Business context and reporting period
This is Smart Global Holdings, Inc.’s unaudited Form 10-Q for the 13 weeks ended November 27, 2020, compared with the 13 weeks ended November 29, 2019. The filing is not a 10-Q filed by Penguin Solutions, Inc.; it identifies Penguin Computing as a subsidiary and borrower. The company designs and manufactures computing and memory products and reports Specialty Memory Products, Brazil Products, and Specialty Compute and Storage Solutions (SCSS).
Key financial metrics
Amounts are in U.S. dollars; financial statement amounts below are in millions unless stated otherwise.
| Metric | Quarter ended Nov. 27, 2020 | Prior-year quarter |
|---|---|---|
| Net sales | $291.7 | $272.0 |
| Gross profit / margin | $52.6 / 18.0% | $54.3 / 20.0% |
| Operating income | $7.6 | $5.9 |
| Net income | $2.0 | $0.2 |
| Diluted earnings per share | $0.08 | $0.01 |
| Cash from operating activities | $35.6 | $25.3 |
| Cash used in investing activities | $14.6 | $5.1 |
| Cash and cash equivalents at period end | $164.1 | $111.4 |
At November 27, 2020, current assets were $558.5 million and current liabilities were $282.6 million. Long-term debt was $197.6 million carrying value, relating to $250 million principal of 2.25% convertible notes due 2026; the filing reports no revolver borrowings at quarter-end. The notes’ effective interest rate was 7.06%. Operating cash flow less capital expenditures was approximately $20.9 million, calculated from the reported figures.
Segment revenue was $120.7 million for Specialty Memory, $105.2 million for Brazil Products, and $65.9 million for SCSS. Adjusted segment gross margins were 15%, 17%, and 27%, respectively; consolidated adjusted gross margin was 19%. These segment measures exclude specified share-based compensation, intangible amortization, and corporate costs.
Material changes versus the prior comparable period
- Net sales rose 7.2%. Specialty Memory sales increased 16.5%, largely on higher Flash and DRAM average selling prices and product mix; Brazil Products sales increased 11.9%, primarily on higher mobile-memory prices. SCSS sales declined 11.6%, mainly reflecting lower Penguin revenue and reduced federal spending associated with COVID-19.
- Gross margin declined from 20.0% to 18.0%, principally because of higher material costs in Specialty Memory and Brazil Products.
- Operating income and net income increased. Research and development expense fell $7.9 million, principally because $7.9 million of Brazilian financial credits reduced expense. SG&A increased $4.5 million, mainly due to higher share-based compensation, including accelerated awards.
- Net interest expense declined $1.3 million following the February 2020 issuance of convertible notes and repayment of term loans. Other income improved by $1.7 million, principally due to foreign-currency gains.
- Operating cash flow increased to $35.6 million. Inventory fell $12.9 million during the quarter, while accounts payable increased $18.0 million; management attributed these movements in part to inventory management and payment timing.
Outlook, risks, contingencies, and unusual items
- Management said cash, available credit, and operating cash generation were expected to fund operations for at least the next 12 months. No specific revenue or earnings guidance was provided in the supplied filing text.
- COVID-19 had reduced sales in certain SCSS product lines in the second half of fiscal 2020 and first quarter of fiscal 2021. Management noted potential further disruption to suppliers, customers, manufacturing, product development, customer support, and productivity.
- On October 18, 2020, the company agreed to acquire Cree’s LED Products business, subject to customary closing conditions. Consideration includes $50 million cash, a $125 million unsecured note, and a potential earn-out of up to $125 million, also payable by note. The company described closing as targeted within 65–95 days as of the filing’s balance-sheet date.
- Subsequent to quarter-end, the company entered into a $100 million asset-based revolving facility on December 23, 2020, with an option to increase commitments to $150 million, subject to conditions. Also after quarter-end, SMART Brazil entered a R$102.2 million (approximately $19.2 million) FINEP facility; it received an initial advance of approximately $10.5 million on December 30, 2020. These are subsequent events, not quarter-end borrowings.
- Brazil tax incentives generated $7.9 million of financial credits recognized as a reduction of R&D expense; $13.4 million of unused credits was recorded as a current asset. Recoverability of accumulated Brazilian ICMS credits depends on estimates and government processes. The company recorded a $0.2 million charge in the quarter to adjust the estimated discount on potential ICMS credit sales.
- Foreign-currency translation reduced comprehensive income by $16.5 million. Brazilian operations accounted for approximately 36% of sales. The company also reported reliance on three suppliers for most raw materials and a significant customer representing 18% of quarterly sales.
- The company disclosed a disputed Brazilian import-duty assessment with a balance of approximately $1.0 million, including interest and charges; management considered a material loss remote. Western Digital requested reimbursement of legal fees related to a SanDisk indemnification matter; the company disputed the request. The filing did not quantify a probable loss for these matters.
- Share-based compensation was $11.1 million, versus $6.0 million a year earlier; the quarter included $5.8 million of additional expense from modification and immediate vesting of restricted awards. Management reported effective disclosure controls and no material change in internal control over financial reporting.
Important facts for investors to verify
- Confirm the issuer: this historical filing is for Smart Global Holdings, Inc., not a filing under the name Penguin Solutions, Inc.
- Track whether CreeLED closed, the final purchase consideration and financing, and the acquired business’s subsequent revenue, margins, and cash needs.
- Assess whether the lower gross margin and SCSS sales weakness persisted, and whether Brazilian financial credits continue at comparable levels.
- Review cash conversion and working-capital movements, including the unusually large quarter-to-quarter changes in accounts payable and inventory.
- Monitor convertible-note obligations and the terms, availability, and usage of the post-quarter revolving and FINEP facilities.
- Evaluate exposure to COVID-19, Brazilian tax-credit recoverability and litigation, supplier concentration, and major-customer concentration.