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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended February 25, 2022
OR
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number 001-38102
sgh-20220225_g1.jpg
SMART GLOBAL HOLDINGS, INC.
(Exact name of registrant as specified in its charter)
Cayman Islands98-1013909
(State or Other Jurisdiction of
Incorporation or Organization)
(I.R.S. Employer
Identification No.)
c/o Walkers Corporate Limited
190 Elgin Avenue
George Town, Grand Cayman
  Cayman Islands
KY1-9008
(Address of Principal Executive Offices)(Zip Code)
Registrant’s Telephone Number, including Area Code: (510) 623-1231
Securities registered pursuant to Section 12(b) of the Act:
Title of each classTrading Symbol(s)Name of each exchange on which registered
Ordinary shares, $0.03 par value per shareSGHNasdaq Global Select Market
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large Accelerated FilerAccelerated filerNon-accelerated filerSmaller reporting companyEmerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes No ☒
As of March 28, 2022, the registrant had 49,764,649 ordinary shares outstanding.


Table of Contents
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Cautionary Note Regarding Forward-Looking Statements
This Quarterly Report on Form 10-Q (“Quarterly Report”) and the documents incorporated herein by reference contain “forward-looking statements” that are not historical in nature, that are predictive or that depend upon or refer to future events or conditions. These statements include, but are not limited to, statements regarding our future financial or operating performance, the extent and timing of future revenues and expenses and customer demand, statements regarding the deployment of our products and services, statements regarding our reliance on third parties, and statements using words such as “anticipate,” “believe,” “could,” “estimate,” “expect,” “forecast,” “intend,” “plan,” “potential,” “should” and similar words and the negatives thereof constitute forward-looking statements. Forward-looking statements are based on current expectations and preliminary assumptions that are subject to factors, risks and uncertainties that could cause actual results to differ materially from those described in these forward-looking statements. Such factors, risks and uncertainties include, but are not limited to, those identified in “Risk Factors,” “Critical Accounting Estimates,” “Results of Operations,” “Quantitative and Qualitative Disclosures About Market Risk” and “Liquidity and Capital Resources” contained in this Quarterly Report and the risks discussed in our other Securities and Exchange Commission (“SEC”) filings.
We urge you to consider these factors, risks and uncertainties carefully in evaluating the forward-looking statements contained in this Quarterly Report. All subsequent written or oral forward-looking statements attributable to our Company or persons acting on our behalf are expressly qualified in their entirety by these cautionary statements. The forward-looking statements included in this Quarterly Report are made only as of the date of this Quarterly Report. We do not intend, and undertake no obligation, to update or revise any forward-looking statements in order to reflect events or circumstances that may arise after the date of this Quarterly Report, except as required by law.
About This Quarterly Report
As used herein, “SGH,” “Company,” “Registrant,” “we,” “our,” “us” or similar terms refer to SMART Global Holdings, Inc. and our consolidated subsidiaries, unless the context indicates otherwise. Our fiscal year is the 52- or 53-week period ending on the last Friday in August. Fiscal 2022 and 2021 each contain 52 weeks. All period references are to our fiscal periods unless otherwise indicated.
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PART I. Financial Information
Item 1. Financial Statements
INDEX TO FINANCIAL STATEMENTS
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SMART Global Holdings, Inc.
Consolidated Balance Sheets
(In thousands, except par value amount)
(Unaudited)
As ofFebruary 25,
2022
August 27,
2021
Assets
Cash and cash equivalents$365,768 $222,986 
Accounts receivable, net (1)
385,925 313,393 
Inventories334,148 363,601 
Other current assets45,876 50,838 
Total current assets1,131,717 950,818 
Property and equipment, net149,059 156,266 
Operating lease right-of-use assets35,816 40,869 
Intangible assets, net88,887 101,073 
Goodwill73,413 74,255 
Other noncurrent assets29,621 21,517 
Total assets$1,508,513 $1,344,798 
Liabilities and Equity
Accounts payable and accrued expenses$440,983 $484,107 
Current debt6,425 25,354 
Other current liabilities86,396 74,337 
Total current liabilities533,804 583,798 
Long-term debt483,911 340,484 
Acquisition-related contingent consideration101,700 60,500 
Noncurrent operating lease liabilities27,047 32,419 
Other noncurrent liabilities7,139 8,673 
Total liabilities1,153,601 1,025,874 
Commitments and contingencies
SMART Global Holdings shareholders’ equity:
Ordinary shares, $0.03 par value; authorized 200,000 shares; 51,189 shares issued and 49,733 outstanding as of February 25, 2022; 50,138 shares issued and 48,736 outstanding as of August 27, 2021
1,535 1,504 
Additional paid-in-capital423,136 396,120 
Retained earnings207,272 184,787 
Treasury shares, 1,456 and 1,402 shares held as of February 25, 2022 and August 27, 2021, respectively
(53,440)(50,545)
Accumulated other comprehensive income (loss)(229,676)(221,615)
Total SGH shareholders’ equity348,827 310,251 
Noncontrolling interest in subsidiary6,085 8,673 
Total equity354,912 318,924 
Total liabilities and equity$1,508,513 $1,344,798 
(1)
Receivables from related parties were de minimis and $14,057 as of February 25, 2022 and August 27, 2021, respectively.
The accompanying notes are an integral part of these consolidated financial statements.
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SMART Global Holdings, Inc.
Consolidated Statements of Operations
(In thousands, except per share amounts)
(Unaudited)
Three Months EndedSix Months Ended
February 25,
2022
February 26,
2021
February 25,
2022
February 26,
2021
Net sales (1)
$449,171 $304,009 $919,115 $595,705 
Cost of sales336,458 250,553 684,201 489,606 
Gross profit112,713 53,456 234,914 106,099 
Operating expenses:
Research and development18,794 8,852 36,451 15,816 
Selling, general and administrative53,114 31,664 105,664 69,720 
Change in fair value of contingent consideration24,000  41,200  
Total operating expenses95,908 40,516 183,315 85,536 
Operating income16,805 12,940 51,599 20,563 
Non-operating (income) expense:
Interest expense, net4,462 4,365 9,568 7,518 
Other non-operating (income) expense1,785 1,531 3,020 699 
Total non-operating (income) expense6,247 5,896 12,588 8,217 
Income before taxes10,558 7,044 39,011 12,346 
Income tax provision7,586 1,200 15,341 4,475 
Net income2,972 5,844 23,670 7,871 
Net income attributable to noncontrolling interest514  1,185  
Net income attributable to SGH$2,458 $5,844 $22,485 $7,871 
Earnings per share:
Basic$0.05 $0.12 $0.46 $0.16 
Diluted$0.04 $0.12 $0.40 $0.16 
Shares used in per share calculations:
Basic49,522 48,435 49,267 48,778 
Diluted57,636 50,407 56,135 50,307 
(1)
Sales to related parties were de minimis in 2022 and were $18,173 and $33,148 in the three and six months ended February 26, 2021, respectively.
The accompanying notes are an integral part of these consolidated financial statements.
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SMART Global Holdings, Inc.
Consolidated Statements of Comprehensive Income (Loss)
(In thousands)
(Unaudited)
Three Months EndedSix Months Ended
February 25,
2022
February 26,
2021
February 25,
2022
February 26,
2021
Net income$2,972 $5,844 $23,670 $7,871 
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustments11,379 10,934 (8,061)(5,591)
Comprehensive income (loss)14,351 16,778 15,609 2,280 
Comprehensive income attributable to noncontrolling interest514  1,185  
Comprehensive income (loss) attributable to SGH$13,837 $16,778 $14,424 $2,280 
The accompanying notes are an integral part of these consolidated financial statements.
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SMART Global Holdings, Inc.
Consolidated Statements of Shareholders’ Equity
(In thousands)
(Unaudited)
Shares
Issued
AmountAdditional
Paid-in-capital
Retained
Earnings
Treasury
Shares
Accumulated
Other
Comprehensive
Income (Loss)
Total SGH
Shareholders’
Equity
Non-
controlling
Interest in
Subsidiary
Total
Equity
As of August 27, 202150,138 $1,504 $396,120 $184,787 $(50,545)$(221,615)$310,251 $8,673 $318,924 
Net income— — — 20,027 — — 20,027 671 20,698 
Other comprehensive income (loss)— — — — — (19,440)(19,440)— (19,440)
Shares issued under equity plans734 22 5,007 — — — 5,029 — 5,029 
Repurchase of ordinary shares(51)(2)2 — (2,666)— (2,666)— (2,666)
Share-based compensation expense— — 9,739 — — — 9,739 — 9,739 
As of November 26, 202150,821 1,524 410,868 204,814 (53,211)(241,055)322,940 9,344 332,284 
Net income— — — 2,458 — — 2,458 514 2,972 
Other comprehensive income (loss)— — — — — 11,379 11,379 — 11,379 
Shares issued under equity plans372 11 2,420 — — — 2,431 — 2,431 
Repurchase of ordinary shares(4)— — — (229)— (229)— (229)
Share-based compensation expense— — 9,848 — — — 9,848 — 9,848 
Distribution to noncontrolling interest— — — — — — — (3,773)(3,773)
As of February 25, 202251,189 $1,535 $423,136 $207,272 $(53,440)$(229,676)$348,827 $6,085 $354,912 
Shares
Issued
AmountAdditional
Paid-in-capital
Retained
Earnings
Treasury
Shares
Accumulated
Other
Comprehensive
Income (Loss)
Total SGH
Shareholders’
Equity
Non-
controlling
Interest in
Subsidiary
Total
Equity
As of August 28, 202048,988 $1,469 $347,431 $163,475 $(2,032)$(228,241)$282,102 $ $282,102 
Net income— — — 2,027 — — 2,027 — 2,027 
Other comprehensive income (loss)— — — — — (16,525)(16,525)— (16,525)
Shares issued under equity plans956 29 3,077 — — — 3,106 — 3,106 
Repurchase of ordinary shares(139)(4)4 — (3,483)— (3,483)— (3,483)
Share-based compensation expense— — 11,088 — — — 11,088 — 11,088 
As of November 27, 202049,805 1,494 361,600 165,502 (5,515)(244,766)278,315  278,315 
Net income— — — 5,844 — — 5,844 — 5,844 
Other comprehensive income (loss)— — — — — 10,934 10,934 — 10,934 
Shares issued under equity plans371 11 2,534 — — — 2,545 — 2,545 
Repurchase of ordinary shares(1,104)(33)33 — (44,481)— (44,481)— (44,481)
Share-based compensation expense— — 5,398 — — — 5,398 — 5,398 
As of February 26, 202149,072 $1,472 $369,565 $171,346 $(49,996)$(233,832)$258,555 $ $258,555 
The accompanying notes are an integral part of these consolidated financial statements.
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SMART Global Holdings, Inc.
Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
Six Months EndedFebruary 25,
2022
February 26,
2021
Cash flows from operating activities:
Net income$23,670 $7,871 
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation expense and amortization of intangible assets31,890 17,160 
Amortization of debt discount and issuance costs4,770 4,307 
Share-based compensation expense19,748 16,486 
Change in fair value of contingent consideration41,200  
Amortization of operating lease right-of-use assets5,245 2,913 
Other1,341 981 
Changes in operating assets and liabilities:
Accounts receivable(75,579)10,082 
Inventories26,415 (28,134)
Other current assets5,200 (19,126)
Accounts payable and accrued expenses(31,646)45,921 
Operating lease liabilities(4,496)(2,742)
Deferred income taxes, net(447)271 
Net cash provided by operating activities47,311 55,990 
Cash flows from investing activities:
Capital expenditures and deposits on equipment(20,142)(34,795)
Other(692)167 
Net cash used for investing activities(20,834)(34,628)
Cash flows from financing activities:
Proceeds from debt270,775 11,439 
Proceeds from borrowing under line of credit84,000 42,500 
Proceeds from issuance of shares7,460 5,651 
Repayments of debt(125,000) 
Repayments of borrowings under line of credit(109,000)(42,500)
Distribution to noncontrolling interest(3,773) 
Payments to acquire ordinary shares(2,895)(47,964)
Other(3,841) 
Net cash provided by (used for) financing activities117,726 (30,874)
Effect of changes in currency exchange rates on cash and cash equivalents(1,421)(1,496)
Net increase (decrease) in cash and cash equivalents142,782 (11,008)
Cash and cash equivalents at beginning of period222,986 150,811 
Cash and cash equivalents at end of period$365,768 $139,803 
The accompanying notes are an integral part of these consolidated financial statements.
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SMART Global Holdings, Inc.
Notes to Consolidated Financial Statements
(Tabular amounts in thousands, except per share amounts)
(Unaudited)
Significant Accounting Policies
Basis of Presentation
The accompanying consolidated financial statements include SGH and its consolidated subsidiaries and have been prepared in accordance with accounting principles generally accepted in the United States of America consistent in all material respects with those applied in our Annual Report on Form 10-K for the year ended August 27, 2021. In the opinion of our management, the accompanying unaudited consolidated financial statements contain all necessary adjustments, consisting of a normal recurring nature, to fairly state the financial information set forth herein. These consolidated interim financial statements should be read in conjunction with the consolidated financial statements and accompanying notes included in our Annual Report on Form 10-K for the year ended August 27, 2021. Certain reclassifications have been made to prior period amounts to conform to current period presentation.
Fiscal Year: Our fiscal year is the 52 or 53-week period ending on the last Friday in August. Fiscal 2022 and 2021 each contain 52 weeks. All period references are to our fiscal periods unless otherwise indicated. All financial information for our subsidiaries in Brazil is included in our consolidated financial statements on a one-month lag because their fiscal years end on July 31 of each year.
Subsequent Event
Share Repurchase Authorization
On April 4, 2022, our Board of Directors approved a $75 million share repurchase authorization, under which the Company may repurchase its outstanding ordinary shares from time to time through open market purchases, privately-negotiated transactions or otherwise. The share repurchase authorization has no expiration date but may be suspended or terminated by the Board of Directors at any time.
Share Dividend
On January 3, 2022, our Board of Directors declared a share dividend of one ordinary share, $0.03 par value per share, for every one outstanding ordinary share owned to shareholders of record as of January 25, 2022. The dividend was paid on February 1, 2022. The accompanying consolidated financial statements and notes have been restated and adjusted for the impact of the share dividend.
Recently Adopted Accounting Standards
In December 2019, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2019-12 – Income Taxes: Simplifying the Accounting for Income Taxes, which simplifies the accounting for income taxes by removing certain exceptions to the general principles in Topic 740. The amendments also improve consistent application of and simplify GAAP for other areas of Topic 740 by clarifying and amending existing guidance. We adopted ASU 2019-12 in the first quarter of 2022 on a prospective basis. The adoption of this ASU did not have a significant impact on our financial statements.
In June 2016, the FASB issued ASU 2016-13 – Financial Instruments – Credit Losses: Measurement of Credit Losses on Financial Instruments, which requires a financial asset (or a group of financial assets) measured on the basis of amortized cost to be presented at the net amount expected to be collected. This ASU requires that the income statement reflect the measurement of credit losses for newly recognized financial assets as well as the increases or decreases of expected credit losses that have taken place during the period. This ASU requires that credit losses of debt securities designated as available-for-sale be recorded through an allowance for credit losses and limits the credit loss to the amount by which fair value is below amortized cost. We adopted ASU 2016-13 in the first quarter of 2021 under the modified retrospective adoption method. The adoption of this ASU did not have a significant impact on our financial statements.
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Recently Issued Accounting Standards
In October 2021, the FASB issued ASU 2021-08 – Business Combinations: Accounting for Contract Asset and Contract Liabilities from Contracts with Customers, to require that an acquirer recognize and measure contract assets and liabilities acquired in a business combination in accordance with ASC 606, Revenue from Contracts with Customers. This ASU is effective for us in the first quarter of 2023 and, if adopted early, requires the retrospective method of transition applied to transactions occurring on or after the beginning of the fiscal year of adoption. We are evaluating the timing and effects of adoption of this ASU on our financial statements.
In August 2020, the FASB issued ASU 2020-06 – Debt – Debt with Conversion and Other Options and Derivatives and Hedging – Contracts in Entity’s Own Equity: Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity, which simplifies the accounting for convertible debt instruments by reducing the number of accounting models and the number of embedded conversion features that could be recognized separately from the primary contract. This ASU requires a convertible debt instrument to be accounted for as a single liability measured at its amortized cost, as long as no other features require bifurcation and recognition as derivatives. This ASU requires an entity to use the if-converted method in the diluted earnings per share calculation for convertible instruments. This ASU is effective for us in the first quarter of 2023 and permits the use of either the modified retrospective or fully retrospective method of transition. We are evaluating the effects of adoption of this ASU on our financial statements.
Business Acquisition
LED Business
On March 1, 2021, pursuant to the previously announced Asset Purchase Agreement, dated October 18, 2020, as amended by the Amendment to Asset Purchase Agreement, dated March 1, 2021 (as amended, the “CreeLED Purchase Agreement”), (i) we acquired the LED business of Cree, Inc., a corporation now known as Wolfspeed, Inc. (“Cree”), including (a) certain equipment, inventory, intellectual property rights, contracts and real estate comprising Cree’s LED products segment, (b) all of the issued and outstanding equity interests of Cree Huizhou Solid State Lighting Company Limited, a limited liability company organized under the laws of the People’s Republic of China and an indirect wholly owned subsidiary of Cree and (c) Cree’s 51% ownership interest in Cree Venture LED Company Limited (“Cree Joint Venture”), Cree’s joint venture with San’an Optoelectronics Co., Ltd. (“San’an”) and (ii) we assumed certain liabilities related to the LED business (collectively, (i) and (ii), the “LED Business”). In connection with the transaction, Cree retained certain assets used in and pre-closing liabilities associated with its LED products segment.
Purchase Price: The purchase price for the LED Business consisted of (i) a payment of $50 million in cash, subject to customary adjustments, (ii) an unsecured promissory note issued to Cree by the Company in the amount of $125 million (“LED 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 (“Earnout Period”), with a minimum payment of $2.5 million, payable in the form of an unsecured promissory note to be issued by us (“Earnout Note”) and (iv) the assumption of certain liabilities. The LED 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 the second quarter of 2022, we repaid the LED Purchase Price Note. See “Debt.”
Contingent Consideration: The Earnout Note is accounted for as contingent consideration. The fair value of the Earnout Note was estimated as of the date of acquisition to be $28.1 million and was valued using a Monte Carlo simulation analysis in a risk-neutral framework with assumptions for volatility, market price of risk adjustment, risk-free rate and cost of debt. The fair value measurement was based on significant inputs not observable in the market.
The Earnout Note is revalued each quarter and changes in valuation are reflected in results of operations. In the second half of 2021, we recorded charges of $32.4 million to adjust the value of the Earnout Note to its fair value as of August 27, 2021, and in the first six months of 2022, we recorded additional aggregate charges of $41.2 million to adjust the value of the Earnout Note to its fair value as of February 25, 2022. The changes in fair value reflected new information about the probability and timing of meeting the conditions of the revenue and gross profit targets of the LED Business.
As of February 25, 2022, the fair value of the Earnout Note was $101.7 million. Upon completion of the Earnout Period, the Earnout Note will be reclassified as debt.
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Unaudited Pro Forma Financial Information: The following unaudited pro forma financial information presents our combined results of operations as if the acquisition of the LED Business had occurred on August 31, 2019. The unaudited pro forma financial information is based on various adjustments and assumptions and is not necessarily indicative of what our results of operations actually would have been had the acquisition been completed as of August 31, 2019 or will be for any future periods. Furthermore, the pro forma financial information does not include adjustments to reflect any potential revenue, synergies or dis-synergies or cost savings that may be achievable in connection with the acquisition, or the associated costs that may be necessary to achieve such revenues, synergies or cost savings.
The unaudited pro forma financial information for the second quarter and first six months of 2021 combines our results of operations for the three and six months ended February 26, 2021 and the results of operations of the LED Business for the three and six months ended December 26, 2021.
Three Months EndedSix Months Ended
February 26,
2021
February 26,
2021
Net sales$409,166 $799,899 
Net loss attributable to SGH(27,680)(155,758)
Earnings (loss) per share:
Basic$(0.57)$(3.19)
Diluted$(0.57)$(3.19)
The unaudited pro forma financial information above reflects the following adjustments:
Incremental cost of sales related to the estimated fair value of inventories.
Incremental depreciation expense related to the estimated fair value of property and equipment.
Incremental amortization expense related to the estimated fair value of identifiable intangible assets.
Incremental interest expense related to the LED Purchase Price Note and the Earnout Note.
The impacts to income tax expense as a result of the pro forma adjustments.
Inventories
As ofFebruary 25,
2022
August 27,
2021
Raw materials$168,956 $163,610 
Work in process67,990 92,901 
Finished goods97,202 107,090 
$334,148 $363,601 
As of February 25, 2022 and August 27, 2021, 7% and 11%, respectively, of total inventories were inventories owned and held under our logistics services.
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Property and Equipment
As ofFebruary 25,
2022
August 27,
2021
Equipment$185,514 $182,493 
Buildings and building improvements55,306 53,502 
Furniture, fixtures and software35,356 32,114 
Land16,126 16,126 
292,302 284,235 
Accumulated depreciation(143,243)(127,969)
$149,059 $156,266 
Depreciation expense for property and equipment was $10.2 million and $19.7 million in the three and six months ended February 25, 2022, respectively, and $5.4 million and $10.3 million in the three and six months ended February 26, 2021, respectively.
Intangible Assets and Goodwill
February 25, 2022August 27, 2021
Gross
Amount
Accumulated
Amortization
Gross
Amount
Accumulated
Amortization
Intangible assets:    
Technology$61,336 $(13,934)$61,307 $(9,142)
Customer relationships57,500 (27,315)57,500 (22,393)
Trademarks/trade names19,200 (8,199)19,200 (6,628)
Order backlog3,400 (3,101)3,800 (2,571)
$141,436 $(52,549)$141,807 $(40,734)
Goodwill by segment:
Intelligent Platform Solutions$40,401 $40,401 
Memory Solutions33,012 33,854 
$73,413 $74,255 
In the first six months of 2022, we capitalized $0.8 million for intangible assets with weighted average useful lives of 13.6 years. Amortization expense for intangible assets was $5.9 million and $12.2 million in the three and six months ended February 25, 2022, respectively, and $3.4 million and $6.8 million in the three and six months ended February 26, 2021, respectively. Amortization expense is expected to be $11.7 million for the remainder of 2022, $21.8 million in 2023, $18.1 million in 2024, $15.4 million in 2025, $8.4 million in 2026 and $13.6 million thereafter.
Goodwill of our Memory Solutions segment decreased by $0.8 million in the first six months of 2022 and increased in all of 2021 by $0.3 million from translation adjustments.
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Accounts Payable and Accrued Expenses
As ofFebruary 25,
2022
August 27,
2021
Accounts payable (1)
$380,088 $429,640 
Salaries, wages and benefits38,514 37,795 
Income and other taxes21,041 14,319 
Other1,340 2,353 
$440,983 $484,107 
(1)
Includes accounts payable for property and equipment of $2.1 million and $3.1 million as of February 25, 2022 and August 27, 2021, respectively.
Debt
As ofFebruary 25,
2022
August 27,
2021
Credit Facility Term Loan$270,560 $ 
Convertible Senior Notes208,452 203,992 
LED Purchase Price Note 125,000 
ABL Credit Agreement 25,000 
Other11,324 11,846 
 490,336 365,838 
Less current debt(6,425)(25,354)
Long-term debt$483,911 $340,484 
Credit Facility
On February 7, 2022, we entered into a credit agreement (the "Credit Agreement") with a syndicate of banks that provides for (i) a term loan credit facility in an aggregate principal amount of $275.0 million (the "2027 TLA") and (ii) a revolving credit facility in an aggregate principal amount of $250.0 million (the "2027 Revolver," and together with the 2027 TLA, the "Credit Facility"), in each case, maturing on February 7, 2027 (subject to certain earlier “springing maturity” dates upon certain conditions specified in the Credit Agreement). The Credit Agreement provides that up to $35.0 million of the 2027 Revolver is available for issuances of letters of credit.
Issuance costs incurred in connection with the Credit Facility were $9.1 million and were allocated to the 2027 TLA and 2027 Revolver on a pro rata basis. Unamortized issuances costs allocated to the 2027 TLA are amortized using the effective interest method and are included as a reduction of the principal amount of the 2027 TLA within debt. Unamortized issuances costs allocated to the 2027 Revolver are amortized using the straight-line method and are included in other current and noncurrent assets.
Principal payments under the 2027 TLA are due quarterly, beginning in May 2022, equal to 2.5% per annum of the initial aggregate principal amount, with such per annum percentage equal to 5.0%, 5.0%, 5.0% and 7.5% per annum in years two through five, respectively, with the balance due at maturity.
Interest and fees: Loans under the Credit Agreement bear interest at a rate per annum equal to either, at our option, a term secured overnight financing rate ("SOFR") rate or a base rate, in each case plus an applicable margin.
2027 TLA: The applicable margin for 2027 TLA is 2.00% per annum with respect to term SOFR borrowings, and 1.00% per annum with respect to base rate borrowings. As of February 25, 2022, the interest rate applicable to the principal amount outstanding under the 2027 TLA was 2.37% per annum. As of February 25, 2022, there was $275.0 million of 2027 TLA
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principal amount outstanding and unamortized issuance costs were $4.4 million and, as of February 25, 2022, the 2027 TLA had an effective interest rate of 2.76%.
2027 Revolver: The applicable margin for revolving loans varies based on our Total Leverage Ratio (as defined in the Credit Agreement) and ranges from 1.25% to 3.00% per annum with respect to term SOFR borrowings and from 0.25% to 2.00% per annum with respect to base rate borrowings. In addition, we are required to pay a quarterly unused commitment fee at an initial rate of 0.25%, which may increase up to a rate of 0.35% based on certain Total Leverage Ratio levels specified in the Credit Agreement. As of February 25, 2022, there were no amounts outstanding under the 2027 Revolver and unamortized issuance costs were $4.6 million.
Security: The Credit Agreement is jointly and severally guaranteed on a senior basis by certain subsidiaries of SGH organized in the United States and Cayman Islands. In addition, the Credit Agreement is secured by a pledge of the capital stock of, or equity interests in, certain subsidiaries of SGH organized in the United States and the Cayman Islands and by substantially all of the assets of certain subsidiaries of SGH organized in the United States and the Cayman Islands.
Covenants: The Credit Agreement contains a number of covenants that, among other things, restrict, subject to certain exceptions, our ability and the ability of our subsidiaries to: incur additional indebtedness; create liens on assets; engage in mergers or consolidations; sell assets; pay dividends; make distributions or repurchase capital stock; make investments, loans or advances; repay or repurchase certain subordinated debt (except as scheduled or at maturity); create restrictions on the payment of dividends or other amounts to us from our restricted subsidiaries; make certain acquisitions; engage in certain transactions with affiliates; amend material agreements governing our subordinated debt and fundamentally change our business.
The Credit Agreement also includes the following financial maintenance covenants tested on the final day of each fiscal quarter:
i.
a First Lien Leverage Ratio (as defined in the Credit Agreement) of 3.00 to 1.00;
ii.
a Total Leverage Ratio of 5.00 to 1.00; provided, that commencing after the eighth full fiscal quarter after the Effective Date, such Total Leverage Ratio level will instead be 4.50 to 1.00; provided further, that commencing after the eighth full fiscal quarter after the Effective Date, in connection with any Material Acquisition (as defined in the Credit Agreement), at the election of the Borrowers, the maximum Total Leverage Ratio for the next four testing periods after such Material Acquisition has been consummated will be automatically increased by 0.50 to 1.00 above the otherwise permitted Total Leverage Ratio for the applicable fiscal quarter (not to exceed 5.00 to 1.00 in any event); provided further, that (x) no more than two such elections may be made during the term of the Credit Agreement and (y) following the first such election, no subsequent election may be made unless the Total Leverage Ratio has been less than or equal to 5.00 to 1.00 as of the last day of at least two consecutive Test Periods (as defined in the Credit Agreement) following the expiration of the first increase; and
iii.
an Interest Coverage Ratio (as defined in the Credit Agreement) of 3.00 to 1.00.
For purposes of calculating the First Lien Leverage Ratio and the Total Leverage Ratio, the consolidated debt of the Company and its Restricted Subsidiaries (as defined in the Credit Agreement) is reduced by up to $100 million of the aggregate amount of unrestricted cash and Permitted Investments (as defined in the Credit Agreement) of the Company and its Restricted Subsidiaries.
Other: Substantially simultaneously with entering into the Credit Agreement, we used a portion of the proceeds of the Credit Facility to pay in full all borrowings and terminated all commitments under (i) our ABL Credit Agreement, dated as of December 23, 2020, (ii) our Amended Credit Agreement, dated as of of March 6, 2020 and (iii) the LED Purchase Price Note, dated as of March 1, 2021. In connection therewith, we used an aggregate of $160.4 million to pay principal and interest outstanding under these agreements and recorded charges of $0.7 million in other non-operating expense to write off certain unamortized issuance costs.
Convertible Senior Notes
In February 2020, we issued $250.0 million in aggregate principal amount of 2.25% convertible senior notes due 2026 (the “2026 Notes”). The 2026 Notes are general unsecured obligations, bear interest at an annual rate of 2.25% per year, payable semi-annually on February 15 and August 15, and mature on February 15, 2026, unless earlier converted, redeemed or repurchased. The 2026 Notes are governed by an indenture (the “Indenture”) between us and U.S. Bank
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National Association, as trustee. After the effect of the share dividend paid in the second quarter of 2022, the conversion rate of the 2026 Notes is 49.2504 ordinary shares per $1,000 principal amount of notes, which represents a conversion price of approximately $20.30 per ordinary share. The conversion rate is subject to adjustment upon the occurrence of certain specified events as set forth in the Indenture.
Conversion Rights: Holders of the 2026 Notes may convert them under the following circumstances:
i.
during any fiscal quarter commencing after the fiscal quarter ended on May 28, 2020 (and only during such fiscal quarter) if the last reported sale price per ordinary share exceeds 130% of the conversion price for at least 20 trading days in the 30 consecutive trading days ending on the last trading day of the immediately preceding fiscal quarter;
ii.
during the five consecutive business days immediately after any 10 consecutive trading day period (such 10 consecutive trading day period, the “Measurement Period”) in which the trading price per $1,000 principal amount of notes for each trading day of the Measurement Period was less than 98% of the product of the last reported sale price per ordinary share on such trading day and the conversion rate on such trading day;
iii.on or after August 15, 2025 until the close of business on the second scheduled trading day immediately before the maturity date;
iv.upon the occurrence of certain corporate events or distributions on our ordinary shares, as provided in the Indenture; or
v.the 2026 Notes are called for redemption.
Upon conversion, we will pay or deliver, as applicable, cash, ordinary shares or a combination of cash and ordinary shares at our election. Our intent is to settle in cash the principal amount of our convertible notes upon conversion and may, at our option, settle any excess of the conversion value over the principal amount in cash, ordinary shares or any combination thereof.
The closing price of our ordinary shares exceeded 130% of the conversion price for our 2026 Notes for at least 20 trading days in the 30 consecutive trading days ended on February 25, 2022. As a result, the 2026 Notes are convertible by holders through May 27, 2022.
If we receive a notice of conversion for our 2026 Notes, and we elect to settle in cash any portion of the conversion obligation, the cash settlement obligation becomes a derivative debt liability subject to mark-to-market accounting treatment based on the volume-weighted-average price of our ordinary shares over a period of 40 consecutive trading days, beginning two business days after the holder gives notice to convert. Accordingly, as of the date of our election to settle any part of a conversion in cash, we would reclassify all or a portion of the fair value of the equity component of the converted 2026 Notes from additional capital to derivative debt liability within current debt in our consolidated balance sheet.
Other: Unamortized debt discount and issuance costs are amortized over the term of the 2026 Notes using the effective interest rate method. As of February 25, 2022 and August 26, 2021, the effective interest rate was 7.06%. Interest expense for the 2026 Notes consisted of 2.25% contractual stated interest and amortization of discount and issuance costs and included of the following:
Three Months EndedSix Months Ended
February 25,
2022
February 26,
2021
February 25,
2022
February 26,
2021
Contractual stated interest$1,390 $1,391 $2,781 $2,781 
Amortization of discount and issuance costs2,250 2,098 4,460 4,159 
 $3,640 $3,489 $7,241 $6,940 
As of both February 25, 2022 and August 27, 2021, the carrying amount of the equity components of the 2026 Notes, which is included in additional paid-in-capital, was $50.8 million.
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Leases
As of February 25, 2022 and August 27, 2021, we had operating leases through which we utilize facilities, offices and equipment in our manufacturing operations, research and development activities and selling, general and administrative functions. Sublease income was not significant in the first six months of 2022 or 2021. The components of operating lease expense were as follows:
Three Months EndedSix Months Ended
February 25,
2022
February 26,
2021
February 25,
2022
February 26,
2021
Fixed lease cost$3,213 $1,915 $6,516 $3,454 
Variable lease cost453 288 821 560 
Short-term lease cost182 57 258 115 
 $3,848 $2,260 $7,595 $4,129 
Cash flows used for operating activities for the first six months of 2022 and 2021 included payments for operating leases of $5.1 million and $3.1 million, respectively. Noncash acquisitions of right-of-use assets were $0.6 million and $3.3 million for the first six months of 2022 and 2021, respectively.
As of February 25, 2022 and August 27, 2021, the weighted-average remaining lease term for our operating leases was 5.8 years and 6.1 years, respectively. Certain of our operating leases include one or more options to extend the lease term for periods from two to five years. In determining the present value of our operating lease liabilities, we have assumed we will not extend any lease terms. As of February 25, 2022 and August 27, 2021, the weighted-average discount rate for our operating leases was 6.8% and 6.7%, respectively.
Minimum payments of lease liabilities as of February 25, 2022 were as follows:
Remainder of 2022
$6,820 
202310,805 
20247,272 
20254,664 
20263,581 
2027 and thereafter15,652 
48,794 
Less imputed interest(10,618)
Present value of total lease liabilities$38,176 
The table above excludes lease liabilities for leases that have been executed but not yet commenced. As of February 25, 2022, we had such lease commitments relating to operating lease payment obligations of $51.8 million for a building lease with a term of 16 years. We will recognize a right-of-use asset and an associated lease liability at the time such asset becomes available for our use. Such lease is currently expected to commence in the second half of fiscal 2022.
Commitments and Contingencies
Contingencies
From time to time, we are involved in legal matters that arise in the normal course of business. Litigation in general, and intellectual property, employment and shareholder litigation in particular, can be expensive and disruptive to normal business operations. Moreover, the results of complex legal proceedings are difficult to predict. Additionally, from time to time, we are a party in the normal course of business to a variety of agreements pursuant to which we may be obligated to indemnify another party. It is not possible to predict the maximum potential amount of future payments under these types of agreements due to the conditional nature of our obligations and the unique facts and circumstances involved in each particular agreement. Historically, our payments under these types of agreements have not had a material adverse effect
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on our business, results of operations or financial condition. We regularly review contingencies to determine whether the likelihood of loss has changed and to assess whether a reasonable estimate of the loss or range of loss can be made.
Equity
SGH Shareholders’ Equity
Ordinary Share Repurchases
In January 2021, we agreed to repurchase an aggregate of 1.1 million ordinary shares from Silver Lake Partners III Cayman (AIV III), L.P., Silver Lake Technology Investors III Cayman, L.P., Silver Lake Sumeru Fund Cayman, L.P. and Silver Lake Technology Investors Sumeru Cayman, L.P. at a purchase price of $40.30 per share in a privately negotiated transaction. The transaction closed on January 15, 2021. In addition, ordinary shares withheld as payment of withholding taxes and exercise prices in connection with the vesting or exercise of equity awards are treated as ordinary share repurchases.
We repurchased 4 thousand and 55 thousand ordinary shares in the second quarter and first six months of 2022, respectively, and 1.1 million and 1.2 million ordinary shares in the second quarter and first six months of 2021, respectively. As of February 25, 2022, these repurchased shares are held in treasury.
Noncontrolling Interest in Subsidiary
In connection with our acquisition of the LED Business, we have a 51% ownership interest in the Cree Joint Venture. The remaining 49% ownership interest is held by San’an. The Cree Joint Venture has a five-member board of directors, three of which are designated by us and two of which are designated by San’an. As a result of our majority voting interest, we consolidate the operations of the Cree Joint Venture and report its results of operations within our LED Solutions segment.
The Cree Joint Venture has a manufacturing agreement pursuant to which San’an supplies it with mid-power LED products and we and the Cree Joint Venture have a sales agent agreement pursuant to which we are the independent sales representative of the Cree Joint Venture. The Cree Joint Venture produces and delivers to market high performing, mid-power lighting class LEDs in an exclusive arrangement serving the expanding markets of North and South America, Europe and Japan, and serves China markets and the rest of the world on a non-exclusive basis.
The 49% ownership interest held by San’an is classified as noncontrolling interest. In the second quarter of 2022, the Cree Joint Venture distributed an aggregate of $7.7 million to its partners, including $3.9 million to SGH and $3.8 million to San’an. Noncontrolling interest increased by $0.5 million and $1.2 million in the second quarter and first six months of 2022, respectively, for San’an’s share of net income from the Cree Joint Venture. Remaining cash and other assets of the Cree Joint Venture are generally not available for use by us in our other operations.
Government Incentives
Brazil Financial Credits
Through our Brazil subsidiaries, we participate in two programs (“Brazil Incentive Programs”), pursuant to which the Brazilian government incentivizes the manufacture and sale of certain information technology and consumer electronics products within Brazil. The programs include 1) Lei da Informática – Processo Produtivo Básico Program (also known as Informatics Law – Basic Productive Process Program) (“IT Law/PPB”) and 2) Programa de Apoio ao Desenvolvimento Tecnológico da Indústria de Semicondutores (also known as Program of Support of the Development of the Semiconductor Industry) (“PADIS”). In January 2022, the Brazilian government approved an extension to PADIS. The financial credits available through PADIS are set to expire in December 2026, while the financial credits through IT Law/PPB are set to expire in December 2029. The Brazil Incentive Programs provide for reduced import and other transaction-related taxes for certain procurement, manufacturing and sales activities. In exchange, we must invest in certain research and development activities related to semiconductors and IT solutions in aggregate amounts that exceed a specified percentage of our gross revenues recognized in connection with sales in Brazil, excluding exports and sales to customers located at the Manaus Free Trade Zone. Accordingly, financial credits earned in connection with the Brazil Incentive Programs are reflected as a reduction of research and development expense. Financial credits available under the Brazil Incentive Programs are subject to limitations, which range from approximately 11% to 14% of gross revenues recognized for sales in Brazil.
Under PADIS, we recognized aggregate financial credits, reflected as a reduction of research and development expense, of $6.0 million and $11.9 million in the second quarter and first six months of 2022, respectively, and $6.2 million and $14.0
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million in the second quarter and first six months of 2021, respectively. Financial credits earned under the Brazil Incentive Programs may be refunded in cash or used to offset liabilities for Brazil federal taxes. As of February 25, 2022 and August 27, 2021, earned under PADIS but unused financial credits of $17.5 million and $19.8 million, respectively, were included in other current assets. Financial credits earned under PADIS but unused as of February 25, 2022 can be utilized through November 2026.
Fair Value Measurements
Cash and cash equivalents as of both February 25, 2022 and August 27, 2021 included money market funds of $2.7 million, which were valued based on Level 1 measurements using quoted prices in active markets for identical assets.
Fair value measurements of other assets and liabilities were as follows:
February 25, 2022August 27, 2021
Fair
Value
Carrying
Value
Fair
Value
Carrying
Value
Assets:
Derivative financial instrument assets$ $ $883 $883 
Liabilities:
Derivative financial instrument liabilities$2,895 $2,895 $50 $50 
Credit Facility Term Loan275,000 270,560   
Convertible Senior Notes382,903