01—Abstract
Summary
Summary of the 10-K filed May 17, 2019. Cited figures are marked; the original filing is the authoritative source.
Super Micro Computer, Inc. (Supermicro) filed this Form 10-K for fiscal year ended June 30, 2017 on May 17, 2019, nearly two years late.
The filing follows an Audit Committee investigation, begun in August 2017, into accounting and internal control matters focused principally on revenue recognition. That investigation led the Board on November 14, 2018 to conclude that certain previously filed financial statements should no longer be relied upon, and the filing includes restated financial statements for fiscal 2016 and 2015. Deloitte & Touche LLP issued an adverse opinion on internal control over financial reporting as of June 30, 2017, citing material weaknesses in the control environment, risk assessment, control activities, information and communication, and monitoring, including revenue recognition and IT general controls.
Fiscal 2017 net sales were $2,484.9 milliona, up from $2,225.0 million in fiscal 2016, and net income was $66.9 million, down from $72.1 million. Gross margin declined to 14.1% from 14.9%, driven by memory and SSD component shortages and a mix shift toward lower-margin sales in Asia. Cash used in operating activities was $96.2 million, driven by a $235.6 million increase in inventories and a $149.5 million increase in accounts receivable.
Cash and cash equivalents fell to $110.6 million, and total debt rose to $161.9 millionb. The filing highlights significant ongoing risks.
The common stock was suspended from Nasdaq on August 23, 2018 and delisted on March 22, 2019, and now trades on the OTC Market under 'SMCI.' The company is a defendant in securities class actions, is cooperating with SEC subpoenas, and reports professional fees related to the investigation of $40.6 millionc in fiscal 2018 and $50.7 million through the third quarter of fiscal 2019. Its 2018 Bank of America credit facility carries a delivery covenant tied to timely SEC filings, and the company states it cannot ensure timely filing of future reports.
02—Key points
Key Highlights
- Net sales of $2,484.9 million in fiscal 2017, up from $2,225.0 million in fiscal 2016; net income of $66.9 million, down from $72.1 million.
- Gross margin fell to 14.1% from 14.9%, attributed to higher memory and SSD component costs and more competitive pricing in Asia.
- Restated fiscal 2016 and 2015 financial statements following an Audit Committee investigation into revenue recognition and related irregularities.
- Deloitte & Touche issued an adverse opinion on internal control over financial reporting as of June 30, 2017, with multiple material weaknesses.
- Common stock suspended from Nasdaq on August 23, 2018 and delisted March 22, 2019; now quoted on the OTC Market.
- Operating cash flow was negative $96.2 million in fiscal 2017, with inventories increasing $235.6 million and accounts receivable increasing $149.5 million.
- Ongoing securities class actions and SEC subpoenas; professional fees related to the investigation were $40.6 million in fiscal 2018 and $50.7 million through Q3 fiscal 2019.
03—One dollar
Follow one dollar
Of each $1.00 of revenue in FY2017, Super Micro Computer kept $0.03.
- Revenue$2.48B100.0%
- Cost of revenue−$2.13B85.9%
- Gross profit$350.0M14.1%
- Operating costs−$255.1M10.3%
- Operating income$94.9M3.8%
- Interest, other & tax−$28.0M1.1%
- Net income$66.9M2.7%
Where FY2017 revenue went
$2.48B- Cost of revenue: $2.13B, 86% of revenue
- Net income: $66.9M, 2.7% of revenue
- R&D: $144.0M, 5.8% of revenue
- Other operating costs: $111.1M, 4.5% of revenue
- Interest, other & tax: $28.0M, 1.1% of revenue
Kept 2.7% as net incomeNet income $66.9M · 2.7%Interest, other & tax $28.0M · 1.1%
Full revenue history →04—Financials
Financial Highlights
Figures from 10-KFY2017filed May 17, 2019Financial Statements
FY2017 against FY2016
| Line item | FY2017FY2016 | Change |
|---|---|---|
| Revenue | $2.48B$2.22B | +12.2% |
| Cost of Revenue | $2.13B$1.89B | +12.7% |
| Gross Profit | $349.96M$330.50M | +5.9% |
| R&D Expenses | $143.99M$124.22M | +15.9% |
| Operating Expenses | $255.08M$223.01M | +14.4% |
| Operating Income | $94.88M$107.49M | −11.7% |
| Interest Expense | $2.30M$1.59M | +44.3% |
| Net Income | $66.85M$72.08M | −7.3% |
| EPS (Basic) | $1.38$1.50 | −8.0% |
| EPS (Diluted) | $1.29$1.39 | −7.2% |
| Shares Outstanding (Basic) | 48.38M47.92M | +1.0% |
| Shares Outstanding (Diluted) | 51.68M51.84M | −0.3% |
05—Questions
Frequently Asked Questions
Why was this 10-K filed so late?
The filing was delayed by the Audit Committee's investigation into accounting and internal control matters, which began in August 2017 and focused principally on revenue recognition. The findings led the Board to conclude on November 14, 2018 that certain previously issued financial statements should no longer be relied upon, requiring restatement and extensive remediation before filing.
What were the main accounting errors identified?
The errors primarily related to the timing of revenue recognition, expenses for certain inventory used for engineering and marketing, and expenses related to defective products under warranty. The company also found that it had derecognized inventory it retained control over because it was obligated to buy it back, and that extended warranty contracts were recognized as revenue at sale rather than deferred over the service period.
What is the status of the company's stock listing?
Trading on the Nasdaq Global Select Market was suspended effective August 23, 2018, and the stock was formally delisted effective March 22, 2019. The stock now trades on the OTC Market under the symbol 'SMCI.' The company intends to apply to relist on a national securities exchange after filing its delinquent reports, but states no assurance can be given that it will be relisted in a timely manner or at all.
How did the company's financial position and liquidity look at fiscal year-end 2017?
Cash and cash equivalents were $110.6 million at June 30, 2017, down from $178.8 million a year earlier. Total debt, net of issuance costs, was $161.4 million, up from $93.6 million. Inventories rose to $736.7 million from $516.8 million. Management stated that current cash was adequate to meet needs for the next twelve months.
What legal and regulatory risks does the company face?
The company and certain executives are defendants in securities class actions filed in February 2018 alleging misrepresentations about revenue recognition, and an earlier 2015 securities complaint was dismissed and ended in November 2018. The company has received SEC subpoenas related to the late filing and a Bloomberg Businessweek article from October 2018, and says it is cooperating fully. It states it cannot predict outcomes or assure they will not have a material adverse effect.
06—Continue