Wolfspeed (Cree, Inc.) Form 10-Q Summary
Business context and reporting period
Reporting period: second quarter and first six months of fiscal 2021, ended December 27, 2020. Cree’s continuing operations were its Wolfspeed silicon carbide and GaN materials, power-device and RF-device businesses; the LED Products segment was classified as discontinued operations after the company agreed to sell it. Comparisons are with the quarter and six months ended December 29, 2019.
Key financial metrics
| Metric | Quarter | Six months |
|---|---|---|
| Continuing-operations revenue | $127.0 million, up 5% from $120.7 million | $242.5 million, down 2% from $248.4 million |
| Gross profit and margin | $41.3 million; 32.5%, versus $35.6 million and 29.5% | $76.8 million; 31.7%, versus $88.1 million and 35.5% |
| Operating loss | $57.6 million, versus $63.4 million | $119.8 million, versus $105.6 million |
| Continuing-operations net loss | $54.3 million, versus $57.9 million | $129.6 million, versus $97.2 million |
| Net loss, including discontinued operations | $82.7 million, versus $54.0 million | $266.8 million, versus $91.8 million |
| Loss per share from continuing operations | $0.49 | $1.18, versus $0.90 |
For the six months, continuing-operations cash used in operations was $32.1 million, compared with $39.6 million. Including discontinued operations, operating cash use was $25.9 million, versus $11.8 million. Property and equipment purchases were $257.5 million, up from $100.3 million. Cash and cash equivalents plus short-term investments totaled $968.7 million at quarter-end, down from $1.240 billion at June 28, 2020. Total cash and cash equivalents declined by $60.7 million during the six months to $388.1 million.
Convertible notes had $999.8 million aggregate principal and an $803.5 million net carrying amount. The $125 million secured revolving credit line was undrawn and fully available. The company reported total shareholders’ equity of $1.865 billion at quarter-end.
Material changes versus prior comparable periods
- Quarterly continuing revenue and gross margin improved, with management citing greater demand for power and RF devices and prior-period Huawei-related inventory reserves. Unfavorable product mix partly offset the gross-margin improvement.
- Six-month revenue and gross margin declined. Management attributed the revenue decrease to COVID-19-related supply and demand factors and lower RF demand in China, partly offset by stronger power-application demand and added production capacity. Unfavorable product mix weighed on gross margin.
- Research and development expense rose 18% for the quarter and 17% for the six months, reflecting investment in silicon carbide and GaN technologies. Six-month operating loss increased despite lower project and transaction costs.
- Six-month interest expense increased, primarily following issuance of the 2026 convertible notes in April 2020. The company used part of their proceeds to repurchase $150.2 million principal amount of 2023 notes.
Outlook, commentary, risks and unusual items
- Management targeted approximately $550 million of net capital investment for fiscal 2021, mainly for capacity and infrastructure; the target depends substantially on progress at the New York fab. It expects approximately $1.0 billion of spending on that facility through fiscal 2024 and anticipates about $500 million of state grant reimbursement, subject to agreement requirements.
- The LED divestiture was pending at the filing date and targeted to close in the first calendar quarter of 2021, subject to approvals and customary conditions. Consideration includes $50 million cash, a $125 million unsecured note and potential earnout of up to $125 million; the notes and earnout are subject to repayment and performance risks. A four-year wafer-supply arrangement is also contemplated.
- Discontinued operations recorded $112.6 million of goodwill impairment and $19.5 million of impairment on assets held for sale in the six-month period. The quarter included an additional $6.9 million goodwill impairment and the $19.5 million asset impairment.
- COVID-19 effects remained uncertain. Management cited possible impacts on demand, suppliers, labor, production, costs and cash flows, though it did not expect a material effect on liquidity or financial position at that time.
- Key execution risks include factory construction and ramp-up, manufacturing yields, adoption of silicon carbide and GaN products, customer and product mix, competition and pricing, supply-chain constraints, trade restrictions, and the company’s ability to meet grant obligations. Management expected available liquidity and anticipated operating cash flows to cover needs for at least 12 months.
- The company disclosed an immaterial prior-period income-tax calculation error: it increased reported tax expense and net loss by $1.5 million for the three and six months ended December 29, 2019, and planned a corresponding revision to the March 2020 quarter. It concluded no revision was material to the affected periods.
- Management stated disclosure controls were effective and reported no material change in internal control over financial reporting during the quarter.
Most important facts for investors to verify
- Whether the LED divestiture closed on the expected terms, and the collectability of the $125 million note and any earnout.
- Actual fiscal 2021 capital spending, New York fab construction and ramp timing, and fulfillment of conditions for state grant reimbursements.
- Whether demand, product mix, manufacturing yields and COVID-19-related supply constraints support improvement in continuing-operations margins and cash generation.
- Debt service and potential dilution or cash settlement associated with the convertible notes, alongside remaining liquidity as investment balances fund heavy capital spending.
- Whether the disclosed tax correction or any legal, regulatory, trade or supply-chain developments lead to additional material charges or operating disruption.