SMART Global Holdings(US:SGH)2024-04-09 21:23PART I. Financial Information Financial Statements The unaudited consolidated financial statements for Q2 2024 reflect a year-over-year revenue decrease, net loss, and key events like the SMART Brazil divestiture Consolidated Statements of Operations Highlights (Q2 FY2024 vs Q2 FY2023) | Metric | Three Months Ended March 1, 2024 (in thousands) | Three Months Ended February 24, 2023 (in thousands) | | :--- | :--- | :--- | | Total net sales | $284,821 | $388,377 | | Gross profit | $81,934 | $111,008 | | Operating income (loss) | $(3,312) | $(2,077) | | Net income (loss) from continuing operations | $(13,007) | $(32,963) | | Diluted earnings (loss) per share (continuing) | $(0.26) | $(0.68) | Consolidated Balance Sheet Highlights | Metric | As of March 1, 2024 (in thousands) | As of August 25, 2023 (in thousands) | | :--- | :--- | :--- | | Total current assets | $884,730 | $907,402 | | Total assets | $1,517,454 | $1,505,958 | | Total current liabilities | $267,959 | $426,250 | | Total liabilities | $1,105,950 | $1,276,725 | | Total equity | $411,504 | $229,233 | Consolidated Statements of Cash Flows Highlights (Six Months Ended) | Metric | Six Months Ended March 1, 2024 (in thousands) | Six Months Ended February 24, 2023 (in thousands) | | :--- | :--- | :--- | | Net cash provided by (used for) operating activities from continuing operations | $37,796 | $(6,954) | | Net cash used for investing activities from continuing operations | $(8,146) | $(232,524) | | Net cash provided by (used for) financing activities from continuing operations | $(86,302) | $222,472 | Divestiture of SMART Brazil SGH completed the divestiture of an 81% interest in SMART Brazil for $194.1 million, resulting in a $190.5 million loss and reclassification of a $212.4 million cumulative translation adjustment - Completed the divestiture of an 81% interest in SMART Brazil on November 29, 2023, retaining a 19% interest. The operations of SMART Brazil are now presented as discontinued242729 Consideration for 81% Interest in SMART Brazil | Component | Amount (in thousands) | | :--- | :--- | | Cash received at closing | $164,487 | | Post-closing adjustment | $451 | | Deferred payment | $25,433 | | Deferred cash adjustment | $3,721 | | Total consideration | $194,092 | - Recognized a total loss on the divestiture of $190.5 million, which includes a pre-tax loss of $163.9 million and an income tax provision of $26.6 million. The pre-tax loss was primarily driven by the reclassification of a $212.4 million cumulative translation adjustment373972 Business Acquisition - Stratus Technologies The company fully paid the $50.0 million contingent consideration for the Stratus Technologies acquisition during Q2 fiscal 2024 - In the second quarter of 2024, the company paid in full the $50.0 million contingent consideration (Stratus Earnout) related to the acquisition of Stratus Technologies43102 Debt Total debt stood at $740.7 million as of March 1, 2024, with recent prepayments of $30.0 million and $75.0 million on the TLA Debt Composition as of March 1, 2024 | Debt Instrument | Carrying Value (in thousands) | | :--- | :--- | | Amended 2027 TLA | $494,607 | | 2029 Notes | $147,165 | | 2026 Notes | $98,891 | | Total Long-term debt | $740,663 | - On February 29, 2024, the company prepaid $30.0 million of the Amended 2027 TLA. Subsequent to the quarter end, on March 29, 2024, an additional $75.0 million was prepaid57 Segment and Other Information The company's three segments, Memory Solutions, IPS, and LED Solutions, showed varied Q2 2024 performance, with IPS as the largest by revenue but both IPS and Memory Solutions experiencing significant declines Net Sales by Segment (Q2 FY2024 vs Q2 FY2023) | Segment | Q2 2024 Net Sales (in thousands) | Q2 2023 Net Sales (in thousands) | | :--- | :--- | :--- | | Memory Solutions | $83,297 | $110,339 | | Intelligent Platform Solutions | $141,405 | $222,451 | | LED Solutions | $60,119 | $55,587 | | Total net sales | $284,821 | $388,377 | Segment Operating Income (Q2 FY2024 vs Q2 FY2023) | Segment | Q2 2024 Operating Income (in thousands) | Q2 2023 Operating Income (in thousands) | | :--- | :--- | :--- | | Memory Solutions | $6,016 | $20,366 | | Intelligent Platform Solutions | $22,291 | $36,645 | | LED Solutions | $(1,793) | $(1,227) | | Total segment operating income | $26,514 | $55,784 | Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses the 26.7% year-over-year decrease in Q2 net sales, driven by IPS and Memory Solutions, and highlights the strategic SMART Brazil divestiture and strong liquidity position - The divestiture of the SMART Brazil business enables the company to focus its strategy on delivering high-performance, high-availability solutions to enterprise customers100 - Key factors affecting performance include macro-economic demand, shifts in revenue mix between segments, the ability to integrate acquisitions, and supply chain disruptions, particularly for AI components105106108 Results of Operations Q2 2024 net sales decreased by 26.7% to $284.8 million, primarily due to declines in IPS and Memory Solutions, while gross margin slightly improved to 28.8% - Q2 2024 net sales decreased by $103.6 million (26.7%) YoY, primarily due to lower sales in the IPS and Memory Solutions businesses110 - Gross margin increased slightly to 28.8% in Q2 2024 from 28.6% in Q2 2023, mainly due to a favorable mix from higher service revenue in the IPS business112 Non-GAAP Operating Income Non-GAAP operating income for Q2 2024 declined sharply to $26.5 million, driven by significant decreases in Memory Solutions and IPS segment performance GAAP to Non-GAAP Operating Income Reconciliation (Q2 FY2024) | Metric | Amount (in thousands) | | :--- | :--- | | GAAP operating loss | $(3,312) | | Share-based compensation expense | $10,639 | | Amortization of acquisition-related intangibles | $9,751 | | Diligence, acquisition and integration expense | $5,885 | | Restructure charge & other | $3,551 | | Non-GAAP operating income | $26,514 | - Memory Solutions non-GAAP operating income decreased by 70.5% YoY, and IPS non-GAAP operating income decreased by 39.2% YoY115116 Liquidity and Capital Resources As of March 1, 2024, the company held $465.8 million in cash and investments, deemed sufficient for operations, with key cash flow events including the SMART Brazil divestiture and debt repayments - As of March 1, 2024, the company had cash, cash equivalents, and short-term investments of $465.8 million129 - Net cash provided by operating activities from continuing operations was $37.8 million for the first six months of 2024, a significant improvement from a use of $7.0 million in the prior-year period, mainly due to a $49.5 million decrease in accounts receivable135136 - Key financing activities in the first six months of 2024 included $51.6 million in debt repayments and $15.9 million in share repurchases139 Quantitative and Qualitative Disclosures About Market Risk The company identifies foreign currency exchange risk and interest rate risk as primary market exposures, with hypothetical adverse changes impacting revaluation losses and annual interest expense - A hypothetical 10% adverse change in foreign currency exchange rates versus the U.S. dollar would result in a revaluation loss of $3.1 million on monetary assets and liabilities as of March 1, 2024146 - A 1.0% increase in interest rates on the company's variable-rate debt would increase annual interest expense by approximately $7.5 million148 Controls and Procedures Management concluded that disclosure controls and procedures were effective as of March 1, 2024, with no material changes to internal control over financial reporting during Q2 fiscal 2024 - Management, including the principal executive and financial officers, concluded that disclosure controls and procedures were effective as of March 1, 2024150 - There were no material changes in the company's internal control over financial reporting during the second quarter of fiscal 2024151 PART II. Other Information Legal Proceedings This section refers to the 'Commitments and Contingencies' note in the financial statements for information on legal proceedings, with no new material developments - For information on legal proceedings, the report refers to the 'Commitments and Contingencies' note in the financial statements152 Risk Factors The company reports no material changes to the risk factors previously disclosed in its most recent Annual Report on Form 10-K - There have been no material changes to the risk factors described in the company's most recent Annual Report on Form 10-K152 Unregistered Sales of Equity Securities and Use of Proceeds The company authorized an additional $75 million for share repurchases, repurchasing 105,998 shares for $1.85 million during the quarter, with $77.7 million remaining - On January 8, 2024, the Audit Committee approved an additional $75 million share repurchase authorization154 Share Repurchase Activity (Q2 FY2024) | Period | Total Shares Purchased | Average Price Paid per Share | | :--- | :--- | :--- | | Dec 2, 2023 – Mar 1, 2024 | 105,998 | $17.47 | - As of March 1, 2024, $77.7 million remained available for future share repurchases under the authorized plans154 Defaults Upon Senior Securities The company reports no defaults upon senior securities during the period - None156 Mine Safety Disclosures This item is not applicable to the company's business - Not applicable157 Other Information No director or officer adopted or terminated a Rule 10b5-1 trading arrangement during the fiscal quarter ended March 1, 2024 - No director or officer of the Company adopted or terminated a Rule 10b5-1 trading arrangement during the quarter158 Exhibits This section lists all exhibits filed with the Form 10-Q, including required certifications from the Principal Executive Officer and Principal Financial Officer - The report includes a list of all exhibits filed, such as CEO and CFO certifications (Exhibits 31.1, 31.2, 32.1, 32.2) and Inline XBRL documents160