SMART Global Holdings(SGH) - 2025 Q2 - Quarterly Report

PART I. Financial Information Item 1. Financial Statements The company achieved significant revenue growth and profitability in Q2 and H1 FY2025, bolstered by a $200 million SK Telecom investment Consolidated Balance Sheets The balance sheet strengthened significantly by February 28, 2025, with cash and total equity substantially increasing due to preferred share issuance Consolidated Balance Sheet Highlights (in thousands) | Account | Feb 28, 2025 | Aug 30, 2024 | Change | | :--- | :--- | :--- | :--- | | Cash and cash equivalents | $621,682 | $383,147 | +$238,535 | | Total current assets | $1,244,765 | $867,704 | +$377,061 | | Total assets | $1,811,344 | $1,474,506 | +$336,838 | | Total current liabilities | $473,705 | $327,596 | +$146,109 | | Total liabilities | $1,199,453 | $1,075,298 | +$124,155 | | Total equity | $611,891 | $399,208 | +$212,683 | Consolidated Statements of Operations Strong Q2 FY2025 performance saw net sales grow 28.3% to $365.5 million, reversing prior-year operating loss to an $18.5 million income Q2 Fiscal 2025 vs Q2 Fiscal 2024 Performance (in thousands, except per share data) | Metric | Q2 FY2025 | Q2 FY2024 | YoY Change | | :--- | :--- | :--- | :--- | | Total net sales | $365,519 | $284,821 | +28.3% | | Gross profit | $104,648 | $81,934 | +27.7% | | Operating income (loss) | $18,488 | $(3,312) | N/A | | Net income (loss) attributable to Penguin Solutions | $8,082 | $(13,620) | N/A | | Diluted EPS | $0.09 | $(0.26) | N/A | Six Months Fiscal 2025 vs Six Months Fiscal 2024 Performance (in thousands, except per share data) | Metric | Six Months FY2025 | Six Months FY2024 | YoY Change | | :--- | :--- | :--- | :--- | | Total net sales | $706,621 | $559,068 | +26.4% | | Gross profit | $202,460 | $164,784 | +22.9% | | Operating income (loss) | $35,844 | $(2,007) | N/A | | Net income (loss) attributable to Penguin Solutions | $13,299 | $(33,541) | N/A | | Diluted EPS | $0.19 | $(0.64) | N/A | Consolidated Statements of Cash Flows Operating cash flow significantly improved in H1 FY2025, with financing activities providing $175.1 million, primarily from preferred share issuance Six Months Ended Cash Flow Summary (in thousands) | Cash Flow Activity | Feb 28, 2025 | Mar 1, 2024 | | :--- | :--- | :--- | | Net cash provided by operating activities | $86,696 | $9,561 | | Net cash provided by (used for) investing activities | $(23,271) | $110,792 | | Net cash provided by (used for) financing activities | $175,096 | $(86,908) | | Net increase in cash | $238,521 | $32,265 | - The primary driver of financing cash inflow was the $191.2 million in net proceeds from the issuance of preferred shares[18] Notes to Consolidated Financial Statements Key notes detail the SMART Brazil divestiture, a $200 million SK Telecom investment, and segment performance, impacting financial reporting - On November 29, 2023, the company completed the divestiture of an 81% interest in SMART Brazil. The results of SMART Brazil are now presented as discontinued operations for all periods shown[20][26] - On December 13, 2024, the company closed a $200 million investment from an SK Telecom affiliate through the sale of 200,000 convertible preferred shares at $1,000 per share[23][61] - During Q2 2025, the company recorded a $6.1 million goodwill impairment charge related to its plan to wind down manufacturing of legacy products in the Penguin Edge business within the Advanced Computing segment[47] Segment Net Sales (in thousands) | Segment | Q2 FY2025 | Q2 FY2024 | YoY Change | | :--- | :--- | :--- | :--- | | Advanced Computing | $200,157 | $141,405 | +41.5% | | Integrated Memory | $105,260 | $83,297 | +26.4% | | Optimized LED | $60,102 | $60,119 | -0.03% | | Total | $365,519 | $284,821 | +28.3% | Management's Discussion and Analysis of Financial Condition and Results of Operations Q2 2025 revenue growth of 28.3% was driven by Advanced Computing and Integrated Memory segments, with liquidity significantly enhanced by strategic investments Results of Operations Q2 2025 net sales rose 28.3% due to strong Advanced Computing and Integrated Memory performance, despite a slight gross margin decline and goodwill impairment - Advanced Computing net sales increased by 41.5% in Q2 and 45.1% in the first six months of 2025, primarily due to higher hardware sales driven by increased demand for AI solutions and high-performance computing[108] - Integrated Memory net sales increased by 26.4% in Q2 and 19.5% in the first six months of 2025, mainly due to higher sales volumes of DRAM products[108] - Gross margin decreased slightly in Q2 2025 to 28.6% from 28.8% in Q2 2024, primarily due to an unfavorable mix from higher product revenue in the Advanced Computing business[110] - A goodwill impairment charge of $6.1 million was recorded in Q2 2025 related to the plan to wind down manufacturing and sales of certain legacy products in the Penguin Edge business[117] Non-GAAP Measure of Segment Operating Income Non-GAAP segment operating income significantly increased to $49.1 million in Q2 2025, with all segments showing improved profitability GAAP to Non-GAAP Operating Income Reconciliation (Q2, in thousands) | Description | Q2 FY2025 | Q2 FY2024 | | :--- | :--- | :--- | | GAAP operating income (loss) | $18,488 | $(3,312) | | Non-GAAP Adjustments | $30,602 | $29,826 | | Non-GAAP operating income | $49,090 | $26,514 | Non-GAAP Operating Income by Segment (Q2, in thousands) | Segment | Q2 FY2025 | Q2 FY2024 | YoY Change | | :--- | :--- | :--- | :--- | | Advanced Computing | $36,933 | $22,291 | +65.7% | | Integrated Memory | $10,970 | $6,016 | +82.3% | | Optimized LED | $1,187 | $(1,793) | N/A | | Total | $49,090 | $26,514 | +85.1% | Liquidity and Capital Resources The company's liquidity is strong, with $647.0 million in cash and equivalents, bolstered by the SKT investment and SMART Brazil divestiture proceeds - As of February 28, 2025, the company had cash, cash equivalents, and short-term investments of $647.0 million[124] - In December 2024, the company received aggregate proceeds of $200.0 million from the SKT Investment in convertible preferred shares[130] - In November 2023, the company received net cash of $143.0 million from the sale of an 81% interest in SMART Brazil[129] Quantitative and Qualitative Disclosures About Market Risk The company faces market risks from foreign currency fluctuations and interest rate changes, potentially impacting earnings by millions - A hypothetical 10% adverse change in foreign exchange rates versus the U.S. dollar would result in an estimated loss of $2.2 million as of February 28, 2025[144] - The company has $300.0 million in variable-rate debt. A 1.0% increase in interest rates would result in an increase in annual interest expense of $5.5 million, assuming the $250.0 million revolver was also fully drawn[145] Controls and Procedures Management confirmed the effectiveness of disclosure controls and procedures as of February 28, 2025, with no material changes in internal controls - Management concluded that the company's disclosure controls and procedures were effective as of February 28, 2025[147] - No changes in internal control over financial reporting occurred during the second quarter of 2025 that have materially affected, or are reasonably likely to materially affect, internal controls[148] PART II. Other Information Legal Proceedings The company may face legal matters in the normal course of business, with no specific material proceedings detailed in this section - The company states it may be involved in legal matters from time to time in the normal course of business, but no specific material proceedings are detailed in this section[59][150] Risk Factors Key risks include adverse impacts from tariffs and trade restrictions, and the potential unrealized benefits of the planned redomiciliation to Delaware - Tariffs and trade restrictions, particularly related to China, could negatively impact demand or increase costs for the company's products, especially within the LED business[152] - The company announced a plan to redomicile from the Cayman Islands to Delaware, but warns that the anticipated benefits of this U.S. Domestication may not be realized[153] Unregistered Sales of Equity Securities and Use of Proceeds The company repurchased 167,046 shares at an average of $19.70, with $66.6 million remaining for future repurchases under authorization Issuer Purchases of Equity Securities (Q2 FY2025) | Period | Total Shares Purchased | Average Price Paid | | :--- | :--- | :--- | | Nov 30, 2024 - Dec 27, 2024 | 167,046 | $19.70 | | Dec 28, 2024 - Jan 24, 2025 | — | $— | | Jan 25, 2025 - Feb 28, 2025 | — | $— | - As of February 28, 2025, $66.6 million remained available for share repurchases under the company's current authorization[155] Exhibits The exhibits section lists key documents including the Certificate of Designation for Convertible Preferred Shares and the Investor Agreement - Key exhibits filed include the Certificate of Designation for the Convertible Preferred Shares and the Investor Agreement related to the SKT investment[162]