filings.toolsItem 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
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Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
This section and other parts of this Quarterly Report on Form 10-Q/A contain “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) that involve risks and uncertainties. These statements relate to future events or our future financial performance. In some cases, you can identify forward-looking statements by terminology including “would,” “could,” “may,” “will,” “should,” “expect,” “intend,” “plan,” “anticipate,” “believe,” “estimate,” “predict,” “potential,” or “continue,” the negative of these terms or other comparable terminology. In evaluating these statements, you should specifically consider various factors, including the risks discussed under “Risk Factors in Part II, Item 1A of this filing. These factors may cause our actual results to differ materially from those anticipated or implied in the forward-looking statements. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. We cannot guarantee future results, levels of activity, performance or achievements.
The following discussion and analysis of the financial condition and results of our operations should be read in conjunction with our condensed consolidated financial statements and related footnotes included elsewhere in this Quarterly Report on Form 10-Q/A and with the consolidated financial statements included in our Annual Report on Form 10-K for the year ended June 30, 2017, which we expect to file subsequent to the filing of this Quarterly Report on Form 10-Q/A and which will include our restated consolidated financial statements for the years ended June 30, 2016 and 2015.
Background of Investigation, Procedures and Analysis
See "Explanatory Note" to this Quarterly Report on Form 10-Q/A.
Nasdaq Delisting of Our Common Stock
As a result of the delay in filing our periodic reports with the SEC and failure to hold an annual meeting, we were unable to comply with the Nasdaq listing standards and our common stock was suspended from trading on the Nasdaq Global Select Market effective August 23, 2018 and formally delisted effective March 22, 2019. Following the suspension of trading, our common stock has been quoted on the OTC Market and is currently traded under the symbol “SMCI.”
Overview
We are a global leader in high performance, high efficiency server technology and innovation. We develop and provide end-to-end green computing solutions to the cloud computing, data center, enterprise, big data, high performance computing ("HPC"), and internet of things ("IoT")/embedded markets. Our solutions range from complete server, storage, blade and workstations to full racks, networking devices, server management software and technology support and services.
We commenced operations in 1993 and have been profitable every year since inception. Our net income was $15.4 million and $53.6 million for the three and nine months ended March 31, 2017, respectively, and $16.0 million and $66.6 million for the three and nine months ended March 31, 2016, respectively.
In order to increase our sales and profits, we believe that we must continue to develop flexible and customizable server solutions and be among the first to market with new features and products. We must also continue to expand our software and customer service and support offerings, particularly as we increasingly focus on larger enterprise sales. We measure our financial success based on various indicators, including growth in net sales, gross profit margin and operating margin as key measures of profitability, and cash conversion cycle as a key measure of working capital management. Among the key non-financial indicators of our success is our ability to rapidly introduce new products and deliver the latest application optimized server solutions. In this regard, we work closely with microprocessor and other component vendors to take advantage of new technologies as they are introduced. Historically, our ability to introduce new products rapidly has allowed us to benefit from the introduction of new microprocessors and as a result we monitor the introduction cycles of Intel Corporation, Advanced Micro Devices, Inc. and Nvidia Corporation carefully. This also impacts our research and development expenditures as we continue to invest more in our current and future product development efforts.
Financial Highlights
The following is a summary of other financial highlights of the third quarter of fiscal 2017:
| • | Net sales increased by 19.7% as compared to the three months ended March 31, 2016, which was due to increased sales of our storage, accelerated computing servers or HPC, MicroBlade and high density Twin family of servers. |
| • | Gross margin decreased to 13.9% from 15.4% in the three months ended March 31, 2016 due to higher costs related to shortages of memory and solid state drives (“SSD”) as well as many of our server systems being based on mature, late life cycle processors and GPUs that had lower prices. |
| • | Operating expenses increased by 15.4% as compared to the three months ended March 31, 2016 and were equal to 10.4% and 10.7% of sales in the three months ended March 31, 2017 and 2016, respectively. |
Subsequent Events
For details, see Part I, Item 1, Note 11, "Subsequent Events" in our notes to the condensed consolidated financial statements in this Quarterly Report on Form 10-Q/A.
Fiscal Year
Our fiscal year ends on June 30. References to fiscal year 2017, for example, refer to the fiscal year ending June 30, 2017.
Revenues and Expenses
Net sales. Net sales consist of sales of our server solutions, including server systems and related services, subsystems and accessories. The main factors that impact our net sales are the number of compute nodes sold, the average selling prices per node for our server system sales and units shipped and the average selling price per unit for our subsystem and accessories. The prices for our server systems range widely depending upon the configuration, including the number of compute nodes, and the prices for our subsystems and accessories vary based on the type. A compute node is a hardware configuration having its own CPU, RAM and storage and that is capable of running its own instance of a non-virtualized operating system. Measuring
volume using compute nodes enables more consistent measurement across different server form factors and across different vendors. As with most electronics-based products, average selling prices typically are highest at the time of introduction of new products that utilize the latest technology and tend to decrease over time as such products mature in the market and are replaced by next generation products.
Cost of sales. Cost of sales primarily consists of the costs to manufacture our products, including the costs of materials, contract manufacturing, shipping, personnel and related expenses including stock-based compensation, equipment and facility expenses, warranty costs and inventory excess and obsolete provisions. The primary factors that impact our cost of sales are the mix of products sold and cost of materials, which include raw material costs, shipping costs and salary and benefits related to production. Cost of sales as a percentage of net sales may increase over time if decreases in average selling prices are not offset by corresponding decreases in our costs. Our cost of sales as a percentage of net sales is also impacted by the extent to which we are able to efficiently utilize our expanding manufacturing capacity. Because we generally do not have long-term fixed supply agreements, our cost of sales is subject to change in the cost of materials based on market conditions. As a result, our cost of sales as a percentage of sales in any period can be negatively impacted by significant component price increases resulting from component shortages.
Research and development expenses. Research and development expenses consist of the personnel and related expenses including stock-based compensation of our research and development teams, and materials and supplies, consulting services, third party testing services and equipment and facility expenses related to our research and development activities. All research and development costs are expensed as incurred. We occasionally receive non-recurring engineering (“NRE”) funding from certain suppliers and customers for joint development. Under these programs, we are reimbursed for certain research and development costs that we incur as part of the joint development of our products and those of our suppliers and customers. These amounts offset a portion of the related research and development expenses and have the effect of reducing our reported research and development expenses.
Sales and marketing expenses. Sales and marketing expenses consist primarily of salaries, stock-based compensation and incentive bonuses for our sales and marketing personnel, costs for tradeshows, independent sales representative fees and marketing programs. From time to time, we receive cooperative marketing funding from certain suppliers. Under these programs, we are reimbursed for certain marketing costs that we incur as part of the joint promotion of our products and those of our suppliers. These amounts offset a portion of the related expenses and have the effect of reducing our reported sales and marketing expenses. The timing, magnitude and estimated usage of these programs can result in significant variations in reported sales and marketing expenses from period to period. Spending on cooperative marketing, reimbursed by our suppliers, typically increases in connection with significant product releases by our suppliers.
General and administrative expenses. General and administrative expenses consist primarily of general corporate costs, including personnel expenses, financial reporting, information technology, corporate governance and compliance and outside legal, audit and tax fees.
Other income (expense), net. Other income (expense), net consists primarily of interest earned on our investment and cash balances and foreign exchange gains and losses.
Interest expense. Interest expense represents interest expense on our term loans and lines of credit.
Income tax provision. Our income tax provision is based on our taxable income generated in the jurisdictions in which we operate, primarily the United States, Taiwan and the Netherlands. Our effective tax rate differs from the statutory rate primarily due to research and development tax credits and the domestic production activities deduction which were partially offset by state taxes and unrecognized tax benefits related to permanent establishment exposures.
Critical Accounting Policies and Estimates
For a description of our critical accounting policies and estimates, see Part I, Item 1, Note 1, "Organization and Summary of Significant Accounting Policies" in our notes to the condensed consolidated financial statements in this Quarterly Report on Form 10-Q/A.
Results of Operations
Net Sales
The following table presents net sales by product type for the three and nine months ended March 31, 2017 and 2016 (dollars in millions):
| Three Months Ended March 31, | Change | Nine Months Ended March 31, | Change | ||||||||||||||||||||||||||
| 2017 | 2016 | $ | % | 2017 | 2016 | $ | % | ||||||||||||||||||||||
| Server systems | $ | 427.6 | $ | 356.7 | $ | 70.9 | 19.9 | % | $ | 1,242.6 | $ | 1,186.0 | $ | 56.6 | 4.8 | % | |||||||||||||
| Percentage of total net sales | 69.5 | % | 69.5 | % | 68.8 | % | 70.0 | % | |||||||||||||||||||||
| Subsystems and accessories | $ | 187.2 | $ | 156.8 | $ | 30.4 | 19.4 | % | $ | 564.2 | $ | 507.8 | $ | 56.4 | 11.1 | % | |||||||||||||
| Percentage of total net sales | 30.5 | % | 30.5 | % | 31.2 | % | 30.0 | % | |||||||||||||||||||||
| Total net sales | $ | 614.8 | $ | 513.5 | $ | 101.3 | 19.7 | % | $ | 1,806.8 | $ | 1,693.8 | $ | 113.0 | 6.7 | % |
Comparison of Three Months Ended March 31, 2017 and 2016
The increase of $101.3 million in our net sales in the three months ended March 31, 2017 as compared with the three months ended March 31, 2016 was primarily due to an increase in sales of our server systems. The increase in server systems sales was primarily due to higher shipment volumes of standard servers, microblade servers and an increase of average selling price per node from $2,872 per compute node in the three months ended March 31, 2016 to $3,304 per compute node in the three months ended March 31, 2017.
The increase in net sales of our subsystems and accessories in the three months ended March 31, 2017 as compared with the three months ended March 31, 2016 was due to higher sales of server accessories and serverboards to our distributors and an increase in our average selling price per unit from $185 to $188.
Comparison of Nine Months Ended March 31, 2017 and 2016
The increase of $113.0 million in our net sales in the nine months ended March 31, 2017 as compared with the nine months ended March 31, 2016 was a result of a $56.6 million increase in sales of server systems and an increase of $56.4 million in unit sales of our subsystems and accessories. The increase in net sales of subsystems and accessories was primarily due to higher sales of serverboards and server accessories to our distributors. The increase in sales of server systems was primarily due to higher shipment volumes of standard servers and microblade servers, partially offset by lower shipment volumes of complete servers and rack servers.
The following table presents the percentages of net sales from products sold to distributors and direct and original equipment manufacturers ("OEM") customers for the three and nine months ended March 31, 2017 and 2016:
| Three Months Ended March 31, | Change | Nine Months Ended March 31, | Change | ||||||||||||||
| 2017 | 2016 | % | 2017 | 2016 | % | ||||||||||||
| Distributors | 46.6 | % | 46.9 | % | (0.3 | )% | 47.8 | % | 45.6 | % | 2.2 | % | |||||
| Direct and OEM customers | 53.4 | % | 53.1 | % | 0.3 | % | 52.2 | % | 54.4 | % | (2.2 | )% | |||||
| Total net sales | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % |
The net sales to distributors and direct and OEM customers in the three months ended March 31, 2017 remained relatively consistent as compared to the three months ended March 31, 2016. The decrease in direct and OEM sales in the nine months ended March 31, 2017 as compared to the nine months ended March 31, 2016 was primarily due to lower demand of our complete server systems from cloud computing and internet data center customers.
The following table presents percentages of net sales by geographic region for the three and nine months ended March 31, 2017 and 2016:
| Three Months Ended March 31, | Change | Nine Months Ended March 31, | Change | ||||||||||||||
| 2017 | 2016 | % | 2017 | 2016 | % | ||||||||||||
| United States | 56.4 | % | 59.4 | % | (3.0 | )% | 57.9 | % | 62.5 | % | (4.6 | )% | |||||
| Asia | 21.5 | % | 15.9 | % | 5.6 | % | 19.0 | % | 14.7 | % | 4.3 | % | |||||
| Europe | 17.1 | % | 18.0 | % | (0.9 | )% | 18.6 | % | 17.8 | % | 0.8 | % | |||||
| Others | 5.0 | % | 6.7 | % | (1.7 | )% | 4.5 | % | 5.0 | % | (0.5 | )% | |||||
| Total net sales | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % |
The decrease in net sales in the United States was primarily due to the lower sales of server systems to our cloud computing and internet data center customers. As a result, our United States sales as a percentage of total net sales decreased in the three and nine months ended March 31, 2017 as compared to three and nine months ended March 31, 2016. The increase in net sales in Asia in the three and nine months ended March 31, 2017 as a percentage of total net sales was primarily due to the higher demand for our server systems in China and other in-region sales for large data centers. The decrease in net sales in Europe in the three months ended March 31, 2017 as a percentage of total net sales was primarily due to a lower demand from our channel partners of server systems for cloud computing and internet data center customers. During the nine months ended March 31, 2017 net sales in Europe increased as a percentage of total sales due to high demand of server systems in the United Kingdom.
Cost of Sales and Gross Margin
Cost of sales and gross margin for the three and nine months ended March 31, 2017 and 2016 are as follows (dollars in millions):
| Three Months Ended March 31, | Change | Nine Months Ended March 31, | Change | ||||||||||||||||||||||||||
| 2017 | 2016 | $ | % | 2017 | 2016 | $ | % | ||||||||||||||||||||||
| Cost of sales | $ | 529.5 | $ | 434.5 | $ | 95.0 | 21.9 | % | $ | 1,542.7 | $ | 1,434.2 | $ | 108.5 | 7.6 | % | |||||||||||||
| Gross profit | $ | 85.3 | $ | 79.0 | $ | 6.3 | 8.0 | % | $ | 264.0 | $ | 259.6 | $ | 4.4 | 1.7 | % | |||||||||||||
| Gross margin | 13.9 | % | 15.4 | % | (1.5 | )% | 14.6 | % | 15.3 | % | (0.7 | )% |
Comparison of Three Months Ended March 31, 2017 and 2016
The $95.0 million increase in cost of sales in the three months ended March 31, 2017 as compared with the three months ended March 31, 2016 was primarily attributable to an increase of $91.4 million in product cost as related to the increase in net sales and higher costs related to shortages of memory and SSD components, an increase of $1.1 million in compensation and benefits including stock-based compensation as a result of an increase in annual salaries and increase of 104 operation personnel to support the growth of our business, an increase of $0.9 million in service cost, an increase of $1.6 million in the warranty provision charge as a result of an increase in cost of servicing warranty claims in the three months ended March 31, 2017, a decrease of $0.5 million in inventory provision and an increase of $1.6 million in depreciation expense.
Our gross margin percentage was 13.9% and 15.4% for the three months ended March 31, 2017 and 2016, respectively. The decrease was primarily due to higher component costs related to shortages of memory and SSD as well as a higher percentage of sales of our server systems being based on mature, late life cycle processors which generally are lower margin sales. Geographically, we had higher sales in Asia where pricing is typically more competitive.
Comparison of Nine Months Ended March 31, 2017 and 2016
The $108.5 million increase in cost of sales in the nine months ended March 31, 2017 as compared with the nine months ended March 31, 2016 was primarily attributable to an increase of $98.2 million in product cost as related to the increase in net sales and higher costs related to shortages of memory and SSD, an increase of $3.1 million in compensation and benefits including stock-based compensation as a result of an increase in annual salaries and increase in operation personnel to support the growth of our business, an increase of $2.8 million in the warranty provision charge as a result of an increase in cost of servicing warranty claims in the nine months ended March 31, 2017, an increase of $2.1 million in inventory provision and an increase of $1.6 million in depreciation expense.
Our gross margin percentage was 14.6% and 15.3% for the nine months ended March 31, 2017 and 2016, respectively. The decrease was primarily due to higher costs related to shortages of memory and SSD as well as a higher percentage of sales of our server systems being based on mature, late life cycle processors which generally are lower margin sales. Geographically, we had higher sales in Asia where pricing is typically more competitive.
Operating Expenses
Operating expenses for the three and nine months ended March 31, 2017 and 2016 are as follows (dollars in millions):
| Three Months Ended March 31, | Change | Nine Months Ended March 31, | Change | ||||||||||||||||||||||||||
| 2017 | 2016 | $ | % | 2017 | 2016 | $ | % | ||||||||||||||||||||||
| Research and development | $ | 36.0 | $ | 31.7 | $ | 4.3 | 13.6 | % | $ | 105.6 | $ | 90.5 | $ | 15.1 | 16.7 | % | |||||||||||||
| Percentage of total net sales | 5.9 | % | 6.2 | % | 5.8 | % | 5.3 | % | |||||||||||||||||||||
| Sales and marketing | $ | 16.2 | $ | 14.1 | $ | 2.1 | 14.9 | % | $ | 48.2 | $ | 42.7 | $ | 5.5 | 12.9 | % | |||||||||||||
| Percentage of total net sales | 2.6 | % | 2.7 | % | 2.7 | % | 2.5 | % | |||||||||||||||||||||
| General and administrative | $ | 11.5 | $ | 9.5 | $ | 2.0 | 21.1 | % | $ | 32.7 | $ | 29.9 | $ | 2.8 | 9.4 | % | |||||||||||||
| Percentage of total net sales | 1.9 | % | 1.8 | % | 1.8 | % | 1.8 | % | |||||||||||||||||||||
| Total operating expenses | $ | 63.8 | $ | 55.3 | $ | 8.5 | 15.4 | % | $ | 186.6 | $ | 163.1 | $ | 23.5 | 14.4 | % | |||||||||||||
| Percentage of total net sales | 10.4 | % | 10.7 | % | 10.3 | % | 9.6 | % |
Comparison of Three Months Ended March 31, 2017 and 2016
Research and development expenses. Research and development expenses increased by $4.3 million in the three months ended March 31, 2017 as compared with the three months ended March 31, 2016. This increase was primarily due to an increase of $5.5 million in compensation and benefits including stock-based compensation expense, partially offset by an increase of $1.0 million related to a reimbursement received for certain research and development costs that we incur as part of the joint development of our and our suppliers’ and customers’ products. Our compensation and benefit expense increased primarily as a result of an increase in annual salaries and an increase of 151 research and development personnel to support our expanded product development initiatives in the United States and in Taiwan and to support the growth of our business in many market verticals.
Sales and marketing expenses. Sales and marketing expenses increased by $2.1 million in the three months ended March 31, 2017 compared to the three months ended March 31, 2016. This increase was primarily due to an increase of $1.0 million in compensation and benefits including stock-based compensation expense as a result of an increase in annual salaries and an increase of 46 sales and marketing personnel and an increase of $0.7 million in advertising, marketing promotional and trade show expenses.
General and administrative expenses. General and administrative expenses increased by $2.0 million in the three months ended March 31, 2017 as compared with the three months ended March 31, 2016. This increase was primarily due to an increase of $1.6 million in compensation and benefits including stock-based compensation expense as a result of an increase in annual salaries and an increase of 49 general and administrative personnel.
Comparison of Nine Months Ended March 31, 2017 and 2016
Research and development expenses. Research and development expenses increased by $15.1 million in the nine months ended March 31, 2017 as compared with the nine months ended March 31, 2016. This increase was driven primarily by an increase of $15.4 million in compensation and benefits including stock-based compensation expense. Our compensation and benefit expense increased primarily as a result of an increase in annual salaries and an increase of research and development personnel to support our expanded product development initiatives in the United States and in Taiwan and to support the growth of our business in many market verticals.
Sales and marketing expenses. Sales and marketing expenses increased by $5.5 million in the nine months ended March 31, 2017 as compared with the nine months ended March 31, 2016. The increase was primarily due to an increase of $2.9 million in compensation and benefits including stock-based compensation expense, resulting primarily from growth in sales and marketing personnel, an increase of $1.0 million in advertising, marketing promotional and trade show expenses, an increase of $0.4 million in outside service costs, and $1.2 million in other immaterial expenses.
General and administrative expenses. General and administrative expenses increased by $2.8 million in the nine months ended March 31, 2017 as compared with the nine months ended March 31, 2016. This increase was primarily due to an increase of $4.9 million in compensation and benefits including stock-based compensation expense which was partially offset by a decrease of $2.0 million in legal, audit and accounting expenses.
Interest and Other Income (Expense), Net
Other income (expense), net consists primarily of interest earned on our investment and cash balances, and foreign exchange gains and losses.
Interest expense represents interest expense on our term loans and lines of credit.
Interest and other income (expense), net for the three and nine months ended March 31, 2017 and 2016 are as follows (dollars in millions):
| Three Months Ended March 31, | Change | Nine Months Ended March 31, | Change | ||||||||||||||||||||||||||
| 2017 | 2016 | $ | % | 2017 | 2016 | $ | % | ||||||||||||||||||||||
| Other income (expense), net | $ | (1.6 | ) | $ | 0.1 | $ | (1.7 | ) | (1,700.0 | )% | $ | (1.4 | ) | $ | 1.6 | $ | (3.0 | ) | (187.5 | )% | |||||||||
| Interest expense | (0.6 | ) | (0.4 | ) | (0.2 | ) | 50.0 | % | (1.4 | ) | (1.1 | ) | (0.3 | ) | 27.3 | % | |||||||||||||
| Interest and other income (expense), net | $ | (2.2 | ) | $ | (0.3 | ) | $ | (1.9 | ) | 633.3 | % | $ | (2.8 | ) | $ | 0.5 | $ | (3.3 | ) | (660.0 | )% |
Comparison of Three Months Ended March 31, 2017 and 2016
Interest and other income (expense), net. Interest and other income (expense), net decreased by $1.9 million in the three months ended March 31, 2017 as compared with the three months ended March 31, 2016. This decrease was primarily due to a foreign currency loss related the remeasurement of our NTD$700.0 million CTBC term loan.
Comparison of Nine Months Ended March 31, 2017 and 2016
Interest and other income (expense), net. Interest and other income (expense), net decreased by $3.3 million in the nine months ended March 31, 2017 as compared with the nine months ended March 31, 2016. This decrease was primarily due to a foreign currency loss related the remeasurement of our NTD$700.0 million CTBC term loan.
Provision for Income Taxes
Provision for income taxes and effective tax rates for the three and nine months ended March 31, 2017 and 2016 are as follows (dollars in millions):
| Three Months Ended March 31, | Change | Nine Months Ended March 31, | Change | ||||||||||||||||||||||||||
| 2017 | 2016 | $ | % | 2017 | 2016 | $ | % | ||||||||||||||||||||||
| Income tax provision | $ | 4.0 | $ | 7.4 | $ | (3.4 | ) | (45.9 | )% | $ | 21.1 | $ | 30.4 | $ | (9.3 | ) | (30.6 | )% | |||||||||||
| Percentage of total net sales | 0.7 | % | 1.4 | % | 1.2 | % | 1.8 | % | |||||||||||||||||||||
| Effective tax rate | 20.8 | % | 31.5 | % | 28.3 | % | 31.3 | % |
Comparison of Three Months Ended March 31, 2017 and 2016
Income tax provision. Provision for income taxes decreased by $3.4 million, or 45.9% in the three months ended March 31, 2017, as compared to the three months ended March 31, 2016. The effective tax rate was 20.8% and 31.5% for the three months ended March 31, 2017 and 2016, respectively. The lower income tax provision for the three months ended March 31, 2017 was primarily attributable to our lower operating income and a tax benefit resulting from the completion of an income tax audit in a foreign jurisdiction.
Comparison of Nine Months Ended March 31, 2017 and 2016
Income tax provision. Provision for income taxes decreased by $9.3 million, or 30.6% in the nine months ended March 31, 2017, as compared to the nine months ended March 31, 2016. The effective tax rate was 28.3% and 31.3% for the nine months ended March 31, 2017 and 2016, respectively. The lower income tax provision and effective tax rate for the nine months ended March 31, 2017 was primarily attributable to our lower operating income and a tax benefit resulting from the completion of an income tax audit in a foreign jurisdiction.
Liquidity and Capital Resources
Since our inception, we have financed our growth primarily with funds generated from operations and from the proceeds of our initial public offering. In addition, we have, from time to time, utilized borrowing facilities, particularly in relation to the financing of real property acquisitions. Our cash and cash equivalents were $105.2 million and $178.8 million as of March 31, 2017 and June 30, 2016, respectively. Our cash in foreign locations was $40.4 million and $46.5 million as of March 31, 2017 and June 30, 2016, respectively. It is management's intention to reinvest the undistributed foreign earnings indefinitely in foreign operations. We believe that our current cash and cash equivalents are adequate to meet our needs, including any debt balances due at maturity, for the next twelve months from the issuance of these condensed consolidated financial statements.
Operating Activities. Net cash provided by (used in) operating activities was $(90.5) million and $94.2 million for the nine months ended March 31, 2017 and 2016, respectively.
Net cash used in our operating activities for the nine months ended March 31, 2017 was primarily due cash outflows from an increase in inventories of $210.1 million, an increase in accounts receivable of $97.1 million, an increase in prepaid expenses and other assets of $17.9 million, an increase in deferred income taxes assets of $6.9 million and excess tax benefits from stock-based compensation of $1.9 million. These cash outflows were partially offset by cash inflows from an increase in accounts payable of $120.5 million, our net income of $53.6 million, an increase in other long-term liabilities of $15.8 million, an increase in accrued liabilities of $17.3 million and non-cash charges from stock-based compensation expense of $14.4 million, depreciation and amortization expense of $11.8 million and provision for excess and obsolete inventories of $8.2 million.
Net cash provided by our operating activities for the nine months ended March 31, 2016 was primarily due cash inflows from our net income of $66.6 million, a decrease in accounts receivable of $60.8 million, an increase in other long-term liabilities of $15.1 million, an increase in accrued liabilities of $14.6 million, and increase in income taxes payable of $4.0 million and non-cash charges from stock-based compensation expense of $12.5 million, depreciation expense of $9.5 million, and provision for excess and obsolete inventories of $6.1 million. These cash inflows were partially offset by cash outflows from a decrease in accounts payable of $22.7 million, an increase in inventories of $29.7 million, a decrease in deferred income taxes of $1.4 million, an increase in prepaid expenses and other assets of $38.4 million, excess tax benefits from stock-based compensation of $2.5 million, and foreign currency exchange gains of $1.4 million.
The increase for the nine months ended March 31, 2017 in accounts receivable was primarily due to higher sales in the last month of the third quarter of fiscal year 2017 as compared to the last month of the fourth quarter of fiscal year 2016. The increase for the nine months ended March 31, 2017 in inventories and accounts payable was primarily due to higher inventory purchases in light of memory and SSD component shortages, sourcing for new product lines related to the SkyLake launch and supporting for the seasonally strong quarter ended June 30, 2017. We anticipate that accounts receivable, inventories and accounts payable will increase to the extent we continue to grow our product lines and our business.
The decrease for the nine months ended March 31, 2016 in accounts receivable was primarily due to lower sales in the last month of the third quarter of fiscal year 2016 as compared to the last month of the fourth quarter of fiscal year 2015. The decrease for the nine months ended March 31, 2016 in accounts payable was primarily due to lower purchases of inventory in the third quarter of fiscal year 2016. The increase for the nine months ended March 31, 2016 in inventory was primarily due to lower sales in the third quarter of fiscal year 2016.
Investing activities. Net cash used in our investing activities was $23.6 million and $26.1 million for the nine months ended March 31, 2017 and 2016, respectively. In the nine months ended March 31, 2017, of the net cash used in our investing activities, $23.3 million was related to the purchase of property, plant and equipment, of which $13.1 million was related to the property and equipment for the manufacturing buildings at our Green Computing Park in San Jose, California. In the nine months ended March 31, 2016, $25.1 million was related to the purchase of property, plant and equipment.
Financing activities. Net cash provided by our financing activities was $40.5 million and $13.2 million for the nine months ended March 31, 2017 and 2016, respectively. In the nine months ended March 31, 2017, we borrowed an additional $170.4 million under our term loan and revolving lines of credit from Bank of America and CTBC Bank and repaid $119.9 million in loans. We received $9.1 million related to the proceeds from the exercise of stock options in the nine months ended March 31, 2017. Further, we used $18.5 million to repurchase our outstanding common stock.
In the nine months ended March 31, 2016, we borrowed an additional $24.1 million under our revolving line of credit from Bank of America and CTBC Bank and repaid $23.7 million in loans. Further, we received $10.7 million related to the proceeds from the exercise of stock options in the nine months ended March 31, 2016.
We expect to experience continued growth in our working capital requirements and capital expenditures as we continue to expand our business. Our long-term future capital requirements will depend on many factors, including our level of revenues, the timing and extent of spending to support our product development efforts, the expansion of sales and marketing activities, the timing of our introductions of new products, the costs to ensure access to adequate manufacturing capacity and the continuing market acceptance of our products. We intend to fund this continued expansion through cash generated by operations and by drawing on our revolving credit facility or through other debt financing. However, we cannot be certain whether such financing will be available on commercially reasonable or otherwise favorable terms or that such financing will be available at all. We anticipate that working capital and capital expenditures will constitute a material use of our cash resources.
Other factors affecting liquidity and capital resources
Activities under Revolving Lines of Credit and Term Loans
Bank of America
2015 Bank of America Credit Facility
In June 2015, we entered into an amendment to our then existing credit agreement with Bank of America N.A. ("Bank of America"), which provided for (i) a $65.0 million revolving line of credit facility that would have matured on November 15, 2015, and (ii) a five-year $14.0 million term loan facility (collectively, the “2015 Bank of America Credit Facility”). The term loan was secured by 3 buildings located in San Jose, California and the principal and interest was payable monthly through September 30, 2016, with an interest rate at the LIBOR rate plus 1.50% per annum. In May 2016, we extended the revolving line of credit to mature on June 30, 2016.
2016 Bank of America Credit Facility
In June 2016, we entered into a new credit agreement with Bank of America, which provided for (i) a $55.0 million revolving line of credit facility including a $5.0 million letter of credit sublimit that was to mature on June 30, 2017 and (ii) a five-year $50.0 million term loan facility (collectively, the “2016 Bank of America Credit Facility”). The 2016 Bank of America Credit Facility replaced the 2015 Bank of America Credit Facility. The 2016 Bank of America Credit Facility term loan is secured by 7 buildings located in San Jose, California and the property, plant and equipment and the inventory in those buildings. The principal and interest of the 2016 Bank of America Credit Facility term loan are payable monthly through June 30, 2021 with an interest rate at the LIBOR rate plus 1.25% per annum. The interest rate for the 2016 Bank of America Credit Facility revolving line of credit is at the LIBOR rate plus 1.25% per annum. The LIBOR rate was 0.78% at March 31, 2017. The letter of credit bears interest at a rate of 1.25% per annum. In May 2017, we entered into an amendment to the 2016 Bank of America Credit Facility to increase the revolving line of credit to $85.0 million and extended the maturity date of the revolving lines of credit to October 31, 2018. Prior to the maturity, in April 2018, we repaid and terminated the 2016 Bank of America Credit Facility with proceeds from a new revolving line of credit (the "2018 Bank of America Credit Facility").
In June 2016, we also entered into a separate credit agreement as a part of the 2016 Bank of America Credit Facility, which provided for a revolving line of credit of $10.0 million for our Taiwan and Netherlands subsidiaries that was to mature on June 30, 2017. The interest rate of the revolving line of credit is equal to a minimum of 0.9% per annum plus the lender's cost of funds. In December 2016, we entered into an amendment to this separate credit agreement to increase the revolving line of credit from $10.0 million to $20.0 million. We extended the revolving line of credit to mature on October 31, 2018. Under the terms of this separate credit agreement, we cannot directly or indirectly pay any dividends, except in limited situations.
As of March 31, 2017 and June 30, 2016, the total outstanding borrowings under the 2016 Bank of America Credit Facility term loans was $42.5 million and $0.9 million, respectively. The total outstanding borrowings under the 2016 Bank of
America Credit Facility revolving lines of credit was $63.2 million and $62.2 million as of March 31, 2017 and June 30, 2016, respectively. The interest rates for these loans ranged from 1.37% to 2.16% per annum as of March 31, 2017 and from 1.02% to 1.96% per annum as of June 30, 2016, respectively. As of March 31, 2017, the amount of the unused revolving lines of credit with Bank of America under the credit agreements was $1.8 million. As of March 31, 2017, our total assets amounting to $1,091.2 million collateralized the line of credit with Bank of America under the credit agreement, which represent the total assets of our United States headquarters, except for seven buildings located in San Jose, California and property, plant and equipment and inventory in those buildings. As of March 31, 2017, total assets collateralizing the term loan with Bank of America under the credit agreement were $97.6 million.
2018 Bank of America Credit Facility
In April 2018, we entered into the 2018 Bank of America Credit Facility, which replaced the 2016 Bank of America Credit Facility. The 2018 Bank of America Credit Facility provides for a revolving credit line and other financial accommodations of up to $250.0 million extended by certain lenders. The 2018 Bank of America Credit Facility expires after 364 days, or at our option, and if certain conditions are satisfied, including being current on all of our delinquent quarterly and annual filings with the SEC, may convert into a 5-year revolving credit facility. If and upon such conversion, the lenders for the 2018 Bank of America Credit Facility shall extend, in aggregate, a principal amount of up to $400.0 million. Prior to the 2018 Bank of America Credit Facility’s conversion to the 5-year revolving credit facility, interest shall be at the LIBOR rate plus 2.75% per annum. Upon the 2018 Bank of America Credit Facility converting to the 5-year revolving credit facility, interest shall accrue at the LIBOR rate plus an amount between 1.50% and 2.00% for loans to both Super Micro Computer and Super Micro Computer B.V. Interest accrued on any loans under the 2018 Bank of America Credit Facility is due on the first day of each month, and the loans are due and payable in full on the termination date of the 2018 Bank of America Credit Facility, unless payment is required earlier. Voluntary prepayments are permitted without early repayment fees or penalties. Subject to customary exceptions, the 2018 Bank of America Credit Facility is secured by substantially all of our assets. Upon conversion to the 5-year revolving credit facility both Super Micro Computer’s assets, and at our option, Super Micro Computer B.V.'s assets will be used as collateral. Under the terms of the 2018 Bank of America Credit Facility, we cannot pay any dividends.
On January 31, 2019, we paid a fee and entered into an amendment of the 2018 Bank of America Credit Facility that resulted in the extension of the maturity date of the 2018 Bank of America Credit Facility from April 19, 2019 to June 30, 2019.
CTBC Bank
In April 2016, we entered into a credit agreement with CTBC Bank Co., Ltd ("CTBC Bank") that provides for (i) a 12-month NTD$700.0 million or $21.6 million U.S. dollar equivalent term loan facility secured by our land and building located in Bade, Taiwan with an interest rate equal to the lender's established NTD interest rate plus 0.25% per annum which was adjusted monthly, which term loan facility also included a 12-month line of guarantee up to NTD$100.0 million or $3.1 million U.S. dollar equivalent with an annual fee equal to 0.5% per annum, and (ii) a 12-month revolving line of credit up to 80.0% of eligible accounts receivable in an aggregate amount of up to $40.0 million with an interest rate equal to the lender's established USD interest rate plus 0.30% per annum which was adjusted monthly (collectively, the “CTBC Credit Facility”). The total borrowings allowed under the CTBC Credit Facility was capped at $40.0 million. We extended the CTBC Credit Facility to mature on May 31, 2017.
In May 2017, we renewed the credit agreement with respect to the CTBC Credit Facility, such that it provides for (i) a 12-month NTD$700.0 million or $23.0 million U.S. dollar equivalent term loan facility secured by our land and building located in Bade, Taiwan with an interest rate equal to the lender's established NTD interest rate plus 0.25% per annum which is adjusted monthly, which term loan facility also included a 12-month line of guarantee up to NTD$100.0 million or $3.3 million U.S. dollar equivalent with an annual fee equal to 0.5% per annum, and (ii) a 12-month revolving line of credit up to 80.0% of eligible accounts receivable in an aggregate amount of up to $50.0 million with an interest rate equal to the lender's established USD interest rate plus an interest rate ranging from 0.40% to 0.45% per annum which is adjusted monthly. The total borrowings allowed under the CTBC Credit Facility were capped at $50.0 million.
The total outstanding borrowings under the CTBC Credit Facility term loan were denominated in Taiwanese dollars and remeasured into U.S. dollars of $19.8 million and $20.4 million at March 31, 2017 and June 30, 2016, respectively. At March 31, 2017 and June 30, 2016, the total outstanding borrowings under the CTBC Credit Facility revolving line of credit were $20.3 million and $10.1 million, respectively, in U.S. dollars. The interest rate for these loans ranged from 0.94% and 1.83% at March 31, 2017 and 0.90% and 1.25% per annum at June 30, 2016. At March 31, 2017, there was no available amount for future borrowing under the CTBC Credit Facility. As of March 31, 2017, the net book value of land and building located in Bade, Taiwan, collateralizing the CTBC Credit Facility term loan was $26.5 million. Under the terms of the May
2017 renewed credit agreement, the CTBC Credit Facility was to mature on April 30, 2018 but prior to the maturity we entered into a new credit agreement with CTBC Bank in January 2018.
In January 2018, we entered into a credit agreement with CTBC Bank that provides for (i) a 12-month NTD$700.0 million or $23.6 million U.S. dollar equivalent term loan facility secured by the land and building located in Bade, Taiwan with an interest rate equal to the lender's established NTD interest rate plus 0.25% per annum which is adjusted monthly, which term loan facility also includes a 12-month line of guarantee up to NTD$100.0 million or $3.4 million U.S. dollar equivalent with an annual fee equal to 0.5% per annum and (ii) a 12-month NTD$1,500.0 million or $50.5 million U.S. dollar equivalent term loan facility with an interest rate equal to the lender's established NTD interest rate plus 0.25% per annum which is adjusted monthly (collectively, the “2018 CTBC Credit Facility”). The 2018 CTBC Credit Facility replaced the CTBC Credit Facility. The total borrowings allowed under the 2018 CTBC Credit Facility was initially capped at $50.0 million and in August 2018 was reduced to $40.0 million. In April 2019, we extended the maturity of 2018 CTBC Credit Facility to June 30, 2019.
Covenant Compliance
2018 Bank of America Credit Facility
The credit agreement with Bank of America related to the 2018 Bank of America Credit Facility contains customary representations and warranties and customary affirmative and negative covenants applicable to us. The credit agreement contains a financial covenant, which requires that we maintain a Fixed Charge Coverage Ratio, as defined in the agreement of at least 1.00 for each twelve-month period while a Trigger Period, as defined in the agreement, is in effect. We have maintained compliance with this covenant.
On September 7, 2018, Bank of America issued an extension letter to us in connection with the 2018 Bank of America Credit Facility, which extended the delivery date of our audited consolidated financial statements, compliance certificates and other material reports for the fiscal year ended June 30, 2018 to January 31, 2019. On January 31, 2019, we entered into an amendment of the loan and security agreement with respect to the 2018 Bank of America Credit Facility to, among other matters, (a) extend the delivery date of our audited consolidated financial statements, compliance certificates and other material reports for the fiscal year ended June 30, 2018 to June 30, 2019, and (b) require the delivery, by no later than March 31, 2019, of our audited consolidated financial statements for the fiscal year ended June 30, 2017. In April 2019, we paid a fee to extend the delivery of our audited consolidated financial statements for the fiscal year ended June 30, 2017 to June 30, 2019. We intend to negotiate the further extension for delivery of our audited consolidated financial statements, compliance certificates and other material reports for the fiscal year ended June 30, 2018.
CTBC Bank
There are no financial covenants associated with the CTBC Credit Facility or the 2018 CTBC Credit Facility.
Share Repurchase Program
In July 2016, our Board of Directors adopted a program to repurchase from time to time at management’s discretion up to $100.0 million of our common stock in the open market or in private transactions during the next twelve months at prevailing market prices. During the three months ended March 31, 2017, we did not purchase any shares of our common stock in the open market. During the nine months ended March 31, 2017, we purchased 888,097 shares of our common stock in the open market at a weighted average price of $20.79 per share for approximately $18.5 million. Repurchases were made under the program using our cash resources. The repurchase program ended in July 2017.
Recent Accounting Pronouncements
For a description of recent accounting pronouncements, including the expected dates of adoption and estimated effects, if any, on our condensed consolidated financial statements, see Part I, Item 1, Note 1, “Organization and Summary of Significant Accounting Policies” in our notes to the condensed consolidated financial statements in this Quarterly Report on Form 10-Q/A.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements.
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