Penguin Solutions (SMART Global Holdings, Inc.) — Q1 FY2024 10-Q
Reporting period: Three months ended December 1, 2023. The company’s fiscal year ends in August. SMART Brazil is presented as discontinued operations; comparisons are to the three months ended November 25, 2022 unless otherwise noted.
Financial performance
| Metric | Q1 FY2024 | Prior year |
|---|---|---|
| Net sales | $274.2 million | $391.8 million |
| Gross profit / margin | $82.9 million / 30.2% | $112.1 million / 28.6% |
| Operating income, GAAP | $1.3 million | $14.8 million |
| Operating income, non-GAAP | $26.7 million | $51.4 million |
| Net loss from continuing operations | $11.2 million | $3.6 million |
| Net income (loss) attributable to SGH, including discontinued operations | $(19.9) million | $5.0 million |
| Diluted loss per share | $(0.38) | Diluted earnings per share of $0.10 |
Sales fell 30.0%, principally from lower IPS hardware sales and lower Memory Solutions Flash volumes; higher LED Solutions demand partly offset the declines. Gross margin improved, mainly from a more favorable mix of higher-service IPS revenue. Non-GAAP operating income is a company-defined measure that excludes specified items, including share-based compensation, acquisition-related amortization and restructuring costs.
- Memory Solutions: Sales of $85.7 million, down 27.6%; segment operating income of $7.2 million, down 62.2%.
- Intelligent Platform Solutions (IPS): Sales of $118.8 million, down 43.7%; segment operating income of $17.9 million, down 45.7%.
- LED Solutions: Sales of $69.8 million, up 11.5%; segment operating income of $1.6 million versus a $0.6 million loss.
Cash flow, liquidity and debt
- Cash and cash equivalents were $529.1 million and short-term investments were $24.4 million at quarter-end, for total cash and investments of $553.4 million. $351.4 million was held by non-U.S. subsidiaries.
- Operating cash flow from continuing operations was $59.7 million, versus cash use of $84.8 million a year earlier. The current-quarter inflow benefited from a $48.7 million decrease in receivables and higher payables, partly offset by a $33.5 million inventory increase. Total operating cash flow, including discontinued operations, was $31.5 million.
- Continuing-operations investing cash use was $3.6 million, primarily capital spending. Continuing-operations financing cash use was $26.2 million, including $14.4 million of debt repayments and $13.1 million of share repurchases.
- Total debt carrying value was $776.8 million, including $28.5 million current debt and $748.3 million long-term debt. The term loan had $537.2 million principal outstanding and an 8.51% effective interest rate; the $250 million revolver had no borrowings. Management said cash, investments, available credit and operating cash flow should fund operations for at least the next 12 months.
Material changes, outlook and risks
- SMART Brazil divestiture: On November 29, the company sold an 81% interest and retained 19%. It received $143.0 million in closing cash net of withholding taxes; total consideration was valued at $194.1 million, including deferred amounts and adjustments. The retained interest had a carrying value of $37.8 million. The quarter included an $8.9 million net loss from discontinued operations associated with the divestiture and Brazil’s operations. The sale also caused a $212.4 million cumulative translation adjustment to be reclassified from accumulated other comprehensive income; the filing’s divestiture accounting includes material noncash and prior-period effects.
- Stratus earnout: The $50.0 million cash obligation was recorded at quarter-end and paid in December 2023, after the quarter closed.
- Restructuring: The company recorded $2.9 million of restructuring charges, primarily severance and benefits, and expects further charges in coming quarters. It plans to wind down Penguin Edge legacy manufacturing and sales by approximately the end of calendar 2024; management said the remaining $16.1 million of related goodwill may be further impaired.
- Capital returns: The company repurchased 825,733 shares for $12.1 million under its existing authorization during the quarter. On January 8, 2024, it authorized an additional $75 million repurchase program.
- Outlook and risks: No specific revenue or earnings guidance is provided in this filing. Management cited variable customer demand and revenue mix, reliance on a limited number of customers and third-party suppliers, constraints in sourcing AI-related components, macroeconomic and geopolitical uncertainty, foreign-exchange exposure, and interest-rate risk. A 1% rate increase, assuming the revolver were fully drawn and covenants satisfied, would increase annual interest expense by an estimated $7.9 million.
- The company reported disclosure controls were effective at quarter-end and no material change in internal control over financial reporting. It reported no material changes to previously disclosed risk factors.
Important facts for investors to verify
- Whether IPS and Memory Solutions demand recovers, and whether improved gross margin can be sustained as segment and service mix changes.
- Cash generation after the Brazil divestiture proceeds and the December $50.0 million Stratus earnout payment; also monitor debt service and the 2027 term-loan maturities.
- Final receipts and timing for Brazil’s deferred consideration and post-closing adjustment, and the value and terms of the retained 19% interest and future put/call option.
- Additional restructuring costs and any further impairment related to Penguin Edge’s wind-down.
- Effects of supply availability, customer concentration, foreign exchange and variable-rate borrowing on results and liquidity.