# Penguin Solutions, Inc.: Form 10-Q for the period ended Mar 1, 2024

- Company: [Penguin Solutions, Inc.](/companies/peng.md) (CIK 1616533)
- Form: 10-Q
- Filed: 2024-04-09
- Accepted by EDGAR: Apr 9, 2024, 17:23 ET
- Period: 2024-03-01
- Accession: 0001628280-24-015494
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/1616533/000162828024015494/sgh-20240301.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/1616533/000162828024015494/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2024-03-01.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2023-12-02 to 2024-03-01 | $284.8m | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax |
| Revenue | 6 months, 2023-08-26 to 2024-03-01 | $559.1m | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax |
| Cost of revenue | 3 months, 2023-12-02 to 2024-03-01 | $202.9m | us-gaap:CostOfGoodsAndServicesSold |
| Cost of revenue | 6 months, 2023-08-26 to 2024-03-01 | $394.3m | us-gaap:CostOfGoodsAndServicesSold |
| Gross profit | 3 months, 2023-12-02 to 2024-03-01 | $81.9m | us-gaap:GrossProfit |
| Gross profit | 6 months, 2023-08-26 to 2024-03-01 | $164.8m | us-gaap:GrossProfit |
| Research and development | 3 months, 2023-12-02 to 2024-03-01 | $20.5m | us-gaap:ResearchAndDevelopmentExpense |
| Research and development | 6 months, 2023-08-26 to 2024-03-01 | $41.9m | us-gaap:ResearchAndDevelopmentExpense |
| Selling, general and administrative | 3 months, 2023-12-02 to 2024-03-01 | $61.4m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Selling, general and administrative | 6 months, 2023-08-26 to 2024-03-01 | $118.6m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Operating income | 3 months, 2023-12-02 to 2024-03-01 | −$3.3m | us-gaap:OperatingIncomeLoss |
| Operating income | 6 months, 2023-08-26 to 2024-03-01 | −$2.0m | us-gaap:OperatingIncomeLoss |
| Income tax | 3 months, 2023-12-02 to 2024-03-01 | $2.2m | us-gaap:IncomeTaxExpenseBenefit |
| Income tax | 6 months, 2023-08-26 to 2024-03-01 | $5.7m | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2023-12-02 to 2024-03-01 | −$13.6m | us-gaap:NetIncomeLoss |
| Net income | 6 months, 2023-08-26 to 2024-03-01 | −$33.5m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2023-12-02 to 2024-03-01 | −$0.26 | us-gaap:EarningsPerShareDiluted |
| Diluted EPS | 6 months, 2023-08-26 to 2024-03-01 | −$0.64 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2023-12-02 to 2024-03-01 | −$0.26 | us-gaap:EarningsPerShareBasic |
| Basic EPS | 6 months, 2023-08-26 to 2024-03-01 | −$0.64 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2023-12-02 to 2024-03-01 | 52,031,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Diluted shares (weighted) | 6 months, 2023-08-26 to 2024-03-01 | 52,050,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 6 months, 2023-08-26 to 2024-03-01 | $9.6m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 6 months, 2023-08-26 to 2024-03-01 | $9.9m | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Share repurchases | 6 months, 2023-08-26 to 2024-03-01 | $15.9m | us-gaap:PaymentsForRepurchaseOfCommonStock |
| Cash and equivalents | at 2024-03-01 | $442.3m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2024-03-01 | $884.7m | us-gaap:AssetsCurrent |
| Total assets | at 2024-03-01 | $1.52bn | us-gaap:Assets |
| Current liabilities | at 2024-03-01 | $268.0m | us-gaap:LiabilitiesCurrent |
| Total liabilities | at 2024-03-01 | $1.11bn | us-gaap:Liabilities |
| Long-term debt | at 2024-03-01 | $740.7m | us-gaap:LongTermDebtNoncurrent |
| Current portion of debt | at 2024-03-01 | $0 | us-gaap:LongTermDebtCurrent |
| Shareholders' equity | at 2024-03-01 | $405.0m | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 33,442 characters.

*The following discussion and analysis should be read in conjunction with the consolidated financial statements and accompanying notes included elsewhere in this Quarterly Report and in our Annual Report on Form 10-K for the fiscal year ended August 25, 2023. This discussion contains forward looking statements that involve risks, uncertainties and other factors. Our actual results could differ materially from those contained in these forward-looking statements due to a number of risks, uncertainties and other factors, including those discussed below and elsewhere in this Quarterly Report and in our Annual Report on Form 10-K for the fiscal year ended August 25, 2023. See also “Cautionary Note Regarding Forward-Looking Statements.”*

*Our fiscal year is the 52- or 53-week period ending on the last Friday in August. Fiscal years 2024 and 2023 contain 53 weeks and 52 weeks, respectively. All period references are to our fiscal periods unless otherwise indicated. All tabular amounts are in thousands. Financial information for our subsidiaries in Brazil was included in our consolidated financial statements on a one-month lag because their fiscal years ended on July 31 of each year. In connection with the completion of the divestiture of an 81% interest in SMART Brazil, we ceased consolidating the operations of SMART Brazil in our financial statements as of the November 29, 2023 disposal date. As a result, financial information for the first quarter of 2024 includes the four-month period for our SMART Brazil operations from August 1, 2023 to November 29, 2023.*

### Overview

For an overview of our business, see “PART I – Item 1. Business” of our Annual Report on Form 10-K for the fiscal year ended August 25, 2023.

### Divestiture of SMART Brazil

On November 29, 2023, we completed our previously announced divestiture of SMART Modular Technologies Brasil – Indústria e Comercio de Componentes Ltda. (“SMART Brazil”) to Lexar Europe B.V., an affiliate of Shenzhen Longsys Electronics Co. Ltd.

SMART Brazil operates as a stand-alone business which assembles and tests modules for electronics manufacturers that sell devices to Brazilian consumers. In line with our strategic priorities, the majority divestiture of our standards-based, commodity module business in Brazil will enable us to focus on our strategy of delivering high-performance, high availability solutions to our enterprise customers. This transaction also strengthens our financial position, enabling us to increase our strategic investments into domestic research and development and U.S.-based production of advanced technologies.

***Presentation of SMART Brazil as Discontinued Operations:*** On June 13, 2023, we entered into an agreement to divest of an 81% interest in SMART Brazil. We concluded that, as of August 25, 2023, (i) the net assets of SMART Brazil met the criteria for classification as held for sale and (ii) the proposed sale represented a strategic shift that was expected to have a major effect on our operations and financial results. On November 29, 2023, we completed the divestiture. The balance sheets, results of operations and cash flows of SMART Brazil have been presented as discontinued operations for all periods presented. SMART Brazil was previously included within our Memory Solutions segment.

See “Item 1. Financial Statements – Notes to Consolidated Financial Statements – Divestiture of SMART Brazil.”

### Acquisition of Stratus Technologies

On August 29, 2022, we completed the acquisition of Storm Private Holdings I Ltd., a Cayman Islands exempted company (together with its subsidiaries, “Stratus Technologies”). At the closing, SGH paid a cash purchase price of $225 million, subject to certain adjustments. In addition, the seller had the right to receive, and SGH was obligated to pay, contingent consideration of up to $50 million (the “Stratus Earnout”) based on the gross profit performance of the Stratus Technologies business during the first full 12 fiscal months of Stratus Technologies following the closing of the acquisition. Throughout 2023, we adjusted the fair value of the Stratus Earnout by an aggregate of $29.0 million and, as of August 25, 2023, current liabilities included $50.0 million for the amount payable in connection with the Stratus Earnout. In the second quarter of 2024, we paid in full $50.0 million related to the Stratus Earnout.

See “Item 1. Financial Statements – Notes to Consolidated Financial Statements – Business Acquisition – Stratus Technologies.”

### Factors Affecting Our Operating Performance

***Macro-Economic Demand Factors.*** Our business segments each have their own unique set of demand factors. Demand in our Memory Solutions group is driven by end-market demand from OEMs for customer-specific solutions in vertical markets such as industrial, government, networking, high-performance compute and enterprise storage, as well as emerging demand for higher density and greater bandwidth solutions for AI deployments. Our IPS business is driven by demand for high compute solutions across AI and machine learning initiatives, as well as traditional workload optimization and efficiency applications. Finally, demand for our LED products is derived from targeted end-market applications, such as general high-power and mid-power lighting and specialty lighting, including video and horticulture applications. We believe our diversified business segments may provide a natural hedge against downturns in any particular industry although broader macro-economic trends, such as the COVID-19 pandemic, can adversely affect all three segments concurrently.

***Shifts in the Mix of Our Revenue.*** Shifts in the mix of revenue from our operating segments, which can vary significantly from period to period, can impact our business and operating results, including gross and operating margins. For example, our IPS group has shown solid growth, but is subject to variability in its sales and margin profile from period to period, as recognition of revenue is tied to customer decisions as to the completion of delivery and system go-live events and margin is driven by the extent to which higher margin software and managed services comprise IPS sales. Our resource commitments and planning for each segment are relatively fixed in the short term, and as such, variability in expected revenue mix will have direct implications for our operating income and margins.

***Our Ability to Identify, Complete and Successfully Integrate Acquisitions.*** A substantial portion of our growth over the last several years has been driven by acquisitions, and we intend to continue to use corporate development as an engine for growth. Within our existing segments, we plan to pursue acquisitions to expand features and functionality, expand into adjacent businesses and grow our customer base and geographic footprint. From time to time, we may seek to expand our addressable market by entering new business segments where, as we did with our LED business and Stratus Technologies business, we identify a business opportunity at scale with a path to being accretive to our overall operations in the near term. If we are unable to identify and complete attractive acquisitions, we may not be successful in growing our revenue and/or expanding our margins. Any acquisitions we do complete may require us to incur debt or raise capital through equity financings or may subject us to unforeseen liabilities or operational challenges that in turn impede our ability to realize the expected returns on our investment.

***Disruptions in Our Supply Chain May Adversely Affect Our Businesses.*** We depend on third-party suppliers for key components of our products, such as commodity DRAM components from offshore foundries that we use in our specialty memory products and third-party wafers that we use in our memory and LED businesses. We have adopted this “Fab-Light” business model to reduce our capital expenditures and operating expenses, while affording greater flexibility in adapting to shifts in demand and other market trends. Our Fab-Light business model has contributed significantly to margin expansion in our overall business. However, our reliance on third-party manufacturers exposes us to risk of supply chain disruption and lost business. For example, the recent global semiconductor shortage has adversely affected our operating results. In addition, the recent high demand for, and limited supply of, AI components globally, can affect our sourcing of these components and affect timing of deployments. If such disruptions worsen or are prolonged, or if there is meaningful disruption in our supply arrangement with any of our third-party suppliers, our operating results and financial condition could be adversely affected.

### Results of Operations

| Net sales: | Three Months Ended March 1, 2024 |  | February 24, 2023 |  | Six Months Ended March 1, 2024 |  | February 24, 2023 |  |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| Memory Solutions | $83,297 | 29.2% | $110,339 | 28.4% | $168,965 | 30.2% | $228,625 | 29.3% |
| Intelligent Platform Solutions | 141,405 | 49.6% | 222,451 | 57.3% | 260,229 | 46.5% | $433,422 | 55.6% |
| LED Solutions | 60,119 | 21.1% | 55,587 | 14.3% | 129,874 | 23.2% | $118,127 | 15.1% |
| Total net sales | 284,821 | 100.0% | 388,377 | 100.0% | 559,068 | 100.0% | $780,174 | 100.0% |
| Cost of sales | 202,887 | 71.2% | 277,369 | 71.4% | 394,284 | 70.5% | $557,068 | 71.4% |
| Gross profit | 81,934 | 28.8% | 111,008 | 28.6% | 164,784 | 29.5% | $223,106 | 28.6% |
| Operating expenses: |  |  |  |  |  |  |  |  |
| Research and development | 20,526 | 7.2% | 25,272 | 6.5% | 41,915 | 7.5% | 49,344 | 6.3% |
| Selling, general and administrative | 61,385 | 21.6% | 60,074 | 15.5% | 118,602 | 21.2% | 127,782 | 16.4% |
| Impairment of goodwill | — | —% | 17,558 | 4.5% | — | —% | 17,558 | 2.3% |
| Change in fair value of contingent consideration | — | —% | 6,400 | 1.6% | — | —% | 10,100 | 1.3% |
| Other operating (income) expense | 3,335 | 1.2% | 3,781 | 1.0% | 6,274 | 1.1% | 5,552 | 0.7% |
| Total operating expenses | 85,246 | 29.9% | 113,085 | 29.1% | 166,791 | 29.8% | 210,336 | 27.0% |
| Operating income (loss) | (3,312) | (1.2)% | (2,077) | (0.5)% | (2,007) | (0.4)% | 12,770 | 1.6% |
| Non-operating (income) expense: |  |  |  |  |  |  |  |  |
| Interest expense, net | 7,249 | 2.5% | 9,430 | 2.4% | 16,808 | 3.0% | 17,924 | 2.3% |
| Other non-operating (income) expense | 248 | 0.1% | 13,307 | 3.4% | (328) | (0.1)% | 11,945 | 1.5% |
| Total non-operating (income) expense | 7,497 | 2.6% | 22,737 | 5.9% | 16,480 | 2.9% | 29,869 | 3.8% |
| Income (loss) before taxes | (10,809) | (3.8)% | (24,814) | (6.4)% | (18,487) | (3.3)% | (17,099) | (2.2)% |
| Income tax provision (benefit) | 2,198 | 0.8% | 8,149 | 2.1% | 5,732 | 1.0% | 19,471 | 2.5% |
| Net income (loss) from continuing operations | (13,007) | (4.6)% | (32,963) | (8.5)% | (24,219) | (4.3)% | (36,570) | (4.7)% |
| Net income (loss) from discontinued operations | — | —% | 6,177 | 1.6% | (8,148) | (1.5)% | 15,108 | 1.9% |
| Net income (loss) | (13,007) | (4.6)% | (26,786) | (6.9)% | (32,367) | (5.8)% | (21,462) | (2.8)% |
| Net income attributable to noncontrolling interest | 613 | 0.2% | 433 | 0.1% | 1,174 | 0.2% | 765 | 0.1% |
| Net income (loss) attributable to SGH | $(13,620) | (4.8)% | $(27,219) | (7.0)% | $(33,541) | (6.0)% | $(22,227) | (2.9)% |

Percentages represent percentage of total net sales. Summations of percentages may not compute precisely due to rounding.

### Net Sales, Cost of Sales and Gross Profit

Net sales decreased by $103.6 million, or 26.7%, in the second quarter of 2024 compared to the same period in the prior year, and by $221.1 million, or 28.3%, for the first six months of 2024 compared to the same period in the prior year. These decreases were primarily due to lower sales in both our IPS and Memory Solutions businesses, partially offset by higher LED Solutions sales. IPS net sales decreased by $81.0 million, or 36.4%, and by $173.2 million, or 40.0%, in the second quarter and first six months of 2024 compared to the same periods in the prior year, respectively, primarily due to lower hardware sales. Memory Solutions sales decreased by $27.0 million, or 24.5%, and by $59.7 million, or 26.1%, in the second quarter and first six months of 2024 compared to the same periods in the prior year, respectively, primarily due to lower sales volumes of Flash products. LED Solutions sales increased by $4.5 million, or 8.2%, and by $11.7 million, or 9.9%, in the second quarter and first six months of 2024 compared to the same periods in the prior year, respectively, primarily due to higher channel demand.

Cost of sales decreased by $74.5 million, or 26.9%, in the second quarter of 2024, compared to the same period in the prior year, and by $162.8 million, or 29.2%, for the first six months of 2024 compared to the same period in the prior year. IPS and Memory Solutions segments had lower material cost from lower sales and lower other costs from initiatives that resulted in additional savings.

Gross margin increased to 28.8% in the second quarter of 2024 compared to 28.6% in the same period in 2023, and to 29.5% for the first six months of 2024 compared to 28.6% in the same period in 2023, primarily due to favorable mix from higher service revenue in our IPS business.

### Non-GAAP Measure of Segment Operating Income

Below is a table of our operating income, measured on a non-GAAP basis, which SGH management uses to supplement SGH’s financial results under GAAP to analyze its operations and make decisions as to future operational plans and believes that this supplemental non-GAAP information is useful to investors in analyzing and assessing the Company’s past and future operating performance. These non-GAAP measures exclude certain items, such as share-based compensation expense; amortization of acquisition-related intangible assets (consisting of amortization of developed technology, customer relationships, trademarks/trade names and backlog acquired in connection with business combinations); acquisition-related inventory adjustments; diligence, acquisition and integration expense; restructure charges; changes in the fair value of contingent consideration and other infrequent or unusual items. While amortization of acquisition-related intangible assets is excluded, the revenue from acquired companies is reflected in our non-GAAP measures and these intangible assets contribute to revenue generation. See “Item 1. Financial Statements – Notes to Consolidated Financial Statements – Segment and Other Information.”

Non-GAAP financial measures should not be considered as a substitute for, or superior to, measures of financial performance prepared in accordance with GAAP, as they exclude important information about our financial results, as noted above. The presentation of these adjusted amounts varies from amounts presented in accordance with GAAP and therefore may not be comparable to amounts reported by other companies.

|  | Three Months Ended March 1, 2024 | February 24, 2023 | Six Months Ended March 1, 2024 | February 24, 2023 |
| --- | ---: | ---: | ---: | ---: |
| GAAP operating income (loss) | $(3,312) | $(2,077) | $(2,007) | $12,770 |
| Share-based compensation expense | 10,639 | 10,031 | 21,609 | 20,012 |
| Amortization of acquisition-related intangibles | 9,751 | 10,815 | 19,759 | 21,673 |
| Flow-through of inventory step up | — | — | — | 2,599 |
| Cost of sales-related restructure | 216 | 5,552 | 884 | 5,552 |
| Diligence, acquisition and integration expense | 5,885 | 2,824 | 6,674 | 9,556 |
| Impairment of goodwill | — | 17,558 | — | 17,558 |
| Change in fair value of contingent consideration | — | 6,400 | — | 10,100 |
| Restructure charge | 3,335 | 3,781 | 6,274 | 5,552 |
| Other | — | 900 | — | 1,800 |
| Non-GAAP operating income | $26,514 | $55,784 | $53,193 | $107,172 |
| Non-GAAP operating income (loss) by segment: |  |  |  |  |
| Memory Solutions | $6,016 | $20,366 | $13,211 | $39,405 |
| Intelligent Platform Solutions | 22,291 | 36,645 | 40,192 | 69,630 |
| LED Solutions | (1,793) | (1,227) | (210) | (1,863) |
| Total non-GAAP operating income (loss) by segment | $26,514 | $55,784 | $53,193 | $107,172 |

Memory Solutions operating income decreased by $14.4 million, or 70.5%, in the second quarter of 2024 compared to same period in the prior year, and by $26.2 million, or 66.5%, in the first six months of 2024 compared to the same period in the prior year, primarily due to lower sales and gross profit due to lower sales volumes of Flash products.

IPS operating income decreased by $14.4 million, or 39.2%, in the second quarter of 2024 compared to same period in the prior year, and by $29.4 million, or 42.3%, in the first six months of 2024 compared to the same period in the prior year, primarily due to lower sales from our Penguin Solutions business, partially offset by lower operating expenses mainly driven by personnel-related expenses due to lower headcount.

LED Solutions operating loss increased by $0.6 million, or 46.1%, in the second quarter of 2024 compared to the same period in the prior year, and decreased by $1.7 million, or 88.7% in the first six months of 2024 compared to the same period in the prior year, primarily due to changes in sales and gross profit resulting from channel demand.

### Operating and Non-operating (Income) Expense

### Research and Development

Research and development expense decreased by $4.7 million, or 18.8%, in the second quarter of 2024 compared to the same period in the prior year, and by $7.4 million, or 15.1%, for the first six months of 2024 compared to the same period in the prior year, primarily due to lower subcontract services mainly driven by Penguin Solutions.

### Selling, General and Administrative

Selling, general and administrative expense increased by $1.3 million, or 2.2%, in the second quarter of 2024 compared to the same period in the prior year, primarily due to higher diligence expenses, partially offset by lower personnel-related expenses mainly driven by headcount reductions. Selling, general and administrative expenses decreased by $9.2 million, or 7.2%, for the first six months of 2024 compared to the same period in the prior year, primarily due to lower personnel-related expenses, mainly driven by headcount reductions, as well as lower acquisition and integration expenses.

Selling, general and administrative expense in the first six months of 2024 and 2023 included costs of $6.7 million and $9.6 million, respectively, associated with the diligence, acquisition and integration of executed and potential business combinations. We anticipate that these activities will continue into future quarters.

### Impairment of Goodwill

During the second quarter of 2023, we initiated a plan pursuant to which we intend to wind down manufacturing and discontinue the sale of certain legacy products offered through our Penguin Edge business by approximately the end of calendar 2024. We recorded impairment charges of $17.6 million and $1.5 million in the second and fourth quarters of 2023, respectively, to impair the carrying value of Penguin Edge goodwill. We currently anticipate that the remaining goodwill of the Penguin Edge reporting unit of $16.1 million as of the end of the second quarter of 2024 may become further impaired in future periods.

### Change in Fair Value of Contingent Consideration

Our acquisition of Stratus Technologies in the first quarter of 2023 included contingent consideration. We estimated the fair value of the contingent consideration as of the date of acquisition and subsequently recognized changes in the fair value in results of operations. In the second quarter and first six months of 2023, we recorded charges of $6.4 million and $10.1 million, respectively, to adjust the fair value of the contingent consideration. As of August 25, 2023, current liabilities included $50.0 million for the amount payable for the Stratus Earnout, which we paid in full in the second quarter of 2024. See “Item 1. Financial Statements – Notes to Consolidated Financial Statements – Business Acquisition – Stratus Technologies.”

### Other Operating (Income) Expense

Other operating expense in the first six months of 2024 and 2023 included restructure charges of $6.3 million and $5.6 million, respectively, primarily for employee severance costs and other benefits resulting from workforce reductions, the elimination of certain projects across our businesses and other costs associated with the wind down of our Penguin Edge business. We anticipate that these activities will continue into future quarters and anticipate recording additional restructure charges.

### Interest Expense, Net

Net interest expense decreased by $1.1 million in the first six months of 2024 compared to the same period in the prior year, primarily due to higher interest income resulting from higher cash balances, partially offset by higher interest expense from the Amended 2027 TLA.

### Other Non-operating (Income) Expense

Other non-operating (income) expense in the second quarter and first six months of 2023 consisted primarily of a $15.9 million loss on the extinguishment of debt, partially offset, in the first six months of 2023, by $3.0 million gain on disposition of assets. See “Item 1. Financial Statements – Notes to Consolidated Financial Statements – Other Non-operating (Income) Expense” and “Item 1. Financial Statements – Notes to Consolidated Financial Statements – Debt – Convertible Senior Notes – Convertible Senior Notes Exchange.”

### Income Tax Provision (Benefit)

Income tax provision in the second quarter and in the first six months of 2024 decreased by $6.0 million and by $13.7 million, respectively, as compared to the same periods in the prior year, primarily due to a decrease in profit before tax in jurisdictions subject to income tax.

Our effective tax rate was (20.3)% and (31.0)% in the second quarter and first six months of 2024, respectively, and differed from the U.S. statutory rate primarily due to losses generated in a jurisdiction where no tax benefit can be recognized and to withholding taxes and state income taxes. Our effective tax rate was (32.8)% and (113.9)% in the second quarter and first six months of 2023, respectively and differed from the U.S. statutory rate primarily due to losses generated in a jurisdiction where no tax benefit can be recognized.

See “Item 1. Financial Statements – Notes to Consolidated Financial Statements – Income Taxes.”

### Net Income (Loss) From Discontinued Operations

As discussed above, we have presented the results of SMART Brazil as discontinued operations in our consolidated statements of operations for all periods presented. As of August 25, 2023, SMART Brazil was classified as held for sale. Accordingly, in 2023 we evaluated the carrying value of the net assets of SMART Brazil (including $206.3 million recognized within shareholders’ equity related to the cumulative translation adjustment from SMART Brazil), estimated costs to sell and expected proceeds and concluded the net assets were impaired. As a result, we recognized an impairment charge of $153.0 million in 2023 to write down the carrying value of the net assets of SMART Brazil. In addition, we concluded that the outside basis of SMART Brazil inclusive of any withholding taxes should be recognized upon the classification as held for sale as of August 25, 2023. Accordingly, we recognized withholding taxes on the expected capital gain and deferred tax liabilities of $28.6 million in 2023. In the first quarter of 2024, we completed the divestiture, and in connection therewith, recognized an additional loss of $8.9 million.

See “Item 1. Financial Statements – Notes to Consolidated Financial Statements – Divestiture of SMART Brazil.”

### Liquidity and Capital Resources

As of March 1, 2024, we had cash, cash equivalents and short-term investments of $465.8 million, of which $348.6 million was held by subsidiaries outside of the United States. Our principal uses of cash and capital resources have been acquisitions, debt service requirements, capital expenditures, research and development expenditures and working capital requirements. We expect that future capital expenditures will focus on expanding our research and development activities, manufacturing equipment upgrades, acquisitions and IT infrastructure and software upgrades. Cash and cash equivalents generally consist of funds held in demand deposit accounts, money market funds and time deposits. We do not acquire investments for trading or speculative purposes.

We may from time to time seek additional equity or debt financing. Any future equity financing may be dilutive to our existing investors, and any future debt financing may include debt service requirements and financial and other restrictive covenants that may constrain our operations and growth strategies. In the event that we seek additional financing, we may not be able to raise such financing on terms acceptable to us or at all. If we are unable to raise additional capital or generate cash flows necessary to expand our operations and invest in continued product innovation, we may not be able to compete successfully, which would harm our business, operations and financial condition.

We expect that our existing cash and cash equivalents, short-term investments, borrowings available under our credit facilities and cash generated by operating activities will be sufficient to fund our operations for at least the next twelve months.

***Divestiture of SMART Brazil:*** On November 29, 2023, we completed the previously announced divestiture of SMART Brazil. In connection with the divestiture, we sold an 81% interest and retained a 19% interest in SMART Brazil. At the closing of the transaction, we received $143.0 million in cash from the sale (which includes gross proceeds of $164.5 million less withholding taxes of $21.5 million). In addition, we have the right to receive a deferred payment of $28.4 million eighteen months following the closing. See “Item 1. Financial Statements – Notes to Consolidated Financial Statements – Divestiture of SMART Brazil.”

***Stratus Technologies Earnout:*** On August 29, 2022, we completed the acquisition of Stratus Technologies. At the closing of the transaction (including in connection with the completion of the review of the working capital assets acquired and liabilities assumed), we paid the Stratus Seller a cash purchase price of $242.2 million. In addition, the Stratus Seller had the right to receive contingent consideration of up to $50.0 million, based on the gross profit performance of Stratus Technologies during the first full 12 fiscal months following the closing. In the second quarter of 2024, we paid in full $50.0 million related to the Stratus Earnout.

### Cash Flows

|  | Six Months Ended March 1, 2024 | February 24, 2023 |
| --- | ---: | ---: |
| Net cash provided by (used for) operating activities from continuing operations | $37,796 | $(6,954) |
| Net cash used for investing activities from continuing operations | (8,146) | (232,524) |
| Net cash provided by (used for) financing activities from continuing operations | (86,302) | 222,472 |
| Net increase (decrease) in cash and cash equivalents from discontinued operations | 90,097 | 28,908 |
| Effect of changes in currency exchange rates | (1,180) | 1,917 |
| Net increase (decrease) in cash and cash equivalents | $32,265 | $13,819 |

***Operating Activities:*** Cash flows from operating activities reflects net income, adjusted for certain non-cash items, including depreciation and amortization expense, share-based compensation, adjustments for changes in the fair value of contingent consideration, gains and losses from investing or financing activities, and from the effects of changes in operating assets and liabilities.

Net cash provided by operating activities from continuing operations in the first six months of 2024 resulted primarily from net loss of $24.2 million, adjusted for non-cash items of $59.4 million. Operating cash flows were favorably affected by a $2.6 million net change in our operating assets and liabilities primarily from the effects of a decrease of $49.5 million in accounts receivable, partially offset by the payment of $29.0 million of contingent consideration related to our 2023 acquisition of Stratus Technologies and an increase of $21.1 million in other current assets. The decrease in accounts receivable was primarily due to lower gross sales in our IPS and Memory Solutions segments.

Net cash used for operating activities from continuing operations in the first six months of 2023 resulted primarily from net loss of $36.6 million, adjusted for non-cash items of $105.7 million. Operating cash flows were adversely affected by a $76.1 million net change in our operating assets and liabilities primarily from the effects of decreases of $174.7 million in accounts payable and accrued expenses and other liabilities and the payment of $73.7 million of contingent consideration related to our 2021 acquisition of the LED business, partially offset by the effect of a decrease of $172.0 million in accounts receivable. The decreases in accounts payable and accrued expenses and other liabilities and in accounts receivable were primarily due to timing of payments and receipts.

***Investing Activities:*** Net cash used for investing activities from continuing operations in the first six months of 2024 consisted primarily of $9.9 million for capital expenditures and deposits on equipment.

Net cash used for investing activities from continuing operations in the first six months of 2023 consisted primarily of $213.1 million for the acquisition of Stratus Technologies and $19.7 million for capital expenditures and deposits on equipment.

***Financing Activities:*** Net cash used for financing activities from continuing operations in the first six months of 2024 consisted primarily of $51.6 million in repayments of debt, $21.0 million for payment of contingent consideration related to our 2023 acquisition of Stratus Technologies and $15.9 million of payments to acquire our ordinary shares (including $13.9 million under our share repurchase program), partially offset by $4.2 million in proceeds from the issuance of ordinary shares from our equity plans.

Net cash provided by financing activities from continuing operations in the first six months of 2023 consisted primarily of $295.3 million in net proceeds from the issuance of a term loan and $4.3 million in proceeds from the issuance of ordinary shares, partially offset by $28.1 million for payment of contingent consideration related to our 2021 acquisition of the LED business, $16.2 million of payments to acquire our ordinary shares (including $13.8 million under our share repurchase program and convertible note exchange), $14.1 million for payment of premium in connection with our convertible note exchange, $7.2 million in principal repayment of the LED Purchase Price Note and $4.3 million net cash paid for settlement and purchase of privately-negotiated capped call transactions (“Capped Calls”).

### Critical Accounting Estimates

The preparation of these financial statements and related disclosures in conformity with U.S. GAAP requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues, expenses and related disclosures. Estimates and judgments are based on historical experience, forecasted events and various other assumptions that we believe to be reasonable under the circumstances. We evaluate our estimates and judgments on an ongoing basis; however, actual results could differ from those estimates. Our management believes our critical accounting estimates require management’s most difficult, subjective or complex judgments and are critical in the portrayal of our financial condition and results of operations. Our discussion of critical accounting estimates is intended to supplement our summary of significant accounting policies so that readers will have greater insight into the uncertainties involved in applying our critical accounting policies and estimates.

For a summary of our critical accounting estimates, see “PART II – Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations – Critical Accounting Estimates” of our Annual Report on Form 10-K for the fiscal year ended August 25, 2023. There have been no material changes to our critical accounting estimates from those described in our Annual Report on Form 10-K for the fiscal year ended August 25, 2023.

For a summary of our significant accounting policies, see “PART I. Financial Information – Item 1. Financial Statements – Notes to Consolidated Financial Statements – Significant Accounting Policies” of this Quarterly Report and “PART II – Item 8. Financial Statements and Supplementary Data – Notes to Consolidated Financial Statements – Significant Accounting Policies” of our Annual Report on Form 10-K for the fiscal year ended August 25, 2023. There have been no material changes to our significant accounting policies from those described in our Annual Report on Form 10-K for the fiscal year ended August 25, 2023.

## Market risk

As filed, 3,808 characters.

### Foreign Exchange Risk

We are subject to inherent risks attributed to operating in a global economy. Our international sales and our operations in foreign countries subject us to risks associated with fluctuating currency values and exchange rates. Because a significant portion of our sales are denominated in U.S. dollars, increases in the value of the U.S. dollar could increase the price of our products so that they become relatively more expensive to customers in a particular country, possibly leading to a reduction in sales and profitability in that country. In addition, we have certain costs that are denominated in foreign currencies and decreases in the value of the U.S. dollar could result in increases in such costs, which could have a material adverse effect on our results of operations.

As a result of our international operations, we generate a portion of our net sales and incur a portion of our expenses in currencies other than the U.S. dollar, such as the Japanese Yen, Malaysian Ringgit and Chinese Renminbi. We present our consolidated financial statements in U.S. dollars and remeasure certain assets and liabilities of our foreign operations into U.S. dollars at applicable exchange rates. Consequently, increases or decreases in the value of the U.S. dollar may affect the value of these items with respect to our non-U.S. dollar businesses in our consolidated financial statements, even if their value has not changed in their local currency. Our customer pricing and material cost of sales are generally based on U.S. dollars. Accordingly, the impact of currency fluctuations to our consolidated statements of operations is primarily to our other costs of sales (i.e., non-material components) and our operating expenses as those items are typically denominated in local currency. Our consolidated statements of operations are also impacted by foreign currency gains and losses arising from transactions denominated in a currency other than the U.S. dollar. These translations could significantly affect the comparability of our results between financial periods or result in significant changes to the carrying value of our assets, liabilities and equity. As a result, changes in foreign currency exchange rates impact our reported results.

Based on our monetary assets and liabilities denominated in foreign currencies as of March 1, 2024 and August 25, 2023, we estimate that a 10% adverse change in exchange rates versus the U.S. dollar would result in losses recorded in non-operating expense of $3.1 million and $1.6 million, respectively, to revalue these assets and liabilities.

### Interest Rate Risk

We are subject to interest rate risk in connection with our variable-rate debt. As of March 1, 2024, we had $500.0 million outstanding under the Amended 2027 TLA. In addition, our Amended Credit Agreement provides for borrowings of up to $250.0 million under the 2027 Revolver. Assuming that we would satisfy the financial covenants required to borrow and that the amounts available under the 2027 Revolver were fully drawn, a 1.0% increase in interest rates would result in an increase in annual interest expense, and a decrease in our cash flows, of $7.5 million per year.

We had cash, cash equivalents and short-term investments of $465.8 million as of March 1, 2024. We maintain our cash and cash equivalents in deposit accounts, money market funds with various financial institutions and in short-duration fixed income securities. Due to the short-term nature of these instruments, we believe that we do not have any material exposure to changes in the fair value of these investments as a result of changes in interest rates. Increases or decreases in interest rates would be expected to augment or reduce future interest income by an insignificant amount.

## Controls and procedures

As filed, 1,494 characters.

### Evaluation of Disclosure Controls and Procedures

An evaluation was performed under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, of the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of the end of the period covered by this report. Based upon that evaluation, our management, including our principal executive officer and principal financial officer, concluded that our disclosure controls and procedures were effective as of March 1, 2024 to provide reasonable assurance that the information required to be disclosed by us in the reports that we file or submits under the Exchange Act is (i) recorded, processed, summarized and reported within the time periods specified in the SEC rules and forms and (ii) accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosures.

### Changes in Internal Control Over Financial Reporting

During the second quarter of fiscal 2024, there were no changes in our internal control over financial reporting, as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

## Risk factors

As filed, 1,209 characters.

There have been no material changes to the risks described in “PART I – Item 1A. Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended August 25, 2023. You should carefully consider the risks and uncertainties and the other information in our Annual Report and in this Quarterly Report, including “PART I. Financial Information – Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our financial statements and related notes. Our business, financial condition or results of operations could be materially and adversely affected if any of these risks occurs and, as a result, the market price of our ordinary shares could decline and you could lose all or part of your investment.

This Quarterly Report also contains forward-looking statements that involve risks and uncertainties. See “Cautionary Note Regarding Forward-Looking Statements” for additional information. Our actual results could differ materially and adversely from those anticipated in these forward-looking statements as a result of certain factors, including the risks facing our Company described in our Annual Report on Form 10-K for the fiscal year ended August 25, 2023.

Filed Apr 9, 2024.
Source: SEC EDGAR, the filing index for accession 0001628280-24-015494. Last ingested by Listed: Nov 2, 2026, 18:46 ET. No prices; not investment advice.