WOLFSPEED, INC. — Filing identity and reporting period
Important identity discrepancy: The supplied filing is Cree, Inc.’s Form 10-Q, not a filing by Wolfspeed, Inc. It covers the fiscal quarter ended December 25, 2016 (fiscal Q2 2017) and the six months then ended. Cree classified its Wolfspeed power and RF business as discontinued operations while a proposed sale to Infineon was pending. Figures below summarize Cree’s filing and should not be attributed to Wolfspeed, Inc. as a separate registrant.
Financial performance and position
Unless otherwise stated, amounts are U.S. dollars; income-statement figures are in millions. Quarterly revenue and operating results primarily reflect continuing businesses; Wolfspeed results are presented separately as discontinued operations.
| Metric | Quarter ended Dec. 25, 2016 | Six months ended Dec. 25, 2016 | Comparable prior period |
|---|---|---|---|
| Continuing-operations revenue | $347.0 million | $668.3 million | $393.8 million and $775.3 million |
| Gross profit / margin | $110.9 million / 32.0% | $197.2 million / 29.5% | $111.1 million / 28.2%; $218.3 million / 28.2% |
| Operating income (loss) | $8.7 million | ($1.5 million) | $3.2 million; ($8.5 million) |
| Continuing-operations income (loss), after tax | ($1.1 million) | ($4.0 million) | $9.4 million; ($16.3 million) |
| Income from discontinued operations, after tax | $7.3 million | $10.8 million | $4.0 million; $5.3 million |
| Net income (loss) | $6.2 million | $6.8 million | $13.4 million; ($11.0 million) |
| Diluted earnings (loss) per share | $0.06 | $0.07 | $0.13; ($0.11) |
- Six-month cash provided by operating activities was $119.7 million, versus $123.8 million. Investing activities used $67.7 million; financing activities used $80.4 million. Cash and cash equivalents declined by $29.1 million during the six months.
- At December 25, cash, cash equivalents and short-term investments totaled $591.1 million, compared with $605.3 million at fiscal year-end. Total assets were $2.71 billion; inventory was $281.7 million.
- Long-term debt was $170 million under a $500 million revolving credit facility, with $330 million available. The company reported compliance with all facility covenants. Cash and investments exceeded reported debt by about $421 million.
- Quarterly income from discontinued operations included Wolfspeed revenue of $54.4 million and gross profit of $29.7 million. For six months, Wolfspeed revenue was $104.3 million and net income from discontinued operations was $10.8 million.
Material changes versus the prior comparable period
- Continuing-operations revenue fell 12% in the quarter and 14% for the six-month period. Lighting Products revenue declined 18% and 22%, respectively; LED Products revenue declined 1% in the quarter and increased 1% for six months.
- Lighting revenue weakness reflected lower unit sales and average selling prices. Quarterly Lighting Products units fell 27% and average selling price fell 4%; for six months, units fell 15% and average selling price fell 16%.
- Gross margin improved year over year, but the quarter benefited from a patent-license issuance fee under a confidential agreement. Management said that without the fee, quarterly revenue would have been around the middle of its $310–$330 million target range. The fee’s amount is not stated in the filing text.
- Lighting Products quarterly gross margin rose to 35.8% from 28.5%, in part due to the license fee; six-month margin rose to 31.6% from 28.2%. LED Products margins declined to 29.2% quarterly and 29.8% for six months, from 30.9% and 31.1%, respectively, amid pricing pressure and product-mix changes.
- Six-month operating loss narrowed to $1.5 million from $8.5 million, while net income turned positive, principally including increased income from discontinued operations. Prior-period 2015 figures were revised for patent-amortization errors; the filing says the revisions had no effect on previously reported operating cash flow.
Outlook, commentary, risks and unusual items
- Cree agreed to sell the Wolfspeed business to Infineon for $850 million cash, subject to adjustments and closing conditions. The transaction was pending regulatory approvals and other customary conditions; Cree targeted closing in fiscal Q3 2017. Infineon could owe a $12.5–$42.5 million termination fee in certain specified regulatory-related termination circumstances.
- Management expected the sale to accelerate Cree’s transition toward an LED-lighting-focused company, provide resources for growth and increase free cash flow after closing, while reducing short-term profits. These are expectations, not assured outcomes.
- Management’s stated priorities included growing commercial lighting, keeping consumer lighting and LED revenue in similar ranges, improving operating margins through cost reductions and higher-value products, and keeping operating-expense growth below revenue growth. The filing provides no specific full-year revenue or earnings guidance.
- Fiscal 2017 capital investment was targeted at approximately $55 million for Lighting Products and LED Products; Cree also reported $20 million of year-to-date capital investment for Wolfspeed, which it had agreed to sell.
- Competitive pricing, uncertain LED demand, customer and channel concentration, product acceptance, manufacturing capacity and supply constraints, and foreign exchange and investment volatility were identified as risks. The company recorded a $3.8 million quarterly loss on its Lextar equity investment; further share-price declines could adversely affect results.
- During the quarter Cree increased warranty reserves after identifying potentially defective third-party drivers in some commercial lighting products. It also disclosed a voluntary recall of linear LED T8 replacement lamps due to overheating and melting, and expected most recall costs to be recoverable from insurance, with an anticipated immaterial net financial impact.
- Quarterly tax expense was $5.0 million despite pre-tax income of $3.9 million, producing a 128.2% effective tax rate; management attributed the elevated rate primarily to increased valuation allowance related to Luxembourg losses. The filing also disclosed $17.7 million of unrecognized tax benefits.
- Management stated that working capital, available credit and expected operating cash flows should fund operations and capital expenditures for at least the next 12 months. It reported no off-balance-sheet arrangements and said disclosure controls were effective.
Important facts for investors to verify
- Confirm the issuer: the supplied document is Cree, Inc.’s 10-Q, notwithstanding the request metadata naming Wolfspeed, Inc.
- Check whether the Infineon sale closed, its final adjusted proceeds, and the resulting separation costs, retained liabilities, indemnification exposure and transition or wafer-supply obligations.
- Assess how much reported gross-margin performance depended on the undisclosed patent-license fee, and whether margins and revenue improved without that non-recurring benefit.
- Monitor lighting demand, LED price competition, commercial-driver warranty claims and recall costs, including actual insurance recoveries.
- Review cash generation, capital spending, share repurchases, borrowing levels and covenant headroom alongside the company’s stated liquidity outlook.
- Track Lextar valuation changes, tax valuation allowances and uncertain tax positions, and the status and potential outcome of disclosed legal proceedings.