This section and other parts of this Quarterly Report 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 and included in our comprehensive Annual Report on Form 10-K for the fiscal year endedJune 30, 2019 (the "2019 Comprehensive 10-K"), which includes our consolidated financial statements for the fiscal years endedJune 30, 2019 and 2018.
Nasdaq Relisting of Our Common Stock
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Overview
We are a global leader and innovator of high-performance, high-efficiency server and storage technology. We develop and provide end-to-end green computing solutions to the cloud computing, data centers, enterprise, big data, artificial intelligence ("AI"), High-Performance Computing ("HPC"), edge computing and Internet of Things/embedded ("IoT") markets. Our solutions range from complete server, storage, modular blade servers, blades and workstations to full racks, networking devices, server management software, server sub-systems and global support and services. We commenced operations in 1993 and have been profitable every year since inception. Although our net sales for the three months endedDecember 31, 2019 declined from our net sales for the corresponding period in the prior year, we seek to increase our sales and profits every quarter. We believe that to do so, we must continue to develop flexible and application optimized server and storage 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 customers. We measure our financial success based on various indicators, including growth in net sales, gross profit margin and operating margin. Among the key non-financial indicators of our success is our ability to rapidly introduce new products and deliver the latest application-optimized server and storage solutions. In this regard, we work closely with microprocessor and other key 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 technology transitions such as the introduction of new microprocessors and storage technologies, and as a result, we monitor the product introduction cycles of Intel Corporation, Advanced Micro Devices, Inc., Nvidia Corporation, Samsung Electronics Company Limited, Micron Technology, Inc. and others carefully. This also impacts our research and development expenditures as we continue to invest more in our current and future product development efforts. For the three months endedDecember 31, 2019 , our industry experienced a slightly increased demand as evidenced by some improvement in demand from hyperscale datacenter customers primarily associated with the public cloud, offset by continued soft enterprise datacenter customer demand. The industry continued to see declining component prices for memory and SSDs, which offset shipment volumes leading to lower revenues in comparison to the prior year. As a result, we experienced higher volume of server and storage systems purchased by our datacenter customers as compared to last year for the same period, but lower component prices led us to adjust lower our average selling prices per compute node, resulting in lower server and storage systems revenue. Gross margins improved because the prices we charged our customers on an average declined at a slower rate than the reduction in prices we paid for the components we purchased. Therefore, despite the decline in net sales, our gross margin increased. As a result, net income and earnings per share increased as compared to the comparable period in the prior fiscal year. 31
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Financial Highlights
The following is a summary of our financial highlights of the second quarter of fiscal year 2020:
• Net sales decreased by 6.5% as compared to the three months endedDecember 31, 2018 . The decrease was mainly due to a decline in average selling prices per compute node caused by lower component prices offset by an increase in the volume of server and storage systems sold. • Gross margin increased to 15.9% in the three months endedDecember 31, 2019 from 13.7% for the three months endedDecember 31, 2018 , primarily due to a favorable geographic, customer and product mix and lower costs for key components. • Operating expenses increased by 8.2% as compared to the
three months
endedDecember 31, 2018 , and were equal to 12.7% and 11.0% of net sales in the three months endedDecember 31, 2019 and 2018, respectively. • Effective tax rate decreased from 18.4% in the three months endedDecember 31, 2018 to 7.9% in the three months endedDecember 31, 2019 . Revenues and Expenses Net sales. Net sales consist of sales of our server and storage solutions, including systems and related services and 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 and storage system sales and units shipped and the average selling price per unit for our subsystem and accessories. The prices for our server and storage systems range widely depending upon the configuration, including the number of compute nodes in a server system as well as the level of integration of key components such as SSDs, and memory, and the prices for our subsystems and accessories can also vary widely based on whether a customer is purchasing power supplies, server boards, chassis or other accessories. A compute node is an independent hardware configuration within a server system capable of having its own CPU, memory and storage and that is capable of running its own instance of a non-virtualized operating system. The number of compute nodes sold, which can vary by product, is an important metric we use to track our business. Measuring volume using compute nodes enables more consistent measurement across different server form factors and across different vendors. As with most electronics-based product life cycles, 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. Additionally, in order to remain competitive throughout all industry cycles, and due to price transparency of certain higher cost components, we must actively change our selling price per unit in response to changes in costs for key components such as memory and SSDs, and actively adjust our procurement practices in anticipation of near term fluctuations in market prices for key components. 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 obsolescence provisions. The primary factors that impact our cost of sales are the mix of products sold and cost of materials, which include purchased parts, shipping costs, salary and benefits and overhead costs 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 based on the cost of materials and market conditions. As a result, our cost of sales as a percentage of net sales in any period can increase due to significant component price increases resulting from component shortages. We use several suppliers and contract manufacturers to design and manufacture subsystems in accordance with our specifications, with most final assembly and testing performed at our manufacturing facility inSan Jose, California . During the first quarter of fiscal year 2020 and during fiscal year 2019, we continued to expand manufacturing and service operations inTaiwan andthe Netherlands primarily to support our Asian and European customers and have continued to work on improving our utilization of our overseas manufacturing capacity. We work with Ablecom, one of our key contract manufacturers and also a related party to optimize modular designs for our chassis and certain of other components. We also outsource to Compuware, also a related party, a portion of our design activities and a significant part of our manufacturing of subsystems, particularly power supplies. Our purchases of products from Ablecom and Compuware represented 10.3% and 9.3% of total cost of sales for the three months endedDecember 31, 2019 and 2018, respectively, and 10.0% and 9.2% for the six months endedDecember 31, 2019 and 2018, respectively. For further details on our dealings with related parties, see Part I, Item 1, Note 9, "Related Party Transactions." 32
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Research and development expenses. Research and development expenses consist of personnel expenses including: salaries, benefits, stock-based compensation and incentive bonuses, and related expenses for our research and development personnel, as well as other product development costs such as 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 funding from certain suppliers and customers for joint development. Under these arrangements, we are reimbursed for certain research and development costs that we incur as part of the joint development efforts with 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 personnel expenses, including: salaries, benefits, stock-based compensation and incentive bonuses, and related expenses 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 arrangements, 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 new product releases by our suppliers. General and administrative expenses. General and administrative expenses consist primarily of general corporate costs, including personnel expenses such as: salaries, benefits, stock-based compensation and incentive bonuses, and related expenses for our general and administrative personnel, financial reporting, information technology, corporate governance and compliance and outside legal, audit, tax fees, insurance and bad debt. 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, primarilythe United States ,Taiwan andthe 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
Our financial statements are prepared in accordance with generally accepted accounting principles inthe United States . The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, expenses and related disclosures. We evaluate our estimates and assumptions on an ongoing basis. Our estimates are based on historical experience and various other assumptions that we believe to be reasonable under the circumstances. Our actual results could differ from these estimates. Except for the changes to our accounting policy as a result of the adoption of the new lease accounting guidance onJuly 1, 2019 , there have been no material change to our critical accounting policies and estimates as compared to those disclosed in our 2019 Comprehensive 10-K. 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. 33
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Table of Contents Results of OperationsNet Sales
The following table presents net sales by product type for the three and six
months ended
Three Months Ended December 31, Change Six Months Ended December 31, Change 2019 2018 $ % 2019 2018 $ % Server and storage systems$ 672.7 $ 762.6 $ (89.9 ) (11.8 )%$ 1,308.7 $ 1,568.5 $ (259.8 ) (16.6 )% Percentage of total net sales 77.2 % 81.9 % 78.3 % 82.4 % Subsystems and accessories$ 198.2 $ 168.9 $ 29.3 17.3 %$ 362.0 $ 334.1 $ 27.9 8.4 % Percentage of total net sales 22.8 % 18.1 % 21.7 % 17.6 % Total net sales$ 870.9 $ 931.5 $ (60.6 ) (6.5 )%$ 1,670.7 $ 1,902.6 $ (231.9 ) (12.2 )%
Comparison of Three Months Ended
The period-over-period decrease in net sales of our server and storage systems was primarily due to a decrease in average selling price per compute node by approximately 20%. The decline in average selling prices was primarily due to substantially lower costs for key components, specifically for memory and SSDs. The decrease in the average selling price was partially offset by an increase in the number of units of compute nodes shipped by approximately 10%, driven by a higher demand for our products from our datacenter customers. The period-over-period increase in net sales of our subsystems and accessories is primarily due to an increase in the volume of subsystems and accessories sold by approximately 31% due to increased demand from our indirect sales channel.
Comparison of Six Months Ended
The period-over-period decrease in net sales of our server and storage systems was primarily due to a decrease in average selling price per compute node by approximately 17%. The decline in average selling prices was primarily due to substantially lower costs for key components. The period-over-period increase in net sales of our subsystems and accessories is primarily due to an increase in the volume of subsystems and accessories sold by approximately 33%, partially offset by a decrease in the average selling prices per unit by approximately 16%.
The following table presents the percentages of net sales from products sold
through our indirect sales channel and to our direct customers and OEMs
customers for the three and six months ended
Three Months Ended Six Months Ended December 31, Change December 31, Change 2019 2018 % 2019 2018 % Indirect sales channel 51.4 % 40.8 % 10.6 % 50.7 % 37.5 % 13.2 % Direct customers and OEMs 48.6 % 59.2 % (10.6 )% 49.3 % 62.5 % (13.2 )% Total net sales 100.0 % 100.0 % 100.0 % 100.0 %
Comparison of Three Months Ended
The period-over-period increase in net sales through our indirect sales channel as a percentage of total net sales was primarily due to increased demand from channel partners supporting large end users and the lower average selling prices for our server and storage systems, caused by lower component pricing. This resulted in the decline of direct customer and OEM net sales as a percentage of total net sales. While the number of units of compute nodes shipped to direct customers and OEMs increased by 10%, the period-over-period decrease in net sales to our direct customers and OEMs as a percentage of total net sales was lower primarily due to a 20% drop in average selling price. 34
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Comparison of Six Months Ended
The period-over-period increase in net sales through our indirect sales channel as a percentage of total net sales was primarily due to increased demand from the channel and the lower average selling prices for our server and storage systems, caused by lower component pricing. This resulted in the decline of direct customer and OEM net sales as a percentage of total net sales. The period-over-period decrease in net sales to our direct customers and OEMs as a percentage of total net sales was primarily due to 17% lower average selling price per compute node.
The following table presents percentages of net sales by geographic region for
the three and six months ended
Three Months Ended Six Months Ended December 31, Change December 31, Change 2019 2018 % 2019 2018 % United States 60.6 % 55.0 % 5.6 % 59.6 % 56.7 % 2.9 % Europe 16.9 % 19.4 % (2.5 )% 16.5 % 18.1 % (1.6 )% Asia 19.0 % 21.1 % (2.1 )% 19.6 % 21.2 % (1.6 )% Others 3.5 % 4.5 % (1.0 )% 4.3 % 4.0 % 0.3 % Total net sales 100.0 % 100.0 % 100.0 % 100.0 %
Comparison of Three Months Ended
The period-over-period increase in net sales inthe United States as a percentage of total net sales for the three months endedDecember 31, 2019 and 2018 was primarily due to higher sales of our server and storage systems to our direct customers and OEMs and increased sales through our indirect sales channel. The period-over-period decrease in net sales inAsia as a percentage of total net sales was due primarily to decreased sales inChina andJapan partially offset by increased sales inTaiwan andKorea . The decreased percentage of net sales inEurope was primarily due to lower sales in theUnited Kingdom andthe Netherlands , partially offset by increased sales inGermany andRussia . The period-over-period decrease in net sales in other countries as a percentage of total net sales was due to lower sales inBrazil ,South Africa andIsrael .
Comparison of Six Months Ended
The period-over-period increase in net sales inthe United States as a percentage of total net sales for the six months endedDecember 31, 2019 and 2018 was primarily due to higher sales through our indirect sales channel. The period-over-period decrease in net sales inAsia as a percentage of total net sales was due primarily to decreased sales inChina ,Japan andKorea , partially offset by increased sales inTaiwan . The decreased percentage of net sales inEurope was primarily due to lower sales inthe Netherlands ,United Kingdom andGermany , partially offset by increased sales inRussia . The period-over-period increase in net sales in other countries as a percentage of total net sales was due to increased sales inSouth America , primarilyMexico .
Cost of Sales and Gross Margin
Cost of sales and gross margin for the three and six months ended
Three Months Ended December 31, Change Six Months Ended December 31, Change 2019 2018 $ % 2019 2018 $ % Cost of sales$ 732.5 $ 803.6 $ (71.1 ) (8.8 )%$ 1,401.4 $ 1,651.5 $ (250.1 ) (15.1 )% Gross profit$ 138.4 $ 127.9 $ 10.5 8.2 %$ 269.3 $ 251.2 $ 18.1 7.2 % Gross margin 15.9 % 13.7 % 2.2 % 16.1 % 13.2 % 2.9 %
Comparison of Three Months Ended
The period-over-period decrease in cost of sales was primarily attributable to a decrease of$76.9 million in product costs related to the decrease in the cost of key components primarily associated with server and storage systems, offset by an 35
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increase of$1.4 million in personnel expenses a result of an increase in the number of personnel, an increase in overhead costs of$2.4 million attributable primarily to increased tariffs and an increase of$1.4 million in other manufacturing costs. The period-over-period increase in the gross margin percentage was primarily due to lower costs for key components, as the prices we charged our customers on average declined at a slower rate than the reduction in prices we paid for the components we purchased. In addition, in the three months endedDecember 31, 2019 , as compared with three months endedDecember 31, 2018 , we had a lower percentage of net sales inAsia where pricing is typically lower because the market there is more competitive, which had a positive impact on our gross margin percentage.
Comparison of Six Months Ended
The period-over-period decrease in cost of sales was primarily attributable to a decrease of$258.1 million in product costs related to the decrease in the cost of key components primarily associated with server and storage systems, offset by an increase of$2.5 million in personnel expenses a result of an increase in the number of personnel, an increase in overhead costs of$10.0 million attributable primarily to increased tariffs and an increase of$1.0 million in manufacturing costs. The period-over-period increase in the gross margin percentage was primarily due to lower costs for key components, as the prices we charged our customers on average declined at a slower rate than the reduction in prices we paid for the components we purchased. In addition, in the six months endedDecember 31, 2019 as compared with six months endedDecember 31, 2018 we had a lower percentage of net sales inAsia where pricing is typically lower because the market there is more competitive, which had a positive impact on our gross margin percentage.
Operating Expenses
Operating expenses for the three and six months ended
Three Months Ended December 31, Change Six Months Ended December 31, Change 2019 2018 $ % 2019 2018 $ % Research and development$ 55.6 $ 45.9 $ 9.7 21.1 %
6.4 % 4.9 % 6.3 % 4.7 %
Sales and marketing
$ 42.2 $ 38.0 $ 4.2 11.1 % Percentage of total net sales 2.5 % 2.1 % 2.5 % 2.0 % General and administrative$ 33.0 $ 36.6 $ (3.6 ) (9.8 )%$ 61.3 $ 70.0 $ (8.7 ) (12.4 )% Percentage of total net sales 3.8 % 4.0 % 3.7 % 3.7 % Total operating expenses$ 110.6 $ 102.2 $ 8.4 8.2 %$ 208.7 $ 196.9 $ 11.8 6.0 % Percentage of total net sales 12.7 % 11.0 % 12.5 % 10.4 %
Comparison of Three Months Ended
Research and development expenses. The period-over-period increase in research and development expenses was primarily due to an increase of$6.4 million in personnel expenses as a result of an increase in the number of personnel, an increase of$1.5 million in other product development costs, a decrease of$0.6 million in reimbursements received for certain research and development costs that we incur as part of the joint product development and an increase of$1.1 million related primarily to facilities and other research and development expenses.
Sales and marketing expenses. The period-over-period increase in sales and
marketing expenses was primarily due to an increase of
General and administrative expenses. The period-over-period decrease in general and administrative expenses includes a decrease of$5.5 million in professional fees that were primarily incurred to investigate, assess and begin remediating the causes that led to the delay in filing our periodic reports with theSEC and the associated restatement of certain of our previously issued financial statements, offset by an increase of$2.0 million in personnel expenses as a result of an increase in the number of personnel. 36
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Comparison of Six Months Ended
Research and development expenses. The period-over-period increase in research and development expenses was primarily due to an increase of$10.7 million in personnel expenses as a result of an increase in the number of personnel, an increase of$3.1 million in parts and materials expenses, and increase of$0.8 million in facilities expenses, a decrease of$0.6 million in reimbursements received for certain research and development costs that we incur as part of the joint product development and an increase of$0.8 million related primarily to other research and development expenses. Sales and marketing expenses. The period-over-period increase in sales and marketing expenses was primarily due to an increase of$2.7 million in personnel expenses as a result of an increase in the number of personnel, an increase of$1.0 million related to participation in trade shows and an increase of$0.9 million in expenses related to advertising and promotion activities. General and administrative expenses. The period-over-period decrease in general and administrative expenses includes a decrease of$12.6 million in professional fees that were primarily incurred to investigate, assess and begin remediating the causes that led to the delay in filing our periodic reports with theSEC and the associated restatement of certain of our previously issued financial statements, offset by an increase of$3.3 million in personnel expenses as a result of an increase in the number of personnel.
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 six months ended
Three Months Ended Six Months Ended December 31, Change December 31, Change 2019 2018 $ % 2019 2018 $ % Other income (expense), net$ (0.4 ) $ 0.6 $ (1.0 ) (166.7 )%$ 1.2 $ 0.8 $ 0.4 50.0 % Interest expense (0.6 ) (1.8 ) 1.2 (66.7 )% (1.1 ) (4.2 ) 3.1 (73.8 )% Interest and other income (expense), net$ (1.0 ) $ (1.2 ) $ 0.2 (16.7 )%$ 0.1 $ (3.4 ) $ 3.5 (102.9 )%
Comparison of Three Months Ended
The period-over-period change in interest and other income (expense), net was due to a decrease of$1.2 million in interest expense primarily as a result of lower average outstanding debt during the three months endedDecember 31, 2019 as compared to three months endedDecember 31, 2018 , which was due to repayments of our borrowings. This was offset by a change of$1.0 million in other income (expense), net attributable to an increase of$0.6 million in interest income on our interest bearing deposits offset by change of$(1.6) million related to foreign exchange losses due to unfavorable foreign currency fluctuations.
Comparison of Six Months Ended
The period-over-period change in interest and other income (expense), net was due to a decrease of$3.1 million in interest expense primarily as a result of lower average outstanding debt during the six months endedDecember 31, 2019 as compared to six months endedDecember 31, 2018 , which was due to repayments of our borrowings. This was offset by a change of$0.4 million in other income (expense), net attributable to an increase of$1.3 million in interest income on our interest bearing deposits offset by change of$(0.9) million related to foreign exchange losses due to unfavorable foreign currency fluctuations.
Provision for Income Taxes
Provision for income taxes and effective tax rates for the three and six months
ended
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Table of Contents Three Months Ended Six Months Ended December 31, Change December 31, Change 2019 2018 $ % 2019 2018 $ % Income tax provision$ 2.1 $ 4.5 $ (2.4 ) (53.3 )%$ 10.7 $ 10.0 $ 0.7 7.0 % Percentage of total net sales 0.2 % 0.5 % 0.6 % 0.5 % Effective tax rate 7.9 % 18.4 % 17.6 % 19.8 %
Comparison of Three Months Ended
The period-over-period decrease in income tax provision and effective tax rate
was primarily due to a release of unrecognized tax benefits following the
settlement of a
Comparison of Six Months Ended
The period-over-period decrease in effective tax rate was primarily due to a release of unrecognized tax benefits following the settlement of aTaiwan tax audit for the six months endedDecember 31, 2019 .
Liquidity and Capital Resources
We have financed our growth primarily with funds generated from operations, in addition to utilizing borrowing facilities, particularly in relation to the financing of real property acquisitions as well as working capital. Our cash and cash equivalents were$309.0 million and$248.2 million as ofDecember 31, 2019 andJune 30, 2019 , respectively. Our cash in foreign locations was$93.5 million and$124.6 million as ofDecember 31, 2019 andJune 30, 2019 , respectively. Amounts held outside of theU.S. are generally utilized to support non-U.S. liquidity needs. Repatriations generally will not be taxable from aU.S. federal tax perspective but may be subject to state income or foreign withholding tax. Where local restrictions prevent an efficient intercompany transfer of funds, our intent is to keep cash balances outside of theU.S. and to meet liquidity needs through ongoing cash flows, external borrowings, or both. We do not expect restrictions or potential taxes incurred on repatriation of amounts held outside of theU.S. to have a material effect on our overall liquidity, financial condition or results of operations. We believe that our current cash, cash equivalents, credit lines and internally generated cash flows will be generally sufficient to support our operating businesses, remediation efforts, maturing debt and interest payments for the twelve months following the issuance of these condensed consolidated financial statements. Expected uses of our cash over the short term include our continued development of resource saving products, manufacturing expansion inthe United States andTaiwan and ongoing remediation of our material weaknesses in internal controls over financial reporting. Additionally, we expect to incur additional charges of$35.0 million to$40.0 million , which will be one-time in nature, in the third or fourth fiscal quarter of 2020. These one-time charges, which will likely be settled in cash, will address residual clean-up matters from our extended black-out period.
Our key cash flow metrics were as follows (dollars in millions):
Six Months
Ended
2019 2018 Change Net cash provided by operating activities$ 87.2 $ 81.1 $ 6.1 Net cash used in investing activities$ (23.3 ) $ (9.3 ) $ (14.0 ) Net cash used in financing activities$ (2.1 ) $ (69.3 ) $ 67.2 Net decrease in cash, cash equivalents and restricted cash$ 61.9 $ 2.4$ 59.5 Operating Activities Net cash provided by operating activities increased by$6.1 million for the six months endedDecember 31, 2019 as compared to the six months endedDecember 31, 2018 . The increase was due primarily to an increase in net income in the current period of$12.5 million and a reduction of non-cash charges from the change in deferred taxes, net of$7.1 million , from lower period-over-period changes in reserves and accruals, offset by increased net working capital of$10.8 million 38
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resulting from a decrease in the cash collected from our customers, an increase in prepayments to tax authorities, a decrease in payments for professional fees, and a decrease in the share of loss from our equity investee of$3.2 million .
Investing Activities
Net cash used in investing activities was$23.3 million and$9.3 million for the six months endedDecember 31, 2019 and 2018, respectively, as we continued to invest in expanding our capacity and office space, including the expansion of ourGreen Computing Park inSan Jose . During the six months endedDecember 31, 2019 , we received$0.8 million from the sale of our investment in a privately held company. Financing Activities Net cash used in financing activities decreased by$67.2 million for the six months endedDecember 31, 2019 as compared to the six months endedDecember 31, 2018 primarily due to decreased debt repayments of$66.5 million .
Other Factors Affecting Liquidity and Capital Resources
Activities under Revolving Lines of Credit and Term Loans
2018
InApril 2018 , we entered into a revolving line of credit withBank of America (the "2018Bank of America Credit Facility "), which replaced the then existing credit facility withBank of America (the "2016Bank of America Credit Facility "). The 2018Bank of America Credit Facility provides for a revolving credit line and other financial accommodations of up to$250.0 million extended by certain lenders, including a$5.0 million letter of credit sublimit, which was extended to$15.0 million inOctober 2019 . The 2018Bank of America Credit Facility was originally set to expire after 364 days and was extended toJune 30, 2020 through subsequent amendments. Prior to its maturity, at our option and if certain conditions are satisfied, the 2018Bank of America Credit Facility may convert into a five-year revolving credit facility. If and upon such conversion, the lenders for the 2018Bank of America Credit Facility shall extend, in aggregate, a principal amount of up to$400.0 million . Prior to the 2018Bank of America Credit Facility's conversion to the five-year revolving credit facility, interest shall accrue at the LIBOR rate plus 2.75% per annum. Upon the 2018Bank of America Credit Facility converting to the five-year revolving credit facility, interest shall accrue at the LIBOR rate plus an amount between 1.50% and 2.00% for loans to bothSuper Micro Computer andSuper Micro Computer B.V . Under the terms of the 2018Bank of America Credit Facility , we are required to grant the lenders a continuing security interest in and lien upon all amounts credited to any of our deposit accounts. Interest accrued on any loans under the 2018Bank 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 2018Bank of America Credit Facility , unless payment is required earlier as determined by the lenders. Voluntary prepayments are permitted without early repayment fees or penalties. The terms of the arrangement require any amounts in the deposit accounts to be applied against our line of credit the next business day. Subject to customary exceptions, the 2018Bank of America Credit Facility is secured by substantially all ofSuper Micro Computer's assets. If converted to the five-year revolving credit facility,Super Micro Computer's assets, and at our option,Super Micro Computer B.V.'s assets will be used as collateral for the 2018Bank of America Credit Facility . Under the terms of the 2018Bank of America Credit Facility , we are not permitted to either repurchase our shares or pay any dividends. In the fourth fiscal quarter of 2018, we paid$3.2 million in fees to the lenders and third parties in connection with the 2018Bank of America Credit Facility . The replacement of the 2016Bank of America Credit Facility by the 2018Bank of America Credit Facility is accounted for as a modification of the then-existing credit facility to the extent the lenders before and after the modification were the same. Any unamortized fees relating to the 2016Bank of America Credit Facility and the fees paid for the 2018Bank of America Credit Facility are amortized over the term of the 2018Bank of America Credit Facility as interest expense in our consolidated statements of operation and any unamortized amounts are classified within prepaid and other current assets in our consolidated balance sheets. OnJanuary 31, 2019 , we paid a fee and entered into an amendment of the 2018Bank of America Credit Facility that resulted in the extension of the maturity date fromApril 19, 2019 toJune 30, 2019 . OnJune 27, 2019 , we entered into a second amendment of the 2018Bank of America Credit Facility that extended the maturity date fromJune 30, 2019 toJune 30, 2020 . 39
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As ofDecember 31, 2019 , we had no outstanding borrowings under the 2018Bank of America Credit Facility . As ofJune 30, 2019 , the total outstanding borrowings under the 2018Bank of America Credit facility were$1.1 million . The interest rates under the 2018Bank of America Credit Facility as ofDecember 31, 2019 andJune 30, 2019 were 3.75% per annum and 4.50% per annum, respectively. As ofDecember 31, 2019 , a$6.4 million letter of credit was outstanding under the 2018Bank of America Credit Facility . The balance of debt issuance costs outstanding were immaterial as ofDecember 31, 2019 andJune 30, 2019 . As ofDecember 31, 2019 , our available borrowing capacity under the 2018Bank of America Credit Facility was$243.6 million , subject to the borrowing base limitation and compliance with other applicable terms.
InJanuary 2018 , we entered into a credit agreement withCTBC Bank that provided for (i) a 12-month NTD$700.0 million ($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 was adjusted monthly, which term loan facility also included a 12-month guarantee of up to NTD$100.0 million ($3.4 million U.S. dollar equivalent) with an annual fee equal to 0.50% per annum, and (ii) a 12-month NTD$1,500.0 million ($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 was adjusted monthly (collectively, the "2018 CTBC Credit Facility"). The total borrowings allowed under the 2018 CTBC Credit Facility was initially capped at$50.0 million and inAugust 2018 was reduced to$40.0 million . InJune 2019 prior to its maturity, the 2018 CTBC Credit Facility was replaced by the 2019 CTBC Credit Facility (defined below). InJune 2019 , we entered into a credit agreement withCTBC Bank that provides for (i) a 12-month NTD$700.0 million ($22.5 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 guarantee of up to NTD$100.0 million ($3.2 million U.S. dollar equivalent) with an annual fee equal to 0.50% per annum, (ii) a 180-day NTD$1,500.0 million ($48.2 million U.S. dollar equivalent) term loan facility up to 100% of eligible accounts receivable in an aggregate amount with an interest rate equal to the lender's established NTD interest rate ranging from 0.30% to 0.50% per annum which is adjusted monthly, and (?) a 12-month revolving line of credit of up to 100% 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 0.30% to 0.50% per annum which is adjusted monthly (collectively, the "2019 CTBC Credit Facility"). The total borrowings allowed under the 2019 CTBC Credit Facility was capped at$50.0 million . The 2019 CTBC Credit Facility is to mature onJune 30, 2020 . The total outstanding borrowings under the 2019 CTBC Credit Facility term loan were denominated in NTD and remeasured intoU.S. dollars of$23.3 million and$22.5 million atDecember 31, 2019 andJune 30, 2019 , respectively. The interest rate for these loans were 0.91% per annum as ofDecember 31, 2019 and 0.93% per annum as ofJune 30, 2019 . AtDecember 31, 2019 , the amount available for future borrowing under the 2019 CTBC Credit Facility was$26.7 million . As ofDecember 31, 2019 , the net book value of land and building located in Bade,Taiwan collateralizing the 2019 CTBC Credit Facility term loan was$25.6 million .
Covenant Compliance
2018
The credit agreement withBank of America related to the 2018Bank of America Credit Facility contains customary representations and warranties and customary affirmative and negative covenants applicable to us and our subsidiaries. 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 been in compliance with all the covenants under the 2018Bank of America Credit Facility . OnSeptember 7, 2018 ,Bank of America issued an extension letter to us in connection with the 2018Bank 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 endedJune 30, 2018 toJanuary 31, 2019 . OnJanuary 31, 2019 , we entered into an amendment of the loan and security agreement with respect to the 2018Bank 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 endedJune 30, 2018 toJune 30, 2019 , and (b) require the delivery, by no later thanMarch 31, 2019 of our audited consolidated financial statements for the fiscal year endedJune 30, 2019 . InApril 2019 , we paid a fee to extend the delivery toJune 30, 2019 of our audited consolidated financial statements for the fiscal year endedJune 30, 2017 . In connection with the second amendment of the 2018Bank of America Credit Facility to extend the maturity of the 2018Bank of America Credit Facility , we were required to deliver our audited consolidated financial statements for the 40
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fiscal year endedJune 30, 2018 byDecember 31, 2019 , and deliver our audited consolidated financial statements for the fiscal year endedJune 30, 2019 byMarch 31, 2020 . If we elect to deliver the audited consolidated financial statements for the fiscal years endedJune 30, 2019 and 2018 together in a combined filing with theSEC , we are required to deliver our audited financial statements byMarch 31, 2020 . OnDecember 19, 2019 , we filed with theSEC our comprehensive Annual Report on Form 10-K for the fiscal year endedJune 30, 2019 , with expanded financial and other disclosures in lieu of filing a separate Annual Report on Form 10-K for the fiscal year endedJune 30, 2018 and in lieu of filing Quarterly Reports on Form 10-Q for the first three quarters of fiscal year 2018. OnDecember 19, 2019 , we also filed with theSEC our Quarterly Reports on Form 10-Q for the quarters endedSeptember 30, 2018 ,December 31, 2018 andMarch 31, 2019 . As such, we complied with the requirements of the second amendment of the 2018Bank of America Credit Facility .CTBC Bank
There are no financial covenants associated with the 2018 CTBC Credit Facility or the 2019 CTBC Credit Facility.
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.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements.
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