Business context and reporting period
This is Cree, Inc.’s unaudited Form 10-Q for the quarter ended December 24, 2017 (second quarter of fiscal 2018), not a standalone Wolfspeed filing. Cree reported three segments: Lighting Products, LED Products, and Wolfspeed, which sells silicon-carbide materials and power devices and gallium-nitride RF devices. Comparisons are with the quarter and six months ended December 25, 2016.
Financial performance and liquidity
| Metric | Quarter | Six months |
|---|---|---|
| Revenue | $367.9 million, down 8% | $728.3 million, down 6% |
| Gross profit / margin | $92.6 million / 25.2%, versus $140.6 million / 35.0% | $192.9 million / 26.5%, versus $250.5 million / 32.4% |
| Operating income (loss) | $(26.3) million, versus $19.5 million | $(40.4) million, versus $14.3 million |
| Net income (loss) attributable to controlling interest | $13.7 million, versus $6.2 million | $(6.1) million, versus $6.8 million |
| Diluted EPS | $0.14, versus $0.06 | $(0.06), versus $0.07 |
| Operating cash flow | Not presented for the quarter | $105.8 million, versus $119.7 million |
| Capital expenditures | Not presented for the quarter | $85.2 million, versus $35.2 million |
At December 24, cash, cash equivalents and short-term investments totaled $649.9 million, compared with $610.9 million at June 25, 2017. Long-term debt was $124.0 million, down from $145.0 million; $376 million remained available under the $500 million revolving facility, and the company reported compliance with its covenants. Inventories were $273.2 million, down from $284.4 million. Management said available liquidity and expected operating cash flow should cover operating and capital needs for at least 12 months.
Material changes and segment results
- Lighting Products revenue fell 31% in the quarter and 25% over six months. The prior-year period included a significant patent-license issuance fee; current-period unit sales were also pressured by weak North American commercial lighting, quality-related project losses, and lower consumer demand.
- LED Products revenue rose 11% in the quarter and 8% over six months, mainly on higher unit volumes. Gross margin declined to 25.3% for the quarter from 29.2%, reflecting factory-expansion costs, product mix, and pricing pressure.
- Wolfspeed revenue rose 30% in the quarter and 31% over six months. Six-month segment gross margin improved to 48.7% from 47.4%, attributed to product mix, factory utilization, and yields.
- Consolidated quarterly net income included a $24.7 million gain on the Lextar equity investment. A $18.8 million discrete tax benefit from remeasuring U.S. deferred tax liabilities under the 2017 Tax Act contributed to the reported tax benefit. These items helped produce quarterly net income despite an operating loss.
- Six-month operating cash flow declined 12%; investing outflows increased, primarily reflecting higher capital spending for capacity expansion. Financing included $21 million of net debt repayment and $46.6 million of net proceeds from common-stock issuance; no shares were repurchased under the program.
Outlook, risks and unusual items
Management’s priorities are to expand Wolfspeed capacity and technology, improve Lighting Products execution and margins, grow LED Products, and improve customer service. It targeted approximately $220 million of fiscal 2018 capital investment, primarily for infrastructure and growth projects. No specific revenue or earnings guidance was provided in the supplied filing text. The company was working toward shifting most Wolfspeed power production from 100mm to 150mm substrates and warned that execution delays or costs could hurt results. Wolfspeed demand exceeded current production capacity, creating longer customer lead times.
Key stated risks include competitive pricing and market cyclicality, manufacturing yield and capacity-transition challenges, reliance on limited-source suppliers and sales channels, product reliability and warranty exposure, customer concentration, foreign-exchange and investment-value volatility, and litigation and intellectual-property claims. Cree had voluntarily recalled linear LED T8 replacement lamps over overheating and melting concerns; it expected insurance to recover most costs, with an immaterial financial impact anticipated. Warranty liabilities totaled $34.6 million, including $19.5 million classified as long-term. Legal outcomes were not reasonably estimable; management said unfavorable outcomes could nevertheless materially affect the business. The filing also noted a full valuation allowance against U.S. and Luxembourg deferred tax assets and uncertainty in estimates under the newly enacted U.S. tax law.
Important facts for investors to verify
- Whether Lighting Products sales, quality issues, commercial-market weakness, and margins improve after the steep year-over-year decline.
- Whether Wolfspeed capacity expansion and the 150mm transition meet schedule, yield, cost, and customer-demand expectations.
- How much reported earnings depend on Lextar share-price changes and discrete tax items, rather than recurring operating performance.
- Whether fiscal 2018 capital investment approaches the stated $220 million target and remains supported by operating cash flow and liquidity.
- Subsequent developments in the T8 lamp recall, warranty claims, litigation, and potential impairment risk for the Lighting Products reporting unit.