Business context and reporting period
The supplied filing is Cree, Inc.’s unaudited Form 10-Q for the quarter ended March 27, 2011, covering the third quarter and first nine months of fiscal 2011. This does not match the request metadata identifying Wolfspeed, Inc. and “2010 Q3”; verify the issuer and period before relying on this summary. Cree reported one segment and primarily developed and manufactured LED, silicon carbide (SiC), and gallium nitride (GaN) products.
Financial results and liquidity
Amounts below are in U.S. dollars; financial statement amounts have been converted from thousands to millions where applicable.
| Metric | Three months ended Mar. 27, 2011 | Prior-year quarter | Nine months ended Mar. 27, 2011 | Prior-year nine months |
|---|---|---|---|---|
| Revenue | $219.2 million | $234.1 million | $744.6 million | $602.7 million |
| Gross profit / margin | $91.4 million / 42% | $112.2 million / 48% | $343.1 million / 46% | $280.1 million / 46% |
| Operating income | $19.7 million | $56.6 million | $148.5 million | $129.3 million |
| Net income | $18.9 million | $44.6 million | $126.7 million | $99.4 million |
| Diluted EPS | $0.17 | $0.41 | $1.15 | $0.97 |
- Quarterly LED revenue declined 8% to $194.3 million, while Power and RF revenue rose 12% to $24.9 million. For the nine-month period, LED revenue increased 22% and Power and RF revenue increased 44%.
- Quarterly gross margin contracted six percentage points; management attributed the decline to lower revenue, more aggressive pricing, and lower factory utilization. Nine-month gross margin was unchanged year over year.
- For the first nine months, operating cash flow was $186.9 million, versus $155.6 million a year earlier. Investing activities used $218.1 million and financing activities provided $43.8 million. Property and equipment purchases were $189.2 million.
- At March 27, 2011, cash and cash equivalents were $410.4 million, short-term investments $662.7 million, and combined cash and investments $1.073 billion. Current assets were $1.441 billion and current liabilities $123.1 million; working capital was reported as $1.3 billion. The company stated it had no debt or credit lines.
- Inventory rose to $169.6 million from $112.2 million at June 27, 2010. Days of inventory supply increased from 76 to 119, days sales outstanding from 40 to 52, and the cash conversion cycle from 73 to 118 days. Management linked the inventory build to demand below forecast.
Material changes versus prior comparable periods
- Quarterly revenue fell 6% year over year, primarily reflecting weaker-than-expected demand and pricing pressure for LED components and chips. Nine-month revenue increased 24%.
- Quarterly operating income fell from $56.6 million to $19.7 million and diluted EPS from $0.41 to $0.17, despite lower income tax expense. Research and development expense rose 52% for the quarter and SG&A rose 30%.
- Capital spending continued to expand manufacturing capacity; quarterly capital expenditures were $62.8 million, compared with $66.0 million a year earlier. Nine-month property and equipment purchases increased to $189.2 million from $127.8 million.
- Cash and investments were slightly higher than at fiscal year-end, while inventory and the cash conversion cycle increased substantially.
Outlook, risks, contingencies, and unusual items
- Management expected highly competitive markets through the remainder of fiscal 2011. It planned to advance LED lighting adoption and customer support, expand capacity and transition to 150mm wafer production, increase R&D, and continue developing SiC power products. No specific revenue or EPS forecast was provided.
- Fiscal 2011 capital expenditure target was approximately $200–$210 million. Management said available liquidity and expected operating cash flow should meet operating and capital needs for at least the next 12 months.
- Key disclosed risks include uncertain LED general-lighting adoption, competition and price erosion, demand forecasting and excess inventory/capacity, customer and distributor concentration, manufacturing yields and supply constraints, international and foreign-exchange exposure, and intellectual-property litigation.
- The company disclosed patent litigation both against it and brought by it. A patent infringement case against Cree had a July 2011 trial scheduled; Cree’s patent action against SemiLEDs and Helios Crew had been expanded to include three additional patents. Outcomes and potential financial effects were not quantified in the supplied text.
- Tax matters included $7.6 million of unrecognized tax benefits and ongoing or announced tax examinations. Management cited a Malaysia tax holiday and anticipated tax benefits from federal credits; changes in tax jurisdiction mix also affected the effective tax rate.
- The final $13.2 million earn-out payment for the LLF acquisition was made during the quarter and recorded as additional goodwill. Management also identified the March 2011 Japan earthquake as a potential supply-chain disruption risk, without reporting a specific resulting impact.
Important facts for investors to verify
- Confirm that Cree, Inc. and the fiscal quarter ended March 27, 2011—not Wolfspeed, Inc. or 2010 Q3—are the intended issuer and reporting period.
- Track whether LED demand, pricing, factory utilization, and inventory levels recover; these drove the sharp quarterly deterioration in revenue and margins.
- Verify execution and returns on the $200–$210 million fiscal 2011 capital spending plan and the 150mm wafer and capacity expansion.
- Review subsequent developments in the disclosed patent cases, tax examinations, and tax-credit assumptions.
- Assess cash conversion and working-capital trends, particularly the rise in inventory days and receivable collection days.