Penguin Solutions Inc.

10/20/2026 | Press release | Distributed by Public on 10/20/2026 14:39

Annual Report for Fiscal Year Ending August 28, 2026 (Form 10-K)

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 accompanying consolidated financial statements and notes for the year ended August 28, 2026. This discussion contains forward-looking statements that involve risks, uncertainties and other factors. Our actual results could differ materially from those contained in these forward-looking statements due to a number of risks, uncertainties and other factors, including those discussed below and elsewhere in this report. See also "Cautionary Note Regarding Forward-Looking Statements" and "PART I - Item 1A. Risk Factors."
Our fiscal year is the 52- or 53-week period ending on the last Friday in August. Fiscal years 2026, 2025 and 2024 contained 52, 52 and 53 weeks, respectively. All period references are to our fiscal periods unless otherwise indicated.
Overview
For an overview of our business, see "PART I - Item 1. Business."
On June 30, 2025, we completed the U.S. Domestication of the parent company of our corporate group, Penguin Solutions Cayman, from the Cayman Islands to the State of Delaware in the United States, resulting in Penguin Solutions Delaware becoming our publicly traded parent company and the successor issuer to Penguin Solutions Cayman. The financial information in this Annual Report for periods prior to the completion of the U.S. Domestication relates to Penguin Solutions Cayman. Unless stated otherwise or the context requires otherwise, the terms "Penguin Solutions," "Company," "we," "our," "us" or similar terms (i) for periods prior to the effectiveness of the U.S. Domestication, refer to Penguin Solutions Cayman and its consolidated subsidiaries and (ii) for periods at or after the completion of the U.S. Domestication, refer to Penguin Solutions Delaware and its consolidated subsidiaries. See "About This Annual Report," above.
Divestiture of SMART Brazil
On November 29, 2023, we completed the divestiture of an 81% interest in SMART Brazil to Lexar Europe B.V., an affiliate of Shenzhen Longsys Electronics Co. Ltd. On March 30, 2026, we sold our remaining 19% interest in SMART Brazil, subsequently renamed Zilia Technologies, completing our divestiture of the business.
Presentation of SMART Brazil as Discontinued Operations: In accordance with authoritative guidance under U.S. GAAP, we have presented the balance sheets, results of operations and cash flows of SMART Brazil operations in this Annual Report, including in the accompanying consolidated financial statements and notes, as discontinued operations for all periods presented. The SMART Brazil operations were previously reported as part of our Integrated Memory segment. Unless otherwise noted, discussion within this Annual Report relates solely to our continuing operations and excludes the SMART Brazil operations.
See "PART II - Item 8. Financial Statements and Supplementary Data - Notes to Consolidated Financial Statements - Divestiture of SMART Brazil."
Factors Affecting Our Operating Performance
Macro-Economic Demand Factors: Our business segments each have their own unique set of demand factors. Our Advanced Computing business is driven by demand for our AI and HPC products, as well as traditional workload optimization and efficiency applications. We expect increased AI adoption and broader implementation by enterprises within but not limited to verticals such as financial services, oil and gas, telecommunications, energy, government, manufacturing, and education, as well as increased neocloud and sovereign AI adoption, as organizations seek scalable infrastructure solutions, though the extent and timing of such adoption and implementation may vary and may affect our results of operations.
Demand in our Integrated Memory segment is driven by end-market demand from OEMs for customer-specific solutions in vertical markets such as industrial, government, networking, HPC and enterprise storage, as well as emerging demand for higher density and greater bandwidth solutions for AI deployments, and we anticipate growing demand for higher performance and reliability memory solutions, such as our CXL family of products, to support both traditional use cases and increasingly complex AI applications, although there can be no assurance that such demand will materialize as expected or at all. Finally, demand for our Optimized LED products is derived from targeted end-market applications, such as general high-power and mid-power lighting and specialty lighting,
including video display and horticulture applications. However, broader macro-economic trends, including regional market demand and the global macro-economic environment, including those related to global conflicts, such as those in the Middle East and Ukraine, and the global effects thereof on international relations, transport and trade, recessionary indicators, high inflation rates, uncertainty and costs associated with trade policies and tariffs, and interest rates, can adversely affect all three segments concurrently.
Shifts in the Mix and Timing of Our Net Sales: Shifts in the mix of net sales from our operating segments, and in the timing of net sales, which can vary significantly from period to period, have impacted and can continue to impact our business and results of operations, including gross and operating margins. For example, our Advanced Computing segment is subject to variability in its sales and margin profile from period to period due to factors such as the following: recognition of revenue sometimes being tied to customer decisions as to the completion of delivery and system go-live events; certain sales being affected by the timing of customer deployments and shipments or customer budget considerations; changes in customer spending on our products and services (including as a result of macro-economic demand factors); the impact of customer churn rates (including discounting and churn of significant customers from whom we derive a significant percentage of our net sales); discontinuation of certain of our products from time to time; shifts in our customer mix, including expected trends with respect to growth in demand from non-hyperscaler customers for AI and HPC solutions; and margin being driven by the proportion of higher margin software and managed services within our Advanced Computing sales. Within our Advanced Computing segment, our "AI infrastructure business" refers to customer engagements focused on AI workloads, including designing, building, deploying, and managing AI infrastructure hardware, software, and services. When we refer to our non-hyperscale AI infrastructure business, we are referring to our AI infrastructure business excluding sales to hyperscaler customers. Our AI infrastructure business has been transitioning from a hyperscaler concentration toward a more diversified non-hyperscaler customer base across neocloud, enterprise, and sovereign AI. This transition contributed to strong revenue growth in the second half of 2026, though the pace and timing of new customer deployments may create variability in net sales from period to period. Additionally, our net sales and margins have been negatively impacted by the winding down of our Penguin Edge business, which was completed in the fourth quarter of fiscal 2026. The comparability of our results of operations against prior periods will also be affected following the wind down of our Penguin Edge business. Our resource commitments and planning for each segment are relatively fixed in the short term, and as such, variability in expected net sales mix may have direct implications for our operating income and margins. Our Integrated Memory business historically has gross margins which are lower than the Company average and if net sales from this business grow faster than net sales for the Company overall, it may negatively impact total Company gross margins. In 2026, higher memory pricing increased Integrated Memory gross margin, and a decline in memory pricing would reverse that benefit.
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 Cree LED and Stratus Technologies acquisitions, 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 and successfully integrate such businesses, we may not be successful in growing our net sales and/or expanding our margins. Any acquisitions we do complete may require us to incur debt or raise capital through equity financings or may subject us to unforeseen liabilities or costs, 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 as well as certain raw materials, such as commodity DRAM components from offshore foundries that we use in our specialty memory products, third-party wafers that we use in our memory and LED businesses and AI and HPC components for our Advanced Computing business; the costs of such components and raw materials may fluctuate from time to time due to market conditions. In our memory and LED businesses, we have adopted a "Fab-Light" business model to reduce our capital expenditures and operating expenses, while affording greater flexibility in adapting to shifts in demand and other market trends. However, our reliance on third-party manufacturers exposes us to risk of supply chain disruption and lost business. For example, constrained memory supply may affect our ability to meet demand in our Integrated Memory business on a timely basis or at all, and the global semiconductor shortage, particularly during its peak, has adversely affected our results of operations. In addition, in our Advanced Computing business, where we source components from third parties, the high demand for and limited supply of AI components globally, as well as any delays in the production of such components, continues to affect our sourcing of these components and the timing of deployments. In particular, we continue to experience extended lead times for certain components that are
incorporated into our overall solutions, which impacts how quickly we are able to ramp existing and new customer projects and may negatively affect gross margins due to changes in shipment timing and product mix. 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 results of operations and financial condition may continue to be adversely affected.
Results of Operations
Year ended August 28,
2026
% of net
sales (1)
August 29,
2025
% of net
sales (1)
August 30,
2024
% of net
sales (1)
Net sales:
Advanced Computing $ 558,789 32.3 % $ 648,417 47.4 % $ 554,552 47.4 %
Integrated Memory 924,001 53.4 % 464,249 33.9 % 356,426 30.4 %
Optimized LED 248,678 14.4 % 256,128 18.7 % 259,818 22.2 %
Total net sales 1,731,468 100.0 % 1,368,794 100.0 % 1,170,796 100.0 %
Cost of sales 1,252,543 72.3 % 974,520 71.2 % 830,020 70.9 %
Gross profit 478,925 27.7 % 394,274 28.8 % 340,776 29.1 %
Operating expenses:
Research and development 81,677 4.7 % 79,801 5.8 % 81,537 7.0 %
Selling, general and administrative 220,412 12.7 % 238,177 17.4 % 233,880 20.0 %
Impairment of goodwill - - % 16,063 1.2 % - - %
Other operating expense 11,240 0.6 % 2,098 0.2 % 7,064 0.6 %
Total operating expenses 313,329 18.1 % 336,139 24.6 % 322,481 27.5 %
Operating income 165,596 9.6 % 58,135 4.2 % 18,295 1.6 %
Non-operating (income) expense:
Interest expense, net 438 - % 7,305 0.5 % 28,378 2.4 %
Other non-operating (income) expense 13,235 0.8 % 1,929 0.1 % 21,084 1.8 %
Total non-operating (income) expense 13,673 0.8 % 9,234 0.7 % 49,462 4.2 %
Income (loss) before taxes 151,923 8.8 % 48,901 3.6 % (31,167) (2.7) %
Income tax (benefit) provision (33,865) (2.0) % 20,066 1.5 % 10,618 0.9 %
Net income (loss) from continuing operations 185,788 10.7 % 28,835 2.1 % (41,785) (3.6) %
Net loss from discontinued operations - - % - - % (8,148) (0.7) %
Net income (loss) 185,788 10.7 % 28,835 2.1 % (49,933) (4.3) %
Net income attributable to noncontrolling interest 5,173 0.3 % 3,444 0.3 % 2,539 0.2 %
Net income attributable to Penguin Solutions $ 180,615 10.4 % $ 25,391 1.9 % $ (52,472) (4.5) %
(1)Summations of percentages may not compute precisely due to rounding.
Net Sales, Cost of Sales and Gross Profit
Net sales increased by $362.7 million, or 26.5%, in 2026 compared to the prior year, primarily driven by strong growth for our Integrated Memory segment. Integrated Memory net sales increased by $459.8 million, or 99.0%, compared to the same period in the prior year, primarily driven by strong momentum across DRAM and Flash, as accelerating AI-driven demand drove favorable pricing and increased volume. Advanced Computing net sales decreased by $89.6 million, or 13.8%, compared to the same period in the prior year, primarily due to the wind down of Penguin Edge and hyperscale hardware sales in 2025 that did not recur in 2026. These declines more than offset significant growth elsewhere within Advanced Computing, which accelerated in the fourth quarter and represented the majority of segment net sales in the quarter. Optimized LED net sales decreased by $7.5 million, or 2.9%, compared to the same period in the prior year, primarily due to a broad-based decline in demand across the business.
Net sales increased by $198.0 million, or 16.9%, in 2025 compared to the prior year, primarily due to higher sales from our Advanced Computing and Integrated Memory business segments. Advanced Computing net sales increased by $93.9 million, or 16.9%, compared to the same period in the prior year, primarily due to higher hardware sales driven by increased demand for AI solutions and HPC. Integrated Memory net sales increased by $107.8 million, or 30.3%, compared to the same period in the prior year, primarily due to higher sales volumes of flash and DRAM products stemming from improved market demand. Optimized LED net sales decreased by $3.7
million, or 1.4%, compared to the same period in the prior year, primarily due to lower direct sales across China and Europe.
Cost of sales increased by $278.0 million, or 28.5%, in 2026 compared to the prior year, primarily driven by strong growth for our Integrated Memory segment. Cost of sales increased by $144.5 million, or 17.4%, in 2025 compared to the prior year, primarily due to our Advanced Computing and Integrated Memory segments having increased product sales for the year.
Gross margin decreased to 27.7% in 2026 compared to 28.8% in 2025 primarily attributable to the wind down of our Penguin Edge business under our Advanced Computing segment, along with a shift in the overall mix of sales across all our business units. Gross margin decreased to 28.8% in 2025 compared to 29.1% in 2024 primarily due to unfavorable mix from higher product revenue in our Advanced Computing segment and a higher mix of Integrated Memory sales.
Non-GAAP Measure of Segment Operating Income
Below is a table of our operating income, measured on a non-GAAP basis, which Penguin Solutions management uses to supplement Penguin Solutions' financial results under GAAP to analyze its operations and make decisions as to future operational plans, and which management believes provides supplemental information that is useful to investors in analyzing and assessing our past and future operating performance. These non-GAAP measures exclude certain items, such as stock-based compensation expense; amortization of acquisition-related intangible assets (consisting of amortization of developed technology, customer relationships, trademarks/trade names and backlog acquired in connection with business combinations); diligence, acquisition and integration expense; restructuring charges; impairment of goodwill; redomiciliation costs; and other infrequent or unusual items. While amortization of acquisition-related intangible assets is excluded, the revenues from acquired companies is reflected in our non-GAAP measures and these intangible assets contribute to revenue generation. See "Item 8. Financial Statements and Supplementary Data - Notes to Consolidated Financial Statements - Segment and Other Information."
Non-GAAP financial measures should not be considered as a substitute for, or superior to, measures of financial performance prepared in accordance with GAAP, as they exclude important information about our financial results, as noted above. The presentation of these adjusted amounts varies from amounts presented in accordance with GAAP and therefore may not be comparable to amounts reported by other companies.
Year ended August 28,
2026 		August 29,
2025 		August 30,
2024
GAAP operating income $ 165,596 $ 58,135 $ 18,295
Stock-based compensation expense 31,815 41,176 43,160
Amortization of acquisition-related intangibles 29,469 34,838 39,272
Cost of sales-related restructuring (483) 746 2,136
Diligence, acquisition and integration expense 1,916 1,829 8,772
Redomiciliation costs (1)
- 10,038 470
Impairment of goodwill - 16,063 -
Restructuring charges 11,240 2,098 7,064
Other (1)
1,409 2,729 1,088
Non-GAAP operating income $ 240,962 $ 167,652 $ 120,257
Non-GAAP operating income by segment:
Advanced Computing $ 38,307 $ 115,009 $ 95,291
Integrated Memory 184,942 43,639 22,413
Optimized LED 17,713 9,004 2,553
Total non-GAAP operating income by segment $ 240,962 $ 167,652 $ 120,257
(1) In 2025 we began breaking out costs related to the U.S. Domestication from "Other." All periods presented have been adjusted to reflect this change.
Advanced Computing operating income on a non-GAAP basis decreased by $76.7 million, or 66.7%, in 2026 compared to the prior year primarily due to the wind down of our Penguin Edge business and hyperscale hardware sales in 2025 that did not recur in 2026. Advanced Computing operating income on a non-GAAP basis increased by $19.7 million, or 20.7%, in 2025 compared to the prior year primarily due to increased net sales
driven by increased demand for AI solutions, as well as lower subcontract services, partially offset by increased operating expenses, mainly driven by increased personnel-related expenses stemming from bonus achievement.
Integrated Memory operating income on a non-GAAP basis increased by $141.3 million, or 323.8%, in 2026 compared to the prior year primarily attributable to increased net sales driven by strong momentum across DRAM and Flash, as accelerating AI-driven demand supported higher pricing and increased volumes. Integrated Memory operating income on a non-GAAP basis increased by $21.2 million, or 94.7%, in 2025 compared to the prior year primarily due to increased net revenue, partially offset by increased operating expenses, mainly driven by increased personnel costs stemming from bonus achievement.
Optimized LED operating income on a non-GAAP basis increased by $8.7 million, or 96.7%, in 2026 primarily attributable to lower personnel-related expenses resulting from headcount reductions, together with improved gross profit driven by a more favorable product mix and tariff recoveries. Optimized LED operating income on a non-GAAP basis increased by $6.5 million, or 252.7%, in 2025 primarily due to higher gross profit, stemming from a more favorable product mix.
Operating and Non-operating (Income) Expense
Research and Development
Research and development expense increased by $1.9 million, or 2.4%, in 2026 compared to the prior year, primarily due to higher personnel-related expenses stemming from increased bonus achievement as a result of Company performance.
Research and development expense decreased by $1.7 million, or 2.1%, in 2025 compared to the prior year, primarily due to lower personnel-related expenses mainly driven by headcount reductions, as well as lower subcontract services mainly driven by Advanced Computing.
Selling, General and Administrative
Selling, general and administrative expense decreased by $17.8 million, or 7.5%, in 2026 compared to the prior year, primarily due to lower personnel-related expenses mainly driven by headcount reductions as well as lower subcontract services following the completion of our U.S. Domestication in 2025.
Selling, general and administrative expense increased by $4.3 million, or 1.8%, in 2025 compared to the prior year, primarily due to higher personnel-related expenses stemming from increased bonus achievement as a result of Company performance, partially offset by decreased professional services driven by increased cost in the prior year due to the SMART Brazil divestiture referenced above.
Impairment of Goodwill
In the second quarter of 2023, we initiated a plan to wind down manufacturing and discontinue the sale of certain products offered through our Penguin Edge business, which we completed in the fourth quarter of 2026. In connection therewith and with the preparation of the financial statements included in this Annual Report, we assessed goodwill associated with our Penguin Edge business within our Advanced Computing segment and concluded it is fully impaired. As a result, we recorded impairment charges of $16.1 million in 2025, to impair the carrying value of Penguin Edge goodwill. See "Item 8. Financial Statements and Supplementary Data - Notes to Consolidated Financial Statements - Intangible Assets and Goodwill."
Other Operating (Income) Expense
Other operating expense in 2026, 2025, and 2024 included restructuring charges of $11.2 million, $2.1 million, and $7.1 million, respectively, primarily for employee severance costs and other benefits resulting from workforce reductions, the elimination of certain projects across our businesses and other costs associated with the wind down of our Penguin Edge business. We anticipate that such activities will continue into future quarters and anticipate recording additional restructuring charges.
Interest Expense, Net
Net interest expense decreased by $6.9 million, or 94.0%, in 2026 compared to the prior year, primarily due to the full repayment of the Amended 2022 TLA (as defined below) during the fourth quarter of fiscal 2025. Net interest
expense decreased by $21.1 million, or 74.3%, in 2025 compared to the prior year, primarily due to principal payments made on the Amended 2022 TLA during the second half of fiscal 2024 along with the full repayment in the fourth quarter of fiscal 2025.
Other Non-operating (Income) Expense
Other non-operating (income) expense in 2026 included expense associated with the induced conversion of the 2029 and 2030 Notes of $33.2 million and a $10.0 million impairment expense on a non-marketable equity investment, partially offset by a net gain of $30.9 million from the disposition of equity investments. Other non-operating (income) expense in 2025 and 2024 included losses of $2.9 million, and $22.8 million, respectively, from the extinguishment or prepayment of debt. See "Item 8. Financial Statements and Supplementary Data - Notes to Consolidated Financial Statements - Cash and Investments, and Debt."
Income Tax Provision (Benefit)
Our provision for income taxes decreased by $53.9 million, or 268.8%, in 2026 compared to 2025 primarily due to the release of a valuation allowance. Our provision for income taxes increased by $9.4 million, or 89.0%, in 2025 compared to 2024 primarily due to an increase in profit before tax in jurisdictions subject to income tax.
In 2026, our tax benefit of $33.9 million and effective tax rate of (22.3)% differed from the U.S. statutory tax rate of 21.0%, primarily due to the release of the valuation allowance, the impact of foreign operations in jurisdictions with tax rates lower than the U.S. statutory rate, and U.S. tax credits and incentives, offset in part by foreign withholding taxes, state income taxes, nondeductible executive compensation and other nondeductible expenses.
In 2025, our tax expense of $20.1 million and effective tax rate of 41.0% differed from the U.S. statutory tax rate primarily due to losses generated in a jurisdiction where no tax benefit can be recognized, non-deductible expenses, return to provision adjustments, and foreign withholding taxes, offset in part by benefits from the U.S. Domestication (net of valuation allowance) and tax credits.
In 2024, our tax expense of $10.6 million and effective tax rate of (34.1)% differed from the U.S. statutory tax rate primarily due to losses generated in a jurisdiction where no tax benefit can be recognized, non-deductible expenses and foreign withholding taxes, offset in part by benefits associated with decreases in reserves for uncertain tax provisions and U.S. federal and state tax credits.
We have operations in Malaysia, where we have tax incentive arrangements for our pioneer status activities and our global supply chain business. The statutory tax rate in Malaysia is 24%. The Malaysia tax incentive arrangement for our pioneer status activities, which was originally scheduled to expire in August 2028, was renegotiated and extended through August 2031. The arrangement is subject to certain conditions, with which we have fully complied in 2026, 2025 and 2024. The Malaysia tax incentive arrangement for our global supply chain activities was amended in fiscal year 2025 and is also scheduled to expire in August 2031. The amended arrangement applies retroactively to the 2024 and 2025 tax years, and we have satisfied the applicable conditions for 2026, 2025 and 2024. The impact of the amended arrangement, including its retroactive application, has been reflected in our 2026 income tax provision. Our effective income tax rate in the future may be higher depending on a combination of our overall and jurisdictional profitability, our ability to continue to satisfy the conditions associated with our tax incentive arrangements, the tax rates applicable to future tax incentive arrangements, and the impact of the Organisation for Economic Co-operation and Development's Pillar Two Model Rules, which provide for a global minimum tax rate of 15%. For additional information, see "Item 8. Financial Statements and Supplementary Data - Notes to Consolidated Financial Statements - Income Taxes."
Net Loss From Discontinued Operations
As discussed above, we have presented the results of SMART Brazil as discontinued operations in our consolidated statements of operations for all periods presented. In the first quarter of 2024, we completed the divestiture, and in connection therewith, recognized an additional loss of $8.9 million. See "Item 8. Financial Statements and Supplementary Data - Notes to Consolidated Financial Statements - Divestiture of SMART Brazil."
Liquidity and Capital Resources
As of August 28, 2026, we had cash and cash equivalents of $647.2 million, of which $332.5 million was held by subsidiaries outside of the United States. Our principal uses of cash and capital resources have been debt service requirements, investments in working capital, acquisitions, repurchases of our common stock, capital expenditures, research and development expenditures, and other operating expenses. We expect that future capital expenditures will focus on expansion of our research and development activities, manufacturing equipment upgrades, acquisitions and IT infrastructure and software upgrades. Cash and cash equivalents generally consist of funds held in demand deposit accounts, money market funds and time deposits. We do not acquire investments for trading or speculative purposes.
We may from time to time seek additional equity or debt financing. Any future equity or debt financing may be dilutive to our existing investors and may include debt service requirements and financial and other restrictive covenants that may constrain our operations and growth strategies. In the event that we seek additional financing, we may not be able to raise such financing on terms acceptable to us, or at all. If we are unable to raise additional capital or generate cash flows necessary to expand our operations and invest in continued product innovation, we may not be able to compete successfully, which would harm our business, operations and financial condition.
We expect that our existing cash and cash equivalents, borrowings available under our credit facilities, and cash generated by operating activities will be sufficient to fund our operations for at least the next 12 months.
Entry Into 2025 Credit Agreement and Repayment of 2022 TLA
On February 7, 2022, Penguin Solutions Cayman and SMART Modular Technologies, Inc. (the "Borrowers") entered into a credit agreement (the "2022 Original Credit Agreement") with a syndicate of banks and Citizens Bank, N.A., as administrative agent that provided for (i) a term loan credit facility in an aggregate principal amount of $275.0 million (the "2022 TLA") and (ii) a revolving credit facility in an aggregate principal amount of $250.0 million (the "2022 Revolver"), in each case, maturing on February 7, 2027. The 2022 Original Credit Agreement provided that up to $35.0 million of the 2022 Revolver was available for issuances of letters of credit. On August 29, 2022, the 2022 Original Credit Agreement was amended (the "2022 Amended Credit Agreement") to, among other things, provide for incremental term loans of $300.0 million (together with the 2022 TLA, the "Amended 2022 TLA"), amend the First Lien Leverage Ratio (as defined in the 2022 Amended Credit Agreement) and increase the aggregate amount of unrestricted cash and permitted investments netted from the definitions of Consolidated First Lien Debt and Consolidated Net Debt. As of August 30, 2024, there was $300.0 million of aggregate principal amount outstanding under the Amended 2022 TLA and there were no amounts outstanding under the 2022 Revolver.
On June 24, 2025 (the "Refinancing Closing Date"), the Borrowers entered into a new Credit Agreement (the "2025 Credit Agreement") by and among the Borrowers, the lenders party thereto, and JPMorgan Chase Bank, N.A., as administrative agent, collateral agent and an issuing bank. The 2025 Credit Agreement provides for a revolving credit facility in an aggregate principal amount of $400 million (the "2025 Credit Facility" and the revolving loans thereunder, the "2025 Loans"), maturing on June 24, 2030 (subject to certain earlier "springing maturity" dates upon certain conditions specified in the 2025 Credit Agreement). The 2025 Credit Agreement provides that up to $35.0 million of the 2025 Credit Facility is available for issuances of letters of credit.
On the Refinancing Closing Date, we borrowed $100 million under the 2025 Credit Facility and simultaneously applied such proceeds, together with $200 million cash on hand, to repay in full all borrowings and terminate all commitments under the 2022 Amended Credit Agreement. Immediately prior to the repayment and termination of the 2022 Amended Credit Agreement, we had $300 million of principal outstanding under the Amended 2022 TLA, with unamortized issuance costs of $1.8 million and an effective interest rate of 7.17%, and no amounts outstanding under the 2022 Revolver, with unamortized issuance costs of $1.5 million. Following the termination of the 2022 Amended Credit Agreement, we recognized a loss on extinguishment of debt of $2.9 million.
Under the 2025 Credit Agreement, 2025 Loans bear interest at a rate per annum equal to either, at the Borrowers' option, Term Secured Overnight Financing Rate ("Term SOFR") rate or a base rate, in each case plus an applicable margin based on the Total Leverage Ratio (as defined in the 2025 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 2025 Credit Agreement. In July 2026, we used a portion of the net proceeds from the issuance of the 2031 Notes (as defined below) to repay the $100.0 million then outstanding under the 2025 Credit Facility. As of August 28, 2026, no principal amount of the 2025 Credit Agreement was outstanding.
For additional details regarding the 2025 Credit Agreement, refer to "PART II - Item 8. Financial Statements and Supplementary Data - Notes to Consolidated Financial Statements - Debt - Credit Agreement."
Convertible Senior Notes
2031 Notes
On July 17, 2026, we issued $750.0 million aggregate principal amount of our 0.00% Convertible Senior Notes due 2031 (the "2031 Notes") pursuant to, and governed by, an indenture (the "2031 Indenture"), dated July 17, 2026, between us and U.S. Bank Trust Company, National Association, as trustee. The 2031 Notes are general unsecured obligations, do not bear regular interest, and mature on August 1, 2031 (the "2031 Maturity Date"), unless earlier converted, redeemed or repurchased. Net proceeds from the offering were approximately $735.2 million, after deducting the initial purchasers' discounts, offering expenses, commissions, and other third-party costs. Total cost of issuance amounted to $14.8 million. As of August 28, 2026, $750.0 million in aggregate principal amount of 2031 Notes were outstanding.
In July 2026, simultaneously with the issuance of the 2031 Notes, we entered into privately negotiated transactions with certain noteholders to exchange (i) $135.5 million in aggregate principal amount of our 2.00% Convertible Senior Notes due 2029 (the "2029 Notes") for aggregate consideration consisting of approximately $135.5 million of cash, plus accrued and unpaid interest of $1.3 million, and 4.7 million shares of common stock; and (ii) $160.0 million in aggregate principal amount of our 2.00% Convertible Senior Notes due 2030 (the "2030 Notes") for aggregate consideration consisting of approximately $160.0 million of cash, plus accrued and unpaid interest of $1.3 million, and 4.0 million shares of common stock. Pursuant to such transactions, we extended limited-time inducement offers that provided those noteholders with consideration, the fair value of which exceeded the value that would have been received under the original conversion terms of the 2029 Notes and 2030 Notes. The fair value of the total consideration transferred was determined based on the quoted market price of our common stock on the date the inducement offers were accepted and the contractual cash amounts paid.
The exchanges were accounted for as induced conversions of debt. The exchanged 2029 Notes' and 2030 Notes' carrying values were removed from the Balance Sheet upon settlement. We recognized an associated inducement expense equal to the fair value of the incremental consideration of approximately $6.1 million for the 2029 exchange and $27.2 million for the 2030 exchange, which was included in other non-operating (income) expense. The exchanges resulted in increases to common stock and additional paid-in capital of approximately $0.3 million and $27.6 million, respectively. After giving effect to the exchanges, the total principal amount of the 2029 Notes and 2030 Notes outstanding as of July 17, 2026 was $14.5 million and $40.0 million, respectively. The capped call transactions associated with the 2029 Notes and 2030 Notes were not unwound and remain outstanding following the exchange transactions.
2030 Notes
On August 6, 2024 and August 14, 2024, we issued $175.0 million and $25.0 million aggregate principal amount, respectively, of our 2030 Notes pursuant to, and governed by, an indenture (the "2030 Indenture"), dated August 6, 2024, between us and U.S. Bank Trust Company, National Association, as trustee. The 2030 Notes will mature on August 15, 2030, unless earlier converted, redeemed or repurchased. As of August 28, 2026, $40.0 million in aggregate principal amount of 2030 Notes were outstanding.
2029 Notes
In February 2023, we issued $150.0 million in aggregate principal amount of our 2029 Notes pursuant to an indenture (the "2029 Indenture"), dated as of January 23, 2023, between the Company and U.S. Bank Trust Company, National Association, as trustee. The 2029 Notes will mature on February 1, 2029, unless earlier converted, redeemed or repurchased. As of August 28, 2026, $14.5 million in aggregate principal amount of 2029 Notes were outstanding.
2026 Notes
In February 2020, we issued $250.0 million in aggregate principal amount of 2.25% Convertible Senior Notes due 2026 (the "2026 Notes") pursuant to an indenture (the "2026 Indenture") between the Company and U.S. Bank Trust Company National Association, as trustee.
On January 18, 2023, we exchanged $150.0 million principal amount of 2026 Notes for $150.0 million principal amount of new 2029 Notes. On August 6, 2024, we repurchased $80.0 million aggregate principal amount of our 2026 Notes for $100.6 million cash (including payment for accrued interest) in privately-negotiated transactions. See "Item 8. Financial Statements and Supplementary Data - Notes to Consolidated Financial Statements - Debt - Convertible Senior Notes - Repurchase of Convertible Senior Notes" in this Annual Report.
The 2026 Notes matured on February 15, 2026. Per the terms of the 2026 Indenture, the Company elected to settle the principal portion of the 2026 Notes in cash and the excess conversion value in shares of the Company's common stock. At maturity, the outstanding principal amount of $20.0 million was paid in cash with no excess conversion value.
For additional details of the terms of our Convertible Senior Notes, refer to "PART II - Item 8. Financial Statements and Supplementary Data - Notes to Consolidated Financial Statements - Debt - Convertible Senior Notes" in this Annual Report.
Capped Calls
In connection with our Convertible Senior Notes, we have entered into privately-negotiated capped call transactions, which are intended to reduce the effect of potential dilution upon conversion of our Convertible Senior Notes. The capped calls provide for our receipt of cash or shares, at our election, from counterparties if the trading price of our common stock is above the strike price on the expiration date. For additional information on our capped call transactions, refer to "PART II - Item 8. Financial Statements and Supplementary Data - Notes to Consolidated Financial Statements - Equity - Capped Calls" in this Annual Report.
Divestiture of SMART Brazil
In November 2023, we completed the divestiture of SMART Brazil. In connection with the divestiture, we sold an 81% interest and retained a 19% interest in SMART Brazil. At the closing of the transaction, we received cash of $143.0 million, net of tax, from the sale. In addition, we received a deferred payment of $24.3 million (net of $4.2 million withholding tax) in May 2025. On March 30, 2026, we sold our retained interest, including our rights to the deferred cash adjustment, and received cash proceeds of $39.6 million, net of $6.5 million of withholding taxes. Refer to "PART II - Item 8. Financial Statements and Supplementary Data - Notes to Consolidated Financial Statements - Divestiture of SMART Brazil" and "- Cash and Investments - Non-marketable Equity Investments - Zilia Technologies."
Preferred Stock Investment
On December 13, 2024, we closed the SKT Investment (as defined below) by SK Telecom Co., Ltd. ("SKT"). Pursuant to the SKT Purchase Agreement, we sold to Astra AI Infra LLC, an affiliate of SKT ("Astra AI Infra"), 200,000 convertible preferred shares, par value $0.03 per share (the "Issued Cayman CPS") at a price of $1,000 per share or an aggregate price of $200.0 million (the "SKT Investment").
On the closing date of the SKT Investment, we and Astra AI Infra entered into an Investor Agreement (the "Investor Agreement"), and the Certificate of Designation of Convertible Preferred Shares setting forth the terms, rights and obligations of the Issued Cayman CPS (the "CPS Cayman Certificate of Designation") became effective. The Investor Agreement and the CPS Cayman Certificate of Designation provided for certain rights and restrictions relating to the SKT Investment, including but not limited to board representation rights, pro rata rights, registration rights and consent rights, and standstill provisions, disposition restrictions and voting obligations.
On June 27, 2025, in connection with the U.S. Domestication, Penguin Solutions Delaware executed and adopted a Certificate of Designation of Convertible Preferred Stock (the "CPS Delaware Certificate of Designation") that sets forth the terms, rights and obligations of the Issued CPS, which principal attributes remain substantially the same as prior to the U.S. Domestication, with changes to give effect to requirements of Delaware law. The shares of Issued CPS are convertible into shares of common stock of Penguin Solutions at an initial conversion price of $32.81 per share of common stock, subject to adjustment upon the occurrence of certain events, have an initial
liquidation preference of 1x and are only redeemable at our option, subject to certain conditions. The holder of Issued CPS may convert such holder's Issued CPS into shares of common stock at any time, provided that the Issued CPS may, at our option, automatically be converted into shares of common stock on any date following the second anniversary of the closing upon certain conditions. The Issued CPS entitles the holder to receive dividends of six percent per annum, cumulative, and payable quarterly in-kind or in cash at our option. Shares of Issued CPS are not redeemable upon or repurchased upon the election of the holders of Issued CPS. Refer to the CPS Delaware Certificate of Designation filed as Exhibit 3.3 hereto, and to the section entitled "Comparison of Rights of Cayman Islands Shareholders and Delaware Stockholders" contained in Penguin Solutions Cayman's definitive proxy statement on Schedule 14A filed with the SEC on May 2, 2025.
On June 30, 2025, effective upon consummation of the U.S. Domestication, Penguin Solutions Delaware assumed the Investor Agreement from Penguin Solutions Cayman, and Penguin Solutions Delaware and SKT amended and restated the Investor Agreement (as amended and restated, the "Amended and Restated Investor Agreement") such that the rights and restrictions relating to SKT's beneficial ownership of the Issued Cayman CPS in place prior to the U.S. Domestication apply in respect of SKT's holdings of the Issued CPS following consummation of the U.S. Domestication.
See "Item 8. Financial Statements and Supplementary Data - Notes to Consolidated Financial Statements - Preferred Stock Investment."
Contractual Obligations
For information regarding our debt obligations, see "Item 8. Financial Statements and Supplementary Data - Notes to Consolidated Financial Statements - Debt." For our operating lease obligations, see "Item 8. Financial Statements and Supplementary Data - Notes to Consolidated Financial Statements - Leases." For our purchase obligations, see "Item 8. Financial Statements and Supplementary Data - Notes to Consolidated Financial Statements - Commitments and Contingencies."
Cash Flows
Year ended August 28,
2026 		August 29,
2025 		August 30,
2024
Net cash provided by (used for) operating activities from continuing operations $ (151,914) $ 113,183 $ 105,521
Net cash provided by (used for) investing activities from continuing operations 58,090 (3,377) (11,804)
Net cash provided by (used for) financing activities from continuing operations 287,278 (63,464) (209,495)
Net increase in cash and cash equivalents from discontinued operations - 24,251 90,447
Effect of changes in currency exchange rates - - (1,256)
Net increase in cash, cash equivalents and restricted cash $ 193,454 $ 70,593 $ (26,587)
Operating Activities: Cash flows from operating activities reflects net income, adjusted for certain non-cash items, including depreciation and amortization expense, stock-based compensation, impairment charges, gains and losses from investing or financing activities and from the effects of changes in operating assets and liabilities.
Net cash used for operating activities from continuing operations in 2026 was $151.9 million, comprised primarily of net income of $185.8 million, adjusted for non-cash items of $36.3 million. Operating cash flows were negatively affected by a $374.0 million net change in our operating assets and liabilities, primarily from the effects of an increase of $493.6 million of inventories primarily to support future demand and an increase of $488.4 million in accounts receivable primarily driven by increased Integrated Memory sales, partially offset by an increase of $607.0 million in accounts payable and accrued expenses and other liabilities primarily due to higher accounts payable related to the increase and timing of purchases from suppliers and an increase in deferred revenue from customer services.
Net cash provided by operating activities from continuing operations in 2025 was $113.2 million, comprised primarily of net income of $28.8 million, adjusted for non-cash items of $103.5 million. Operating cash flows were negatively affected by a $19.1 million net change in our operating assets and liabilities, primarily from the effects of an increase of $101.6 million of inventories primarily to support future demand across both Advanced
Computing and Integrated Memory and an increase of $56.2 million in accounts receivable primarily due to timing of cash receipts, partially offset by an increase of $131.0 million in accounts payable and accrued expenses and other liabilities primarily due to higher accounts payable related to the timing of purchases from suppliers and an increase in deferred revenue from customer services, along with a decrease of $7.7 million in other assets.
Net cash provided by operating activities from continuing operations in 2024 was $105.5 million, comprised primarily of net loss of $41.8 million, adjusted for non-cash items of $121.6 million. Operating cash flows were favorably affected by a $25.7 million net change in our operating assets and liabilities, primarily from the effects of an increase of $54.3 million in accounts payable and accrued expenses and other liabilities and a decrease of $23.8 million inventories, partially offset by an increase of accounts receivable of $32.5 million and the payment of $29.0 million of contingent consideration, which related to our 2023 acquisition of Stratus Technologies. The increase in accounts payable and accrued expenses and other liabilities was primarily due to timing of payments, as well as higher deferred revenue resulting from amounts received from customers in advance of satisfying performance obligations.
Investing Activities: Net cash provided by investing activities from continuing operations in 2026 consisted primarily of proceeds from the disposition of equity investments of $71.8 million, partially offset by $11.6 million used for capital expenditures and deposits on equipment.
Net cash used for investing activities from continuing operations in 2025 consisted primarily of $9.0 million used for capital expenditures and deposits on equipment, partially offset by net maturities of marketable investment securities of $7.3 million.
Net cash used for investing activities from continuing operations in 2024 consisted primarily of $19.4 million used for capital expenditures and deposits on equipment and $11.0 million used for the purchases of marketable investment securities, partially offset by net maturities of marketable investment securities of $19.9 million.
Financing Activities: Net cash provided by financing activities from continuing operations in 2026 was $287.3 million, consisting primarily of net proceeds from the issuance of the 2031 Notes, net of issuance costs, of $735.2 million, $93.0 million in proceeds from restricted cash advances and $10.4 million in proceeds from the issuance of common stock from our equity plans, partially offset by $415.5 million in principal payments of debt and lines of credit, $49.1 million for the purchase of the 2031 Capped Calls, $74.4 million of payments to acquire common stock (including $55.7 million under our stock repurchase program), and $12.2 million cash paid for dividends to the holder of Issued CPS.
Net cash used for financing activities from continuing operations in 2025 was $63.5 million, consisting primarily of $300.0 million in principal repayment of debt, $52.3 million of payments to acquire common stock (including $41.2 million under our stock repurchase program), $7.9 million cash paid for dividends to the holder of Issued CPS, partially offset by $191.2 million of proceeds from the issuance of the Issued CPS, $100.0 million of proceeds from amounts drawn from the 2025 Credit Facility, and $8.8 million in proceeds from the issuance of common stock from our equity plans.
Net cash used for financing activities from continuing operations in 2024 was $209.5 million, consisting primarily of $351.3 million in principal repayment of debt, $21.3 million of payments to acquire ordinary shares, $21.0 million payment of contingent consideration related to our 2023 acquisition of Stratus Technologies and $16.3 million of payments to acquire capped calls in connection with the issuance of our 2030 Notes, partially offset by $192.7 million in net proceeds from the issuance of our 2030 Notes and $9.8 million in proceeds from the issuance of ordinary shares from our equity plans.
Critical Accounting Estimates
The preparation of these financial statements and related disclosures in conformity with U.S. GAAP requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues, expenses and related disclosures. We evaluate our estimates and judgments on an ongoing basis. Estimates and judgments are based on historical experience, forecasted events and various other assumptions that we believe to be reasonable under the circumstances; however, actual results could differ from those estimates. 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.
Our discussion of critical accounting estimates is intended to supplement our summary of significant accounting policies so that readers will have greater insight into the uncertainties involved in applying our critical accounting policies and estimates. For a summary of our significant accounting policies, see "Item 8. Financial Statements and Supplementary Data - Notes to Consolidated Financial Statements - Significant Accounting Policies."
Income Taxes: We are required to estimate our provision for income taxes and amounts ultimately payable or recoverable in numerous tax jurisdictions around the world. These estimates involve significant judgment and interpretations of regulations and are inherently complex. Resolution of income tax treatments in individual jurisdictions may not be known for many years after completion of the applicable year. We are also required to evaluate the realizability of our deferred tax assets on an ongoing basis in accordance with U.S. GAAP, which requires the assessment of our performance and other relevant factors. Realization of deferred tax assets is dependent on our ability to generate future taxable income. Our income tax provision or benefit is dependent, in part, on our ability to forecast future taxable income in various jurisdictions. Such forecasts are inherently difficult and involve significant judgments including, among others, projecting future average selling prices and sales volumes, manufacturing and overhead costs and other factors that significantly impact our analyses of the amount of net deferred tax assets that are more likely than not to be realized.
Inventories: Inventories are stated at the lower of cost or net realizable value. In our Optimized LED segment, cost is determined on a first-in, first-out basis. For all other segments, inventory value is determined on a specific identification basis for material and an allocation of labor and manufacturing overhead. At each balance sheet date, we evaluate ending inventories for excess quantities and obsolescence, including analyses of sales levels by product family, historical demand and forecasted demand in relation to inventory on hand, competitiveness of product offerings, market conditions and product life cycles. From time to time, our customers may request that we purchase and maintain significant inventory of raw materials for specific programs. Such inventory purchases are evaluated for excess quantities and potential obsolescence and could result in a provision at the time of purchase or subsequent to purchase. Inventory levels may fluctuate based on inventory held under service arrangements. Our provision for excess and obsolete inventory is also impacted by our arrangements with our customers and/or suppliers, including our ability or inability to resell such inventory to them.
Goodwill and Intangible Assets: We test goodwill for impairment in our fourth quarter each year, or more frequently if indicators of an impairment exist, to determine whether it is more likely than not that the fair value of the reporting unit with goodwill is less than its carrying value. For reporting units for which we conclude that it is more likely than not that the fair value is more than its carrying value, goodwill is considered not impaired and we are not required to perform the goodwill impairment test. Qualitative factors considered in this assessment include industry and market considerations, overall financial performance and other relevant events and factors affecting the fair value of the reporting unit. For reporting units for which this assessment concludes that it is more likely than not that the fair value is below the carrying value, goodwill is tested for impairment by determining the fair value of the reporting unit and comparing it to the carrying value of the net assets assigned to the reporting unit. If the fair value of the reporting unit exceeds its carrying value, goodwill is considered not impaired. If the carrying value of the reporting unit exceeds its fair value, we would record an impairment loss up to the difference between the carrying value and implied fair value.
Determining when to test for impairment, the reporting units, the assets and liabilities of the reporting unit and the fair value of the reporting unit requires significant judgment and involves the use of significant estimates and assumptions. These estimates and assumptions include revenue growth rates, forecasted manufacturing costs, budgets and other expenses developed as part of our long-range planning process. We test the reasonableness of the output of our long-range planning process by calculating an implied value per share and comparing that to current stock prices, analysts' consensus pricing and management's expectations. These estimates and assumptions are used to calculate projected future cash flows for the reporting unit, which are discounted using a risk-adjusted rate to estimate a fair value. We base fair value estimates on assumptions we believe to be reasonable but that are unpredictable and inherently uncertain. Actual future results may differ from those estimates.
We test other identified intangible assets with definite useful lives when events and circumstances indicate the carrying value may not be recoverable by comparing the carrying amount to the sum of undiscounted cash flows expected to be generated by the asset. Estimating fair values involves significant assumptions, including future sales prices, sales volumes, costs and discount rates.
Revenue Recognition: We enter into contracts with customers that may include combinations of products and services, resulting in arrangements containing multiple performance obligations for hardware and software products and/or various services.
We assess relevant contractual terms in our customer contracts to determine the transaction price. We apply judgment in identifying contractual terms and determining the transaction price as we may be required to estimate variable consideration when determining the amount of revenue to recognize. We include estimated variable consideration in the transaction price only to the extent it is probable that a significant reversal of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is resolved. Estimates of variable consideration are reassessed each reporting period and recorded as an adjustment to revenue, as applicable.
We also consider the customers' right of return in determining the transaction price, where applicable. If actual credits received by customers under these programs were to deviate significantly from our estimates, which are based on historical experience, our revenue could be adversely affected.
We allocate the transaction price for each customer contract to the performance obligation based on the relative stand-alone selling price ("SSP"). Determining the relative SSP for contracts that contain multiple performance obligations requires significant judgment. The best evidence of SSP is the observable price of a product or service when we sell the goods separately in similar circumstances and to similar customers. In instances where SSP is not directly observable, we apply judgment and determine SSP using information that may include market conditions and other observable inputs. For all performance obligations, we are able to establish the SSP by maximizing the use of observable inputs. We typically establish an SSP range for our products and services, which is reassessed on a periodic basis, or when facts and circumstances change. SSP for our products and services can evolve over time due to changes in our pricing practices, internally approved pricing guidelines with respect to geographies, customer type, internal costs, and gross margin objectives for the related performance obligations, which can also be influenced by intense competition, changes in demand for our products and services, economic and other factors.
We provide certain services on an agent basis, whereby we procure product, materials and services on behalf of our customers and then resell such product, materials or services to our customers. Determining whether we are the principal or agent in these transactions requires significant judgment. This determination affects the amount of revenue we recognize; a principal recognizes revenues at the gross amount received for the goods and services, while an agent recognizes revenue at the net amount.
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