SMART Global Holdings(SGH) - 2020 Q3 - Quarterly Report

Part I Financial Statements (Unaudited) This section presents the unaudited condensed consolidated financial statements for SMART Global Holdings, Inc. for the quarterly period ended May 29, 2020, including key financial statements and detailed notes Condensed Consolidated Balance Sheets Total assets increased to $792.3 million, total liabilities rose to $527.8 million, and total shareholders' equity slightly decreased to $264.5 million as of May 29, 2020 Condensed Consolidated Balance Sheets (in thousands) | | May 29, 2020 | August 30, 2019 | | :--- | :--- | :--- | | Total current assets | $567,106 | $472,260 | | Total assets | $792,300 | $704,137 | | Total current liabilities | $306,260 | $237,900 | | Total liabilities | $527,781 | $430,677 | | Total shareholders' equity | $264,519 | $273,460 | Condensed Consolidated Income Statements Net sales increased to $281.3 million for the three months ended May 29, 2020, while the nine-month period saw a net loss of $8.7 million Key Income Statement Data (in thousands, except per share data) | | Three Months Ended May 29, 2020 | Three Months Ended May 31, 2019 | Nine Months Ended May 29, 2020 | Nine Months Ended May 31, 2019 | | :--- | :--- | :--- | :--- | :--- | | Net sales | $281,287 | $235,657 | $825,347 | $933,599 | | Gross profit | $54,233 | $43,035 | $160,059 | $185,235 | | Income from operations | $10,064 | $7,399 | $24,101 | $77,649 | | Net income (loss) | $825 | $1,945 | $(8,671) | $45,707 | | Diluted EPS | $0.03 | $0.08 | $(0.36) | $1.96 | Condensed Consolidated Statements of Comprehensive Income (Loss) The company reported comprehensive losses of $34.9 million and $65.4 million for the three and nine months ended May 29, 2020, respectively, primarily due to negative foreign currency translation adjustments Comprehensive Income (Loss) (in thousands) | | Three Months Ended May 29, 2020 | Nine Months Ended May 29, 2020 | | :--- | :--- | :--- | | Net income (loss) | $825 | $(8,671) | | Foreign currency translation | $(35,752) | $(56,768) | | Comprehensive income (loss) | $(34,927) | $(65,439) | Condensed Consolidated Statements of Equity Total shareholders' equity decreased to $264.5 million as of May 29, 2020, influenced by a net loss and negative foreign currency translation adjustments - Total shareholders' equity decreased to $264.5 million as of May 29, 2020, from $273.5 million as of August 30, 2019[23] - Key changes in equity for the nine months ended May 29, 2020 include a net loss of $8.7 million, share-based compensation of $15.5 million, and a $50.8 million equity component from new convertible notes[23][26] Condensed Consolidated Statements of Cash Flows Net cash provided by operating activities decreased to $62.2 million for the nine months ended May 29, 2020, while financing activities provided $12.8 million Net Cash Flow Summary (in thousands) | | Nine Months Ended May 29, 2020 | Nine Months Ended May 31, 2019 | | :--- | :--- | :--- | | Net cash provided by operating activities | $62,227 | $120,716 | | Net cash used in investing activities | $(16,735) | $(30,189) | | Net cash provided by financing activities | $12,751 | $770 | | Net increase in cash and cash equivalents | $33,706 | $88,865 | Notes to Unaudited Condensed Consolidated Financial Statements These notes detail accounting policies, recent acquisitions, financial instruments, segment reporting changes, debt refinancing, and contingencies including a Brazilian tax assessment - The company operates in three segments: Specialty Memory Products, Brazil Products, and Specialty Compute and Storage Solutions (SCSS)[30][218] - In July 2019, the company acquired SMART Embedded Computing (SMART EC) for approximately $77.7 million and SMART Wireless Computing for approximately $14.6 million[94][102][104] - In February 2020, the company issued $250.0 million of 2.25% convertible senior notes due 2026, using proceeds to repay existing term loans and recognizing a $6.6 million loss on extinguishment of debt[143][169] - The company is contesting a Brazilian import duty tax assessment of R$5.7 million ($1.1 million) as of May 29, 2020, with management believing the probability of a material loss is remote[214][216][217] Net Sales by Segment (in thousands) | Segment | Three Months Ended May 29, 2020 | Three Months Ended May 31, 2019 | | :--- | :--- | :--- | | Specialty Memory Products | $127,700 | $98,755 | | Brazil Products | $92,701 | $100,982 | | SCSS | $60,886 | $35,920 | | Total | $281,287 | $235,657 | Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses financial performance, including a 19.4% Q3 net sales increase driven by acquisitions, an 11.6% nine-month decline due to Brazil, COVID-19 impacts, and liquidity analysis - The COVID-19 pandemic may negatively impact sales, marketing, and product development, with reduced sales volumes already observed in certain SCSS product lines[231] Net Sales Comparison (in millions) | Period | FY20 Q3 | FY19 Q3 | % Change | Nine Months FY20 | Nine Months FY19 | % Change | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | Net Sales | $281.3 | $235.7 | +19.4% | $825.3 | $933.6 | -11.6% | - Q3 sales increased due to SCSS acquisitions (contributing $19.9 million) and a 29.3% rise in Specialty Memory sales, while nine-month sales declined primarily from an 8.2% drop in Brazil product sales due to lower average selling prices[234] - Cash from operations for the nine months ended May 29, 2020, was $62.2 million, down from $120.7 million in the prior year, primarily due to a $72.5 million increase in inventory and a $17.9 million increase in accounts receivable[246][251] - In February 2020, the company issued $250.0 million in convertible notes, using proceeds to extinguish $204.9 million of long-term debt and purchase $21.8 million in capped calls[247] Quantitative and Qualitative Disclosures About Market Risk The company faces market risks from foreign currency fluctuations, especially the Brazilian real, and interest rate changes, using forward contracts to mitigate some foreign exchange exposure - The company is subject to foreign exchange risk, with approximately 35% of net sales for the nine months ended May 29, 2020, originating in Brazilian reais[264] - Foreign exchange forward contracts are utilized to mitigate risk associated with foreign-currency-denominated assets and liabilities, primarily in Brazil[263] - The company faces interest rate risk on its $50 million revolving credit facility, where a 1.0% interest rate increase would result in a $0.5 million increase in annual interest expense if fully drawn[266] Controls and Procedures Management concluded that the company's disclosure controls and procedures were effective as of May 29, 2020, with no material changes in internal control over financial reporting - Management concluded that the company's disclosure controls and procedures were effective as of the end of the period covered by this report[269] - No material changes in internal control over financial reporting occurred during the quarter[270] Part II Legal Proceedings The company is involved in legal matters arising in the normal course of business, with details provided in Note 10 of the financial statements - Information regarding legal proceedings is detailed in Note 10, Commitments and Contingencies, of the financial statements[272] Risk Factors This section updates risk factors, including potential adverse impacts of the COVID-19 pandemic, risks associated with convertible senior notes, and changes to Brazilian tax incentive programs - The COVID-19 pandemic poses significant risks, potentially disrupting manufacturing, supply chains, and sales, and has negatively impacted certain SCSS product lines[274] - Risks related to convertible senior notes include potential inability to repurchase upon a 'fundamental change' and adverse accounting impacts on financial results[280][282] - Capped call transactions related to the notes may affect the value of notes and ordinary shares, subject to counterparty hedging activities[288][290] - Changes to Brazilian tax incentive programs (PPB/IT and PADIS) have shifted benefits from reduced tax rates to financial credits based on R&D investment, creating uncertainty about future benefits[292][295][299] Unregistered Sales of Equity Securities and Use of Proceeds The company's use of working capital and ability to pay dividends are restricted by its Amended Credit Agreement, as detailed in Note 7 - The company's use of working capital and ability to pay dividends are restricted by its Amended Credit Agreement[308] Defaults Upon Senior Securities The company reports no defaults upon senior securities during the period - None[309] Mine Safety Disclosures This item is not applicable to the company - Not applicable[310] Exhibits This section lists the exhibits filed with the Form 10-Q, including amended articles of association, CEO and CFO certifications, and XBRL data files - Filed exhibits include CEO and CFO certifications (31.1, 31.2, 32.1, 32.2) and XBRL interactive data files[312]