Business context and reporting period
Period clarification: The supplied filing is Cree, Inc.’s Form 10-Q for the quarter ended March 28, 2021 (fiscal Q3 2021), not a 2020 Q3 filing. Cree’s continuing business was Wolfspeed, focused on silicon carbide and GaN materials and power and RF devices. On March 1, 2021, Cree completed the sale of its LED business; results are presented as discontinued operations for all periods.
Financial performance
Amounts are in U.S. dollars. Comparisons are with the three and nine months ended March 29, 2020; the filing recasts the former LED business as discontinued operations.
| Metric | Q3 FY2021 | Q3 FY2020 | Nine months FY2021 | Nine months FY2020 |
|---|---|---|---|---|
| Continuing revenue | $137.3 million | $113.9 million | $379.8 million | $362.3 million |
| Gross profit / margin | $44.0 million / 32.0% | $41.3 million / 36.3% | $120.8 million / 31.8% | $129.4 million / 35.7% |
| Operating loss | $61.4 million | $48.0 million | $181.2 million | $153.6 million |
| Net loss from continuing operations | $66.5 million | $56.2 million | $196.1 million | $153.4 million |
| Loss per share, continuing operations | $0.59 | $0.52 | $1.75 | $1.42 |
- Q3 revenue rose 21%, attributed to greater demand for power and RF devices. Nine-month revenue increased 5%, while gross profit fell 7%.
- Management attributed weaker gross margin primarily to unfavorable product mix and higher factory costs; Q3 gross profit also benefited from increased revenue and improved yields.
- Research and development expense increased 19% in Q3 and 18% for nine months, reflecting investment in silicon carbide and GaN technologies. Nine-month SG&A was broadly flat.
- Including discontinued operations, net loss attributable to controlling interest was $108.9 million for Q3 and $376.3 million for nine months, versus $60.1 million and $152.2 million, respectively, in the prior-year periods. The LED business recorded a $178.8 million nine-month loss, including a $26.3 million loss on sale and prior goodwill and held-for-sale impairments.
Cash flow, liquidity and debt
- At March 28, 2021, cash and cash equivalents were $531.6 million and short-term investments were $761.7 million, totaling $1.293 billion, versus $1.240 billion at June 28, 2020.
- Nine-month cash used in operating activities was $75.5 million, including $58.9 million from continuing operations. Cash used in investing was $339.5 million; capital expenditure purchases were $394.0 million. Financing provided $497.6 million, primarily reflecting common-stock issuance.
- Convertible notes had $999.8 million aggregate principal and an $813.7 million net carrying value. The $125 million revolving credit facility had no borrowings outstanding at quarter end. The filing says both note series were holder-convertible through June 30, 2021, following the stock-price test.
- In February, the company completed a $500 million at-the-market stock offering, receiving $489.1 million net and issuing 4.22 million shares. Shares outstanding were 115.425 million at March 28, 2021.
- Management said working capital, the credit facility and anticipated operating cash flows were expected to cover operating needs and capital expenditures for at least 12 months.
Outlook, commentary and risks
- Management targeted approximately $550 million of net capital investment for fiscal 2021, net of expected New York State reimbursements. The New York silicon carbide facility is expected to require approximately $1 billion through fiscal 2024, with approximately $500 million expected to be reimbursed under a state grant agreement, subject to conditions.
- The LED sale consideration includes $50 million cash, a $125 million unsecured promissory note due in 2023, and a potential $2.5 million to $125 million earn-out note based on the business’s performance. The earn-out is contingent; the filing identifies collection and transition-service risks.
- After quarter-end, Cree sold its ENNOSTAR shares for net proceeds of $66.1 million. The filing reports the sale occurred from March 29 to April 16, 2021.
- Management described COVID-19 effects on supply, labor, demand and output as uncertain and not reasonably estimable; it noted limited supplier disruptions to date and higher inventory buffers. Other material execution risks include manufacturing yields, capacity expansion and 200mm technology transition, product acceptance, competition, customer concentration, supply-chain constraints and trade restrictions.
- The company expects approximately $70 million of factory-optimization restructuring charges through 2024. Legal outcomes were not reasonably estimable; management said unfavorable outcomes could materially affect the business, though it did not believe current proceedings were likely to materially harm the company.
Important facts for investors to verify
- Confirm the intended reporting period: this filing covers fiscal Q3 2021, not 2020 Q3.
- Track continuing-business revenue, gross margin and cash use separately from the divested LED business and its sale-related losses.
- Assess whether the New York facility’s construction, production ramp, yield improvements and grant reimbursements remain on plan.
- Verify payment of the $125 million LED sale note and performance-based earn-out, along with costs and obligations under transition and wafer-supply agreements.
- Consider potential dilution and conversion of the convertible notes, and the company’s ability to fund elevated capital spending while operating at a loss.