SMART Modular Technologies (WWH), Inc. - FORM 10-Q

Attached files

file	filename
EX-32 - EXHIBIT 32 - SMART Modular Technologies (WWH), Inc.	c19457exv32.htm
EX-31.2 - EXHIBIT 31.2 - SMART Modular Technologies (WWH), Inc.	c19457exv31w2.htm
EX-31.1 - EXHIBIT 31.1 - SMART Modular Technologies (WWH), Inc.	c19457exv31w1.htm

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)


þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended May 27, 2011


o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission file number 000-51771

SMART MODULAR TECHNOLOGIES (WWH), INC.

(Exact name of registrant as specified in its charter)


Cayman Islands		20-2509518
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification Number)

39870 Eureka Drive, Newark, California 94560
(Address of principal executive offices, zip code)

(510) 623-1231
(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days: Yes þ No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act (Check one):


Large accelerated filer o	Accelerated filer þ	Non-accelerated filer o	Smaller reporting company o
		(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act): Yes o No þ

The number of registrant’s ordinary shares outstanding as of June 27, 2011: 65,198,771.

SMART MODULAR TECHNOLOGIES (WWH), INC.

INDEX TO QUARTERLY REPORT

TABLE OF CONTENTS


	Page
PART I. FINANCIAL INFORMATION		3

Item 1. Financial Statements		3

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		22

Item 3. Quantitative and Qualitative Disclosures About Market Risk		31

Item 4. Controls and Procedures		31

PART II. OTHER INFORMATION		31

Item 1. Legal Proceedings		31

Item 1A. Risk Factors		32

Item 6. Exhibits		35

SIGNATURES		36

Exhibit 31.1
Exhibit 31.2
Exhibit 32

PART I. FINANCIAL INFORMATION


Item 1.		Financial Statements

SMART MODULAR TECHNOLOGIES (WWH), INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)


	May 27,		August 27,
	2011		2010
	(In thousands, except
	share data)
ASSETS

Current assets:
Cash and cash equivalents	$	131,737	$	115,474
Accounts receivable, net of allowances of $1,778 and $1,660 as of May 27, 2011 and August 27, 2010, respectively		177,664		208,377
Inventories		98,071		112,103
Prepaid expenses and other current assets		22,670		33,488

Total current assets		430,142		469,442
Property and equipment, net		52,505		46,221
Other non-current assets		32,719		21,217
Other intangible assets, net		5,744		6,460
Goodwill		1,061		1,061

Total assets	$	522,171	$	544,401


LIABILITIES AND SHAREHOLDERS’ EQUITY

Current liabilities:
Accounts payable	$	91,441	$	151,885
Accrued liabilities		21,977		29,318
Short-term debt		55,072		—

Total current liabilities		168,490		181,203
Other long-term liabilities		7,298		4,546
Long-term debt		—		55,072

Total liabilities		175,788		240,821

Commitments and contingencies
Shareholders’ equity:
Ordinary shares, $0.00016667 par value; 600,000,000 shares authorized; 65,152,351 and 62,740,650 shares issued and outstanding as of May 27, 2011 and August 27, 2010, respectively		11		10
Additional paid-in capital		133,548		118,123
Accumulated other comprehensive income		28,625		11,658
Retained earnings		184,199		173,789

Total shareholders’ equity		346,383		303,580

Total liabilities and shareholders’ equity	$	522,171	$	544,401

See accompanying notes to unaudited condensed consolidated financial statements.

SMART MODULAR TECHNOLOGIES (WWH), INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)


	Three Months Ended					Nine Months Ended
	May 27,		May 28,			May 27,			May 28,
	2011		2010			2011			2010
	(In thousands, except per share data)

Net sales	$	164,479	$	201,235		$	551,387		$	484,438
Cost of sales ⁽¹⁾		132,100		155,738			446,474			368,162

Gross profit		32,379		45,497			104,913			116,276

Operating expenses:
Research and development ⁽¹⁾		7,652		6,657			23,664			17,606
Selling, general and administrative ⁽¹⁾		15,224		16,340			45,241			44,037
Acquisition costs		3,533		—			3,533			—
Restructuring charges		480		—			3,311			—
Technology access charge		—		—			7,534			—

Total operating expenses		26,889		22,997			83,283			61,643

Income from operations		5,490		22,500			21,630			54,633
Interest income (expense), net		179		(837	)		(762	)		(3,663	)
Other income, net		2,047		608			2,882			5,125

Total other income (expense)		2,226		(229	)		2,120			1,462

Income before provision for income taxes		7,716		22,271			23,750			56,095
Provision for income taxes		5,444		7,354			13,340			20,504

Net income	$	2,272	$	14,917		$	10,410		$	35,591


Net income per share, basic	$	0.04	$	0.24		$	0.16		$	0.57

Net income per share, diluted	$	0.03	$	0.23		$	0.16		$	0.55

Shares used in computing net income per ordinary share		64,137		62,463			63,405			62,216

Shares used in computing net income per diluted share		67,648		65,502			66,498			64,843


⁽¹⁾ Stock-based compensation by category:
Cost of sales	$	219	$	192		$	681		$	511
Research and development		426		378			1,209			982
Selling, general and administrative		1,567		1,338			4,715			3,900

See accompanying notes to unaudited condensed consolidated financial statements.

SMART MODULAR TECHNOLOGIES (WWH), INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)


	Three Months Ended				Nine Months Ended
	May 27,		May 28,		May 27,		May 28,
	2011		2010		2011		2010
	(In thousands)

Net income	$	2,272	$	14,917	$	10,410	$	35,591
Other comprehensive income:
Net changes in unrealized gain or loss on derivative instruments accounted for as cash flow hedges		—		161		—		1,149
Foreign currency translation		9,793		8,079		16,967		6,985

Comprehensive income	$	12,065	$	23,157	$	27,377	$	43,725

See accompanying notes to unaudited condensed consolidated financial statements.

SMART MODULAR TECHNOLOGIES (WWH), INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)


	Nine Months Ended
	May 27,			May 28,
	2011			2010
	(In thousands)
Cash flows from operating activities:
Net income	$	10,410		$	35,591
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Depreciation and amortization		16,935			11,779
Stock-based compensation		6,605			5,393
Provision for (recovery of) doubtful accounts receivable and sales returns		118			(19	)
Amortization of debt issuance costs		298			861
Loss on sale of assets		582			430
Deferred income tax provision (benefit)		273			31
Gain on early repayment of long-term debt		—			(1,178	)
Loss on display business divestiture		—			486
Changes in operating assets and liabilities:
Accounts receivable		32,547			(79,732	)
Inventories		16,195			(46,314	)
Prepaid expenses and other assets		(2,340	)		(17,434	)
Accounts payable		(58,195	)		74,277
Accrued expenses and other liabilities		(3,624	)		11,755

Net cash provided by (used in) operating activities		19,804			(4,136	)

Cash flows from investing activities:
Capital expenditures		(15,030	)		(15,384	)
Cash deposits on equipment		(743	)		(2,157	)
Net proceeds from display business divestiture		—			2,181
Proceeds from sale of property and equipment		—			326

Net cash used in investing activities		(15,773	)		(15,034	)

Cash flows from financing activities:
Proceeds from issuance of ordinary shares from stock option exercises		8,641			1,384
Excess tax benefits from share-based compensation		180			—
Repayment of long-term debt		—			(25,000	)

Net cash provided by (used in) financing activities		8,821			(23,616	)

Effect of exchange rate changes on cash and cash equivalents		3,411			1,111

Net increase (decrease) in cash and cash equivalents		16,263			(41,675	)
Cash and cash equivalents at beginning of period		115,474			147,658

Cash and cash equivalents at end of period	$	131,737		$	105,981


Supplemental disclosures of cash flow information:
Cash paid during the year:
Interest	$	2,510		$	4,217
Taxes		15,910			19,361
Non-cash activities information:
Change in ICMS assessment payable and related indemnification receivable	$	2,416		$	—
Change in fair value of derivative instruments		—			1,149

See accompanying notes to unaudited condensed consolidated financial statements.

SMART MODULAR TECHNOLOGIES (WWH), INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

NOTE 1 — Basis of Presentation and Principles of Consolidation

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements of SMART Modular Technologies (WWH), Inc. and subsidiaries (“SMART” or the “Company”) are as of May 27, 2011 and August 27, 2010 and for the three and nine months ended May 27, 2011 and May 28, 2010. These unaudited condensed consolidated financial statements have been prepared by the Company in accordance with generally accepted accounting principles in the United States (“U.S. GAAP”). The results of operations for the interim periods shown in this report are not necessarily indicative of results to be expected for the full fiscal year ending August 26, 2011. In the opinion of the Company’s management, the unaudited interim financial statements reflect all adjustments, consisting only of normal, recurring adjustments considered necessary for a fair statement of the financial position, results of operations and cash flows for the periods indicated. The interim unaudited condensed consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements as of and for the fiscal year ended August 27, 2010, which are included in the Annual Report on Form 10-K filed with the Securities and Exchange Commission (“SEC”).

The accompanying unaudited condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries and operations located in Phoenix, Arizona; Newark and Irvine, California; Westford, Massachusetts; South Korea; Scotland; Puerto Rico; Malaysia; and Brazil. The financial information for two of the Company’s subsidiaries, SMART Modular Technologies Indústria de Componentes Eletrônicos Ltda. (“SMART Brazil”) and SMART Modular Technologies do Brasil — Indústria e Comércio de Componentes Ltda. are included in the Company’s consolidated financial statements on a one month lag.

The preparation of unaudited condensed consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates and assumptions.

Product and Service Revenue

The Company recognizes revenue in accordance with ASC 605, Revenue Recognition. Product revenue is recognized when there is persuasive evidence of an arrangement, product delivery has occurred, the sales price is fixed or determinable, and collectability is reasonably assured. Product revenue typically is recognized at the time of shipment or when the customer takes title of the goods. All amounts billed to a customer related to shipping and handling are classified as revenue, while all costs incurred by the Company for shipping and handling are classified as cost of sales. Sales taxes collected from customers and remitted to governmental authorities are accounted for on a net basis and therefore are excluded from revenues in the consolidated statements of income.

In addition, the Company has classes of transactions with customers that are accounted for on an agency basis (that is, the Company recognizes as revenue the net profit associated with serving as an agent with immaterial or no associated cost of sales). The Company provides procurement, logistics, inventory management, temporary warehousing, kitting and packaging services for these customers. Revenue from these arrangements is recognized as service revenue and is determined by a fee for services based on material procurement costs. The Company recognizes service revenue upon the completion of the services, typically upon shipment of the product. There are no post-shipment obligations subsequent to shipment of the product under the agency arrangements.

The following is a summary of our gross billings to customers and net sales for services and products (in thousands):


	Three Months Ended				Nine Months Ended
	May 27,		May 28,		May 27,		May 28,
	2011		2010		2011		2010

Service revenue, net	$	8,255	$	10,751	$	28,327	$	28,493
Cost of sales — service ⁽¹⁾		267,106		259,310		748,429		624,304

Gross billings for services		275,361		270,061		776,756		652,797
Product net sales		156,224		190,484		523,060		455,945

Gross billings to customers	$	431,585	$	460,545	$	1,299,816	$	1,108,742


Product net sales	$	156,224	$	190,484	$	523,060	$	455,945
Service revenue, net		8,255		10,751		28,327		28,493

Net sales	$	164,479	$	201,235	$	551,387	$	484,438


⁽¹⁾		Represents cost of sales associated with service revenue reported on a net basis.

Recent Accounting Pronouncements

With the exception of those discussed below, there have been no recent accounting pronouncements or changes in accounting pronouncements during the nine months ended May 27, 2011 that are of significance, or potential significance, to the Company.

In January 2010, the FASB issued ASU 2009-16, Accounting for Transfers of Financial Assets (FASB Statement No. 166, Accounting for Transfers of Financial Assets), or ASU 2009-16, which eliminates the concept of a “qualifying special-purpose entity” (QSPE), revises conditions for reporting a transfer of a portion of a financial asset as a sale (e.g., loan participations), clarifies the derecognition criteria, eliminates special guidance for guaranteed mortgage securitizations, and changes the initial measurement of a transferor’s interest in transferred financial assets. ASU 2009-16 is effective for financial statements issued for fiscal years, and interim periods within those fiscal years, beginning after November 15, 2009. The Company adopted the provisions of this ASU in fiscal 2011 and it did not have a material impact on its consolidated results of operations and financial condition.

In January 2010, the FASB issued ASU 2009-17, Improvements to Financial Reporting by Enterprises Involved with Variable Interest Entities (FASB Statement No. 167, Amendments to FASB Interpretation No. 46 (R)), which revises analysis for identifying the primary beneficiary of a variable interest entity, or VIE, by replacing the previous quantitative-based analysis with a framework that is based more on qualitative judgments. The new guidance requires the primary beneficiary of a VIE to be identified as the party that both (i) has the power to direct the activities of a VIE that most significantly impact its economic performance and (ii) has an obligation to absorb losses or a right to receive benefits that could potentially be significant to the VIE. ASU 2009-17 is effective for financial statements issued for fiscal years, and interim periods within those fiscal years, beginning after November 15, 2009. The Company adopted the provisions of this ASU in fiscal 2011 and it did not have a material impact on its consolidated results of operations and financial condition.

In October 2009, the FASB issued Accounting Standards Update (“ASU”) 2009-13, Revenue Recognition (Topic 605) — Multiple-Deliverable Revenue Arrangements. This guidance modifies the fair value requirements of FASB ASC subtopic 605-25, Revenue Recognition-Multiple Element Arrangements, by allowing the use of the “best estimate of selling price” in addition to vendor specific objective evidence and third-party evidence for determining the selling price of a deliverable. This guidance establishes a selling price hierarchy for determining the selling price of a deliverable, which is based on: (a) vendor-specific objective evidence, (b) third-party evidence, or (c) estimates. In addition, the residual method of allocating arrangement consideration is no longer permitted. ASU 2009-13 is effective for fiscal years beginning on or after June 15, 2010. The Company adopted ASU 2009-13 in fiscal 2011 and it did not have a material impact on its consolidated results of operations and financial condition.

In October 2009, the FASB issued ASU 2009-14, Software (Topic 985) — Certain Revenue Arrangements that Include Software Elements. This guidance modifies the scope of FASB ASC subtopic 965-605, Software-Revenue Recognition, to exclude from its requirements non-software components of tangible products and software components of tangible products that are sold, licensed, or leased with tangible products when the software components and non-software components of the tangible product function together to deliver the tangible product’s essential functionality. ASU 2009-14 is effective for fiscal years beginning on or after June 15, 2010. The Company adopted ASU 2009-14 in fiscal 2011 and it did not have a material impact on its consolidated results of operations and financial condition.

NOTE 2 — Merger Agreement

Pursuant to the Merger Agreement, at the effective time of the Merger, each issued and outstanding ordinary share of the Company (other than treasury shares, shares owned by Parent or Merger Sub, shares owned by any of the Company’s wholly-owned subsidiaries and shares held by any shareholders who are entitled to and who properly exercise appraisal and dissention rights under the laws of the Cayman Islands) will be canceled and extinguished and automatically converted into the right to receive $9.25 in cash, without interest and less applicable withholding taxes.

The Merger Agreement contains a provision under which the Company may solicit alternative acquisition proposals for the 45 days following the date the Merger Agreement was signed, and such period concluded on June 10, 2011 with no alternative acquisition proposals being received. After expiration of this period, the Company is subject to a “no-shop” restriction on its ability to solicit alternative acquisition proposals, provide information and engage in discussions with third parties. The no-shop provision is subject to a “fiduciary-out” provision that allows the Company under certain circumstances to provide information and participate in discussions with respect to unsolicited alternative acquisition proposals.

The Merger Agreement contains certain termination rights for both the Company and the Parent. The Merger Agreement provides that, upon termination under specified circumstances, the Company would be required to pay Parent a termination fee of $19.4 million or $12.9 million, depending on the timing and circumstances of the termination and, under certain circumstances, to reimburse Parent for an amount not to exceed $5 million for transaction expenses incurred by Parent and its affiliates (such reimbursement amount to be offset against any termination fee payable by the Company). The Merger Agreement also provides that, upon termination under certain specified circumstances, Parent would be required to pay the Company a termination fee of $58.1 million.

Parent has obtained equity and debt financing commitments for the transactions contemplated by the Merger Agreement. The aggregate proceeds from these commitments is expected to be sufficient to fully finance the Merger and the other transactions contemplated thereby. Consummation of the Merger is not subject to a financing condition, but is subject to customary conditions to closing, including the approval of the Company’s shareholders and receipt of requisite antitrust approvals. The affirmative vote of two-thirds of the ordinary shares attending a duly convened shareholders meeting voting in person or by proxy is required to approve the Merger. The Company expects the Merger to close in the third calendar quarter of 2011 contingent on the satisfaction of all closing conditions including shareholder approval.

Concurrently with the execution of the Merger Agreement, pursuant to the limited guarantees by each of Silver Lake Partners III, L.P. and Silver Lake Sumeru Fund, L.P. in favor of the Company, such funds, severally and not jointly, have unconditionally and irrevocably agreed to guarantee (i) the due and punctual payment, observance, performance and discharge of their respective portions of Parent’s payment obligations with respect to its termination fee described above, subject to the limitations set forth in the limited guarantees and the Merger Agreement, and (ii) the expense reimbursement obligations of Parent in connection with the costs and expenses incurred in connection with any suit to enforce the payment of the $58.1 million termination fee.

The foregoing description of the Merger Agreement is only a summary, does not purport to be complete and is qualified in its entirety by reference to the Merger Agreement, which is attached as Exhibit 2.1 to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on April 28, 2011.

In the third quarter of fiscal 2011, the Company incurred and expensed $3.5 million of acquisition costs in connection with the Merger.

NOTE 3 — Stock-Based Compensation

The Company accounts for stock-based compensation under ASC 718, Compensation — Stock Compensation, which requires companies to recognize in their statement of operations all share-based payments, including grants of stock options and other types of equity awards, based on the grant date fair value of such share-based awards.

Total stock-based compensation expense for options, restricted share units and other awards recognized for the three months ended May 27, 2011 and May 28, 2010 was approximately $2.2 million and $1.9 million, respectively. Total stock-based compensation expense for options, restricted share units and other awards recognized for the nine months ended May 27, 2011 and May 28, 2010 was approximately $6.6 million and $5.4 million, respectively.

Stock Options

The Company’s stock option plan provides for grants of options to employees and independent directors of the Company to purchase the Company’s ordinary shares at the fair value of such shares on the grant date. The options generally vest over a four-year period beginning on the grant date and have a 10-year term. As of May 27, 2011, there were 11,061,020 ordinary shares reserved for issuance under this plan, of which 2,504,761 ordinary shares represented the number of shares available for grant.

For stock options, excluding restricted share units and other awards, the stock-based compensation expense recognized for the three months ended May 27, 2011 and May 28, 2010 was approximately $1.3 million and $1.4 million, respectively. For stock options, excluding restricted share units and other awards, the stock-based compensation expense recognized for the nine months ended May 27, 2011 and May 28, 2010 was approximately $4.0 million and $4.1 million, respectively.

Summary of Assumptions and Activity for Stock Options

The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model that uses the assumptions noted in the following table. Expected volatility for the nine months ended May 27, 2011 is based on the Company’s historical common stock volatility, compared to prior periods when the Company used a weighted average of the Company’s historical common stock volatility (80% weighting) together with the historical volatilities of the common stock of comparable publicly traded companies (20% weighting). The expected term of options granted represents the weighted average period of time that options granted are expected to be outstanding giving consideration to vesting schedules and our historical exercise patterns. The risk-free interest rate for the expected term of the options is based on the average U.S. Treasury yield curve at the end of the quarter. The following assumptions were used to value stock options:


	Nine Months Ended
	May 27,			May 28,
	2011			2010
Stock options:
Expected term (years)		4.4			4.7
Expected volatility		81	%		78	%
Risk-free interest rate		1.71	%		2.18	%
Expected dividends		—			—

A summary of option activity as of and for the nine months ended May 27, 2011, is presented below (dollars and shares in thousands, except per share data):


						Weighted
						Average
				Weighted		Remaining
				Average		Contractual		Aggregate
				Exercise		Term		Intrinsic
	Shares			Price		(Years)		Value
Options outstanding at August 27, 2010		8,434		$	4.39
Options granted		1,088			6.60
Options exercised		(2,342	)		3.69
Options forfeited and cancelled		(469	)		6.19

Options outstanding at May 27, 2011		6,711		$	4.86		6.83	$	29,752

Options exercisable at May 27, 2011		3,709		$	4.41		5.63	$	18,322

Options vested and expected to vest at May 27, 2011		6,453		$	4.81		6.74	$	28,951

The Black-Scholes weighted average fair value of options granted during the three months ended May 27, 2011 and May 28, 2010 was $4.84 and $3.99 per option, respectively. The Black-Scholes weighted average fair value of options granted during the nine months ended May 27, 2011 and May 28, 2010 was $4.03 and $2.78 per option, respectively. The total intrinsic value of employee stock options exercised during the nine months ended May 27, 2011 and May 28, 2010 was approximately $10.6 million and $3.1 million, respectively. Upon the exercise of options, the Company issues new ordinary shares from its authorized shares available for issuance.

A summary of the status of the Company’s non-vested stock options as of May 27, 2011, and changes during the nine months ended May 27, 2011, is presented below (shares in thousands):


				Weighted
				Average
				Grant Date Fair
	Shares			Value Per Share
Non-vested stock options at August 27, 2010		3,739		$	2.61
Stock options granted		1,088		$	4.03
Vested stock options		(1,356	)	$	2.33
Forfeited and cancelled stock options		(469	)	$	3.50

Non-vested stock options at May 27, 2011		3,002		$	3.12

As of May 27, 2011 there was approximately $8.3 million of total unrecognized compensation costs related to employee and independent director stock options. Such cost is expected to be recognized over the weighted average period of 2.4 years. The total fair value of shares vested during the nine months ended May 27, 2011 was approximately $3.2 million.

Restricted Share Units (“RSUs”)

The Company’s equity incentive plan also provides for grants of RSUs, and, beginning with the first quarter of fiscal 2009, the Company began issuing performance-based and time-based RSUs.

The time-based RSUs vest over a period ranging from one year to four years and their fair value is determined by the closing price of the Company’s ordinary shares on the date of grant.

The Company has issued two types of performance-based RSUs, one based on an internal metric and the other based on an external metric, the Russell MicroCap index (IWC).

The performance-based RSUs containing an internal metric which were issued in fiscal 2009 would have vested in fiscal 2011 if the Company achieved its fiscal 2009 adjusted EBIT target as approved by the Board of Directors. In the first quarter of fiscal 2010, these performance-based RSUs were not awarded because the target was not met.

In the first and second quarters of fiscal 2010 and the first quarter of fiscal 2011, the Company issued performance-based RSUs that contained an external stock market index as a benchmark for performance (“market-based RSUs”). The number of market-based RSUs awarded will depend upon the Company’s stock performance compared to an external stock market index on a date three days before the date set for vesting. The ultimate number of market-based RSUs awarded will then vest three years after the grant date. The fair value of market-based RSUs is determined by using a Monte Carlo valuation model.

A summary of the changes in RSUs outstanding under the Company’s equity incentive plan during the nine months ended May 27, 2011 is presented below (dollars and shares in thousands, except per share data):


				Weighted
				Average		Aggregate
				Grant Date		Intrinsic
	Shares			Fair Value		Value
Awards outstanding at August 27, 2010		1,153		$	5.25
Awards granted		895			7.01
Awards vested		(70	)		5.09
Awards forfeited and cancelled		(133	)		6.33

Awards outstanding at May 27, 2011		1,845		$	6.41	$	17,012

The stock-based compensation expense related to RSUs for the three months ended May 27, 2011 and May 28, 2010 was approximately $0.9 million and $0.5 million, respectively. The stock-based compensation expense related to RSUs for the nine months ended May 27, 2011 and May 28, 2010 was approximately $2.6 million and $1.3 million, respectively.

As of May 27, 2011, the Company had approximately $5.8 million of unrecognized compensation expense related to RSUs, net of estimated forfeitures and cancellations, which will be recognized over a weighted average estimated remaining life of 1.9 years.

NOTE 4 — Goodwill and Other Intangible Assets, net

In accordance with ASC 350, Intangibles — Goodwill and Other, the Company performs a goodwill impairment test annually during the fourth quarter of its fiscal year and more frequently if events or circumstances indicate that impairment may have occurred. Such events or circumstances may include significant adverse changes in the general business climate, among others. There were no events or circumstances in the fiscal quarter ended May 27, 2011 indicating that impairment may have occurred. As of May 27, 2011, the carrying value of goodwill on the Company’s unaudited condensed consolidated balance sheet was $1.1 million.

The Company operates in one reporting unit, one operating and reportable segment: the design, manufacture, and sale of electronic subsystem products and services to various segments of the electronics industry.

The Company reviews its long-lived assets for impairment in accordance with ASC 360, Property, Plant and Equipment. Under ASC 360, long-lived assets, excluding goodwill, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset group may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset group to the future undiscounted cash flows expected to be generated by the asset group. If such assets are considered to be impaired, the impairment is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. Assets to be disposed are reported at the lower of the carrying amount or fair value, less cost to sell.

The following table summarizes the gross amounts and accumulated amortization of other intangible assets from the Adtron acquisition by type as of May 27, 2011 and August 27, 2010 (in thousands):


	Weighted		Value at		As of May 27, 2011				As of August 27, 2010
	Avg. Life		Date of		Accumulated		Carrying		Accumulated		Carrying
	(years)		Acquisition		Amortization		Value		Amortization		Value
Amortized intangible assets:
Customer relationships		10	$	3,700	$	1,203	$	2,497	$	925	$	2,775
Technology		7		2,800		1,300		1,500		1,000		1,800
Company trade name		20		2,040		331		1,709		255		1,785
Leasehold interest		3		260		260		—		203		57
Product names		9		60		22		38		17		43

Total			$	8,860	$	3,116	$	5,744	$	2,400	$	6,460

Amortization expense related to identifiable intangible assets totaled approximately $0.2 million for both three-month periods ended May 27, 2011 and May 28, 2010 and $0.7 million and $0.8 million for the nine months ended May 27, 2011 and May 28, 2010, respectively. Acquired intangibles with definite lives are amortized on a straight-line basis over the remaining estimated economic life of the underlying intangible assets.

Estimated amortization expenses of these intangible assets for the remainder of fiscal 2011, the next four fiscal years and all years thereafter are as follows (in thousands):


Fiscal Year:	Amount
Remainder of fiscal 2011	$	220
2012		879
2013		879
2014		879
2015		678
Thereafter		2,209

Total	$	5,744

NOTE 5 — Net Income Per Share

Basic net income per ordinary share is calculated by dividing net income by the weighted average of ordinary shares outstanding during the period. Diluted net income per ordinary share is calculated by dividing the net income by the weighted average of ordinary shares and dilutive potential ordinary shares outstanding during the period. Dilutive potential ordinary shares consist of dilutive shares issuable upon the exercise of outstanding stock options and vesting of RSUs computed using the treasury stock method.

The following table sets forth for all periods presented the computation of basic and diluted net income per ordinary share, including the reconciliation of the numerator and denominator used in the calculation of basic and diluted net income per share (dollars and shares in thousands, except per share data):


	Three Months Ended				Nine Months Ended
	May 27,		May 28,		May 27,		May 28,
	2011		2010		2011		2010
Numerator:
Net income	$	2,272	$	14,917	$	10,410	$	35,591
Denominator:
Weighted average ordinary shares, basic		64,137		62,463		63,405		62,216
Effect of dilutive securities:
Stock options and RSUs		3,511		3,039		3,093		2,627

Weighted average ordinary shares, diluted		67,648		65,502		66,498		64,843


Net income per ordinary share, basic	$	0.04	$	0.24	$	0.16	$	0.57

Net income per ordinary share, diluted	$	0.03	$	0.23	$	0.16	$	0.55

The Company excluded 2,018,305 and 3,407,397 weighted shares from stock options and RSUs from the computation of diluted net income per share for the three and nine months ended May 27, 2011, respectively, as the effect of their inclusion would have been anti-dilutive. The Company excluded 4,011,221 and 4,607,522 weighted shares from stock options and RSUs from the computation of diluted net income per share for the three and nine months ended May 28, 2010, respectively, as the effect of their inclusion would have been anti-dilutive.

NOTE 6 — Balance Sheet Details

Inventories

Inventories consisted of the following (in thousands):


	May 27,		August 27,
	2011		2010
Raw materials	$	43,911	$	44,180
Work-in-process		10,504		13,309
Finished goods		43,656		54,614

Total inventories *	$	98,071	$	112,103


*		As of May 27, 2011 and August 27, 2010, inventory held under service arrangements was approximately 41% of total inventories and of that, the majority is classified as finished goods.

Prepaid Expenses and Other Current Assets

Prepaid expenses and other current assets consisted of the following (in thousands):


	May 27,		August 27,
	2011		2010
Prepaid ICMS taxes in Brazil *	$	—	$	11,277
Indemnification receivable for ICMS assessment *		—		4,115
Prepayment for taxes on property and equipment		6,936		2,792
Unbilled receivables		6,586		6,182
Receivable from subcontractors		3,293		3,594
Deferred and other income taxes		1,911		1,197
Other prepaid expenses and other current assets		3,944		4,331

Total prepaid expenses and other current assets	$	22,670	$	33,488


*		See Note 10 — Commitments and Contingencies.

Property and Equipment, net

Property and equipment consisted of the following (in thousands):


	May 27,		August 27,
	2011		2010
Office furniture, software, computers, and equipment	$	7,117	$	5,751
Manufacturing equipment		93,275		78,901
Leasehold improvements		20,535		18,317

		120,927		102,969
Less accumulated depreciation and amortization		68,422		56,748

Property and equipment, net	$	52,505	$	46,221

Depreciation expense totaled approximately $5.2 million and $16.2 million for the three and nine months ended May 27, 2011, respectively. Depreciation expense totaled approximately $4.0 million and $11.0 million for the three and nine months ended May 28, 2010, respectively.

Other Non-Current Assets

Other non-current assets consisted of the following (in thousands):


	May 27,		August 27,
	2011		2010
Prepaid ICMS taxes in Brazil *	$	17,360	$	6,358
Judicial deposit and indemnification receivable related to Brazil ICMS assessment *		6,888		4,115
Prepayment for taxes on property and equipment		4,564		4,114
Deposits on property and equipment		740		3,076
Other		3,167		3,554

Total other non-current assets	$	32,719	$	21,217


*		See Note 10 — Commitments and Contingencies.

Accrued Liabilities

Accrued liabilities consisted of the following (in thousands):


	May 27,		August 27,
	2011		2010
Accrued employee compensation	$	8,387	$	15,406
VAT and other transaction taxes payable		5,413		5,966
Accrued joint research and development services *		2,754		—
Accrued warranty reserve		1,207		732
Income taxes payable		—		3,145
Other accrued liabilities		4,216		4,069

Total accrued liabilities	$	21,977	$	29,318


*		See Note 10 — Commitments and Contingencies.

NOTE 7 — Income Taxes

The provision for income tax expense (benefit) is summarized as follows (in thousands):


	Three Months Ended						Nine Months Ended
	May 27,			May 28,			May 27,		May 28,
	2011			2010			2011		2010

Current	$	5,457		$	7,364		$	13,067	$	20,535
Deferred		(13	)		(10	)		273		(31	)

Total	$	5,444		$	7,354		$	13,340	$	20,504

Income (loss) before provision for income taxes for the three and nine months ended May 27, 2011 and May 28, 2010, consisted of the following components (in thousands):


	Three Months Ended						Nine Months Ended
	May 27,			May 28,			May 27,			May 28,
	2011			2010			2011			2010

U.S. loss	$	(4,788	)	$	(2,296	)	$	(22,283	)	$	(8,290	)
Non-U.S. income		12,504			24,567			47,033			64,385

Total	$	7,716		$	22,271		$	23,750		$	56,095

The effective tax rates for the three months ended May 27, 2011 and May 28, 2010 were approximately 71% and 33%, respectively. The effective tax rates for the nine months ended May 27, 2011 and May 28, 2010 were approximately 56% and 37%, respectively. The increase in the effective tax rate for the three months ended May 27, 2011, as compared to the three months ended May 28, 2010, and for the nine months ended May 27, 2011, as compared to the nine months ended May 28, 2010 is primarily due to an increase in losses in the U.S. and Puerto Rico (including restructuring charges) that provide no tax benefit and a decline of income being generated in non-U.S. tax jurisdictions that are subject to lower tax rates.

Effective February 1, 2011, the Company began to participate in a Brazilian government investment incentive program, known as “PADIS” (Programa de Apoio do Desenvolvimento Tecnológico da Industria de Semicondutores). This program is specifically designed to promote the development of the local semiconductor industry. The Brazilian government approved our application for certain beneficial tax treatment under the PADIS system. This beneficial tax treatment includes a reduction in the Brazil statutory income tax rate from 34% to 9% on taxable income from the semiconductor portion of our operations. In order to receive the expected benefits, the Company is required to invest 5% of its net semiconductor sales in research and development (“R&D”) activities. While the Company might not meet the required amount of PADIS R&D investments on a quarterly basis, it expects to fulfill this requirement by the end of the calendar year which is the measurement period. In computing the tax expense for the three months and nine months ended May 27, 2011, the Company estimated its annual effective tax rate incorporating the anticipated impact of beneficial tax treatment under the PADIS system, which included the reduction in the Brazil statutory income tax rate from 34% to 9% on semiconductor operations in Brazil.

Also effective February 1, 2011, the Company started to participate in another Brazilian government investment incentive program, known as “PPB” (Lei da Informática — Processo Produtivo Básico). This program is intended to promote local content by allowing qualified PPB companies to sell certain IT products with a reduced rate of the excise tax known as “IPI” (Imposto sobre Produtos Industrializados), as compared to the rate that is required to be collected by non-PPB suppliers. This treatment provides an incentive for certain customers to purchase from the Company because they will not be required to pay the regular level of IPI on their purchases. In order to receive the intended treatment, the Company is required to invest in R&D activities 3% of the difference between its module net sales less its cost to purchase the integrated circuits (“ICs”) from its semiconductor company. While the Company might not meet the required amount of PPB R&D investments on a quarterly basis, it expects to fulfill this requirement by the end of the calendar year which is the measurement period.

As of May 27, 2011, the Company evaluated its valuation allowance on deferred tax assets to determine if a change in circumstances caused a change in judgment regarding the realization of deferred tax assets in future years. The Company has had a cumulative loss for the U.S. in recent years and projects a tax loss for the U.S. in the current fiscal year and for the foreseeable future. A cumulative loss in recent years within the U.S. represents significant evidence in evaluating the need for a valuation allowance on U.S. net deferred tax assets. As a result, the Company continues to record a full valuation allowance on its U.S. deferred tax assets. The Company also projects a tax loss for Puerto Rico in the current fiscal year. During the second quarter of fiscal 2011, the Company initiated a restructuring plan to close its Puerto Rico facility. As of August 27, 2010, the Company had net deferred taxes of approximately $48 thousand at its Puerto Rico facility. The Company anticipates no future taxable income to realize the tax benefit of existing Puerto Rico deferred tax assets. As a result, the Company has recorded a full valuation allowance on its Puerto Rico deferred tax assets.

As of May 27, 2011, the liability for uncertain tax positions was $0.2 million.

NOTE 8 — Indebtedness

On March 28, 2005, the Company issued $125.0 million in senior secured floating rate notes due on April 1, 2012 (the “144A Notes”) in an offering exempted from registration under the Securities Act of 1933, as amended (the “Offering”). The 144A Notes were jointly and severally guaranteed on a senior basis by all of our restricted subsidiaries, subject to limited exceptions. In addition, the 144A Notes and the guarantees were secured on a second-priority basis by the capital stock of, or equity interests in, most of our subsidiaries and substantially all of the Company’s and most of its subsidiaries’ assets. The 144A Notes accrued interest at the three-month London Inter Bank Offering Rate, or LIBOR, plus 5.50% per annum, payable quarterly in arrears, and were redeemable under certain conditions and limitations. The 144A Notes were then registered and exchanged for the senior secured floating rate exchange notes (the “Notes”) on October 27, 2005. The terms of the Notes are identical in all material respects to the terms of the 144A Notes, except that the transfer restrictions and registration rights related to the 144A Notes do not apply to the Notes. On August 13, 2008, the Company de-registered the Notes with the SEC to suspend on-going reporting obligations to file reports under Sections 13 and 15(d) with respect to the Notes. The indenture relating to the Notes contains various covenants including limitations on our ability to engage in certain transactions and limitations on our ability to incur debt, pay dividends and make investments. The Company was in compliance with such covenants as of May 27, 2011.

The Company incurred approximately $4.9 million in related debt issuance costs, the remaining portion of which is included in other non-current assets in the accompanying unaudited condensed consolidated balance sheets. Except for the portion written off in connection with the repurchase discussed below, debt issuance costs related to the Notes are being amortized to interest expense on a straight-line basis, which approximates the effective interest rate method, over the life of the Notes.

On October 13, 2009, the Board of Directors approved up to $25.0 million to repurchase and/or redeem a portion of the outstanding Notes, excluding unpaid accrued interest. On October 22, 2009, using available cash, the Company repurchased and retired a portion of the Notes representing $26.2 million of aggregate principal for $25.0 million; at 95.5% of the principal or face amount. In connection with the repurchase, a gain of $1.2 million was recognized in other income (expense) in fiscal 2010, offset by a $0.4 million write-off of debt issuance costs. As of August 27, 2010, the aggregate principal amount of Notes that remained outstanding was $55.1 million. As of May 27, 2011, the Notes that remained outstanding are classified as current liabilities on the accompanying condensed consolidated balance sheet and their fair value was estimated to be approximately $55.1 million.

The Company also has a senior secured credit facility in the amount of $35 million with Wells Fargo Bank. As of April 30, 2010, SMART Modular Technologies, Inc., SMART Modular Technologies (Europe) Limited, and SMART Modular Technologies (Puerto Rico) Inc., as borrowers (the “Borrowers”), entered into the Third Amendment to Second Amended and Restated Loan and Security Agreement (the “Third Amendment”), with the lenders identified therein (the “Lenders”) and Wells Fargo Bank, National Association, as the arranger, administrative agent and security trustee for the Lenders. The Second Amended and Restated Loan and Security Agreement dated April 30, 2007, as amended by the First Amendment dated November 26, 2008, the Second Amendment dated August 14, 2009 and the Third Amendment dated April 30, 2010, is referred to as the “WF Credit Facility.” The WF Credit Facility is jointly and severally guaranteed on a senior basis by all of our subsidiaries, subject to limited exceptions. In addition, the WF Credit Facility and the guarantees are secured by the capital stock of, or equity interests in, most of the Company’s subsidiaries and substantially all of the Company’s and most of its subsidiaries’ assets. As a result of the Third Amendment, the Maturity Date, as defined in the WF Credit Facility, was extended to April 30, 2012, and the Company is again required to comply with certain financial covenants as modified and as set forth in the WF Credit Facility. The Base Rate Margin and LIBOR Rate Margin, as defined in the WF Credit Facility, were changed to 1.25% and 2.25%, respectively. The Company has not borrowed under the WF Credit Facility since November 2007 and had no borrowings outstanding as of May 27, 2011. While the Company was in compliance with the financial covenants required to borrow funds under the WF Credit Facility as of May 27, 2011 and expects to be able to satisfy the financial covenants in the future, it may not meet the financial covenants or financial condition test during all periods before it expires on April 30, 2012 and therefore may not be able to borrow funds if and when it needs funds in the future.

NOTE 9 — Fair Value Measurements

Effective in the first quarter of fiscal 2010, the Company adopted the provisions of ASC 820, Fair Value Measurements and Disclosures, for all non-financial assets and non-financial liabilities.

The fair value of the Company’s cash, cash equivalents, accounts receivable, accounts payable and WF Credit Facility approximates the carrying amount due to the relatively short maturity of these items. Cash and cash equivalents consist of funds held in general checking and savings accounts, money market accounts and certificates of deposit with an original maturity on the date of purchase of three months or less. The Company does not have investments in variable rate demand notes or auction rate securities.

The FASB guidance establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets to identical assets or liabilities (level 1 measurements) and the lowest priority to unobservable inputs (level 3 measurements). The three levels of the fair value hierarchy are described below:

•

Level 1. Valuations based on quoted prices in active markets for identical assets or liabilities that an entity has the ability to access. The Company’s Level 1 assets include money market funds and certificates of deposit that are classified as cash equivalents.

•

Level 2. Valuations based on quoted prices for similar assets or liabilities, quoted prices for identical assets or liabilities in markets that are not active, or other inputs that are observable or can be corroborated by observable data for substantially the full term of the assets and liabilities. The Company does not have any assets or liabilities measured under Level 2.

•

Level 3. Valuations based on inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. The Company does not have any assets or liabilities measured under Level 3.

Assets and liabilities measured at fair value on a recurring basis include the following (in thousands):


	Quoted Prices in		Observable/
	Active Markets		Unobservable
	for Identical		Inputs		Significant
	Assets or		Corroborated by		Unobservable
	Liabilities		Market Data		Inputs
	Level 1		Level 2		Level 3		Total
Balances as of May 27, 2011:
Assets:
Cash	$	118,569	$	—	$	—	$	118,569
Money market funds		13,168		—		—		13,168

Total assets measured at fair value ⁽¹⁾	$	131,737	$	—	$	—	$	131,737


Balances as of August 27, 2010:
Assets:
Cash	$	45,657	$	—	$	—	$	45,657
Money market funds		69,817		—		—		69,817

Total assets measured at fair value ⁽¹⁾	$	115,474	$	—	$	—	$	115,474


⁽¹⁾		Included in cash and cash equivalents on the Company’s condensed consolidated balance sheets.

NOTE 10 — Commitments and Contingencies

Product Warranty and Indemnities

Product warranty reserves are established in the same period that revenue from the sale of the related products is recognized, or in the period that a specific issue arises as to the functionality of a Company’s product. The amounts of the reserves are based on established terms and the Company’s best estimate of the amounts necessary to settle future and existing claims on products sold as of the balance sheet date.

The following table reconciles the changes in the Company’s accrued warranty reserve (in thousands):


	Nine Months Ended
	May 27,
	2011
Balance of accrual at August 27, 2010	$	732
Settlement of warranty claims		(687	)
Provision for product warranties		1,162

Balance of accrual at May 27, 2011	$	1,207

Product warranty reserves are recorded in accrued liabilities in the accompanying unaudited condensed consolidated balance sheets.

In addition to potential liability for warranties related to defective products, the Company currently has in effect a number of agreements in which it has agreed to defend, indemnify and hold harmless its customers and suppliers from damages and costs which may arise from product defects as well as from any alleged infringement by its products of third-party patents, trademarks or other proprietary rights. The Company believes its internal development processes and other policies and practices limit its exposure related to such indemnities. Maximum potential future payments cannot be estimated because many of these agreements do not have a maximum stated liability. However, to date, the Company has not had to reimburse any of its customers or suppliers for any losses related to these indemnities. The Company has not recorded any liability in its financial statements for such indemnities.

Technology Access and Development Agreements

During the first quarter of fiscal 2011, the Company entered into a strategic joint development project with a semiconductor company. On November 24, 2010, the Company signed a Technology Access Agreement (“TAA”) with this strategic partner which allowed the Company access to certain in-process technology as developed to date by the semiconductor company in order to accelerate the development of the Company’s solid state drives (“SSDs”). In connection with the TAA, the Company also entered into a development agreement under which the Company will compensate the semiconductor company for the development of this in-process technology into a commercially viable product. The total consideration to be paid by the Company to the semiconductor company under the access and development arrangements is $10.0 million, of which $7.0 million was paid on November 29, 2010 and the remaining $3.0 million will be paid in installments as milestones are achieved under the development agreement. The Company determined that the relative fair value of the technology access charge and the development agreement was approximately $7.5 million and $2.5 million, respectively based on the terms and conditions of the agreements and the expected future discounted cash flows of the SSD products.

In the first quarter of fiscal 2011, the Company recognized a technology access charge of $7.5 million associated with the TAA since the technological feasibility associated with this in-process technology had not yet been established and there were remaining development costs to be incurred to complete the development of this technology into a commercially viable product. In addition, the access and use of this in-process technology was restricted only to this development project and thus, there were no alternative future uses by the Company of this in-process technology. The Company also recognized research and development expenses of $0.3 million and $2.2 million during the third quarter and first nine months of fiscal 2011, respectively, associated with the development agreement, which represented the effort incurred by the semiconductor company under the development agreement during the respective periods.

Legal Matters

From time to time the Company is 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. The Company believes that it has defenses to the cases pending, including those set forth below. Except as noted below, the Company is not currently able to estimate, with reasonable certainty, the possible loss, or range of loss, if any, from such legal matters, and accordingly no provision for any potential loss which may result from the resolution of these matters has been recorded in the accompanying consolidated financial statements. In the Company’s opinion, the estimated resolution of these disputes and litigation is not expected to have a material impact on its consolidated financial position, results of operations or cash flow.

Tessera

On December 7, 2007, Tessera, Inc. filed a complaint under section 337 of the Tariff Act of 1930 (“Tariff Act”), 19 U.S.C. § 1337, in the U.S. International Trade Commission (“ITC”) against a subsidiary of the Company, as well as several other respondents. Tessera alleged that “small-format Ball Grid Array (“BGA”) semiconductor packages” and products containing such semiconductor packages, including memory module products sold by the Company, infringe certain claims of United States Patent Nos. 5,697,977; 6,133,627; 5,663,106 and 6,458,681 (the “Asserted Patents”). On January 3, 2008, the ITC instituted an investigation entitled, “In the Matter of Certain Semiconductor Chips with Minimized Chip Package Size and Products Containing Same (III)”, Inv. No. 337-TA-630. In May 2008, Tessera withdrew one of the four Asserted Patents (U.S. Patent No. 6,458,681) from the ITC investigation. On December 29, 2009, the ITC issued a final determination stating that there has been no violation of §337 of the Tariff Act, and that it had terminated the investigation (the “Final Determination”). In the Final Determination, the ITC found no infringement by the Company’s subsidiary. As the ‘627 and ‘977 patents expired in September 2010, Tessera only appealed the Final Determination as to the ‘106 patent. On May 23, 2011 the U.S. Court of Appeals issued a decision which affirmed the ITC decision that respondents do not infringe the ‘106 patent and that to the extent that the accused products were packaged by Tessera licensed packaging houses, Tessera’s patent claims are exhausted. On the other two patents, the court ruled that because those patents have expired, the decision on the patents as well as the appeal of the decision were moot and the court ordered that the portion of the Final Determination relating to the ‘627 and ‘977 patents be vacated.

Tessera also filed a parallel patent infringement claim in the Eastern District of Texas, Case No. 2:07-cv-534, alleging infringement of the same patents at issue in the ITC action. The district court action seeks an unspecified amount of damages and injunctive relief. The district court action has been stayed pending the completion of the ITC action.

The Company believes that it has meritorious defenses against Tessera’s allegations and that the likelihood of any material charge for this matter is not probable.

Creative Mobile Technologies

On March 7, 2011, Creative Mobile Technologies LLC (“CMT”) filed a complaint in the Supreme Court of the State of New York, County of Queens, alleging, among other things, breach of contract, fraud and fraud in the inducement, and negligent misrepresentation. The allegations are in connection with the sale of certain display and embedded products starting in calendar year 2008, and a settlement agreement and release entered into between CMT and the Company in December 2009 (the “CMT Settlement Agreement”). CMT is seeking a rescission of the CMT Settlement Agreement and punitive and other damages not less than $7.5 million.

The Company believes that it has valid defenses against CMT’s claims which the Company believes are without merit. The Company intends to vigorously defend this lawsuit and to file counterclaims against CMT to, among other things, seek to recover moneys owed to the Company by CMT. The Company believes that the likelihood of any material charge for this matter is remote.

On April 11, 2011, the Company moved to dismiss the complaint on several grounds, including that CMT was bound by a valid and enforceable forum selection clause to assert its claims in California. On May 10, 2011 the court entered an order granting the Company’s motion to dismiss the case based on the forum selection clause and the case was dismissed without prejudice to CMT’s ability to re-file in California. CMT has filed a notice of appeal for which briefs have not yet been filed.

Litigation Related to Potential Acquisition

Four putative class action lawsuits relating to the proposed acquisition of the Company have been filed in the Superior Court of the State of California, County of Alameda on behalf of the Company’s shareholders against the Company, members of its Board of Directors, and other defendants. Walpole v. SMART Modular Technologies, Inc. et al., No. RG11573587 (the “Walpole Action”) was filed on April 29, 2011. Peters v. Ajay Shah et al., No. RG11574156 was filed on May 4, 2011. Marder v. SMART Modular Technologies, Inc. et al., No. RG11575180 and Wilkes v. Ajay Shah et al., No. RG11575013 were filed on May 10, 2011. On or about June 10, 2011, the court consolidated the actions for all purposes, designating the Walpole Action as the lead case. The complaints generally allege that the Company and members of its Board of Directors breached their fiduciary duties by causing the Company to enter into the Merger Agreement pursuant to an unfair process and at a price that undervalues the Company. The complaints further assert that Silver Lake Partners III, L.P., Silver Lake Sumeru Fund, L.P., and their affiliates aided and abetted those alleged breaches of duty. The actions seek damages as well as declaratory and injunctive relief, including an order prohibiting consummation of the Merger or rescinding the Merger if consummated. The Company believes these claims are without merit, and intends to vigorously defend against them, however, the Company cannot make an assessment at this time as to the amount or range of the liability, if any, resulting from such claims.

Contingencies

Brazil ICMS Assessment

On October 3, 2008, the Company’s subsidiary in Brazil (“SMART Brazil”) received a notice from the Sao Paulo State Treasury Office providing an assessment for the collection of State Value-Added Tax (“ICMS”) as well as interest and penalties (collectively the “Assessment”) related to the transfer of ICMS credits during 2004 between two Brazilian entities. These transfers occurred prior to the acquisition in April 2004 of SMART from Solectron Corporation (“Solectron”). Solectron was subsequently acquired by Flextronics International Ltd. (“Flextronics”). The Company believes that the Assessment is covered by indemnification pursuant to the Transaction Agreement dated February 11, 2004 dealing with the acquisition of SMART from Solectron, and pursuant to the Flextronics Settlement Agreement described below, and, under the terms of the Transaction Agreement, Flextronics elected to assume responsibility to contest the Assessment on SMART Brazil’s behalf. In June 2010, the Company was advised by tax counsel that the efforts to contest the Assessment in the administrative level were unsuccessful.

In October 2010, the attorneys appointed by Flextronics filed a proceeding in the judicial sphere aiming, among other things, to: (i) dispute the enforceability of the state legislation that is involved in the Assessment; and (ii) dispute the penalties against SMART Brazil. On March 8, 2011, the Company and certain of its subsidiaries entered into a Private Deed of Settlement and Release with Flextronics (the “Flextronics Settlement Agreement”) pursuant to which Flextronics agreed to pay to SMART Brazil $4.5 million (or 7.5 million BRL) as a reimbursement of the Judicial Deposit balance. On March 23, 2011, SMART Brazil received this reimbursement. As of May 27, 2011, the Judicial Deposit increased to $4.6 million (or 7.2 million BRL) due to accrued interest and exchange rate fluctuations. Until the proceedings in connection with the Assessment are resolved, the Judicial Deposit will continue to be held by the tax authorities and may continue to increase.

As of May 27, 2011, the Company’s unaudited condensed consolidated balance sheet reflects both a long-term liability under other long-term liabilities for the Assessment and a corresponding long-term judicial deposit and indemnification receivable related to Brazil ICMS assessment under other non-current assets for approximately $6.9 million (or 10.8 million BRL). These amounts are based on figures posted on a government website where assessments are listed and include interest on the tax, punitive penalties, interest on the penalties, and attorney’s fees. The balance of the Assessment increases daily.

On May 13, 2011, SMART Brazil received a notice indicating that the State of Sao Paulo had commenced a tax foreclosure proceeding against SMART Brazil in connection with the Assessment. The Company believes that the Assessment, as revised, as well as the defense of the foreclosure proceedings, are covered by the indemnity from Solectron and/or Flextronics discussed herein and as such, the likelihood of a material adverse effect on the Company’s cash flows, results of operations or financial condition is not probable. While the Company believes that the Assessment as revised and the defense of the foreclosure proceedings are subject to the indemnity, there can be no absolute assurance that Solectron and/or Flextronics will comply with their contractual indemnity obligations in this regard.

Prepaid ICMS Taxes in Brazil

Since 2004, the Sao Paulo State tax authorities have granted SMART Brazil a tax benefit to defer and eventually eliminate the payment of ICMS levied on certain imports from independent suppliers. This benefit, known as an ICMS Special Ruling, is subject to renewal every two years and expired on March 31, 2010. SMART Brazil applied for a renewal of this benefit, but the renewal was not granted until August 4, 2010. The Company was originally advised by tax counsel that the renewal of the benefit would be denied if SMART Brazil did not post a deposit against the Assessment for the benefit of the tax authorities in the event that the tax authorities prevail on any contests against the Assessment. In order to post the deposit, in June 2010 SMART Brazil instituted the judicial proceeding and made the Judicial Deposit as discussed above. Until the proceedings in connection with the Assessment are resolved, the Judicial Deposit will continue to be held by the tax authorities and may continue to increase.

On June 22, 2010, the Sao Paulo authorities published a regulation allowing companies that applied for a timely renewal of an ICMS Special Ruling, such as SMART Brazil, to continue utilizing the benefit until a final conclusion on the renewal request was rendered. As a result of this publication, SMART Brazil was temporarily allowed to utilize the benefit while it waited for its renewal. From April 1, 2010, when the ICMS benefit lapsed, through June 22, 2010 when the regulation referred to above was published, SMART Brazil was required to pay the ICMS taxes on imports. The payment of ICMS generates tax credits that may be used to offset ICMS generated from sales by SMART Brazil of its products, however, the vast majority of SMART Brazil’s sales in Sao Paulo are either subject to a lower ICMS rate or are made to customers that are entitled to other ICMS benefits that enable them to eliminate the ICMS levied on their purchases of products from SMART Brazil. As a result, from April 1, 2010 through June 22, 2010, SMART Brazil did not have sufficient ICMS collections against which to apply the credits accrued upon payment of the ICMS on SMART Brazil’s imports. Although the renewal has been granted, there was no refund of ICMS tax credits that accumulated during the period when the Company was waiting for the renewal.

Effective February 1, 2011, in connection with its participation in a Brazilian government investment incentive program, known as “PADIS”, SMART Brazil spun off the module manufacturing operations into SMART do Brazil, a separate subsidiary. Also effective February 1, 2011, SMART do Brazil started to participate in another Brazilian federal government investment incentive program, known as “PPB”. This program is intended to promote local content by allowing qualified PPB companies to sell certain IT products with a reduced rate of the excise tax known as “IPI”, as compared to the tax rate that is required to be collected by non-PPB suppliers. In connection with this spin off, SMART do Brazil has also applied for a tax benefit from the State of Sao Paulo in order to obtain for this second subsidiary, a deferral of state ICMS. This tax benefit is referred to as State PPB, or CAT 14. CAT 14 allows taxpayers engaged in the computer industry that were granted with the IPI tax benefit, to import and purchase from suppliers located within the State of Sao Paulo, with a deferral of the ICMS imposed on imports and other local purchases. The Company has been advised by its tax counsel that it is eligible for CAT 14; however, the approval has not yet been received. As a result, from February 1, 2011 until the CAT 14 approval is granted, SMART do Brazil will not have sufficient ICMS collections against which to apply the credits accrued upon payment of the ICMS on SMART do Brazil’s imports and inputs. There will be no refund of ICMS tax credits that accumulate while SMART do Brazil waits for its CAT 14 approval. While there can be no assurance that the CAT 14 approval will be obtained, the Company believes that obtaining the tax benefit is probable.

As of May 27, 2011, the accumulated ICMS tax credits reported on the Company’s unaudited condensed consolidated balance sheet was $17.4 million (or 27.3 million BRL), classified as other non-current assets on the accompanying condensed consolidated balance sheet. Due to the delay in getting the CAT14 approval, the Company expects its accumulated ICMS tax credit balance to increase in the next fiscal quarter and as there is no net recovery projected in the next 12 months, as of May 27, 2011, the tax credits are classified as non-current assets.

It is expected that the excess ICMS credits will be recovered primarily in fiscal 2012 through fiscal 2014. The Company updates its forecast of the recoverability of the ICMS credits quarterly, considering the following key variables in Brazil: timing of government approval of SMART do Brazil’s CAT 14 application, timing of government approvals of automated credit utilization, the total amount of sales, the product mix and the inter-state mix of sales, the utilization of appropriation of credits and debits between the Company’s two subsidiaries in Brazil, and the amount of semiconductor wafer and component imports. If these estimates or the mix of products or regions vary, it could take longer or shorter than expected to fully recover the ICMS credits accumulated to date, resulting in a reclassification of ICMS credits from current to non-current, or vice versa. The accumulation of the excess credits had an adverse impact on the Company’s cash flows and while the Company expects to recover these excess credits, there can be no absolute assurance that the ICMS credits will be fully recoverable.

NOTE 11 — Segment and Geographic Information

The Company operates in one operating segment: the design, manufacture, and sale of electronic subsystem products and services to the electronics industry. The Company’s chief operating decision-maker, the President and CEO, evaluates financial performance on a company-wide basis.

A summary of the Company’s net sales and property and equipment by geographic area is as follows (in thousands):


	Three Months Ended				Nine Months Ended
	May 27,		May 28,		May 27,		May 28,
	2011		2010		2011		2010
Geographic net sales:
U.S.	$	41,819	$	59,040	$	128,845	$	150,094
Brazil		68,578		88,897		270,807		199,570
Asia		43,226		38,178		119,533		94,054
Europe		6,247		9,626		18,349		28,088
Other Americas		4,609		5,494		13,853		12,632

	$	164,479	$	201,235	$	551,387	$	484,438


	May 27,		August 27,
	2011		2010
Property and equipment, net:
U.S.	$	6,105	$	6,298
Brazil		38,535		32,175
Malaysia		7,671		7,705
Other		194		43

	$	52,505	$	46,221

NOTE 12 — Major Customers

A majority of the Company’s net sales are attributable to customers operating in the information technology industry. Net sales to SMART’s major customers, defined as net sales in excess of 10% of total net sales or those who have outstanding customer accounts receivable balance at the end of each fiscal period of 10% or more of total net accounts receivable, are as follows:


	Percent of Net Sales
	Three Months Ended						Nine Months Ended
	May 27,			May 28,			May 27,			May 28,
	2011			2010			2011			2010
Customer A		19	%		21	%		20	%		22	%
Customer B		12	%		15	%		13	%		16	%
Customer C		12	%		15	%		15	%		14	%

As of May 27, 2011, approximately 36%, 25% and 13% of accounts receivable were concentrated with Customers A, B and C, respectively. As of August 27, 2010, approximately 42%, 26% and 9% of accounts receivable were concentrated with Customers A, B and C, respectively. The loss of a major customer or a significant reduction in revenue or nonpayment of accounts receivable from a major customer could have a material adverse effect on the Company’s business, results of operations and financial condition.

NOTE 13 — Restructuring

During the second quarter of fiscal 2011, the Company initiated a restructuring plan to close its Puerto Rico facility as a result of a continuing long-term decline in production at the location. In the three and nine months ended May 27, 2011, we recognized restructuring costs of $0.5 million and $3.3 million, respectively, for severance and severance-related benefits, assets/facility-related costs and other exit costs.

The following table summarizes the restructuring accrual activity for the nine months ended May 27, 2011 (in thousands):


	Severance and			Assets/Facility
	Benefits			Related			Other			Total
Accrual as of August 27, 2010	$	—		$	—		$	—		$	—
Restructuring charges		2,831			—			—			2,831

Accrual as of February 25, 2011		2,831			—			—			2,831
Restructuring charges		16			303			161			480
Non-cash charges		—			(42	)		—			(42	)
Cash payment		(2,761	)		(210	)		(47	)		(3,018	)

Accrual as of May 27, 2011	$	86		$	51		$	114		$	251

The restructuring accrual as of May 27, 2011 is mostly expected to be paid by August 2011 and is recorded under accrued liabilities in the accompanying condensed consolidated balance sheets. There were no restructuring activities for the three and nine months ended May 28, 2010.

NOTE 14 — Other Income, net

Other income, net consisted of the following (in thousands):


	Three Months Ended				Nine Months Ended
	May 27,		May 28,		May 27,		May 28,
	2011		2010		2011		2010
Foreign currency gains	$	433	$	385	$	521	$	338
Insurance settlement*		1,435		—		1,435		—
Legal settlement**		—		—		—		3,044
Gain on early repayment of long-term debt		—		—		—		1,178
Other		179		223		926		565

Total other income, net	$	2,047	$	608	$	2,882	$	5,125


*		In May 2011, the Company received an insurance settlement from a claim filed in fiscal 2009.

**		In December 2009, the Company received a legal settlement as a non-active participant, class member in a class action against certain component suppliers initiated in 2002.


Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations

This Quarterly Report on Form 10-Q, including this Management’s Discussion and Analysis of Financial Condition and Results of Operations, contains forward-looking statements regarding future events and our future results that are subject to the safe harbors created under the Securities Act of 1933, as amended (the “Securities Act”) and the Securities Exchange Act of 1934, as amended (the “Exchange Act”). These statements are based on current expectations, estimates, forecasts and projections about the industries in which we operate and the beliefs and assumptions of our management. Words such as “expects,” “anticipates,” “targets,” “goals,” “projects,” “intends,” “plans,” “believes,” “seeks,” “estimates,” “continues,” “will,” “may,” and variations of such words and similar expressions are intended to identify such forward-looking statements. In addition, any statements that refer to projections of our future financial performance, our anticipated trends in our businesses, and other characterizations of future events or circumstances are forward-looking statements. Readers are cautioned not to place undue reliance on any forward-looking statements as these are only predictions and are subject to risks, uncertainties, and assumptions that are difficult to predict, including those identified elsewhere herein, and those discussed in Part I, Item 1A, “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended August 27, 2010 filed with the SEC on November 3, 2010 as revised in Part II, Item 1A, “Risk Factors” in our Quarterly Report on Form 10-Q for the three months ended November 26, 2010 filed with the SEC on January 4, 2011 and in our Quarterly Report on Form 10-Q for the three months ended February 25, 2011 filed with the SEC on April 1, 2011, as well as in Part II, Item 1A, “Risk Factors” in this Quarterly Report on Form 10-Q below. Therefore, actual results may differ materially and adversely from those expressed in any forward-looking statements. We undertake no obligation to revise or update any forward-looking statements for any reason.

The following discussion should be read in conjunction with our unaudited condensed consolidated financial statements and notes thereto included elsewhere in this Quarterly Report on Form 10-Q.

Overview

We are a leading independent designer, manufacturer and supplier of value added subsystems sold primarily to Original Equipment Manufacturers (“OEMs”). Our subsystem products include memory modules, flash memory cards and other solid state storage products such as embedded flash and solid state drives or SSDs. We offer our products to customers worldwide. We also offer custom supply chain services including procurement, logistics, inventory management, temporary warehousing, kitting and packaging services. Our products and services are used for a variety of applications in the computing, networking, communications, printer, storage, aerospace, defense and industrial markets worldwide. Products that incorporate our subsystems include servers, routers, switches, storage systems, workstations, personal computers (“PCs”), notebooks, printers and gaming machines.

Generally, increases in overall demand by end users for, and increases in memory or storage content in products that incorporate our subsystems should have a positive effect on our business, financial condition and results of operations. Conversely, decreases in product demand should have a negative effect on our business, financial condition and results of operations. Generally, declines in DRAM pricing reduce our sales and gross profit margins particularly in our operations in Brazil due to on-hand inventory purchased when prices were higher, and conversely, increases in DRAM pricing have the opposite effect. We cannot predict when DRAM price declines will occur, how severe the declines will be and for how long the periods of decline will last and conversely, we cannot predict when DRAM price increases will occur, by how much they will increase or for how long the periods of increase will last. In a declining DRAM pricing environment, our specialty memory business outside of Brazil can also be adversely impacted when customers slow their purchases and reduce inventory as there is usually excess product availability and customers wait to see if prices on these products will decline. We are somewhat insulated from volatility in DRAM pricing on our specialty memory products because a substantial portion of this business involves legacy DRAM which has less price volatility. In addition, the specialty modules that we sell to our customers incorporate DRAM components acquired at market prices and include substantial value added features such as custom or semi-custom design, thermal analysis, unique testing, application integration, signal integrity analysis, different form factors and high density packaging, which also results in less price volatility.

Our business was originally founded in 1988 as SMART Modular Technologies, Inc. (“SMART Modular”) and SMART Modular became a publicly traded company in 1995. Subsequently, SMART Modular was acquired by Solectron Corporation (“Solectron”) in 1999 and operated as a subsidiary of Solectron. In April 2004, a group of investors led by TPG, Francisco Partners and Shah Capital Partners acquired SMART Modular from Solectron (the “Acquisition”), at which time we began to operate our business as an independent company under the name SMART Modular Technologies (WWH), Inc. incorporated under the laws of the Cayman Islands. In February 2006, SMART again became a publicly traded company.

Since the Acquisition, we have repositioned our business by focusing on delivery of certain higher value added products, diversifying our end markets and our capabilities, extending into new vertical markets, creating more technically engineered products and solutions, migrating manufacturing to low cost regions and controlling expenses. In fiscal 2006, we completed a new manufacturing facility in Atibaia, Brazil where we import finished wafers, package them into memory integrated circuits and build memory modules. In fiscal 2008, we acquired Adtron Corporation (“Adtron”), a leading designer and global supplier of high performance and high capacity SSDs for the defense, aerospace and industrial markets which we renamed to SMART Modular Technologies (AZ), Inc. In fiscal 2010, we expanded our development of SSD products and continue to do so in fiscal 2011 to address the significant growth opportunities in the enterprise market. Also in fiscal 2010, we invested in our Brazilian operations to launch initial flash production which began in fiscal 2011 and, in fiscal 2011 we continued to invest in this initiative.

We operate in one reportable segment: the design, manufacture, and sale of electronic subsystem products and services to various sectors of the electronics industry. The Company’s chief operating decision-maker, the President and CEO, evaluates financial performance on a company-wide basis. In April 2010, we sold our display business for net proceeds of $2.2 million and incurred a loss of $0.5 million in the third quarter of fiscal 2010. Management’s decision to exit display and embedded products was based on a determination that the market for these products was not scalable to significant revenue growth by the Company. These non-core product lines accounted for only three percent or less of net sales for each of the five fiscal quarters prior to the sale of the display business and therefore we do not believe that exiting these product lines had a material impact on our sales, operating results or our financial condition. We concluded that the display business was a business component that did not require separate reporting of its activities under discontinued operations.

In February 2011, we announced the closure of our Puerto Rico facility as a result of a continuing long-term decline in production at this facility. In the second quarter of fiscal 2011, we recognized restructuring charges of $2.8 million for severance and severance-related benefits which were largely paid out during the third quarter of fiscal 2011. In the third quarter of fiscal 2011, we recognized restructuring charges of $0.5 million, consisting of asset and facility-related costs associated with the closure of the Puerto Rico facility and other exit costs. Our Puerto Rico product lines accounted for five percent or less of net sales for the first nine months of fiscal 2011 and for fiscal year 2010. Products that were manufactured in our Puerto Rico facility can be built in our other facilities if necessary; therefore we do not believe the closing of this facility will have a material impact on our sales, operating results or our financial condition.

On April 26, 2011, we announced that we agreed to be acquired by entities formed by private equity funds Silver Lake Partners III, L.P. (“Silver Lake Partners”) and Silver Lake Sumeru Fund, L.P. (“Silver Lake Sumeru”) for $9.25 per share in cash in a transaction valued at approximately $645 million in equity value (the “Merger”) as of the date the deal was announced. We expect the Merger to close in the third calendar quarter of 2011 contingent on the satisfaction of all closing conditions including shareholder approval. In the third quarter of fiscal 2011, we incurred and expensed $3.5 million of acquisition costs in connection with the Merger. Please refer to Note 2 of our Notes to Unaudited Condensed Consolidated Financial Statements for additional detail.

Key Business Metrics

The following is a brief description of the major components of the key line items in our financial statements.

Net Sales

We generate product revenues predominantly from sales of our value added subsystems, including memory modules, flash memory cards and other solid state storage products, principally to leading computing, networking, communications, printer, storage, aerospace, defense and industrial OEMs. Sales of our products are generally made pursuant to purchase orders rather than long-term commitments. We generate service revenue from a limited number of customers by providing procurement, logistics, inventory management, temporary warehousing, kitting and packaging services. Our net sales are dependent upon demand in the end markets that we serve and fluctuations in end-user demand can have a rapid and material effect on our net sales. Furthermore, sales to relatively few customers have accounted for, and we expect will continue to account for, a significant percentage of our net sales in the foreseeable future.

Cost of Sales

The most significant components of cost of sales are materials, fixed manufacturing costs, labor, depreciation, freight and customs charges. Increases in capital expenditures may increase our future cost of sales due to higher levels of depreciation expense. Cost of sales also includes any inventory write-downs. We may write down inventory for a variety of reasons, including obsolescence, excess quantities and declines in market value to below our cost.

Research and Development Expenses

Research and development expenses consist primarily of the costs associated with the design and testing of new products. These costs relate primarily to compensation of personnel involved with development efforts, materials and outside design and testing services. Our customers typically do not separately compensate us for design and engineering work involved in the development of custom products.

Selling, General and Administrative Expenses

Selling, general and administrative expenses consist primarily of personnel costs, including salaries, bonuses, commissions and benefits, facilities and non-manufacturing equipment costs, allowances for bad debt, costs related to advertising and marketing and other support costs including utilities, insurance and professional fees.

Critical Accounting Policies

Management’s Discussion and Analysis of Financial Condition and Results of Operations is based on our financial statements which have been prepared in accordance with accounting principles generally accepted in the United States, or U.S. GAAP. The preparation of these financial statements requires us to make certain estimates that affect the reported amounts in our financial statements. We evaluate our estimates on an ongoing basis, including those related to our net sales, inventories, asset impairments, restructuring charges, income taxes, stock-based compensation and commitments and contingencies. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions.

We believe the following critical accounting policies are the most significant to the presentation of our financial statements and they at times require the most difficult, subjective and complex estimates.

Revenue Recognition

Our product revenues are predominantly derived from the sale of value added subsystems, including memory modules, flash memory cards and solid state storage products, which we design and manufacture. We recognize revenue when persuasive evidence of an arrangement exists, product delivery has occurred, the sales price is fixed or determinable, and collectability is reasonably assured. Product revenue typically is recognized at the time of shipment or when the customer takes title of the goods. Amounts billed to customers related to shipping and handling are classified as sales, while costs incurred by us for shipping and handling are classified as cost of sales. Taxes, including value added taxes, assessed by a government authority that are both imposed on and concurrent with a specific revenue producing transaction are excluded from revenue.

Our service revenues are derived from procurement, logistics, inventory management, temporary warehousing, kitting and packaging services. The terms of our contracts vary, but we generally recognize service revenue upon the completion of the contracted services. Our service revenue is accounted for on an agency basis. Service revenue for these arrangements is typically based on material procurement costs plus a fee for the services provided. We determine whether to report revenue on a net or gross basis depending on a number of factors, including whether we are the primary obligor in the arrangement, have general inventory risk, have the ability to set the price, have the ability to determine who the suppliers are, can physically change the product, or have credit risk. Under some service arrangements, we retain inventory risk. All inventories held under service arrangements are included in the inventories reported on the accompanying condensed consolidated balance sheets.

The following is a summary of our gross billings to customers and net sales for services and products (in thousands):


	Three Months Ended				Nine Months Ended
	May 27,		May 28,		May 27,		May 28,
	2011		2010		2011		2010

Service revenue, net	$	8,255	$	10,751	$	28,327	$	28,493
Cost of sales — service ⁽¹⁾		267,106		259,310		748,429		624,304

Gross billings for services		275,361		270,061		776,756		652,797
Product net sales		156,224		190,484		523,060		455,945

Gross billings to customers	$	431,585	$	460,545	$	1,299,816	$	1,108,742


Product net sales	$	156,224	$	190,484	$	523,060	$	455,945
Service revenue, net		8,255		10,751		28,327		28,493

Net sales	$	164,479	$	201,235	$	551,387	$	484,438


⁽¹⁾		Represents cost of sales associated with service revenue reported on a net basis.

Accounts Receivable

We evaluate the collectability of accounts receivable based on several factors. When we are aware of circumstances that may impair a specific customer’s ability to meet its financial obligations, we record a specific allowance against amounts due, and thereby reduce the net recognized receivable to the amount we reasonably believe will be collected. Increases to the allowance for sales returns or credits are offset against the revenue. Increases to the allowance for bad debt are recorded as a component of general and administrative expenses. For all other customer accounts receivable, we record an allowance for doubtful accounts based on a combination of factors including the length of time the receivables are outstanding, industry and geographic concentrations, the current business environment, and historical experience.

Inventory Valuation

We evaluate our inventories for excess quantities and obsolescence. This evaluation includes analyses of sales levels by product family. Among other factors, we consider historical demand and forecasted demand in relation to the inventory on hand, competitiveness of product offerings, market conditions and product life cycles when determining obsolescence and net realizable value. We adjust the carrying values to approximate the lower of our manufacturing cost or net realizable value. Inventory cost is determined on a specific identification basis and includes material, labor and manufacturing overhead. 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 provisions for excess and obsolete inventory are also impacted by our arrangements with our customers and/or suppliers, including our ability or inability to sell such inventory. If actual market conditions or our customers’ product demands are less favorable than those projected or if our customers or suppliers are unwilling or unable to comply with any arrangements related to their purchase or sale of inventory, additional provisions may be required and would have a negative impact on our gross margins in that period. We have had material inventory write-downs in the past for reasons such as obsolescence, excess quantities and declines in market value below our costs, and we may be required to do so from time to time in the future.

Income Taxes

We use the asset and liability method of accounting for income taxes. Deferred tax assets and liabilities are recognized for the future consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis and net operating loss and credit carryforwards. When necessary, a valuation allowance is recorded or reduced to value tax assets to amounts expected to be realized. The effect of changes in tax rates is recognized in the period in which the rate change occurs. U.S. income and foreign withholding taxes are not provided on that portion of unremitted earnings of foreign subsidiaries that are expected to be reinvested indefinitely.

After excluding ordinary losses in a tax jurisdiction for which no tax benefit can be recognized, we estimate our annual effective tax rate and apply such rate to year-to-date income, adjusting for unusual or infrequent items that are treated as discrete events in the period. We also evaluate our valuation allowance to determine if a change in circumstances causes a change in judgment regarding realization of deferred tax assets in future years. If the valuation allowance is adjusted as a result of a change in judgment regarding future years, that adjustment is recorded in the period of such change affecting our tax expense in that period.

The calculation of our tax liabilities involves accounting for uncertainties in the application of complex tax rules, regulations and practices. We recognize benefits for uncertain tax positions based on a two-step process. The first step is to evaluate the tax position for recognition of a benefit (or the absence of a liability) by determining if the weight of available evidence indicates that it is more likely than not that the position taken will be sustained upon audit, including resolution of related appeals or litigation processes, if any. If it is not, in our judgment, more likely than not that the position will be sustained, we do not recognize any benefit for the position. If it is more likely than not that the position will be sustained, a second step in the process is required to estimate how much of the benefit we will ultimately receive. This second step requires that we estimate and measure the tax benefit as the largest amount that is more than 50 percent likely of being realized upon ultimate settlement. It is inherently difficult and subjective to estimate such amounts. We reevaluate these uncertain tax positions on a quarterly basis. This evaluation is based on a number of factors including, but not limited to, changes in facts or circumstances, changes in tax law, new facts, correspondence with tax authorities during the course of an audit, effective settlement of audit issues, and commencement of new audit activity. Such a change in recognition or measurement could result in the recognition of a tax benefit or an additional charge to the tax provision in the period.

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

We review our long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to the future undiscounted cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. Assets to be disposed are reported at the lower of the carrying amount or fair value, less cost to sell.

Stock-Based Compensation

We account for stock-based compensation under ASC 718, Compensation – Stock Compensation, which requires us to recognize expenses in our statement of operations related to all share-based payments, including grants of stock options and RSUs, based on the grant date fair value of such share-based awards. The key assumptions used in valuing share-based awards are described in Note 3 to the Unaudited Condensed Consolidated Financial Statements.

Results of Operations

The following is a summary of our results of operations for the three and nine months ended May 27, 2011 and May 28, 2010 (in millions):


	Three Months Ended⁽¹⁾											Nine Months Ended⁽¹⁾
	May 27,		% of			May 28,			% of			May 27,			% of			May 28,			% of
	2011		sales			2010			sales			2011			sales			2010			sales

Net sales	$	164.5		100	%	$	201.2			100	%	$	551.4			100	%	$	484.4			100	%
Cost of sales		132.1		80	%		155.7			77	%		446.5			81	%		368.2			76	%

Gross profit		32.4		20	%		45.5			23	%		104.9			19	%		116.3			24	%

Research and development		7.7		5	%		6.7			3	%		23.7			4	%		17.6			4	%
Selling, general and administrative		15.2		9	%		16.3			8	%		45.2			8	%		44.0			9	%
Acquisition costs		3.5		2	%		—			—			3.5			1	%		—			—
Restructuring charges		0.5		0	%		—			—			3.3			1	%		—			—
Technology access charge		—		—			—			—			7.5			1	%		—			—

Total operating expenses		26.9		16	%		23.0			11	%		83.3			15	%		61.6			13	%

Income from operations		5.5		3	%		22.5			11	%		21.6			4	%		54.6			11	%
Interest income (expense), net		0.2		0	%		(0.8	)		0	%		(0.8	)		0	%		(3.7	)		-1	%
Other income, net		2.0		1	%		0.6			0	%		2.9			1	%		5.1			1	%

Total other income (expense)		2.2		1	%		(0.2	)		0	%		2.1			0	%		1.5			0	%

Income before provision for income taxes		7.7		5	%		22.3			11	%		23.8			4	%		56.1			12	%
Provision for income taxes		5.4		3	%		7.4			4	%		13.3			2	%		20.5			4	%

Net income	$	2.3		1	%	$	14.9			7	%	$	10.4			2	%	$	35.6			7	%


⁽¹⁾		Summations may not compute precisely due to rounding.

Three and Nine Months Ended May 27, 2011 as Compared to the Three and Nine Months Ended May 28, 2010

Net Sales

Net sales for the three months ended May 27, 2011 were $164.5 million, an 18% decrease from $201.2 million for the three months ended May 28, 2010. This decrease was primarily due to a decline in DRAM prices in the third quarter of fiscal 2011 as compared to the same period a year ago, partially offset by strength in PC and notebook end-user demand in Brazil and increased demand for our solid state storage products. Investments to increase capacity at our Brazil operations have enabled us to meet strong end-user demand by substantially increasing unit volume. However, the unit volume increases could not offset the impact of the decline in the DRAM prices on our net sales during this period.

Net sales for the nine months ended May 27, 2011 were $551.4 million, a 14% increase from $484.4 million for the nine months ended May 28, 2010. This increase was primarily due to strong net sales in the first three months of fiscal 2011 which increased 76% compared to the same period in fiscal 2010, which included strength in PC and notebook end-user demand in Brazil and increased demand for our solid state storage products. Unit volume increases in the nine months ended May 27, 2011 offset the substantial decline in DRAM prices during this period as compared to the same period last year. Our solid state storage products also grew significantly due to increased demand for our enterprise and defense products and our embedded flash drives. We believe that pricing in the DRAM market appears to have stabilized when compared to the substantial declines in DRAM pricing we experienced throughout the first half of fiscal 2011.

Cost of Sales

Cost of sales for the three months ended May 27, 2011 was $132.1 million, a 15% decrease from $155.7 million for the three months ended May 28, 2010. The decrease in cost of sales was primarily due to a $22.3 million decrease in the cost of products resulting from the decrease in net sales and the decline in DRAM pricing as discussed above. In addition, our factory overhead and other components of cost of sales decreased by $1.3 million, primarily due to decreased bonus, customs clearance and warranty expenses, offset by increased depreciation expense of $1.0 million primarily due to our continued capital investment to expand capacity primarily in Brazil.

Cost of sales for the nine months ended May 27, 2011 was $446.5 million, a 21% increase from $368.2 million for the nine months ended May 28, 2010. The increase in cost of sales was primarily due to a $68.4 million increase in the cost of products resulting from the increase in net sales as discussed above. Our factory overhead and other components of cost of sales also increased by $9.9 million, primarily due to increased volume, especially in Brazil, as well as higher payroll and other employee-related expenses due to increased headcount and higher depreciation expense of $4.4 million primarily due to our continued capital investment to expand capacity primarily in Brazil.

Gross Profit

Gross profit for the three months ended May 27, 2011 was $32.4 million, a 29% decrease from $45.5 million for the three months ended May 28, 2010. The decrease in gross profit was primarily due to the decrease in net sales discussed above, partially offset by volume increases as described above. Gross profit was also negatively impacted by the fact that our Brazil module pricing adjusts faster than our inventory turns which lowers gross profit in a declining price environment. Gross profit for the nine months ended May 27, 2011 was $104.9 million, a 10% decrease from $116.3 million for the nine months ended May 28, 2010. The decrease in gross profit was primarily due to the rapid decline in the DRAM module selling prices and the fact that Brazil module prices declined faster than the cost of inventory as previously discussed.

Gross profit percentage decreased to 20% for the three months ended May 27, 2011 from 23% for the three months ended May 28, 2010. Gross profit percentage decreased to 19% for the nine months ended May 27, 2011 from 24% for the nine months ended May 28, 2010. These decreases in gross profit percentage were primarily due to increased cost of products as a percentage of net sales resulting from the rapid decline in DRAM prices which reduced the selling prices of our modules in Brazil. In addition, gross profit percentage was also negatively impacted by an unfavorable mix of products sold during the periods.

Research and Development Expenses

Research and development (“R&D”) expenses for the three months ended May 27, 2011 were $7.7 million, a 15% increase from $6.7 million for the three months ended May 28, 2010. R&D expenses for the nine months ended May 27, 2011 were $23.7 million, a 35% increase from $17.6 million for the nine months ended May 28, 2010. These increases were primarily due to increased spending on development of enterprise SSDs, which included $0.2 million and $2.2 million of R&D expenses incurred under a development agreement with a strategic partner for the three and nine months ended May 27, 2011, respectively, as well as higher payroll and other employee-related expenses due to a 20% increase in R&D headcount, partially offset by lower bonus expense. During the remainder of fiscal 2011, we expect to further increase R&D spending on enterprise SSDs and to initiate spending on our recently announced corporate R&D center in Brazil.

Selling, General and Administrative Expenses

Selling, general and administrative (“SG&A”) expenses for the three months ended May 27, 2011 were $15.2 million, a 7% decrease from $16.3 million for the three months ended May 28, 2010. Sales and marketing expenses decreased by $0.3 million primarily due to lower payroll and other employee-related expenses resulting from decreased headcount, as well as lower commissions resulting from the decline in sales. General and administrative expenses decreased $0.8 million primarily due to lower bonus expense.

SG&A expenses for the nine months ended May 27, 2011 were $45.2 million, a 3% increase from $44.0 million for the nine months ended May 28, 2010. Sales and marketing expenses decreased by $0.1 million primarily due to lower bonus expense, partially offset by higher commissions resulting from the growth in sales. General and administrative expenses increased $1.3 million primarily due to increased payroll and other employee-related expenses, higher professional service expenses mostly in Brazil, and increases in stock-based compensation expense, all partially offset by lower bonus expense.

Acquisition costs

In the third quarter of fiscal 2011, we announced a Merger with affiliates of Silver Lake Partners and Silver Lake Sumeru. We expect the Merger to close in the third calendar quarter of 2011 contingent on the satisfaction of all closing conditions, including receipt of shareholder and regulatory approvals. We incurred and expensed $3.5 million of acquisition costs for the three months ended May 27, 2011 for professional services in connection with the Merger. Please refer to Note 2 of our Notes to Unaudited Condensed Consolidated Financial Statements for additional detail.

Restructuring Charges

During the second quarter of fiscal 2011, we initiated a restructuring plan to close our Puerto Rico facility as a result of a continuing long-term decline in production at the location. In the three and nine months ended May 27, 2011, we recognized restructuring costs of $0.5 million and $3.3 million, respectively, for severance and severance-related benefits, assets/facility-related costs and other exit costs. The severance costs were largely paid out during the third quarter of fiscal 2011, with the majority of the remaining costs to be paid by August 2011. There were no restructuring charges in the three and nine months ended May 28, 2010. Please refer to Note 13 of our Notes to Unaudited Condensed Consolidated Financial Statements for additional detail.

Technology Access Charge

During the nine months ended May 27, 2011, a one-time technology access charge of $7.5 million was incurred to gain access to in-process technology in order to accelerate our development of enterprise SSDs. Please refer to Note 10 of our Notes to Unaudited Condensed Consolidated Financial Statements for additional detail.

Interest Income (Expense), net

Net interest income for the three months ended May 27, 2011 was $0.2 million compared to net interest expense of $0.8 million for the three months ended May 28, 2010. The increase in net interest income was primarily due to an $0.8 million increase in interest income due to higher amounts on deposit, as well as a $0.2 million decrease in interest expense mostly resulting from the expiration of an interest swap agreement in April 2010.

Net interest expense for the nine months ended May 27, 2011 was $0.8 million compared to $3.7 million for the nine months ended May 28, 2010. The decrease in net interest expense was primarily due to a $2.0 million decrease in interest expense resulting from lower outstanding long-term debt, the expiration of an interest swap agreement in April 2010 and a $0.9 million increase in interest income due to higher amounts of deposit.

Other Income, net

Net other income for the three months ended May 27, 2011 was $2.0 million compared to $0.6 million for the three months ended May 28, 2010. This increase was primarily due to a $1.4 million insurance settlement received from a claim.

Net other income for the nine months ended May 27, 2011 was $2.9 million compared to $5.1 million for the nine months ended May 28, 2010. This decrease was largely due to a $3.0 million gain from a legal settlement in the first nine months of fiscal 2010 and a $1.2 million gain on the partial repurchase of a portion of our long-term debt in the first nine months of fiscal 2010, both of which did not recur in fiscal 2011, offset by a $1.4 million insurance settlement received in the first nine months of fiscal 2011.

Provision for Income Taxes

The effective tax rates for the three months ended May 27, 2011 and May 28, 2010 were approximately 71% and 33%, respectively. The effective tax rates for the nine months ended May 27, 2011 and May 28, 2010 were approximately 56% and 37%, respectively. These increases were primarily due to an increase in losses in the U.S. and Puerto Rico (including restructuring charges) that provided no tax benefit and a decline of income being generated in non-U.S. tax jurisdictions that are subject to lower tax rates.

Liquidity and Capital Resources

Our principal sources of liquidity are cash flows from operations and borrowings under our senior secured floating rate notes that remain outstanding. We also have an unutilized senior secured revolving credit facility available. Our principal uses of cash and capital resources are debt service requirements as described below, capital expenditures, potential acquisitions, research and development expenditures and working capital requirements. From time to time, surplus cash may be used to pay down long-term debt to reduce interest expense.

Cash and cash equivalents consist of funds held in demand deposit accounts, money market funds and certificates of deposit. Cash is held in multiple jurisdictions outside the United States. There are no significant restrictions or tax costs on the transfer of or repatriation of such assets.

Debt Service

As of May 27, 2011, we had total short-term indebtedness of $55.1 million, which represents the aggregate principal amount under the Notes (defined below) that remain outstanding and are due April 2012.

Senior Secured Floating Rate Exchange Notes Due April 2012 (the “Notes”). As of May 27, 2011, the Notes bear an interest rate of 5.80%, which is equal to LIBOR plus 5.50% per annum, and are guaranteed by most of our subsidiaries. The interest rate is reset quarterly. The guarantees are secured on a second-priority basis by the capital stock of, or equity interests in, most of our subsidiaries and substantially all of our and most of our subsidiaries’ assets. Interest on the Notes is payable quarterly in cash. The Notes contain customary covenants and events of default, including covenants that limit our ability to incur debt, pay dividends and make investments. We were in compliance with such covenants as of May 27, 2011.

Senior Secured Revolving Line of Credit Facility. The Company has a senior secured revolving credit facility in the amount of $35 million with Wells Fargo Bank. On April 30, 2010, the Third Amendment to Second Amended and Restated Loan and Security Agreement (the “Third Amendment”) was entered into by and among SMART Modular Technologies, Inc., SMART Modular Technologies (Europe) Limited, and SMART Modular Technologies (Puerto Rico), Inc., as borrowers (the “Borrowers”), and Wells Fargo Bank, National Association, as arranger, administrative agent and security trustee for the Lenders named therein. The Second Amended and Restated Loan and Security Agreement dated April 30, 2007, as amended by the First Amendment dated November 26, 2008, the Second Amendment dated August 14, 2009 and the Third Amendment dated April 30, 2010, is referred to as the “WF Credit Facility”. The WF Credit Facility is jointly and severally guaranteed on a senior basis by all of our subsidiaries, subject to limited exceptions. In addition, the WF Credit Facility and the guarantees are secured by the capital stock of, or equity interests in, most of the Company’s subsidiaries and substantially all of the Company’s and most of its subsidiaries’ assets. As a result of the Third Amendment, the Maturity Date, as defined in the WF Credit Facility, was extended to April 30, 2012, and the Company is again required to comply with certain financial covenants as modified and as set forth in the WF Credit Facility. The Base Rate Margin and LIBOR Rate Margin, as defined in the WF Credit Facility, were changed to 1.25% and 2.25%, respectively. While the Company was in compliance with the financial covenants required to borrow funds under the WF Credit Facility as of May 27, 2011 and expects to be able to satisfy such financial covenants in the future, we may not meet the financial covenants during all periods. If we do not meet the financial covenants or financial condition test, we will be in default of the WF Credit Facility and, among other things, we will be unable to borrow under the WF Credit Facility if and when we need the funds in the future. We have not borrowed under the WF Credit Facility since November 2007 and we had no borrowings outstanding as of May 27, 2011.

Capital Expenditures

We expect that future capital expenditures will primarily focus on our Brazil operations, establishing our corporate research and development center in Brazil, manufacturing equipment upgrades and/or acquisitions, IT infrastructure and software upgrades. The WF Credit Facility contains restrictions on our ability to make capital expenditures. Based on current estimates, we believe that the amount of capital expenditures permitted to be made under the WF Credit Facility will be adequate to implement our current plans.

Sources and Uses of Funds

On October 13, 2009, the Board of Directors approved up to $25.0 million, excluding unpaid accrued interest, to repurchase and/or redeem a portion of the outstanding Notes. On October 22, 2009, using available cash, we repurchased and retired $26.2 million of aggregate principal amount of Notes for $25.0 million; at 95.5% of the principal or face amount. As of May 27, 2011, the aggregate principal amount under the Notes that remain outstanding was $55.1 million, which is due April 2012. We expect to redeem all outstanding Notes in connection with the Merger. If the Merger does not close, we may repurchase additional Notes prior to this maturity date.

In Brazil, an ICMS Special Ruling tax benefit received from the Sao Paulo State tax authorities expired on March 31, 2010. Even though we filed a timely application for renewal with the appropriate authorities on January 27, 2010, the renewal was not received until August 4, 2010. As a result, starting on April 1, 2010, we began accruing excess ICMS credits. On June 22, 2010, the Sao Paulo tax authorities published a regulation allowing companies that applied for a timely renewal of an ICMS Special Ruling to continue utilizing the benefit until a final conclusion on the renewal request was rendered. For the period from April 1, 2010 through June 22, 2010, SMART Brazil was required to pay ICMS taxes on imports for which we received related tax credits. As of May 27, 2011, we had a balance of $17.4 million (or 27.3 million BRL) of ICMS credits which we expect to recover over a period of time through fiscal 2014. We expect this balance to increase by approximately $4 million per month until we receive the CAT 14 approval which we expect in the near future. Please refer to Contingencies under Note 10 of our Notes to Unaudited Condensed Consolidated Financial Statements for more details.

We anticipate that our existing cash and anticipated cash generated from operations will be sufficient to meet our working capital needs, fund our required and planned R&D and capital expenditures, and service the requirements on our debt obligations for at least the next 12 months including the payoff of the Notes due in April 2012. Our ability to fund our cash requirements or to refinance our indebtedness beyond the next 12 months will depend upon our future operating performance, which will be affected by general economic, financial, competitive, business and other factors beyond our control.

In fiscal 2010, our capital expenditures were 4% of net sales due to capacity expansion and the initiation of flash packaging in Brazil. In fiscal 2011, we expect our capital expenditures to be approximately 3 to 4% of net sales primarily due to our Brazil operations, establishing our corporate research and development center in Brazil, manufacturing equipment upgrades and/or acquisitions, IT infrastructure and software upgrades.

From time to time, we may explore financing options in order to fund cash flow requirements for internal growth, to repay existing indebtedness, and/or to fund any future acquisitions. This additional funding could include additional share issuances and/or debt financing or a combination thereof. There can be no assurance that additional funding will be available to us on acceptable terms or at all.

Historical Trends

Historically, our financing requirements have been funded primarily through cash generated by operating activities. As of May 27, 2011, our cash and cash equivalents were $131.7 million.

Cash Flows from Operating Activities. Net cash provided by operating activities of $19.8 million for the nine months ended May 27, 2011 was primarily comprised of $10.4 million from net income and $24.8 million from non-cash expenses offset by $15.4 million from changes in our operating assets and liabilities. The $15.4 million change in operating assets and liabilities includes cash generated from a reduction in accounts receivable of $32.5 million and an inventory decrease of $16.2 million. The reduction in accounts receivable was mostly due to improved collections. In addition, both the accounts receivable and inventory decreases were related to lower gross sales during the third quarter of fiscal 2011. This was offset by a decrease in accounts payable of $58.2 million, a decrease in accrued liabilities of $3.6 million and an increase in prepaid expenses and other assets of $2.3 million. The decrease in accounts payable was primarily due to reduced inventory purchases, as well as increased early payment discounts taken during the period.

Net cash used in operating activities of $4.1 million for the nine months ended May 28, 2010 was primarily comprised of $57.4 million change in our net operating assets and liabilities, offset by $35.6 million of net income and $17.7 million of non-cash related expenses. The $57.4 million change in operating assets and liabilities includes an increase in accounts receivable of $79.7 million, an inventory increase of $46.3 million and an increase in prepaid expenses and other assets of $17.5 million. The increase in accounts receivable was primarily due to increased gross sales. The increase in inventory was mainly due to increased gross sales and our positioning in a shortage market, as well as to prepare for increases in demand for our logistics business. The increase in prepaid expenses and other assets was due in part to the expiration of a Brazil tax benefit on import duties resulting in $4.9 million of prepaid ICMS taxes (see Contingencies under Note 10 of our Notes to Unaudited Condensed Consolidated Financial Statements for more details). Cash used in the period was partially offset by cash generated from increases in accounts payable of $74.3 million and an increase in accrued expenses and other liabilities of $11.8 million.

Cash Flows from Investing Activities. Net cash used in investing activities of $15.8 million for the nine months ended May 27, 2011 was due to purchases of $15.0 million in property and equipment and $0.8 million of cash deposits on equipment. Net cash used in investing activities of $15.0 million for the nine months ended May 28, 2010 was primarily due to purchases of $15.4 million in property and equipment and cash deposits of $2.2 million on equipment, partially offset by net proceeds from the sale of our display business of $2.2 million and proceeds from sales of property and equipment of $0.3.

Cash Flows from Financing Activities. Net cash provided by financing activities of $8.8 million for the nine months ended May 27, 2011 was primarily due to proceeds from ordinary share issuances resulting from option exercises. Net cash used in financing activities of $23.6 million for the nine months ended May 28, 2010 was primarily due to $25.0 million used for the repurchase of a portion of the Notes (as disclosed above), partially offset by $1.4 million provided by ordinary share issuances resulting from option exercises.

Contractual Obligations

There have been no material changes to contractual obligations previously disclosed in our Annual Report on Form 10-K for the year ended August 27, 2010.

Off-Balance Sheet Arrangements

We do not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. In addition, we do not have any undisclosed borrowings or debt, and we have not entered into any synthetic leases. We are, therefore, not materially exposed to any financing, liquidity, market or credit risk that could arise if we had engaged in such relationships.

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

Inflation

We do not believe that inflation has had a material effect on our business, financial condition or results of operations. If our costs were to become subject to significant inflationary pressures, we may not be able to fully offset such higher costs through price increases. Our inability or failure to do so could adversely affect our business, financial condition and results of operations.

Recent Accounting Pronouncements

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


Item 3.		Quantitative and Qualitative Disclosures About Market Risk

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

Foreign Exchange Risks

We are subject to inherent risks attributed to operating in a global economy. Our international sales and our operations in foreign countries subject us to risks associated with fluctuating currency values and exchange rates. Because sales of our products are denominated mainly in United States dollars, increases in the value of the United States dollar could increase the price of our products so that they become relatively more expensive to customers in a particular country, possibly leading to a reduction in sales and profitability in that country. Some of the sales of our products are denominated in foreign currencies. Gains and losses on the conversion to U.S. dollars of accounts receivable arising from such sales, and of other associated monetary assets and liabilities, may contribute to fluctuations in our results of operations. In addition, we have certain costs that are denominated in foreign currencies, and decreases in the value of the U.S. dollar could result in increases in such costs that could have a material adverse effect on our results of operations. We do not currently purchase financial instruments to hedge foreign exchange risk, but may do so in the future.

Interest Rate Risk

We are subject to interest rate risk in connection with our short-term debt of $55.1 million under the Notes that remain outstanding as of May 27, 2011. Although we did not have any balances outstanding as of May 27, 2011 under our WF Credit Facility, this facility provides for borrowings of up to $35 million that would also bear interest at variable rates. Assuming that we will satisfy the financial covenants required to borrow and that the WF Credit Facility is fully drawn, other variables are held constant and the impact of any hedging arrangements is excluded, each 1.0% increase in interest rates on our variable rate borrowings would result in an increase in annual interest expense and a decrease in our cash flow and income before taxes of $0.9 million per year.


Item 4.		Controls and Procedures

(a) Evaluation of Disclosure Controls and Procedures. Our President and Chief Executive Officer and our Senior Vice President and Chief Financial Officer, after evaluating the effectiveness of the Company’s “disclosure controls and procedures” (as defined in the Exchange Act Rules 13a-15(e) or 15d-15(e)) as of the end of the period covered by this quarterly report, have concluded that our disclosure controls and procedures are effective based on their evaluation of these controls and procedures required by paragraph (b) of Exchange Act Rules 13a-15 or 15d-15.

(b) Changes in Internal Control Over Financial Reporting. There were no changes in our internal control over financial reporting identified in connection with the evaluation required by paragraph (d) of Exchange Act Rules 13a-15 or 15d-15 that occurred during our last fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION


Item 1.		Legal Proceedings

See Note 10 of our Notes to Unaudited Condensed Consolidated Financial Statements for information regarding legal matters.


Item 1A.		Risk Factors

There have been no material changes from the risk factors previously disclosed in our Annual Report on Form 10-K for the year ended August 27, 2010 that was filed on November 3, 2010 and in our Quarterly Report on Form 10-Q for the three months ended November 26, 2010 that was filed on January 4, 2011 and in our Quarterly Report on Form 10-Q for the three months ended February 25, 2011 that was filed on April 1, 2011, except for the risk factors below which have been updated as follows:

There are risks and uncertainties associated with the proposed Merger.

On April 26, 2011, the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Saleen Holdings, Inc., a Cayman Islands exempted company (“Parent”), and Saleen Acquisition, Inc., a Cayman Islands exempted company and wholly owned subsidiary of Parent (“Merger Sub”), providing for the merger (the “Merger”) of Merger Sub with and into the Company, with the Company surviving the Merger as a wholly owned subsidiary of Parent. Parent and Merger Sub were formed by private equity funds Silver Lake Partners III, L.P. and Silver Lake Sumeru Fund, L.P. Pursuant to the Merger Agreement, at the effective time of the Merger, each issued and outstanding ordinary share of the Company (other than treasury shares, shares owned by Parent or Merger Sub, shares owned by any of the Company’s wholly-owned subsidiaries and shares held by any shareholders who are entitled to and who properly exercise appraisal and dissention rights under the laws of the Cayman Islands) will be canceled and extinguished and automatically converted into the right to receive $9.25 in cash, without interest and less applicable withholding taxes.

The Merger Agreement contains a provision under which the Company may solicit alternative acquisition proposals for the 45 days following the date the Merger Agreement was signed, and such period concluded on June 10, 2011 with no alternative acquisition proposals being received. After expiration of this period, the Company is now subject to a “no-shop” restriction on its ability to solicit alternative acquisition proposals, provide information and engage in discussions with third parties. The no-shop provision is subject to a “fiduciary-out” provision that allows the Company under certain circumstances to provide information and participate in discussions with respect to unsolicited alternative acquisition proposals.

There are a number of risks and uncertainties relating to the Merger. For example, the Merger may not be consummated on a timely basis or at all, or may not be consummated as currently anticipated, as a result of several factors, including, but not limited to, the failure to satisfy the closing conditions set forth in the Merger Agreement, Parent’s failure to obtain the necessary equity and debt financing contemplated by the commitments received in connection with the Merger Agreement or the failure of that financing to be sufficient to complete the Merger and the transactions contemplated thereby. Parent may also breach its obligations under the Merger Agreement or fail to proceed with the closing of the Merger, subject to payment to us of a $58.1 million termination fee, which fee may not be sufficient to compensate us for the harm we may suffer as a result of such termination. In addition, there can be no assurance that approval of our shareholders and requisite regulatory approvals will be obtained, that the other conditions to closing of the Merger will be satisfied or waived or that other events will not intervene to delay or result in the termination of the Merger. If the Merger is not completed, the price of our ordinary shares may decline to the extent that the current market price of our ordinary shares reflects an assumption that the Merger will be consummated. Furthermore, if the Merger is not completed, the price of our ordinary shares may decline to a level substantially below the market price of our ordinary shares prior to the announcement of the Merger.

Failure of the Merger to close, or a delay in its closing, may have a negative impact on our ability to pursue alternative strategic transactions or our ability to implement alternative business plans. Additionally, under certain circumstances, if the Merger Agreement is terminated, we will be required to pay a termination fee of $19.4 million or $12.9 million, depending on the circumstances of the termination, and/or reimbursement of expenses and out-of-pocket fees of Parent not exceeding $5 million. Pending the closing of the Merger, the Merger Agreement also restricts us from engaging in certain actions without Parent’s approval, which could prevent us from pursuing opportunities that may arise prior to the closing of the Merger. In addition, four putative class action lawsuits relating to the proposed acquisition of the Company were filed on behalf of the Company’s shareholders against the Company, members of our Board of Directors and other defendants, seeking damages as well as declaratory and injunctive relief, including an order prohibiting consummation of the Merger or rescinding the Merger if consummated. Even if without merit, these suits can be time consuming for our management and costly to defend and, if successful could delay or prevent the consummation of the Merger. Any delay in completing, or the failure to complete, the Merger could have a negative impact on our business, stock price and our relationships with our customers, employees and suppliers.

Our business could be adversely impacted as a result of uncertainty related to the proposed Merger.

The Merger could cause disruptions in our business relationships and business generally, which could have an adverse effect on our cash flows, results of operations and our financial condition. For example:

• Our employees may experience uncertainty about their future at the Company, which might adversely affect our ability to hire and retain key managers and other employees;

• Customers and suppliers may experience uncertainty about the Company’s future and seek alternative business relationships with third parties or seek to alter their business relationships with us; and

• The attention of our management may be directed to transaction-related considerations and may be diverted from the day-to-day operations of our business and pursuit of our strategic initiatives.

In addition, we have incurred and expensed $3.5 million of acquisition costs during the three months ended May 27, 2011, and will continue to incur, significant costs, expenses and fees for professional services and other transaction costs in connection with the Merger, and many of these fees and costs are payable by us regardless of whether or not the Merger is consummated. In addition, if the Merger Agreement is terminated under certain circumstances, we are required to pay a termination fee of $19.4 million or $12.9 million.

Changes in, or interpretations of, tax regulations or rates, or changes in the geographic dispersion of our revenues, or changes in other tax benefits, may adversely affect our income, value-added and other taxes, which may in turn have a material adverse effect on our cash flow and financial condition.

Our future effective tax rates could be unfavorably affected by the resolution of issues arising from tax audits with various tax authorities in the United States and abroad; adjustments to income taxes upon finalization of various tax returns; increases in expenses not deductible for tax purposes, including write-offs of acquired in-process research and development and impairments of goodwill in connection with acquisitions; changes in available tax credits; changes in tax laws or regulations or tax rates; changes in the interpretation or application of tax laws; changes in generally accepted accounting principles; changes in tax regulations or rates; increases or decreases in the amount of revenue or earnings in countries with particularly high or low statutory tax rates; or by changes in the valuation of our deferred tax assets and liabilities. While we enjoy and expect to continue to enjoy beneficial tax treatment in certain of our foreign locations, most notably Brazil and Malaysia, we are subject to meeting specific conditions in order to receive the beneficial treatment. Additionally, the beneficial treatments need to be renewed periodically and are subject to change. We are subject to tax examination in the United States and in foreign jurisdictions. We regularly assess the likelihood of outcomes resulting from these examinations to determine the adequacy of our provision for income taxes and have reserved for potential adjustments that may result from current examinations. We believe such estimates to be reasonable, however there can be no assurance that the final determination of any examinations will be in the amounts of our estimates. Any significant variance in the results of an examination as compared to our estimates, or any failure to renew or continue to receive any beneficial tax treatment in any of our foreign locations, or any increase in our future effective tax rates due to any of the factors set forth above or otherwise, could reduce net income and could have a material adverse effect on our results of operations, our cash flow and our financial condition.

On October 3, 2008, our subsidiary in Brazil (“SMART Brazil”) received a notice from the Sao Paulo State Treasury Office providing an assessment for the collection of State Value-Added Tax (“ICMS”) as well as interest and penalties (collectively the “Assessment”) related to the transfer of ICMS credits during 2004 between two Brazilian entities. These transfers occurred prior to the acquisition in April 2004 of SMART from Solectron Corporation (“Solectron”). Solectron was subsequently acquired by Flextronics International Ltd. (“Flextronics”). We believe that the Assessment is covered by indemnification pursuant to the Transaction Agreement dated February 11, 2004 dealing with the acquisition of SMART from Solectron, and pursuant to the Flextronics Settlement Agreement described below, and, under the terms of the Transaction Agreement, Flextronics elected to assume responsibility to contest the Assessment on SMART Brazil’s behalf. In June 2010, we were advised by tax counsel that the efforts to contest the Assessment in the administrative level were unsuccessful.

In June 2010, SMART Brazil instituted a judicial proceeding requesting an injunction in relation to the Assessment which injunction was granted on June 16, 2010. In connection with this injunction, on June 17, 2010, SMART Brazil made a judicial deposit (the deposit, as may be increased from time to time is referred to as the “Judicial Deposit”) in the amount of the Assessment at that time which totaled $4.1 million (or 7.2 million BRL). In October 2010, the attorneys appointed by Flextronics filed a proceeding in the judicial sphere aiming, among other things, to: (i) dispute the enforceability of the state legislation that is involved in the Assessment; and (ii) dispute the penalties against SMART Brazil. On March 8, 2011, we entered into a Private Deed of Settlement and Release with Flextronics (the “Flextronics Settlement Agreement”) pursuant to which Flextronics agreed to pay to SMART Brazil $4.5 million (or 7.5 million BRL) as a reimbursement of a judicial deposit made by SMART Brazil in connection with the Assessment. On March 23, 2011, SMART Brazil received the reimbursement. As of May 27, 2011, the Judicial Deposit increased to $4.6 million (or 7.2 million BRL) due to accrued interest and exchange rate fluctuations. Until the proceedings in connection with the Assessment are resolved, the Judicial Deposit will continue to be held by the tax authorities and may continue to increase.

As of May 27, 2011, our unaudited condensed consolidated balance sheet reflects both a long-term liability under other long-term liabilities for the Assessment and a corresponding long-term judicial deposit and indemnification receivable related to Brazil ICMS assessment under other non-current assets for approximately $6.9 million (or 10.8 million BRL). These amounts are based on figures posted on a government website where assessments are listed and include interest on the tax, punitive penalties, interest on the penalties, and attorney’s fees. The balance of the Assessment increases daily.

On May 13, 2011, SMART Brazil received a notice indicating that the State of Sao Paulo had commenced a tax foreclosure proceeding against SMART Brazil in connection with the Assessment. We believe that the Assessment, as revised, as well as the defense of the foreclosure proceedings, are covered by the indemnity from Solectron and/or Flextronics discussed herein and as such, the likelihood of a material adverse effect on our cash flows, results of operations or financial condition is not probable. While we believe that the Assessment as revised and the defense of the foreclosure proceedings are subject to the indemnity, there can be no absolute assurance that Solectron and/or Flextronics will comply with their contractual indemnity obligations in this regard.

Since 2004, the Sao Paulo State tax authorities have granted SMART Brazil a tax benefit to defer and eventually eliminate the payment of ICMS levied on certain imports from independent suppliers. This benefit, known as an ICMS Special Ruling, is subject to renewal every two years and expired on March 31, 2010. SMART Brazil applied for a renewal of this benefit, but the renewal was not granted until August 4, 2010. We were originally advised by tax counsel that the renewal of the benefit would be denied if SMART Brazil did not post a deposit against the Assessment for the benefit of the tax authorities in the event that the tax authorities prevail on any contests against the Assessment. In order to post the deposit, in June 2010 SMART Brazil instituted the judicial proceeding and made the Judicial Deposit as discussed above. Until the proceedings in connection with the Assessment are resolved, the Judicial Deposit will continue to be held by the tax authorities.

Effective February 1, 2011, in connection with its participation in a Brazilian government investment incentive program, known as “PADIS”, SMART Brazil spun off the module manufacturing operations into SMART do Brazil, a separate subsidiary. Also effective February 1, 2011, SMART do Brazil started to participate in another Brazilian federal government investment incentive program, known as “PPB”. This program is intended to promote local content by allowing qualified PPB companies to sell certain IT products with a reduced rate of the excise tax known as “IPI”, as compared to the tax rate that is required to be collected by non-PPB suppliers. In connection with this spin off, SMART do Brazil has also applied for a tax benefit from the State of Sao Paulo in order to obtain for this second subsidiary, a deferral of state ICMS. This tax benefit is referred to as State PPB, or CAT 14. CAT 14 allows taxpayers engaged in the computer industry that were granted with the IPI tax benefit, to import and purchase from suppliers located within the State of Sao Paulo, with a deferral of the ICMS imposed on imports and other local purchases. We have been advised by its tax counsel that it is eligible for CAT 14; however, the approval has not yet been received. As a result, from February 1, 2011 until the CAT 14 approval is granted, SMART do Brazil will not have sufficient ICMS collections against which to apply the credits accrued upon payment of the ICMS on SMART do Brazil’s imports and inputs. There will be no refund of ICMS tax credits that accumulate while SMART do Brazil waits for its CAT 14 approval. While we believe that we will receive the CAT 14 approval, there can be no assurance that the CAT 14 approval will be obtained. Failure to obtain the CAT 14 approval could have a material adverse effect on our cash flow, results of operation and our financial condition.

As of May 27, 2011, the accumulated ICMS tax credits reported on our unaudited condensed consolidated balance sheet was $17.4 million (or 27.3 million BRL), classified as other non-current assets on the accompanying condensed consolidated balance sheet. Due to the delay in getting the CAT14 approval, we expect our accumulated ICMS tax credit balance to increase in the next fiscal quarter and as there is no net recovery projected in the next 12 months, as of May 27, 2011, the tax credits are classified as non-current assets.

It is expected that the excess ICMS credits will be recovered primarily in fiscal 2012 through fiscal 2014. We update our forecast of the recoverability of the ICMS credits quarterly, considering the following key variables in Brazil: timing of government approval of SMART do Brazil’s CAT 14 application, timing of government approvals of automated credit utilization, the total amount of sales, the product mix and the inter-state mix of sales, the utilization of appropriation of credits and debits between our two subsidiaries in Brazil, and the amount of semiconductor wafer and component imports. If these estimates or the mix of products or regions vary, it could take longer or shorter than expected to fully recover the ICMS credits accumulated to date, resulting in a reclassification of ICMS credits from current to non-current, or vice versa. The accumulation of the excess credits had an adverse impact on our cash flows and while we expect to recover these excess credits, there can be no absolute assurance that the ICMS credits will be fully recoverable.


Item 6.		Exhibits

The following exhibits are filed herewith:


Exhibit No.		Exhibit Title

	2.1	Agreement and Plan of Merger dated as of April 26, 2011, by and among SMART Modular Technologies (WWH), Inc., Saleen Holdings, Inc. and Saleen Acquisition, Inc. (Incorporated by reference to Exhibit 2.1 of the Company’s Current Report on Form 8-K filed with the SEC on April 28, 2011).
	31.1	Certification of Chief Executive Officer pursuant to Rule 13a-14(a) or 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
	31.2	Certification of Chief Financial Officer pursuant to Rule 13a-14(a) or 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
	32	Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

SMART MODULAR TECHNOLOGIES (WWH), INC.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, SMART Modular Technologies (WWH), Inc. has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


SMART MODULAR TECHNOLOGIES (WWH), INC.

By:	/s/ IAIN MACKENZIE

	Name:	Iain MacKenzie
	Title:	President and Chief Executive Officer
		(Principal Executive Officer)

By:	/s/ BARRY ZWARENSTEIN

	Name:	Barry Zwarenstein
	Title:	Senior Vice President and Chief Financial Officer
		(Principal Financial and Accounting Officer)

Date: June 30, 2011

EXHIBIT INDEX


Exhibit No.		Exhibit Title

	2.1	Agreement and Plan of Merger dated as of April 26, 2011, by and among SMART Modular Technologies (WWH), Inc., Saleen Holdings, Inc. and Saleen Acquisition, Inc. (Incorporated by reference to Exhibit 2.1 of the Company’s Current Report on Form 8-K filed with the SEC on April 28, 2011).
	31.1	Certification of Chief Executive Officer pursuant to Rule 13a-14(a) or 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
	31.2	Certification of Chief Financial Officer pursuant to Rule 13a-14(a) or 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
	32	Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

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