Business context and reporting period
This is Cree, Inc.’s Form 10-K for fiscal 2020, the year ended June 28, 2020—not a Wolfspeed standalone filing or a fiscal 2019 Q4 report. Cree (Nasdaq: CREE) reported two segments: Wolfspeed (SiC and GaN materials, power and RF devices) and LED Products. The former Lighting Products business was sold to IDEAL in May 2019 and is reported as discontinued operations.
Financial performance and liquidity
| Metric | FY2020 | FY2019 |
|---|---|---|
| Revenue | $903.9 million | $1,080.0 million |
| Gross profit / margin | $248.3 million / 27.5% | $391.0 million / 36.2% |
| Operating loss | $209.4 million | $15.9 million |
| Continuing-operations net loss | $190.6 million | $57.9 million |
| Loss per share, continuing operations | $1.78 | $0.56 |
| Cash from continuing operations | Used: $29.0 million | Provided: $220.2 million |
| Capital expenditures | $237.1 million | $131.3 million |
Cash, cash equivalents and short-term investments were $1.252 billion at year-end, up from $1.051 billion. Working capital was $1.302 billion; total assets were $3.231 billion and total equity was $2.089 billion. Convertible-note principal totaled $999.8 million: $424.8 million of 0.875% notes due 2023 and $575.0 million of 1.75% notes due 2026. The $125 million revolving credit facility was undrawn, with $125 million available.
Material changes versus the prior comparable period
- Revenue fell 16% year over year. Wolfspeed revenue declined 13% to $470.7 million; LED Products revenue fell 20% to $433.2 million.
- Wolfspeed gross margin declined to 39% from 48%; LED Products gross margin fell to 21% from 28%. Management cited weaker demand, unfavorable mix, factory and technology transitions, underutilization, and COVID-related constraints and costs.
- Operating loss widened substantially as gross profit contracted while R&D rose 17% to $184.2 million and SG&A rose 5% to $211.4 million.
- Operating cash flow deteriorated by $231.3 million to a $29.0 million use, while property and equipment purchases increased by $105.8 million.
- FY2019 included a $317.2 million discontinued-operations loss, including a $66.2 million loss on the Lighting Products sale; FY2020 had no discontinued-operations activity.
Outlook, commentary, risks and unusual items
Management plans continued investment in Wolfspeed capacity, products and technology, while focusing LED efforts on differentiated offerings. FY2021 net capital investment was targeted at approximately $400 million, dependent on the timing and progress of the New York facility and net of expected state reimbursements. The Marcy, New York SiC fabrication facility is part of a planned approximately $1.0 billion investment through FY2024; the company expects up to $500 million of reimbursements under a state grant, subject to performance requirements.
Management said COVID-19 had adversely affected operating income and created uncertain demand, supply, labor and production conditions; the size and duration of its impact could not be estimated. Other significant risks include trade restrictions and tariffs, including suspended Huawei shipments and an $8.3 million inventory reserve; intense pricing competition, particularly in LEDs; manufacturing yield and capacity-ramp risks; dependence on distributors and key customers (Arrow represented 15% of FY2020 revenue); and supplier, customer-adoption and litigation risks.
FY2020 non-operating income included gains of $14.2 million on the Lextar equity investment, $11.0 million from partial extinguishment of 2023 notes, and $7.9 million from arbitration proceedings. Other operating expense of $46.2 million included $25.5 million of project, transformation and transaction costs, $9.5 million of factory start-up costs, and $9.1 million of restructuring costs. The auditor issued an unqualified opinion on the financial statements and found internal control over financial reporting effective.
Key facts investors should verify
- Confirm the filing identity and period: Cree, Inc. FY2020, rather than Wolfspeed standalone or FY2019 Q4.
- Assess whether Wolfspeed demand and margins recover as COVID-19, China-related trade constraints, product mix and manufacturing transitions evolve.
- Track operating cash generation against the planned capital program and the timing, conditions and realization of New York state grant reimbursements.
- Review convertible-note terms, potential dilution, and the company’s capacity to service or refinance the $999.8 million principal balance.
- Monitor distributor-related revenue estimates and customer concentration; distributor sales were 44% of revenue and Arrow accounted for 15%.