What changed in this filing

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Item 2. Management’s Discussion and Analysis

2022-01-04 compared with 2021-07-06 · 158 added, 145 removed, 23 unchanged (93% of the section changed)

Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the condensed consolidated financial statements and the notes to those statements included elsewhere in this Quarterly Report on Form 10-Q, and with the consolidated financial statements and management’s discussion and analysis of our financial condition and results of operations in our Annual Report on Form 10-K for our fiscal year ended August 28, 2020 (our “Annual Report”).

The following discussion and analysis should be read in conjunction with the consolidated financial statements and accompanying notes included in our Annual Report on Form 10-K for the year ended August 27, 2021.

This discussion contains forward-looking statements that involve risks and uncertainties.

Our actual results could differ materially from those contained in these forward-looking statements due to a number of factors, including those discussed under the caption “Risk Factors” in our Annual Report and elsewhere in this report.

See also “Cautionary Note Regarding Forward-Looking Statements” at the beginning of this report.

SMART Global Holdings businesses are leading designers and manufacturers of electronics for computing, memory and specialty LED solutions.

The Company specializes in application-specific product development and support for customers in enterprise, government, OEM and other distribution and sales channels.

Customers rely on SMART as a strategic partner with the highest quality technology products, customer service, technical support, and worldwide supply chain and logistics excellence.

The Company targets customers in markets such as computing, including edge computing and high performance computing, communications, storage, networking, mobile, industrial automation, internet of things, industrial internet of things, government, military and lighting.

The Company operates in four segments:

Specialty, Brazil, IPS, and LED.

Recent Developments

Our actual results could differ materially from those contained in these forward-looking statements due to a number of factors, including those discussed below and elsewhere in this report.

See also “Cautionary Note Regarding Forward-Looking Statements.”

Our fiscal year is the 52 or 53-week period ending on the last Friday in August.

Fiscal 2022 and 2021 each contain 52 weeks.

All period references are to our fiscal periods unless otherwise indicated.

All financial information for our subsidiaries in Brazil is included in our consolidated financial statements on a one-month lag because their fiscal years end on July 31 of each year.

All tabular dollar amounts are in millions, except per share amounts.

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 the LED Business 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

On March 1, 2021, pursuant to the CreeLED Purchase Agreement, the Company acquired the Cree LED Business and assumed certain liabilities related to Cree’s LED Business.

The purchase price for the LED Business consisted of (i) a payment of $50 million in cash, subject to customary adjustments, (ii) the Purchase Price Note, (iii) an earn-out payment of up to $125 million based on the revenue and gross profit performance of the LED Business in Cree’s first four full fiscal quarters following the closing, with a minimum payment of $2.5 million, payable in the form of an unsecured promissory note to be issued by the Company, and (iv) the assumption of certain liabilities.

The Purchase Price Note bears interest at LIBOR plus 3.0% and is due on August 15, 2023.

The Earnout Note will begin to bear interest upon completion of the Earnout Period at LIBOR plus 3.0% and is due on March 27, 2025.

In connection with this transaction, Cree and the Company also entered into certain ancillary and related agreements, including (i) an Intellectual Property Assignment and License Agreement, (ii) a Transition Services Agreement, (iii) a Wafer Supply and Fabrication Services Agreement, and (iv) a Real Estate License Agreement.

In March 2021, we completed the acquisition of the LED business (“LED Business”) of Cree, Inc., a corporation now known as Wolfspeed, Inc.

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.

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 a significant disruption of our operations as a result of the COVID-19 pandemic, the pandemic resulted in reduced sales volumes of certain product lines within IPS in the second half of fiscal 2020 as well as in the first three quarters of fiscal 2021.

COVID-19 also disrupted our product development, marketing and corporate development activities.

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, such reduced sales volumes may continue or worsen 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.

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.

2 unchanged sentences

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.

The COVID-19 pandemic also disrupted our product development, marketing and corporate development activities.

Factors Affecting Our Operating Performance

Our operating expenses have grown in recent periods as we drive innovation, expand our products and services portfolio and invest in greater operational capabilities to support our growth.

Our total operating expenses grew in 2021, primarily as a result of the addition of the LED Solutions business.

We expect to continue to see increased operating expenses in 2022 as we record a full year of operating expenses for the LED Solutions business, continue to increase our investment in new products and services for the IPS business and potentially experience the phase-out of certain Brazil financial tax credits, which would result in an increase in operating expense in Memory Solutions.

Macro-economic Demand Factors.

Our business segments each have their own unique set of demand factors.

Demand in our Memory Solutions group is driven by end-market demand from OEMs for customer-specific solutions in vertical markets such as industrial, government, networking, high-performance compute and enterprise storage, as well as from OEMs for memory modules used in desktop and notebook computers, smartphones, IoT and SSD products in Brazil.

In addition, macro-economic factors specific to the Brazil economy affect this segment, given our sales and operations in that market.

Our IPS business is driven by demand for high compute solutions across AI and machine learning initiatives, as well as traditional workload optimization and efficiency applications.

Finally, demand for our LED products is derived from targeted end-market applications, such as general high-power and mid-power lighting and specialty lighting, such as video and horticulture applications.

We believe our diversified business segments may provide a natural hedge against downturns in any particular industry although broader macro-economic trends, such as the COVID-19 pandemic, can adversely affect all three segments concurrently.

Shifts in the Mix of Our Revenue.

Shifts in the mix of revenue from our operating segments, which can vary significantly from period to period, can impact our business and operating results, including gross and operating margins.

For example, our Memory Solutions group, while not party to long-term fixed purchasing commitments, has nonetheless historically seen relatively stable demand and margins.

By contrast, our IPS group has shown solid growth, but is subject to greater variability in its sales and margin profile from period to period, as recognition of revenue is tied to customer decisions as to the completion of delivery and system go-live events, and margin is driven by the extent to which higher margin software and managed services comprise IPS sales.

In addition, while we have experienced favorable demand and overall margin uplift compared to the rest of our businesses from our LED Solutions group to date, this group is the newest segment of our business, and we may be subject to unforeseen changes in its business and operating results.

Our resource commitments and planning for each segment are relatively fixed in the short term and, as such, variability in expected revenue mix will have direct implications for our operating income and margins.

Our Ability to Identify, Complete and Successfully Integrate Acquisitions.

A substantial portion of our growth over the last several years has been driven by acquisitions, and we intend to continue to use corporate development as an engine for growth.

Within our existing segments, we plan to pursue acquisitions to expand features and functionality, expand into adjacent businesses and grow our customer base and geographic footprint.

From time to time, we may seek to expand our addressable market by

entering new business segments where, as we did with our LED B usiness, we identify a business opportunity at scale with a path to being accretive to our overall operations in the near term.

If we are unable to identify and complete attractive acquisitions, we may not be successful in growing our revenue and/or expanding our margins.

Any acquisitions we do complete may require us to raise debt or equity financing or may subject us to unforeseen liabilities or operational challenges that in turn impede our ability to realize the expected returns on our investment.

Disruptions in Our Supply Chain May Adversely Affect Our Businesses.

We depend on third-party suppliers for key components of our products, such as commodity DRAM components from offshore foundries that we use in our specialty memory products and third-party wafers that we use in our memory and LED businesses.

We have adopted this “fab-lite” business model to reduce our capital expenditures and operating expenses, while affording greater flexibility in adapting to shifts in demand and other market trends.

In recent periods, our fab-lite business model has contributed significantly to margin expansion in our overall business.

However, our reliance on third-party manufacturers exposes us to risk of supply chain disruption and lost business.

For example, the current global semiconductor shortage has adversely affected our operating results.

If such disruptions worsen or are prolonged, or if there is meaningful disruption in our supply arrangement with any of our third-party suppliers, our operating results and financial condition could be adversely affected.

Results of Operations

The following is a summary of our results of operations for the three and nine months ended May 28, 2021 and May 29, 2020:

Three months ended

Nine Months Ended

(in thousands, other than percentages and per share data)

Condensed Consolidated Statements of Operations:

Memory Solutions

Intelligent Platform Solutions

LED Solutions

Total net sales

Cost of sales

2 unchanged sentences

Selling, general and administrative

Change in estimated fair value of acquisition-related contingent consideration

Change in fair value of contingent consideration

Total operating expenses

Income from operations

Other expense, net:

Operating income

Non-operating (income) expense:

Interest expense, net

Other expense, net

Total other expense

Income (loss) before income taxes

Provision for income taxes

Net income (loss)

Other non-operating (income) expense

Total non-operating (income) expense

Income before taxes

Income tax provision

Net income attributable to noncontrolling interest

Net income (loss) attributable to SGH

Earnings per share:

Shares used in computing earnings per share:

* Summations may not compute precisely due to rounding.

(1) Includes share-based compensation expense as follows:

Cost of sales

Net income attributable to SGH

Summations of percentages may not compute precisely due to rounding.

Net Sales, Cost of Sales and Gross Profit

Net sales increased by $178.2 million, or 61.1 %, in the first quarter of 2022 compared to same period in the prior year, primarily due to $111.9 million of revenue in the first quarter of 2022 from our recent acquisition of the LED Business and to strong performance in our IPS and Memory Solutions businesses.

IPS net sales increased by $52.8 million, or 80.1%, primarily due to higher volumes of sales in our Penguin Computing business.

Memory Solutions sales increased by $13.6 million, or 6.0%, primarily due to a 13.5% higher volume of DRAM products and a 34.0% increase in average selling prices for Brazil DRAM products.

Cost of sales increased by $108.7 million, or 45.5%, in the first quarter of 202 2 compared to the same period in the prior year , primarily due to our acquisition of the LED Business and from higher cost of materials and production costs due to a higher level of sales for our IPS and Memory Solutions segments .

Gross profit margin increased to 26.0% in the first quarter of 2022 compared to 18.0% in the first quarter of 2021 primarily due to inclusion of higher margin LED Solutions products in 2022 as well as process and efficiency improvement in the Memory Solutions and IPS segments compared to the prior year.

Segment Operating Income

Three months ended

November 26, 2021

November 27, 2020

Segment operating income:

Memory Solutions

Intelligent Platform Solutions

LED Solutions

Total segment operating income

Share-based compensation expense

Amortization of acquisition-related intangibles

Change in fair value of contingent consideration

Total unallocated

Consolidated operating income

Percentages represent segment operating income as a percentage of segment net sales.

In the fourth quarter of 2021, we reorganized SGH into three business units:

Memory Solutions, Intelligent Platforms Solutions and LED Solutions.

Two of our previous segments, specialty memory products and Brazil products, have been combined to become Memory Solutions.

Intelligent Platform Solutions was formerly referred to as specialty compute and storage solutions.

All prior year information in the table above has been revised to reflect the change to our three reportable segments.

Memory Solutions operating income increased by $15.8 million, or 75.8%, in the first quarter of 2022 compared to the same period in the prior year, primarily due to higher sales and gross profit, partially offset by higher operating expenses mainly driven by higher research and development expense due to less Brazil financial credits.

IPS operating income increased by $11.3 million, or 392.2%, in the first quarter of 2022 compared to same period in the prior year, primarily due to higher sales and gross profit, partially offset by higher operating expenses mainly driven by personnel-related expenses due to increased headcount to support the revenue growth.

LED Solutions operating income of $18.3 million in the first quarter of 2022 was due to our acquisition of the LED Business in March 2021.

Operating and Non-operating (Income) Expense

Research and Development

Selling, general and administrative

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

Cost of sales

Research and development expense increased by $10.7 million, or 153.5%, in the first quarter of 2022 compared to the same period in the prior year, primarily due to additional costs from the acquisition of the LED Business as well as lower Brazil financial credits.

We expect research and development expense to increase in absolute dollars in 2022 as compared to 2021 primarily because we will include the full year of operations for our LED Solutions segment and may include the effects of the termination of certain Brazil financial credits, currently scheduled to occur in January 2022.

Selling, General and Administrative

Three and Nine Months Ended May 28, 2021 as Compared to the Three and Nine Months Ended May 29, 2020

Net sales increased by $156.4 million, or 55.6%, during the three months ended May 28, 2021 compared to the same period in the prior year, and by $208.1 million, or 25.2%, during the nine months ended May 28, 2021 compared to the same period in the prior year.

The increase was due in large part to $101.8 million of revenue from our LED business acquired in March 2021.

Net sales were positively impacted by an increase in IPS product sales of $35.0 million, or an increase of 57.4%, and $48.9 million, or an increase of 24.7%, for the three- and nine-month periods, respectively, primarily due to increased volume of sales with one of our largest customers in the IPS segment.

In addition, our sales of Brazil products increased by $25.8 million and $42.4 million, or 27.8% and 14.9%, respectively, for the three- and nine- month periods, primarily due to higher volume of mobile memory and DRAM revenue and higher average selling prices for mobile memory of 28.7% and 48.3%, respectively, resulting from a change in product mix.

Cost of Sales

Cost of sales increased by $126.2 million, or 55.6%, during the three months ended May 28, 2021 compared to the same period in the prior year, and by $177.6 million, or 26.7%, during the nine months ended May 28, 2021 compared to the same period in the prior year.

The increase in the three- and nine-month periods was primarily due to higher cost of materials of $92.4 million and $140.7

million or 48% and 25%, respectively, due to the higher level of sales, as well as additional costs for the new LED business, as well as higher production costs related to the increased revenue.

Included in the cost of sales increases were favorable foreign exchange impacts of $ 1.4 million and $ 6.3 million for the three and nine-month periods, respectively, due to locally sourced cost of sales in Brazil .

Gross margin remained level at 19.3% during both three-month periods, and decreased to 18.4% during the nine months ended May 28, 2021 compared to 19.4% for the same period in the prior year, primarily due to higher material costs for our Brazil and IPS products.

Research and Development Expense

Research and development (“R&D”) expense increased $2.3 million, or 15.8%, during the three months ended May 28, 2021 compared to the same period in the prior year, and decreased $11.5 million, or 26.1%, during the nine months ended May 28, 2021 compared to the same period in the prior year.

The change during the three- and nine-month periods was primarily due to $7.5 million additional costs from our new LED business, as well as higher personnel-related expenses and depreciation.

The higher expense was partially offset by $8.2 million and $22.2 million in the three- and nine-month periods, respectively, of Brazil financial credits resulting from amendments to the IT law implemented in April 2020.

For additional information, see Note 1(i) in our Notes to Unaudited Condensed Consolidated Financial Statements.

Included in the R&D expense increases/decreases were unfavorable foreign exchange impacts of $0.2 million and $2.7 million for the three- and nine-month periods, respectively.

Selling, General and Administrative Expense

Selling, general and administrative (“SG&A”) expense increased by $18.7 million, or 63.0%, during the three months ended May 28, 2021 compared to the same period in the prior year, and $26.3 million, or 28.6%, during the nine months ended May 28, 2021 compared to the same period in the prior year.

The increases were primarily $9.7 million additional costs from our new LED business, as well as higher share-based compensation expense of $2.3 million and $8.0 million in the three- and nine-month periods, respectively, resulting from additional grants, as well as higher personnel-related expenses, professional services, acquisition expenses and intangible amortization expense.

For additional information on share-based compensation expense, see Note 9 in our Notes to Unaudited Condensed Consolidated Financial Statements.

Included in the SG&A expense increases were favorable foreign exchange impacts of $0.2 million and $1.3 million for the three- and nine-month periods, respectively.

Other Income (Expense)

Interest expense, net increased $2.0 million, or 63.2%, during the three months ended May 28, 2021 compared to the same period in the prior year, and $0.8 million, or 7.1%, during the nine months ended May 28, 2021 compared to the same period in the prior year, primarily due to higher interest expense resulting from the issuance of the Purchase Price Note resulting from the LED acquisition, as well as our convertible senior notes.

For additional information, see Notes 2 and 7 in our Notes to Unaudited Condensed Consolidated Financial Statements.

Other income (expense), net decreased by $3.0 million and $15.5 million for the three- and nine-month periods, respectively.

The decrease in the nine-month period was primarily due to $6.8 million extinguishment loss of long-term debt and $7.7 million mark-to-market losses on our Capped Calls in the second quarter of fiscal 2020, as well as foreign currency losses.

Provision for Income Taxes

Income tax expense includes a provision for federal, state and foreign taxes based on the annual estimated effective tax rate applicable to SMART, adjusted for certain discrete items which are fully recognized in the period they occur.

Provision for income taxes increased by $1.3 million and $4.1 million for the three and nine months ended May 28, 2021, respectively, compared to the same period in the prior year, primarily due to the profits and related taxes in non-U.S.

jurisdictions.

As of May 28, 2021, SMART has a full valuation allowance for our net deferred tax assets associated with our U.S.

The amount of the deferred tax asset considered realizable could be adjusted if significant positive evidence increases.

Determining the consolidated provision for income tax expense, income tax liabilities and deferred tax assets and liabilities involves judgment.

SMART calculates and provides for income taxes in each of the tax jurisdictions in which it operates, which involves estimating current tax exposures as well as making judgments regarding the recoverability of deferred tax assets in each jurisdiction.

The estimates used could differ from actual results, which may have a significant impact on operating results in future periods.

Selling, general and administrative expense increased by $14.5 million, or 38.1%, in the first quarter of 2022 compared to the same period in the prior year, primarily due to additional costs from the acquisition of the LED Business as well as higher personnel-

related expenses due to increased headcount , professional services and acquisition expenses associated with the acquisition.

We expect selling, general and administrative expense to increase in absolute dollars in 2022 as we include the full year of operations for our LED Solutions segment.

Change in Fair Value of Contingent Consideration

Our acquisition of the LED Business included contingent consideration, which we estimated the fair value as of the date of acquisition to be $28.1 million.

During the first quarter of 2022, we recorded a charge of $17.2 million to adjust the amount of contingent consideration to its fair value as of November 26, 2021.

Financial Information – Item 1.

Financial Statements – Notes to Consolidated Financial Statements – Business Acquisition – LED Business.”

Other Non-operating (Income) Expense

Other non-operating (income) expense in the first quarters of 2022 and 2021 primarily reflected foreign currency (gains) and losses relate primarily to our Brazil operating subsidiaries, as well as higher interest expense mainly due to the seller note from the LED acquisition.

Income Tax Provision

Our provision for income taxes increased by $4.5 million in the first quarter of 2022 compared to the same period in the prior year, primarily due to higher income in non-U.S.

jurisdictions subject to tax.

Liquidity and Capital Resources

Nine Months Ended

(in thousands)

Cash provided by operating activities

Cash used in investing activities

Cash provided by financing activities

Effect of exchange rate changes on cash and cash equivalents

Net increase in cash and cash equivalents

At May 28, 2021, we had cash and cash equivalents of $189.0 million, of which approximately $164.2 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, see Note 7 in our Notes to Unaudited Condensed Consolidated Financial Statements.

On March 1, 2021, as part of the acquisition of the LED Business, we paid Cree $50.0 million in cash and issued Cree a $125 million Purchase Price Note.

Cree also has the potential to receive an earn-out payment of up to $125 million based on the revenue and gross profit performance of the LED Business during the Earnout Period with a minimum payment of $2.5 million, payable in the form of an Earnout Note.

The Purchase Price Note and the Earnout Note, if earned and issued, will accrue interest at a rate of three-month LIBOR plus 3.0% with interest paid every three months, and one bullet payment of principal and all accrued and unpaid interest will be payable on each of the notes’ respective maturity dates.

The Purchase Price Note will mature on August 15, 2023, and the Earnout Note will mature on March 27, 2025.

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, acquisitions and IT infrastructure and software upgrades.

At November 26, 2021, we had cash and cash equivalents of $233.1 million, of which $181.3 million was held outside of the United States.

Our principal uses of cash and capital resources have been acquisitions, debt service requirements as described below, capital expenditures, research and development expenditures and working capital requirements.

We expect that future capital expenditures will focus on expanding capacity of our operations, expanding our research and development 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.

We do not enter into investments for trading or speculative purposes.

During the nine months ended May 28, 2021, cash provided by operating activities was $105.3 million.

The primary factors affecting our cash flows during this period were $82.6 million of non-cash related expenses, $21.5 million change in our net operating assets and liabilities, and $1.2 million of net income.

The $21.5 million change in net operating assets and liabilities consisted of increases of $15.4 million in accounts receivable, $66.5 million in inventory and $14.2 million in prepaid expenses and other assets and a decrease of $4.5 million of operating lease liabilities, offset by increases of $116.2 million of accounts payable and $5.9 million in other current and long-term liabilities.

The increase in accounts receivable was due to higher gross sales, and increases in both inventory and accounts payable were primarily due to higher inventory along all business areas.

During the nine months ended May 29, 2020, cash provided by operating activities was $62.2 million.

The primary factors affecting our cash flows during this period were $65.3 million of non-cash related expenses and $5.6 million change in our net operating assets and liabilities, partially offset by $8.7 million of net loss.

The $5.6 million change in net operating assets and liabilities consisted of increases of $17.9 million in accounts receivable, $72.5 million in inventory and $1.1 million in prepaid expenses and other assets, and a decrease of $3.5 million of operating lease liabilities, offset by increases of $95.7 million of accounts payable and $4.9 million in accrued expense and other liabilities.

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 inventory from contract manufacturers to the company due to our recent acquisitions, as well as higher purchases for certain programs.

Net cash used in investing activities during the nine months ended May 28, 2021 was $68.4 million consisting primarily of $40.0 million of purchases of property and equipment and deposits and $28.6 million for the LED acquisition, net of cash acquired.

Net cash used in investing activities during the nine months ended May 29, 2020 was $16.7 million consisting primarily of purchases of property and equipment.

Net cash provided by financing activities during the nine months ended May 28, 2021 was $1.3 million, consisting primarily of $25.0 million net proceeds from borrowings under our revolving line of credit, $13.2 million proceeds from issuance of ordinary shares from share option exercises and employee share purchase plans and $11.4 million proceeds from issuance of the FINEP loan, partially offset by $44.3 million payment for repurchase of ordinary shares and $4.0 million for withholding tax on restricted stock units.

Net cash provided by financing activities during the nine months ended May 29, 2020 was $12.8 million, consisting primarily of $243.1 million proceeds from issuance of convertible notes and $4.9 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, $7.9 million long-term debt payments for both the Amended Credit Agreement and the BNDES Credit Agreement and $0.6 million for withholding tax on restricted stock units.

There have been no material changes to contractual obligations previously disclosed in our Annual Report.

Off -Balance Sheet Arrangements

We do not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes.

In addition, we do not have any undisclosed borrowings or debt, and we have not entered into any synthetic leases.

We are, therefore, not materially exposed to any financing, liquidity, market or credit risk that could arise if we had engaged in such relationships.

We do not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial conditions, net sales or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to investors.

Recent Accounting Pronouncements

See Note 1 of our Notes to Unaudited Condensed Consolidated Financial Statements for information regarding the effect of recent accounting pronouncements on our financial statements.

Critical Accounting Policies

The preparation of financial statements and related disclosures in conformity with accounting principles generally accepted in the United States of America (“U.S.

GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period.

We base our estimates on historical facts and various other assumptions that we believe to be reasonable at the time the estimates are made.

Actual results could differ from those estimates.

Our critical accounting policies are important to the portrayal of our financial condition and results of operations, and require us to make judgments and estimates about matters that are inherently uncertain.

Except for the critical accounting estimates associated with revenue recognition and business acquisitions as discussed below, there have been no material changes to our critical accounting policies and estimates disclosed in “Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies and Estimates” and Note 1, Overview, Basis of Presentation and Significant Accounting Policies, in each case in our Annual Report.

Business Acquisitions

Accounting for acquisitions requires us to estimate the fair value of consideration paid and the individual assets and liabilities acquired, which involves a number of judgments, assumptions and estimates that could materially affect the amount and timing of costs recognized in subsequent periods.

We typically obtain independent third-party valuation studies to assist in determining fair values, including assistance in determining future cash flows, discount rates and comparable market values.

Items involving significant assumptions, estimates and judgments include the following:

• Fair value of consideration paid or transferred (including contingent consideration);

• Inventory, including estimated future selling prices, timing of product sales, and completion costs for work in process;

• Property, plant and equipment, including determination of values in a continued-use model;

• Debt, including discount rate and timing of payments;

Intangible assets, including valuation methodology, estimates of future revenues and costs, profit allocation rates attributable to the acquired technology and discount rates;

Deferred tax assets, including projections of future taxable income and tax rates.

The valuation of contingent consideration in connection with an acquisition is inherently challenging due to dependence on the occurrence of future events and often complex payment provisions.

Estimating the fair value of contingent consideration at an acquisition date and in subsequent periods involves significant judgments, including projecting future average selling prices, future sales volumes, manufacturing costs and gross margins.

To project average selling prices and sales volumes, we review recent sales volumes, existing customer orders, current prices and other factors such as industry analyses of supply and demand, seasonal factors, general economic trends and other information.

To project manufacturing costs, we must estimate future production levels and costs of production, including labor, materials and other overhead costs.

Actual selling prices and sales volumes, as well as levels, and costs, of production, can often vary significantly from projected amounts.

Revenue Recognition

Revenue is primarily recognized at a point in time when control of the promised goods or services is transferred to our customers in an amount that reflects the consideration we expect to be entitled to in exchange for those goods or services.

Contracts with our customers are generally short-term in duration at fixed, negotiated prices with payment generally due shortly after delivery.

We estimate a liability for returns using the expected value method based on historical rates of return.

In addition, we generally offer price protection to our distributors, which is a form of variable consideration that decreases the transaction price.

We use the expected value method, based on historical price adjustments and current pricing trends, to estimate the amount of revenue recognized from sales to distributors.

Differences between the estimated and actual amounts are recognized as adjustments to revenue.

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

We may from time to time seek additional equity or debt financing.

Any future equity financing may be dilutive to our existing investors, and any future debt financing may include debt service requirements and financial and other restrictive covenants that may constrain our operations and growth strategies.

In the event that we seek additional financing, we may not be able to raise such financing on terms acceptable to us or at all.

If we are unable to raise additional capital or generate cash flows necessary to expand our operations and invest in continued product innovation, we may not be able to compete successfully, which would harm our business, operations and financial condition.

In February 2020, we issued $250.0 million in aggregate principal amount of 2.25% convertible senior notes due 2026 (the “2026 Notes”).

The initial conversion rate of the 2026 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 closing price of our ordinary shares exceeded 130% of the conversion price for our 2026 Notes for at least 20 trading days in the 30 consecutive trading days ended on November 26, 2021.

As a result, the 2026 Notes are convertible by holders through February 25, 2022.

For information regarding our debt obligations, see “PART I.

Financial Information – Item 1.

Financial Statements – Notes to Consolidated Financial Statements – Debt.” For our operating lease obligations, see “PART I.

Financial Information – Item 1.

Financial Statements – Notes to Consolidated Financial Statements – Leases.” For our purchase obligations, see “PART I.

Financial Information – Item 1.

Financial Statements – Notes to Consolidated Financial Statements – Commitments and Contingencies.”

Three months ended

Net cash provided by operating activities

Net cash used for investing activities

Net cash provided by (used for) financing activities

Effect of changes in currency exchange rates

Net increase in cash and cash equivalents

Operating Activities :

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

Net cash provided by operating activities in the three months ended November 26, 2021 was $15.1 million, comprised primarily of net income of $20.7 million, adjusted for non-cash items of $47.5 million.

Operating cash flows were also affected by a $53.1 million decrease in our net operating assets and liabilities, consisting primarily of an increase of $36.1 million in accounts receivable and a decrease of $53.8 million in accounts payable and accrued expenses, offset by a decrease of $39.6 million in inventories.

The decrease in both inventories and accounts payable and accrued expenses was primarily due to lower inventory primarily in our Memory Solutions and IPS segments, and the increase in accounts receivable was primarily due to higher gross sales in the same segments.

Net cash provided by operating activities in the three months ended November 27, 2020 was $35.6 million, comprised primarily of net income of $2.0 million, adjusted for non-cash items of $23.3 million.

Operating cash flows were also affected by a $10.3 million increase in our net operating assets and liabilities, consisting primarily of a decrease of $12.9 million in inventories and an increase of $10.1 million in accounts payable and accrued expenses, partially offset by an increase of $9.3 million in other current assets.

Investing Activities :

Net cash used in investing activities in the first quarter of 2022 was $13.4 million, consisting primarily of purchases of property and equipment.

Net cash used in investing activities during the three months ended November 27, 2020 was $14.6 million consisting primarily of purchases of property and equipment and deposits.

Financing Activities :

Net cash provided by financing activities in the first quarter of 2022 was $12.4 million, consisting primarily of $10.0 million in net proceeds from borrowing under our line of credit, $5.0 million in proceeds from issuance of ordinary shares from our equity plans, partially offset by $2.7 million for the repurchase of ordinary shares.

Net cash used for financing activities in the first quarter of 2021 was $0.4 million, consisting primarily of $3.5 million for the repurchase of ordinary shares, partially offset by $3.1 million in proceeds from issuance of ordinary shares from our equity plans.

Critical Accounting Estimates

The preparation of financial statements and related disclosures in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues, expenses and related disclosures.

Estimates and judgments are based on historical experience, forecasted events and various other assumptions that we believe to be reasonable under the circumstances.

We evaluate our estimates and judgments on an ongoing basis.

Our management believes the accounting policies below are critical in the portrayal of our financial condition and results of operations and require management’s most difficult, subjective or complex judgments.

There have been no material changes to our critical accounting estimates from those described in “PART II.

Other Information – Item 7.

Management’s Discussion and Analysis of Financial Condition and Results of Operations – Critical Accounting Estimates” in our Annual Report on Form 10-K for the year ended August 27, 2021.

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-Q

Item 2. Management’s Discussion and Analysis