Business context and reporting period
This filing is Cree, Inc.’s unaudited Form 10-Q for the fiscal quarter ended December 29, 2013 (second quarter of fiscal 2014), not a filing identified as Wolfspeed, Inc. Cree reported three segments: LED Products, Lighting Products, and Power and RF Products. The quarter and six-month periods had one fewer week than the comparable prior-year periods.
Financial performance and position
Amounts are in U.S. dollars; financial results below are in millions except per-share data.
| Metric | Quarter ended Dec. 29, 2013 | Prior-year quarter | Six months ended Dec. 29, 2013 | Prior-year six months |
|---|---|---|---|---|
| Revenue | $415.1 | $346.3 | $806.1 | $662.0 |
| Gross profit / margin | $155.8 / 37.5% | $133.5 / 38.5% | $306.5 / 38.0% | $249.5 / 37.7% |
| Operating income | $35.4 | $25.1 | $72.2 | $42.4 |
| Net income | $35.7 | $20.4 | $66.2 | $36.5 |
| Diluted EPS | $0.29 | $0.18 | $0.54 | $0.31 |
- Six-month operating cash flow was $168.0 million, versus $178.3 million a year earlier. Investing cash flow was negative $176.9 million, including $83.5 million of property and equipment purchases; financing cash flow was positive $87.8 million. Cash and cash equivalents increased $79.3 million.
- At December 29, 2013, cash and short-term investments totaled $1.184 billion. Current assets were $1.734 billion and current liabilities $275.0 million; working capital was approximately $1.5 billion. The company reported no debt or active lines of credit.
- Inventory rose to $234.5 million from $197.0 million at June 30, 2013. The cash conversion cycle was 69 days, down from 75 days.
- Segment revenue for the quarter: LED Products $215.0 million (+7% year over year), Lighting Products $173.7 million (+42%), and Power and RF Products $26.4 million (+17%). Segment gross margins were 45.4%, 27.9%, and 58.0%, respectively.
Material changes versus the prior comparable period
- Quarterly revenue grew 20%; six-month revenue grew 22%, with growth in all segments and the largest contribution from Lighting Products. Management attributed LED Products growth mainly to higher unit volumes, partly offset by lower average selling prices.
- Quarterly gross margin declined to 37.5% from 38.5%, despite higher gross profit. Lighting Products margin fell to 27.9% from 33.7%, principally because consumer LED bulbs, which carry lower segment margins, entered the product mix. Six-month consolidated gross margin improved slightly to 38.0% from 37.7%.
- LED and Power and RF segment margins improved on cost reductions, increased factory utilization and new lower-cost products. Selling-price pressure affected products across segments.
- Operating income and earnings increased; the six-month effective tax rate declined to 15.6% from 24.3%, reflecting a higher share of income in lower-tax jurisdictions and tax credits.
Outlook, risks, contingencies and unusual items
- Management expected highly competitive markets during fiscal 2014 and emphasized product innovation and cost parity, brand investment, targeted LED-adoption opportunities, and translating innovation into revenue and profit growth. No specific revenue or earnings guidance was provided.
- Fiscal 2014 capital investment was targeted at approximately $145 million to support strategic priorities and capacity. Management said available liquidity and expected operating cash generation should meet requirements for at least the next 12 months.
- In the quarter, Cree was notified of an additional allocation of up to $30 million in federal Section 48C tax credits. It anticipated generating the remaining $15 million of that allocation in fiscal 2014 and expected a fiscal-2014 tax benefit of approximately $5.2 million; $3.7 million was recorded in the second quarter.
- Unrecognized tax benefits totaled $20.0 million at quarter-end, including an $18.0 million increase relating to uncertainty over a tax depreciation methodology. The company said approximately $1.4 million could change within 12 months; it was also under German tax audit for fiscal 2008–2010.
- A September 2013 binding term sheet settled six patent disputes involving Cooper Lighting and Illumination Management Solutions through cross-licenses and a seven-year component supply arrangement. Cree recorded a $17.4 million noncash settlement charge and a corresponding $17.4 million offset related to amounts receivable from Ruud Lighting acquisition escrow, subject to execution of definitive agreements.
- Other principal risks include uncertain LED adoption and demand, intense competition and price erosion, customer and distributor concentration, manufacturing capacity and yield execution, supplier constraints, product quality and warranty exposure, international and currency risks, tax uncertainty, and intellectual-property litigation. The company had $6.3 million of warranty liabilities at quarter-end.
Important facts for investors to verify
- Confirm the issuer identity: the supplied filing is for Cree, Inc., whereas the request metadata names Wolfspeed, Inc.
- Track Lighting Products growth against its materially lower gross margin, and assess the continuing effects of pricing and product mix.
- Review inventory growth, operating cash flow, and the planned $145 million capital investment for effects on cash conversion and capacity utilization.
- Monitor completion and accounting treatment of the patent settlement, including the definitive agreements and recovery of the escrow receivable.
- Check realization and timing of Section 48C credits and developments in the $20.0 million uncertain-tax-benefit balance.
- Consider that results are unaudited and the current and comparative periods differ by one week.