Filing summary
Period and issuer: This is Cree, Inc.’s unaudited Form 10-Q for the quarter ended March 26, 2017 (the third quarter of fiscal 2017), not a Wolfspeed, Inc. filing or a 2016 quarter. Wolfspeed was a Cree reportable segment. Financial amounts below are in U.S. dollars.
Financial results and liquidity
| Metric | Three months ended Mar. 26, 2017 | Comparable 2016 period | Nine months ended Mar. 26, 2017 | Comparable 2016 period |
|---|---|---|---|---|
| Revenue | $341.5 million | $366.9 million | $1,114.1 million | $1,228.2 million |
| Gross profit / margin | $86.1 million / 25.2% | $109.0 million / 29.7% | $336.6 million / 30.2% | $374.1 million / 30.5% |
| Operating loss | $19.9 million | $4.5 million | $5.6 million | $5.7 million |
| Net income (loss) | $(99.0) million | $0.2 million | $(92.2) million | $(10.9) million |
| Diluted earnings (loss) per share | $(1.02) | Approximately $0 | $(0.93) | $(0.11) |
- For the nine months, operating cash flow was $163.2 million, versus $138.8 million. Investing activities used $108.2 million and financing activities used $103.6 million. Cash and cash equivalents declined $49.1 million to $117.1 million.
- At March 26, cash, cash equivalents and short-term investments totaled $591.9 million. Long-term debt was $153 million under a $500 million revolving facility, with $347 million available; the company reported compliance with its covenants. The facility matures January 2020.
- Capital expenditures were $56.9 million for the nine months; management targeted approximately $95 million for fiscal 2017. Share repurchases totaled $104.0 million during the nine months.
Material changes and segment performance
- Quarterly revenue fell 7%, primarily from Lighting Products, down 18%, and LED Products, down 3%; Wolfspeed revenue rose 29%. For the nine months, revenue fell 9%, principally because Lighting Products declined 21%, partly offset by Wolfspeed growth of 24%.
- Quarterly consolidated gross margin declined to 25.2% from 29.7%. LED Products margin fell to 24.7% from 31.6%, and Wolfspeed margin to 47.0% from 52.1%; Lighting Products margin was 23.0% versus 26.0%. Management cited competitive pricing, product mix and ramp-up costs in LED and Wolfspeed, and lower lighting factory utilization and higher warranty reserves in Lighting.
- Net loss widened sharply mainly because Cree recorded $89.0 million of quarterly income tax expense, including a $67.6 million valuation allowance against U.S. deferred tax assets and a related deferred tax charge. Management linked the allowance to cumulative U.S. pretax losses and the termination of the expected Wolfspeed sale.
Outlook, unusual items and risks
- Cree and Infineon terminated the proposed Wolfspeed sale on March 6, 2017, after they could not resolve national-security concerns or obtain CFIUS approval. Infineon paid Cree a $12.5 million cash termination fee, recorded as an operating expense offset. Cree restored Wolfspeed to continuing operations and a separate reportable segment. The quarter also included a $14.2 million adjustment for depreciation and amortization that would have been recorded had Wolfspeed assets remained classified as held and used.
- Management said it would continue investing in Wolfspeed capacity and technology, pursue growth in all three segments, improve lighting margins and customer service, and expand LED products. It expected working capital, available credit and operating cash flows to cover operating needs and capital expenditures for at least 12 months. No specific revenue or earnings forecast was provided.
- Key disclosed risks include intense competition and price erosion, uncertain demand and production utilization, execution of new-product ramps and growth investments, supplier and manufacturing constraints, and product quality and warranty exposure. The company had voluntarily recalled linear LED T8 replacement lamps over overheating and melting; it expected insurance recovery to make the financial impact immaterial. Warranty liabilities were $25.2 million at quarter-end.
- Management stated that legal proceedings’ outcomes were not reasonably estimable; an unfavorable result could materially affect the company. It also identified volatility in its Lextar equity investment and foreign exchange as sources of potential earnings variability.
Important facts for investors to verify
- Confirm the intended issuer and period: this filing is Cree, Inc., fiscal Q3 2017, with Wolfspeed reported as a segment.
- Assess whether lighting revenue and margins stabilize, and whether LED pricing pressure and Wolfspeed ramp costs persist.
- Review the sustainability of operating cash flow, the planned fiscal 2017 capital investment, and use of the revolving credit facility and repurchase authorization.
- Track the effects of the U.S. deferred-tax valuation allowance and any future tax provision changes.
- Monitor warranty claims and recall recoveries, as well as litigation and Lextar investment/foreign-exchange exposure.