Super Micro Computer, Inc. — Form 10-Q Summary
Reporting period: Quarter and six months ended December 31, 2012 (fiscal 2013 Q2). Financial statements are unaudited. The company develops and sells server systems, subsystems, and accessories.
Key financial results
| Metric | Three months ended Dec. 31, 2012 | Prior-year quarter | Six months ended Dec. 31, 2012 | Prior-year six months |
|---|---|---|---|---|
| Net sales | $291.5 million | $249.9 million | $562.2 million | $497.8 million |
| Gross profit / margin | $40.1 million / 13.8% | $42.6 million / 17.1% | $75.1 million / 13.4% | $82.2 million / 16.5% |
| Operating income / margin | $7.6 million / 2.6% | $13.7 million / 5.5% | $9.3 million / 1.7% | $27.2 million / 5.4% |
| Net income | $4.9 million | $8.8 million | $5.8 million | $17.3 million |
| Diluted EPS | $0.11 | $0.20 | $0.13 | $0.39 |
Quarterly sales rose 16.6%, while net income fell 44.0%. For the six-month period, sales increased 12.9%, while net income declined 66.3%. Gross margin contracted as storage products carried higher hard-drive and memory costs relative to selling prices; inventory and warranty provisions also increased. Higher R&D spending contributed to lower operating profit.
Cash flow, balance sheet, and liquidity
- Cash and cash equivalents were $88.4 million at December 31, 2012, versus $80.8 million at June 30, 2012. Long-term investments were $2.7 million; cash plus investments was approximately $91.1 million.
- Six-month operating cash flow was $5.6 million, compared with $36.9 million in the prior-year period. Working-capital movements included a $17.0 million increase in receivables and a $25.1 million decrease in accounts payable, partly offset by a $26.7 million reduction in inventory.
- Six-month investing cash outflow was $2.5 million; financing cash inflow was $4.1 million. The filing’s MD&A separately reports $32.2 million of operating cash flow for the three-month quarter.
- Total debt was $37.1 million, including $29.2 million classified as current. The company had $29.1 million of unused capacity under its Bank of America revolver and reported compliance with its financial covenants.
- Current assets were $475.5 million and current liabilities were $213.5 million. Inventory was $243.6 million, down from $276.6 million at fiscal year-end; quarter-end DSO was 37 days, versus 33 days at fiscal year-end.
Developments, outlook, and risks
- Growth came mainly from subsystems and accessories, including hard drives, serverboards, and chassis, and from higher-priced server configurations. U.S. sales declined for the six-month period, while Europe and Asia sales increased.
- Management said second-quarter profitability improved from the first quarter as hard-drive and memory pricing stabilized, and expected pricing to remain more stable in following quarters. It also expects continued investment and growth in working-capital needs and capital expenditures, and stated that cash on hand was sufficient for at least the next 12 months. No specific revenue or earnings guidance is provided in this filing.
- Purchase commitments totaled $289.3 million, including approximately $157.9 million of hard-drive commitments payable through March 2014. These commitments expose the company to demand, inventory, and margin risks.
- Ablecom, a related-party contract manufacturer, supplied purchases representing 15.4% of quarterly cost of sales and 18.1% for the six-month period. The company disclosed family ownership links, $37.2 million owed to Ablecom, and $62.8 million of outstanding purchase orders.
- Auction-rate securities of $2.7 million remain illiquid; the company says it may be unable to sell them without a loss of principal. Management considered the unrealized loss temporary.
- The company recorded inventory provisions of $6.3 million and warranty provisions of $6.5 million for the six-month period. It also reported $8.8 million of gross unrecognized tax benefits and $1.0 million accrued for related interest and penalties. A research tax credit law enacted January 2, 2013 is expected to produce an approximately $2.5 million tax benefit in fiscal Q3.
- Management said pending legal matters were not expected to have a material adverse effect. Disclosure controls were assessed as effective, and no material change in internal control over financial reporting was reported.
Important facts for investors to verify
- Whether gross margins recover as component pricing stabilizes, and whether inventory and warranty charges moderate.
- Whether operating cash generation improves as receivables, payables, and inventory fluctuate with growth.
- The company’s ability to fulfill and manage its substantial purchase commitments without excess inventory or discounted sales.
- Ongoing dependence on Ablecom, related-party transaction terms, and alternative supply capacity.
- Liquidity and valuation developments for auction-rate securities, and resolution of tax uncertainties.