Item 1. Business
Item1. Business
Overview
Since our inception over 30 years ago, SGH has grown into a diversified group of businesses focused on the design and manufacture of specialty solutions for the computing, memory and LED markets. Our success is based on a customer-focused approach characterized by a commitment to quality, advanced technical expertise, quick time-to-market, build-to-order flexibility and excellence in customer service.
At SGH, we strive to achieve long-term growth by investing in our people, innovation, processes and new opportunities. Since the beginning of fiscal 2018, we have accelerated our growth through the completion of five acquisitions. With our most recent acquisition of Cree LED in 2021, we have organized the company into three lines of business: Memory Solutions, Intelligent Platform Solutions (“IPS”) and LED Solutions.
In addition to driving growth organically and through acquisitions, we use the SGH operating system to support and drive operational efficiency and performance.
Our employees have always played a key role in our success. Today, SGH employs a diverse workforce of approximately 3,900 employees around the world who are focused on innovation and customer satisfaction.
Acquisition of LED Business
In March 2021, we completed the acquisition of the LED business (“LED Business”) of Cree, Inc., a corporation now known as Wolfspeed, Inc. (“Cree”). The acquisition of the LED Business, a leader in LED lighting technology, further enhances our growth and diversification strategy and fits well with our other specialty businesses in computing and memory. The purchase price for the LED Business consisted of cash payments of $72.4 million, the issuance of an unsecured promissory note issued in the amount of $125 million and the potential for Cree to receive an earn-out payment of up to $125 million based on the revenue and gross profit performance of the LED Business in the twelve-month period ended in March 2022.
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COVID-19
The outbreak of coronavirus disease 2019 (“COVID-19”) has resulted in substantial loss of life, economic disruption and government intervention worldwide. While we have not yet experienced significant disruptions of our operations as a result of the COVID-19 pandemic, the pandemic resulted in reduced sales volumes of certain product lines since early calendar 2020. COVID-19 also disrupted our product development, marketing and corporate development activities, and has more recently affected our supply chain. Our recently acquired LED Business experienced similar impacts from the pandemic from early in calendar 2020. If these conditions continue, or if we have an outbreak in any of our facilities, sales volumes may be negatively impacted and we may, among other issues, experience, in any or all product lines, delays in product development, a decreased ability to support our customers, disruptions in sales and manufacturing activities and overall reduced productivity each of which could have a negative impact on our ability to meet customer commitments and on our revenue and profitability. The reduction of investment in new capacity due to the pandemic, coupled with strong demand to expand delivery and logistics, internet and cloud services as well as a rebound in economic conditions and general demand at a pace faster than expected, has resulted in significant supply shortages that may impact our ability to manufacture products for our customers and may result in rising prices of the materials we need to manufacture our products. We may not be able to pass on these rising costs to our customers which could result in a negative impact to our gross margins. Furthermore, if there is a significant outbreak or if travel restrictions or stay-at-home or work remote or from home conditions or other governmental or voluntary restrictions relating to the COVID-19 pandemic significantly impact our suppliers’ ability to manufacture or deliver raw materials or provide key components or services, we could experience more delays or reductions in our ability to manufacture and ship products to our customers. While certain segments of our customer base are experiencing strong demand, the pandemic may negatively impact the demand for other segments for our customer base or those customers’ ability to manufacture their products, which could reduce their demand for our products or services.
Our Products and Services
In connection with our acquisition of the LED Business in 2021, we reorganized SGH into three business units: Memory Solutions, IPS and LED Solutions.
Memory Solutions
Our Memory Solutions group provides high performance and reliable memory solutions through the design, development and advanced packaging of leading-edge to extended lifecycle products. These specialty products are tailored to meet customer-specific requirements across networking and communications, enterprise storage, computing, including desktop, notebook and server applications, smartphones and other vertical markets. These products are marketed to OEMs and to commercial and government customers. The Memory Solutions group also offers SMART Supply Chain Services, which provides customized, integrated supply chain services to enable our customers to better manage supply chain planning and execution, reduce costs and increase productivity. Our Memory Solutions group had net sales of $931.8 million, $857.2 million and $995.4 million in 2021, 2020 and 2019, respectively.
SMART Modular Technologies
SMART Modular Technologies focuses on the design and manufacture of application-specific memory products, technical support and value-added testing services that differ from the core focus of standard memory module providers. We collaborate closely with our global OEM customers throughout their design process and across multiple projects to create solutions for demanding applications with differentiated requirements, such as specific form factors, higher density, lower power, specific firmware or greater durability and reliability compared to standard solutions. We target opportunities where we believe we can be a primary supplier of longer-lifecycle solutions to OEM customers for diverse and growing end markets within the industrial, government, networking and communications and enterprise storage and computing markets as well as other vertical markets. In this business, we offer an extensive portfolio of over 2,000 products available in standard and rugged formats.
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We offer an extensive lineup of dynamic random access memory (“DRAM”) modules utilizing a wide range of DRAM technologies from legacy synchronous DRAM to double data rate (“DDR”), DDR2, DDR3 and leading-edge, high-performance DDR4 DRAM devices. These technologies are incorporated into standard memory, enterprise memory and hybrid memory solutions in standard and rugged formats. These modules encompass a broad range of form factors and functions, including dual in-line memory modules (“DIMMs”) , nonvolatile DIMMs, load reduced DIMMs, registered DIMMs, unbuffered DIMMs, small outline dual in-line memory modules and mini-DIMMs and XR-DIMMs for industrial and government, networking and communications, enterprise storage and computing and other vertical markets. These memory modules come in configurations of up to 288 pins and densities of up to 128 gigabytes. We support leading-edge and emerging interconnect standards such as Gen-Z and OpenCAPI with our Gen-Z Memory module (ZMM) and Differential DIMM (DDIMM). We utilize advanced printed circuit board and device packaging and stacking technologies to achieve cost-effective, high-density solutions. Our products are designed to meet the quality requirements of enterprise class systems pursuant to stringent specifications required by various high-speed applications.
We work closely with our customers to develop solutions that incorporate application-specific requirements. Our products are designed into our customers’ applications for industrial, networking and communications, enterprise storage and computing, government and other vertical markets.
We also design and manufacture embedded and removable Flash memory products in a variety of form factors and capacities incorporated into storage and hybrid memory solutions in standard and rugged formats. Our wide range of Flash memory products includes solid-state drives (“SSDs”), Serial Advanced Technology Attachment (“SATA”) and PCIe NVMe products in 2.5” enclosures, M.2 and other module form factors. We also offer Flash component products such as embedded MultiMediaCard (“eMMC”) and embedded and removable products in USB, CompactFlash and SD and microSD Card configurations. Our Flash capabilities include application-specific and customized firmware development.
In Brazil, we have established a leading market position, as measured by market share, where we are the largest in-country manufacturer of memory modules and our products are designed and qualified by OEM customers for desktops, notebooks, servers and smartphones. In this market, we process imported wafers and die and we cut, package and test them to create embedded Multi Chip Packages (“eMCP”), DRAM modules and other DRAM and Flash-based products. We have a strategic, long-term relationship with a global memory wafer supplier that has provided us with a stable source of competitively priced wafers for the Brazil market. The relationship also provides our supplier with access to that market through our in-country infrastructure and capabilities.
SMART Supply Chain Services
We offer supply chain services, including procurement, logistics, inventory management, temporary warehousing, programming, kitting and packaging services. We tailor our supply chain service offerings to meet the specific needs of our customers to enable our customers to manage supply chain planning and execution, which reduces costs and increases productivity. Our supply chain services are based on our proprietary software platform that we develop, which is then integrated with our customers’ respective procurement management systems as well as our suppliers’ distribution management systems. Our global footprint allows us to provide these services to customers and their manufacturing partners in many regions of the world and our global inventory management capabilities allow us to manage a vast array of customer and supplier part numbers across worldwide manufacturing and logistics hubs, helping our customers minimize inventory levels while maintaining reliable delivery and availability of supply.
Intelligent Platform Solutions
Our Intelligent Platform Solutions group (“IPS”) consists of Penguin Computing and Penguin Edge. Penguin Computing offers specialized platform solutions for high-performance computing (“HPC”), artificial intelligence (“AI”), machine learning (“ML”) and advanced modeling for technology research. We provide these leading-edge solutions to customers in the government, hyper-scale, energy, financial services and education markets. Penguin Edge offers solutions for embedded and wireless applications, specializing in high-reliability products for a wide range of customers in government, telecommunications, health care, smart city, network edge and industrial applications. IPS had net sales of $344.8 million, $265.1 million and $216.6 million in 2021, 2020 and 2019, respectively.
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Penguin Computing
Through Penguin Computing, we provide a robust portfolio of hardware (including solutions based on the Open Compute Project (“OCP”) and software products and services offerings. Our solutions are comprised of: servers, software, integrated turn-key clusters, enterprise-grade storage and networking, all available in hardware or cloud-based solutions via Penguin-On-Demand (POD). Our product offering includes our Open Compute Tundra Extreme Scale products to solve technical and density challenges. We also provide turn-key storage solutions that provide power and flexibility with hardware optimized for software-defined storage. Our rackmount servers and graphics processing unit (“GPU”) accelerated computing platforms give customers powerful tools to implement their AI and ML advanced modeling and HPC applications. Complementing our compute, storage and networking hardware solutions is our Scyld Software line of cloud and cluster management software. These products provide advanced capabilities for management of HPC clusters from department-level systems to supercomputers. In addition, our products and services enable customers to provide their own HPC cloud with remote access via our proprietary browser-based VDI solution. Our services offering include solution design, deployment services, software automation and managed services.
Penguin Edge
Penguin Edge encompasses the operations of two businesses, SMART Embedded Computing (“SMART EC”) and SMART Wireless Computing (“SMART Wireless”). SMART EC provides advanced embedded computing solutions including high-end application-ready platforms, single-board computers (“SBCs”), enclosures, blades, edge servers, network accelerator cards and enabling software. SMART EC’s advanced computing board and system solutions include ATCA, VME, PCIe and rackmount server products. Target markets for SMART EC solutions and products include network edge computing, government, telecommunications infrastructure, industrial and transportation applications.
Our SMART Wireless business provides computing products such as system-on-a-module (“SOMs”), SBCs and integrated systems for wireless computing endpoint applications. Available in standard and custom configurations, our boards, systems and services meet the needs of connected devices used in Internet of Things (“IoT”) endpoint applications such as smart city, digital health and smart office.
LED Solutions
Our LED Solutions group offers a broad portfolio of application-optimized LEDs focused on improving on lumen density, intensity, efficacy, optical control and reliability. Backed by expert design assistance and superior sales support, our LED products enable our customers to develop and market LED-based products for lighting, video screens and specialty lighting applications. Our LED Solutions group had net sales of $224.6 million in the second half of 2021. Our LED Solutions group was formed after the closing of our acquisition of the LED Business from Cree in March 2021, and our products are offered to customers under the brand CreeLED.
CreeLED
For over 30 years, CreeLED has been a leader in LED lighting technology, offering new and differentiated LED solutions to a broad base of customers across multiple market segments. CreeLED solutions include CreeLED chips and components.
Our CreeLED chip products include blue and green LED chips based on gallium nitride (“GaN”) and related materials. LED chips or die are used in a number of applications and are currently available in a variety of brightness levels, wavelengths (colors) and sizes. Products using our blue and green LED chips are featured in a variety of applications including video screens, gaming displays and function indicator lights. Customers also combine our blue LED chips with phosphors to create white LEDs, which are used in various applications for indoor and outdoor illumination and backlighting, full-color display screens, liquid crystal display (“LCD”) backlighting, white keypads, automotive backlights, headlamps and directional indicators.
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Our CreeLED components include packaged LED products, from our XLamp and J Series LED components and LED modules for lighting applications to our high-brightness LED components. Our XLamp LED components and LED modules are designed to meet a broad range of market needs for lighting applications, including general illumination (both indoor and outdoor applications), portable, architectural, signal and transportation lighting. Our high-brightness LED components consist of surface mount device (“SMD”) and through-hole packaged LED products. Our SMD LED component products are available in a full range of colors designed to meet a broad range of market needs, including video, signage, general illumination, transportation, gaming and specialty lighting. Our through-hole packaged LED component products are available in a full range of colors primarily designed for the signage market and provide users with color and brightness consistency across a wide viewing area.
Manufacturing and Test
We have manufacturing facilities in Atibaia, Brazil; Newark and Fremont, California; and Penang, Malaysia, which are all certified in one or more of the following: ISO 9001:2015, ISO 14001:2015 and ISO 45001:2018. We also have a manufacturing facility in Huizhou, China, which is ISO/TS16949 certified and where products for our LED Solutions group are packaged. In addition, in early fiscal 2022, we began manufacturing operations in our Manaus, Brazil facility. We also have a test and integration facility in Tempe, Arizona for SMART EC and other products. Additionally, we are a member of the Responsible Business Alliance (“RBA”) and our manufacturing facilities are compliant with the RBA Code of Conduct which is increasingly a business requirement of our customers.
We believe that our manufacturing operations for Memory Solutions have benefited from our many years of design experience and our existing library of proven designs which stress high manufacturability and quality. Over 30 years of manufacturing experience enables us to quickly move from manufacturing initiation to full production volumes of new products, which is paramount in helping our customers achieve rapid time-to-market for their new product introductions. As a result of our design efficiencies, high level of automation and expertise in utilizing advanced manufacturing processes, we achieve high manufacturing yields and reduced direct labor costs and offer our customers quick turnaround of both small and large production orders, which is a key factor in enabling our build-to-order model.
While we do not own or operate wafer fabrication facilities, we have capabilities for subsequent stages of the product manufacturing cycle. Our manufacturing capabilities in Atibaia, Brazil and Huizhou, China receive unmounted integrated circuits and LED chips in wafer or discrete chip form from third-party wafer fabrication facilities, preparing and packaging the die into semiconductor and LED components, testing the components and, in some cases, assembling components on substrates or printed circuit boards to make modules, multi-chip packages and LED products. Through our investments and experience, we have developed expertise in semiconductor and LED technology and advanced manufacturing and test that allows us to manufacture semiconductor products with shrinking geometries, increasing complexity and broader levels of performance and, for LED products, brighter, more efficient and lower cost LED chips and components for a broad range of lighting applications. We have made significant capital investments to further expand our manufacturing and test capabilities and operate at an even higher level of efficiency.
In our IPS group, we have utilized two primary methods of fulfilling demand for products: building products to order and configuring products to order, in each case using components and subassemblies we acquire from a wide range of vendors. At Penguin Computing, we have developed capabilities for design and development of large scale systems and dense HPC and AI clusters that have significant power and cooling requirements with manufacturing and test for our HPC products being done in Fremont, California. At SMART EC and SMART Wireless, we have developed capabilities for design and development of a wide range of embedded and wireless computing products which we manufacture, assemble and/or test in our manufacturing facilities in Newark, California; Penang, Malaysia; and Tempe, Arizona.
Product testing is an important aspect of our manufacturing operations and we believe that we have established substantial technical expertise in the testing of products for high-end applications. Our extensive testing capabilities not only help to ensure a low defect rate, but they also enable us, in certain situations, to sell specialized testing as an additional service. We design customer specific testing processes that differ from the core focus of standard providers. We have achieved stringent quality targets across a broad spectrum of system applications and customer-specific designs. Our staff includes experienced test engineers who have developed proprietary testing routines and parameters which, combined with our advanced test equipment, enable us to diagnose problems in components as well as in system design and enable us to characterize the performance of new products and to provide high quality products in volume.
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For certain of our customers, we employ extensive software-based electrical and thermal simulations and test our designs on high-end functional testers utilizing a broad set of test suites. These tests are designed to meet the quality requirements of enterprise class systems pursuant to stringent specifications required by various high speed and high compute applications. We also conduct design verification testing of hardware and firmware as well as system integration and reliability testing. We work to continually improve our test routines and associated software and, for our specialty memory products, we have developed a high-volume, fully automated reliability testing and screening capability substantially beyond standard industry practices. These practices enable us to reduce the occurrence of early life failures and weak module fallout which can save our customers from the often significant expenses associated with replacing products that fail after their field deployment.
Customers
We believe our customers rely on us as a strategic supplier due to our application-specific products, quality and technical support, our global footprint and our ability to provide locally manufactured products. We also provide customized, integrated supply chain services to certain customers to assist them in the management and execution of their procurement and distribution processes. We believe our close collaboration with customers, customer-specific designs, long-lifecycle solutions and proprietary supply chain services create significant customer attachment. Our products are generally manufactured on a build-to-order basis. Our sales are made primarily pursuant to customer purchase orders and are not based on long-term supply agreements.
We sell our products and solutions directly to a diversified base of local and global OEM, enterprise and government customers. In our Memory Solutions group, we sell to OEM customers in industrial, government, networking and communications, enterprise storage, computing and mobile, as well as other vertical markets. In IPS, we sell Penguin Computing products to enterprise and government customers in financial services, energy, government, hyper-scale and education end markets. As part of Penguin Edge, we sell SMART EC and SMART Wireless products to OEM customers in government, telecommunications infrastructure, industrial, network edge computing and transportation markets as well as in IoT endpoint applications such as smart city, digital health and smart office markets. Our LED Solutions group sells LED chips and components to manufacturers, distributors and other customers. Our LED products and solutions are sold on a channel and direct basis to a diversified base of local and global OEM and contract manufactures supporting a broad range of customers.
We also utilize third-party sales representatives who generally do not maintain a product inventory. A substantial portion of our LED Solutions products are sold to distributors, who stock inventory and sell our products to their customer base, which includes value added resellers, manufacturers who incorporate our products into their own manufactured goods and ultimate end users of our products. Similar to other global semiconductor component suppliers, our LED Solutions business has historically experienced, and in the future may experience, seasonally lower sales during the earlier part of the calendar year.
In 2021, 2020 and 2019, sales to our ten largest end customers (including sales to contract manufacturers or ODMs at the direction of such end customers) accounted for 65%, 66% and 73% of total net sales, respectively. See “Item 8. Financial Statements and Supplementary Data – Notes to Consolidated Financial Statements – Concentrations.”
Suppliers
To address the needs of our customers, we have developed and maintained relationships with leading suppliers located in Asia, Europe and the Americas. Our semiconductor suppliers include many of the world’s largest memory manufacturers including Samsung Semiconductor, Inc., Micron Technology, Inc., SK hynix, Inc. and Kioxia Holdings Corporation (formerly Toshiba Memory Corporation). They also include some of the world’s largest providers of computing, communications and graphics processers, including Intel Corporation, Advanced Micro Devices, Inc., NVIDIA Corporation and Qualcomm Incorporated; as well as providers of subsystems including Intel and Giga-Byte Technology Co., Ltd.; networking products including Artista Networks, Inc. and suppliers of software products. We frequently work jointly with our suppliers in bidding for customers’ design-in opportunities. We also work closely with our suppliers to better ensure that materials are available and delivered on time. Our established global network of materials sourcing helps to ensure that our pricing remains competitive and that we are able to provide a stable source of supply for our customers.
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We believe that our longstanding relationships with leading suppliers put us in a favorable position to procure sufficient quantities of materials, including during periods of industry shortages. Our flexible and responsive global manufacturing capabilities, inventory management systems and global IT system allow us to cost-effectively move materials from one site to another and often deploy what might otherwise be excess inventory among other products and customers. In our Memory Solutions and IPS businesses, we purchase a significant portion of our materials from suppliers on a purchase order basis and generally do not have long-term commitments from our suppliers. Our LED Solutions business has a number of supply agreements with third-party providers for LED chips in wafer or discret e form.
The COVID-19 pandemic, as well as a rebound in general economic conditions, has resulted in significant supply shortages in the overall supply chain. These shortages may impact our ability to manufacture products for our customers and may result in rising prices of the materials we need to manufacture our products. Many of these issues relate to reduced investment in capacity by our suppliers, as well as local government policies that have affected the ability of employees of our suppliers to work. Additionally, the impact over the past year on airline freight capacity affected the timeliness of some deliveries and increased our freight cost.
Sales, Support and Marketing
We primarily sell our products directly to global OEMs and to enterprise, government and other end customers located across North America, Latin America, Asia and Europe. Our sales and marketing efforts are conducted through an integrated process incorporating our direct sales force, e-commerce, customer service representatives and our on-site field application engineers (“FAE”) with a network of independent sales representatives, distributors, integrators and resellers. Our sales and marketing efforts also include a high level of involvement from our senior executives. Larger customers are also often supported by dedicated sales and support teams.
Our on-site FAEs work closely with our sales team to provide product design support to our customers. Our FAEs collaborate closely with our customers, providing us with insight into their business models and product roadmaps and allowing us to identify opportunities at an early stage to help grow our business. The combination of our integrated sales network with our FAEs enables us to be more responsive and successful in navigating through each customer’s unique and oftentimes complex design qualification or bid proposal processes.
Our marketing activities include advertising in technical journals, publishing articles in leading industry periodicals, hyper-scale, periodic webinars, publishing white papers, electronic newsletters, blogs and utilizing direct email solicitation. In addition, we participate in many industry trade shows worldwide and have active memberships in various industry organizations, including the Joint Electron Device Engineering Council (“JEDEC”), SD Card Association: Storage Networking Industry Association, Gen-Z Consortium, OpenCAPI Consortium, CXL Consortium, Trusted Computing Group, OCP; Sensor Open Systems Architecture and Peripheral Component Interconnect Special Interest Group.
Research and Development
The timely development of new products and services is essential to maintaining our competitive position. Our primary research and development activities are conducted at our research and development centers in the United States (Durham, North Carolina; Fremont, California; Irvine, California; Newark, California; Tempe, Arizona and Tewksbury, Massachusetts) and in Atibaia, Brazil; Huizhou, China; India (Bangalore and Kochin); New Taipei City, Taiwan; Penang, Malaysia; and Seongnam-City, South Korea. Our research and development activities are focused on driving innovation in our products and services as well as continuous process improvement for our procurement, test and manufacturing. Our product development in Memory Solutions includes innovations for next generation DRAM products, including DDR5, mobile DRAM, hybrid memories such as hybrid volatile and non-volatile DRAM (“NVDIMM”), enterprise memory and Flash-based products, such as eMMC and eMCP, as well as associated firmware development. Our research and product development for IPS includes server selection and occasional design; designs to enable integration of racks and clusters; storage system design and evaluation; high performance network design; component testing for switches; cables and interface devices; development of software-defined storage systems; and embedded computer boards and systems. In our LED Solutions group our research and development includes innovations for next generation LED products including chips, packages for high power general illumination, packages for next generation direct view video displays and packages for specialty applications such as horticulture lighting, architectural, torch, emergency vehicle and other applications. We plan to continue to devote research and development efforts to the innovation and design of these and other new products which address the requirements of our customers, with a focus on the faster growing markets.
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We continue to develop a broad offering of Flash-based products targeting the industrial, government, communications and enterprise storage and compute markets. Our engineering team is focused on firmware development, systems engineering and integration, system and platform validation and applications and product and reliability engineering for new products. In addition, in order to take advantage of local regulations and government incentive programs for the growing mobile memory market in Brazil, we have invested substantial financial and management resources to expand our Brazil research and development capabilities to enable us to develop a broad offering of Flash-based products for the local market. We are also working on expanding our offering for IoT and IIoT products and, through our acquisition of SMART Wireless, we now have over 40 design engineers combined in our two locations in India.
Our advanced engineering and design capabilities allow us to address our customers’ increasingly complex needs. We design our products to be compatible with existing industry standards and, where appropriate, develop and promote new standards or provide custom solutions to meet customers’ requirements. An important aspect of our research and development effort is understanding the challenges presented by our customers’ requirements and addressing them by utilizing our industry knowledge, proprietary technologies and technical expertise. By working closely with our customers and suppliers, we are able to deliver technically advanced products designed to meet customer-specific needs with competitive solutions to satisfy our customers’ memory, storage; and compute requirements, shorten their time-to-market; and enhance the performance of our customers’ end products and applications.
Research and development expense was $49.3 million, $52.1 million and $47.9 million in 2021, 2020 and 2019, respectively. As of August 27, 2021, we had 448 research and development personnel worldwide.
Competition
Within our diversified Memory Solutions, IPS and LED Solutions businesses, we compete with numerous global and local companies. The principal competitive factors in our markets include the ability to meet customer-specific requirements and provide high product quality, strong technical support, technologically advanced products and services, advanced testing capabilities, flexible and global delivery options, reliable supply and reasonable pricing.
In our Memory Solutions business, we primarily compete against memory module providers, and to a lesser extent, large memory semiconductor manufacturers that utilize a portion of their capacity to manufacture memory modules. In Brazil, other than the large, global semiconductor manufacturers, our competitors are generally much smaller in scale than we are in terms of revenue and capabilities for manufacturing and for research and development. To a lesser degree, we compete with companies that import DRAM and Flash components and products. Within IPS, Penguin Computing competes primarily with global manufacturers of HPC products and services. In SMART EC products, we primarily compete with makers of ruggedized computer boards and systems as well as makers of edge computing devices. In SMART Wireless products, we primarily compete with providers of SOMs and SBCs. Within LED, we compete with companies that manufacture and/or sell nitride-based LED chips and those manufacturers of LED components concentrated primarily in indoor and outdoor commercial lighting; specialty lighting, including torch lamps (flashlights); color changing architectural lighting; signs and signals; and transportation.
Our principal competitors include:
• Providers of specialty memory products;
• Memory semiconductor manufacturers that also manufacture DRAM modules and Flash products;
• Local Brazil manufacturers of DRAM modules and Flash products and manufacturers of memory integrated circuits;
• A broad set of companies in supply chain services, including distributors and third party logistics providers;
• Providers of compute and storage systems;
• Semiconductor and subsystem manufacturers;
• Providers of embedded computing platforms and systems;
• Providers of SOMs and SBCs; and
• LED product manufacturers.
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Some of our global competitors are large international companies that have substantially greater financial, technical, marketing, distribution and other resources, as well as greater name recognition and longer-standing relationships with customers and suppliers than we do. These competitors are generally focused on higher-volume memory, storage or compute products that are manufactured to industry standard specifications, and they have limited customization and service capabilities. We believe that our close collaboration with customers, customer-specific designs, long-lifecycle solutions, superior products and proprietary supply chain services create significant customer attachment that may provide an advantage when competing with the large international companies.
In addition, some of our competitors are also our suppliers or customers. See ”Item 1A. Risk Factors – Risks Related to Our Business – We depend on a select number of customers for a significant portion of our revenue” and “– We depend on a small number of sole or limited source suppliers.”
Intellectual Property
Intellectual property is an important aspect of our business, and we actively seek to protect and leverage our intellectual property to promote our business interests. For example, as of August 27, 2021, we own or exclusively license approximately 1900 patents that expire from 2021 to 2039. We continually review our development efforts to assess the existence and patentability of new intellectual property, which we actively seek to protect as appropriate. We believe the duration and scope of our most relevant patents are sufficient to support our business, which as a whole is not significantly dependent on any particular patent or other intellectual property rights.
To protect our intellectual property, we rely upon a combination of patent, copyright, trade secret and trademark laws, contractual restrictions such as nondisclosure agreements, licenses and intellectual property assignment agreements and policies and procedures. We pursue the registration of our domain names and trademarks in various jurisdictions, and we register trademarks in the United States and other countries as warranted. We maintain a policy requiring our employees, contractors, consultants and other third parties to enter into confidentiality and proprietary rights agreements to control access to our proprietary information. Additionally, we actively monitor data on our computer networks to assure compliance with data use policies. These laws, procedures and policies provide only limited protection, and any of our intellectual property rights may be challenged, invalidated, infringed or misappropriated. Furthermore, the laws of certain countries do not protect proprietary rights to the same extent as the laws of the United States, and we therefore may be unable to protect our proprietary technology in certain jurisdictions.
While many of our products contain proprietary aspects and are protected by patents, some of our products are built around mature industry standards and have less patent protection. For these products, we rely on trade secrets and know-how to protect our proprietary interests. The absence of patent protection, however, means that we cannot prevent our competitors from reverse-engineering and duplicating those products. Moreover, some of our product solutions incorporate open source software that is available under public licenses such as the GNU General Public License. We maintain policies and procedures to evaluate open source software used in our products and seek to minimize the risk of our proprietary intellectual property being inadvertently pulled under such licenses.
Human Capital
At SGH, we put people first, nurturing a culture that supports creativity and growth. We value our employees, and we understand the importance of their development and enhancement. We believe that at the best workplaces, employees feel inspired, engaged, valued and included. As part of our “people first” mindset, we invest in key initiatives including, but not limited to, talent development, diversity and inclusion and physical and mental health.
Employees
As of August 27, 2021, we employed 3,926 employees in locations across the globe, including, among others, the United States, China, Malaysia and Brazil. We have never experienced a work stoppage in any of our locations worldwide, and we consider our employee relations to be good.
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Employee Engagement and Development
Continuous growth requires continued investment in people, innovation and new opportunities. We are always improving upon our communications between employees and management teams to drive our company goals and enhance the employee experience. We aim to develop capable leadership that can meet the challenges of business growth while instilling a supportive and inclusive company culture. At all locations, we provide our employees with performance assessments and evaluations. Where applicable, employees also have access to coaching programs, as well as job specific training. We also provide our employees with training on workplace culture and enrichment through our learning platform, covering topics such as harassment, creating healthy work environments, inclusion and global ethics and compliance.
Diversity, Equity and Inclusion
We are committed to diversity, equity and inclusion, and we believe that it starts at the top, where half of our executive team has been reorganized to include leaders from diverse backgrounds. We value diversity and inclusion and are proud that our employees represent various races, religious beliefs, genders, ages, national origins and points of view. We know that our diverse teams bring valuable perspectives and backgrounds to our company, helping us consistently raise the bar and drive innovation forward. This philosophy applies to all levels of our organization, including our executive leadership team and our Board of Directors.
We are committed to providing employees with an inclusive and nondiscriminatory work environment, which is outlined in our non-discrimination policy. Through this policy, we articulate people-oriented and fair treatment principles in the recruitment, promotion, performance evaluation, compensation, training and retirement of all employees.
We are committed to creating a working environment with equal opportunity employment so that workers are treated with fairness and respect. In the coming years, we look forward to expanding on our strategy to nurture a diverse and inclusive environment by focusing on initiatives such as employee resource groups and recruiting more diverse leadership.
Wellness, Health and Safety
We strive to provide and maintain a safe work environment, as well as to promote overall wellness among employees. We prioritize employee wellbeing throughout our operations as well as through physical fitness programs. We also support mental health and wellness through our Employee Assistance Program, which offers free and confidential counseling and support for our employees and members of their households.
In 2020, as the global pandemic impacted every person, we made it a priority to ensure that our employees and their families were safe and healthy. In our U.S. offices in Newark, Fremont and Tempe, we provided free weekly COVID-19 testing to all employees, as well as diligently maintained contact tracing to track and prevent spread. In Penang, Malaysia, automated temperature and facial recognition systems were implemented to ensure that all on-site employees are healthy and protected. For our essential employees who worked on-site at our facilities, we took additional measures to ensure their ongoing health and safety. We distributed and trained users on the correct use of personal protective equipment (PPE) and maintained social distancing, sanitization and employee awareness and communication.
Compensation and Benefits
We offer compensation and benefits programs designed to inspire and reward our employees. Our bonus program both links employee compensation to SGH’s business performance and includes a focus on individual performance. We also offer an Employee Stock Purchase Plan, equity compensation, retirement benefits and, in the U.S., a 401(k) match program.
Brazil Local Manufacturing Requirements and Incentives
The Brazilian government has a long history of utilizing local manufacturing requirements to promote job creation, sustain economic growth and increase the competitiveness of various domestic industries. These requirements have been important in the development of numerous industries in Brazil, including automotive, oil and gas, aerospace and healthcare. Beginning in 1991, local manufacturing regulations were introduced to vitalize Brazil’s IT industry as government programs began to be implemented to incentivize manufacturers to establish and expand their operations in Brazil and to incentivize OEMs to apply and utilize locally manufactured components for their products. Since 2011, we have participated in a number of government investment incentive programs.
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In connection with these programs, we have recognized financial credits as a reduction of certain research and development expenses. In 2021 and 2020, we reduced our operating expenses as a result of these incentive programs by $30.0 million and $6.4 million, respectively. The financial credits available through the incentive program are currently set to expire in January 2022. The elimination of or a reduction in the incentives for local manufacturing, or our inability to secure the benefits of these regulations, could significantly reduce the demand for, and the profit marg ins on, our products in Brazil. See “Item 1 A. Risk Factors – Risks Related to Our International Operations – We depend on Brazil markets for a significant portion of our sales” and “ – Our success in part depends on incentives in Brazilian laws for local manufacturing of electronics products. The elimination of or a reduction in the incentives for local manufacturing, or our inability to secure the benefits of these regulations, could significantly reduce our profitability for products in Brazil .”
Environmental Regulations
Our operations and properties are subject to various federal, state, local, foreign and international environmental laws and regulations governing, among other things, environmental licensing and registries, protection of flora and fauna, air and noise emissions, use of water resources, wastewater discharges, management and disposal of hazardous and non-hazardous materials and wastes, reverse logistics (take-back policy) and remediation of releases of hazardous materials. The presence of lead in quantities not believed to be significant have been found in the ground under one of the multi-tenant buildings we lease in Brazil. While we did not cause the contamination, we may be held responsible if remediation is required, although we may be entitled to seek indemnification from the responsible parties under Brazilian laws and from our lessor under our lease. In addition, as part of the acquisition of Cree’s LED business, we acquired facilities in China, which could present similar issues. We cannot be certain that identification of presently unidentified environmental conditions, more vigorous enforcement by regulatory agencies, enactment of more stringent laws and regulations or other unanticipated events will not arise in the future and give rise to material environmental liabilities and related costs which could have a material adverse effect on our business, financial condition and results of operations.
Available Information
Our address in the Cayman Islands is c/o Maples Corporate Services Limited, P.O. Box 309, Ugland House, Grand Cayman, Cayman Islands, KY1-1104, Cayman Islands. Our principal U.S. executive offices are located at 1390 McCarthy Boulevard, Milpitas, California 95035. Our telephone number at this address is (866) 977-4446. Our principal website is http://www.sghcorp.com. The information contained on, or that can be accessed through, our website is not a part of this Annual Report.
We make available, free of charge through our website, our annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K, and amendments to those reports, filed or furnished pursuant to Sections 13(a) or Section 15(d) of the Securities Exchange Act of 1934, as amended, as soon as reasonably practicable after they have been electronically filed with, or furnished to, the SEC.
The public may read and copy any materials we file with the SEC at the SEC’s Public Reference Room at 100 F. Street, NE, Washington, DC 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC maintains an internet site (http://www.sec.gov) that contains reports, proxy and information statements and other information regarding issuers that file electronically with the SEC.
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