Rackable Shares Dip on Auction Rate Risk

Shares of Rackable (RACK) are lower today due to investor reaction to Rackable's exposure to credit risk from auction rate securities.

Shares of Rackable (RACK) are lower today due to investor reaction to Rackable's exposure to credit risk from auction rate securities. The company also disclosed that its auditor had found "material weaknesses" in the company's financial reporting. Shares of Rackable are down 33 cents to $8.24 in morning trading, a decline of about 3.8 percent. The stock had been up to 10 percent lower in pre-market trading.

In its 10K filing with the SEC, Rackable disclosed that it holds $9.1 million in auction rate securities, short-term investments that have been thrown into chaos by liquidity. Many investors who bought auction rate notes, including Rackable, have been unable to find bidders for periodic auctions to set the interest rate on the notes.

Rackable had held $64 million in auction rate notes at year-end. It was able to reduce its exposure to $9 million in February, when an auction to set rates on the remaining $9.1 million failed. An excerpt from the 10K:

These securities had a successful auction reset subsequent to December 29, 2007, but failed in February 2008. If these securities remain in the portfolio and do not have a successful reset prior to March 29, 2008, (the end of the Company's first quarter of fiscal 2008), they will need to be reclassified to long-term investments at their then fair value and an impairment charge may be required.

The 10-K also disclosed that Rackable's auditor, Deloitte & Touche, "expressed an adverse opinion on the Company's internal control over financial reporting because of material weaknesses" in a March 12 report. The company said two weaknesses were identified, which "created a reasonable possibility of material misstatements in our financial statements. These material weaknesses related to our accounting for inventory valuation and accounting for income taxes." Rackable said addressing the accounting issues will require "significant resources and management oversight." From the 10K:

We have begun the process of remediating these material weaknesses, but this process will take time ... As a result of this and similar activities, management's attention may be diverted from other business concerns, which could have a material adverse effect on our business, financial condition and results of operations.

Rackable provides servers and storage products for high-density data center deployments, and has been noted for its DC power technology, innovative back-to-back rack design, and recent unveiling of a mobile data center.