Business Context and Reporting Period
Company: Cree, Inc. (Note: Request metadata listed "Wolfspeed," but the filing text identifies the registrant as Cree, Inc.)
Filing Type: Form 10-K
Reporting Period: Fiscal year ended June 29, 2003
Business Overview: Cree develops and manufactures semiconductor materials and devices based on silicon carbide (SiC), group III nitrides (GaN), and silicon. The company operates in two segments: the Cree segment (SiC-based LEDs, wafers, power devices, and RF devices) and the Cree Microwave segment (silicon-based RF transistors). The majority of revenue is derived from LED products used in mobile appliances, automotive lighting, and displays.
Key Financial Metrics
| Metric | Fiscal 2003 | Fiscal 2002 |
|---|---|---|
| Total Revenue | $229.8 million | $155.4 million |
| Net Income (Loss) | $34.9 million | ($101.7 million) |
| Earnings Per Share (Diluted) | $0.46 | ($1.40) |
| Gross Margin | 43.2% | 40.8% |
| Operating Cash Flow | $89.6 million | $39.1 million |
| Cash and Equivalents | $64.8 million | $73.7 million |
| Working Capital | $181.1 million | $151.9 million |
| Long-term Debt | $0 | $0 |
Material Changes vs. Prior Period
- Revenue Growth: Total revenue increased 48% to $229.8 million, driven primarily by a 90% increase in LED revenue ($172.3 million) due to strong demand for mobile appliance and automotive applications.
- Profitability Turnaround: The company returned to profitability with $34.9 million in net income, reversing a $101.7 million net loss in fiscal 2002. The prior year loss was heavily impacted by a $76.5 million goodwill impairment and significant investment write-downs.
- Segment Performance:
- Cree Segment: Strong performance with gross profit of $108.3 million.
- Cree Microwave Segment: Revenue collapsed 88% to $3.0 million following the termination of the supply agreement with Spectrian (which previously accounted for 99% of segment revenue). The segment reported a gross loss of $9.2 million.
- Government Contracts: Contract revenue increased 40% to $26.9 million due to new awards from the Office of Naval Research (ONR) and DARPA.
Guidance, Outlook, and Risks
Outlook and Guidance
- Fiscal 2004 Targets: Management targets $100 million in revenue from distributor Sumitomo Corporation. Capital spending is expected to be $50–$60 million, funded by cash from operations.
- Product Focus: Growth is expected from white LED applications for mobile appliances and the expansion of the XBright LED family. The company aims to improve yields and reduce forward voltage for mobile applications.
- Cash Flow: The company projects positive free cash flow for fiscal 2004.
Risks and Contingencies
- Legal Proceedings:
- SEC Inquiry: The SEC initiated an informal inquiry in July 2003 regarding the company's operations and disclosures.
- Shareholder Litigation: Nineteen purported class action lawsuits were filed alleging violations of federal securities laws related to the UltraRF acquisition, Spectrian supply agreement, and investments.
- Internal Investigation: A special committee was formed to investigate allegations of corporate wrongdoing made by former CEO Eric Hunter.
- Patent Litigation: Pending patent infringement lawsuit against AXT, Inc. regarding GaN-based LED technology.
- Customer Concentration: The company relies heavily on a few large customers. Sumitomo (24%), Osram (21%), and Agilent (10%) comprised the majority of revenue. The loss of any major customer could materially impact results.
- Supply Chain: Dependence on limited suppliers for raw materials and equipment.
- Technology Transition: Risks associated with transitioning production from two-inch to three-inch wafers, which may temporarily reduce yields.
Investor Verification Checklist
- Legal Resolution: Monitor the outcome of the SEC informal inquiry and the consolidated shareholder class action lawsuits.
- Customer Contracts: Verify the status of the new purchase agreement with Osram (expiring September 2003) and the stability of the Sumitomo distributorship.
- Cree Microwave Viability: Assess the ability of the Cree Microwave segment to generate revenue from new customers following the loss of Spectrian.
- Yield Improvements: Confirm progress on yield improvements for the transition to three-inch wafers and the new XBright LED products.
- Investment Valuation: Review the valuation of remaining non-marketable strategic equity securities ($15.6 million) for potential future write-downs.