##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 Form 10-Q
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the Quarterly Period Ended November 30, 2007
 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(State or Other Jurisdiction of 
Incorporation or Organization)
    
    20-2509518(I.R.S. Employer
Identification No.)4211 Starboard DriveFremont, CA(Address of Principal Executive Offices)
    
    94538(Zip Code)
 (510) 623-1231
Registrants Telephone Number, Including Area Code
 
 þ o
  o þ o
 o þ




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##### 



SMART MODULAR TECHNOLOGIES (WWH), INC.
 INDEX TO QUARTERLY REPORT
 TABLE OF CONTENTS
 PagePART I. FINANCIAL INFORMATION
    
    
    3Item 1. Financial Statements
    
    
    3Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    13Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    20Item 4. Controls and Procedures
    
    
    20PART II. OTHER INFORMATION
    
    
    22Item 1. Legal Proceedings
    
    
    22Item 1A. Risk Factors
    
    
    22Item 6. Exhibits
    
    
    22SIGNATURES
    
    
    23EXHIBIT 10.23EXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32
  2




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##### Table of Contents



PART I. FINANCIAL INFORMATION
 
 Item 1. Financial Statements
 SMART MODULAR TECHNOLOGIES (WWH), INC. AND SUBSIDIARIES
 CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
 November 30,
    
    
    August 31,2007
    
    
    2007(In thousands)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    112,814
    
    
    $
    144,147Accounts receivable, net of allowances of
$2,350 and $2,517 as of November 30, 2007 and
August 31, 2007, respectively
    
    
    218,670
    
    
    
    184,391Inventories
    
    
    65,899
    
    
    
    65,105Prepaid expenses and other current assets
    
    
    7,836
    
    
    
    8,217Total current assets
    
    
    405,219
    
    
    
    401,860Property and equipment, net
    
    
    36,519
    
    
    
    33,588Goodwill
    
    
    3,187
    
    
    
    3,187Other non-current assets
    
    
    14,741
    
    
    
    14,442Total assets
    
    $
    459,666
    
    
    $
    453,077LIABILITIES AND SHAREHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    123,998
    
    
    $
    131,937Accrued expenses and other current liabilities
    
    
    21,627
    
    
    
    24,043Total current liabilities
    
    
    145,625
    
    
    
    155,980Long-term debt
    
    
    81,250
    
    
    
    81,250Other long-term liabilities
    
    
    863
    
    
    
    Total liabilities
    
    
    227,738
    
    
    $
    237,230Shareholders equity:Ordinary shares
    
    
    10
    
    
    
    10Additional paid-in capital
    
    
    93,960
    
    
    
    92,250Deferred stock-based compensation
    
    
    (250
    )
    
    
    (335
    )Accumulated other comprehensive income
    
    
    8,647
    
    
    
    6,083Retained earnings
    
    
    129,561
    
    
    
    117,839Total shareholders equity
    
    
    231,928
    
    
    
    215,847Total liabilities and shareholders equity
    
    $
    459,666
    
    
    $
    453,077
  3




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SMART MODULAR TECHNOLOGIES (WWH), INC. AND SUBSIDIARIES
 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
 Three Months
    
    
    Three MonthsEnded
    
    
    EndedNovember 30,
    
    
    November 24,2007
    
    
    2006(In thousands, exceptper share data)Net sales
    
    $
    174,951
    
    
    $
    237,170Cost of sales*
    
    
    141,429
    
    
    
    199,258Gross profit
    
    
    33,522
    
    
    
    37,912Operating expenses:Research and development*
    
    
    4,685
    
    
    
    4,040Selling, general and administrative*
    
    
    15,061
    
    
    
    14,254Total operating expenses
    
    
    19,746
    
    
    
    18,294Income from operations
    
    
    13,776
    
    
    
    19,618Interest expense
    
    
    (2,423
    )
    
    
    (2,587
    )Interest income
    
    
    1,399
    
    
    
    500Other income (expense), net
    
    
    1,422
    
    
    
    (71
    )Total other income (expense), net
    
    
    398
    
    
    
    (2,158
    )Income before provision for income taxes
    
    
    14,174
    
    
    
    17,460Provision for income taxes
    
    
    2,681
    
    
    
    2,907Net income
    
    $
    11,493
    
    
    $
    14,553Net income per ordinary share, basic
    
    $
    0.19
    
    
    $
    0.25Shares used in computing basic net income per ordinary share
    
    
    60,695
    
    
    
    58,663Net income per ordinary share, diluted
    
    $
    0.18
    
    
    $
    0.23Shares used in computing diluted net income per ordinary share
    
    
    63,656
    
    
    
    63,488*   Stock-based compensation by category:Cost of
sales
    
    $
    193
    
    
    $
    113Research and development
    
    
    441
    
    
    
    272Selling, general and administrative
    
    
    1,041
    
    
    
    564
  4




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SMART MODULAR TECHNOLOGIES (WWH), INC. AND SUBSIDIARIES
 CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
 Three Months
    
    
    Three MonthsEnded
    
    
    EndedNovember 30,
    
    
    November 24,2007
    
    
    2006(In thousands)Net income
    
    $
    11,493
    
    
    $
    14,553Other comprehensive income:Net changes in unrealized gain or loss
on derivative instruments accounted for
as cash flow hedges
    
    
    (741
    )
    
    
    (310
    )Foreign currency translation adjustments
    
    
    3,305
    
    
    
    489Comprehensive income
    
    $
    14,057
    
    
    $
    14,732
  5




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SMART MODULAR TECHNOLOGIES (WWH), INC. AND SUBSIDIARIES
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
 Three Months
    
    
    Three MonthsEnded
    
    
    EndedNovember 30,
    
    
    November 24,2007
    
    
    2006(In thousands)Cash flows from operating activities:Net cash (used in) provided by operating activities
    
    $
    (26,902
    )
    
    $
    10,521Cash flows from investing activities:Capital expenditures
    
    
    (3,828
    )
    
    
    (2,635
    )Cash deposits on equipment
    
    
    (1,311
    )
    
    
    Other, net
    
    
    
    
    
    
    3Net cash used in investing activities
    
    
    (5,139
    )
    
    
    (2,632
    )Cash flows from financing activities:Excess tax benefits from share-based compensation
    
    
    71
    
    
    
    289Borrowings under revolving line of credit
    
    
    11,500
    
    
    
    39,741Repayments on revolving line of credit
    
    
    (11,500
    )
    
    
    (39,741
    )Proceeds from issuance of ordinary shares from stock option exercises
    
    
    86
    
    
    
    174Net cash provided by financing activities
    
    
    157
    
    
    
    463Effect of exchange rate changes on cash and cash equivalents
    
    
    551
    
    
    
    33Net (decrease) increase in cash and cash equivalents
    
    
    (31,333
    )
    
    
    8,385Cash and cash equivalents at beginning of period
    
    
    144,147
    
    
    
    85,620Cash and cash equivalents at end of period
    
    $
    112,814
    
    
    $
    94,005Supplemental disclosures of cash flow information:Cash paid during the period for:Interest
    
    
    2,211
    
    
    
    2,242Income taxes
    
    
    2,251
    
    
    
    1,275
  6




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SMART MODULAR TECHNOLOGIES (WWH), INC. AND SUBSIDIARIES
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 NOTE 1  Basis of Presentation and Principles of Consolidation
 Basis of Presentation
   Product and Service Revenue
 Revenue Recognition
 Reporting Revenue Gross as a Principal versus Net as an Agent
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Recent Accounting Pronouncements
 Accounting for Nonrefundable Advance Payments for Goods or Services
Received for Use in Future Research and Development Activities
 NOTE 2  Stock-Based Compensation
 Share-Based
Payment Accounting for Stock Issued to
Employees
  Plan Description
  Summary of Assumptions and Activity
 .
 Three MonthsEndedNovember 30, 2007Stock options:Expected term (years)
    
    
    5.0Expected volatility
    
    
    51
    %Risk-free interest rate
    
    
    3.74
    %Expected dividends
    
    
    
 8




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WeightedAverageWeighted
    
    
    RemainingAverage
    
    
    Contractual
    
    
    AggregateExercise
    
    
    Term
    
    
    IntrinsicShares
    
    
    Price
    
    
    (Years)
    
    
    ValueOptions outstanding at August 31, 2007
    
    
    6,359
    
    
    $
    4.75Options granted
    
    
    2,001
    
    
    
    7.59Options exercised
    
    
    (58
    )
    
    
    1.49Options forfeited
    
    
    (93
    )
    
    
    10.25Options outstanding at November 30, 2007
    
    
    8,209
    
    
    $
    5.40
    
    
    
    8.2
    
    
    $
    29,245Options exercisable at November 30, 2007
    
    
    3,085
    
    
    $
    2.71
    
    
    
    7.3
    
    
    $
    18,263Options vested and expected to vest at
November 30, 2007
    
    
    7,849
    
    
    $
    5.28
    
    
    
    8.2
    
    
    $
    28,822
   Weighted AverageGrant Date FairShares
    
    
    Value Per ShareNon-vested stock options at August 31, 2007
    
    
    3,794
    
    
    $
    4.25Non-vested stock options granted
    
    
    2,001
    
    
    
    3.67Vested stock options
    
    
    (578
    )
    
    
    2.80Forfeited stock options
    
    
    (93
    )
    
    
    6.34Non-vested stock options at November 30, 2007
    
    
    5,124
    
    
    $
    2.81
  NOTE 3  Net Income Per Share
   Three Months
    
    
    Three MonthsEnded
    
    
    EndedNovember 30,
    
    
    November 24,2007
    
    
    2006Numerator:Net income
    
    $
    11,493
    
    
    $
    14,553Denominator:Weighted average ordinary shares
    
    
    60,695
    
    
    
    58,663Effect of dilutive securities:Stock options
    
    
    2,961
    
    
    
    4,825Total ordinary shares, diluted
    
    
    63,656
    
    
    
    63,488Net income per ordinary share, basic
    
    $
    0.19
    
    
    $
    0.25Net income per ordinary share, diluted
    
    $
    0.18
    
    
    $
    0.23
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NOTE 4  Inventories
  November 30, 2007
    
    
    August 31, 2007Raw materials
    
    $
    28,823
    
    
    $
    27,477Work-in process
    
    
    5,577
    
    
    
    4,815Finished goods
    
    
    31,499
    
    
    
    32,813$
    65,899
    
    
    $
    65,105
 NOTE 5  Income Taxes
  Three Months
    
    
    Three MonthsEnded
    
    
    EndedNovember 30,
    
    
    November 24,2007
    
    
    2006Current
    
    $
    2,668
    
    
    $
    2,508Deferred
    
    
    13
    
    
    
    399Total
    
    $
    2,681
    
    
    $
    2,907
  Three Months
    
    
    Three MonthsEnded
    
    
    EndedNovember 30,
    
    
    November 24,2007
    
    
    2006U.S. income
    
    $
    (4,611
    )
    
    $
    1,423Non-U.S. income
    
    
    18,785
    
    
    
    16,037Total
    
    $
    14,174
    
    
    $
    17,460
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NOTE 6  Indebtedness
  NOTE 7  Financial Instruments
 Fair Value of Financial Instruments
  Derivative Instruments
 Accounting for Derivative Instruments and Hedging Activities.
   NOTE 8  Commitments and Contingencies
 Product Warranty
  11




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Three MonthsEndedNovember 30, 2007Balance of accrual at August 31, 2007
    
    $
    589Warranty claims
    
    
    (201
    )Provision for product warranties
    
    
    355Balance of accrual at November 30, 2007
    
    $
    743
   Legal Matters
  NOTE 9  Segment and Geographic Information
  Three Months
    
    
    Three MonthsEnded
    
    
    EndedNovember 30,
    
    
    November 24,2007
    
    
    2006Geographic net sales:U.S.A.
    
    $
    105,278
    
    
    $
    154,769Other North and Latin America
    
    
    30,578
    
    
    
    31,144Europe
    
    
    15,804
    
    
    
    19,226Asia
    
    
    23,291
    
    
    
    32,031$
    174,951
    
    
    $
    237,170
 November 30,
    
    
    August 31,2007
    
    
    2007Property and equipment:U.S.A.
    
    $
    6,657
    
    
    $
    6,591Other North and Latin America
    
    
    25,084
    
    
    
    22,322Europe
    
    
    21
    
    
    
    24Asia
    
    
    4,757
    
    
    
    4,651$
    36,519
    
    
    $
    33,588
 12




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NOTE 10  Major Customers
  Three Months
    
    Three MonthsEnded
    
    EndedNovember 30,
    
    November 24,2007
    
    2006Customer A
    
    
    46
    %
    
    
    52
    %Customer B
    
    
    12
    %
    
    
    11
    %Customer C
    
    
    6
    %
    
    
    4
    %
  NOTE 11  Subsidiary Guarantors
  
 Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
  Executive Overview
  13




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Key Business Metrics
  Net Sales
  Cost of Sales
  Research and Development Expenses
  Selling, General and Administrative Expenses
  Critical Accounting Policies
   Revenue Recognition
  14




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Reporting Revenue
Gross as a Principal versus Net as an Agent
  Three Months
    
    
    Three MonthsEnded
    
    
    EndedNovember 30,
    
    
    November 24,2007
    
    
    2006Product net sales
    
    $
    163,810
    
    
    $
    224,448Service revenue
    
    
    11,141
    
    
    
    12,722Net sales
    
    
    174,951
    
    
    
    237,170Plus: Cost of sales associated with service revenue accounted for on an agency basis
    
    
    264,045
    
    
    
    259,736Gross billing to customers
    
    $
    438,996
    
    
    $
    496,906
 Accounts Receivable
  Inventory Valuation
  15




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Income Taxes
 Accounting for Uncertainty in Income Taxes  An Interpretation of FASB Statement 109,
   Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed
  Stock-Based Compensation
 Share-Based Payment
 Results of Operations
  Three Months
    
    
    Three MonthsEnded
    
    
    EndedNovember 30,
    
    
    November 24,2007
    
    
    2006Net sales
    
    $
    175.0
    
    
    $
    237.2Cost of sales
    
    
    141.4
    
    
    
    199.3Gross profit*
    
    
    33.5
    
    
    
    37.9Operating Expenses:Research and development
    
    
    4.7
    
    
    
    4.0Selling, general and administrative
    
    
    15.1
    
    
    
    14.3Total operating expenses*
    
    
    19.7
    
    
    
    18.3Income from operations
    
    
    13.8
    
    
    
    19.6Interest expense, net
    
    
    (1.0
    )
    
    
    (2.1
    )Other income (expense), net
    
    
    1.4
    
    
    
    (0.1
    )Total other expense, net
    
    
    0.4
    
    
    
    (2.2
    )Income before provision for income taxes*
    
    
    14.2
    
    
    
    17.5Provision for income taxes
    
    
    2.7
    
    
    
    2.9Net income
    
    $
    11.5
    
    
    $
    14.6
 
 *
    
    Summations may not compute precisely due to rounding. 16




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Three Months Ended November 30, 2007 as Compared to the Three Months Ended November 24, 2006
 Net Sales
  Cost of Sales
  Gross Profit
  Research and Development Expenses
  Selling, General and Administrative Expenses
  Interest Expense, Net
  17




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Other Income (Expense), Net
  Provision for Income Taxes
  Liquidity and Capital Resources
  Debt Service
  Senior Secured Wells Fargo Credit Facility.
 Senior Secured Floating Rate Exchange Notes Due April 2012.
 Capital Expenditures
  Sources of Funds
  18




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Historical Trends
  Cash Flows from Operating Activities.
 Cash Flows from Investing Activities.
 Cash Flows from Financing Activities.
 Contractual Obligations
  Payments Due by Period
 Payments Due by Period1 Year
    
    
    2-3 Years
    
    
    4-5 Years
    
    
    After 5 Years
    
    
    Total(In millions)Total debt
    
    $
    
    
    
    $
    
    
    
    $
    81.3
    
    
    $
    
    
    
    $
    81.3Interest expense cash obligations
in connection with long-term debt
and related interest rate swaps
    
    
    8.9
    
    
    
    17.9
    
    
    
    14.2
    
    
    
    
    
    
    
    41.0Operating leases
    
    
    2.2
    
    
    
    2.5
    
    
    
    1.5
    
    
    
    0.1
    
    
    
    6.3Total contractual cash obligations
    
    $
    11.1
    
    
    $
    20.4
    
    
    $
    97.0
    
    
    $
    0.1
    
    
    $
    128.6
 Off-Balance Sheet Arrangements
  19




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Inflation
  Recent Accounting Pronouncements
 Accounting for Nonrefundable Advance Payments for Goods or Services
Received for Use in Future Research and Development Activities
 
 Item 3. Quantitative and Qualitative Disclosures About Market Risk
  Foreign Exchange Risks
  Interest Rate Risk
  
 Item 4. Controls and Procedures
 Evaluation of Disclosure Controls and Procedures
 20




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Changes in Internal Control Over Financial Reporting
 21




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PART II. OTHER INFORMATION
 
 Item 1. Legal Proceedings
  
 Item 1A. Risk Factors
  
 Item 6. Exhibits
  Exhibit No.
    
    Exhibit Title10.23
    
    Employment Agreement of Iain MacKenzie, dated December 18, 200731.1
    
    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 200231.2
    
    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 200232
    
    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
 22




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SMART MODULAR TECHNOLOGIES (WWH), INC.
 
 SIGNATURES
  SMART MODULAR TECHNOLOGIES (WWH), INC.By:
    /s/ IAIN MACKENZIEName:
    Iain MacKenzieTitle:
    President and Chief Executive OfficerBy:
    /s/ JACK A. PACHECOName:
    Jack A. PachecoTitle:
    Senior Vice President and Chief Financial Officer  23




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EXHIBIT INDEX
 Exhibit No.
    
    Exhibit Title10.23
    
    Employment Agreement of Iain MacKenzie, dated December 18, 200731.1
    
    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 200231.2
    
    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 200232
    
    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
 24