Super Micro Computer, Inc. — Q2 FY2012 Form 10-Q
Reporting period: Three and six months ended December 31, 2011; fiscal year ends June 30. Financial statements are unaudited. The company develops and sells server systems, subsystems and accessories.
Financial results and liquidity
Amounts below are in millions of dollars, except per-share data and percentages.
| Metric | Three months ended Dec. 31, 2011 | Prior year | Six months ended Dec. 31, 2011 | Prior year |
|---|---|---|---|---|
| Net sales | $249.9 | $240.8 | $497.8 | $448.0 |
| Gross profit / margin | $42.6 / 17.1% | $40.2 / 16.7% | $82.2 / 16.5% | $73.2 / 16.3% |
| Operating income / margin | $13.7 / 5.5% | $16.9 / 7.0% | $27.2 / 5.4% | $28.9 / 6.4% |
| Net income / margin | $8.8 / 3.5% | $11.6 / 4.8% | $17.3 / 3.5% | $18.8 / 4.2% |
| Diluted EPS | $0.20 | $0.27 | $0.39 | $0.45 |
- Cash flow: Operating cash flow was $11.8 million for the quarter and $36.9 million for the six months, versus $4.0 million and $20.9 million, respectively, in the prior-year periods. Six-month investing cash use was $13.7 million, including substantial property and facility spending; financing provided $9.4 million.
- Balance sheet at Dec. 31: Cash and cash equivalents were $102.4 million; current assets $394.7 million and current liabilities $156.9 million. Total assets were $500.0 million and stockholders’ equity $311.5 million.
- Debt: Total short- and long-term borrowings were approximately $34.7 million, compared with $28.2 million at June 30, 2011. Unused revolving capacity was $28.7 million at Bank of America and $1.3 million at China Trust Bank. The company reported compliance with Bank of America financial covenants.
- Working capital indicators: Inventory was $193.4 million; days sales of inventory rose to 85 from 75 at fiscal year-end. DSO was 31 days versus 30. Purchase commitments were $119.5 million, payable within a year.
Material changes versus prior comparable periods
- Quarterly sales rose 3.8%; six-month sales rose 11.1%. Server-system sales grew 12.8% for the quarter and 21.1% for six months, while quarterly subsystems and accessories sales declined 2.4%.
- Net income fell 24.2% for the quarter and 8.1% for six months despite higher sales and modestly improved gross margin. Operating expenses grew faster than revenue, led by research and development: up 27.3% for the quarter and 29.6% for six months.
- Operating cash flow improved year over year, while capital expenditures increased: purchases of property, plant and equipment were $18.3 million for the six months, versus $8.3 million.
- Cash and cash equivalents increased from $69.9 million at June 30 to $102.4 million at December 31. Total debt increased by about $6.5 million over the same dates.
Outlook, commentary, risks and unusual items
- Management provided no specific numerical revenue or earnings guidance. It cited the planned Sandy Bridge product launch in the quarter ending March 31, 2012, and expected continued business expansion, working-capital needs and capital spending. It said cash on hand was sufficient for operations over the next 12 months.
- Thailand flooding disrupted hard-disk-drive supply, constrained sales and affected customers’ ability to complete systems. Management warned supply-chain recovery could take several quarters; customers may also defer orders ahead of new Intel microprocessors.
- Profitability was pressured by increased product-development, staffing and expansion costs. Management attributed some gross-margin improvement to product mix and favorable pricing on previously purchased hard drives. Inventory provisions were $3.9 million for the six months, versus $0.5 million a year earlier; warranty provisions were $5.1 million versus $4.9 million.
- Related-party supplier Ablecom accounted for $75.7 million of purchases in the six months and $32.6 million was payable to it at period-end. Outstanding Ablecom purchase orders were $52.0 million, identified as maximum exposure on those orders; the company stated it had no direct or indirect guarantees of Ablecom losses.
- Approximately $3.7 million of auction-rate securities remained illiquid and were valued using Level 3 inputs. Management considered the unrealized loss temporary but warned that future impairment or loss on sale was possible.
- Tax matters include $7.6 million of gross unrecognized tax benefits and $0.8 million of accrued interest and penalties. The IRS had begun a pre-examination of 2007–2009 federal returns; IRS and Netherlands tax audits were ongoing. Management did not expect a material near-term liquidity or financial-position impact.
- Non-cancelable supplier purchase commitments totaled $119.5 million, due within one year. Management said pending legal matters were not expected to have a material adverse effect. Disclosure controls were deemed effective, and no material change in internal control was reported.
Most important facts for investors to verify
- Whether hard-drive supply recovered as expected and how shortages, customer order deferrals and the Sandy Bridge launch affected subsequent sales.
- Whether higher operating expenses, inventory write-downs and warranty claims continued to pressure operating margins and earnings.
- How inventory levels and the $119.5 million of near-term purchase commitments converted into sales and cash flow.
- Ongoing reliance on Ablecom, related-party pricing and purchase exposure, including the period-end payable and open purchase orders.
- Availability of revolving credit, covenant compliance and the liquidity implications of illiquid auction-rate securities.
- Developments in tax examinations, unrecognized tax benefits and related accruals.