SMART GLOBAL: Management’s Discussion and Analysis of Financial Position and Results of Operations (Form 10-Q)


The following discussion and analysis of our financial condition and results of
operations should be read in conjunction with the condensed consolidated
financial statements and the notes to those statements included elsewhere in
this Quarterly Report on Form 10-Q, and with the consolidated financial
statements and management's discussion and analysis of our financial condition
and results of operations in our Annual Report on Form 10-K for our fiscal year
ended August 28, 2020 (our "Annual Report"). This discussion contains forward
looking statements that involve risks and uncertainties. Our actual results
could differ materially from those contained in these forward-looking statements
due to a number of factors, including those discussed under the caption "Risk
Factors" in our Annual Report and elsewhere in this report. See also "Cautionary
Note Regarding Forward-Looking Statements" at the beginning of this report.

Overview

SMART Global Holdings businesses are leading designers and manufacturers of
electronics for computing, memory and specialty LED solutions. The Company
specializes in application-specific product development and support for
customers in enterprise, government, OEM and other distribution and sales
channels. Customers rely on SMART as a strategic partner with the highest
quality technology products, customer service, technical support, and worldwide
supply chain and logistics excellence. The Company targets customers in markets
such as computing, including edge computing and high performance computing,
communications, storage, networking, mobile, industrial automation, internet of
things, industrial internet of things, government, military and lighting. The
Company operates in four segments: Specialty, Brazil, IPS, and LED.

Recent developments

Acquisition of the LED activity

On March 1, 2021, pursuant to the CreeLED Purchase Agreement, the Company
acquired the Cree LED Business and assumed certain liabilities related to Cree's
LED Business. The purchase price for the LED Business consisted of (i) a payment
of $50 million in cash, subject to customary adjustments, (ii) the Purchase
Price Note, (iii) an earn-out payment of up to $125 million based on the revenue
and gross profit performance of the LED Business in Cree's first four full
fiscal quarters following the closing, with a minimum payment of $2.5 million,
payable in the form of an unsecured promissory note to be issued by the Company,
and (iv) the assumption of certain liabilities. The Purchase Price Note bears
interest at LIBOR plus 3.0% and is due on August 15, 2023. The Earnout Note will
begin to bear interest upon completion of the Earnout Period at LIBOR plus 3.0%
and is due on March 27, 2025.

In connection with this transaction, Cree and the Company also entered into
certain ancillary and related agreements, including (i) an Intellectual Property
Assignment and License Agreement, (ii) a Transition Services Agreement, (iii) a
Wafer Supply and Fabrication Services Agreement, and (iv) a Real Estate License
Agreement.

COVID-19

The outbreak of coronavirus disease 2019 ("COVID-19") has resulted in
substantial loss of life, economic disruption, and government intervention
worldwide. While we have not yet experienced a significant disruption of our
operations as a result of the COVID-19 pandemic, the pandemic resulted in
reduced sales volumes of certain product lines within IPS in the second half of
fiscal 2020 as well as in the first three quarters of fiscal 2021. COVID-19 also
disrupted our product development, marketing and corporate development
activities. Our recently acquired LED Business experienced similar impacts from
the pandemic from early in calendar 2020. If these conditions continue, or if we
have an outbreak in any of our facilities, such reduced sales volumes may
continue or worsen and we may, among other issues, experience, in any or all
product lines, delays in product development, a decreased ability to support our
customers, disruptions in sales and manufacturing activities and overall reduced
productivity each of which could have a negative impact on our ability to meet
customer commitments and on our revenue and profitability. The reduction of
investment in new capacity due to the pandemic, coupled with strong demand to
expand delivery and logistics, internet and cloud services as well as a rebound
in economic conditions and general demand at a pace faster than expected, has
resulted in significant supply shortages that may impact our ability to
manufacture products for our customers and may result in rising prices of the
materials we need to manufacture our products. We may not be able to pass on
these rising costs to our customers which could result in a negative impact to
our gross margins. Furthermore, if there is a significant outbreak or if travel
restrictions or stay-at-home or work remote or from home conditions or other
governmental or voluntary restrictions relating to the COVID-19 pandemic
significantly impact our suppliers' ability to manufacture or deliver raw
materials or provide key components or services, we could experience more delays
or reductions in our ability to manufacture and ship products to our
customers. While certain segments of our customer base are experiencing strong
demand, the pandemic may negatively impact the demand for other segments for our
customer base or those customers' ability to manufacture their products, which
could reduce their demand for our products or services. The COVID-19 pandemic
also disrupted our product development, marketing and corporate development
activities.

                                       44

--------------------------------------------------------------------------------

Results of operations

The following is a summary of our operating results for the three and nine months ended. May 28, 2021 and May 29, 2020:


                                                         Three Months Ended                                                           Nine Months Ended
                                  May 28,               % of                 May 29,           % of             May 28,                % of               May 29,           % of
                                    2021               sales*                  2020           sales*             2021                 sales*                2020           sales*
                                     (in thousands, other than percentages and per share data)                    (in thousands, other than percentages and per share data)
Condensed Consolidated
Statements of Operations:
Net sales                      $      437,728                 100 %       $      281,287          100 %    $       1,033,433                100 %      $      825,347          100 %
Cost of sales (1)(2)                  353,241                  81 %              227,054           81 %              842,847                 82 %             665,288           81 %
Gross profit                           84,487                  19 %               54,233           19 %              190,586                 18 %             160,059           19 %
Operating expenses:
Research and development (1)           16,718                   4 %               14,436            5 %               32,534                  3 %              44,023            5 %
Selling, general and
administrative (1) (2)                 48,475                  11 %               29,733           11 %              118,195                 11 %              91,935           11 %
Change in estimated fair
value of acquisition-related
contingent consideration               16,400                   4 %                    -            -                 16,400                  2 %                   -            -
Total operating expenses               81,593                  19 %               44,169           16 %              167,129                 16 %             135,958           16 %
Income from operations                  2,894                   1 %               10,064            4 %               23,457                  2 %              24,101            3 %
Other expense, net:
Interest expense, net                  (5,049 )                (1 %)              (3,094 )         (1 %)             (12,568 )               (1 %)            (11,736 )         (1 %)
Other expense, net                       (489 )                 0 %               (3,445 )         (1 %)              (1,187 )                0 %             (16,671 )         (2 %)
Total other expense                    (5,538 )                (1 %)              (6,539 )         (2 %)             (13,755 )               (1 %)            (28,407 )         (3 %)
Income (loss) before income
taxes                                  (2,644 )                (1 %)               3,525            1 %                9,702                  1 %              (4,306 )         (1 %)
Provision for income taxes              4,010                   1 %                2,700            1 %                8,485                  1 %               4,365            1 %
Net income (loss)                      (6,654 )                (2 %)                 825            0 %                1,217                  0 %              (8,671 )         (1 %)
Net income attributable to
noncontrolling interest                   557                   0 %                    -            -                    557                  0 %                   -            -
Net income (loss)
attributable to SGH            $       (7,211 )                (2 %)      $          825            0 %    $             660                  0 %      $       (8,671 )         (1 %)

Earnings per share:
Basic                          $        (0.30 )                           $         0.03                   $            0.03                           $        (0.36 )
Diluted                        $        (0.30 )                           $         0.03                   $            0.03                           $        (0.36 )
Shares used in computing
earnings per share:
Basic                                  24,035                                     24,066                              24,843                                   23,895
Diluted                                24,035                                     24,431                              25,902                                   23,895

* Amounts may not be calculated accurately due to rounding.

(1) Includes share-based compensation expense as follows:
Cost of sales                  $        1,166                             $          699                   $           2,807                           $        2,161
Research and development                1,468                                        780                               3,056                                    2,306
Selling, general and
administrative                          5,747                                      3,428                              19,004                                   11,043
(2) Includes amortization of intangible assets expense as follows:
Cost of sales                  $        2,937                             $          647                   $           4,231                           $        1,941
Selling, general and
administrative                          3,247                                      2,767                               8,780                                    8,299



Three and nine months over May 28, 2021 compared to the three and nine months ended May 29, 2020

Net sales

Net sales increased by $156.4 million, or 55.6%, during the three months ended
May 28, 2021 compared to the same period in the prior year, and by $208.1
million, or 25.2%, during the nine months ended May 28, 2021 compared to the
same period in the prior year. The increase was due in large part to $101.8
million of revenue from our LED business acquired in March 2021. Net sales were
positively impacted by an increase in IPS product sales of $35.0 million, or an
increase of 57.4%, and $48.9 million, or an increase of 24.7%, for the three-
and nine-month periods, respectively, primarily due to increased volume of sales
with one of our largest customers in the IPS segment. In addition, our sales of
Brazil products increased by $25.8 million and $42.4 million, or 27.8% and
14.9%, respectively, for the three- and nine- month periods, primarily due to
higher volume of mobile memory and DRAM revenue and higher average selling
prices for mobile memory of 28.7% and 48.3%, respectively, resulting from a
change in product mix.

Cost of sales

Cost of sales increased by $126.2 million, or 55.6%, during the three months
ended May 28, 2021 compared to the same period in the prior year, and by $177.6
million, or 26.7%, during the nine months ended May 28, 2021 compared to the
same period in the prior year. The increase in the three- and nine-month periods
was primarily due to higher cost of materials of $92.4 million and $140.7

                                       45

--------------------------------------------------------------------------------


million or 48% and 25%, respectively, due to the higher level of sales, as well
as additional costs for the new LED business, as well as higher production costs
related to the increased revenue. Included in the cost of sales increases were
favorable foreign exchange impacts of $1.4 million and $6.3 million for the
three and nine-month periods, respectively, due to locally sourced cost of sales
in Brazil.

Gross Profit

Gross margin remained level at 19.3% during both three-month periods, and
decreased to 18.4% during the nine months ended May 28, 2021 compared to 19.4%
for the same period in the prior year, primarily due to higher material costs
for our Brazil and IPS products.

Research and development costs

Research and development ("R&D") expense increased $2.3 million, or 15.8%,
during the three months ended May 28, 2021 compared to the same period in the
prior year, and decreased $11.5 million, or 26.1%, during the nine months ended
May 28, 2021 compared to the same period in the prior year. The change during
the three- and nine-month periods was primarily due to $7.5 million additional
costs from our new LED business, as well as higher personnel-related expenses
and depreciation. The higher expense was partially offset by $8.2 million and
$22.2 million in the three- and nine-month periods, respectively, of Brazil
financial credits resulting from amendments to the IT law implemented in April
2020. For additional information, see Note 1(i) in our Notes to Unaudited
Condensed Consolidated Financial Statements. Included in the R&D expense
increases/decreases were unfavorable foreign exchange impacts of $0.2 million
and $2.7 million for the three- and nine-month periods, respectively.

Selling, general and administrative expenses

Selling, general and administrative ("SG&A") expense increased by $18.7 million,
or 63.0%, during the three months ended May 28, 2021 compared to the same period
in the prior year, and $26.3 million, or 28.6%, during the nine months ended May
28, 2021 compared to the same period in the prior year. The increases were
primarily $9.7 million additional costs from our new LED business, as well as
higher share-based compensation expense of $2.3 million and $8.0 million in the
three- and nine-month periods, respectively, resulting from additional grants,
as well as higher personnel-related expenses, professional services, acquisition
expenses and intangible amortization expense. For additional information on
share-based compensation expense, see Note 9 in our Notes to Unaudited Condensed
Consolidated Financial Statements. Included in the SG&A expense increases were
favorable foreign exchange impacts of $0.2 million and $1.3 million for the
three- and nine-month periods, respectively.

Other income (expenses)

Interest expense, net increased $2.0 million, or 63.2%, during the three months
ended May 28, 2021 compared to the same period in the prior year, and $0.8
million, or 7.1%, during the nine months ended May 28, 2021 compared to the same
period in the prior year, primarily due to higher interest expense resulting
from the issuance of the Purchase Price Note resulting from the LED acquisition,
as well as our convertible senior notes. For additional information, see Notes 2
and 7 in our Notes to Unaudited Condensed Consolidated Financial Statements.

Other income (expense), net decreased by $3.0 million and $15.5 million for the
three- and nine-month periods, respectively. The decrease in the nine-month
period was primarily due to $6.8 million extinguishment loss of long-term debt
and $7.7 million mark-to-market losses on our Capped Calls in the second quarter
of fiscal 2020, as well as foreign currency losses.

Provision for income taxes

Income tax expense includes a provision for federal, state and foreign taxes
based on the annual estimated effective tax rate applicable to SMART, adjusted
for certain discrete items which are fully recognized in the period they occur.

Provision for income taxes increased by $1.3 million and $4.1 million for the
three and nine months ended May 28, 2021, respectively, compared to the same
period in the prior year, primarily due to the profits and related taxes in
non-U.S. jurisdictions.

As of May 28, 2021, SMART has a full valuation allowance for our net deferred
tax assets associated with our U.S. operations. The amount of the deferred tax
asset considered realizable could be adjusted if significant positive evidence
increases.

Determining the consolidated provision for income tax expense, income tax
liabilities and deferred tax assets and liabilities involves judgment. SMART
calculates and provides for income taxes in each of the tax jurisdictions in
which it operates, which involves estimating current tax exposures as well as
making judgments regarding the recoverability of deferred tax assets in each
jurisdiction. The estimates used could differ from actual results, which may
have a significant impact on operating results in future periods.

                                       46

--------------------------------------------------------------------------------

Liquidity and capital resources


                                                              Nine Months Ended
                                                          May 28,          May 29,
                                                            2021             2020
                                                               (in thousands)
Cash provided by operating activities                   $    105,328     $  

62 227

Cash used in investing activities                            (68,408 )        (16,735 )
Cash provided by financing activities                          1,295        

12 751

Effect of exchange rate changes on cash and cash
equivalents                                                      (34 )        (24,537 )
Net increase in cash and cash equivalents               $     38,181     $     33,706



AT May 28, 2021, we had cash and cash equivalents of $ 189.0 million, of which approximately $ 164.2 million took place outside of United States.

In February 2020, we issued $250.0 million in aggregate principal amount of
2.25% convertible senior notes due 2026 for which we received proceeds of $243.1
million, net of issuance costs. We used $204.9 million for extinguishment of
long-term debt and $21.8 million for purchasing privately-negotiated Capped
Calls. For additional information, see Note 7 in our Notes to Unaudited
Condensed Consolidated Financial Statements.

On March 1, 2021, as part of the acquisition of the LED Business, we paid Cree
$50.0 million in cash and issued Cree a $125 million Purchase Price Note. Cree
also has the potential to receive an earn-out payment of up to $125 million
based on the revenue and gross profit performance of the LED Business during the
Earnout Period with a minimum payment of $2.5 million, payable in the form of an
Earnout Note. The Purchase Price Note and the Earnout Note, if earned and
issued, will accrue interest at a rate of three-month LIBOR plus 3.0% with
interest paid every three months, and one bullet payment of principal and all
accrued and unpaid interest will be payable on each of the notes' respective
maturity dates. The Purchase Price Note will mature on August 15, 2023, and the
Earnout Note will mature on March 27, 2025.

We expect that our existing cash and cash equivalents, line of credit and cash
generated by operating activities will be sufficient to fund our operations for
at least the next twelve months. Our principal uses of cash and capital
resources are acquisitions, debt service requirements as described below,
capital expenditures, R&D expenditures and working capital requirements. We
expect that future capital expenditures will focus on expanding capacity of our
operations, expanding our R&D activities, manufacturing equipment upgrades,
acquisitions and IT infrastructure and software upgrades. Cash and cash
equivalents consist of funds held in demand deposit accounts and money market
funds. We do not enter into investments for trading or speculative purposes.

During the nine months ended May 28, 2021, cash provided by operating activities
was $105.3 million. The primary factors affecting our cash flows during this
period were $82.6 million of non-cash related expenses, $21.5 million change in
our net operating assets and liabilities, and $1.2 million of net income. The
$21.5 million change in net operating assets and liabilities consisted of
increases of $15.4 million in accounts receivable, $66.5 million in inventory
and $14.2 million in prepaid expenses and other assets and a decrease of $4.5
million of operating lease liabilities, offset by increases of $116.2 million of
accounts payable and $5.9 million in other current and long-term liabilities.
The increase in accounts receivable was due to higher gross sales, and increases
in both inventory and accounts payable were primarily due to higher inventory
along all business areas.

During the nine months ended May 29, 2020, cash provided by operating activities
was $62.2 million. The primary factors affecting our cash flows during this
period were $65.3 million of non-cash related expenses and $5.6 million change
in our net operating assets and liabilities, partially offset by $8.7 million of
net loss. The $5.6 million change in net operating assets and liabilities
consisted of increases of $17.9 million in accounts receivable, $72.5 million in
inventory and $1.1 million in prepaid expenses and other assets, and a decrease
of $3.5 million of operating lease liabilities, offset by increases of $95.7
million of accounts payable and $4.9 million in accrued expense and other
liabilities. The increase in accounts receivable was primarily due to timing of
sales, while the increases in inventory and accounts payable were primarily due
to the transition of inventory from contract manufacturers to the company due to
our recent acquisitions, as well as higher purchases for certain programs.

Net cash used in investing activities during the nine months ended May 28, 2021
was $68.4 million consisting primarily of $40.0 million of purchases of property
and equipment and deposits and $28.6 million for the LED acquisition, net of
cash acquired. Net cash used in investing activities during the nine months
ended May 29, 2020 was $16.7 million consisting primarily of purchases of
property and equipment.

Net cash provided by financing activities during the nine months ended May 28,
2021 was $1.3 million, consisting primarily of $25.0 million net proceeds from
borrowings under our revolving line of credit, $13.2 million proceeds from
issuance of ordinary shares from share option exercises and employee share
purchase plans and $11.4 million proceeds from issuance of the FINEP loan,
partially offset by $44.3 million payment for repurchase of ordinary shares and
$4.0 million for withholding tax on restricted stock units. Net cash provided by
financing activities during the nine months ended May 29, 2020 was $12.8
million, consisting primarily of $243.1 million proceeds from issuance of
convertible notes and $4.9 million proceeds from issuance of ordinary shares
from share option exercises and employee share purchase plans, partially offset
by $204.9 million payment for extinguishment of long-term debt, $21.8 million
purchase of Capped Calls, $7.9 million long-term debt payments for both the
Amended Credit Agreement and the BNDES Credit Agreement and $0.6 million for
withholding tax on restricted stock units.

                                       47

--------------------------------------------------------------------------------

No material changes have been made to the contractual obligations previously disclosed in our annual report.

Off-balance sheet provisions

We do not have any relationships with unconsolidated entities or financial
partnerships, such as entities often referred to as structured finance or
special purpose entities, which would have been established for the purpose of
facilitating off-balance sheet arrangements or other contractually narrow or
limited purposes. In addition, we do not have any undisclosed borrowings or
debt, and we have not entered into any synthetic leases. We are, therefore, not
materially exposed to any financing, liquidity, market or credit risk that could
arise if we had engaged in such relationships.

We do not have any off-balance sheet arrangements that have or are reasonably
likely to have a current or future effect on our financial condition, changes in
financial conditions, net sales or expenses, results of operations, liquidity,
capital expenditures or capital resources that is material to investors.

Recent accounting positions

See Note 1 of our Notes to Unaudited Condensed Consolidated Financial Statements
for information regarding the effect of recent accounting pronouncements on our
financial statements.

Critical accounting policies

The preparation of financial statements and related disclosures in conformity
with accounting principles generally accepted in the United States of America
("U.S. GAAP") requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosures of contingent
assets and liabilities at the date of the financial statements and the reported
amounts of revenue and expenses during the reporting period. We base our
estimates on historical facts and various other assumptions that we believe to
be reasonable at the time the estimates are made. Actual results could differ
from those estimates.

Our critical accounting policies are important to the portrayal of our financial
condition and results of operations, and require us to make judgments and
estimates about matters that are inherently uncertain. Except for the critical
accounting estimates associated with revenue recognition and business
acquisitions as discussed below, there have been no material changes to our
critical accounting policies and estimates disclosed in "Item 2. Management's
Discussion and Analysis of Financial Condition and Results of
Operations-Critical Accounting Policies and Estimates" and Note 1, Overview,
Basis of Presentation and Significant Accounting Policies, in each case in our
Annual Report.

Business Acquisitions

Accounting for acquisitions requires us to estimate the fair value of
consideration paid and the individual assets and liabilities acquired, which
involves a number of judgments, assumptions and estimates that could materially
affect the amount and timing of costs recognized in subsequent periods. We
typically obtain independent third-party valuation studies to assist in
determining fair values, including assistance in determining future cash flows,
discount rates and comparable market values. Items involving significant
assumptions, estimates and judgments include the following:



• Fair value of the consideration paid or transferred (including contingent consideration);

• Inventory, including estimated future selling prices, product sales schedule and costs of completing work in progress;

• Properties, installations and equipment, including the determination of values ​​in a continuous use model;

• Debt, including discount rate and payment schedule;

• Intangible assets, including valuation methodology, estimates of

      revenues and costs, profit allocation rates attributable         to the
      acquired technology and discount rates; and

• Deferred tax assets, including projections of future taxable income and taxes

rates.


The valuation of contingent consideration in connection with an acquisition is
inherently challenging due to dependence on the occurrence of future events and
often complex payment provisions. Estimating the fair value of contingent
consideration at an acquisition date and in subsequent periods involves
significant judgments, including projecting future average selling prices,
future sales volumes, manufacturing costs and gross margins. To project average
selling prices and sales volumes, we review recent sales volumes, existing
customer orders, current prices and other factors such as industry analyses of
supply and demand, seasonal factors, general economic trends and other
information. To project manufacturing costs, we must estimate future production
levels and costs of production, including labor, materials and other overhead
costs. Actual selling prices and sales volumes, as well as levels, and costs, of
production, can often vary significantly from projected amounts.

                                       48

--------------------------------------------------------------------------------

Revenue recognition

Revenue is primarily recognized at a point in time when control of the promised
goods or services is transferred to our customers in an amount that reflects the
consideration we expect to be entitled to in exchange for those goods or
services. Contracts with our customers are generally short-term in duration at
fixed, negotiated prices with payment generally due shortly after delivery. We
estimate a liability for returns using the expected value method based on
historical rates of return. In addition, we generally offer price protection to
our distributors, which is a form of variable consideration that decreases the
transaction price. We use the expected value method, based on historical price
adjustments and current pricing trends, to estimate the amount of revenue
recognized from sales to distributors. Differences between the estimated and
actual amounts are recognized as adjustments to revenue.



                                       49

————————————————– ——————————

© Edgar online, source Previews


About Andrew Estofan

Check Also

LEGAL ACTIONS AGAINST ASTR, TASK and ABBV – Jakubowitz Law pursues shareholder claims

TO SEE OUR COMPLAINT, CLICK HERE TO SEE OUR VIDEO, CLICK HERE CLICK HERE TO …