Super Micro Computer, Inc. — FY2014 Form 10-K
Reporting period: Fiscal year ended June 30, 2014. Although the request metadata says “2013 Q4,” this filing reports FY2014, including quarterly data for the quarter ended June 30, 2014.
Business context
Super Micro develops and sells configurable server, storage, networking and related systems and components for data-center, cloud, enterprise, HPC and embedded markets. Sales are primarily through distributors; products were sold to more than 800 customers in 93 countries. No customer represented 10% or more of annual sales. FY2014 growth was led by complete server systems, higher-density products and increased manufacturing utilization in Taiwan.
Key financial results
| Metric | FY2014 | FY2013 |
|---|---|---|
| Net sales | $1,467.2 million | $1,162.6 million |
| Gross profit / margin | $225.5 million / 15.4% | $160.1 million / 13.8% |
| Operating income / margin | $80.3 million / 5.5% | $27.2 million / 2.3% |
| Net income / diluted EPS | $54.2 million / $1.16 | $21.3 million / $0.48 |
| Operating cash flow | $6.5 million | $13.6 million |
| Cash and cash equivalents | $96.9 million | $93.0 million |
| Total debt | $46.3 million | $35.2 million |
- Sales increased 26.2%. Server-system sales rose 47.6% to $740.8 million; systems were 50.5% of sales versus 43.2% a year earlier. Subsystems and accessories generated $726.4 million, up 9.9%.
- Gross margin improved as inventory write-downs fell to $2.3 million from $9.7 million, purchasing power and Taiwan factory utilization improved, and the sales mix shifted toward systems. Higher sales to internet data-center customers, which generally carry lower margins, partly offset these benefits.
- Net income rose substantially, primarily on higher gross profit; the effective tax rate increased to 32.0% from 20.0%, partly because the federal R&D tax credit expired December 31, 2013.
- Operating cash flow was modest relative to earnings, with increases in receivables ($64.9 million) and inventory ($63.9 million) absorbing cash. Fourth-quarter DSO was 44 days versus 39; year-end inventory was $315.8 million, while inventory days improved to 83 from 95.
- Working capital was $343.2 million. Current debt was $42.6 million, with $3.7 million long-term. Cash and cash equivalents were $96.9 million; the separate $2.6 million auction-rate investment was illiquid.
Changes, outlook and notable items
- FY2014 quarterly sales rose sequentially to $428.1 million in the June quarter; quarterly net income was $16.5 million, compared with $322.3 million and $8.4 million, respectively, in the year-ago quarter.
- No quantified FY2015 financial guidance is provided in the supplied filing text. Management expected continued growth and increased inventory to support anticipated FY2015 sales. It stated cash on hand was sufficient to operate for at least 12 months.
- Capital investment accelerated: the company bought a San Jose property for $30.2 million and planned about $22.1 million of FY2015 construction and renovation spending for its Green Computing Park, funded with operating cash and additional bank borrowing.
- Non-cancellable supplier and contract-manufacturer commitments totaled $211.1 million, including $45.2 million of hard-drive commitments payable through December 2014. Management warned these commitments could pressure margins or cause inventory losses if demand or market prices weaken.
- Related-party supplier Ablecom accounted for about 16% of cost of sales; Super Micro owed it $49.0 million at year-end. Family and ownership ties, supplier dependence and the potential for non-arm’s-length terms are material considerations.
- The Bank of America revolving facility matured November 15, 2014 and renewal negotiations were ongoing. CTBC facilities also had a November 30, 2014 maturity. The company reported compliance with Bank of America financial covenants at year-end.
- Other key risks include volatile quarterly orders and component availability, pricing and competitive pressure, inventory obsolescence, ERP implementation, international expansion, and dependence on key personnel. The filing also describes past export-control settlements and ongoing ordinary-course legal matters, which management did not expect to materially affect results or liquidity.
- Deloitte issued unqualified opinions on the financial statements and internal control over financial reporting. The filing reports no off-balance-sheet arrangements and no expected cash dividends in the foreseeable future.
Important facts for investors to verify
- Whether sales growth and improved margins persist, particularly as product mix, pricing and data-center customer sales change.
- Whether receivables and inventory convert to cash; investigate the $6.5 million operating cash flow versus $54.2 million net income and the year-end working-capital build.
- Renewal and terms of the near-term bank facilities, debt maturities, covenant headroom and financing for planned construction.
- Demand, pricing and potential losses on the $45.2 million hard-drive commitments and the broader $211.1 million purchase commitments.
- Ablecom-related purchasing, outstanding balances and purchase orders, and whether these arrangements remain operationally reliable and commercially favorable.