Business context and reporting period
This is Cree, Inc.’s unaudited Form 10-Q for the fiscal first quarter ended September 27, 2015, compared with the quarter ended September 28, 2014. Cree reported Lighting Products, LED Products, and Power and RF Products. The filing says Cree had filed a confidential registration statement for a planned IPO of its Power and RF business under the name Wolfspeed; this is not a standalone Wolfspeed 10-Q.
Financial results and liquidity
| Metric | Quarter ended Sep. 27, 2015 | Prior comparable quarter |
|---|---|---|
| Revenue | $425.5 million | $427.7 million |
| Gross profit / margin | $131.7 million / 31.0% | $135.8 million / 31.8% |
| Operating income (loss) | ($8.7 million) | $11.5 million |
| Net income (loss) | ($23.6 million); diluted EPS ($0.23) | $11.1 million; diluted EPS $0.09 |
| Cash from operating activities | $46.8 million | $13.3 million |
| Cash used in investing activities | $42.6 million | $107.7 million |
| Cash used in financing activities | $59.8 million | Cash provided: $4.2 million |
At quarter-end, cash, cash equivalents, and short-term investments totaled $632.1 million, down from $713.2 million at June 28, 2015. Total assets were $2.89 billion and shareholders’ equity was $2.39 billion. Long-term debt was $207 million under a $500 million revolving credit facility, with $293 million available; the company reported covenant compliance. Current assets were $1.25 billion and current liabilities were $251.8 million.
Capital expenditures were $49.9 million. The company repurchased 2.7 million shares for $69.6 million during the quarter. Inventory rose to $289.1 million from $280.6 million, and the cash conversion cycle increased to 82 days from 79 days.
Material changes versus the prior period
- Revenue declined 1% overall: Lighting Products grew 11% to $248.0 million, while LED Products fell 15% to $148.2 million and Power and RF Products fell 6% to $29.3 million.
- Lighting growth reflected higher commercial fixture sales and a 26% increase in average selling price, partly offset by 12% fewer units sold. LED revenue was pressured by a 27% ASP decline amid global competition, partly offset by 13% unit growth. Power and RF revenue reflected a 34% decline in units, partly offset by a 31% ASP increase.
- Lighting gross margin improved to 27.9% from 24.9%; LED gross margin fell to 35.5% from 39.0%; Power and RF gross margin fell to 49.0% from 57.6%. Consolidated gross margin declined 0.8 percentage points.
- Operating results swung to a loss, including a $14.6 million loss on disposal or impairment of long-lived assets, primarily associated with the LED restructuring. Non-operating results included a $19.9 million loss on the Lextar equity-method investment and $4.3 million of foreign-currency losses.
- Operating cash flow increased year over year, primarily due to working-capital changes. Cash and investments declined from quarter-end June, with repurchases and capital investment among the cash uses.
Outlook, commentary, risks, and unusual items
Management targeted approximately 10% revenue growth for fiscal 2016 and higher operating margins for the year, with priorities to grow commercial Lighting, stabilize LED, expand Power and RF, and manage operating expenses. Fiscal 2016 capital investment was targeted at approximately $150 million. Management said working capital, available credit, and expected operating cash flows should be adequate for daily operations and capital expenditures for at least 12 months.
The LED restructuring was intended to reduce excess capacity and overhead through equipment sales or abandonment, facility consolidation, and position eliminations. Estimated total charges were $102.2 million; $99.5 million had been incurred cumulatively through September 27, 2015, and management expected remaining charges in fiscal 2016’s second quarter. Benefits and timing are uncertain.
The planned Wolfspeed IPO was intended to raise capital for Power and RF growth, but completion, terms, valuation, and proceeds were uncertain. Other risks highlighted include intense competition and LED price erosion, uncertain LED adoption and demand, capacity and inventory management, customer and distributor concentration, supply constraints, product quality and warranty exposure, foreign-exchange and investment-value volatility, and litigation. The filing notes a voluntary recall of linear LED T8 replacement lamps due to overheating and melting; management expected most costs to be recovered from insurance and the net impact to be immaterial. An Italian tax audit was ongoing; unrecognized tax benefits totaled $18.4 million.
Important facts for investors to verify
- Confirm whether fiscal 2016 revenue and margin targets were achieved, especially the assumed recovery or stabilization in LED Products.
- Track LED restructuring charges against the $102.2 million estimate and assess realized cost savings and capacity utilization.
- Monitor the Lextar investment valuation and further potential non-operating losses, as well as foreign-exchange exposure.
- Verify the status, eventual terms, and proceeds of the proposed Wolfspeed IPO; the filing provides no settled valuation or proceeds amount.
- Review inventory growth, channel inventory and reserves, cash conversion, share repurchases, capital spending, and revolving-credit borrowings.
- Assess outcomes of the T8 lamp recall, legal proceedings, and Italian tax audit; final outcomes and potential liabilities were not fully determinable in the filing.