Business context and reporting period
The supplied filing is Cree, Inc.’s unaudited Form 10-Q for the quarter ended December 26, 2010 (fiscal 2011 Q2), not a Wolfspeed filing. Cree develops and manufactures LED, silicon carbide (SiC), and gallium nitride (GaN) products; LED products are its largest revenue source. The six-month comparisons are against the six months ended December 27, 2009.
Financial performance and position
Amounts below are in millions of dollars, except per-share data and percentages.
| Metric | Fiscal Q2 2011 | Prior-year Q2 | Six months FY2011 | Prior-year six months |
|---|---|---|---|---|
| Revenue | $257.0 | $199.5 | $525.4 | $368.6 |
| Gross profit / margin | $121.1 / 47% | $94.1 / 47% | $251.7 / 48% | $167.8 / 46% |
| Operating income | $55.4 | $46.0 | $128.8 | $72.7 |
| Net income | $49.8 | $33.8 | $107.8 | $54.8 |
| Diluted EPS | $0.45 | $0.32 | $0.98 | $0.55 |
| Operating cash flow | Not separately stated | Not separately stated | $145.8 | $82.7 |
- Quarterly revenue increased 29%; six-month revenue increased 43%. LED revenue rose 26% in the quarter and 40% for six months. Power and RF revenue rose 56% and 68%, respectively.
- Quarterly gross margin was flat year over year; six-month margin improved two percentage points, which management attributed to product mix and improved production yields. Operating expenses rose, including R&D growth of 51% in the quarter and SG&A growth of 31%.
- Quarterly effective tax rate was 13.7%, versus 29.6% a year earlier; the filing cites foreign income mix, a $2.1 million discrete R&D tax-credit benefit, a Malaysia tax holiday, and U.S. manufacturing tax credits. Six-month effective tax rates were 18.9% and 28.3%.
- At December 26, cash and cash equivalents were $465.6 million and short-term investments $645.3 million, totaling $1.111 billion, up from $1.066 billion at June 27, 2010. Working capital was approximately $1.3 billion. The company reported no debt or credit lines.
- Six-month investing cash outflow was $117.1 million, including $126.4 million of property and equipment purchases; financing cash inflow was $39.3 million. Cash and cash equivalents increased by $68.1 million over the six months.
- Total assets were $2.384 billion; total liabilities were $194.8 million and shareholders’ equity was $2.189 billion. Inventory rose to $145.5 million from $112.2 million at fiscal year-end.
Material changes versus the prior comparable period
- Revenue and earnings grew substantially, while quarterly gross margin remained unchanged. Six-month gross margin and operating margin improved; six-month operating income rose about 77%.
- Capital spending increased: Q2 capex was $64.7 million versus $41.4 million a year earlier; first-half property and equipment purchases were $126.4 million versus $61.8 million.
- The cash conversion cycle lengthened to 90 days from 73 days at June 27, 2010, driven mainly by inventory build and higher days sales outstanding. Management said inventory was built against a demand forecast that exceeded actual results.
- First-half financing cash flow was far below the prior year, primarily because the prior-year period included about $434 million of net proceeds from a common-stock offering.
Outlook, risks, contingencies, and unusual items
- Management described markets as highly competitive and prioritized LED lighting adoption, customer support and integrated products, increased manufacturing capacity and 150mm wafer production, higher R&D spending, and growth in SiC power products. No revenue or earnings forecast was provided in the supplied filing text.
- Fiscal 2011 capital expenditure target was approximately $250–$260 million. Management stated that cash, investments, and expected operating cash flows should meet liquidity needs for at least the next 12 months.
- Key risks include uncertain adoption of LED general lighting, pricing and competitive pressure, demand forecasting and capacity execution, customer and distributor concentration, manufacturing yields and supplier availability, international operations, and intellectual-property disputes.
- Legal proceedings include a patent-infringement action against Cree by The Fox Group, which seeks unspecified damages and injunctive relief; Cree denies infringement and asserts defenses and counterclaims. Trial was scheduled for July 2011. Cree also sued SemiLEDs and Helios Crew for alleged patent infringement; defendants denied infringement and counterclaimed that the patents were invalid.
- A final $13.2 million contingent payment related to the LLF acquisition was accrued as a current liability and added to goodwill; payment was expected in fiscal Q3 2011. Unrecognized tax benefits totaled $7.6 million, with approximately $1.4 million potentially changing within 12 months. Federal and Hong Kong tax examinations were underway.
- Management reported effective disclosure controls and no material second-quarter change in internal control over financial reporting.
Most important facts for investors to verify
- Confirm the issuer and filing identity: the document is for Cree, Inc., despite the request metadata naming Wolfspeed.
- Assess whether inventory growth, the longer cash conversion cycle, and elevated capital spending reflect sustainable demand and capacity needs.
- Track LED and power/RF product growth, product mix, selling prices, yields, and margin performance against rising operating expenses.
- Review the outcome and potential costs of the patent litigation, tax examinations, and the LLF contingent payment.
- Verify execution of the $250–$260 million fiscal-year capex plan and management’s liquidity outlook; the filing provides no specific revenue or earnings guidance.