respectively. Amortization expense is expected to be $9.9 million for the remainder of 2024, $35.6 million for 2025, $30.2 million for 2026, $29.6 million for 2027, $9.9 million for 2028 and $16.2 million for 2029 and thereafter.
In connection with our acquisition of Stratus Technologies in the first quarter of 2023, we capitalized $3.9 million of in-process research and development related to next generation fault tolerant architecture. Amortization of this technology commenced in the second quarter of 2024.
During the second quarter of 2023, we initiated a plan within our IPS segment pursuant to which we intend to wind down manufacturing and discontinue the sale of legacy products offered through our Penguin Edge business by approximately the end of 2025. As a result, we recorded aggregate charges of $19.1 million in 2023 to impair the carrying value of Penguin Edge goodwill. At each reporting date through the end of the wind-down period, we reassess the estimated remaining cash flows of the Penguin Edge business. We currently anticipate that the remaining goodwill of the Penguin Edge reporting unit of $16.1 million as of the end of the third quarter of 2024 may become further impaired in future periods.
Accounts Payable and Accrued Expenses
| As of | May 31, 2024 | August 25, 2023 | |||||||||
Accounts payable (1) | $ | $ | |||||||||
| Salaries, wages and benefits | |||||||||||
| Income and other taxes | |||||||||||
| Other | |||||||||||
| $ | $ | ||||||||||
(1)Included accounts payable for property and equipment of $1.2 million and $5.2 million as of May 31, 2024 and August 25, 2023, respectively.
17 | |||||
Debt
| As of | May 31, 2024 | August 25, 2023 | |||||||||
| Amended 2027 TLA | $ | $ | |||||||||
| 2029 Notes | |||||||||||
| 2026 Notes | |||||||||||
| Less current debt | ( | ||||||||||
| Long-term debt | $ | $ | |||||||||
Credit Facility
On February 7, 2022, SGH and SMART Modular Technologies, Inc. (collectively, the “Borrowers”) entered into a credit agreement (the “Original Credit Agreement”) with a syndicate of banks and Citizens Bank, N.A., as administrative agent (the “Administrative Agent”) that provided for (i) a term loan credit facility in an aggregate principal amount of $275.0 million (the “2027 TLA”) and (ii) a revolving credit facility in an aggregate principal amount of $250.0 million (the “2027 Revolver”), in each case, maturing on February 7, 2027 (subject to certain earlier “springing maturity” dates upon certain conditions specified in the Original Credit Agreement). On August 29, 2022, the Borrowers entered into the First Amendment (the “Incremental Amendment”; the Original Credit Agreement as amended by the Incremental Amendment, the “Amended Credit Agreement”) with and among the lenders party thereto and the Administrative Agent. The Incremental Amendment amended the Original Credit Agreement and (i) provides for incremental term loans under the Amended Credit Agreement in an aggregate amount of $300.0 million (the “Incremental Term Loans” and together with the 2027 TLA, the “Amended 2027 TLA”), which Incremental Term Loans are on the same terms as the term loans incurred under the Original Credit Agreement, (ii) increases the maximum First Lien Leverage Ratio (as defined in the Amended Credit Agreement) financial covenant from 3.00 :1.00 to 3.25 :1.00 and (iii) increases the aggregate amount of unrestricted cash and permitted investments netted from the definitions of Consolidated First Lien Debt and Consolidated Net Debt under the Amended Credit Agreement from $100.0 million to $125.0 million.
As of May 31, 2024, there was $425.0 million of principal amount outstanding under the Amended 2027 TLA, unamortized issuance costs were $4.3 million and the effective interest rate was 8.72 %. As of May 31, 2024, there were no amounts outstanding under the 2027 Revolver and unamortized issuance costs were $2.5 million.
Amended 2027 TLA
On February 29, 2024 and March 29, 2024, we prepaid $30.0 million and $75.0 million outstanding, respectively, under the Amended 2027 TLA and, in connection therewith, wrote off $0.3 million and $0.8 million, respectively, of unamortized issuance costs.
Convertible Senior Notes
Convertible Senior Notes Exchange
In the second quarter of 2023, we exchanged $150.0 million principal amount of 2.25 % Convertible Senior Notes due 2026 (the “2026 Notes”) for $150.0 million in aggregate principal amount of 2.00 % Convertible Senior Notes due 2029 (the “2029 Notes”), together with an aggregate of $15.6 million in cash, with such cash payment representing $14.1 million of premium paid for the 2026 Notes in excess of par value and $1.5 million of accrued and unpaid interest on the 2026 Notes. The exchange was accounted for as an extinguishment of the 2026 Notes and the issuance of the 2029 Notes. In connection therewith, we recognized an extinguishment loss in the second quarter of 2023, included in other non-operating expense, of $16.7 million, consisting of $14.1 million of premium paid to extinguish the 2026 Notes and $2.5 million for the write-off of unamortized issuance costs.
Convertible Senior Notes Interest
Unamortized debt discount and issuance costs are amortized over the terms of our 2026 Notes and 2029 Notes using the effective interest method. As of May 31, 2024 and August 25, 2023, the effective interest rate for our 2026 Notes was 2.83 2.40 Aggregate
18 | |||||
interest expense for our convertible notes consisted of contractual stated interest and amortization of discount and issuance costs and included the following:
| Three Months Ended | Nine Months Ended | ||||||||||||||||||||||
| May 31, 2024 | May 26, 2023 | May 31, 2024 | May 26, 2023 | ||||||||||||||||||||
| Contractual stated interest | $ | $ | $ | $ | |||||||||||||||||||
| Amortization of discount and issuance costs | |||||||||||||||||||||||
| $ | $ | $ | $ | ||||||||||||||||||||
As of August 26, 2022, the carrying amount of the equity components of the 2026 Notes, which was included in additional paid-in capital, was $50.8 million. As of the beginning of 2023, we adopted ASU 2020-06. In connection therewith, we reclassified $32.2 million from additional paid-in-capital to long-term debt and $18.6 million from additional paid-in-capital to retained earnings.
Maturities of Debt
As of May 31, 2024, maturities of debt were as follows:
| Remainder of 2024 | $ | ||||
| 2025 | |||||
| 2026 | |||||
| 2027 | |||||
| 2028 | |||||
| 2029 and thereafter | |||||
| Less unamortized discount and issuance costs | ( | ||||
| $ | |||||
Leases
We have operating leases through which we utilize facilities, offices and equipment in our manufacturing operations, research and development activities and selling, general and administrative functions. Sublease income was not significant in any period presented. The components of operating lease expense were as follows:
| Three Months Ended | Nine Months Ended | ||||||||||||||||||||||
| May 31, 2024 | May 26, 2023 | May 31, 2024 | May 26, 2023 | ||||||||||||||||||||
| Fixed lease cost | $ | $ | $ | $ | |||||||||||||||||||
| Variable lease cost | |||||||||||||||||||||||
| Short-term lease cost | |||||||||||||||||||||||
| $ | $ | $ | $ | ||||||||||||||||||||
Cash flows used for operating activities in the first nine months of 2024 and 2023 included payments for operating leases of $6.7 million and $6.1 million, respectively. Acquisitions of right-of-use assets were $1.6 million in the first nine months of 2024 and $10.6 million in the first nine months of 2023.
As of May 31, 2024 and August 25, 2023, the weighted-average remaining lease term for our operating leases was 10.3 years and 10.5 years, respectively and the weighted-average discount rate was 6.0 five years . In determining the present value of our operating lease liabilities, we have assumed we will not extend any lease terms.
19 | |||||
As of May 31, 2024, minimum payments of lease liabilities were as follows:
| Remainder of 2024 | $ | ||||
| 2025 | |||||
| 2026 | |||||
| 2027 | |||||
| 2028 | |||||
| 2029 and thereafter | |||||
| Less imputed interest | ( | ||||
| Present value of total lease liabilities | $ | ||||
Commitments and Contingencies
Product Warranty and Indemnities
We generally provide a limited warranty that our products are in compliance with applicable specifications existing at the time of delivery. Under our standard terms and conditions of sale, liability for certain failures of product during a stated warranty period is usually limited to repair or replacement of defective items or return of amounts paid for such items. Our warranty obligations are not material.
We are party to a number of agreements in which we have agreed to defend, indemnify and hold harmless our customers and suppliers from damages and costs, which may arise from product defects as well as from any alleged infringement by our products of third-party patents, trademarks or other proprietary rights. We believe our internal development processes and other policies and practices limit our exposure related to such indemnities. Maximum potential future payments cannot be estimated because many of these agreements do not have a maximum stated liability. However, to date, we have not had to reimburse any of our customers or suppliers for any significant losses related to these indemnities. We have not recorded any liability for such indemnities.
Contingencies
From time to time, we may be involved in legal matters that arise in the normal course of business. Litigation in general, and intellectual property, employment and shareholder litigation in particular, can be expensive and disruptive to normal business operations. Moreover, the results of complex legal proceedings are difficult to predict. We regularly review contingencies to determine whether the likelihood of loss has changed and to assess whether a reasonable estimate of the loss or range of loss can be made.
Equity
SGH Shareholders’ Equity
Share Repurchase Authorization
On April 4, 2022, our Board of Directors approved a $75.0 million share repurchase authorization (the “Initial Authorization”), under which we may repurchase our outstanding ordinary shares from time to time through open market purchases, privately-negotiated transactions or otherwise. The Initial Authorization has no expiration date but may be suspended or terminated by the Board of Directors at any time. On January 8, 2024, the Audit Committee of the Board of Directors approved an additional $75.0 million share repurchase authorization (the “Additional Authorization,” and together with the Initial Authorization, the “Current Authorization”). The Additional Authorization has no expiration date but may be suspended or terminated by the Board of Directors at any time. In the first nine months of 2024 and 2023, we repurchased 931 thousand and 533 thousand ordinary shares for $13.9 million and $8.4 million, respectively, under the Initial Authorization. As of May 31, 2024, an aggregate of $77.7 million remained available for the repurchase of our ordinary shares under the Current Authorization.
20 | |||||
Other Share Repurchases
Ordinary shares withheld as payment of withholding taxes and exercise prices in connection with the vesting or exercise of equity awards are treated as ordinary share repurchases. In the first nine months of 2024 and 2023, we repurchased 239 thousand and 217 thousand ordinary shares as payment of withholding taxes for $4.1 million and $3.1 million, respectively.
In connection with the convertible senior notes exchange in the second quarter of 2023, we repurchased 326 thousand ordinary shares for $5.4 million. See “Debt – Convertible Senior Notes – Convertible Senior Notes Exchange.”
Accumulated Other Comprehensive Income (Loss)
Changes in accumulated other comprehensive income (loss) by component for the first nine months of 2024 were as follows:
Cumulative Translation Adjustment | Gains (Losses) on Investments | Total | |||||||||||||||
| As of August 25, 2023 | $ | ( | $ | $ | ( | ||||||||||||
| Other comprehensive income (loss) before reclassifications | ( | ( | |||||||||||||||
| Reclassifications out of accumulated other comprehensive income | |||||||||||||||||
| Other comprehensive income (loss) | |||||||||||||||||
| As of May 31, 2024 | $ | $ | $ | ||||||||||||||
In connection with our divestiture of an 81 % interest in SMART Brazil, we reclassified $212.4 million of cumulative translation adjustment related to SMART Brazil from other accumulated comprehensive income to results of operations in the first quarter of 2024. See “Divestiture of SMART Brazil.”
Fair Value Measurements
| As of May 31, 2024 | As of August 25, 2023 | ||||||||||||||||||||||
| Fair Value | Carrying Value | Fair Value | Carrying Value | ||||||||||||||||||||
| Assets: | |||||||||||||||||||||||
| Derivative financial instrument | $ | $ | $ | $ | |||||||||||||||||||
| Liabilities: | |||||||||||||||||||||||
| Amended 2027 TLA | $ | $ | $ | $ | |||||||||||||||||||
| 2029 Notes | |||||||||||||||||||||||
| 2026 Notes | |||||||||||||||||||||||
The deferred cash adjustment resulting from the divestiture of an 81 % interest in SMART Brazil is accounted for as a derivative financial instrument and is revalued at the end of each reporting period. The fair value as of May 31, 2024, as measured on a recurring basis, was based on Level 2 measurements, including market-based observable inputs of interest rates and credit-risk spreads.
Equity Plans
As of May 31, 2024, 7.9 million of our ordinary shares were available for future awards under our equity plans.
The disclosures related to our restricted awards, share options and employee share purchase plan include both our continuing and discontinued operations.
21 | |||||
Restricted Share Awards and Restricted Share Units Awards (“Restricted Awards”)
Aggregate Restricted Award activity was as follows:
| Three Months Ended | Nine Months Ended | ||||||||||||||||||||||
| May 31, 2024 | May 26, 2023 | May 31, 2024 | May 26, 2023 | ||||||||||||||||||||
| Awards granted | |||||||||||||||||||||||
| Weighted-average grant date fair value per share | $ | $ | $ | $ | |||||||||||||||||||
| Aggregate vesting date fair value of shares vested | $ | $ | $ | $ | |||||||||||||||||||
As of May 31, 2024, total unrecognized compensation costs for unvested Restricted Awards was $82.1 million, which was expected to be recognized over a weighted-average period of 2.4 years.
Share Options
As of May 31, 2024, total aggregate unrecognized compensation costs for unvested options was $0.3 million, which was expected to be recognized over a weighted-average period of 0.3 years.
Employee Share Purchase Plan (“ESPP”)
Under our ESPP, employees purchased 584 thousand ordinary shares for $6.8 million in the first nine months of 2024 and 602 thousand ordinary shares for $6.6 million in the first nine months of 2023.
Share-Based Compensation Expense
Share-based compensation expense for our continuing operations was as follows:
| Three Months Ended | Nine Months Ended | ||||||||||||||||||||||
| May 31, 2024 | May 26, 2023 | May 31, 2024 | May 26, 2023 | ||||||||||||||||||||
| Share-based compensation expense by caption: | |||||||||||||||||||||||
| Cost of sales | $ | $ | $ | $ | |||||||||||||||||||
| Research and development | |||||||||||||||||||||||
| Selling, general and administrative | |||||||||||||||||||||||
| $ | $ | $ | $ | ||||||||||||||||||||
Income tax benefits for share-based awards were $1.9 million and $5.4 million in the third quarter and first nine months of 2024, respectively, and $1.6 million and $5.0 million in the third quarter and first nine months of 2023, respectively.
Revenue and Customer Contract Balances
Net Sales and Gross Billings
We provide certain logistics services on an agent basis, whereby we procure materials and services on behalf of our customers and then resell such materials and services to our customers. Our materials logistics business includes procurement, logistics, inventory management, temporary warehousing, kitting and/or packaging services. While we take title to inventory under such arrangements, control of such inventory does not transfer to us as we do not, at any point, have the ability to direct the use, and thereby obtain the benefits of, the inventory.
Gross amounts invoiced to customers in connection with these agent services include amounts related to the services performed by us in addition to the cost of the materials and services procured. However, only the amount related to the agent component is recognized as revenue in our results of operations. We generally recognize revenue for these procurement, logistics and inventory management services upon the completion of such services, which generally occurs at
22 | |||||
the time of shipment of product to the customer. The cost of materials and services invoiced to our customers under these arrangements, but not recognized as revenue or cost of sales in our results of operations, were as follows:
| Three Months Ended | Nine Months Ended | ||||||||||||||||||||||
| May 31, 2024 | May 26, 2023 | May 31, 2024 | May 26, 2023 | ||||||||||||||||||||
Cost of materials and services invoiced in connection with logistics services | $ | $ | $ | $ | |||||||||||||||||||
Customer Contract Balances
| As of | May 31, 2024 | August 25, 2023 | |||||||||
Contract assets (1) | $ | $ | |||||||||
Contract liabilities: (2) | |||||||||||
Deferred revenue | $ | $ | |||||||||
| Customer advances | |||||||||||
| $ | $ | ||||||||||
(1)Contract assets are included in other current and noncurrent assets.
(2)Contract liabilities are included in other current and noncurrent liabilities based on the timing of when our customer is expected to take control of the asset or receive the benefit of the service.
Contract assets represent amounts recognized as revenue for which we do not have the unconditional right to consideration.
Deferred revenue represents amounts received from customers in advance of satisfying performance obligations. As of May 31, 2024, we expect to recognize revenue of $88.7 million of the $111.5 million balance in the next 12 months and the remaining amount thereafter. In the first nine months of 2024, we recognized revenue of $47.1 million from satisfying performance obligations related to amounts included in deferred revenue as of August 25, 2023. Deferred revenue includes $10.2 million and $10.9 million as of May 31, 2024 and August 25, 2023, respectively, related to contracts that contain termination rights.
Customer advances represent amounts received from customers for advance payments to secure product. In the first nine months of 2024, we recognized revenue of $1.3 million from satisfying performance obligations related to amounts included in customer advances as of August 25, 2023.
As of May 31, 2024 and August 25, 2023, other current liabilities included $12.7 million and $12.5 million, respectively, for estimates of consideration payable to customers, including estimates for pricing adjustments and returns.
Other Operating (Income) Expense
In 2024 and 2023, we initiated plans that included workforce reductions and the elimination of certain projects across our businesses. In connection therewith, we recorded restructure charges of $6.7 million and $5.4 million in the first nine months of 2024 and 2023, respectively, primarily for employee severance costs and other benefits. We anticipate that these activities will continue into future quarters and anticipate recording additional restructure charges. As of May 31, 2024, $0.9 million remained unpaid, which is expected to be paid by the end of calendar 2024.
23 | |||||
Other Non-operating (Income) Expense
| Three Months Ended | Nine Months Ended | ||||||||||||||||||||||
| May 31, 2024 | May 26, 2023 | May 31, 2024 | May 26, 2023 | ||||||||||||||||||||
| Loss (gain) on extinguishment or prepayment of debt | $ | $ | $ | $ | |||||||||||||||||||
| Loss (gain) from changes in foreign currency exchange rates | |||||||||||||||||||||||
| Loss (gain) on disposition of assets | ( | ( | ( | ||||||||||||||||||||
| Other | ( | ( | ( | ( | |||||||||||||||||||
| $ | $ | $ | $ | ||||||||||||||||||||
Income Taxes
| Three Months Ended | Nine Months Ended | ||||||||||||||||||||||
| May 31, 2024 | May 26, 2023 | May 31, 2024 | May 26, 2023 | ||||||||||||||||||||
| Income (loss) before taxes | $ | $ | ( | $ | ( | $ | ( | ||||||||||||||||
| Income tax provision (benefit) | ( | ||||||||||||||||||||||
| Effective tax rate | ( | % | ( | % | ( | % | ( | % | |||||||||||||||
Income taxes includes a provision (benefit) for federal, state and foreign taxes based on the annual estimated effective tax rate applicable to us and our subsidiaries, adjusted for certain discrete items, which are fully recognized in the period they occur. We have historically determined our interim income tax provision (benefit) by applying the annual estimated effective income tax rate expected to be applicable for the full fiscal year to the income (loss) before taxes for jurisdictions which are subject to income tax. In determining the full year estimate, we do not include the impact of unusual and/or infrequent items, which may cause significant variations in the customary relationship between income tax provision (benefit) and income (loss) before taxes. Accordingly, the interim effective tax rate may not be reflective of the annual estimated effective tax rate. Additionally, our income tax provision (benefit) is subject to volatility and could be impacted by changes in our geographic earnings, non-deductible share-based compensation and certain tax credits.
Our effective tax rate was (27.0 )% and (32.5 )% in the third quarter and first nine months of 2024, respectively, and differed from the U.S. statutory rate primarily due to losses generated in a jurisdiction where no tax benefit can be recognized and to withholding taxes and state income taxes, partially offset by the effect of a $4.5 million benefit recognized in the third quarter of 2024 upon completion of a research and development tax credit study for prior years. Our effective tax rate was (59.9 )% and (91.5 )% in the third quarter and first nine months of 2023, respectively, and differed from the U.S. statutory rate primarily due to losses generated in a jurisdiction where no tax benefit can be recognized.
Determining the consolidated income tax provision (benefit), income tax liabilities and deferred tax assets and liabilities involves judgment. We calculate and provide for income taxes in each of the tax jurisdictions in which we operate, which involves estimating current tax exposures as well as making judgments regarding the recoverability of deferred tax assets in each jurisdiction. The estimates used could differ from actual results, which may have a significant impact on operating results in future periods.
24 | |||||
Earnings Per Share
| Three Months Ended | Nine Months Ended | ||||||||||||||||||||||
| May 31, 2024 | May 26, 2023 | May 31, 2024 | May 26, 2023 | ||||||||||||||||||||
| Net income (loss) from continuing operations | $ | $ | ( | $ | ( | $ | ( | ||||||||||||||||
| Net income (loss) from discontinued operations | ( | ( | |||||||||||||||||||||
| Net income (loss) attributable to SGH – Basic and Diluted | $ | $ | ( | $ | ( | $ | ( | ||||||||||||||||
| Weighted-average shares outstanding – Basic | |||||||||||||||||||||||
| Dilutive effect of equity plans and convertible notes | |||||||||||||||||||||||
| Weighted-average shares outstanding – Diluted | |||||||||||||||||||||||
| Basic earnings (loss) per share: | |||||||||||||||||||||||
| Continuing operations | $ | $ | ( | $ | ( | $ | ( | ||||||||||||||||
| Discontinued operations | ( | ( | |||||||||||||||||||||
| $ | $ | ( | $ | ( | $ | ( | |||||||||||||||||
| Diluted earnings (loss) per share: | |||||||||||||||||||||||
| Continuing operations | $ | $ | ( | $ | ( | $ | ( | ||||||||||||||||
| Discontinued operations | ( | ( | |||||||||||||||||||||
| $ | $ | ( | $ | ( | $ | ( | |||||||||||||||||
Below are unweighted potentially dilutive shares that were not included in the computation of diluted earnings per share because to do so would have been antidilutive:
| Three Months Ended | Nine Months Ended | ||||||||||||||||||||||
| May 31, 2024 | May 26, 2023 | May 31, 2024 | May 26, 2023 | ||||||||||||||||||||
| Equity plans | |||||||||||||||||||||||
| Stratus Technologies contingently issuable shares | |||||||||||||||||||||||
Segment and Other Information
Segment information presented below is consistent with how our chief operating decision maker evaluates operating results to make decisions about allocating resources and assessing performance. We have the following three business units, which are our reportable segments:
•Memory Solutions: Our Memory Solutions group, under our SMART Modular brand, provides high performance and reliable memory solutions through the design, development and advanced packaging of leading-edge to extended lifecycle products. These specialty products are tailored to meet customer-specific requirements across networking and communications, enterprise storage and computing, including server applications and other vertical markets. These products are marketed to original equipment manufacturers and to commercial and government customers. The Memory Solutions group also offers SMART Supply Chain Services, which provides customized, integrated supply chain services to enable our customers to better manage supply chain planning and execution, reduce costs and increase productivity.
•Intelligent Platform Solutions: Our IPS group, under our Penguin Solutions and Stratus Technologies brands, offers specialized platform solutions and services for high-performance computing, artificial intelligence, machine learning, advanced modeling and the internet of things that span the continuum of edge, core and cloud. Our solutions are designed specifically for customers across multiple markets, including hyperscale, financial services, energy, government, education, healthcare and others.
•LED Solutions: Our LED Solutions group, under our CreeLED brand, offers a broad portfolio of application-optimized LEDs focused on improving lumen density, intensity, efficacy, optical control and/or reliability. Backed by
25 | |||||
expert design assistance and superior sales support, our LED products enable our customers to develop and market LED-based products for general lighting, video screens and specialty lighting applications.
Segments are determined based on sources of revenue, types of customers and operating performance. There are no differences between the accounting policies for our segment reporting and our consolidated results of operations. Operating expenses directly associated with the activities of a specific segment are charged to that segment. Certain other indirect operating income and expenses are generally allocated to segments based on their respective percentage of net sales. We do not identify (other than goodwill) or report internally our assets nor allocate certain expenses and amortization, interest, other non-operating (income) expense or taxes to segments.
Three Months Ended | Nine Months Ended | ||||||||||||||||||||||
| May 31, 2024 | May 26, 2023 | May 31, 2024 | May 26, 2023 | ||||||||||||||||||||
| Net sales: | |||||||||||||||||||||||
| Memory Solutions | $ | $ | $ | $ | |||||||||||||||||||
| Intelligent Platform Solutions | |||||||||||||||||||||||
| LED Solutions | |||||||||||||||||||||||
| Total net sales | $ | $ | $ | $ | |||||||||||||||||||
| Segment operating income: | |||||||||||||||||||||||
| Memory Solutions | $ | $ | $ | $ | |||||||||||||||||||
| Intelligent Platform Solutions | |||||||||||||||||||||||
| LED Solutions | ( | ( | ( | ( | |||||||||||||||||||
| Total segment operating income | |||||||||||||||||||||||
| Unallocated: | |||||||||||||||||||||||
| Share-based compensation expense | ( | ( | ( | ( | |||||||||||||||||||
| Amortization of acquisition-related intangibles | ( | ( | ( | ( | |||||||||||||||||||
| Flow through of inventory step up | ( | ||||||||||||||||||||||
| Cost of sales-related restructure | ( | ( | ( | ( | |||||||||||||||||||
| Diligence, acquisition and integration expense | ( | ( | ( | ( | |||||||||||||||||||
| Impairment of goodwill | ( | ||||||||||||||||||||||
| Change in fair value of contingent consideration | ( | ( | |||||||||||||||||||||
| Restructure charge | ( | ( | ( | ||||||||||||||||||||
| Other | ( | ||||||||||||||||||||||
| Total unallocated | ( | ( | ( | ( | |||||||||||||||||||
| Consolidated operating income (loss) | $ | $ | ( | $ | $ | ||||||||||||||||||
26 | |||||
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis should be read in conjunction with the consolidated financial statements and accompanying notes included elsewhere in this Quarterly Report and in our Annual Report on Form 10-K for the fiscal year ended August 25, 2023. This discussion contains forward-looking statements that involve risks, uncertainties and other factors. Our actual results could differ materially from those contained in these forward-looking statements due to a number of risks, uncertainties and other factors, including those discussed below and elsewhere in this Quarterly Report and in our Annual Report on Form 10-K for the fiscal year ended August 25, 2023. See also “Cautionary Note Regarding Forward-Looking Statements.”
Our fiscal year is the 52- or 53-week period ending on the last Friday in August. Fiscal years 2024 and 2023 contain 53 weeks and 52 weeks, respectively. All period references are to our fiscal periods unless otherwise indicated. All tabular amounts are in thousands. Financial information for our subsidiaries in Brazil was included in our consolidated financial statements on a one-month lag because their fiscal years ended on July 31 of each year. In connection with the completion of the divestiture of an 81% interest in SMART Brazil, we ceased consolidating the operations of SMART Brazil in our financial statements as of the November 29, 2023 disposal date. As a result, financial information for the first quarter of 2024 includes the four-month period for our SMART Brazil operations from August 1, 2023 to November 29, 2023.
Overview
For an overview of our business, see “PART I – Item 1. Business” of our Annual Report on Form 10-K for the fiscal year ended August 25, 2023.
Divestiture of SMART Brazil
On November 29, 2023, we completed our previously announced divestiture of SMART Modular Technologies Brasil – Indústria e Comercio de Componentes Ltda. (“SMART Brazil”) to Lexar Europe B.V., an affiliate of Shenzhen Longsys Electronics Co. Ltd.
SMART Brazil operates as a stand-alone business which assembles and tests modules for electronics manufacturers that sell devices to Brazilian consumers. In line with our strategic priorities, the majority divestiture of our standards-based, commodity module business in Brazil will enable us to focus on our strategy of delivering high-performance, high availability solutions to our enterprise customers. This transaction also strengthens our financial position, enabling us to increase our strategic investments into domestic research and development and U.S.-based production of advanced technologies.
Presentation of SMART Brazil as Discontinued Operations: On June 13, 2023, we entered into an agreement to divest of an 81% interest in SMART Brazil. We concluded that, as of August 25, 2023, (i) the net assets of SMART Brazil met the criteria for classification as held for sale and (ii) the proposed sale represented a strategic shift that was expected to have a major effect on our operations and financial results. The balance sheets, results of operations and cash flows of SMART Brazil have been presented as discontinued operations for all periods presented. SMART Brazil was previously included within our Memory Solutions segment.
See “Item 1. Financial Statements – Notes to Consolidated Financial Statements – Divestiture of SMART Brazil.”
Acquisition of Stratus Technologies
On August 29, 2022, we completed the acquisition of Storm Private Holdings I Ltd., a Cayman Islands exempted company (together with its subsidiaries, “Stratus Technologies”). At the closing, SGH paid a cash purchase price of $225 million, subject to certain adjustments. In addition, the seller had the right to receive, and SGH was obligated to pay, contingent consideration of up to $50 million (the “Stratus Earnout”) based on the gross profit performance of the Stratus Technologies business during the first full 12 fiscal months of Stratus Technologies following the closing of the acquisition. Throughout 2023, we adjusted the fair value of the Stratus Earnout by an aggregate of $29.0 million and, as of August 25, 2023, current liabilities included $50.0 million for the amount payable in connection with the Stratus Earnout. In the second quarter of 2024, we paid in full $50.0 million related to the Stratus Earnout.
See “Item 1. Financial Statements – Notes to Consolidated Financial Statements – Business Acquisition – Stratus Technologies.”
27 | |||||
Factors Affecting Our Operating Performance
Macro-Economic Demand Factors. Our business segments each have their own unique set of demand factors. Demand in our Memory Solutions group is driven by end-market demand from OEMs for customer-specific solutions in vertical markets such as industrial, government, networking, high-performance compute and enterprise storage, as well as emerging demand for higher density and greater bandwidth solutions for AI deployments. Our IPS business is driven by demand for high compute solutions across AI and machine learning initiatives, as well as traditional workload optimization and efficiency applications. Finally, demand for our LED products is derived from targeted end-market applications, such as general high-power and mid-power lighting and specialty lighting, including video and horticulture applications. We believe our diversified business segments may provide a natural hedge against downturns in any particular industry although broader macro-economic trends, such as the COVID-19 pandemic, can adversely affect all three segments concurrently.
Shifts in the Mix of Our Revenue. Shifts in the mix of revenue from our operating segments, which can vary significantly from period to period, can impact our business and operating results, including gross and operating margins. For example, our IPS group has shown solid growth, but is subject to variability in its sales and margin profile from period to period, as recognition of revenue is tied to customer decisions as to the completion of delivery and system go-live events and margin is driven by the extent to which higher margin software and managed services comprise IPS sales. Our resource commitments and planning for each segment are relatively fixed in the short term, and as such, variability in expected revenue mix will have direct implications for our operating income and margins.
Our Ability to Identify, Complete and Successfully Integrate Acquisitions. A substantial portion of our growth over the last several years has been driven by acquisitions, and we intend to continue to use corporate development as an engine for growth. Within our existing segments, we plan to pursue acquisitions to expand features and functionality, expand into adjacent businesses and grow our customer base and geographic footprint. From time to time, we may seek to expand our addressable market by entering new business segments where, as we did with our LED business and Stratus Technologies business, we identify a business opportunity at scale with a path to being accretive to our overall operations in the near term. If we are unable to identify and complete attractive acquisitions, we may not be successful in growing our revenue and/or expanding our margins. Any acquisitions we do complete may require us to incur debt or raise capital through equity financings or may subject us to unforeseen liabilities or operational challenges that in turn impede our ability to realize the expected returns on our investment.
Disruptions in Our Supply Chain May Adversely Affect Our Businesses. We depend on third-party suppliers for key components of our products, such as commodity DRAM components from offshore foundries that we use in our specialty memory products and third-party wafers that we use in our memory and LED businesses. We have adopted this “Fab-Light” business model to reduce our capital expenditures and operating expenses, while affording greater flexibility in adapting to shifts in demand and other market trends. Our Fab-Light business model has contributed significantly to margin expansion in our overall business. However, our reliance on third-party manufacturers exposes us to risk of supply chain disruption and lost business. For example, the recent global semiconductor shortage has adversely affected our operating results. In addition, the recent high demand for, and limited supply of, AI components globally, can affect our sourcing of these components and affect timing of deployments. If such disruptions worsen or are prolonged, or if there is meaningful disruption in our supply arrangement with any of our third-party suppliers, our operating results and financial condition could be adversely affected.
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Results of Operations
| Three Months Ended | Nine Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||
| May 31, 2024 | May 26, 2023 | May 31, 2024 | May 26, 2023 | ||||||||||||||||||||||||||||||||||||||||||||
| Net sales: | |||||||||||||||||||||||||||||||||||||||||||||||
| Memory Solutions | $ | 91,629 | 30.5 | % | $ | 109,458 | 31.8 | % | $ | 260,594 | 30.3 | % | $ | 338,083 | 30.1 | % | |||||||||||||||||||||||||||||||
| Intelligent Platform Solutions | 144,968 | 48.2 | % | 170,854 | 49.6 | % | 405,197 | 47.1 | % | $ | 604,276 | 53.7 | % | ||||||||||||||||||||||||||||||||||
| LED Solutions | 63,983 | 21.3 | % | 64,106 | 18.6 | % | 193,857 | 22.6 | % | $ | 182,233 | 16.2 | % | ||||||||||||||||||||||||||||||||||
| Total net sales | 300,580 | 100.0 | % | 344,418 | 100.0 | % | 859,648 | 100.0 | % | $ | 1,124,592 | 100.0 | % | ||||||||||||||||||||||||||||||||||
| Cost of sales | 211,674 | 70.4 | % | 243,938 | 70.8 | % | 605,958 | 70.5 | % | $ | 801,006 | 71.2 | % | ||||||||||||||||||||||||||||||||||
| Gross profit | 88,906 | 29.6 | % | 100,480 | 29.2 | % | 253,690 | 29.5 | % | $ | 323,586 | 28.8 | % | ||||||||||||||||||||||||||||||||||
| Operating expenses: | |||||||||||||||||||||||||||||||||||||||||||||||
| Research and development | 19,681 | 6.5 | % | 20,338 | 5.9 | % | 61,596 | 7.2 | % | 69,682 | 6.2 | % | |||||||||||||||||||||||||||||||||||
| Selling, general and administrative | 57,249 | 19.0 | % | 67,914 | 19.7 | % | 175,851 | 20.5 | % | 195,696 | 17.4 | % | |||||||||||||||||||||||||||||||||||
| Impairment of goodwill | — | — | % | — | — | % | — | — | % | 17,558 | 1.6 | % | |||||||||||||||||||||||||||||||||||
| Change in fair value of contingent consideration | — | — | % | 14,800 | 4.3 | % | — | — | % | 24,900 | 2.2 | % | |||||||||||||||||||||||||||||||||||
| Other operating (income) expense | 465 | 0.2 | % | (186) | (0.1) | % | 6,739 | 0.8 | % | 5,366 | 0.5 | % | |||||||||||||||||||||||||||||||||||
| Total operating expenses | 77,395 | 25.7 | % | 102,866 | 29.9 | % | 244,186 | 28.4 | % | 313,202 | 27.9 | % | |||||||||||||||||||||||||||||||||||
| Operating income (loss) | 11,511 | 3.8 | % | (2,386) | (0.7) | % | 9,504 | 1.1 | % | 10,384 | 0.9 | % | |||||||||||||||||||||||||||||||||||
| Non-operating (income) expense: | |||||||||||||||||||||||||||||||||||||||||||||||
| Interest expense, net | 6,167 | 2.1 | % | 9,314 | 2.7 | % | 22,975 | 2.7 | % | 27,238 | 2.4 | % | |||||||||||||||||||||||||||||||||||
| Other non-operating (income) expense | 441 | 0.1 | % | 354 | 0.1 | % | 113 | — | % | 12,299 | 1.1 | % | |||||||||||||||||||||||||||||||||||
| Total non-operating (income) expense | 6,608 | 2.2 | % | 9,668 | 2.8 | % | 23,088 | 2.7 | % | 39,537 | 3.5 | % | |||||||||||||||||||||||||||||||||||
| Income (loss) before taxes | 4,903 | 1.6 | % | (12,054) | (3.5) | % | (13,584) | (1.6) | % | (29,153) | (2.6) | % | |||||||||||||||||||||||||||||||||||
| Income tax provision (benefit) | (1,323) | (0.4) | % | 7,216 | 2.1 | % | 4,409 | 0.5 | % | 26,687 | 2.4 | % | |||||||||||||||||||||||||||||||||||
| Net income (loss) from continuing operations | 6,226 | 2.1 | % | (19,270) | (5.6) | % | (17,993) | (2.1) | % | (55,840) | (5.0) | % | |||||||||||||||||||||||||||||||||||
| Net income (loss) from discontinued operations | — | — | % | (4,807) | (1.4) | % | (8,148) | (0.9) | % | 10,301 | 0.9 | % | |||||||||||||||||||||||||||||||||||
| Net income (loss) | 6,226 | 2.1 | % | (24,077) | (7.0) | % | (26,141) | (3.0) | % | (45,539) | (4.0) | % | |||||||||||||||||||||||||||||||||||
| Net income attributable to noncontrolling interest | 610 | 0.2 | % | 378 | 0.1 | % | 1,784 | 0.2 | % | 1,143 | 0.1 | % | |||||||||||||||||||||||||||||||||||
| Net income (loss) attributable to SGH | $ | 5,616 | 1.9 | % | $ | (24,455) | (7.1) | % | $ | (27,925) | (3.2) | % | $ | (46,682) | (4.1) | % | |||||||||||||||||||||||||||||||
Percentages represent percentage of total net sales. Summations of percentages may not compute precisely due to rounding.
Net Sales, Cost of Sales and Gross Profit
Net sales decreased by $43.8 million, or 12.7%, in the third quarter of 2024 compared to the same period in the prior year, and by $264.9 million, or 23.6%, for the first nine months of 2024 compared to the same period in the prior year. These decreases were primarily due to lower sales in both our IPS and Memory Solutions businesses in the third quarter and the first nine months of 2024 compared to the same periods in the prior year, while LED Solutions sales remained relatively unchanged for the third quarter of 2024 compared to the same period in the prior year but were higher for the first nine months of 2024 compared to the same period in the prior year. IPS net sales decreased by $25.9 million, or 15.2%, and by $199.1 million, or 32.9%, in the third quarter and first nine months of 2024 compared to the same periods in the prior year, respectively, primarily due to lower hardware and federal sales. Memory Solutions net sales decreased by $17.8 million, or 16.3%, and by $77.5 million, or 22.9%, in the third quarter and first nine months of 2024 compared to the same periods in the prior year, respectively, primarily due to lower sales volumes of Flash and DRAM products, partially offset by higher broker sales. LED Solutions net sales increased by $11.6 million, or 6.4%, in the first nine months of 2024 compared to the same periods in the prior year, respectively, primarily due to higher channel demand.
Cost of sales decreased by $32.3 million, or 13.2%, in the third quarter of 2024, compared to the same period in the prior year, and by $195.0 million, or 24.4%, for the first nine months of 2024 compared to the same period in the prior year. IPS and Memory Solutions segments had lower material cost from lower sales and lower other costs from initiatives that resulted in additional savings.
Gross margin increased slightly to 29.6% in the third quarter of 2024 compared to 29.2% in the same period in 2023, and to 29.5% for the first nine months of 2024 compared to 28.8% in the same period in 2023, primarily due to favorable mix from higher service revenue in our IPS business.
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Non-GAAP Measure of Segment Operating Income
Below is a table of our operating income, measured on a non-GAAP basis, which SGH management uses to supplement SGH’s financial results under GAAP to analyze its operations and make decisions as to future operational plans and believes that this supplemental non-GAAP information is useful to investors in analyzing and assessing the Company’s past and future operating performance. These non-GAAP measures exclude certain items, such as share-based compensation expense; amortization of acquisition-related intangible assets (consisting of amortization of developed technology, customer relationships, trademarks/trade names and backlog acquired in connection with business combinations); acquisition-related inventory adjustments; diligence, acquisition and integration expense; restructure charges; changes in the fair value of contingent consideration and other infrequent or unusual items. While amortization of acquisition-related intangible assets is excluded, the revenue from acquired companies is reflected in our non-GAAP measures and these intangible assets contribute to revenue generation. See “Item 1. Financial Statements – Notes to Consolidated Financial Statements – Segment and Other Information.”
Non-GAAP financial measures should not be considered as a substitute for, or superior to, measures of financial performance prepared in accordance with GAAP, as they exclude important information about our financial results, as noted above. The presentation of these adjusted amounts varies from amounts presented in accordance with GAAP and therefore may not be comparable to amounts reported by other companies.
| Three Months Ended | Nine Months Ended | ||||||||||||||||||||||
| May 31, 2024 | May 26, 2023 | May 31, 2024 | May 26, 2023 | ||||||||||||||||||||
| GAAP operating income (loss) | $ | 11,511 | $ | (2,386) | $ | 9,504 | $ | 10,384 | |||||||||||||||
| Share-based compensation expense | 11,192 | 9,642 | 32,801 | 29,654 | |||||||||||||||||||
| Amortization of acquisition-related intangibles | 9,766 | 11,609 | 29,525 | 33,282 | |||||||||||||||||||
| Flow-through of inventory step up | — | — | — | 2,599 | |||||||||||||||||||
| Cost of sales-related restructure | 387 | 211 | 1,271 | 5,763 | |||||||||||||||||||
| Diligence, acquisition and integration expense | 4 | 8,637 | 6,678 | 18,193 | |||||||||||||||||||
| Impairment of goodwill | — | — | — | 17,558 | |||||||||||||||||||
| Change in fair value of contingent consideration | — | 14,800 | — | 24,900 | |||||||||||||||||||
| Restructure charge | 465 | (186) | 6,739 | 5,366 | |||||||||||||||||||
| Other | — | — | — | 1,800 | |||||||||||||||||||
| Non-GAAP operating income | $ | 33,325 | $ | 42,327 | $ | 86,518 | $ | 149,499 | |||||||||||||||
| Non-GAAP operating income (loss) by segment: | |||||||||||||||||||||||
| Memory Solutions | $ | 4,471 | $ | 19,368 | $ | 17,682 | $ | 58,773 | |||||||||||||||
| Intelligent Platform Solutions | 28,921 | 24,169 | 69,113 | 93,799 | |||||||||||||||||||
| LED Solutions | (67) | (1,210) | (277) | (3,073) | |||||||||||||||||||
| Total non-GAAP operating income (loss) by segment | $ | 33,325 | $ | 42,327 | $ | 86,518 | $ | 149,499 | |||||||||||||||
Memory Solutions operating income decreased by $14.9 million, or 76.9%, in the third quarter of 2024 compared to the same period in the prior year, and by $41.1 million, or 69.9%, in the first nine months of 2024 compared to the same period in the prior year, primarily due to lower sales and gross profit due to lower sales volumes of Flash and DRAM products.
IPS operating income increased by $4.8 million, or 19.7%, in the third quarter of 2024 compared to same period in the prior year, primarily due to a higher volume of Penguin service revenue. IPS operating income decreased by $24.7 million, or 26.3%, in the first nine months of 2024 compared to the same period in the prior year, primarily due to lower sales from our Penguin Solutions business, partially offset by lower operating expenses, mainly driven by personnel-related expenses due to lower headcount, and lower subcontract services.
LED Solutions operating loss improved by $1.1 million in the third quarter of 2024 compared to the same period in the prior year, and improved by $2.8 million in the first nine months of 2024 compared to the same period in the prior year, primarily due to higher revenue from increased demand, better factory leverage and product mix and lower personnel-related expenses due to headcount reductions.
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Operating and Non-operating (Income) Expense
Research and Development
Research and development expense decreased by $0.7 million, or 3.2%, in the third quarter of 2024 compared to the same period in the prior year, and by $8.1 million, or 11.6%, for the first nine months of 2024 compared to the same period in the prior year, primarily due to lower personnel-related expenses mainly driven by headcount reductions for both the three-month and nine-month periods, as well as lower subcontract services mainly driven by Penguin Solutions for the nine-month comparative periods.
Selling, General and Administrative
Selling, general and administrative expense decreased by $10.7 million, or 15.7%, in the third quarter of 2024 compared to the same period in the prior year, and by $19.8 million, or 10.1%, for the first nine months of 2024 compared to the same period in the prior year, primarily due to lower diligence, acquisition and integration expense, lower personnel-related expenses, mainly driven by headcount reductions and lower amortization expense of intangible assets.
Selling, general and administrative expense in the first nine months of 2024 and 2023 included costs of $6.7 million and $18.2 million, respectively, associated with the diligence, acquisition and integration of executed and potential business combinations. We anticipate that these activities will continue into future quarters.
Impairment of Goodwill
During the second quarter of 2023, we initiated a plan pursuant to which we intend to wind down manufacturing and discontinue the sale of certain legacy products offered through our Penguin Edge business by approximately the end of 2025. We recorded impairment charges of $17.6 million and $1.5 million in the second and fourth quarters of 2023, respectively, to impair the carrying value of Penguin Edge goodwill. We currently anticipate that the remaining goodwill of the Penguin Edge reporting unit of $16.1 million as of the end of the third quarter of 2024 may become further impaired in future periods.
Change in Fair Value of Contingent Consideration
Our acquisition of Stratus Technologies in the first quarter of 2023 included contingent consideration. We estimated the fair value of the contingent consideration as of the date of acquisition and subsequently recognized changes in the fair value in results of operations. In the third quarter and first nine months of 2023, we recorded charges of $14.8 million and $24.9 million, respectively, to adjust the fair value of the contingent consideration. As of August 25, 2023, current liabilities included $50.0 million for the amount payable for the Stratus Earnout, which we paid in full in the second quarter of 2024. See “Item 1. Financial Statements – Notes to Consolidated Financial Statements – Business Acquisition – Stratus Technologies.”
Other Operating (Income) Expense
Other operating expense in the first nine months of 2024 and 2023 included restructure charges of $6.7 million and $5.4 million, respectively, primarily for employee severance costs and other benefits resulting from workforce reductions, the elimination of certain projects across our businesses and other costs associated with the wind down of our Penguin Edge business. We anticipate that these activities will continue into future quarters and anticipate recording additional restructure charges.
Interest Expense, Net
Net interest expense decreased by $3.1 million in the third quarter of 2024 compared to the same period in the prior year, primarily due to higher interest income resulting from higher cash and investment balances and lower interest expense due to the prepayments of the Amended 2027 TLA. Net interest expense decreased by $4.3 million in the first nine months of 2024 compared to the same period in the prior year, primarily due to higher interest income resulting from higher cash and investment balances, partially offset by higher interest expense from the Amended 2027 TLA.
Other Non-operating (Income) Expense
Other non-operating (income) expense in the first nine months of 2023 consisted primarily of a $15.9 million loss on the extinguishment of debt, partially offset by $3.0 million gain on disposition of assets. See “Item 1. Financial Statements –
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Notes to Consolidated Financial Statements – Other Non-operating (Income) Expense” and “Item 1. Financial Statements – Notes to Consolidated Financial Statements – Debt – Convertible Senior Notes – Convertible Senior Notes Exchange.”
Income Tax Provision (Benefit)
Income tax provision in the third quarter and first nine months of 2024 decreased by $8.5 million and $22.3 million, respectively, as compared to the same periods in the prior year, primarily due to a decrease in profit before tax in jurisdictions subject to income tax, partially offset by the effect of a $4.5 million benefit recognized upon completion of a research and development tax credit study for prior years.
Our effective tax rate was (27.0)% and (32.5)% in the third quarter and first nine months of 2024, respectively, and differed from the U.S. statutory rate primarily due to losses generated in a jurisdiction where no tax benefit can be recognized and to withholding taxes and state income taxes, partially offset by the effect of a $4.5 million benefit recognized in the third quarter of 2024 upon completion of a research and development tax credit study for prior years. Our effective tax rate was (59.9)% and (91.5)% in the third quarter and first nine months of 2023, respectively, and differed from the U.S. statutory rate primarily due to losses generated in a jurisdiction where no tax benefit can be recognized.
See “Item 1. Financial Statements – Notes to Consolidated Financial Statements – Income Taxes.”
Net Income (Loss) From Discontinued Operations
As discussed above, we have presented the results of SMART Brazil as discontinued operations in our consolidated statements of operations for all periods presented. As of August 25, 2023, SMART Brazil was classified as held for sale. Accordingly, in 2023 we evaluated the carrying value of the net assets of SMART Brazil (including $206.3 million recognized within shareholders’ equity related to the cumulative translation adjustment from SMART Brazil), estimated costs to sell and expected proceeds and concluded the net assets were impaired. As a result, we recognized an impairment charge of $153.0 million in 2023 to write down the carrying value of the net assets of SMART Brazil. In addition, we concluded that the outside basis of SMART Brazil inclusive of any withholding taxes should be recognized upon the classification as held for sale as of August 25, 2023. Accordingly, we recognized withholding taxes on the expected capital gain and deferred tax liabilities of $28.6 million in 2023. In the first quarter of 2024, we completed the divestiture, and in connection therewith, recognized an additional loss of $8.9 million.
See “Item 1. Financial Statements – Notes to Consolidated Financial Statements – Divestiture of SMART Brazil.”
Liquidity and Capital Resources
As of May 31, 2024, we had cash, cash equivalents and short-term investments of $467.5 million, of which $384.1 million was held by subsidiaries outside of the United States. Our principal uses of cash and capital resources have been acquisitions, debt service requirements, capital expenditures, research and development expenditures and working capital requirements. We expect that future capital expenditures will focus on expanding our research and development activities, manufacturing equipment upgrades, acquisitions and IT infrastructure and software upgrades. Cash and cash equivalents generally consist of funds held in demand deposit accounts, money market funds and time deposits. We do not acquire investments for trading or speculative purposes.
We may from time to time seek additional equity or debt financing. Any future equity financing may be dilutive to our existing investors, and any future debt financing may include debt service requirements and financial and other restrictive covenants that may constrain our operations and growth strategies. In the event that we seek additional financing, we may not be able to raise such financing on terms acceptable to us or at all. If we are unable to raise additional capital or generate cash flows necessary to expand our operations and invest in continued product innovation, we may not be able to compete successfully, which would harm our business, operations and financial condition.
We expect that our existing cash and cash equivalents, short-term investments, borrowings available under our credit facilities and cash generated by operating activities will be sufficient to fund our operations for at least the next twelve months.
Divestiture of SMART Brazil: On November 29, 2023, we completed the previously announced divestiture of SMART Brazil. In connection with the divestiture, we sold an 81% interest and retained a 19% interest in SMART Brazil. At the closing of the transaction, we received $143.0 million in cash from the sale (which includes gross proceeds of $164.5 million less withholding taxes of $21.5 million). In addition, we have the right to receive a deferred payment of $28.4 million eighteen
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months following the closing. See “Item 1. Financial Statements – Notes to Consolidated Financial Statements – Divestiture of SMART Brazil.”
Stratus Technologies Earnout: On August 29, 2022, we completed the acquisition of Stratus Technologies. At the closing of the transaction (including in connection with the completion of the review of the working capital assets acquired and liabilities assumed), we paid the Stratus Seller a cash purchase price of $242.2 million. In addition, the Stratus Seller had the right to receive contingent consideration of up to $50.0 million, based on the gross profit performance of Stratus Technologies during the first full 12 fiscal months following the closing. In the second quarter of 2024, we paid in full $50.0 million related to the Stratus Earnout.
Cash Flows
| Nine Months Ended | |||||||||||
| May 31, 2024 | May 26, 2023 | ||||||||||
| Net cash provided by operating activities from continuing operations | $ | 117,677 | $ | 26,121 | |||||||
| Net cash used for investing activities from continuing operations | (3,526) | (244,077) | |||||||||
| Net cash provided by (used for) financing activities from continuing operations | (159,615) | 218,093 | |||||||||
| Net increase in cash and cash equivalents from discontinued operations | 90,447 | 35,343 | |||||||||
| Effect of changes in currency exchange rates | (1,256) | 2,730 | |||||||||
| Net increase in cash and cash equivalents | $ | 43,727 | $ | 38,210 | |||||||
Operating Activities: Cash flows from operating activities reflects net income, adjusted for certain non-cash items, including depreciation and amortization expense, share-based compensation, adjustments for changes in the fair value of contingent consideration, gains and losses from investing or financing activities, and from the effects of changes in operating assets and liabilities.
Net cash provided by operating activities from continuing operations in the first nine months of 2024 resulted primarily from a net loss of $18.0 million, adjusted for non-cash items of $80.7 million. Operating cash flows were favorably affected by a $55.0 million net change in our operating assets and liabilities, primarily from the effects of an increase of $84.6 million in accounts payable and accrued expenses and other liabilities, partially offset by the payment of $29.0 million of contingent consideration related to our 2023 acquisition of Stratus Technologies. The increase in accounts payable and accrued expenses and other liabilities was primarily due to timing of payments, as well as higher deferred revenue resulting from amounts received from customers in advance of satisfying performance obligations.
Net cash provided by operating activities from continuing operations in the first nine months of 2023 resulted primarily from a net loss of $55.8 million, adjusted for non-cash items of $148.8 million. Operating cash flows were adversely affected by a $66.9 million net change in our operating assets and liabilities, primarily from the effects of a decrease of $226.4 million in accounts payable and accrued expenses and other liabilities and the payment of $73.7 million of contingent consideration related to our 2021 acquisition of the LED business, partially offset by the effect of decreases of $159.5 million in accounts receivable and $66.7 million in inventories. The decreases in accounts payable and accrued expenses and other liabilities and in accounts receivable and inventories were primarily due to timing of payments and receipts.
Investing Activities: Net cash used for investing activities from continuing operations in the first nine months of 2024 consisted primarily of $13.6 million for capital expenditures and deposits on equipment, offset by net maturities of investment securities of $11.4 million.
Net cash used for investing activities from continuing operations in the first nine months of 2023 consisted primarily of $213.1 million for the acquisition of Stratus Technologies and $31.7 million for capital expenditures and deposits on equipment.
Financing Activities: Net cash used for financing activities from continuing operations in the first nine months of 2024 consisted primarily of $126.6 million in repayments of debt, $21.0 million for payment of contingent consideration related to our 2023 acquisition of Stratus Technologies and $18.0 million of payments to acquire our ordinary shares (including $13.9 million under our share repurchase program), partially offset by $8.1 million in proceeds from the issuance of ordinary shares from our equity plans.
Net cash provided by financing activities from continuing operations in the first nine months of 2023 consisted primarily of $295.3 million in net proceeds from the issuance of a term loan and $8.4 million in proceeds from the issuance of ordinary
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shares, partially offset by $28.1 million for payment of contingent consideration related to our 2021 acquisition of the LED business, $16.9 million of payments to acquire our ordinary shares (including $13.8 million under our share repurchase program and convertible note exchange), $14.1 million for payment of premium in connection with our convertible note exchange, $14.4 million in principal repayment of the LED Purchase Price Note and $4.3 million net cash paid for settlement and purchase of privately-negotiated capped call transactions (“Capped Calls”).
Critical Accounting Estimates
The preparation of these financial statements and related disclosures in conformity with U.S. GAAP requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues, expenses and related disclosures. Estimates and judgments are based on historical experience, forecasted events and various other assumptions that we believe to be reasonable under the circumstances. We evaluate our estimates and judgments on an ongoing basis; however, actual results could differ from those estimates. Our management believes our critical accounting estimates require management’s most difficult, subjective or complex judgments and are critical in the portrayal of our financial condition and results of operations. Our discussion of critical accounting estimates is intended to supplement our summary of significant accounting policies so that readers will have greater insight into the uncertainties involved in applying our critical accounting policies and estimates.
For a summary of our critical accounting estimates, see “PART II – Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations – Critical Accounting Estimates” of our Annual Report on Form 10-K for the fiscal year ended August 25, 2023. There have been no material changes to our critical accounting estimates from those described in our Annual Report on Form 10-K for the fiscal year ended August 25, 2023.
For a summary of our significant accounting policies, see “PART I. Financial Information – Item 1. Financial Statements – Notes to Consolidated Financial Statements – Significant Accounting Policies” of this Quarterly Report and “PART II – Item 8. Financial Statements and Supplementary Data – Notes to Consolidated Financial Statements – Significant Accounting Policies” of our Annual Report on Form 10-K for the fiscal year ended August 25, 2023. There have been no material changes to our significant accounting policies from those described in our Annual Report on Form 10-K for the fiscal year ended August 25, 2023.
Item 3. Quantitative and Qualitative Disclosure About Market Risk
Foreign Exchange Risk
We are subject to inherent risks attributed to operating in a global economy. Our international sales and our operations in foreign countries subject us to risks associated with fluctuating currency values and exchange rates. Because a significant portion of our sales are denominated in U.S. dollars, increases in the value of the U.S. dollar could increase the price of our products so that they become relatively more expensive to customers in a particular country, possibly leading to a reduction in sales and profitability in that country. In addition, we have certain costs that are denominated in foreign currencies and decreases in the value of the U.S. dollar could result in increases in such costs, which could have a material adverse effect on our results of operations.
As a result of our international operations, we generate a portion of our net sales and incur a portion of our expenses in currencies other than the U.S. dollar, such as the Japanese Yen, Malaysian Ringgit and Chinese Renminbi. We present our consolidated financial statements in U.S. dollars and remeasure certain assets and liabilities of our foreign operations into U.S. dollars at applicable exchange rates. Consequently, increases or decreases in the value of the U.S. dollar may affect the value of these items with respect to our non-U.S. dollar businesses in our consolidated financial statements, even if their value has not changed in their local currency. Our customer pricing and material cost of sales are generally based on U.S. dollars. Accordingly, the impact of currency fluctuations to our consolidated statements of operations is primarily to our other costs of sales (i.e., non-material components) and our operating expenses as those items are typically denominated in local currency. Our consolidated statements of operations are also impacted by foreign currency gains and losses arising from transactions denominated in a currency other than the U.S. dollar. These translations could significantly affect the comparability of our results between financial periods or result in significant changes to the carrying value of our assets, liabilities and equity. As a result, changes in foreign currency exchange rates impact our reported results.
Based on our monetary assets and liabilities denominated in foreign currencies as of May 31, 2024 and August 25, 2023, we estimate that a 10% adverse change in exchange rates versus the U.S. dollar would result in losses recorded in non-operating expense of $2.9 million and $1.6 million, respectively, to revalue these assets and liabilities.
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Interest Rate Risk
We are subject to interest rate risk in connection with our variable-rate debt. As of May 31, 2024, we had $425.0 million outstanding under the Amended 2027 TLA. In addition, our Amended Credit Agreement provides for borrowings of up to $250.0 million under the 2027 Revolver. Assuming that we would satisfy the financial covenants required to borrow and that the amounts available under the 2027 Revolver were fully drawn, a 1.0% increase in interest rates would result in an increase in annual interest expense, and a decrease in our cash flows, of $6.8 million per year.
We had cash, cash equivalents and short-term investments of $467.5 million as of May 31, 2024. We maintain our cash and cash equivalents in deposit accounts, money market funds with various financial institutions and in short-duration fixed income securities. Due to the short-term nature of these instruments, we believe that we do not have any material exposure to changes in the fair value of these investments as a result of changes in interest rates. Increases or decreases in interest rates would be expected to augment or reduce future interest income by an insignificant amount.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
An evaluation was performed under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, of the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of the end of the period covered by this report. Based upon that evaluation, our management, including our principal executive officer and principal financial officer, concluded that our disclosure controls and procedures were effective as of May 31, 2024 to provide reasonable assurance that the information required to be disclosed by us in the reports that we file or submits under the Exchange Act is (i) recorded, processed, summarized and reported within the time periods specified in the SEC rules and forms and (ii) accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosures.
Changes in Internal Control Over Financial Reporting
During the third quarter of fiscal 2024, there were no changes in our internal control over financial reporting, as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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PART II. Other Information
Item 1. Legal Proceedings
For a discussion of legal proceedings, see “PART I. Financial Information – Item 1. Financial Statements – Notes to Consolidated Financial Statements – Commitments and Contingencies” and “Item 1A. Risk Factors.”
Item 1A. Risk Factors
There have been no material changes to the risks described in “PART I – Item 1A. Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended August 25, 2023. You should carefully consider the risks and uncertainties and the other information in our Annual Report and in this Quarterly Report, including “PART I. Financial Information – Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our financial statements and related notes. Our business, financial condition or results of operations could be materially and adversely affected if any of these risks occurs and, as a result, the market price of our ordinary shares could decline and you could lose all or part of your investment.
This Quarterly Report also contains forward-looking statements that involve risks and uncertainties. See “Cautionary Note Regarding Forward-Looking Statements” for additional information. Our actual results could differ materially and adversely from those anticipated in these forward-looking statements as a result of certain factors, including the risks facing our Company described in our Annual Report on Form 10-K for the fiscal year ended August 25, 2023.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Issuer Purchases of Equity Securities
On April 5, 2022, we announced that our Board of Directors approved a $75.0 million share repurchase authorization (the “Initial Authorization”), under which we may repurchase our outstanding ordinary shares from time to time through open market purchases, privately-negotiated transactions or otherwise. The Initial Authorization has no expiration date but may be suspended or terminated by our Board of Directors at any time. On January 8, 2024, the Audit Committee of the Board of Directors approved an additional $75 million share repurchase authorization (the “Additional Authorization,” and together with the Initial Authorization, the “Current Authorization”). The Additional Authorization has no expiration date but may be suspended or terminated by the Board of Directors at any time. No shares were repurchased during the third quarter of 2024 under the Current Authorization. As of May 31, 2024, the remaining aggregate dollar value of shares that may be repurchased under the Current Authorization was $77.7 million.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Other Information
On April 26, 2024 , Jack Pacheco , our Executive Vice President and Chief Operating Officer , adopted a Rule 10b5-1 trading arrangement (the “Pacheco 10b5-1 Plan”) that is intended to satisfy the affirmative defense of Rule 10b5-1(c) under the Exchange Act. The Pacheco 10b5-1 Plan provides for the sale of up to 140,000 ordinary shares acquired upon the exercise of share options, commencing on July 26, 2024 and continuing until all shares are sold or until March 31, 2025, whichever occurs first.
During the fiscal quarter ended May 31, 2024, no other officers or directors of SGH adopted or terminated
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Item 6. Exhibits
INDEX TO EXHIBITS
| Incorporated by Reference | ||||||||||||||||||||
| Exhibit No. | Description | Filed Herewith | Form | File No. | Exhibit | Filing Date | ||||||||||||||
| 3.1 | 10-Q | 001-38102 | 3.1 | 04/07/2020 | ||||||||||||||||
| 4.1 | 10-K | 001-38102 | 4.1 | 10/25/2021 | ||||||||||||||||
10.1* | X | |||||||||||||||||||
10.2* | X | |||||||||||||||||||
| 31.1 | X | |||||||||||||||||||
| 31.2 | X | |||||||||||||||||||
32.1** | X | |||||||||||||||||||
32.2** | X | |||||||||||||||||||
| 101.INS | Inline XBRL Instance Document – the instance document does not appear in the Interactive Data File because XBRL tags are embedded within the Inline XBRL document | X | ||||||||||||||||||
| 101.SCH | Inline XBRL Taxonomy Extension Schema Document | X | ||||||||||||||||||
| 101.CAL | Inline XBRL Taxonomy Extension Calculation Linkbase Document | X | ||||||||||||||||||
| 101.DEF | Inline XBRL Taxonomy Extension Definition Linkbase Document | X | ||||||||||||||||||
| 101.LAB | Inline XBRL Taxonomy Extension Label Linkbase Document | X | ||||||||||||||||||
| 101.PRE | Inline XBRL Taxonomy Extension Presentation Linkbase Document | X | ||||||||||||||||||
| 104 | Cover Page Interactive Data File (embedded within the Inline XBRL document) | X | ||||||||||||||||||
* | Constitutes a management contract or compensatory plan or arrangement. | ||||
** | The certifications attached as Exhibit 32.1 and Exhibit 32.2 that accompany this Quarterly Report on Form 10-Q are deemed furnished and not filed with the Securities and Exchange Commission and are not to be incorporated by reference into any filing of the Registrant under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, whether made before or after the date of this Quarterly Report, irrespective of any general incorporation language contained in such filing. | ||||
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| SMART Global Holdings, Inc. | ||||||||
Date: July 9, 2024 | By: | /s/ Mark Adams | ||||||
| Mark Adams | ||||||||
| President and Chief Executive Officer | ||||||||
| (Principal Executive Officer) | ||||||||
Date: July 9, 2024 | By: | /s/ Nate Olmstead | ||||||
Nate Olmstead | ||||||||
Senior Vice President and Chief Financial Officer | ||||||||
| (Principal Financial and Accounting Officer) | ||||||||
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