SMART Global Holdings(SGH) - 2021 Q4 - Annual Report

Part I Business SGH operates as a diversified company with three business segments: Memory Solutions, Intelligent Platform Solutions (IPS), and the newly formed LED Solutions, following the acquisition of Cree's LED business in March 2021 - The company is organized into three lines of business: Memory Solutions, Intelligent Platform Solutions ("IPS"), and LED Solutions, following the acquisition of Cree LED in 2021[18] - In March 2021, SGH completed the acquisition of the LED business from Cree, Inc. (now Wolfspeed, Inc.) for $72.4 million in cash, a $125 million promissory note, and a potential earn-out payment of up to $125 million[21] Net Sales by Business Unit (Fiscal Years 2019-2021) | Business Unit | 2021 Net Sales | 2020 Net Sales | 2019 Net Sales | | :--- | :--- | :--- | :--- | | Memory Solutions | $931.8 million | $857.2 million | $995.4 million | | Intelligent Platform Solutions | $344.8 million | $265.1 million | $216.6 million | | LED Solutions | $224.6 million | N/A | N/A | - The company's top ten end customers accounted for 65% of total net sales in fiscal 2021[48] - SGH benefits from Brazilian government incentive programs, which reduced operating expenses by $30.0 million in 2021, with these financial credits currently set to expire in January 2022[75] Risk Factors The company identifies significant risks that could adversely affect its business, including the ongoing impacts of the COVID-19 pandemic on supply chains and demand, dependency on a small number of key customers and suppliers, and the cyclical nature of its markets, alongside challenges in integrating the newly acquired LED business and exposure to international political and economic conditions, particularly in Brazil - The COVID-19 pandemic has caused reduced sales volumes, disrupted product development, and created significant supply shortages which may impact manufacturing and increase material costs[88][89] - A material weakness in internal control over financial reporting related to the accounting for import taxes was identified and has been remediated[92][93] - The company has significant customer concentration, with the ten largest end customers accounting for 65% of net sales in 2021, where the loss of a key customer could seriously harm the business[101] - SGH depends on a small number of sole or limited source suppliers, with purchases from four key suppliers totaling $1.3 billion in 2021, where a disruption in these relationships could materially affect operations[113] - A significant portion of sales (30% in 2021) is concentrated in Brazil, making the company susceptible to local economic conditions and changes to government incentive programs for local manufacturing[154][156] Unresolved Staff Comments The company reports that it has no unresolved staff comments from the SEC - None[205] Properties SGH's principal facilities are located globally, with major manufacturing, R&D, and sales operations in Atibaia and Manaus, Brazil; Newark and Fremont, California; Penang, Malaysia; and Huizhou, China Principal Facilities Summary | Location | Primary Use | Ownership | | :--- | :--- | :--- | | Atibaia, Brazil | Manufacturing, R&D, Sales | Leased | | Fremont, CA | Manufacturing, R&D, Sales | Leased | | Huizhou, China | Manufacturing, R&D, Procurement | Owned Building, Leased Land | | Newark, CA | Manufacturing, R&D, Sales, Supply Chain | Leased | | Penang, Malaysia | Manufacturing, R&D, Sales, Supply Chain | Owned Building, Leased Land | Legal Proceedings The company refers to discussions of legal proceedings within Item 1A (Risk Factors) and Note on Commitments and Contingencies in the financial statements - For a discussion of legal proceedings, see "Item 1A. Risk Factors" and "PART II – Item 8. Financial Statements and Supplementary Data – Notes to Consolidated Financial Statements – Commitments and Contingencies"[209] Mine Safety Disclosures This item is not applicable to the company - Not applicable[209] Part II Market for Registrant's Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity Securities SGH's ordinary shares trade on the Nasdaq Global Select Market under the symbol "SGH", and the company does not currently pay cash dividends, intending to retain future earnings for business growth, while also repurchasing 1.1 million shares for $44.3 million in January 2021 - The company's ordinary shares are listed on the Nasdaq Global Select Market under the trading symbol "SGH"[211] - SGH has not paid cash dividends and does not intend to in the foreseeable future, retaining earnings to finance growth[212] - On January 7, 2021, the company repurchased 1,100,000 ordinary shares from affiliates of Silver Lake Partners for an aggregate consideration of $44.3 million[213] Management's Discussion and Analysis of Financial Condition and Results of Operations Management reports a 34% increase in net sales to $1.5 billion for fiscal 2021, driven by the LED business acquisition and strong performance in the IPS and Memory Solutions segments, with gross margin improving to 20.5% Fiscal Year 2021 vs. 2020 Performance | Metric | Fiscal 2021 | Fiscal 2020 | Change | | :--- | :--- | :--- | :--- | | Net Sales | $1.50 billion | $1.12 billion | +33.7% | | Gross Profit | $308.4 million | $216.4 million | +42.5% | | Gross Margin | 20.5% | 19.3% | +120 bps | | Operating Income | $55.2 million | $41.3 million | +33.6% | | Net Income (SGH) | $21.3 million | ($1.1 million) | N/A | - The increase in 2021 net sales was driven by $224.6 million from the new LED Solutions segment, a $79.6 million (30.0%) increase in IPS sales, and a $74.6 million (8.7%) increase in Memory Solutions sales[227] - Research and development expense decreased by 5.3% in 2021, primarily due to a $23.6 million increase in Brazil financial credits, which are recorded as a reduction of R&D expense[236] - A charge of $32.4 million was recorded in 2021 to adjust the fair value of the contingent consideration (earn-out) related to the LED Business acquisition[240] Cash Flow Summary (Fiscal Year 2021) | Cash Flow Activity | Amount | | :--- | :--- | | Net cash provided by operating activities | $153.4 million | | Net cash used for investing activities | ($84.2 million) | | Net cash provided by financing activities | $2.8 million | Quantitative and Qualitative Disclosures About Market Risk The company is exposed to market risks, primarily from foreign currency exchange rate fluctuations and interest rate changes, with a significant portion of sales originating in Brazilian real, mitigated by foreign exchange forward contracts - The company is exposed to foreign exchange risk, particularly from the Brazilian real, as sales in Brazil accounted for 30% of net sales in 2021, with foreign exchange forward contracts used for mitigation[275][276] - A hypothetical 10% adverse change in foreign exchange rates versus the U.S. dollar would result in an estimated loss of $7.7 million as of August 27, 2021[277] - The company is subject to interest rate risk on its variable-rate debt, where a 1.0% increase in interest rates would increase annual interest expense by $1.5 million, assuming its credit facilities were fully drawn[278] Financial Statements and Supplementary Data This section presents the company's audited consolidated financial statements for fiscal years 2019-2021, including Balance Sheets, Statements of Operations, Comprehensive Income, Shareholders' Equity, and Cash Flows, with an unqualified opinion from Deloitte & Touche LLP Consolidated Balance Sheet Highlights (As of Aug 27, 2021) | Account | Amount | | :--- | :--- | | Total Assets | $1,344.8 million | | Total Liabilities | $1,025.9 million | | Total SGH Shareholders' Equity | $310.3 million | Consolidated Statement of Operations Highlights (Year Ended Aug 27, 2021) | Account | Amount | | :--- | :--- | | Net Sales | $1,501.1 million | | Gross Profit | $308.4 million | | Operating Income | $55.2 million | | Net Income (SGH) | $21.3 million | | Diluted EPS | $0.83 | - The report from independent auditor Deloitte & Touche LLP expresses an unqualified opinion on the financial statements and the company's internal control over financial reporting[434][435] Controls and Procedures Management concluded that the company's disclosure controls and procedures were effective as of August 27, 2021, having remediated a previously disclosed material weakness related to import taxes, with the LED Business acquisition excluded from the internal control assessment - Management concluded that disclosure controls and procedures were effective as of August 27, 2021[445] - A previously disclosed material weakness concerning the accounting for import taxes has been remediated through enhanced controls, procedures, and training[449] - The assessment of internal control over financial reporting excluded the LED Business acquired from Cree Inc. on March 1, 2021, as permitted by the SEC[447] Other Information The company reports no other information for this item - None[459] Disclosure Regarding Foreign Jurisdictions That Prevent Inspections This item is not applicable to the company - Not applicable[460] Part III Directors, Executive Officers and Corporate Governance Information required for this item is incorporated by reference from the company's 2021 Proxy Statement, to be filed with the SEC within 120 days after the fiscal year-end - The information required by this item is incorporated by reference to the registrant's 2021 Proxy Statement[462] Executive Compensation Information required for this item is incorporated by reference from the company's 2021 Proxy Statement - The information required by this item is incorporated by reference to the registrant's 2021 Proxy Statement[462] Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Information required for this item is incorporated by reference from the company's 2021 Proxy Statement - The information required by this item is incorporated by reference to the registrant's 2021 Proxy Statement[462] Certain Relationships and Related Transactions, and Director Independence Information required for this item is incorporated by reference from the company's 2021 Proxy Statement - The information required by this item is incorporated by reference to the registrant's 2021 Proxy Statement[462] Principal Accountant Fees and Services Information required for this item is incorporated by reference from the company's 2021 Proxy Statement - The information required by this item is incorporated by reference to the registrant's 2021 Proxy Statement[462] Part IV Exhibits and Financial Statement Schedules This section lists the financial statements, schedules, and exhibits filed as part of the Form 10-K, including the Asset Purchase Agreement for the Cree LED business, debt agreements, and management compensation plans - This section lists all documents filed as part of the report, including financial statements and exhibits[465] Form 10-K Summary This item is not applicable - Not applicable[470]