Penguin Solutions, Inc.(PENG) - 2025 Q4 - Annual Report

PART I Business Overview Penguin Solutions, formerly SMART Global Holdings, Inc., is an end-to-end technology company specializing in computing, memory, and LED solutions, with a strategic focus on AI, U.S. Domestication, and key acquisitions Company Overview - Penguin Solutions is an end-to-end technology company with over two decades of experience in computing, memory, and LED solutions[19] - The company rebranded from 'SMART Global Holdings, Inc.' to 'Penguin Solutions, Inc.' on October 15, 2024, and changed its Nasdaq ticker symbol from 'SGH' to 'PENG'[22] - The U.S. Domestication of the parent company from the Cayman Islands to Delaware was consummated on June 30, 2025[23] Business Segments - The company has transformed its business to focus on delivering leading-edge solutions for AI complexity[26] - Current business segments are Advanced Computing, Integrated Memory, and Optimized LED[26] Divestiture of SMART Brazil - Completed the divestiture of an 81% interest in SMART Modular Technologies do Brasil ('SMART Brazil') on November 29, 2023[27] - SMART Brazil operations are presented as discontinued operations for all periods in the financial reports[28] Acquisition of Stratus Technologies - Acquired Stratus Technologies on August 29, 2022, for a cash purchase price of $225.0 million, plus a contingent earnout of up to $50.0 million (paid in Q2 2024)[29] Our Products and Services Advanced Computing Net Sales | Year | Net Sales (Millions USD) | | :--- | :--- | | 2025 | $648.4 | | 2024 | $554.6 | | 2023 | $749.7 | - Advanced Computing offers HPC and AI solutions under Penguin Solutions, Penguin Computing, Stratus, and Penguin Edge brands[30] - The Penguin Edge product portfolio is expected to be fully discontinued by approximately the end of calendar 2025 due to obsolescence[36] Integrated Memory Net Sales | Year | Net Sales (Millions USD) | | :--- | :--- | | 2025 | $464.2 | | 2024 | $356.4 | | 2023 | $443.3 | - Integrated Memory provides specialty DRAM modules (including CXL Memory) and flash storage solutions under the SMART Modular Technologies brand, along with SMART Supply Chain Services[37][42][43] Optimized LED Net Sales | Year | Net Sales (Millions USD) | | :--- | :--- | | 2025 | $256.1 | | 2024 | $259.8 | | 2023 | $248.3 | - Optimized LED, under the Cree LED brand, offers application-optimized LED chips and packaged components for various lighting and display applications[44][46][47] Manufacturing and Test - Manufacturing and testing facilities are primarily located in the United States, Malaysia, and China, with certifications including ISO 9001:2015, ISO 14001:2015, ISO 45001:2018, and IATF16949:2016[48] - The company utilizes third-party contract manufacturers, builds products to order, and configures products to order, with extensive product testing capabilities[50][49] Customers - Serves a diversified base of global OEM, enterprise, and government customers directly and through third-party channels[56] - Sales to the ten largest end customers accounted for 66% of total net sales in 2025, 58% in 2024, and 60% in 2023[60] Suppliers - Maintains relationships with leading suppliers and contract manufacturers in Asia, Europe, and the Americas, including major memory manufacturers (Samsung, Micron, SK hynix) and computing/graphics providers (Intel, AMD)[61][62] - Global macroeconomic headwinds and industry dynamics have led to supply constraints, increased material costs, and affected delivery timelines[64] Sales, Support and Marketing - Sales and marketing efforts are integrated, utilizing a direct sales force, e-commerce, customer service, field application engineers (FAEs), and a network of independent sales representatives, distributors, integrators, and resellers[65] Research and Development - R&D activities are conducted globally, focusing on innovation in Advanced Computing (HPC, AI, high-availability servers), Integrated Memory (next-gen DRAM, CXL, flash products), and Optimized LED (next-gen LED products)[69][70][71] R&D Expenses | Year | R&D Expenses (Millions USD) | | :--- | :--- | | 2025 | $79.8 | | 2024 | $81.5 | | 2023 | $90.6 | - Approximately 430 R&D personnel worldwide as of August 29, 2025[73] Competition - The company competes in highly competitive markets with numerous global and local companies, including large international firms with greater resources[74][78] - Principal competitive factors include meeting customer-specific requirements, product quality, strong technical support, and technologically advanced products[74] Intellectual Property - Owns or exclusively licenses approximately 1,650 patents and has 442 pending patent applications as of August 29, 2025[79] - Relies on a combination of patent, copyright, trade secret, and trademark laws, along with contractual restrictions, to protect intellectual property[80] Human Capital - Focuses on a 'people first' culture, emphasizing employee engagement, development, inclusion, belonging, wellness, health, safety, and competitive compensation and benefits[82][84][85][87][88] - Had approximately 2,900 full-time employees worldwide as of August 29, 2025[83] Environmental Regulations - Operations are subject to various federal, state, local, foreign, and international environmental laws and regulations[89] - Non-compliance or unforeseen environmental conditions could lead to substantial costs and liabilities[90] Available Information - Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, and Current Reports on Form 8-K are available free of charge on the company's website (www.penguinsolutions.com) and the SEC's website (www.sec.gov)[91](index=91&type=chunk)[92][93] Risk Factors The company faces broad risks from global economic conditions, operational fluctuations, intense competition, supply chain dependencies, and rapidly evolving AI markets, alongside international operations, significant debt, and stock volatility - Changing worldwide economic conditions, including inflation and higher interest rates, could adversely affect demand and increase costs[105] - Quarterly results are difficult to predict due to factors like key customer demand, R&D investments, acquisitions, and supply chain disruptions[106][108] - Dependence on a select number of customers (66% of net sales from top ten in 2025) poses a significant revenue risk[116] - Significant investments in AI initiatives face competition, an uncertain regulatory environment, and potential for high costs without expected returns[118][119] - Reliance on a small number of sole or limited source suppliers for critical materials can lead to supply disruptions and increased costs[136][137] - Cybersecurity risks, including data breaches and system disruptions, could expose the company to losses, reputational harm, and liability[149][151] - International operations (43% of net sales in 2025) are subject to diverse legal regimes, political instability, and currency fluctuations[219][222] - Significant debt outstanding could impair financial condition, limit operational flexibility, and trigger default under credit agreements and convertible notes[228][233] - The trading price of common stock has been and may continue to be volatile, and future sales could cause price declines[240][243] - The company does not anticipate paying cash dividends on common stock in the foreseeable future[253] Unresolved Staff Comments There are no unresolved staff comments to report - No unresolved staff comments[275] Cybersecurity Penguin Solutions' cybersecurity risk management program, aligned with NIST and ISO, is overseen by the Board and CIO, covering risk assessments, external testing, training, and incident response - Cybersecurity risk management program is aligned with recognized security frameworks such as NIST Cybersecurity Framework and ISO standards[277] - Key elements include risk assessments, use of external service providers, employee training, an information security event response plan, and a third-party risk management process[278] - The Board of Directors' Cybersecurity and Technology Risk Management Committee oversees the cybersecurity risk management program[279] - The Chief Information Officer (CIO) is primarily responsible for assessing and managing material cybersecurity threats[282] - No identified risks from cybersecurity threats materially affected the company's business strategy, results of operations, or financial condition during 2025[278] Properties Penguin Solutions operates various leased or owned facilities for design, manufacturing, R&D, and sales, primarily in the United States, China, and Malaysia Principal Facilities as of August 29, 2025 | Location | Square Feet (in 000s) | Manufacturing | Procurement | R&D | Sales | Supply Chain Services | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | Durham, NC | 102 | | X | X | X | | | Fremont, CA | 86 | X | X | X | X | | | Huizhou, China | 824 | X | X | X | | | | Maynard, MA | 69 | | X | X | X | | | Newark, CA | 79 | X | X | X | X | X | | Penang, Malaysia | 139 | X | X | X | X | X | | Tempe, AZ | 50 | X | X | X | X | | - Additional leased facilities are located in the United States, China, Hong Kong, Ireland, Japan, Scotland, Singapore, and Taiwan[287] Legal Proceedings Information regarding legal proceedings is cross-referenced to the 'Risk Factors' section and the 'Commitments and Contingencies' note in the financial statements - Discussion of legal proceedings is available in 'Item 1A. Risk Factors' and 'PART II – Item 8. Financial Statements and Supplementary Data – Notes to Consolidated Financial Statements – Commitments and Contingencies'[288] Mine Safety Disclosures This item is not applicable to the company - Mine Safety Disclosures are not applicable[288] PART II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Penguin Solutions' common stock trades on Nasdaq under 'PENG'; no common stock dividends are anticipated, but preferred stock dividends are paid, with remaining stock repurchase authorization of $36.5 million as of August 29, 2025 - Common stock is listed on the Nasdaq Global Select Market under the trading symbol 'PENG'[290] - As of October 15, 2025, there were 37 registered holders of common stock and one registered holder of preferred stock (Issued CPS)[290] - The company does not intend to pay any cash dividends on its common stock in the foreseeable future[292] - The Issued CPS entitles the holder to receive cumulative dividends of six percent per annum, payable quarterly in-kind or in cash[293] - The U.S. Domestication involved an exchange of shares exempt from registration under Section 3(a)(10) of the Securities Act[296][297] - The Board of Directors approved additional $75.0 million stock repurchase authorizations in 2024 and 2025[298] - As of August 29, 2025, an aggregate of $36.5 million remained available for common stock repurchase under the 2024 Authorization[298] Issuer Purchases of Equity Securities (May 31, 2025 - August 29, 2025) | Period | Total number of shares purchased | Average price paid per share | | :--- | :--- | :--- | | May 31, 2025 - June 27, 2025 | 16,207 | $18.26 | | June 28, 2025 - July 25, 2025 | — | — | | July 26, 2025 - August 29, 2025 | — | — | | Total | 16,207 | $18.26 | Stock Performance (August 31, 2020 = $100) | Index | August 31, 2020 | August 31, 2021 | August 31, 2022 | August 31, 2023 | August 31, 2024 | August 31, 2025 | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | Penguin Solutions, Inc. | $100 | $192 | $146 | $205 | $164 | $192 | | Russell 2000 Index | $100 | $147 | $121 | $126 | $150 | $163 | | Nasdaq Electronic Components Index | $100 | $144 | $128 | $145 | $183 | $283 | Reserved This item is reserved and contains no content - This item is reserved[305] Management's Discussion and Analysis of Financial Condition and Results of Operations Penguin Solutions' 2025 net sales increased by 16.9%, driven by Advanced Computing and Integrated Memory, improving operating income; liquidity is strong, supported by cash and credit facilities, with key accounting estimates for acquisitions, taxes, inventories, goodwill, and revenue recognition - Net sales increased by $198.0 million (16.9%) in 2025 compared to the prior year, primarily due to higher sales in Advanced Computing and Integrated Memory[317] - Advanced Computing net sales increased by 16.9% in 2025, driven by increased demand for AI solutions and HPC[317] - Integrated Memory net sales increased by 30.3% in 2025, primarily due to higher sales volumes of flash and DRAM products[317] - Gross margin decreased slightly to 28.8% in 2025 from 29.1% in 2024, mainly due to an unfavorable product mix[320] Non-GAAP Operating Income by Segment (in thousands) | Year ended | 2025 | 2024 | 2023 | | :--- | :--- | :--- | :--- | | Advanced Computing | $115,009 | $95,291 | $110,975 | | Integrated Memory | $43,639 | $22,413 | $73,639 | | Optimized LED | $9,004 | $2,553 | $(4,820) | | Total Non-GAAP operating income | $167,652 | $120,257 | $179,794 | - Net cash provided by operating activities from continuing operations was $113.2 million in 2025, up from $105.5 million in 2024[359][360] - As of August 29, 2025, cash, cash equivalents, and short-term investments totaled $453.8 million[340] - Entered into a new $400 million revolving credit facility (2025 Credit Agreement) on June 24, 2025, and repaid the Amended 2022 TLA[344][345] - SKT invested $200.0 million for 200,000 convertible preferred shares on December 13, 2024[354] - Critical accounting estimates include business acquisitions, income taxes, inventories, goodwill and intangible assets, and revenue recognition[371][373][374][376][378][379] Quantitative and Qualitative Disclosures About Market Risk Penguin Solutions faces foreign exchange risk from international operations, with a 10% adverse change potentially causing $2.7 million in losses, and interest rate risk from variable-rate debt, where a 1.0% increase could raise annual interest expense by $4.0 million if fully drawn - International operations expose the company to foreign exchange risk from currencies like Japanese yen, Malaysian ringgit, and Chinese renminbi[392] - A 10% adverse change in exchange rates versus the U.S. dollar is estimated to result in $2.7 million in losses for 2025[393] - The company has $100.0 million outstanding under the variable-rate 2025 Credit Agreement as of August 29, 2025[394] - A 1.0% increase in interest rates would result in an increase in annual interest expense and a decrease in cash flows of $4.0 million per year, assuming the $400.0 million 2025 Credit Facility were fully drawn[394] Financial Statements and Supplementary Data This section presents consolidated financial statements, including balance sheets, statements of operations, comprehensive income, stockholders' equity, and cash flows, with detailed notes on accounting policies, acquisitions, debt, equity, and income taxes, highlighting increased net sales and operating income in 2025, significant debt repayments, and the impact of U.S. Domestication Consolidated Balance Sheets (in thousands) | Metric | August 29, 2025 | August 30, 2024 | | :--- | :--- | :--- | | Total assets | $1,617,200 | $1,474,506 | | Total liabilities | $1,008,973 | $1,075,298 | | Temporary equity (Preferred stock) | $202,710 | — | | Total Penguin Solutions stockholders' equity | $394,246 | $391,381 | Consolidated Statements of Operations (in thousands, except per share amounts) | Metric | 2025 | 2024 | 2023 | | :--- | :--- | :--- | :--- | | Total net sales | $1,368,794 | $1,170,796 | $1,441,250 | | Gross profit | $394,274 | $340,776 | $415,171 | | Operating income | $58,135 | $18,295 | $8,745 | | Net income (loss) attributable to Penguin Solutions | $25,391 | $(52,472) | $(187,526) | | Basic earnings (loss) per share of common stock | $0.29 | $(1.00) | $(3.78) | | Diluted earnings (loss) per share of common stock | $0.28 | $(1.00) | $(3.65) | Consolidated Statements of Cash Flows (in thousands) | Activity | 2025 | 2024 | 2023 | | :--- | :--- | :--- | :--- | | Net cash provided by operating activities from continuing operations | $113,183 | $105,521 | $63,677 | | Net cash used for investing activities from continuing operations | $(3,377) | $(11,804) | $(281,184) | | Net cash provided by (used for) financing activities from continuing operations | $(63,464) | $(209,495) | $237,221 | | Net increase (decrease) in cash, cash equivalents and restricted cash | $70,593 | $(26,587) | $46,999 | - The U.S. Domestication on June 30, 2025, led to the reclassification of Issued Convertible Preferred Stock to temporary equity[405][539][540] - A $16.1 million goodwill impairment charge was recorded in 2025 related to the Penguin Edge business[417][488] - Total debt outstanding was $461.8 million as of August 29, 2025, including $100.0 million from the 2025 Credit Facility and convertible senior notes[490][502] - Income tax provision was $20.1 million in 2025, with an effective tax rate of 41.0%[586][587] - A $69.7 million valuation allowance was recorded in 2025 against interest expense carryforward attributes inherited from the U.S. Domestication[588][590] Net Sales by Geographic Area (in thousands) | Region | 2025 | 2024 | 2023 | | :--- | :--- | :--- | :--- | | United States | $776,506 | $672,751 | $877,416 | | China | $186,848 | $190,654 | $192,104 | | Europe | $96,999 | $114,298 | $114,118 | | Mexico | $147,298 | $27,301 | $9,902 | | Other | $161,143 | $165,792 | $247,710 | | Total | $1,368,794 | $1,170,796 | $1,441,250 | Changes in and Disagreements With Accountants on Accounting and Financial Disclosure There have been no changes in or disagreements with accountants on accounting and financial disclosure - No changes in and disagreements with accountants on accounting and financial disclosure[636] Controls and Procedures Management concluded that the company's disclosure controls and procedures and internal control over financial reporting were effective as of August 29, 2025, with no material changes during the fourth fiscal quarter - Management concluded that disclosure controls and procedures were effective as of August 29, 2025[637] - Management concluded that internal control over financial reporting was effective as of August 29, 2025, based on the COSO framework[639] - No material changes in internal control over financial reporting occurred during the fourth quarter of fiscal year 2025[640] Other Information No officers or directors adopted or terminated Rule 10b5-1 or non-Rule 10b5-1 trading arrangements during the fiscal quarter ended August 29, 2025 - No officers or directors adopted or terminated a 'Rule 10b5-1 trading arrangement' or a 'non-Rule 10b5-1 trading arrangement' during the fiscal quarter ended August 29, 2025[649] Disclosure Regarding Foreign Jurisdictions That Prevent Inspections This item is not applicable to the company - This item is not applicable[650] PART III Directors, Executive Officers and Corporate Governance Information regarding directors, executive officers, and corporate governance is incorporated by reference from the 2025 Proxy Statement; the company maintains a Code of Business Conduct and Ethics - Information is incorporated by reference to the 2025 Proxy Statement[652] - The company has adopted a Code of Business Conduct and Ethics, available on its website, applicable to officers, directors, and employees[653] Executive Compensation Information regarding executive compensation is incorporated by reference from the 2025 Proxy Statement - Information is incorporated herein by reference to the 2025 Proxy Statement[654] Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Information regarding security ownership of certain beneficial owners and management, and related stockholder matters, is incorporated by reference from the 2025 Proxy Statement - Information is incorporated herein by reference to the 2025 Proxy Statement[655] Certain Relationships and Related Transactions, and Director Independence Information regarding certain relationships and related transactions, and director independence, is incorporated by reference from the 2025 Proxy Statement - Information is incorporated herein by reference to the 2025 Proxy Statement[656] Principal Accountant Fees and Services Information regarding principal accountant fees and services is incorporated by reference from the 2025 Proxy Statement - Information is incorporated herein by reference to the 2025 Proxy Statement[657] PART IV Exhibits and Financial Statement Schedules This section lists the exhibits and financial statement schedules filed as part of the report, including various agreements, indentures, and certifications - The report includes financial statements, financial statement schedules (with certain omissions), and a comprehensive list of exhibits[661] Form 10-K Summary This item is not applicable to the company - Form 10-K Summary is not applicable[665] Signatures The report is duly signed on behalf of Penguin Solutions, Inc. by its President and Chief Executive Officer, Senior Vice President and Chief Financial Officer, and members of the Board of Directors - The report is signed by Mark Adams (President and CEO), Nate Olmstead (SVP and CFO), and members of the Board of Directors[668][671]