SMART Global Holdings Reports Third Quarter Fiscal 2018

NEWARK, Calif., June 21, 2018 (GLOBE NEWSWIRE) -- SMART Global Holdings, Inc. (“SMART”) (NASDAQ:SGH), parent company of SMART Modular Technologies, Inc., today reported financial results for the third quarter of fiscal 2018 ended May 25, 2018.

Third Quarter Fiscal 2018 Highlights:

Net sales of $335.5 million, 62% higher than comparable quarter of prior year
GAAP operating income of $48.7 million
GAAP net income of $31.9 million
Adjusted EBITDA of $51.5 million
GAAP diluted earnings per share (EPS) of $1.37
Non-GAAP diluted EPS of $1.84 (excluding FX losses)

“I am pleased to report another strong sales quarter with net revenues 62 percent higher than the comparable period a year ago. Both our Specialty and Brazil businesses performed very well. Additionally, as announced on June 11, we have embarked upon the first step in our strategy to broaden our offerings with the acquisition of Penguin Computing,” commented Ajay Shah, Chairman and Chief Executive Officer of SMART Global Holdings. “Penguin is the cornerstone of our new business unit, SMART Specialty Compute & Storage Solutions (SCSS), and greatly expands the markets and technologies where we can participate into areas requiring specialized computing platforms in artificial intelligence, machine learning, advanced modeling and high performance computing. We expect to leverage our proven system design and integration capabilities and create a more diversified business.”

Jack Pacheco, Chief Operating and Financial Officer, added, “The strength in net sales in the third fiscal quarter was due to continued strength in our Specialty Memory business and our increased penetration into the Brazilian market. That said, due to the recent depreciation of the Brazilian Real, we saw a $0.27 per share negative impact to our GAAP earnings due to foreign currency losses. The Specialty Memory business and our Brazil memory business continue to be markets where we have a unique competitive advantage, a proven business model, and growth potential in multiple sectors.”


Quarterly Financial Results	GAAP ⁽¹⁾						Non-GAAP ⁽²⁾
(In millions, except per share amounts)	Q3 FY18		Q2 FY18		Q3 FY17		Q3 FY18		Q2 FY18		Q3 FY17
Net sales	$	335.5	$	314.0	$	207.0	$	335.5	$	314.0	$	207.0
Gross profit	$	78.1	$	73.0	$	47.4	$	78.5	$	73.2	$	47.6
Operating income	$	48.7	$	45.1	$	20.4	$	53.8	$	48.5	$	24.8
Net income	$	31.9	$	36.8	$	8.0	$	43.0	$	37.7	$	14.6
Diluted earnings per share (EPS)⁽³⁾	$	1.37	$	1.60	$	0.50	$	1.84	$	1.64	$	0.92

(1) GAAP represents U.S. Generally Accepted Accounting Principles.
(2) Please refer to the “Non-GAAP Information” section and the "Reconciliation of Non-GAAP Financial Measures" table below for further detail on the non-GAAP financial reporting referenced herein and a reconciliation of such measures to our nearest GAAP measures.
(3) Beginning in the third quarter of fiscal 2018, we will exclude foreign currency gains/losses from our non-GAAP diluted EPS as we believe this non-GAAP financial measure is a more relevant indicator of our core operating results. This change is reflected for all the periods presented in this release.

Business Outlook
The following statements are based upon management's current expectations for the fourth quarter of fiscal 2018 ending August 31, 2018 and include the results of Penguin Computing from the acquisition date of June 8, 2018. As the purchase accounting for this acquisition is still being evaluated, the GAAP forecast does not incorporate any related purchase price adjustments which may affect actual results. These statements are forward-looking and actual results may differ materially. SMART undertakes no obligation to update these statements.


		Net Sales - GAAP / Non-GAAP	$360 to $380 million
		Gross Margin - GAAP / Non-GAAP	22% to 23%
		Diluted EPS - GAAP	$1.41 to $1.50

		Share-based compensation per share	$0.12
		Intangible amortization per share	$0.05
		Acquisition costs per share	$0.04

		Diluted EPS - Non-GAAP	$1.62 to $1.71

		Expected diluted share count	23.4 million

Conference Call Details
SMART will host a conference call today for analysts and investors at 1:30pm Pacific Time, 4:30pm Eastern Time. Dial-in US toll free +1-866-487-6452 using access code 6781298.

A replay of the conference call will be available for one week following today’s call through the Events section of the SMART website at www.smartgh.com or by calling US toll free +1-855-859-2056; Passcode: 6781298.

Forward-Looking Statements
This release contains, and statements made during the above-referenced conference call will contain "forward-looking statements" including among other things, statements regarding future events and the future financial performance of SMART (including the business outlook for the next fiscal quarter) and statements regarding growth drivers in SMART’s and Penguin’s industry and markets. These statements are only predictions and may differ materially from actual future events or results due to a variety of factors, including but not limited to: business and economic conditions and growth trends in the technology industry, our customer markets and various geographic regions; global economic conditions and uncertainties in the geopolitical environment; changes in currency exchange rates; overall information technology spending; appropriations for government spending; the success of our strategic initiatives including additional investments in new products, additional capacity and acquisitions; the DRAM market and the temporary and volatile nature of pricing trends; deterioration in customer relationships; production or manufacturing difficulties; competitive factors; technological changes; difficulties with or delays in the introduction of new products; slowing or contraction of growth in the memory market in Brazil; reduction in or termination of local content requirements in Brazil; changes to applicable tax regimes or rates; prices for the end products of our customers; fluctuations in material costs and availability; strikes or labor disputes; deterioration in or loss of relations with any of our limited number of key vendors; changes in the availability of supply of materials, components or memory products; the inability of Penguin Computing to maintain its status as a small business or to obtain and retain security clearances to expand its government business; and other factors and risks detailed in SMART’s filings with the Securities and Exchange Commission. Such factors and risks as outlined above and in such filings may not constitute all factors and risks that could cause actual results of SMART to be materially different from the historical results and/or from any future results or outcomes expressed or implied by such forward-looking statements. SMART and its subsidiaries operate in a continually changing business environment and new factors emerge from time to time. SMART cannot predict such factors, nor can it assess the impact, if any, from such factors on SMART or its subsidiaries’ results. Accordingly, investors are cautioned not to place undue reliance on any forward-looking statements. Forward-looking statements should not be relied upon as a prediction of actual results. These forward-looking statements are made as of today, and SMART does not intend, and has no obligation, to update or revise any forward-looking statements in order to reflect events or circumstances that may arise after the date of this press release, except as required by law.

Non-GAAP Information
Certain non-GAAP financial measures are contained in this press release or will be discussed on our conference call, including non-GAAP gross profit, non-GAAP operating income, non-GAAP net income, non-GAAP net income per diluted share and Adjusted EBITDA. We define Adjusted EBITDA as GAAP net income plus net interest expense, income tax expense, depreciation and amortization expense, share-based compensation expense, acquisition costs, restructuring charges, amortization of non-cash debt discount related to warrants, non-cash charges in connection with refinancing, and other infrequent or unusual items. Adjusted EBITDA is not a measure of financial performance calculated in accordance with U.S. GAAP and should be viewed as a supplement to, not a substitute for, our results of operations presented on the basis of U.S. GAAP. Adjusted EBITDA also does not purport to represent cash flow provided by, or used in, operating activities in accordance with U.S. GAAP and should not be used as a measure of liquidity.

The non-GAAP financial results presented herein exclude share-based compensation expense, intangible amortization expense, acquisition costs, amortization of non-cash debt discount related to warrants, non-cash charges in connection with refinancing and, with respect to non-GAAP diluted EPS, foreign currency gains (losses). These non-GAAP financial measures are provided to enhance the user's overall understanding of our financial performance. By excluding these charges, as well as any related tax effects, our non-GAAP results provide information to management and investors that is useful in assessing SMART's core operating performance and in evaluating and comparing our results of operations on a consistent basis from period to period. These non-GAAP financial measures are also used by management to evaluate financial results, to plan and forecast future periods, and to assess performance of certain executives for compensation purposes. The presentation of this additional information is not meant to be a substitute for the corresponding financial measures prepared in accordance with U.S. GAAP. In addition, these measures may not be used similarly by other companies and therefore may not be comparable between companies.

Investors are encouraged to review the “Reconciliation of Non-GAAP Financial Measures to GAAP Results” and “Reconciliation of GAAP Net Income (Loss) to Adjusted EBITDA” tables below for more detail on non-GAAP calculations.

About SMART Global Holdings
The SMART family of companies are global leaders in specialty memory, storage and hybrid solutions serving the electronics industry with standard and custom products for over 25 years. SMART delivers components, modules and solutions to a broad customer base, including OEMs in computing, networking, communications, storage, mobile and industrial markets. With the addition of Penguin Computing and the creation of a new business unit, SMART Specialty Compute & Storage Solutions (SCSS), SMART has expanded its serviceable markets into areas requiring specialized computing platforms in artificial intelligence and machine learning, advanced modeling and high performance computing. Customers rely on SMART as a strategic supplier with custom designs, product quality, technical support, a global footprint, and the ability to provide locally manufactured products in multiple geographies. See www.smartgh.com, www.smartm.com, www.smarth.com or www.smartsscs.com for more information.

SMART Global Holdings, Inc.
and Subsidiaries
Consolidated Statements of Income
(In thousands, except per share data)

			Three Months Ended									Nine Months Ended
			May 25, 2018			February 23, 2018			May 26, 2017			May 25, 2018			May 26, 2017
Net sales:
	Brazil DRAM		$	71,157		$	67,322		$	38,028		$	190,438		$	86,051
	Brazil Mobile Memory			161,585			141,311			71,216			408,787			177,359
	Specialty Memory			102,735			105,332			97,730			315,626			274,862
		Total net sales		335,477			313,965			206,974			914,851			538,272
Cost of sales ⁽¹⁾				257,423			240,948			159,599			705,944			424,030
	Gross profit			78,054			73,017			47,375			208,907			114,242
Operating expenses:
	Research and development ^{(1) (2)}			9,763			9,852			8,797			28,165			28,442
	Selling, general and administrative^{(1) (2)}			19,597			18,087			17,193			55,502			49,037
	Management advisory fees			—			—			1,000			—			3,000
	Restructuring			—			—			—			—			457
		Total operating expenses		29,360			27,939			26,990			83,667			80,936
		Income from operations		48,694			45,078			20,385			125,240			33,306
Other income (expense):
	Interest expense, net			(4,098	)		(4,230	)		(8,294	)		(12,927	)		(23,072	)
	Other income (expense), net			(7,145	)		2,548			(762	)		(7,312	)		(1,664	)
		Total other expense		(11,243	)		(1,682	)		(9,056	)		(20,239	)		(24,736	)
		Income before income taxes		37,451			43,396			11,329			105,001			8,570
Provision for income taxes				5,505			6,602			3,371			15,256			6,156
		Net income	$	31,946		$	36,794		$	7,958		$	89,745		$	2,414

Earnings per share:
	Basic		$	1.44		$	1.68		$	0.57		$	4.09		$	0.17
	Diluted		$	1.37		$	1.60		$	0.50		$	3.90		$	0.16

Shares used in computing earnings per share:
	Basic			22,206			21,915			13,986			21,932			13,909
	Diluted			23,306			23,038			15,955			23,020			15,230

(1) Includes share-based compensation expense as follows:
	Cost of sales		$	414		$	227		$	176		$	859		$	444
	Research and development			325			288			(22	)		887			423
	Selling, general and administrative			2,558			1,182			1,235			4,853			2,666
		Total stock-based compensation expense	$	3,297		$	1,697		$	1,389		$	6,599		$	3,533

(2) Includes amortization of intangible assets expense as follows:
	Research and development		$	245		$	245		$	1,224		$	735		$	3,672
	Selling, general and administrative			976			993			1,774			2,992			5,296
		Total amortization expense	$	1,221		$	1,238		$	2,998		$	3,727		$	8,968

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

			Three Months Ended									Nine Months Ended
			May 25, 2018			February 23, 2018			May 26, 2017			May 25, 2018			May 26, 2017
Reconciliation of gross profit:
GAAP gross profit			$	78,054		$	73,017		$	47,375		$	208,907		$	114,242
	GAAP gross margin			23.3	%		23.3	%		22.9	%		22.8	%		21.2	%

Add: Share-based compensation included in cost of sales				414			227			176			859			444

Non-GAAP gross profit			$	78,468		$	73,244		$	47,551		$	209,766		$	114,686
	Non-GAAP gross margin			23.4	%		23.3	%		23.0	%		22.9	%		21.3	%

Reconciliation of operating expenses:
GAAP operating expenses			$	29,360		$	27,939		$	26,990		$	83,667		$	80,936

Less: Share-based compensation expense included in opex
	Research and development			325			288			(22	)		887			423
	Selling, general and administrative			2,558			1,182			1,235			4,853			2,666
		Total		2,883			1,470			1,213			5,740			3,089

Less: Amortization of intangible assets included in opex
	Research and development			245			245			1,224			735			3,672
	Selling, general and administrative			976			993			1,774			2,992			5,296
		Total		1,221			1,238			2,998			3,727			8,968

Less: S-1 related costs				—			513			—			813			—
Less: Acquisition costs				591			—			—			591			—

Non-GAAP operating expenses			$	24,665		$	24,718		$	22,779		$	72,796		$	68,879

Reconciliation of income from operations:
GAAP income from operations			$	48,694		$	45,078		$	20,385		$	125,240		$	33,306
	GAAP operating margin			14.5	%		14.4	%		9.8	%		13.7	%		6.2	%

Add: Share-based compensation expense				3,297			1,697			1,389			6,599			3,533
Add: Amortization of intangible assets				1,221			1,238			2,998			3,727			8,968
Add: S-1 related costs				—			513			—			813			—
Add: Acquisition costs				591			—			—			591			—

Non-GAAP income from operations			$	53,803		$	48,526		$	24,772		$	136,970		$	45,807
	Non-GAAP operating margin			16.0	%		15.5	%		12.0	%		15.0	%		8.5	%

Reconciliation of income before income taxes:
GAAP income before income taxes			$	37,451		$	43,396		$	11,329		$	105,001		$	8,570
Add: Share-based compensation expense				3,297			1,697			1,389			6,599			3,533
Add: Amortization of intangible assets				1,221			1,238			2,998			3,727			8,968
Add: S-1 related costs				—			513			—			813			—
Add: Acquisition costs				591			—			—			591			—
Less: Amortization of debt discount related to warrants				—			—			1,733			—			3,913
Less: Loss on extinguishment of LT debt				—			—			—			—			1,385
Add: Foreign currency (gains) losses				6,932			(2,415	)		1,009			7,259			748

Non-GAAP income before income taxes			$	49,492		$	44,429		$	18,458		$	123,990		$	27,117

Reconciliation of provision for income taxes:
GAAP provision for income taxes			$	5,505		$	6,602		$	3,371		$	15,256		$	6,156
	GAAP effective tax rate			14.7	%		15.2	%		29.8	%		14.5	%		71.8	%

Tax effect of adjustments to GAAP results				(1,025	)		(96	)		(477	)		(1,744	)		(1,153	)

Non-GAAP provision for income taxes			$	6,530		$	6,698		$	3,848		$	17,000		$	7,309
	Non-GAAP effective tax rate			13.2	%		15.1	%		20.8	%		13.7	%		27.0	%

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

		Three Months Ended									Nine Months Ended
		May 25, 2018			February 23, 2018			May 26, 2017			May 25, 2018			May 26, 2017
Reconciliation of net income and earnings per share (diluted):
GAAP net income		$	31,946		$	36,794		$	7,958		$	89,745		$	2,414

Adjustments to GAAP net income:
	Share-based compensation		3,297			1,697			1,389			6,599			3,533
	Amortization of intangible assets		1,221			1,238			2,998			3,727			8,968
	S-1 related costs		—			513			—			813			—
	Acquisition costs		591			—			—			591			—
	Amortization of debt discount related to warrants		—			—			1,733			—			3,913
	Loss on extinguishment of LT debt		—			—			—			—			1,385
	Foreign currency (gains) losses		6,932			(2,415	)		1,009			7,259			748
	Tax effect of items excluded from non-GAAP results		(1,025	)		(96	)		(477	)		(1,744	)		(1,153	)

Non-GAAP net income		$	42,962		$	37,731		$	14,610		$	106,990		$	19,808

Shares used in computing earnings per share (diluted)			23,306			23,038			15,955			23,020			15,230

Non-GAAP earnings per share (diluted)		$	1.84		$	1.64		$	0.92		$	4.65		$	1.30

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

		Three Months Ended						Nine Months Ended
		May 25, 2018		February 23, 2018		May 26, 2017		May 25, 2018		May 26, 2017

GAAP net income		$	31,946	$	36,794	$	7,958	$	89,745	$	2,414

	Share-based compensation expense		3,297		1,697		1,389		6,599		3,533
	Amortization of intangible assets		1,221		1,238		2,998		3,727		8,968
	Interest expense, net		4,098		4,230		8,294		12,927		23,072
	Provision for income tax		5,505		6,602		3,371		15,256		6,156
	Depreciation		4,806		5,120		4,848		14,928		16,431
	S-1 related costs		—		513		—		813		—
	Acquisition costs		591		—		—		591		—
	Management advisory fees		—		—		1,000		—		3,000
	Debt extension costs*		—		—		—		—		1,745
	Loss on extinguishment of LT debt **		—		—		—		—		1,385
	Restructuring		—		—		—		—		457
	Special retention bonuses		—		—		—		—		25
	Investment advisory fees		—		—		—		—		540
	Obsolete inventory related to restructuring		—		—		—		—		372

	Adjusted EBITDA	$	51,464	$	56,194	$	29,858	$	144,586	$	68,098

	* Debt extension costs consist of $1.7 million associated with the amendment of our senior secured term loan and revolving credit facility in November 2016.
	** Loss on extinguishment of long-term debt consists of $1.4 million loss on a February 2017 extinguishment.

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

			May 25,			August 25,
			2018			2017
Assets
Current assets:
	Cash and cash equivalents		$	64,495		$	22,436
	Accounts receivable, net			262,101			183,303
	Inventories			147,948			127,135
	Prepaid expenses and other current assets			20,219			14,115
		Total current assets		494,763			346,989
Property and equipment, net				53,051			55,182
Other noncurrent assets				21,193			26,728
Intangible assets, net				1,173			5,107
Goodwill				42,872			46,022
		Total assets	$	613,052		$	480,028
Liabilities and Shareholders’ Equity
Current liabilities:
	Accounts payable		$	264,954		$	189,717
	Accrued liabilities			20,816			27,316
	Current portion of long-term debt			22,073			22,841
		Total current liabilities		307,843			239,874
Long-term debt				136,606			154,450
Deferred tax liabilities				351			1,439
Other long-term liabilities				1,897			1,869
		Total liabilities	$	446,697		$	397,632
Shareholders’ equity:
	Ordinary shares			672			653
	Additional paid-in capital			245,097			232,162
	Accumulated other comprehensive loss			(161,950	)		(143,210	)
	Retained earnings			82,536			(7,209	)
		Total shareholders’ equity		166,355			82,396
		Total liabilities and shareholders’ equity	$	613,052		$	480,028

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

						Three Months Ended									Nine Months Ended
						May 25, 2018			February 23, 2018			May 26, 2017			May 25, 2018			May 26, 2017
Cash flows from operating activities:
	Net income					$	31,946		$	36,794		$	7,958		$	89,745		$	2,414
	Adjustments to reconcile net income to net cash
		provided by (used in) operating activities:
			Depreciation and amortization				6,028			6,358			7,846			18,656			25,399
			Share-based compensation				3,297			1,697			1,389			6,599			3,533
			Provision for doubtful accounts receivable and sales returns				(80	)		39			205			(13	)		31
			Deferred income tax benefit				(422	)		(734	)		(84	)		(1,376	)		(1,195	)
			(Gain) loss on disposal of property and equipment				(14	)		244			—			230			129
			Write off of long-term asset				250			—			—			250			—
			Extinguishment loss on long-term debt				—			—			—			—			1,386
			Amortization of debt discounts and issuance costs				714			722			2,480			2,165			6,424
			Changes in operating assets and liabilities:
				Accounts receivable			(45,799	)		14,894			(36,891	)		(86,706	)		(33,516	)
				Inventories			(6,384	)		(17,810	)		(4,833	)		(27,940	)		(31,184	)
				Prepaid expenses and other assets			(5,186	)		(67	)		(735	)		(3,495	)		741
				Accounts payable			46,532			(10,145	)		27,525			83,879			11,799
				Accrued expenses and other liabilities			(2,545	)		2,705			3,846			(4,703	)		7,097
					Net cash provided by (used in) operating activities		28,337			34,697			8,706			77,291			(6,942	)
Cash flows from investing activities:
	Capital expenditures and deposits on equipment						(7,794	)		(4,418	)		(3,784	)		(18,251	)		(11,179	)
	Proceeds from sale of property and equipment						35			66			425			101			467
					Net cash used in investing activities		(7,759	)		(4,352	)		(3,359	)		(18,150	)		(10,712	)
Cash flows from financing activities:
	Long-term debt payment						(6,093	)		(6,125	)		(5,954	)		(18,402	)		(17,689	)
	Payment for extinguishment of long-term debt						—			—			—			—			(938	)
	Fees paid for revolving line of credit refinancing						—			(469	)		—			(768	)		—
	Payment of costs related to initial public offering						—			(302	)		(200	)		(1,591	)		(200	)
	Proceeds from borrowings under revolving line of credit						69,000			103,000			123,000			277,500			338,250
	Repayments of borrowings under revolving line of credit						(69,000	)		(103,000	)		(123,000	)		(277,500	)		(338,250	)
	Proceeds from issuance of ordinary shares from share option exercises						1,993			3,638			348			6,170			348
					Net cash used in financing activities		(4,100	)		(3,258	)		(5,806	)		(14,591	)		(18,479	)
	Effect of exchange rate changes on cash and cash equivalents						(3,799	)		1,226			(541	)		(2,491	)		(160	)
					Net increase (decrease) in cash and cash equivalents		12,679			28,313			(1,000	)		42,059			(36,293	)
Cash and cash equivalents at beginning of period							51,816			23,503			23,341			22,436			58,634
Cash and cash equivalents at end of period						$	64,495		$	51,816		$	22,341		$	64,495		$	22,341

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

SMART Global Holdings Reports Third Quarter Fiscal 2018 Financial Results

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SMART Global Holdings Reports Third Quarter Fiscal 2018 Financial Results

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