Penguin Solutions, Inc. 10-Q

Item 1. Financial Statements INDEX TO FINANCIAL STATEMENTS Page Consolidated Balance Sheets 5 Consolidated Statements of Operations 6 Consolidated Statements of Comprehensive Income (Loss) 7 Consolidated Statements of Shareholders’ Equity 8 Consolidated Statements of Cash Flows 9 Notes to Consolidated Financial Statements 10 4 Table of Contents SMART Global Holdings, Inc. Consolidated Balance Sheets (In thousands, except par value amount) (Unaudited) As of February 25, 2022 August 27, 2021 Assets Cash and cash equivalents $ 365,768 $ 222,986 Accounts receivable, net (1) 385,925 313,393 Inventories 334,148 363,601 Other current assets 45,876 50,838 Total current assets 1,131,717 950,818 Property and equipment, net 149,059 156,266 Operating lease right-of-use assets 35,816 40,869 Intangible assets, net 88,887 101,073 Goodwill 73,413 74,255 Other noncurrent assets 29,621 21,517 Total assets $ 1,508,513 $ 1,344,798 Liabilities and Equity Accounts payable and accrued expenses $ 440,983 $ 484,107 Current debt 6,425 25,354 Other current liabilities 86,396 74,337 Total current liabilities 533,804 583,798 Long-term debt 483,911 340,484 Acquisition-related contingent consideration 101,700 60,500 Noncurrent operating lease liabilities 27,047 32,419 Other noncurrent liabilities 7,139 8,673 Total liabilities 1,153,601 1,025,874 Commitments and contingencies SMART Global Holdings shareholders’ equity: Ordinary shares, $ 0.03 par value; authorized 200,000 shares; 51,189 shares issued and 49,733 outstanding as of February 25, 2022; 50,138 shares issued and 48,736 outstanding as of August 27, 2021 1,535 1,504 Additional paid-in-capital 423,136 396,120 Retained earnings 207,272 184,787 Treasury shares, 1,456 and 1,402 shares held as of February 25, 2022 and August 27, 2021, respectively ( 53,440 ) ( 50,545 ) Accumulated other comprehensive income (loss) ( 229,676 ) ( 221,615 ) Total SGH shareholders’ equity 348,827 310,251 Noncontrolling interest in subsidiary 6,085 8,673 Total equity 354,912 318,924 Total liabilities and equity $ 1,508,513 $ 1,344,798 (1) Receivables from related parties were de minimis and $ 14,057 as of February 25, 2022 and August 27, 2021, respectively. The accompanying notes are an integral part of these consolidated financial statements. 5 Table of Contents SMART Global Holdings, Inc. Consolidated Statements of Operations (In thousands, except per share amounts) (Unaudited) Three Months Ended Six Months Ended February 25, 2022 February 26, 2021 February 25, 2022 February 26, 2021 Net sales (1) $ 449,171 $ 304,009 $ 919,115 $ 595,705 Cost of sales 336,458 250,553 684,201 489,606 Gross profit 112,713 53,456 234,914 106,099 Operating expenses: Research and development 18,794 8,852 36,451 15,816 Selling, general and administrative 53,114 31,664 105,664 69,720 Change in fair value of contingent consideration 24,000 — 41,200 — Total operating expenses 95,908 40,516 183,315 85,536 Operating income 16,805 12,940 51,599 20,563 Non-operating (income) expense: Interest expense, net 4,462 4,365 9,568 7,518 Other non-operating (income) expense 1,785 1,531 3,020 699 Total non-operating (income) expense 6,247 5,896 12,588 8,217 Income before taxes 10,558 7,044 39,011 12,346 Income tax provision 7,586 1,200 15,341 4,475 Net income 2,972 5,844 23,670 7,871 Net income attributable to noncontrolling interest 514 — 1,185 — Net income attributable to SGH $ 2,458 $ 5,844 $ 22,485 $ 7,871 Earnings per share: Basic $ 0.05 $ 0.12 $ 0.46 $ 0.16 Diluted $ 0.04 $ 0.12 $ 0.40 $ 0.16 Shares used in per share calculations: Basic 49,522 48,435 49,267 48,778 Diluted 57,636 50,407 56,135 50,307 (1) Sales to related parties were de minimis in 2022 and were $ 18,173 and $ 33,148 in the three and six months ended February 26, 2021, respectively. The accompanying notes are an integral part of these consolidated financial statements. 6 Table of Contents SMART Global Holdings, Inc. Consolidated Statements of Comprehensive Income (Loss) (In thousands) (Unaudited) Three Months Ended Six Months Ended February 25, 2022 February 26, 2021 February 25, 2022 February 26, 2021 Net income $ 2,972 $ 5,844 $ 23,670 $ 7,871 Other comprehensive income (loss), net of tax: Foreign currency translation adjustments 11,379 10,934 ( 8,061 ) ( 5,591 ) Comprehensive income (loss) 14,351 16,778 15,609 2,280 Comprehensive income attributable to noncontrolling interest 514 — 1,185 — Comprehensive income (loss) attributable to SGH $ 13,837 $ 16,778 $ 14,424 $ 2,280 The accompanying notes are an integral part of these consolidated financial statements. 7 Table of Contents SMART Global Holdings, Inc. Consolidated Statements of Shareholders’ Equity (In thousands) (Unaudited) Shares Issued Amount Additional Paid-in-capital Retained Earnings Treasury Shares Accumulated Other Comprehensive Income (Loss) Total SGH Shareholders’ Equity Non- controlling Interest in Subsidiary Total Equity As of August 27, 2021 50,138 $ 1,504 $ 396,120 $ 184,787 $ ( 50,545 ) $ ( 221,615 ) $ 310,251 $ 8,673 $ 318,924 Net income — — — 20,027 — — 20,027 671 20,698 Other comprehensive income (loss) — — — — — ( 19,440 ) ( 19,440 ) — ( 19,440 ) Shares issued under equity plans 734 22 5,007 — — — 5,029 — 5,029 Repurchase of ordinary shares ( 51 ) ( 2 ) 2 — ( 2,666 ) — ( 2,666 ) — ( 2,666 ) Share-based compensation expense — — 9,739 — — — 9,739 — 9,739 As of November 26, 2021 50,821 1,524 410,868 204,814 ( 53,211 ) ( 241,055 ) 322,940 9,344 332,284 Net income — — — 2,458 — — 2,458 514 2,972 Other comprehensive income (loss) — — — — — 11,379 11,379 — 11,379 Shares issued under equity plans 372 11 2,420 — — — 2,431 — 2,431 Repurchase of ordinary shares ( 4 ) — — — ( 229 ) — ( 229 ) — ( 229 ) Share-based compensation expense — — 9,848 — — — 9,848 — 9,848 Distribution to noncontrolling interest — — — — — — — ( 3,773 ) ( 3,773 ) As of February 25, 2022 51,189 $ 1,535 $ 423,136 $ 207,272 $ ( 53,440 ) $ ( 229,676 ) $ 348,827 $ 6,085 $ 354,912 Shares Issued Amount Additional Paid-in-capital Retained Earnings Treasury Shares Accumulated Other Comprehensive Income (Loss) Total SGH Shareholders’ Equity Non- controlling Interest in Subsidiary Total Equity As of August 28, 2020 48,988 $ 1,469 $ 347,431 $ 163,475 $ ( 2,032 ) $ ( 228,241 ) $ 282,102 $ — $ 282,102 Net income — — — 2,027 — — 2,027 — 2,027 Other comprehensive income (loss) — — — — — ( 16,525 ) ( 16,525 ) — ( 16,525 ) Shares issued under equity plans 956 29 3,077 — — — 3,106 — 3,106 Repurchase of ordinary shares ( 139 ) ( 4 ) 4 — ( 3,483 ) — ( 3,483 ) — ( 3,483 ) Share-based compensation expense — — 11,088 — — — 11,088 — 11,088 As of November 27, 2020 49,805 1,494 361,600 165,502 ( 5,515 ) ( 244,766 ) 278,315 — 278,315 Net income — — — 5,844 — — 5,844 — 5,844 Other comprehensive income (loss) — — — — — 10,934 10,934 — 10,934 Shares issued under equity plans 371 11 2,534 — — — 2,545 — 2,545 Repurchase of ordinary shares ( 1,104 ) ( 33 ) 33 — ( 44,481 ) — ( 44,481 ) — ( 44,481 ) Share-based compensation expense — — 5,398 — — — 5,398 — 5,398 As of February 26, 2021 49,072 $ 1,472 $ 369,565 $ 171,346 $ ( 49,996 ) $ ( 233,832 ) $ 258,555 $ — $ 258,555 The accompanying notes are an integral part of these consolidated financial statements. 8 Table of Contents SMART Global Holdings, Inc. Consolidated Statements of Cash Flows (In thousands) (Unaudited) Six Months Ended February 25, 2022 February 26, 2021 Cash flows from operating activities: Net income $ 23,670 $ 7,871 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation expense and amortization of intangible assets 31,890 17,160 Amortization of debt discount and issuance costs 4,770 4,307 Share-based compensation expense 19,748 16,486 Change in fair value of contingent consideration 41,200 — Amortization of operating lease right-of-use assets 5,245 2,913 Other 1,341 981 Changes in operating assets and liabilities: Accounts receivable ( 75,579 ) 10,082 Inventories 26,415 ( 28,134 ) Other current assets 5,200 ( 19,126 ) Accounts payable and accrued expenses ( 31,646 ) 45,921 Operating lease liabilities ( 4,496 ) ( 2,742 ) Deferred income taxes, net ( 447 ) 271 Net cash provided by operating activities 47,311 55,990 Cash flows from investing activities: Capital expenditures and deposits on equipment ( 20,142 ) ( 34,795 ) Other ( 692 ) 167 Net cash used for investing activities ( 20,834 ) ( 34,628 ) Cash flows from financing activities: Proceeds from debt 270,775 11,439 Proceeds from borrowing under line of credit 84,000 42,500 Proceeds from issuance of shares 7,460 5,651 Repayments of debt ( 125,000 ) — Repayments of borrowings under line of credit ( 109,000 ) ( 42,500 ) Distribution to noncontrolling interest ( 3,773 ) — Payments to acquire ordinary shares ( 2,895 ) ( 47,964 ) Other ( 3,841 ) — Net cash provided by (used for) financing activities 117,726 ( 30,874 ) Effect of changes in currency exchange rates on cash and cash equivalents ( 1,421 ) ( 1,496 ) Net increase (decrease) in cash and cash equivalents 142,782 ( 11,008 ) Cash and cash equivalents at beginning of period 222,986 150,811 Cash and cash equivalents at end of period $ 365,768 $ 139,803 The accompanying notes are an integral part of these consolidated financial statements. 9 Table of Contents SMART Global Holdings, Inc. Notes to Consolidated Financial Statements (Tabular amounts in thousands, except per share amounts) (Unaudited) Significant Accounting Policies Basis of Presentation The accompanying consolidated financial statements include SGH and its consolidated subsidiaries and have been prepared in accordance with accounting principles generally accepted in the United States of America consistent in all material respects with those applied in our Annual Report on Form 10-K for the year ended August 27, 2021. In the opinion of our management, the accompanying unaudited consolidated financial statements contain all necessary adjustments, consisting of a normal recurring nature, to fairly state the financial information set forth herein. These consolidated interim financial statements should be read in conjunction with the consolidated financial statements and accompanying notes included in our Annual Report on Form 10-K for the year ended August 27, 2021. Certain reclassifications have been made to prior period amounts to conform to current period presentation. Fiscal Year : Our fiscal year is the 52 or 53-week period ending on the last Friday in August. Fiscal 2022 and 2021 each contain 52 weeks. All period references are to our fiscal periods unless otherwise indicated. All financial information for our subsidiaries in Brazil is included in our consolidated financial statements on a one-month lag because their fiscal years end on July 31 of each year. Subsequent Event Share Repurchase Authorization On April 4, 2022, our Board of Directors approved a $ 75 million share repurchase authorization, under which the Company may repurchase its outstanding ordinary shares from time to time through open market purchases, privately-negotiated transactions or otherwise. The share repurchase authorization has no expiration date but may be suspended or terminated by the Board of Directors at any time. Share Dividend On January 3, 2022, our Board of Directors declared a share dividend of one ordinary share, $ 0.03 par value per share, for every one outstanding ordinary share owned to shareholders of record as of January 25, 2022. The dividend was paid on February 1, 2022. The accompanying consolidated financial statements and notes have been restated and adjusted for the impact of the share dividend. Recently Adopted Accounting Standards In December 2019, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2019-12 – Income Taxes: Simplifying the Accounting for Income Taxes , which simplifies the accounting for income taxes by removing certain exceptions to the general principles in Topic 740. The amendments also improve consistent application of and simplify GAAP for other areas of Topic 740 by clarifying and amending existing guidance. We adopted ASU 2019-12 in the first quarter of 2022 on a prospective basis. The adoption of this ASU did not have a significant impact on our financial statements. In June 2016, the FASB issued ASU 2016-13 – Financial Instruments – Credit Losses: Measurement of Credit Losses on Financial Instruments , which requires a financial asset (or a group of financial assets) measured on the basis of amortized cost to be presented at the net amount expected to be collected. This ASU requires that the income statement reflect the measurement of credit losses for newly recognized financial assets as well as the increases or decreases of expected credit losses that have taken place during the period. This ASU requires that credit losses of debt securities designated as available-for-sale be recorded through an allowance for credit losses and limits the credit loss to the amount by which fair value is below amortized cost. We adopted ASU 2016-13 in the first quarter of 2021 under the modified retrospective adoption method. The adoption of this ASU did not have a significant impact on our financial statements. 10 Table of Contents Recently Issued Accounting Standards In October 2021, the FASB issued ASU 2021-08 – Business Combinations: Accounting for Contract Asset and Contract Liabilities from Contracts with Customers , to require that an acquirer recognize and measure contract assets and liabilities acquired in a business combination in accordance with ASC 606, Revenue from Contracts with Customers . This ASU is effective for us in the first quarter of 2023 and, if adopted early, requires the retrospective method of transition applied to transactions occurring on or after the beginning of the fiscal year of adoption. We are evaluating the timing and effects of adoption of this ASU on our financial statements. In August 2020, the FASB issued ASU 2020-06 – Debt – Debt with Conversion and Other Options and Derivatives and Hedging – Contracts in Entity’s Own Equity: Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity , which simplifies the accounting for convertible debt instruments by reducing the number of accounting models and the number of embedded conversion features that could be recognized separately from the primary contract. This ASU requires a convertible debt instrument to be accounted for as a single liability measured at its amortized cost, as long as no other features require bifurcation and recognition as derivatives. This ASU requires an entity to use the if-converted method in the diluted earnings per share calculation for convertible instruments. This ASU is effective for us in the first quarter of 2023 and permits the use of either the modified retrospective or fully retrospective method of transition. We are evaluating the effects of adoption of this ASU on our financial statements. Business Acquisition LED Business On March 1, 2021, pursuant to the previously announced Asset Purchase Agreement, dated October 18, 2020, as amended by the Amendment to Asset Purchase Agreement, dated March 1, 2021 (as amended, the “CreeLED Purchase Agreement”), (i) we acquired the LED business of Cree, Inc., a corporation now known as Wolfspeed, Inc. (“Cree”), including (a) certain equipment, inventory, intellectual property rights, contracts and real estate comprising Cree’s LED products segment, (b) all of the issued and outstanding equity interests of Cree Huizhou Solid State Lighting Company Limited, a limited liability company organized under the laws of the People’s Republic of China and an indirect wholly owned subsidiary of Cree and (c) Cree’s 51 % ownership interest in Cree Venture LED Company Limited (“Cree Joint Venture”), Cree’s joint venture with San’an Optoelectronics Co., Ltd. (“San’an”) and (ii) we assumed certain liabilities related to the LED business (collectively, (i) and (ii), the “LED Business”). In connection with the transaction, Cree retained certain assets used in and pre-closing liabilities associated with its LED products segment. Purchase Price : The purchase price for the LED Business consisted of (i) a payment of $ 50 million in cash, subject to customary adjustments, (ii) an unsecured promissory note issued to Cree by the Company in the amount of $ 125 million (“LED Purchase Price Note”), (iii) an earn-out payment of up to $ 125 million based on the revenue and gross profit performance of the LED Business in Cree’s first four full fiscal quarters following the closing (“Earnout Period”), with a minimum payment of $ 2.5 million, payable in the form of an unsecured promissory note to be issued by us (“Earnout Note”) and (iv) the assumption of certain liabilities. The LED Purchase Price Note bears interest at LIBOR plus 3.0 % and is due on August 15, 2023. The Earnout Note will begin to bear interest upon completion of the Earnout Period at LIBOR plus 3.0 % and is due on March 27, 2025. In the second quarter of 2022, we repaid the LED Purchase Price Note. See “Debt.” Contingent Consideration : The Earnout Note is accounted for as contingent consideration. The fair value of the Earnout Note was estimated as of the date of acquisition to be $ 28.1 million and was valued using a Monte Carlo simulation analysis in a risk-neutral framework with assumptions for volatility, market price of risk adjustment, risk-free rate and cost of debt. The fair value measurement was based on significant inputs not observable in the market . The Earnout Note is revalued each quarter and changes in valuation are reflected in results of operations. In the second half of 2021, we recorded charges of $ 32.4 million to adjust the value of the Earnout Note to its fair value as of August 27, 2021, and in the first six months of 2022, we recorded additional aggregate charges of $ 41.2 million to adjust the value of the Earnout Note to its fair value as of February 25, 2022. The changes in fair value reflected new information about the probability and timing of meeting the conditions of the revenue and gross profit targets of the LED Business. As of February 25, 2022, the fair value of the Earnout Note was $ 101.7 million. Upon completion of the Earnout Period, the Earnout Note will be reclassified as debt. 11 Table of Contents Unaudited Pro Forma Financial Information : The following unaudited pro forma financial information presents our combined results of operations as if the acquisition of the LED Business had occurred on August 31, 2019. The unaudited pro forma financial information is based on various adjustments and assumptions and is not necessarily indicative of what our results of operations actually would have been had the acquisition been completed as of August 31, 2019 or will be for any future periods. Furthermore, the pro forma financial information does not include adjustments to reflect any potential revenue, synergies or dis-synergies or cost savings that may be achievable in connection with the acquisition, or the associated costs that may be necessary to achieve such revenues, synergies or cost savings. The unaudited pro forma financial information for the second quarter and first six months of 2021 combines our results of operations for the three and six months ended February 26, 2021 and the results of operations of the LED Business for the three and six months ended December 26, 2021. Three Months Ended Six Months Ended February 26, 2021 February 26, 2021 Net sales $ 409,166 $ 799,899 Net loss attributable to SGH ( 27,680 ) ( 155,758 ) Earnings (loss) per share: Basic $ ( 0.57 ) $ ( 3.19 ) Diluted $ ( 0.57 ) $ ( 3.19 ) The unaudited pro forma financial information above reflects the following adjustments: • Incremental cost of sales related to the estimated fair value of inventories. • Incremental depreciation expense related to the estimated fair value of property and equipment. • Incremental amortization expense related to the estimated fair value of identifiable intangible assets. • Incremental interest expense related to the LED Purchase Price Note and the Earnout Note. • The impacts to income tax expense as a result of the pro forma adjustments. Inventories As of February 25, 2022 August 27, 2021 Raw materials $ 168,956 $ 163,610 Work in process 67,990 92,901 Finished goods 97,202 107,090 $ 334,148 $ 363,601 As of February 25, 2022 and August 27, 2021, 7 % and 11 %, respectively, of total inventories were inventories owned and held under our logistics services. 12 Table of Contents Property and Equipment As of February 25, 2022 August 27, 2021 Equipment $ 185,514 $ 182,493 Buildings and building improvements 55,306 53,502 Furniture, fixtures and software 35,356 32,114 Land 16,126 16,126 292,302 284,235 Accumulated depreciation ( 143,243 ) ( 127,969 ) $ 149,059 $ 156,266 Depreciation expense for property and equipment was $ 10.2 million and $ 19.7 million in the three and six months ended February 25, 2022, respectively, and $ 5.4 million and $ 10.3 million in the three and six months ended February 26, 2021, respectively. Intangible Assets and Goodwill February 25, 2022 August 27, 2021 Gross Amount Accumulated Amortization Gross Amount Accumulated Amortization Intangible assets: Technology $ 61,336 $ ( 13,934 ) $ 61,307 $ ( 9,142 ) Customer relationships 57,500 ( 27,315 ) 57,500 ( 22,393 ) Trademarks/trade names 19,200 ( 8,199 ) 19,200 ( 6,628 ) Order backlog 3,400 ( 3,101 ) 3,800 ( 2,571 ) $ 141,436 $ ( 52,549 ) $ 141,807 $ ( 40,734 ) Goodwill by segment: Intelligent Platform Solutions $ 40,401 $ 40,401 Memory Solutions 33,012 33,854 $ 73,413 $ 74,255 In the first six months of 2022, we capitalized $ 0.8 million for intangible assets with weighted average useful lives of 13.6 years. Amortization expense for intangible assets was $ 5.9 million and $ 12.2 million in the three and six months ended February 25, 2022, respectively, and $ 3.4 million and $ 6.8 million in the three and six months ended February 26, 2021, respectively. Amortization expense is expected to be $ 11.7 million for the remainder of 2022, $ 21.8 million in 2023, $ 18.1 million in 2024, $ 15.4 million in 2025, $ 8.4 million in 2026 and $ 13.6 million thereafter. Goodwill of our Memory Solutions segment decreased by $ 0.8 million in the first six months of 2022 and increased in all of 2021 by $ 0.3 million from translation adjustments. 13 Table of Contents Accounts Payable and Accrued Expenses As of February 25, 2022 August 27, 2021 Accounts payable (1) $ 380,088 $ 429,640 Salaries, wages and benefits 38,514 37,795 Income and other taxes 21,041 14,319 Other 1,340 2,353 $ 440,983 $ 484,107 (1) Includes accounts payable for property and equipment of $ 2.1 million and $ 3.1 million as of February 25, 2022 and August 27, 2021, respectively. Debt As of February 25, 2022 August 27, 2021 Credit Facility Term Loan $ 270,560 $ — Convertible Senior Notes 208,452 203,992 LED Purchase Price Note — 125,000 ABL Credit Agreement — 25,000 Other 11,324 11,846 490,336 365,838 Less current debt ( 6,425 ) ( 25,354 ) Long-term debt $ 483,911 $ 340,484 Credit Facility On February 7, 2022, we entered into a credit agreement (the "Credit Agreement") with a syndicate of banks that provides for (i) a term loan credit facility in an aggregate principal amount of $ 275.0 million (the "2027 TLA") and (ii) a revolving credit facility in an aggregate principal amount of $ 250.0 million (the "2027 Revolver," and together with the 2027 TLA, the "Credit Facility"), in each case, maturing on February 7, 2027 (subject to certain earlier “springing maturity” dates upon certain conditions specified in the Credit Agreement). The Credit Agreement provides that up to $ 35.0 million of the 2027 Revolver is available for issuances of letters of credit. Issuance costs incurred in connection with the Credit Facility were $ 9.1 million and were allocated to the 2027 TLA and 2027 Revolver on a pro rata basis. Unamortized issuances costs allocated to the 2027 TLA are amortized using the effective interest method and are included as a reduction of the principal amount of the 2027 TLA within debt. Unamortized issuances costs allocated to the 2027 Revolver are amortized using the straight-line method and are included in other current and noncurrent assets. Principal payments under the 2027 TLA are due quarterly, beginning in May 2022, equal to 2.5 % per annum of the initial aggregate principal amount, with such per annum percentage equal to 5.0 %, 5.0 %, 5.0 % and 7.5 % per annum in years two through five, respectively, with the balance due at maturity. Interest and fees : Loans under the Credit Agreement bear interest at a rate per annum equal to either, at our option, a term secured overnight financing rate ("SOFR") rate or a base rate, in each case plus an applicable margin. 2027 TLA : The applicable margin for 2027 TLA is 2.00 % per annum with respect to term SOFR borrowings, and 1.00 % per annum with respect to base rate borrowings. As of February 25, 2022, the interest rate applicable to the principal amount outstanding under the 2027 TLA was 2.37 % per annum. As of February 25, 2022, there was $ 275.0 million of 2027 TLA 14 Table of Contents principal amount outstanding and unamortized issuance costs were $ 4.4 million and, as of February 25, 2022, the 2027 TLA had an effective interest rate of 2.76 %. 2027 Revolver : The applicable margin for revolving loans varies based on our Total Leverage Ratio (as defined in the Credit Agreement) and ranges from 1.25 % to 3.00 % per annum with respect to term SOFR borrowings and from 0.25 % to 2.00 % per annum with respect to base rate borrowings. In addition, we are required to pay a quarterly unused commitment fee at an initial rate of 0.25 %, which may increase up to a rate of 0.35 % based on certain Total Leverage Ratio levels specified in the Credit Agreement. As of February 25, 2022, there were no amounts outstanding under the 2027 Revolver and unamortized issuance costs were $ 4.6 million. Security : The Credit Agreement is jointly and severally guaranteed on a senior basis by certain subsidiaries of SGH organized in the United States and Cayman Islands. In addition, the Credit Agreement is secured by a pledge of the capital stock of, or equity interests in, certain subsidiaries of SGH organized in the United States and the Cayman Islands and by substantially all of the assets of certain subsidiaries of SGH organized in the United States and the Cayman Islands. Covenants : The Credit Agreement contains a number of covenants that, among other things, restrict, subject to certain exceptions, our ability and the ability of our subsidiaries to: incur additional indebtedness; create liens on assets; engage in mergers or consolidations; sell assets; pay dividends; make distributions or repurchase capital stock; make investments, loans or advances; repay or repurchase certain subordinated debt (except as scheduled or at maturity); create restrictions on the payment of dividends or other amounts to us from our restricted subsidiaries; make certain acquisitions; engage in certain transactions with affiliates; amend material agreements governing our subordinated debt and fundamentally change our business. The Credit Agreement also includes the following financial maintenance covenants tested on the final day of each fiscal quarter: i. a First Lien Leverage Ratio (as defined in the Credit Agreement) of 3.00 to 1.00; ii. a Total Leverage Ratio of 5.00 to 1.00; provided, that commencing after the eighth full fiscal quarter after the Effective Date, such Total Leverage Ratio level will instead be 4.50 to 1.00; provided further, that commencing after the eighth full fiscal quarter after the Effective Date, in connection with any Material Acquisition (as defined in the Credit Agreement), at the election of the Borrowers, the maximum Total Leverage Ratio for the next four testing periods after such Material Acquisition has been consummated will be automatically increased by 0.50 to 1.00 above the otherwise permitted Total Leverage Ratio for the applicable fiscal quarter (not to exceed 5.00 to 1.00 in any event); provided further, that (x) no more than two such elections may be made during the term of the Credit Agreement and (y) following the first such election, no subsequent election may be made unless the Total Leverage Ratio has been less than or equal to 5.00 to 1.00 as of the last day of at least two consecutive Test Periods (as defined in the Credit Agreement) following the expiration of the first increase; and iii. an Interest Coverage Ratio (as defined in the Credit Agreement) of 3.00 to 1.00. For purposes of calculating the First Lien Leverage Ratio and the Total Leverage Ratio, the consolidated debt of the Company and its Restricted Subsidiaries (as defined in the Credit Agreement) is reduced by up to $ 100 million of the aggregate amount of unrestricted cash and Permitted Investments (as defined in the Credit Agreement) of the Company and its Restricted Subsidiaries. Other : Substantially simultaneously with entering into the Credit Agreement, we used a portion of the proceeds of the Credit Facility to pay in full all borrowings and terminated all commitments under (i) our ABL Credit Agreement, dated as of December 23, 2020, (ii) our Amended Credit Agreement, dated as of of March 6, 2020 and (iii) the LED Purchase Price Note, dated as of March 1, 2021. In connection therewith, we used an aggregate of $ 160.4 million to pay principal and interest outstanding under these agreements and recorded charges of $ 0.7 million in other non-operating expense to write off certain unamortized issuance costs. Convertible Senior Notes In February 2020, we issued $ 250.0 million in aggregate principal amount of 2.25 % convertible senior notes due 2026 (the “2026 Notes”). The 2026 Notes are general unsecured obligations, bear interest at an annual rate of 2.25 % per year, payable semi-annually on February 15 and August 15, and mature on February 15, 2026, unless earlier converted, redeemed or repurchased. The 2026 Notes are governed by an indenture (the “Indenture”) between us and U.S. Bank 15 Table of Contents National Association, as trustee. After the effect of the share dividend paid in the second quarter of 2022, the conversion rate of the 2026 Notes is 49.2504 ordinary shares per $ 1,000 principal amount of notes, which represents a conversion price of approximately $ 20.30 per ordinary share. The conversion rate is subject to adjustment upon the occurrence of certain specified events as set forth in the Indenture. Conversion Rights : Holders of the 2026 Notes may convert them under the following circumstances: i. during any fiscal quarter commencing after the fiscal quarter ended on May 28, 2020 (and only during such fiscal quarter) if the last reported sale price per ordinary share exceeds 130 % of the conversion price for at least 20 trading days in the 30 consecutive trading days ending on the last trading day of the immediately preceding fiscal quarter; ii. during the five consecutive business days immediately after any 10 consecutive trading day period (such 10 consecutive trading day period, the “Measurement Period”) in which the trading price per $1,000 principal amount of notes for each trading day of the Measurement Period was less than 98 % of the product of the last reported sale price per ordinary share on such trading day and the conversion rate on such trading day; iii. on or after August 15, 2025 until the close of business on the second scheduled trading day immediately before the maturity date; iv. upon the occurrence of certain corporate events or distributions on our ordinary shares, as provided in the Indenture; or v. the 2026 Notes are called for redemption. Upon conversion, we will pay or deliver, as applicable, cash, ordinary shares or a combination of cash and ordinary shares at our election. Our intent is to settle in cash the principal amount of our convertible notes upon conversion and may, at our option, settle any excess of the conversion value over the principal amount in cash, ordinary shares or any combination thereof. The closing price of our ordinary shares exceeded 130 % of the conversion price for our 2026 Notes for at least 20 trading days in the 30 consecutive trading days ended on February 25, 2022. As a result, the 2026 Notes are convertible by holders through May 27, 2022. If we receive a notice of conversion for our 2026 Notes, and we elect to settle in cash any portion of the conversion obligation, the cash settlement obligation becomes a derivative debt liability subject to mark-to-market accounting treatment based on the volume-weighted-average price of our ordinary shares over a period of 40 consecutive trading days, beginning two business days after the holder gives notice to convert. Accordingly, as of the date of our election to settle any part of a conversion in cash, we would reclassify all or a portion of the fair value of the equity component of the converted 2026 Notes from additional capital to derivative debt liability within current debt in our consolidated balance sheet. Other : Unamortized debt discount and issuance costs are amortized over the term of the 2026 Notes using the effective interest rate method. As of February 25, 2022 and August 26, 2021, the effective interest rate was 7.06 %. Interest expense for the 2026 Notes consisted of 2.25 % contractual stated interest and amortization of discount and issuance costs and included of the following: Three Months Ended Six Months Ended February 25, 2022 February 26, 2021 February 25, 2022 February 26, 2021 Contractual stated interest $ 1,390 $ 1,391 $ 2,781 $ 2,781 Amortization of discount and issuance costs 2,250 2,098 4,460 4,159 $ 3,640 $ 3,489 $ 7,241 $ 6,940 As of both February 25, 2022 and August 27, 2021, the carrying amount of the equity components of the 2026 Notes, which is included in additional paid-in-capital, was $ 50.8 million. 16 Table of Contents Leases As of February 25, 2022 and August 27, 2021, we had operating leases through which we utilize facilities, offices and equipment in our manufacturing operations, research and development activities and selling, general and administrative functions. Sublease income was not significant in the first six months of 2022 or 2021. The components of operating lease expense were as follows: Three Months Ended Six Months Ended February 25, 2022 February 26, 2021 February 25, 2022 February 26, 2021 Fixed lease cost $ 3,213 $ 1,915 $ 6,516 $ 3,454 Variable lease cost 453 288 821 560 Short-term lease cost 182 57 258 115 $ 3,848 $ 2,260 $ 7,595 $ 4,129 Cash flows used for operating activities for the first six months of 2022 and 2021 included payments for operating leases of $ 5.1 million and $ 3.1 million, respectively. Noncash acquisitions of right-of-use assets were $ 0.6 million and $ 3.3 million for the first six months of 2022 and 2021, respectively. As of February 25, 2022 and August 27, 2021, the weighted-average remaining lease term for our operating leases was 5.8 years and 6.1 years, respectively. Certain of our operating leases include one or more options to extend the lease term for periods from two to five years . In determining the present value of our operating lease liabilities, we have assumed we will not extend any lease terms. As of February 25, 2022 and August 27, 2021, the weighted-average discount rate for our operating leases was 6.8 % and 6.7 %, respectively. Minimum payments of lease liabilities as of February 25, 2022 were as follows: Remainder of 2022 $ 6,820 2023 10,805 2024 7,272 2025 4,664 2026 3,581 2027 and thereafter 15,652 48,794 Less imputed interest ( 10,618 ) Present value of total lease liabilities $ 38,176 The table above excludes lease liabilities for leases that have been executed but not yet commenced. As of February 25, 2022, we had such lease commitments relating to operating lease payment obligations of $ 51.8 million for a building lease with a term of 16 years. We will recognize a right-of-use asset and an associated lease liability at the time such asset becomes available for our use. Such lease is currently expected to commence in the second half of fiscal 2022. Commitments and Contingencies Contingencies From time to time, we are involved in legal matters that arise in the normal course of business. Litigation in general, and intellectual property, employment and shareholder litigation in particular, can be expensive and disruptive to normal business operations. Moreover, the results of complex legal proceedings are difficult to predict. Additionally, from time to time, we are a party in the normal course of business to a variety of agreements pursuant to which we may be obligated to indemnify another party. It is not possible to predict the maximum potential amount of future payments under these types of agreements due to the conditional nature of our obligations and the unique facts and circumstances involved in each particular agreement. Historically, our payments under these types of agreements have not had a material adverse effect 17 Table of Contents on our business, results of operations or financial condition. We regularly review contingencies to determine whether the likelihood of loss has changed and to assess whether a reasonable estimate of the loss or range of loss can be made. Equity SGH Shareholders’ Equity Ordinary Share Repurchases In January 2021, we agreed to repurchase an aggregate of 1.1 million ordinary shares from Silver Lake Partners III Cayman (AIV III), L.P., Silver Lake Technology Investors III Cayman, L.P., Silver Lake Sumeru Fund Cayman, L.P. and Silver Lake Technology Investors Sumeru Cayman, L.P. at a purchase price of $ 40.30 per share in a privately negotiated transaction. The transaction closed on January 15, 2021. In addition, ordinary shares withheld as payment of withholding taxes and exercise prices in connection with the vesting or exercise of equity awards are treated as ordinary share repurchases. We repurchased 4 thousand and 55 thousand ordinary shares in the second quarter and first six months of 2022, respectively, and 1.1 million and 1.2 million ordinary shares in the second quarter and first six months of 2021, respectively. As of February 25, 2022, these repurchased shares are held in treasury. Noncontrolling Interest in Subsidiary In connection with our acquisition of the LED Business, we have a 51 % ownership interest in the Cree Joint Venture. The remaining 49 % ownership interest is held by San’an. The Cree Joint Venture has a five -member board of directors, three of which are designated by us and two of which are designated by San’an. As a result of our majority voting interest, we consolidate the operations of the Cree Joint Venture and report its results of operations within our LED Solutions segment. The Cree Joint Venture has a manufacturing agreement pursuant to which San’an supplies it with mid-power LED products and we and the Cree Joint Venture have a sales agent agreement pursuant to which we are the independent sales representative of the Cree Joint Venture. The Cree Joint Venture produces and delivers to market high performing, mid-power lighting class LEDs in an exclusive arrangement serving the expanding markets of North and South America, Europe and Japan, and serves China markets and the rest of the world on a non-exclusive basis. The 49 % ownership interest held by San’an is classified as noncontrolling interest. In the second quarter of 2022, the Cree Joint Venture distributed an aggregate of $ 7.7 million to its partners, including $ 3.9 million to SGH and $ 3.8 million to San’an. Noncontrolling interest increased by $ 0.5 million and $ 1.2 million in the second quarter and first six months of 2022, respectively, for San’an’s share of net income from the Cree Joint Venture. Remaining cash and other assets of the Cree Joint Venture are generally not available for use by us in our other operations. Government Incentives Brazil Financial Credits Through our Brazil subsidiaries, we participate in two programs (“Brazil Incentive Programs”), pursuant to which the Brazilian government incentivizes the manufacture and sale of certain information technology and consumer electronics products within Brazil. The programs include 1) Lei da Informática – Processo Produtivo Básico Program (also known as Informatics Law – Basic Productive Process Program) (“IT Law/PPB”) and 2) Programa de Apoio ao Desenvolvimento Tecnológico da Indústria de Semicondutores (also known as Program of Support of the Development of the Semiconductor Industry) (“PADIS”). In January 2022, the Brazilian government approved an extension to PADIS. The financial credits available through PADIS are set to expire in December 2026, while the financial credits through IT Law/PPB are set to expire in December 2029. The Brazil Incentive Programs provide for reduced import and other transaction-related taxes for certain procurement, manufacturing and sales activities. In exchange, we must invest in certain research and development activities related to semiconductors and IT solutions in aggregate amounts that exceed a specified percentage of our gross revenues recognized in connection with sales in Brazil, excluding exports and sales to customers located at the Manaus Free Trade Zone. Accordingly, financial credits earned in connection with the Brazil Incentive Programs are reflected as a reduction of research and development expense. Financial credits available under the Brazil Incentive Programs are subject to limitations, which range from approximately 11 % to 14 % of gross revenues recognized for sales in Brazil. Under PADIS, we recognized aggregate financial credits, reflected as a reduction of research and development expense, of $ 6.0 million and $ 11.9 million in the second quarter and first six months of 2022, respectively, and $ 6.2 million and $ 14.0 18 Table of Contents million in the second quarter and first six months of 2021, respectively. Financial credits earned under the Brazil Incentive Programs may be refunded in cash or used to offset liabilities for Brazil federal taxes. As of February 25, 2022 and August 27, 2021, earned under PADIS but unused financial credits of $ 17.5 million and $ 19.8 million, respectively, were included in other current assets. Financial credits earned under PADIS but unused as of February 25, 2022 can be utilized through November 2026. Fair Value Measurements Cash and cash equivalents as of both February 25, 2022 and August 27, 2021 included money market funds of $ 2.7 million, which were valued based on Level 1 measurements using quoted prices in active markets for identical assets. Fair value measurements of other assets and liabilities were as follows: February 25, 2022 August 27, 2021 Fair Value Carrying Value Fair Value Carrying Value Assets: Derivative financial instrument assets $ — $ — $ 883 $ 883 Liabilities: Derivative financial instrument liabilities $ 2,895 $ 2,895 $ 50 $ 50 Credit Facility Term Loan 275,000 270,560 — — Convertible Senior Notes 382,903 208,452 335,668 203,992 LED Purchase Price Note — — 125,000 125,000 ABL Credit Agreement — — 25,000 25,000 Debt – other 10,375 11,324 10,702 11,846 Acquisition-related contingent consideration 101,700 101,700 60,500 60,500 The fair values of our derivative financial instruments, as measured on a recurring basis, were based on Level 2 measurements, including market-based observable inputs of currency exchange spot and forward rates, interest rates and credit-risk spreads. The fair value of our Convertible Senior Notes (excluding the value of the equity component of our convertible notes), as measured on a non-recurring basis, was determined based on Level 2 measurements, including the trading price of the convertible notes. The fair values of our LED Purchase Price Note, ABL Credit Agreement and other debt, as measured on a non-recurring basis, were estimated based on Level 2 measurements, including discounted cash flows and interest rates based on similar debt issued by parties with credit ratings similar to ours. Acquisition-related contingent consideration relates to our acquisition of the LED Business and is included in noncurrent liabilities. The fair value, as measured on a recurring basis, was based on Level 3 measurements, which includes significant inputs not observable in the market. The fair value was estimated using a Monte Carlo simulation analysis in a risk-neutral framework with assumptions for volatility, market price of risk adjustment, risk-free rate and cost of debt. Assumptions used in the determination of fair value also included estimates of future revenue and gross profit of the LED Business in Cree’s first four full fiscal quarters following the closing of the acquisition. Generally, changes in the assumptions for projected future revenue, gross profit and volatility would be accompanied by a directionally similar change in the fair value measurement. Conversely, changes in the discount rate would be accompanied by a directionally opposite change in the related fair value measurement. However, due to the contingent consideration having a maximum payout amount, changes in these assumptions would not affect the fair value of the contingent consideration if they increase (decrease) beyond certain amounts. Subsequent to the acquisition date, at each reporting date, the contingent consideration liability is remeasured to fair value with changes recorded in our results of operations. See “Business Acquisition – LED Business.” 19 Table of Contents Derivative Instruments We use currency forward contracts to mitigate our exposure of certain monetary assets and liabilities from changes in currency exchange rates. Realized and unrealized gains and losses from derivative instruments without hedge accounting designation as well as the changes in the underlying monetary assets and liabilities from changes in currency exchange rates are included in other non-operating (income) expense. In the three and six months ended February 25, 2022, we recognized net realized gains of $ 1.2 million and $ 4.5 million in the three and six months ended February 25, 2022, respectively, and net unrealized losses of $ 4.3 million and $ 3.5 million, respectively, from changes in the fair value of the non-designated forward contracts. In the three and six months ended February 26, 2021, we recognized net realized losses of $ 2.9 million and $ 0.7 million, respectively, and net unrealized gains of $ 0.1 million and $ 3.1 million, respectively, from changes in the fair value of the non-designated forward contracts. Equity Plans As of February 25, 2022, 8.6 million shares of our ordinary shares were available for future awards under our equity plans. Restricted Share Awards and Restricted Share Units Awards (“Restricted Awards”) Aggregate Restricted Award activity was as follows: Three Months Ended Six Months Ended February 25, 2022 February 26, 2021 February 25, 2022 February 26, 2021 Awards granted 113 337 646 1,434 Weighted average grant-date fair value per share $ 30.28 $ 20.02 $ 28.42 $ 12.67 Aggregate vesting-date fair value of shares vested $ 6,272 $ 3,038 $ 18,228 $ 11,408 Restricted Awards include grants with service, performance and/or market conditions with restrictions that generally lapse after a three to four-year service period. Awards with market conditions are based on either the Company’s share price or the Company’s total shareholder return (“TSR”) relative to companies included in a market index. For awards with market conditions, the number of shares that will vest will vary between 0 % and 200 % of target amounts, depending upon the Company’s achievement level over the specified performance period. The fair value of awards with market conditions were fixed at the grant date using a Monte Carlo simulation analysis and were based on significant inputs not observable in the market. In May 2020, we granted a performance-based restricted share award to our former CEO that had both service and performance conditions. As of August 28, 2020, we deemed it was probable that the service condition would be met and the attainment of the performance condition for this award was probable. On October 20, 2020, we modified this award, as well as another time-based award previously granted to our former CEO, to accelerate the remaining service-based vesting requirements such that they became fully vested as of the acceleration date. These modifications resulted in additional share-based compensation expense in the first quarter of 2021 of $ 5.8 million. As of February 25, 2022, total unrecognized compensation costs for unvested Restricted Awards was $ 87.4 million, which was expected to be recognized over a weighted average period of 2.76 years. 20 Table of Contents Share Options Share option activity and assumptions were as follows: Six Months Ended February 26, 2021 Share options granted 500 Weighted average grant-date fair value per share $ 6.65 Average expected term in years 6.25 Weighted-average expected volatility 52.07 % Weighted-average risk-free interest rate 0.49 % Expected dividend yield — As of February 25, 2022, total unrecognized compensation costs for unvested options was $ 4.4 million, which was expected to be recognized over a weighted average period of 1.77 years. Employee Share Purchase Plan Under our employee share purchase plan (“ESPP”), employees purchased 133 thousand ordinary shares for $ 3.0 million in the first six months of 2022 and 173 thousand ordinary shares for $ 1.8 million in the first six months of 2021. Share-Based Compensation Expense Three Months Ended Six Months Ended February 25, 2022 February 26, 2021 February 25, 2022 February 26, 2021 Share-based compensation expense by caption: Cost of sales $ 1,648 $ 804 $ 3,379 $ 1,641 Research and development 1,559 810 3,099 1,588 Selling, general and administrative 6,766 3,784 13,270 13,257 $ 9,973 $ 5,398 $ 19,748 $ 16,486 Income tax benefits related to the tax deductions for share-based awards are recognized only upon the settlement of the related share-based awards. Consistent with our treatment of income or loss from our U.S. operations, our income tax provision in 2022 and 2021 reflects de minimis income tax benefits for share-based compensation expense. Revenue and Customer Contract Balances We disaggregate revenue by segment and geography and by product and service revenue. See “Segment and Other Information.” 21 Table of Contents Net Sales and Gross Billings Net sales by products and services and gross amounts billed for services, including logistics services in which we act as an agent for our customers, were as follows: Three Months Ended Six Months Ended February 25, 2022 February 26, 2021 February 25, 2022 February 26, 2021 Net sales: Products and professional services $ 434,036 $ 296,996 $ 890,461 $ 582,197 Logistics services 15,135 7,013 28,654 13,508 $ 449,171 $ 304,009 $ 919,115 $ 595,705 Gross billings in connection with logistics services: Logistics services $ 15,135 $ 7,013 $ 28,654 $ 13,508 Cost of materials (1) 339,715 144,109 675,990 275,633 $ 354,850 $ 151,122 $ 704,644 $ 289,141 (1) Included in gross billings in connection with services are amounts billed to customers for the cost of materials procured in an agent capacity in connection with our logistics services business, which includes procurement, logistics, inventory management, temporary warehousing, kitting and/or packaging services. While we take title to inventory under such arrangements, control of such inventory does not transfer to us as we do not, at any point, have the ability to direct the use, and thereby obtain the benefits of, the inventory. Customer Contract Balances As of February 25, 2022 August 27, 2021 Contract assets (1) $ 102 $ 4,247 Contract liabilities: (2) Deferred revenue $ 23,544 $ 19,271 Customer advances 17,202 15,835 $ 40,746 $ 35,106 (1) Contract assets are included in other current assets. (2) Contract liabilities are included in other current liabilities and noncurrent liabilities based on the timing of when our customer is expected to take control of the asset or receive the benefit of the service. Deferred revenue related to amounts received from customers in advance of satisfying performance obligations. As of February 25, 2022, we expect to recognize revenue of $ 19.8 million of the balance of $ 23.5 million in the next 12 months and the remaining amount thereafter. In the first six months of 2022, we recognized revenue of $ 11.2 million from satisfying performance obligations related to amounts included in deferred revenue as of August 27, 2021. Customer advances represent amounts received from customers for advance payments to secure product and services within the next 12 months. In the first six months of 2022, we recognized revenue of $ 5.1 million from satisfying performance obligations related to amounts included in customer advances as of August 27, 2021. As of February 25, 2022 and August 27, 2021, other current liabilities included $ 23.4 million and $ 24.9 million, respectively, for estimates of consideration payable to customers, including estimates for pricing adjustments and returns. 22 Table of Contents Other Non-operating (Income) Expense Three Months Ended Six Months Ended February 25, 2022 February 26, 2021 February 25, 2022 February 26, 2021 Foreign currency (gains) losses $ 1,408 $ 843 $ 2,875 $ 201 Other 377 688 145 498 $ 1,785 $ 1,531 $ 3,020 $ 699 Foreign currency (gains) and losses relate primarily to our Brazil operating subsidiaries. Income Taxes Three Months Ended Six Months Ended February 25, 2022 February 26, 2021 February 25, 2022 February 26, 2021 Income before income taxes $ 10,558 $ 7,044 $ 39,011 $ 12,346 Income tax provision 7,586 1,200 15,341 4,475 Income tax expense includes a provision for federal, state and foreign taxes based on the annual estimated effective tax rate applicable to us and our subsidiaries, adjusted for certain discrete items which are fully recognized in the period they occur. Accordingly, the interim effective tax rate may not be reflective of the annual estimated effective tax rate. Our provision for income taxes for the six months ended February 25, 2022 increased by $ 10.9 million as compared to the same period in the prior year, primarily due to an increase in the amount of earnings subject to non-U.S. tax. As of February 25, 2022 and August 27, 2021, we had a full valuation allowance for net deferred tax assets associated with our U.S. operations. 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. The Company 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. Earnings Per Share Three Months Ended Six Months Ended February 25, 2022 February 26, 2021 February 25, 2022 February 26, 2021 Net income attributable to SGH – Basic and Diluted $ 2,458 $ 5,844 $ 22,485 $ 7,871 Weighted-average shares outstanding – Basic 49,522 48,435 49,267 48,778 Dilutive effect of equity plans and convertible notes 8,114 1,972 6,868 1,529 Weighted-average shares outstanding – Diluted 57,636 50,407 56,135 50,307 Earnings per share: Basic $ 0.05 $ 0.12 $ 0.46 $ 0.16 Diluted $ 0.04 $ 0.12 $ 0.40 $ 0.16 23 Table of Contents Below are potentially dilutive shares that were not included in the computation of diluted earnings per share because to do so would have been antidilutive: Three Months Ended Six Months Ended February 25, 2022 February 26, 2021 February 25, 2022 February 26, 2021 Equity plans 24 2,145 276 2,303 Convertible notes — 12,313 — 12,313 24 14,458 276 14,616 We have the option to pay cash, issue shares or a combination thereof for the aggregate amount due upon any conversion of our 2026 Notes. It is our intent to settle the principal amount of the 2026 Notes in cash upon any conversion. As a result, only the amounts payable in excess of the principal amounts upon conversion of the 2026 Notes are considered in diluted earnings per share under the treasury stock method. The 2026 Notes are dilutive when the average share price of the Company’s ordinary shares for a reporting period exceeds the conversion price of the 2026 Notes of $ 20.30 per share. See “Debt – Convertible Senior Notes.” Segment and Other Information Segment information presented below is consistent with how our chief operating decision maker evaluates operating results to make decisions about allocating resources and assessing performance. 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, were combined to become Memory Solutions. Intelligent Platform Solutions was formerly referred to as specialty compute and storage solutions. All prior period information in the tables below has been revised to reflect the change to our three reportable segments. • Memory Solutions : Our Memory Solutions group, under our SMART Modular brand, 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. • Intelligent Platform Solutions (“IPS”) : Our IPS group, under our Penguin Solutions brand, consists of two major product lines – Penguin Computing and Penguin Edge. Penguin Computing offers specialized platform solutions for high-performance computing, artificial intelligence, machine learning 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. • LED Solutions : Our LED Solutions group, under our Cree LED brand, 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 general lighting, video screens and specialty lighting applications. Our LED Solutions is comprised of the LED Business we acquired from Cree, Inc. on March 1, 2021. Segments are determined based on sources of revenue, types of customers and operating performance. There are no differences between the accounting policies for our segment reporting and our consolidated results of operations. Operating expenses directly associated with the activities of a specific segment are charged to that segment. Certain other 24 Table of Contents indirect operating income and expenses are generally allocated to segments based on their respective percentage of net sales. We do not allocate interest, other non-operating (income) expense or taxes to segments. Three Months Ended Six Months Ended February 25, 2022 February 26, 2021 February 25, 2022 February 26, 2021 Net sales: Memory Solutions $ 260,081 $ 218,597 $ 499,482 $ 444,421 Intelligent Platform Solutions 82,257 85,412 200,911 151,284 LED Solutions 106,833 — 218,722 — Total net sales 449,171 304,009 919,115 595,705 Segment operating income: Memory Solutions $ 32,496 $ 18,238 $ 69,166 $ 39,099 Intelligent Platform Solutions 7,702 8,922 21,882 11,803 LED Solutions 17,237 — 35,537 — Total segment operating income 57,435 27,160 126,585 50,902 Unallocated: Share-based compensation expense ( 9,973 ) ( 5,398 ) ( 19,748 ) ( 16,486 ) Amortization of acquisition-related intangibles ( 5,829 ) ( 3,413 ) ( 12,172 ) ( 6,827 ) Change in fair value of contingent consideration ( 24,000 ) — ( 41,200 ) — Out of period import tax expense (1) — ( 4,345 ) — ( 4,345 ) Other ( 828 ) ( 1,064 ) ( 1,866 ) ( 2,681 ) Total unallocated ( 40,630 ) ( 14,220 ) ( 74,986 ) ( 30,339 ) Consolidated operating income $ 16,805 $ 12,940 $ 51,599 $ 20,563 (1) During the second quarter of 2021, we recorded an out-of-period adjustment to correct errors originating in previous periods related to understated import tax costs, which resulted in a $4.3 million increase in cost of sales, $0.8 million increase in interest expense and $1.7 million benefit for income taxes. The adjustment was not considered material to the interim or annual consolidated financial statements for the year ended August 27, 2021 nor to any previously issued interim or annual consolidated financial statements. 25 Table of Contents