Attached files
file | filename |
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EX-32 - EXHIBIT 32 - SMART Modular Technologies (WWH), Inc. | c10486exv32.htm |
EX-31.2 - EXHIBIT 31.2 - SMART Modular Technologies (WWH), Inc. | c10486exv31w2.htm |
EX-31.1 - EXHIBIT 31.1 - SMART Modular Technologies (WWH), Inc. | c10486exv31w1.htm |
EX-10.40 - EXHIBIT 10.40 - SMART Modular Technologies (WWH), Inc. | c10486exv10w40.htm |
EX-10.38 - EXHIBIT 10.38 - SMART Modular Technologies (WWH), Inc. | c10486exv10w38.htm |
EX-10.42 - EXHIBIT 10.42 - SMART Modular Technologies (WWH), Inc. | c10486exv10w42.htm |
EX-10.41 - EXHIBIT 10.41 - SMART Modular Technologies (WWH), Inc. | c10486exv10w41.htm |
EX-10.39 - EXHIBIT 10.39 - SMART Modular Technologies (WWH), Inc. | c10486exv10w39.htm |
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
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 November 26, 2010
OR
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)
(Address of principal executive offices, zip code)
(510) 623-1231
(Registrants telephone number, including area code)
(Registrants 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 registrants ordinary shares outstanding as of December 28, 2010: 63,103,873.
SMART MODULAR TECHNOLOGIES (WWH), INC.
INDEX TO QUARTERLY REPORT
TABLE OF CONTENTS
Page | ||||||||
3 | ||||||||
3 | ||||||||
20 | ||||||||
28 | ||||||||
28 | ||||||||
28 | ||||||||
28 | ||||||||
28 | ||||||||
29 | ||||||||
30 | ||||||||
Exhibit 10.38 | ||||||||
Exhibit 10.39 | ||||||||
Exhibit 10.40 | ||||||||
Exhibit 10.41 | ||||||||
Exhibit 10.42 | ||||||||
Exhibit 31.1 | ||||||||
Exhibit 31.2 | ||||||||
Exhibit 32 |
2
Table of Contents
PART I. FINANCIAL INFORMATION
Item 1. | Financial Statements |
SMART MODULAR TECHNOLOGIES (WWH), INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(Unaudited)
November 26, | August 27, | |||||||
2010 | 2010 | |||||||
(In thousands, except | ||||||||
share data) | ||||||||
ASSETS |
||||||||
Current assets: |
||||||||
Cash and cash equivalents |
$ | 92,944 | $ | 115,474 | ||||
Accounts receivable, net of allowances
of $1,773 and $1,660 as of November 26,
2010 and August 27, 2010, respectively |
178,887 | 208,377 | ||||||
Inventories |
103,464 | 112,103 | ||||||
Prepaid expenses and other current assets |
22,325 | 33,488 | ||||||
Total current assets |
397,620 | 469,442 | ||||||
Property and equipment, net |
49,179 | 46,221 | ||||||
Other non-current assets |
27,838 | 21,217 | ||||||
Other intangible assets, net |
6,220 | 6,460 | ||||||
Goodwill |
1,061 | 1,061 | ||||||
Total assets |
$ | 481,918 | $ | 544,401 | ||||
LIABILITIES AND SHAREHOLDERS EQUITY |
||||||||
Current liabilities: |
||||||||
Accounts payable |
$ | 81,681 | $ | 151,885 | ||||
Accrued liabilities |
21,178 | 29,318 | ||||||
Total current liabilities |
102,859 | 181,203 | ||||||
Long-term debt |
55,072 | 55,072 | ||||||
Other long-term liabilities |
4,749 | 4,546 | ||||||
Total liabilities |
162,680 | 240,821 | ||||||
Commitments and contingencies |
||||||||
Shareholders equity: |
||||||||
Ordinary shares, $0.00016667 par value;
600,000,000 shares authorized; 63,090,207 and
62,740,650 shares issued and outstanding as of
November 26, 2010 and August 27, 2010,
respectively |
11 | 10 | ||||||
Additional paid-in capital |
121,269 | 118,123 | ||||||
Accumulated other comprehensive income |
16,202 | 11,658 | ||||||
Retained earnings |
181,756 | 173,789 | ||||||
Total shareholders equity |
319,238 | 303,580 | ||||||
Total liabilities and shareholders equity |
$ | 481,918 | $ | 544,401 | ||||
See accompanying notes to unaudited condensed consolidated financial statements.
3
Table of Contents
SMART MODULAR TECHNOLOGIES (WWH), INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(Unaudited)
Three Months Ended | ||||||||
November 26, | November 27, | |||||||
2010 | 2009 | |||||||
(In thousands, except per share data) | ||||||||
Net sales |
$ | 216,359 | $ | 123,093 | ||||
Cost of sales (1) |
172,350 | 94,327 | ||||||
Gross profit |
44,009 | 28,766 | ||||||
Operating expenses: |
||||||||
Research and development (1) |
8,160 | 5,730 | ||||||
Selling, general and administrative (1) |
14,848 | 13,366 | ||||||
Technology access charge |
7,534 | | ||||||
Total operating expenses |
30,542 | 19,096 | ||||||
Income from operations |
13,467 | 9,670 | ||||||
Interest expense, net |
(711 | ) | (1,663 | ) | ||||
Other income, net |
550 | 1,292 | ||||||
Total other expense |
(161 | ) | (371 | ) | ||||
Income before provision for income taxes |
13,306 | 9,299 | ||||||
Provision for income taxes |
5,339 | 4,717 | ||||||
Net income |
$ | 7,967 | $ | 4,582 | ||||
Net income per share, basic |
$ | 0.13 | $ | 0.07 | ||||
Net income per share, diluted |
$ | 0.12 | $ | 0.07 | ||||
Shares used in computing basic net income
per share |
62,899 | 61,974 | ||||||
Shares used in computing diluted net income per share |
65,760 | 64,016 | ||||||
(1) Stock-based compensation by category: | ||||||||
Cost of sales |
$ | 238 | $ | 157 | ||||
Research and development |
386 | 297 | ||||||
Selling, general and administrative |
1,521 | 1,192 |
See accompanying notes to unaudited condensed consolidated financial statements.
4
Table of Contents
SMART MODULAR TECHNOLOGIES (WWH), INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
(Unaudited)
Three Months Ended | ||||||||
November 26, | November 27, | |||||||
2010 | 2009 | |||||||
(In thousands) | ||||||||
Net income |
$ | 7,967 | $ | 4,582 | ||||
Other comprehensive income: |
||||||||
Net changes in unrealized gain or loss on
derivative instruments accounted for as
cash flow hedges |
| 475 | ||||||
Foreign currency translation |
4,544 | 5,371 | ||||||
Comprehensive income |
$ | 12,511 | $ | 10,428 | ||||
See accompanying notes to unaudited condensed consolidated financial statements.
5
Table of Contents
SMART MODULAR TECHNOLOGIES (WWH), INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Unaudited)
Three Months Ended | ||||||||
November 26, | November 27, | |||||||
2010 | 2009 | |||||||
(In thousands) | ||||||||
Cash flows from operating activities: |
||||||||
Net income |
$ | 7,967 | $ | 4,582 | ||||
Adjustments to reconcile net income to net cash provided by
(used in) operating activities: |
||||||||
Depreciation and amortization |
5,898 | 3,615 | ||||||
Stock-based compensation |
2,145 | 1,646 | ||||||
Provision for doubtful accounts receivable and sales returns |
113 | 92 | ||||||
Amortization of debt issuance costs |
99 | 550 | ||||||
(Gain) loss on sale of assets |
508 | (35 | ) | |||||
Deferred income tax provision |
151 | | ||||||
Gain on early repayment of long-term debt |
| (1,178 | ) | |||||
Changes in operating assets and liabilities: |
||||||||
Accounts receivable |
29,377 | 4,650 | ||||||
Inventories |
9,328 | (14,580 | ) | |||||
Prepaid expenses and other assets |
4,062 | (2,676 | ) | |||||
Accounts payable |
(68,382 | ) | 8,089 | |||||
Accrued expenses and other liabilities |
(7,447 | ) | 2,948 | |||||
Net changes in operating assets and liabilities |
(33,062 | ) | (1,569 | ) | ||||
Net cash provided by (used in) operating activities |
(16,181 | ) | 7,703 | |||||
Cash flows from investing activities: |
||||||||
Capital expenditures |
(8,228 | ) | (1,410 | ) | ||||
Cash deposits on equipment |
691 | (1,630 | ) | |||||
Proceeds from sale of property and equipment |
| 145 | ||||||
Net cash used in investing activities |
(7,537 | ) | (2,895 | ) | ||||
Cash flows from financing activities: |
||||||||
Repayment of long-term debt |
| (25,000 | ) | |||||
Proceeds from issuance of ordinary shares from stock option
exercises |
1,002 | 218 | ||||||
Net cash provided by (used in) financing activities |
1,002 | (24,782 | ) | |||||
Effect of exchange rate changes on cash and cash equivalents |
186 | 1,418 | ||||||
Net decrease in cash and cash equivalents |
(22,530 | ) | (18,556 | ) | ||||
Cash and cash equivalents at beginning of period |
115,474 | 147,658 | ||||||
Cash and cash equivalents at end of period |
$ | 92,944 | $ | 129,102 | ||||
Supplemental disclosures of cash flow information: |
||||||||
Cash paid during the period: |
||||||||
Interest |
$ | 841 | $ | 1,648 | ||||
Taxes |
8,687 | 4,081 | ||||||
Non-cash activities information: |
||||||||
Change in fair value of derivative instruments |
$ | | $ | (350 | ) |
See accompanying notes to unaudited condensed consolidated financial statements.
6
Table of Contents
SMART MODULAR TECHNOLOGIES (WWH), INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(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 November 26, 2010
and August 27, 2010 and for the three months ended November 26, 2010 and November 27, 2009. 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
Companys 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
Companys 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; Tewksbury (which has recently moved to Westford), Massachusetts; South
Korea; Scotland; Puerto Rico; Malaysia; and Brazil. The financial information for one of the
Companys subsidiaries, SMART Modular Technologies Indústria de Componentes Eletrônicos Ltda.
(SMART Brazil) is included in the Companys 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.
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.
7
Table of Contents
The following is a summary of our gross billings to customers and net sales for services and
products (in thousands):
Three Months Ended | ||||||||
November 26, | November 27, | |||||||
2010 | 2009 | |||||||
Service revenue, net |
$ | 10,486 | $ | 7,952 | ||||
Cost of sales service (1) |
228,368 | 153,604 | ||||||
Gross billings for services |
238,854 | 161,556 | ||||||
Product net sales |
205,873 | 115,141 | ||||||
Gross billings to customers |
$ | 444,727 | $ | 276,697 | ||||
Product net sales |
$ | 205,873 | $ | 115,141 | ||||
Service revenue, net |
10,486 | 7,952 | ||||||
Net sales |
$ | 216,359 | $ | 123,093 | ||||
(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 three months ended November 26,
2010 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 transferors 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 products 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.
8
Table of Contents
NOTE 2 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 November 26, 2010 and November 27, 2009 was approximately
$2.1 million and $1.6 million, respectively.
Stock Options
The Companys stock option plan provides for grants of options to employees and independent
directors of the Company to purchase the Companys 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 November 26, 2010, there were 13,123,164 ordinary shares reserved
for issuance under this plan, of which 2,422,266 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 November 26, 2010 and November 27, 2009
was approximately $1.3 million.
Option Exchange
During the fourth quarter of fiscal 2009, the Companys shareholders approved an employee
stock option exchange program (Option Exchange) to permit eligible employees (excluding named
executive officers and directors) to exchange outstanding stock options with exercise prices equal
to or greater than $4.20 per share, for new options under the Companys Amended and Restated Stock
Incentive Plan.
During the first quarter of fiscal 2010, the Company completed the employee stock option
exchange program. On September 25, 2009, 2,449,645 of the 3,446,561 eligible options were tendered
in exchange for 1,864,301 new options with a strike price of $5.38 per share. The newly granted
replacement options were issued subject to a new two year vesting period.
The exchange of options in this Option Exchange was treated as a modification of the existing
stock options for accounting purposes. Accordingly, unrecognized compensation expenses from the
surrendered stock options are being recognized over the new service period of the newly granted
options. There was no material incremental cost resulting from the Option Exchange.
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 three months ended November 26, 2010 is a weighted average of the Companys 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:
Three Months Ended | ||||||||
November 26, | November 27, | |||||||
2010 | 2009 | |||||||
Stock options: |
||||||||
Expected term (years) |
4.7 | 4.7 | ||||||
Expected volatility |
76 | % | 70 | % | ||||
Risk-free interest rate |
1.53 | % | 2.11 | % | ||||
Expected dividends |
| |
9
Table of Contents
A summary of option activity as of and for the three months ended November 26, 2010, 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 |
789 | 6.31 | ||||||||||||||
Options exercised |
(280 | ) | 3.58 | |||||||||||||
Options forfeited and cancelled |
(167 | ) | 6.22 | |||||||||||||
Options outstanding at November 26, 2010 |
8,776 | $ | 4.55 | 6.9 | $ | 14,946 | ||||||||||
Options exercisable at November 26, 2010 |
4,875 | $ | 4.04 | 5.7 | $ | 11,449 | ||||||||||
Options vested and expected to vest at
November 26, 2010 |
8,432 | $ | 4.50 | 6.8 | $ | 14,758 | ||||||||||
The Black-Scholes weighted average fair value of options granted during the three months ended
November 26, 2010 and November 27, 2009 was $3.82 and $2.47 per option, respectively. The total
intrinsic value of employee stock options exercised during the three months ended November 26, 2010
and November 27, 2009 was approximately $1.0 million and $0.3 million, respectively. Upon the
exercise of options, the Company issues new ordinary shares from its authorized shares.
A summary of the status of the Companys non-vested stock options as of November 26, 2010, and
changes during the three months ended November 26, 2010, 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 |
789 | $ | 3.82 | |||||
Vested stock options |
(460 | ) | $ | 2.28 | ||||
Forfeited and cancelled stock options |
(167 | ) | $ | 3.42 | ||||
Non-vested stock options at November 26, 2010 |
3,901 | $ | 2.86 | |||||
As of November 26, 2010, there was approximately $10.4 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 three months ended November 26, 2010 was approximately $1.0 million.
Restricted Share Units (RSUs)
The Companys 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 Companys 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
Companys 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.
10
Table of Contents
A summary of the changes in RSUs outstanding under the Companys equity incentive plan during
the three months ended November 26, 2010 is presented below (dollars and shares in thousands,
except per share data):
Weighted | ||||||||||||
Average | Aggregate | |||||||||||
Grant Date Fair | Intrinsic | |||||||||||
Shares | Value | Value | ||||||||||
Awards outstanding at August 27, 2010 |
1,153 | $ | 5.25 | |||||||||
Awards granted |
862 | 7.05 | ||||||||||
Awards vested |
(70 | ) | 5.09 | |||||||||
Awards forfeited and cancelled |
(21 | ) | 6.31 | |||||||||
Awards outstanding at November 26, 2010 |
1,924 | $ | 6.09 | $ | 11,027 | |||||||
The stock-based compensation expense related to RSUs for the three months ended November 26,
2010 and November 27, 2009 was approximately $0.8 million and $0.3 million, respectively.
As of November 26, 2010, the Company had approximately $7.5 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 2.4 years.
NOTE 3 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 three months ended November 26, 2010 indicating that impairment may
have occurred. As of November 26, 2010, the carrying value of goodwill on the Companys unaudited
condensed consolidated balance sheet was $1.1 million.
Currently, 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. In fiscal 2008 and 2009, the Company had categorized its products and
services into the following two reporting units and two operating and reportable segments: the
Memory, Display & Embedded Segment and the Adtron Segment. With the completion of the integration
of Adtron into SMART during fiscal 2009, the Company has been operating in one operating and
reportable segment since the beginning of fiscal 2010.
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 November 26, 2010 and August 27, 2010
(in thousands):
As of November 26, 2010 | As of August 27, 2010 | |||||||||||||||||||||||
Weighted | Value at | |||||||||||||||||||||||
Avg. Life | Date of | Accumulated | Carrying | Accumulated | Carrying | |||||||||||||||||||
(years) | Acquisition | Amortization | Value | Amortization | Value | |||||||||||||||||||
Amortized intangible
assets: |
||||||||||||||||||||||||
Customer relationships |
10 | $ | 3,700 | $ | 1,018 | $ | 2,682 | $ | 925 | $ | 2,775 | |||||||||||||
Technology |
7 | 2,800 | 1,100 | 1,700 | 1,000 | 1,800 | ||||||||||||||||||
Company trade name |
20 | 2,040 | 281 | 1,759 | 255 | 1,785 | ||||||||||||||||||
Leasehold interest |
3 | 260 | 223 | 37 | 203 | 57 | ||||||||||||||||||
Product names |
9 | 60 | 18 | 42 | 17 | 43 | ||||||||||||||||||
Total |
$ | 8,860 | $ | 2,640 | $ | 6,220 | $ | 2,400 | $ | 6,460 | ||||||||||||||
Amortization expense related to identifiable intangible assets totaled approximately $0.2
million and $0.3 million for the three months ended November 26, 2010 and November 27, 2009,
respectively. Acquired intangibles with definite lives are amortized on a straight-line basis over
the remaining estimated economic life of the underlying intangible assets.
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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 |
$ | 695 | ||
2012 |
879 | |||
2013 |
879 | |||
2014 |
879 | |||
2015 |
678 | |||
Thereafter |
2,210 | |||
Total |
$ | 6,220 | ||
NOTE 4 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 | ||||||||
November 26, | November 27, | |||||||
2010 | 2009 | |||||||
Numerator: |
||||||||
Net income |
$ | 7,967 | $ | 4,582 | ||||
Denominator: |
||||||||
Weighted average ordinary shares, basic |
62,899 | 61,974 | ||||||
Effect of dilutive securities: |
||||||||
Stock options and RSUs |
2,861 | 2,042 | ||||||
Weighted average ordinary shares, diluted |
65,760 | 64,016 | ||||||
Net income per ordinary share, basic |
$ | 0.13 | $ | 0.07 | ||||
Net income per ordinary share, diluted |
$ | 0.12 | $ | 0.07 | ||||
The Company excluded 4,899,602 and 5,407,116 weighted shares from stock options and RSUs from
the computation of diluted net income per share for the three months ended November 26, 2010 and
November 27, 2009, respectively, as the effect of their inclusion would have been anti-dilutive.
NOTE 5 Balance Sheet Details
Inventories
Inventories
consisted of the following (in thousands):
November 26, | August 27, | |||||||
2010 | 2010 | |||||||
Raw materials |
$ | 38,518 | $ | 44,180 | ||||
Work-in-process |
16,577 | 13,309 | ||||||
Finished goods |
48,369 | 54,614 | ||||||
Total inventories * |
$ | 103,464 | $ | 112,103 | ||||
* | As of November 26, 2010 and August 27, 2010, 41% of total inventories
represented inventory held under service arrangements. |
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Prepaid Expenses and Other Current Assets
Prepaid expenses and other current assets consisted of the following (in thousands):
November 26, | August 27, | |||||||
2010 | 2010 | |||||||
Prepaid ICMS taxes in Brazil * |
$ | 2,708 | $ | 11,277 | ||||
Indemnification receivable for ICMS assessment * |
4,325 | 4,115 | ||||||
Prepayment for property and equipment taxes |
2,585 | 2,122 | ||||||
Unbilled receivables |
5,300 | 6,182 | ||||||
Receivable from subcontractor |
1,745 | 3,594 | ||||||
Deferred and other income taxes |
1,117 | 1,197 | ||||||
Other prepaid expenses and other current assets |
4,545 | 5,001 | ||||||
Total prepaid expenses and other current assets |
$ | 22,325 | $ | 33,488 | ||||
* | See Note 9 Commitments and Contingencies. |
Property and Equipment, net
Property
and equipment consisted of the following (in thousands):
November 26, | August 27, | |||||||
2010 | 2010 | |||||||
Office furniture, software, computers, and equipment |
$ | 5,703 | $ | 5,751 | ||||
Manufacturing equipment |
87,804 | 78,901 | ||||||
Leasehold improvements |
19,098 | 18,317 | ||||||
112,605 | 102,969 | |||||||
Less accumulated depreciation and amortization |
63,426 | 56,748 | ||||||
Property and equipment, net |
$ | 49,179 | $ | 46,221 | ||||
Depreciation expense totaled approximately $5.7 million and $3.3 million for the three months
ended November 26, 2010 and November 27, 2009, respectively.
Other Non-Current Assets
Other non-current assets consisted of the following (in thousands):
November 26, | August 27, | |||||||
2010 | 2010 | |||||||
Prepaid ICMS taxes in Brazil * |
$ | 13,154 | $ | 6,358 | ||||
Judicial deposit related to Brazil ICMS assessment * |
4,325 | 4,115 | ||||||
Prepayment for property and equipment taxes |
5,040 | 4,114 | ||||||
Deposits on property and equipment |
2,385 | 3,076 | ||||||
Capitalized loan costs |
538 | 637 | ||||||
Other |
2,396 | 2,917 | ||||||
Total other non-current assets |
$ | 27,838 | $ | 21,217 | ||||
* | See Note 9 Commitments and Contingencies. |
Accrued Liabilities
Accrued
liabilities consisted of the following (in thousands):
November 26, | August 27, | |||||||
2010 | 2010 | |||||||
Accrued employee compensation |
$ | 9,623 | $ | 15,406 | ||||
VAT and other transaction taxes payable |
4,459 | 5,966 | ||||||
Income taxes payable |
334 | 3,145 | ||||||
Accrued warranty reserve |
1,085 | 732 | ||||||
Other accrued liabilities |
5,677 | 4,069 | ||||||
Total accrued liabilities |
$ | 21,178 | $ | 29,318 | ||||
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NOTE 6 Income Taxes
The provision for income tax expense is summarized as follows (in thousands):
Three Months Ended | ||||||||
November 26, | November 27, | |||||||
2010 | 2009 | |||||||
Current |
$ | 5,201 | $ | 4,728 | ||||
Deferred |
138 | (11 | ) | |||||
Total |
$ | 5,339 | $ | 4,717 | ||||
Income (loss) before provision for income taxes for the three months ended November 26, 2010
and November 27, 2009, consisted of the following components (in thousands):
Three Months Ended | ||||||||
November 26, | November 27, | |||||||
2010 | 2009 | |||||||
U.S. |
$ | (12,387 | ) | $ | (4,263 | ) | ||
Non-U.S. |
25,693 | 13,562 | ||||||
Total |
$ | 13,306 | $ | 9,299 | ||||
The effective tax rates for the three months ended November 26, 2010 and November 27, 2009
were approximately 40% and 51%, respectively. The decrease in the effective tax rate for the three
months ended November 26, 2010, as compared to the three months ended November 27, 2009, is
primarily due to higher income taxed at lower tax rates being generated in non-U.S. tax jurisdictions,
partially offset by an increase in losses in the U.S. that provide no tax benefit.
At November 26, 2010, the liability for uncertain tax positions was $0.2 million.
As of November 26, 2010, 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 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.
NOTE 7 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 Companys 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 November 26, 2010.
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 November
26, 2010, the fair value of the Notes that remained outstanding was estimated to be approximately
$55.1 million.
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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 Companys subsidiaries and
substantially all of the Companys 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 November 26,
2010. While the Company was in compliance with the financial covenants required to borrow funds
under the WF Credit Facility as of November 26, 2010 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 8 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 Companys 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 Companys 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. |
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Assets and liabilities measured at fair value on a recurring basis include the following (in
millions):
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 November 26, 2010: |
||||||||||||||||
Assets: |
||||||||||||||||
Cash |
$ | 76.5 | $ | | $ | | $ | 76.5 | ||||||||
Money market funds |
15.4 | | | 15.4 | ||||||||||||
Certificates of deposit |
1.0 | | | 1.0 | ||||||||||||
Total assets measured at fair value (1) |
$ | 92.9 | $ | | $ | | $ | 92.9 | ||||||||
Balances as of August 27, 2010: |
||||||||||||||||
Assets: |
||||||||||||||||
Cash |
$ | 45.7 | $ | | $ | | $ | 45.7 | ||||||||
Money market funds |
69.8 | | | 69.8 | ||||||||||||
Total assets measured at fair value (1) |
$ | 115.5 | $ | | $ | | $ | 115.5 | ||||||||
(1) | Included in cash and cash equivalents on the Companys unaudited condensed consolidated balance sheets. |
NOTE 9 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 Companys product. The amounts of the reserves are based on established terms
and the Companys 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 Companys accrued warranty reserve (in
thousands):
Three Months Ended | ||||
November 26, | ||||
2010 | ||||
Balance of accrual at August 27, 2010 |
$ | 732 | ||
Settlement of warranty claims |
(242 | ) | ||
Provision for product warranties |
595 | |||
Balance of accrual at November 26, 2010 |
$ | 1,085 | ||
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 Companys 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 million, of
which $7 million was paid on November 29, 2010 and the remaining $3 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.
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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 $1.2 million during the first quarter
of fiscal 2011 associated with the development agreement, which represented the effort incurred by
the semiconductor company under the development agreement during the three months ended November
26, 2010.
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 and employment 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. The Company is not currently able to estimate, with
reasonable certainty, the possible loss, or range of loss, if any, from the cases listed below, 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 Companys
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. In the Final Determination, the ITC found no infringement by the
Companys subsidiary. As the 627 and 977 patents expired in September 2010, Tessera is only
appealing the Final Determination as to the 106 patent. The Federal Circuit Court of Appeals will
hear Tesseras appeal on January 14, 2011.
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 Tesseras allegations and that
the likelihood of any material charge for this matter is not probable.
Ring Technology
On December 11, 2009, Ring Technology Enterprises of Texas, LLC (Ring Technology) filed a
complaint in the Eastern District of Texas alleging infringement of United States Patent No.
6,879,526 entitled Methods and Apparatus for Improved Memory Access (the 526 patent) by two of
the Companys subsidiaries as well as by several other respondents. Ring Technology alleges that
the Companys two subsidiaries have been and now are infringing, jointly infringing and/or
contributing to the infringement of the 526 patent, by making, using, importing, offering for
sale, and/or selling one or more devices having a memory device and a set of shift registers
interconnected in series that shift data from the memory device from one shift register to the next
in the set according to a shift frequency received from a clock signal. In particular, Ring has
alleged that both FB-DIMM memory products and solid state drive (SSD) products are covered by one
or more claims of the 526 patent. Ring Technology claims liability for infringement of the 526
patent pursuant to 35 U.S.C. §271 and seeks an unspecified amount of damages and injunctive relief.
In February 2010, the Companys subsidiaries answered the Ring Technology complaint and denied the
allegations of infringement. The Company believes that it has valid defenses against all
allegations and that the likelihood of any material charge for this matter is not probable.
17
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Contingencies
Brazil ICMS Assessment
On October 3, 2008, the Companys 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 subject to indemnification by Solectron to SMART pursuant to the Transaction
Agreement dated February 11, 2004 dealing with the acquisition of SMART from Solectron. The Company
notified Solectron and Flextronics of the Assessment, and under the terms of the Transaction
Agreement, Flextronics elected to assume responsibility to contest the Assessment on SMART Brazils
behalf. The Company has been advised that the efforts to contest the Assessment in the
administrative level have been unsuccessful and on June 16, 2010, the Company was notified that the
last administrative appeal was not admitted, thereby exhausting all administrative appeals. The
Company has also been advised by tax counsel that additional appeals can only be made in a judicial
proceeding. In October 2010, the attorneys appointed by Flextronics filed a proceeding in the
judicial sphere aiming at: (i) disputing the enforceability of the state legislation that is
involved in the Assessment; and (ii) disputing the penalties against SMART Brazil.
As of November 26, 2010, the Companys unaudited condensed consolidated balance sheet reflects
both a liability for the Assessment and a corresponding indemnity receivable from Flextronics for
approximately $4.3 million (or 7.4 million Brazilian Reais BRL). In November 2010, SMART Brazil
received a correspondence from the tax collection division advising SMART Brazil of the conclusion
of an administrative appeal contesting the Assessment. According to the government website where
assessments are listed, the revised assessment amount was $5.5 million (or 9.3 million BRL). This
revised amount includes interest on the tax, interest on the penalties, and attorneys fees. The
Company is currently reviewing the revised Assessment, but believes that the Assessment as revised
is covered by the indemnity from Solectron and/or Flextronics discussed above and as such, it is
not likely to have a material adverse effect on its cash flows, results of operations or financial
condition. As of November 26, 2010, the Company has not recorded the incremental $1.2 million
assessment in either the liability for the Assessment or as part of the corresponding indemnity
receivable as the impact is only balance sheet. While the Company believes that the Assessment as
revised is 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, SMART Brazil instituted a
judicial proceeding requesting an injunction which was granted on June 16, 2010. In connection with
this injunction, on June 17, 2010, SMART Brazil made a judicial deposit in the amount of the
Assessment at that time which totaled $4.1 million (or 7.2 million BRL). This deposit had an
adverse impact on the Companys cash flow. As of November 26, 2010, the judicial deposit balance
increased to $4.3 million (or 7.4 million BRL) and is classified in other non-current assets in the
accompanying unaudited condensed consolidated balance sheet.
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 upon
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 Brazils 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 Brazils imports. Although the renewal has been granted, there was no refund of ICMS tax
credits that accumulated during the period the Company was waiting for the renewal.
As of November 26, 2010, the total amount of accumulated ICMS tax credits reported on the
Companys unaudited condensed consolidated balance sheet was $15.9 million (or 27.0 million BRL),
with $2.7 million (or 4.6 million BRL) under other current assets and $13.2 million (or 22.4
million BRL) under other non-current assets. It is expected that $2.7 million of the excess ICMS
credits will be recovered during the next twelve months, with the remainder of $13.2 million being
recovered primarily in fiscal 2012 and 2013. The Company updates its forecast of the
recoverability of the ICMS credits quarterly, considering the following key variables in Brazil:
timing of government approvals of automated credit utilization, the total amount of sales, the
inter-state mix of sales, the timing of fixed asset purchases and the amount of semiconductor
component imports. These expectations are based on various estimates including the mix of products
and regions where the Companys sales will occur. If these estimates or the mix of products or
regions vary, it could take longer 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 Companys cash flow and there
can be no absolute assurance that the ICMS credits will be fully utilized. While the Company has
notified Solectron and Flextronics that losses, including interest and foreign exchange losses related to the delay in receiving the renewal of the ICMS benefit,
are also subject to their indemnity obligations, Flextronics has repudiated this claim and there
can be no absolute assurance that Solectron and/or Flextronics will comply with their contractual
indemnity obligations in this regard. The Company has not recorded any receivable from Flextronics
for the indemnity of these losses.
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NOTE 10 Segment and Geographic Information
The Company currently operates in one operating segment: the design, manufacture, and sale of
electronic subsystem products and services to the electronics industry. The Companys chief
operating decision-maker, the President and CEO, evaluates financial performance on a company-wide
basis. In fiscal 2008 and 2009, the Company had categorized its products and services into the
following two business segments, the Memory, Display & Embedded Segment and the Adtron Segment.
However, with the completion of the Adtron integration into SMART during fiscal 2009, the Company
has been operating in one segment since the beginning of fiscal 2010.
A summary of the Companys net sales and property and equipment by geographic area, as well as
net sales by type is as follows (in thousands):
Three Months Ended | ||||||||
November 26, | November 27, | |||||||
2010 | 2009 | |||||||
Geographic net sales: |
||||||||
U.S. |
$ | 48,213 | $ | 43,104 | ||||
Brazil |
119,408 | 44,005 | ||||||
Asia |
37,446 | 24,892 | ||||||
Europe |
6,548 | 8,630 | ||||||
Other Americas |
4,744 | 2,462 | ||||||
$ | 216,359 | $ | 123,093 | |||||
November 26, | August 27, | |||||||
2010 | 2010 | |||||||
Property and equipment, net: |
||||||||
U.S. |
$ | 6,219 | $ | 6,298 | ||||
Brazil |
34,868 | 32,175 | ||||||
Malaysia |
8,038 | 7,705 | ||||||
Other |
54 | 43 | ||||||
$ | 49,179 | $ | 46,221 | |||||
NOTE 11 Major Customers
A majority of the Companys net sales are attributable to customers operating in the
information technology industry. Net sales to SMARTs 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:
Three Months Ended | ||||||||
November 26, | November 27, | |||||||
2010 | 2009 | |||||||
Customer A |
21 | % | 23 | % | ||||
Customer B |
14 | % | 18 | % | ||||
Customer C |
16 | % | 12 | % |
As of November 26, 2010, approximately 38%, 22% and 9% of accounts receivable were
concentrated with Customer A, B and C, respectively. As of August 27, 2010, approximately 42%, 26%
and 9% of accounts receivable were concentrated with Customer A, B and C, respectively. The loss of
a major customer or a significant reduction in revenue from a major customer could have a material
adverse effect on the Companys business, financial condition and results of operations.
NOTE 12 Other Income, net
Other
income consisted of the following (in thousands):
Three Months Ended | ||||||||
November 26, | November 27, | |||||||
2010 | 2009 | |||||||
Foreign currency gains (losses) |
$ | 133 | $ | (50 | ) | |||
Gain on early repayment of long-term debt |
| 1,178 | ||||||
Other income |
417 | 164 | ||||||
Total |
$ | 550 | $ | 1,292 | ||||
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Item 2. | Managements Discussion and Analysis of Financial Condition and Results of Operations |
This Quarterly Report on Form 10-Q, including this Managements 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 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, such as we are currently experiencing, 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.
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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 expect to 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 flash production in fiscal 2011.
We currently operate in one reportable segment: the design, manufacture, and sale of
electronic subsystem products and services to various sectors of the electronics industry. The
Companys chief operating decision-maker, the President and CEO, evaluates financial performance on
a company-wide basis. In fiscal 2008 and 2009, we had categorized our products and services into
the following two business segments, the Memory, Display & Embedded Segment and the Adtron Segment.
With the completion of the integration of Adtron into SMART during fiscal 2009, we have been
operating in one segment since the beginning of fiscal 2010. 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. Managements 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.
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, 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.
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Critical Accounting Policies
Managements 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. 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 consolidated balance sheet.
The following is a summary of our gross billings to customers and net sales for services and
products (in thousands):
Three Months Ended | ||||||||
November 26, | November 27, | |||||||
2010 | 2009 | |||||||
Service revenue, net |
$ | 10,486 | $ | 7,952 | ||||
Cost of sales service (1) |
228,368 | 153,604 | ||||||
Gross billings for services |
238,854 | 161,556 | ||||||
Product net sales |
205,873 | 115,141 | ||||||
Gross billings to customers |
$ | 444,727 | $ | 276,697 | ||||
Product net sales |
$ | 205,873 | $ | 115,141 | ||||
Service revenue, net |
10,486 | 7,952 | ||||||
Net sales |
$ | 216,359 | $ | 123,093 | ||||
(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 customers 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.
As a result of the macroeconomic environment and associated credit market conditions, both
liquidity and access to capital have impacted some of our customers. We have continued to closely
monitor our credit exposure with our customers to anticipate exposures and manage our risk.
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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 2
to the Unaudited Condensed Consolidated Financial Statements.
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Results of Operations
The following is a summary of our results of operations for the three months ended November
26, 2010 and November 27, 2009 (in millions):
Three Months Ended (1) | ||||||||||||||||
November 26, | % of | November 27, | % of | |||||||||||||
2010 | sales | 2009 | sales | |||||||||||||
Net sales |
$ | 216.4 | 100 | % | $ | 123.1 | 100 | % | ||||||||
Cost of sales |
172.4 | 80 | % | 94.3 | 77 | % | ||||||||||
Gross profit |
44.0 | 20 | % | 28.8 | 23 | % | ||||||||||
Research and development |
8.2 | 4 | % | 5.7 | 5 | % | ||||||||||
Selling, general and administrative |
14.8 | 7 | % | 13.4 | 11 | % | ||||||||||
Technology access charge |
7.5 | 3 | % | | | |||||||||||
Total operating expenses |
30.5 | 14 | % | 19.1 | 16 | % | ||||||||||
Income from operations |
13.5 | 6 | % | 9.7 | 8 | % | ||||||||||
Interest expense, net |
(0.7 | ) | 0 | % | (1.7 | ) | -1 | % | ||||||||
Other income, net |
0.6 | 0 | % | 1.3 | 1 | % | ||||||||||
Total other expense |
(0.2 | ) | 0 | % | (0.4 | ) | 0 | % | ||||||||
Income before provision for income taxes |
13.3 | 6 | % | 9.3 | 8 | % | ||||||||||
Provision for income taxes |
5.3 | 2 | % | 4.7 | 4 | % | ||||||||||
Net income |
$ | 8.0 | 4 | % | $ | 4.6 | 4 | % | ||||||||
(1) | Summations may not compute precisely due to rounding. |
Three Months Ended November 26, 2010 as Compared to the Three Months Ended November 27,
2009
Net Sales
Net sales for the three months ended November 26, 2010 were $216.4 million, a 76% increase
from $123.1 million for the three months ended November 27, 2009. This increase was primarily due
to considerable strength in PC and notebook end-user demand in Brazil and increased demand for our
solid state storage products. Strategic investments in increased capacity at our Brazil operations
enabled us to meet strong end-user demand by substantially increasing volume. Our solid state
storage business also grew significantly due to increased demand for our embedded flash drives and
defense products. The increase in net sales was partially offset by decreased net sales from
display and embedded computing products, which we exited in the third quarter of fiscal 2010. We
expect net sales to decrease in the second quarter of fiscal 2011 given the substantial decline in
DRAM prices that has occurred and is expected to continue for the balance of the second quarter of
fiscal 2011.
Cost of Sales
Cost of sales for the three months ended November 26, 2010 was $172.4 million, an 83% increase
from $94.3 million for the three months ended November 27, 2009. The increase in cost of sales was
primarily due to a $71.8 million increase in the cost of products resulting from the increase in
net sales as discussed above. In addition, our factory overhead and other components of cost of
sales increased by $6.2 million, primarily due to increased volume, especially in Brazil, as well
as higher payroll and other employee-related expenses due to a 7% increase in our production
headcount and the restoration of salaries to U.S. employees in January 2010 that were temporarily
reduced during portions of fiscal 2009 and 2010. In addition, we had increased depreciation
expense of $2.1 million due to our continued capital investment to expand capacity primarily in
Brazil.
Gross Profit
Gross profit for the three months ended November 26, 2010 was $44.0 million, a 53% increase
from $28.8 million for the three months ended November 27, 2009. The increase in gross profit was
primarily due to higher net sales as explained above.
Gross profit percentage decreased to 20% for three months ended November 26, 2010 down from
23% for the three months ended November 27, 2009. The decrease in gross profit percentage was
primarily due to increased cost of products as a percentage of net sales resulting from decreased
DRAM pricing which reduces our selling prices, offset by increased end-user demand and improved
manufacturing utilization. In addition, while there was increased end-user demand leading to
increased net sales, gross profit percentage was also negatively impacted by an unfavorable mix of
products sold during the period. Given the continuing decline in DRAM prices, we expect our gross
profit percentage to decrease as a percentage of sales in the second quarter of fiscal 2011.
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Research and Development Expenses
Research
and development (R&D) expenses for the three months ended November 26, 2010 were
$8.2 million, a 44%
increase from $5.7 million for the three months ended November 27, 2009. This increase was
primarily due to increased spending on development of enterprise SSDs, which included $1.2 million
of R&D expenses incurred under a development agreement with a strategic partner, as well as higher
payroll and other employee-related expenses due to a 21% increase in R&D headcount and the
restoration of salaries to U.S. employees in January 2010 that were temporarily reduced during
portions of fiscal 2009 and 2010. During the balance 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 November 26,
2010 were $14.8 million, a 10% increase from $13.4 million for the three months ended November 27,
2009. Sales and marketing expenses increased by $0.5 million primarily due to higher commissions
resulting from the growth in sales. General and administrative expenses increased $1.0 million
primarily due to increased payroll and other employee-related expenses resulting from the
restoration of salaries to U.S. employees (including named executive officers) in January 2010 that
were temporarily reduced during portions of fiscal 2009 and 2010, as well as increased stock-based
compensation expense.
Technology Access Charge
A one-time technology access charge of $7.5 million for the three months ended November 26,
2010 was incurred to gain access to in-process technology in order to accelerate our development of
enterprise SSDs. Please refer to Note 9 of our Notes to Unaudited Condensed Consolidated Financial
Statements for additional detail.
Interest Expense, net
Net interest expense for the three months ended November 26, 2010 was $0.7 million compared to
$1.7 million for the three months ended November 27, 2009. The decrease in net interest expense
was primarily due to a $1.2 million decrease in interest expense resulting from lower outstanding
long-term debt, partially offset by a $0.2 million decrease in interest income due to lower
interest rates and lower amounts on deposit.
Other Income, net
Other income, net for the three months ended November 26, 2010 was $0.6 million compared to
$1.3 million for the three months ended November 27, 2009. This decrease was largely due to a $1.2
million gain on the repurchase of a portion of our long-term debt during the three months ended
November 27, 2009, offset by foreign currency transaction gains mainly from our Brazil operations
during the three months ended November 26, 2010.
Provision for Income Taxes
The effective tax rates for the three months ended November 26, 2010 and November 27, 2009
were approximately 40% and 51%, respectively. The decrease in tax rate for the three months ended
November 26, 2010, as compared to the three months ended November 27, 2009 is primarily due to
higher income taxed at lower tax rates being generated in non-U.S. tax jurisdictions, partially
offset by an increase in losses in the U.S. that provided no tax benefit.
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 line of 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.
Debt Service
As of November 26, 2010, we had total long-term indebtedness of $55.1 million, which
represents the aggregate principal amount outstanding under the Notes (defined below) that remain
outstanding.
Senior Secured Floating Rate Exchange Notes Due April 2012 (the Notes). As of November 26,
2010, the Notes bear an interest rate of 6.03%, 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 November 26, 2010.
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Senior Secured Revolving Line of Credit Facility. The Company has a senior secured 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 Companys subsidiaries and substantially all
of the Companys 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 November 26,
2010 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 November 26, 2010.
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 November 26, 2010, the
aggregate principal amount under the Notes that remain outstanding was $55.1 million which is due
April 2012. We may, however, repurchase additional Notes prior to this maturity.
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 April 1, 2010 through June 22, 2012, SMART Brazil was
required to pay ICMS taxes on imports for which we received tax credits. As of November 26, 2010,
we had a balance of $15.9 million (or 27.0 million BRL) of ICMS credits which will be recovered
over a period of time. It is expected that $2.7 million (or 4.6 million BRL) of the ICMS credits
will be recovered during the next twelve months, with the remainder of $13.2 million (or 22.4
million BRL) being recovered primarily in fiscal 2012 and 2013. On June 17, 2010, we also made a
judicial deposit in the amount of $4.1 million (or 7.2 million BRL) related to the contest of an
ICMS assessment in Brazil. Please refer to Contingencies under Note 9 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 R&D and capital expenditures, and service
the requirements on our debt obligations for at least the next 12 months. 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.
From fiscal 2004 through fiscal 2009, our annual capital expenditures were 3% or less of net
sales. In fiscal 2010, our capital expenditures were 4% of net sales due to capacity expansion and
the initiation of flash packaging for the consumer market in Brazil. In fiscal 2011, we expect our
capital expenditures to be approximately 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.
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Historical Trends
Historically, our financing requirements have been funded primarily through cash generated by
operating activities. As of November 26, 2010, our cash and cash equivalents were $92.9 million.
Cash Flows from Operating Activities. Net cash used in operating activities of $16.2 million
for the three months ended November 26, 2010 was primarily comprised of $33.1 million from changes
in our operating assets and liabilities, offset by $8.0 million of net income and $8.9 million of
non-cash related expenses. The $33.1 million change in operating assets and liabilities includes
cash used for a decrease in accounts payable of $68.4 million and a decrease in accrued liabilities
of $7.4 million. The decrease in accounts payable was primarily due to reduced inventory purchases,
including logistics, as well as more early payment discounts taken during the period. This was
partially offset by cash generated from a reduction in accounts receivable of $29.4 million, an
inventory decrease of $9.3 million and a decrease in prepaid expenses and other assets of $4.1
million. The reduction in accounts receivable was mostly due to improved collections. In addition,
both the accounts receivable and inventory decreases were related to decreased gross sales during
the period. The decrease in prepaid expenses and other assets was primarily due to decreased
non-trade receivables.
Net cash provided by operating activities of $7.7 million for the three months ended November
27, 2009 was primarily comprised of $4.6 million of net income and $4.7 million of non-cash related
expenses, offset by a $1.6 million change in our net operating assets and liabilities. The $1.6
million change in operating assets and liabilities was comprised of cash used for an inventory
increase of $14.6 million and an increase in prepaid expenses and other current assets of $2.7
million, partially offset by cash generated from an accounts receivable decrease of $4.7 million,
increases in accounts payable of $8.1 million and an increase in accrued liabilities of $3.0
million.
Cash Flows from Investing Activities. Net cash used in investing activities of $7.5 million
for the three months ended November 26, 2010 was primarily due to purchases of $8.2 million in
property and equipment, partially offset by lower cash deposits on equipment of $0.7 million. Net
cash used in investing activities of $2.9 million for the three months ended November 27, 2009 was
primarily due to purchases of $1.4 million in property and equipment and cash deposits on equipment
of $1.6 million.
Cash Flows from Financing Activities. Net cash provided by financing activities of $1.0
million for the three months ended November 26, 2010 was due to proceeds from ordinary share
issuances through option exercises. Net cash used in financing activities of $24.8 million for the
three months ended November 27, 2009 was primarily due to $25.0 million used for the partial
repurchase of the Notes, partially offset by $0.2 million provided by proceeds from ordinary share
issuances through 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 that is
material to investors.
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.
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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 long-term debt of $55.1 million
under the Notes that remain outstanding as of November 26, 2010. Although we did not have any
balances outstanding as of November 26, 2010 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 Companys 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 9 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, except
for the risk factors below which have been updated as follows:
Declines in memory component prices and our selling prices may result in declines in our net sales
and gross profit and could have a material adverse affect on our business, our results of
operations and our financial condition.
Our industry is highly competitive and characterized by historical declines in selling prices.
Our selling prices may decline due to several factors including general declines in demand for our
products, and/or excess supply of DRAM and flash memory components as a result of overcapacity
caused by increased manufacturing efficiencies, new manufacturing processes and/or manufacturing
capacity expansions by component suppliers. In the past, transitions to smaller design geometries
and other factors causing overcapacity in memory markets have also led to significant increases in
the worldwide supply of memory components. If not accompanied by increases in demand, supply
increases usually result in significant declines in component prices which in turn lead to declines
in the selling prices of our products. Moreover, even if end-user demand is strong, the fall in
global DRAM prices can still cause selling prices to decline and can also have a negative impact on
our gross profit margins, particularly in Brazil. We cannot
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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. During periods of price erosion,
our net sales may decline if we do not increase sales of existing products or fail to introduce and
sell new products in quantities sufficient to offset declines in our selling prices. Efforts to
increase sales or to introduce new products to offset the impact of declines in selling prices may
not be successful. Periods of price declines can also cause customers to reduce purchases as they
consume and reduce their inventory while waiting for lower prices when there is abundant
availability of product. Furthermore, our competitors and customers regularly impose significant
pricing pressures on us. Additionally, overall market factors may adversely affect product prices.
These declines in selling prices and their impact on purchasing practices have in the past and may
again in the future, have a material adverse effect on our business, our results of operations and
our financial condition. Declines in prices could also affect the valuation of our inventory which
could result in inventory write-downs and could harm our business, our results of operations and
our financial condition. Declines in selling prices might also enable OEMs to preinstall higher
density memory modules into new systems at existing price points thereby reducing the demand for
future memory upgrades and reducing demand for our products. In addition, our net sales and gross
profit may be negatively affected by shifts in our product mix during periods of declining selling
prices.
Worldwide political conditions, armed conflicts and threats of terrorist attacks may adversely
affect our operations and demand for our products.
The occurrence or threat of terrorist attacks may in the future adversely affect demand for
our products. In addition, such attacks may negatively affect our operations directly or
indirectly and such attacks or other armed conflicts may directly impact our physical facilities or
those of our suppliers or customers. Such attacks may make travel and the transportation of our
products more difficult and more expensive, ultimately having a negative effect on our business.
Also,
any armed conflicts around the world, including current tensions and/or hostilities in the Korean Peninsula, could have a substantial impact on our sales, our
supply chain and our ability to deliver products to our customers. Political and economic
instability in some regions of the world could also have a negative impact on our business. More
generally, various events could cause consumer confidence and spending to decrease or result in
increased volatility to the U.S. and the worldwide economies.
Any such occurrences could have a material adverse effect on our business, our results of
operations and our financial condition.
Item 6. | Exhibits |
The following exhibits are filed herewith:
Exhibit No. | Exhibit Title | |||
10.38 | Severance and Change of Control Agreement for Iain MacKenzie, dated December 10, 2010 |
|||
10.39 | Severance and Change of Control Agreement for Barry Zwarenstein, dated December 10, 2010 |
|||
10.40 | Severance and Change of Control Agreement for Alan Marten, dated December 10, 2010 |
|||
10.41 | Severance and Change of Control Agreement for Wayne Eisenberg, dated December 10, 2010 |
|||
10.42 | Severance and Change of Control Agreement for John Moyer, dated December 10, 2010 |
|||
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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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: January 4, 2011 |
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EXHIBIT INDEX
Exhibit No. | Exhibit Title | |||
10.38 | Severance and Change of Control Agreement for Iain MacKenzie, dated December 10, 2010 |
|||
10.39 | Severance and Change of Control Agreement for Barry Zwarenstein, dated December 10, 2010 |
|||
10.40 | Severance and Change of Control Agreement for Alan Marten, dated December 10, 2010 |
|||
10.41 | Severance and Change of Control Agreement for Wayne Eisenberg, dated December 10, 2010 |
|||
10.42 | Severance and Change of Control Agreement for John Moyer, dated December 10, 2010 |
|||
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 |
31