Business context and reporting period
This is Cree, Inc.’s unaudited Form 10-Q for its fiscal first quarter ended September 28, 2014; it compares results with the quarter ended September 29, 2013. The filing identifies the registrant as Cree, Inc., not Wolfspeed, Inc. Its businesses were LED Products, Lighting Products, and Power and RF Products.
Financial performance and liquidity
| Metric | Quarter ended September 28, 2014 | Prior-year quarter |
|---|---|---|
| Revenue | $427.7 million | $391.0 million |
| Gross profit / margin | $135.8 million / 31.8% | $150.8 million / 38.6% |
| Operating income | $11.5 million | $36.8 million |
| Net income | $11.1 million | $30.5 million |
| Diluted EPS | $0.09 | $0.25 |
| Operating cash flow | $13.3 million | $69.2 million |
| Capital expenditures | $63.4 million | $33.7 million |
Revenue grew 9%, but gross margin fell 6.8 percentage points and operating income declined 69%. Operating cash flow fell 81%, which management attributed primarily to lower net income and higher working capital. Cash, cash equivalents, and short-term investments totaled $1.105 billion at quarter-end, versus $1.162 billion at June 29, 2014. Current assets were $1.757 billion and current liabilities $292.9 million.
At September 28, 2014, long-term debt was $45 million under a $150 million unsecured revolving facility, with $105 million available. The facility matures August 12, 2017; the company reported covenant compliance. Cash and cash equivalents decreased $90.5 million during the quarter. Inventory rose to $310.8 million from $284.8 million, and the cash conversion cycle lengthened to 85 days from 74 days.
Material changes and segment results
- LED Products: Revenue declined 20% to $173.6 million; gross margin fell to 39.0% from 46.6%. Management cited weaker global demand, fewer units sold, and lower pricing.
- Lighting Products: Revenue increased 51% to $223.1 million, mainly on higher unit sales. Gross margin slipped to 24.9% from 26.9%, principally due to a greater mix of lower-margin LED bulbs.
- Power and RF Products: Revenue increased 24% to $31.0 million and gross margin rose to 57.6% from 53.7%, reflecting higher revenue, factory cost reductions, and improved utilization.
Research and development expense increased 12% to $46.7 million; sales, general and administrative expense increased 8% to $69.7 million. The company recorded $1.4 million of losses on disposal or impairment of long-lived assets, mainly related to equipment, patents, and building improvements.
Outlook, risks, and contingencies
- Management expected highly competitive markets in fiscal 2015. It targeted revenue growth in Lighting Products and Power and RF Products, while targeting lower full-year LED Products revenue. A new LED technology platform was expected to support design wins later in fiscal 2015; management targeted incremental operating leverage in the second half versus the first half.
- Management targeted approximately $200 million of fiscal 2015 capital investment, primarily for infrastructure and longer-term growth. It stated that working capital, available credit, and expected operating cash flows should cover operations and capital expenditures for at least the next 12 months.
- Key risks include LED demand uncertainty, price and competitive pressure, changing product mix, capacity and supply-chain execution, customer and channel concentration, product quality and warranty claims, intellectual-property disputes, foreign-exchange exposure, and international and regulatory risks.
- The company reported various legal proceedings; management said outcomes were not reasonably estimable and unfavorable outcomes could materially affect the business. Warranty liabilities were $7.2 million. Unrecognized tax benefits were $18.4 million, with approximately $0.2 million potentially changing within 12 months; the company was under French tax audit for fiscal 2011–2014.
- The company repurchased $54.3 million of shares during the quarter. Its authorization allowed up to $300 million of aggregate repurchases through June 28, 2015.
Important facts for investors to verify
- Confirm the issuer and filing identity: the supplied filing is for Cree, Inc., although the request metadata names Wolfspeed, Inc.
- Assess whether the sharp deterioration in gross margin, operating income, and operating cash flow persisted beyond this quarter, particularly given weaker LED Products demand.
- Check execution against management’s fiscal 2015 segment outlook and approximately $200 million capital-investment target.
- Monitor working capital, inventory, cash-conversion-cycle trends, and the use of revolving credit and share repurchases.
- Review subsequent developments in litigation, warranty exposure, and the French tax audit; the filing says legal outcomes were not reasonably estimable.