Super Micro’s financial reporting saga: inventory adjustments, audit progress, and regulatory scrutiny
Breaking down the no-restatement claim, internal controls, and the Implications of SEC and DOJ investigations
On February 11, 2025, Super Micro Computer, Inc (Ticker: SMCI) released preliminary earnings for the December 31, 2024, quarter. The Company also provided a long-anticipated update on the Company's efforts to release delinquent 10-K report for the year ending June 30, 2024.
As a reminder, Super Micro’s stock was going through a period of turbulence after Super Micro’s former auditor, Ernst & Young, suddenly resigned in October 2024, alleging an inability to rely on Super Micro’s management representations.
Super Micro must file the delinquent annual report by the February 25, 2025, a deadline set by Nasdaq, or risk delisting. I outlined the compliance process timeline and implications of missing the deadline in my previous post.
According to Super Micro, the Company is on track to release the financials:
“Supermicro continues to work diligently toward the filing of its Annual Report on Form 10-K for the fiscal year ended June 30, 2024, and its Quarterly Report on Form 10-Q for the period ended September 30, 2024. Based on information currently available, the Company believes it will make such filings by February 25, 2025. Additionally, the Company today filed a Form 12b-25 for its second fiscal quarter and expects to file its Quarterly Report on Form 10-Q for period ended December 31, 2024, also by February 25, 2025.”
Super Micro reiterated that its previously filed financial statements would not require a restatement. Still, it disclosed changes to previously announced results for the quarter ending June 30, 2024, an additional inventory charge following a decline in the inventory's market value (emphasis added):
“The Company is reconfirming that no previously issued financial statements require a restatement. As the Company works toward completing the audit, it made certain adjustments to the preliminary unaudited results for the fourth quarter of fiscal year 2024 that it announced on August 6, 2024. The adjustments recorded in the results for the fourth quarter of fiscal year 2024 include an increase in net sales of approximately $46 million, an increase in cost of sales of approximately $96 million, which includes a charge due to an increase in inventory reserves of approximately $45 million, and an increase in operating expenses of approximately $5 million. Until the Company’s fiscal year 2024 financial statements are filed, the Company is required to reassess its accounting estimates for financial reporting. The charge for inventory reserves results from an unanticipated decline in the market value of certain components that were held in the Company’s inventory or on non-cancellable purchase orders at the end of fiscal year 2024. Collectively, these changes resulted in a downward adjustment to the previously announced preliminary unaudited fiscal year 2024 and fourth quarter of fiscal year 2024 GAAP and non-GAAP diluted net income per common share of approximately $0.09 based on post-split diluted shares outstanding. The foregoing adjustments are to previously announced preliminary unaudited financial results and, as such, do not constitute a restatement.”
So, how do we reconcile the "no-restatement" claim with an inventory adjustment to the fourth quarter 2024 results? Let's break the disclosure into smaller, digestible pieces.
First, no restatement does not mean there were no errors.
Super Micro’s accounting policy states that the Company records inventory at a lower of cost or market:
“Inventories
Inventories are stated at lower of cost, using weighted average cost method, or net realizable value. Net realizable value is the estimated selling price of the Company's products in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. Inventories consist of purchased parts and raw materials (principally electronic components), work in process (principally products being assembled) and finished goods. The Company evaluates inventory on a quarterly basis for excess and obsolescence and lower of cost or net realizable value and, as necessary, writes down the valuation of inventories based upon the Company's inventory aging, forecasted usage and sales, anticipated selling price, product obsolescence and other factors. Once inventory is written down, its new value is maintained until it is sold or scrapped.”
Super Micro was required to estimate the market value of its inventory as of June 30, 2024. I would generally expect the Company to include this estimate in the preliminary Q4 results released to investors on August 6, 2024. Omitting this estimate inflated the EPS numbers: the inventory adjustment reduced the previously reported Q4 non-GAAP EPS of $6.51 by 0.09, or 1.4%.
According to Super Micro, the adjustment is not a restatement because the audited results were not filed:
“The foregoing adjustments are to previously announced preliminary unaudited financial results and, as such, do not constitute a restatement.”
You cannot restate what was not formally filed, right? However, Super Micro also noted that until “financial statements are filed, the Company is required to reassess its accounting estimates.” Importantly, the assessment of the inventory estimate must have been performed as of June 30, 2024, based on the information that was known (or should have been known) to the management as of June 30, 2024.
Let me reiterate: no restatement does not mean there was no error. While Super Micro is silent about how the understatement of the inventory reserve was discovered or why it was omitted from the preliminary results, it is reasonable to assume that Super Micro’s new audit firm, BDO LLP, discovered the incorrect inventory valuation during the June 30, 2024, audit process and prompted the Company to record the adjustment.
Suppose BDO did impose the adjustment. This would raise a question: why didn't the Company discover the adjustment and what does it tell us about Super Micro's internal controls over financial reporting? Does the adjustment point to material weaknesses related to inventory valuation and the period-end closing process? We will know more once the late 10-K report is (hopefully) filed.
Interestingly, with just about a week to the February 25, 2025, deadline, Super Micro's earnings release includes a 300-word disclaimer paragraph under “Financial Information Is Preliminary and May Be Subject to Change” caption. The short version: the results for the quarter ending December 31, 2024, were not reviewed by BDO, are preliminary, and investors will not know what the final numbers are until the 10-Q is filed.
Let me say it one more time: changing previously reported numbers is concerning, whether it's a restatement or an adjustment to preliminary results. Ironically, in Super Micro's case, the updated Q4 numbers give me slightly more confidence that Super Micro is getting closer to releasing the audited financial results. Why? Because reporting the magnitude of the adjustments suggests that BDO made substantial progress toward completing the audit.
Please note that this is an opinion, not a factual statement. Note also that getting closer is not the same as complete. The indicator of the latter would be the 10-K filing publicly available on EDGAR.
The earnings release also provided an update on the status of the regulatory investigations.