Business context and reporting period
This is Cree, Inc.’s unaudited Form 10-Q for the fiscal quarter ended March 31, 2019 (fiscal Q3 2019), with nine-month comparisons to the period ended March 25, 2018. The filing is for Cree, whose Wolfspeed business is a reportable segment; it is not a filing by a separate company named Wolfspeed. The supplied metadata’s “2018 Q3” period does not match the filing period.
Cree reported its Lighting Products business as discontinued operations after agreeing on March 14, 2019 to sell it to IDEAL Industries. Continuing operations comprise the Wolfspeed and LED Products segments.
Financial results and liquidity
| Metric | Three months ended March 31, 2019 | Nine months ended March 31, 2019 |
|---|---|---|
| Revenue | $274.1 million (+22% year over year) | $828.7 million (+26%) |
| Gross profit / margin | $100.5 million / 36.7% (prior year: 33.2%) | $302.3 million / 36.5% (prior year: 32.5%) |
| Operating income (loss) | ($11.1) million | $9.7 million (prior year: loss of $20.2 million) |
| Continuing-operations net income (loss) | ($22.3) million | ($23.3) million (prior year: income of $12.4 million) |
| Net loss, including discontinued operations | ($227.7) million | ($241.3) million |
| Basic and diluted loss per share | ($2.20) | Basic: ($2.35); diluted: ($2.35) |
- Wolfspeed revenue was $141.3 million in Q3 (+72%) and $404.0 million for nine months (+85%). Growth reflected organic growth, the Infineon RF Power acquisition, and higher average selling prices; unit volumes declined 7% in Q3 and 27% for nine months.
- LED Products revenue was $132.8 million in Q3 (-7%) and $424.8 million for nine months (-4%). Management attributed declines to lower average selling prices and market uncertainty, including U.S.-China trade tensions.
- Q3 gross margins were 48.7% for Wolfspeed and 27.8% for LED Products. Nine-month margins were 48.0% and 28.7%, respectively.
- Nine-month operating cash flow was $187.0 million, versus $125.4 million in the prior-year period. Investing cash use was $192.5 million; financing provided $343.0 million. Cash and cash equivalents increased to $456.2 million from $118.9 million at June 24, 2018.
- Cash, cash equivalents and short-term investments totaled $789.3 million at March 31, 2019, versus $387.1 million at June 24, 2018. Inventory was $172.8 million, up from $151.6 million. The cash conversion cycle increased to 66 days from 51 days, primarily due to higher inventory days.
- The company had $575 million principal amount of 0.875% convertible notes due 2023, with a net balance-sheet carrying amount of $463.5 million. No revolver borrowings were outstanding; the $500 million facility had $309 million available for borrowing under applicable covenants. Cree reported covenant compliance.
Material changes, outlook and risks
- Lighting Products sale: The agreed sale is for $225 million cash, subject to adjustments, plus a performance-based earnout. Closing was targeted by fiscal year-end 2019, subject to customary conditions and regulatory approvals. Cree also agreed to supply IDEAL certain LED products for three years and provide transition services.
- Discontinued operations and impairment: Lighting Products generated a Q3 net loss of $205.4 million and a nine-month net loss of $218.1 million. The filing reports a $197.6 million impairment charge on assets held for sale, including $90 million of goodwill, in the financial-statement note. The risk-factor discussion separately cites a $199.2 million impairment charge; investors should reconcile the difference.
- Management priorities: Cree plans to focus on its semiconductor businesses, investing in Wolfspeed SiC materials, power devices and RF products, while concentrating LED Products on differentiated offerings. The company targeted approximately $175 million of capital investment for fiscal 2019, mainly for infrastructure supporting longer-term growth.
- Near-term liquidity: Management said working capital, revolver availability, convertible-note proceeds and expected operating cash flows should cover operating and capital needs for at least the next 12 months. No specific revenue or earnings guidance is provided in the supplied filing text.
- Key risks: Management cited uncertain adoption and demand, competitive pricing, tariffs and trade restrictions, foreign-exchange exposure, manufacturing capacity constraints, execution of the Lighting Products divestiture, and the risks of scaling production and transitioning Wolfspeed power production from 100mm to 150mm substrates. Wolfspeed demand was described as exceeding current production capacity, creating longer customer lead times.
- Other unusual items: The nine-month non-operating result included a $12.5 million loss on the Lextar equity investment, compared with a $7.5 million gain in the prior-year period. Cree maintained a full valuation allowance against U.S. and Luxembourg deferred tax assets; management said the U.S. valuation-allowance assessment could change within the next 12 months. The filing also discloses pending legal proceedings whose outcomes were not reasonably estimable.
Most important facts for investors to verify
- Confirm the fiscal-period labeling: the filing covers Q3 2019, despite the request metadata saying 2018 Q3.
- Review the IDEAL sale’s closing conditions, final cash proceeds and adjustments, earnout terms, and expected separation or transition costs.
- Reconcile the stated $197.6 million and $199.2 million impairment amounts and assess the remaining held-for-sale valuation and discontinued-operation losses.
- Assess whether Wolfspeed can expand capacity and deliver the targeted growth, and monitor unit volumes, average selling prices, margins and the 150mm substrate transition.
- Track inventory and the longer cash conversion cycle, operating cash generation, capital spending, and liquidity available under revolver covenants.
- Review convertible-note dilution and repayment exposure, the Lextar investment’s valuation volatility, and potential changes in tax valuation allowances.