What changed in this filing

/stocks — the workspaceLOADING

Item 7. Management’s Discussion and Analysis

2020-10-22 compared with 2019-11-06 · 169 added, 152 removed, 337 unchanged (49% of the section changed)

58 unchanged sentences

We regularly review our deferred tax assets for recoverability based on historical taxable income, projected future taxable income, the expected timing of the reversals of existing temporary differences and tax planning strategies.

Our judgments regarding future profitability may change due to many factors, including future market conditions and our ability to successfully execute our business plans and/or tax planning strategies.

Our judgments regarding future profitability may change due to many factors, including future market conditions

and our ability to successfully execute our business plans and/or tax planning strategies.

Should there be a change in our ability to recover our deferred tax assets, our tax provision would increase or decrease in the period in which the assessment is changed.

3 unchanged sentences

Fiscal Year Ended

Consolidated Statement of Operations

Consolidated Statement of Operations Data:

Cost of sales (1)(2)

2 unchanged sentences

Selling, general and administrative (1) (2)

Restructuring charge

Change in estimated fair value of

acquisition-related contingent

consideration

Management advisory fees

Restructuring

acquisition-related contingent consideration

Total operating expenses

22 unchanged sentences

Cost of sales (1)

Includes share-based compensation expense and intangible amortization of $2.5 million, $0.6 million, $1.3 million and $0 in fiscal 2019 and 2018, respectively.

Includes share-based compensation expense of $3.0 million and $2.5 million, and intangible amortization of $2.6 million and $0.6 million in fiscal 2020 and 2019, respectively.

Net Sales, Cost of Sales and Gross Margin

Net sales decreased by $89.6 million, or 7.4%, during fiscal 2020 compared to the prior fiscal year.

Net sales were negatively impacted by lower mobile memory and DRAM sales in Brazil in fiscal 2019 of $266.0 million, or a decline of 33.3%.

These decreases were mainly due to lower customer demand for mobile memory and DRAM products of 25% and 26%, respectively, as well as 22% lower average selling prices for mobile memory.

The decreases in Brazil were partially offset by additional sales from Penguin Computing for the full year in fiscal 2019.

Penguin, which was acquired in June 2018, contributed additional revenue of $150.4 million in fiscal 2019 as compared to the prior year as Penguin’s results were only consolidated into the Company’s results for one quarter in fiscal 2018.

The sales decrease was also offset in part by 7% higher Specialty DRAM sales in fiscal 2019, which was driven by 8% higher average selling prices due to product mix, as well as sales of new products and increased customer penetration.

Cost of sales decreased by $22.8 million, or 2.3%, during fiscal 2019 compared to the prior fiscal year, primarily due to a decrease of 4.6% in the cost of materials for the lower level of sales, offset by higher production costs related to the increased revenue and additional costs for the new SCSS business.

Included in the cost of sales decreases was a favorable foreign exchange impact of $6.8 million due to locally sourced cost of sales in Brazil.

Gross margin decreased to 19.6% during fiscal 2019, compared to 22.6% for fiscal 2018, primarily due to higher cost of sales for SCSS, as well as fixed manufacturing costs for Brazil.

Net sales were negatively impacted by a decrease in Brazil product sales of $147.1 million, or a decline of 27.4% compared to the prior year.

The decrease in Brazil was primarily due to 50.1% and 36.5% lower average selling prices for DRAM and mobile memory, respectively.

Net sales were positively impacted by higher overall revenue from SCSS of $48.6 million, or an increase of 22.4% over the prior fiscal year, primarily driven by our two acquisitions in July 2019 which did not contribute to sales for the full year in fiscal 2019, partially offset by lower Penguin revenue due to lower federal spending as a result of COVID-19.

In addition, our sales of Specialty products increased by $8.9 million, or 1.9% over the prior fiscal year, primarily due to higher Flash revenue resulting from 59.2% higher average selling prices mainly due to increased OEM sales , partially offset by lower DRAM revenue resulting from 18.4% lower average selling prices mainly due to a change in product mix.

Cost of sales decreased by $68.5 million, or 7.0%, during fiscal 2020 compared to the prior fiscal year, primarily due to lower cost of materials of $78.2 million or 9.2% due to lower level of sales, partially offset by higher production costs related to the increased revenue and additional costs from the SCSS acquisitions.

Included in the cost of sales changes was a favorable foreign exchange impact of $4.5 million due to locally sourced cost of sales in Brazil.

Gross margin remained relatively flat at 19.3% during fiscal 2020, compared to 19.6% for fiscal 2019.

Operating Expenses

4 unchanged sentences

Selling, general and administrative (1) (2)

Restructuring

Change in estimated fair value of acquisition-

5 unchanged sentences

(2) Includes amortization of intangible assets expense as follows:

Research and development

Selling, general and administrative

Research and Development Expense

Research and development, or R&D, expense increased by $8.1 million, or 20.3% in fiscal 2019 compared to the prior fiscal year mainly due to $7.8 million higher costs from our new SCSS businesses, as well as higher depreciation and share-based compensation, partially offset by lower intangible amortization expense as some intangible assets became fully amortized.

Research and development, or (“R&D”), expense increased by $4.1 million, or 8.6% in fiscal 2020 compared to the prior fiscal year primarily due to $12.4 million higher costs from the addition of our SCSS acquisitions, partially offset by $6.4 million of Brazil financial credits resulting from amendments to the IT law implemented in April 2020.

Included in the R&D expense increase was a favorable foreign exchange impact of $2.2 million.

1 unchanged sentence

Selling, general and administrative, or (“SG&A”), expense increased by $16.3 million, or 15.8%, during fiscal 2020 compared to the prior fiscal year.

The increase was primarily due to $22.8 million higher costs from our new SCSS business, as well as higher share based compensation, partially offset by lower professional services and personnel-related expenses.

The increase was primarily due to $16.8 million of higher costs from the addition of our SCSS acquisitions (including intangible amortization expense), as well as integration expenses associated with the acquisitions.

Included in the SG&A expense increase was a favorable foreign exchange impact of $1.5 million.

Restructuring Charge

In fourth quarter of fiscal 2020, we made the decision to cease manufacturing and selling of products under the battery product line, the operations of which are reported under the operating segment for Brazil products.

The decision to cease this activity is due to unattractive benefits for our customers in score based PPB which impacts our ability to remain competitive as customers can get these products cheaper from other international sources without having a negative impact on their PPB score.

This action was put into effect as of the end of the fourth quarter of fiscal 2020, and all operations related to this product line ceased as of that date.

All employees associated with the product line were reassigned to other parts of the business.

During fiscal 2020, we recorded restructuring charges amounting to $3.5 million, composed of $2.7 million of asset impairment, $0.4 million of deferred ICMS taxes related to impaired assets, and $0.4 million accrued for contract termination costs.

As of August 28, 2020, the amounts accrued for contract termination costs have yet to be paid.

We do not expect additional costs to be incurred before completion of the restructuring efforts.

We anticipate completion of these restructuring efforts, including payment on all outstanding amounts to be complete by January 2021.

Other Income (Expense)

5 unchanged sentences

Total other expense

Interest expense, net increased $1.6 million, or 8.2%, during fiscal 2019 compared to the prior fiscal year primarily due to higher interest expense from an incremental loan in connection with the Penguin acquisition.

Other expense, net decreased by $11.1 million, or 83.8%, primarily due to $10.1 million foreign currency gains/losses.

Interest expense, net decreased $5.7 million, or 27.6%, during fiscal 2020 compared to the prior fiscal year primarily due to lower interest expense resulting from the issuance of our Notes and the extinguishment of our term loans in the second quarter of fiscal 2020.

For additional information, see Note 7, Long-Term Debt , in our Notes to Consolidated Financial Statements in this Annual Report on Form 10-K.

Other expense, net increased by $14.8 million primarily due to $7.7 million mark-to-market losses on the Capped Calls and $6.8 million extinguishment loss on long-term debt and revolver.

Provision for Income Taxes

2 unchanged sentences

Provision for income taxes

Provision for income taxes decreased by $3.4 million, or 18.8% during fiscal 2019 compared to the prior fiscal year primarily due to lower income in non-U.S.

Provision for income taxes decreased by $4.4 million, or 29.4% compared to the prior fiscal year primarily due to lower income in non-U.S.

jurisdictions subject to tax.

Our Malaysian subsidiary was approved for income tax holidays for the operations of its Pioneer business and Global Supply Chain (GSC) business.

Our Malaysian subsidiary was previously approved for income tax holidays for the operations of its Pioneer business and Global Supply Chain (GSC) business.

We have received approvals for a continuation of these tax incentives for up to ten years, subject to certain operating conditions.

The impact of these tax incentives will be recorded in the period in which they become effective.

In general, these future tax holidays will have tax rates greater than our prior approved tax holidays, thus our effective income tax rate in the future may be higher depending on a combination of our overall and jurisdictional profitability.

In general, these future tax holidays will have tax rates greater than our prior approved tax holidays, and therefore we expect that our effective income tax rate in the future may be higher depending on a combination of our overall and jurisdictional profitability.

For additional information, see Note 6, Income Taxes , in our Notes to Consolidated Financial Statements in this Annual Report on Form 10-K.

Comparison of the Years Ended August 30, 2019 and August 31, 2018

2 unchanged sentences

Cost of sales (1)

Includes share-based compensation expense of $1.3 million and $0.6 million in fiscal 2018 and 2017, respectively.

Includes share-based compensation expense of $2.5 million and $0.6 million, and intangible amortization of $1.3 million and $0 million in fiscal 2019 and 2018, respectively.

Net Sales, Cost of Sales and Gross Margin

Net sales increased by $527.5 million, or 69.3%, during fiscal 2018 compared to the prior fiscal year.

The increase was primarily due to a 104% increase in sales of mobile memory products in Brazil in fiscal 2018 which was driven in part by new product introductions of higher density eMCP products, a 43% increase in the average selling prices of mobile memory products resulting from increasing mobile density, and an increase in local content requirements from 30% to 50% for mobile memory products for smartphones effective January 1, 2018.

Strategic investments to increase production capacity in prior periods helped enable us to meet the increased demand in the Brazil mobile memory market.

Our Brazil PC DRAM sales also increased as consumer IC and server demand grew, leading to 94% higher sales, and product mix also positively impacted our average selling prices of modules as they increased 61%.

Our Specialty DRAM and Flash sales also increased due to strength in the server, networking and communication markets, leading to 17% and 33% higher sales, respectively, and increases of 60% and 49% in the average selling prices, respectively.

The new SCSS business also added $52.5 million of revenue in fiscal 2018.

Cost of sales increased by $398.2 million, or 66.5%, during fiscal 2018 compared to the prior fiscal year, primarily due to an increase of 74% in the cost of materials for the higher level of sales, as well as higher production costs related to the increased revenue and additional costs for the new SCSS business.

Included in the cost of sales increase was a favorable foreign exchange impact of $2.0 million due to locally sourced cost of sales in Brazil.

Gross margin increased to 22.6% during fiscal 2018, compared to 21.3% for fiscal 2017, primarily due to higher Brazil mobile memory and specialty DRAM revenue while cost of sales associated with higher density memory modules increased at a lower rate.

Net sales decreased by $76.8 million, or 6.0%, during fiscal 2019 compared to the prior fiscal year.

Net sales were negatively impacted by lower mobile memory and DRAM sales in Brazil in fiscal 2019 of $266.0 million, or a decline of 33.3% from the prior fiscal year.

These decreases were primarily due to lower customer demand for

mobile memory and DRAM products of 25% and 26%, respectively, as well as 22% lower average selling prices for mobile memory.

The decreases in Brazil were partially offset by additional sales from Penguin Computing for the full year in fiscal 2019 compared to just a partial year in fiscal 2018.

Penguin, which was acquired in June 2018, contributed additional revenue of $150.4 million in fiscal 2019 as compared to the prior fiscal year as Penguin’s results were only consolidated into the Company’s results for one quarter in fiscal 2018.

The sales decrease was also offset in part by 7% higher Specialty DRAM sales in fiscal 2019 as compared to the prior fiscal year, which was driven by 8% higher average selling prices due to changes in product mix, as well as sales of new products and increased customer penetration.

Included in the cost of sales decreases was a favorable foreign exchange impact of $6.8 million due to locally sourced cost of sales in Brazil.

Gross margin decreased to 19.6% during fiscal 2019, compared to 22.6% for fiscal 2018, primarily due to higher cost of sales for SCSS, as well as fixed manufacturing costs for Brazil.

Operating Expenses

6 unchanged sentences

related contingent consideration

Management advisory fees

Restructuring

Total operating expenses

6 unchanged sentences

Research and Development Expense

Research and development, or R&D, expense increased by $1.7 million in fiscal 2018 compared to the prior fiscal year mainly due to higher costs from our new SCSS business, as well as higher outside services and personnel-related expenses, partially offset by lower intangible amortization expense as some intangible assets became fully amortized.

Included in the R&D expense increase was a favorable foreign exchange impact of $2.3 million.

Selling, General and Administrative Expense

Selling, general and administrative, or SG&A, expense increased by $17.8 million, or 26.6%, during fiscal 2018, which was our first full year as a public company, compared to the prior fiscal year.

The increase was primarily due to higher expenses from our new SCSS business (including $3.4 million acquisition-related expenses), as well as personnel-related, professional and shareholder services expenses, aggregating $19.7 million, partially offset by a $1.9 million net decrease in intangible amortization expense as some intangible assets became fully amortized.

Selling, general and administrative, or SG&A, expense increased by $18.7 million, or 22.1%, during fiscal 2019 compared to the prior fiscal year.

The increase was primarily due to $22.8 million higher costs from our new SCSS business, as well as higher share based compensation, partially offset by lower professional services and

personnel-related expenses.

Included in the SG&A expense increase was a favorable foreign exchange impact of $1.4 million.

6 unchanged sentences

Total other expense

Interest expense, net decreased $10.1 million, or 34.4%, during fiscal 2018 compared to the prior fiscal year primarily due to $4.7 million lower interest expense resulting from lower principal balances after our 2017 refinancing, as well as $5.1 million lower warrant amortization (i.e., fiscal 2017 expense).

Other income (expense), net decreased by $9.3 million primarily due to the non-recurrence of a $23.3 million debt extinguishment loss in fiscal 2017, partially offset by a $13.5 million currency loss mainly in Brazil.

Other expense, net decreased by $11.1 million, or 83.8% over the prior fiscal year primarily due to $10.1 million foreign currency gains/losses.

Provision for Income Taxes

2 unchanged sentences

Provision for income taxes

Provision for income taxes increased by $8.4 million, or 84.7% during fiscal 2018 compared to the prior fiscal year primarily due to higher income in non-U.S.

Provision for income taxes decreased by $3.4 million, or 18.8% during fiscal 2019 compared to the prior fiscal year primarily due to lower income in non-U.S.

jurisdictions subject to tax.

Our Malaysian subsidiary was approved for income tax holidays for the operations of its Pioneer business and Global Supply Chain (GSC) business.

We have received approvals for a continuation of these tax incentives beyond calendar 2018, subject to certain operating conditions.

We have received approvals for a continuation of these tax incentives for up to ten years, subject to certain operating conditions.

The impact of these tax incentives will be recorded in the period in which they become effective.

3 unchanged sentences

(in thousands)

Cash provided by (used in) operating activities

Cash provided by operating activities

Cash used in investing activities

Cash used in financing activities

Cash provided by financing activities

Effect of exchange rate changes on cash and

cash equivalents

Net decrease in cash and cash equivalents

Net increase in cash and cash equivalents

At August 28, 2020, we had cash and cash equivalents of $150.8 million, of which approximately $95.3 million was held outside of the United States.

In February 2020, we issued $250.0 million in aggregate principal amount of 2.25% convertible senior notes due 2026 for which we received proceeds of $243.1 million, net of issuance costs.

We used $204.9 million for

extinguishment of long-term debt and $21.8 million for purchasing privately-negotiated capped calls.

For additional information, s ee Note 7 , Long-Term Debt , in our Notes to Consolidated Financial Statements in this Annual Report on Form 10-K .

In July 2019, we acquired SMART EC and SMART Wireless for purchase prices of approximately $77 million and $15 million, respectively.

1 unchanged sentence

In June 2018, we acquired Penguin for a purchase price of approximately $45 million and assumed approximately $32.3 million of Penguin’s outstanding indebtedness.

We financed this acquisition with net proceeds from the $60 million Incremental Amendment as defined below.

On May 23, 2017, we completed our IPO and raised proceeds, net of underwriting commissions and discounts and other offering costs, of approximately $60.8 million.

On June 2, 2017, we used the net proceeds to make a mandatory prepayment of $61.1 million aggregate principal amount of our outstanding term loans under the Amended Credit Agreement.

We financed this acquisition with net proceeds from the $60 million Incremental Amendment.

For additional information, see Note 2, Business Acquisitions , and Note 7, Long-Term Debt , in our Notes to Consolidated Financial Statements in this Annual Report on Form 10-K.

We expect that our existing cash and cash equivalents, line of credit and cash generated by operating activities will be sufficient to fund our operations for at least the next twelve months.

Our principal uses of cash and capital resources are acquisitions, debt service requirements as described below, capital expenditures, R&D expenditures and working capital requirements.

We expect that future capital expenditures will focus on expanding capacity of our operations , expanding our R&D activities, manufacturing equipment upgrades and/or acquisitions and IT infrastructure and software upgrades.

We expect that future capital expenditures will focus on expanding capacity of our operations , expanding our R&D activities, manufacturing equipment upgrades, acquisitions and IT infrastructure and software upgrades.

Cash and cash equivalents consist of funds held in demand deposit accounts and money market funds.

2 unchanged sentences

During fiscal 2020, cash provided by operating activities was $87.2 million.

The primary factors affecting our cash flows during this period were a $1.1 million net loss, $7.5 million in change in our net operating assets and liabilities and $80.8 million of non-cash related expenses.

The $7.5 million change in net operating assets and liabilities consisted of a decrease of $5.8 million in prepaid expenses and other assets and increases of $70.1 million in accounts payable and $0.5 million in accrued expenses and other liabilities, offset by increases of $12.3 million in accounts receivable and $51.8 million in inventory and a decrease of $4.8 million in operating leases.

The increase in accounts receivable was primarily due to timing of sales, while the increases in inventory and accounts payable were primarily due to the transition of manufacturing from contract manufacturers to the company due to our recent acquisitions, as well as higher purchases for certain programs.

During fiscal 2019, cash provided by operating activities was $169.7 million.

The primary factors affecting our cash flows during this period were a $51.3 million net income, $71.6 million in change in our net operating assets and liabilities and $46.8 million of non-cash related expenses.

2 unchanged sentences

The decreases in inventory and accounts payable were primarily due to the reduction of inventory along all business areas as product lead times and average selling prices reduced.

During fiscal 2018, cash provided by operating activities was $67.9 million.

The primary factors affecting our cash flows during this period were a $119.5 million net income and $34.7 million of non-cash related expenses, partially offset by an $86.3 million change in our net operating assets and liabilities.

The $86.3 million change in net operating assets and liabilities consisted of increases of $55.3 million in accounts receivable, $42.4 million in inventory, and $8.7 million in prepaid expenses and other assets, offset by increases of $17.5 million in accounts payable and $2.6 million in accrued expenses and other liabilities.

The increase in accounts receivable was due to lower purchases under our Receivables Purchasing Agreement (terminated at the end of fiscal 2017), while the increase in inventory was due to both higher sales forecast and higher cost of materials resulting from increased DRAM prices.

Investing Activities

Net cash used in investing activities during fiscal 2020 was $32.0 million consisting primarily of purchases of property and equipment.

Net cash used in investing activities during fiscal 2019 was $109.4 million consisting primarily of $76.1 million for the new SCSS acquisitions, net of cash acquired, and $33.4 million used for purchases of property and equipment.

Net cash used in investing activities during fiscal 2018 was $67.7 million consisting primarily of $42.3 million for the Penguin acquisition, net of cash acquired, and $25.7 million used for purchases of property and equipment.

Financing Activities

Net cash provided by financing activities during fiscal 2019 was $0.1 million, consisting primarily of $7.4 million of proceeds from issuance of ordinary shares from share option exercises and purchases under our employee share purchase plan, offset by $6.8 million of long-term debt payments for the BNDES Credit Agreements and $0.5 million for withholding tax on the vesting of restricted share units.

Net cash provided by financing activities during fiscal 2018 was $7.9 million, consisting primarily of $59.4 million of net proceeds from issuance of long-term debt (due to the Incremental Amendment) and $7.5 million of proceeds from option exercises, offset by $24.3 million of long-term debt payments, $32.3 million to pay off Penguin’s line of credit assumed from the acquisition, $1.6 million payment of IPO costs and $0.8 million in fees paid for revolving line of credit financing.

Net cash provided by financing activities during fiscal 2020 was $12.6 million, consisting primarily of $243.1 million proceeds from issuance of convertible notes and $5.5 million proceeds from issuance of ordinary shares from share option exercises and employee share purchase plans, partially offset by $204.9 million payment for extinguishment of long-term debt, $21.8 million purchase of Capped Calls, $8.5 million long-term debt payments for both the Amended Credit Agreement and the BNDES Credit Agreement and $0.8 million for withholding tax on restricted stock units.

under our employee share purchase plan, offset by $6.8 million of long-term debt payments for the BNDES Credit Agreements and $0.5 million for withholding tax on the vesting of restricted share units.

Contractual Obligations

2 unchanged sentences

(in millions)

Amended Credit Agreement Debt

Interest expense in connection with the

Amended Credit Agreement

BNDES 2014 Credit Agreement

Interest expense in connection with the

BNDES 2014 Credit Agreement

Interest expense in connection with the Notes

Operating leases

Non-cancellable product purchase

Non-cancellable product purchase commitments

Total contractual obligations

2 unchanged sentences

At this time, we are unable to make a reasonably reliable estimate of the timing of payments in individual years in connection with these tax liabilities and therefore such amounts are not included in the above contractual obligation table.

Senior Secured Credit Agreement

On August 9, 2017, SMART Worldwide, SMART Modular Technologies (Global), Inc.

(Global), and SMART Modular Technologies, Inc.

(SMART Modular) entered into a Second Amended and Restated Credit Agreement (together with all related loan documents, as amended from time to time including as amended by the Incremental Amendment as defined below, the Amended Credit Agreement) with certain lenders which amended and restated that certain Amended and Restated Credit Agreement dated as of November 5, 2016 (the ARCA), which had amended and restated that certain Credit Agreement dated as of August 26, 2011 (the Original Credit Agreement).

The Company’s subsidiaries named as borrowers in the Amended Credit Agreement and certain other subsidiaries that entered into a guarantee with respect to the Amended Credit Agreement including Penguin, SMART EC and SMART Wireless, are collectively referred to as the Loan Parties and together with SMART Modular Technologies Sdn.

(SMART Malaysia), the Credit Group.

The Amended Credit Agreement provides for $165 million of initial term loans (the Initial Term Loans) with a maturity date of August 9, 2022, and $50 million of revolving loans with a maturity date of February 9, 2021 (the Initial Revolver Maturity Date) which revolving loan maturity date automatically extends to February 9, 2022 if the total leverage ratio of the Credit Group is less than 3.0:1.0 on the Initial Revolver Maturity Date.

SMART Global Holding is not a party to the Amended Credit Agreement .

On June 8, 2018, SMART Worldwide, Global and SMART Modular entered into an Incremental Facility Agreement (the Incremental Amendment) which provided for incremental term loans under the Amended Credit Agreement in the aggregate amount of $60 million (the Incremental Term Loans) which Incremental Term Loans are on substantially identical terms as the Initial Term Loans.

Pursuant to the Incremental Amendment, the borrowers agreed to pay the structuring advisor a $0.6 million fee pursuant to a separate agreement .

On October 2, 2018, SMART Worldwide, Global and SMART Modular entered into the Second Amendment to the Amended Credit Agreement (the Second Amendment) which did not become effective until October 25, 2018.

As a result of the Second Amendment, the borrowers were granted a holiday from the obligation to make quarterly repayments of principal under the Initial Term Loans and the Incremental Term Loans at any time with respect to fiscal 2019.

In addition, the borrowers were granted a holiday from the obligation to repay any loans as a result of excess cash flow that would otherwise be due with respect to any period of fiscal 2019.

The Amended Credit Agreement is jointly and severally guaranteed on a senior basis by certain subsidiaries of Global (including Penguin, SMART EC and SMART Wireless, and excluding, among other subsidiaries, SMART Malaysia).

In addition, the Amended Credit Agreement is secured by a pledge of the capital stock of, or equity interests in, most of the subsidiaries of SMART Worldwide (including, without limitation, SMART Malaysia, Penguin, SMART EC and SMART Wireless) and by substantially all of the assets of the subsidiaries of SMART Worldwide, excluding the assets of SMART Malaysia and certain other subsidiaries .

The Amended Credit Agreement contains various representations and warranties and affirmative and negative covenants that are usual and customary for loans of this nature including, among other things, limitations on the Credit Group’s ability to engage in certain transactions, incur debt, pay dividends, and make investments.

The Amended Credit Agreement also requires that the Credit Group maintain a Secured Leverage Ratio not in excess of 3.5:1.0 as of the end of each fiscal quarter (commencing with the fiscal quarter ending November 24, 2017) and puts restrictions on the Credit Group’s ability to retain cash proceeds from the sale of certain assets with net proceeds in excess of $2 million, subject to customary six-month reinvestment rights.

The Incremental Amendment required the Credit Group to repay the Penguin Credit Facility, as defined below, and to pledge as collateral, all of the capital stock of and substantially all of the assets of Penguin within 60 days after the closing of the Penguin acquisition .

Interest and Interest Rates.

Loans under the Amended Credit Agreement accrue interest at a rate per annum equal to an applicable margin plus, at the borrowers’ option, either a LIBOR rate, or a base rate.

The applicable margin for term loans with respect to LIBOR borrowings is 6.25% and with respect to base rate borrowings is 5.25%.

The interest rate on the Initial Term Loans was 8.43%, 8.6% and 7.57% as of August 30, 2019, August 31, 2018 and August 25, 2017, respectively.

The interest rate on the Incremental Term Loans was 8.71% and 8.58% as of August 30, 2019 and August 31, 2018, respectively .

The applicable margin for revolving loans adjusts every quarter based on the Secured Leverage Ratio for the most recent fiscal quarter with the applicable margin for revolving loans with respect to LIBOR borrowings ranging from 3.75% to 4.00% and the applicable margin for revolving loans with respect to base rate borrowings ranging from 2.75% to 3.00%.

Interest on base rate loans is payable on the last day of each calendar quarter.

Interest on LIBOR-based loans is payable every one, two, three, six, nine or twelve months after the date of each borrowing, dependent on the particular interest rate period selected with respect to such borrowing .

Principal Payments.

The Amended Credit Agreement requires quarterly repayments of principal under the Initial Term Loans equal to 2.5% of $165 million, or $4.1 million per fiscal quarter and, commencing on November 30, 2018, quarterly repayments of principal under the Incremental Term Loans equal to 2.5% of $60 million, or $1.5 million per fiscal quarter.

As a result of the Second Amendment, the borrowers were granted a holiday in fiscal 2019 from the obligation to make quarterly repayments of principal under the Initial Term Loans and the Incremental Term Loans.

During fiscal 2019 and 2018, the borrowers made scheduled principal payments of $0 million and $16.5 million, respectively .

Prepayments .

The borrowers have the right at any time to make optional prepayments of the principal amounts outstanding under the Amended Credit Agreement provided that prepayments of principal which are voluntary or are made in connection with certain transactions will be subject to prepayment premiums of 3%, 2% and 1% during the first, second and third years, respectively, after the effective date of the Amended Credit Agreement .

The Amended Credit Agreement also requires certain mandatory prepayments of principal whereby the borrowers must prepay outstanding loans, subject to certain exceptions, which include, among other things:

(i) 75% of excess cash flow on a semi-annual basis if the total leverage ratio is greater than 1.5:1.0, (ii) 50% of excess cash flow on a semi-annual basis if the total leverage ratio is greater than 1.0:1.0 but less than or equal to 1.5:1.0 and (iii) 25% of excess cash flow on an annual basis if the secured leverage ratio is less than or equal to 1.0:1.0., which amounts will be reduced by any voluntary prepayments of principal made in the applicable period;

100% of the net proceeds of certain asset sales or other dispositions of property of Global or any of its restricted subsidiaries, subject to customary rights to reinvest the proceeds within six months;

100% of the net cash proceeds of incurrence of certain debt by Global or any of its restricted subsidiaries, other than proceeds from debt permitted to be incurred under the Amended Credit Agreement.

As a result of the Second Amendment, the borrowers were granted a holiday from the obligation to repay any loans as a result of excess cash flow that would otherwise be due with respect to any period of fiscal 2019.

No mandatory prepayments were required for fiscal 2019 or 2018.

On June 2, 2017, SMART Global Holdings contributed to Global $61.0 million from the proceeds of the IPO closed in May 2017.

Global in turn used the proceeds to pay down the original term loans under the Original Credit Agreement, as required under the ARCA, which resulted in a $6.7 million loss on early repayment of long-term debt.

As of August 9, 2017, prior to the one year anniversary of the ARCA, the Credit Group entered into the Amended Credit Agreement with new term loans in the aggregate principal amount of $165 million with different lenders.

The proceeds from the Amended Credit Agreement were used to fully repay and refinance the term loans under the ARCA in the principal amount of $151.0 million, which resulted in a write off of $15.2 million of original issue discount and debt issuance costs as an extinguishment loss .

Term loans under the Amended Credit Agreement were issued at a discount of 2.0% of the then outstanding principal amount of $165 million, for a discount of $3.3 million.

The Company incurred $8.7 million debt issuance costs upon entering into the Amended Credit Agreement, of which $5.3 million was attributable to the term loans and recorded as a direct reduction to the face amount of the term loans, and $3.4 million was allocated to the revolving line of credit and recorded as a separate asset on the balance sheet.

Debt issuance costs and debt discount related to term loans are being amortized to interest expense based on the effective interest rate method over the life of the term loans.

Those fees allocated to the revolving line of credit are being amortized to interest expense ratably over the life of the revolving line of credit.

As of August 30, 2019 and August 31, 2018, the outstanding principal balance of all term loans under the Amended Credit Agreement was $208.5 million and there were no outstanding revolving loans.

The fair value of the term loans as of August 30, 2019 and August 31, 2018 was estimated to be approximately $210.6 million and $207.5 million, respectively .

Penguin Credit Agreement

On June 8, 2018 in connection with the Penguin acquisition, the Company assumed the outstanding balances due under that certain credit agreement dated January 8, 2018 between Penguin and Wells Fargo Capital Finance, LLC (the Penguin Credit Facility) which had an outstanding balance of $32.3 million as of June 8, 2018.

In addition, on June 8, 2018, SMART Global Holdings entered into a guarantee with Wells Fargo Capital Finance, LLC (WFCF) whereby SMART Global Holdings guaranteed the repayment and full performance of Penguin under the Penguin Credit Facility.

As required under the Incremental Amendment, the Company paid off the outstanding balance under the Penguin Credit Facility in August 2018.

BNDES Credit Agreements

In December 2013, SMART Brazil, entered into a credit facility with the Brazilian Development Bank, or BNDES (such loan the BNDES 2013 Credit Agreement).

Under the BNDES 2013 Credit Agreement, a total of R$50.6 million (or $13.4 million) was made available to SMART Brazil for investments in infrastructure, research and development conducted in Brazil and acquisitions of equipment not otherwise available in the Brazilian domestic market.

SMART Brazil’s obligations under the BNDES 2013 Credit Agreement were guaranteed by Banco Itaú BBA S.A., or Itaú Bank, which guarantee was in turn secured by a guarantee from SMART Brazil and SMART do Brazil and a commitment by SMART Brazil to maintain minimum cash balances with Itaú Bank equal to 11.85% of the maximum aggregate balance of principal, interest and fees outstanding under the BNDES 2013 Credit Agreement.

The committed amount was R$6.0 million (or $1.6 million), which is shown on the Company’s consolidated balance sheets as restricted cash in other noncurrent assets as of August 31, 2018.

Approximately half of the available debt under the BNDES 2013 Credit Agreement accrues interest at a fixed rate while the other half accrues interest at a floating rate.

The facility under the BNDES 2013 Credit Agreement is a term loan fully amortizing in 48 equal monthly installments beginning on August 15, 2015 with the final principal payment paid on July 15, 2019.

As of August 30, 2019, SMART Brazil had no outstanding debt under the BNDES 2013 Credit Agreement.

As of August 31, 2018, SMART Brazil’s outstanding debt under the BNDES 2013 Credit Agreement was R$12.9 million (or $3.4 million), of which R$6.3 million (or $1.7 million) accrues interest at the fixed rate of 3.5% and R$6.6 million (or $1.7 million) of the debt accrues interest at the floating rate of 0.5% above the TJLP rate published by the Central Bank of Brazil, or BZTJLP (5.0%), combined corresponding to an overall effective interest rate of 5.5% per annum.

In December 2014, SMART Brazil, entered into a second credit facility with BNDES, referred to as the BNDES 2014 Credit Agreement.

The BNDES 2013 Credit Agreement and the BNDES 2014 Credit Agreement are collectively referred to as the BNDES Agreements.

Under the BNDES 2014 Credit Agreement, a total of R$52.8 million (or $14.

0 million) was made available to SMART Brazil for research and development conducted in Brazil related to integrated circuit (IC) packaging and for acquisitions of equipment not otherwise available in the Brazilian domestic market .

Prior to July 2018, SMART Brazil’s obligations under the BNDES 2014 Credit Agreement were also guaranteed by Itaú Bank, which guarantee was in turn secured by a guarantee from SMART Brazil and SMART do Brazil in favor of Itaú Bank and a commitment by SMART Brazil to maintain minimum cash balances with Itaú Bank equal to 30.31% of the maximum aggregate balance of principal, interest and fees outstanding under the BNDES 2014 Credit Agreement, or approximately R$16.0 million (or $4.3 million) of required cash balances, which is shown on the Company’s consolidated balance sheets as restricted cash in other noncurrent assets as of August 31, 2018.

In July 2018, SMART Brazil entered into guarantee arrangements with Banco Votorantim S.A.

which bank in turn replaced the guarantees of the BNDES Credit Agreements previously issued by Itaú Bank.

As a result, the guarantees with Itaú Bank were cancelled and Itaú Bank returned R$22.0 million (or $5.9 million) of committed balances to SMART Brazil in the first quarter of fiscal 2019.

As such, the Company no longer has any restricted cash on its consolidated balance sheets as of August 30, 2019.

The available debt under the BNDES 2014 Credit Agreement accrues interest at a fixed rate of 4% per annum.

The BNDES 2014 Credit Agreement is a term loan fully amortizing in 48 equal monthly installments beginning on August 15, 2016 with the final principal payment being due on July 15, 2020.

As of August 30, 2019 and August 31, 2018, SMART Brazil’s outstanding debt under the BNDES 2014 Credit Agreement was R$13.2 million (or $3.5 million) and R$26.4 million (or $7.0 million), respectively.

While the BNDES Agreements do not include any financial covenants, they contain affirmative and negative covenants customary for loans of this nature, including, among other things, an obligation to comply with all laws and regulations;

a right for BNDES to terminate the loan in the event of a change of effective control;

and a prohibition against the disposition or encumbrance, without BNDES consent, of intellectual property developed with the funds from the loans.

The BNDES 2013 Credit Agreement includes an obligation to draw down the entire loan within specified periods of time or pay unused commitment fees of 0.1%.

The BNDES 2014 Credit Agreement required a loan fee of 0.3% of the total face amount of the loan facility .

The future minimum principal payments under the Amended Credit Agreement and the BNDES 2014 Agreement as of August 30, 2019 are (in thousands ):

Fiscal year ending August:

Management Agreement

In connection with the Amended and Restated Transaction and Management Fee Agreement (the Management Agreement), management advisory fees consisting of quarterly fees plus out-of-pocket expenses, were payable by us to Silver Lake Management Company III, L.L.C.

and Silver Lake Management Company Sumeru, L.L.C., affiliates of Silver Lake, or the Managers.

Under the Management Agreement, we recorded quarterly fees of $1.0 million plus out-of-pocket expenses.

The Management Agreement was terminated upon the completion of our IPO on May 23, 2017.

As of August 30, 2019, there are no amounts due and payable under the Management Agreement.

Convertible Senior Notes due 2026

In February 2020, the Company issued $250.0 million in aggregate principal amount of 2.25% convertible senior notes due 2026 (the Notes), in a private placement, including $30.0 million in aggregate principal amount of the Notes that the Company issued resulting from initial purchasers fully exercising their option to purchase additional notes.

The Notes are general unsecured obligations and bear interest at an annual rate of 2.25% per year, payable semi-annually on February 15 and August 15 of each year, beginning on August 15, 2020.

The Notes are governed by an indenture (the Indenture) between the Company and U.S.

Bank National Association, as trustee.

The Notes will mature on February 15, 2026, unless earlier converted, redeemed or repurchased.

No sinking fund is provided for the Notes.

The initial conversion rate of the Notes is 24.6252 ordinary shares per $1,000 principal amount of Notes, which represents an initial conversion price of approximately $40.61 per ordinary share.

The conversion rate is subject to adjustment upon the occurrence of certain specified events as set forth in the Indenture.

The holders of the Notes may convert their Notes at their option in the following circumstances:

during any fiscal quarter commencing after the fiscal quarter ending on August 28, 2020 (and only during such fiscal quarter), if the last reported sale price per ordinary share exceeds 130% of the conversion price for each of at least 20 trading days, whether or not consecutive, during the 30 consecutive trading days ending on, and including, the last trading day of the immediately preceding fiscal quarter;

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;

upon the occurrence of certain corporate events or distributions on the Company’s ordinary shares, as provided in the Indenture;

if the Company calls such Notes for redemption;

on or after August 15, 2025 until the close of business on the second scheduled trading day immediately before the maturity date.

Upon conversion, the Company will pay or deliver, as applicable, cash, ordinary shares or a combination of cash and ordinary shares at the Company's election.

The Company’s intent is to settle conversions through combination settlement with a specified dollar amount of $1,000 per $1,000 principal amount of Notes, which involves repayment of the principal portion of such Notes in cash and any excess of the conversion value over the principal amount in ordinary shares, with cash in lieu of any fractional ordinary shares.

Upon the occurrence of a “make-whole fundamental change” (as defined in the Indenture), the Company will in certain circumstances increase the conversion rate for a specified period of time.

In addition, upon the occurrence of a “fundamental change” (as defined in the Indenture), holders of the Notes may require the Company to repurchase their Notes at a cash repurchase price equal to the principal amount of the Notes to be repurchased, plus accrued and unpaid interest, if any.

If any taxes imposed or levied by or on behalf of the Cayman Islands (or certain other jurisdictions described in the Indenture) are required to be withheld or deducted from any payments or deliveries made under or with respect to the Notes, then, subject to certain exceptions, the Company will pay or deliver to the holder of each Note such additional amounts as may be necessary to ensure that the net amount received by the beneficial owner of such Note after such withholding or deduction (and after withholding or deducting any taxes on the additional amounts) will equal the amounts that would have been received by such beneficial owner had no such withholding or deduction been required.

The Company has a right to redeem the Notes, in whole or in part, at its option at any time, and from time to time, from February 21, 2023 through the 40th scheduled trading day immediately before the maturity date, at a cash redemption price equal to the principal amount of the Notes to be redeemed, plus accrued and unpaid interest.

However, the repurchase right is only applicable if the last reported per share sale price of ordinary share exceeds 130% of the conversion price on each of at least twenty trading days during the thirty consecutive trading days ending on, and including, the trading day immediately before the redemption notice date for such redemption.

In accounting for the issuance of the Notes, the Company separated the Notes into liability and equity components.

The carrying amount of the liability component of approximately $197.5 million was calculated by using a discount rate of 6.53%, which was the Company’s borrowing rate on the date of the issuance of the Notes for a similar debt instrument without the conversion feature.

The carrying amount of the equity component of approximately $52.5 million, representing the conversion option, was determined by deducting the fair value of the liability component from the par value of the Notes.

The equity component of the Notes is included in additional paid-in capital in the consolidated balance sheet and is not remeasured as long as it continues to meet the conditions for equity classification, which the Company will reassess every reporting period.

The difference between the principal amount of the Notes and the liability component (the debt discount) is amortized to interest expense using the effective interest method over the term of the Notes.

Debt issuance costs for the issuance of the Notes were approximately $8.0 million, consisting of initial purchasers' discount and other issuance costs.

In accounting for the transaction costs, the Company allocated the total amount incurred to the liability and equity components using the same proportions as the proceeds from the Notes.

Transaction costs attributable to the liability component were approximately $6.3 million, were recorded as debt issuance cost (presented as contra debt in the consolidated balance sheet) and are being amortized to interest expense over the term of the Notes using the effective interest method.

The transaction costs attributable to the equity component were approximately $1.7 million and were netted with the equity component in shareholders’ equity.

The carrying value of the Notes is as follows (in thousands):

Unamortized debt discount

Unamortized issuance costs

Net carrying amount

As of August 28, 2020, the remaining life of the Notes was approximately 66 months.

The unamortized debt discounts and unamortized debt issuance cost are amortized over the remaining useful life, using an effective interest rate of 7.06%.

As of August 28, 2020, the carrying value of the equity component was $50.8 million, net of the issuance costs of $1.7 million.

The following table sets forth the total interest expense recognized related to the Notes (in thousands):

Contractual interest expenses

Amortization of debt discount

Amortization of debt issuance costs

Total interest cost recognized

The total estimated fair value for the Notes was determined to be $221.5 million based on the closing trading price per $100 of the Notes as of the last day of trading for the period.

There are no future minimum principal payments under the Notes until the full amount of $250.0 million is due in fiscal 2026

Off-Balance Sheet Arrangements

45 unchanged sentences

For services provided to the customers over a period of time, such revenues are recognized over time in line with when the customer receives and consumes the benefit of the services.

Extended warranty and on-site services, hardware support, software support, and subscription revenue for access to the Company’s high performance computing environment is deferred and recognized ratably over the contractual period as the Company transfers control as it satisfies its performance obligations over time as the services are rendered.

Extended warranty and on-site services,

hardware support, software support, and subscription revenue for access to the Company’s high performance computing environment is deferred and recognized ratably over the contractual period as the Company transfers control as it satisfies its performance obligations over time as the services are rendered.

These services contracts are typically one to three years in length.

28 unchanged sentences

Represents material procurement costs of products provided as an agent reported on a net basis.

Amounts for fiscal 2018 and 2017 are accounted for under ASC 605 (refer to Note 1(u)).

Amounts for fiscal 2018 are accounted for under ASC 605 (refer to Note 1(u)).

Inventory Valuation

26 unchanged sentences

Such a change in recognition or measurement could result in the recognition of a tax benefit or an additional charge to the tax provision in the period.

Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed

Goodwill Valuation

We perform a goodwill impairment test annually during the fourth quarter of our fiscal year and more frequently if events or circumstances indicate that impairment may have occurred.

Such events or circumstances may, among others, include significant adverse changes in the general business climate.

When conducting the annual impairment test for goodwill, we compare the estimated fair value of a reporting unit containing goodwill to its carrying value.

If the fair value of the reporting unit is determined to be more than its carrying value, no goodwill impairment is recognized.

We determine the fair value of the our reporting units using the income approach methodology of valuation that includes the discounted cash flow method as well as the market approach which includes the guideline company method.

These approaches use significant unobservable inputs, or Level 3 inputs, as defined by the fair value hierarchy and require us to make significant management judgments and assumptions including, but not limited to, future net sales, earnings before interest, and the selection of the discount rate.

These assumptions consider our budgets, business plans and economic projections, and are believed to reflect market participant views.

Some of the inherent estimates and assumptions used in determining fair value of the reporting units are outside the control of management.

While we believe we have made reasonable estimates and assumptions

to calculate the fair value of the reporting units, it is possible a material change could occur.

If our actual results are not consistent with our estimates and assumptions used to calculate fair value, it could result in material impairments of our goodwill.

For additional information, s ee Note 1(k), Goodwill , in our Notes to Consolidated Financial Statements in this Annual Report on Form 10-K .

Based on the results of the impairment test, the fair values exceed the respective carrying values for each reporting unit.

Accordingly, no impairment of goodwill was recognized through August 28, 2020.

The estimated forecasted results used in the discounted cash flow portion of the impairment analysis reflect our best estimates as of August 28, 2020.

Long-Lived Assets Valuation

We review our long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable.

31 unchanged sentences

Selling, general and administrative

Quantitative and Qualita tive Disclosures About Market Risk

Our exposure to market rate risk includes risk of foreign currency exchange rate fluctuations, changes in interest rates and translation risk.

Foreign Exchange Risks

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 portion of our sales are denominated in United States dollars, increases in the value of the United States 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.

A significant portion of the sales of our products are denominated in reais.

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 that could have a material adverse effect on our results of operations.

We utilize foreign exchange forward contracts to mitigate foreign currency exchange rate risk associated with foreign-currency-denominated assets and liabilities, primarily third party payables in Brazil.

We do not use foreign currency contracts for speculative or trading purposes.

Foreign exchange forward contracts outstanding at August 28, 2020 are not designated as hedging instruments for hedge accounting purposes.

We do not currently purchase financial instruments to hedge foreign exchange risk, but may do so in the future.

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, particularly the reais.

Approximately 35%, 44% and 62% of our net sales during fiscal 2020, 2019 and 2018, respectively, originated in reais.

We present our consolidated financial statements in U.S.

dollars, and we must translate the assets, liabilities, net sales and expenses of a substantial portion 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 combined financial statements, even if their value has not changed in their local currency.

Our customer pricing and material cost of sales are based on U.S.

dollars, as is the global market for memory products.

Accordingly, the impact of currency fluctuations to our consolidated statement 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 statement of operations is also impacted by foreign currency gains and losses recorded in Other Income (Expense) arising from transactions denominated in a currency other than the functional currency of the respective subsidiary.

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.

During fiscal 2020, 2019 and 2018, we recorded $3.4 million, $3.1 million, and $13.2 million, respectively, of foreign exchange losses.

Interest Rate Risk

We are subject to interest rate risk in connection with our short-term debt under the Amended Credit Agreement as of May 29, 2020.

Although we did not have any revolving balances outstanding as of August 28, 2020, the revolving facility under the Amended Credit Agreement provides for borrowings of up to $50 million that would also bear interest at variable rates.

Assuming that we will satisfy the financial covenants required to borrow and that the revolving loans under the Amended Credit Agreement were fully drawn and other variables are held constant, each 1.0% increase in interest rates on our variable rate borrowings would result in an increase in annual interest expense and a decrease in our cash flow and income before taxes of $0.5 million per year.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis